Lenzing Aktiengesellschaft (LNZ) Earnings Call Transcript & Summary

A very warm welcome to this investor presentation. Before we start with the real investor presentation, let me give a chance to our new Board member, Nico Reiner, who is for first time in this call to introduce himself. Nico?

Stephan, thank you very much having the chance to get an introduction from my side. My name is Nico Reiner. I'm 54 years old. I am having roughly 15 to 20 years experience as a CFO in different companies as it is family-owned businesses, stock-listed companies, private equity owned companies. And I'm really looking forward having joined the Lenzing team by beginning of this year, and I am very convinced of having a very successful future. So thank you very much for that. Thank you.

Thank you, Nico. With me today are as well my other Board colleagues, Christian Skilich and Robert van de Kerkhof as well as our Vice President, Investor Relations, Sebastien Knus. The year 2022 can be clearly cut in 2 halves. Whilst the first half was actually a pretty solid result driven by first signs of cost increases, but thanks to the good demand on the other half side, we could pass on these cost increases pretty well in the first half. Whilst in the second half, we saw an extremely challenging market environment for the overall industry, but also for Lenzing. We saw on one hand side, a strong drop in demand, especially on our textile fiber side, combined with an increase -- a strong increase of cost on both raw materials and energy. And that was really different to the COVID half. You remember the COVID year, we saw a drop in demand, but in these years, we also saw a drop of the raw material cost. Altogether, we certainly see the second half of '22 as an unprecedented year or half of the year, and we call it internally a perfect storm. At the same time, we are also very positive to see an improvement in the overall market environment in the coming months. And first indications are visible already in Jan and Feb. Of course, when we saw this perfect storm arising, we immediately reacted and started programs to generate on one hand side, cost savings but also on the other hand side, to manage our costs -- cash, sorry. The cost savings initiatives were 2 programs, one called [ Advanced Lenzing ], and other one called [ GO more ] dedicated to our personnel costs. Both programs are very well on track, and they will deliver an annualized impact of around about EUR 70 million. So on one hand side, we saw a business environment with strong headwinds, especially in the second half. But on the other side of the year 2022, we also saw some strategic highlights. First and foremost to mention our 2 milestone projects. Both our projects in Thailand as well as in Brazil were completed in time and in budget despite quite some challenges driven from the pandemic conditions really supposed the entire team, both plants operating and running and will deliver significant earnings in the year 2023. Also, when we look at our sustainability actions and results, we see that we remain the champion of sustainability, and that is also seen by the external world. We again received a AAA from CDP. We again received a AA from MSCI, and we have received the platinum status for -- from EcoVadis again. And for sure, also in highlight is that we successfully completed the search for our new CFO, and we have today, Nico, the first time in this investor call. He started on the 1st of Jan. Now looking at the numbers of the year 2022. While our revenue grew to above EUR 2.5 billion, our EBITDA came only in at EUR 242 million, and a net loss after minorities of minus EUR 73 million was recorded. Despite the high planned CapEx and the weak operating results and the inventory build in the fourth quarter of last year, we still maintain a solid liquidity cushion of more than EUR 680 million. Due to the loss, we decided that we will have no dividend for the year '22. Now how will it be the year '23? We call it a year of the comeback, and the outlook is certainly more positive and assuming a further market recovery as we guided in our ad hoc yesterday, we expect the EBITDA in a range of EUR 320 million to EUR 420 million. On the next slide, I will give you a little bit the guidance of this presentation to what we want to explain in this presentation. We want to spend some more time to explain what really happened in the second half of '22, what we call the perfect storm. Here you see that we have several unforeseeable developments, creating the so-called perfect storm for our company. To be honest, only a few people thought that Russia would really start a war in Europe, leading to an unprecedented rally of energy prices, and at the same token, the demand of the textile industry really dropped in the second half of the year sharply. Let me also be very clear. We at Lenzing took immediate actions and the right steps to control the situation. And that is what we can clearly report today. We are in control, have a sustainable cost-saving program, which is not only serving for the year '22 or the year '23 but is enhancing our competitiveness going forward, and we take care, we take seriously care of our free cash flow. The year 2023 will be our comeback year. Not only because we have done the right adjustments in place, and we can also expect positive contribution from our signature investments in Thailand and Brazil. Both plants are fully invested and fully operational, and they will contribute significantly to the earnings in 2023. Assuming a further market recovery, therefore, we guided to be in the range of EUR 320 million to EUR 420 million for '23. And how will be the midterm future for Lenzing? We are saying we have still excellent prospects for the years to come. We remain absolutely convinced that Lenzing has an excellent position in the market because we have strong products, strong brands and a pretty nicely filled innovation pipeline. And all of that is serving the 2 megatrends of the industry and the markets we are operating in, sustainability and circularity. Both megatrends are actually in the DNA of Lenzing. And in addition, there is a market for specialty fibers, which has constantly grown way above the market average and Lenzing has the right products to serve this highly growing market. And as I mentioned before, with our cost reduction program, we increased our competitiveness going forward. Now let's go into the details, and we would start with the year 2022 and what happened, what we call the perfect storm on the raw material and energy side. And I would like to hand over to Christian to take us through the development in energy and raw materials. Thank you.

