2023-08-06 11:44:10 ET
Lenzing Aktiengesellschaft (LNZNF)
Q2 2023 Earnings Conference Call
August 2, 2023 09:00 ET
Company Participants
Stephan Sielaff - Chief Executive Officer
Nico Reiner - Chief Financial Officer
Conference Call Participants
Isha Sharma - Stifel
Markus Mayer - Baader Helvea
Teresa Schinwald - Raiffeisen Bank International
Presentation
Stephan Sielaff
[Call starts abruptly]
Also from my side, a very warm welcome to the presentation of Lenzing's Half Year 2023 results. With me today is Nico Reiner, our CFO. And let's go quickly through our agenda for today. We will start with an executive summary, followed by an update on market developments. Afterwards, Nico Reiner will guide you through the financials and I will talk about how we expect the next quarters and beyond. We will end with the Q&A and I look forward to a lively discussion.
Let's start with an overview of the key developments and strategic highlights of the first half year. In the first quarter, we saw first signs of recovery in the fiber market with solid business development in nonwoven as well as good demand on the pulp side. The second quarter has continued with fiber demand improvements versus the second half for the year 2022; however, prices remain under pressure. The positive development on the raw material and energy cost has continued, as expected but these costs are still high on elevated levels versus pre-crisis performance.
Our cost reduction program, with an annualized impact of over €70 million as well as the strengthening of our sales activity program are well on track. We have proactively and with foresight in mind, significantly strengthened our liquidity and deleveraged our balance sheet with a successful completion of a capital increase with net proceeds of €392 million. In parallel, we have proactively extended upcoming debt amortizations in the amount of €249 million.
Let's move to the financial results. On the revenue side, we saw further recovery in volumes in line with the market environment compared to the second half of 2022. But, as mentioned before, prices continue to be under pressure. Costs further decreased in the second quarter compared to the last quarter, leading to a positive impact on EBITDA. In addition, there was a positive impact from valuation of the biological assets.
Revenue slightly decreased versus the first half year 2022 to €1.25 million versus €1.294 million in 2022. EBITDA reached €137 million versus €189 million in the precrisis half year 1, 2022. If we compare the EBITDA in the second quarter 2023 to the last quarter, we can see a clear increase from €30 million to €107 million. The net result after minorities and hybrid bond was negative at €104 million versus €63 million in the first half of 2022.
The free cash flow significantly increased in the second quarter of 2023 to minus €33 million versus minus €132 million in quarter one, 2023. Looking at our guidance, assuming a continued market recovery, we'll keep the expectation of EBITDA in 2023 to be in the range of €320 million to €420 million.
With this, I would like to give an update on some of our key costs. In the second quarter of 2023, both energy and chemicals cost came further down compared to the last quarters. However, if you compare those costs to previous years, the prices are still elevated. On the left-hand side, you can see the decline in energy costs. Most notably, the European natural gas reduced to €35 per megawatt hour in Q2. However, you need to remember that in the first quarter of 2020, this price was below €10 per megawatt hour.
On the right chart, you can see the development of caustic soda, one of our key ingredients in the viscose production. Prices have come down in all geographies. However, European market prices are still almost twice as high as before the pandemic/before the crisis, the Ukraine crisis. The prices in China and Southeast Asia are also significantly higher than earlier. Please keep in mind that those development of market prices do not fully reflect the impact for Lenzing as we are sourcing at better conditions in Europe and we partially source from Asia if the price delta is very high and benefit thereby from our storage facilities in Italy.
Let's look now at some of the developments on the demand side. Let's start by looking into inventories along the textile value chain which has been particularly important aspect of what created the perfect storm in the second half of last year. On the left, you see inventories of the Chinese viscose industry. Industry increased drastically in the second half of last year, reaching close to a full month. Since then, they have come down to a much more manageable level and we are now at roughly 15 days which is a very healthy level. However, downstream, we still have above-average inventories in rayon yarn as well as stretch fabrics.
