Corbion NV
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Corbion NV
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Ladies and gentlemen, welcome to the Corbion Third Quarter Results 2018 Conference Call on Friday, the 2nd of November, 2018. [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 Harten, Investor Relations. Please go ahead, sir.
Thank you, operator. Good morning, everybody. Welcome to the third quarter Corbion 2018 call. With us today, Tjerk de Ruiter, CEO; and Eddy van Rhede van der Kloot, CFO.As usual at Q3, we'll start with a introduction by Tjerk, followed by Q&A. And as a reminder, you can find the PowerPoint presentation on our website under the Investor Relations/Financial Publications heading.So with that, please go ahead, Tjerk.
Thank you, Jeroen. Good morning, everybody. Thanks for joining us today on our Q3 call. Overall, I'm quite pleased with the top line progression we're making, but less so with the profit. I'll say a little more on that later.So starting with Food. We're comfortably in the 1% to 3% growth rates. Bakery still showed a small decline, but that decline in Bakery was again lesser than Q2 and we expect to continue to improve on that going forward.In Biochemicals, we progressed well. And even though we would have expected more from the top line growth, it grew in the right area such as Medical and Pharma.If you look at the profitability, we saw nice progression in Biochemicals. In Food, however, the margin came down. The biggest reason is that we see a broad increase in our input cost across many areas, and I'm talking about freight, packaging, energy, chemicals, but also duty differences. We're addressing this as normally in our businesses through a multitude of measures such as price increases and reformulations where needed.Finally, on the Innovation Platform, we're growing our lactic acid sales to the PLA joint venture. The commissioning of that plant is going well and we continue to expect that the plant will be operational at the end of the H2.Although it's early days, the Algae Ingredients had a pretty decent third quarter for our AlgaPrime DHA, which is the omega-3 product for fish. The bump in sales did coincide with the seasonal peak of the salmon feed in Norway.As for an outlook is concerned, Ingredient Solutions is unchanged. For Innovation Platforms, we've raised our outlook a little.With that, I'd like to open up the call for Q&A. Operator?
[Operator Instructions] We will now take our first question from Wim Hoste from KBC Securities.
I have a couple of questions on the Innovation Platforms and specifically on the TerraVia business, the Algae business. So first, can you elaborate on the progress you're making with the efficiency of the process? Fermentation yields, et cetera, is that going in the right direction? Also with regards to the quality of the product, are now fully happy with the quality of the product that is delivered? I'm talking specifically on AlgaPrime. And also can you elaborate a little bit on the commercial progress? Yes, there was a seasonal pick-up in Q3, but how do you see the outlook going? Do you see order books building also for the product going into Q4 and 2019? Can you elaborate a little bit on that as well please?
Okay. So thank you, Wim. So we look at the Algae business -- as I talked with you about last quarter, when we look from an operations point of view, we're making good progress. The plant in Brazil is running well. We had, as you know, issues with quality early on. They have been resolved and have been able to produce now consistently in the right specs. So that's nice to see. But it's also nice to see the progress the teams are making by collaborating and sharing best practice. So overall, very strong progress on that side. So with that, leads to some nice efficiency gains. So that is also starting to help. And you actually see that in this quarter, that, when we get sales, the other contribution helps offset some of the investments we're making in this area. Now when we look at the overall sales development, as indicated, it was a decent quarter, partly because the industry itself has -- this is the strongest quarter in the -- for the salmon industry. Personally, we're not happy with the progress we've made on the commercial side and that's what we're working very hard, as was also indicated earlier. So overall, I think good progress in the Algae business. Nice to see that we can now make a multitude of different products in this plant, also beyond the AlgaPrime. And the focus is now really on driving growth going forward.
Our next question comes from Emmanuel Carlier of Kempen.
