Lenzing Group (LZAGY), a leading fiber manufacturer, has revealed its 2023 annual results during an earnings call. Despite a challenging year marked by weak demand in the fiber market and increased raw material and energy costs, the company managed to generate positive cash flow in the second half of the year.
Revenue remained stagnant at approximately EUR 2.5 billion, but EBITDA increased to EUR 303 million. Lenzing reported a net loss of EUR 649 million for the year, mainly due to non-cash effective impairment losses affecting assets in Lenzing and Indonesia. The company's holistic performance program contributed to a positive outlook, with an expected increase in EBITDA for the fiscal year 2024.
Key Takeaways
- Lenzing's revenue was stable at around EUR 2.5 billion, with an increase in EBITDA to EUR 303 million.
- The company experienced a net loss of EUR 649 million for the year, primarily due to impairment losses.
- Positive cash flow was generated in Q3 and Q4 of 2023, attributed to a successful holistic performance program.
- Lenzing defended its premium pricing for specialty fibers over commodity fibers.
- Investments in capacity expansion and a focus on circularity and sustainability are key strategic areas.
- The company anticipates higher demand for fibers and stable demand in pulp for 2024, with a projected increase in EBITDA.
Company Outlook
- Lenzing projects higher EBITDA for the fiscal year 2024.
- The company's holistic performance program is expected to continue driving positive free cash flow.
- Sustainability efforts have been recognized with high ratings, including a CDP AAA rating.
- Lenzing anticipates stable demand in pulp and increasing demand for fibers in 2024.
Bearish Highlights
- High raw material and energy costs negatively impacted the company's performance.
- Apparel retail sales declined, affecting the fiber market.
- Lenzing reported a net loss for the year due to significant impairment losses.
Bullish Highlights
- Fiber sales volumes increased in the second half of 2023.
- The company successfully maintained a premium for specialty fibers.
- Investments in innovation and sustainability are expected to strengthen Lenzing's market position.
Misses
- Revenue from fiber division decreased by 12% to EUR 1.8 billion.
- Pulp revenues, however, increased by 45% to EUR 676 million.
Q&A highlights
- Lenzing's plants in Thailand are not producing the expected profits, leading to write-offs.
- The company is confident in its Lyocell products and market leadership.
- Lenzing has over 1 million carbon credit certificates, providing a potential liquidity source until the end of 2025.
- Expectations for 2024 include higher fiber demand and utilization, but pricing pressures are anticipated.
Lenzing Group's annual results highlighted the resilience of its business model amid a challenging economic environment. The company's focus on specialty fibers, sustainability, and innovation, coupled with its holistic performance program, appears to set a positive trajectory for the coming fiscal year. While the textile industry's recovery is expected to be slow, Lenzing's strategic investments and strong brand partnerships position it well to capitalize on the incentivized need for sustainable solutions.
Full transcript - None (LNZNF) Q4 2023:
Stephan Sielaff: Thank you very much. Also from our side, a very warm welcome to the presentation of Lenzing's 2023 Annual Results. With me today is Nico Reiner, our CFO, and Christian Skilich, our Chief Pulp and Technology Officer. Let's go through our agenda for today. We will start with the executive summary, followed by a market update by Christian Skilich and myself. Nico Reiner will guide you through the financials afterwards, and I will share an update on our holistic performance program, talk about some of the highlights in 2023, as well as the outlook. We will end, as always, with the Q&A. Let's start with an overview of the key developments. The recovery expected for the second half of 2023 in the markets relevant to us has not occurred. Weak demand in the fiber market, as well as still elevated raw material and energy costs heavily affected our results. We took swift action in summer 2023, and introduced our holistic performance program. We lead the entire organization on strengthening the top line, enhancing our cost excellence, and generating free cash flows with a clear objective to increase our resilience. We are very satisfied with the progress of this program so far. It is ahead of plan with the first ultimate impact resulting in free positive cash flow in both Q3 and Q4 2023. Let's now look at our financial results. Revenue in 2023 stagnated at around EUR2.5 billion in 2023, with a growing share from pulp. The EBITDA increased to EUR303 million, compared to EUR242 million in '22. This led to a net result after minorities and hybrid bonds of EUR469 million minus, of which a large part is coming from the non-cash impacted impairment of around about EUR465 million in 2023. As already mentioned, free cash flow in Q3 and Q4 2023 were positive and significantly increased for the full year to minus EUR103 million, compared to minus EUR741 million in the year 2022. Looking at our guidance, we expect EBITDA for the 2024 fiscal year to be higher than the previous year. With this, I hand over to Christian Skilich for an update on some of our key costs.
