Lenzing Aktiengesellschaft (LNZ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome, and thank you for joining Lenzing Group's Q3 investor and analyst call. [Operator Instructions] Your hosts today are Stefan Doboczky and Thomas Obendrauf. I would now like to turn the conference over to Stefan Doboczky, CEO of Lenzing. Please go ahead.

Good morning, everybody. Stefan Doboczky. Thank you very much for joining us for the third quarter results call today. From 3 months back, we were reflecting on second quarter. And at that time, we said second quarter likely was the trough of the year with the pandemic in, let's say, full swing and impacting us. And indeed, I think third quarter was significantly better. Revenue up some good EUR 40 million versus the same quarter before, EBITDA up some good 50% versus the quarter before. Now we stand at EUR 1.195 billion year-to-date on revenue and EUR 140 million year-to-date on EBITDA. Overall, strong improvement versus Q2 driven by both demand and I think some price bouncing back on the viscose side. COVID-19 continued to impact on the overall industry. We saw us sailing well through the way we managed our staff, not impacted in our operations. And overall, I see, we -- I think we also see that in the market we see demand coming back. Particularly, I think, on the viscose side, we saw next to demand also prices coming back, and I think nonwoven demand remains robust throughout the quarter. Our strategic projects, we give you today some more color to it as we move closer and closer, I think, and make further progress on our construction side. We remain very committed to all our ESG targets, to our sustainability road map, and we were very pleased to -- are now within the top 10% of the paper and forest product sector of ISS with the ESG rating and that we again could come up with innovations, namely carbon-zero TENCEL fibers, both from Modal as well as lyocell, to underpin our innovation leadership when it comes to sustainable fibers. As mentioned in my intro, our guidance that we gave in Q2 was confirmed. So indeed, second quarter was the trough of 2020. Q3 improved, and we expect a further quarter-on-quarter improvement in Q4. The area of specific focus, and again, we'll also spend more time on that in this call, are the expansion projects in Brazil and Thailand as well as everything around our balance sheet. COVID-19. We have not taken our eyes off the goal throughout the whole summer. The initiatives that we have put in place and that we shared with you already in spring, we started with it actually in February, we continued throughout the whole year. And as a consequence, our organization did sail very well through the pandemic so far. And that's in the light of significant construction projects with some good 7,000 people now in Thailand as well as in Brazil. And all in all, I must say, I'm very pleased how Lenzing staff has been so far managing this difficult situation. And all the measures that you also hear from other companies, we are deploying as well. And we stay in very close contact also with our value chain partners. So far, so good. I think we sailed well through the crisis. Now the pandemic in itself keeps us very busy, but it also dealt us some opportunities. And I spoke already in the previous calls about this. Our Hygiene Austria venture, where we produce hygiene and protective equipment, different kind of specialty face mask, continues to do very well. We received the respective certification, both CE certifications, ISO certifications, and now we have the full slate of Type I, II, IIR protective masks. We are very pleased with the progress that we made on FFP2 masks. We're expanding the portfolio. And now the 12 million of MNS masks, 3 million FFP2 masks, given the, let's say, the second wave we've seen in a number of countries is very, very well filled. And we are very pleased with the progress that we're making there. Again, COVID-19 dealt us quite amount of challenges, but we were using also the opportunity side, in my opinion, very well. If you look a bit more from a helicopter view at the 2 big markets, what is there to say? We see retail sales recovering further, China literally at or even slightly above pre-COVID levels, we see North America and Europe also coming back. Having said that, I think we also need to be mindful of what the new lockdowns will bring us. But overall, the sentiment in retail for clothing has been significantly up versus the same period of last quarter. On the nonwoven side, generally, hygiene products continue to do very well, but there has been one development that over the last quarter gained more shape and form, and that's the EU single-use plastic directive. Now it's a major piece of legislation that the European Union is working on. And there was a heated debate what all falls under the definition of plastic, what doesn't. And we are very pleased with the progress that we are seeing at both viscose, but also all, of course, our specialty fibers are very likely not to be classified and are going to be classified as sort of recommended products or alternatives to plastics. Now the specification for plastic definition will end in the course of this year. And then by mid of next year, beginning third quarter, we expect this law to become effective. And that we consider as a potential, very interesting demand-booster for all the nonwoven products based on cellulosics. Let's now switch gears from a more helicopter view of the market trends, COVID, and dive a bit more in depth into the business. I already mentioned in my introduction that we did see in the third quarter viscose prices coming back. Textile viscose prices increased some good 28% from its lows in the second quarter. We touched a low point of CNY 8,300 in August, and we are now at the level of around CNY 10,600 to -- sorry, CNY 10,600 per ton. Main trigger was indeed stronger demand. We also saw operating rates up from a level that was well below the 70%, now at 75%. We are still not there at the average rate that we typically would see. However, it's a substantial step into the right direction. What was particularly pleasing is that the inventory levels went down to a level that was even below the long-term average of 17 days. And if you just think back a quarter, we had inventory days even north of 30 days. Cotton. Also, we see prices benefiting from improved demand, some concerns on the weather front and how it might affect the harvest for the next season. And as a consequence, we did see cotton prices also moving up. Polyester remains comparatively low. However, we also saw some spike due to increased demand, and we stand now at somewhat above CNY 6,000. On the right-hand side, you see also from a margin point of view these higher prices have a substantial impact. We see for the first time for quite a number of quarters that actually the profit and loss, as it is reported by the consultancies in China for the industry, is moving up. We're still in negative territory, but we are now on the more best level that we did see for more than a year in the industry. And also on the conversion margin over pulp, we, for a long term now, see a substantial tick-up, also indicating that the industry fundamentals are gradually moving back to a somewhat more normal level. Having said that, we are still in a territory that is very difficult for the industry. However, as we indicated also last quarter, we are moving in the right direction. And I think, with the inventory days that we see, with the demand pattern that we see, with the good traffic that we see in China, I think we are confident that the low points that we saw in Q2 will not come back anywhere soon. Our specialties continued to do well. And I think, overall, we, of course, are also impacted by the low prices on the fiber basket. But if you look at this chart, we also see that the Lenzing specialties continue to sail comparatively well. And please never forget that, in our specialties, we also, of course, include products like ECOVERO, which are priced on the viscose plus base and, as a consequence, also impact the 6-month average that you see here. All in all, we were very pleased with the progress that we were making. Good. This time, we would like to make a more of a deep dive now into 2 major projects because we feel it is important for you on the investor side, on the analysis side, to have more transparency on the progress, more transparency on the debt financing, how we also draw down, because it might help you in your modeling. Again, as a small reminder, Lenzing holds 51% in Lenzing Duratex Cellulose, in LDC, which I will use as an abbreviation, 49% on the Duratex. We are building there with 500,000 tons, the single-line DWP mill, which is the largest of its kind. The industrial CapEx of $1.38 billion is well underway. Some $950 million are still remaining. 