Lenzing AG

VSE:LNZ

Ladies and gentlemen, welcome to the Lenzing AG Analyst Conference Call and Live Webcast. I'm Carmen, the Chorus Call operator. [Operator Instructions] 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 Rohit Aggarwal, CEO. Please go ahead.

Thank you, Carmen. Ladies and gentlemen, welcome to the presentation of Lenzing's results of the first quarter 2025.

With me today, as usual, is Nico Reiner, our CFO.

Let's start with an overview of the key developments. Revenue and EBITDA continued to improve also in the first quarter of this year in a market environment that remains still challenging. Our revenue reached EUR 690 million, an increase of 5% compared to the first quarter last year. EBITDA more than doubled compared to the first quarter 2024 and reached EUR 156 million with an EBITDA margin increasing from 11% to 23%. Free cash flow was back to positive in the first quarter. However, not on the very high level we have seen in quarter 1 of 2024.

Overall, our performance continues to show very positive developments despite the lack of market recovery. As I said, the markets remain challenging also in the beginning of 2025. Since the inauguration of Donald Trump and its first tariff announcements, market uncertainty has clearly increased. However, the direct impact on the first quarter 2025 was still relatively limited as the measures intensified in the beginning of second quarter.

Let's start with a brief overview on demand, prices as well as input costs. On the demand side, global apparel markets developed mostly flat, while nonwoven markets continue to remain more robust. With regards to market prices, we saw a slight decrease of selected generic fiber prices compared to quarter 4 2024, especially towards the end of the quarter. On the cost side, energy and caustic soda market prices remained elevated versus pre-crisis levels.

Let's look at the relevant markets for Lenzing, textiles and nonwovens. When adjusted for inflation, global demand for apparel remained almost unchanged with modest growth in the first quarter versus last year. However, there were slight differences in the regional comparison. While demand in China developed slightly positively, consumer confidence in the U.S. fell sharply over the quarter due to political uncertainty. This development was also reflected in falling U.S. apparel retail sales in February. Demand recovered in March after the U.S. consumers stocked up on apparel given the expected price increases due to the announced tariffs. Overall, U.S. apparel retail sales grew marginally year-over-year in the first quarter.

However, in Europe, demand for apparel fell due to increasing consumer uncertainty. Low consumer confidence and reduced spending appetite remains ongoing challenges in 2025. In addition, economic and geopolitical instability, considering the U.S.-China trade war keeps the uncertainty high.

Now let's turn our attention to nonwovens. Also in nonwovens, tariffs play a major role, but particularly Chinese sellers are looking for alternative outlets for volumes so far going into the U.S. End markets show high resiliency with a relatively stable consumer demand. The trend towards less plastic is ongoing, and the carbon footprint and other sustainability credentials are increasing, becoming a differentiator for nonwoven manufacturers and brands and driving interest for more sustainable fibers.

Moving to looking at the prices. Now these are fiber prices of the Chinese market. Please keep in mind that prices shown on this slide are generic market prices. Lenzing prices are mainly traded at a premium and the current share of specialties is at over 90%. However, the generic market prices shown here give an indication of the price development in the fiber market. Now most of the first quarter, the Chinese viscose market performed stable. Chinese plants were running at high operating rates and inventories remained relatively low. However, the spring peak season that traditionally emerges in March was overshadowed by macroeconomic developments. Demand and prices did not increase as expected. Instead, they started to gradually decline towards the end of the quarter. The price for medium-grade viscose fiber stood in at RMB 13,300 per ton, which is about 3% below beginning of the year.

Now let's look at cotton prices. Cotton prices were already suffering from weak demand before the U.S.-China trade intensified again. The United States is the second largest source of Chinese cotton imports. It is expected that China will source more cotton from other countries, probably Brazil and Australia in the future. The main concern is that a downturn in the global economy could have additional negative impact on demand. The pressure on dissolving pulp prices increased during the first quarter as downstream markets became weaker and paper pulp prices were on a very low level. Suppliers made some price concessions and the dissolving pulp prices came down a bit from the highs of 2024.

