Lenzing Aktiengesellschaft (LNZ) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Lenzing AG Strategy Announcement Conference Call and Live Webcast. I'm Sergen, the Chorus Call operator. [Operator Instructions] and the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Georg Kasperkovitz, CEO. Please go ahead.

Good morning, everyone. Thank you for joining us. We are very excited to speak with you today and to share a new strategy. That is really what today is all about. For those I have met, I'm Georg Kasperkovitz. I took over as CEO in June, having joined the company 1 year earlier COO. Alongside me is Mathias Breuer, our CFO. Mathias joined the company in 2023 and became CFO at the start of this year. Over the course of today, we will walk you through where the business currently stands and the direction we are taking. Here is the agenda we have put for together for today. I will start on strategy market, and Mathias will take you through the financial section. Let me be candid about the situation. Pulp remains profitable, fiber markets remain challenging. The macroeconomic and geopolitical headwinds have proven persistent and they continue to weigh on the whole industry. In Manmade cellulosic fibers, we see a structural shift, not a temporary downturn to wait out. Demand for textile fibers remains volatile. Pricing recovery is taking longer than expected. At the same time, Asian competitors have significantly improved their position on scale, on cost and on quality. Put simply, competition has intensified and premium value capture is narrowed. Sustainability remains important but customers are less willing to pay a premium for it. It became clear that Lenzing's previous better growth strategy was no longer fit for purpose. This is why we have initiated a strategic reset. So what does the new strategy look like? We have 3 clear priorities: grow nonwovens, reset textiles and capitalize on pulp. Each of these priorities has been chosen to make Lenzing more resilient in the fiber division more profitable. We are focusing on the parts of the portfolio that are less cyclical and structurally more attractive. At the same time, we are simplifying and streamlining the rest. These priorities are supported by 3 value creation levers. First, profitable growth. We are no longer chasing funds for their own sake. We will grow where we have an advantage and can earn attractive markets -- margins. That improves both the quality and the resilience of our earnings. Second, cost reduction. A leaner SG&A base has helped us in the past. Now we are going further. We are simplifying the organization, cutting SG&A cost to the core and continue to optimize our operating costs, including energy. Third, capital efficiency. We will concentrate capital on our strongest assets. That improves returns, strengthen cash generation and creates flexibility for future growth. The key message is simple. We recognize that the fiber market and competition has fundamentally changed. Our response is disciplined and within our control. We are going -- we are growing the most resilient part of the portfolio, reducing costs and improving capital efficiency. This is how we will create sustainable value regardless of where we are in the cycle.

Yes. Good morning, ladies and gentlemen, also from my side, I'm Mathias Breuer here in the call. Before we go into the strategy, just let me reflect on the current trading update pre-announcement to quarter 2 figures that we plan to announce on August 5. So on the next page, a first glimpse on market situation and both on the, viscose and also competitive fiber. Cotton. Stepping back on the short term, we saw some macroeconomic and geopolitical disruptions that somehow in our segment is the ongoing effort for accurate pricing. We also saw improving downstream demand in China with regard to textiles, which fed through also to generic viscose prices, and encouragingly, the demand for sustainable cellulosic fibers stayed resilient, which underpins stable pricing in our segment of the market. This was also supported in the first 2 quarters of the year, the price hikes in competitive fibers like polyester and cotton as you can see here on the page, driven by higher cost of oil and fertilizers, respectively. So at this point with on to live with, although Q2 was constructive on pricing, the investment case going forward is not dependent on favorable market conditions. Our progress going forward is driven, first and foremost, by execution of our strategy and does not depend on market tailwinds. This is what we're going to discuss today. On preliminary quarter 2 performance, just starting with the top line. Revenue was essentially flat at approximately EUR 650 million, and it would stress by design, we're deliberately prioritizing value over volume. So flat revenue with rising profit is exactly the trade we want to be making. EBITDA was up 9% to EUR 123 million and the margin improved 2 points to 19%, a very reassuring development continuing our trajectory of the first quarter in 2026. That improvement came from controllable actions better pricing, a richer product mix with the fiber ASP up to EUR 214 per kilogram and dissolving wood pulp ASP up to EUR 700 per tonne in quarter 2 as well as the continued cost discipline that we have proven that we can control over the last quarters. On the balance sheet, the net financial debt came down 5% to EUR 1.36 billion, helps us for stronger cash generation and the working capital and inventory optimization, again, an early down payment on the lower leverage we are targeting over the midterm. About free cash flow. The unlevered free cash flow was lower year-on-year, but that reflects some one-off effects in the comparable quarter and deliberately a higher level of CapEx in quarter 2, 2026 to support the strategy. The most important takeaway here on this slide, the run rate benefit of everything that we are doing is not yet fully captured in these reported numbers. What you're seeing is early progress, not yet the finished picture. This brings us now to the strategy part. Moving back to Georg.

