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

Good morning. We welcome you to the Altri 3 Quarters 2024 Results Conference Call. [Operator Instructions] If you are experiencing any difficulty in hearing the conference at any time, please make sure you have your headset fully plugged in or alternatively, please try calling from a different device. I will now hand the conference over to Mr. Rui Cesario, Head of IR, the Altri Group. Please go ahead, sir.

Good morning, everyone. Thank you for joining us for Altri's Third Quarter 2024 Results Conference Call. We'll review our latest financial performance, market conditions, operational highlights and future perspectives, followed by Q&A at the end. To do that, we have with us today the CEO of Altri, Mr. José Pina, and Mr. Miguel Silva, the group's CFO. I'll hand it over now to Mr. José Pina.

Thank you very much, Rui, and good morning. Thank you for attending Altri's conference call. We're always pleased to host this call with investors and analysts to share our results and talk about the market environment and challenges we have. In Slide #2, we comment on some of the main highlights during the third quarter of 2024. The global Hardwood Pulp Market slowed down during the third quarter, mainly due to China as a consequence of lower demand for paper in the local market. Demand continues positive and sound in Europe and North America. After reaching a peak in July, Hardwood Pulp prices have corrected rapidly in China, which has been followed by Europe and North America, with some delays. Demand on the dissolving pulp continues strong with prices continuing to move upwards compared with the previous quarter and with last year's third quarter. EBITDA for the third quarter this year reached EUR 56 million, a margin of 27%, that compares to around 9% in last year's same period. A favorable free cash flow generation allowed for a 23% net debt reduction in the quarter to EUR 250 million, placing our net debt level LTM ratio at 1.1x at the end of the year -- at the end of the quarter, I'm sorry. We were very happy to be ranked #1 in the world amongst 58 companies in the Paper and Pulp subindustry in the ESG Risk Rating of 2024 awarded by Sustainalytics, as you know, one of the most recognized global ESG rating agencies. Regarding diversification and growth projects, Altri developing the recovery and valorizing of the acetic acid and furfural from renewable sources at our industry units in Caima. The project we anticipate to have an IRR above 15% and generate an EBITDA margin here of 80%. At Biotek, we are advancing with a full migration of BHKP production into Dissolving Pulp until the end of 2026. Now moving to Slide #3. On Global Pulp demand is now negative for the first 9 months of the year after a slowdown during the third quarter, mainly due to China on an unfavorable comparison. Paper demand in that region continues to perform weaker than expected in the last 9 months. On the two main types of pulp, we continue to see the same trend of last year's with Hardwood market share to Softwood. In Slide #4, we see an acceleration to 6.7% growth in global demand for the Softwood Pulp in the first 8 months of the year, in line with the increasing interest we continue to see in this market. In Slide #5, inventories at European Ports increased to the historical average level during the quarter as expected, given Europe's premium price to China in the last several months. In Slide #6, average fixed prices for Hardwood pulp prices in Europe were 65% higher in the third quarter 2024 versus the third quarter of 2023, but only 2% sequentially quarter-on-quarter. However, the peak price was reached in July at approximately $1,440 per ton and has corrected in August and September, following the same trend than China. Pulp prices were at USD 1,261 per ton at the end of September 2024. If you turn to Slide #7, we see Dissolving Pulp prices with a stable and low volatile trend having grown by 12% on an annual basis and 2% on a quarterly basis. These prices are net and sourced from China, so not fully comparable to the European BHKP prices that include financial discounts. Now turning on to Slide #8, we show our production and volumes sold in the first months of the year, which indicated a slight increase both in production and sales. Turning to Slide #9. Volumes sold maintained a similar pattern when looking at sales per region with the end use being led by Tissue followed by the Printing & Writing segment. I would now pass to Miguel Silva, the Group CFO, who will comment on the financial highlights of the third quarter of this year.