Christian Skilich: Thank you, Stephan. Good afternoon from my side as well. In 2023, energy and chemical costs came down compared to 2022. However, if you compare those costs to the previous years, prices are still elevated. On the left-hand side, you can see the decline in energy costs. While European natural gas prices were just above EUR30 per megawatt hour in the third quarter, they started to rise again and even exceeded EUR50 per megawatt hour in mid-October levels last seen in April. Remember that in the first quarter of 2020, the price was below EUR10 per megawatt hour. In the US, gas prices started to rise already in the third quarter and continued to increase in quarter four. Also, energy costs in Asia increased in quarter four, as you can see in the chart. On the right-hand side, you can see the price development of caustic soda. Prices normalized further in Europe, but increased slightly in Southeast Asia and China in the fourth quarter. Even though prices in all regions significantly decreased in 2023, they are still 30% to 50% above the level seen in early 2020. Let's look now how that impacted our production costs. The share of energy costs in our production costs, excluding depreciation, increased by 7% compared to 2021. To make numbers comparable, we excluded costs of the new pulp mill in Brazil and as well the new Lyocell plant in Thailand as those sites started operations only in the course of 2022. The increase of chemical costs was even higher, and here we are mainly talking about caustic soda where market prices remain elevated as just seen on the last slide. Costs for chemicals increased by 35% in 2023, compared to 2021. As already mentioned by Stephan, these elevated costs negatively affected our results in 2023. With this, I hand back to Stephan for the developments on the demand side.
Stephan Sielaff: Thank you, Christian. So after looking at the cost side, let's look at the revenue side, and let's start with the development of apparel retail sales in the last year. This is an important market for us as 65% of our fiber sales revenue came from textile fibers in 2023, and the biggest part of that ends up in apparel. For the full year 2023, we saw a slightly positive trend in global apparel retail sales compared to the previous year. These figures are, by the way, adjusted for inflation. According to preliminary estimates, global apparel retail sales in 2023 were plus 4% higher than in the previous year. While sales in US and Europe were largely unchanged in real terms, China made a strong contribution to global sales growth with an increase of plus 12%. When looking at sales in the US, it needs to be considered that 2021 saw a strong increase, so the baseline in 2022 was already higher. The high growth in China was driven by local demand and reflects a reduced prior-year level due to COVID-related measures in 2022. What is in our view, even more relevant than the relatively stable end market demand in 2023, is the development of the inventories. Let us look now at the development of inventories in the US, in particular. The green shaded area is the range where inventory levels have been normally in the past. The green line on top shows the clear increase of inventories in the year 2022, and the red line shows the development in 2023. You can see that the inventory level stayed relatively stable through the course of the year and dropped significantly in the fourth quarter of 2023. We hear from brands that reducing inventories was a top priority last year, and many are in a much better position with healthy inventory levels now. In November 2022, inventory levels were 30% higher than the average levels between 2012 and 2019, and they came down to plus 17% in December last year. Holiday promotions have helped to reduce inventories and move towards normalization. So in a nutshell, the very low level of apparel sales in the US in 2023 was served through inventory reduction, which explains that the demand for fibers was poor in 2023. As you can read in the quotes on the right side, many brands and retailers remain cautious about ordering to avoid being caught in a further overstocking situation again. And here a new slide. On this new slide, we are looking at the inventory levels along the global textile value chain. On the Y-axis, we plotted the steps of the value chain starting with fibers on the top, and on the X-axis, you see the quarterly development on the inventory from 2021 to 2023. The color code stands for the level of inventories compared to the same quarter of 2019. As you can see, in 2022, brands and retailer inventory increased significantly following high ordering in anticipation of demand recovery and supply chain issues. Note that spinning and fabric knitting, garment-ing, et cetera, kept inventories low while they increased somewhat on the fiber stage. In the first quarter of 2023, inventory levels at brands and retailers started to decrease as the new orders were placed only cautiously. In quarter four of 2023, inventories fell for the fourth consecutive quarter, approaching pre-COVID level, also helped by increased promotional activities during the holiday season in November and December. So we might now approach the end of this destocking cycle where brands and retailers are at inventory levels which at some point require some more active ordering. We expect to see a resulting upcoming amplification of higher demand out of this, of which we already see some first signs so far in the early weeks of 2024 where fiber sales and volumes are increasing. If we now look, what did that do to our fiber sales volume? As just mentioned, the overall decline in demand for fibers, especially in the textile industry in the second half of 2022, you remember we quoted it as the perfect storm led to a steep decline of fiber sales for Lenzing. Since the second half of 2022, fiber sales volumes have continuously increased again and reached around 430,000 tons in the second half of 2023, which is already 20% above the levels of the second half of 2022. Yes, this is still below pre-crisis levels, but we are very positive to further increase our fiber sales volume this year. If I look at the fiber sales volume and order books for the year 2024, so far, I would say that the trajectory is definitely, going in the right direction. Now after having looked at the volume development, now let's look at the prices. Let's look at viscose cotton and dissolving pulp prices, and here we are looking at the market prices in China for generic products. The first thing you will notice on this chart is that the price volatility in 2023 was quite a bit lower than in 2022. Viscose prices remain under pressure after a slight rebound in the first quarter. Looking especially at quarter four 2023, you will notice somewhat higher prices at the beginning of the quarter, driven by higher chemical costs and a seasonally higher demand. During the course of the quarter, prices in the Chinese market declined, again driven by seasonal effects. Cotton prices reached their highest price point for 2023 already in January, based on the high expectation after the Chinese reopening. Since the hopes for a quick recovery of the Chinese demand only materialized partially, prices were declining and relatively flat during the rest of the year. Dissolving pulp prices were also in a relatively narrow band in 2023. Having bottomed out in August, prices have recovered to some extent and ended the year slightly down at $880 per ton. When you compare viscose and dissolving pulp prices, you will see that the conversion margin was only $0.77 on average in the year 2023, which was relatively low. In the five years pre-COVID, that margin was at $0.96. So generic viscose manufacturers are quite a bit under pressure at these viscose and GDP -- DWP price levels. Now these were the generic prices. Now let us look at the development of Lenzing specialty fiber prices compared to commodity viscous. Lenzing had more than 75% of its fiber revenues from specialty fibers in the fourth quarter of 2023. Since 2017, Lenzing could increase the premium of these specialty fibers compared to commodity fibers until 2019, and it could largely keep this premium at a solid level since. Even in challenging market environments, Lenzing could successfully defend its premium for specialty fibers compared to the commodity fibers, also, thanks to our partnership with brands and retailers in both textiles and non-woven through our very strong brands portfolio. And with this, I hand over now to Nico Reiner for an update on the financials for the fiscal year 2023.
