Ladies and gentlemen, thank you for standing by. I'm Moritz, your Chorus Call operator. Welcome, and thank you for joining the Lenzing Group's Analyst Call. Throughout today's recorded presentation, all participants will be in the listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touchtone telephone. Please press the star key followed by zero for operator assistance. Your hosts today are Stephan Sielaff and Nico Reiner. I would now like to turn the conference over to Stephan Sielaff, CEO of Lenzing.
Thanks a lot, operator. Also from my side, a very warm welcome to the presentation of Lenzing's half year 2023 results. With me today is Nico Reiner, our CFO. 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 nonwoven, 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 EUR 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 EUR 392 million. In parallel, we have proactively extended upcoming debt amortizations in the amount of EUR 249 million. 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. 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 EUR 1.25 billion, versus EUR 1.294 billion in 2022. EBITDA reached EUR 137 million, versus EUR 189 million 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 EUR 30 million to EUR 107 million.
The net result after minorities and hybrid bonds was negative at EUR 104 million versus EUR 63 million in the first half of 2022. The free cash flow significantly increased in the second quarter of 2023 to -EUR 33 million, versus -EUR 132 million 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 EUR 320 million-EUR 420 million. With this, I would like to give an update on some of our key costs. In the second quarter of 2023, both energy and chemicals 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 EUR 35 per MWh in Q2. However, you need to remember that in the first quarter of 2020, this price was below EUR 10 per MWh . On the right chart, you can see the development of caustic soda, one of our key ingredients in the viscose production. Prices have come down in all geographies. However, European market prices are still almost twice as high as before the pandemic/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 Lenzing, 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 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 viscose 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. 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 greige fabrics. The biggest issue continues to be apparel inventories. You can see the number, the U.S. 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. Since then, we rather see limited movements. Yes, the impact of apparel to the U.S. 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 viscose market, prices followed the declining DWP price from early May.
Operating rates in the Chinese VSF industry were really high throughout the second quarter, ending up at a level of 87%. At the same time, repeated sales promotion kept inventories low at 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 build up 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 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. Here we saw a rather stable development. DWP prices started to decline early May. At the same time, the prices for paper 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. The good news is Lenzing could defend its premium. Lenzing 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, Lenzing 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. 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 chip 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. You see on the right-hand side that between 2020 to 2022, the number of co-branding programs quadrupled.
You know, Lenzing is a champion of sustainability, Lenzing is also a champion when it comes to innovation and branding. 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 Filippa K, based on our TENCEL Refibra fibers. All of you know the brand Neutrogena. Neutrogena is as committed to sustainability as Lenzing is, and they committed to shift their entire portfolio to 100% cellulosic-based products. We are very pleased that out of 88 million licensed products, 77 million products will be 100% Lyocell. Also, in the textile segment, we can report a major success.
We presented at the ITMA, 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. Finally, Lenzing is on the pink carpet with Barbie. We actually are very proud that we could equip the actress Nicola Coughlan, with a wonderful dress on the pink carpet made out of TENCEL fibers. With that, I would hand over to Nico for the financials.
Thank you, Stephan. A warm welcome from me as well. Let's start with revenues. They increased slightly to EUR 627 million, versus EUR 623 million in Q1 2022. Looking at the half year, revenue slightly decreased to EUR 1.25 billion from EUR 1.29 billion. This development is mainly due to the decrease in fiber revenues, while pulp revenues increased. Fiber prices continued to remain under pressure, as outlined by Stephan. EBITDA reached EUR 107 million, which is a clear increase compared to Q1 2023, with an EBITDA of EUR 30 million. This includes a positive impact from the valuation of our biological assets of EUR 25 million in the second quarter, and EUR 18 million in the first quarter.
