Altri, SGPS, S.A. (ALTR) Earnings Call Transcript & Summary

Good morning. We welcome you to the Altri Full Year 2022 Results Conference Call. [Operator Instructions] I will now hand the conference over to Mr. Rui Cesario, Altri's Head of IR. Please go ahead, sir.

Good morning. Thank you for attending today's conference call of Altri's 2022 results. My name is Rui Cesario, and I'm the Investor Relations at Altri. We have with us Mr. José Pina, the Group CEO; and Mr. Miguel Silva, the Group CFO. Mr. José Pina and Mr. Miguel Silva will give you a brief description of 2022 results, and the floor will be open for Q&A. So I'll hand over to Mr. José Pina.

Good morning, everyone. Thank you, Rui, and thank you for attending today's conference call on Altri's 2022 results. We're pleased to hold this call with investors and analysts. And hopefully, we can give you a picture of 2022 for Altri and discuss the outlook and challenges ahead of the current year. If you turn to Slide #2, we show what we believe to be the main highlights for 2022. It was a record year, both in revenues and EBITDA, with Altri surpassing EUR 1 billion mark in revenues, reaching EUR 1,066 million, 34% above 2021; and an EBITDA of EUR 301 million, a 32% increase comparing to 2021. The net debt level decreased by 5% in 2022 despite a higher level of investment, higher working capital needs and additional dividends. It was a generous year in dividends for shareholders. We have distributed a cash dividend of roughly EUR 49 million that added to the cash outflow from Greenvolt's withholding tax to a total of EUR 79 million. Additionally, we have distributed 52.5 million shares of Greenvolt, which was equivalent at the time to EUR 1.74 per share of Altri. Altogether, in 2022, we have distributed around EUR 400 million to our shareholders. On the development of project Gama in Spain, we continue to work actively in all fronts to be able to reach a decision during the current year. If you move to Slide #3, we're seeing a trend towards a normalization of the level of inventories at the European ports during the fourth quarter of the year after reaching a 5-year low during third quarter of 2022. Inventory levels should continue to trend higher given the destocking effect that we have been seeing in the European market in the last few months. In Slide #4, we highlight the evolution of hardwood pulp prices in Europe. Average prices have increased 27% in 2022 versus 2021. Looking at the fourth quarter 2022, average prices have increased by 21% year-on-year and 1% higher quarter-on-quarter. List hardwood pulp prices have been stable at $1,380 per ton since July, but in euro terms, there was a decrease since November. Looking at Slide #5, we present the production and sales volume in the fourth quarter. The level of production was in line with the previous quarter, while sales volume was slightly below. This was a consequence of some softness in demand in December and also our decision to build inventory ahead of Celbi's downtime scheduled for February/March of 2023. Looking at Slide #6, we show an annual production -- our annual production numbers, which were up 2% year-on-year and posting a new record number at 1,143,000 tons. Sales volume decreased in 2022, especially due to the reasons already mentioned in the previous slide. In Slide #7 is our sales breakdown per region and end-use segments. Markets of proximity are and will continue to be our strategy. So you should expect the current regional breakdown to remain similar for the future with more than 90% of volumes sold in European and near Middle East regions. Sales to Asia continue to be fully attributable to our dissolving wood pulp products. And on the end use, Tissue and Printing & Writing remain our main segments with a slight increase for both in 2022. I would now pass the word to Miguel Silva, the Group CFO, that will comment on the main financial highlights for the last year.

