Altri SGPS SA

ELI:ALTR

Earnings Call Transcript 2022-Q3

[Rui Pereira, executive]

Hi. Good morning. Thank you for attending today's conference call of Altri's third quarter 2022 results. My name is Rui Cesario. I'm the Investor Relations at Altri. We have with us today Mr. Jose Pina, the Group CEO; and Mr. Miguel Silva, the Group CFO. Mr. Jose Pina and Mr. Miguel Silva will make a brief presentation and description of the results, and the floor will be open for 30 minutes Q&A.

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

[Jose Armindo Farinha de Pina, executive]

Thank you, Rui, and good morning to everyone, and thank you for attending today's conference call of Altri's third quarter 2022 results. As always, we're pleased to host this call with investors and analysts. And hopefully, we can give a clear picture to all of you on how the third quarter 2022 for Altri and talk somewhat on the outlook and challenges ahead.

If you turn to Slide #2, we present the main highlights of the third quarter of 2022. We are quite pleased to report that Altri achieved an EBITDA of EUR 92.6 million in the third quarter, which represents a 16% increase comparing to last year's third quarter, and a 33% increase more compared to the second quarter of 2022, an improvement of 7 percentage points when comparing to the previous quarter. When looking to the 9 months, EBITDA increased by 25% to EUR 223.4 million. We have achieved a new EBITDA per ton record at EUR 338 per ton, which is 23% higher than last year's third quarter and 41% higher than the same indicator for the second quarter of 2022.

On the development of the project Gama in Spain, we'd like to share that we are actively working on all fronts needed to reach a final investment decision during the first half of 2023.

Altri's 25 return on capital employed achieved in the 9 months of 2022 continues to be among the best in class, reaffirming its solid position as a reference in the sector and such an important KPI for management.

Moving to Slide #3. We highlight the tight situation of the pulp market in Europe, with the level inventories at European ports in September near historic levels, having reached the 5-year low in the month of July. We see inventory levels in September very much in line with 2022 average levels, one of the lowest years on record.

In Slide #4, we present the recent evolution of hardwood pulp prices in Europe. Prices have increased by 20% since last year's third quarter and during 2022. After a material increase in prices during the first 6 months of the year, we saw a stabilization in list prices at $1,380 per ton since July.

Looking at Slide #5, we present the production and sales volumes in the quarter. Production levels were in line with previous quarters, while sales volumes were slightly below, as we increased our inventory level to a minimum, we believe, to be more appropriate in light of scheduled maintenance shutdowns.

In Slide #6, we show our sales breakdown per region and end use. On the regional side, these confirms only our strategic focus in markets of proximity, namely Europe and Middle East, with more than 90% of sales. Sales to Asia, as you all know, are fully attributable to our dissolving pulp production. On the end use, tissue and printing and writing remain our main segments.

I would now like to pass the word to Miguel Silva, the Group CFO, that will comment some on the financial highlights of Altri during the first 9 months of 2022.

[Vitor Miguel Martins de Silva, executive]

Thank you, Jose. So we move to Slide #7, and we comment on revenues and EBITDA achieved in the quarter. Altri reached revenues of EUR 284 million in the third quarter of '22, an increase of 31% compared the third quarter of '21 and 4% more comparing with the second quarter of '22. EBITDA reached EUR 92.6 million in the third quarter, 16% more than last year's third quarter and 33% higher than the second quarter of 2022.

In Slide #8, we present our EBITDA margin that reached 32.6% in the quarter, a deterioration compared to last year's third quarter, but an improvement of 7 percentage points when compared with the previous quarter. This improvement is mainly due to the positive evolution of pulp prices and the U.S. dollar strength, but also the change of the electricity regime to self-consumption.

We have set the new profitability record of EBITDA per ton at EUR 338, an increase of 23% when comparing to last year's third quarter and 41% higher than in the second quarter of '22.

In Slide 9, we look at the 9-month numbers. Revenues increased by 38% to EUR 805.9 million, while EBITDA rose by 25% to EUR 223.4 million, which translates into a margin of 27.7%.

Turning to Slide #10. And despite all the challenges at the cost level, operating results increased by 21% versus the third quarter of '21 and accelerated 43% when compared with the previous quarter.

Net profit grew 4% in the third quarter compared to last year's third quarter mainly due to higher financial and higher effective tax rate. On a quarterly basis, net profit registered an increase of 20%.

In Slide 11, we focus on the 9-month numbers with operating results increasing by 34% to EUR 174 million and net profit 30% higher to EUR 117 million.

Turning to Slide 12. We have some comments on the cost side. Inflation continued to impact our cash cost base during the third quarter, despite all our efforts to minimize the impact. Natural gas prices reached its peak level in 2022 so far during the third quarter, more than offsetting the positive effect from the implementation of the self-consumption electricity regime.