28% of the project are by now complete, and we will be the absolute cash cost leader in the industry with cash cost of around $300 per ton. Again, and it's also something that we mentioned before, long-term average of the dissolved wood pulp price was in the order of USD 900 per ton. And we expect that by the end of 2022, we will be at full run rate with this world-scale production facility. On the financing side, 37% of the financing is based on equity, 63% on debt. And from the USD 115 billion -- sorry, USD 1.15 billion of debt, everything is fully committed, $500 million tranche A financing of the big international lenders, IFC, IDB, multi-laterals; $500 million of the commercial banks under tranche B covered under the IFC, IDB umbrella; and $147 million by export credit financing from Finnvera. But please be reminded that, from this debt, our economic share, the amount that we guarantee is 51%. We have a very, very favorable covenant structure, and Thomas will speak later on a bit about it, but our repayments will start in December of 2023. The construction is very well underway. You see here a couple of impressions of the evaporation section, wood handling section, also the section where we take the water off the river and the recovery and biomass boilers. And note that you will be able to model a lot with the 5 indicators here on the right side, but it signals to you, first of all, the magnitude of the project, but also the very positive progress we are making. Because, particularly with piling, which is a major activity in preparing the ground pipeline work, we are very much ahead of schedule. And the others, underground, paving as well as concrete, we are at schedule. Overall, we are very pleased with the progress at the construction side. On the next page, still a couple of photo images on fiberline, white liquor plant, the generators as well as the pulp dryer. And you get an impression of the magnitude of the site over there, which is, for those of you who have ever been to Lenzing, bigger than the total site of Lenzing. The progress overall is well on track. What was for us an important milestone was to come out of the ground or out of the ground before the rainy season start, which is typically around the November-ish time frame. And with all the relevant sections of the plant, we are now above the ground that allows us to continue construction also during rainy season without any negative impact. And that, I think, is, for us, a major step in the derisking of the execution. Overall project progress, as said, 28% at the end of the quarter; engineering are 70% completed; procurement, 32% completed; civil construction already 38% completed; and erection and commissioning also started. We also draw down with the first disbursement on our debt financing with EUR 72 million. And last but not least, all our EPC and EPCM supply contracts are in place. 90% of the CapEx is committed. So all in all, very solid progress. If we look a bit on the spending profile and the debt drawdown profile, some $520 million of the CapEx will be spent this year, $600 million next year and the remaining part in 2022. From a debt drawdown schedule, we will draw down $325 million debt this year. Again, please bear in mind that our economic share is just around 51%. In 2021, we will draw down $540 million, again, our economic share, 51%. And in 2022, then the remaining of $285 million, again, our economic share, 51%, with an $145 million. The cost position, very attractive. Here, you see modeled the overall industry curve. I think it's not a lot of rocket science to do a bit of math with 500,000 tons of capacity; cash cost, $300; long-term average of $900 on pulp price. And we expect by the end of 2022 to be fully ramped up. For those of you who are not so familiar, the integration advantage is 1 ton of pulp yields 1 ton of fiber. As a last point on the project, maybe some more detail on the financing, many of it I mentioned already. Currency is the U.S. These are all U.S. dollars loans. They're hedged for the construction phase. I already mentioned that the repayments will start in 2023. The maturities are 2029 and 2031 and a little bit still then in 2033. So very long-term financing. And as mentioned, we have a very attractive covenants package with no affirmative covenants, only negative covenants, and you see I mentioned the most important ones. Good. Let's switch gears and look at almost the other side of the globe, to Thailand. Also our Thailand project is fully on track. Again, as a reminder, we are building there 100,000 ton lyocell plant. It's the largest of its kind. It will be a strong boost to our specialty exposure. We announced that the total CapEx is EUR 400 million, some EUR 250 million of that are remaining. The financing is 25% equity, 75% debt. In this case, of course, it's all part of Lenzing because we're 100% owner of it. The project is fully on track, with engineering literally done, construction, more than 1/3 underway. And we are very positive about the ramping up by -- towards the end of the year. And I think, in the second half of 2022, we expect that the plant will be running at 100% output. Essential also for our ESG discussions, we have secured the bioenergy at the site. It will be a carbon-neutral site. And as I mentioned at the announcement, the tax incentive scheme is very attractive, giving us for a number of 0 tax rate and thereafter 50%. Maybe also there a bit to the CapEx split and the debt drawdown, $230 million of CapEx will be spent this year. The remainder of -- will be spent next year. Debt drawdown, some $210 million this year, $160 million next year. Also here a couple of pictures on the construction side. You see the production building. We're already now at level 5 in the construction. We have more than 3,500 people at the construction site. It's a major construction place. And so far, I must say we are very pleased. If we put now the 2 things together, we see both projects really changing the nature of the company. These are transformative projects for the group with very strong free cash flow generation from '22 onwards. T3, as mentioned, full run rate expected by the second half. Our pulp project will be then contributing in full as of Q4 2022, and the consequence is a substantial group margin expansion due to the backward integration, but also the higher specialty share. I stress that because I think it is particularly during the period of construction when we don't have yet the EBITDA of the Amadeus joint venture of our pulp venture hitting our numbers. But the way I think we need to look at the debt is important to focus on the economic share of the LDC debt. And that is something that we will report also going forward with more focus on because we're convinced that this is, in essence, the right way for the next quarters to look at it. We will then have a very speedy deleveraging. You -- I will get back to this also in reiterating our targets midterm. The leverage will be again below 2.5x. Our liquidity position remains very strong, comfortable cash position. We have committed financing for -- all the projects are fully financed. And as such, we feel we're in very good shape. So with that, I would like to hand over to Thomas to take us through the financial and more some in-depth view on the balance sheet.

