Corbion NV
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Corbion NV
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Welcome to the Corbion First Quarter Results 2019 Conference Call on Friday, the 26th of April 2019. [Operator Instructions] Please note that this call will be recorded and will be available by webcast on the website of Corbion. I will now hand the conference over to Mr. Jeroen van Harten, Investor Relations. Please go ahead, sir.
Thank you, Rachel. Good morning, everybody. Welcome to the Corbion First Quarter 2019 Call. With us today, Tjerk de Ruiter, CEO; and Eddy Van Rhede van Der Kloot, CFO. And as usual, Tjerk will give a brief opening statement followed by a Q&A. As a quick reminder, you can find the PowerPoint presentation on our website under the Investor Relations page. So with that, Tjerk, please go ahead.
Thank you, Jeroen. Good morning, everybody, and thank you for joining us at this Q1 call. So let me start by saying that I'm happy to see that we've been able to turn the margin around to the current levels. As you know, the second half of last year, we were facing a wave of input cost increases, which were hurting our margins. But price increases and a better mix brought us to the results we were looking for.The top line for Q1 was below our bandwidth of 2% to 4%, and that was because of decline in Biochemicals. As we already indicated, the main reason for this is quarterly phasing, and we do expect growth in Biochemicals to improve over the first quarter. Our guidance for the year has remained unchanged. I'm happy, of course, to report that in Food, Bakery has shown growth and we hope to continue this going forward. On the Innovation Platforms, you clearly see the deliveries of lactic acid to the PLA joint venture continuing. The joint venture has started delivering different PLA grades to many customers. For Algae Ingredients, this has been a slow quarter due to the maintenance of the plant in Brazil. And we would expect to see sales improvements in the quarters to come, mostly from our omega-3 product. And with that, I'd like to open the lines for questions. Operator?
[Operator Instructions] The first question comes from Wim Hoste of KBC Securities.
Yes. Wim Hoste, KBC Securities. A question on the PLA business or the lactic acid supplies towards the PLA joint venture. Can you maybe offer a little bit more insight to what extent the orders are coming in, and to what extent the ramp up is proceeding? Is that in line with all your expectations? Are you working towards the previously disclosed kind of letters of intent, capacity utilization rates? Any additional color there would be helpful.
Okay. Thank you, Wim. As you could clearly see in the quarter, we have nice lactic acid sales in the joint venture that -- which also indicates that the joint venture is successfully rolling out their product. And we actually see good momentum in the market, both on the general discussion that's going on, on how to deal with the plastic problem and triggering a wide discussion of many companies on what to do about it. And the PLA is one in the mix. So I think, clearly, it's early in the year, but it's encouraging to see the wide range of discussions we're having and the wide range of customers we're working with. To give you a little bit more color on the -- what's going on in the plant. As we said, the plant has started up but it's still in its early phases of production. And you should not expect it to run smoothly all the time. But we're not seeing any issues that you would not normally expect in the start-up phase for this. So yes, we are pleased with the progress we're seeing so far.
We will now take our next question from Patrick Roquas of Kepler Cheuvreux.
A couple of questions on PLA also. Firstly, are the clients that are buying the PLA are also actually using it and selling it to their customers? So for example, can we already buy, let's say, the end product in the store? Second, can you say anything about, let's say, the phasing of lactic acid sales in the coming quarters? Because I know that obviously in Q4, you had a lot of pre-ordering from the JV. So I assume that's a pretty tough comparison base. But Q2, Q3 should be seeing kind of similar sales as seen in Q1. And then any comments on, let's say, the pricing of the PLA sold by the JV versus, let's say, on one hand, your competitor, NatureWorks; on the other, let's say, fossil-based polystyrene. And then I have a question on Bakery. It's good to see that's in positive trend again. Can you remind us about, let's say, when the Bakery enzyme in the U.S. went off-patent and when that effect is gone?
Okay. Thank you very much, Patrick. Is there PLA already in the market, I think, is your question. It's actually a very difficult question to answer. We have supplied PLA produced in the plant to several of our customers. Whether that actually hit the shelves is difficult to say. Don't forget that most of the customers had already been buying material from us that we produce it as a co-producer. But I would say at the rate that the market development is going, I would expect, if it's not there, it would be very soon. I think what we clearly see as a positive part in the market, as I indicated earlier, is the broad interest from many players on PLA. We do believe that, that has also created because of our main competitor, NatureWorks, being close to capacity, and so a lot of people are looking at our material as an alternative source. And also because of that, the pricing is remaining pretty robust in this market. So this has been a project long in the working and a lot will have to be done before we can claim success, but it certainly feels nice [ particularly ] at this point, at this stage in the game. And the key challenge now really in my mind is going to be how fast will it be that we can fill this plant. With regard to the Bakery, and specifically to the enzyme question. The patent ran out in March, if I believe right. But knowing why you're asking -- I'm sorry, March '17, right?
