Vidrala Sa

Good morning and welcome to the presentation of the results of the third quarter 2023 of Vidrala. The company will be represented by Raúl Gómez, financial director, and Íñigo Mendieta, investor relations manager. The exhibition will be held in English. In the Q&A session, questions will also be answered in Spanish. On the website www.vidrala.com You will find support documentation for this presentation, as well as a link to access the webcast. Good morning and welcome to the conference call organized by Vidrala to present its 2023 third quarter results. Vidrala will be represented in this meeting by Raúl Gómez, CFO, and Íñigo Mendieta, Head of IR. The presentation will be held in English and in the Q&A session questions will be also answered in Spanish. Nevertheless, it is strongly recommended to post questions in English in order to facilitate understanding of everyone. In the company website www.vidrala.com, you will find available a presentation that will be used as a supporting material to cover this goal, as well as a link to access the webcast. Mr Mendieta, you now have the floor.

Good morning to everyone and thank you for the time that you dedicate to attend this talk. As announced, IDRELA has published this morning its 2023 third quarter results. And additionally, we have also published the results presentation that will be used as supporting material to this conference call. Following this document, we will dedicate the first part of our exposition to briefly explain the figures released today, to devote afterwards as much time as necessary to discuss on the business performance in the Q&A session. So, starting with the main magnitudes, in the nine months of 2023, we achieved as most relevant business figures revenues of almost 1.2 billion euros, an EBITDA above 315 million euros, and a net income equivalent to an EPS of 6.01 euros. Net debt at the end of the period stood at 209 million euros, which is equivalent to a leverage ratio of 0.5 times the reported EBITDA. Turning to slide four, we look at the top line performance, analyzing the annual variation of revenue broken down by concepts. We arrived at the reported figure of 1.194 million euros, that as it is shown in the graph is the result of 18.6% growth on a constant currency basis. Volumes were down minus 6%, considering a positive contribution of the part of plus 2% in the first nine months, while price mix effect was up 24%. Following the order of key business figures referred to at the beginning, we analyzed with the same breakdown the variation of operating income. 2023 nine months EBITDA amounted to 315.6 million euros, reflecting a constant currency growth of 100.1%. These operating figures resulted in an operating margin EBITDA over sales of 26.4%. which represents an expansion of more than 10 percentage points compared to the 15.6% registered in the previous year that was, as we all know, affected by unprecedented inflationary pressures. Let's analyze now the pre-cash flow generation in detail. We will do so with the help of the chart on slide eight, which reconstruct the cash conversion year to date. So, starting from an EBITDA margin of 26.4%, we have dedicated 9.9% of sales to investments and another 9.0% to the aggregate of working capital, financials and taxes. Still affected by exceptional working capital movements that are already reverting as anticipated. Finally, net debt at the end of the reported period closed at 209 million euros. This figure is the consequence of the just mentioned cash generation, our firm commitment to shareholder remuneration and the cash out for the acquisition of the park and the non-controlling minority stake in the share capital of Vidroport. As a result, leverage ratio stands at 0.5 times EBIT. And now before turning to the Q&A session, I pass the word to Raúl so that he can strike the main conclusions and make additional comments that he considers appropriate.

Good morning, everyone. Thank you, Inigo, and thank you all for your time attending this call today. Well, we are today publishing results that are an evidence of our business profile. I mean, under a weaker than expected demand context, We have recovered margins and we are expanding profits and making the expected level of cash. Consistent with this, we do reiterate our previous guidance. So our revenue for the full year 2023 will grow by double digits. And we still expect our margins to remain in line with our 25% EBITDA over sales target. We also see our profits reaching the expected level of 7 euros per share. And finally, we should generate more than 150 million euros of free cash in the full year, in the 12 months period. More. The more intense macroeconomic uncertainties we are living, that let me say, let me remark that despite the recent volatility seen in packaging demand, shouldn't or won't change the long-term natural resilience of our business. Anyway, I was saying this certain weakness, will make us adapt the capacity, control inventories, and put our focus on keeping our margins under control. But much more important, under our view, this context further provides the credit deserved to the rationale of our recent strategic actions. A study of actions that will make us grow and diversify the business and secure higher margins, profits, and cash returns. Let me remind that we, at the beginning of the year, acquired the filling facilities in the UK, named The Park. And as a result, we are capturing new sales, we are improving our knowledge about the fundamentals of the packaging industry, and we are intensifying long-term partnership with customers that are strategic, making our business and our subsidiary in the UK and CERC an even more different packaging player with a unique, it's unique in the world, customer service approach. And maybe even more important today, under current conditions, we are, this is a big thing for us, we are entering a new market in Brazil through the acquisition of Vitraport that will offer us opportunities to grow that are becoming particularly valuable today under a more modest demand context. And finally, we are executing all this, maintaining a, I would say, quite solid financial position. Thank you. Inigo, we may now go directly to the Q&A.

