Borregaard ASA

OSE:BRG

Earnings Call Transcript 2018-Q1

[Per Arthur Sørlie, President & CEO]

Okay, good morning, and welcome to this first quarter 2018 presentation for Borregaard. My name is Per Sørlie and I'm the CEO of the company. I'll be joined this morning by our CFO, Per Bjarne Lyngstad, and we will take you through this agenda, highlights for the quarter, the business areas and the market situation for each of those, and a short update on the strategic projects, and outlook for the next quarter and the remaining -- remainder of the year. And then Per Bjarne will take you through the more -- go more into the financial figures.The highlights, the EBITDA adjusted for the quarter, came in at NOK 177 million compared to NOK 200 million a year ago. The -- we saw, in particular on the positive side, we saw an improved product mix in Performance Chemicals. We -- in Specialty Cellulose, on the other hand, we had a lower sale of acetate, as we guided after the fourth quarter. We saw higher sales both in Ingredients and in Fine Chemicals, and we absorbed approximately NOK 40 million in added costs between price increases in wood and caustic soda, increased lignin distribution costs, and buildup of fixed costs in the Florida, before the Florida startup. So between those 4 items NOK 40 million added costs compared to the first quarter a year ago.And finally, we are approaching startup for the Florida project and we can report that the project is well on track. Then to go -- move on to the market situation, in Performance Chemicals first, we saw increased sales of specialties and even more positive, we saw also a stronger mix inside the specialties, so we sold, in other words, we sold more products in specialties but we also sold particularly more of the higher priced products. And these -- then the categories for those are the batteries, the agro, and the oilfield chemicals.However, the sales volume increased by 1% versus the same quarter last year. This is lower than what we had expected and this is due to the cold weather that we have experienced as -- particularly in North America but also in the European market, the cold weather has slowed down the construction activity and hence that explains why the volume only came up by 1,000 tonnes year-on-year.The strong price competition that we see in certain regions of the construction market continues but in spite of that, if you look at our pricing, the price in sales currency is in line with the same quarter last year hence the increased specialization has compensated for the price pressure that we see in construction. The price -- sales price that you see on the curve here is in Norwegian kroner, so the change from the first quarter last year is explained by the change, the movement in the Norwegian kroner versus in particular the U.S. dollar. So in sales currency, the price is on average unchanged from the year before.If we move on to Speciality Cellulose, the -- we saw quite high sales volume in this quarter compared to the same quarter last year, however, as we have guided for, the mix is slightly or somewhat weaker. In particular, we are -- we see a lower sales of acetate cellulose. The market remains quite unchanged from last year, which means that the ether market continues to be quite strong. Where as there is a challenge -- there are challenges in the acetate market.The average price in sales currency here came down -- the price came down 4%, which is slightly lower or more than we had guided for, for the full year, but this will even itself out as we move into the year. Bioethanol had higher sales prices but also a lower sales volume, which is just normal variations between quarters. However, we should also mention that we started opting new dehydration plant during this quarter, which is the plant that enables us to produce 100% of the volume going into biofuels. This was started up during this quarter.Then I'll move on to Ingredients and Fine Chemicals both businesses had strong quarters. If you start with Ingredients, as you can see it was quite very high sales in the first quarter, and this was a combination of higher sales volume and this positive market trend that we reported after the fourth quarter, which will continue, the higher sales volume means that it's at a level which cannot be -- is higher than the production in the quarter, so the higher sales volume will, of course, be -- vary between quarters. But the positive market trend is a -- I think that will continue also in future quarters.Fine Chemicals, you can see there that -- you know that we have varying delivery patterns in Fine Chemicals and the first quarter was a reasonably good quarter, as you can see, when you compare to the 4 quarters in 2017. So there were high deliveries of key products in this particular quarter. But the market here remains fairly strong and we are producing at full capacity.Then I'll just give you a brief update on the strategic projects because as you know, we are in a fairly intensive CapEx period and we are executing on a number of strategic projects, and some of them are coming to completion and have been completed, so I'll just take you down the status on each and every one of them.We are doing several things to expand or improve the value creation at the biorefinery asset that we have in Sarpsborg and as I already mentioned at the end -- towards the end of the first quarter, we started up the expansion that we are making in bioethanol, which is not a volume expansion but it's an expansion of the capacity to make the water free bioethanol that is the necessary grade for biofuel. So from this quarter we are -- or we will be able to supply all -- or