Altri SGPS SA

ELI:ALTR

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, and welcome to the First Half 2022 Altri Results Call. My name is Brika, and I'll be your event specialist operating today's event. [Operator Instructions] I now have the pleasure of handing the call over to our host, Rui Cesario. So Rui, please go ahead when you're ready.

[Rui Cesario Pereira, executive]

Hi. Good morning. Thank you for attending today's conference call of Altri's second quarter results. My name is Rui Cesario, and 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 CFO. Mr. Jose de Pina and Mr. Miguel Silva will make a brief description of the second quarter results. And the floor will then be opened for Q&A.

So I'll pass it to Mr. Jose de Pina.

[Jose Armindo Farinha de Pina, executive]

Good morning to everyone, and thank you for attending today's conference call of Altri's second quarter 2022 results. We're pleased to host this call with investors and analysts, and hopefully, we can give you a clear picture to everyone how the second quarter went for Altri and also talk about the outlook I have.

If you turn to Slide 2, we present the main highlights of the quarter. We're quite pleased to report that Altri achieved an EBITDA of nearly EUR 70 million in the second quarter, which represents a 6% increase compared to last year's second quarter, while looking at the first half of 2022, EBITDA increased by 33% to EUR 130.8 million.

At the end of June, our net debt reached nearly EUR 360 million, an increase of EUR 54 million versus March given the EUR 79.1 million dividend related cash outflow and leaving our net debt-to-EBITDA ratio at 1.4x, a comfortable level to develop our strategy.

We also wanted to highlight that during the month of May, Altri has distributed nearly EUR 400 million to our shareholders of which EUR 49 million in cash dividends and the rest in the form of GreenVolt shares. We believe it was an operation that was very well received by the market.

Altri was able to achieve a return on capital employed of 23%, reaffirming a solid position as a reference in the sector and such an important KPI for our management.

Moving to Slide #3. We highlighted the tight situation of the pulp market in Europe, with the level of inventories at the European ports in June at near historic low levels after reaching in April, a recent low level in years. The increase in May seems to be related with the accumulation of vessels at the ports in the last stage of the month, which was mostly corrected in June.

Turning to Slide #4. We present the recent evolution of hardwood pulp prices in Europe after recovery in prices during the first half of 2021, where we saw stabilization during the second half. Prices started to increase again during the first quarter of 2022 and continued during the second quarter of 2022 with 3 consecutive price increases of $50 per tonne from April to June and in the quarter with lease prices in Europe at $1,350 per tonne.

For July, there was an additional announcement of a $30 per tonne price increase, placing per tonne price in Europe at $1,380 per tonne.

Looking at Slide 5, we present the production and sales volumes in the quarter. Sales were flat when comparing to last year's second quarter despite slightly lower production when compared with last year's second quarter due to a scheduled maintenance stoppage at our Biotek facility.

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

Turning into Slide 7. We can see the sales breakdown for end use, tissue and printing and writing are our main segments, which actually increased their weight in the first half versus 2021, given the strength of these segments in the European market.

I would now like to pass the word to Miguel Silva, the Group CFO, that will comment on the main highlights of Altri's during the second quarter of 2022.

[Miguel Silva, executive]

Thank you, Jose. In Slide 8, we comment on revenues and EBITDA achieved in the quarter. Altri reached total revenues of EUR 273 million in the second quarter of 2022, an increase of 38% versus the second quarter of 2021 and plus 9% comparing to the previous quarter.

EBITDA reached EUR 70 million in the second quarter, 6% more than last year's second quarter and 14% higher than the first quarter of 2022. EBITDA margin stood at 25.6% in the second quarter.

In Slide 9, we look at the first half of the year numbers. Revenues increased by 42% to EUR 522 million, while EBITDA grew by 33% to EUR 131 million, which translates in a margin of 25.1%.

Turning to Slide 10 and despite all the challenges at the cost level, operating results increased by 8% and net profit [ grew ] by 24% in the second quarter compared with last year's second quarter.

In Slide 11, we focus now on first half of 2022 number, with operating results increasing by 47% to EUR 98 million and net profit with an increase of 57% to EUR 70 million.

