Lenzing Ag Ord

Also from my side, a very warm welcome to the presentation of Lansing's half-year 2023 results. With me today is Nico Reiner, our CFO. And let's go quickly through our agenda for today. We will start with an executive summary, followed by an update on market developments. Afterwards, Nico Reiner will guide you through the financials and I will talk about how we expect the next quarters and beyond. We will end with the Q&A, and I look forward to a lively discussion. Let's start with an overview of the key developments and strategic highlights of the first half year. In the first quarter, we saw first signs of recovery in the fiber market with solid business development in non-woven, as well as good demand on the pulp side. The second quarter has continued with fiber demand improvements versus the second half of the year 2022. However, prices remain under pressure. The positive development on the raw material and energy costs has continued as expected, but these costs are still high on elevated levels versus pre-crisis performance. Our cost reduction program with an annualized impact of over 70 million as well as the strengthening of our sales activity program are well on track. We have proactively and with foresight in mind significantly strengthened our liquidity and deleveraged our balance sheet with a successful completion of a capital increase with net proceeds of 392 million. In parallel, we have proactively extended upcoming debt amortizations in the amount of 249 million euros. Let's move to the financial results. On the revenue side, we saw further recovery in volumes in line with the market environment compared to the second half of 2022. But, as mentioned before, prices continue to be under pressure. Costs further decreased in the second quarter compared to the last quarter, leading to a positive impact on EBITDA. In addition, there was a positive impact from valuation of the biological assets. Revenue slightly decreased versus the first half year 2022, to 1.25 million euros versus 1.294 million euros in 2022. EBITDA reached 137 million euros versus 189 million euros in the pre-crisis half year one 2022. If we compare the EBITDA in the second quarter 2023 to the last quarter, we can see a clear increase from 30 million euros to 107 million euros. The net results after minorities and hybrid bond was negative at 104 million euros versus 63 million euros in the first half of 2022. The free cash flow significantly increased in the second quarter of 2023 to minus 33 million euros versus minus 132 million euros in quarter one, 2023. Looking at our guidance, assuming a continued market recovery, we keep the expectation of EBITDA in 2023 to be in the range of 320 to 420 million euros. With this, I would like to give an update on some of our key costs. In the second quarter of 2023, both energy and chemical costs came further down compared to the last quarter. However, if you compare those costs to previous years, the prices are still elevated. On the left-hand side, you can see the decline in energy costs. Most notably, the European natural gas reduced to 35 euros per megawatt hour in Q2. However, you need to remember that in the first quarter of 2020, this price was below 10 euros per megawatt hour. On the right chart, you can see the development of caustic soda, one of our key ingredients in the viscous production. Prices have come down in all geographies. However, European market prices are still almost twice as high as before the pandemic slash before the crisis, the Ukraine crisis. The prices in China and Southeast Asia are also significantly higher than earlier. Please keep in mind that those developments of market prices do not fully reflect the impact for Lansing. as we are sourcing at better conditions in Europe and we partially source from Asia if the price delta is very high and benefit thereby from our storage facilities in Italy. Let's look now at some of the developments on the demand side. Let's start by looking into inventories along the textile value chain. which has been a particularly important aspect of what created the perfect storm in the second half of last year. On the left, you see inventories of the Chinese viscous industry. Industry increased drastically in the second half of last year, reaching close to a full month. Since then, they have come down to a much more manageable level, And we are now at roughly 15 days, which is a very healthy level. However, downstream, we still have above average inventories in rayon yarn, as well as braids fabrics. And the biggest issue continues to be apparel inventories. You can see the number, the US numbers on the right, as you will remember, they increased during last year and they did come down seasonality towards the end of the year. But since then, we rather see limited movements. Yes, the impacts of apparel to the US are below average, but it still seems to take time for brands and retailers to meaningful reduce excess inventory. When we look Now to the fiber prices. We see in the Chinese viscous market, prices followed the declining DWP price from early May. Operating rates in the Chinese VFF industry were really high throughout the second quarter, ending up at a level of 87%. And at the same time, retreated sales promotion kept inventories low, as the mentioned 15 days we've just seen on the previous slide. On the cotton side, we still experience high price volatility, as well as stock buildup in various markets. The reasons for that are twofold. On one hand side, on the buyer side, we still see inflated inventories on the very expensive cotton. as well as the cotton market reacts to the interest rate hikes as well as the banking crisis in March. Cotton is also late to react to any change in demand. Since once planting is done, the volume will hit the market regardless of the demand. Polyester prices, not shown here on that slide, are largely following the development of the intermediate prices. And here we saw a rather stable development. DWP prices started to decline early May. At the same time, the prices for pale tar pulp in China dropped rapidly by almost 40%. In dissolving wood pulp for the fiber production, some mill-specific supply constraints as well as a relatively healthy demand prevented a similar drop. On the next slide, you see one of our cornerstones, the premiumization. And the good news is Lansing could defend its premium. Lansing had more than 75% of its fiber revenue from specialty fibers in the second quarter of this year. On the left chart, you see how our specialty prices developed compared to commodity viscose on an index basis. Since 2017, Lansing could increase the premium of these specialty fibers compared to commodity fibers until 2019. And it could maintain these premiums at solid levels since, despite the various crises. And how was this possible? This was supported by our strong branding activities. As you know and as you are aware, we are not a classical B2B supplier. that is always in danger to be commoditized. We are actively driving our B2B2B model throughout our co-branding programs and are highly successful with this. We operate successful a push and pull strategy built around Blue Ship customers through involvement and early involvement in their value chain decision process. This resulted in numerous partnerships with those very important brands in the textile industry. And you see on the right-hand side that between 2020 to 2022, the number of co-training programs quadrupled. You know, Lansing is a champion of sustainability, but Lansing is also a champion when it comes to innovation and branding and you see here a couple of examples what happened in the first half of 2023 to underpin this leadership you see on the one hand side on circularity we have developed a product which will be launched in the autumn winter collection of philippa k based on our can still refree bar fibers. All of you know the brand Neutrogena. Neutrogena is as committed to sustainability as Lansing is. And they committed to shift their entire portfolio to 100% soliloquic-based products. And we are very pleased that out of 88 million licensed products, 77 million products, will be 100% VO cells. Also in the textile segment, we can report a major success. We presented at the IDMA, one of the most important textile fairs in Milan, a machine together with the Karl Mayer Group, which is able to produce a carbon zero T-shirt. And finally, Lansing is on the pink carpet with Barbie. We actually are very proud that we could equip the actress Nicola Coughlin with a wonderful dress on the pink carpet made out of tensile fibers. With that, I would hand over to Nico for the financials.