Thank you. Mathias has shown you the first financial proof points. Now let us explain why we believe this is only the beginning, starting with the markets we serve, because there's 1 point we want to make very clear. We operate in steadily growing markets. What you see on the slide is global fiber demand has grown by around 3% per year since the 1960s through all crisis, financial crisis and the global pandemic. Fiber demand is remarkably resilient, and our segment is even more attractive. Over the last 15 years, man-made cellulosic fibers have consistently outgrown the overall fiber market. Lyocell grew by nearly 16% per year. This closed staple fiber by around 5%. The conclusion is straightforward. We are exposed to markets with strong long-term demand fundamentals. That's a very good place to start, which is why our strategic reset is not about changing the markets we serve. It's about repositioning lensing to capture that growth more effectively and more profitably. This is what the rest of our strategy is designed to do, and that brings us to the next slide. The opportunity becomes even clearer when we look ahead. Manmade cellulosics are expected to grow by around 5.5% per year through 2040, significantly faster than both natural and synthetic fibers. The reason is what the industry calls the cellulose gap, supply growth in cotton is constrained. At the same time, demand for sustainable fibers continues to increase. Cellulosics are most scalable and cost-effective way to close that gap, and that matters strategically. The fastest-growing segment of the global fiber market is exactly where we compete. In other words, the market is growing in our direction, but betting on a recovery in declining category, we are doubling down on the category with strong structural tailwind in the case of growth ahead. That gives us confidence that our strategy is aligned with where the market is growing. Let me frame how the strategy actually comes together. We have 4 key objectives and each is designed to achieve an outcome that matters. Sustainably higher profitability, increased competitiveness in demanding market, strengthened resilience in an increasingly volatile geopolitical environment and most importantly, lower earnings volatility and reduced cyclicality. Our strategy comes down to 4 actions: shift the product portfolio, take out costs, reduce capital employed and invest where innovation creates value. These are the 4 building blocks that will get us there. And the map directly on to the value creation levers we set out at the start. Product portfolio transition and innovation profitable volume growth while the cost and capital measures deliver the cost and capital efficiency levers. We won't go through them in detail here because each one deserves its own discussion. And that's exactly what the next section does. So let me walk through you through each initiative in turn. Here is the challenge we're addressing. Textile is a highly cyclical business. The cycle typically last 5 to 7 years, we speak to trial swings of up to 40%. There's a significant amount of volatility to carry. Nonwovens, on the other hand, tell a very different story. The market has grown almost continuously and has proven far more resilience through economic and industry disruptions. That is why we are rebalancing our fiber portfolio. By 2030, we are targeting a much more balanced business mix roughly 1/3 textile, 1/3 nonwovens and 1/3 pulp. The path is straightforward. We reduced our exposure to generic textile volumes and adjust fiber capacity through site closures. At the same time, we continue to grow nonwovens and increased external sales as capacity is freed up. The result is a fundamentally stronger lending, more profitable, more resilient and less cyclical. Textile and nonwovens require different strategies, and we are very deliberate about that. In nonwovens, we play offense. We're accelerating cellulosic adoption in hygiene growing our tempo business, upgrading our U.S. plant mobile into specialty nonwoven side and harvesting value from standard pipes. Nonwoven is a fiber market where customers value reliability, quality and verified sustainability and where long-term partnerships create lasting value. In textile, we play for profitability. We are exiting loss-making generic volumes and harvesting value from our lyocell and clothing businesses, but we're not retreating. We are growing the niches where we truly differentiate, particularly modal and flame retardant fibers, and we continue to invest in innovation. Through to textile, we have the exclusive opportunity to commercialize the next generation of manmade cellulosic fibers, 25 years after Lenzing disrupted industry with lyocell. So what does that mean financially? So moving on to the performance program that will accompany also our strategic transformation. And we want to ground our cost ambitions in -- somewhat in track record because at Lenzing, we have proven that we can implement what is in our hands. We delivered over EUR 70 million of savings compared to 2022 and 2023 and more than EUR 200 million compared to 2023 at the end of 2025. We have consistently done what we have said that we would do. The next step is a new performance program targeting now more than EUR 120 million by end of 2027, focused on a leaner overhead structure and as well to a minor extent, operational improvement and energy optimization. This will include the EUR 5 million announced last year in September. We've already started. We've already implemented EUR 25 million to be fully affected already in 2026. For the remainder, we have a clear implementation road map to deliver the benefits by the end of 2027. We understand the execution here, and in our view, this is very manageable. We know exactly what needs to be done. And as you can see, we have already started. Coming also to the footprint of implications of our new strategy. The footprint today is a legacy also years of growth. And the honest reality is that the profitability over those sites is uneven. Our assets we have effectively been supporting less profitable ones, which adversely impacts the overall group returns. So we try, and we plan to manage and strengthen the core. Lenzing is our Lighthouse, Cellulose in Brazil and in Czech Republic as pulp profit engines. Mobile in the U.S. is very important sites, the nonwoven sector, and our remaining Asian hubs in China and Thailand. While on the same time, we simplify elsewhere. We plan to wind down sites in Heiligenhaus, in Grimsby U.K., and we continue to run an active divestment of the generic viscose site in Indonesia. Needless to say, this is not a decision which came very easy to us, and we take lightly. But ultimately, this is necessary to secure the next step of the transformation. Exiting these sites, as you also can see here, will result in noncash impairment charges of approximately EUR 150 million. And in addition, we will recognize restructuring provisions of approximately EUR 40 million, primarily related to head count reductions in Indonesia, Austria, U.K., Grimsby also for the SG&A optimization program in the headquarter. These are onetime largely noncash items, and we see that there's a natural consequence of making the right long-term decisions now in order for better returns. So let's move on to innovation. And let me be very clear on one point. Reshaping the product portfolio and the fiber plant footprint does not mean stepping back from innovation, Quite the opposite. Innovation remains at the core of who we are. It's one of the key reasons customers choose Lenzing, and it remains a critical driver of our future growth, differentiation and value creation. You can see that in our prioritized innovation pipeline, Lenzing nonwovens technology, that the proprietary technology with structural cost advantages already validate by leading European FMCG customers, 3 to textile, a disruptive next-generation fiber platform, where we have secured the controlling stake. Lyocell filament, where we already hold a leading position in a growing market. Filtration fibers address the new regulatory requirements in Europe and beyond, and next-generation flame-retardant fibers for the growing PPE market. So the new strategy is about sharpening our commercial focus and improving returns, not about reducing our innovation efforts. We come out of this transformation leaner, more focused and still the innovation leader in our industry. Let me bring the pieces together because what matters is not the individual actions, it's where they take us. Our goal is clear: to build a more focused, more profitable and more resilient integrated leader in fiber and pulp. Every element of the strategy supports that goal. We're creating a more balanced portfolio moving towards approximately even split across textile nonwovens and pulp. That gives us a strong earnings profile and reduces our exposure to any single market cycle. At the same time, we are simplifying the business. By the end of 2017, we expect to operate 6 sites instead of 9 with a structurally lower cost base and leaner capital base. And that combination matters. Lower costs and less capital tied up in the business, create the financial flexibility to keep investing in innovation and future growth. In short, we become simpler, stronger and more resilient. Ultimately, all these initiatives point to one objective: sustainably higher profitability and long-term shareholder value creation. Of course, strategy alone does not create results, it's execution, and execution starts with having the right leadership team in place. So let me turn to the team that will deliver this transformation. Strategy is only as good as its execution. So let me spend a moment on why we are confident we have the right team to deliver it. We have -- now a refreshed Managing Board in place, myself as CEO, Mathias as CFO; and Christian Skilich as Chief Pulp and Technology Officer. Together, we combine deep industry knowledge, strong operational expertise and a proven track record of delivering transformation. Just as importantly, we are fully aligned. We have jointly defined the strategy, agreed to target and taken clear accountability for delivering them. Execution is not just a priority for us. It is the priority. We are fully committed to turning this strategy into measurable results. Execution is where strategies succeed or fail. We have the team, the plan and the accountability in place. Now let me turn to another key enabler of our value creation, our capital structure.

