Altri SGPS SA

ELI:ALTR

Earnings Call Transcript 2022-Q1

[Rui Cesario Pereira, executive]

Hi, good morning. Thank you for attending today's conference call of Altri's First Quarter '22 Results. As you -- it was already announced, my name is Rui Pereira. I'm the Investor Relations at Altri. We have with us today, Mr. Jose de Pina, the Group CEO; and Mr. Miguel Silva, the Group's CFO. Mr. Jose de Pina, and Mr. Miguel Silva, will make a brief description of the first quarter results. And the floor will be open to 30 minutes Q&A.

So I'll hand over to Mr. Jose de Pina.

[Jose Armindo Farinha de Pina, executive]

Thank you, Rui. Good morning, everyone, and thank you all for attending today's conference call on our first quarter 2022 results. We're pleased to host this call with investors and analysts, and hopefully, we can give you a clear picture of how the first quarter of 2022 for Altri has gone and talk about the outlook and the challenges we had.

If you go to Slide #2, we present several highlights of the first quarter. We're pleased to report that Altri achieved an EBITDA of EUR 61 million in the first quarter, 86% increase comparing to last year's first quarter. Net debt closed the first quarter at EUR 303 million, which places our net debt-to-EBITDA ratio at about 1.2x. a comfortable level to develop our strategy. We're also pleased to announce that we closed in April, the potential location for the greenfield plant in Galicia, which we call Gama project. And this important milestone will certainly allow for other important steps in the decision-making process to move forward.

We also wanted to share with you that Altri's invoices started to include information about the carbon and water footprint for each tonne of pulp produced, and we are leading the sector in these trends and believe this is a clear sign of transparency for our customers and the market overall positioning ourselves as a reference in sustainability.

Moving on to Slide #3. We wanted to highlight the tight situation of the pulp market in Europe with inventories at European ports in March, very near all-time lows. April numbers in fact, came out yesterday with the new monthly decrease to a new historic low of 1.014 million tonnes, which effectively represents about a reduction of 8% since the start of the year.

Going to Slide #4, we present the recent evolution of hardwood pulp prices in Europe. Prices have started to recover in early 2021 from a weak 2020, growing rapidly to $1,140 per tonne by mid-2021 until early this year. Already during this quarter, there were 2 additional price increases of $30 per tonne each, making the list price in Europe to end the quarter at $1,200 per tonne. Given the strong demand and supply tightness of the European markets, we have seen additional announcement that price increases already in the second quarter of 2022 of $50 each both for April and May to a total of $1,300 per tonne.

Looking at Slide #5. We present the production and sales level in the quarter being broadly flat when compared to last year's first quarter and a positive evolution versus the fourth quarter of 2021 and due to Celbi's maintenance stoppage in October.

In Slide #6, we show our sales breakdown per region, confirming our strategic focus in markets of proximity namely Europe and near Middle East with more than 90% of sales. Our sales to Asia are all attributed to our dissolving pulp production.

Turning in to Slide #7, you can see our sales breakdown for end-use tissue and print and writing are our main segments which actually increased their weight in the first quarter of 2022 versus 2021, given the strength of these segments in the European markets.

I would like now to pass the word to Miguel Silva, the Group CFO, that will comment on our financial highlights.

[Miguel Silva, executive]

Thank you, Jose. So looking at Slide #8. We can see that our revenue achieved EUR 249 million in the first quarter, an increase of 20% versus the last quarter of 2021 and 40% more comparing with last year's first quarter. EBITDA reached EUR 61 million in the first quarter of 2022, which is 23% more than in the fourth quarter of last year and 86% higher than the first quarter of 2021.

In Slide #9, we have some comments related with the cost inflation theme we have been seeing in the last few quarters in which we are trying to minimize the impact. The change in the electricity regime from regulated to market prices in early February, was a positive factor, but was partially absorbed by the growing expenses with natural gas.

On the wood side, we continue to need a high level of imports versus historical standards and also an expense that has been penalized by rising logistic costs. Chemicals has also been a relevant component in the increase of the variable costs.