Perfect. So this completes our exposition and we now give way to the Q&A session.

Thank you. Ladies and gentlemen, we will now move on to the Q&A session. First, the questions will be answered by phone. If you wish to intervene, please type asterisk 5 on the keyboard of your phone. Ladies and gentlemen, the Q&A session starts now. Questions by telephone will be answered first. If you wish to ask a question, please dial star five on your telephone keypad. And our first question comes from the line of Alberto Espelosin for JB Capital. Please go ahead, sir.

Good morning.

Yes, we can hear you.

Yeah, hello. Thank you for taking my questions. I have four. I might. My first question is on all year 23 guidance. It seems a bit conservative after seeing the results of the first nine months, mainly on margins and EPS. So in my figures, for you to not read guidance, every day margin in fourth quarter should be below 20%. So my question is, why are you not writing your guidance? Is there that low visibility for fourth quarter? My second question is on volumes for next year. What should we expect in terms of end consumer demand volumes? And should we see further stocking from the client-handed volumes? Also, do you expect the volumes for this quarter to be great? My third question is on hedging. What are your current levels of hedging? And if energy skyrockets with the conflict in the Middle East, do you think we will be able to increase prices as we did in 2002? Because it seems that demand scenario is much weaker as of today. And last, on free cash flow, which remains very healthy, are you looking for any further M&A? And if you could share the latest updates on this report, it would be great. Thank you.

Okay, Alberto, thank you very much. Well, your first question regarding our full-year guidance, you're right. We are very conscious that the intrinsic last quarter results in our guidance is... It's guiding lower margins than in the first nine months of the year. And this is something that is purely reasonable considering the seasonally normal weaker last quarter of every year. It's true that we are seeing our margins levels up around 20%. And this is consistent with full year margins of 25%. The reason for that is that demand is still somewhat weaker than initially expected or softer than initially expected. And the main reason is that if you include this in a natural last quarter of every year that is naturally weaker, that's the reason. That's the explanation of this 20% EBITDA margin for the last quarter of this year. More important, going to your second question, volumes expectations for 2024. I think that the demand conditions that we are seeing today, the weakness that we are facing is abnormal. If you take a look at the historical figures and can only be explained as a result of a simultaneous combination of different factors. And some of these factors are temporary by nature. I mean, the last year comparison is quite challenging. This is one explanation. Second, customers that secure higher class inventories a year ago are today probably the stocking class. And finally, the macro factor on the stock. Some of these temporary factors will end. So we should see some sort of stabilization or recovery soon. Maybe the macro factor will be the big question mark for 2024. But so far today, it's difficult to say. It's unlikely to foresee for us an even more negative demand context or sales volumes scenario for us in 2024 in comparison with this 2023 that will end being significantly weaker than expected for all the industry.

Okay, thank you. Your third question, Alberto, on hedging. You know that we have policy that forces us to have at least one third of our exposition for the next 12 months hedged. In this case, our levels of hedging at this point of the year is something in the range of 60% for the next 12 months, which implies a level of protection in the range of 50% for 2024, at similar or slightly below current market levels.

