Vidrala Sa

Good morning to everyone and thank you for the time that you dedicate to attend this call. As announced, BIDRAL has published this morning its 2023 full year results, and additionally we have also published the results presentation that will be used as reporting 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 dedicate 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 full year 2023, we achieved as most relevant business figures, revenues above 1.5 billion euros, an EBITDA of almost 394 million euros, and a net income of that is equivalent to an EPS of 7.23 euros. Net debt at the end of the period stood at 472 million euros, which is equivalent to a leverage ratio of 1.1 times the pro forma EBITDA, which considers the contribution of the last 12 months of the report. Turning to slide four, we look at the top line performance analyzing the annual variation of revenue broken down by concepts to arrive at the reported figure of 1.559 million euros. As it is shown in the graph, this figure is the result of a 15.3% growth at constant currency and comparable scope. Volumes were down minus 7% in the full year, including the park contribution, while price-miss effect was up 22%. Hidroporto, fully consolidated since December 1st, 2023, contributed an additional 1.4%. Following the order of key business figures referred to at the beginning, we analyzed with exactly the same breakdown the variation of operating income. 2023 full-year EBITDA amounted to 393.7 million euros, reflecting a growth of 43.5% at constant accuracy and comparable scope. These operating figures resulted in an operating margin EBITDA over sales of 25.3%, which represents an expansion of more than 5 percentage points compared to 20.1% registered in the previous year, which was, as we all know, negatively affected by the extraordinary context derived from inflationary pressures and the energy prices. Let's analyze now the free cash flow generation in detail. We will do so with the help of the chart on slide 7, which reconstructs the cash conversion for the full year. So, starting from an EBITDA margin of 25.3%, we have dedicated 9.7% of sales to investments and another 5.7% to the aggregate of working capital, financials, and taxes. Free cash flow generation recovers the path of gradual normalization, reaching the equivalent of 9.8% of sales. Now, NetDev. at the end of the reported period, close at 472 million euros. This figure is mainly the consequence of the cash out for the acquisitions of the PARC and Hidroporto, including debt, on top of our firm commitment to shareholder remuneration and the just-mentioned cash generation. As a result, leverage ratio stands at 1.1 times pro forma EBITDA. And finally, in this slide, we present the distribution of sales and EBITDA by divisions, considering a 12-month contribution of the report. If we make the analysis under the new perimeter, after yesterday's announcement of the agreement to sell the Italian business, the new group would have generated, in 2023, revenue of 1.567 million euros and an EBITDA of 406 million euros. And now, before turning to the Q&A session, I pass the word to Raúl so that he can extract main conclusions or highlights and make additional comments that he considers appropriate.