Thank you, Stefan, and a warm welcome from me as well. Let's start with revenues. they increased slightly to 627 million versus 623 million in Q1 2022. Looking at the half year, revenue slightly decreased to 1.25 billion from 1.29 billion euros. This development is mainly due to the decrease in FIBA revenues while pulp revenues increased. Fiber prices continued to remain under pressure, as outlined by Stefan. EBITDA reached 107 million euros, which is a clear increase compared to Q1 2023 with an EBITDA of 30 million euros. This includes a positive impact from the valuation of our biological assets of 25 million euros in the second quarter and 18 million euros in the first quarter. Looking at the half-year figures, EBITDA decreased from 189 million to 137 million euros. Looking at EBIT, it turned positive again in the second quarter and reached 29 million euros, a plus of 71 million compared to the last quarter, with depreciation amortization being at 77 million euros. For the half year of 2023, EBIT was negative at minus 12 million euros. And for group net profit attributable to Lansing shareholders in Q2 2023, we reported a net loss of 24 million euros, which compares to 80 million euros in the first quarter. For the half year, net loss amounted to 104 million euros. Financial result was comparable to the first quarter at minus 31 million euros, and income taxes were positive at 1 million euros. Looking now at cash flow. In the free cash flow, we can see further positive impact from our capex reduction due to the completion of our two projects in Thailand and Brazil in 2022. Operating cash flow came out positive again at 18 million euros. As a result, free cash flow significantly increased to minus 33 million euros by almost 100 million euros compared to the first quarter this year. Going forward, in 2023, we will not have such significant projects and are therefore confident that CAPEX levels are further normalizing and investments will be focused on maintenance CAPEX. Trade working capital slightly decreased in the second quarter of 2023, which was mostly driven by a slight decrease of trade receivables and an increase of trade payables and a slight increase of inventories overall. Due to ongoing working capital improvement measures, we are confident in our ability to further optimize our working capital which will benefit our free cash flow going forward. On the next slide, we show historical net financial debt quarterly evolution. Reported net financial debt increased slightly to approximately 1.95 billion from 1.92 billion euros quarter-on-quarter mainly due to the negative free cash flows. Since the quarter end, Lansing has raised 392 million euros of net proceeds via a right issue to strengthen the balance sheet and liquidity position and to provide sufficient flexibility to further support better growth strategy and cash generating profitable growth. Net financial debt position materially improved at 1.56 billion euros pro forma for capital increase with continued deleveraging trajectory expected over the remainder of 2023. The capital increase, together with the expected market recovery, will support Lansing's path to net leverage ratio target of below two and a half times. The capital increased increased Lansing's liquidity cushion by 392 million euros to a pro forma level of 971 million euros by the end of the second quarter. In parallel, we have proactively extended upcoming debt amortizations in the amount of 249 million euros with the majority impacting debt maturities in 2024. As you can see, we are basically financed through the end of 2025 with this. By having said that, I hand over back to Stefan now for the outlook.

