Lenzing Aktiengesellschaft (LNZ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome and thank you for joining Lenzing Group's Q2 investor and analyst call. [Operator Instructions]. Your hosts today are Stefan Doboczky and Thomas Obendrauf. And I would now like to turn the conference over to Stefan Doboczky, CEO of Lenzing. Please go ahead, sir.

Thank you, operator. Good morning. Welcome, everybody, and thank you for joining the first half 2020 financial call of the Lenzing Group. First half 2020 dominated by one theme, COVID-19. It was the first half of the year that was from various perspectives and first half of unprecedented challenges. On the one hand, how to keep our people and partners safe, how to keep operations uninterrupted from supply chain interruptions whilst facing an unprecedented demand drop to the global closure of most of the retail outlets and textiles and the corresponding demand drop, how to manage and panic buying on the nonwoven side, and the corresponding demand surge. So clearly, I think, all in all, a mix and an environment that the group hasn't seen for many, many years, probably not in history. If you look at the results at a glance, revenue came in some EUR 280 million lower than the same period last year to EUR 810 million, a reflection result out of poor demand, in part even frozen demand if I look at April and May. And given the supply demand, very poor prices across the value chain and across, I think, all segments with the exceptions of nonwoven. EBITDA came in at EUR 96.7 million compared to EUR 181 million in the same period before, reflecting the trends that I mentioned before, but also reflecting the efforts that we did display on the cost side. Net profit attributable to Lenzing shareholders came in at EUR 1.5 million compared to EUR 78.8 million in the same period last year. If you look at the key developments, as I said, COVID-19, we did manage to keep our people safe. It was an unusual first-half year with second quarter for the first time in history surpassing in revenue, textile revenue. You'll remember, typically, nonwoven sales are somewhere between 1/3 to 1/4 of sales, but we saw really the Lenzing world, in a way, turned upside down in the second quarter given by the interruptions that we saw on the textile supply chain, but the surge in demand on nonwoven. What we were very pleased about and more to come there is how our strategic project in Thailand and in Brazil performed. Looking a little bit further out for the year, the developments in June and July make us confident in saying in Q2 the Lenzing Group should have seen the worst. In textile, we see still a varying picture dependent on the region, on the demand momentum, but overall going in the right direction. Nonwoven showing a bit of reverse from the panic buying, coming down to some more normalized pattern. But all in all, I think that the world of Lenzing is moving fortunately now in the right direction. The focus areas for us will remain to manage in this period, those things that we have firm under control; that's cost, operational excellence, and the very important strategic project in Thailand and Brazil. If we look at the initiatives that we have done to keep our people safe and to manage the crisis, we were very successful introducing all the hygiene measures, social distancing measures, home office measures, and so forth. And I feel very proud on the efforts of the whole Lenzing community to keep people safe, keep operations intact, keep the relation with suppliers and customers very tight to manage the uncertainty, to manage the, in part, erratic patterns that we saw from downstream market. All in all, I think a very intense, but also a very successful effort. It was a period where, I think, as for most of you flying and traveling was impossible. However, we still managed to keep close contact with our most important partners in the industry. What helped in this period was the programs available from the Austrian government. We did have some good 1,500 people in short-term work in the period May to July, some good 900 we extended until September. And, as I think Thomas will later on also elucidate, we managed in this, I think, demanding period, a very solid liquidity position and actually very successfully and as planned, finalized the Amadeus financing. If you look at the market side, as I mentioned in my introduction, textile retail was hammered in all parts of the world, recovery showing different patterns, but all pointing to one thing and this is that over the next quarters, we should expect that retail sales slowly but surely go up to pre-COVID-19 levels. However, that will not be a question of weeks, this will be a question of months and quarters. If we look at North American apparel traffic, you see that even now, end June-July, we have some 40% less people going to the stores. If we look at retail sales, clothing, still down some 20%, also indicating one trend that we see, and this is that online sales are doing relatively well. However, online sales typically are sales coming with higher pressure on margins, more discounting, and putting more pressure on the total textile value chain. If we look at retail sales in China, we do see on many fronts, actually a very positive recovery. We also find this very noticeable, for example, on innerwear, on the modal side, where a lot of innerwear sales in China are back to pre-crisis level. So China, we clearly see as having recovered the fastest. If we see retail sales in Europe, whether it's in Germany, Spain, and U.K., still I think very difficult. However, what we feel very encouraged by is on what basis consumers focus on their purchases for clothing. We have one trend, which is clearly that price is important. I think that's something that we saw in online particularly. But at the same time, if we look at the way