Moving to input costs. Energy and chemical costs are still significantly higher compared to historical levels and cost pressure partially increased compared to the previous quarter. Colder-than-expected weather and geopolitical developments drove European gas prices even higher, while reduced demand weighed on Southeast Asian coal prices. Caustic soda prices slightly reduced in Europe due to weaker demand, but they increased in Asia as companies built up inventories ahead of Lunar New Year holidays. Hence, cost side remains a challenge for fiber markets.

As we saw, the relevant markets for us still show no or little signs of a sustainable recovery with especially generic fiber prices continuing to remain under pressure and input costs are still on elevated levels compared to 2020. It is therefore even more important that we took swift action with the holistic performance program. The program initiatives are primarily aimed at generating free cash flow and improving EBITDA through strengthened sales and margin growth as well as sustainable cost excellence. As a reminder, it consists of 3 pillars: profitable top line growth with full focus on margin improvement, cost excellence in all we do and free cash flow generation. The overall impact of the program should result in a significant positive free cash flow.

Now let's look at the second point of a program, which is cost excellence. In 2024, we already realized our EUR 130 million in cost savings. Now we do expect cost savings to further increase to an annual cost savings of more than EUR 180 million for this year, and we are clearly well on track to meet this target as well. To make it clear, we are talking about our recurring target with an ongoing impact beyond this year as well. Progress continues to be good in the area of product cost and quality through intelligent efficiency improvement measures. Successes have also been achieved in purchasing through operational and strategic measures.

Looking ahead, the holistic performance program is expected to continue to improve manufacturing costs and to leverage further cost potential, particularly in the area of overhead functions. At the same time, the structural and process improvements addressed will lead to positive effects on sales and margins generation. We can certainly be satisfied with our success so far, but there are still improvement areas ahead of us in order to maximize our full potential.

And with this, I hand over now to Nico Reiner for an update on financials.

Thank you, Rohit, and also a warm welcome from my side as well. Despite continuously challenging markets, we were able to increase both our revenues and our margins, thanks to the measures that we have actively taken. Revenue increased by EUR 32 million in the first quarter compared to quarter 1 in 2024 and reached EUR 690 million. EBITDA more than doubled and increased by EUR 85 million to EUR 156 million. As the number of CO2 certificates helped continued to increase in 2024, we decided to sell some of them in the amount of EUR 25.5 million, which positively impacted the EBITDA.

Depreciation was at EUR 82 million, leading to an EBIT of EUR 74.3 million, which compares to EUR 1.5 million in Q1 2024. Income taxes amounted to EUR 3.3 million compared to EUR 9.2 million in Q1 2024, and the financial result was EUR 39.2 million compared to EUR 19.2 million in Q1 2024. As a result, there was a profit of EUR 4.7 million for Lenzing shareholders. This is a clear improvement compared to the loss of EUR 32 million in Q1 2024, and our target is clearly to continue to improve.

Let's move to the next slide. Looking now at cash flow. Trading working capital increased by 16% to Q1 2024. Our objective is to have the right balance. I would say that levies at the end of March were a bit on the high side, and we aim to reduce it. With regards to CapEx, Lenzing continues to put a clear focus on maintenance and license to operate projects as part of its performance program and CapEx remained on low levels of EUR 33 million in Q1, comparable to the first quarter last year. As a result, free cash flow was positive again at EUR 15 million. That was not as high as in the first quarter 2024, partially impacted by one-offs. We clearly continue to have a very clear focus on free cash flow.

Let's move to the balance sheet. On the left side of the slide, we show the development of net financial debt. It remained relatively stable at around EUR 1.5 billion. On the right side, you see the development of our liquidity cushion. It decreased slightly by EUR 14 million and reached [ EUR 636 million ] at the end of the first quarter.

With this, I hand back to you, Rohit.