Turning to Slide #10. And despite the challenges at the cost level, we would highlight that EBIT and net profit in the first quarter more than doubled comparing with the first quarter of 2021. And the operating results increased by 31% in the first quarter comparing with the last quarter of 2021.

In Slide 11, the free cash flow generation of almost EUR 41 million in the first quarter made possible for reduction of around 12% in Altri's net debt in the first 3 months of 2022 reaching EUR 303 million. The net debt-to-EBITDA over the last 12 months is now at a very comfortable 1.2x.

Turning to Slide #12. We are proud to maintain best-in-class return on capital employed level of 18% in the first quarter, which compares with an average of 17% for the past 5 years.

I will now pass the word back to Jose Pina.

[Jose Armindo Farinha de Pina, executive]

Thank you, Miguel. If we look at Slide 13, we wanted to share with you the environmental data that we started to include in our customers' invoices from April onwards. All invoices are now issued with information on greenhouse gas emissions, the use of water and the consumption of renewable energy for each tonne of produced pulp. And these, I would like to stress our audits and numbers.

If we look at Slide 14, we highlight additional milestones and developments in the sustainability front. We have made an update on the evolution of the many environmental metrics in our SDG 2030 targets, and we're pleased to share with you that we have surpassed over 90% in the required target set by the end of 2021, considering that for a series of these goals, namely SPGs water reduction, process waste recovery, reutilization, et cetera, were achieved by 100%.

If we now move to Slide 15, we present an update on the Gama project. We have announced the location of the site in April, a 200-hectare site in the region of Lugo in Spain. This was a rigorous selection based in several criteria that included technical, environmental, hydric and orographic factors. This was an extremely important milestone as we now move forward with the environmental impact study. The engineering and economic viability plans, licenses to local authorities, make advances with EU subsidies.

Finally, in Slide 16, we wanted to share our views looking forward, we continue to see the European market quite strong with a sound order book. Pulp availability continues to be an issue, confirmed by the low inventory level at European ports. Therefore, we have seen an additional 2 price increases, as I've mentioned before, April and May, $50 per tonne each to USD 1,300 per tonne. This continues to support the cost inflation that we have also seen in the last months.

The site location of our Gama project is now a reality, and we can now accelerate several crucial steps for a decision to be taken until year-end 2022.

We're also pleased to conclude the separation process of the Pulp business and GreenVolt, which we believe went quite well for an interested parties -- for all interested parties. As we mentioned at the time of the announcement, we should maintain a 15.45% stake in GreenVolt, which -- to which we would have the shares from withholding tax process, that could mean a final economic stake still below 20%. And in due course, very soon, we will announce the exact final numbers.

So I'll return now the floor back to Rui.

[Rui Cesario Pereira, executive]

So we're now open to Q&A for the next 30 minutes.

[Operator]

[Operator Instructions] Our first question comes from Bruno Bessa of CaixaBank.

[Bruno Bessa, analyst]

I have 2 if I may. The first one focused on wood costs and second one on the new project in Galicia. Starting with wood costs. We have been seeing a sharp increase in terms of cash costs for Altri. A relevant part of this, I believe, is related with wood costs. If you could share with us some visibility on your expectations regarding the evolution of wood costs over the coming quarters when you believe that this higher need for imports could normalize? And when could we start seeing here a bit of some normalization in terms of wood costs? It will be appreciated.

Also relative with wood costs and more on a long-term view, again, coming back to the expansionary projects that exist in Iberia, the way that you see here any kind of issues in terms of wood cost evolution due to these projects that have been announced by Altri in particular. So this will be the 2 questions focused on wood costs.

And the third question and last one. Regarding the location of the plant in Lugo. It seems like a bit of a different location to what we are used to see. So all your plants in Portugal are close to either to the sea or to rivers. This one -- and correct me if I'm wrong, seems to be a little bit away from this kind of channels for the distribution of the product. My question here is trying to understand why to choose this location? And what should you be doing to offset potential higher transportation costs that you might have with this plant if that is the case. So any views on this will be highly appreciated.