TENCEL, the way sustainable clothing is being on consumer's mind and you see here an indexed chart on how actually TENCEL and sustainable clothing was reflected on Google searches, it just reiterates that we are, as Lenzing, focusing on the key megatrends that are there to sustain, I think, also crisis like COVID-19 that we have seen. Let's now make a more deep dive in the markets of the wood-based cellulosic fiber world. And what we saw across the board, a very difficult market environment. Viscose prices remained under severe pressure, 30% down year-on-year at CNY 8,500 per ton. We even saw periods where it was around CNY 8,300 at the beginning of June-July. However, reflecting poor demand, producers continue to produce and inventories being very high and just producers fighting to offload inventory of whatever price it takes. On the other hand, we saw that nonwoven prices, given the demand, actually even went up in this period. We saw prices exceeding CNY 10,000. As I mentioned in my introduction before, this is, however, gradually normalizing. KEY driver on viscose prices remains utilization rates in the industry. We are now below 70%. If you look at the longer term average, this is some good 20% below long-term average; long-term average around 83%. We still had, not so long ago, utilization rates north of 90%, and inventory levels remain very high. Polyester also under severe price pressure. We did see some take-up in cotton that is promising. However, we will only see some of the effects of cotton supporting viscose if we see demand coming back. On the chart on the right hand, you see that the margin over pulp. So if you just deduct from viscose prices, pulp price is on historical low level, at level just around USD 500 per ton. And that just, I think, underpins how difficult the environment in the industry is. And the only way we see this, I think, walking itself -- eating itself through will be with demand coming back. Looking at the next chart, I think specialty prices. We did see that with poor viscose prices, poor cotton prices, and very poor demand that we had to adjust also on the specialty prices to make sure that our volumes in the industry continue to be placed. The downstream customers work with our specialties in their selections. Premiums remained high versus commodity. However, we did have to adjust our prices at certain regions, at certain customers, to reflect, I think, the COVID environment. At the same time, I want to reiterate, given the success that we have with ECOVERO that this -- the fact that we have in specialty also a substantial viscose portion that is more price and viscose plus basis, that is an element that you see in here reflected as well. So overall, a very difficult market environment. We do see that June and July volumes are starting to come back. We also see some pickups on viscose prices in the last -- in the more recent history. However, environment remains very, very challenging. Looking at our expansion projects and I feel extremely proud how our team in Brazil is managing our dissolved wood pulp project there. We now have some good 2,000 people at the construction site. You all read from the newspapers what a difficult environment it is from the COVID-19 situation. I must say that we received feedback from the authorities that they feel very pleased if our people -- if people, construction people are at our site because it's difficult to have a safer place in many parts of Brazil than what we have here. We very tightly control who comes to the site, make ongoing tests, who is coming in, how people behave. We make audits at the dormitories and so forth, just to make sure that the site remains well under control. We managed so far very well both time and budget of the project. We are fully on track. Our, I think, operational team has been very successful. And I think one thing to say that has been the highlight of, I think, our efforts is the successful signing of the financing contract and the financing package with a total of $1.15 billion. Here, you see a couple of pictures of the construction site. If you're there, it's a gigantic, I think, site of some good 2 square kilometers plus. You see here the overview of the construction site. You see the offices that have been finalized. We have finalized the whole infrastructure because now we are in big mobilization of all the contractors at the site with the civil works. The key goal for us is to be out of the earth before the raining season starts than towards the end of fourth quarter. You see that water and effluent treatment, the temporary one, how it looks like, as well as the huge pipeline work that we are doing between the water intake and the site. All of that is progressing very well and we are very pleased with the way the construction site is managed and the way the whole project is performing. Similar picture we see in Thailand. Thailand, clearly not as hard hit by the COVID-19 crisis as Brazil. Initially, it was one of the countries on the -- very high on the radar screen, but we saw very good, I think, national management of the crisis. And we can say that COVID-19 does not impact today our project in Thailand. Also in Thailand, we are fully in time, we are fully in budget, and you see on the page now a couple of pictures of the construction site. You see here, we already are well out of the earth. The whole, let's say, ground plates are laid, piles, piling is behind us, and we are starting the construction of production building, auxiliary buildings, and also there a very intense construction site, very well and tight managed, and I think we're very pleased with the progress there. Challenging markets requiring, I think, the best of what Lenzing has to give. Construction projects are well underway and I think I would like now to ask Thomas to take us through the financials.