Thank you, Stephan. Good morning, good afternoon from my side as well. Yes, development on the cost side. For costs here at Lenzing, both energy and chemicals increased throughout 2022 sharply. The most striking increase was, of course, in European natural gas prices, which increased more than 20-fold in Quarter 3 of last year compared to early 2020 and have only started now to normalize. Natural gas in the U.S. as well increased, but much less than in Europe, but still more than [indiscernible]. Coal prices in Asia as well have roughly doubled. On the chemical side, as you know, caustic soda is the key input for the viscose process. Prices in Asia more than doubled, but most strikingly, the European market prices reached all-time highs based on the supply/demand imbalance in the chlorine industry and as well driven by the very high energy costs. To visualize the impact of those 2 trends just outlined. Lenzing's production costs have increased by 35% in total versus the full year 2021. Furthermore, our cost split for production has shifted with energy representing of 17% and chemicals 20% of our total production costs. By that, moving over from the cost side to Robert with an input on the demand side.

Thank you very much, Christian, and also a very warm welcome from my side. Now this perfect storm year, as Stephan already elucidated, was supposed to be a great year. When the year started off, most of the industry leaders in the fashion industry expected 2022 to be a very, very strong year. The executives, as you can see here, more than half the executives expected that the year would be better or at least the same, even 91% than 2021. So now that optimism resulted in quite some unfavorable decisions. The brand and retailers ordered a lot of merchandise. They expected that the consumers would come back to the stores and buy these goods. And this is also a correction then of the supply chain hiccups that occurred during the COVID crisis as well as the various logistics problems that we had with Suez Canal and, of course, in the Shanghai port that was blocked for a long time. Now this then resulted in significant higher inventories throughout the value chain. As you can see on the next slide, the closing inventories, and here, we have an example now from the United States only who is quite transparent with this data, the closing industry in values had reached an absolute record high somewhere around September, October of 2022. The lighter green area at the bottom shows you the average range between 2012 and 2019, you can say it was fairly stable. It was always around, let's say, the low end of around 65 to the higher end of the 90, but never has it been such a steep increase as we've seen at retail level than in 2022. This was then driven by the optimism of the brand and most of them were caught off guard by this very sluggish consumer demand. Their reaction was also very rapid. They reduced ordering and even orders that have been confirmed were canceled. And this, of course, trickled down all the way through the value chain, which led to a declining demand for the fabrics, the yarns and of course, ultimately also for suppliers like us on the fiber side. Now the optimism that was mentioned before, if you look here on the left, has resulted in a significant decrease, both in U.S. and Europe in the second half of this year. So this is something that hurt us, as I said, as an overall industry. And on the next slide, you can see that is reflected in the ITMF mood of the industry index. The optimism in the beginning of 2022, and these are people throughout the value chain. These are people that are like us fiber producer with spinners, machine makers, everybody in the textile value chain is providing its input. Anything that is above 0 means it's very, very positive. Things will be better. You can see that until May, the mood was extremely positive. And certainly, in July, it tipped around with an absolute low. Things will get worse even in November of 2022. This is also reflected on the operating rates of the viscose industry. You can see in the middle slide that the operating rate of the viscose producers in China. Steady operating rates around 80%, quite business as usual in China and then suddenly a drop in September to a barely 50% operating rate with a slow recovery than by November. And again, a drop, of course, in preparation of the Chinese New Year in the beginning of '23. The prices followed the same trend. Robust demand increased the prices to EUR 15,500. Also, please mind the comments that Christian Skilich made about the increases in chemical costs also, of course, resulted in the need for the Chinese producers to increase the viscose prices to an absolute record of EUR 15,500, but since then have come down to a level of the EUR 13,000 of this year. What does it mean for Lenzing? Overall, we saw a fiber demand drop of 10% in 2022. It was approximately 100,000 tons of less fibers that we managed to sell. And this specifically has been, of course, in the textile industry. Our nonwoven industry remained very solid. Also, this confirms clearly our strategy to serve both the textile and the nonwoven industry. Now this is not typical for the viscose industry. The same trend you've seen throughout all the different fiber producers, cotton, for instance, also had a similar drop than what we have seen here on the viscose side. So with that market overview, I would like to hand over to Nico.

Thank you, Robert, for that great explanation about the content of our top line. But let's have a look now on the numbers themselves. So revenues of EUR 2.6 billion versus EUR 2.2 billion in 2021, mostly driven by an increase in fiber prices and EWP volumes. The share of pulp in our revenues increased to 18% points compared to 13% points in 2021. The quarterly development clearly shows that revenues were negatively impacted starting in Q3 2022 due to the softening of demand, while our performance in H1 was relatively strong. The fourth quarter in 2022 includes the building of provisions for cost reduction methods of approximately EUR 15 million as well as FX effects. In connection, we saw an increase in energy and raw material prices that we could only partly are on. All in all, this then caused a significant drop in EBITDA from Q3 onwards and thereby leading to our revision of EBITDA guidance in December 2022. Overall, EBITDA in 2022 was above the levels of 2020 when COVID hit. Looking on EBIT. For EBIT, we see the same development as for our EBITDA with a peak in Q2 and a decline afterwards. And for sure, net results are in line with the overall development. We reported a net loss of EUR 73 million attributable to shareholders at Lenzing. Getting from profitability now moving into the free cash flow for the period. It is evident that the negative cash flow generation is mainly driven by the investments in the new plants that have now been completed successfully and will not require additional CapEx for the full ramp-up. The negative EUR 43 million of operating cash flow was instead driven by the significant increase in working capital due to the increase in inventories. With regards to working capital, in the last years, it has always been around a level of plus/minus EUR 400 million. In 2022, we see a peak in the level of trade working capital, mostly driven by a lower level of sales in Q4 and consequent increase of inventory. Inventory increased from EUR 477 million by the end of 2021 to EUR 709 million in 2022. Getting from the cash now into the balance sheet on the next slide. We show here the historical net financial debt evolution. For year 2022, levels have increased mainly due to a reduction in liquidity caution driven by EUR 700 million CapEx program in relation to Thailand and Brazil plants as well as increase in trade working capital due to rising inventories. As such, reported net financial debt increased to approximately EUR 1.9 billion from EUR 1 billion in full year 2021. Whereas economic net financial debt increased to approximately EUR 1.4 billion from EUR 600 million in full year 2021. Drawing attention to the balance sheet metrics on the right side of the slide. Also, they evidently reflect the impact of overall weaker full year 2022. We are still in a strong position at year-end 2022 with approximately EUR 700 million of liquidity cushion available as well as substantial adjusted equity position with more than 37%. By having said that, I would like to hand over back again to Stephan.