On the wood side, we continue to see an impact from our need of a higher level of imports versus historical standards as well as some inflation in the sourcing in Iberia.

Chemicals prices have continued to increase during the third quarter, having a relevant impact in the increase of variable costs during 2022.

In Slide 13, we present the evolution of net debt during the third quarter. Altri's net debt by September 2022 was at EUR 360 million, a slight increase versus June, given higher CapEx needs, but mainly due to higher working capital needs. The change in the electricity supplier with better pricing condition, but shorter payment terms ended up having an important effects of close to 3 -- EUR 30 million in the quarter, being the rest attributable to higher pulp prices and increasing the inventory level. In September, the net debt to EBITDA in the last 12 months was at 1.3x.

I will now pass the word back to Jose Pina.

[Jose Armindo Farinha de Pina, executive]

Thank you, Miguel.

If you turn to Slide 14. We're pleased to present Altri continues to deliver one of the best ROCE levels in the industry, reaching 25% in the 9 months of 2022, which compares with an 18% average for the past 5 years.

In Slide #15, we wanted to share that Altri was 1 of 80 Portuguese companies signing the manifest towards COP27, showing our commitment to make concrete contributions into an net zero economy, more sustainable and socially inclusive.

Going into Slide 16. We mentioned a report made by several well-known independent Portuguese institutions about SDGs, sustainable development goals, in Portuguese companies and their validation that Altri has some of the most important SDGs in its core corporate strategy.

Finally, in Slide 17, we wanted to share our views looking forward. We continue to see the European market with a sound demand of the main segments, led by tissue. We may see less strength from the construction segment in decor. Pulp availability remains an issue. Inventories in September remained at the same average level of 2022 and reached a 5-year low in July.

On the cost front, we believe it is still an issue for 2022. We are seeing some relief in some items for the fourth quarter of 2022 with greater visibility, but geopolitical uncertainty continues to be a relevant unknown.

As mentioned in the last quarters, we have been working on solutions to minimize the cost inflation impact and are managing to: one, partially replace the consumption of the natural gas with alternative fuels; two, lower the specific wood consumption; three, implement additional energy generation solutions, including solar.

On the Gama project, the work is progressing at a strong pace in all fronts. All the needed steps, like the environmental impact study, the engineering plans, the economic viability study, the financial options as well as potential European funds are well underway to be ready to make a final decision on investment until June of 2023.

[Rui Pereira, executive]

So this completes our presentation. So we're now open to Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Jaime Escribano from Banco Santander.

[Jaime Escribano, analyst]

So a few questions from my side. The first one, maybe more sector related, maybe you could tell us, out of the London Pulp Week, which are your main takeaways in terms of pricing expectations, demand/supply evolving. This would be my first question.

And second question more related with the performance. So in terms of the cash cost, how should we think about the cash cost evolving in Q4, Q1 next year? And particularly, one investor was commenting the -- on the cost of chemicals, particularly on the caustic soda, which apparently is surging. I don't know if you can quantify how much it represents out of your cash cost and what could be the impact or if you are having like expecting a big impact from this increase in the caustic soda. Yes, I will leave these 2 questions and jump back to the queue.

[Jose Armindo Farinha de Pina, executive]

Thank you, Jaime. So starting with your first question on pulp week -- London Pulp Week main key takeaways, starting with the demand -- on the demand side, we have come away from the discussions with customers, I would say, with a view as to continued strong demand around, in particular, some of the hygienic tissue segments. So that remains key in terms of how the market has been evolving.

There are certain segments, which have started to show some weakness, in particular decor, and a few of the paper segments, particularly coated. But generally, I would say, was a vote of confidence from customers in terms of their own outlook, as I said, in some of these segments and a continuation of strong supply/demand tightness in the near term. As I said, it's very segment specific, and that's something that we need to bear in mind in the near term.

Also with some comments around the Chinese markets, and even though there is lower visibility, we've seen some positive demand numbers in the third quarter, which obviously is an indication of low inventory levels in the region. And any potential economic pickup in the country should lead to some upside on the demand -- from a demand perspective.

I would say on the supply side, there are 2 major projects in the line of sight that have been suffering continuous delays. One, which is the [ Arco ] plant, we believe from everything that we have heard, that seems to be looking to start off early next year; and as well the second project, a larger one from UPM as well in the first half of next year.

So I would say those new capacities coming to market would likely have an impact at some point in the first half of next year, considering that most of that demand will not be targeting Europe, as I'm sure you're aware.

The third point on the supply side is there's been -- due to a significant reduction and even a significant condition of supply of birch, there's about 1 million tons of birch hardwood capacity that is going to be coming up -- that is coming already off the market. But from the first of next year, we've heard that some of the Nordic suppliers will be switching to softwood. Therefore, that will compensate additional capacity that may be coming to market from Latin America.