Thank you, Stefan. Hello and welcome also from my side. Let me guide you through the most important financial numbers for our second quarter and first half of 2020. And let me start with revenues. Revenues came in with EUR 344 million compared to EUR 529 million the year before. It is a drop of almost 35%. Our half year number now stands at EUR 810 million compared to EUR 1.089 billion the year before. So that's a drop, of course, of more than 25%. As you can see from the revenue by application, our nonwoven fiber sales did benefit from the increased demand for our hygiene products. At the same time, our textile fiber sales suffered due to the global pandemic. As a consequence, the share of our textile fibers dropped from the historical level of around 70% to less than 50%. Our specialty fibers share now stands at 60%. That compares to 48% the year before. That is, of course, the result of standard fibers being down in volume, but also in prices, whilst our specialty prices kept their relative premium to commodities. Now moving on to earnings and let me start with EBITDA. EBITDA is, of course, significantly impacted by our revenue development. Q2 came in with EUR 27 million compared to EUR 89 million the year before. It's a drop of almost 70%. EBITDA margin is now at close to 8% compared to 17% the year before. I think we have been quite successful in managing our cost positions. I mean, we could bring down our cost of materials and supplies as a percentage of revenues. We've also been able to bring down salaries and wages as well as other operating costs. And with that, of course, we could mitigate the impact of our revenue drop off; however, not fully compensate. With regards to the half-year numbers, we are now at EUR 97 million compared to EUR 181 million. That's a drop of almost 47%. And with regards to EBITDA margin, we are now at close to 12% compared to 16% the year before. Let me maybe, at this point in time, also highlight one more thing. I mean, as Stefan mentioned, I mean, Duratex actually contributed the biomass as a contribution in kind into our joint venture in Q1 2020. As the dissolving wood pipe business is denominated in U.S. dollar, actually we have decided to use the U.S. dollar as the functional currency for our project in Brazil. Now the simplified and really the simplified value of the biomass is, of course, the product out of wood volume times Brazilian wood price. That translated into U.S. dollar and then, of course, later translated into euro. Now with the Brazilian real depreciating quite a bit over the last couple of months, we also saw quite an impact on the value of the biological asset. And of course, once we harvest the biological asset, then that will, of course, translate into lower cost of materials and supplies. Now whilst weaker Brazilian real is, of course, helpful to the long-term KPIs of our project in Brazil, it also adds quite some volatility via the value of the biomass. And actually if you just take a look at our Q2 numbers, actually the biological asset -- actually the fair value of the biological asset decreased by about EUR 6 million. And with regards in Q2 alone and for the first half year, actually it decreased by EUR 9 million. However, of course, besides actually the impact on our biological assets, there we will, of course, see also quite a significant impact via the tax line as, of course, in Brazil taxes are still denominated in real, of course. Now moving on to EBIT. Of course, here we see basically the same pattern as we saw for EBITDA. EBIT for Q2 was a negative EUR 12.8 million compared to EUR 51 million the year before. Year-to-date, we are now at EUR 17.6 million compared to EUR 105 million the year before. Moving on to net profit and earnings per share. Q2 came in with a negative result of slightly more than EUR 20 million compared to EUR 35 million the year before. Year-to-date, we are basically just in a black zero, so it's EUR 1.5 million compared to EUR 78.8 million the year before. Moving on to cash flow and working capital development. Of course, cash flow is impacted by our result accordingly. So with gross cash flow down compared to last year as well as operating cash flow. And of course, as we have started our big projects, that, of course, adds significantly to our CapEx. And therefore, our free cash flow is, of course, highly negative in Q2; it was EUR 179 million. Looking at the trading working capital development. In absolute numbers, actually we are, let's say, relatively stable at hovering around the level of around EUR 400 million. So for Q2, it's EUR 436 million. With regards to trading working capital in percent of revenues, I mean, what -- of course, there's a huge increase now, as you can see here from last quarter 24% to 31%. I mean, actually if you go back a couple of quarters, actually we have been hovering around most of the time at the level of around 20%. However, please keep in mind how we do this calculation. We actually just take the revenues of the last quarter and annualize that numbers. And therefore, of course, with revenues being significantly below prior quarter's level, of course, the percentage -- the trading working capital as a percent of annualized group revenue increased significantly. However, we're, of course, very confident that we will bring it back to normal over the next couple of quarters. Last but not least, some balance sheet metrics. Let me start with equity. The equity is still very, very strong with slightly less than EUR 1.5 billion, equity ratio at close to 42%. Our net debt, of course, went up due to the investments, the CapEx we made, especially in Brazil, but also for the project in Thailand. And of course, it is also impacted by IFRS 16. With regards to liquidity, as per end of June, we had liquid assets of close to EUR 600 million available. In addition, of course, unused credit lines of another EUR 160 million. Of course, that does not include the lines, especially the ones we just secured for the Brazilian project. With that, I hand back to Stefan.

