Altri SGPS SA

ELI:ALTR

Earnings Call Analysis

Altri's 2024 Q2: Strong Performance Amid Market Dynamics

In Q2 2024, Altri saw strong financial performance, with EBITDA rising 48% from Q1 to €74 million and an improved EBITDA margin of 30.8%. Pulp prices in Europe hit a high of $1,440 per ton. Despite distributing €51 million in dividends, net debt decreased by €15 million, reaching a 1.8 net debt-to-EBITDA ratio. Revenue grew by 19% year-on-year. Future projections indicate mid-single-digit growth in sales volumes. The company expects cost stabilization and is progressing on key projects, anticipating continued positive market conditions for 2025-2028. Sustainability efforts earned an improved score of 14.5 from Sustainalytics.

Strong Financial Performance in Q2 2024

Altri demonstrated solid results in the second quarter of 2024 with a total revenue increase of 19% year-on-year, reaching EUR 74 million in EBITDA, a notable 48% rise from the previous quarter. The EBITDA margin improved significantly to 30.8%, a leap from 22.3% in Q1 2023, showcasing enhanced profitability driven by a favorable market environment.

Volume Growth and Market Dynamics

The company reported a year-to-date revenue growth of 9% for the first half of 2024. Pulp demand maintained solid momentum, particularly for hardwood, which saw a 6.3% rise. Pulp prices reached a peak of $1,440 per ton in May, but after several months of increases, corrections are expected in the latter half of 2024. Altri's strategic approach to balancing production and inventory has contributed to these outcomes, with total volumes sold reflecting a 9% increase.

Cost Management and Financial Stability

Despite a EUR 51 million dividend distribution, Altri successfully reduced its net debt by EUR 15 million, marking a net debt-to-EBITDA ratio decline from 2.6 at the end of 2023 to 1.8. Continued operational focus on cost management has placed the company in a stable position, with projections indicating cost stabilization in the latter half of the year. Nonetheless, slight inflation pressures, particularly in energy costs, may persist.

Guidance and Future Outlook

Looking ahead, Altri expects to sustain its targets of mid-single-digit sales growth for the year. However, a scheduled maintenance program for its Celbi unit in the third quarter may impact production volumes temporarily. The guidance for cash costs remains steady with a projected year-on-year increase in the low single-digits. The capital expenditure for the year is anticipated to remain in the mid-40s range.

Sustainability and Strategic Projects

Altri is making strides in sustainability with an updated rating from Sustainalytics, maintaining a low-risk status. Furthermore, the company is advancing various diversification projects, particularly in bioproducts, which are expected to culminate in growth opportunities by 2025. The commitment to sustainability will enhance Altri's operational agility and long-term profitability in an increasingly eco-conscious market.

Conclusion: A Positive Trajectory

Overall, Altri’s strong financial performance in the first half of 2024 reflects its adept management of market dynamics and operational costs. The company remains well-positioned for continued growth, particularly as the global pulp market stabilizes. Attention to sustainability and strategic investment projects will bolster Altri’s competitive edge into 2025 and beyond.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning. We welcome you to the Altri Second Quarter's 2024 Results Conference Call.[Operator Instructions]

I will now hand the conference over to Mr. Rui

Cesario, Head of Investor Relations of the Altri Group. Please go ahead, sir.

[Rui Pereira, executive]

Hi. Good morning, everyone. Thank you for joining us at today's second quarter results of Altri conference call. We will review our latest financial performance, market conditions, operational highlights, future perspectives and at the end, we will follow with a Q & A session.

To do that, we have with us today the CEO of the group, Mr. Jose Pina; and Mr. Miguel Silva, the group's CFO. I'll hand over to Mr. Jose Pina.

[Jose Armindo Farinha de Pina, executive]

Thank you. Good morning, and thank you for attending Altri's conference call. We're always pleased to host this call with investors and analysts to share Altri's results and talk about the market environment and challenges it has.

In Slide #2, we comment on some of the main highlights during the second quarter of 2024. The global pulp market remained with positive demand dynamics during the second quarter of this year, as we shared with you at our first quarter results conference call. Demand continues sound in Europe and North America despite some slowdown seen in China and Asia overall in the last weeks of the second quarter.

