Altri SGPS SA

ELI:ALTR

Earnings Call Transcript 2024-Q1

[Operator]

Good morning. We welcome you to the Altri Q1 2024 Results Conference Call.During the presentation, all participants will be on a listen-only mode. There will be an opportunity to ask questions after the presentation. [Operator Instructions]I now hand the conference over to Mr. Rui Cesario, Head of Investor Relations of the Altri Group. Please go ahead, sir.

[Rui Pereira, executive]

Good morning, everyone. Thank you for joining us today for Altri's first quarter 2024 results.We will review our latest financial performance, market conditions, operational highlights, future perspectives, followed By Q&A at the end. To do that, we have with us today the CEO of Altri, Mr. Jose Pina; and Mr. Miguel Silva, the Group's CFO.I'll pass now the floor to Mr. Jose Pina.

[Jose Armindo Farinha de Pina, executive]

Thank you, Rui, and good morning, and thank you all for attending Altri's conference call.We are always pleased to host this call with investors and analysts to share Altri's financial results, and discuss the market environment and challenges ahead of us.If you turn to Slide number 2, we comment on some of the main highlights during the first quarter of 2024. We observed positive trends in the global pulp market. It remains a tight market driven by strong demand in China and Asia, recovering markets in Europe, and improvements in North America. Supply constraints, such as strikes in key ports and capacity shutdowns have also impacted the market. As a result, pulp prices in Europe have increased, a trend that has continued into April and May. Our EBITDA for the first quarter reached EUR 50 million, a 25.7% improvement compared to the fourth quarter '23 and our EBITDA margin increased to 22.5%. Despite lower results in 2023, we maintained a stable dividend policy, distributing an ordinary dividend of EUR 0.25 per share which implied a payout ratio of 120% over the net profit reported in 2023. Additionally, we continue to advance with the diversification project at our plans, namely the valorization of furfural and acetic acids at our Caima unit to be concluded at the end of 2025, and we continue to work towards a final investment decision for Project Gama in this year.Moving to Slide number 3, global pulp demand saw a significant recovery in the latter half of the year, continuing to improve in the first quarter of 2024. Hardwood pulp demand rose by 10.1% year over year with double-digit increases in China, Europe, and North America. Softwood pulp demand also grew, albeit at a slower rate of 2.1%, showing hardwood's capacity -- capability as a product to continue to gain market share in the pulp space.If you turn to Slide number 4, and despite a strong start of the year for hardwood pulp, the dissolving pulp market experienced a slower start. However, demand for dissolving pulp remains robust and we continue to have strong demand for these products.In Slide number 5, on inventories at European ports, they remain at a low level similar during the quarter and in line with the numbers reported during the fourth quarter of last year. With pulp prices in Europe at a premium to China, it is possible we see some volumes redirected to Europe and inventories more in line with historical averages in the future in the 1.4 million to 1.5 million range.In Slide number 6, average PIX prices for hardwood pulp in Europe were 16% lower for the first quarter of 2024 versus the same quarter of last year. On a quarterly basis, there was a 23% recovery in average prices, fueled by the mentioned improvement in the global demand environment. After setting a recent record low at $800 per ton in August of 2023, pulp prices ended the year at $1,001 per ton and were at $1,220 per ton at the end of March of the current year.In Slide number 7, we can see dissolving pulp prices quite stable during the last year. These prices are net and sourced from China without any commercial discount. We believe it is worth highlighting the low volatility during the last five quarters when compared to BHKP.Then Slide number 8, we take that the demand of our products have normalized during the first quarter of 2024. We have strategically optimized our inventories and tried to balance production we sell even as demand continues to push our inventories to minimum levels.Going to Slide number 9, sales volumes increased across all regions, with tissue products leading the way, followed by the printing and writing segment. Europe regained a larger share of our sales, particularly with the normalization of the already mentioned print and writing segments.I would now pass to Miguel Silva, our Group CFO, who will comment on the main financial highlights of 2023.