Thank you, Thomas. So I think reflected in the figures is a very difficult market environment. However, at the same time, the intense effort of the whole organization to manage cost and to do whatever is in our power to sort of weather the storm. Looking forward for the year, I think there is still limited visibility due to the COVID-19 pandemic. As I said before, we do see, dependent on the region, textile sales coming back. Clearly, in this case, the west is lagging behind the east. We do see -- get, I think, quite a number of markets; South America, North American part, also Europe, where demand is still far away from what we did see sort of in the pre-COVID crisis. As I mentioned before, nonwoven sales are still strong. However, demand and pricing gradually starts to normalize. We don't see any fast sort of recovery across the market. I think we expect that commodity prices, viscose prices will continue to trade at very low levels. In part, we even see historic lows for the months to come. Specialty fibers continue to be more resilient. However, any -- also anyway impacted by just the overall environment. We have a very strong focus on strengthening our cost position and operational excellence. And if you add all of this up, what we do conclude is Q3 and Q4 will be better than what we saw in Q2. I think the developments in June and July make us confident that we have the worst behind us. And I think with that, I would close our call and open the floor to questions, please. Operator, please.

[Operator Instructions]. First question comes from the line of Matthias Pfeifenberger with Deutsche Bank.

I would point your focus on this chart, on the theoretic profit margins versus the viscose price. And there, I think the correlation has been quite good in the past. Whenever losses kind of spiked, prices went up a bit. And now, I don't know, the prices are declining further, but the losses are trimmed. So is this only dissolving wood pulp or why are prices actually not coming back when the losses are trimmed? Is this more leeway to for Chinese supplies just to play the volume arbitrage to get up operating rates and sacrifice prices a little bit more or what's that I'm [ missing ] here?

Okay. I think we see here a development of 3 different things. On the one hand, yes, dissolved wood pulp prices did come down, but if you compare the chart conversion margin over pulp and the margin, that is actually not the full explanation, but it is an element of that. However, you saw 2 more developments. Number one, some of the lower performing -- the poor performing assets in China were started to be shut down. So as a consequence, those who remained were more efficient producers and losses as a consequence were less. That is a bit the way CCF, who is the provider of that, calculates it. So they have most players a kind of individual cost overview. So if poor performance step out, as a consequence the rest is performing better. Well, you also need to keep in mind is that energy and caustic prices in this period in China further eased and helped, I think, despite the falling prices. So overall, we actually did see in April-May clearly the low point in profitability. It slightly eased, but it also primarily eased because many who could not afford anymore just stepped out of the industry.

And maybe a follow-on. Now everybody is shutting pulp and also viscose capacity on a temporary basis. Is there a risk that if apparel and retail demand doesn't recover to pre-crisis levels also outside of China that there might be more shuts needed to balance the market? And what is, in your view, the lag in terms of when capacities are being shut and then for prices to finally recover at some stage?