Nico Reiner: Thank you, Stephan, and a warm welcome from my side as well. Let's start with revenues. They increased in the fourth quarter compared to the same period last year by 10% to EUR655 million. This is an increase of 6% compared to the third quarter. Looking at the full year, Group revenue was relatively stagnant compared to 2022, but you need to remember that demand in the first half of 2022 was still relatively solid and leading to high revenues. The revenue from the fiber decision decreased by 12% to EUR1.8 billion, while pulp revenues increased by 45% to EUR676 million in 2023. Pulp revenues accounting for 27% of our revenue, this compares to 18% in 2022. EBITDA reached EUR84 million in the fourth quarter and EUR303 million for the full year. EBITDA in 2023 includes a positive impact from the valuation of the biological assets of around EUR80 million, as well as from the sale of CO2 certificates of around EUR40 million. Even though EBITDA increased by 25% compared to 2022, this is obviously, not a level that makes us satisfied. However, when I look at the development of our fiber sales in the first two months of this year, as well as to our order book situation, I'm very positive that we will see improvements this year. Let's move to the next slide. EBIT was negative at minus EUR466 million in the fourth quarter. This was heavily affected by the impairment of EUR465 million. Without the impairment, EBIT would have been at minus EUR1 million. In the full year 2023, EBIT reached minus EUR476 million with the impact of the impairment. You need also to consider that depreciation increased in 2023, compared to 2022 due to the investments made. And for the results attributable to Lenzing shareholders, in Q4 2023, we reported a net loss of EUR501 million. This is, of course, also heavily affected by the impairment. For the full-year. Group net loss attributable to Lenzing shareholders amounted to minus EUR649 million. Let's have a closer look to the impairment. The annual valuation of assets in accordance with IFRS has resulted in an asset impairment of EUR465 million for the fiscal year 2023. The reasons for the impairment requirements are, on the one hand, continued uncertainties in the economic environment and on the other hand, still increased raw materials and energy costs, as well as higher interest rate environment. These impairment losses are non-cash effective, and as we have seen, they have no impact on the full-year EBITDA for 2023, but did affect EBIT in 2023. The Lenzing side, as well as the site in Indonesia, were most affected as the impairment of those assets contributed to more than 80% of the total impairment. The impairment in the US and in Thailand were mainly related to investments made for future Lyocell expansions, which are expected to come with some temporal deferral impacting the valuation. In Lenzing, more than 50% came from capitalized innovation projects. We are still very much convinced about those technologies, but a shift in timing led to revaluation. The remaining impairments were mainly due to the viscose market situation, which has been under pressure for some time now. Looking now at cash flow. Lenzing further increased its operating cash flows to EUR99 million in the fourth quarter, which compared to EUR90 million in the third quarter. Total CapEx in 2023 significantly decreased from EUR698 million to EUR283 million as 2022 was still including expansion CapEx for the new sites in Brazil and Thailand. As a result, free cash flow increased by EUR680 million, compared to 2022 and were at minus EUR123 million for the full year. Free cash flows have steadily improved since Q4 2022, and we are satisfied with the positive result in the last two quarters in the light of the current weak market environment. This development shows that the measures defined in our performance program have already a positive impact. Trade working capital decreased in the fourth quarter and was down 13% from the peak levels in Q1 2023. I want to highlight here that inventories went down by EUR88 million compared to Q1 2023, another positive impact from our performance program. However, you need to consider that our two new sites in Brazil and Thailand led to a continuing increase of our trading working capital compared to 2021. Let's move to the balance sheet. On the left side of the slide, we show the development of net financial debt. Net financial debt significantly decreased by 20% compared to the peak in the second quarter, and reached EUR1.56 billion at the end of 2023. In 2023, Lenzing has raised EUR392 million of net proceeds via rights issue to strengthen the balance sheet and the liquidity position. It is important to also consider the maturity extension of EUR249 million. So in total, it was a package of about EUR650 million. The liquidity cushion reached a solid EUR934 million at the end of 2023. Let's move now to our debt maturities. As we have just seen, our liquidity cushion, consisting of liquid assets and unused credit facilities, reached after the capital increase a solid EUR934 million at the end of 2023. Looking at the upcoming debt maturities, with this we are basically financed through the end of 2025. I hand back now to Stephan who will share an update on Lenzing's new holistic performance program. Thank you.