[Jose Armindo Farinha de Pina, executive]

Okay. Thank you, Bruno. Let me start with your first question, first and second, which obviously relates primarily to wood costs and this is a reflection, I think, of what we see in terms of inflationary pressures throughout the industry. Obviously, we're not immune to that. We had indicated previously that we would expect to see generally costs this year to be in the teens. We still continue with that perspective. If anything, obviously, we have seen in the last quarter, we would frame that as something in the high teens. So we're talking about 15% to 20% year-on-year. Wood costs would be likely on the high range of that, so you're talking about possibly in the range of approximately 20%.

In terms of issues and risks, we don't -- at least as far as what we can see a normalization of this, we have our plans in place for the remaining of the year. Our wood needs at this moment, have been essentially contracted. So we don't expect to see significant issues related to that. And that means that the evolution that we've seen at least so far would likely lead to a normalization level.

On your third question, specifically to the location of the plant in Lugo, in fact, we've studied 46 locations. When you say that traditionally or these are typically located closer to waterways. In fact, this is the case for this plant is near a river called [ Ulla ] and near water basin, [ Portugal model ] in Lugo. This is the exact geographic center of Galicia. So proximity to raw materials, in particular, wood is very -- was very much one of the key factors. There's significant proximity to the forest that we would be focusing on to provide raw materials.

In terms of the [ orography ] of the terrain. We've been able to identify a location that of over 200 hectares, which is obviously a very important type of project. Also in terms of accessibilities, there are very well-developed road accessibility. In fact, this particular location is near a highway that connects Lugo with [ Coruña ] and Santiago. So also from a transportation standpoint, we believe that it's extremely well located.

So these were some of the key -- not all, but some of the key reasons that led us to this selection, as I said, was a very thorough process where we assessed over 46 locations and it included other criteria such as environmentally sensitive areas, cultural sites, the overall [ geographical ] makeup of specific potential locations. So overall, this was the one that we felt met the best requirements for the location.

[Bruno Bessa, analyst]

Okay. And just a follow-up, we can conclude then that this plant is starting to operate. Will -- from a logistic point of view, will operate as smoothly as those you have in Portugal, right?

[Jose Armindo Farinha de Pina, executive]

Yes. No, absolutely.

[Operator]

Our next question comes from Jaime Escribano of Banco Santander.

[Jaime Escribano, analyst]

Yes. So first question maybe on outlook, even if you have commented already, but it would be nice to have an insight on what's going on in China. First, we saw last week that IPP was increasing $50 per tonne on the hardwood price there. I don't know if you can give us any color, and we know you don't sell except [indiscernible], you don't see hardwood there. But I'm just curious to understand the dynamics with the COVID lockdown and how is the demand evolving? Bearing in mind that IPP is increasing prices. So why is this happening?

And also, we got the European inventory at a historical low of around 1 million tonnes. It was released yesterday in Europe. So also just to have your view on -- do you think the inventories are very low because clients are restocking ahead of higher prices in June, July? Or is it because also the demand is strong and there is scarcity of pulp and that's why everybody is kind of buying pulp because they are concerned. So a little bit your views on the sector would be appreciated.

Then also a follow-up on Bruno's question. I also was surprised because of the location. Now I understand it better. The only bit that maybe I would like to understand is if it would have been useful to have the harbor close by, like, for example, in the river in order to export the lyocell or is it that you're going to -- you expect to sell it all locally, and that's why you don't really need to be close to the sea? Yes, this would be my 2 questions.

[Jose Armindo Farinha de Pina, executive]

Thank you, Jaime. Starting with the first point, just a bit of an outlook as you very well stated. We don't sell hardwood pulp, craft hardwood pulp in China. But from the follow-up that we do, we have the perception that the recent lockdowns and the Zero-COVID policy have increased bottlenecks, although this is starting to ease. And therefore, there is an expectation of rising economic activity. So even though there are, I think, still some risks from a demand standpoint in China, those are starting to ease. Also the government has announced economic stimulus that would likely also have some impact.