Turning to Slide #12. We have some comments related with the cost inflation thing. Inflation continued to impact our cash cost base during the second quarter despite our efforts to minimize the impact. The increase in natural gas prices has more than offset some positive effects on electricity. We are working on solutions to minimize the consumption of natural gas that will be implemented during the second half of the year.

On the wood side, we continue to need a high level of imports versus historical numbers and expense has also been penalized by rising logistic costs and stronger U.S. dollar. Chemicals has also been a relevant component in increase of variable costs with a significant impact during 2022.

In Slide 13, we present the evolution of net debt during the second quarter. Altri's net debt by the end of June of 2022 was at EUR 357 million, an increase versus the first quarter given the dividend-related cash outflow of EUR 79.1 million. Net debt to EBITDA over the last 12 months ended the quarter at 1.4x. Jose Pina will now continue.

[Jose Armindo Farinha de Pina, executive]

Thank you, Miguel. So turning to Slide #14. We're pleased to present 1 of the best return on capital employed levels of the industry at 23%, which compares with an 18% average for the past 5 years.

If we turn to the next slide 15, we wanted to share with you the science-based targets initiative, the global partnership between CDP and United Nations Global Compact, validated the reduction targets of greenhouse gas measures set by the Altri Group starting in 2020, those targets point for Scope 1 and 2 greenhouse emissions reductions of 51% per tonne produced until 2030.

Finally, in Slide 16. We wanted to share our views looking forward. We continue to see a tight European market with a solid order book. Bulk availability remains an issue confirmed by the low inventory levels at European ports at the end of the second quarter. After a very positive quarter with 3 consecutive price increases of $50 per tonne each to $1,350 per tonne, we have seen an additional announcement of $30 per tonne for July to USD 1,380 per tonne. We also wanted to point out that a significant part of these price increases has been to cover the additional inflation of many of the variable cost expenses.

We continue quite motivated and enthusiastic with our project in Galicia project Gama and the opportunity we see ahead. We're moving the final investment decision deadline for the first half of 2023 in order to able to have all major information for a proper decision.

The separation of pulp business from GreenVolt occurred during May, with the distribution in kind of a 43.3% stake in GreenVolt shares to Altri's shareholders. After the inclusion of the operation, Altri ended up with a 19.1% stake in GreenVolt, which was dilutive to 16.6% after the recent GreenVolt capital increase.

The floor is now open to a 30-minute Q&A, and I pass the call back to our Investor Relations.

[Rui Cesario Pereira, executive]

Yes. So please, the floor is open to Q&A. So please can you start questions.

[Operator]

[Operator Instructions] We have the first question on the line from João Pinto of JB Capital.

[João Pinto, analyst]

Three questions, if I may. The first 2 regarding cash costs, where do you see cash costs going increasing on a full year basis? I mean, with the information available today, of course. And in terms of comparison versus 2021? And related to this, do you see the second quarter as a big in cash costs? I mean should we assume them to fall in the second half? And what would be the drivers for that? If you could comment on the wood market would be great.

And finally, if you -- could you elaborate on how do you see market dynamics evolving, namely supply that we have some capacity projects coming online next year. If you are seeing -- how do we are seeing the strength of the market to absorb those new capacity?

[Jose Armindo Farinha de Pina, executive]

Thank you, João. Well, going back to the comments we made regarding cash cost and in particular, what we saw in the second quarter. And here, perhaps I address both your first and second questions jointly. We did see a significant or a continued significant cost inflation pressure from the key items, mainly we talk about energy and energy, specifically natural gas, followed by wood prices, particularly to imports and processing chemicals. Those were really the 3 key elements.

We did see -- nevertheless, despite the increases, we did see what we would perhaps a deceleration of some of those costs with the exception perhaps of natural gas as we all know. But when we look at it now on a full year-on-year and considering what we've experienced in Q2 and looking now into Q3, given that we already have July, essentially under our belt. Year-on-year, we're looking at cost inflation possibly in the range of approximately 30%. So that should give you an indication in terms of what we see, which will be, again, looking at the second quarter, in line with the second quarter.

