U.S. markets closed

Edited Transcript of LNZ.VA earnings conference call or presentation 6-May-20 7:00am GMT

Q1 2020 Lenzing AG Earnings Call

Jun 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Lenzing AG earnings conference call or presentation Wednesday, May 6, 2020 at 7:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Stefan Doboczky

Lenzing Aktiengesellschaft - Chairman of Management Board & CEO

* Thomas Obendrauf

Lenzing Aktiengesellschaft - CFO & Member of Management Board

================================================================================

Conference Call Participants

================================================================================

* Christian Faitz

Kepler Cheuvreux, Research Division - Equity Analyst

* Jan-Erik Schmidt

LOYS AG - Investment Professional

* Laura Lopez Pineda

Baader-Helvea Equity Research - Analyst

* Matthias Pfeifenberger

Deutsche Bank AG, Research Division - Research Analyst

* Sebastian Christian Bray

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Teresa Schinwald

Raiffeisen CENTROBANK AG, Research Division - Financial Analyst

* Vladimira Urbankova

Erste Group Bank AG, Research Division - CEE Pharma Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operator. Welcome and thank you for joining Lenzing Group's Q1 Investor and Analyst Call. (Operator Instructions)

Your host today are Stefan Doboczky and Thomas Obendrauf. I would now like to turn the conference over to Stefan Doboczky, CEO of Lenzing. Please go ahead.

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [2]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Welcome to the Q1 results call for investors and analysts. Q1 2020 has been dominated by one subject, and it was COVID-19 and in a historically difficult market environment, Lenzing accomplished a solid set of numbers with revenues, EUR 466 million; EBITDA, close to EUR 70 million; and net result of EUR 17.7 million. The delta to the same period of last year was, in essence, driven by one thing, and this is on the market environment around viscose, both on the demand side, but particularly on the price side.

Now Q1 2020, dominated by COVID-19, it started to affect us as a company and the total industry, textile industry as of February. We were pleased with the measures that we have taken, and I will speak more about this on the way we protect our people, partners and ensure business continuity. But I think, we also had to experience the enforced shutdowns, specifically, and its impact on the textile fiber world, retail world, had substantial impact on demand. On the other hand, on the hygiene side, the nonwoven side, we saw the reverse, very strong demand.

Now the measures that we have taken to protect our people, operations also, had a positive impact on our construction side. Our expansion projects remain on track. We remain very committed to our expansion project and as such, we are there well on track.

I will speak about the guidance later on. We put a lot of focus in the first quarter also on measures to strengthen our cost position, operational excellence and given the opportunity that emerged to also help the Austrian public to help Europe with the, let's say, supply of safety masks, we decided with a partner, Palmers, to enter into a production joint venture there.

We decided to have a virtual Annual Shareholder Meeting on June 18 and also, to adjust the proposal to the shareholders with respect to our dividend to not pay out a dividend for 2019. On June 1, our fifth Board member will join us, Christian Skilich, who joins us from Mondi, who will take responsibility for all our dissolved wood pulp activities.

COVID-19 was the dominating theme. In the first quarter, we were affected, and I spoke about this at our annual results conference call. Early on in China, we learned a lot in terms of how to protect our people and business partners from our activities in China and start to implement all of those measures very early on around all the Lenzing facilities around the globe.

Keeping our people in home offices. Now we have some good 1,500 people plus who work from home to avoid business travel, to have all the social distancing at our sites, very different regimes in the way we run our shifts. And we were very pleased with all those measures led that we did not have any noticeable supply interruptions across the globe, that all are construction sites are still going strong, and as such, I think we have helped our people to stay safe, healthy and I think well committed to the company.

On the business side, we decided to operate with higher inventory levels, both in the raw materials as well as on the finished goods side to, a, ensure flexibility to supply our customers, take measures in terms of lines whenever we feel we need them, but at the same time, to avoid any unplanned shutdowns due to supply interruptions on the raw material side. You still remember maybe in our call in full year that I mentioned the 2 weeks in China, we were impacted by supply shortages, and that's what we wanted to avoid.

We stay in very close contact with the whole downstream partners. The life for our customers and downstream customers as well as retail is extremely challenging at this moment in time, and we see to it that our core partners, we support them. We anticipate, together with them when new collections will come, use the timing part also for innovation activities and, in essence, just stay close to them.

We put a lot of focus on stringent cost management, hiring freeze, using the time also to operate these flexible working hours, and Thomas will speak about this later on, just also ensure that our liquidity position remains very solid.

