Corbion NV
AEX:CRBN
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Corbion NV
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Welcome to the Corbion Q1 2021 Call on the 30th of April 2021. [Operator Instructions] Please note that this call will be recorded. I would now like to hand the conference over to Jeroen van Harten, Investor Relations Director. Please go ahead, sir.
Thank you, operator, and good morning to everyone on the call and to those on the webcast listening in. So this is the Corbion Q1 2021 call. Of course, with us today are Olivier Rigaud, our CEO; and Eddy Van Rhede van Der Kloot, our CFO. My name is Jeroen van Harten, Investor Relations. During this call, Olivier will start with a few opening remarks, after which we will move quickly into Q&A. Additional information, you can find on our website on the Investor Relations part of the Corbion local website, where you will find a presentation with some backup data to help you understand the numbers really better. And with that, Olivier. Please go ahead.
Yes, good morning, everybody, and welcome to the Corbion Q1 2020 Results Call. I'm very pleased with the strong start that we've made to 2021. We are continuing the positive momentum that we developed in the first year of our Advance 2025 strategy last year. We've seen continued strong demand in Sustainable Food Solutions, especially considering the challenging operation base of Q1 2020, so achieving a 12.4% organic sales growth. Growth in the Lactic Acid & Specialties division was more modest at 1.9%. But there, we expect significantly stronger growth in the quarter to come. Incubator came really strong in Q1. As you know, we've been getting much better traction in the aquaculture sector, and that's beginning to show in the numbers as well. And of course, finally, in the Total Corbion, PLA joint venture, we saw continued growth momentum, very rapid growth and the joint venture is ramping up production as quickly as possible. In conclusion, we are seeing an improved outlook for all business segments, and that is why we've raised the growth outlook for our core activities to 7% to 10%. And with that, I'd like to open the lines for questions.
[Operator Instructions] We can now take our first question from Alex Sloane from Barclays.
Congrats on the strong growth in the quarter. A couple of questions from my side. Just firstly, on the outlook for raw material cost inflation. I think you referenced that in the outlook as having obviously picked up, but you're taking some mitigating actions to offset. So just be interested if you could provide a little bit more color on that and the potential impact to margin this year and next from that would be useful. And then just secondly, just on Incubator. And the algae business. Obviously, maybe slightly disappointing to see the news around algae protein, the joint development agreement with Nestlé ending. I wonder if you could sort of talk a little bit why maybe that happened and the outlook for your activities in that area given that development going forward?
Okay. So maybe I suggest, Eddy, you take the raw material outlook, and I will come back on the algae business.
Yes. So what we're experiencing is we see quite an broad-based increase in cost on our input cost as well. It's both [indiscernible]. It is also in packaging. And of course, logistics. And yes, to give it some kind of order of magnitude, we're facing something like EUR 15 million to EUR 20 million cost increases in that sense. That is for the total company. So part of that -- the majority of that will hit the core business, if you will, and about, I would say, 1/3 or so is going to have an impact on the noncore business and in most of our business. So that is a need, something we have to further address in terms of mitigating actions. So think about further price increases, it can also be that we don't take all business on a continual basis. So we have to see how those price increases will materialize. Yes, some of this increases -- I don't know if you -- said it following the agriculture market, for example, if you look at corn, for example, at EUR 6.5 a bushel. If you look to soybean oils, which is an input factor for our emulsifiers business, it's more or less increased by 50% in the first quarter only from a $0.40 level to $0.60 level. So these are quite very pronounced, I would say, even price volatility in these core markets. And some of that we have hedged, but we do have some exposures left to mitigate.
On the algae and incubators, so important subject. It is an Nestlé's decision to stop R&D activities related to algae. As you know, amongst -- I mean, the plant base, there is no protein trend, whether you speak about indeed algae, but primarily today, other proteins as feed proteins, soy, there is quite -- I mean, a lot going on there. On our side, if you remember, this is a -- this was a joint development -- this project, a purely R&D project that we all said would be 3, 4, 5 years down the road. The product is not even approved yet by regulatory authorities. So it was a long shot. And now it was not part of our Advance 2025 plan in terms of bringing any massive revenue and contribution. Having said that, yes, this is the life of any R&D innovation project, that it not all go through. Again, on our side, it doesn't mean we would stop looking or investigating at our algae protein platform. We simply now have to regroup and see how we're going to move the project forward. So no real impact short term. Again, decision came from Nestlé, we need to respect that. I think -- then our focus is really getting the business to breakeven on omega-3 because this is where we make or break the algae business. I hope it answers your question.
We can now take our next question from Robert Vos from ABN AMRO.