Thank you, Nico. So in a nutshell, Lenzing had a solid start in the year. Demand was strong in all product groups, be it fibers, be it dissolving wood pulp, and we had prices on high levels in both categories. So as a consequence, revenues increased accordingly by 25% versus the first half year 2021. So even though costs were increasing, Lenzing achieved a solid EBITDA in the first half year of round about EUR 190 million. However, as previously mentioned, the second half of last year really represents a perfect storm for us. But with highly unfavorable market conditions, meeting an already challenged free cash flow. In particular, the industry saw an unprecedented further increase in energy prices, 20x the gas price in Austria, for example, and raw material costs 5x then caustic versus the price levels in the year 2020, coupled with the destocking and softening in demand in textile, as Robert explained. Additionally, we have the plants but still very high CapEx for our 2 new plants and the inventory build in the second half of the year that both affected significantly our free cash flow for the period. Now we hopefully could explain to you that the magnitude of the events was very difficult to predict at the beginning of last year. Hence, we revised our guidance in September and in December. As you know, transparency is extremely important for us. And therefore, we also wanted to take the necessary time today to explain the various factors in detail that leads to our results and how we see those developing going forward. Now going forward, it means also we took action, of course, immediately, proactively in '22 to reduce our cost on one hand side, but also to secure our liquidity. During the second half of 2022, we adjusted our production volumes in order to reduce our overall cost and limit any further increase in trade working capital. Furthermore, we initiated a reorganization and cost reduction program, which is expected to deliver annual savings of more than EUR 70 million with a full impact to be expected at the end of the year 2023. And I can report the programs are running very well. We believe that our proactiveness and swiftness in identifying and addressing the challenges our industry is facing today has helped to build a position for us for a strong rebound. Having said so, let's focus on the year '23, the comeback year for Lenzing. All in all, we believe that 2022 has been an unprecedented year that we don't foresee to repeat any time soon. While we leave these developments behind us, we really focus on '23 and have several measures in mind for Lenzing to come back strong again with an overall recovered market environment. Let me remind you, we have, in our cost reduction program, realized cash effective savings of an annualized impact bigger than EUR 90 million, addressing personnel costs, procurement costs as well as operational or cost of goods sold. We also have initiated working capital improvement measures, reducing both our fiber and pulp inventory levels. And I can report that already at the beginning of this year, our fiber inventory is back to normal levels, and that will help to overall improve our liquidity. For sure, we had a strong cash out in our CapEx for our 2 major projects, but they are now up and running and will significantly contribute in the cash flow for this year. We're also reassessing our FX risk management as well as our energy hedging policy to mitigate adverse effects we have on those sides. So in a nutshell, 2023 will be the year of incumbent. Why do we believe that '23 is going to be a year of incumbent. On the macroeconomic side, rather being revised downwards constantly, growth outlook starts to rise again. Analysts agree a recession can be likely avoided in both U.S. and Europe. And what we hear from China's reopening is promising. And we see that on early indicators, important indicators for textile turnover like the metro ridership, the traveling in general and the activities elsewhere in the private and hobbies in China. If we are looking more particular into the textile industry, the current situation is still rated as very poor in Jan, but the outlook is much better than it was a couple of months ago. And the sentiment is rather becoming optimistic with a huge jump on this optimism in the last weeks and months. Robert explained what happened and why the textile value chain build these inventories. And that was a big part of the problem in '22. And now the inventories have come down along the textile value chain. Business inventories are at 22 days now, which is right at the 5-year average and at the same level as mid '22. On a similar level, inventories of viscose yarn and viscose fabrics have come down. And in a finished product, closing inventories, for example, in the U.S. have also released. Overall, we see that the demand of fiber as a consequences of what Robert explained was depressed in the second half of 2022, but it's now picking up again. And we see that in our order book already in Jan and Feb, still on a low level, but constantly increasing. Consumer confidence has declined strongly when the war started in Ukraine, but it's picking up again in many European countries. And lastly, we had very high input costs in 2022, as Christian explained, and we see costs coming down, both on the energy side. Take, for example, the day ahead, natural gas price in Europe is back under EUR 50 from its peak of above EUR 300 in August, and also caustic soda, our key chemical for the viscose and modal process is coming down. But let me be honest, on the flip side, we also know that there are still many risks to harm us including geopolitics. However, as a whole, we see much more positive signs than we saw a couple of quarters ago. And therefore, after the perfect storm in the second half of 2022, 2023 will be the year of the comeback. We expect overall improvement of the market condition than versus '22. We have seen that the European gas prices are coming down from a summer highs and the mild winter has resulted in record natural gas storage levels in Western Europe. That should help the prices as well. As we said, caustic soda is coming to more normalized levels. And on the demand side, we saw that we have first positive signs and first increasing order levels versus the months before. With this improved demand, we will also see an increase of prices again. And finally, we shouldn't forget that all had a positive impact to our free cash flow. On one hand side, the wave of heavy investment, EUR 2 billion in the last 3 years is behind us. Both sides will now, on the contrary, contribute positively to our cash as well as our cost-saving measures as well as our working capital measures, the inventory reduction. And with that, I hand over to Nico again to talk a little bit more about our liquidity position.