If we look at the textile industry and the impact of COVID-19, you can read, whatever analyst study you can choose, it's a very grim picture. Whether it is the China apparel and textile environment that did come down in terms of traffic in retail, that did come down -- did come up in traffic, did come up in terms of open shops, however, still today, retail spend with respect to clothing in China is impacted still strongly. If you look at North American, if you look at European statistics, in essence, we are in a shutdown. And the physical stores still account for the majority of retail sales that had a strong impact on the total industry.

On the e-commerce side, online, we see healthy business, however, but it cannot fully offset, of course, the physical sales decline. And I think typically, we also see on e-commerce/online retail stronger price competition, more sensitivity with respect to costs. So that clearly could not offset the shutdown that we saw in retail across the world.

Different picture on the hygiene side, but before that, the textile demand is very difficult to forecast when it really will come back. If you look at the different statistics, there is not a uniform picture. We look now at the experiences that we see from China, we shouldn't be overly optimistic of a fast recovery. Some analysts forecast with Asia Pacific, we already see back in Q3 2020, pre-COVID sales. I think we at Lenzing will remain rather cautious.

What is encouraging is that if you look at the search volumes online when it comes to TENCEL, when it comes to clothing and apparel, you do see that the consumer interest for clothing remains there or gets back to the level that we had before the crisis. However, I think it just remains very difficult to interpret overall picture, and it's difficult to forecast when things really will get back to before COVID-19.

If you look at the hygiene and care segments, the nonwoven segment, there we see a very different picture. If you look at household and personal care, whether it's in Europe, whether it's in U.S., it has been strongly driven up by, in part, panic buying, but in general, demand for products, for hygiene applications and that, you will see later on also helped our nonwoven segment. Because if you look at the split of our sales by application, we typically were around the 29%, 28% in 2019 as a percentage of sales with nonwoven. And in the first quarter, we increased this strongly by more than 15% and have a total share of 33% in the first quarter. That helps, however, of course, cannot offset the impact that we saw on the textile side.

The overall strong demand for nonwovens, but particularly the almost panic buying with respect to face mask that we experienced, even personally that when we tried to help the Austrian government to source face masks in China, led us to the decision to form a joint venture together with Palmers. Palmers is one of our innerwear partners on the retail side in Austria, and we decided to start operating face masks production in the vicinity of Vienna. It's a joint venture that we have set up where Lenzing holds the majority with 50.1%, so we will also consolidate this joint venture. The rationale is, in essence, we want to support Austria, we want to support Europe with the supply of high-quality, critical, good, strong focus now on safety masks production, both normal MNS masks as well as FFP2 masks. The production capacity that we currently have installed and are ramping up is 12 million units per month, and our intention is to double this over the next months.

If you look this and translate this overall picture and what it translated itself for the major commodity prices in our markets, we see a challenging picture. All the big commodity of fibers that are relevant for us, viscose, cotton, polyesters and the raw material pulp are at or around all-time lows. In polyester, we saw some blip up over a couple of weeks, literally. It was driven by strong nonwoven demand, but now back at very low level of around CNY 5,400 per ton. Cotton prices, at times were, in terms of future, even below the EUR 0.50 per pound level, and we have seen viscose prices in textiles now as low as RMB 9,000 per ton, beginning of this month, even slightly below that. Nonwoven, better because the demand for nonwoven being so strong and not everybody in the industry can produce nonwoven quality, so their prices were slightly better. But the operating rates in the industry are very low, even now below the 70% level. And given the fact that most of the viscose producers managed to continue this, in part, run operations, we also saw, paired with the low demand, inventory levels going up to almost effect of 3 to what we typically have with 45 days, we are at a very, very high level.

If you look at the price development and what it means in terms of margins, you see that on the profit side, we are deeply in the red and the margins over pulp that sort of describes the ability to cover raw materials, personnel costs and other costs, are at all-time lows. And I think I mentioned this before, we are in deep cash burning territory for most of the players in the industries. So viscose, under a lot of pressure. Cotton, under a lot of pressure. Our specialty fibers sales comparatively well in this environment, but we also see on the specialty fibers that we are impacted, given that demand literally, I think, vanished from all the Western economies. The spreads over commodity fibers, cotton and viscose being historically high, we also see impact there. And, of course, that the sales of our viscose specialties, as I mentioned before, are always a viscose plus pricing. That's why you see also our specialty index coming down. But in comparison to what we see on the viscose and other sides, still comparatively well.

With that, I would like to hand over to Thomas, who will take you through the financials.

--------------------------------------------------------------------------------

Thomas Obendrauf, Lenzing Aktiengesellschaft - CFO & Member of Management Board [3]

--------------------------------------------------------------------------------

Good morning. Hello, and welcome also from my side. Let me guide you through the most important financial numbers for Q1 2020.