'18.
'18, sorry. I'm getting help here from the room. But keep in mind that -- and knowing why you're the question is, first of all, we should be close to lapping. But what you see clearly happening now is many competitors coming with this enzyme in the market. Ultimately, I think for Corbion, that is a good thing because we use it as an input in our blends. It does create a higher risk in the market, that sometimes, somebody might be there with a lower-cost offering. But so far, we have proven that with our business model, we can handle that. But -- so the patent runs out -- it should be running out in -- or lap in March.
And then on the question with regards to, let's say, lactic acid sales to the JV in Q2, Q3. Knowing that Q4, you have a tough comparison base.
Yes, now be careful. If you look back at our results over the last year, you saw a supply lactic acid, I believe, somewhere in the middle of last -- the second quarter last year, maybe a little bit into the summer then it stopped and then it picked up again. Obviously, when you see those bumps in sales, we have a tough comparable. I think for the overall year, you would see a nice growth in the lactic acid development.
Okay. And then I have still one follow-up, if I may. Firstly -- or let's say, on the Innovation Platforms, you confirmed the guidance of, let's say, the losses for full year. That should imply, let's say, some lower losses versus Q1 and remaining of 2019. Could you kind of give us, let's say, some of the drivers to get lower profitability or, let's say, lower losses in the remaining quarters?
Yes. As you might remember, we shut down the plant in Brazil because of the shutdown in the sugar season. So the expenses, both in the fourth quarter -- in the first quarter and the fourth quarter should be higher because the plant is not running, right? We don't need a full capacity of the plant. If you look at our lactic acid business, for example, in Thailand, we overcome that by building up stocks of sugar. Here, with the algae facility not being fully utilized, we don't need to build those stocks. So you had a slower production season during that time. That's the main impact. The other part, of course, is the seasonality of the agriculture business.
We will now take our next question from Reg Watson of ING.
I'd like to ask you about the Bakery business. I think in prior quarters, you've talked about the effect of resetting pricing expectations with your customers, and that you were lucky in that a large number of contracts were rolling over at the time when you're experiencing raw material price increases. When I look at the Food business margin you've delivered, that was way ahead of consensus. And my understanding is that is because you've been successful in getting those price increases through. How is the balance -- how do you expect the balance going forward this year of margin improvement versus volumes to pan out? Because I think you previously highlighted that the volume recovery in Bakery was not coming through. Because you're putting out the price increases, those are now coming through and we've now seen a stabilization of volume. So what happens next?
I think, Reg, I think you have to be careful in that. The comments we made on the input cost were across all businesses, not just Bakery, right? In the Bakery sector specifically, we had the enzyme coming off patent that limited our possibilities to offset all that. So I think the comments that we've made on the input costs are business-wide. And you can clearly see that we're starting to be able to pass on some of that. We also had a better mix this quarter. On the Bakery business, I think going forward, that's why we're still cautious. We'll have to see how this whole enzyme pricing is now going to play out. We believe we're in a good space, but it's hard work. And so I would not want to give indications on pricing or volume. But in general, I think we feel comfortable with our position in Bakery.
And should the -- is the experience of Novamyl going off-patent in Europe applicable to the U.S. as well? Because I believe it took actually a couple of years in Europe for the effect to work through completely. Is that your expectation also the same in North America?
Yes. You would -- I mean I cannot comment on how it will go in Europe and U.S. But if you think about it, the situation, what really happened here is this was a very powerful enzyme that had a very unique position. Now it coming off patent will mean that many suppliers will come to the market with solutions. And so will we have a period of uncertainty as this develops? You would expect so. Whether it's going to take years is difficult to say. But the reality is the landscape in this enzyme -- for these enzymes is changing. For us, other than the pain it might give as we transition to it, business-wise, it doesn't make that much difference as we use the enzyme as an ingredient in our blends, combining it with other enzymes, other functionalities to offer a solution to the baker. So for us, it's more managing of an input cost that we could [indiscernible].
And I think Novozymes has Novamyl 3D as an alternative. What's your view on how well that works as a sort of way of maintaining the patent protection of the Novamyl technology?
And now you're going a little bit more technical than even I am. I think the 3D is, as what I hear, is a good enzyme. But for us, it's really combining different functionalities and finding the best price/value solution for the customer. And with the changing landscape, that creates opportunities and it creates challenges, right? Because we're not the only player in this market that is making blends. It also opens up opportunities for some of our competitors to come with a competitive solution. And we need to make sure that we stay ahead of that game, and I think we've proven we can play that game well.