As a result, pulp prices in Europe, especially for hardwood, continued to increase during the second quarter of 2024 to reach a new high of $1,440 in May with some stability in June. Giving a more stable demand environment and after 9 months of price increases, we may see some correction during the second half of 2024 as anticipated by many industry [indiscernible].

Our EBITDA for the second quarter of 2024 reached EUR 74 million, 48% better than the first quarter and an EBITDA margin of 30.8%, an improvement from 22.5% in the first quarter. If we compare with 2023, growth rates will be significantly better. The pricing environment was quite different last year.

As a result of the high free cash flow conversion level, we maintain -- we've managed to lower our net debt level in the quarter by EUR 15 million despite distributing full year dividends of EUR 51 million. Net debt-to-EBITDA ratio is now at 1.8, which compares with 2.6 at the end of 2023.

Altri continues to develop several diversification and growth projects in segments such as bioproducts and textile fibers as well as dissolving, where we highlight the recovery and valorization of acetic acid and furfural from renewable sources at our industrial unit at Caima already in execution.

Moving to Slide #3. On global pulp demand, it continues to grow at mid-single digits in the first 5 months of 2024. Hardwood pulp demand rose by 6.3% year-over-year with double-digit increases in Western and Eastern Europe and North America. China has slowed during the second quarter of 2024, but still positive by almost 4% as paper demand seems to be less dynamic than earlier in the year.

The softwood pulp demand also grew, but at a slower rate of 1.5%, showing hardwood's capability as a product to continue to gain market share in the pulp space.

If you turn to Slide #4, we see a stable 5% -- 5.7% growth in global demand for dissolving pulp in the first 4 months of the year, in line with the increasing interest we continue to see for this product.

In Slide #5, inventories at European ports during the quarter continued to -- at a low level of around 1.2 million tons, in line with the previous 6 months. And even more recently, that trend continues with the recently [ published ] June levels. With pulp prices in Europe at a premium to China [indiscernible] possible, we may see as well some more volumes being redirected towards Europe.

In Slide #6, average fixed prices for hardwood in Europe were 23% higher in the second quarter of 2024 versus the second quarter of 2023. On a quarterly basis, average prices increased by 21%, fueled by the mentioned positive demand environment during the quarter. Pulp prices ended the year at $1,001 per ton, and we're at $1,440 per ton at the end of June 2024.

In Slide #7, we can see dissolving pulp prices with a more stable and less volatile trend having grown by 4% on an annual and quarterly basis. These prices are [ net ] and sourced from China, so not fully comparable to the European BHKP prices that include commercial discounts.

At Slide #8, we show our production and volumes sold in the first half of the year at more normalized levels than last year respectively, with increases of 6% and 9% versus the first half of 2023. As we mentioned in previous calls, we have strategically tried to balance production with sales to optimize our pulp inventories.

Going to Slide #9. Volumes sold maintain a similar pattern when looking at sales per region, with the end use being led by Tissue followed by Printing and Writing.

I'll now pass the call to Miguel Silva, our group's CFO, who will comment on the main financial highlights of the second quarter 2024.

[Vitor Miguel Martins de Silva, executive]

Thank you, Jose. We can see in Slide 10 that as the market environment continued to improve during the quarter, so did our revenues and profitability. Total revenues for the second quarter of '24 increased by 19% year-on-year and are also 8% higher than the first quarter. An EBITDA of EUR 74 million is significantly higher than last year's second quarter, and 48% more than the previous quarter.

In Slide #11, the accumulated numbers for the semester point for an increase of 9% in revenues and 53% growth in EBITDA in the first half of the year.

In Slide 12, we can see that Altri's EBITDA margin in the second quarter of '24 increased to 30.8%, the highest since the beginning of 2023. As a comparing reference, we have reported a 22.3% EBITDA margin in the first quarter of '23, a quarter with very similar average BHKP prices. EBITDA margin in the first half of the year was 26.7%.

Slide 13 and Slide 14, we see the improvement in EBIT and net profit levels, with net profit in the quarter almost doubling when comparing with the first quarter of '24 and reaching EUR 62 million in the first half of '24, 122% higher than in the first half of 2023.