In terms of market dynamics, and in particular, around supply, obviously, the market continues to be extremely tight, and that's been really, I think, exemplified by the stock levels at European ports, which are very much in line with what they were in April, which was in an EBIT of already low. Order books remain relatively robust for our clients, in particular around paper, print and writing and tissue.

And on the supply side, looking at the projects that were coming on stream, it's really, I'll say that the major trend has been delays of those projects. You've had obviously, [indiscernible] came on stream earlier in the year. And in essence, it's been switching on to dissolving with pulp. We haven't seen any implications at least as far as Europe is concerned.

But the other projects, not the UPM project, et cetera, you're really looking at the first half next year according to the latest information. Is that going to create or drive significant availability of market pulp remains to be seen. Most of it is primarily directed at Asia. So we would need to see Asia picking up a bit more given the softness that we've experienced this year. And there is no reason at least that we can see at this point why that may not be the case. That would absorb a significant portion of that additional demand, the additional supply.

And Europe continuing to look at the constraints around logistics that we've seen, not expecting that we, at any point through the end of this year or early next year, we don't expect at least at this point that those projects will have a significant impact on the supply/demand...

[Operator]

The next question comes from Jaime Escribano of Banco Santander.

[Jaime Escribano, analyst]

Yes. So yes, my questions are regarding the commercial discount, my calculations is that it came at 33% blend with solving and same calculation for Q1 was 35%. Just to understand why is this dropping or what could be behind this dynamic?

Second question would be regarding the Gama project. And my question would be we are seeing hence some water problems or water shortage in their Pontevedra plant, the site that you have selected, do you think that this could be an issue in the future? And then finally, on GreenVolt the potential second dividend in kind, when could we expect to be paid?

[Jose Armindo Farinha de Pina, executive]

Thank you, Jaime. So going back to your first question, I think it's really down to product mix. As you know, the -- if you look at the total value -- total level of presumed discounts. It includes as well resolving wood pulp, which is not necessarily a like-for-like comparison because most [ prices there ] are net contrary to traditional hard pulp in the European market.

So -- but it's primarily due to product mix. There hasn't been any significant changes, certainly to our commercial conditions, which remain the same. Perhaps we've been a little bit more or we've taken a little bit more advantage of some of the spot market and the spot market usually it's net prices. So that tends to also change some of the dynamics.

If you look also at our presence in markets like Turkey, which again the net market and without discounts. So that may explain what you're seeing at some of the changes there.

With respect to the situation in Galicia and particularly, obviously, I can't comment on the used by -- regarding the recent cutting operations of an existing facility in Galicia, but there are significant droughts going on through Europe. The location that we have picked, we continue to monitor the flow, in particular of the river, in this case, is river Ulla, which sits on -- on a reservoir, there's actually a couple of reservoirs down the river.

So the water levels are a little bit lower, but nevertheless, they're still -- even at this stage, they're still in line with what we saw during our historic analysis. And we don't see it as an issue at this point. What it does drive is I think an overall trend that we have been working on. As you know, we've talked about this in the past. We use a state-of-the-art technology to recycle part of our discharge water back into the process. We're doing that for a number of years.

And 1 of our units, Biotek is currently, for example, recycling up to 20% probably discharge water, and that reduces the actual fresh water needs that these plants use and the design specifically for plant in Galicia, this new facility, has that in mind and actually incorporated into a higher level. So that's always been part of our approach and our design strategy for that project.

With respect to the remaining share of GreenVolt, we haven't yet announced any specific decision of when that would be made. We'll do that in due course. But at this point, at least, we don't anticipate that will happen this year. So it's likely that we're looking at next year, and that's primarily, again, due to legal reserve ratios and the need for us to have that in mind during the disbursement.

[Jaime Escribano, analyst]

Okay. Maybe a follow-up question on market. Now that you mentioned about Turkey, how are the price dynamics there? What is the price right now because usually it's a leading indicator, if the pricing in Turkey is going up is usually a leading indicator of some tightness in supply demand. So would like to know about that dynamic.