I think it's a very good question, Mr. Pfeifenberger, and also very difficult to find an answer for that. So what we do see is that at the moment, we still have -- despite capacity closures, we still have pretty strong inventories. So we even see on fiber level some volumes more than a month worth of inventory, which is high on relative terms despite capacity being taken out. What we do see is that, I think, some of the newcomers fight for market share and that is, I think, a period that we would expect to still last for a couple of months. What we have seen historically that at prices like we have now, actually viscose start to eat into cotton and polyester. However, given that structural demand at the moment is not there, it's difficult to say when those effects starts to kick in. We at Lenzing at the moment, we feel that from a margin perspective, we don't think that it can go lower. So if prices would drop, yes, you can. But it's not that from a margin perspective, I think we would see people going lower. However, we also don't expect a fast recovery unless we suddenly see some one or two players really stepping out on big terms. But that, I think, is more tea leaf reading.

And then maybe a small one. Can you just confirm where the change of the biological assets of the market value is booked? Is it the minorities line or the financial result?

No, there is a separate line item. There is a separate line item.

Allocation of profits or loss to puttable non-controlling interest, but that's both 0 in both quarters. That was in Q1, you mentioned?

No, sorry. I mean, what you mean now with the minority interest, I mean, that is actually the allocation of the result for those legal entities where we do have minority partners. There are 2 major assets. There are 2 major assets where we have minority stakeholders. The biggest one, of course, being in Brazil with Duratex owning 49% of our joint venture. And as I mentioned before, actually in Brazil, actually what we saw is quite some impact on our tax plan. That impact, of course, is out of the devaluation of the Brazilian real and the other actually share of the -- with regards to minority interest actually, that is coming out historically, of course, of our operation in Indonesia.

But it's fair to say with this line gains and losses from fair value measurement of biological assets that there is a currency -- there's an additional currency impact on the EBITDA from now on in terms of the biological assets?

Yes, Mr. Pfeifenberger, thank you for the question. I think it's -- I think this is a point I would again like to highlight. This is something we will have to live with for the next 2 years, especially for the next 2 years because for that period of time, the site in Brazil will be under construction. However, still, of course, we will -- we are owning already the biomass. So whatever the real is doing, actually that will have at least some impact on the fair value of the biological asset. And as I said before, it will also have an impact on our tax line. Once actually we start up operation, then, of course, I think all things are back in place. Just think about the biological asset. If the value of the biological asset decreases due to FX development, that, of course, then will later translate into lower cost of materials and supplies. However, there is no such line yet at this point in time.

Next question comes from the line of Christian Faitz with Kepler Cheuvreux.

Two questions from my side. I'll ask them one by one. First of all, how do you see cash flow developing in the second half? And do we have a view of cash flow development for the entire fiscal '20?

With regards to cash flow, I would say the same is true as for the revenue development and our operational result. I would say that with Q2, we should have the worst behind us. And now we should see an improvement in Q3 and Q4.

Then second question. Given the improved sequential demand momentum, and part of that was discussed before, but what is your assessment regarding potential VSF price improvements in the second half? Just like my predecessor asked, wouldn't you see VSF pricing coming back? Or is that really dependent on some key players essentially leaving your supply side?

Mr. Faitz, I think our optimism with respect to viscose prices recovering, I think, is not particularly, let's say, strong at least not short term. Because if you just look again at how the profit and loss in China has developed, we have seen a sluggish or comparable picture now for some good 3 quarters of the year. So this was also pre-COVID level. So what we do expect is that in a limited range, sort of prices could slightly recover. But this -- we're not going to see anywhere soon levels of RMB 13,000, RMB 14,000, RMB 15,000 as we saw, say, still in beginning of '19 or even in 2018. It will take time until I think we see this eating itself through this crisis. So fast recovery, no. However, recovery overall expected, yes.

Next question comes from the line of Markus Mayer with Baader Helvea.

Four questions from my side as well. I will ask them one by one. Coming back to Christian's question, could you elaborate what the demand run rate from June into July was? And also if you expect a rather sequential continuous demand decline? Or do you expect kind of step changes from the demand?

Mr. Mayer, I think if you look -- please accept that we will not guide precisely on July. But if I just look at momentum, then I would say we did see now, particularly in China, very strong momentum across, I think, the total textile industry and across the various segments. And that has been historically one of the core markets, of course, of Lenzing. We do see a very nuanced and different picture in part of the western economies. We are, I think, positive that also in those markets, we will see, I think, picture improving. However, July and also June, I think, brings us to the point that we say the worst is behind us. And this we would not say if this is just more or less still within the margin of error. It's a clear trend that we see I think in July things do become better.