Thank you, José. In Slide #10, we can see that the market environment was significantly better in the third quarter of 2024 than last year's third quarter. Revenues for the third quarter increased by 19% year-on-year, and EBITDA was up 244%. However, when comparing with the previous year, less favorable conditions of the market led to revenues and EBITDA decrease. In Slide #11, the accumulated numbers for the 9 months point for an increase of 11% in revenues and 85% growth in EBITDA. Going to Slide #12. Altri's EBITDA margin has been in the mid-20s during 2024, a more normalized level when comparing to 2023. In Slides 13 and 14, we see the improvement in EBIT and net profit levels, with net profit in the 9 months reaching EUR 19 million, which compares with EUR 28 million in the same period of 2023. On Slide 15, we have some remarks on the cost side. We have continued to deliver a stable cash cost on a quarterly basis, which has been our commitment since the beginning of 2024. However, we had an incident in the cogeneration turbine at Celbi, that limits the production of electricity. From watching out at this point, that incident should have an economic impact, around EUR 6 million, during the fourth quarter of 2024. The turbine should resume operations during the first quarter of '25. Excluding the effect of the turbine, we expect the cash cost to remain stable and in line with previous quarters. Wood prices have been fairly stable in the quarter and see no reason -- and we see no reason for a change. Chemical prices could increase slightly in the fourth quarter of '24 due mainly to some supply issues in caustic soda. In Slide 16, there was a significant reduction of 23% in net debt during the third quarter of 2024, making the net debt-to-EBITDA last 12 months ratio reached to 1.1x. The EUR 75 million free cash flow generated during the quarter was a consequence of solid EBITDA, lower investment, a strict working capital management and also reimbursement from the tax authorities of the past income tax paid in excess. I will now pass the word back to José.

Thank you, Miguel. If you turn to Slide 17, Altri's return on capital employed level increases to 23% in the first 9 months of '24, based on the operating results of the last 12 months. The current level of ROCE is already above Altri's historic returns and clearly 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 its 2024 ESG rating, full revision, and improved our score to 11.9, making us the #1 in the world among 58 companies in the Paper and Pulp subindustry. Altri was also once again, awarded the Platinum Medal in the sustainability assessment made by EcoVadis. This ranking places us in the top 1% of companies in the Pulp, Paper and Paperboard Manufacturing sector ranked by EcoVadis. Safety also continues to be a main concern with our employees at Altri. As such, we organized for the first time a safety convention to promote better practices and push for a stronger safety culture with zero accidents. In Slide #19, and although we are a few quarters away of completion, we decided to share with you some figures related to the ongoing investment at Caima to be able to produce acetic acid and furfural. Total CapEx of EUR 25 million, partially financed by Green Fund, should return a stable annual EBITDA of EUR 5 million with an expected IRR above 15% depending on the subsidy level. Finally, on Slide 20, and looking ahead, we see demand to stabilize in the months ahead and the current correction phase to be near its end. Europe and North America looked the most dynamic regions, but China will continue to be the main demand driver globally. Nonetheless, we maintained our positive outlook for 2025-2028 period where additional capacity is limited and demand should continue on a positive trend. As demand could be stabilizing in China, we may see also a stabilization in pulp prices in that region. Europe has been following China's strength but with some delay. It is likely that Europe's price premium versus China continues to narrow during the fourth quarter of '24. On the cost side, we maintain our view of cost stabilization for the fourth quarter of '24, excluding the incident with the turbine, which we estimated at EUR 6 million, as already mentioned, and non-recurring. Lower pulp prices usually contain inflationary pressures on the wood costs. On the diversification and growth projects, we're moving forward with our project at Biotek to fully migrate our production of BHKP to Dissolving Pulp until the end of 2026. At Caima, we expect to complete by the end of 2025, the project for valorizing acetic acid and furfural. And on project Gama, Altri continues in the process to obtain the integrated environmental license, which is an essential condition for a final investment decision. So in conclusion, Altri had a positive 9 months of 2024 with stable market conditions and improved financial performance. We expect to have further progress on our growth projects during 2025 and focus to execute our strategic plan, optimize operations and deliver value to our shareholders. Thank you for your attention. We look forward to your questions.

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

I have three, if I may. First one, rather than a question, it'd be interesting if you could share your thoughts on the outcome of the London Pulp Week? How do you see sentiment across the industry for the end of this year and the next one? Second one on cash costs. I know it may be a bit early to say, but what would you expect the trend for next year to be considering full year '24 exit levels of 460 to 470, excluding for those one-offs and the lower pulp prices -- average pulp prices expected for next year? So any room for potential savings from Wood or other components? And final one related to the project to migrate Biotek's pulp production from BHKP to dissolving grade. Could you share with us how much CapEx is going to be invested in this initiative? And what sort of production levels will the mill have once it reaches run rate levels?