Thank you, Inio, for the excellent presentation. And thank you all attending this call today. We know that you are quite busy. We really appreciate your time. Thank you. Well, we finally ended the year 2023 meeting the expectations expressed in our official guidance. But this doesn't mean that it was an easy year for us. Far beyond the numbers, in 2023 there were a number of strategic movements and operational actions to react to predicted business conditions. Actions that proved that Vidrala is today a stronger company. Let me explain this better. First, in our more traditional region, Southern Europe, we were able to recover in full the margins we had lost during the energy crisis in 2022. And we did it despite demand was abnormally weak during the year, a point that forced us to reduce capacity and control inventories. So this is to explain that we do consider the recovery of our profitability levels, mostly the results of internal actions. You probably have in mind the capacity realignment plan started five years ago. We have divested, invested, closed, and opened capacity, investing selectively. And so, because of these internal reasons, because we are industrially and operationally stronger than ever, we do consider that our margins in this region, in Southern Europe, are safe for 2024. In the UK and Ireland, in our admired company in Zurich, our unique approach was, you probably remember, further enhanced last year after the acquisition of a large boating facility located in the city of Bristol. and transactions that help us capture a very valuable portion of the market, reinforcing NSERC's unparalleled fundamentals as the only company that offers a full 360 approach to the beverage supply chain in the UK. Because this transaction will progressively contribute to profits, and because of the strong competitive fundamentals of our NSERC business, our margins there should progressively improve about 23 levels. In both regions, in Europe and the UK, the path of margin conversions into profits in value will obviously depend on the path of recovery in our demand. But please, let me remark that the level of optimising you are seeing today is based on internal reasons. We are operationally and commercially better than in the past. And third, a more particular case for us. We finally, after a long process of, let's say, analysis, we, late in 2023, completed acquisition of Hydroport. A new division joined in the Vitella Group, an excellent business led by an excellent management team. A big step for us, that represents our entry into Brazil or even into the American continent. That is a platform for future growth. There, in this report, the business is evolving well, as expected. That means that our customers are responding well. We are capturing the sales volumes that are consistent with the new investments, investments that increase our capacity by approximately 30%, and this is being reflected in our numbers. At the end, In Brazil, in 2024, we do reiterate today that our profits will grow, as it was anticipated. In conclusion, we have a much more clear focus on very clear three core divisions that have been selectively defined, that are seeing quite different demand dynamics, business dynamics, that we are managing differently. that at the end creates a great new business combination. My intention with this simple summary is to explain as easy as possible the rationale behind the divestment of our Italian business. We had a plan, and this is part of the plan. We are reallocating capital, refocusing the business on three core divisions, structurally improving our cash profile and our profitability levels, monetizing the value that has been created, and returning part of this value in cash to our shareholders. That was the plan, and we are executing the plan. That ends my conclusions. Thank you very much. Time for your questions.

Okay, thank you. So this completes our explanation. We now give way to the Q&A session.

Thank you. Señoras y señores, a continuación daremos paso al turno de preguntas. Primero se atenderán a las preguntas por vía telefónica. Si desean intervenir, por favor marquen asterisco 5 en el teclado de su teléfono. 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 5 on your telephone keypad. Our first question comes from the line of Alberto Spelosin from JB Capital. Please go ahead.

Good morning, and thank you for checking my questions. I have three if I might. My first question is on full year 24 outlook. Could you please provide a bit of visibility and volumes for next year as well as practice development, both in Europe and Brazil? Thank you. I'll go with all the questions. My second question is on margins. How should we think of profitability in 2024? Are you still working at low utilization rates? Where do you expect this to recover? And do you expect to see a strong recovery in margins in the UK? My last question is on the sale of Italy. How much of the funds do you expect to be used to repay debt? And how much would be financed by the United States? Thank you.

Thank you, Alberto. Thank you very much. Well, first question regarding how to for 2024, please let me remind that as usual, in our style, we will provide official guidance during the annual general meeting to be held on April 30th. So what we can say so far is that, okay, we saw our volumes under some process of recovery in those regions that suffered the most in 2023. Please let us keep in mind that we do have three very different market dynamics. There is a process of recovery in Southern Europe. There is a process of capture of market in the UK after the acquisition of the park. And there is a process of real growth, organic growth in Brazil. Please keep in consideration these combinations. All in, we do expect our volumes to... to grow positively in 2024, but please let us some time to provide more official guidance. Second question is regarding, as I understood well, where we are in terms of capacity utilization. We are running at full in Brazil. This is basically the result of these different dynamics. We are basically running close to full capacity in the U.K., And we are progressively restarting lines, increasing use of capacity in Southern Europe as a proof that the beginning of the year, that this is only the beginning, has started as expected. I mean, we are seeing some signs of recovery. that will help us to progressively and cautiously increase use of capacity. And third, a very predictable question regarding how much the funds of Italy are going to be used to dividends. Please let us remind that we still need some time to finalize the needed approvals to close this deal. If that happens, that will basically depend on our board decision. It's on their hands. Our board will make a proposal for approval at the annual general meeting. But you won't be surprised. What we have seen in the press release is that the funds will be partially dedicated to an extraordinary dividend. And partially is exactly what it seems, what you can imagine. One part on one side, and the other part on the other.