produce all of our bioethanol as bio-grade or bio-fuel grade.The Ice Bear expansion -- capacity expansion is on track, it will be completed before the end of this year, and also the NOK 500 million upgrade that we are doing on the lignin side in Sarpsborg that will both reduce the costs and also increase the capability to make specialized products, that is on schedule to be completed by the end of 2019, but there will be gradual implementation of this product, projects -- also some things will start to come into effect before -- just before the end of 2018 and then gradually through 2019.Then the single largest project we have is the Florida project, and the Florida project is on schedule for start-up in the middle of 2018. It's on time and it's on cost when it comes to the CapEx. And it's also well prepared for the market introduction that will take place from the middle of this year. We have been working, by July we will have worked 24 months on preparing the market introduction and we feel that we have done the -- what is -- what we can do in order to prepare for a smooth transition from project to operations.Finally, Exilva. The Exilva and SenseFi projects the Cellulose Fibrils the market introduction in Exilva is ongoing, we have now -- we are now well over 900 prospects looking at this project, it continues to grow. Just to remind you, a prospect is somebody that's received a sample and is testing the sample, it's somebody that's given feedback and moved forward with the project, past the sample stage, or somebody that's moved into piloting, or somebody that's become a commercial customer. So between them we are now about 900, so we are really pleased with the strong interest we see from the market.But as I've told you before the commercial, the lead time here for becoming commercial sales is fairly long, it's -- as far as we can see, it's in the range of roughly 3 years, is the typical lead time. But number of customers growing all the time. The SenseFi expansion is something that we are deliberating over as we speak and we will make a decision during 2018, whether we will move forward on this project or whether we will slow it down, as we see it now.So overall, I would say that we are well on track with all these projects both on CapEx and on timing.Then finally the outlook, the Performance Chemicals, I would say it is unchanged when it comes to the construction sector. We still see a fairly slow market in certain regions with strong competition, so we will continue the reallocation efforts and also that means that some of these distribution costs that the added distribution costs we have will continue.The sales volume is forecast to increase by between 5% and 10%, we had a fairly slow start because of the cold winter, it came up only 1% in the first quarter. But for the full year, we still expect it to be between 5% and 10% higher volume than in 2017. We also expect the positive development that we saw for specialties in Q1 to continue for all of 2018. And as a result of these [ statements ] of course then the second quarter sales volume is expected to be higher than what we saw a year ago.And as we already touched upon the ramp up in Florida. We are getting close to startup in Florida, which means that the ramp up or the fixed cost will continue also during the second quarter and then we will reach the normal fixed cost level and then when we start up the plant approximately beginning of Q3, we will also then commence depreciation on that facility.Speciality Cellulose is unchanged from last quarter in terms of guiding. The average cellulose price is expected to be very close to the price that we saw last year in sales currency, which means that some prices are down, some prices are up but on average fairly close, and the product mix is expected to be weaker than we saw last year, which is due to the lower sales of acetate cellulose. In the second quarter, we expect both a lower sales volume and also sales of highly specialized grades to be lower than we saw in Q1 '18 but remember Q1 '18 was a high sales quarter with 40,000 tonnes delivered.In other businesses, we don't expect any changes in the market conditions for Fine Chemicals they are fairly good and we can expect them to continue to be fairly strong. The positive market trend that we have seen in wood-based vanillin is expected to continue and when it comes to cellulose fibrils we expect that sales will gradually increase throughout the year. But I already cautioned you that there are fairly long lead times but the fixed cost and depreciation will stay more or less at the same level as we had last year. So if you manage to grow the sales it will improve the, or reduce the losses that we have in this business at the moment.After the fourth quarter, we told you about the increasing some of the commodities that we buy in particular wood and caustic soda have seen sharp price increases towards the end of 2017 and we have told you, in this report, how much that has impacted the result in the first quarter. This will continue for some time both wood costs and caustic soda are expected to be at a higher level than we saw in 2017. This is -- both these costs are affecting Speciality Cellulose and when it comes to the Ingredients business they are a consumer of caustic soda as well but not wood.And finally, the FX exposure has not really been a factor in the last few quarters but we are just reminding you that we do have the hedging policy that will at this point reduce the fluctuations or delay the fluctuations of any movements in the Norwegian kroner. So that completes the outlook and then I will hand over to Per Bjarne for the financial performance.