Thank you, Enrique. Let me start with the London Pulp Week. We felt it was a good set of meetings overall, I mean, the sentiment that we could bring from London, and I'll separate a little bit in terms of short term versus long term. On the short term, China does seem to be relatively stable if you look at the trends, development of prices, which have pretty much been at the same level, at least for the last few months. And we would expect that to continue into Chinese New Year. We shouldn't see much price movement until then, and especially as it could be approaching marginal cost in that region. So I think China, that it was more of a, let's call it, a soft landing given that it started already correcting early summer. On the other hand, Europe, we see it also as stabilizing. I think, the general view of the market participants is that it's clearly stabilizing with prices still likely to converge somewhat towards prices in China, although this is being done still with a small premium as has been the case historically. So I think overall, when you look at the global market, clearly, there is a trend towards reaching a fairly stable and potentially a bottoming of the market. If you look into next year, China, we believe, especially after the Chinese New Year, is expected to move on restocking. Volumes, although have been good through the third quarter, particularly the late part of third quarter and early fourth quarter, but there's still -- this has been considering stocks were depleted through the summer when there was a lot of -- there was a push towards price correction, we believe that a lot of it has been hand to mouth. So -- and the stocks in China have necessarily shown a lot of growth despite the fact there has been weaker demand, particularly on Paper. So I think at some point, we're likely to see some restocking taking place and that's likely going to absorb, in particular, some of the newer supply. In terms of volumes, I think there's been a lot of discussion on, obviously, the multiple moving parts that you see on the industry, but there is a fair amount of program stoppages. There is some swing in production happening with some producers. We are, ourselves, already doing swinging campaigns in Dissolving. So we believe that that's going to, at least contain or mitigate some of the potential increase due to the new Brazilian project that started up in earlier this year, in July. Regarding Softwood, the expectation also is that we should continue to see some decrease. And producers probably need with that, we believe, the world with less Softwood and more Hardwood, both from a volume in absolute and percentage terms. And that gain in market share should continue to happen or even accelerate, which effectively is going to provide an outlet for the additional capacity that we've seen over the last recent years. So that's pretty much the -- I think, the sentiment was positive, in particular looking at where the market is now. And I think there's some expectations that we'll see also some stability next year, possibly with a potential upswing in the second part of the year. Moving on, considering your second question, Enrique, on cash cost and the trend for next year. We see, first of all, a very stable cash cost at the levels that we're operating now. And in fact, we're looking to identify potential improvements, even though I would say, slight improvements. But clearly, we're on a fairly stable, steady cash flow -- cash cost base. And I think that's likely what you should expect in the medium term. On the conversion side, regarding BHKP to DP at Biotek, the overall -- so Biotek has been over the years, subject to improvements that will help us get to a point of triggering this conversion. And that, effectively, what happened. So a lot of what I would call past investments in Biotek was clearly targeted towards getting us to the point where we can start doing some swinging. And effectively, this year, in 2024, we will be doing by the end of the year, potentially five campaigns that we've run through the whole year. It's one of the reasons why Biotek has a little bit less, let's say, continuous production because of the different campaigns. But every single one of those campaigns, the intent was to stabilize the overall operations, enable us to demonstrate the quality we were seeking, and this was not just for Viscose grade, Dissolving Pulp, but also for lyocell Dissolving Pulp and I think we've been able to do that. We've been in the process of qualifying customers. So that's usually where the initial campaigns are targeted. And we think we're in a pretty good position right now for that to continue. We will be upgrading the volumes that we intend to place in this market next year. As we said, the full conversion should happen by the end of 2026. And I would say, purely on an estimate basis, our targets, if we think of end of 2026 and beyond, our target is to be in the range of about 200,000 tons of Dissolving Wood Pulp. And we would see without other environmental investments we're doing, for example, in potentially a new lime kiln in the near term. But overall, focusing on dissolving, we estimate the total investment will likely be in the range of about EUR 50 million, and that's through a multiyear set of changes. And the objective of that is to continuously remove and debottleneck the overall production in order to reach, as I said, that stated capacity goal and to improve efficiency. That's really the bottom line regarding how we're approaching it.

The next question comes from Bruno Bessa from Caixa Bank.

Yes. So three questions from my side, if I may. The first one, if you could clarify what is the impact of the tax effect on net debt during Q3? That will be appreciated. The second one, on the impact from the turbine. If you could split between Q4 and Q1, the impact that you are expecting? And the third on CapEx, which has been relatively low this year. What are your expectations for next year?

Thank you, Bruno. Perhaps I'll ask Miguel to comment on the first two, and we talk a little bit about the third as well.

Yes. Well, the tax reimbursement that occurred during this third quarter, it was something that we expected already. As we knew, we have made some down payments in excess in 2023. So the amount was slightly above EUR 20 million. That was the amount of the tax reimbursement that we had in this third quarter. Regarding the impact of the incident that we have in the turbine, the estimated impact that we mentioned will occur all in the fourth quarter of 2024. So this will be around EUR 6 million that we can estimate as of now, will impact on the fourth quarter of '24. Then we have, in insurance, that will cover for the rest of the period, even if the turbine is expected to resume during the first quarter of 2025. Regarding CapEx, I will pass to José.