Yes. Thanks, Georg. And to execute the strategy like this properly, we have to start with the foundation and the first strategic action with that regard is to later foundation for sustainable and long-term capital structure. So as a first step, we intend to strengthen our equity position to a EUR 300 million capital increase in the form of a discounted rights issue. Two points I would like to emphasize with that regard. The rights issue is fully underwritten by a syndicate of international banks and our key shareholders, P&C and Suzano, have committed to voting in favor of the capital increase at the planned extraordinary general meeting as well as participating in the rights issue. In addition, Oberbank Ag as a minority shareholder also has committed to participate in the capital increase in relation to their current shareholding. The shareholder commitment is a strong vote of confidence in both the management team and the new strategy. In parallel, we are in highly constructive and pretty advanced discussions with our financing partners on a new debt package of around EUR 300 million, including an upsizing and an extension of our existing syndicated loans in the new facility. This new financing structure perfect fits also into the implementation road map of our strategy. As you could see with regard to the performance program and also the exit or the consolidation of the sites footprint we plan to implement until end of 2027 and focus on a target -- medium target window of 2028 to 2030. Taken together, the objective is straightforward and consistent with the message at the foot of the slide. These measures establish a sustainable long-term capital structure with ample headroom to support the successful execution of our strategy, by proactively addressing near-term maturities within the implementation window. For the time line, I keep it on a rather high level. Our ambition is to complete the capital increase during the second half of this year. The key steps are the strategy announcement as of yesterday, our half year 1 results, August 5, the planned extraordinary general meeting in late August in which we will see the necessary capital authorization and then the final launch of the capital increase. Further details on exact timetable and transaction milestones will be communicated in due course. Having outlined now both on the strategic road map and also the financing measures that support it, let me now turn to what this also means to our financial ambitions going forward. Let me explain the logic a bit behind the guidance rather than just the numbers. First, on revenue. As expected, closing less profitable sites will temporarily lower near-term reported revenue. We would stress this is deliberate portfolio optimization, not weakening underlying demand. As the initiatives stay core, we clearly expect to return to sustainable revenue growth over the midterm. On profitability, we expect the margins to improve materially as the portfolio optimization and the value creation initiatives gain traction. The medium-term ambition is an EBITDA margin of 20% to 25% in marking a substantial uplift of EUR 150 million EBITDA in the midterm and thus bringing the leverage down below 2.5x, down from around 3.3x the end of 2025. And we've already taken an encouraging first step with regard to profitability. Q2 2026 margin was already 19%, up from 16% in 2025. This is exactly the self-help progress that we pointed to at the outside, and that gives us the confidence that the execution is on track. What moves us within that EBITDA margin range, it depends on the pace of execution. How quickly we will deliver the transformation the cost programs, supported by a stable market. Alongside sustainably improving the profitability, we have an equally clear ambition to keep strengthening the financial profile. The objective is to establish and maintain a sustainable long-term capital structure that supports disciplined investments, financial flexibility and long-term value creation.