Thank you, Stefan. Hello, and welcome also from my side. So let me guide you through the most important financial numbers for our Q3 and the first 9 months of 2020. And let me start with revenues. Revenues came in with EUR 385 million compared to EUR 344 million in Q2. That's an increase by about 12% or EUR 40 million. With retail sales recovering further and China being back basically on pre-COVID level, we saw a strong rebound of our textile fiber business. The revenue by application clearly confirms that, I mean, just looking at the share of textile fibers in Q3, we are now back at 50% and nonwoven fibers at 40%. With regards to our specialty fiber share, we are now at 61% compared to 50% the year before. Moving on. Actually, in 2020, we, of course, put a huge focus also on cost efficiency. Back in Q4 2019, we launched our Heartbeat for Endurance Efficiency program with the targets to realize the high double-digit euro million savings in 2020. And as you can see from the chart on the right side of the slide, we could reduce our personnel costs by about EUR 30 million compared to 2019. We could realize these savings with selective hirings, reduction of overtime. And for sure, and there's also some impact out of short-time work. We could also reduce our other operating costs by about EUR 20 million by cutting our discretionary spending and optimizing our repair and maintenance activities. And we have also been quite successful with regards to our cost of materials and supplies as cost in this category actually decreased in percent of revenues. Costs will, of course, remain our focus point in '21 and '22 as well. And actually, we will focus on operational excellence and continuous improvement, and we will target an impact of EUR 50 million by 2022. Moving on to EBITDA. Actually, EBITDA came in with close to EUR 44 million. That's an increase of more than 60% compared to Q2 2020. EBITDA margin improved by more than 3 percentage points, and that is, of course, a result of higher revenues and operating performance in Q3 compared to Q2. With regards to our first 9 months, actually, we are now at EUR 140 million, and EBITDA margin is at 12%. Moving on to EBIT. Actually, on EBIT level, of course, we see the same development as for EBITDA. EBIT is now back in positive territory with slightly more than EUR 4 million. And year-to-date, we are now at EUR 22 million. With regards to net profit and earnings per share, actually, we are now back at breakeven level. There's one thing, actually, which you need to keep in mind in this regard, which is our deferred tax expense, which is, of course, impacted by the foreign exchange development. Just as a recap, for our sites in Indonesia, in Thailand and in Brazil, actually, we have defined the U.S. dollar is our functional currency. So whenever the U.S. dollar weakens, this not just has an impact on our equity via the FX, the foreign exchange translation adjustment, but it also has an impact, of course, on our deferred taxes. Moving on to cash flow and working capital development. Operating cash flow is now back in positive territory, whereas free cash flow is still negative. And of course, this is driven by the CapEx to our strategic projects in Brazil and in Thailand. With regards to our working capital, actually, we already see an improvement there in terms of percent of annualized revenues. I mean for sure, we are not there yet. However, we are very sure that we will see further improvements over the next coming quarters. Moving on to net financial debt. Actually, the net financial debt -- the reported net financial debt amounts to EUR 823 million. And that, of course, includes the fully consolidated joint venture debt. That means that the amount also includes the share that is being guaranteed by our joint venture partner, Duratex. So as the first loan disbursement has already taken place in September, so when you adjust the reported net financial debt by the amount guaranteed by our joint venture partner, you then end up, of course, with an economic net financial debt. And for end of September, that amounts to EUR 787 million, which, of course, reflects the underlying situation. Last but not least, some balance sheet numbers. The chart shows the development of our reported net financial debt and the economic net financial debt. Net financial debt, of course, increased due to the CapEx of our strategic projects. With regards to equity, equity now stands at EUR 1.4 billion. The reduction is caused actually by the foreign exchange development, the foreign exchange translation adjustment, and on the other side, by the development of our cash flow hedges. And with regards to liquidity, actually, as per end of September 2020, we had liquid assets of close to EUR 600 million available. And on top of that, we have unused credit facilities of approximately EUR 1 billion, bringing the total liquidity cushion to a level of around EUR 1.6 billion. With that, actually, I hand back to Stefan for the outlook.