Three questions from my side. The first one is on Ingredient Solutions. So you have explained that, yes, why the EBITDA margin was a bit weaker, but maybe you could provide a little bit more color on the different buckets and how important they all were? And secondly, do you expect this weakness to persist into Q4 '18 and full year '19? And then the third question is on the net debt level. I think at Q2 you mentioned that net debt by the end of full year '18 needs to be around EUR 230 million to EUR 250 million. Could you confirm that because on Bloomberg I see still a much lower estimate? Maybe a final question also on AlgaPrime. Could you help us in explaining the seasonality a little bit better for forecasting reasons kind of percentage of sales per quarter and also what the kind of gross profit margin is on that product?
Okay. So I'll answer the first questions. Then when we get to net debt, Eddy will address that. So when you look at the margin development in our Ingredients Solution business, we're really talking about the margin development in Food. And whereas, we already indicated at Q2 that we saw increased raw material and input cost. That's clearly continued a lot more than expected in the -- in this quarter. I don't think that's a unique situation that we face. I think that's just a fact of the energy. Now some of you might be saying, "Yes, but your sugar prices are significantly coming down." That is absolutely true. But remember that for our Food business a large part is actually not sugar related. It's not the lactic acid business. And there we see the increases. So what are we doing about it is really a multitude of things as part of our normal business, seeing what we can offset of these increases by price increases. I think if there is a positive to this increase it's the fact that this is the time that a lot of the contracts are being reviewed. And in those cases where price increase is unacceptable, working with the customers to see how we can reformulate the product. So I think it's very much a normal part of our business. How long will this take? I think in general when we talk about the price increases, it could be a 9- to 12-month cycle. What we have as an advantage here is that it actually starts in the season where the bulk of our contacts are being addressed. So I would expect a slightly shorter cycle than normal. With that, I'll -- oh, I forgot. The next question was your AlgaPrime and the seasonality. No, I'm not going to comment on that, because I think for a industry where we ourselves are fairly new -- I think there's a lot of stuff being written about that and I think it's generally true that in the third quarter sales to this industry are higher. So that's what we're just trying to reflect.
Okay, on your...
And are the other quarters kind of even?
Yeah, the other quarters I think -- I think I prefer to just not answer that question because I'm not 100% sure.
On your question on net debt development. I don't think we have ever quoted absolute amounts, but I think what we can say is we ended Q2 this year at an increased level of 1.8x of EBITDA. That's a fair assumption that towards the end of the year we're cruising around that range.
The next question comes from Fernand de Boer from Petercam.
It's Fernand de Boer from Degroof Petercam. I've a couple of questions. From your presentation, I understand actually that Meat growth is slowing down. Could you share a little bit of that because in the first 6 months you have seen good growth and now you're seeing slight growth on the 9 months? Then you have -- in Innovation, you mentioned that they benefited from absorption effect, taking the sugar -- inventory built up for sugar shut down. Why is that only in Innovation and not in other, for instance, in Biomedical, also chemical? And then in Biochemical, you had a negative absorption effect, while volume trends were still quite positive. So I have difficultly to understand. Could you explain that? And then you also mentioned that you were not satisfied with the commercial -- how do you say it? -- approach in TerraVia. So what has to be changed there? What is not going according to your expectations? That were my questions at this moment.
Okay. First, with the Meat. I don't think that the -- that we're saying that the Meat is slowing down. I think we see continued strong performance. So --
If you look at your first page...
I disagree with that.
But in your presentation you say that Food -- Meat is doing well -- okay. No, fine. Okay. Thank you. Sorry.
Yes, I think -- Slide 7 I think states it, but -- and so I don't think Meat has slowed down. If the text indicates that, it shouldn't.
Okay, my mistake.
Yes, okay. Then your next question was around the growth in Biochems, if I'm correct. And I think what we're seeing there is the growth was impacted by the slower sales in Animal Nutrition and HPC, whilst the Biomedical and Pharma is growing nicely. So what that has is a more positive effect on the margin because of the different margins that were making these segments. I think that's the explanation, if I understand your question absolutely correct. And the third question...
Yes.
Go ahead.
No, because in the presentation you also mentioned there a negative absorption effect. So what is Biochemicals' negative absorption effect while you have a positive in Innovation?
