Vidrala Sa

Good morning, everyone, and thank you for the time to join this call. As previously announced, Bidron has released its 2024 third quarter results earlier today, and we have also published a results presentation that will serve as the supporting material for this conference call. In line with the presentation, we will begin by briefly reviewing the key figures disclosed today, and then we will dedicate ample time to discussing business performance in the Q&A session. So starting with the main magnitudes in the first nine months of 2024, we achieved as most relevant business figures revenues above 1.2 billion euros, an EBITDA of almost 338 million euros, and a net income equivalent to an EPS of 7.22 euros. Net debt at the end of the period stood at 299 million euros, which is equivalent to a leverage ratio of 0.7 times the pro forma EBITDA, which considers the contribution of the last 12 months from Bitterport. Moving to slide 4, we look at the top-line performance by analysing the annual revenue variation categorised by concept, leading to the reported figure of 1,216.4 million euros. As shown in the graph, this figure reflects 0.9 growth at constant currency and comparable scope. Volumes increased by almost 9%, which was nearly offset by a negative price-mix effect. FX and scope, which aggregates the combined effect of the incorporation of Vidro Porto's 2023 year-to-date results and the exclusion of Vidrella Italy since 1st of March 2024, these two effects contributed an additional 1% to revenue growth. Continuing with the key business figures mentioned earlier, we analyzed the variation in operating income using the same breakdown. So for the first nine months of 2024, EBITDA amounted to 337.7 million euros, representing an organic improvement of 4.3%. Considering the rest of effects, EBITDA increased by 7% year-on-year. These operating figures led to a robust operating margin, EBITDA over sales, of 27.8% in the period, which means an expansion of of 140 basis points compared to the previous year. Now, in this slide, we present the distribution of sales and EBITDA by business unit under the new perimeter, that is, including Vidro Porto in 2023 figures and fully excluding the results of Vidrella Italy in 2024. Although, as you know, Vidrella Italy contributed to reported sales and EBITDA in the first two months of 2024, and then it was reported that discontinued operations contributed to net profit from March to June. The graphs show very similar trends to that reported back in July. Iberia is still experiencing weaker performance due to price adjustments and a soft demand context, but results should improve in Q4, mainly due to easier comps. The UK continues to perform well driven by the filling business integration and better glass falling performance. And Brazil is still enjoying the benefits of the capacity expansion executed in 2023. Finally, we take a close look at free cash flow generation using this chart that outlines the year-to-date cash conversion. Starting with an EBITDA margin of 27.8%, we have allocated 10.4% of sales to investments and an additional 4.6% to the aggregate of working capital, financials and taxes. Consequently, free cash flow generation is close to 13% of sales. As a result of this, net debt at the end of September 2024 closed at 299.1 million euros, which is equivalent to the leverage ratio of 0.7 times last 12 months pro forma EBITDA. These figures include, of course, the reimbursements for recent M&A and the acquired debt, as well as the proceeds from the sale of Italy and the amount allocated to dividends and survey backs. And now, before turning to the Q&A, I pass the word to Raúl so that he can strike main conclusions or highlights and make additional comments.

Good morning. Thank you, Inigo. And thank you all for attending this meeting today. It's Friday morning, quite a busy day for most of you. We are aware of this, and that's why we do appreciate that much your time. Thank you. Well, our results published today put on evidence that we are creating a stronger Vidrala. A Vidrala grounded on a more solid business profile, better diversified, strategically refocused on core regions, resilient under weak demand environments, less seasonal thanks to a great combination of three different markets of activity with the proper dynamics, and above all, a business profile that is finally showing its capacity to generate a superior structural level of cash that will help us elevate the company to a new level as a packaging supplier of choice. Indeed, we see 2024 as a transformational year for us. A change that we are executing with the expected results. As a good proof of this, despite the prolonged period of demand weakness, we are still suffering in some of our more mature markets. We are today to reiterate our guidance for the full year. That means that we still see our full year EBITDA at 450 million euros, and that also means that we do expect to exceed 180 million euros of cash generation in the year, a point that will mark a record level for us to help us better invest to create future. And we will do it strictly fixed to our three core priorities, customer, cost, and capital. Customer first. We will invest with the aim to consolidate and reinforce our commercial relationships and supply our products and services under the most efficient, competitive, and sustainable way. Cost, second. We will use our internal glass manufacturing expertise to remain efficient, and we will use our superior level of cash to invest more, more than in the past, to further improve our competitiveness and better serve our markets. And capital. Third, we will strictly control our inventory levels to remain adapted to the existing conditions when needed. And much more relevant, we will execute our ambitious CapEx plans and our ambitious corporate strategy actions, maintaining always our financial leverage radius, and their particularly solvent levels. At the end, we are becoming a multinational company, a particularly competitive manufacturer. We invest with ambition. Finally, in my conclusion, you probably may note in my words that we are living intense times in Vidrala, quite dynamic internally. We have the confidence that we are creating future. that will be reflected in value for our shareholders, in competitive service proposals for our customers, in future for our people, and in business sustainability for all of our stakeholders. Hope you today appreciate in our numbers, in our message, a good proof of our confidence in our purpose. Thank you.