I have a couple of questions, please. First one, can you explain a little bit the metrics of the phasing in Lactic Acid & Specialties? More specifically, why do you expect significantly higher growth in the forthcoming quarters? Second question on the PLA joint venture. Sales grew by 20% in the quarter. Is it possible to provide a little bit of color to what extent this was driven by volumes and to what extent by price mix? And maybe also what has been the currency impact? I assume it to be negative in the quarter for PLA joint venture sales? And then my third question, yes, on the noncore operations, what is roughly the run rate annual revenue to work with going forward? And is that around till EUR 120 million? And related to this, you reported quite a sizable jump in profitability explained by the phasing out of the low-margin business and also the frozen dough disposal. So my question is, is the 17-spot-something EBITDA profitability in Q1, is that a proxy also for the coming quarters because it's quite a bit higher than what you reported last year in noncore?
Okay. Thank you. So I will answer the first point on LAS and Eddy will take the last 2 questions. So about phasing of LAS. So first, if you remember, we had a very strong quarter last year in LAS, primarily related also to lactic acid supplies to the JV as we were preparing a major shutdown in April 2020. So we had a kind of a front-load in Q1 last year. So actually the comparison was tougher this year. Then when we look at the dynamic in July, we've been impacted by some of the logistical issues we've been facing and container supplies that delayed some volume from Q1 to Q2 this year. There is a point on some of the supplies we've had globally outside Europe. The second, obviously, we've seen also in some sectors like the agrochemicals, the impact of some regulatory changes that were affecting our supplies to the agro industry. When we look forward and when we look at our various businesses, seeing the ramp-up and the rapid ramp-up of lactic acid supplies to the JV. The outlook for the remaining 3 quarters is very strong. That's one. But we see also a nice pickup in the other sectors being our pharma business and other industrial businesses, for instance. The only segment where we still have uncertainty is our biomaterial business, and we are back to the similar story that we've developed already a few times. Unfortunately, that they are still because of the COVID pandemic some postponement into the, let's say, elective surgeries. So this is still where we do not have a clear -- fully clear outlook yet. So -- but when we look to the other businesses dynamic, the future for lactic acid is strong, and we have also more favorable comparative in the quarters to come. Eddy, maybe you take the PLA question?
Yes. So your question on PLA. So indeed, if you look at our press release and the information we provide here is expressed in euros. So indeed, 20% sales growth in euros for the PLA joint venture on annual basis. That business is driven in U.S. dollar environment. So if you look underlying, indeed in Q1 to Q1 comparison, the dollar has depreciated by about 10%. So if you look underlying, the dollar sales growth has been close to 30, 3-0, percent. The split between volume and price/mix, I've been meaning to stay away from that. What I can say is qualitatively that both the volume component and the price/mix components have been positive in terms of its development versus Q1 last year. Then the question on the noncore business, indeed, that is now hosting -- comprising the U.S. emulsifiers business. On a run rate basis, it is a relatively flat pattern. So indeed the goods, EUR 30 million of sales in Q1. Then if you extrapolate it to EUR 120 million, then you're not too much off, I would say. So that's a fair approach. In terms of profitability, that comes a bit back to the remark earlier on the [indiscernible]. There's quite a big cost increase in one of the key components, which is soybean oils. And again, that market, as an input cost for us, is really increasing a lot in terms of pricing. And it has to be seen in what way we will be able to pass that on to the increased pricing, for example. So I would take for a moment, here the Q1 margin is relatively high in that sense in terms of margin dynamics for the rest of the year.
And we can now go to our next question from Wim Hoste from KBC Securities.
So a couple of questions on PLA from my side. Maybe first, can you talk a little bit about, yes, business development in PLA, whether you're succeeding in onboarding your new customers? Also, is there any change to the type of contracts that you can sign, maybe customers looking now increasingly for longer durations. So can you talk a little bit about that as well? And then final point is on the financing of the new PLA joint venture plans? Is there already a decision taken on external or internal financing from the models? Can you maybe elaborate on that as well.
Okay. So I will take the first one and Eddy the second question. So now, on business development, we see a bit more customer adoption globally. What we are doing also to prepare the upcoming investments in France, but also the debottlenecks in Thailand is broadening the customer base, but also the application and the geographical base. So we are active on several fronts. To be able to scale it when the time is coming and leverage the new capacity. So we see actually strong momentum in some packaging categories, whether it is both flexible and rigid packaging, but we have also more and more high-tech applications where PLA is being used either on its own to bring harness and resistance or in combination with other compounds, could be PHA or starch-based bioplastics. So we are really now also expanding the overall reach of PLA in terms of categories. And also looking on how we could even further optimize pricing and margins. So that's one, the thing. And last time we announced, we had already, let's say, over 400 customers. So -- and this is still -- I mean growing nicely. About contract duration, indeed, I mean, again, we are preparing the upcoming new capacity. Although we are still early days. But I think it's important, indeed, that we primarily from what we call a key account approach, are preparing to, let's say, pre-load part of the volume on longer-term agreement to secure the start-up of the new facility in Europe. So that that is something that lies on our agenda. Eddy, maybe you take up the financing part?
