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

Good morning. We welcome you to the Altri First Quarter 2023 Results Conference Call. [Operator Instructions] I will now hand the conference over to Mr. Rui Cesario, Altri's Head of IR. Please go ahead.

Good morning. Thank you for attending today's conference call of Altri's first quarter 2023 results. My name is Rui Cesario, Altri's Investor Relations. We have with us today Mr. José Pina, the group CEO; and Mr. Miguel Silva, the CFO of Altri. Mr. José Pina and Mr. Miguel Silva will give you a brief description of our first quarter 2023 results, and the floor will be opened to Q&A. I will hand over now to Mr. José Pina.

Thank you, Rui. Good morning to everyone, and thank you for attending today's conference call of our results. We're pleased to host this call with investors and analysts. And hopefully, we can give you a picture of first quarter 2023 for Altri and talk about the outlook and challenges they have for this year. If you turn to Slide #2, we show what we believe to be the main highlights for the first quarter of 2023. We have entered the new pulp cycle phase with a significant destocking and softening in prices taking place in the pulp and paper value chain. Therefore, volumes sold had been lower than last year's first quarter, and revenues have decreased by 10%. Printing & Writing and Decór segments are the softer segments, while Tissue remains a sound performance segment. In a more challenging environment, as what we're currently experiencing, we're even more focused on the management of the overall production costs and implementing additional measures to improve operating efficiency. EBITDA reached EUR 50.2 million, an 18% decrease compared to the first quarter of 2022 and minus 36% quarter-on-quarter. On a quarterly basis, there was a slight decrease in cash cost per ton, and we believe that trend should accelerate during the following quarters. The net debt level of EUR 328 million was flat quarter-on-quarter, implies a flexible net debt to EBITDA of 1.1x, which is important to accommodate future projects. On project Gama and Galicia, we continue to focus to have all the pieces together, leading to a final investment decision during this year 2023. Moving to Slide #3. We have seen a normalization of the level of inventories at European ports during the fourth quarter of 2022, having now during the first quarter of 2023 surpassed the average historic levels. This is a consequence of the destocking effect we have been discussing and seeing in the European market in the last few months. On Slide #4, we highlight the evolution of hardwood pulp prices in Europe. In the first quarter 2023, average prices are 16% higher in first quarter 2023 versus first quarter 2022, while on a quarterly basis, there was already a 3% decrease. Pulp prices started to decline in February and in the quarter at $1,280 per ton. Looking at Slide #5, we present the production and sales volume in the first quarter. The level of production decreased by 15% year-on-year and 18% less than in the previous quarter mainly due to the program downtime at our largest unit, Celbi. Volumes sold decreased by 16% when compared with last year's first quarter. We registered a 3% increase versus the fourth quarter of 2022. As already mentioned, the destocking effect from many of the players in the pulp and paper value chain has led to significant softness in demand during the first quarter of the year. In Slide #6, you'll see our sales breakdown for end use and the region. Given the destocking effect occurring during the first quarter 2023, we have seen an important impact, especially at the Print and Writing end use segment. In the first quarter 2023, the weighting sales from the Print and Writing segment was 16% when it usually ranges from 20% to 25%. Tissue reinforced its weight to 56% from historic levels near 50%. On a regional basis, we continue to focus on markets of proximity in Europe and near Middle East. During the first quarter of the year, Europe accounted for 66% of our sales volume, while Middle East increased to 23% versus the historic value of around 15% -- 17% as a consequence of our efforts to maintain the sales volume in the quarter. Sales to Asia, 11% -- which represented approximately 11% continue to be the most -- mostly attributed to our dissolving pulp products. I would now pass to Miguel Silva, the Group CFO, that will comment on the main financial highlights of the first quarter 2023.