Yes, so I can take that one. So in Biochemicals, we have different products that we're playing, it's coming from different plants. And indeed, in Biochemicals, we had a negative absorption effect, meaning we are selling more than what we're producing in that period. And that's very much to do with the pattern also when it's -- whenever we are building up of volumes of stocks. For example, we have a planned shutdown of a plant, then you need to ramp-up stocks temporarily. The moment the plant is back up operational, then it comes down again. So this is typically the pattern that we have. But for this quarter, it was more pronounced than we normally see that happening. And that had quite an impact on the margin developments in Q3 for Biochemicals, while if you compare to Q3 last year, we had a small positive in that side. When it is for Algae Ingredients, yes, there are very much in Brazil links and we're co-sited on one of the sugar plants of Bunge, as you understand. And the sugar is running in campaigns. And there's always towards the end of the year, say, in the timeframe December-January that the sugar operation is shut down for big maintenance for sugar plants. But as a consequence, the utilities like steam, for example, generated from the sugar plants which we use for our plants is also shut down. So that means we're being co-sited temporarily. We will have also to shut down our production process. And then still to cater for serving the markets in that period, we need to build up before such a shutdown period happens. So that is causing a slight uplift in absorption effect in Algae Ingredients. So we've increased our stocks temporarily as to cater for sales to take place in that shutdown period.
And I think -- and that's why don't we see that not in Biochemicals. Our lactic acid plants are running year around.
But then the question on the commercial progress at TerraVia. You were not happy about it. What is not going according to expectation?
So there really -- that's based on the problems that we earlier had in the year with the quality that really delayed us in getting to market. I think now, as I said, the quality is working well and it's good to see that. But as a result, we just had not made as much progress with new customers as we would have hoped.
The next question comes from Fintan Ryan from Berenberg.
Two questions from me please. Firstly, in terms of the Food Bakery business. I'm just wondering what visibility do you have on the improving sales trend there. Is there any sort of significant contracts or a pipeline that you have going into 2019 that gives you confidence that volumes in that business can go back to positive in the near future? And then secondly, just in terms -- I know there's always an element of volatility quarterly in this. But just in terms of the price mix effect that we saw in Q3 in Solutions, particularly -- obviously, it was quite negative both -- across both Food and Biochemicals. Could you give a sense in terms of what of that is mix and what of that is pricing -- absolutely pricing deflation, if anything, and what should we expect from that contribution going forward for Q4 and into 2018 -- 2019? I know you have said that you're in contract negotiations with customers currently, but is there any sort of sense you think that that can go back to positive?
Okay. So let's start with your question on Bakery. As you can expect, that has a lot of our attention and we work very much in the development approach, where you work with a pipeline of products. So that gives us a good insight of what we can expect. Where you -- what is almost more -- always more difficult to see is what changes are happening on your customer perspective -- on customer perspective. Or give you an example, who would have known 18 months that an ARYZTA would get in trouble that they did? And that I think is just reality. But if we look at the products that we have in the pipeline and the progress we're making, that gives us the confidence to make the statements that we see a continued improvement in Bakery. Now your question on the price mix. There several things are in play. But a large part of that is, as we are more competitive and as we -- we already said that. We took more business in Asia as our Rayong Plant, our plant in Thailand, became more competitive versus the Chinese competitors. This is a result of the cost of corn in China. And as we gain some business there -- but that it is in general a lower margin business and affects the mix.
Okay. And just as a clarification. And the -- within the Bakery business as well, now at the Capital Markets Day you talked about entering new markets, particularly in Latin America. How is that progressing?
Yes, so as a execution of the strategy, I'm actually quite pleased in the Latin American market. We are copying our North American model. So what you've got to think about there is how can we have technical support at our customers, bringing solutions for their local needs. And so what we're doing in South America is really strengthening the team with local bakers that work with our customers there. So there's some nice progress in that business.
Our next question comes from Katy Hutchinson from Davy.