Thank you very much, Thomas. So Q3 better than Q2. We did see some positive developments in the overall market. However, the picture remains not necessarily the most easy to interpret one. But overall, we feel confident that quarter-on-quarter, Q4 2020 will be better than Q3 2020. We do see an improved sentiment. But of course, we just need to read the paper over the last couple of days with some of the lockdowns in the various countries. There is uncertainty due to the '19 pandemic. We feel positive with the developments that we see on the commodity fibers. We see positive -- we feel positive overall with the demand development. But again, all with the disclaimer, COVID-19 pandemic does go up and down, and we need to see how this plays out. We will remain very strongly committed to continuous improvement, operational excellence, full focus on our expansion projects in Thailand and Brazil because we feel that next to a very strong operational performance, next to an excellent performance on the 2 construction sites, we have a couple of very positive catalysts in the next quarter to expect. One, I already mentioned the EU single-plastic directives. We feel that Hygiene Austria increasingly starts to be a contributor to the Lenzing Group. But more importantly, I think also that on the viscose side, we do see operating rates coming back. We don't see any major capacity announcements in the pipeline. And all in all, I'm somewhat reminded of the phase when I joined the company just coming out of the '13, '14 period, where I think times were not necessarily easy, and I think we do see some silver linings on the horizon. Midterm, you see here the same slide that I showed when we were discussing the full year results when we did our strategy update. The strategy remains our strategy. We focus on specialization, we focus on vertical integration. Sustainability is the guiding force of the company. We spent a lot of time and emphasis to work on our ESG ratings. ISS is in -- we are awaiting a very positive report from Carbon Disclosure Project, so CDP. That is something that we would expect in December. Midterm, our targets remain intact. Again, please be reminded what Thomas said before, what I said before, we have been using those figures here on the basis of full consolidation. So LDC in at 100%; EBITDA, EUR 800 million; ROCE, above 10%; leverage, again, then on a fully consolidated basis, below 2.5; and the strategic targets with the 2 investments, we will boost our specialty share well above 75%; dissolved wood pulp integration, above 75%. For some period, we might even become a net seller and targeted, and personally feel very strong about is our CO2 emission reduction over 40% per ton of fiber and pulp that is being sold. With that, we would like to thank you for your interest and open the floor to questions. Operator, please.

[Operator Instructions] And the first question comes from the line of Christian Faitz of Kepler Cheuvreux.

Yes. Not an easy day to report strong results. I have 3 questions, I would ask them step by step. First question would be, can you comment on the current lyocell price and supply/demand at present? And where do you see prices in lyocell going into 2021?

Lyocell prices, we don't report separately. I gave, I think, some guidance last time. We did see also our specialty prices, including lyocell prices, coming down as cotton, viscose, polyester were all at or close to historic lows, and we need to make sure that we stayed in the various collections. Now if I look, however, at the conversion margin of pulp, what we saw in lyocell prices, I must say that I found the performance very acceptable and well. What we do see now on the competitive front, interestingly, we do hear that 2 of the lyocell projects are currently being postponed. Interesting, because it seems that some of our competition maybe sees our reaction as a strong sign also of commitment. And overall, I must say that we -- again, if I look now at the start of the fourth quarter, I feel that the pull of the market is remarkably positive.

Okay. Great. Very helpful. Second question. You had a very helpful chart on margin development in your viscose pricing. But since then, I guess, as of the last few days, key input costs, such as caustic soda and dissolved wood pulp, have actually been up. Would you believe that higher fiber prices still outweigh the cost increase?

I think, as I showed on the chart of the margin development, overall, we saw the margin -- the conversion margin, as a consequence, the profitability of viscose players improving. Structurally, you're right. Dissolved wood pulp is now following course. However, higher dissolved wood pulp prices have always been helpful for the viscose industry, have always been helpful, because typically, the majority of the players is not backward-integrated, and that helps driving viscose prices further up. All in all, the fortunes for the viscose industry and profitability has improved, and I would expect, at least, again, with all the disclaimers that I made before, more steps in the positive direction than more negative impact on that.