Thank you, Nico. This is a chart we have shown to you in the past. But in case you haven't seen it before, let me quickly explain. The International Textile Manufacturing Federation, short ITMF, conducts a bimonthly survey amongst close to 300 executives in the global textile industry, which we believe is actually a pretty helpful pulse check of the industry. the satisfaction with the current situation had declined since November 2021 and now in July survey it improved for the first time from minus 36 pp to minus 27 suggesting though that the overall sentiment is slightly improving but minus 27 is still a very negative sentiment. The single biggest concern continues to be the weak demand mentioned by two-thirds of the respondents. However, it is very fair to say that, in particular in textile, the visibility is even lower than before. Brands are acting with a high portion of cautionness Order patterns have changed and the supply chain is trying to act on a very short notice, avoiding inventory buildup. On the positive side, the business expectation in six months continues to be very optimistic at plus 21, pointing towards the potential recovery. Let's see what potential this impact has for Lansing. To remind you, 2022 was an unprecedented year, and we call the second half of 2022 the perfect storm. Costs in chemicals and energy were at unprecedented levels. Demand for fibers in the textile industry declined in the second half, which led to a decline of fiber sales and sales prices for Lansing. Free cash flows were significantly affected by the capex for two new plants in Brazil and Thailand, and inventories built up as well as by the resulting negative operating cash flow. In the first half of 2023, costs have declined, but were still elevated as explained before. Actually, non-volvin sales as well as pulse sales including cold product sales remained solid while textile sales started to increase compared to q4 fiber prices remained as explained before under pressure dwp prices were relatively stable at least up until may due to the completion of our new sites in brazil and thailand in 2022 CapEx decreased by about 55% compared to the second half of last year. In the remaining two quarters of 2023, costs are expected to further decrease, however, at a slower rate, and the cost-saving program is expected to further contribute. We expect actually stable demand in pulp, including coproduct, as well as for the non-woven business. While visibility for demand in textile fibers is still very low, with a positive impact on prices when the market recovery happens. As a result, operating cash flow is expected to increase, capex will be focused on maintenance, and trading working capital is expected to decrease. Now, what does that mean for our outlook? As mentioned before, we saw signs of demand recovery accompanied by raw material and energy cost decreases in the first half of 2023. Whilst visibility in particular in textile remains restricted, we expect further upside in the second half of 2023 compared to the first half. And the main drivers for these upsides are, number one, our recently completed expansion projects. And these are not only Thailand and Brazil, but lately also China. And they will contribute to the result of the second half. And I can announce that also in Indonesia, we are very confident on the progress of the modernization of that factory. Second, our global cost reduction program with more than 70 million annualized savings, as well as the measures we are taking to strengthen our sales activities, are well in track and are expected to have a further positive impact in the second half. We expect also further decreases on costs in particular on raw materials, however, at a slower rate. And number four, we expect stable demand in pulp, including co-products, as well as in non-volatile. As a result, we keep the expectation of EBITDA for 2023 in the range of 320 to 420 million euros, assuming a continued market recovery. During this presentation, we already spoke about the operational measures we have implemented in the recent past. I think it is important to point out at this stage that we think that Lansing is in a great position to capture the market recovery and to harvest what we have planted with our capacity extension, with our significant investment program in the past. And give me, please, your attention to take you through the seven strong reasons why we believe we have such a strong positioning. Number one, we cover the megatrends of sustainability and recycling in a unique way. Number two, our market has a structural growth drivers included, basically built in. This is driven by the population growth and the improving middle class income globally. Number three, we as a company, we as Lansing, we are shifting towards specialities. By the fourth quarter of 2023, the group expects that all of its production sites are capable to produce specialty fibers. Number four, we have competitive costs and we have an innovation advantage through our backward integration in DWP with our latest investment. As mentioned before, Lansing has a unique position when it comes to branding. We have by far the strongest brand portfolio with Tencel, with Viocell, and with Ecovero to support the brands of our customers. And number six, we drive our day-to-day continuous improvement agenda. Efficiency is part of our better growth strategy, and it is the clear focus of the entire management team. And last but not least, we just added with our investments in Thailand, but now in China, and soon to come in Indonesia, enough capacity to capture the growth. With that, we've finished our presentation, and I would hand back for the Q&A section.