In terms of pricing on hardwood, we've seen stable prices since the summer, namely since Q3. And we expect, at least in the near term for a very strong momentum on pricing. And we'll have to see how the first half of next year works out, in particular on this demand/supply balance. But I would say in the very near term, in terms of our visibility, we still continue to see a fairly strong steady market.

On your second question regarding cash costs, what we see currently, obviously, with the year getting closer to the end, we have somewhat, I would say, greater visibility. We see inflationary pressures have been significantly less compared to what we've seen in the first half of the year and into Q3. So we don't expect those to have a significant impact from the position where we're in. And certainly, Q1 of next year as well, I think we'll see a similar picture.

Chemicals -- or processing chemicals, as you mentioned, are a significant portion of our overall cash costs. And there's been, depending on which type of materials, certainly, caustic soda is one of them, but we see those into next year as well abating for the most part with a few exceptions.

But I would say, overall, the visibility we have at this point is fairly stable cash cost going into the end of the year and into early next year.

[Jaime Escribano, analyst]

So just as a follow up, Jose, so cash cost for Q4 and Q1, could we assume that it's not going up quarter-on-quarter, it will be more kind of stable or even declining?

[Jose Armindo Farinha de Pina, executive]

That would be our outlook at this point. So stable into Q4 and then with downside adjustment going into next year.

[Operator]

Our next question comes from the line of Enrique Parrondo from JB Capital.

[Enrique Parrondo, analyst]

It will be two on my side. Firstly, on the working capital outflow from this quarter, I believe you explained it quite well. But it would be really helpful to understand how should we expect working capital evolving in the next quarters. Is this unwinding something that should extend into the next years? And how should we think about working capital in the next quarters?

And then my second question would be on the Dissolving Pulp greenfield project. There's been a lot of noise in the press last months about discussions with the authorities. How is your current feeling on discussions with the financing and the funds coming in? Have you seen any progress in the latter?

[Jose Armindo Farinha de Pina, executive]

Thank you, Enrique. So regarding working capital, I think from the presentation, it was clear in terms of where the key impacts were, in particular on, as Miguel mentioned, the change in terms of the electricity regime, plus the increase in overall prices, which had an impact on working capital.

But going forward, we would see -- in terms of the electricity regime, that's pretty much into -- it's already considered. We'll see somewhat of a slight reversal on that just because as payments catch-up over time. And in terms of the rest of the working capital line in particular, wood, et cetera, I would say we'll see some reversal of that. But -- and they'll still remain at elevated levels just on the customer accounts due to higher sales volumes.

But I'll ask Miguel as well to comment a little bit more in detail in terms of what we expect.

[Vitor Miguel Martins de Silva, executive]

Yes, in terms of working capital, it's normal when sales increase that you're going to need more working capital due to higher amounts in sales also to some higher inventories. And usually, we compensate that with also higher amounts in payables, which was not the case because we had really a one-off effect due to the change of suppliers in terms of electricity.

That happened from April onwards, but the payments started only in the third quarter. So basically, with better -- this new supply have better pricing conditions, but shorter payment terms. So what happened, an easy way to say, was that in the third quarter, we paid 6 months of electricity, so that had a one-off impact.

We still have a very low impact in this last quarter. But this was the main reason and this is -- this was a one-off impact. So we expect in the next quarters to be back to our, more or less, usual free cash flow generation.

[Jose Armindo Farinha de Pina, executive]

Regarding -- thank you, Miguel. Regarding your second question on the dissolving wood pulp project, which is actually more than that, with the sustainable fiber textile, nontextile fiber project, and in particular, on the financing components, we have been holding in terms of discussions with financial partners, in particular around the debt conditions. So those continue at good pace.

And in terms of the discussions on the access to public funds, we have multiple ongoing discussions, both at the autonomous region as well as the natural -- the national central government level. I'm not going to comment on specifics of those discussions, as you would expect, until those are concluded.

But what I can say is I think there is a recognition that it's an important project for both the Galicia autonomous region as well as for Spain. And our expectation is that the government will recognize that strategic importance in terms of its decisions in the next months.

[Operator]

Our next question comes from the line of António Seladas from A|S Independent Research.

[António Seladas, analyst]

I have three questions. First one is related to your financial struggles and your currency -- hedge currency policy, if you can explain because the figures were not good.

Second question is related with volumes. Volumes -- sales volumes on pulp went down quarter-on-quarter and year-on-year. And taking into consideration prices are -- so why are you not selling more?

And finally, last question is related with your energy contracts for 2023, if you have already did any hedge. So if you have already hedged in terms of natural gas or electricity, probably not all that.

[Jose Armindo Farinha de Pina, executive]

António, could you repeat the first question? It didn't come quite clear.