Ernesto, thank you.

Our next question comes from the line of Carl Hafen from Jefferies. Please go ahead.

Good morning. Thanks for taking my question. I'd just like some color on On the end markets, I mean, if we look at the various consumer companies across beer, spirits, and wine, they're in different cycles of what they're seeing for destocking and demand into 2024 as well as food. So I'd just like a bit of color of what you're seeing from your customers around kind of the food, wine, and spirits, and then the beer markets. That would just be helpful. And then I'd like some color on the disposal of Italy where you were kind of a smaller player. It does seem like you're focusing on the regions where you've got scale. Can you describe the benefits of that scale in your kind of Iberian market and what you're thinking about doing to improve that scale? Will it be strategic investments behind more kind of color processing plants? How do you kind of build on that scale that you've got in that Iberian market and the UK market? Thank you.

Okay. Thank you very much, Cole, for your questions. Yes, that's the introduction for the first one on demand context by different product segments. Just to remind you that approximately one-third of our sales is on wine. Another third is beer. Probably this will be slightly increased after the acquisition of Vidro Porto. And then the rest, we have several segments that are in the range of 10%, which is food, mainly focused in our case on olive oil, soft drinks and spirits.

And just to clarify in terms of segments, we need also to understand the different demand dynamics by regions. I mean, in Brazil, for example, most of our sales are beer. And beer consumption in Brazil is particularly buoyant. But maybe beer consumption was one of the segments that suffered the most in 2023 in Europe and the U.K. And you should consider beers as a naturally cyclical segment of sales, one of our sales. Our sales for wine are mostly focused, mostly concentrated in Europe and the U.K., Our sales in wine are going well because we are capturing new demand for wine bottles in the UK after the integration of the park. So we are probably different and we are probably not a good reference of what is happening in the wine market, in the glass packaging market for wine bottles. Spirits, we know that we are seeing a lot of noise about following some of our customers' comments and following where Organic demand for spirits is low, particularly concentrated in the UK, where our commercial positioning is particularly strong. So again, maybe we are not a good reference, but we are seeing some positive growth in this segment. And finally, sorry for this simplistic explanation, in the food segment, this segment enjoyed a great momentum during the pandemic. and now it's becoming more normal. Organic demand in food is becoming more normal, but our presence in this segment is particularly less significant than the industry average. Second question regarding the rationale of our divestment from Italy. Well, one of the main reasons you are right, one of the main operational or study reasons of analyzing the divestment of Italy is our weak market share. 3% of the market share is far from our intention, is far from our strategy. That means that it's a different business. This business is profitable. I will say that you probably agree with me that we did well, as you see at our numbers over the last three or four years, particularly at margin levels or capital levels. But our market share in Italy relies on the fact that it's structurally small. We haven't been able in the past to increase our market share through investments or through acquisitions, despite, you can believe, we tried our best. So that means that this is out of our style, out of our strategy. What is our strategy? This is probably your question. We want to be one of the leaders in every region we are present. We are one of the leaders in market share and in competitiveness in Iberia, Spain, and Portugal. We are the leaders in the UK with two unique glass manufacturing sites combined by a unique large bottling facility in the south. And we do have approximately 20% of the market share in Brazil. So, obviously, we want to increase our market share in Brazil and in Latin America.

Maybe then just as a follow-up, being a regional player and having proximity to your customers, having good scale, what are the key benefits that you're looking in to invest behind in the UK and Iberia? I'm just trying to understand you when you're thinking about your capital allocations to make sure that you retain that market leadership in Iberia and And the UK, what are the areas that are of most interest to you? Is it on the raw material sourcing side, on the cullets? Is it kind of continuing investments behind efficiencies of your existing plants? I'm just trying to understand, where will you be allocating capital in those markets?