Let me start with revenues. Revenues came in with EUR 466 million compared to EUR 560 million the year before, with a decrease of slightly more than 16%. The reasons for the decrease is most -- the reason for the decrease is mostly in -- a significantly lower risk cost price. If you just take a look at the CCF price in Q1, it was, on average, at the level of around RMB 9,800 compared to more than RMB 13,000, on average, the year before. So that is a decrease of more than 26%. So mostly, of course, price-driven on the viscose side and to a smaller extent, actually also due to lower volume. Compared to Q4 2019, revenues are only slightly down.

With regards to our specialty fibers share, actually, that came in with a very strong 61%. That compares to 47% the year before. Of course, this is also usually impacted by viscose prices being significantly lower than the year before.

With regards to fiber revenue per application, actually, we, on average, in the past, saw a level of around slightly more than 70% for textile fibers and as a consequence, close to 30% for the nonwoven fibers. However in Q1, due to very strong demand in the nonwovens sector and weaker demand in the textile industry actually, the share of nonwoven fibers increased to 33% and textile went down to 67%.

Moving on to earnings. EBITDA came in with close to EUR 70 million. That compares to EUR 92 million, the year before. It's a drop by 24%. Of course, this is mostly driven by lower revenues. And they are, as I mentioned before, mostly, of course, coming from significantly lower viscose prices.

EBIT actually shows the same pattern, of course, than EBITDA. EBIT came in with EUR 30 million compared to EUR 54 million. EBIT margin now at 6.5% compared to 9.7% the year before. And with regards to earnings per share, actually, Q1 ended with EUR 0.84 compared to EUR 1.65, the year before. Net income at a level of close to EUR 18 million.

Moving on the cash flow and working capital. Free cash flow, of course, is negative in Q1. That is, of course, a consequence of the investments we did in Q4 -- Q1. Of course, the investment level is significantly higher than the year before.

With regards to the working capital, actually, anyway, as in the past, our working capital is usually hovering around the level of EUR 400 million to EUR 450 million.

Moving on to some balance sheet metrics. Net financial debt now stands at a level of EUR 561 million. That, of course, is driven by the negative free cash flow on the one side. And on the other side, of course, impacted by IFRS 16. We actually capitalized the rights of use assets in Brazil and that added also more than EUR 40 million in Q1 2020.

Overall, liquidity position, very, very strong. I mean, we have liquid assets of close to EUR 600 million as for end of Q1. And in addition, of course, we have unused credit lines amounting to more than EUR 200 million. So actually, a very strong liquidity position.

And with regards to our equity, also still very strong, with an equity level of close to EUR 1.5 billion. Equity ratio now at close to 45%. Of course, this is now driven by -- or impacted by balance sheet total that also increased by almost 7%.

So overall, from our perspective, I think, a solid set of numbers, especially looking at the market environment we are in.

And with that, I hand back to Stefan.

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [4]

--------------------------------------------------------------------------------

Thank you. When we look a bit further on, I think, we face the same situation as most companies these days, it's very difficult to make any meaningful forecasting for the full year, given the very limited visibility due to the COVID-19 pandemic.

A lot will depend on how different nations choose their exit strategy out of the shutdowns and how quickly consumer confidence will come back. We should expect the textile fiber market to continue to be soft. We already have commodity prices at historic lows. I don't expect this to change anywhere soon, given the inventory levels that we see on the viscose side, the almost nonexisting demand in many of the textile segments and regions.

Nonwoven fibers will remain to be pretty solid but I think overall, it will be quite a difficult couple of months going forward. However, I think the limited visibility does not put us in a different position than 1.5 months back when we actually discontinued or suspended our guidance.

We will have a strong focus on cost and operational excellence in the month to go. Those are the things that we can influence. However, medium and long term, we are on the right track. We are fully committed also to our expansion projects in Thailand and Brazil. And as we, I think, have also displayed with the decision to enter into face masks production. Wherever there is a lot of risk and downside, there is also the odd opportunity to make a contribution both to society but also to shareholders.

With that, we would like to end our elucidations and open up the floor to questions. Operator, please.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from line of Matthias Pfeifenberger with Deutsche Bank.

--------------------------------------------------------------------------------

Matthias Pfeifenberger, Deutsche Bank AG, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

First off, congrats to the face mask joint venture. I think it's a great activity, especially in the ESG considerations. The first one would be an easy one. I mean to ask maybe not to answer, what's the color on Q2 on the top line? I mean, are we looking at minus EUR 30 million, minus EUR 50 million? Anything you can give us at this stage?

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [3]

--------------------------------------------------------------------------------

I think if we look at Q2, we saw demand being very dry from most of the bigger textile environment. Dependent on the segment, I think the ranges that you mentioned in terms of demand are not completely off. So I think we will have clearly the top line challenge in Q2.