Okay. Great. And last and final question, please. We've seen operating rates go up. But looking at your assets, is it right to assume that your capacity utilization continued to be rather high throughout Q3 and also going into Q4 now?

As I mentioned, I think in the August call, we did have during end Q2, Q3 also some lines that we took out of operation because we simply saw the impact of COVID. But indeed, I think you should expect that this -- that we see maybe an even more pronounced, let's say, curve up, as you saw in some of the demand and price charts before. So I think we are getting to full rate as we speak.

The next question is from Markus Mayer of Baader-Helvea.

Three questions from my side as well. The first one is on your current run rate of approximately EUR 200 million based on the 9 months results of 2020. Can you elaborate the path to your midterm targets of EUR 800 million by 2024? And also, given the current run rate, it's a bit below where it was when you first announced the targets, how comfortable do you still feel with this EUR 800 million target? And related to this, also, are you comfortable that the 2021 and 2022 EBITDA consensus of EUR 270 million for '21 and EUR 356 million for 2022? That will be my first question.

Okay. Thank you, Mr. Markus, for your question. I think the first one, indeed, if I remember correctly, in April, I gave some guidance on more or less the bridge to the EUR 800 million target. Again, basis fully consolidation. I think, number one, from the dissolved wood pulp side, I think it is fair to assume from where we are today, from EUR 200 million to EUR 250 million, if you look at the total viscose market side, mix side, operations side, I think it is fair to assume from where we are now, indeed, that one has increased. So I think we would expect by 2024 a more pronounced viscose recovery, but mix and operational efficiency effect also will make its contribution. So there, I think, to assume some EUR 200 million and EUR 250 million and the specialty side where we would be in the EUR 100 million to EUR 150 million. So those 3 buckets I think you would need to use. Now in terms of consensus, we will not comment or give guidance now on 2021. But let me make one remark on the '22 consensus. I think from some of the information we shared today, if one does the math on our Brazilian pulp venture, you should come to different figures and, let's say, different higher figures than that because I think that math, personally, I don't understand. But again, I'm not doing the consensus. It's part of your work. We don't give guidance. But I think it is worthwhile to look at your '22 consensus because I think that, at least, I wouldn't be able to calculate if I were to -- would be doing the math.

Yes. I know that feeling. The second question would be on this margin improvement from the expansion projects, but also from the more focus on specialties and also the cost measures you just have elaborated. What kind of EBITDA margin should we see from late 2020 on -- 2022 onwards when particularly the projects are fully ramped up?

Again, I would hesitate to give an EBITDA margin target. I think from the transparency that we provided on pulp, it should not be too difficult to do the math. I think you heard Thomas saying that versus the 2019 baseline, we will add another EUR 50 million now on the operational efficiency side. And I think that the estimate that has been out there on our specialty side, they were not completely off. I think if you would sum it up, there will be a substantial EBITDA margin lift when those plants are up and running, but I would refrain from giving specific figures.

Okay. And then my third question would be more on the market side. So since the outbreak of COVID, we've seen in many newspapers statements from C&A, from Deal, H&M, Zara, whatever, all large brands, which are emphasizing then the shift of the products towards sustainable raw materials to sustainable products and bio cotton or also viscose initiatives. Has -- was there due to this pandemic a shift in consumer, at least, and the producer sentiment towards this course? Or is this for you just an ongoing trend and then not really something which has accelerated over and over the pandemic?

I will put it in 2 baskets, Mr. Mayer. I think what we saw full term was a strong focus on price. That, I think, was the first reaction that we saw in the market with more online sale. It was price becoming the major criteria that the brands offered to the consumer as a source of, let's say, differentiation. However, what we see now, and it's a very interesting development as particularly European, American brands come back, the pull on more sustainable fiber is remarkable. We see it most pronounced also on the more eco-friendly viscose offering that we have. You remember ECOVERO that I spoke the last 2, 3 times in detail about. The way ECOVERO came back now with retail coming back even surprised our relatively high expectation that we had. So all in all, I think the mega trend in the industry to more sustainable fiber, more supporting, more environmentally conscious buyers and taking more active responsibility that we see, indeed, more and more pronounced. As a consequence also, we support our brand-building more and more, not just, by the way, I think what we do on the ground, but getting more and more certifications like CDP, like ISS, like MSCI and so on. And I think the feedback we received there is unanimously very positive. We just got our best-ever rating on Canopy, for example. So all in all, I think we're building up the credential to support this development. Sorry, long answer on your third question.

Yes. But if I would have an add-on question. This [ excess ] short-term, strong focus on price, and there was also this big gap between cotton and viscose prices, which meanwhile closed a little bit, but it's still there. Is there still the strong price focus of the brands? And was this one of the reasons why there was then this price improvement in the standard viscose fibers? Or it still has this more to do with underlying market situation of a recovery and not so much of this gap situation?