Thank you, Nico. Let us now move to a topic which is probably keeping every company busy at the moment, which is the U.S. tariffs. While in Q1, the key focus was mainly on the dispute between the U.S. and its neighbors with Mexico, Canada as well as the 10% and later 20% on all imports from China, we saw limited impact in our Q1 result. However, the actual escalation from reciprocal tariffs followed in early April, with the now ongoing 90-day pause, we have 10% additional import tariffs into the U.S. and 145% additional on Chinese imports into the U.S., while China levies 125% of import tariffs on U.S. goods.

Now this has led to both supply and demand shocks, a collapse of China-U.S. trade and two, an impact of global value chains and supply chains. Now as a globally active company, those tariffs do have an impact on Lenzing as they make our imports of raw materials for our U.S. manufacturing site in Mobile, Alabama more expensive. And they come with a lot of uncertainty from secondary effects, which today are hard to estimate.

Let me just give you one example. U.S. tariffs will make goods more expensive for consumers, which might lead to hesitancy to spend and eventually lower demand volumetrically. All in all, everybody in the industry is scrambling to deal with the situation and plan in scenarios given the high uncertainty. Still, we believe Lenzing is better positioned than other fiber manufacturers given our global footprint. And needless to say, we are working on a set of mitigation measures, which include switching supply routes for input materials such as dissolving pulp and chemicals and shifting fiber volumes between our production sites to optimize for existing and possible tariffs and really supporting our customers. In general, we maintain very close contact to our customers and regional value chains to handle the situation in the best possible way with our partners.

Let's move a little bit and talk about the outlook. I can clearly say that thanks to our performance program, the operational performance in the first quarter 2025 was solid. We assume stable demand in pulp and have a cautious outlook on the generic fiber market development in 2025, and we expect energy and raw material price -- cost to remain on elevated levels. However, market visibility is low, and that has further intensified due to the current changes in global tariffs, the potential impact of which is continuously being evaluated. We have set up a task force to analyze the situation and mitigation measures are being added or adjusted depending on the developments.

While the market has not helped us so far, we are not waiting on tailwinds from the market. We continue to take the future in our own hands, and we expect operational results to continue to be positively impacted by the performance program. Therefore, we expect EBITDA for the 2025 financial year to be higher than in the previous year.

With this, I will hand over back to the operator for the Q&A.

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

Yes. I have one question, please. In light of the current challenges you just described, can you tell us a bit about the capacity utilization rates in your plants at present, possibly region by region, if any specific region is affected or whether all of your plants would be affected by the tariff discussions?

Thank you, Christian, for these questions, and I will give that to Rohit, please.

Thank you, Christian. Situation is still unfolding. And as we know, there are some specific regional impacts. But what we are looking to do using and leveraging our global footprint to be able to work with our partners and customers to continuously to be able to adapt our supply chains. And therefore, at this stage, we are not seeing any material changes in our utilization of our plants. Now we are continuously monitoring the situation. As I mentioned, we have set up a task force and almost on a daily basis, we are trying to get a better handle on how the situation will evolve, how the supply chains may adapt, how the customers may choose preferences in terms of locations of supply. And therefore, we are ready to be able to deal with that change in a more agile manner. Now in terms of specificities, that's a number that we don't generally hand out. But generally, what we have is there's no material impact at this stage.

We have now a question from the line of Mr. Patrick Steiner from ODDO.

It's Patrick Steiner speaking. I would have a few, and I would like to take them one by one, if possible. Firstly, given the impacts from the U.S. trade tariffs we just discussed, market prices for viscose, cotton, dissolving wood pulp having declined in Q1. Could you give us your view on the components going into the expected EBITDA increase in 2025 compared to 2024? I mean is this mostly driven by cost savings, valuation effects and certificate sales? And how do you think about volume pricing components for '25 compared to '24?

Thank you, Patrick. Now this -- I think Rohit will start with answering that question.