Just 2 questions from my side. How has your net working capital developed in the quarter? I understand that you were building inventory. And do you have any comment on how your receivables are developing? And then secondly, on your cost headwinds. Could you just provide some color on the mix of cost in Q3 and so far in Q4? Was it more weighted towards freight or raw materials? Some players in the industry have cited low to mid-single-digit inflation, so a bit more color on the cost inflation will be helpful.
Do you want to start, Eddy?
Yes. So typically in our Q3 calls, we don't go into balance sheet positions and working capital developments. But like I already alluded to in the absorptions, indeed on a net basis we've increased our inventory positions. But again, that is very much of a temporary nature. So we will come back on this with the Q4 results.
Now with regards to your question on cost headwinds, really what you could -- what you need to think there is, in general, freight, I think it has surprised all of us and I think there's a multi-factor to it. Of course there cost of energy is going up, which you can pass on. But it's also tightness of supply in the market that actually has driven those prices. You see that actually translating in a wide range. So it's not only our own internal freight, but it's of course also the cost of the freight getting our raw materials into our plants. Next to that, I think in general the whole chemical complex has been increasing. And then last but not least, we also faced some duties in our business, not so much the China, U.S. as you might be expecting. You know we don't have much production in China. But we're actually facing is some Mexican duties as a result of the NAFTA discussions. We believe those to be very temporary, but had not seen them removed at this point.
[Operator Instructions] We will take our next question from Emmanuel Carlier from Kempen.
I have 3 additional questions. One on Ingredient Solutions. You guide for 2% to 4% organic sales growth. I just want to check if you believe that is already realistic for 2018, because it implies a quite strong improvement in Q4 versus previous quarters. Secondly, coming back on the duties that -- Mexico. Could you quantify them? Let us know since when you have to pay them and explain why you believe it is temporary? And then the final question is a bit of a broad question. If I look at consensus, I see that for Ingredient Solutions consensus is expecting profitability to move up towards 21% by 2020. I know this is still far away, but how do you look at that? Do you believe it is tough to continue to grow the top line while improving profitability as well or do you believe over the mid-term you could improve profitability levels as well?
Okay. So let's start with the growth rates, 2% to 4%. Yes, we believe that that will be achieved. With request to the duties, we're not going to explain the size of that duty, but the real reasoning there was the Mexicans countering some of the statements that the Americans were making. That's why we believe now with the new NAFTA agreement as far as we understand, about signed or about implemented, these should disappear again. With regards to the consensus, I think we've given clear guidance what we believe we can achieve in our strategic strategy -- in our strategic period of above 19% while strengthening our growth profile.
The next question comes from Patrick Roquas of the Kepler Group.
Two questions. First, on the outlook. I missed part of the call, so I might reiterate this question. But you raised your guidance for Innovation Platform for this year. Does it also imply that the guidance for, let's say, getting close to breakeven is raised? That's the first question. Secondly, on PLA. We saw the news that in China there will be a PLA plant opened by Thyssenkrupp, COFCO. Do you see more of these initiatives and are these kind of stimulating and boosting the whole PLA market or do you see it as a competitor?
Okay. Now let's start with the outlook for the Innovation Platform. I think it's too early to change the outlook. What we really did is reflect the strong quarter that we just had for this year. And I would not draw any further conclusions on that. With regards to the PLA, COFCO has started a small plant. I think it's a 10 kilo -- ton plant. And as we know, there are several of that size in China. We see it as a positive, in that more and more people start to look at that market, because in the end of the day it is about increasing the use of PLA that will help our success. If we look at our own position -- this of course is a relatively small plant. So it's more about creating market demand that COFCO is doing versus the size of our plant. We're actually quite -- as you know, we're quite proud of the progress we've made with the PLA and the commissioning is going quite nicely.
Our next question comes from Fintan Ryan from Berenberg.