Yes. So CapEx is always a function of time and status, some of the discussions that we're having with suppliers and obviously on the ground development of the project. But we should continue to keep line of sight in terms of where we're aiming for this year, which we've indicated previously. But quarter-on-quarter, you may have some of these deviations. So the fact that it was lower in Q3 should not detract us from continuing to move ahead with the things we're doing. And at some point, especially when you get into the end of the year, there could be some, let's call it, leakage of CapEx investment passing on to subsequent years, especially if it's already committed, at least on a cash flow basis. But I would say we're trying to remain committed to what we've stated before. So you should see that, that having much impact in terms of our overall yearly level.

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

So I have three questions. The first one is related with volumes that we sold into third quarter that were below my expectations. I know that it was related with Celbi. So my question is for the fourth quarter, should we expect same level of volumes? Second question is related with Biotek. So you mentioned EUR 50 million CapEx investment, if I understood well. But most of -- the bulk of it was already done. So my understanding, if you could confirm it? And also related with Biotek, I think, that there's one customer that is supplied through a pipeline from your mill. So my question is, even this customer will stop to be supplied from 2026 onwards? And the last question is regarding with your new project at Caima. You mentioned some figures in the presentation. So I understood that it will be a delta on the current operation already at -- of Caima mill? Okay.

António, just to clarify the first and the last question, when you said the project on Caima?

Yes. Your new project in Caima that you -- your new project in Caima that will be ready by the end of next year. Just -- and you mentioned some figures on the presentation. It's just to understand that, that will be a delta. So it will be add on, on the current operation, if I understood well.

I got it. And the first one, you were talking about the level of sales, but it should be in Q4, correct?

The level of volumes, yes, for the Q4. If you could provide some color on what should we expect?

Okay. Yes. So starting with the first one. I mean, in terms of the volume levels. Q3, we did have two things happening. We had a swing at Biotek into Dissolving. We also have, at the end of September, the maintenance stoppage of Celbi, which obviously reduces the overall production levels. And we wanted to be -- whenever we go into some of these, let's call it, disruptions in operations, you want to be a little bit more cautious. So we did not try to push too much volume. Also, knowing that when you have the downwards trend on pricing, likely the reaction of the market is going to be looking for lower volumes. I mean, this is perfectly natural. It happens every single cycle in the same way when you are on an upswing in prices that customers try to stock up a bit earlier and that has a reflection on volumes. But nothing out of what you would expect in terms of normal conduction of business. On Biotek, so we've made a number of investments. The EUR 50 million that I'm talking about is in terms of the continued investments that we have ahead of us. So these are investments we'll be obviously making through the next few years and that's in addition of what we have done in the past. So that will be in order to go through the full conversion. If you think of it, we are specifically -- I mean, Biotek has a nameplate capacity, over 250,000 tons, and this is for Kraft Pulp, BHKP. When you move into Dissolving, you do lose some capacity. We would estimate to be down initially to the level of about 180,000 tons. But this is why some of these investments are targeted towards to elevate that, as I said, above 200,000 tons. So 200,000 tons plus is our target and remains our target and the baseline for how we looked at some of these investments. On the -- regarding also Biotek in terms of pipeline customers, first of all, we don't tend to comment on the call on specific customers, and we won't do that. What I can tell you is, we have informed all our customers of the conversion that is taking place. And secondly, we will be looking to maintain most of those relationships, because we still have opportunities to continue to grow somewhat in Celbi, and also continuously upgrade our customer portfolio. So that's precisely what's going to happen with our BHKP customer portfolio that we have in Biotek. And in terms of the kind of projects that we're going through by the end of '25, yes, this is -- this will be an add-on business to the existing Caima operations.

[Operator Instructions] There are no further questions from the conference call. We will start now with the written questions. Sorry, we have another new question from the conference call. The question comes from Luis de Toledo from ODDO.

Yes, I was just wondering if you have any comment on Gama project. You're still working in general environmental license. I don't know if you're considering any final investment decision deadline or date? If you can comment on the progress on environmental, if you're facing any specific issue or something? If the conversion of the Biotek plant has been implication for the Gama project? And yes, basically, if you could provide some detail on Gama if, for example, the political landscape in Spain is something that might concern you? Or it's just a process of environmental licensing?