Many thanks, Stephan, and great for these explanations about the year 2023, the comeback year, And this comeback year is based upon a strong liquidity position. Turning into the slide here. We have now an overview of Lenzing's debt maturity profile. There's approximately EUR 250 million of debt maturing by end of 2023, which is well covered by existing liquidity and undrawn credit facilities. We are also proactively looking into refinancing alternatives for debt coming up due in 2024 and 2025. We continue focusing on implementing measures to further protect liquidity and improve cash flow generation, which will provide us with additional comfort and headroom with regard to upcoming maturities. As a result, we also have suspended dividend 2022, and we announced yesterday our position to the dividend policy for 2023. In parallel, we are also working on optimizing Lenzing's capital structure for the long term. So we are well positioned to execute our own future growth strategy. Overall, Lenzing's liquidity position remains strong. But having said that, back to you, Stephan.

Thank you. So summarizing, again, what we have walked you through in the previous slides. As mentioned, the market environment is challenging for the whole industry. We see demand in Q1 increasing but still on a low level, but week by week, it gets better. And so does our capacity utilization, whilst it is not yet on a precrisis level. Still, visibility is low at this point in time and volatility on the cost side is high. However, with our new hedging strategy we can, at least on the energy side create a buffer. We firmly believe that during the course of 2023, market conditions will improve stimulating demand and leading to a reduction in inventory levels further, and that will create the demand drive as well as our pricing part. This will be coupled with positive cash flow contribution from our recently completed project in Thailand and Brazil. And if I add on top, our successfully implemented measures on the cost reduction program. We are very positively looking onto the results for the year 2023. And as we guided yesterday, we expect the EBITDA, depending on the market recovery between EUR 320 million and EUR 420 million. After looking into 2023, I would ask Robert to give us a look into the year 2024 and afterwards. Robert?

Thank you, Stephan. Now if you look at this slide, and it start at 1960, the fiber industry has almost continuously grown. But I say almost because in about 9 instances, this growth pattern has been disrupted by external [indiscernible] macroeconomic recessions. But you can see definitely on the right side, the COVID hit, hit very deep. What remains very clear from this slide, however, is the trend continues to be upwards. And also what is really clear takeaway there is a very rapid recovery of the fiber industry after such crisis. And this is something that we should be prepared for now as well. We can have a quick recovery also in the current circumstances of the fiber industry. Now what drives this fiber growth? On the next slide, you can see it's still the fundamentals that we've been sharing with you in the last few years. Population continues to grow. GDP continues to grow, so people have more money to spend. And this is resulting in an overall fiber market growth of 2% to 3%. Now the wood-based cellulosic fiber industry is growing at about double that rate. Historically, it has been growing at this rate, and we also expect this to continue. The fundamental driver, of course, is that sustainability gap that we've been talking about before. There's increasing pressure on the fossil-based fibers and there's all the synthetics, the polyesters and the nylons. And as a consequence, the wood-based cellulosic fibers are really a much stronger demand. Now the cherry on the cake, of course, is the lyocell. It's a very small fiber in the overall fiber industry. But there, you can still see driven both in textile and in woven, we continue to anticipate growth rates of over 20%. Now what are we doing on the market from a Lenzing perspective. We really have a lot of innovation, as Stephan said already at the beginning, we have a pipeline of good innovations. And despite COVID, we could continue to develop some of these great innovations and bring them successfully to the market. So on the left side, you see just a few of these highlights. On the right side, you see an amazing picture that was taken in a water fountain when we celebrated the 30 anniversary of our TENCEL brand, something that we're really proud of and really gives us a very strong heritage of the brand itself. Awards like the ISPO Award, which is the biggest organization in the textile industry for athletic wear was something that we were very, very pleased about because the activewear industry is an industry where synthetic is, of course, very dominant. But having this ISPO awards 2022, but also the ITMF award for sustainability and innovation really is something that we can be very, very proud of. And also, what is amazing, 300,000 tons of total Lenzing ECOVERO brand fibers have been sold since we launched it in 2017. As you all might recall, the viscose industry got under tremendous pressure from some of the NGOs that our ECOVERO brand shows that Lenzing is really the leader in the industry in cleaning up the impact of the fiber industry when it comes down to the chemicals. Now let me give you a very quick update a little bit on where do we stand with the various brands. So VEOCEL is a very young brand. VEOCEL was created to really address the normal open market. It's an industry where synthetics are the key driver because cost is the key factor there. It's very often disposable product. But with trends like in Europe, the Single-Use Plastics Directive, we believe that there is an opportunity to educate the consumers to really help to differentiate those brands and retailers that want to do something right with their products, and they are now adapting very rapidly the VEOCEL brand name. So as you can see here on the left, the co-branding programs, these are programs where the brands that you can see in the middle actually use our VEOCEL brand on their packaging has continuously increased. And the brand wearers for VEOCEL also continued to increase in the last few years, and it's a very young brand, but to have that kind of awareness is something that we can be very proud of. And then, of course, our flagship brand, TENCEL. Despite the crisis -- despite the COVID crisis, consumer changed completely. Very few people could go shopping. Most of them went online, but with a change in our branding strategy, much more going to co-branding programs, much more going to digital marketing. We managed to increase the TENCEL brand awareness again. This is not normal. In the history of a brand, you will always see brands a little bit going up and down. So the steady increase of the TENCEL brand awareness, as you can see on the right, something we can be very proud of. But also then the brands, as you can see in the middle, with whom we have active co-branding agreements is something that we can be proud of because these are the people that actually reinforce the overall strength of the TENCEL brand, but also the whole promise of innovation and sustainability that we bring with our brands to the consumer. And with that, I would like to hand back to Stephan for some of the internal things we have been doing extremely well.