Looking at the half year figures, EBITDA decreased from EUR 189 million to EUR 137 million. Looking at EBIT, it turned positive again in the second quarter and reached EUR 29 million, a plus of EUR 71 million compared to the last quarter, with depreciation and amortization being at EUR 77 million. For the half year of 2023, EBIT was negative at -EUR 12 million. For group net profit attributable to Lenzing shareholders in Q2 2023, we reported a net loss of EUR 24 million, which compares to EUR 80 million in the first quarter. For the half year, net loss amounted to EUR 104 million. Financial result was comparable to the first quarter, at -EUR 31 million, and income taxes were positive at EUR 1 million. 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 EUR 18 million. As a result, free cash flow significantly increased to - EUR 33 million, by almost EUR 100 million 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 historically net financial debt quarterly evolution. Reported net financial debt increased slightly to approximately EUR 1.95 billion from EUR 1.92 billion quarter-on-quarter, mainly due to the negative free cash flows. Since the quarter end, Lenzing has raised EUR 392 million of net proceeds via a rights 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 EUR 1.56 billion 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 Lenzing's path to net leverage ratio target of below 2.5x . The capital increased, increased Lenzing's liquidity cushion by EUR 392 million to a pro forma level of EUR 971 million by the end of the second quarter. In parallel, we have proactively extended upcoming debt amortizations in the amount of EUR 249 million, with the maturity 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 Stephan now for the outlook.
Thank you, Nico. This is a chart we have shown to you in the past. In case you haven't seen it before, let me quickly explain. The International Textile Manufacturers Federation, short ITMF, conducts a bi-monthly 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 has declined since November 2021. Now in July survey, it improved for the first time from -36 PP to -27 PP. Suggesting, though, that the overall sentiment is slightly improving. -27 is still a very negative sentiment. The single biggest concern continues to be the weak demand mentioned by 2/3 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 lot of high portion of cautiousness. 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 +21 PP, pointing towards a potential recovery. Let's see what potential this impact has for Lenzing. To remind you, 2022 was an unprecedented year, and we called 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 Lenzing.
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, nonwoven sales as well as pulp, including co-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 co-products, as well as for the nonwoven 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 cost cash flow is expected to increase, CapEx will be focused on maintenance, and trading working capital is expected to decrease. 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.
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. 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 on 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. Number four, we expect stable demand in pulp, including co-products as well as in nonwoven.
As a result, we keep the expectation of EBITDA for 2023 in the range of EUR 320 million-EUR 400 million, 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 Lenzing 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. 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 mega trends 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 Lenzing, we are shifting towards specialties. By the fourth quarter of 2023, the group expects that all of its production sites are capable to produce specialty fibers. Number fourth, we have competitive costs, and we have an in- innovation advantage through our backward integration in DWP with our latest investment. As mentioned before, Lenzing has a unique position when it comes to branding. We have, by far, the strongest brand portfolio with TENCEL, with Veocel, and with EcoVero to support the brands of our customers. 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.
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'll 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 one on their touchtone telephone. If you wish to withdraw your question, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question comes from Isha Sharma, from Stifel 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 EUR 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 Lenzing Group, please?. The third one is on the market trends. It seems that the last data point shows that Chinese inventories are increasing again. 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 U.S. still, so wondering if we can assume that across the regions. Thank you.
Thank you, Isha. With the first question with regards to the valuation of the biological assets, I will give this to Nico Reiner, please.
Yeah, thank you. As you already mentioned, we are clearly showing in a full transparency the effect of this biological value coming into the numbers from the first half year. As you might know, these valuations are underpinned by a long-term development also in the situation of when we are doing these topics. Basically, these long-term trends to be then also for longer time. Having said that, it is a positive impact, probably also going forward. You might do a calculation on it on your own, as these topics are continuing, might continue.
Therefore, a clear guidance going into the second half year is not possible to give me to you, as I do not know the markets on these biological assets, as how they develop directly. First of all, as a first assumption, if you do an old calculation, you could assume that.
Now, the second question was with 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, on separated boxes of, of CapEx, so for maintenance CapEx and for growth CapEx. Clearly to state, we, we are really focusing now at this point of time, on maintenance and license to operate CapEx. These are the clear guidance on, on the CapEx side. 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, on global scale. I would hand over this one to Stephan.
Yeah. Thanks a lot. Thanks for the question. Yeah, as we elucidated, the viscose 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 Mayer, from Baader Helvea. Please go ahead.
