Vidrala Sa

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Much lower than in the past. We do feel confident on this. And that is linked with your second question, inflation. Well, despite energy and raw materials costs that have largely stabilized over the last few months, they still remain a significant headwind for us, particularly versus two years ago. And we remain seeing inflation in many pieces across our cost base. I mean, raw materials has started to stabilize. Energy is – energy markets are under a process of relaxation. But we still see in these two pieces that accounts for more than 40 percent of our OPEX, of our total OPEX, inflation – year-on-year inflation of more than 20 percent, two years inflation over a two-year perspective of more than 40%. So having said that, should the underlying cost factors further relax, really relax, and are consolidated at these levels, our prices will progressively and probably efficiently adapt with an effort focused on securing a positive or neutral price to cost gap, and as a result, maintaining our margins safe. But as I said before, inflation is under a process of realization, but they still remain as a headwind.

And on your third question, Paco, and before Raúl comments, just to provide some numbers and to clarify the figures, in the second quarter standalone of 2023, we have seen volumes minus 6%, excluding the positive impact or the positive contribution of the PAC that would partially mitigate this decline, would be plus two. And for the first half, as you mentioned, volumes are minus five, with also the park partially mitigating that effect, plus two.

I look at the future at this level, these volumes, it's very evident that demand is today softer than initially expected. But we, as I said before, we do see a limited impact on this in our numbers, at least in the short term. Let me remind you that our strategic targets, our strategic priorities were not based on top-line growth. You probably remember that. Our strategic target has been broadly based on our deliberate capacity-realizing plan, selectively divesting and investing a number of our facilities to improve the competitiveness of our industrial footprint. That means that our margins are much more based and our profits are much more based on cost competitiveness than on top-line growth. Having said that, we do feel comfortable We do feel that we are well-positioned to manage a weaker demand context, and that, in fact, has been previously accepted by us as possible. We are prepared for that. And the confidence in our guidance is a good proof of this. Our sales volumes variation is today negative due probably to a number of factors. First, the last year comparison is quite challenging. Let's take a look at a more historical perspective to better understand where we are in terms of underlying demand conditions. Our customers that secure higher glass inventories a year ago are today probably destocking glass. And finally, consumption levels are somewhat lower, globally affected by following macroeconomic factors. But under a two-, three-year perspective, as I said before, our demand is quite higher, quite solid, following underlying strong fundamentals. And our production capacity, nominal production capacity, and our recent static actions are broadly aligned with our current sales levels. So, having said that, following the more limited short-term visibility on our sales volumes, while we prefer to avoid giving you a specific prediction at that particular point, our year-on-year change on sales volumes for the second half won't be relevant, I will say. And I believe that won't surprise you significantly. positively or negatively, we still don't know, but the variation will be very limited. And evidence of this, of how comfortable we feel with this, is our rate-related guidance at a margin level or EPS or even free cash flow.

Okay. Okay, thank you, Raúl.

Thank you. The next question comes from Alberto Espelosín from JV Capital. Please go ahead.

Yeah, hello, good morning. Can you hear me?

Yes, we can hear you, Albert.

Yeah, sorry if I repeat any questions, but I also had some technical issues and had to disconnect. I only heard Paco's questions. So I have two follow-up questions. First on prices, gas prices collapsed. And if I remember correctly, about half of your sales have automatic price adjustment formulas. So are you already lowering prices to customers and are clients pressuring you on this front? Or does the plus 20% OPEX inflation compensate for this? And how do you expect prices to develop to the year end? And my second question is, do you have any update on any details on Vitroporto? And do you think this acquisition can be closed in second half 2023 or should we wait for next year? Thank you.

Okay, Alberto, thank you very much. Just a very brief introduction on your first question in terms of pricing. You have seen that the contribution of pricing in the second quarter of the year has been lower. This is still not due to relevant price level adaptation. This is mainly, first of all, because of comparison basis. You remember that in the first quarter of 2022, we were increasing prices in the range of 10%, and in the second quarter, we already introduced the energy surcharge that meant prices in the range of 30%. That's why the annual variation has mathematically moderated in this second quarter, and this base effect will also affect the remainder of the year.