In addition to that, we also believe that there should be a relevant restocking effect in China once the situation starts normalizing. And I think that's probably one of the key factors that is driving that. We saw IPP's announcements. We wouldn't be surprised if there could be any further announcements as well. So -- but that situation or the combination of those situations, I think, is clearly putting some pressure in the value chain.

Logistics, by the way, continued to be an issue around China. So there are significant volumes on the water heading into China, and I'm sure that's going to help a little bit with the restocking effect. But that's not likely to happen very quickly.

With respect to Europe, I mean, the inventories are, as you said, at historical levels, we have seen additional layers of complexity on the offer side on to the pulp market. So I think it is clearly a combination of difficult logistics. There's been some unplanned shutdowns that happen in suppliers outside of Europe that have also delayed shipments on to Europe. And generally speaking, the European market has been extremely dynamic this year as you probably have noted, I mean, we talked to customers who tell us that, in particular in print and writing segments that they have their order books full all the way through the fall of this year. So that's likely to continue to put a lot of pressure on the demand side. And effectively, if there is a continuation of disruptions in logistics.

And ultimately, I mean, we have -- there's been -- for the first part of this year, a significant strike at a major producer in the Nordic countries. And also the dynamics of the war in Ukraine, I think, has also impacted that. So all of those have contributed clearly to what seems to continue to be a very, very tight market without any specific change that would be seen at least in the near medium term.

Going to your third question and regarding the Gama projects and again on location. First of all, we -- this plant is going to serve multiple markets, primarily Europe, but also parts of Northern Africa and Southeast Europe, namely Turkey, which are very significant customers for these products. But ultimately, I mean, the logistics we have considered in terms of reaching ports is not something that we would consider to see of any significance because as I said, they are very -- it's very well located in terms of road transport. There are some rail logistics as well that would have to be connected to the site. But overall, I mean, proximate to the port, we value much more, in particular, with the plants of these characteristics, the specific operational environment, access to freshwater was clearly one of the key criteria. But the location ultimately, we were able to consider a lot of the key elements, and it enabled us to find a selection of the size that has effectively the best conditions for that.

And as I said, on road transport, I mean, you have a highway that's basically is passing very close to the site. So we don't believe that logistics is going to be any issue at this point.

[Operator]

And our final question of today comes from António Seladas of AS Independent Research.

[António Seladas, analyst]

Most of the questions are already answered. So I have just 2 questions. Quick question, I think. Your figures in terms of external supplies and services have been around EUR 70 million for the last 2 quarters. So should we consider this figure a plateau in terms of costs for the coming quarters or not?

And the second question is circulated with the energy. So as far as I understand, or I understood, now you sell all the energy, all the energy to the market and you buy from the market at market price. Just to confirm and to understand your figures in terms of energy costs and energy revenues.

[Jose Armindo Farinha de Pina, executive]

So if I understood you correctly, you were asking about the energy balance in terms of what we sell and what we buy. Is that correct, António?

[António Seladas, analyst]

Yes, exactly. Just to understand if when you see the revenues, other revenues, so the energy revenue should be there. And we also see external supplies and service increasing for the last 2 or 3 quarters. So I guess that this is because you are buying energy, not just natural gas, but also and electricity to the market.

[Jose Armindo Farinha de Pina, executive]

Yes. So considering our 3 units, 2 of them are essentially balanced in terms of energy generation versus consumption and 1 has excess production, which we sell the -- it produces generally about 200 gigawatt hour in access on an annual basis. So you're right. We sell all energy. We also buy all energy and the balance of that, as I mentioned, is a positive balance. The way we structure the new reporting, so in other sale, it includes the energy and also another component is the biomass that we sell, in particular, through contracts to GreenVolt. So that's included in the other revenue as stated in the new reporting.

[António Seladas, analyst]

Okay. And -- okay. So regarding the first question, so EUR 70 million, the excess supply have been around EUR 70 million for the last 2 quarters. So do you see this as a plateau? Or do you think that costs could still increase from the current level?