--------------------------------------------------------------------------------

Matthias Pfeifenberger, Deutsche Bank AG, Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

Yes. Okay. A question on nonwovens. A segment we, as analysts don't ask about too often in the past. How much can this grow relatively? What could be the short-term share, like could it be 50-50 in some of the quarters? And also how does the current health crisis change your view on the nonwovens exposure in the longer term?

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [5]

--------------------------------------------------------------------------------

I think number one, I think maybe 1/3 -- I would say, we probably would stop at some 40% of sales that we can accomplish just from the asset configuration that is there. But I think also, frankly, from the capacity that we see in the hygiene segment on how -- on what they could do because all our customers are running absolutely flat out at this moment in time.

Now it doesn't change our view because we also didn't have a different view before. We always considered the nonwoven segment as being critical because if one goes back to the years '13 and '14, also there, it was one of sort of the solid pillars when textile was under a lot of pressure. So I think those 2 segments always have a strong justification to coexist site to each other.

What we see now, of course, is that our strong position in nonwoven is very, very helpful because in Europe and the U.S., which is the dominating market for high-end nonwovens, we have a very strong share, and that is very helpful. So we will continue to build on this. I think also our -- the know-how that we have in this area will help us in our -- in this new joint venture in part. So we will continue to look at it strongly, but I think in 35%, maximum 40%, I think, is what one can expect out of the segment.

--------------------------------------------------------------------------------

Matthias Pfeifenberger, Deutsche Bank AG, Research Division - Research Analyst [6]

--------------------------------------------------------------------------------

Yes. Okay. My other question would be on dissolving wood pulp. What are you seeing on the price side there? I mean, with all the tissue demand globally going on, especially in the hygiene business and also I saw recovered fiber prices go up a lot because of supply chain difficulties, what's the situation there? And is there a risk that you'll get an incremental margin increase from dissolving wood pulp going up and then obviously not having such a tailwind from the declines we've seen in the recent months?

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [7]

--------------------------------------------------------------------------------

I think this is rather unlikely. First of all, I think dissolved wood pulp prices always are impacted by -- strongly impacted by the fortunes of the viscose environment but also, of course, of the paper on world.

At the moment, we see a lot of capacity in Asia actually being idle, just because there is such poor demand that I don't expect any strong pressure from dissolved wood pulp prices to come soon. If it comes, I think structurally, it is rather helpful than hurtful because historically, we have seen that once dissolved wood pulp prices go up, they force viscose prices up.

--------------------------------------------------------------------------------

Matthias Pfeifenberger, Deutsche Bank AG, Research Division - Research Analyst [8]

--------------------------------------------------------------------------------

Yes. And my last one would be on working capital. I mean we see the free cash flow dive in the first quarter on CapEx, but also on working capital. And you just said it's at the same level, absolutely, but still on a relative basis, IFRS 16, in my mind, but still it kind of deteriorated constantly over the quarters. And as much as we appreciate your cash preservation activities, you can't be satisfied with that, right?

--------------------------------------------------------------------------------

Thomas Obendrauf, Lenzing Aktiengesellschaft - CFO & Member of Management Board [9]

--------------------------------------------------------------------------------

That is a clear question. Of course, we cannot be happy with the overall level of the working capital. However, I mean actually, just to mention, inventories. Actually, we on purpose, actually, we increased inventory levels in Q1, simply to make sure that we have raw material available so that we can keep our sites and clients running. This is one thing. And the same is true, of course, also for finished goods. Actually, we also want to make sure that we can -- we are in the position actually to satisfy the demand that we have from our customers. So actually, we intentionally actually even build up some goods on finished goods. And the other thing -- I mean the other major impact is coming out of accounts payables. However, that is to a quite a big extent, actually just related to the reporting date as per end of March.

--------------------------------------------------------------------------------

Matthias Pfeifenberger, Deutsche Bank AG, Research Division - Research Analyst [10]

--------------------------------------------------------------------------------

Can we expect a bit of a release over the next quarters? Or is this an -- is the EUR 450 million level you'd be comfortable with for now?

--------------------------------------------------------------------------------

Thomas Obendrauf, Lenzing Aktiengesellschaft - CFO & Member of Management Board [11]

--------------------------------------------------------------------------------

No, it's not. With the absolute level of EUR 450 million, of course, we cannot be happy. We are working on that. Actually, the expectation would be that, let's say, supply chain becomes, let's say, significantly more stable and that, of course, would allow us to bring back, let's say, raw materials but also finished goods to a level that we see much more suitable for the situation we are in.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

The next question comes from the line of Christian Faitz with Kepler Cheuvreux.