We will now take our next question from Xian Deng of Berenberg.
So I have 2, please. The first question is in end of March, I saw that the EU passed the revised version of single-use plastic ban by 2021 with a few more statistics laid out. To me, it is still not very clear where bioplastics such as PLA stands in this proposal. But at the same time, the proposal seems to suggest they want to ban some single-use polystyrene products, where PLA seems to be a good alternative. I was just wondering if you have seen any impacts from this proposal to your PLA business in either directions. Also just wondering if you could provide any insights on the new stance on bioplastics. So that's the first question. The second question is that I noticed that -- and you stated that you have continued strong Meat growth. I'm just wondering if [indiscernible] or any impact you would expect at all from the Asian swine flu?
Yes. Thank you, Xian. So the European stance on plastics is, of course, a very difficult and very frustrating exercise because at one time or at one point -- or when you talk to the regulators, I think they all see the benefit of bioplastics. The challenge that they're all facing is they need to be seen to do something and recycling or improving the throwaway culture is what they're really focusing on. I think what we see, and again with this regulatory statement, it's not clear that there is a benefit or a negative to it. I think the intent of the EU is to be positive to bioplastics, but they haven't put that into words yet. The positive side is what we see really happening at our customers side, where many people are looking for alternative solutions. And as I said before, PLA is at least a commercially available solution. It has its limitations, but it has a clear area of use. And that's, I think, where we see a lot of activity. If we now can get the regulatory phase or the legislation phase displaying that change, that would be very powerful. But even without that being in our favor, I will see positive developments for the market. Your next question was on the clean label and the Asian...
Swine flu.
Swine flu. No, we're not seeing any effects of that. We're trying to figure out what is happening because, of course, with the shortest -- short-term impact that we could see is you would expect that pork prices are going up significantly around the world, and as I hear, sometimes even chicken because people look for alternative space. And what that then exactly means for us is actually difficult to see. I don't immediately expect an impact from it.
We will now take our next question from Fernand de Boer of Degroof Petercam.
It's Fernand de Boer of Petercam. On Biochemicals, I think the margin were much better than I expected at least, and I think also consensus, where you mentioned stable sales in biomedical and Pharma, where I think earlier this year, you actually said due to different phasing, that would be more back-end loaded. So what should we then expect for the rest of the year? And also on the semiconductor weak sales, which probably not comes as a surprise. But what do you see there? What do you expect there in the remainder of the year? And then to come back on Bakery. You mentioned a better performance in Bakery but also ongoing good performance in Meat. So I take that Bakery was positive, including price, but that volumes were still negative. So when could we see some improvements in volume there?
Okay. So to start with the Biochemicals. I think the first context to look at it, let's not forget that Q1 last year had tremendous growth, right? So we'll work out a different -- difficult comparable. When you look at the biomedical and Pharma, it was okay, but it wasn't as strong a growth than we had seen. And again, think of last quarter when it was fantastic. What was really the impact in the biomedical is that the -- or in the Biochemicals, sorry, is that all other sectors did not develop. And that's -- when you look at it, you know this business is very choppy. We normally have 1 or 2 growers and then 1 or 2 that go a different way. I think in this quarter, it just happened to be all weak, and that I already indicated. In Electronics, we just had very limited visibility. It's been a very nice grower for us over the last couple of years. Right now, it softened. It's difficult. But there's no indication why it should continue to stay soft, but there's also no hard proof that it's returning to its growth. That's why we're careful with the guidance. With regards to the Bakery volumes. I find -- you make assumptions. I think overall, what we're seeing is a good development in Bakery. Despite the enzyme effect -- price effect we pushed out a little growth which, actually, quite honestly, if you ask me, was a little better than I personally had expected. But now I need to see if we can string that together and prove to you to that the Bakery business has turned around. But it feels like good momentum too.
We will now take our next question from Robert Vos of ABN AMRO.
People also know it as ABN AMRO. I have one small question. You mentioned 17.2% from the full consolidation of the remaining 49.9% stake in the joint venture you bought in the second quarter last year. That was -- well, roughly, that's EUR 1 million or so in sales. It was a bit lower than I had expected. Is it fair to assume, also looking at the consolidation date, that going forward, this impact will be immaterial or close to 0? That's my question.
I'm looking at the -- so I don't think you can say that the impact is immaterial. I mean it hit a quarter. We still have another, what is it, a quarter to go with the impact of SB Oils. I think where you should look overall is the guidance we've given for the year. And really, what you can see there is that we had an expensive quarter in Q1. We need to do better in the other quarters to hit that guidance, and that should really be reflected by the fact that the plant will start up and sales will pick up.