[Jose Armindo Farinha de Pina, executive]

António, as I mentioned in terms of the overall cost inflation energy, as you know, it's an open market. And the futures have been evolving significantly over the last few months. So it's hard to tell where energy is going to go long term, but I would assume that at this point, we've seen at least what would be the most significant impact. We do have also on the purchase of energy besides electricity, we also purchased natural gas and year-on-year, that's where we've seen a significant increase. I mean, if you look at the natural gas prices, they've been 4 to 5x greater just in the last 12 months. So you see a reflection of that. It's hard to see where that would go any further at this point because it would likely have an impact as well in terms of the cost structure across the value chain and not just in the pulp and paper value chain, but across many other value chains that depend on natural gas for energy and steam production.

So we'll see where -- how that is going to evolve. But overall, and just to restate where we see our cost inflation year-on-year particularly for the remaining of the year and at the levels that we project, we likely see something in the high teens, so year-on-year between 15% to 20%.

[Operator]

Apologies. Our next question comes from Carlos de Jesus of CaixaBank.

[Carlos de Jesus, analyst]

Two questions from my part. First is regarding discount levels. How do you see discount levels at the moment? What -- at which level can we see discounts of [ BHKP ]?

And the second one, if you look cost levels at the current moment or at the current level, what would be your vision for EBITDA margin for the remaining of 2022?

[Jose Armindo Farinha de Pina, executive]

Thank you, Carlos. First of all, on the discount levels, I mean, they don't change for us. If you imagine month-on-month. We do annual contracts where those are fixed and the changes that you could see primarily deal with product mix or any particular change in terms of noncontracted business. But I would say, on average, these tend to be historically in the industry anywhere between 34% to 36%. And that's just based again on an industry level.

In terms of cost levels, and our expectations in terms of EBITDA margins, I think we'll continue to see healthy EBITDA margins, as you've seen in our results, we increased our EBITDA margins. We are already considering most of the impact on cost inflation compared to the same period last year and compared to Q4. But it's really going to depend on the evolution of prices. And as I said, with the market being as tight as it is right now, it is -- I would not be surprised as I said to see prices continue to evolve favorably at least over the next few months. And if that's the case, obviously, would see that impacting positively our EBITDA margin.

[Operator]

Our next question comes from Luis Toledo of ODDO BHF.

[Luis de Toledo Heras, analyst]

I had a question but it has already been addressed. Maybe it was reading on the other revenue. I don't know if you could provide some breakdown between the different items that regarding the energy and also the maintenance of [ biomass ] plant and the last component, you mentioned also that -- yes, the sale of [indiscernible]. I don't know if you could provide some breakdown on [indiscernible].

[Jose Armindo Farinha de Pina, executive]

Yes, Luis, what I would suggest is, perhaps you could follow up with Rui, our Investor Relations. He can give you a little bit more clarity in terms of how we're structuring our reporting.

[Operator]

Our next question is a follow-up from Bruno Bessa of CaixaBank.

[Bruno Bessa, analyst]

Sorry for coming back to another 2 questions. The first one, just trying to understand a bit the dynamics of supply in Europe. And with the end of the strikes that we were seeing at the UPM facilities in Finland. How do you think this will impact the level of supply in Europe during the -- over the coming quarters? This would be the first question.

And the second one, again, to the -- coming back to the project in Galicia, what will be the biggest challenge that you will have in this project in your view?

[Jose Armindo Farinha de Pina, executive]

Thank you, Bruno. Well, in terms of the supply, I think there are 2 factors here that we need to see how it evolves. On the end of the UPM strike, we would expect to see some volumes coming back to market, although we haven't seen much evidence of that. It always takes a certain time for that to normalize. So I would assume that over the next few months, you may see some of that happening, although in terms -- purely in terms of volume, it's probably not going to be meaningful enough to change the current supply-demand dynamics.

