Altri SGPS SA

ELI:ALTR

Earnings Call Transcript 2023-Q2

[Operator]

Good morning. We welcome you to the Altri Q2 2023 Results Conference Call. [Operator Instructions]

We have with us Mr. Jose Pina, the CEO of the Altri Group; and Mr. Miguel Silva, the group's CFO. Mr. Jose Pina and Mr. Miguel Silva will give us a brief description of Q2 2023 results, and the floor will be open to Q&A.

I will now hand the conference over to Mr. Jose Pina, the CEO of the Altri Group. Please, you may go ahead, sir.

[Jose Armindo Farinha de Pina, executive]

Good morning to everyone, and thank you for attending today's conference call of Altri's second quarter 2023 results. We're pleased to host this call with investors and analysts, and hopefully, we can give a picture of the second quarter for Altri and talk somewhat about the outlook and challenges I have for this year.

If we turn to the first slide, we show what we believe to be the main highlights of the second quarter 2023. The slowdown in Global Pulp demand resulted from a significant destocking effect in the Pulp and Paper industry, which combined with lower sale prices has caused a decrease in revenues. Accordingly, volumes sold have been lower than last year's second quarter, and revenues have decreased by 26%. Print & Writing segment has been the most impacted while Tissue remains resilient.

Considering the challenging environment we are currently experiencing, we are even more focused on improving our efficiency. EBITDA reached EUR 31 million, a 56% decrease compared to the second quarter of 2022. On a quarterly basis, we have witnessed accelerated variable cost reductions, but not enough to compensate lower sale prices observed in recent months.

In May 2023, the Altri Group distributed to shareholders a cash dividend of EUR 0.25 per share and a dividend in kind corresponding to Greenvolt shares equivalent to EUR 0.74 per Altri share. Also in May, the Altri Group performed an accelerated book building operation to sell the remaining Greenvolt shares, and the group now holds no interest in Greenvolt. Finally, we maintained the intention to take a final investment decision in 2023 regarding the Gama project in Galicia, and we continue to be focused on developing the project on all fronts.

Moving to Slide #3. We see the inventories at European ports during the second quarter of 2023, reached levels above the historical average because of destocking trends in both -- in the whole Pulp and Paper chain. Stock levels have seen stabilized in recent months.

In Slide #4, we highlight the evolution of Hardwood Pulp prices in Europe. Average fixed prices are 12% lower in second quarter 2023 versus the same quarter the previous year on a quarterly basis, that was an 18% decrease. Pulp prices started to decline last February and in this quarter at $958 per ton.

Looking at Slide #5, we present the production and sales volume in the second quarter. The level of production decreased by 1% year-on-year and increased by 17% when compared to the previous quarter, which means that production is now at a normalized level after the program downtime at our largest unit Celbi in the first quarter of 2023.

Volumes sold decreased by 6% when compared with last year's second quarter, mainly due to a softening of demand, combined with the destocking effect along the Pulp and Paper value chain. However, we registered a 9% increase in volumes sold versus the first quarter 2023 as a result of the group's commitment in finding new market destinations primarily in the Middle East.

In Slide #6, we show our sales breakdown per end use and per region. Given the destocking effect occurring during 2023, we have seen an important impact, especially in the Print and Writing end-use segment. In the second quarter 2023, the weighting sales from the Print and Writing segment was at 17% when it usually ranges from 20% to 25%. Tissue remains resilient with the weight of 53% near historic levels of 50%.

On a regional basis, we continue to focus on markets in proximity like Europe and near Middle East during the second quarter of 2023. Europe, including Portugal accounted for 61% of our sales volume, while the Middle East increased to 26% versus a historic value around 16% to 17%, as a consequence of our effort to maintain the sales volume in the quarter. Sales to Asia around 13%, continued to be mostly attributable to our Dissolving Pulp business.

I'd like now to pass the floor to Miguel Silva, the Group's CFO, who will comment the main financial highlights for the second quarter.