Maybe as I said, question to this, the -- could you elaborate how short your order book visibility is in comparison to the past right now?

The order book visibility, when it comes to firm orders, we always speak of a couple of weeks that we can assess. However, I think changes in there, particularly in the crisis level, were high. So orders canceled and postponed. But overall, I think we have a reasonable visibility for a couple of weeks.

My second question would be, again, on the impact of the Brazilian real. The 1 question is, A, on -- if you now ramp up or basically do the production work or the construction work of this pulp expansion project in Brazil. Until then, from a financial perspective, do you have to make impairment testing of -- on the assets?

An impairment testing, you anyway have to do at each and any point in time once you see a trigger.

Yes, but this is done quarterly? Or is it done on a yearly basis?

For sure. But that is routine. That is routine.

And due to the lower Brazilian real, do you have any kind -- have you hedged the construction costs? Or if we assume that this present level stays at the current level, should we also expect then lower construction cost and lower CapEx for this project as well?

No. First of all, maybe let me go back one step. I mean, as I explained during my elucidations actually, the reason for this -- for the currency situation we have starts with that the dissolving wood pulp market is denominated in U.S. dollar. So actually the joint venture in Brazil will have income in U.S. dollar. And as a consequence, of course, of that, actually what we did is we secured the financing in U.S. dollar. Otherwise, we would have a currency mismatch. So the revenue line will basically be denominated in U.S. dollar. There will be a smaller portion of local energy sales. However, that is, let's say, relatively small compared, of course, to the revenue with regards to dissolving wood pulp. So actually once we would assume the Brazilian currency to be weaker than actually in our financial model or in our business case, that, of course, would overall benefit the overall KPIs of the project because our costs, most of the costs or a significant portion of the costs actually, are denominated in real. So be it now, especially salaries and wages and other expenses. So those are all denominated in Brazilian real. So actually a weaker Brazilian real actually benefits the KPIs of the project. So having said that, coming back to your question on hedging, we hedged a portion of the investment costs actually with a rate that is quite a bit better than in our financial model. And with regards to the unhedged portion anyway, we fully now benefit from the weaker real.

Not that impairment test was not basically that I fear a negative impairment, basically could think on a positive impairment. But with the explanation you made, of course, then this is also most likely has a low risk or low option as well?

Yes. I mean, as said, I mean, the revenue in U.S. dollar, the costs are basically in real. So overall, the project is benefiting from a weaker real.

Then another question on inventories. Given the higher inventories, not only at your level but also in the full value chain and the falling prices, is there a risk for inventory devaluation from your side or also at competitors, in particular if Chinese competitors are deep in the red and have to devaluate inventories that might be then also a kind of trigger for market consolidation?

So let me start with the market side and then I'll hand it over to Thomas to look at our situation. What we do see at the moment is indeed, I think, efforts to generate cash at our competitors in China. So offloading volumes at prices that even don't cover raw materials. So that's something we have seen. I think that's a situation that we have seen also in '13-'14 for a couple of weeks, but that's something that will stop, yes. However, it did put pressure on prices. Now Thomas, maybe looking at our own situation and inventory valuations.

I mean, with regards to the provision for our inventories, that is, again, a routine process. We look at it, of course, on a monthly basis. I mean, with regards to the overall inventory level, actually also coming back to what Stefan elucidated during his presentation. Actually what we did is we shut down a couple of lines. We deliberately increased our inventory level. And actually by doing so, actually we could take, let's say, maximum advantage of the short-term work subsidies, especially here in Austria. And now, of course, as inventories are at this point in time or as per today, we are basically already back on the level we saw at the end of 2019. So actually whatever provision would have to be made, that is all reflected. It's just a routine process.

And then my last question would be again on raw materials and energy impact. Could you remind me on what is the contract length of your contracts? Or otherwise, what would be the delayed factor of falling caustic soda and also energy process? And of course, also dissolving wood pulp if the prices are coming down further.

On low wood pulp, the time lag is typically some 4 months that you see that those prices that are reflected in the CCF index find itself wired and whatever formula we are using back at our prices. Thomas, on caustic, maybe some words from your side.