I think it is fair to assume the textile industry will remain a cost-conscious industry for quarters and years to come. However, the consumer more and more demand certain type of fibers that force producers to do something different, force converters to do something different. And I think that structurally will move the industry in the right direction. But it's more of a long-term trend. What we now see on viscose is more the consequence of demand patterns, low inventory levels in the chain and, I think, a more solid situation in the overall demand portfolio of the brands. But please don't forget, viscose and particularly our specialty fibers are niche fibers in the overall basket. I mean, we are very much building on the momentum that we see from environmentally conscious buyers and environmentally conscious brands. And there, we have significantly less competition than in the more commodity areas.

The next question comes from Sebastian Bray of Berenberg.

I would have 3 of them, please. The first thing, on the details of the lyocell project delays. Could you give an idea of what capacity has been delayed and for how long? And could I ask on the balance of capacity additions over the next 2 to 3 years? Including the 100 kilotons from Lenzing, what is the approximate amount that will, in your view, come to market?

I think on the capacities that we see shifted, one, I think, it's called Golden Hubei. The other one now does not come to mind, but I will ask Stefan Doboczky to provide you with the detail. The overall picture that we see on the lyocell side is that we would expect for the coming 2, 3 years a substantial capacity increase up. We don't give today a detailed breakdown of that. But very likely, in the next quarter, we will provide you again with the picture of that.

Yes. Understood. And can I ask about Modal? This has been perhaps a little less discussed over the last 2 or 3 quarters. Is there any potential within the next year or so to add capacity in this area, given that prices historically have been tied closer to viscose and the market seems to be quite tight?

Yes. Part of our strategy is to continue converting viscose standard capacities into specialty lines. We did this very successfully converting viscose to ECOVERO. But also, we have -- as part of our 2024 targets, we assume that we will convert some of our China viscose capacity in Modal capacity. To build greenfield Modal capacity is not something that we have seen in this industry very often because it's very helpful if you actually have a viscose capacity next to it.

Okay. The cost savings, the EUR 50 million that is mentioned in the slides, I remember back in 2015 when Lenzing was completing its last round, there was talk of perhaps cutting to the bone where cost savings were applied. Is it that costs are, in some cases, being reset back to a level below the increases over the last few years? Where exactly are these coming from?

The major areas of cost improvements that we will see comes more from initiatives of Lean Six Sigma and continuous improvement. With Stephan Sielaff on board, who joins us as the new CTO, he was very helpful for us, identifying opportunities that we have in our existing facilities. And I think what we see is a more structural cost reduction, which is not a cutting down, and later on, building up with more structural efficiency gain that we gain we'll have throughout the organization.

Okay. And very last one from me. Dissolving wood pulp supply and demand, would you have any comments on the expected developments over the next 2 to 3 years? Would you expect this market to tighten up as well?

Indeed, I think we would also expect dissolved wood pulp to tighten up. But as I mentioned in my last more in-depth review of the dissolved wood pulp market, there are 3 things to watch. Number one is how the viscose market develops or wood-based cellulosic fiber markets develop. And there we are, in principle, very positive. Number two, dissolved wood pulp investments. We do get a couple of investment next to ours into the market. However, we also see some of the lagging or -- laggard capacities are likely to be made redundant. And number three, very important, is the fortunes of the paper business because the substantial part of the total capacity are swing capacities that can move not on a daily basis but regularly in and out of paper or dissolved wood pulp. All in all, I think dissolved wood pulp will remain an industry where it's very important to be forward integrated into the fibers. And we think that we can really make a difference also both economically but also to the quality of our fibers.

And the next question is from Andreas Heine of MainFirst Bank.

Yes. The first one would be on prices again. How much is the time lag on what we see as spot prices and to your realized prices? That's the first one. Second, nonwoven had a very high demand. Is that something where nonwoven prices could decouple from the viscose price trend? Or are they still very much aligned? That's the first question. And the second one is on the Thailand project. The total capacity, finally, should be 400 kilotons. In your projections for 2024, is that based on the 100 kilotons? Or does that already include the second line?

Okay. First, if you look at spot prices of viscose, it typically takes 3 weeks until we see this on a more broader front reflected, and it's reasonably a bit different. In China, we see it almost immediately. In Southeast Asia, it takes them 2, 3 weeks, whereas in Europe and the U.S., typically, it takes a month or sometimes even a quarter. Specialty prices typically are not directly impacted by the spot prices that you see there. I think it is more a weighing of how shall we price dependent on also the overall competitive fiber basket pricing develops. So -- but for the viscose side, I think it is fair to assume some 2, 3 weeks until things work are being seen in the Lenzing P&L. Nonwoven, we did see indeed different developments over the last 2 quarters. And if you remember still, the second quarter results that we reported that nonwoven prices actually moved opposite direction of textile. That was simply because due to the huge demand. Supply/demand was very different. There was an undersupply of nonwoven fibers. We see this again a bit normalized. It is common that nonwoven prices are some RMB 300, RMB 400 or RMB 500 per ton higher than the textile grades in Q2. We sometimes have way over RMB 1,000 at peak, even some RMB 2,000 delta. So there is not a real uncoupling of it because you still use the majority, the same installations. But given the high degree of cleanliness, sometimes different dryer facilities are required, you can have a temporary different supply/demand picture. When it comes to your second question on Thailand, our 2024 picture does not assume that we have a second plant in Thailand already up and running. It's strategically not completely out of, let's say, the possibilities. Having said that, I think we now are very focused on executing the projects, then focusing on deleveraging, and also making sure that our balance sheet moves now, I think, with our ambition through this transformative period. But the target that we have set are not expected -- are not including the expectation of a second plant in Thailand, even though, as you rightly pointed out, our -- the plot that we have there, the land that we have been preparing some of the outside battery limit, infrastructure, indeed, is designed to add another 3 lines in Thailand.