[Jose Armindo Farinha de Pina, executive]

Yes. So if you think, as I mentioned, the Turkish market is usually a market that is primarily a net market. There is a big demand related to tissue. Europe is becoming a significant producer of tissue products that, obviously, they export part of it to Western Europe, part of it to some of the Middle Eastern markets. So that's likely to continue.

But if you look in terms of the price levels, just so that you have a reference, we see -- and they tend to be because the net prices tend to be a lot closer to Chinese or follow at least what you've seen in the Chinese markets. But currently, those on a net basis are above USD 1,000 per tonne. So it should give you an indication of where that market is.

[Jaime Escribano, analyst]

Okay. And just a final question, if I may. And do you see further or in your intuition, do you think that the LatAm players are going to increase the higher wood price in Europe any further? Or do you think that we are at an optimal level where there is no further room for price increases?

[Jose Armindo Farinha de Pina, executive]

From everything that we're seeing right now and looking at the remaining of the third quarter, I think there is still upside risk in terms of the pricing.

[Operator]

We now have a question from the webcast from Jose Antonio Suarez from Scotiabank. And his question is regarding the change of combination plants to self-consumption, do you believe that this will more than compensate for the increase in the cost of natural gas suggest by futures?

[Jose Armindo Farinha de Pina, executive]

So perhaps I'll pass it to Miguel who's been obviously very focused on adjusting some of our position. But just as a side comment, we believe that moving on to self-consumption is something that is clearly going to be a significant compensation in terms of managing our natural gas, but I'll let Miguel comment on it further.

[Miguel Silva, executive]

Yes. So what we are planning to do, and that will be from August onwards, probably is effectively to change our main plant Celbi to self-consumption in terms of our -- this will led us to a better situation. And as Jose said, it will have a positive impact, and it can compensate to in part -- part of the gas increase, maybe not all, but a part, yes.

[Operator]

We now have another question on the phone lines from António Seladas of A|S Research.

[António Seladas, analyst]

First 1 is related with both questions are issues that were already discussed. So first 1 is related to our Galicia project. If I ask you that if you are now more -- well, are you more comfortable? Or are you less comfortable with the project now than 1 or 2 quarters ago? You can answer this question, first one.

And second one, just to clarify, when you mentioned now that you are going to move to auto consumption at Celbi. I didn't understand what will be the month. I think just to clarify, it would be August, I understood it was August, but I -- just to clarify if it was August. And what kind of impact in terms of cost we shall see when you move to auto consumption in Celbi -- at Celbi. Thank you very much.

[Jose Armindo Farinha de Pina, executive]

Starting with your second question just for clarification, what Miguel mentioned was it's likely to be August. That's what we're currently targeting. And the impact in essence, instead of purchasing everything in the market, selling everything as market, we will be selling the excess balance energy. So you're talking about roughly on a yearly basis considering Celbi is about 200 gigawatt power. And prices are pretty much in line with what you see currently in the Iberian peninsula.

As you know, there is change with the pricing cap on natural gas used for electricity generation, that impacted the actual market prices. But those will be -- that excess energy will go to market. So we'll be looking to possibly -- it could be anywhere between 1 million to 2 million on a monthly basis, at least.

In terms of your first question regarding Galicia, at this point, we have actually no reason to be less comfortable with the project on the contrary, the more specific we get about the project, the more comfortable we actually are about the project because we're looking to answer to various questions as we move through it.

So we have currently the financial impact assessment and the way we have basic moving on to the self-engineering and the way we have the feasibility, economic feasibility of the project underway. So a lot of those are actually moving in the right direction. And as you gain more detailed specificity in terms of how the project looks like, it gives us actually a greater comfort.

[Operator]

We have no further questions. So I would like to hand it back to Mr. Jose Pina for some closing remarks.

[Jose Armindo Farinha de Pina, executive]

Well, so thank you very much for attending the conference call today. Hopefully, we've given you a good indication of where we are and the outlook for the upcoming quarters, and we're pleased that you were able to make up the -- to join us and to have the opportunity to give you more detail on our current operations. So thank you very much, and have a good day.

[Operator]

Thank you all for joining. That does conclude today's call. You may now disconnect your lines.