Thank you.

This finalizes our exposition, so we now give way to the Q&A session. 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... five-star on your telephone keypad. The first question comes from Alberto Espelosin from GB Capital. Now your line is open.

Hello, Raúl and Joan. Good afternoon. Thank you for taking my questions. I have two, if I might. The first one is relating to volumes. It seems that after two years of constant volume declines in Europe, mainly in Iberia, We have now reached a drought and a somewhat more positive volume cycle is beginning. My question is, what is your view on this and how and at what speed do you expect volume increases in Europe to take place? And my second question is relating to pricing. You should already be negotiating prices with customers for next year. Should we expect any relevant price adjustments for next year? And should we expect a positive price-cost spread in 2025? Thank you.

Well, thank you, Berto. With regarding volumes, regarding our demand conditions, please let me start helping you consider that we now have three different markets of activity with three quite different macro demand dynamics. And this is a new proof of the solid business combinations we are creating. I mean, we are seeing some growth in Brazil while we are seeing some weakness in Europe and the UK. And this is, I mean, quite consistent with what our margins, sorry, our customers are reporting. And this will obviously dictate our strategy. With regards to your specific questions, I assume that you refer to the demand conditions that we are seeing in Europe and the UK, our more mature markets where demand is weaker. Here, demand has dropped over the last two years approximately minus 10 to minus 15 percent organically, globally, not in our specific case. And despite we don't see yet the signs of recovery that some were expecting, It is true, and it is probably evident in our numbers, as you say, that the demand has at least stopped dropping. We shouldn't be particularly optimistic about a potential quick, immediate recovery of demand. We have little, let's say, macro or external reasons for that. But we do think that additional demand drops having reached to these levels is, under our view, particularly for our case and our specific commercial positioning, unlikely. or 2025.

Thank you, Raul. Just to add some points, Raul was speaking, Alberto, which I understand was your question on general demand trends, external organic demand trends. Just to clarify our volume performance by region, we are roughly flattish in the nine months in Iberia and others in terms of volumes. We are up plus 9% in the UK and Ireland in the first nine months. And in Brazil, due to our specific characteristic of the new capacity executed back in 2023, volumes are up almost 60% in the first nine months. Based on your first question, taking the second question on prices 2025, well, it's still too soon. We are right now in the moment of elaborating our budget for next year and negotiating with customers. Just to remind you that More than 50% of the group sales are now subject to commercial agreements linked to price adjournment formula with the capacity to transfer cost variation to sales prices. The result of the formulas today are pointing to a small price moderation, let's say down low single digit for next year, as they show with some delay. cost trends, okay? Because probably we are not seeing significant, let's say, deflationary trends looking into 2025.

Thank you, Inigo. Just to add on this, Alberto, as you may know, we have significantly reduced our prices this year after the needed increases implemented in the previous two years to recover past abnormal inflation. And we are doing this, we are adapting down our prices significantly maintaining our margins under, I would say, a reasonable level of control, proving that our pricing initiatives are consistent and our internal cost actions are providing some results. Looking ahead to 2025, as Inigo said, you should remember that a significant and growing portion of our sales volumes are priced under specific indexes or formula. The result calculated today gives us a modest negative variation, as Inigo said, For the remainder of our sales, customers with direct price negotiations, we will make our best to remain competitive, remain as the most attractive supplier of choice. But we have little reason so far to reduce our prices, as we still see inflation in many of our cost factors, for example, the energy factor. It is true, external cost inflation is much more moderate. That's good news. for us, for our customer, and for the consumer, but inflation is still positive.