Okay, thank you, Alberto. Inflation in many pieces across our cost structure. You mentioned that the natural gas are collapsing. Okay. Unfortunately, for us, in our experience, natural gas are just progressively under a process of relaxation. But natural gas prices today are likely still double the level we had three years ago. And that needs to be reflected in our prices. And Beyond the natural gas or the energy factor, we still do see a lot of inflation in many pieces. It's true that inflation is giving us signs of relaxation. This is a top priority for us. I mean, our top priority is to intensify as much as possible the capture of the process that we are seeing of cost, I will say, day inflation. If this is finally consolidated in our numbers, we will... be fair and transparent with our customers and progressively adapt our prices with the focus and the priority on securing a positive or neutral price-to-cost spread and maintaining our margin safe. And we do feel confident with that. Just to give you a reference, you probably remember that approximately one-third of our sales volumes are dictated by long-term supply agreements with price adjustment formulas. This is just A mathematical result of a price adjustment formula following our cost structure calculated today is giving us a minimal negative price variation that completely secures this neutral to positive price to cost spread and maintain our margin safe. So we don't feel particularly concerned about that. Prices will be adapted progressively only if costs are definitively relaxed. or under a process of moderation. Your final question is expected about Vidro Porto or Brazil. Well, let me say that we know well Vidro Porto. We know well what we are doing there since years ago. We have been providing Vidro Porto technical assistance for years. We have been involved in the process of, the corporate process of this company since years. I will say that our destiny is to be partners The assets of Hidroporto are the type of assets we like, very well invested. Hidroporto is expanding capacity in one of its two sites, and Hidroporto is today by far, in our opinion, the most competitive player in Brazil, one of the most competitive players in the Latin America glass market. And what we are seeing today as minority stakeholders is that all stakeholders around Vidro Porto welcome us as potential future openers, from shareholders to management, staff, customers, governments. Probably they are giving us credit to our business integrity and our long-term industrial intentions. We are taking part of Vidro Porto's management as a minority shareholder, offering them our industrial expertise. I do think that Vitroporto needs us industrially and financially, and actually the majority shareholder that represents the founder family and all the great industrial legacy created by them has formally expressed its desire to sell to us, and we do have an agreement with them. So we transparently want to take full control of Vitroporto, but we feel comfortable with where we are today as minority shareholders. And we won't accelerate events and the times or events that we can't control. So this will take the time needed. Let's be patient, okay? It shouldn't be a lot of time, okay? And let's remind us that even with a minority stake, we are creating value for Vidrola. And let me please invite you to consider that this is only probably the beginning of the platform we are creating for future growth. These months of wait are the wait we need and will be probably soon forgotten in our study history.

Thank you. Ladies and gentlemen, let me remind you, if you wish to ask a question, please press star one on your telephone keypad. Thank you. The next question comes from Manejul from Amiral. Please go ahead. The next question comes from Ignacio Lorente from Mirabal. Please go ahead.

Hi, good morning. Can you hear me?

Yes, we can hear you.

Hi, guys. Sorry if I repeat ourselves, but I also have several issues on the call. So my first question probably is on... on regional trends. I was wondering whether Raúl's comment about the softening demand is specific to any specific region or something that you have seen before because it looks like UK, Italy will be weaker than other regions and even the exposure of UK to wine, whether that might be an issue of the performance in terms of demand. Do you see any difference between regions or between trends on why and here?

Well, thank you very much, Ignacio. Well, I will say that demand is softer than initially expected globally everywhere in our regions of activity. And I do think that our numbers are more or less aligned or even better than the numbers that some of our competitors are announcing. So it seems that this is an evidence that, okay, these softer demand conditions are more or less a global factor. The differences that we are seeing in our regions are probably more due to seasonal structural differences. Do you know that – the first half of the year is less, for a seasonal, is less relevant in the UK market than in continental Europe. This is the only reason for this difference, in my opinion. From now in the future, we should take into consideration that for specific internal reasons, our volumes in the UK will perform progressively better than in the rest of our regions because we will progressively capture more of the glass volumes that are coming from the acquisition of the filling facilities of the parking Bristol. The rest probably will be more exposed to underlying demand conditions. The comparison basis, as we said before, is the last year comparison.

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What we expect for the full year is this effect to normalize because the year should be possibly a small cash outflow. but more in the range of flat to minus 20 million euros than the levels that we have seen for the last couple of 18, 24 months. If you want to check that specific figure, we can talk after the call because I don't know what figure are you referring to, but again, we can clarify this after the call with any problem.