Thank you, José. In Slide #7, we comment on the revenue level achieved in the quarter. Altri reached revenues of EUR 225 million in the first quarter of 2023, a decrease of 10% versus the first quarter of 2022. Pulp revenues closed the first quarter at EUR 189 million, a decrease of 6% versus the first quarter of 2022, while other revenues, which include the sale of electricity, decreased by 28%. The main reason for the decrease in revenues when comparing with the 2022 first quarter, was, on one hand, the lower volumes sold during the first quarter and, on the other hand, the change in the energy regime to self-consumption at Celbi, decreasing the reported gross energy revenues. In Slide #8, we present our EBITDA, which reached EUR 50 million in the first quarter, 18% less than last year's first quarter and 36% lower than the previous quarter. Reported EBITDA margin was at 22.3%, a decrease of 2.2 percentage points versus last year first quarter and -- which compares with 30% in the previous quarter. The main reasons for the decrease in margin were the lower sales volume persisted in the quarter and the level of cash cost. Turning now to Slide #9. Operating results decreased by 26% versus the first quarter of 2022 and by 48% versus the previous quarter. Net profit reached EUR 20 million, a 34% decrease comparing to last year's first quarter and 44% lower than the previous quarter. On Slide 10, we make some remarks on the cost evolution. After a sterilization in the fourth quarter of 2022, we started to see a slight cost deflation in the first quarter of 2023 versus the previous quarter. We believe this trend should accelerate during the next quarters. The positive contribution from the sale of excess electric energy to the grid is now stabilized. Natural gas prices continue to decline after reaching a peak in the third quarter of 2022. On the wood side, prices have stabilized in Portugal and Spain during the first quarter of 2023 and expect some softening in price strength in the next few quarters. We also expect a reduction of wood imports in 2023, which should improve our mix, lowering our wood expenses. Chemical prices started to decrease during this first quarter of 2023, and we see further reductions during the 2023. In Slide #11, we present the evolution of net debt during the first quarter. Altri's net debt during the quarter remained almost flat. The quarterly EBITDA was offset by a higher level of CapEx, EUR 18.4 million, in the quarter and a higher working capital needs, which were mostly attributed to the increase in wood inventory. Despite the program downtime of the Celbi, we have maintained our normal pace of wood purchases. I will now pass the word back to José Pina.

Thank you, Miguel. Turning to Slide #12. With the Altri's ROCE level at 14% in the first quarter of 2023, a sound figure, especially considering the fact that we're in a different phase of the pulp cycle. In Slide #13, on sustainability front, Altri continues its work with ESG rating agencies. CDP has made an extensive evaluation of Altri's forest, looking at its policies, commitments, risk management, certification, strategy, amongst others. Altri received the B rating for the forestry category, which compares with the European average of B- and in line with wood and paper sectors, as defined by CDP. Finally, in Slide #14, we wanted to share our views looking forward. We have seen a destocking process in the European market since the end of 2022, especially in the Print and Writing and Decór end use segments. We continue to see that effect for most of the second quarter 2023, but have now started to see some signs of stabilization in the second half -- for the second half of 2023. Pulp prices in China have moved downwards quite rapidly, despite the reopening of the local economy. At current levels, we see demands being reactivated, as suggested by the recent announcements from a large producer to increase June prices by $30 per ton. We also wanted to add that dissolving wood pulp prices have stabilized at the end of the first quarter 2023 and are now at historical level premiums to the hardwood kraft pulp, which is roughly in the range of about $300 per ton. On the cost side, and despite what was already commented, we have started to see some deflation trends during the first quarter of 2023. We believe this trend should accelerate in the next quarters. On Gama, finally, the work is progressing well, and most of the pieces we need for the final investment decision should materialize during the second half of 2023.

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

I have 2, if I may. So firstly, on pulp price outlook, we've seen a few relevant players, as you commented, announcing small price increases for deliveries to China for June orders. My question is for the possible read across for pulp price in Europe. Could we expect something similar or assume that the current levels are close to a bottom or as demand continues to be softer here, we could still see some further declines? And my second one would be on the outlook for cash cost. So you commented briefly on the moving parts that you're seeing. But in a nutshell, you previously guided for a double-digit -- low double-digit declines year-on-year for 2023. Could, on the back of what you've already seen in the first quarter, this guidance be lifted to maybe mid-single digit or high double-digit year-on-year declines?

Enrique, thank you for your questions. First of all, in terms of pulp prices outlook, as we've commented before, I mean, you've seen these increased announcements recently in China. China effectively, from a demand standpoint, has been fairly active, in particular since March, April. That's led to some producers believing that the market had reached its bottom and, therefore, should correct upwards. And I think that is the situation, at least, that is putting somewhat of a floor in the global pulp market. If you look at the current conditions effectively, if you consider the current spot prices in China, you're looking at least a 20%, 25% of the global pulp production below marginal costs. A lot of that essentially is in Asia, and most of it is integrated. So the question becomes how resilient that is and when are we expected -- expecting to see some reverse integration. We're starting to see at least some signs that, that's happening. In Europe, Europe has always had a certain level of arbitrage, especially in periods of rapid price adjustments. Outside where Europe will go in the near term, it's certainly going to be a function of what happens in China and, obviously, how demand is going to ultimately evolve in the next few quarters. So I would continue to expect -- if we look at long term, that prices, both in Europe and China, they tend to converge at some point. There is always some level of arbitrage nevertheless, if nothing else, because these are 2 very different markets. But I would say you end up seeing some cargoes that ended being diverted coming -- instead of coming to Europe, going to Asia. We've seen some evidence of that. That also contributed to a little bit of a different picture going forward. But I would say if demand remains softer, as we're seeing currently, we would expect, at least purely on the destocking trend that, that has, for the most part, already occurred. So going into particularly the second half, that should not be necessarily a fact. There is more going to be related to pent-up demand. And depending where that goes, that may at least continue to leave prices to be softer. And eventually, as I said, there will be some sort of a conversion. In the meantime, if we do see the stabilization, as we're seeing prices in China and potentially some uptick, as I said, that could deflate any significant pressure in Europe. But nevertheless, we should see some conversion. On the cash costs, effectively our comments, if you go back to what we said in the results for 2022, in particular, the fourth quarter, we said that we would expect to see a reduction in the high single digits. We do expect actually to see some potential deflation or further deflation to the cash costs, as was mentioned in the call, and would expect what you've seen already this quarter, which was effectively decrease. We would see likely that decelerating. Now for the whole year, I'll probably look to, at least, be within the same range what we said, high single digits to low double digits.