Thank you, Robert. Yes, being proud of something. I think that's the perfect transition to this slide. Even in a challenging environment, our 2 new plants were delivered on time and at budget, and they will now allow Lenzing to fully participate on the market recovery in 2023. The team did really an incredible job to complete the highly strategic expansion projects, shout out to the teams. The lyocell plant in Thailand will help us to serve the growing demand for sustainable produced fibers and the plant itself will be operated carbon neutral, and is, therefore, extremely important milestone towards the carbon-free future. Just to remind, we have the strong demand in the first half of 2022, but we were sold out and couldn't fully participate on the demand. The dissolve wood pulp in Brazil will help us in the cost reduction program as it represents a perfect backward integration in our most important raw material pulp, and it increases on top of our security of supply. In addition, for this year, we have the 2 ongoing upgrades, which we have reported in prior calls, one in China, converting a line to modal. And the other one in Indonesia in converting one of our last factories, the last factory actually into a specialty plant and both factories will be technically completed in the first half of 2023. With all of these investments, Lenzing will be significantly strengthened its backward integration in pulp as well as offering more of the highly demanded sustainable premium fiber. Lenzing stands for sustainability. The press is calling us the sustainability champion. And maybe these 3 awards are telling why they call us that way. On one hand side, we won again the AAA awards of CDP and AAA rating is only given to 12 companies globally. MSCI, again, AA, but with a significantly improved score from 7.6 to 8.4. And EcoVadis, yet again, platinum status, the status which only 1% of the companies achieve. Let me summarize what we have taken you through. After having navigated through the perfect storm in half year 2 of '22, our outlook for '23 is positive. We see ourselves well positioned in a recovering market environment and intend to further strengthen our positioning through the ongoing company costs reduction programs and other initiatives, for example, on working capital. Of course, there remains a high level of uncertainty when it comes to FX, raw material costs, energy costs, logistics costs, and there are several factors that neither we nor anyone else in the industry can influence. However, taking all the above into account and due to the margin contribution of the 2 new plants and our activities, we have initiated and we have fully in our control, i.e., the cost saving program. We are confident to have an EBITDA range for the year '23 in the order of magnitude between EUR 320 million to EUR 420 million. As Robert explained, with regards to 2024 and beyond, we will have a better picture later this year. But as you know, historically, the textile market and also Lenzing always came back after a crisis and always came back stronger than before. We expect this pattern to continue. The key reason behind this expectations are, we are in a leading position to tackle the mega trends of sustainability and circularity. Specialty fibers has the highest growth rate in the industry as you have seen. And those are the products we have in our portfolio. And as Robert elucidated, we have a strong innovation platform on top with unique technologies that secure our long-term prospects. As we have seen in the recent past years with innovations such as Lenzing ECOVERO turning into strong margin contributors. And we can build that on strong ingredient brands like TENCEL as well as VEOCEL to further support our both margin and growth. But last but not least, our new and upgraded assets. The new assets in Thailand and Brazil, the upgraded assets in China and Indonesia will have a boosting impact after the full recovery of the market. And that is the reason why we are optimistic about '23, and we are optimistic about Lenzing in total. Thank you for your attention, and we'll now open up the floor for your questions.

[Operator Instructions] First question is from the line of Ingo Schachel with BNP Paribas Exane.

And my first one would be on the energy and chemical cost inflation, which you've illustrated well on Slide 7. I think you've explained well that spot prices have started to decrease. But regarding the, let's say, realized energy and chemical costs in your P&L, can you explain a bit what, let's say, at the lower end of your guidance, whether you've already baked in energy and chemical cost relief or whether the lower end of the guidance should also be achievable if energy and chemical costs remain at 17% and 20% of your production costs?

I will hand over this question to Christian Skilich.

Yes. Thanks for the question. We have penciled in all our energy and chemical assumptions so far into the guidance. And for the energy side, we had been able to have fully hedged for our European and U.S.-based sites, a bigger portion of the 2023 energy demand both for steam, gas and electricity so that we are really confident that we will keep energy costs and chemical costs within the guidance.

Okay. Maybe a question also to Nico Reiner as the new CFO, and welcome to the team. I think maybe a conceptual question on the financial position and balance sheet of Lenzing. I mean, you've outlined with the liquidity position strong, as you said. And of course, some metrics like net debt-to-EBITDA are quite impacted by the low EBITDA levels. Do you already have a view, let's say, with the 3-year view where you think the whatever metric you think would be important net debt-to-EBITDA or maximum net debt level, whether you already have certain target metrics in mind that the balance sheet should be at in, let's say, 3 years' time when it comes to key credit metrics?

Yes. Thank you very much for that question. I think it's important to note that, for sure, we are looking on our leverage, and we are looking on the improvement of our leverage at this point of time. So overall, we are permanently also watching our balance sheet structure and as is usual practice on that one. It's also clear that based on this development, we are also doing a clear focus on our thoughts going into the years 2024 and 2025 when it comes probably to refinancing topics, which is a common practice in every company. So clear to say we have our overall guidance if you look there till 2027 of 2.5x here. But it's absolutely clear that we are doing everything as it is the cost-cutting program as it is also said with the working capital measures. And also by having said that for 2023, a very solid liquidity cushion is there. So we are taking our thoughts and are looking, therefore, this strategic approach how further our balance sheet can be improved, and we are quite confident on achieving that.