And the biggest issue continues to be apparel inventories. You can see the number -- the U.S. numbers on the right. As you will remember, they increased during last year and they did come down seasonality towards the end of the year. But since then, we rather see limited movements. Yes, the impact of apparel to the U.S. are below average but it still seems to take time for brands and retailers to meaningfully reduce excess inventory.
When we look now to the fiber prices, we see in the Chinese Viscose market, prices followed the declining DWP price from early May. Operating rates in the Chinese VSF industry were really high throughout the second quarter, ending up at a level of 87%. And at the same time, repeated sales promotions kept inventories low, at the mentioned 15 days we've just seen on the previous slide.
On the cotton side, we still experienced high price volatility as well as stock buildup in various markets. The reasons for that are twofold. On one hand side, on the buyer side, we still see inflated inventories on the very expensive cotton as well as the cotton market reacts to the interest rate hikes as well the banking crisis in March. Cotton is also late to react to any change in demand since once planting is done, the volume will hit the market regardless of the demand.
Polyester prices, not shown here on that slide, are largely following the development of the intermediate prices. And here, we saw a rather stable development. DWP prices started to decline early May. At the same time, the prices for paper pulp in China dropped rapidly by almost 40%. In dissolving wood pulp for the fiber production, some mill-specific supply constraints as well as a relatively healthy demand prevented a similar drop.
On the next slide, you see one of our cornerstones, the premiumization and the good news is Lenzing could defend its premium. Lenzing had more than 75% of its fiber revenue from specialty fibers in the second quarter of this year. On the left chart, you see how our specialty prices develop compared to commodity viscose on an index basis. Since 2017, Lenzing could increase the premium of these specialty fibers compared to commodity fibers until 2019 and it could maintain these premiums at solid levels since, despite the various crises. And how was this possible? This was supported by our strong branding activities.
As you know and as you are aware, we are not a classical B2B supplier. That is always in danger to be commoditized. We are actively driving our B2B2B model throughout our co-branding program and are highly successful with this. We operate successful a push and pull strategy built around blue chip customers through involvement and early involvement in their value chain decision process. This resulted in numerous partnerships with those very important brands in the textile industry. And you see on the right-hand side that between 2020 to 2022; the number of co-branding programs quadrupled.
As you know Lenzing is a champion of sustainability. But Lenzing is also a champion when it comes to innovation and branding. And you see here a couple of examples what happened in the first half of 2023 to underpin this leadership. You see on the one hand side on circularity, we have developed a product which will be launched in the autumn-winter collection of Filippa K based on our TENCEL REFIBRA fibers.
All of you know the brand, Neutrogena. Neutrogena is as committed to sustainability as Lenzing is and they committed to shift their entire portfolio to 100% cellulosic-based products. And we are very pleased that out of 88 million licensed products, 77 million products will be 100% VEOCEL.
Also in the textile segment, we can report a major success. We presented at the ITMA, one of the most important textile fairs in Milan, a machine together with the KARL MAYER GROUP which is able to produce a carbon zero T-shirt. And finally, Lenzing is on the pink carpet with Barbie. We actually are very proud that we could equip the actress Nicola Coughlan with a wonderful dress on the pink carpet made out of TENCEL fibers.
With that, I would hand over to Nico for the financials.
Nico Reiner
Thank you, Stephan and a warm welcome from me as well. Let's start with revenues. They increased slightly to €627 million versus €623 million in Q1 2022. Looking at the half year, revenue slightly decreased to €1.25 billion from €1.29 billion. This development is mainly due to the decrease in fiber revenues while pulp revenues increased. Fiber prices continued to remain under pressure as outlined by Stephan.
EBITDA reached €107 million which is a clear increase compared to Q1 2023 with an EBITDA of €30 million. This includes a positive impact from the valuation of our biological assets of €25 million in the second quarter and €18 million in the first quarter. Looking at the half year figures, EBITDA decreased from €189 million to €137 million.