[António Seladas, analyst]

Financial charges and the -- your alternative policy because the figures on the quarter were not -- were higher than usual. Well, if you can explain what was the issue and what should we expect for the coming quarters.

[Jose Armindo Farinha de Pina, executive]

Sure, sure. So I'll go with the first and the third question, and I'll ask Miguel to comment. But on your second question, specifically in terms of the sales volumes, we have had a strong first half of the year. As you know, this year, we've had no maintenance shutdown for our largest mill, Celbi, which is now planned for February of next year. And we also anticipated the maintenance shutdown, which was also scheduled for the first quarter of next year into December for Caima.

So we took a decision to actually reduce somewhat our sales pace essentially to build up inventory for those 2 maintenance shutdowns, which are coming up, those scheduled maintenance shutdown. So that's essentially the reason that you see there.

And I'll pass it to Miguel for -- to comment on the financial charges and potential hedges for next year.

[Vitor Miguel Martins de Silva, executive]

Thank you. In terms of financials, I think it's quite easy to explain. Our policy is to hedge our ForEx exposure in a certain percentage. So when the ForEx evolution is favorable, we gain on the operational side, and that's what we've been seeing in these last few months. One part of -- also the increase in sales and in prices is due to a favorable U.S. dollar evolution.

But we have to pay that assurance. So in this -- especially in this third quarter, there was -- the U.S. dollar was so strong, so it was the cost of that assurance that we made in terms of hedge. We have the gain, which much more than compensates this loss in the financial side, but we have to have the cost.

In this last quarter, I think, situation is a little bit different because, as you all know, the euro is now a bit stronger than it was some weeks before.

In terms of fixing electricity and gas, we don't have yet closed positions to 2023, but we are looking at it. And I think it will be likely that we close some positions, both in electricity and gas for 2023 or at least for one part of the volumes and maybe for the whole year or just for one part of the year. But at the moment, we don't have yet close positions.

[António Seladas, analyst]

Okay. Just on the currency side, so from my understanding, so it seems that you cover for the coming 3 months, for the next 3 months, Is it right, what I'm saying?

[Vitor Miguel Martins de Silva, executive]

Yes, we cover for the whole year. Usually, we have the whole year covered, yes.

[Jose Armindo Farinha de Pina, executive]

Yes, we tend to cover about 50% of our sales in USD.

[António Seladas, analyst]

Okay. And you do it at the beginning of the year or with 12 -- for 12 months or one quarter...

[Jose Armindo Farinha de Pina, executive]

We do it throughout the year, for the year ahead.

[Operator]

We have now a question from the webcast. [indiscernible]. And the question is, do you retain a stake of 16.6% on GreenVolt? Do you plan either to distribute or monetize it in the near term?

[Jose Armindo Farinha de Pina, executive]

Thank you. So we've stated previously that this will be a nonstrategic stake for us long term. We've also stated that we're in the process of restructuring a portion of that. So 13.5% of those 16% stake is actually in one of the subsidiaries, and we're now in the process of moving that up to our holding company, the publicly traded company. So that's the process that is going -- that there is underway currently.

I would say our -- the expectation that we have at this point is we'll make a decision in 2023 regarding this remaining stake. And in the past, we've done it through the prior distribution through a dividend in kind. And that was the most fiscal efficient decision, and we'll reassess that next year, but the intent is to continue in that process.

[Operator]

We have a follow-up question from the line of Jaime Escribano from Banco Santander.

[Jaime Escribano, analyst]

Yes, just a follow-up question on -- maybe on the debt side. I was looking to the -- to your presentation and see that you have maturities for -- well, for 2023 of around EUR 50 million and then EUR 140 million in 2024.

Maybe can you remind us what is the interest -- the average interest rate that you are paying on debt. And second question, what is -- what are your plans in terms of refinancing, if any, at these state?

[Jose Armindo Farinha de Pina, executive]

Thank you, Jaime. We have been working on that, and I'll pass it to Miguel as well to comment.

[Vitor Miguel Martins de Silva, executive]

Yes. So as I just mentioned, we are already working in the refinancing that debt. I would say that for 2024, we have closed a position of one part of that debt to be refinancing and in very good conditions. And also we are working for the 2023, which is a smaller amount. But we started already discussions to renegotiate that debt, and we think we will be able to do it in very good conditions, despite the current moment and environment of increasing in interest rates. We still have a very, very good average interest rate, and we think we can keep those conditions in the next negotiations of that.

[Operator]

We have no further questions, so I would like to hand over to Mr. Jose Pina for the conclusion remarks.

[Jose Armindo Farinha de Pina, executive]

Thank you so much, and thank you again for joining our third quarter results presentation. And we wish you a good rest of the day, and we'll speak soon. Thank you.

[Rui Pereira, executive]

Thank you. This ends our Q&A and the presentation. So thank you for your interest, and we'll speak soon.