[Per Bjarne Lyngstad, Chief Financial Officer]

Thank you, Per, and good morning, everyone. Borregaard's revenues increased by 7% in the first quarter compared with the same quarter last year, mainly due to a high sales volume in several business areas. EBITDA adjusted was NOK 177 million, NOK 23 million lower than in the same quarter last year.The result in other business improved but both Performance Chemicals and Speciality Cellulose had weaker results. Compared with the first quarter of 2017 our costs increased by -- like Per said, approximately NOK 40 million and that were the main reason for the lower result.Out of the NOK 40 million wood and caustic soda prices amounted to approximately NOK 25 million and affected mainly Speciality Cellulose and to lesser degree Ingredients. For Performance Chemicals higher distribution costs and the effect or -- from increased manning in Florida were approximately NOK 15 million.The net currency impact was insignificant when comparing to the same quarter last year. And earnings per share were NOK 1.37 compared with NOK 1.48 in the first quarter of 2017. Revenues in Performance Chemicals were largely in line with the same quarter last year. EBITDA adjusted was NOK 115 million and decreased by NOK 17 million primarily due to the approximately NOK 15 million impact from higher distribution costs and increased manning in the ramp-up phase of the Florida project.In addition, net currency effects were negative in this business area compared with the same quarter last year. A strong product makes mix and higher sales volume of specialities compensated for their continued price competition in certain construction markets.The average price in sales currency was pretty much unchanged. And as you can see the cost increases also affected the EBITDA adjusted margin, which ended at 20.7%, compared with 24% in the first quarter of 2017.In Speciality Cellulose revenues were 5% above the same quarter last year due to higher sales volume. EBITDA adjusted ended at NOK 64 million compared with NOK 89 million in the first quarter of 2017. The effect from higher wood prices and a major part of the impact from higher caustic soda prices ended up in Speciality Cellulose. In addition, a weaker product mix from lower sales of acetate cellulose contributed to the decline in the result. The weaker product mix was the main reason for the 4% lower average sales price in the Norwegian kroner but also textile cellulose prices were relatively high in the beginning of last year and also the lower level this year contributed to the lower average sales price.The net currency impact was positive in this business area compared with the same quarter last year. For bioethanol higher prices but a lower sales volume gave a result in line with the same quarter last year. And EBITDA adjusted margin declined to 14.7% in the first quarter about 5 percentage points below the same quarter last year.Revenues were at the high level in other businesses in the first quarter due to high sales both in Ingredients and Fine Chemicals. EBITDA adjusted ended at minus NOK 2 million, an improvement on NOK 19 million compared with the first quarter of 2017. Ingredients had an improved result due to high sales volumes and a positive trend -- market trend for wood-based vanillin.However, there was a negative impact in Ingredients from increased caustic soda prices. Also, Fine Chemicals had an increased result due to higher deliveries of key products. Cellulose fibrils had higher net costs as a result of optimization activities in the production and strengthening of the marketing organization. Net corporate costs were in line with the same quarter last year and net currency effects were insignificant compared with the same quarter last year.The net currency impact on EBITDA adjusted was negligible for -- compared with the first quarter of 2017. The NOK 25 million positive impact from hedging compared with the same quarter last year was offset but by a similar size negative impact from changes in currency rates.The NOK strengthened by more than 3% both compared with the first quarter of '17 and the fourth quarter of '17, if you're using Borregaard's currency basket. Using the currency rates as of yesterday, the net currency impact in the second quarter is estimated to be plus NOK 5 million compared with the same -- the second quarter of 2017. The corresponding impact for the full year of 2018 is estimated to be NOK 35 million positive compared with 2017.Borregaard's cash flow from operations was slightly lower than in the first quarter of 2017. The cash effects from a lower EBITDA adjusted was partly offset by a slightly more favorable development in net working capital than we had in the first quarter of 2017.Investments in total were higher than in the first quarter of last year in spite of low replacement investments. A large portion of the expansion investments comes from the Florida lignin project, which is still on schedule both for time and cost like Per also mentioned.The net interest-bearing debt increased by NOK 99 million in the first quarter partly due to an increase in net working capital and tax payments in Norway where the main tax payments are done for the year in the first and second quarter of the year.At the end of the first quarter, Borregaard is well capitalized with an equity ratio of 59% and a leverage ratio, which is net interest-bearing debt over EBITDA, 0.91.And that concludes today's presentation. Now Per Sorlie and I will be ready to answer any questions.