Looking at EBIT; it turned positive again in the second quarter and reached €29 million, a plus of €71 million compared to the last quarter with depreciation and amortization being at €77 million. For the half year of 2023, EBIT was negative at minus €12 million. And for Group, net profit attributable to Lenzing shareholders in Q2 2023, we reported a net loss of €24 million which compares to €80 million in the first quarter. For the half year, net loss amounted to €104 million. Financial result was comparable to the first quarter at minus €31 million and income taxes were positive at €1 million.
Looking now at cash flow. In the free cash flow, we can see further positive impact from our CapEx reduction due to the completion of our 2 projects in Thailand and Brazil in 2022. Operating cash flow came out positive again at €18 million. As a result, free cash flow significantly increased to minus €33 million, by almost €100 million compared to the first quarter this year. Going forward, in 2023, we will not have such significant projects and are therefore confident that CapEx levels are further normalizing and investments will be focused on maintenance CapEx.
Trade working capital slightly decreased in the second quarter of 2023 which was mostly driven by a slight decrease of trade receivables and an increase of trade payables and a slight increase of inventories overall. Due to ongoing working capital improvement measures, we are confident in our ability to further optimize our working capital which will benefit our free cash flow going forward.
On the next slide, we show historical net financial debt quarterly evolution. Reported net financial debt increased slightly to approximate €1.95 billion from €1.92 billion quarter-on-quarter, mainly due to the negative free cash flows. Since the quarter end, Lenzing has raised €392 million of net proceeds via a rights issue to strengthen the balance sheet and liquidity position and to provide sufficient flexibility to further support better growth, strategy and cash generating profitable growth.
Net financial debt position materially improved at €1.56 billion pro forma for capital increase. This continued deleveraging trajectory expected over the remainder of 2023. The capital increase together with the expected market recovery will support Lenzing's path to net leverage ratio target of below 2.5x. The capital increase increased Lenzing's liquidity cushion by €392 million to a pro forma level of €971 million by the end of the second quarter.
In parallel, we have proactively extended upcoming debt amortization in the amount of €249 million with the majority impacting debt maturities in 2024. As you can see, we are basically financed through the end of 2025 with this.
By having said that, I hand over back to Stephan now for the outlook.
Stephan Sielaff
Thank you, Nico. This is a chart we have shown to you in the past. But in case you haven't seen it before, let me quickly explain. The International Textile Manufacturing Federation, short ITMF, conducts a bimonthly survey amongst close to 300 executives in the global textile industry which we believe is actually a pretty helpful pulse check of the industry.
The satisfaction with the current situation had declined since November 2021. And now in July survey, it improved for the first time from minus 36 pp to minus 27, suggesting though that the overall sentiment is slightly improving but minus 27% is still a very negative sentiment. The single biggest concern continues to be the weak demand mentioned by 2/3 of the respondents. However, it is very fair to say that, in particular in textile, the visibility is even lower than before. Brands are acting with a lot of -- a high portion of cautiousness, order patterns have changed and the supply chain is trying to act on a very short notice, avoiding inventory buildup. On the positive side, the business expectation in 6 months continues to be very optimistic at plus 21%, pointing towards a potential recovery.
Let's see what potential this impact has for Lenzing. To remind you, 2022 was an unprecedented year and we call the second half of 2022, the perfect storm. Costs in Chemicals and Energy were at unprecedented levels, demand for fibers in the textile industry declined in the second half which led to a decline of fiber sales and sales prices for Lenzing. Free cash flows were significantly affected by the CapEx for our 2 new plants in Brazil and Thailand and inventories built up as well as by the resulting negative operating cash flow.
In the first half of 2023, costs have declined but were still elevated as explained before. Actually, non-woven sales as well as pulp, including co-product sales remained solid, while textile sales started to increase compared to Q4. Fiber prices remained, as explained before, under pressure, DWP prices were relatively stable at least up until May.
Due to the completion of our new sites in Brazil and Thailand in 2022, CapEx decreased by about 55% compared to the second half of last year. In the remaining 2 quarters of 2023, costs are expected to further decrease. However, at a slower rate and the cost saving program is expected to further contribute. We expect actually stable demand in pulp, including co-products as well as for the non-woven business.