[Vitor Miguel Martins de Silva, executive]

Thank you, Jose. So we move to Slide 7, where we comment on the revenues and EBITDA levels achieved in the second quarter. Altri reached revenues of EUR 202 million in the second quarter of 2023, a decrease of 26% versus the second quarter of 2022. The main reasons for the decrease in total revenues were, on the one hand, the lower volumes of cellulosic fibers sold due to slowdown in demand and the decrease in prices. And on the other hand, for other revenues, the change to self-consumption, energy regime at Celbi, decreasing the energy volume sold. EBITDA reached EUR 31 million in the second quarter, 56% less than last year's second quarter and 38% lower than the previous quarter.

Now on Slide 8, we present the revenues and EBITDA for the first half of 2023. Total revenues reached EUR 427 million and -- which is 18% less than last year. EBITDA reached EUR 81 million in the first half of 2023, which is 38% less than last year's half.

Now in Slide 9. Reported EBITDA margin was at 15.4% in the second quarter, a decrease of 10.2 percentage points versus last year's second quarter and also a decrease of 6.9 percentage points versus the previous quarter. In the first 6 months of 2023, the EBITDA margin was at 19%, a decrease of 6.1 percentage points versus last year's half. Despite the favorable evolution of variable costs, this was not sufficient to compensate the reduction in sales prices and was the main cause for the EBITDA margin decrease.

Turning now to Slide #10. EBIT decreased by 74% versus the second quarter of 2022 by 58% versus the previous quarter. Net profit reached EUR 8 million, a 79% decrease comparing to last year's second quarter and 57% lower than the previous quarter. The decrease in net profit is impacted by EUR 5.8 million noncash negative variation in the fair value of a derivative contract towards the acquisition of electricity.

This contract, whose initial valuation on signing date was not accounted for as still a positive value at the end of the quarter. It is Altri's expectation according to current price forecasts that the present positive value of the contract will translate in a future benefit for the group.

On Slide 11, we make now some remarks on the cost evolution. After a slight cost deflation in the first quarter, we saw an accelerated favorable evolution of cost in the second quarter of 2023. Natural gas prices continued to decline in the second quarter after reaching a peak in last year's third quarter. Additional power generation capacity is expected in the second half of 2023, mainly through the sale of the electricity surplus from the new biomass boiler in Caima, which will make this plant Altri's first fossil fuel free units.

Moreover, Altri will also start the photovoltaic auto consumption units at the 3 plants. Regarding Wood, during second quarter, we noticed a reduction in import needs and the decrease in overall wood prices, which allows for a reduction in costs. Prices of chemicals continue the downward trends that started in the first quarter of the year.

In Slide 12, we present the evolution of net debt during the second quarter. Altri's net debt reached EUR 401 million at the end of this second quarter, while net debt to EBITDA from the last 12 months increased to 1.6x in the quarter due mainly to cash outflow related to dividend distribution.

I will now pass the word back to Jose Pina.

[Jose Armindo Farinha de Pina, executive]

Thank you, Miguel. We would now move to Slide #13. We see Altri's return on capital employed level, which is at 23% in the second quarter 2023, which remains a solid figure and above the group's historical average.

Slide #14 on the sustainability front. Altri continues to improve its ESG ratings and focused on our 2030 commitments, which is our road map on sustainability and ESG. We'd like to highlight the achievement of 0 incidents involving internal employees during 2 consecutive months, April and May, which emphasizes our focus on safety.

In terms of ESG ratings, Altri has significantly improved the ratings assigned by Sustainalytics, now reaching the top 5 worldwide in the Pulp and Paper sector. Also, Ecovadis granted the Platinum score to the Altri Group, which places us in the top 1% of the sector worldwide. Additionally, the Altri Group was awarded the first place in the sustainability category in the Kaizen Awards Portugal, which is an encouraging recognition of our work developed towards our commitment 2030.

Finally, in Slide #15, I wanted to share our views looking forward. In the Chinese market, there is some evidence that demand is strengthening, and we believe these trends could continue during the second half of 2023. The destocking process in the European market experienced since the end of 2022 should be coming to an end. The end use segments of Print and Writing Décor and some specialties show low levels of demand while demand in Tissue remains very resilient. The group is seeking the best possible commercial solutions to accommodate to the demand trends across segments, but we remain disciplined and prudent.