[Eivind Sars Veddeng, Analyst]

Eivind Veddeng, DNB Markets, 2 questions please. One on lignin, what is driving the increase in speciality sales, you say agro, oil well chemicals and batteries. But can you go into a little bit more detail on what's driving the demand? And also on Speciality Cellulose, you talked about a slightly weaker mix or a weaker mix, is it possible to be a bit more specific?

[Per Arthur Sørlie, President & CEO]

Yes, well, on the first on the lignin specialities, if you look at it in context from over the last 8, 9 years, we have grown the volume by more than 50% in the high specialities. And in the last 3 years, we had a slowdown, which was really down to the reduction by 50% in our sales to oil-field chemicals as a result of the slowdown in oil activity. So below that reduction of 50%, the other categories have been growing all the time, so this is a result, but now that the oil-field chemicals is coming back as we reported last year then it comes to the surface, the growth that has been there more or less all the time in the others, but we are all the time working hard to develop these markets further through both product development, but also through market development. And the ambition is to continue to grow with, as aggressively as possible and to the extent that you can look in the rear mirror, you can see what we have achieved in the previous years. But it is in our -- the material that we use for investors as well, we have a slide where we show what the growth -- expected growth rates are within these different areas. In the batteries area, there is a strong technology development and there is strong increase, I would say, across all kinds of technologies in batteries, so that's really market and demand driven from what's happening out there in the marketplace. In the agrochemicals area, it's a conversion issue because people want to make more environmentally friendly pesticides and lignin is an enabler for that, so we see more than average market growth in that area. And in the oil-field chemicals, the market is coming back if you like, so we are taking back some of the sales that we lost when the activity slowed down. So it's a combination of things all across these very profitable and high priced applications. When it comes to the acetate volume, I don’t want to give you an exact number on what's happening to the high specialities share. It came up to -- was it 72% last year?

[Per Bjarne Lyngstad, Chief Financial Officer]

Yes.

[Per Arthur Sørlie, President & CEO]

72% of our sales last year was into the ethers and acetate segments and it will definitely be a bit lower than that. It's ranged from 57% to 72% over the last 3, 4 years, so it will be somewhere within that range, what we will deliver this year. And there are variations between years because of contracts expiring at different points in time and so forth, so that explains part of the variations. But at the same time, there is a pressure downward pressure in this market compared to what we're seeing in the ether market, so -- but it's too early to exactly pinpoint where that will be.

[Per Bjarne Lyngstad, Chief Financial Officer]

What we can say a little bit about this, of course, what happened in the first quarter and as I said the price in Norwegian kroner came in average down by 4%. Currency was not really a factor in this area because in this area, we've more euros than dollar sales. So out of the 4%, the main part of the drop, there was the weaker product mix which is mainly related to acetate sales. And then there was a small negative impact from the high textiles prices from last year. But for the full-year, we say that prices in currency will be at the same level as last year in average, but it was slightly negative in the first quarter.