And the next question is from [ Shanta Shimwald ] of [ Robinson Central Bank ].

It's actually only 1 question remaining, and this is on a kind of midterm outlook for Hygiene Austria as the pandemic seems to be here to stay for a while. If you could give us some revenue outlook for next year, if it continues like it is at the moment.

Thank you for your question. We will not give a revenue outlook for Hygiene Austria. But I think to help a bit get a feeling for the business in itself, normal mouth and nose mask typically sell at around a EUR 0.25 a piece, and FFP2 mask, I think, we're speaking 3 to 4x even more of that price on wholesale level. If you then go to retail, of course, that is a different picture. What we are seeing, and that's why it's very difficult to give a revenue outlook, we are now very well filled in Hygiene Austria. We continue to invest in new capacities. And with enormous success that we have seen now in getting listed at REWE, at Hofer, at SPAR, at all the major retailers, and also, I think, the success that we now have with public biddings, I think that is an important part to bear in mind.

[Operator Instructions] And the next question comes from the line of Lars Vom-Cleff of Deutsche Bank.

Thank you very much for drawing our attention on the EU single-use plastic directive. As you explicitly mentioned it, I assume that you also expect a positive financial impact for you from it. Would you already be willing and able to share your thoughts with us on what impact this could have on your numbers?

Thank you, Mr. Vom-Cleff. No, we won't. But I think the way you need to look at that is the nonwoven side of the business is a very different industry structure than what you see on the textile side. In nonwoven, you have more the likes of Procter & Gamble, of J&J, of Kimberly-Clark and the like who are the major player when it comes to hygiene products, wipes and so forth. Those are companies that when it gets to their reputation as being environmentally conscious with such a legislation in place, I think there will be action. And that's something that we see already in all the preparation and inquiries for this new legislation. If you look at the total impact of the single-use plastic directives on the industry, you don't need a lot of fantasy to say 1 billion ton north of products might end up in this direction. That is not there today.

Okay. And with parts of that coming from you, of course. So in the end, I assume it will have a massive impact on...

It will have an impact on what we do, particularly we have -- is we were just discussing in the question before how does nonwoven business develop, is it uncoupled. This is not uncoupled. It just brings, I think, an interesting catalyst event to the discussion, where are we in supply/demand in viscose, where -- who is well positioned in the area of nonwovens. And in the area of nonwovens, Lenzing has been a traditional leader when it comes to cellulosic fiber sales.

The next question is from [ Smalan Dutayla ] of [indiscernible].

I have 2 questions. The first one, you talked about the fact that textile industry was still a very cost-focused industry. And when we look at the polyester prices driven down by the plastics prices in general, do you feel that it will slow the switch to sustainable fibers or at least that it will burden the viscose price?

Mr. [indiscernible], I hope I got your question right. So the question was whether my statement that the textile industry is overall conscious together with the development that we were discussing before on still more sustainability focus, whether that will slow down the transformation away from more plastic kind of products to more cellulosic type of products?

So I was looking at the polyester prices and the -- do you feel that the fact that it's -- the premium of viscose over the polyester is consequent? Do you feel that it will slow down the switch to viscose? Or that maybe some players will come back to polyester?

Okay. Thank you. I think we are acting in an intra-fiber competitive world at any moment in time in this industry. And yes, low polyester prices don't help our industry, like low cotton prices don't help. So even if we don't directly compete, those fibers do have an impact. And that was one of the reasons why, on the specialty front, we felt we even needed to take action, even though maybe we were not directly impacted. But we were losing, I think, touch with some of the collections. Now low polyester prices today, as a consequence, also impact viscose prices. However, what I do see increasingly on the consumer side is more consciousness for sustainable solution. And I think the single-use plastic directive, for example, will not make the life of crude oil-based fibers necessarily easier. However, the textile industry will remain cost-conscious. That is just in the nature of the industry with very low margins at many parts of the value chain. I will not expect a structural change. However, where I do see more and more momentum is that particularly more [ divestment ] or more [ excellent ] consumers are demanding a more sustainable solution. I think that will structurally help cellulosic fibers.

Okay. And my second question is on Thailand. You have tax incentives. So 0% tax rate. I wanted to know for how much years. And do you have counterparty besides having built the plant?

Okay. In terms of 0 tax rate, we have 8 years, and then we have a subsequent 50% corporate tax rate for another -- I think it's 4 or 5 years.

Okay. And is it automatic? Or do you have a counterparty in terms of emissions, in terms of employment?

I think there are conditions to it, but they are particularly for the second part. The first one, I think there is no condition. Of course, you need to just comply with the general rules and regulations. In the second part, with the 50%, there are certain obligations that we have in educating the local workforce. That is anyhow something that we are already doing because it's part of our normal start-up training of our ready-to-operate team. But in principle, if you do the modeling, I think you can safely put the 8 plus 4 years at 50% into the model.