Thank you, José. In Slide 8, we comment on revenues and EBITDA achieved in the quarter. Altri reached revenues of EUR 260 million in the fourth quarter of 2022, an increase of 25% versus the fourth quarter of 2021 and a decrease of 8% comparing to the third quarter of '22. EBITDA reached EUR 78 million in the fourth quarter, 75% more than last year's fourth quarter and 16% lower than the previous quarter. In Slide 9, we present our EBITDA margin that reached 30% in the quarter, an improvement of 6.1 percentage points compared to last year's fourth quarter, despite a small decrease versus the previous quarter. For the full year, we have been able to maintain our EBITDA margin nearly at the same level as 2021 despite being a year with relevant cost inflation. Turning to Slide 10. Operating results increased by 86% versus the fourth quarter of '21, at the lower level compared with the third quarter of 2022. Net profit grew 4% in the fourth quarter compared to last year's fourth quarter, mainly due to higher financials and a normalized effective tax rate. In Slide 11, we focus on the full year numbers with revenues growing by 34% and surpassing the EUR 1 billion mark, while EBITDA increased by 32% to EUR 301 million. In Slide 12 and still looking at the full year figures, EBIT increased 45% to EUR 237 million, while net profit reached EUR 153 million, a 23% growth year-on-year. As already mentioned, the accounting of FX hedges during 2022 was more than compensating at the operating level, and the more normalized tax rates were the main reasons for slower evolution in the net profit. In Slide 13, we make some comments on the cost side. Overall, cost inflation started to stabilize during the fourth quarter. The self-consumption electricity regime was now working at full during the fourth quarter, allowing us to sell to the grid the excess power produced at full prices. The natural gas price, after reaching a peak during the third quarter, continued to decrease most of the time during the fourth quarter. On the wood side, the 2 main factors contributing for the average price increase during 2022, either wood imports or Iberian suppliers passing cost increase, seemed to have stabilized. Chemical prices still increased during the fourth quarter, but now we are starting to see some price reductions going forward given it's linked to energy prices. In Slide 14, we present the evolution of net debt during the fourth quarter. Altri's free cash flow in the quarter was at a more normalized level of EUR 34 million, which meant ending the year with a net debt level of EUR 326 million. In Slide 15, we show the same net debt chart bridge for the full year. Altri was -- Altri has reduced its net debt by 5% in 2022 and ended the year with a comfortable net debt-to-EBITDA ratio of 1.1x. Most of the relevant cash items have increased in 2022, such as dividends, CapEx, financials, taxes and working capital needs. The latter was mainly because of inventory buildup in the second half of the year and a one-off confirming effect related with the energy supplier. I will now pass the word back to José Pina.

Thank you, Miguel. Turning to Slide 16, we are pleased to say that Altri finishes 2022 with an ROCE of 25%. It's the highest ROCE level over the past 5 years and among the best ROCE levels in the industry. If you turn to Slide 17, on the sustainability front, Altri continues to improve its ESG ratings with 1-notch improvement to BBB according to the rating agency MSCI. And the rating agency CDP maintained its A- rating in the climate change category, mentioning Altri as a reference in implementation of best practices. Going into Slide 18, we'd like to share with you some milestones that Altri has achieved towards its 2030 ambitious goals. A reduction of greenhouse emissions, Scope 1 and 2, by 24% in 2022 versus 2020. The goal is to achieve a reduction of 51% by 2030. The use of primary energy from renewable sources at our plants is now at 93% in 2022 with the goal of achieving 100% by 2030. The level of certified used wood was 70% in 2022 with the goal of reaching 80% by 2030 and coming from 57% in 2018. We have also reached 7 biodiversity spots, in particular, within our forests by the end of last year, with a goal of 15 by 2030 and coming from 2 in 2018. Finally, if you turn to Slide 19, we wanted to share our views -- some of our views going forward. We have seen some softness in the European pulp market near the end of 2022 and early 2023, led by the more cyclical segments as Printing & Writing and construction-related Decór papers. The Tissue segment remains solid with continuing positive market trends. Market expectations points for price correction during 2023. Inventories are normalizing, in particular due to a destocking effect from the Printing & Writing and Decór segments. China reopening of the economy could be an upside risk for the industry where we expect a more stable and positive outlook in Q2 and second half of the current year. Cost inflation started to stabilize in the fourth quarter of '22, as we mentioned before, significant deceleration and lower costs such as energy and chemicals should have a positive impact in 2023 starting this quarter. On the project Gama, we continue our work on all fronts, environmental, engineering, economic financing as well as the overall European Union NextGeneration funds. And as mentioned before, we expect to take a decision in the current year. And now I pass the call to Rui Cesario for [ queuing ] and opening up Q&A.

So the floor is now open to Q&A.