Perfect.

Thank you. The next question comes from Francisco Ruiz from BNP Paralyze Exxon. Now your line is open.

Thank you very much and good morning. I have three questions. The first one is on the sharp increase on UK margins. You pointed out 9% volume growth, which is an acceleration versus what we saw in Q2, but If we compare with last year, there is more than 600 basic points of improvement in margin. So I don't know if there is a reason for that, if it's sustainable or it's something I want to see this quarter. We will not see in the coming months. The second question is on the precast soil generation. So there has been also an acceleration here with more than I mean, according to my calculation, 65 million euros of free household generation this quarter. If you could give us what's your estimate for the full year, because you got it to about 100, sorry, about 180, but this rhythm is going to be well above 200. So if there is something with inventories that has made it a big change. Last but not least, also, You highlighted that the market is strong, that you have or you see a nice market coming next year. What's your capacity utilization right now? You sold Italy, you closed one furnace. What is the ability that you have to grow next year with existing capacity? Thank you.

Okay, thank you, Paco. Well, first, regarding our markets in the UK, I'm What we are seeing today is what we were expecting. It's not a surprise for us. We are capturing new demand, particularly a year after the relevant acquisition for us, for our UK business of the bottling facilities, the large bottling facilities in Bristol, UK. Something that is helping us capture demand in a context where organic demand is not growing, obviously. And that means that we are using better our unique capabilities in the UK and CERC, as we named this subsidiary. And that has an effect of operating leverage. And the margins that we are seeing is the margins that we should have seen probably in the past. So, yes, answering your question, we do consider this level of margins sustainable for 2024 and beyond.

Then, second back on free cash flow in the quarter, you're right. We are reporting free cash flow for the nine months in the range of 155 million euros. This implies a free cash flow generation in the quarter of 65. This is mainly due to the positive contribution of working capital in Q3, which is basically explained by reduction on our stocks as a consequence of taking the right decisions back in 2023 to stop capacity to maintain a reasonable level of inventories. And, yeah, we agree with you. I mean, the guidance for the full year is to exceed 180 million euros of free cash flow generation. Not sure if well above, but we agree that free cash flow generation should be above 200 million euros for the full year.

Okay, and last question regarding demand conditions and our capacity control actions. Again, let me say that we have three different, very different markets of activity. In Brazil, it's a platform for growth for us. We are running at full capacity and we are successfully capturing the new sales. We needed to put on sale the new capacity with, let me say, hope you agree, evident results. Okay. In the UK, demand is weak, as it is in continental Europe. But as I said before, in the UK, our unique, particular commercial approach is helping us to capture some sales volumes. We are running there, again, at close to full capacity, and that's the reason of our confidence in our margins in the UK. You remember the first question. And third, Probably more relevant for your question is our business in continental Europe. Here, demand has dropped over the last two years, accumulated by minus 10, minus 15%. We are dropping slightly less, maybe because we are becoming progressively more competitive. But due to this relevant drop, minus 10, minus 15% drop in two years is quite relevant for The characteristics of our industry, we are forced and we will remain forced as much as needed to adapt our capacity to control inventories. That means that we are running at 85% capacity utilization rate in this region. I insist in the rest of our regions, UK and Brazil, we are running at full capacity. And the good point is that even after this less than optimal utilization of our capacity, our margins remain more or less safe, something that gives us confidence for the future.

Thank you. Could you give me the level of inventories that you are running at this moment?

Yeah, level of inventories. Paco differs by region, but at the group level, we are approximately at 65, 70 days.

That means, Paco, that our inventory levels today are not the problem they were a year ago in this period. Our inventory levels today are more or less normal with our historical data. with our historical level. So we will remain dynamic and we will control capacity progressively only when needed. And we are ready, very prepared to restart capacity in continental Europe as long as we need. Please do not consider that we have a problem of excess of inventories because this is not how we see the business today. No, 65 days is not a high level.

Thank you.

The next question comes from Louise Weiser from UBS. Now your line is open.