Well, this is a good question. There are two ways for us to allocate capital, and these two ways will be different depending on the level of maturity of demand and the different regions, okay? it's very evident that Southern Europe is a much more mature demand than Brazil, just to put things on extremes. And that means that the capital that we will allocate in our traditional regions, let me say quite profitable regions historically for us, will be capital used to improve our cost base and not to expand our capacity. Improving our cost base means... Investing on verticalization means investing on energy transition and means investing with economic sense to improve our cost competitiveness and to offer a more competitive proposal to our customers. And that will be the case of Iberia, Spain and Portugal. In the UK, we will see, in terms of capital allocation, we will see some opportunities to allocate capital to improve our cost, obviously, but also to allocate capital to enhance our different business approach, for example, in our boating activities. So we will probably, hopefully, find some opportunities to allocate capital in the UK, despite the level of maturity of demand is also high, as it is in continental Europe. because our business in the UK is different and will offer us some opportunities, small, minor opportunities to grow. And in Brazil, or even in Latin America, if we think it big, we will be tempted and we will try our best, we promise, to allocate capital to expand capacities and to improve our market share and our presence in a region that is full of opportunities for us.

Thank you.

Ladies and gentlemen, please be reminded that if you wish to ask a question, you may press star 5 on your telephone keypad. We have a follow-up question from the line of call from Jeffries. Please go ahead.

Thank you for taking the follow-up question. I'd just like a little bit more color on the quantum of the Italy disposal. I mean, if I think about the capex needed for a new glass facility like that, I would imagine the new capex cost would clearly be lower than what you're selling this business for. Could you just give a little bit of color on what the approximate capex of building a one or two glass facility furnace line would be if you were to build a greenfield site. Thank you.

Thank you. Well, this is not an easy question to answer. What we can say is our experience. We acquired this site 15 years ago, approximately by approximately 50 million euros, and we decided to invest approximately an additional 120 million euros, 110 and 120 million euros five years ago. the result of this initial investment, and the additional investments basically creates the extraordinary profits that we have published in our press release. But that doesn't mean that replicating a site like this from scratch has a cost of 150 or 160 million euros, probably. The capital needed to replicate this model is higher than this, and more than the capital needed, the operational difficulties you can find to build a new infield similar to the site that we are divesting or trying to divest takes probably more time, surface of land, recruiting of people, operational difficulties, design, engineering, the rest of things. So, okay. I will say at the end that we are doing a good deal because the value that we are capturing is above the value we have considered in our accounts, because this deal is helping us to refocus on real core regions. And unfortunately for us, Italy was not a core business for Pedrala. But I will say that the other part, Pedrala is also doing a good business in terms of the multiples they are paying and the valuation we have agreed. Thank you.

The next question comes from the line of Inigo Busquiza from Caltech. Please go ahead.

Hi. Good morning. Buenos dias, Inigo, Raul. Thanks for your presentation. I have two additional questions, if I may. The first one is on, Inigo, you mentioned pricing and volumes, performance in in the full year, if you can give us more or less the numbers for the Q4. I have the impression, making the calculation, which are quite similar, but if we have seen any change in volumes in Q4 versus Q3, this is the first question that I have. And the second question that I have, Raúl, is if I understood well, it seems that the year has started slightly slightly better in Europe. You were mentioning that you are increasing utilization capacity and that volumes, I have the impression, have slightly recovered in January and February, as you were mentioning. The question is, what about pricing for 2024? I don't know what is the level of pricing or the price adaptation that you are mentioning here. uh previously uh after uh the big increase we have seen on on pricing in both 2022 and 2023 thank you okay thank you very much uh regarding uh