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

So I have 2, if I may. The first one would be on recent trading. You shared a bit of an outlook for what you're seeing. What -- based on other comments from other peers, their outlook for the coming months is a bit more positive in the sense that they expect the destocking to end by the end of the second quarter. I don't know if you could give us a little bit your view on how much this process could take. And secondly, on the spin-off of your remainder 16.6% stake in Greenvolt, I recall that in the last quarter results presentation, you commented that you were finalizing the restructuring of the stake within the group. Could you comment whether this process has been concluded and maybe on the timing that we should expect for the spin-off?

Thank you, Enrique. Let me give you a bit of an outlook, at least from our perspective. Considering where we are and what we've mentioned before in terms of what is clearly a destocking process that started towards the end of last year, historically, that tends to take 1 to 2 quarters. We're clearly seeing that in the first quarter of this year. But I think looking forward, as you mentioned, in getting -- particularly getting into next quarter, I think you will start seeing that, that process is obviously stabilizing. So we do expect some positive outlook, at least on the destocking front, towards the end -- mid towards the end of next quarter. If you just look at the stocks in wood pulp European ports, that was just published yesterday for February, you've seen that was somewhat of an increase. I think the levels are still within the range of historic levels, perhaps slightly higher in February. And that's a clear, I think, a clear evidence of that process. On your second question regarding Greenvolt distribution, we have been going through that restructuring. The process is near conclusion, and we remain on track from what we gave previously as guidance. We haven't announced -- made any -- announced any communication to the market regarding our dividend proposals in kind or cash for this year, which we expect to do early April when we announce our proposals to Altri's AG. But we are -- as we said before, in terms of our guidance, we continue in the same direction.

The next question comes from Jaime Escribano from Banco Santander.

So a question on outlook 2023 in terms of cash cost. Based on what you explained, what should we expect or what levels of cash cost, compared to 2022, would you be comfortable for this year? And also maybe you can also guide us in terms of volumes, how should we think about the total sales volumes for Altri in 2023?

Thank you, Jaime. On your first question regarding cash costs, we have been obviously actively working on the various components of our cost factors. And as we said, we saw a clear deceleration towards the second half, in particular the last quarter of 2022. And now going into '23, that obviously is actually -- it's turning into some early reductions. So effectively, we already anticipate Q1 likely to be lower than last quarter. But for the year, I would probably -- at this point, we would probably expect something closer to the double digits in terms of cash cost reduction, and that's year-on-year. In terms of volumes, as I've said, first quarter and like the second quarter, we probably continue to see some softness in terms of volumes. But our target for the year will be in line with what we saw last year. Thank you, Jaime.

The next question comes from Bruno Filipe Bessa from CaixaBank.

The first one, on the pulp price evolution, I'm just trying to understand what is the current situation of the industry in terms of cash costs and Altri's compares with the levels, for instance, seen in 2019? Because I remember that in the past, one of the arguments to believe that prices will not come back to the lows that we saw in the past was the fact that cash costs were at much higher levels. But what we have been seeing is a gradual reduction. And we are seeing, particularly on the energy front, much lower prices, market prices than we were seeing last year. So if you could give us a bit of an idea on where the industry cash cost stand today compared to 2019. And also linked to this question, if you could give us an idea of which pulp price level could start triggering capacity shutdowns in the industry in your view. So this will be the first 2 questions related with the pulp price evolution. And the last question, if I may, on the Gama project, if you could give us a bit of visibility on this project after the recent decision on the continuation of the Pontevedra plant from Ence. How does this affect, if it affects, but how does this affect your view on the project and your expectations regarding the return on invested capital, particularly considering that now that Pontevedra should be -- should continue operating with the potential start-up of the Gama project, we will most probably see high pressure in terms of demand for wood in Iberia? So these will be my questions.