Pulp prices in Europe are in line with prices in China, having followed the global trends. We believe that this trend may be coming to an end, and we expect the stabilization in prices in the following months. The group will remain cautiously aware and attentive to the outlook for the coming quarters. We have witnessed an accelerated cost reduction in the second quarter of 2023, and Altri will continue to work towards achieving additional cost reductions in the rest of the year. Finally, on the Gama project, we should reach a final decision during the second half of 2023, and the work is progressing well on all fronts.

[Operator]

[Operator Instructions] Our first question comes from Enrique Parrondo from JB Capital.

[Enrique Parrondo, analyst]

I would like to ask 3, if I may. So the first one on demand and pricing. I was wondering if you could provide us your view -- a little bit more color on your view for the sector. A competitor of yours yesterday highlighted that they had seen an increase in their order books, and they expected a small increase in prices for the year and in Europe. I don't know if you share the view.

Second one, on cash costs. How should we think about them in the second half of the year in the sense of how much room for normalization do you see? And finally, on the Gama project, there has been a relevant amount of new slope on your conversations with the administration. From what I read, I believe that there is a more proactive approach from the administration. I was wondering if you are more positive now maybe that you were at the end of first quarter this year, not saying that you were negative before, but -- and as I asked in previous occasions, are you still targeting to obtain 25% of the front from the EU? Or should we expect -- or do we expect a change in the percentage?

[Jose Armindo Farinha de Pina, executive]

Thank you, Enrique, and good morning. Starting with demand. We have obviously seen the European market has been under significant destocking process across the chain since the end of 2022. And at some point, this was basically a reflex of softer demand as well in the region. And we've seen -- when we look at [indiscernible] numbers, which I'm sure you follow the industry association for the European producers, pulp and paper producers, most of the end segments, on average, you've seen basically a 17 -- over 17% production reduction and that has an impact as well, obviously, on the upstream. And in essence, the combination of slower demand and destocking led to what we have experienced.

On the Tissue side, as I mentioned, we believe demand remains resilient in line with last year. But going forward, we would not expect at least any changes to that. Specifically, when it comes to your question around demand, what I can mention is that we have -- we started to see some -- let's call it, early signs that the destocking process is reaching essentially tail end, but we remain very cautious in terms of how is that going to effectively occur. But as I said, we started seeing some early signs that there could be much more stability going forward on the demand and eventually somewhat of a rebound in the second half or towards the end of the second half.

In terms of prices, again, we remain -- obviously, we have been quite cautious and remain cautious. We believe that where we see it today, I mean, basically, Europe is at the level of China. And we've all seen how China has -- what has occurred at least on China with a very slight rebound from the lows that we've experienced a few months ago. There were 2 announcements of price increases. The first one did take hold. The second one partially took hold. And actually, we expect this month for the rest of that price increase to go through. So I think in China, at least, we're seeing a situation where the overall industry is much more stable. And going forward, we could see a slight rebound.

If we take that back to Europe, effectively, when you have prices at similar levels, there's very little space for prices to drop further. So I think there could be at least some stability in the coming months. And generally, that could lead to somewhat of an upswing towards the end of the year, in particular, as some of these destocking processes generally tend to be -- to overshoot and there could be somewhat of a replenishment or a partial replenishment, I should say, towards the end of the year.

The other thing is a lot of producers, especially those -- that operate outside of -- or particularly Latin American producers, they effectively becomes more attractive to sell pulp into Asia and into the Middle East versus Europe. So I think the European end users are also pretty much aware that these dynamics take place. And therefore, I think we'll see a more cautious approach in terms of trying to force further price reductions from where we are. But as I said, we do remain -- we've taken a very prudent, a very disciplined approach, and that's the stance that we're going to maintain.

Regarding your last question on Gama. Yes, there has been some very direct interactions with the administration. I would say we never really been, to your point, negative on the funding. On the contrary, we remain positive. But it's not a straightforward engagement, and we've seen different levels of engagement in the past. But at this point, we have a very proactive engagement. We've seen more positive as well approach from the administration, and we're in the midst of the discussions. So we would hope in the next few months, we'll have more to report there.