[Mikkel Nyholtt-Smedseng]

Mikkel Nyholt, Carnegie. First off, I wanted to ask about SenseFi and if you could elaborate a bit more on the size and the scale and potential CapEx related to that?

[Per Arthur Sørlie, President & CEO]

Well, SenseFi currently is a large scale demo plant, so it's not a large operation. It has a capacity of approximately 100 plus tonnes, so that the decision point there is whether to scale that up to a manufacturing scale type of facility and that's not a major CapEx. So it's really not the key thing. The key thing is not the CapEx, it's more the assessment of whether the market potential is there. And if you compare SenseFi to Exilva, Exilva has numerous application areas like adhesives, like [ coat ] things, like detergents, like agrochemicals. So let's say there are 10, 15, maybe 20 at least different application areas in Exilva. And you can compare SenseFi to one of those application areas, so it's a much smaller opportunity. So that's sort of the assessment. Is this a big enough, large enough for us to be interested in or is it not? And that's the assessment more so than the CapEx.

[Mikkel Nyholtt-Smedseng]

And regarding Exilva then or the cellulose fibrils where you talk about increased costs due to marketing. Is that increased labor of marketing or sales specialists or is it marketing campaigns. I mean I'm just trying to get a flavor of whether the cost level is fixed going from here?

[Per Arthur Sørlie, President & CEO]

No it's mainly related to us increasing our sales force.

[Mikkel Nyholtt-Smedseng]

And then last one, regarding the lignin markets in Europe or also Middle East and the construction segment, which is still depressed, how is the demand side developing, I mean, we know that it's oversupply as of now, but is the demand side growing healthily, what are you hearing back from your clients when it comes to -- from the takers of lignin?

[Per Arthur Sørlie, President & CEO]

No, I think there are lots of statistics out there about the worldwide construction activity, worldwide cement consumption and so forth and there is all kinds of indication that that is growing, but not at the very high rate, but it's growing. At the same time, just I remind you that also in this particular quarter we had the -- this cold winter issues that drew -- that slowed down construction activity anyway, so I mean there are lots of factors that are impacting on it. So under more normal weather conditions the volume would have been higher in the first quarter. But the story remains the same, there is -- I would say the overall construction market is growing, as is the consumption of lignin, but we don't see a large conversion from synthetics to lignin because the pricing is low and you can only speculate in the explanation for that, and one natural explanation is that they don't want to change the recipes because they know that eventually lignin will become more scarce in supply, so you don't want to mix, switch back and forth during a period like this.

[Jo Erlend Korsvold]

Jo Erlend Korsvold, SEB. Just to follow up on that question, do you still see the same amount of lignin coming out of Russia or is that -- is it coming less volume up there?

[Per Arthur Sørlie, President & CEO]

Well, it's not increasing because I mean there are construction activity that have picked up in Russia but since I am not detailed -- have detailed knowledge of the Russian market I can only assume that there has been a cold winter in Russia as well. But our impression is that there is a slight pickup in construction activity in Russia.

[Jo Erlend Korsvold]

And is it fair to assume that the oil price increase that we are seeing the latest -- is this a good thing for demand?

[Per Arthur Sørlie, President & CEO]

Yes, I mean the oil has an impact on Borregaard in different ways I mean normally it will have an impact on the Norwegian currency [Technical Difficulty] which is negative for [indiscernible] oil price growing which we have the increase the steep increase in the oil price and at the same time it will drive the costs for the substitutes of lignin, which is positive for the lignin business. And of course the lignin business has a lot of manufacturing capacity and growing manufacturing capacity outside of Norway, so they have also dollar exposure and a different dollar exposure. So for the lignin business, high oil price is normally very positive. Okay. So thank you very much.

[Per Bjarne Lyngstad, Chief Financial Officer]

Thank you.