Thank you, Bruno. So addressing your first question in terms of pulp prices, obviously, the indexes have reflected, I think, what seems to be an undergoing correction, which effectively in Chinese markets, we started to see already late last year. It was not totally reflected on European indexes. That's now not the case. You still have a little bit of a difference, net-net, between Europe and China. So you would expect at least that correction somewhat to continue in the very near term. But ultimately, when you look at where prices historically have been, you tend to have a 3- to 6-months sort of course pricing adjustment. I think the industry has started in the path that once it starts reaching marginal cost of the higher cost producers, and namely the higher cost producers you're talking about China or Asia in particular, that would be sort of the limiting factor because essentially, they start shutting down their operations and basically buying pulp from the market, and that significantly changes the buying behavior. So China, this is why we talk about a potential upside risk going forward. I think the other aspect, as you've mentioned, cost inflation was across the industry. Even the best or the more efficient global players have announced in recent investor calls significant increases in their cash costs and had given guidance at relatively high levels, I think, up to 40% increases versus prior years. I don't think that given the cost factors we have, especially for producers in Europe versus Latin America, the biggest impact in Latin America has been on wood prices, which have essentially doubled in a relatively short period of time. We have not seen anything of the like in Europe and like that's probably a bit of a catch-up. But I would say, looking forward, the marginal cost continues to be, in particular, for Asian players and Chinese players, continues to be a little bit the [ reference ], given that at this point, the difference between today and 2019 is you've had a significant inflation pressure coming from last year. And that's going to play a role in establishing a new benchmark going forward. On -- regarding your second question on the Gama project, first of all, when we started to consider the project, we did it without the possibility that Pontevedra would be closing, obviously, that we had to assume that. We have been working very focused on assessing the overall wood availability in the region. And again, that was independent of what would happen with the Pontevedra concession. And we continue to look very positively on the development of forest assets in the region. So I think once we conclude that, that's clearly going to be a key input into the decision, the final decision for the project. Thank you, Bruno.

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

My questions, most of them were already answered. So I just have 2. One is related with capital spending for 2023, if you can provide some guidance and color and some figures. And second one is related with the current absorption in terms of ForEx. If you can elaborate a little bit on what we expect in the future, how it will impact Altri, if it will impact Altri?

Thank you, António. May I ask you if you could clarify your carbon absorption question? Are you...

Well, basically -- well, it's about the volunteer market of carbon credits and about the forest that in principle [ absorbing ] the carbon. And how you can benefit from it, if your forest or if you are going to benefit from it. So if you can provide some thoughts on what are your -- what do you think about it and share with us, of course.

Yes, very good. Thank you, António. Regarding your question -- first question on capital expenditure for the year, it will be somewhat higher than last year as we are in the midst of the cycle regarding some of our investments. We are installing a new wastewater treatment in Celbi, which is going to help us significantly reduce, over time, the specific consumption of water in line with our -- also with our ESG targets as well as the possibility of recycling some of that wastewater back into the process. So that is ongoing. And we're concluding this year also the construction of a new biomass boiler in Caima, which will turn Caima completely fossil fuel-free, the first in Iberian Peninsula, one of the first in Europe. So those investments are waiting on this year. I would expect at this point, we're going to be in the range of EUR 75 million because of those projects. Obviously, with the conclusion of those, then I think we'll be -- that investment cycle at least will ease. We will go back to normalized levels. On your carbon absorption, I mean, forest and the carbon market, 2 elements to that. First of all, we look at the carbon repository in our forest as an asset. It's significant. The types of the species of the forest, our primary use is eucalyptus, as you are aware. That's the fast-growth species. And it absorbs anywhere between 4 to 7x more carbon than most other forest species, in particular, related to softwood. So for us, that's clearly -- we have to look at it as an asset. We have identified potential areas, in particular areas of conservation within our forests, which are primary targets for that, in particular, looking at the options of how a carbon market is going to evolve. What I would say is it's a little bit early. There is a lot of uncertainty regarding how that carbon market is going to be structured. We're obviously, as you would imagine, following it very, very closely. And we'll disclose further information as it becomes clearer. But that's something that we are very much focused on. The other aspect that you didn't mention, but I'll complement, which is the biogenic carbon generation that we have from our plants. And that's an area also of an opportunity where we are spending a significant amount of time focusing on how to value that asset, which we believe it's going to be relevant going forward. Thank you, António.

Sorry, on the last issue, can you explain a little bit better? Because I didn't...

So you have biogenic carbon emissions. And they're biogenic because they originate in -- they have a renewable green source. That carbon is a valuable asset if you were to produce some downstream products, in particular fuels, green fuels. And that's an area that we're considering as well within our operations because of our energy consumption, for example, in the lime kiln or others through methanol. So that's something we'll have an opportunity of discussing more in the future, but we see it as a good potential opportunity as well.