Stephan Sielaff: Yeah. Thank you, Nico. We talked about the performance program already during the presentation. Let's do a deep dive now what it really means. As explained, the challenging market environment has led to unsatisfying results in 2023. It is even more important that we took swift action with a holistic performance program to keep Lenzing on track and to increase its resilience. The holistic performance program integrates ongoing performance initiatives and projects, and it addresses both divisions, fibers and pulp, as well as all the overhead functions. It is built on three key pillars. The first pillar is all about our top line growth. A strengthened top line and margin growth is the prerequisite for profitability and free cash flow generation. We will strengthen top line growth with defined sales initiatives in both push and pull. The second pillar is all about cost excellence. Enhanced cost excellence should be leading to sustainable profitability levels across pulp and fiber operations. And the third pillar is about the generation of free cash flow. Surely, the first two pillars going to pay into that, but we will give full focus on generating positive free cash flow through stringent CapEx management and very efficient net working capital management. As Nico just said, the positive free cash flow in Q3 and Q4 shows that the measures defined in our performance program have already a positive impact. With regards to this year, we expect the overall impact of the performance program to result in positive free cash flow. Let's look in more detail about the target and the status of the cost excellence pillar. To enhance cost excellence, we will make significant operational improvements and further strengthen our process excellence and have already identified around 300 detailed initiatives on site levels. We track all savings on a consumption cost reduction only and we exclude any market effects. We will further optimize our direct spend including chemicals, other production materials, energy and wood, as well as our indirect expense where we are particularly looking at maintenance, logistics and warehousing. We will here as well exclude any market effects when tracking savings. So far we have already identified around 200 initiatives to reduce direct and indirect spend, and we will make our overhead structure even leaner and reduce global personnel cost by reducing up to 500 FTEs globally, and we do that by not filling positions that fall vacant due to retirement and natural attrition as well as by staff reduction. We target cost saving of at least EUR100 million per annum with a full run rate in the year 2025, but we expect already to achieve more than 50% of it in 2024. As mentioned before, I can say that we are very satisfied with the progress of the program so far, both in terms of schedule, as well as in terms of financial impact. Let us look now at some of the examples of the program. As mentioned before, there are a large number of initiatives defined. And when we look at the first pillar to strengthen our top line growth, for instance, we have more than 500 new fiber sales opportunities identified in all regions for the textile business unit. And on the nonwoven side, I would like to highlight one particular initiative. A new lead with a customer infiltrations has been generated with the potential to double our fibrillated fibers business in nonwoven. To reduce our process costs -- our operations process costs, around 300 initiatives have been identified already and are in execution. One concrete example here is that we have identified ways to optimize the steam consumption in our new plant in Thailand by more than 30%. And improving business process excellence should lead to a saving of more than 85,000 productive mandates per year by using also state-of-the-art artificial intelligence solutions. With around 200 initiatives, in direct and indirect spend, I would just highlight two very different examples. We have, for example, renegotiated the terms of our warehousing in China which led to 20% lower cost, and we have installed a new caustic soda import lane in Indonesia which includes an own port tank farm at the harbor in order to utilize regional caustic soda price advantages. To increase, and the third pillar, the free cash flow, around 80 initiative buckets have been identified. Our state-of-the-art end-to-end supply chain process is expected to lead us to 30% less days on hand in inventory at very good service levels for our customers. And active CapEx excellence led to more than 10% reduction of engineering costs for projects. As you can see with these selected examples, the scope of the initiatives is very wide, and as mentioned, we are ahead of schedule and ahead of target with this program. The next slide is a slide which is very familiar to you. However, we found a reason to show it again, and this reason is very much on the right-hand side of the slide. And 2023 was a challenging year with regards to the market environment, but 2023 was also the year when we finalized our investment program with the capacity expansion in Brazil and Thailand, and the site conversion in China and Indonesia. All of these investments are fully operational and meeting the design parameters. With these investments, Lenzing will be well-positioned to increase the harvest from the market recovery. Let's look now at some of the developments we announced in the course of 2023 when it comes to innovation. On the back of our strong heritage, we continue to strengthen our position as innovation leader in circularity and sustainability, as well as in our TENCEL, ECOVERO and VEOCEL brands. Innovation is Lenzing's DNA. Just to name a few of our milestones in 2023, on the textile side, we increased our offering of Lenzing ECOVERO with a black version being produced at the upgraded site in Indonesia, and we rolled out the REFIBRA, the recycling technology of Lenzing to Lenzing ECOVERO. In nonwoven, we introduced carbon-neutral VEOCEL viscose fibers to support brands and partners in their carbon reduction targets of brands. And VEOCEL partners with NEUTROGENA to produce home compostable makeup removal wipes. Lenzing continues to be a leader and an inspiring producer for sustainable products in the natural fiber sector. Sustainability has been a key priority for us and we pride ourselves in having great foresight in where the market needs to go. That being said, our CDP rating of AAA is of course something that distinguish us far above many other companies and makes us exclusive to now only 10 companies that have achieved