Yes, the financing part. So the joint venture, who is in the lead of arranging this is maki made good progress indeed,in trying to set up an external financing line, which is then on a nominal course basis for the 2 parents companies. So good progress being made there. We have not finished that exercise yet, but we're still well in time because, let's face it, the room depends on those new plans, so we'll only start from next year onwards. So we're making good progress and, yes, hopefully, we are able to go back on this -- until the latter part of this year.
And our next question comes from Sebastian Bray from Berenberg.
Congratulations on the results. And I would have 3, please. Two of them are Incubator. The first is that pricing was substantially positive in Q1. And the strategy of the segment in the past has been to reduce prices to increase competitiveness with fish oil. Why is pricing up? My second question on the Incubator segment. Is there any update on what has happened with the FDCA or PEF activities in terms of finding a JV partner, divesting or choosing to bring this to market on Corbion zone? And I'll pause there and come back with my last question after this.
Okay. So do you want to take it on pricing?
Yes, the pricing. So to explain a bit how we are disclosing our bill book of the net self-development and we have the tables that we provide in the press release. So if you look there, the currency column is always talking about the translation exposure of currency. So what is the translation impact from reported currencies to euro currency, which is the new currency. When it comes to price/mix, that column always includes then some transactional exposure on pricing. So that means for every individual invoice, it can be, for example, $1, EUR 1, a [indiscernible], what have you. So that's a whole mixture of difference e-invoice currencies. Now that's currency impact, we don't segregate out. So for Incubator, I'm giving this background for Incubator, we have quite a pronounced effect in the fact that the far majority of Incubator business is store invoicing. But we sell as we reported in an AI entity. So the dollar of AI development that was about 23%. So that's quite a positive uptick that is captured in that 17% positive price/mix. So that means if you extract for that, then underlying the price/mix effect in Incubator has been a small negative, which makes sense because that is also part of how we have been positioning the omega-3 prices in the markets to price them more competitively to fish oil comparables, as you may remember. So that's explained that positive effect.
Yes. So on the FDCA, back to your second question. So actually, we said we are evaluating many options there as we speak. So there are no really yet further progress or decision being made on that. So we would come back to you in due time, whatever the decision is going to be that we are still in the exploring phase on that product line.
That's understood. My first question is on Food Solutions and the category growth. This portfolio has been growing quite nicely now for over a year. And I am wondering if -- to what extent this is due to outperformance of end markets, or just simply a higher corona induced category growth at this stage. Now I'm leaning towards our performance, but have people simply be eating more bread and process meat as a result of corona. And if so, can you give an idea of the category growth over the last quarter or longer period for the bread and processed meat markets to which you're exposed?
Yes. No. So what we see in a Sustainable Food Solutions, and you're correct in stating that we see even an increasing dynamic in that. Obviously, the section that is growing a lot there is around natural preservation. And this is not a new trend, as you know. So -- but we are still leveraging the move to, let's say, cleaner label products. And also the strengthening regulation around the globe where there is quite some, let's say, regulation going for sodium reduction or nitride replacement, amongst others. But also other synthetic products being formulated out because we know the regulation is about to change. So that is an underlying driver that we see as a very important one. That is also there to stay because so far still, the conversion rate from synthetic to natural in the preservation area is still adverse. So that has not changed. So -- and actually, COVID is only emphasizing that trend. We see that there is a lot of consumer consciousness about what they eat. And obviously, food safety and food security in COVID times is also very relevant. So that's one. Obviously, we've been supported to some extent by the COVID pandemic because we are more exposed to retail than to food service and out-of-home. So although it's difficult to quantify, but I would say this is not a major part of the growth. It is, for sure, maybe a couple of percent in the total growth, but not the major part of the growth. What we see also this year happening is that we are benefiting from some very good wins we materialize in the second half of last year. And these were wins that we -- occurred in H2, but are really coming in a very nice way in 2021. So what we see now impacting our results. Another point, not to be discounted when we look to how do we have and why do we have a strong dynamic, is that we also benefited from the fact that we've had a very strong supply chain across the period where everything was upside down. And basically, all in all, being able to supply and be very reliable in COVID times, I think, has strengthened our position because, again, we've been able to secure supply