Yes. Maybe additionally also what Tjerk alluded to before in agriculture markets, that Q1 is seasonality-wise not the strongest quarter. So in that sense, you should expect a higher contribution in that sense in the quarters to come.
We will now take our next question from Emmanuel Carlier of Kempen.
One final question left from my end. So on IFRS 16, there was a EUR 2.4 million positive impact in Q1. You guide for EUR 8 million. But could you provide a bit more disclosure on how that is being allocated to the different divisions?
;Yes. So thanks for your question. So indeed, the EUR 8 million, we have disclosed in our Q4 results, indeed. And that's the impact that it would have had on the 2018 figures. So for 2019, that impact will be higher because of 2 reasons. One is the U.S. dollar is stronger than it was last year. So those lease arrangements expressed in dollars comes across at a higher euro, of course. Secondly, we did have some leases coming into the P&L in the course of 2018. So the 2018 impact was a portion of that. While in 2019, those same leases will have a full year impact. So that's why the EUR 2.4 million, if you multiplied it by 4, all things being equal, you will end up at a higher level of impact on the 2019 figures than it would have had on the 2018 figures. The split over the 2 divisions, we did not disclose that. But it's fair to assume that a clear majority of the EUR 2.4 million impact is to be found in the Ingredient Solutions division and less in the Innovation Platforms division.
Yes. And mainly in Food or pro rata Food, Biochemicals?
Yes. You cannot say that -- you talked, for example, on warehouses and sales offices, IT, company cars. So you tell me how you allocate it to the business. So I would say a fair assumption is to take it on a pro ratio proportion.
We will now take our next question from Cathal Kenny of Davy Research.
One question from my side for Tjerk just on the Brazilian acquisition that you announced, I think, in late March. Just be interested to learn a little bit more of that in terms of is it bringing technology to the table or a route-to-market.
Okay. Thank you, Cathal. Let me start with saying I'm actually pleased to announce that we closed the deal last night. So it's now done. And really, what Granotec do Brazil brings us is a plant and manufacturing platform, a lab and a sales team aimed at the Bakery markets. So if you think about what we were doing in North America with technical sales supporting and working at the customer, designing specific solutions for that customer at that specific plant, what really Granotec do Brazil brings us is that capability now for South America. So in one fell swoop, we were able to achieve our strategy to get a foothold there. We did a nice business platform and we now need to see how we can leverage that capability, especially also at larger international customers where, of course, Corbion brings a strong relationship and expertise, and see what our specific solutions can do in the local markets. So it's two-way: one is the major customers, one is applying the technology to local customers. We're very excited about it. It's a fantastic facility. They built a complete new plant a couple of years ago. So it puts us in a good space.
Very good. I know it's a modest contributor in terms of EBITDA. Is that included in your margin guidance?
Yes. I think in the overall guidance -- Eddy, help me here for a second.
Yes. So what we disclosed in the press release a good month ago, so the business we are buying, sales-wise, is $26 million. The EBITDA as we buy it is $3.7 million. So that comes to an EBITDA margin of $14.2 million. So you would argue that it's slightly dilutive. Then at the same time, as it increases our footprint in Brazil, we have opportunities to go after synergies, of course. And that will have to come in going forward. But the starting position is mildly dilutive from a margin perspective.
[Operator Instructions] We will now take a question from Patrick Roquas of Kepler Cheuvreux.
Yes. So sorry, another question on PLA. There's been some rumors in Asian press about some of your competitors rethinking of again expanding capacity. Do you expect any substantial capacity in PLA to come on stream, let's say, in the coming 2 or 3 years from your competitors?
Right. So Patrick, as we all know, there's always lots of rumors on PLA. So that's the one constant in this market. The reality is if they actually pull the trigger now, it will take a couple of years to build. I don't think they're that far yet. But we continue to monitor it, and I think clearly, what you see is people see the positive momentum in the market, and they're probably listening to this call. And so yes, I think it's a reality. I think what's key for us, remember why we've made this investment, this allows us access to a large lactic acid market. I think we found a very good partner with Total and we're in a good position. And our premise on this market is that it will remain a niche plastic, and with that, I think we're in good shape. When they start talking more and bigger plans, I mean, you get the discussion, "Is the market going to be bigger," which is not the way we invested in space, yes.
There are no further questions.
Okay. Then I would say thank you very much for joining us. It's been hard work. As I said in the beginning, it's nice to see that we've been able to correct some of the margins. And a lot of work ahead of us. So I would say we're on course. We're working hard. Thank you for joining us.
This concludes the Corbion First Quarter Results 2019 Conference Call on Friday, 26th of April 2019. Thank you for participating. You may now disconnect.