And what is the rationale for the Thailand government to do that?

If you look at Southeast Asia, the agency promoting foreign direct investment in Thailand is, I would say, after the EDB in Singapore, is the most professional foreign direct investment agency in the whole of Southeast Asia. The rationale is very simple. We are bringing leading technology to Thailand in an area where Thailand today has no history. We are building on the natural resources of Thailand because we are using bioenergy at the plot where, today, there is no proper consumption, and we are creating skilled labor over there. And it's a scheme that is not just open for Lenzing. The BoI of Thailand offers this to also other investors who come with a similar package like we do. That's not a sweet deal for Lenzing. That's a law in Thailand, that if you come with these kind of investments, you just have that.

And we have a follow-up question from Andreas Heine of MainFirst Bank.

Yes. Three, if I may. The -- in nonwovens, if that demand is now going up steeply, how flexible is Lenzing in increasing the nonwovens' capacity? Is that easy to switch that from textile to nonwoven? That's the first one. And maybe you can give an update on the TENCEL Luxe pilot plant, how that's going, and when do you think you might be -- you know enough about the product to go even for commercial scale. And then maybe the last one, on the Brazil project. I don't fully understand how it will work with these biological assets. Maybe you can help me with that. As I understand from your half year report, you have access, whether the -- your partner has brought in assets from -- in kind of trees from the plantation, and you've given a price for this for -- what price of cubic meter? $8 or EUR 8, I don't know remember fully. That would translate to a very low wood price as an input cost. I think that cannot be real. How does it work from having the trees on the plantation to wood chips getting into the -- into your dissolving wood pulp plant?

Okay. First of all, thank you for your question. Nonwoven, there is a certain amount of flexibility that we have in our operational network, but it's, let's say, not without limit. So I think, in our conversion, for example, efforts that we have for our commodity sites in China as well as Indonesia, that does play a role. So yes, we, for example, do expect that we will have more nonwoven capacity at our Indonesian site, but that has its limits in all transparency. Now with TENCEL Luxe, we successfully finished the pilot plant, the second pilot plant. We, also in our new organization, have set up a separate little business unit that focuses specifically on noble fibers around TENCEL Luxe to further commercialize that. Having said that, in 2020, Luxe was impacted by COVID-19 as on the -- let's say, the willingness of our value chain partners to experiment with new products and fibers given the whole pandemic was limited. So I think that is something where we just need to accept. It's part of a longer-term venture. And 2020, we made less progress than what we wanted to have. If we look then at our biological assets in Brazil, maybe from the way our partner brought this into the joint venture, let me clarify. We're speaking here of several dozens of thousands of hectares of land. We will not be the owner of the land, but we have a 50-year long-term lease on that land. And what our partner -- and that is actually what the joint venture just stepped into a contract, extended this contract by a couple of decades, and that's what we have. The second thing that the joint venture brought in is the contribution in kind, but also indeed the biological assets, because it's a plantation that is established where you have trees of 6, 7, 8, sometimes even as of 10 years. And there is a process of of auditing such a biological asset where you literally walk through the forest, take measurements of the trees, you count the trees, you determine the root mass, and that then was valued at the -- at, let's say, the commercial value of that in this region. But please don't forget that one of the reasons why this was a very good step also of Duratex, this was not an area where it was easy to get rid of the wood. So as a [ constant currency part ], they were -- and the trees were growing, but there was no industry that necessarily [indiscernible]. So that was a basis also that went into the valuation. Now the setup will be such that our plant will be in the center of this plantation. And we will have a 24/7 harvesting, rotating, and I think in broad terms, you can assume that every year, [ 6 to the 7s ] of the total plantation is being cut down and enters as wood into our dissolved wood pulp process. And the cost that we then will incur over time are the plantation costs, the growing cost, the harvesting cost. And it's very different than if you would buy the wood from the market. And that is, I think, one of the reasons why it will be very competitive with our pulp facility there, because if you look at the biomass growth in this part of the world, it's a factor for higher than what we have in -- now in Austria or in the region that we live here.

But that basically means you have access to the wood on a kind of cost-plus base, independent from market fluctuations? So it's cost less from the plantation and whatever the fluctuations of wood prices might be. That doesn't bother you.

Correct. And I think that is one thing that we had a lot of strategic discussions and focus on, because I think if you read the various consultancy reports, Hawkins Wright, McKinsey, you name them, there is one unanimous view, and this is that with the climate change, with the changes in the dynamics in Asia, that wood prices structurally will only see one trend, and that's up.

And there are no more questions at this time. I would like to hand back to Stefan Doboczky for closing comments.

Ladies and gentlemen, thank you again for your interest in the company. I think we go with the pandemic and the impact on the textile industry. Not the easiest of all times, I know that a day like this where we're competing with the U.S. election, we have a strong competitor in share of voice and attention. But as a management team of Lenzing, we feel very pleased with where we stand, with the progress that we made in a difficult year. And I think what you also can get from the tone in which we spoke, there is no lack of confidence and trust in the progress we've been making. Thanks for being interested. Looking forward to talk to you soon. Thank you. Bye.

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