[Vitor Miguel Martins de Silva, executive]

Thank you, Jose.If you turn to Slide number 10, the market environment improved, so did our revenues and profitability. Total revenues for first quarter '24 were EUR 222.7 million, a slight decrease of less than 1% year-on-year, but a 19% increase compared to the fourth quarter of '23. An EBITDA of EUR 50 million almost unchanged versus last year, but as revenues, an important improvement of 26% versus last quarter of '23. Looking forward, we should continue to leverage from the work done on the variable costs front.Now in Slide 11, our EBITDA margin recovered to 22.5%, the highest since the beginning of 2023, despite a lower pricing level than in the fourth quarter of 2023. Comparing with the last quarter of '23, EBITDA margin improvement reaches 1.2 percentage points. Nevertheless, if we exclude the revaluation of the biological assets and other one-off effects usually booked in the fourth quarter of each year, the improvement in our EBITDA margin would have been more than 4 percentage points.In slide 12, EBIT and net profit levels also improved with net profit increasing by 48% compared to the fourth quarter of 2023.Now on Slide 13, we make some remarks related with the cost. Our biggest plan that we returned to the regulated regime for the sale of electricity since February, which continues to ensure a positive energy balance. Stabilization in wood prices has continued during the first quarter of 2024, with chemical prices registering a slight decrease. Looking forward, we see mainly a stabilization of our main cost items even if we don't rule out completely some inflationary pressures.Going now to Slide 14, Altri Group's net debt reached EUR 340 million at the end of March 2024, a quarterly improvement of EUR 17 million. This free cash flow came from EBITDA level, lower investment requirements, and a strict working capital management.I will now pass the word back to Jose.

[Jose Armindo Farinha de Pina, executive]

Thank you, Miguel.If you turn to Slide number 15, Altri's return on capital employed level remains at 9% in the first quarter of 2024 considering the operating results of the last 12 months. If we annualize the EBIT level of the first quarter, we would go to much more interesting levels north of 18%.In the following slide, number 16, we continue to make significant progress in our sustainability efforts. Altri received the Leadership A- rating from the CDP for Climate Change and Forests and maintained a B rating for Water Security. Additionally, we signed the Antwerp Declaration committing with industrial peers to make Europe globally more competitive in terms of energy and promoting net zero emission products.Finally, in Slide number 17 and looking ahead, we expect the positive demand trends in Europe and North America to continue during the first half of 2024. China's demand has also been stronger than anticipated for the first half of the year with some supply restrictions which have also been playing a role, including strikes in some relevant ports, floodings in Brazil and Indonesia, and some capacity shutdown news of softwood mills contributing to a tighter market. Given positive momentum in demand and some events on the supply chain side, we have continued to see new announcements to increase pulp prices in April by $80 per ton and May by $60 per ton with the list price now in Europe for BHKP at $1,440 per ton. Yesterday, there were new announcements of an additional $60 per ton for June, which could effectively take the list price in Europe to a new record of $1,500 per ton. On the cost side, we anticipate a stabilization from the current level for the rest of the year. Nonetheless, we do not exclude some additional inflationary pressures with pulp prices remaining at high levels. In any scenario, our commitment is to maintain our cash cost levels under extremely tight scrutiny. Our diversification projects, including the furfural and acetic acid production at Caima are on track and expected to be completed at the end of 2025. On Gama, Altri is in the process of obtaining the environmental integrated license, which is one of the essential conditions for making a final investment decision.In conclusion, Altri has had a strong start of the year with positive market conditions, improved financial performance, and significant progress in our diversification sustainability projects. We remain focused on executing our strategic plans, optimizing our operations, and delivering value to all our shareholders.Thank you for your attention. We look forward to your questions.

[Operator]

Thank you. Ladies and gentlemen, the Q&A session starts now. [Operator Instructions] And our first question comes from the line of Enrique Parrondo from JB Capital.

[Enrique Parrondo, analyst]

Just 2 on my side. The first one related to the last price increase announced by Eldorado. Do you know if any other player will be joining or has announced that they will be joining this price increase? How confident are you with regards to this implementation? And to what extent would you say this is demand or supply-driven?And the second one is related to cash costs. So you recently flagged that you could even see some upward pressures throughout the year, especially on the back of the bulk price backdrop. So how should we think of your previous guidance of this mid-single-digit year-on-year decline translating into this?

[Jose Armindo Farinha de Pina, executive]

On your first question, and especially regarding the last price increase by Eldorado, the overall general view in the market is that it has a very strong basis. Amd you asked if it's either demand or supply-driven and in fact, we believe it's caused by both. There's been some constraints. The shift, which obviously remains attractive, the volumes that have been targeted to going towards China into Europe doesn't happen overnight, it takes time. It will take time. If something happens, as one could expect. But I would say overall supply remains relatively tight, and in particular, considering the inventory levels as I commented in some of my initial remarks, currently, we're running extremely low inventory levels, and that's obviously driving some of the tightness, which from what we understand is pretty much the case across the industry.On the demand side, we've had additional requests for pulp across the board, across multiple segments. We see print and writing now much more stable. There's been some restocking efforts in the first quarter of the year, but we believe that's now relatively stable and effectively bound to pent-up demand to eventually impact how the industry will evolve over the remaining of the year. And tissue continues to remain resilient. Packaging, perhaps a little bit less so. On the dissolving pulp side, we've seen very good demand, and that's as well demonstrated by the numbers that we have presented. Despite the fact that overall the industry is flattish but we've seen very strong demand, at least from our traditional customers. So I would say, it's a combination of both demand and supply driven. And because of that, we believe that there is a very strong support for this additional price increase and we also intend to take it into the market.On the cash cost question, on our side, as far as our expectation, we continue to be focused and we would actually currently see specifically in the mid-single-digits. So as we've previously discussed, that is our expectation for 2024. And we remain very much focused on that, as I said, despite what could be potentially some inflationary pressures in the second half of the year. But so far, that's our current expectation.