sometime back up for other suppliers, but we are critical -- not to shut any single customers during, I mean, the most critical times of the COVID pandemic but also the container shortage. So we've been able to keep the very high level of service across the market. And this is the feedback we get from our customers. But I think it is also helping us in terms of the reliability of supply during trouble times. And obviously, yes, we see and although it's very early days, that some of the additional front line investment we've made in more sales, more tech sales, in the primary application labs is starting to pay off. Although this is, I mean, again, still very, very early days. Back to your question on categories, when we look at the data, as you know, on a monthly base on each categories, whether it is a meat or bakery, we see that both these categories are back to normal cost, the surge last year. I think so we -- again, we look at them, of course, a stronger momentum due to some meat preservation or savory products or meat analysis or automotive today, if you look at all the plant-based burgers type of applications are well and good. So that is still very strong. And in bakery, we see a bounce for a number of reasons. We've improved our offering. We mentioned last time, a launch of natural mode inhibitors, which is a way for us to leverage the expertise we have in preservation into bakery with a [indiscernible] extension and freshness solutions for our customers, and this is also now paying off very nicely. So I have to say that, yes, stronger growth in meat derivatives or process meat today than bakery. But bakery is showing a very good sign of growth these days as well. So I hope it answers your questions, Sebastian.
And we can now take our next question from Fernand de Boer from Petercam.
First of all, could you tell us or remind us the change in legislation in agriculture, what that exactly is? That's the first one. And you also mentioned in the press release on Food Solutions that you benefited in the second half of March from, let's say, client building up safety stock. Is that -- are you able to quantify that a little bit? And also, could that mean that, let's say, in Q3 or Q4, that there will be a -- could be a destocking effect? And the last one, if you look at price, you are confident to pass on price increases. But I also remember from the past that normally speaking in bakery and food and beverage, you were working with, let's say, 1-year contracts regarding price and that you were hedging for around 6 to 9 months. So should that be with the impact on the margins? Or optionality also?
Yes. So in legislation, just a question. Are you referring to, let's say, preservation or?
No. I mean what you said in the agriculture change to legislation which was...
Yes. Sorry. Yes. No. So in the agrochemical, indeed, what we've seen is that we supply some customers with our green solvents. But what is being challenged is not the Corbion's product. There is the active, let's say, material from these big chemical companies providing these agri products. So basically, regulation, primarily in Europe is strengthening a lot on the type of molecules being used for pesticide -- beside and so on. And our product is just kind of -- yes, of course, solvent to have supply the product. So it's not about our product. It's about the final and active and this is what is indirectly impacting us there. So -- and until the moment, these good players can replace these active molecules by new compounds. As you know, our base business is -- has already suffered in the past. I mean it is still suffering. And we do not expect to know any short-term positive outlook on that part of the business. It is anyhow structurally declining part of our business, which is not huge either. But we do not expect these to reverse anytime soon or that much bigger in the future. On the Food Solutions and safety stock, so far, we don't see that. Honestly, the signal we get from the market and the business is that there are still many uncertainties around. But you know what we can see, probably with our big key accounts is that we still have a quite low inventory all in all. And when we look at our supply chain. And also still the function that is happening in some of the supply chain in terms of forecast we get from them, we don't see that so far. Then your last question on price increase, and it's true that we have some early contracts. But we have also in some of these contracts, some margin closes. You know that -- are allowing us to reopen conversation if we would have some deviation in input cost. So -- and this is something we've already done in the past. And now see, let's say, the substantial level of increase when we are not hedged because we think we are hedging in quite some of this raw material. But when we are not fully hedged, we have closed these contracts that are allowing us to come back to the negotiation table. Not to say it is -- because it's always very challenging and it's always [indiscernible]. But we can come back on pricing. Hope this answers your question.
The next question comes from Patrick Roquas from Kepler.
Patrick Roquas from Kepler Cheuvreux. I've got 2 questions. So the first one is on Sustainable Food Solutions. You have been growing over 10% in the last quarters. And of course, it's early in the year, but what do you expect in the remaining quarters? Also knowing that there was some volatility in Q2 and Q3 last year. And also in relation to your midterm guidance of around 3% growth for this division? And then finally, what have you seen in April for sustainable Food solutions?