--------------------------------------------------------------------------------

Christian Faitz, Kepler Cheuvreux, Research Division - Equity Analyst [13]

--------------------------------------------------------------------------------

Two questions, please. I'll ask them one by one. How do you see cash flow developing in Q2? And do you have a view of your cash flow development for the entire fiscal 2020, please?

--------------------------------------------------------------------------------

Thomas Obendrauf, Lenzing Aktiengesellschaft - CFO & Member of Management Board [14]

--------------------------------------------------------------------------------

Well, that is a very difficult question to answer. And of course, cash flow will follow whatever actually, we see in the overall development. So I mean, that will highly depend on how strong demand will be and by when actually demand will be coming back. So actually that is system-related also to the guidance we gave, which is currently difficult to answer.

--------------------------------------------------------------------------------

Christian Faitz, Kepler Cheuvreux, Research Division - Equity Analyst [15]

--------------------------------------------------------------------------------

Okay, fully understood. Then my next and last question. Obviously, U.S. management are planning for the long term, which is good and right. Yet, are you currently reviewing some of your CapEx plans in terms of delaying some of your projects?

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [16]

--------------------------------------------------------------------------------

We have looked at the total CapEx plan for the next 3 years, yet we are pushing some CapEx out, however, not for the major projects. We have the 2 major projects in Thailand and Brazil. We are well advanced with those projects. Both are in time and in budget. And we see both of them being structurally, strategically, but also economically good choices for us. So we will continue to go ahead with them. And yes, we'll continue to go ahead with them.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sebastian Christian Bray, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [18]

--------------------------------------------------------------------------------

My first one, and I'll do them with a break in between each one, is on the nonwovens for hygiene. Other than baby wipes, what are these applications?

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [19]

--------------------------------------------------------------------------------

We go into baby wipes, moist toilet paper. We see applications also in female hygiene. We see it in areas such as facial masks. Those are the major applications.

--------------------------------------------------------------------------------

Sebastian Christian Bray, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [20]

--------------------------------------------------------------------------------

Understood. Can I ask about the specialty fiber pricing dynamic? Am I right in saying that TENCEL pricing is still relatively flat? And is this more modal and specialty viscose that have declined through Q1?

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [21]

--------------------------------------------------------------------------------

We saw in Q1 pressure on all prices, including also lyocell. The reason is simply that the delta now between cotton and other fibers are such that we simply see also an impact on lyocell. The major impact, however, was on viscose, also modal, but the majority was viscose.

--------------------------------------------------------------------------------

Sebastian Christian Bray, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [22]

--------------------------------------------------------------------------------

And the financing of the Brazilian project. Dr. Doboczky, I believe you said at the full year results that there were discussions ongoing with international financing institutions. Are these proceeding according to plan? And is there likely to be an announcement within the next 3 to 4 months on this?

--------------------------------------------------------------------------------

Thomas Obendrauf, Lenzing Aktiengesellschaft - CFO & Member of Management Board [23]

--------------------------------------------------------------------------------

Yes, that we still can confirm. Actually, we are well on track, and we are confident that we can close actually the financing contracts within this quarter.

--------------------------------------------------------------------------------

Sebastian Christian Bray, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [24]

--------------------------------------------------------------------------------

Understood. That is helpful. And finally, last one on capacity additions in lyocell and modal. Firstly, on lyocell, capacity additions by your competitors proceeding as planned despite coronavirus headwinds?

And secondly, could you give an update on the market for modal. Is either baler or any of the new Chinese entrants, and I'm thinking in particular Tangshan adding any modal capacity at the moment?

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [25]

--------------------------------------------------------------------------------

At this moment in time, we see some of the lyocell capacity of competitors being stalled or pushed into future. But I think overall, the picture that we discussed also still some weeks, a month back, I don't expect to be fundamentally different.

On the modal capacity, our market position really hasn't strongly outed. We do see some competition from Tangshan, we do see some competition historically always from baler, but the dynamics there have not structurally changed.

--------------------------------------------------------------------------------

Sebastian Christian Bray, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [26]

--------------------------------------------------------------------------------

Just as a quantifying number, do you have a number for the amount of capacity that Tangshan has on market or is likely to have available in the near future in modal?

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [27]

--------------------------------------------------------------------------------

I don't have it with me, but I can ask Stephan Trubrich to provide you with those details.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

The next question comes from the line of Laura Lopez Pineda with Baader Bank.