On Slide 15, we have some remarks related with the costs. We reaffirm our belief in cost stabilization for the second half 2024 versus the first half. On the energy side, we continue to benefit from regulated regime both in Celbi and Caima units. We continue to see stabilization in [ oil ] prices during the first half of 2024 as well as in chemical prices.

In Slide 16 and looking at net debt, there was a reduction of around EUR 15 million during the quarter despite a EUR 51 million dividend distribution, placing the free cash flow in the quarter at EUR 66 million. This was a consequence of a positive evolution in EBITDA, lower investment requirements and a strict working capital management.

I will now pass the word back to Jose Pina.

[Jose Armindo Farinha de Pina, executive]

Thank you, Miguel. If you turn to Slide #17. Altri's return on capital employed level increases to 16% in the first half of 2024 based on the operating results of the last 12 months, which still includes the third quarter of last year, an unfavorable comparison. The current level of ROCE is already in line with Altri's historic numbers of 17% over the last -- if you take the last 7 years, and above the industry's average.

In Slide #18, we share an update of some sustainability developments and efforts of the group during the quarter. Sustainalytics made an update to our rating, improving our score to 14.5, maintaining a low-risk status and making us the [ eighth ] globally out of 85 companies in the sector for Paper and Forest. We are currently updating the full year review and expect an update in the coming weeks.

We have also developed several initiatives within our communities, celebrating the Forest Day with several schools in our nursery, Altri Florestal, and association with local authorities to clean several beaches in the surroundings of [indiscernible]. Also, we have been promoting events with our [ works ] for a physical exercise and mental health regarding our own organization.

Finally, in Slide #19, and looking ahead, we expect some stabilization of demand trends for the second half of 2024. Europe and North America are likely to continue to be the most dynamic regions, while China could register some slowdown in the short-term due to a softer local paper market after a 2023 record year. Nonetheless, we maintain our positive outlook for 2025-2028 period where additional capacity is limited and demand should continue on a positive trend.

Based on the demand outlook for the second half of this year, as new capacity enters the market and temporary disruptions tend to diminish, we anticipate some correction for pulp prices in the near term.

On the cost side, we maintain our view of cost stabilization for the second half of the year versus the first half of 2024. Nonetheless, we do not exclude some additional inflation pressures depending on the evolution of pulp prices, especially if there is upside risk. In any scenario, we maintain our commitments as proven to maintain our cash flow, cost levels and a very tight [ scrutiny ].

Our diversification and growth projects, including the valorization of acetic acid and furfural 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 integrated environmental license, which is, as you all know, an [ essential ] condition for a final investment decision.

So in conclusion, Altri has a positive first half of 2024 with positive market conditions and improved financial performance. We expect to have further progress on our growth projects in the coming quarters, and we remain focused on executing our strategic plan, optimizing our operations and delivering value to all our shareholders.

Thank you for your attention, and we look forward to your questions.

[Operator]

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

[Enrique Parrondo, analyst]

I have 3, if I may. First one would be related to expectations for sales volumes for the year. If I read that correctly, in previous quarters you were guiding for a mid-single-digit increase this year. Just wondering if this is still your base case, maybe factoring in a slightly lower third quarter and a recovery in the fourth quarter as some of your peers are guiding to?

Similar one on cash costs. So year-to-date decline is close to low double-digits. You're commenting that you expect this to stabilize in the second half of the year. So it would be helpful to have an update on your view for cash cost declines for the full year, if this is still in the mid-single-digit range?

And final one on CapEx. So reported figure for the second quarter was surprisingly low at EUR 4 million. I just want to confirm if we should expect an increase in the second half to reach the mid-40s levels guided for the full year?

[Jose Armindo Farinha de Pina, executive]

Thank you, Enrique. So specifically on the questions you've raised in terms of expectations for sales volume on -- in the coming quarters, we continue with our target, essentially mid-single digits. As you've seen, we've optimized our production capabilities so far in the first half. And when we look at the second half, on the production level we're going to have a program maintenance stock for Celbi late third quarter. So that's going to have a little bit of an impact in terms of production volumes. In terms of sales volumes, we remain basically on track with our target to be in single-digits for the full year.