Thank you, Mathias. With that, we have reached the end of today's presentation. And the message we hope you take away today is simple. We're operating in the right markets. We have the right strategy, we have the right team, and we are putting the right financial foundation in place. Now it is all about execution. Thank you for your time and attention. Mathias and I look forward to your questions.

[Operator Instructions] And we have the first question coming from Sebastian Bray from Berenberg.

I have 2, please. The first is on the reported EBITDA in the second quarter of just over EUR 120 million. Could you please help me understand if that entails any one-off impacts or it's an underlying EBITDA, no biological adjustments, no CO2 credit sales. The reason that I ask is that it's quite a big organic acceleration versus the underlying EUR 80 million in prices in Q1 and prices are still quite strong. My second question is quite simple. What will happen to financing costs after the EUR 300 million equity raise is done. By how much could these fall from the current interest run rate of about EUR 130 million, EUR 140 million a year?

Thank you, Sebastian, and good morning to you. So I'm going to take fourth question, right? So starting with the reported EBITDA for quarter 2 and the related one-offs. And I remember that you also had the same discussion on quarter 1, where you fairly stated that there were some larger one-offs that impacted or positively impacted the results. So within the EUR 123 million of reported EBITDA, we still see 2 certificates in the amount of approximately EUR 5 million, so significantly lower compared to quarter 1, but on par what we have seen in quarter 2 2025. Further, there was some positive FX development of approximately EUR 3 million that also pushed the reported EBITDA and the bio asset revaluation with a positive impact of EUR 10 million. So walking back now to a true and fair operational performance, I would see it at the level of above -- slightly above EUR 100 million. compared to the amount that you discussed in quarter 1. On your second question, with regards to the financing. So in principle, we do see a pretty profile with regards to interest rates going forward. You know and you're well aware that there is the hybrid in 2028. That potentially is going to be refinanced in case this is going to happen, this will have a significant step up with regards to financial results and interest rates that we're going to pay.

The next question comes from Saul Casadio from M&G.

For the strategic update. It is very clear what you -- sorry for my voice, what you're trying to achieve industrially. On the financial side, I just wanted to understand that the rationale for the capital increase, is it to address liquidity need? Is it to refi the hybrid? Is it to address the leverage problem? I'm just trying to understand the need for a capital increase in your plan?

So thanks for the question. I'm going to take that. So the overall package with the EUR 300 million equity rights issue and an additional EUR 300 million of new debt is sized to provide headroom through the execution. So which shall provide the financing for the transformation. First, this is the first aspect. Second, as I mentioned, the exit of several sites will also come with severe one-off noncash items that's going to hit into Lenzing's equity ratio. The equity rights issue will support to cure with that regard.

Sorry, sorry, just to clarify. So you have some equity rate covenant based on equity ratios and you expect it potentially to be --

We don't have covenants like that. we don't have covenants. It is just about operating on a to a sustainable equity ratio moving forward.

Okay. And in terms of cash costs for closing the assets that you mentioned, is there any significant cash costs given the fact that you're selling the Indonesia you're trying to sell the Indonesian assets. So overall, this restructuring in terms of footprint will be cash positive.