that rating, and one of only six companies out of these achieved this last year, at least a third time in a row. Further, our MSCI AA was confirmed as well as our EcoVadis Platinum rating. Those ratings should speak for themselves and are giving us the deserved rewards for the work we have done over many, many years. All these efforts and achievements are not only for certificates and awards, but most importantly make Lenzing so attractive to our customers and their brands. Hence, we get the strong cobranding support, and we continue to raise the bar in the fight against the climate crisis in our industry significantly. We have just aligned our targets with the 1.5-degree limit, the science-based target initiative, the most respected organization in the field of climate-related target setting, has reviewed and confirmed this target improvement. This makes Lenzing the only producer of regenerated cellulosic fibers with a scientifically confirmed net zero target. A confirmed net zero target. At Lenzing, we have the ambition to positively change the textile and nonwoven industry. This is precisely what makes us a noticeable difference to other companies and is also the basis for our long-term success. Let's turn to the outlook. We have shared this chart with you in the past. It depicts the result of a bimonthly survey by the International Textile Manufacturers Federation, ITMF among close to 300 executives in the global textile industry. We believe this is a useful pulse check of the industry and it helps understand the mood inside the textile value chain. The satisfaction with the current situation had declined for a long time, but in the last survey in January started to improve to minus 29. This still a very low level and reflects the fact that a widespread recovery has still not started. The visibility for the market participant is still low. The majority of the respondents had expected an imminent market recovery already a year ago, and they increasingly do so now. Let us look now at what players in the value chains have communicated this year so far. Given the uncertainty surrounding consumer spending, some brands and retailers are being cautious with their ordering. A number of textile brands highlighted a cautious approach and environment in their latest trading updates this year so far. Some of these brands and retailers are particularly cautious as they want to avoid the overstocking situation that have changed many for long periods in previous quarters. But it's also mentioned that inventory levels have improved. Textile mill operators also point to wait-and-see attitudes from buyers who are holding back on orders due to caution. What we are hearing from nonwoven also sounds to some extent conservative as consumer sentiment has improved but still has not fully recovered yet, and some headwinds could remain in 2024. Looking at our fiber peers, we see that they are all facing a lot of uncertainty as well. Challenges such as the current disruption in the Red Sea, but also events such as the upcoming US elections later this year explain some of the additional caution along the value chain. However, from a structural perspective, we see an unchanged or even incentivized need for sustainable solutions in both textile and the nonwoven industries. And Lenzing products are an integral part of that solution. Global regulatory developments further impact the entire value chain, pushing towards sustainability and circularity in these industries. And here we are talking about traceable sustainability, traceable circularity, where Lenzing has a perfect offering. In the EU, multiple pieces of legislation with this regard have been adopted and all are under discussion. Some examples of adopted regulations are the EU Deforestation Regulation, or the famous single-use plastic directive. On the right, you can see textile and nonwoven players and their climate commitment with a focus on reducing greenhouse gas emissions in the years to come. Just to name a few examples. H&M (ST:HMb) has a target to reduce its absolute greenhouse gas emission across their value chain by 56% by 2030, and by at least 90% by 2040, or [SET] (ph) plans to achieve net zero emissions of greenhouse gases by 2050. Lenzing with its products such as a true carbon zero tensile, or its carbon neutral VEOCEL viscous fiber can significantly contribute to those targets. And what is important to mention here at an affordable price level, the additional fiber costs for a carbon zero shirt are not really significant compared to the sales price of such a shirt. These ongoing and further intensified developments reaffirm our conviction of having the right fundamentals to address the sustainability challenges in both textile and nonwoven industries. Let's see now what we expect for 2024 for Lenzing. To remind you, 2022 was an unprecedented year and we called the second half of 2022 the perfect storm. Cost in chemicals and energy were at unprecedented level, demand for fibers in the textile industry declined, which led to a decline of fiber sales and sales prices for Lenzing. Free cash flows were significantly affected by the CapEx for our two new plants and inventories build, as well as the resulting negative operating cash flow. In 2023 Costs declined but were still elevated, as explained. Nonwoven sales and pulp, including coproducts, remained solid while textile sales started to increase compared to low levels in Q4 2022. Fiber prices remained under pressure. DWP prices were relatively stable. Due to the completion of our new sites in Brazil and Thailand in 2022, CapEx decreased significantly in 2023, and as a result of our performance program, free cash flow was positive in both Q3 and Q4 2023. In 2024, costs for chemicals and energy are expected to continue to remain on elevated level. However, we expect a positive impact from our performance program. We expect stable demand in pulp, including coproduct and demand in fibers to further increase in the course of the year. We expect fiber prices to remain challenging in 2024, while DWP prices are expected to remain relatively stable on profitable levels. With regards to free cash flow, we expect the overall impact of the performance program to result in positive free cash flow in 2024. Let's look now at our guidance 2024. We remain cautious with the market expectation for 2024. We expect stable demand in pulp, including coproduct, increasing demand for fibers in the course of 2024. And if I look at the fiber sales volume, in the early weeks and months of this year and in our order book for this year so far, I'm very