The next question comes from the line of Bruno Bessa from CaixaBank.

Three from my side, if I may. The first one, if you could elaborate a bit on your CapEx plans for both 2023 and 2024, and obviously, here, not including the potential moving forward of the Gama project. This will be the first question. The second question, if you could elaborate a bit more on your new investment plans. I've seen in your corporate presentation that you mentioned the potential swing in biotech towards dissolving pulp. And you also mentioned some projects on bio products. If you could elaborate a bit more on this would be great. And the final question, well, on the Gama project, we know that you have been under several studies. One of them, you have already mentioned studying the availability of woods in the Iberia Peninsula. And my question will be if you could share with us your latest conclusions on this. And if you believe that this new plant is moving forward and will not put pressure on the prices in the [ internal ] market.

Thank you, Bruno. So regarding your first question on CapEx plans for this year, I think we've been looking at an investment in the range of EUR 75 million -- EUR 70 million, EUR 75 million. The big components of that investment is the biomass plant in Caima, which should be operational at the end of October, and that will be accretive given that it has additional -- also additional energy, both thermal and electric, that will be used for development at Caima as well as to inject in the group. So that's sort of the big component. On other investments and actually looking at 2024, so we see 2023 a little bit at towards the end of what we've seen as the most recent CapEx investment cycle. We are still developing as well as part of our -- of the additional availability of utilities, in particular steam, to build this acidic and peripheral asset plant, which basically are green intermediate chemicals that are used in pharmaceutical and food industries. That's something that we have been developing the engineering package already for some time and would expect that materializing at some point towards the end of next year. But I would say, looking forward in terms of 2024, we'd probably see a bit more of a return to a steady state on normal CapEx levels, which, for us, including maintenance, some environmental and projects like these bio products, which tends to be a relatively lower CapEx efforts, you'll probably see us getting back to more of the high 30s or the mid-30s range. In terms of other projects, and I think I've referred before, biotech has been -- has had some investments in the past that would enable it to move towards -- dissolving is still something that could be an opportunity, and we're assessing that on an ongoing basis in the context especially of the evolution of the dissolving market and particularly looking at the development of Caima. So that's something that when we would have further news, we'll certainly comment in the future. Regarding your last question on availability of wood, and particularly the Iberian Peninsula, so after what we've seen in terms of the availability, both 2022 and now at the start of this year, we've always considered the project without the probability or the possibility that the [ probably ] Galician plant in Pontevedra will be closing. But in fact, when we look at the current market scenario, I mean, Galicia effect, we have an excess of supply at this point. There were multiple nontraditional segments that also competed for that fiber in the -- in 2022, especially because of the economic activity. But we're seeing -- if we look at it in the mid- to long term, we see that being somewhat different. So overall, actually, in the Iberian Peninsula, at this point, one of the reasons that why we're reducing our level of imports from outside of the Iberian Peninsula specifically because we do see an improved scenario just because of less use into nontraditional segments. So we're -- now specifically to your question on the study that we're doing, that is being finalized most likely in June, and we'll have more information on that in the near term.

The next question comes from Jaime Escribano from Banco Santander.

So a few questions from my side, just building also on the outlook. In terms of prices in Europe, inventories are, again, at historical high levels. My question for you would be, how long do you think these inventories are going to take to go down? And based on this, what is your best estimate? And I know it's difficult to know, but based on the -- your market knowledge, where do you think European prices could bottom? Maybe you can just give us a range. I don't know if it's around 900, 950, below. Just for us to have a sense, I think it would be useful. Second question would be regarding cash cost. Maybe you can elaborate a little bit more on each of the items. How do you see them going down? For example, in the case of wood, how much imports are you going to do from LatAm? Is this going down? What are the dynamics at this front also in chemicals and logistics mainly? And then a small question on volumes. Could you give us a sense of how could be the volumes for Altri this year compared to last year? And finally, on project Gama, you were talking about the wood availability study. What other -- how can I say -- what other -- not bottlenecks, but what are the other reports or projects -- or what are -- within the moving parts, what are the other key parts that are basically delaying a little bit the decision to year-end, just for better understanding?