Yeah. Good afternoon, gentlemen. Several questions from my side. Maybe I ask them one by one. I have a question block around your guidance. As a add-on question to Isha's question: How much of this one-off effects from the revaluation of your biological assets, have you baked in into your guidance for this year? Is basically nothing baked in, whatever something comes, then this is a nice add-on. Additionally, on the guidance, then, should we see the Q2 EBITDA as a good run rate then for the second half, maybe even then only the, depending on the, on the first question, the EBITDA, excluding this one-off effect, of EUR 24 million-EUR 25 million in the second quarter?
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 Pulp Division. Also, on the Pulp 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 if, or in particular, the Q2, a good run rate for the second half, or is there anything on the agenda you would like to flag? Then I have two other questions and two other blocks, but maybe focus on the guidance questions first.
Thank you, Markus. Yeah, I would still structure this, I think, into two, into three questions. The first one, with regards to, to, to guidance, how much of the one-offs are expected to be in there?
As simple as I have to say, you know, we are not giving any details, which is under beneath of the guidance. I have to say here, clearly, we are holistically looking at our guidance, which we are providing to the market. That would be my comment on that one. Thank you.
Next one was also regarding the guidance, as I understood, 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.
Basically, this is something which 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. What we always said is, based on the recovery of the market, we are highlighting this guidance on the EBITDA levels. When you're doing this mathematically calculation, you are pretty much easily ending up with some numbers which giving you then the clear direction. If you sum up, we are now at EUR 137 million EBITDA by the end of the first half year. 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. Maybe, a add-on question to this. The contribution of the earnings in the second half, is there do you expect any kind of change? Should be there more contribution from the fiber and less contribution from the Pulp Division, or should we 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 pulp and also on the development on, the nonwoven business, where we have clearly highlighted that, these businesses are running quite well on a stable basis. 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. Easy to state on that one, this is then, the, the clear topic and the assumption which is lying behind of it.
Okay. A last question is more a general question. In the past, at least from the IPO, I know that viscose always had versus cotton long-term premium. In your chart, also over the last calls, became clear that there's since several years a discount of viscose to cotton. 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? 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 I, 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 viscose. Now, the generic viscose goes in various markets. And yes, there, there are programs where viscose goes also into, currently cotton or pure cotton application. But the same is true for, for lyocell, where people are converting. And the reasons for conversion, are, are manyfold. 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, through innovation also in pure cotton market, 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, they are developing with different mechanisms. You cannot do an easy comparison between cotton and viscose. We can clearly see that we have a premium versus generic viscose, and then we have, as you, as you know, since the IPO, we added in, in particular, lyocell to the, to the game. We have here a different market mechanisms between cotton and viscose. 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.
The next question comes from Teresa Schinwald, from Raiffeisen Bank 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, is it fair to assume that the first half of 2023 has been, of course, better than the second half of 2022? I'm, I'm looking actually at what level you're including in your guidance. Are you looking for an even higher capacity utilization in the second half, around the level of the first half of 2022? Also, how many lines are running at the moment?
Okay. The first answer is yes. 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. The second part of your question was how many lines we are running. I'm not sure we are disclosing that because that is information, which is, of course, of high interest also for the 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 on energy, which you're commented by you're hedging more. Are you still following the rolling hedging, or are you also making use of the recently Europe low short-term prices? Rolling, 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 2/3 of our energy necessities, and 1/3 is covered by the purchase coming from the spot market. On a longer perspective, on 13 months to 24 months, the hedging is around 1/3, and then ramped up in a steady process to 2/3 when it comes to the rolling of the process. The rest is also then again covered by the spot market.
Awesome, thank you. The last one, I noticed in quarterly reports also there was an increase in the emissions positions and the fair value of derivatives. Where did it come from exactly? Am I right to assume that these increases were P&L 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, we really cannot, cannot hear you well. Teresa, maybe, maybe we'll have a call afterwards, just on the phone line, and we can address that because we, we can just not, not hear you well, unfortunately.
Okay.
There are no further questions at this time, and I would like to hand back to Stephan Sielaff 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.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.