Pricing volumes in Q4 and full year. As we mentioned, full year 2023 prices we saw, sorry, volumes we saw a minus 7 decline, including the park contribution, with prices slightly above 20%. And in Q4, what we saw is volumes now in the range of minus 10%, also including the park, and prices up in the range of 14%. Okay. So very similar trends in terms of volumes in comparison to Q3, and slightly lower contribution from pricing just because of the comparison basis of last year, of the last quarter of 2022. If we take a look on pricing, regarding your second question, pricing for 2024, as you may remember, we were, communicating expectations in terms of pricing for this full year in the range of minus 5% to minus 10%. This is excluding Vigoro Porto, where we expect pricing to be more in the range of flat to slightly positive. And we are, for the start of the year, these two months of this year, we are more or less in this range of minus 5% to minus 10% in Europe, the UK and Ireland.

And you're following this question regarding a trading update at the beginning of the year so far, where this is only the start of the year, you know. There is little we can say with you so far. And first, more relevant, we have quite different markets. Demand dynamics in Brazil are very different than in Europe. So I assume that your question is basically focused on Europe, where we suffer the most in 2023. And what we are seeing so far is some positive growth. even despite the prior year comparison so far, is before demand began to drop. So this is not bad news. But please let us remark that it's only the start of the year because of our pure natural seasonality of our sales. The beginning of the year is particularly not representative of the rest of the year.

Okay. Thank you, Raul Aniño.

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. So there are still some further questions via the webcast that we will try to answer now, okay? First one, the question says, what are the reasons for paying an extraordinary dividend instead of share by backs, given the current Vidrala's low valuation?

Well, thank you very much. As you know, this is part of our style. I won't discuss the valuation is low or high. We never speak about the surprise. We just try to make our best in terms of making profits, having a plan, etc. So we are actually combining different NIA alternatives to return cash to our shareholders. We are increasing our cash dividend structurally annually. We are committing to return cash in the form of dividends after these divestments. And third, please keep in mind that we are today actively buying back shares as part of our buyback share program that was announced yesterday. some weeks ago. So we are actually buying back shares, as Iteria said in your proposal. Thank you.

Yes, in addition to that, the program to acquire shares amounts to a maximum of 330,000 shares, equivalent or a maximum of 33 million euros, and is expected to or has a maximum time duration of 12 months. It's expected to be completed during 2024. There is another question in this case on Brazil that says if we could see an increase in capacity in the Sergipe plant, the plant in Vitroporto in the northeast in 2024.

Well, what a good idea. Thank you. We'll think on this.

And then there are some other questions. First of all, on CapEx, which is the amount of recurring CapEx for 2024 and what is a good proxy in terms of sales. Okay, we are seeing that CapEx in 2024 should be something in the range of 10%. This should be a figure that sounds reasonable for us. It's not pure replacement CapEx, as you know. Let's say that one-third of this CAPEX will be dedicated to investments related to on-site power generation and other sustainability projects. But yes, still this 10% of sales looks reasonable also after the different perimeter, including Vitra Porto, excluding Vitrala Italia. And probably related to this, there is some questions related to our plans to reduce carbon emissions. And probably the answer regarding CapEx is part of this answer. First of all, the actions that we will take in the short-medium term will be mainly dedicated to a higher electrification of our furnaces. This will mean that we'll have somehow hybrid furnaces. The last furnace that we have built or started in Portugal last year is already a furnace that is able to work at higher electrification rates. For this to happen, we will invest, as I just mentioned, in on-site generation, power generation facilities, and probably looking more into the medium, long-term. We are researching alternative fuels to fit our furnaces and to reduce further our CO2 emissions. Okay, there are some other questions in the webcast regarding margins, debt, M&A, dividend outlook. I think all of them have been answered throughout the presentation or the Q&A session. So I assume that all of them are answered. In any case, if somebody feels that some of the questions haven't been answered, just feel free to contact us after the conference call. Okay, so once again, Thank you for the time that you have dedicated to us, especially on this very busy day for many of you. And, again, just to remind you that we are at your complete disposal for any further questions that may arise.