Thank you, Jaime. So first of all, in terms of the outlook on prices, I mean, it's -- we're at a point in the cycle that it's obviously difficult to have a lot of visibility. So I'm not going to get into that as much as when you look at over the extended cycle, for this year, we continue to believe that in terms of the average prices, which should be in the range of about 1,000 to 1050, it's -- that range is slightly, I would say, below where we were perhaps at the beginning of the year because of the speed with which correction has happened in markets outside -- in particular outside of Europe. But I would say that would be the range we're looking at. On inventories, it's hard to see how inventories can go significantly higher from where they ramp because of physical availability. And in fact, as I said, we're starting to see some shipments that were coming towards Europe being diverted towards Asia for 2 reasons: one, because the market in Europe is well supplied; and two, because in Asia, especially in China, it's undergoing a bit of a pulp rally. So we would continue to likely see that in the medium term. But I would expect the whole destocking process, as I said, to be somewhat completed in the next couple of months. So by the time we get into the second half, we would be -- that process should have been pretty much complete, and that's where demand is really going to play a key role. So pent-up demand at the end, consumer level in the key segments, Print and Writing, Decór papers, et cetera, are going to be really key. On Tissue, we continue to see a good, stable market and actually some -- even some growth, so that's going to complement somewhat the -- looking at the other segments. Regarding cash cost, as we said, we are going to -- we're looking at an acceleration of the reductions that -- and we've seen that across all components of our cash cost. We, on wood, specifically, will likely have a reduced need for imports because of availability in Iberia. And that availability will likely also translate into softer prices for wood, which, ultimately, is going to have a positive impact in terms of cash costs. On Chemicals, we've seen -- most of this, as you know, is our global markets. We play and we do sourcing from multiple -- in multiple regions. And sometimes, we even do spot pricing as well, which helps mitigate some of the potential impact that we've seen as well a reduction on that, and that's likely to continue in the near term. It's going to be dependent where hydrocarbon and electricity are going to go, which are the 2 key inputs for that component. So those will be kind of the 2 major ones. On energy, as you know, on a net-net basis, our needs to purchase natural gas are offset by the excess revenue we generate from the sale of electricity, so that's a nonsignificant factor. When you look at volumes versus last year, I'll say the first quarter was a bit softer. We have to see where the second quarter is going to go. But I would -- coming off of the year as a peak of last year, I would say, this year, our main focus is to ensure that we manage appropriately our own inventory levels. So we're going to take a more prudent outlook in terms of how do we do that. If the opportunity comes up to take advantage of specific commercial conditions, we'll definitely take advantage of that. We will be, I would say, more prudent in terms of the overall volume. So we'll probably see it -- versus last year, you'd probably see it would be somewhat lower than what you've seen last year at the peak, but, again, with very, very good levels of productivity. On Gama in -- on -- and regarding some of the key parts, we talked about wood. And specifically, the other component, which is obviously important deals with the whole structure, the financial structure, we have been in discussions with both the national and the regional government as well as the -- we've presented the project to the European Commission. So that's the discussion that is ongoing, which we would hope would provide some visibility in the coming 2 to 3 months in terms of what will be that final structure. And that's clearly looking at the level of subsidies, which we feel is obviously an important component for the financing of the whole project. Apart from that, I mean, the other components we continue to work on. And we're very excited in terms of how that's evolving.

Okay. And one follow-up question. If I recall well, you were talking about a net pulp margin for this year of around EUR 200 per ton of -- at the EBITDA level, very much in line with Q1. How should we think about this figure, which, in the end, what I'm asking is the combination of prices going down, but also, as you pointed out, cash costs going down? How should we think about the net pulp margin evolving in following quarters?

Jaime, as you would expect, when you have a rapid softening -- price softening in the market and, vis-a-vis, the overall cash costs, I would say you should expect that margin to reduce, which would be normal. In upswing cycle periods, you will see that margin increase. And in downswing, you'll see that margin reduce. So I think that will be normal. When we -- previously, when we have looked at the overall development for the remaining of the year, obviously, we were -- when we had the last discussion, I think we have a lot more information as it stands today versus where we were during the last discussion. So that's incorporated into our projections as well.

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