positive that we will further continue to increase our fiber sales volume this year. The trajectory is definitely pointing to the right direction. With regards to prices, we are cautious with our expectations for fiber prices. They are assumed to remain challenging in 2024, even if we have seen some positive signs since the beginning of the year. DWP prices, on the other hand, are expected to continue to be relatively stable at profitable levels. On the cost side, energy and raw material costs are assumed to remain on elevated level. From the performance program, we expect a positive impact on sales volume and prices, as well as supportive profitability and sustainable resilience from the cost reduction. As a result, the Lenzing Group expects EBITDA for the year 2024 to be higher than in the previous year. After having taken you through the developments in 2023, I would like to conclude by briefly highlighting the unwavering advantages of the Lenzing business model. The eight elements of our strong positionings are, number one, we cover the mega trends within the overarching framework of sustainability and circularity directly through our products and brands. Number two, our market has directionally growth drivers included, population growth and the improving middle-class income globally, and in addition, we are the number one in the fastest growing subsegment of the textile market specialty fibers. Number three, we are shifting towards specialties. As mentioned, all of our Lenzing fiber sites are now 100% converted for specialty fiber production, and in Q4, we achieved already 75% sales. Number four, we have a competitive cost and innovation advantage through our backward integration in DWP, further complemented by the recently completed investment in Brazil. Number five, with the well-known TENCEL, VEOCEL and ECOVERO brands, we have by far the strongest ingredient brand portfolio in the cellulosic industry. Number six, we have launched our holistic performance program with three pillars, top line growth, cost leadership and free cash flow generation. And as mentioned before, the program is ahead of schedule and ahead of target. Number seven, with Thailand, we have added 100 kt capacity to the fastest-growing fiber on market, Lyocell. And number eight, we are fully invested with the two new plants ramped up in '22, and the two plants fully converted in 2023. And with this, I would end the presentation and would hand over back to the operator for the Q&A.
Operator: [Operator Instructions] The first question is from Isha Sharma with Stifel. Please go ahead.
Isha Sharma: Hi. Good afternoon. I have four questions, please. The first one, your liquidity cushion does not cover the hybrid bond, which is maturing in '25. What are your options to secure liquidity if the market conditions do not improve by the second half of '24? The second one is, what are your assumptions on the positive free cash flow guide in 2024? If I assume flattish EBITDA development, around EUR250 million to EUR80 million in CapEx and EUR100 million in interest payments, even with some net working capital relief, I still get to a negative free cash flow. So if you could help us with the bridge, please. And then the third question is on the high impairment at the Indonesian site. My understanding was that the economics at the site were not as bad as, for example, at Heiligenkreuz, with the energy costs. So if you could please help us what drove the high impairment costs there? And the last one is on the one-off item on CO2 emissions. Have you booked this in the pulp segment? Because the earnings in the second half were significantly higher than in the first half so what is the run rate that we can expect from this segment going forward, and if it was affected by the one-off? Thank you.
Stephan Sielaff: Thank you, Isha. So we will take those questions one by one, and let's start with the first question with regards to the liquidity caution and also the hybrid bond so what the options will be with the hybrid. On this, I will hand over to Nico Reiner, please.
Nico Reiner: Yeah. Thank you very much for the question. In regards to the hybrid bond, the hybrid bond is due on the 7th of December 2025. So looking at the date today, we are really looking on a period which is close to two years and -- so therefore, we are proactively managing our balance sheet and watching also the development on the Lenzing side, on the profitability side, but also the development on the financial markets. And therefore, we are here proactively looking into that, and I think we do have enough space, enough time to improve our profitability and our cash flow generation. So we are very confident to get on solutions in regards to the hybrid.
Stephan Sielaff: Thank you. Now, the second question from Isha was with regards to the free cash flow. So what your assumptions or our assumptions would be behind the positive free cash flow expectation in 2024?
Nico Reiner: Yeah. In regards to the free cash flow generation, we clearly address that. We do have our performance program in place which will significantly support the free cash flow generation. Overall, when I look into the structure of the free cash flow, we do have on the one side, the operational cash flow, which we see also on a positive magnitude going into 2024, and on the other side, we do have here our free cash flow resulting from CapEx topics. And especially on CapEx topics, we clearly addressed also in our performance program that we are very cautiously managing CapEx, and we are focusing on maintenance and license to operate. And when we are adding these two positions together, we are clearly coming to a positive free cash flow for 2024, and everybody is committed to deliver on that one.
Stephan Sielaff: Now, the third question that also I would assume for Nico Reiner with regards to the impairment in Indonesia. So can you give us some details what was driving this impairment?
Nico Reiner: Yeah. I think you are very familiar with the procedures of the impairment in regards to IFRS, but especially when we are looking to Indonesia, where we had an impairment of EUR210 million, we really need to take into consideration that in the crisis which we have seen and experienced now, since the second half year of 2022, there was a heavy load, especially on viscose, and also, viscose prices are at a relatively low end. We are very positive that we converted our Indonesian site to specialty fibers like ECOVERO, but nevertheless, we have to reconcile and consider the low prices on the viscose, which led then to the impairment in Indonesia.