Regarding cash cost, from what you've seen, we expect so far in the second half to be very much what I'll say in line with the first half of the year. I would say at this point, we're looking to -- we would expect an overall evolution year-on-year on the low single-digits, mainly driven by a slight increase in energy, which obviously [ mitigates ] a little bit of that reduction. But overall, we remain pretty much on target in terms of very stable cash cost outlook.

And on our CapEx investment, effectively as you mentioned, in the first half, in particular third quarter was somewhat lower than what was anticipated. But we remain committed to our full year mid-40s in terms of our CapEx. So you should expect pretty much [ us ] to be somewhat in line by the end of the year.

[Operator]

The next question comes from Antonio Seladas from AS Independent Research.

[António Seladas, analyst]

I have 2, actually, 3. The first one is related to the gross margin that improved in the first quarter, now improved again and is about [ 50% ]. So, apparently, wood prices are coming down. So if you can comment on this?

Second question is related with pulp volumes sold over the second quarter. You mentioned that you are going for mid-single-digit increase over the year. Nevertheless, I'm surprised because prices are doing so well, why you didn't sold more -- more pulp?

Then the last question is related with the prices of the dissolving versus the price of cotton. So cotton is -- prices are coming down according to my -- well, my source with what I'm seeing in terms of benchmark prices, and dissolving is doing well. So I don't know if you can explain this relationship?

[Jose Armindo Farinha de Pina, executive]

In terms of the gross margin, in essence, our overall operating margin was -- growth was driven by somewhat of a cost optimization as well as obviously taking advantage of prices. And that's what we have done, and that led to margins which are somewhat on the high end to look at our historic levels. But we've very much been focusing on managing to optimize our operating margins.

Within that, obviously, wood prices have a significant impact. What we have seen since the second half of last year, it's much more stability in terms of wood pricing. I think this year you would expect some level of inflation on those prices. But overall, I think we managed to compensate that in other places. But I would say at this point, wood prices are very stable, and we would expect them to remain so for the remainder of the year.

In terms of volume growth, I mean, we've sold total volumes of -- we had growth of 9% in the first half of the year. We've tried to maximize our volume opportunities, managing our inventory levels. I think I've mentioned this in the first quarter. We have been operating with low inventory levels, that's been by design.

Obviously, we had a more, let's say, a prudent outlook for the remaining of the year, especially on the back of how 2023 [ fall ]. So we continue to manage a very healthy level of inventory in our plant and in particularly looking at the third quarter where we're going to have our largest unit, Celbi, undergoing regularly scheduled maintenance. So obviously, we need to build up some inventory as well to go through that stoppage. That's actually the reason.

There is one additional point to that, which is -- I think we've mentioned this in the past, we've been expanding somewhat our ability to produce dissolving, and that obviously takes when we go through some campaigns, particularly with our existing [ global ] capacity, sometimes transition, but a little bit of an impact. Despite the fact, in the first half, we were still 6% [ ahead ] of last year in terms of production.

Regarding your third question, in terms of prices on dissolving versus cotton, yes, we've seen some softening on the cotton market. But overall, we've seen a fairly healthy cellulose space, the main fiber, particularly viscose and lyocell. So those markets remain relatively healthy. It's a seasonal market. So you do have some slowdown in the summer months.

But despite that fact, I think operating levels on these [ cost ] plants around the world tend to be relatively healthy, especially compared to last year. So those have provided some support for the current level of prices and actually even with some additional increase, which has been on the back of the volume growth that has been registered as well. So, hopefully, that clarifies the questions you had in time.

[Operator]

[Operator Instructions] There are no further questions from the conference call. So I would like to hand over the session to Mr. Jose Soares de Pina, Altri's CEO.

[Jose Armindo Farinha de Pina, executive]

Well, thank you very much. As we've gone through, it's been -- it's a good part of the cycle. We've had, I think very solid results. We've continued to deliver quarter-on-quarter in our commitments, and we have a relatively positive outlook for the remaining of the year and for the industry, not only in the short-term, but also a bit longer if you look into the incoming couple of years based especially on fundamentals. So we'll continue to remain very focused on managing our operations and looking forward to report back the next -- regarding the next quarter results. So thank you for joining, and wish you a good rest of your day.