Yes. So well, thank you, Patrick, for that question. I'll try and give some color to it and then probably hand over some time to Nico as well to kind of give some flavor in the way we have -- we are looking at 2025. So at this stage, as you know, our performance program has got -- apart from the cash generation, we have got 2 components, which was really about driving growth and growth has got 2 components. One is what we call premiumization of our portfolio, which is moving our portfolio towards more specialty where we see lesser competition. Those are more application innovation-driven growth. And if you see what we have done in the last year, there has been a significant shift towards our specialization share of our portfolio.

We talked about 90% last year. So we feel that the market that we are operating is that we have some headroom for us to be able to continue to work with our partners and continue to grow in that environment. And that reflects also our ability to hold pricing to a certain extent. Now a second lever, of course, is the cost excellence side, and we have been relentless about that ever since we started our performance program. And those are levers that we have in our hands, and those are self-driven, and therefore, we shall continue to execute those as what we have in the plan, and we do not see any impact of that changing one way or the other to have an impact on our numbers for 2025.

Now having said that, there are various other initiatives that we are exploring and looking at to take advantage of both on the market side as well on the cost side. And I'll give you an example. Our plant in Mobile, Alabama finds itself in a sweet spot right now with the tariff situation, where a lot of our nonwoven customers see that as a great position to be in because it's the only fiber plant in North America. And therefore, that gives us some kind of a leg up there. Also on the cost side, we're looking at what we can do on a material side, raw material side, which you can take advantage of in terms of the currently softening demand and material situation. So there are various levers currently coming into play, but then I kind of hand over to Nico to make any additional comments around this issue.

Yes, Rohit, I just can confirm what you are saying. Basically, it's our holistic approach with our performance program that we are tackling all areas of the P&L to improve. Might it be the top line with the shift of the product mix, as you mentioned, might it be also our pricing points. might it be also the volume situation and also going and trickling down the whole P&L, we are really tightly managing each cost position very intensively, and we are trying to get each opportunity to improve further knocking down our cost situation and getting profitability and free cash flow generation into the right spot. And so therefore, I would say this is basically the summary of all these topics. Yes.

Okay. Very helpful. So should we think about flat volumes, flat prices or some kind of deviations? I mean, of course, it's very hard to see at this point given the uncertainty of the tariffs, but what's your feeling on that?

Patrick, at this stage, what we have is really scenarios that we are working with. And I mean if anybody can tell me what's coming tomorrow, I can give you a precise answer. But I think at this stage, uncertainty, all what we can do is prepare the business and create conditions that can allow us to navigate this environment right now we are in. So yes, let's see how things evolve over the next days, weeks and months.

Understood. Second question, other operating income was quite solid with EUR 50.5 million in Q1. I think half of this is probably emission certificate sales, if I understood this correct. Can you give us a bit more detailed split on the other components, if possible?

Thank you, Patrick. So this is also a question to Nico Reiner. So I think there's the other operating income, which was high. We mentioned EUR 25.5 million in CO2 certificates. Any other components that you could share?

Basically, that's it. You mentioned it already, the key driver of the other operating income. The rest is relatively low topics. So therefore, I can only confirm what you said.

All right. Two more questions. What in your view are the effects of the hybrid capital and debt refinancing this year on the financial expenses and coupon payments in total? Could we -- could you somehow quantify that compared to 2024?

So questions with regards to the financing costs, this is also for Nico Reiner, please.

Yes. So basically, Patrick, what we are doing, we are very cautiously and forward-looking managing our balance sheet. And we are doing that in a very professional way. And so therefore, you have seen in the past that we have done a couple of actions, might it be the capital injection, might it be the maturity extension or might it be the refinancing, which we did very professional and also very successfully for LDC. So overall, when it comes to debt refinancing topics, as you mentioned them, we will come to the market and to the community in due course when we have to tell something. So overall, I can only confirm you we are on the topics, and we do that very tightly, very professional and very forward-looking.

Okay. So should we expect higher financing costs this year likely?

Sorry to tell you, we are not guiding on the financing costs in our structure at Lenzing. So I can only say that we are managing very intensively. So sorry, I'm not able to give you and provide you any number.

All right. Understood. Last question. Do you plan on selling more CO2 certificates this year? And what would be a potential effect on EBITDA?