Ladies and gentlemen, at this time, we begin the question and answer session. Please note that questions are only possible via telephone. Anyone who wishes to ask a question may press star followed by 1 on their touchdown telephone. If you wish to withdraw your question, you may press star followed by 2. If you are using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by 1 at this time. One moment for the first question, please. And the first question comes from Isha Sharma from Stiefel, Europe. Please go ahead.

Good afternoon. I have three questions, please. The first one is on the one-off impact of revaluation of biological assets. Thank you for giving us that number. It was around 45 million in the first half. Should we assume a similar adjustment for the second half as well? The second question is on the capex guidance. I will try my luck again. Could you give us a medium-term normalized growth and maintenance capex guidance for the Lensing Group, please. And the third one is on the market trends. It seems that the last data point shows that Chinese inventories are increasing again. And I do understand that you don't have much visibility on fiber sales, but could you give us a flavor of how you think inventories are at your customers globally? seems really high in the US still, so wondering if we can assume that across the region.

Thank you. Thank you, Isha. Now with the first question with regards to the valuation of the biological assets, I will give this to Nico Reiner, please.

Yeah, thank you. So as you already mentioned, we are clearly showing in full transparency the effect of this biological value coming into the numbers from the first half here. And as you might know, these valuations are underpinned by a long-term development also in the situation of when we are doing these topics. So basically, these long-term trends tend to be then also for longer time. And having said that, it is a positive impact probably also going forward. you can might do a calculation on it on your own as these topics are continuing, might continue. So therefore, a clear guidance going into the second half here is not possible to give me to you as I do not know the markets on these biological assets and how they develop directly. But first of all, as a first assumption, if you do an old calculation, you could assume that.

Now the second question was regarding to the CapEx, especially with regards to maintenance CapEx.

Yeah, basically when it comes to CapEx, as I have to say here, we are not guiding on separated boxes of CapEx, so for maintenance CapEx and for growth CapEx. But clearly to state, we are really focusing now at this point of time on maintenance and license to operate CAPEX. These are the clear guidance on the CAPEX side. So I think these are the key takeaways which you might take into consideration.

Now the third question was with regards to the inventory levels that we see on global scale. I would hand over this one to Stefan.

Yeah, thanks a lot. Thanks for the question. Yeah, as we elucidated, the viscous overall inventory is still in a healthy range. When you go further down the textile value chain, I would say also on the yarn side, it looks better than it looked last year at the same time. However, on the apparel side, we still see inflated inventories I think in particular in the U.S., but also in some Western markets.

Thank you very much.

The next question comes from Markus Meyer from Baader Helvetia. Please go ahead.

Good afternoon, gentlemen. Several questions from my side. Maybe I ask them one by one. I have a question block around your guidance. as an add-on question to Isha's question, how much of this one-off effects from the revelation of your biological assets have you baked into your guidance for this year? Or is basically nothing baked in? Whenever something comes, then this is a nice add-on. Additionally, on the guidance, then should we see the Q2 ebitdera as a good run rate then for the second half, maybe even then only depending on the answer of the first question, the EBITDA excluding this one-off effect of 25 million in the second quarter. And do you expect also fibers to generate a positive EBITDA in the second half as so far your EBITDA contribution is solely coming from the park division? And also on the park division, can you give an insight how you see the development going into the second half. Should we see the first half as a good run rate for the second half, or is, in particular, the Q2 a good run rate for the second half? Or is there anything on the agenda you would like to flag? And then I have two other questions and two other blocks, but maybe we focus on the guidance questions first.

Thank you, Markus. I would still structure this, I think, into three questions. So the first one with regards to guidance, so how much of the what-offs are expected to be in there?

As simple as I have to say, you know, we are not giving any details which is underneath of the guidance, but I have to say here Clearly, we are holistically looking at our guidance, which we are providing to the market. So that would be my comment on that one. Thank you.

And the next one was also regarding the guidance, as I understood. So about our assumptions with regards to a run rate of the EBITDA for the next quarters to come, if that would be in the range of what we've seen in the second quarter.

So basically, this is something that you can mathematically follow relatively easily as you do have the knowledge about our first quarter earnings and also the knowledge about our second quarter earnings. And what we always said is based on the recovery of the market, we are highlighting this guidance on the EBITDR levels. And when you're doing this mathematical calculation, you are pretty much easily ending up with some numbers which is giving you then the clear direction. If you sum up, we are now at 137 million EBITDA by the end of the first half year. And to reach our guidance, if you make the calculation on the delta, you can clearly see what our expectations are on the improved market situation, which we are hoping to achieve.