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

Yes. I have 2 questions as I start, please. First of all, I remember that in late 2022, you were suggesting that per the second quarter of this year, you are seeing enhanced capacity utilization. Can you remind us where we are in terms of capacity utilization at present at your major plants? Then a couple of question on EBITDA and free cash flow. What is your view on the mid-cycle EBITDA and free cash flow of your activities? Do you have a few already at this point in time?

So first question with regards to the utilization, I would hand over to Stephan.

Yes. Thank you very much. As you rightfully said, we took the measure of reducing our output at the back end of 2022 when hit by the perfect storm. We are now increasing the output again. Currently, status of this week is we are running with 26 out of 30 lines, that gives you an indication. We are still not back to the old operating level but week by week going up. And regarding the cash flow question, I hand over to you, Nico? Could you repeat maybe?

Yes, the mid-cycle where you see the EBITDA and cash flow level.

Yes, you're quite aware of now our public guidance in going into 2027. So overall, we are -- you're looking into a guidance of 2.5x. So this is the real topic which you should have in mind coming from that perspective. So my guidance would be going into this direction. And also having said that, clearly to say that also EBITDA needs to increase to achieve these targets here clearly, but we are not giving any detailed guidance on the years in between. So overall, what you see now here for 2023 is a clear improvement on EBITDA level coming from 2022 when the perfect storm hit Lenzing in the second half of the year. So for sure, there is a very positive trend also on the EBITDA level. We gave to the market yesterday, a guidance for 2023, and this is a very positive outcome and so looking for on achieving that.

Next question is from the line of Isha Sharma with Stifel Europe.

I have a number of questions. I'll ask first 3, please, and then I'll queue back. If I look at your pulp and fiber split for 2022, is it also something that we should expect to be similar in 2023 with a number of capacity additions in pulp? If you could also comment a little bit on the market development for both your products and how we should think of the earnings split in '23, please? The second question is on CapEx. We saw another step-up in Q4. And overall, for the full year, it was around EUR 700 million. You had guided a little over EUR 600 million earlier. So what changed there? Were there new projects that you have to take care of? Or if you could give us some color on your CapEx? Also going into 2023, what should we take into consideration? And the third one is on net working capital. Typically, we have seen across the industry, working capital release in Q4 and the weak demand environment, but we didn't see this at Lenzing. So if you could please explain why that was the case? And when should we see working capital?

So first question, I will hand over to Stephan and then the second and the third, Nico will be happy to answer.

Yes. Thank you, Isha, for your questions. I take the first two. As you can imagine, with the ramping up and now full production of our factory in Brazil. Actually, the pulp share will increase as planned on -- versus even '22. That was your first question. Second question regarding CapEx. As you know, we had EUR 2 billion or more than EUR 2 billion over the last 3 years. This year, we were really focused mainly on the maintenance CapEx as well as the completion of the mentioned strategic projects in Indonesia and in China. The range you can expect will be in the order of magnitude between EUR 250 million and EUR 280 million.

Yes. And thank you for your question regarding the working capital situation. I mean when you look at the development of the top line and the demand where Robert was also explaining, we could see that in the third quarter and especially in fourth quarter 2022, there was a sharp decline in demand. And as you think about our facilities and our production capabilities, which are on continuous production, basically, it was really difficult to get in balance with the shorten of demand and our capacity production. So as a consequence, it was absolutely clear that the products went into inventory and we had to bring this inventory and also in our balance sheet, which we have seen here, but also obviously clear. First of all, we have reduced also our production capacities than in Q4 as an immediate reaction to the market development. And secondly, we have taken clear actions to reduce inventory already by the end of Q4. And also at this point of time, we are on a good track, getting inventory in a balanced way back again. So this gives you a little bit of a picture what we have been doing here on this topic. And hopefully, this gives you also the color in regards to the working capital.

Right. Then maybe just on the pulp side, if you could please give us a little bit of color on how you expect the market to develop and in turn the pricing because we know a number of capacities are coming in. Yours is obviously captive. I understand that. But with the low demand environment in fibers, you were also selling externally at good margins. So just was wondering how this develops through 2023?

So for these questions, we'll hand over to Christian Skilich.

Yes. Thank you for the question. As you have well pointed out, the pulp markets have a come down with -- in Quarter 4 have come down as well on the pricing side to a level of approximately USD 900 per ton. We went on that price tag as well into the beginning of that year, and have seen now over the last couple of weeks, price movements northwards in the range of USD 30 to USD 50 per ton. So that recovery on the pulp side is clearly following the recovery on the viscose market.

[Operator Instructions] Next question is from the line of [ Dr. Karl Arco ] with [indiscernible].

Even though the outlook might be great, we have to deal with the financials that we see at the moment, which are not too great out of my view. With a gearing of 89%, which jumps to 120% and an equity ratio, which drops to 27% if you deduct the hybrid capital, I'm wondering whether ever any covenants of the banks have been broken already? Was it demanded by the banks that you pay no dividends? Will you pay -- do you plan to pay interest on the hybrid capital? And continuing with the hybrid capital, end of '25, there -- either you repay the hybrid or there is a step-up, which could triple your cost of interest, how do you want to deal with that? Also in your annual report, you say you entered obviously, into different contracts to secure your supply. This obviously obliges you to buy material. At the given demand that you have at the moment, do we have to fear for a loss? Is there -- can you quantify an impending loss out of these contracts -- out of these obligations? So and now my last question, sorry. You have bought 40,000 hectares and rented another 30,000 I read. And you activated this timber on a discounted cash flow basis with EUR 127 million. Discounted cash flow and forest, I know out of own experience is difficult. But anyway, I was wondering what are the acquisition costs of these hectares were? Sorry for so many questions.