Thank you very much. Please keep in mind that we are reiterating our guidance of free cash flow for the full year, 150 million euros. That means that most of this annual free cash flow will be concentrated in the second half of the year. We do feel confident with that, so that means that working capital won't be a significant cash outflow for the second half of the year. We really feel confident with this number.

And this implies, Manuel, that working capital trends should revert in the second half of the year.

Thank you. The next question comes from Inigo Eguzquiza. Please go ahead.

Hi, good morning, Raúl and Inigo, you hear me?

Yes, good morning, Inigo.

Okay, sorry for that. I've been disconnected, I think, three or four times, so probably all my questions have been already answered, but just the two follow-ups that I didn't get. during my connections. Raúl, on volumes, weakness, I don't know if you can give us some color by countries and segments. I'm sure you answered the question, but sorry for asking you the same question again. This is the first question. And the second question, I don't remember. Yes, okay. On pricing for 2024, I assume that negotiation will come after the summer, but I don't know what can we expect considering the cost deflation. What are your guess estimate for pricing in 2024 considering the information that you have today? Thank you. I'm sorry again.

Hello.

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Hello. Hello.

Hi, amigo. Apologies.

Are you there?

Are you there? We are having technical problems. Apologies for all that are connected to the call. We will try to clarify what is happening, okay? But we will also now jump out of the call. We take back your two questions on sound clarification of volume performance by region segments and pricing for 2024.

Okay, well, in terms of demand conditions or sales volumes, what is very real is that sales volumes variation is today negative. We said before that this is probably due to a number of factors. Last year's comparison is quite challenging. Customers are probably stocking, and consumption levels are somewhat lower, probably following macroeconomic factors. But if we do consider these three factors, the second half of the comparison base will be much softer, less challenging. So that gives us some confidence that What we said before is that our year-on-year sales volumes variation for the second half will be less relevant. I don't know if it will be positive or negative, but won't be particularly significant. And as a good proof of this, as a good evidence of this, won't affect significantly our margins or sales in a cadence that we are rated today. These softer demand conditions that we are seeing is probably a global factor. This is what we are seeing from a regional perspective. In our different regions of activity, there is no particular differences. I believe that this is something that is more or less consistent with what some of our competitors are saying in the specific glass space or in other packaging spaces. Looking at the future, looking at the next half or the next year even, we do feel that we are particularly well positioned to face a potentially weaker demand context as long as we are still capturing demand from the acquisition of the park in the UK, something that is not dependent on structural or underlying demand conditions. And second, please keep in mind always that our long-term strategic targets were not based on top-line growth, were based on cost competitiveness and capacity realignment. Our managers this year and next year are to be based more on cost competitiveness than on top-line volumes growth. We do feel confident with the situation we are in today.

Okay, thank you.

Your second point, Inigo, in terms of prices, what we are seeing is that we still see inflation in many factors of our cost structure. There is a reason to maintain our prices. Our prices will be fairly and transparently progressively adapted should our costs are consolidated at lower levels with the focus, the priority of securing a positive for neutral price-cost gap and maintaining our margin safe. If we try to foresee our prices in the second half, particularly next year, following the amount or the percentage of our sales volumes that are dictated by price adjustment formulas and trying to predict what could happen with the rest of our volumes or customers that are dictated by the bilateral or direct negotiations, we see our prices progressively adapted downwards. This is unavoidable. but that will follow real-cause relaxation paths and that won't affect our margins in 2023, probably in 2024, I would say.

Okay. Thank you, Raúl. Just a follow-up, sorry. I think some of my colleagues asked you on Videro Porto, but I didn't get the answer. Any update on Videro Porto's situation in terms of calendar for the acquisition of the remaining stake in the Brazilian company. Thank you.

Thank you. Well, there is nothing new, nothing officially new. We do have an agreement to acquire the remaining stake in Bidro Porto. We are actively... Hello?

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Okay. Thank you. Sorry. Well, I was saying with the case of Hidroporto that we are actively acting, providing technical industrial assistance to Hidroporto. We are happy with our position as minority shareholders. We are creating value. We do have agreement to acquire the remainder stake. but that won't be materialized deliberately until some legal limitations that block the sale of this majority stake owned by a family vehicle are solved. If we don't control the events, we don't control the timing, it shouldn't take much time from this.