--------------------------------------------------------------------------------

Laura Lopez Pineda, Baader-Helvea Equity Research - Analyst [29]

--------------------------------------------------------------------------------

I have 2 remaining questions. First, on nonwovens. So currently, the premium is what I saw in your presentation is like around 20% to the current viscose prices. Can you remind us what was the normal level in the past? And how easily can your competitors also increase capacities here in the nonwoven side?

And then on the financials, so can you maybe give us a guidance how taxes will develop during the year? So you have pretty high taxes with a very weak second quarter. Are there any potential activation of tax loss carry forwards or something that you can -- that you will activate that might have a positive impact during the year? Or should we expect ongoingly, these negative levels throughout 2020?

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [30]

--------------------------------------------------------------------------------

I'll take the first question on the nonwovens, and I will ask Thomas to speak about taxes. The premium that we saw at this moment -- or in the first quarter were for those -- the Chinese market dynamics have been unusually high. Normally, the delta in Asia between nonwoven and textile is actually not very significant. That is different in Europe and the U.S. In Europe and U.S., the deltas have been historically in this region. There, we also see a higher likelihood -- not high likelihood, there, we are very confident that it will be sustainable in Asia. I think it is more a question of months or maximum quarters until this will be back to historic levels because the entry barriers to get into this field are there, but they are not such that they can't be overcome. And I think there's sufficient signs that our Chinese competitors are also trying to get into this field, and they over time will, I think, get into the market. But also, I think that this strong demand for nonwovens that we now saw in the first quarter and also now beginning in the second quarter, I don't think that this will be there forever.

--------------------------------------------------------------------------------

Laura Lopez Pineda, Baader-Helvea Equity Research - Analyst [31]

--------------------------------------------------------------------------------

Yes. And maybe very shortly, just to complement on nonwovens. Will the new JV on the mask production be also included in this part of your reporting as nonwovens or will you report like a separate line?

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [32]

--------------------------------------------------------------------------------

Sorry, the joint venture for face masks? This will not be included into nonwoven sales. Nonwoven sales is purely fiber sales. I think with respect to consolidation, I will hand over to Thomas.

--------------------------------------------------------------------------------

Thomas Obendrauf, Lenzing Aktiengesellschaft - CFO & Member of Management Board [33]

--------------------------------------------------------------------------------

I mean as this is a different line of business, it will then end up in our segment other.

--------------------------------------------------------------------------------

Laura Lopez Pineda, Baader-Helvea Equity Research - Analyst [34]

--------------------------------------------------------------------------------

Okay. Very good. And then the last one on taxes that I asked at the beginning?

--------------------------------------------------------------------------------

Thomas Obendrauf, Lenzing Aktiengesellschaft - CFO & Member of Management Board [35]

--------------------------------------------------------------------------------

Yes. Thanks for mentioning it again. I mean actually going back one step, Lenzing has its main operations in countries, most of them with a nominal tax rate of 25%. Yes, tax rate is relatively high being a consequence of where we are making our profits. Stefan elucidated on the situation in the viscose industry. So that is, of course, having an impact on our viscose sites, especially in Indonesia and to a small extent, also in China.

Actually, with regards to capitalizing tax losses, actually we have a very conservative policy in that regard and actually, already for quite some years and actually, we are not changing that. So actually, you need to assume that the higher tax burden actually will stay with us probably for some more quarters.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

The next question comes from the line of Teresa Schinwald with Raiffeisen CENTROBANK.

--------------------------------------------------------------------------------

Teresa Schinwald, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [37]

--------------------------------------------------------------------------------

I have 2 remaining questions. The first is on the face mask joint venture. You mentioned that you're planning to double the output. Could you give us a time frame until when you want to achieve that?

And the second one is on the cash flow hedge in the other comprehensive income. Could you please elaborate on the causes and maybe even provide us with some sensitivities?

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [38]

--------------------------------------------------------------------------------

I will take the first question, and Thomas Obendrauf will answer the second one. The intention is to double the capacity within the next 3 to 4 months.

--------------------------------------------------------------------------------

Thomas Obendrauf, Lenzing Aktiengesellschaft - CFO & Member of Management Board [39]

--------------------------------------------------------------------------------

And with regards to the hedges actually, maybe also going back one step in this regard. Actually, we are hedging our net exposure as in the past. For those of you who follow Lenzing for quite some years already, I mean, the hedging policy as such remains unchanged. Whatever net exposure we have in a year actually, we hedge with 2/3, one on a rolling 12-month basis and 1/3 actually, when we do the budgets. So actually, we see some increase actually, in hedging activities by the end of Q4 when the budget as such is approved. So that is the normal activities. And what comes in addition to that is actually the 2 major projects we are currently doing, the one in Brazil and the other one in Thailand. And for both projects, actually a significant portion of the CapEx is denominated in local currency. And actually, what we did is that in Q1 -- actually, in Q1, we hedged a significant portion of the exposure in Brazil. And with regards to Thailand, actually, we hedged a significant portion back in Q3 last year. And when you just take a look at the development of the currencies in these 2 countries, actually, both currencies depreciated quite a bit over the last couple of weeks. And that, of course, has an impact on the cash flow hedges accordingly. So actually, we will still participate in the weakening of those currencies, however, of course, only to a smaller extent of course, as we have hedged a significant portion when we kicked off the projects.