While visibility for demand in textile fibers is still very low with a positive impact on prices when the market recovery happens. As a result, operating cash flow is expected to increase, CapEx will be focused on maintenance and trading working capital is expected to decrease. Now, what does that mean for our outlook? As mentioned before, we saw signs of demand recovery accompanied by raw material and energy cost decreases in the first half of 2023.
Whilst visibility, in particular in textile, remains restricted, we expect further upside in the second half of 2023 compared to the first half. And the main drivers for these upsides are; number one, our recently completed expansion projects and these are not only Thailand and Brazil but lately also China and they will contribute to the result of the second half. And I can announce that also in Indonesia, we are very confident on the progress of the modernization of that factory.
Second, our global cost reduction program with more than €70 million annualized savings as well as the measures we are taking to strengthen our sales activities are well on track and are expected to have a further positive impact in the second half. We expect also further decreases on costs, in particular on raw materials, however, at a slower rate. And number four, we expect stable demand in pulp, including co-products as well as in non-woven. As a result, we keep the expectation of EBITDA for 2023 in the range of €320 million to €420 million, assuming a continued market recovery.
During this presentation, we already spoke about the operational measures we have implemented in the recent past. I think it is important to point out at this stage that we think that Lenzing is in a great position to capture the market recovery and to harvest what we have planted with our capacity expansion, with our significant investment program in the past.
And give me, please, your attention to take you through the 7 strong reasons why we believe we have such a strong positioning. Number one, we cover the mega trends of sustainability and recycling in a unique way. Number two, our market has a structural growth drivers included basically built-in. This is driven by the population growth and the improving middle-class income globally.
Number three, we as a company, we as Lenzing, we are shifting towards specialties. By the fourth quarter of 2023, the Group expects that all of its production sites are capable to produce specialty fibers. Number four, we have competitive costs and we have an innovation advantage through our backward integration in DWP with our latest investment. As mentioned before, Lenzing has a unique position when it comes to branding. We have by far the strongest brand portfolio with TENCEL, with VEOCEL and with ECOVERO to support the brands of our customers.
And number six, we drive our day-to-day continuous improvement agenda. Efficiency is part of our better growth strategy and it is the clear focus of the entire management team. And last but not least, we just added with our investments in Thailand but now in China and soon to come in Indonesia, enough capacity to capture the growth.
With that, we finish our presentation and I would hand back for the Q&A section.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Isha Sharma from Stifel Europe.
Isha Sharma
I have 3 questions, please. The first one is on the one-off impact of revaluation of biological assets. Thank you for giving us that number. It was around €45 million in the first half. Should we assume a similar adjustment for the second half as well? The second question is on the CapEx guidance. I will try my luck again. Could you give us a medium-term normalized growth and maintenance CapEx guidance for the Lenzing Group please?
And the third one is on the market trends. It seems that the last data point shows that Chinese inventories are increasing again. And I do understand that you don't have much visibility on fiber sales. But could you give us a flavor of how you think inventories are at your customers globally? Seems really high in the U.S. still, so wondering if we can assume that across the regions?
Stephan Sielaff
Thank you, Isha. Now with the first question with regards to the valuation of the biological assets, I will give this to Nico Reiner please.
Nico Reiner
Yes, thank you. So, as you already mentioned, we are clearly showing in full transparency, the effect of this biological value coming into the numbers from the first half year. And as you might know, these valuations are underpinned by a long-term development also in the situation of when we are doing these topics. So, basically, these long-term trends tend to be then also for longer time. And having said that, it is a positive impact probably also going forward. But you can -- might do a calculation on it on your own as these topics are continuing -- might continue. So therefore, a clear guidance going into the second half year, it's not possible to give me to you, as I do not know the markets on these biological assets, as how they develop directly. But first of all, as a fair assumption, if you do an old calculation, you could assume that.