[Operator]

The next question comes from the line of Bruno Bessa from CaixaBank.

[Bruno Bessa, analyst]

I have quite a few, so I will choose to make three questions and then we will go back to the queue for the end of the line. As a follow-up to Enrique's question about the players joining the [indiscernible] by Eldorado. We saw, particularly APP, APRIL, and their Asian and Brazilian affiliates announcing -- joining that price increase over the recent days. But we haven't seen Suzano. So just if you could give us your view, if you have any, on why Suzano has not joined the price increase so far? So this will be my first question.And the second question. We saw today new data on the global pulp industry showing a still resilient increase of demand on a year-on-year basis but with the news highlighting the relevant decline on April against March, mainly driven by demand in China. If you could give us a bit more visibility on this. If you believe this is a kind of a one-off or if effectively the market is currently being supported by the supply side rather than the demand side. And I'm referring specifically now to the Q2, and this will be the second question.The third question on cash costs. Just trying to understand here a bit the underlying evolution of cash costs. I think you mentioned that at least Celbi has already changed the regime for the renewable remuneration at the plant. And you mentioned this mid-single-digit decline in terms of cash costs for the year and remaining probably stable from the current levels. Just trying to understand, if Celbi kept the same regulation for the renewable energy produced, what would be your expected evolution of cash costs for this year?

[Jose Armindo Farinha de Pina, executive]

A couple of comments and then maybe I'll pass as well to Miguel to comment on the last one. But what I would say, first of all, any comments regarding why Suzano may or may not advance any price increase would be pure speculation on my part, which obviously I will not engage. What I am seeing from our industry discussions with customers and eventually looking at where the supply-demand balance is, we believe all indications that the industry will move towards this price increase in June and I would expect this to be as well the phase for all producers, including Suzano. But they'll obviously make their own decisions and make their own comments.Regarding the new data on global pulp industry and the development in particular from a demand standpoint, I think China, we have seen some slowdown in China, effectively the economic numbers demonstrate that. They've had a good strong first quarter. I think beyond first quarter, things have slowed down somewhat. We haven't truly seen a direct impact of that, at least specifically regarding pulp markets that would set a trend, let's say, in the coming months. So I think this is probably more of a normal development where you have here and there one-off. But I mean, we've seen, as I said, no indication that that would lead to some sort of slowing down trend. It is consistent, the fact that the first quarter, as I said, was strong. Last year also demonstrated, very strong numbers. After you've had some significant growth, usually you tend to get into more stable periods that's probably likely the case. And there will be fluctuations month on month. Just reaffirming right now at least, we don't see any significant trend that will be indicative from this particular data.Regarding on the cash cost and the energy new regime et cetera. The only comment I'll make, and as I said before, I'll pass it on to Miguel, is obviously, we decided not to keep the same regime because we had the option to return to the regulatory regime, which has a regulatory tariff, which is much more attractive. And if we had not done so, it really depends on how the energy markets will evolve given that we were at market prices. It would be different. But to speculate how different it would be, obviously, looking at the current energy prices, which are relatively low, it would have somewhat of an impact. But we've had also gains from the overall volumes on energy and in terms of mitigated prices on gas. So I think we've done the right decision, and that's obviously something people can take advantage in the coming quarters.And maybe, Miguel?

[Vitor Miguel Martins de Silva, executive]

Yeah. Regarding the cash costs, I would add on top of what Jose just said that we attended a very significant decrease in cash cost in 2023. But I would say that we reached some stabilization on quarter three of 2023. Then the last quarter was affected by some non-recurrent effects, mainly the evaluation of the biological assets. And I would say that in the beginning of 2022, it's pretty much comparable with what the levels that we attended on the third quarter of 2023. There are some effects but in part I already in our first quarter cash cost, like the change in the regime for Celbi. We have already two months in this first quarter with that change effect. It is a very positive effect indeed as we are selling electricity at a fixed price and we are buying on the market in very low prices. But at the end, when we compare our estimated cash cost with the full year of 2024 with the full year of 2023, we think it's possible to reach this mid-single-digit decrease that Jose mentioned before.