With regards to caustic, actually we do buy caustic at all our sites basically at spot prices. So there are -- the contracts that are in place, they are only with regards to the volume for a certain period of time, whilst the price is always the spot price. And with regards to energy, actually only, let's say, a minor portion actually of the energy we use is being hedged. And the rest is, of course, being procured in the spot market.

Your next question comes from the line of Sebastian Bray with Berenberg.

My first one is on net debt. The joint venture structure with Duratex, I think, makes the net debt shown on Bloomberg on a nominal basis a bit misleading. Can I just ask how I would go about calculating a true net debt figure for Lenzing at the time of completion of the Brazilian pulp plant? Would it be right to take the EUR 1.1 billion of construction cost, times that by 67% for the total debt financing component, and then times that by 49% for the Duratex component, and then deduct that off a nominal net debt figure?

Actually, I think, overall, the math you just elucidated is correct. Actually, for the next 2 years, we will do have this mismatch. We will have all the net financial debt out of the project in the balance sheet of Lenzing. And whilst actually this mismatch will only be gone once we start up the site in Brazil, then, of course, EBITDA will be also in our profit and loss statement. And then it matches also, of course, the full financial debt. Maybe one more comment in this regard. Actually, the -- all the debt with regards to the project is guaranteed by the sponsors according to the shareholding. So actually 49% of the debt is being guaranteed by Duratex and 51% is being guaranteed by Lenzing.

Could I ask a follow-up question on the dissolving wood pulp market? Lenzing is operationally leveraging itself up quite a bit to dissolving wood pulp prices with this investment. I was wondering if you could comment on the supply-demand outlook for dissolving wood pulp for the next 4 to 5 years. I appreciate Lenzing is, in any case, the lowest cost producer. But is there any chance of this improving? Or is this likely to -- are we likely to stick around $600 a ton for the time being on prices?

I think if we look at the outlook of leading consultancies like Hawkins Wright and so on, I think the conclusion is that dissolved wood pulp prices of the current level are completely unsustainable and that they will go substantially up. I think historically, we saw prices of around $900 being the average over sort of the last 20 years. If we look at the cost situation in dissolved wood pulp, frankly the costs are structurally not changing dramatically because the biomass, particularly at many of the Asian players, has more the tendency to go up rather than down. It's also part, I think, a consequence of climate changing. A lot of the Asian, these old wood pulp mills are dependent on chip imports from either Australia or part of Indonesia and part of Thailand. And I think that expectation is that structurally those will rather go up. Another important equation in there is the paper pulp market. We always need to bear in mind that quite a portion of the total dissolved wood pulp capacity has a swing nature and can swing in and out of paper dependent on, let's say, the situation. At the moment, clearly what does not help is that, I think, also due to COVID and also the paper industry is impacted. But long answer to your short question, Mr. Bray, structurally we will not see those prices.

And a final question, a short one. Would you have any guidance or comments on the tax rate to be expected for this year, given the volatility in earnings and the performance in Q2?

Thank you for the question. I mean, the answer is not an easy one. As I elucidated in my presentation, we do see now a significant impact out of our Brazilian joint venture on our tax rate. So only once, actually once you have come up with an assumption on the real, actually you are able to determine actually the tax rate for Lenzing group. On a -- let's say, if we disregard the FX fluctuations for the time being, in the very long run, actually, of course, we should be coming very close to the nominal tax rates we face in the countries we are having our major operations. So that would, in most cases, then be 25%. However, in addition to that, actually then once Brazil would be up and running, of course, Brazil, we would rather have to calculate it for around 34%. And with regards to our operation in Thailand, there is quite an attractive tax incentive scheme in place, which would basically end up with, for the first couple of years, no taxes to be paid. So actually at this point in time, especially for 2020 I think, it is really, really difficult to come up with the tax rate and to predict it. However, in the long run, as I said before, I mean, I think we should be coming quite close to the nominal rate.

Next question comes from the line of Teresa Schinwald with Raiffeisen CENTROBANK.

Most of my questions have been answered, but one big complex remains. I'm very glad to hear that your projects are on track. But could you give us an update, what you hear from the competitors from their capacity additions? What's going on? What's expected? And maybe even about conversions to high whiteness products in China.