So let's start with the first question with regards to balance sheet and financing to Nico.

Yes. Let me -- first of all, on the covenant topic you are addressing. So at this point of time, Lenzing has got only 1 affirmative covenant out of this financing structure, which is a EUR 250 million cash, which we need to keep on balance sheet due to the financing of our project in Brazil. Next to that, there are no other affirmative covenants. And also, let me allude on the topic. Have you any breach of any covenant at this point of time, as simple as it is, clearly no. Finally, let me also answer your question on the dividend. Has it been, let's say, influenced by any banks regarding our dividend policy? Also a very simple answer, no. And then let me get to your question on the hybrid. Yes, we know the hybrid is due in December 2025. Coming from today, there is a pretty long time going into this time frame and to have, let's say, any type of solution, either refinancing or either not refinancing, I think that's a long way to go. And we are looking forward with all the strategies, which we could have to get here the solution at a point of time pretty far ahead of any maturity of this hybrid. Also, you have been asking if we are willing to pay our obliged interest on the hybrid? Again, very simple answer, yes, as we are fully compliant with all our contracts. And now by having said that, I would love to hand over to my colleague -- to Christian that he could elaborate a little bit on our goods, which is -- they are over in Brazil, and we are using for our pulp production.

Thank you, Nico. Yes, thanks for your question on that topic. The plantation that you're referring to in the amount of approximately 40,000 hectares was brought in as an in kind from our joint venture partner on a lease space into the joint venture. So LDC didn't acquire any land there and all the standings in the forests there accounted in our books according IFRS standards.

Yes. Okay. So it is a -- so you didn't buy it. They brought it into your joint venture. Do I understand this right?

Yes.

But still, you have to address some kind of value when you -- a [Foreign Language] or whatever this is in English. You still need a value for it, no?

Exactly. And that was brought into the joint venture at a certain value.

Okay, which you're not going to tell me. Okay.

Not to disclose.

Okay. And then I have this 1 question with this contracts to ensure your supply. Yes, you obviously entered into a couple of obligations of material, which you have to buy or you can buy and you have to buy. And if you take the current demand that you have, do we have to fear of any write-offs out of these obligations?

There will be no negative impact out of the sourcing of chemicals or energy into our books.

Okay. And whatever -- or any other material...

No.

I don't know what they had. And -- okay, let me see. Sorry. Yes. Well, perhaps one more thing. I guess, obviously, you plan to restructure or rethink your capital structure, obviously. So I guess, one of the options will be a capital increase as well? I guess.

That will be a question for Nico, I assume.

Yes. Thank you. I mean, generally speaking, when we are checking our capital structure, which, by the way, we are doing permanently, we always have all possibilities in all actions in hand. It's either way, debt situation or an equity situation. So at this point of time and also going forward, we are always checking all our possibilities to manage our balance sheet in a very optimized way. That would be my answer to your question.

Okay. So a very small last question. The upcoming investments for the next year '23 and costs that you have, you can -- is your cash flow big enough to come up for all of this?

Very clear answer, yes.

Again, I can only repeat, we have a very solid liquidity cushion. And based on that one and also on our operational cash flow, we do see there are no issues.

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

I also have several questions. I'll come back to Isha's question on net working capital and inventories. Here, we had EUR 200 million -- roughly EUR 200 million higher net working capital in 2022 versus '21. Should we expect higher net working capital to be basically reduced in 2023 as such that this will boost your cash flow or is this too aggressive assumption? And also on inventories, have you seen any inventory devaluation as you have shown that prices for raw materials, but also fiber products went down? And then on your -- more on guidance and housekeeping side. What is the assumption for tax rate you have for 2023? And also, what are the assumptions for the upper and the lower end of the guidance range? And then lastly, if you could give us an update on your dividend policy. Has there -- was there any change? Is now the dividend policy linked to net results to a positive one or to positive cash flow or to leverage situation? That would be helpful.

So for the first question with regards to net working capital, Nico, please.

Yes. As we have seen also in the presentation, historical volumes on working capital has been around the EUR 400 million. And as you have seen also in the presentation that we are clearly above this level. So we are expecting to get back to these normal levels. And the answer is, yes, we will reduce also inventory and therefore, have the positive impact coming from this action. In regards to the question on the valuation of the inventory. Clear to say we are an IFRS company, and we evaluate on current market values, our inventory and not only our inventory also the full balance sheet. And therefore, the answer is we are very convinced about the value of our inventory. And on the dividend policy, lastly, what you said here, I can only reflect what has been communicated yesterday. There is a clear dividend policy in place, which has been communicated by middle of last year. And we stick to the dividend policy and we have given to the market further guidance yesterday with our comments on the dividend policy for 2023. And so therefore, I think from my end, nothing else to comment on.

Yes. Maybe in addition, what we are saying is we are not suspending the dividend policy as per se or as such, but only for the financial year '23.

Okay. And on the guidance functions, if you could help us there, upper and lower end and also tax rate, please?

Yes, very much so depending on the speed of the market recovery. right? So that is the main driver. As we elucidated on the energy cost, we have a very good hedging side or hedging initiatives done. And the speed of the market recovery will determine whether we are going to end up more on the lower end or on the higher end.

And maybe if I can ask another question on Christian Faitz question regarding mid-cycle EBITDA. You previously had a target of EUR 800 million by 2024 EBITDA. Since then, a lot has changed, but would it be fair to assume if the assumptions of the past would have been same the energy situation, demand situation, et cetera, that this EUR 800 million is still in place and there will be a kind of a 2024 mid-cycle EBITDA margin indication. Is this fair?