Stephan Sielaff: Thank you. Now, the fourth question was with regards to the sale of the CO2 certificates and what segments this sale has been reflected.
Nico Reiner: Yes, you are right. As you concluded that the posting of the sale of the CO2 certificate has been happening or happened in the pulp section, and this impacted the profitability by roughly EUR41 million in a positive magnitude.
Isha Sharma: This was super helpful. Thank you so much.
Nico Reiner: Appreciate it.
Operator: The next question is from [indiscernible] Please go ahead.
Unidentified Analyst: Hello. Yes. Thank you very much. You have reevaluated your biological assets, your forest in Brazil for around EUR80 million. I was just wondering, was this a one-off? Or can we expect in the coming years other appreciations? And what is the basis of the appreciation? And the second question is, you have an obligation to buy from your Brazilian daughter cellulose or other products. Is part of the loss of your devaluation that you have here, is that part of devaluating the products that you buy from Brazil? Thank you.
Stephan Sielaff: So the first question with regards to the impact of the biological asset valuation, this one I would hand over to Nico Reiner, please.
Nico Reiner: Yes. We had, as we communicated, a positive impact of EUR80 million on the valuation of the biological assets in Brazil. Basically, if we look into the situation in Brazil, we can see that wood prices have rise quite significantly. And also if we look into wood prices today, wood prices are still quite elaborated in Brazil, and demand from wood is still on the rising side. Overall, we are not guiding of the valuation of the biological asset into 2024, but it's on your own assumption, if you consider the strong underlying market on wood consumption and wood demand in Brazil, if you look into 2024.
Stephan Sielaff: Now, the second question is with regard to LDC, and is the obligation or the contract to buy from LDC has an impact on the impairment. I understood the question correctly. I would hand over this to Christian Skilich.
Christian Skilich: Yeah. [indiscernible] I'll take it. There is an offtake agreement between Lenzing Group and LDC in Brazil. There is no reason for any impairment based on that off-take agreement. It's to the contrary, the sales of pulp out of Brazil have a very beneficial contribution to the results of Lenzing Group.
Unidentified Analyst: Okay. Thank you very much.
Operator: The next question is from Sebastian Bray with Berenberg. Please go ahead.
Sebastian Bray: Hello, hello, Good afternoon, and thank you for taking my questions. I'll ask them in turn. My first one is on the financing charges to be expected for 2024. I want to confirm two things. The first is, does the impairment that Lenzing has made on its assets have any relevance to its arrangement with creditors or impact on the interest rate charged? And the second is, would you expect there to be a substantial increase in financial charges year-on-year? There's still some rate sensitivity there, and I'm coming out at about EUR130 million, as a rough guess. I'll pause there.
Stephan Sielaff: Thank you, Sebastian. So, first question, or like almost two questions now. So with regards to the financing charges expectation, or if the impairment will have an impact on interest rate charges. Nico Reiner, could you give us some details on that?
Nico Reiner: Thank you. Sebastian, a very simple answer to that question, no. It does not have the impairment -- any impact on the interest being paid. There are no documentation in this direction.
Stephan Sielaff: And then the second part of the question is with regards to the development of the interest charges.
Nico Reiner: Yeah. If you look into the development of the interest charges at Lenzing Group, you really have to take into consideration the finalization of our investment in Brazil, and -- so, therefore, there was an increase in interest to be paid, but overall, we do not see any impact in a negative way going forward. Lenzing is financed until the end of 2025, and the interest rates are partially fixed, partially valuable. But we are monitoring the development very intensively and do not see at this point of time any severe impact or any topics which could arise here.
Sebastian Bray: That's helpful. Just to clarify, if you cannot give me a number, would you expect the interest charge to be higher in '24 than it was in '23?
Nico Reiner: Look, we are basically, not guiding on this detailed number, so therefore, please take my apologies on this one. But I think I mentioned the key topic.
Sebastian Bray: That's helpful. Thank you. And the next question is on the nature of the impairment. As far as I understand, the impairment applies primarily to Lyocell activities in Lenzing, the village -- the town or village [Technical Difficulty] as opposed to Heiligenkreuz which is where I personally would have expected it to fall given the relatively high energy costs there. Has something fundamental happened in the Lyocell market to cause this? Or the annual report makes reference to certain activities or new activities, is this simply writing off TENCEL looks? Or what exactly has happened in the Lyocell market to cause the impairment?
Stephan Sielaff: This I would give to Nico Reiner.