The next question comes from Luis de Toledo from ODDO BHF.

Most of my questions have been addressed. Maybe if you could refer to the dissolving pulp market, if you can give some outlook in the short term and if the reopening of the China economy could help to raise prices? And the other question would be regarding the FX and the hedging and the financial costs, if you expect most of the negative effects to have been recorded already in the fourth quarter or we should expect some negative effects still in the next quarters?

Thank you, Luis. I'm glad you asked the question about dissolving wood pulp because it is, I think currently within the pulp market, is a bright spot. We have seen that market evolved a little bit ahead of the kraft pulp. And effectively, we saw some pricing pressure in Q4, and that was essentially related to -- continue to be related to the low level of activity at [ East Coast ] producers in China. Post the removal of the -- or the ending of the lockdowns, we actually saw significant resurgence in both demand and upwards pressure on pricing regarding dissolving wood pulp. So effectively, as we speak, there is an upwards trend on dissolving wood pulp prices, and our order books essentially are pretty full at this point. So that, I think, is the bright spot. It's going to likely continue given where the industry was in the second half of last year. So we believe that's a continuation -- that will be a continuation of that trend. And as China becomes more and more active economically, that's a good proxy in terms of potential implications for dissolving wood pulp. Regarding your second question on FX, hedging, et cetera, perhaps I ask Miguel Silva to make a few comments on that.

Thank you, José. Now the -- what happened in the fourth quarter is something a little bit technical to explain. But basically, at the end of every quarter, we make a reevaluation of our balances. So that's what we did in December 2022. And we have a lot of invoices in U.S. dollars. And what happened in late November and December was a very, very quick strengthening of the euro. So there was a devaluation of those invoices that led to an important and significant amount of FX losses. These are not real losses. They are just accounting losses. This is something that doesn't happen very common in such a short period of time, such as strengthening of the euro, but it's something that it may happen again, but it's not very common too. That doesn't -- that was the main effect for the world's financials in the fourth quarter. So we don't expect any strange movement going forward.

The next question comes from Jack Harrison from Praxis Alpha Partners.

So the first one is on the -- your wood costs because it sounds like your cash costs have moderated quarter-on-quarter. And I'm curious because there's quite a big discrepancy between maybe some of the peers who are commenting that wood costs have been going higher. So wondering why that isn't the case for you. Is it maybe less imports than before? Or perhaps you could comment on that.

Yes. Thanks, Jack, for the question. Obviously, wood cost -- wood input is a significant component of our cash cost, and any movements in that component end up having a significant impact. I mean when we look at it year-on-year, obviously, we saw an increase, which was essentially due with the combination of price and mix. But as you may know, we have a significant -- we operate significant volumes of wood forests, and that had a very positive impact. Our forests currently are the lowest-cost wood that we have. But overall, in terms of the mix, last year, we had somewhat a little bit higher imports than prior years. We hope that to be actually shrinking this year. We see somewhat more availability from the Portuguese market. And a combination with Portugal and the open market and our own forests, we source -- we would tend to source over half of our current needs, and that's actually increasing. And also on our own forests, overall, we're looking at an increase of another 10% to 15% sustainable sourcing in next year. So I think that's probably one of the key differences is in terms of the mix change and also our ability to have access to our own wood sources that somewhat mitigated the impact of costs. Just on a side note, and when you look at peers, in particular in Latin America, they've seen, as I mentioned, a doubling pretty much of their wood costs. And part of that is because the rate of the significant projects that they have in Latin America somewhat ran ahead of the ability to actually manage their forests. So obviously, that had -- the supply/demand balance work there towards making that was a little bit more hard to get, and I think that had an impact in terms of their overall costs.

Okay. That's clear. So I guess a follow-on just from that one. So would you expect, on that basis, wood costs in Latin America to continue to increase given the ramp-up of the [ all and new ] hardwood pulp capacity there?

Actually, for us, we're forecasting a reduction in wood cost this year. And based on, as I said, the mix that we have, that we're currently running, as well as some of the input costs that led to that increase such as some of the services and energy in particular, we'll see those potentially being mitigated. But overall, in terms of the mix changes that we've made, we would see the likelihood of a wood cost reduction and being much more stable compared to last year.