On the Galicia project, this is a -- it's a greenfield project. We have a lot of work ahead of us this year until the final investment decision. We're doing our environmental impact studies, we're doing basic engineering. We're in very active discussions with technology and equipment suppliers, I think until we have a very full picture of that, I wouldn't be able to tell you much more other than the fact that we're progressing, I think, extremely well. If anything, the original assumptions we saw in terms of the market attractiveness have been reinforced. This is a market that is changing significantly, in particular on the textile side. As you know, this is intended to provide potential substitutes for synthetic and fossil-based textiles. And this is a market that is rapidly evolving towards more sustainable fiber. So we believe that at least the fundamentals of the market for this particular project are extremely, extremely attractive.

When you look at the challenges of building a greenfield of this magnitude, as I said, we need to go through all of the design and finalize the discussions with suppliers. We'll see how or if there's going to be any significant impact from the current cost inflation that we have seen in markets, although this is a multiyear project. And therefore, we're not at least at this point, expecting that, that will have a serious impact. So overall, we're very happy of how this is evolving, in particular, now that we have announced a selective location.

[Operator]

And our final question via the telephone line comes from Jaime Escribano.

[Jaime Escribano, analyst]

Yes. Sorry. I was on mute.

Yes. No, I just wanted to ask a final question more regarding market expectations. So I look to Bloomberg consensus close to EUR 300 million EBITDA for the full year. You made EUR 60 million in Q1, which makes a run rate of EUR 240 million. Obviously, prices in Q2 and Q3 are likely to be higher. So in order to match market expectations of around EUR 300 million, the EBITDA should be on average in following quarters should increase to levels of around EUR 80 million per quarter. How comfortable you feel with this, obviously, with the current information? I know that things can change, but bearing in mind your forecast, forecast cost in following quarters and the positive evolution of pulp prices. Do you think this is doable? Is a little bit toppy -- or how -- just -- any insight you can give us on your sentiment on that will be useful?

[Jose Armindo Farinha de Pina, executive]

Thank you, Jaime. As you know, we don't provide outlook and guidance, that's just at least a matter policy. From what we've said and the numbers where we have, it's -- what I mentioned is we'll have to see where the overall market dynamics will evolve. We don't see it much changing in terms of where the market is today, the tightness of the market, that's likely to lead to at least some upward risk on prices. The increases from the first quarter haven't yet fully materialized as you've seen also from what we've published, although we've reflected already the significant cost increases.

So I would say for the remaining of the year, we'll have to see how it's going to evolve. But we're optimistic in terms of how we're likely to see at least based on the current dynamics but we'll certainly continue to work as hard as we can and manage as prudently as we can to be able to deliver the best possible results.

[Operator]

We have received a written question from João Pinto of JB Capital, and the question is, could you please give us an update on cash cost outlook? And how much do you expect them to increase in the financial year 2022 versus 2021?

[Jose Antonio dos Santos, executive]

Thank you, João. As I've mentioned before, in terms of our cash cost outlook, at least based on what we've seen this year, we would expect our cash costs year-on-year to be in the range of 15% to 20%. So you're looking at high teens at this point.

[Operator]

And the second question for João. Could you update us on the process of greenfield project in Galicia?

[Jose Armindo Farinha de Pina, executive]

Sure. So in terms of the project, as I've mentioned, we have -- there's a lot of work streams ongoing once we've had the site selection on both sides. We have the environmental impact study ongoing. We have the basic engineering ongoing, significant discussions with providers technology and equipment. We'll be filing as well the strategic industrial project, which is a green channel on administrative processes in Galicia. We're having active discussions with potential financial backers on the project, in particular, some of the major banks in commercial banks.

So that's all of the ongoing. And I would say, over the next few quarters, we'll definitely have more detailed updates. But we're aiming as we've mentioned earlier that we will be in the condition to make a final investment decision by year-end, assuming that we get all of these workflows up to a successful conclusion. So a lot of work going on, a very significant dedicated team is working hard on it. So we hope to provide more updates in future quarters.

[Operator]

We currently have no further questions. I'll hand back over to Rui for any closing remarks.

[Rui Cesario Pereira, executive]

So thank you very much for attending and on your interest in Altri. And I think that's all for today. So I'll see you back next quarter. And I'm available for any follow-up questions that you might have.