Hello, thanks for taking my question. I guess the first one is, could you give some color on the market conditions or the current trading by category? I mean, like spirits, beer, wine, and maybe there's differences in geographies based on that. And what is your visibility on that too? The second question is just with regards to pricing. I heard your comments around 2025. Just on 2023, where do you think you will land based on the kind of like minus 5% to minus 10% range that you were mentioning before? And the last one is on Brazil. Do you have any update maybe on, you know, you thinking about expanding capacity? I mean, you obviously mentioned that you were running at full capacity at the moment. So wondering, you know, if there's any update on that, please.

Okay. Thank you so much, Luis, for your question. So regarding different segments, what we see for the nine months of the year is basically the clients are focusing on wines and beers. The rest of segments, in our specific case, being flattish or even growing in the first nine months. Of course, this is different by region. So if we include, this is excluding Vidroporto, where we are seeing very significant growth especially on beer, because the additional capacity we executed in 2023 is basically linked to beer customers. Second, regarding pricing for 2024, if I understood right, for the nine months, as we said during the conference, we are seeing volumes up plus 9% almost in the nine months. Prices are down minus 8%, so we are fully in line with the guidance that we give of seeing prices at the group level of minus 5 to minus 10. I think that reference of the nine months is a good one for the full year.

Thank you, Inigo. Hi, Luis, my pleasure. Regarding your third question, it's true that we are running at full capacity in Brazil, it's true that we are capturing sales under a weak organic demand environment in the UK, but it's also even more relevant, true that it Demand is significantly weaker than expected in the rest of our business. That accounts for half of our business, continental Europe. So, actually, we are not thinking, unfortunately, in extending our capacity significantly. We are forced to think in how to control our capacity to adapt our inventory levels to our existing levels of activity. And I hope the industry is maintaining a similar approach Today, we need more than ever discipline. Maybe in some regions, we will need some rationalization of capacity, and we will try to support these bases as much as possible. The only lightness for us to extend capacity, not today, in a year from now, is in, obviously, South America, Brazil, where we are trying to create a platform for future growth and where organic demand conditions are stronger.

Sorry, so at the moment, no plans to further increase the capacity in Brazil. Is that right?

Not at the moment. Maybe in one year from now. I will invite you to repeat the same question next quarterly. Got it.

Thank you.

The next question comes from Beltran Palazuelo from DLTV. Now your line is open.

Hello, good morning. Congratulations for the strong results. I have two questions. First of all, regarding M&A, how do you see the market? What are you analyzing with your strong results? let's say balance sheet and also regarding you were talking about not increasing capacity, let's say next year, what would be the budget for CapEx? And then the second question regarding the cost of debt, if you could give us more detail exactly what you are negotiating currently with your Brazilian banks for the debt you have in reales and euros and how you want to manage it in the future. Thank you very much.

Hi, Beltran. Good morning. Well, thanks. Well, regarding M&A, I would say a predictable question. Our approach and our story remains the same. It's been quite an intense year for us in terms of corporate activity. You will agree with me, having invested in Brazil, having acquired the large boating facilities in the UK, and not less relevant, having divested from Italy. You may agree that we are forced in a period of prioritizing the integration of our new enhanced business model. And this is our priority. Having said that, we will remain dynamic. As always, you know us. We will selectively analyze potential opportunities. And that means that we will also selectively refuse most of the options we are offered. We will remain ambitious but prudent with care. And please give us the time we need to make the next movement.

And then regarding your second point, Beltran, on CapEx and debt, CapEx for next year should be more or less aligned with CapEx we're expecting for this year. This is something around 160 million euros. And today we are reporting a group debt of 299.1 million euros. Out of this, around 140 million euros is based on Brazilian reais, which is almost 50% of our debt. And the cost of that debt after having refinanced this in 2024 is around 12.5%. This is, as you know, our strategy to remain with Deporto, with debt that is denominated in Brazilian reais, because this creates for us a natural hedge, considering that the cash flows generated by Bidroporto will be used either to invest in Brazil or either to repay debt that is denominated in Rias.

Okay, thank you very much. All the support from my side. Thank you.

The last question comes from Enrique Yaguet from Vestimba Securities. Now your line is open.

Good morning, Raul and Igor. Most of my questions have been answered, so I have just two follow-ups. The first one is regarding the strong profitability recovery in the UK. Just to confirm that this is related with operating leverage and there are no deflationary tailwinds that might help in the quarter and in the future. And secondly, You mentioned that no capacity additions should be expected for next year. So just to confirm that guidance should be in line with this year in terms of sales. Thank you very much.