Thank you, Luis. Concerning the Gama project, so as we stated, we continue with the environmental permitting process, is a very detailed, very prolonged process, as you may be aware. There have been a multiple series of specific technical reports in all of the areas related to obviously, a license of these kinds. There's been a thorough review. We've been following up this process. And so far, we don't identify a significant bottlenecks. So as far as we are aware, it continues to move and progress with the local authorities. And usually, this would take roughly about a year or an estimate about a year. So we would assume that latest by early 2025, we should have some indication in terms of this environmental integrated license. In addition to that, and there has been several questions placed to the European Commission regarding obviously the fulfillment of all of the environmental norms. And the European Commission for the third time has reaffirmed that it sees no issues or violation of the European norm. So that gives us, I think, further comfort that we should not have any significant surprises. Just so that you may recall from past comments, we have made a casing point in this project to actually go way beyond the environmental norm requirement, both starting with evolution, environmental norms, which are more strict than the Spanish, which are more strict than the European Union. So we feel very comfortable where that -- how that's moving along. With respect to final investment decision, we always also stated that there are two critical elements that lead us to that decision. And even though we've in the past expected that some of these criteria would have been clear earlier than it is. But effectively, beyond the environmental integrated license, which provides legal certainty, you would want to have the full financing agreed and established, and this has been a significant topic of engagement with the central government, and that continues to be the case. So I believe once the license is clear that we will also be able to move forward faster with the process regarding financing. And -- but that will be after the actual issuing of the license. I think we have...

Yes, I was just -- I'm guessing if Biotek...

On the Biotek, any implications? Yes. On the Biotek and implications. So the conversion has no implications for Gama. They are two completely separate projects. We have the intent to consider a switch into dissolving already for several years, and they were prior -- actually prior to -- we have started with developing the Gama project, which you know is started with an international tender, which was placed by the coalition government through its public-private entity called Impulsa, looking for an industrial partner in order to establish and implement this project in Galicia. So that is completely unconnected and it's part of our long-term development. In fact, some of the investments we've made to prepare Biotek for these particular switch, some of those initial investments are -- were made prior to Gama was announced, and they were actually made possible, the current campaign swings that we have been going through.

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

Just a follow-up question on your EUR 6 million incidental costs. So I understood that will be a cost in a sense that you will have to buy more energy from more electricity from the network, and not less revenues, because you are not able to sell so much energy to the network.

Now just to clarify, we have been selling fully our energy generation and buying fully our needs for the plant. The net volume of energy, it's actually, it's positive. So we sell more than what we actually consume. But there's no impact on our purchases. They continue. The impact essentially is on less revenue.

There are no further questions from the conference call. We'll start now with the written questions. The first question comes from [ Michelle Campagna ] from [indiscernible] Investments. Could you explain the reason for the widening of the discount level between realized prices at the BHKP gross prices during 3 quarters, 45% compared to 41% in the first half 2024?

Thank you for the question. Generally, the widening in terms of discounts, just illustrate with opportunistic volume taking. So if you do the level of spot is higher, and because those spots are usually on a net basis, that has an impact when you calculate the total discount rate. That's the only reason why it's slightly higher. And you'll see that effect reversing when the price trend reverses as well. So if you -- because we're always looking to have at least some volume available to take to market, not much. But generally, we keep a small volume that we generally place in the market due to some of the variations you have with your customers on a regular basis. So when prices are on the upswing, usually opportunistic deals tend to be ahead of markets. When it's the reverse, the same that -- the reverse happen. So I think that's basically what explains it.

The next question comes from [indiscernible] Why are you converting Softwood to DWP?

Thank you for the question. It's been a strategic decision that we've been considering for quite some time. But the explanation is quite straightforward. We have been operating in Dissolving Pulp for more than 10 years a market we know extremely well. We have very well established customer relationships. There are basically no new markets, Dissolving Pulp projects apart from what have been announced and those which are actually in place tends to be the captive or somewhat integrated. We play generally on the market, both rather than on any particular integration. But when you look at the fundamentals of Dissolving, for us, it seems to be a more attractive long-term focus, even though Biotek is a very competitive mill when it comes to BHKP in Europe, but you see growth of Dissolving significantly outpacing the growth of BHKP. And therefore, that seemed to us like quite attractive. And in addition to that, there is more stability in terms of prices of Dissolving Pulp versus BHKP. So overall, it made sense. We have the experience. We have the customer relationships. We have the technology. And we've been preparing for this for quite some time. So it made sense at this point to move in that direction.

There are no further questions. So I will hand over the session to Mr. José Soares de Pina, Altri's CEO. Now your line is open.

Well, thank you for joining our conference call. It's always good to have you on this call. And we look forward to speaking to you soon. Thank you.