Yes. Thanks, Patrick. So in the Q1 was a good [indiscernible] because we have a strong comparative. So with the March 202 surge in the country loading. So we are pleased with Q1. Look, Q2 was a low quarter last year. So yes, you can expect to do that. That we're going to have a positive momentum. Now we -- and again, we see over the next quarters, we are working on our pipeline, and we have a good pipe this year. Now the uncertainty for us is reopening post-COVID of out-of-home and foodservice. Will that have a major impact? It's very important to know for us to see how do we materialize our innovation pipeline, our commercial pipeline going forward. One of the specificity of this period in COVID, which is really new, is that we have less projects because, as you know, the sales people have not been able to visit customers as much as we would have than in normal circumstances. However, the win rates are much higher. And that's quite -- I think it's something to a key learning of the pandemic is that because we have more, let's say, food project and this project, the win rate level is much higher. So we've seen that over the last quarter. So we expect that to continue over the next quarters. So we are, let's say, pretty confident there. So indeed, I mean, yes, you could say, 3% is, of course, on the pessimistic side that we would agree. We see a better outlook than the 3% there. And we do not see any reasons because the reason why sales in SFS would suddenly crash. So that's something, again, yes. A bit how we see the situation there. So still with quite a positive outlook.
That's very helpful. Olivier. Then on your policy for accruing for bonuses. Could you comment on that? Has that changed versus last year? And then finally on algae. The question might have been asked before, but I was on another call, I think, together with Reg. Could you provide us a bit more flavor on what's happening there and what you expect in the rest of the year following, let's say, your indication at the full year event that you have become more positive?
Eddy, can you answer on the business?
Yes. So on the bonus accrual, Patrick, what we do there, we always look at what is our visibility and how confident are we on the visibility of the full year's performance because our bonuses are related to full year performance. One of the driver in the bonus schedule that we have is sales growth. So organic top line growth. And as you've seen in the press release, we have come out with a stronger guidance there, outlook for this year, 7% to 10% growth rather than in the range of 4% to 7% growth. And then it is legible consequence, but that has been also reflected in a first accrual already in Q1 for bonuses outlook for this year. So yes, we did make an accrual in this first quarter on top of the base level. Usually, you always start with the base accrual, and then we adjust as we close through the year. So that's the indicator for that.
Yes. On the -- your second question on algae momentum. Indeed, what we see is that, yes, it's going from straight to [indiscernible] there. Basically, you remember last year, we discussed about this great breakthrough. We are in launching a new strand that increased our yield massively, enabling us to price, let's say, differently without managing our margin. And we implemented that in Q4, the adoption from current customers has been great because that also enabled them to increase the mass, the inclusion level. So that's -- I mean, the bigger factor of what we see. And basically, we've contracted that for individual -- This is why we are confident on this full year outlook because most of the volume is already contracted. What we've seen as well is that in terms of adoption, coming with a new positioning strategy but also reemphasizing the sustainable angle of the value proposition, we have to reposition, it's getting there. It's a lot of efforts in terms of consumer awareness. But what we see are still and we see more and more people thinking about the impact of environmental, [indiscernible] shows, biodiversity, you name it. And what we've seen is that now in our conversation to convert new customers, we are getting there. And this is what I was mentioning before in terms of adoption, although these are not yet new -- necessarily new users or additional contract, we are feeling much better because we have performing more trials. And the outlook of these trials are looking positive. Finally, we could open up new areas where we were not really supplying massive volume, primarily in the shrimp industry but also in the petrol industry. And this is also helping us primary in part to have an improved margin outlook. So when you combine all that. And yes, also, as we've done in the Food Solution business and across the organization, we've really ramped up our capabilities in the IG go-to-market from time. We recruited people on the ground in the 2 key markets in Norway and Chile in terms of tech sales, in terms of business development. So we have quite an investment in terms of people going to the market there and we achieve the end of the gearing end of the day to have customer context, more customer interactions. So yes, so again, fairly positive, but we want to remain, of course, very focused because the path to breakeven is mainly the target for '22. And we would not be there by the end of this year. So we want to be the so we want to stay very, very focused on location there. I hope this this answers your question, Patrick.
There are no further questions on the line at this time. I would now like to hand the call back to the host. I beg your pardon. We have a reprompt for call. And for a question and it's Alex Sloane from Barclays.
It was just a question just on the outlook regarding margins...
Alex, are you still there? We can't hear you.
Yes. I think we've lost Alex there. We'll just give them a few moments to requeue. I don't think so. I think we might some [indiscernible] there. Okay. So I would like to hand the call back to the host now for any additional or closing remarks.
I would say, again, I think thank you all for attending the call. We are really looking to meet again, actually, for our media results early August over. So thanks. Have a good day, a good weekend, and hopefully, stay healthy and safe in these strange times. Thanks, everyone. Bye-bye.
Thank you.