I would hand over to Stephan for this question.

Yes. As we said in our last call, we gave guidance for the year 2027. And I think you realize that the year 2022 was for sure, different than we expected it. We will now see how the year '23 will come in, and then we are in a much better position to see where we are on those levels, which we wanted to be for '27. So I think, again, at the moment, a little bit too early to say is the EUR 1 billion as well as the 2x net debt over EBITDA in the year '27, the number, will it be confirmed? Will it be earlier? Will it be later? There you have to give us a little bit more time depending also on the speed of recovery in '23. As we said, at the moment, it is very much in our focus, and I think Nico elucidated on that one that we are driving the net debt over EBITDA fast in the right direction.

Next question is from the line of Teresa Schinwald with Raiffeisen Bank International.

At least we cannot hear the question. So I think she just dropped out. And operator, maybe we can move on to the question of Teresa.

Schinwald has connected on a second line.

Sorry, I had 2 lines on and there was an echo. First, thanks also for devoting more numbers. I hope this is a practice that is here to stay. And I have some questions still remaining. First, on coming back to the risk management and especially on the energy and FX hedging, can you tell us a bit more about the maturities that you are now hedging on the energy side for electricity and gas? And also if the FX risk management, if there is a change to the usual open position of about EUR 400 million on the U.S. dollar front. And my other question is on what we can expect from depreciation next year? Also that now there is also a depletion portion in the depreciation. And if you feel comfortable, for example, with the consensus of EUR 250 million on the depreciation.

So first question with regards to energy hedging, I hand over to Christian Skilich.

Yes. Thank you for the question. To elucidate a bit on that, we have for gas, steam and power, mostly physical hedges in place for a material portion of our demand for the next 12 months as well rolling forward for a minor portion already for the 12 months then to follow. So in regards of risk management, we see here a rather conservative approach. All really managing our risks for especially the period of the full year 2023. So FX hedging, I would hand over to Nico then.

Yes, pretty simple answer to your question, no big changes here. We are risk averse. And so that's the answer to your question on the FX side. On the depreciation side, I mean, basically, we are usually not giving any guidance on depreciation volumes as we have a guidance of our EBITDA. But basically, what you are talking about is guiding into the right direction, I would say. And also to comment on your thoughts and question in regards to the depreciation, it's in relation to our biological assets, which we do have over there in Brazil. So this is giving the answer then to that portion of the depreciation.

Follow-up question from Isha Sharma with Stifel Europe.

Can I ask you about your guidance again, please? If we think of Q4 EBITDA, and we also adjust for the provisions that you made, underlying, it was kind of no EBITDA. How should we think about going into 2023? And is it fair to say then that your guidance is based on more of a second half recovery since you also still have to work on your inventory levels and bring them down. Is that fair?

Yes, that is fair. It is, as we said, we expect the market recovery during the course of the year, and that is reflected in our guidance. So we expect a stronger Q3 and Q4 than Q1 and Q2.

Understood. And just on D&A, again, EUR 75 million is what you've reported in Q4. Is that a good run rate going forward. And the other one is also on financial costs, which were also elevated in Q4 at EUR 40 million. Of course, you had in the first 9 months some special effects and Thomas told this to us in the last call. If you could help us with your best guess at what run rate we should think of since you still have to refinance for 2024 maturity. That would be great.

Nico, please?

Let me discuss a little bit with you. What was your precise question now? Because you have been crossing around the whole garden of KPIs. And so please, can you please precisely ask your question?

Your depreciation and amortization in Q4 was EUR 75 million. This was much more elevated than in the past. I'm asking if this is the run rate going forward. So if we assume EUR 75 million each quarter for 2023, is that the right number for depreciation and amortization? That is the first one. And the second one is on the financial costs. They were EUR 40 million negative in Q4. While in the first 9 months, they were positive. There were some one-off effects as you have told us before. So my question is, what would be the financial cost going into '23? If you could give us your best guess, please? Is that clear enough? Or should I ask?

No. Thank you. Much now understood because I got it a little bit the 2 types of the -- so on your first question on the depreciation, I mean what you see here, for sure, you have to take in mind, first of all, that we ramped up our new big investments in Brazil and also in Thailand. And simple to that effect, there is a clear increase also in depreciation. And your calculation, which you are doing here on base fourth quarter is going in the right direction, I would assume here. And also, when I talk about your second part of your question, the situation on the financial results. Also pretty clear here is also directionally going into the right direction as we have ramped up all our facilities, our investments here, and with this ramp up, we also have to take into consideration a higher, let's say, impact on our financing costs, which is pretty clear going forward based on our contracts, which we do have in our financing contracts here. So directionally, what you are saying here is also in the right way.

No, I still -- I'm sorry, but I still don't understand financial cost in 1 quarter was EUR 40 million, should I think of EUR 40 million in each quarter. That would be a very high number for the full year.

If you think about the EUR 40 million there, there are also FX effects within this number. I would love to emphasize here. And also additionally, as you are right, EUR 40 million calculation would be relatively high also. But if you take some of the FX effects out of it and look in rational what is really on our balance sheet, I think then you come pretty close to a number here. But overall, we do not give any guidance on a detailed number on financial results. We are guiding only EBITDA, and I think that has been pretty precisely communicated.

There are no further questions at this time. I will hand back to Stephan Sielaff for closing.

Yes. Thanks a lot for dialing in, listening in, I think we could elucidate, the perfect storm in the second half of '22. Our comeback here on -- in 2023 and our excellent prospects for the '24 onwards. Thanks a lot for your time. Thanks a lot for your questions. All the best for you. We are looking positively into '23. All the best. Thank you.