--------------------------------------------------------------------------------

Teresa Schinwald, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [40]

--------------------------------------------------------------------------------

And the split is about half-half?

--------------------------------------------------------------------------------

Thomas Obendrauf, Lenzing Aktiengesellschaft - CFO & Member of Management Board [41]

--------------------------------------------------------------------------------

No, it is not about half-half. Actually, I mean the projects have a different size, of course. I mean, the Thailand project is significantly smaller, of course, compared to Brazil.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

The next question comes the line of Jan-Erik Schmidt from LOYS AG.

--------------------------------------------------------------------------------

Jan-Erik Schmidt, LOYS AG - Investment Professional [43]

--------------------------------------------------------------------------------

I'm just wondering, the pricing for viscose and the specialty fibers, how much lower can they actually go? If we look at maybe the cost side, so there has to be some kind of bottom there. It's just not profitable anymore to produce, just to give me a little color of how much room you basically have to that kind of like bottom line?

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [44]

--------------------------------------------------------------------------------

Mr. Schmidt, I think on the viscose side, we're at the point where no nonintegrated player is even earning the raw materials. No nonintegrated player is earning its raw materials. I'm not speaking about the energy, not speaking about personnel costs, you're just not earning back your raw materials with the prices that we currently see. So I think there is some amount of just converting inventory into cash. There is a certain market share buying. But structurally, I think we have been, for the last good -- yes, close to 3 quarters by now, in an environment that is a nonsustainable pricing environment.

Having said that, we also saw back in 2013, '14, periods where, I think specifically, in China, competitors were willing for a couple of quarters to sustain very low prices.

On the specialty fibers, that is not so much driven by supply/demand in itself, but it's more driven by the delta to other fibers and the overall level for textile demand that at the moment, I think, is making life more challenging because with literally no sales, I think by retail stores across the world, also demand for those products have dried up. And with cotton being as low as it is, viscose being as low as it is and the pressure on customers being enormous, people start to become more creative and saying, okay, maybe we should change to different fiber mix in our collections because at least we save on cost. And I think there, we try to be responsive to that. But that is not a cost bottom. I think it is more testing with which customers do we want to do which collection.

--------------------------------------------------------------------------------

Jan-Erik Schmidt, LOYS AG - Investment Professional [45]

--------------------------------------------------------------------------------

Okay. But if we look at the demand side, I mean, it's not likely that demand is going to pick up anytime soon, even if lockdown measurements are actually loosened in most of the countries by now because obviously, even -- you said yourself that about 3/4 are still retail shopping for textiles. And I mean, this is kind of like freely kind of buying is gone for now because you always have to wear a mask here. There's only like a limited amount of people that are allowed in the shops and stuff like that. So I mean, this kind of like, oh, yes, I strayed through the city and shop left and right is going to be gone for quite a while in the near future. So I don't expect the demand for textiles are going to pick up anytime soon, even without lockdowns. Is there any chance that the market is kind of like cutting down on capacities to increase prices kind of like as a disciplined measure? Or are they just going to keep putting volumes in the market, even though, I mean, you said yourself that this pricing is not sustainable for anyone in the market?

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [46]

--------------------------------------------------------------------------------

No. I will give 2 answers to this. I think your observation or opinion, I think, is something that I think each one of us, I think, has his views. What you do see is that is highly regional dependent on what we're going to see. But I think the overall notion that you have, I think also, I think, is -- I think it's more likely than unlikely that consumer confidence will not miraculously come back.

Now what I would expect in the industry to happen are 2 things. I think, first of all, there are already many lines are being shut down temporarily, whether it's from extended maintenance, whether it is running at lower rates. So the industry is starting to react because now the inventory levels are where they are. I think just everybody in the industry realizes it's not sustainable. So you will have that. And I think, number two, we will see that new projects also will get further delayed. But it will take time until those effects work themselves through the price front. I am not very optimistic on the short run that we will get any relief anywhere soon.

--------------------------------------------------------------------------------

Jan-Erik Schmidt, LOYS AG - Investment Professional [47]

--------------------------------------------------------------------------------

And then maybe on the inventory level, it's, in absolute terms, roughly the same as it has been at the year's end. But obviously, pricing has gone down. So volume-wise, it's actually gone up. Is there any chance of a write-down of inventories or any threat to that? Or is it highly unlikely due to the turnover?