Okay, thank you. Understood. But maybe I don't question to this. The contribution of the earnings in the second half, do you expect any kind of change? Should there be more contribution from the fiber and less contribution from the pipe division? Or should you expect basically the trends of Q2 continue into the second half?

I mean, here you can clearly say and see what we have stated on the development on pipe and also on the development on fiber. the non-woven business where we have clearly highlighted that these businesses are running quite well on a stable basis. And if you do then the logical conversion of this statement into the direction of the fiber business, then you can conclude easily on your own that we will see and hopefully we will achieve an improvement on the market side here. Clearly to state on that one, this is then the clear topic and the assumption which is lying behind of it.

Okay. And then our last question is more a general question. So in the past, at least from the IPO, I know that viscose always had versus cotton long-term a premium. And in your chart, and also over the last course, it became clear that there's since several years a discount of viscose to cotton. So maybe you can help us to understand was there any kind of change in the market sentiment towards viscose? Or should we expect the viscose to regain its premium over fibers? And is there also then a trend that more of the cotton volumes are going into viscose due to cost reasons or just from a cost perspective?

Thank you for the question. I think what we can clearly see is and that we have shown that we are able with our premium product to defend our premium versus generic viscous. Now, the generic viscous goes in various markets. And yes, there are programs where viscous goes also into currently cotton or pure cotton application. But the same is true for Liocel, where people are converting. And the reasons for conversion are many folds. And one of the reasons is, for example, the sustainability aspect of our fibers. And here we are bringing, for example, with our Tencel Carbon Zero fibers, a true innovation also in pure cotton markets, where our customers are very keen on and therefore also are willing to pay a premium. That would be my answer to your question.

Maybe here's a second add-on question. Can you confirm that there's a premium of your specialty viscose versus cotton? Is there a premium?

Well, I think you have to see the markets. They are developing with different mechanisms. You cannot do an easy comparison between cotton and viscous. We can clearly see that we have a premium versus generic viscous. And then we have, as you know, since the IPO, we added in particular Lyocell to the game. So we have here a different market mechanisms between cotton and viscous. I wouldn't make... a calculation here on the premium side. I would rather focus on the specialty fibers versus generic fibers. Okay. Thank you.

And the next question comes from Theresa Schienwald from Rife Eisenbank International. Please go ahead.

Hi. Good afternoon. Thanks for taking my questions. The first one, and I'll ask them one by one, is about capacity utilization. Is it fair to assume that the first half of 23 has been, of course, better than the second half of 22? I'm looking actually at what level you're including in your guidance. Are you looking for... and even higher capacity utilization in the second half around the level of the first class of 22 and also how many lines are running at the moment?

Okay, the first answer is yes. So yeah, our capacity utilization is better than in the second half of last year and we were increasing our utilization throughout the first half of this year and the second part of your question was how many lines we are running i'm not sure we are disclosing that because that isn't in information which is of course of high interest also for our competition but you can assume that we are having on the long-term average, a pretty high utilization in our sites.

Okay, great. Thank you. Second one is energy, which you're hedging more. Are you still following the rolling hedging, or are you also making use of the recently lower short-term prices? rolling hedging or, again, optimistic purchases?

I mean, we clearly stated that our hedging strategy on the energy side is pretty clear. We are, on a 12-month basis, hedging two-thirds of our energy necessities and one-third is covered by the purchase coming from the spot market on a On a longer perspective, on 13 months to 24 months, the hedging is around one-third and then ramped up in a steady process to two-thirds. When it comes to the rolling of the process, the rest is also then again covered by the spot market.

Awesome. Thank you. And the last one. I noticed in the quarterly report also there is an increase. There was an increase in the emissions positions and the fair value of derivatives. Where did it come from exactly? And am I right to assume that these increases were, you know, neutral?

Teresa, the connection is not very good. We couldn't hear you well. Could you please repeat the question?

Oh, sorry. Yes. I noticed there was an increase in the emissions position and the fair value of derivatives. Where did this come from, first part? And the second one is, am I right to assume that this was P&L neutral?

Sorry, we really cannot hear you well. Maybe we'll have a call afterwards, just sort of phone line, and we can address that because we can just not hear you well, unfortunately.

Okay.

So there are no further questions at this time, and I would like to hand back to Stefan Zieler for closing comments.

Yeah, thank you very much, everyone. Thanks for dialing in, listening to our half-year presentation, and looking forward to talk to you with the next results in the next analyst call. Thanks a lot.

All the best also from my side. Thank you very much.