And the last question regarding free cash flow and our uses of cash is through that we are generating this expected level of probably strong amounts of cash. This is all as planned. We are where we were expecting to be at this level. The remainder of the year, we will further generate more cash, as you can see in the reiteration of our guidance at this level. But that won't change our priority in terms of usage of cash. Our priorities emanate. We are actively involved in an emanated transaction. That is Brazil. So hopefully if everything goes as expected, most of the cash to be generated this year will be dedicated as planned to the acquisition of Hidroporto. In this case, in terms of timing, the message remains the same. We are happy shareholders of Hidroporto. We are learning over this valuable transition period. We're probably making solid connections. with our colleagues, administrations, customers, shareholders. We are providing some knowledge or assistance to these companies and we are learning every day about what Brazil and Pedro Porto means. And what we can say is that we are even more excited about the quality of the business, the assets, customer relationships and the managing team. So, in definitive, we will complete this acquisition. that we aim to close this deal under a clean, efficient agreement, avoiding any risk of legacies, once all legal issues that today affect the majority of the shareholders are solved. Finally, we will ask this. The timing remains the same. We expect to close this transaction before the end of this year.

Thank you very much.

Thank you. Our next question comes from the line of Francisco Ruiz from BNP Paribas. Please go ahead.

Hello. Good morning. First of all, I would like to congratulate Inigo for the next step that he's taken in a couple of days. I wish him a lot of happiness in the new stage. Three questions on my side. The first one is you have talked already about some stoppage of some furnaces. in the coming quarters. Petropak has already announced some of them. How do you see the rest of the industry performing on that stage and how do you see prices for next year? The second question is on working capital. If you could give us an idea of what was the working capital in this Q3 and what do you expect for the coming quarters? And finally, we're trying to make a reflection talking out loud. I mean, if, as I presume, your prices will decline a little bit the next year, but with a better demand and with this cost at a lower prices than this year, it is likely that we will see BDA in absolute terms growing in 2024. Thank you.

Thank you very much, Paco. Well, first, a question regarding Our capacity control actions. Well, let me say that our utilization rate today is approximately at the levels of 80%. So this is quite a low number, less than optimal. And that will be another reason to explain our guidance on our margins expected for the remainder of the year. This is more or less under control, as you can see in the reiteration of our guidance, but that will temporarily affect our margins and the or cost absorption capabilities over the next three, four months. We don't know where the industry is, where our competitors are. I will say that we should be performing, because of evident reasons that you will probably agree, we should be performing in terms of sales volumes this year slightly better than the industry average, because we do have the contribution of the capture of sales in the UK from that season of the park. So I will expect the industry to be as disciplined as we are doing. So I should expect the utilization rates across the industry, at least the European glass industry, at similar levels of this 80%. What we are seeing simultaneously is a round of cancellations or stoppages of projects that were announced to add capacity. And this is the level of discipline The example that you are mentioning, recent news from some of our competitors, is a good example of what we should see in the future. There is no reason so far, under my view, to be concerned about the lack of a Disney plan in the industry, under my view. And in any case, Vidrella won't be a case of this. Second point, and link it with this regarding prices. Well, in terms of prices, so far we are still seeing inflation in many factors across the business so we do have arguments to maintain our current pricing level for pricing initiatives till the end of the year this is also another reason to maintain this confidence in our full year guidance so now the the eyes are put on 2024 okay looking at 2024 is still too soon will depend on the demand context the competitive dynamics that we are discussing but we do have a reference and the reference is the 40 percent of our sales volumes of our sales bonus agreements that are dictated by price formulas the result of a typical price formula today for us are showing us a variation in 2024 in comparison with the full year 2023 of around the range of minus five to minus 10%. Nothing has changed since our last message on that sense. And if we are able to materialize this price adaptation that will be completely aligned with the underlying cost inflations that we are seeing, that should help us to secure margins and to maintain a neutral price to cost spread. So if we combine these price costs Let me remark then on the cost volatility we are seeing. Almost 60 percent of our energy position is fixed hedge. the levels that are aligned or slightly below market levels, as Inigo said before, for the next 12 months. So we are more or less protected in that sense. But if we combine this price-cost conditions with some minimal recovery on demand, there is no reason to have any doubts about the sustainability of our profits into 2024. Let me finally remark that our long-term strategic targets never depended on top-line growth. We have been particularly prudent in terms of our capacity actions, study capacity actions over the last five years. In 2024, we are basically to produce or we'll have an installed capacity that is the same capacity we had five years ago and that significantly improve cost mix. We exit from Belgium and we replace this capacity selectively in the UK and Portugal. We are an example of probably a particularly protected class player if we are to see a weaker than expected demand context. Perfect.