--------------------------------------------------------------------------------

Thomas Obendrauf, Lenzing Aktiengesellschaft - CFO & Member of Management Board [48]

--------------------------------------------------------------------------------

As I mentioned before, I mean, we deliberately decided to increase our stock level, both for raw materials and finished goods as well. Actually, if I just think back in February, when China was first hit by COVID-19, we were struggling actually to keep the factory running. Simply, we did not have sufficient raw materials, especially caustic soda was short in supply for a couple of days. And then, of course, the way we reacted is that whatever we could get, actually, of course, we did get. And also, of course, ending up with some safety stock and not just on the raw material side. And the same is, of course, true also for the finished goods side. I mean we have seen quite a couple of weeks where it was difficult to deliver because orders were closed and that kind of stuff. So actually, yes, to be on the safer side, we also built up some inventory on the finished goods level.

--------------------------------------------------------------------------------

Jan-Erik Schmidt, LOYS AG - Investment Professional [49]

--------------------------------------------------------------------------------

Okay. But no write-downs are to be expected?

--------------------------------------------------------------------------------

Thomas Obendrauf, Lenzing Aktiengesellschaft - CFO & Member of Management Board [50]

--------------------------------------------------------------------------------

Anyway, you need to do your inventory valuation at each and any balance sheet date. So that is a normal process. So if there was any, of course, it was already considered.

--------------------------------------------------------------------------------

Jan-Erik Schmidt, LOYS AG - Investment Professional [51]

--------------------------------------------------------------------------------

Okay. And then maybe last question about the CapEx. You said there are some projects being pushed back. Obviously, the larger ones remain intact. Could you just kind of give a little color on what the CapEx for the full year and 2021 are roughly going to look like then?

--------------------------------------------------------------------------------

Thomas Obendrauf, Lenzing Aktiengesellschaft - CFO & Member of Management Board [52]

--------------------------------------------------------------------------------

As we said, actually when we released the numbers for 2019, actually, we expect CapEx in the range of around EUR 700 million for this year.

For next year, of course, I think it is very difficult now to make a prediction. On the one side, of course, it will highly depend on how the 2 major projects are progressing. And the other thing, of course, is then on -- to what extent we would then resume maybe other smaller projects. However, at this point in time, the clear target from our side is to focus on the 2 major projects, which is Brazil and Thailand. And all the other things, we'll have to wait until we have significantly more visibility in the market.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from the line of Vladimira Urbankova with Erste Group Bank.

--------------------------------------------------------------------------------

Vladimira Urbankova, Erste Group Bank AG, Research Division - CEE Pharma Analyst [54]

--------------------------------------------------------------------------------

I will have -- almost all my questions already answered. I will have a question related to what do you say is partially under your consideration, that means some cost containment measures. So in which areas you will be focusing on? And what could be the quantification of these effects in this year, if you can share with us some thoughts?

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [55]

--------------------------------------------------------------------------------

On the cost containment side, we are focusing on 4 areas. The first one is the whole area of discretionary spend. Area number two is everything at our sites in terms of operational excellence, continuous improvement measures. Number three, on the [hard], raw materials and the whole supply side. And number four, on the personnel side. I think those things will be, I think keeping each other pretty much in balance. So there is no one dominating theme. However, the contribution that we should see for this year is we will not quantify today, but it is a very meaningful contribution also in light of the crisis.

--------------------------------------------------------------------------------

Vladimira Urbankova, Erste Group Bank AG, Research Division - CEE Pharma Analyst [56]

--------------------------------------------------------------------------------

Okay. I have seen that already first Q has seen some personnel cost. Was it something which we can see further in upcoming quarters as well? Or...

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [57]

--------------------------------------------------------------------------------

Yes. You will see in the upcoming quarters, of course, the impact of those different measures. But we will not quantify them individually.

--------------------------------------------------------------------------------

Operator [58]

--------------------------------------------------------------------------------

At this time, there are no further questions. I would like to hand back to Stefan Doboczky for closing remarks.

--------------------------------------------------------------------------------

Stefan Doboczky, Lenzing Aktiengesellschaft - Chairman of Management Board & CEO [59]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you very much for your interest in Lenzing and for joining us at the Q1 call. It's a challenging environment. I think for all of us individually, for our families, for our companies, but also for the world at large. I wish you to stay safe, healthy and looking forward to interact with you soon. Thank you.

--------------------------------------------------------------------------------

Operator [60]

--------------------------------------------------------------------------------

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.