[Operator]

[Operator Instructions] The next question comes from the line of Antonio Seladas from AS Independent Research.

[António Seladas, analyst]

So, I have 3. The first one is related with the printing and writing demand. So I understood that you mentioned that the restocking effect is now ending, and so we should expect lower demand from printing and writing from the second quarter onwards, if you can confirm. That is the first question.Second question is related with Galicia project. In your statement, I understood that changed a little bit in the sense that now is more depending on the environmental license. So if you can confirm if I am understanding well or not.And last question is related with your blended prices. Your blended sales prices. Sequentially, it increase well, it depends how you measure, but clearly below the peaks reference prices. So I have probably some explanations for that. Nevertheless, maybe you can provide some color and help us to explain why it happened and what you expect for the coming quarters.

[Jose Armindo Farinha de Pina, executive]

Very good. Antonio, could you reformulate your third question on sequential sales prices, just to make sure I understood.

[António Seladas, analyst]

Well, your blended prices, so your average prices, so dividing turnover by sales by volumes increased clearly below the peak reference sequentially. Peak reference increased about 20% quarter-on-quarter, first quarter versus fourth quarter last year. And your blended price, your average prices increased below that figure. So maybe the mix relating with dissolving, more dissolving pulp. It helps to explain, nevertheless, if you can help us to explain this difference and what should we expect for the coming quarters?

[Jose Armindo Farinha de Pina, executive]

So, regarding the first question and in terms of demand, in particular, on printing and writing, we have seen, as I said, the restocking that seems to be happening. We believe that's relatively over with. So effectively, we'll be down to pent-up demand. We still see, at least when we talk about stability, there's still some improvement in terms of demand, particularly it being caused by some of the supply constraints that you have of imports from outside of Europe, which are causing some internal -- or the sustainability of internal demand in Europe. So we believe that, at least on the printing and writing efforts front, even though things will be -- would not be a result of specifically of restocking, but we see a stable demand going forward, and depending on what happens, as I said, with some of the supply chains, it may or may not have an impact. But year-on-year, I think you'll still see some opportunities for some further growth.Regarding the Galician project, and in terms of what we stated, specifically, we highlight the environmental license and we've always said that any final decision is going to be depending on a couple of factors, in particular on the financing structures, which has a big -- it's especially impacted by the combination of subsidies, debt, and equity and that needs to obviously be clear. But in addition to that, you have the environmental license, which will take its time. And realistically, until we have those well defined, we wouldn't be able to take a final investment decision. So we're just highlighting that the environmental licensing that is underway will obviously condition that final investment decision. It's just highlighting, that is nothing unusual apart from the fact that that's one of the critical components.In terms of the blended prices that you make a reference to a particular quarter-on-quarter. There are two elements here. One deals with discounts, which are applied from January onwards. Obviously, there's been some inflation in discounts for the whole industry and that has an impact in terms of the actual real prices which are obtained. And secondly, that's always somewhat impacted from the dissolving pulp prices, which, as you know, are very different. The way it's calculated versus BHKP. So, BHKP, you have gross prices onto which you have significant discount supply that's been historically the trend in Europe, that's not the case in China, where you deal with net prices. And in the case of dissolving wood pulp, you are always dealing with net prices. So the blend of the two obviously will have variations, invariably, whether the PIX is going up or it's going down and depending on what dissolving wood pulp is doing in the market.

[Operator]

The next question comes from the line of Luis de Toledo from ODDO.

[Luis de Toledo Heras, analyst]

One remaining question from my side. It refers to Page 9 of the presentation. I'm referring to the volume obtained from Middle East and North Africa. It maintains the high level you reported over the last quarters. You mentioned that it's taking advantage of market conditions in each market. I don't know what level of sales in this particular market do you envision for the future? In a tight market, the deliveries to your core traditional European markets, can we think that you might be losing market share is something that bothers you?And maybe a follow-up regarding the sales mix in volumes. The other category, which has raised over the last years now comes for 7% in the first quarter, is that particularly related to that market, the one from Middle East and North Africa? I don't know if you could elaborate and tell us which end use are included in the other category.