Stephan Sielaff
Now the second question was with regarding to the CapEx, especially with regards to maintenance CapEx.
Nico Reiner
Yes. Basically, when it comes to CapEx, as I have to say here, we are not guiding on separated boxes of CapEx; so, for maintenance CapEx and for growth CapEx. But clearly to state, we are really focusing now at this point of time on maintenance and license to operate CapEx. These are the clear guidance on the CapEx side. So I think these are the key takeaways which you might take into consideration. Now, the third question was with regards to the inventory levels that we see on global scale. I would hand over this one to Stephan.
Stephan Sielaff
Yes, thanks a lot. Thanks for the question. Yes, as we elucidated, the viscose overall inventory is still in a healthy range. When you go further down the textile value chain, I would say also on the yarn side, it looks better than it looked last year at the same time. However, on the apparel side, we still see inflated inventories, I think, in particular in the U.S. but also in some Western markets.
Operator
And the next question comes from Markus Mayer from Baader Helvea.
Markus Mayer
Several questions from my side. Maybe I ask them one by one. I have a question block around your guidance, as an add-on question to Isha's question. How much of this one-off effect from the revaluation of your biological assets have you baked into your guidance for this year? Or is basically nothing baked in, whenever something comes then this is a nice add-on? Additionally, on the guidance then, should we see the Q2 EBITDA as a good run rate then for the second half, maybe even then only the -- depending on your other -- the first question, the EBITDA excluding this one-off effect of €25 million in the second quarter? And do you expect also fibers to generate the positive EBITDA in the second half as so far your EBITDA contribution is solely coming from the pulp division.
And also on the Pulp division, can you give an insight how you see the development going into the second half? Should we see the first half as a good run rate for the second half or is, in particular, the Q2 a good run rate for the second half? Or is there anything on the agenda you would like to flag? And then, I have two other questions and two other blocks but maybe we focus on the guidance questions first.
Stephan Sielaff
Thank you, Marcus. Yes, I would still structure this, I think, into 3 questions. So the first one with regards to guidance. So how much of the one-offs are expected to be in there?
Nico Reiner
It's simple, as I have to say, we are not giving any details which is at the beneath of the guidance. But I have to say here, clearly, we are holistically looking at our guidance which we are providing to the market. So that would be my comment on that one. Thank you.
Markus Mayer
And the next one was also regarding the guidance, as I understood. So, about our assumptions with regards to a run rate of the EBITDA for the next quarters to come, if that would be in the range of what we've seen in the second quarter?
Nico Reiner
So, basically, this is something which you can mathematically follow relatively easily as you do have the knowledge about our first quarter earnings and also the knowledge about our second quarter earnings. And what we always said is, based on the recovery of the market, we are highlighting this guidance on the EBITDA level. And when you're doing this mathematic calculation, you are pretty much easily ending up with some numbers which is giving you then the clear direction. So if you sum up, we are now at €137 million EBITDA by the end of the first half year. And to reach our guidance, if you make the calculation on the delta, you can clearly see what our expectations are on the improved market situations which we are hoping to achieve.
Markus Mayer
Okay, understood. But maybe an add-on question to this. The contribution of the earnings in the second half, is there any -- do you expect any kind of change? Should be there more contribution from the fiber and less contribution from the pulp division? Or should you expect basically the trends of Q2 continue into the second half?
Nico Reiner
I mean, here you can clearly say and see what we have stated on the development on pulp and also on the development on the non-woven business, where we have clearly highlighted that these businesses are running quite well on a stable basis. And if you do then the logical conversion of this statement into the direction of the fiber business, then you can conclude easily on your own that we will see and hopefully, we will achieve an improvement on the market side here, easy to state on that one. This is then the clear topic and the assumption which is lying behind of it.
Markus Mayer
Okay. And then last question, is more a general question. So, in the past and at least from the IPO I know that viscose always had, versus cotton, long-term premium. And in your chart and then also over the last calls, it became clear that, it has some several years of discount of viscose to cotton. So maybe you can help us to understand what -- was there any kind of change in the market sentiment towards viscose? Or should we expect the viscose to regain its premium over fibers? And is there also then a trend that more of the pulp -- of the cotton volumes are going into viscose due to cost reasons or just from a cost perspective?