So overall, also in regards to the CO2 certificates, we are looking in this position also pretty closely. We accumulated over the last couple of years quite a lot of these CO2 certificates, and we are also watching and monitoring very tightly the overall development of the price of the CO2 certificates. And if it makes sense, then we are acting here in this way as we did also in Q1. So overall, this optionality is still on the table. And so therefore, we are doing that in the best way we can support Lenzing.

The next question comes from the line of Sebastian Bray from Berenberg.

I have 2, please. The first is on the trading that the company has seen thus far in April. I appreciate it is early and there are various different proxies for volume growth. But if I look at some of the more recent data from Shein and the Chinese fast fashion companies, they appear to be down between 15% and 25% year-on-year in April after a pretty decent Q1. Is that broadly consistent with the type of China-focused volume declines that Lenzing has seen thus far in April? I appreciate you cannot give me a specific number, but is this in the right ballpark, the right direction?

My second question is on financing. I appreciate several options are on the table, and I don't want to push you into one of them. But is convertible debt something which Lenzing has not done historically also on the table?

Thank you, Sebastian. So let's start with the first question with regards to the start in the second quarter. Rohit, if you could answer that question, please?

Yes. Thanks, Sebastian, for the question. And I think at the outset, let me kind of lay it this way. I think it's very difficult to correlate a company like Shein's performance to a general market conditions because the value chains are pretty complex in textiles. And therefore, where we sit in the value chain, we are pretty much at the last stage of where everything else is downstream to us. So in terms of watch -- and Shein is in a particular part of the apparel market, which is in a fast fashion, they had a very large pivot to the U.S. in terms of market size. So I think it's not a conclusion you can draw easily as a basis to see how the industry is performing at the moment.

Now I wouldn't be able to give you any specific numbers for us as you can understand that. But what I can say is that where we sit, we are able to find opportunities as we are standing on different legs in the market from Turkey to India to Southeast Asia and China. And we do believe in the mid- to long term, if the situation doesn't change, the supply chains will adapt to various other countries to overcome the current situation.

So -- and the second question was with regards to the financing options, if we could also consider a convertible. This one is for Nico, please.

Yes. Thank you very much. So look, basically, for professional management of a company and within our responsibility, we always have to think about in a holistic way on all tools which are generally available to manage the balance sheet. So in this regard, also convertible is a tool which you can think of. But basically, our thoughts at this point of time are clearly not on the equity side. And so therefore, I would comment in this way that we are not, at this point, focusing on a convertible or something like that. Yes.

That's helpful. Can I just ask a follow-up on pricing? It was helpful to see the viscose pricing displayed in April and what's happened to it more recently because of trade war pressures. Is Lyocell and is Modal generally behaving in a similar manner over April? It's a little more difficult to track.

Now this question -- yes, this question was prices. I would, yes, give this to you, Rohit, please.

Yes. I mean at the moment, Sebastian, the challenge is that the market -- the generic fiber market prices, which we have shown have shown a sudden weakness towards the end of quarter 1 as what we have been experiencing. But also, again, just as a reminder that Lenzing's portfolio has -- is a more premium kind of portfolio. And therefore, the market that we are serving may or may not behave in a way that the generic market price behaves. And therefore, as I mentioned earlier as well that as far as Lyocell is concerned or viscose is concerned or Modal is concerned, the same factor would apply here in terms of the Lenzing's portfolio. So in terms of specific numbers, I can't hand out to you. But I would say that for reasons of pricing, some of our portfolio may be slightly decoupled to what we see as the generic prices in the market. But yes, there is a general trend, which you are seeing in the fiber market pricing, which is softening a bit.

Ladies and gentlemen, that was the last question for today. I would like to turn the conference back over to Rohit Aggarwal, CEO, for any closing remarks.

Well, thank you, Carmen. And just I want to say thank you to everyone. But as a preview, we will publish our results of the first half of 2025 on August 7. And with this, I will close the call now. Thank you very much for your attention.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.