And then Paco, on working capital, as we reported for the nine months, we are generating almost 90 million euros of free cash flow. All of this has been generated in the third quarter standalone because We were almost flat, if you remember, in the first half of this year. And this includes, as we were mentioning in the presentation, an effect of reverting working capital. In this case, the effect is a positive effect in the third quarter of almost 40 million euros. And working capital movements are mainly explained by accounts receivables in the quarter.

So just a follow-up, Raúl. So if you are telling us that top line will decline this minus 5% on prices with no demand, but you think that VDA will grow, we will see a very positive impact in terms of volume next year. Sorry, in terms of margin, sorry.

What we are seeing, Paco, I'm trying to be a little bit more prudent or conservative so far in that level. What we are seeing is that if we are to face an adaptation of prices between minus 5 to minus 10%, that should be enough for us to maintain margins if demand recovers a little bit. I would say that it's still too soon to foresee or to predict um significant the growth on operating profits in 2024 it's still a little bit too soon and we are all in this industry a little bit surprised about the weakness of demand we are facing okay this is not a big problem for vidala that's the message we don't depend on particular demand buoyancy or to reach our strategic targets this weakness is particularly um we are making our m&a actions particularly efficient today but let me say that it's time for us and you will probably understand it's time for us to keep a little bit conservative looking beyond 2024 okay in terms of total or absolute profits okay thank you very much

Thank you. The next question comes from the line of Inigo Esbusquiza from Kepler Shabu. Please go ahead.

Thank you. Hello, Raúl and Inigo. Thanks for taking my questions. Most of them have been already answered, but just a follow-up, if I may, in terms of of volumes can you explain a bit what have we seen in Q3 if my numbers are right volumes have corrected by double digits so if you can elaborate a bit these volumes these negative volumes by markets and also by segments I don't know if there is any difference between beer, wine and other segments and also between different geographies. Thank you.

Okay, thank you very much for the question. As stated in the call, volumes for the nine months are down minus six and this includes a positive effect of the park of plus two. And prices are for the nine months in the range of 24% positive. Okay. If we take a look at the quarter, as I understand is your question, volumes were down minus 10%. So you're right with your estimate. And this includes also a similar effect of positive effect of the park in the range of 2%. And prices in the quarter have been up 19%. Okay. If we take a look at different regions, there are no big differences. We believe that demand performance is similar across regions. It is true that we are performing slightly better in the UK, probably because our particular business and the integration of the park that give us more visibility in terms of volumes, especially relevant in this more weak demand context. And if we take a look at different families or product segments, we see something similar. Declines are generalized across segments. We could see some worse performance in beer, probably food and olive oil, and spirits, which could be segments that are more cyclical. But again, we see declines all across the segments, and that is something generalized and probably explained by, as we explained during the call, by something more than pure organic demand.

Okay, thank you, Inigo, and congratulations and good luck.

Thank you, thank you.

Thank you. The next question comes from the line of José Antonio Suárez Roig from CaixaBank. Please go ahead.

Hi, good morning. Can you hear me?

Yes, we can hear you.

Perfect. So thank you very much for taking my questions. Most of them have already been solved, but I have a couple of them. First of all, you were mentioning that around 50% of your energy units for 2024 are hedged. Regarding the fourth quarter, what will be the percentage? And also regarding this question, you were also commenting that you are trying to implement a new hedging policy offering the clients to hedge their orders. And how is this evolving? What percentage of sales the clients have been taking this new formula you have been offered? How is it evolving? And also on volumes for 2044, Raul was mentioning that it will be like maybe slightly positive around neutral, slightly positive in terms of volume. But if we take into account that with the stockings, the stocking has had around six percentage points in terms of impact in sales in 2023, this will mean that end demand will drop around a single digit in 2024. Just to clarify to my right, And also, recalling that the resilience of the industry, this is a very huge drop in number. And if you compare it to, for example, the 2008 crisis and why are you seeing such a strong drop in demand for the year, just because of the qualification, why can't we see a single digit in demand fall? Because it's a very resilient industry, and I want to see a little bit how it's a rational line.