Sorry, I think your line had some problems. We didn't hear the second question. If you could repeat.

Yes. Just regarding the CAPEX guidance for next year, you mentioned that no capacity increases or additions should be expected for next year. So just to confirm that CAPEX for next year should be broadly in line with the current guidance for this year.

Yeah, just taking then the second question first, you're totally right. As we said, CapEx should be at similar levels to that that we are guiding for 2024, also in 2025. Okay.

And regarding your first question, margins in the UK, well, as I said before, our business in the UK is where we were expecting to be. Our margins are reflecting the strengths, the capabilities of our unique proposal. Large glass making facilities added with additional boat link services that help us capture new sales, new demand in a context where demand is not growing. And because of this, we are running at a close to full capacity in our UK business and that the explains why we do consider our current level of margins as sustainable and even the starting point for the future. We are in the UK as we were expecting to be years ago.

Okay, understood. Thank you very much.

We have a new question coming from Fraser Dunlop from Berenberg. Now your line is open.

Hi, Raoul and Inigo. Thanks for the presentation. It's Fraser here. I just wanted to continue the line of questioning on the UK. Could you maybe colour a little bit like what your competitors have been doing in terms of capacity shutdowns or stoppages in the UK? And then I guess the add-on to that is kind of where do you see your price level on those versus... competition in the UK given seems to have been remarkably resilient this year and sounds like you don't expect a deterioration next year either. Thank you very much.

Hi, Fraser. Thank you very much. Well, you know that in the UK, the competitive dynamics are quite particular. We are by far the strongest competitor with only two glass sides in terms of economies of scale. Serving approximately 40% of the market with additional boating facilities that help us consolidate or reinforce even better our commercial relationships. So I would say that our competitive dynamics in the UK make us always stronger than our competitors. What we are seeing in the big names that compete with us in the UK is probably what you have seen because they are public companies. I won't mention nothing more than a I'm recommending you to compare our margins with their margins to try to understand what the competitive dynamics will dictate our future in 2025 and beyond. Regarding prices, the understanding of our UK business is easier than the rest of our business, as long as a significant portion of our sales volumes of our customers in the UK are dictated or priced by formulas or indexes. That accounts for more than 70%, correct if I'm wrong, Inigo, 70% of our sales volumes. So there is little to do for us in terms of commercial actions regarding pricing initiatives, but to obtain the result of this formula. And this formula, a typical formula, is today giving us a result of modest negative variation, low single digit, additional to the relaxation that we have executed in 2024. I hope this is good news for our customers. I hope that help us remain competitive in the UK market as we need. And you can be sure that with this result in our prices, our margins are safe. We feel confident on that sense. Thank you.

There are no further questions by telephone. I return the floor to Mr. Mendieta.

Thank you. There is just one additional question that we have received via webcast that said that, okay, given that there is no intention to increase capacity, where are the 160 million to be invested? Is the 160 million the minimum level for maintaining this? First of all, the On the second part of the question, this is not the minimum level of maintenance, but this is the amount that we will invest as an average in the next years. This includes pure replacement, which is clearly below this 160 million euros. But we are investing in technical improvement of our facilities. We are investing also and we will invest in vertical integration. Feeling is an example. Logistics is another example. And we are investing in sustainability, which in the most immediate short term means self-generation energy facilities. Where will be the 160 million invested? Our rationale behind that is, OK, first of all, we have to understand which is the replacement calendar of our furnaces. And the remainder probably will have a tilt towards growth and towards Brazil. And finally, we have just received an additional question through the webcast speaking about the energy hedging. So considering both energy hedging and those energy supplies that have been directly contracted at a fixed price, we estimate that around 70% of our 2025 energy exposure is today protected against market movements. And then finally, it says consolidations. if this will be only focused on South America or could be also focused on Europe, as Raul said before, our intention probably is today now more focused in South America because of the diversification and the growth profile of this region. But of course, if there are some potential opportunities in Europe, at least we will analyze them. So, We have now addressed all the questions received via the webcast, also via telephone. Thank you once again for the time that you've dedicated to us. Please remember that we are always at your disposal for any further inquiries. And don't forget to keep choosing glass. It's good for your health and great for the plant. Thank you all. Have a nice weekend.