Nico Reiner: Yes. Let me elaborate a little bit on the impairment and the details. We mentioned already that the impairment took place at five-sites. I think, I have mentioned already the root causes in relation to our Indonesian site due to the question which has been raised a couple of minutes before. And in regards to your question and the relation to the other side, let me do the following comments. First of all, the Lenzing side here, and you did have the right direction of thoughts already in your mind as you addressed our topics of innovation, and here you addressed already the filament topic. And we do have from the past capitalized pilot innovation plans here at Lenzing, which do not deliver at this point of time, profits nor cash flows. And in accordance with IFRS, we needed to impair them. Nevertheless, I want to reemphasize strictly that we strongly believe into these technologies, and these technologies are still full on our radar. And the other portion of the impairment at Lenzing was in relation also to viscous model. And so therefore, we accomplished in the same manner the topic as we did it for Indonesia. And now let me follow up your thoughts about Lyocell. Especially when we look into the situation in mobile in the US, in the past, we have invested into foundations at the site there which are not used at this point of time. As the Lyocell additional capacity increase in the US did not take place at this point of time due to the situation of the overall markets. The same situation we do have at our plants in Thailand. In Thailand, we also invested already in preparation work for an additional fourth or second at the site, second Lyocell plant, but also these found foundations are not working at this point of time and they're not producing results, nor profits. So therefore we took the impairment and wrote them off. Basically, we have to reconfirm that we strongly believe into our Lyocell products, and we also strongly believe, as Stefan already mentioned, into our cellulosic gap, which we forecast which will take place. And as soon as markets recover, we will relook into the situation and adjust our capacities, especially as we believe strongly in Lyocell technology and our positioning there, which is number one at this point of time in the world.
Sebastian Bray: That's helpful. Thank you. And the last one from me. The carbon credits, how is this a potential future source of liquidity? So I assume Lenzing saved up its free allowances over the shots with its carbon consumption what the EU was allocating it. If it were to get into -- well, it's not a liquidity issue, but if it needed cash, how much more carbon credit could it feasibly sell? How much could be raised using this method?
Stephan Sielaff: This one for Nico Reiner, please.
Nico Reiner: Yes. If we look into the situation of our CO2 certificates, you are totally right. Over the last years, we saved our CO2 certificates and we do have, let's say, at this point of time, due to the regulation which is in place until the end of 2025, an oversupply of certificates, and we are seeing this situation relatively relaxed as we still have quite a nice amount of CO2 certificates in our balance sheet. And just to give you an indication on that one, at this point of time, we do have more than 1 million certificates still there sitting, and the allocation will take place until the end of 2025. What will happen after 2025 in '26, this is up to the government, who are the regulator of this CO2 certificate.
Sebastian Bray: That's helpful. Thank you for taking my questions.
Operator: The last question is from Brigitte Friedrich with BNP Paribas (OTC:BNPQY). Please go ahead.
Brigitte Friedrich: Good afternoon, and thanks for taking my questions. I have two questions in total. First, you said that sales volume for fiber went up, but revenues decreased in the fiber segment as prices went down. If we assume that demand will stabilize or even slightly increase, what can we expect in terms of utilization of the sites, pricing and also the mix for 2024? And the second one, you mentioned that new customers have the potential to double the nonwoven business as a part of the top line growth pillar of the performance program. Could you give us some color on how long it will take until this will be reflected in Lenzing's result and to what extent?
Christian Skilich: So the first question is with regard to the expectation of utilization and pricing in 2024. This one is for you, Stephan, please.
Stephan Sielaff: Yeah. Thanks a lot, Brigitte, for the question. So on the first one, and as we mentioned, we expect a higher demand on our fibers when it comes to volume, and therefore we expect a higher utilization in our factories. When you talk about pricing, we believe that 2024 remains a challenging year and prices will be under pressure. On your second question, I take that immediately on nonwoven, and maybe, I'm not sure, but I completely messed up the expectation here on nonwoven. But we are not targeting with this one customer to double our entire nonwoven business. It's one subsegment which we double and we are in the execution of that. It's not the entire nonwoven business. But however, in this subsegment, it could happen in the course of this year for 2024.
Brigitte Friedrich: Thank you very much.
Operator: The next question is from Teresa Schinwald with Raiffeisen. Please go ahead.
Teresa Schinwald: Good afternoon. Thank you. I have questions on the -- if there is an update on your hedging positions with respect to the FX impact, if it's still the usual ratio, and could you remind us what it is with respect to the US dollars and the [I guess the] (ph) open position. And the second one also with regard to your energy price hedging. So when we can be able to gauge when we can expect the impact -- the lower energy prices in Europe?
Stephan Sielaff: Good. So first one with regards to the hedging position on FX, so what -- can you remind us, Nico Reiner, please?
Nico Reiner: Yes, sure. So basically, your assumption is right, there's no change on the FX situation there so we did not change any hedging there to the behavior we had in previous years.
Stephan Sielaff: And now with regards to energy hedging, Christian Skilich, please.
Christian Skilich: Yeah, glad to take that. Our hedging principle still unchanged in place. So we have some 60% for 2024 hedged now, and going forward with a hedging period for '25 of roughly one-third, and then still one quarter into 2026. So out of the hedges placed in 2023 at quite decent levels, we should get as well the input into '25 numbers now.
Teresa Schinwald: Awesome. Great. Thank you.
Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Stephan Sielaff for any closing remarks.
Stephan Sielaff: Yeah. Thank you very much for dialing into this call. As we said, a year where we certainly were not satisfied with the results, however, we took swift action on our performance program. We are very well on track with this performance program, and the results on the first two months of this year are trending in the right direction. With that, I wish you a very nice weekend. Thanks for dialing in and talk to you soon.
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