Thank you. The next question comes from Daniel Suarez from CaixaBank. Please go ahead.

Hi, Raúl, can you hear me?

Yes, we can hear you, José Antonio.

Sorry, my line was also disconnected several times, so probably some questions will be answered, but just a clarification. I think, Inigo, you were explaining, can you explain again for this quarter the breakdown between prices, volumes, and how the park has been provided? And also, I think I was mentioning the evolution of price expectations in the second half and 2024, and also regarding margins we should expect for 2024 if prices fall. Should we expand Should we expect a fall in the margins, or should the priority for the company will be maintaining the margins and prices will adapt to that? Probably you have answered the question, but my line has almost no time, so if you could clarify on that.

No problem, José Antonio. Thank you for the questions. Just clarifying volume and price performance in the second quarter and in the first half, okay? Volumes in the second quarter were down minus 6%, the park contributed 2% positive, and prices were in the range of 17%. I think the rest is currency effect. And for the first half, these numbers are minus 5 in terms of volumes, again, plus 2 in terms of perimeter contribution of the park, and prices in the range of 27%. The rest, again, currency effect.

Thank you. And, José Antonio, regarding prices and margins for 2024, well, as you can understand, it's probably too soon to have the needed visibility. In terms of prices, the moment of renovation will start after the summer, but we do have our reference, and this reference is the amount of our sales volumes that are dictated by long-term supplier agreements and price adjustment formulas. And the result of a typical price adjustment formula calculated today for 2024 is giving us confidence of capturing a positive price-to-cost spread in 2024. Please let me highlight that due to our deliberate energy hedging policy, we are capturing most of the energy market relaxation that we are seeing so far. That means that our marines, we do consider our marines safe in 2024, okay? It will probably more Now the focus will be more to put on future organic demand conditions in 2024 and beyond. And let me finalize and point that hopefully the business in 2024 at a group perspective is different than what it is today following our pending corporate actions.

Perfect. Thank you, Ennio. Thank you, Raul.

Thank you. The next question comes from Luis. Please go ahead.

Hello, can you hear me?

Yes, good morning, Luis.

Okay, good morning. A final question from my side. It's regarding the evolution of the park in terms of results. We know that the volumes have not been strong and that you predict an improvement in the second half and you expect also to strike more synergies. But do you still believe that, I mean, six months into the acquisition, if you could provide an overview of and confirm if there's been an issue with profitability that you didn't expect and you're still targeting EBITDA margins above 20%? Thank you.

Thank you, Luis. Well, there is a big strategic rationale for us in the acquisition of the park. This is by far the largest... wine bottling facility in operation in the British market. That means that we are buying a customer, we are capturing demand in a moment where demand is softer than initially expected, so the timing is particularly efficient for us, and that gives us a comfort of our demand conditions in the UK in 2024 and beyond. Profitability of the park is not only the profitability that we are obtaining the park from an individual or a standalone point of view. Filling wine is also a matter of the profitability that we are to obtain supplying glass to our filling facilities in the park in Bristol. So all in all, we do feel confident with the acquisition we made. That means that even our business plans, the results of our business plans are exceeding our previous expectations. On a group perspective, but that will be quite relevant for our business at an individual perspective or for our business or for Enshare particularly. If you ask us for further details, Let's say that in the future we expect to obtain, including glass volumes, EBITDA of more than 15 million euros, EBITDA after lease in the park after an acquisition that had a value of 35 million euros, as you probably remember. So just to give you a reference that we are making profits again.

Thank you very much. Thank you. Thank you.

Thank you. Ladies and gentlemen, there are no further questions. Dear speakers, back to you.

Okay. We were taking a look also at questions through the webcast. We received several questions from one person, and I think that all that questions have been answered throughout the call, okay? If there is something still missing, please do not hesitate to contact us after this call. So just to finalize, thank you, all of you, for the time that you have dedicated to us. Apologies to all that have connected and have had technical issues. It has been also our case, and we will try to clarify what has happened. Just remind you that we remain at your complete disposal for further questions, and also remind you that there will be the recording of this webcast will be available on our website in a couple of minutes, hours, okay? So thank you very much, all of you.

Thank you very much. We all know that we do probably have busy days ahead. Have a good summer after this, and please keep on eating and drinking on glass. Good for you. Thank you.

Ladies and gentlemen, thank you all for your participation. You may now disconnect your lines.