[Operator]

The next question comes from Jaime Escribano from Banco Santander.

[Jaime Escribano, analyst]

I'm sorry because I'm traveling, so maybe my connection is not very good and I couldn't catch all what you said. Just a follow-up on the market, my question more specifically would be regarding the Paper and Writing segment, so in order to better understand the dynamics there, I see that softwood pulp price remains very high, and the spread in hardwood is very high. And I was wondering why? Because if the demand of Paper and Writing is so weak, why -- maybe you can give us some glimpse of what's going on.

The second question is regarding cash cost, which on my numbers declined around 11% quarter-on-quarter. And I would like to know what should we expect for the second half? If you can give us some kind of visibility and beyond. So in the long run, what do you think could be a sustainable cash cost? How much room we have to keep reducing the cash cost?

[Jose Armindo Farinha de Pina, executive]

Thank you, Jaime. Regarding your first question on the Printing and Writing, effectively, when you look at how prices have evolved, in particular, some of the core segments such as uncoated woodfree and the more A4 market. What we have noticed is, in fact, between the peak prices on both pulp and then compare it to paper, in essence, you have a gap of about -- over $370, which is very significant, as you said and how do we reconcile that with a reduction in 30% demand. And what I would say is, historically, we would tend to see less significant swings when we look at the printing and writing papers, there's never been swings as wide as you've seen in pulp and that makes sense because Pulp being a more upstream segment is more exposed to supply/demand variables.

In Printing and Writing, those have been less obvious. There have been some shutdowns, so the industry has also proactively been managing its supply. And I think to a certain extent, that has played a role in the ability of sustained prices a little bit higher. But nevertheless, prices are declining. And I think you'll see that gap between Pulp and Printing and Writing actually shrinking in the months that have as tends to be the case generally.

Regarding our cash costs, and I understand Enrique also has asked that question. So just to address that, we have indeed seen a decrease of 13% quarter-on-quarter and 10% if you look at same quarter previous year. We have effectively now have consecutive 6 months of month-on-month reductions, and we expect to keep this -- we have stated earlier if you recall that our target was close to double digits. I think that's a target that we'll be able to achieve. So for this year, we continue to work very proactively and the remaining 2 quarters will obviously be relevant, but we expect continued quarter-on-quarter reductions in order to achieve that level.

And on the question regarding what normalized cash cost could be. If I go back 2 years ago, we were probably more in the range of 360 -- 350, 360, a little bit higher. So I think if you look at the impact of inflation, in the last few years, and this is the truth for the entire industry on a global basis, but we would expect at least for us to be somewhat below 400 -- in the high 300s once we reach more normalized levels.

Just to note that on the rest of the industry, what we have seen and in particular because of the significant impact on increases, particularly on wood cost in Latin America, cash costs for the whole industry have been on the upswing. So I think we'll have a new normal going forward. And that should also set a floor in terms of price levels. And we've seen that in China, and I think we're seeing that as well in Europe.

[Operator]

The next question comes from Antonio Seladas from A|S Independent Research.

[António Seladas, analyst]

So I have 3. The first one is related with volumes, volumes sold to both. So in the second quarter, I think that figures were fine, actually surprised me on that side. So my question is, there were any specific reasons for these figures? And what kind of figures should we expect for the second half?

The second question is related with costs. I'm sorry to come to this issue again, but nevertheless, just wood, I think that wood costs now are more normal and more similar to the second half last year. Nevertheless, they are still much higher than 2 years ago. However, you mentioned that costs should continue to go down. It means that wood cost should go to levels seen by 2021 or not? Can add more color on this. And last question is Dissolving. On the press release, I think that you are cautious on dissolving because the price gap in Dissolving and Pulp, if I understood well. So I don't know if you can elaborate a little bit more on this issue. Thank you very much.

[Jose Armindo Farinha de Pina, executive]

Specifically on the first question regarding the volumes sold in second quarter and expectation for the second half. We've had, obviously, year-on-year reduction of 6% quarter-on-quarter, an increase of 9%. We remain, I would say, cautious in terms of this particular period in the cycle and we remain disciplined, so we're not going to go after all of the business opportunities that we have been faced with. And that's something that, as I said, we're managing very carefully.