Okay, thank you very much, José Antonio. On your first question, I repeat, hedging levels for the next 12 months in the range of 60%, 6-0, which implies something in the range of 50%, 5-0 for the full year 2024. For the last quarter of 2023, you can assume a hedging level that should be something around 85% of our exposure.

And regarding the second question about our prospects for some demand recovery in 2024, let's take the third constant that we are seeing today. Apparently, demand in Europe, demand for glass containers in Europe is dropping by double digits. And this is a historical negative variation if you take a look at the long-term historical statistics. So you will agree with me that this is just abnormal. Under my view, things that are abnormal are normally temporary. You will probably agree with me that this is also not reflecting real conditions of consumption. This is not what is happening on the consumer side. Obviously, the macro factor is impacting consumption of food and beverage packaging glass or any other alternative material, but not by that level of 10%. It's evident that there is an amount, significant amount, difficult to quantify for us, of temporary effects. Temporary effects that started five, four months ago, if you remember in our numbers. So we should soon see an end of these temporary factors. And we should soon see a reversion of these temporary factors. And that should add some level of stability or even recovery in 2024. So what I think after this is that in 2024, we will see our sales volumes reflecting real demand or consumption conditions. This is not the case today so far. some recovery of these temporary factors. It's still too soon. We're still a bit surprised, nothing dramatic, but a little bit surprised about the demand conditions we are seeing. That means that the level of visibility we have in the short term is lower than usual, but we are planning some six volumes recovery, positive growth in 2024 in comparison with 2025. If that happens, that we repeat that or insist on this message, that should also help us to maintain our price to cost expressed under control, sustaining or enabling us to sustain our profits, margins, EBITDA and value, and don't forget this, cash flow. As long as CAPEX for the current perimeter in 2024 following a pure calendar effect will be more relaxed than in the last two years.

Perfect. Just a clarification. So in terms of visibility, you're still, like, depending on how you see things evolving for 2024, in a more advanced stage, you can clarify if demand will be stronger or not from an end perspective. But up to now, you don't have enough visibility, right?

Yes, right.

Thank you. There are no further questions by the telephone. I return the floor to Mr. Gomez and Mr. Mendieta. Thank you.

Okay. Thank you very much. There are no... We have... answer the questions via telephone. There are still some questions that we have received through the webcast. We have received several questions on capacity and supply, on M&A and the report on the breakdown on prices and volumes. I think all of them have been already answered live. Please, if the ones that have asked these questions feel that they want to get some additional granularity, feel free to contact us after the call. um anyway there are some questions that are still pending the first one says cash generation in bidrala is extremely high and at the same time financial leverage is extremely low even taking into account with report acquisition the high cash generation should lead to no financial debt in two years time additionally there are current share price is extremely low on any valuation ground so would you consider this opportunity of low share price to buy back your own stock. And there is also a similar question saying that, OK, even given our free cash flow generation, if it is reasonable to expect an increase in dividend according to increase on profit. So both on shareholder remuneration in terms of saver backs and dividends.

thank you well i understand well that this is a question about our shareholder generation policy expected for 2024 and beyond okay it's a little bit soon to speak about the our dividend policy our cash dividend policy for next year we still need some time to make a proposal to to the board but you will understand that following i agree in full with the comments of your question that following uh the confidence we are providing today with regards to our financial position, our cash profile, even the resulting financial position, if we are to close the Brazilian study soon and following the cash that we are generating this year and the profits that we are making this year, there is no reason but to expect positive cash dividend growth in 2024. Maybe if things keep as expected in terms of cash generation as we did in the past, we will deeply analyze with ambition the potential combination of cash dividends growth with share buyback programs. But this case will be monitored carefully on a frequent basis and will depend on the execution of our M&A activity. Priority use of CAS will be M&A, the adquisition of Pedro Porto. If this is completed soon as expected, and if the rest of the business performs as expected, we should combine CAS Evidence Crowd with Serve-by-Vax, because this is a methodology, this is a tool to remunerate our shareholders that we like, and we have executed quite frequently over the last years. Nothing we changed in that sense.

Perfect. So we have now answered all the questions. So once again, thank you for the time that you have dedicated to us this morning. Thank you Paco Inigo for your congratulations and just remind everyone that we remain at your complete disposal for any further questions. Thank you. Thank you very much. Please.