Nico Reiner
Thank you for the question. I think what we can clearly see is and that we have shown that we are able with our premium products to defend our premium versus generic viscose. Now the generic viscose goes in various markets. And yes, there are programs where viscose goes also into currently cotton or pure cotton application. But the same is true for lyocell where people are converting and the reasons for conversion are manyfold. And one of the reasons is, for example, the sustainability aspect of our fibers. And here, we are bringing, for example, with our TENCEL carbon zero fibers, a true innovation also in pure cotton market where our customers are very keen on it and therefore, also are willing to pay a premium. That would be my answer to your question.
Markus Mayer
Then, maybe here is a second add-on question. Can you confirm that there is a premium of your specialty viscose versus cotton? Is there a premium?
Stephan Sielaff
Well, I think you have to see the markets, they are developing with different mechanisms, you cannot do an easy comparison between cotton and viscose. We can clearly see that we have a premium versus generic viscose. And then we have, as you know, since the IPO, we added in particular, lyocell to the game. So we have here a different market mechanisms between cotton and viscose. I wouldn't make a calculation here on the premium side. I would rather focus on the specialty fibers versus generic fibers.
Operator
And the next question comes from Teresa Schinwald from Raiffeisen Bank International.
Teresa Schinwald
The first one and I'll ask them one-by-one, is about capacity utilization. Is it fair to assume that the first half of '23 has been, of course, better than the second half of 2022. I'm looking actually at the -- what level you're including in your guidance? Are you looking for an even higher capacity utilization in the second half around the level of first half of '22? And also how many lines are running at the moment?
Stephan Sielaff
Okay. The first answer is, yes. So, yes, our capacity utilization is better than in the second half of last year. And we were increasing our utilization throughout the first half of this year. And the second part of your question was how many lines we are running. I'm not sure we are disclosing that because that is an information which is, of course, of high interest also for our competition but you can assume that we are having on the long-term average a pretty high utilization in our sites.
Teresa Schinwald
Okay, great. Second one is on energy which your comment by [ph] you're hedging more. Are you still following the rolling hedging or are you also making use of the recently Europe's low short-term prices. So rolling hedging or again, optimistic which is this?
Nico Reiner
I mean, we clearly stated that our hedging strategy on the energy side is pretty clear. We are, on a 12-month basis, hedging 2/3 of our energy necessities and 1/3 is covered by the purchase coming from the spot market. On a longer perspective, on 13 months to 24 months, the hedging is around 1/3 and then ramp up in a steady process to 2/3 when it comes to the rolling of the process. The rest is also then again covered by the spot market.
Teresa Schinwald
And last one, I noticed in the quarterly report also there is an increase -- there was an increase in the emissions positions and the fair value of derivatives. Where did it come from exactly? And am I right to assume that these increases were P&L neutral.
Stephan Sielaff
Teresa, the connection is not very good. We couldn't hear you well. Could you please repeat the question?
Teresa Schinwald
Sorry, yes. I noticed there was an increase in the emissions position and the fair value of derivatives. Where did this come from, first part? And the second one is, am I right to assume that this was P&L neutral?
Stephan Sielaff
Sorry, we really cannot hear you well. Teresa, maybe we'll have a call afterwards just on the phone line and we can address that because we can just not hear you well, unfortunately.
Operator
So, there are no further questions at this time and I would like to hand back to Stephan Sielaff for closing comments. Thank you.
Stephan Sielaff
Yes. Thank you very much, everyone. Thanks for dialing in, listening to our half year presentation. And looking forward to talk to you with next results in the next analyst call. Thanks a lot.
Nico Reiner
All the best also from my side. Thank you very much
Operator
Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.
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Lenzing Aktiengesellschaft (LNZNF) Q2 2023 Earnings Call Transcript