So if you look at it on an annual basis, I think the previous indication is that we would probably see at least a 5 -- or expect at least 5 -- between 5% and 10% reduction in the total volume, but it depends on the dynamics in the second half. If the second half dynamics are more stable than we presented, in particular with a better position with our cost structure, I think we'll take advantage of that, and we'll be ready to take advantage of that.

So I think overall, at least, we've been keeping in line with what we see in the market. We have actually been ahead of some of the reductions we've seen in the market, and that's been a result of the group also looking for additional opportunities. As I said, we have valuable opportunities and that way we'll continue to approach it.

On the wood costs. Personally, I don't think we should expect to see prices where they were 2 years ago. There's been plenty of inflation that has impacted the wood value chain. But we do expect wood prices to continue to adjust, in particular, with the current cycle. But as I said, I don't think that anyone should expect prices to be at the level as they were before the previous pulp cycle. So we'll continue to look for opportunities to optimize our sourcing as we always do, and -- but the expectation is that we'll see further adjustments.

On the Dissolving Wood Pulp, we actually are positive in terms of where that market is today. Prices have held fairly well. There's been some slight price erosion, but not anything significant. We expect prices to remain relatively stable. There may still be slight adjustments in the next few months. But overall, I think Dissolving has been a bright light in the overall Pulp segment. And we've obviously been keen on taking advantage of that.

[Operator]

[Operator Instructions] There are no further questions from the conference call. We will start now with the written questions. Our first questions come from Jose Antonio Suarez Roig from CaixaBank. What cash cost levels do you see for the second half of the year? For 2024, what should we think to be the new normalized cash cost levels? If Gama project doesn't go in Spain, will you consider to develop it in Portugal? What level should we see of discounts in 2024?

[Jose Armindo Farinha de Pina, executive]

On cash costs. I think the indication -- just from what I mentioned before, we expect to continue to see quarter-on-quarter reductions. Overall, for the year, our target has been close to double digits as we've stated, so close to 10%. I think at this point and given the progress we've been making, that should be fully feasible and we'll continue to work to see whether we'll actually be able to go beyond that and we'll take every opportunity available to us. But given where we come from last year, that's been a very, very significant effort for us. And as I said, we'll continue to work very focused on it.

So you should -- when you look at the overall components, in particular, on that cash cost, as I've mentioned just in the previous question, we would expect to see wood continue to be adjusting. I don't expect much more on energy, at least at this point, and we do expect some slight adjustments as well on chemicals and logistics. But overall, that should add to us continuing to make significant progress on our cash costs.

In terms of the Gama project, the Gama project is in Galicia. It's not in Portugal. And if that project was not to go forward, it would not be necessarily in the same configuration. We do have some options that we would consider, in particularly looking at our current industrial footprint in Portugal, but definitely will be a different project, and perhaps we need to look at beyond Spain as well for that. But at this point, that's not something we're considering because of the attractiveness of the project where it is. There is a reason for it being in Galicia, particular proximity to raw materials as well as to some end markets, and that's -- that clearly aligned with the value proposition of the project.

In terms of discounts for 2024, it's a little bit too early to say, but I would expect if you see stabilization in the pulp market, you would only expect commercial discounts based on the volume -- the noncontracted volume that was a transaction this year, you would expect that to lead to slower and eventually to lower discounts overall next year. But again, it depends where the market is going to go in the next few quarters. But if you start seeing less noncontracted volume taking place, then it should lead to a reduction in the discount.

[Operator]

[Operator Instructions] There are no further questions. I will hand over the session to Mr. Jose Pina, Altri's CEO.

[Jose Armindo Farinha de Pina, executive]

Very good. So I just wanted to thank everyone for joining the call. And hopefully, you have a better view as to where Altri is and how we're operating through this environment, and wish you all a good weekend. Thank you for joining.

[Operator]

This concludes today's event. We thank you all for your presence. Ladies and gentlemen, you may now disconnect your lines. Thank you.