[Jose Armindo Farinha de Pina, executive]

So Luis, regarding your first question, in terms of the split, effectively, when we look at the current split with Middle East and Africa, around 24% the first quarter compared to previous. If you look at last year, we've had a higher level of sales. These tend to be more stock markets. So last year, obviously, we looked for additional markets in order to balance our supply-demand approach. And since we have, as you know, last year, we curtailed somewhat production in order to manage our inventory levels throughout the year. And part of that dealt with procuring some markets that traditionally we do not cater to beyond Europe, given that Europe last year suffered a significant decline in some of the segments. So that's the only balance that we've had. We always have a certain amount of sales which are more, let's say, opportunistic, depending where the market is going forward. And given where we are today, I mean, we have our preferences always for our ongoing current customers and we're very much dependent as well on their needs. The fact that we have been increasing somewhat are dissolving pulp sales and will continue to increase. That means we'll have greater exposure, especially to Asia from that end. But overall, if you think of the balance in terms of explicitly European with Portugal included, that's about two-thirds of our sales. I would say going forward, we're probably going to see somewhat of an increase in that balance. As markets tend to stabilize in terms of prices, usually opportunistic sales may eventually shrink, and that means Middle East, African markets will probably shrink somewhat.In terms of end users, the other is representing 7%. That's usually. I mean, there are some specialty markets in particular in things like dissolving, even though we tend to indicate dissolving primarily as textiles. But there are some specialty like sponges and a few other things. There are some specialty segments as well on the BHKP, but generally other would represent sales that we do in particular in some spot markets where we may not be able to fully identify the end-use segment. It's as simple as that.

[Operator]

[Operator Instructions] And we have a follow-up question from the line of Bruno Bessa from CaixaBank. Please go ahead.

[Bruno Bessa, analyst]

First, follow-up on cash costs. I'm not sure if you mentioned it during the call, and sorry if you mentioned. But just trying to understand here, how do you see the evolution of the different cash costs on a year-on-year basis in terms of food, logistics, personnel, and so on? So this will be the first question.The second question. You mentioned in the report that you have several diversification projects. You mentioned specifically one project to recover and valorization of acetic acid and furfural from renewable sources at Caima. This is expected to be completed by the end of 2025. And just wondering if you could give us a bit more visibility on this project, namely in terms of your expectations about additional sales and profitability returns of the project. So whatever you can share with us at this point, this will be the second question.The third question, if you could provide us some visibility on your expectations about discounts for the whole year, and that will be all from my side.

[Jose Armindo Farinha de Pina, executive]

On cash costs, I think if you consider the various components, obviously wood is the key one. When we maximize production, we always look for additional sources of wood, sometimes the balance in particular when it comes to imported wood changes. And I think that's really the only component that could potentially have some inflationary pressures that we've discussed. But overall, the rest of the components, whether it's on energy, whether it's on chemicals, even on fixed costs, actually, we get a greater dilution than when we maximize production. So I'll say, overall, the other elements are pretty stable. And that's why year-on-year, despite the fact that we could see some inflationary impressions on wood, we would still expect to be within the number that we've discussed on middle-single-digits. So that's really where you could see potentially some implications.On diversification projects, I think we've talked previously in terms of furfural and acetic acid. We're recovering actually what's considered in the past as a residue that we tend to value for energy, we're effectively now extracting that particular chain and we're purifying it to the point where we can take it to market. It's a very attractive biochemicals market. These are green biochemicals and we've seen some significant demand. Europe is actually tight on those, and these are also specific to dissolving wood pulp production because effectively they are a result of extracting the sugars from the pulp. That helps you then refine those into biochemical products.In terms of magnitude, I mean, when we think of this particular final product, our estimates would be north of EUR 25 million in terms from a revenue perspective, and we're looking at something in the range of 30% on an EBITDA level. So it just gives you a sense in terms of what that impact has. We Are continuing to work on several, as we mentioned, diversification projects, as well as including some downstream projects that could be considered as part of our existing manufacturing footprint, and we'll provide some further details in due course.Regarding discounts, what I would comment is the contracts that we have are in place for the remaining of the year, so we don't expect any changes to those conditions with the customers that we have. As we know, the vast majority of our customer base in Europe runs on contracts. But usually, the calculation of discounts has an impact primarily coming from any opportunistic spot sales that ultimately impact when you look at the global discount level. I don't expect, frankly, any significant changes in terms of those sales going forward. So as such, I would not expect any significant changes in terms of the discount levels.

[Operator]

Thank you. There are no further questions. So I'll hand the conference over to Mr. Jose Pina, CEO of the Altri Group. Thank you.

[Jose Armindo Farinha de Pina, executive]

Very good. Well, thank you very much for joining the call. Appreciate your questions and your interest. And as I've mentioned previously, we believe that we have a strong start of the year and we're looking forward to what comes ahead and looking forward to continue to bring to you the developments in the group. So thank you very much.