Okay. So if you look at the different product groups, I think we -- different projects in Brazil at the moment have different fortunes. I think some are more impacted by COVID-19, others are less impacted by COVID-19. But overall, I think the big projects that have been announced and I think are some with more delays, some with less delay, are progressing. What we do see in China on more the specialty fiber side is that we continue to see announcements on the lyocell front that, in part, we take very serious, others we take less serious. But I think the picture, as we also painted it over the last quarters, remains that we will see on the lyocell side more competition than what we had in the past. We feel well prepared for that. But in itself, that is to be expected. I think on the viscose side, we do not see any further capacity additions around the corner. There are one or two projects in the pipeline that are close to finalization, one of them in India. From all the intelligence that we gather is delayed or, let's say, is being not pushed now to finalization. So there we see some delay. But overall, I think for the next years, we don't expect any structural additions of viscose capacities to come, given the poor capacity utilization in the industry.

And one more accounting question. Am I right to assume that your outlook for the upcoming 2 quarters is based on current exchange rate dynamics, in particular with regards to the U.S. dollar?

Correct. Correct. I mean, yes, U.S. dollar, of course, is the currency where we usually do have the biggest net exposure. However, as I think now has been pointed out several times, please do not forget actually the impact out of the Brazilian real.

But U.S. dollar hedging strategy remains unchanged.

With regards to our operational results, actually the hedging strategy is unchanged. We do have this -- it's difficult to translate now into English. We call it 1/3 strategy where we hedge actually 1/3 at the time we do our budget. We do hedge 1/3 on a rolling 12-month basis. And the remaining 1/3 actually remains open. That is unchanged. Actually, there has been no change compared to last year or the previous years.

Your next question comes from the line of Roland Konen with Value-Holdings.

Only one is left. It's more technical question. With regard to your cash flow statement, there's a line of capital increase of EUR 35 million. Could you please elaborate a bit what's behind that?

That is, of course, also coming out of our Brazilian joint venture. Whatever equity is being contributed from our Brazilian partner, that shows up as an equity increase in our cash flow statement, of course.

[Operator Instructions]. The next question comes from the line of [ Ike Gunter ] with [indiscernible].

We have heard a lot of the COVID-19 from scientists and et cetera. And you mentioned it always for your business. I have a crazy question about yours very strong in specialties. Is it possible that you can bring material what is as basis from us for people who are shopping and going out, they don't like mask? Is there -- or is it only a crazy question from me.

Mr. Ike, I think the -- there is actually quite strong sales of Lenzing's wood-based cellulosic fibers into hygiene projects at large. So that starts with wipes, it goes into other hygiene products, which all have benefited. Lenzing has, in the second quarter, also started actually actively with the production of mouth and nose masks as well as FFP2 mask to actually support the Austrian and now also increasingly the European public. In this joint venture, where Lenzing holds a bit above 50%, we also see a possibility to introduce materials of Lenzing on the medium to long run. However, it is not something very short term. However, where we do see our products being used, if you see consumers with textile masks, not with the typical blue or green sort of more medical mask, with textile masks, there are products, both lyocell, viscose are actually pretty popular. And that is also something that we actually actively promote. I would like to make one comment, which our Investor Relation had received online because it seems that my comment on dissolved wood pulp might have been not clearly understood. What I tried to express was that the current low prices, where we have price around $600, are non-sustainable prices and that we do expect prices to go up, not the other way around. Good. We don't see any further questions in the pipeline. I would like to express my thanks to all investors, banks, analysts and your continued interest in the Lenzing Group. I hope you do the same as how Lenzing people and primarily keep yourself and your families safe in this challenging environment. We, as Lenzing managing board, will continue to do our utmost to sort of guide, I think, our operational teams to fulfill the mission of Lenzing to turn ourselves in a specialty fiber company based on sustainability as the major theme that we support. Innovation and branding will continue to play a crucial role. It has been the most difficult market environment that Lenzing has seen for decades. However, we are at the same time very positive that Lenzing is learning a lot in this period, becoming fitter and more agile in this period, and that the successful execution of our projects, the successful execution of our strategic transformation will continue to strengthen the group and will actually provide a lot of joy to investors, employees as well as everybody who looks at Lenzing. Thank you very much for your interest.

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.