Okay. Makes sense, because you're importing less wood and you got more of your own. And then I guess my last question was on the -- your discount or the discount to list price in Europe. Should we expect that discount to essentially reflect the discounts or the difference between the China net price and the European list price over time?

I think over time, that tends to be -- that tends to normalize. Historically, you've had at times a shorter gap. And currently, it's a wider gap, but it would tend to normalize to past historic levels. We would see that happening, I would imagine, in the very near term.

The next question comes from Enrique Parrondo from JB Capital.

Just one quick follow-up on the Gama project. I believe that we've seen some press reports speaking and mentioning a CapEx range closer to the EUR 800 million and EUR 850 million. Again, that's explained by some inflation that we've seen in the past year. Is this the range we should expect? Have you made any clear comment on this?

Thank you, Enrique. We're continuing to work with that range. It's a little bit early to make a more definitive comment because we're currently in the process of receiving formal proposals from equipment suppliers, which we expect to happen towards midyear. So I think after that period, we'll be able to make a more informed comment, but we're currently working with that right now.

[Operator Instructions] The next question comes from Jaime Escribano from Banco Santander.

Just a follow-up question on the Gama project. Just to -- so thinking out loud, trying to understand out of the different variables, which ones are more important? My question would be in terms of financing, if in the end, you get significantly lower funds as initially expected, so namely only EUR 10 million, EUR 20 million, how important this is for the go or no-go decision? So -- or asking in a different way, if you don't get financing, is the project profitable enough to go ahead? And similarly, to the wood availability, so imagine that you have wood availability that you have to assume that you have to import partly from Latin America, how important is in the decision-making again for a go or no-go the second variable?

Thank you, Jaime. Well, the 2 elements that you mentioned are obviously very important for the decision. Regarding the next-gen funds, we have always been working with sensitivities around different components, in particular the amount of funding, the amount of the next-gen subsidies. And these could be direct subsidies or it could be as commercially attractive loans at below-market rates. So there is a lot of work happening on that front. I can't comment right now on the specifics regarding on what that amount will be because discussions are ongoing. I have to say, based on where we're at today, we don't see a scenario where we would have, as you mentioned, the EUR 10 million to EUR 20 million subsidies. At least from the discussions we've had, we've seen significantly higher levels than that, given the relevance and the size of the project. So I don't think that's necessarily a point. But we are looking at that very closely. It's -- as I said, it's an important component, and we have very active discussions ongoing. And we expect to see, based on the relevance of the project and by mention of the project, some significant support. But until those discussions have been finalized and formalized, obviously, we have no certainty at this point. So that is one element that is very much open. On the wood component, in the same way, we're running, as I've said it before, studies around wood availability in Galicia. As you know, in the past few years, there's been significant new plantation in Galicia. We have been assessing the overall availability also based on the demand. And in the last few years, there have been additional uses for other applications beyond pulp just because of increased economic activity as well as some exports from outside to outside of Iberian Peninsula. So we're taking all of that into account, but we will be running those sensitivities. And as you would expect, part of it would be asking the question, if at some point, you would have to actually rely on imported wood, what would be the resulting economics of the project? So that's all part of getting to a clear decision point from which we can assess the overall attractiveness of the project.

There are no further questions. So I will hand over the session to Mr. José Soares de Pina, Altri's CEO, for final remarks.

It's Rui Cesario. Just a quick note on several questions that we have from written questions from the Internet connection, and it's related with the dividend announcement. It was already answered, but I'll just underline that on the dividend announcement, that will be made public in the early days of April in the AG proposal. So beginning of April, somewhere in the first 2 weeks of April, it will be announced. I'll hand over to Mr. José Pina for the final remarks.

Thank you, Rui. And again, thank you for attending. As we've stated, it's been a remarkable 2022, I would say, even a historic 2022, given all of the levels of performance that we have put forward despite very, very significant headwinds on cost inflation. As we've shown, we've been able to actually manage to essentially maintain our profitability level. So that was an excellent outcome. Looking forward, we've talked about the outlook for this year. We remain positive given the position where we are and how we've been working in terms of continuing to ensure that we remain one of the most efficient pulp producers in Europe. So thank you very much for attending, and have a good day.