And just sort of a follow on from the previous question. I noted that over the last few weeks we've seen a number of statements from FMCG companies about their sort of plastic strategies for the next 5, 10 years. And a lot of which seems to be Pepsi, Coke, Nestle. A lot of them seem to be doubling down on PET or more sustainable sources or recycled PET, whereas there doesn't seem to be any progress in terms -- or nothing that I've heard in terms of adoption of other compounds like PLA. Are you still confident in terms of the potential for FMCG companies to convert to using PLA in their processes? And how -- in terms of the commercial pipeline, once the plant is commissioned, up and running, how has that developed over the last 3 months?
Yes. So Fintan, if we look at the plastics market, I think the current recognition by consumers that we need to address the amount of plastic that we consume is a very positive one. That -- to address that problem, we need to look at a multitude of solutions. Recycling of course is one of them. But recycling alone is not going to solve the problem and you're going to need different alternatives, which we believe only makes the positioning of a product like PLA attractive. As you also know, we see the PLA not as the all-in-one solution. It's just one of the components. And being positioned with a product that is commercially available; I would say quite cost effective, although more expensive than PET. But if you look at the total end of life situation, it might actually be cheaper. So I believe these things are very positive for us. And keep in mind, we need a multitude of solutions. We see that same response from many of our customers in this market. There's a lot of interest in PLA. It is now for them to find the specific applications for that.
The next question comes from Reg Watson from ING.
You referred to the fact that the North American bakery market is showing signs of improvement for you. I'm just wondering with it going to the contract negotiations, how much competitive pressure you expect, particularly in view of the fact you're going to have to start putting prices up?
All right. I think in any of our markets price increases need to be well explained. But if the reality is there, people do understand it needs to happen. The baking market is a competitive market. But where I get my confidence from is -- the problems that we're talking about here on the input cost is not a Corbion product -- problem. I think it's an industry-wide problem that many people face. And we're going to have to resolve that. And that's why I also in my statement said I don't think it's just about price increases, it might also be about reformulating some of the solutions for our customers. This is our business. It's hard work. But we have proved that we can to this.
It appears there are no further questions at this time. [Operator Instructions] The next question comes from Robert Vos from ABN AMRO.
I have a question on Innovation Platforms. Your implicit guidance for the fourth quarter is EUR 10 million to EUR 15 million in EBITDA loses. Can you remind me why this would be such a big quarter for EBITDA losses? It could be the biggest loss of the year. Is there specific costs that you expect in fourth quarter? Maybe a bit of color there. And the second one I had is, yes, still on the profitability in Food. Considering the steps taken like price increases and also reformulations, as you mentioned, is it fair to assume that your year-on-year EBITDA margin delta will look a bit better in the fourth quarter compared with what you have reported in Q3? Those are my questions.
I think I'll start with your last question and I'll hand it to Eddy on the Innovative Platform. The fourth -- so are you saying are we going to see margin increase already in the fourth quarter? I think that is too early with this -- discussions on pricing are happening now and most of will take till the end of the year or they even will take part of the year if we succeed. So the fourth quarter should be in line with what we are seeing today. Eddy?
So your conclusion is correct indeed that the implicit guidance is the range that you've mentioned. So a more negative Q4 EBITDA than we've seen in Q3. We have already explained part of that, is to be found in the sales development. This DHA, the AlgaPrime, is now in the peak season for the salmon. So that should come down a bit compared to Q3. I already explained that the production plant in Brazil will be shut down temporarily because of this link to the sugar campaign operations. So thus meaning you really have all the cost -- all the production cost going into P&L. There is no positive absorption effect. And maybe a third component is also the rest of our Innovation funnel which is still in an investment mode as well. We have some have seasonality we're facing for the different quarters. So there's not a stable outflow on a quarter-by-quarter basis. So those 3 components make it indeed that we have a more negative EBITDA for the fourth quarter.
There are no further questions at this time. [Operator Instructions] There are no further questions. I'd like to hand the conference back to our host for any additional comments.
So I would say thank you very much and look forward to seeing you at one of the conferences if possible in the coming few weeks. Bye.
This concludes the Corbion third quarter results 2018 conference call on Friday, the 2nd of November, 2018. Thank you for participating. You may now disconnect.