Borregaard ASA

OSE:BRG

Earnings Call Transcript 2020-Q1

[Per Arthur Sørlie, President & CEO]

Good morning, and welcome to this first quarter 2020 presentation for Borregaard. My name is Per Sørlie, I'm the CEO of the company, and I'll be joined this morning by our CFO, Per Bjarne Lyngstad. We will take you through the following agenda. I'll talk about our new classification of business segments, the highlights of the quarter, the coronavirus situation and also the market situation for the different business segments and finally the outlook. Then Per Bjarne will take over and go through the financial performance in more detail. First of all, since we were listed back in October 2012, we have been reporting along 3 different business segments: Performance Chemicals, Speciality Cellulose and Other Businesses. At the beginning of this year, we made a decision that we would change the way we reported and introduced some new business segments. And the reasoning behind this is that we wanted to have better alignment between the value chains where we create value from the different raw material components and also the internal reporting structures that are in place. So the new business segments. First of all, we have BioSolutions. And BioSolution comprises these all lignin-based products, biopolymers and biovanillin organized under one management, and this is the previous Performance Chemicals and the ingredients parts of Other Businesses. And again, just to emphasize this, all the products produced in this new business segment have the same starting material, lignosulfonate, and there is also close interconnections between the biovanillin and the biopolymers in manufacturing. Second business segment is BioMaterials. And this will be all products utilizing wood fibers as the main raw material. So this includes the former Speciality Cellulose business area and the cellulose fibrils. The cellulose fibrils is a downstream business from our Speciality Cellulose. The starting material there is a specialty grade produced by our own Speciality Cellulose manufacturing unit. So altogether, these are all the fiber-based products that we produce at Borregaard. Finally, 2 large businesses that we have are now collectively called Fine Chemicals. Those are the pharma intermediates that are mainly used for diagnostic products in the pharma industry and bioethanol that primarily goes into biofuel. Also one other element here that the previous other businesses was a combination of profit centers and cost centers. And we have on and off discussed this with our investors and analysts. And to simplify things, we have decided to allocate our indirect costs, the corporate overhead and certain other costs, primarily corporate R&D, to the 3 new business segments. So in essence, now we are reporting on 3 business segments, and all of them are profit centers. Then on to the highlights for the first quarter. EBITDA in the first quarter came in at NOK 242 million, down from NOK 255 million in the same quarter last year. We saw quite a positive development for specialties in BioSolutions. And this was primarily driven by biovanillin, the agriculture segment and also across a number of other segments. The BioMaterials and Fine Chemicals businesses had an unfavorable product mix. Both business areas had good sales, but there is a combination -- especially in BioMaterials, we have a number of different products inside the specialization category, but there are big variations in price levels. So that's why we had a slightly unfavorable product mix because we sold more of the lower-priced products in this particular quarter. We also had higher distribution, maintenance and IT transition costs in this quarter. These costs will typically vary between quarters. And for this quarter, we had an elevated level. We also saw a gradual reduction in wood costs as we had expected, but there were some carryover effects from the last quarter of 2019 so that it was only towards the end of the first quarter that we realized the expected level of the new wood costs. We also saw positive net currency effects on EBITDA. But on the other hand, in the balance sheet, we saw some negative impact on the equity and net interest-bearing debt from a weakened NOK particularly towards the end of the first quarter. Regarding the coronavirus situation, we only saw a marginal impact in a quarter itself from that. So to move on more specifically to the coronavirus situation. First of all, safety and health are important and the top priority regarding the coronavirus situation. We have implemented a number of emergency measures in the company and procedures to limit the risk of infection. Borregaard has a very high level of automation, so we can easily implement social distancing in the organization, and also, a high number of our employees now work from their home offices. We said that we had no material impact in the first quarter. I'd like to say that 2 government agencies has classified Borregaard's Norwegian operation as essential for society. We are also involved in a large number of value chains with foreign customers, international customers that have also been classified as essential by their local government. So you see the value of diversification and also the value of an essential product portfolio at the moment. In the first quarter, there were some logistical and other practical challenges, but they have been managed without any adverse effects either on deliveries or production as such. As we ended -- towards the end of the first quarter, entering the second quarter, we announced that the Lignotech South Africa operation had been temporarily stopped. And the reason for this was the interruption in supply of raw material from our raw material supplier in South Africa. We will come back to this situation when we start on the outlook slide later on in the presentation. Then on to the market side, first of all, BioSolutions. First of all, the price situation, the average price in sales currency came down 1% compared with the same quarter last year. You can see that in Norwegian kroner, the price came up quite comfortably. But of course, that's also driven by the underlying changes in the Norwegian kroner. There was a downward price pressure from the competition and price pressure that we see in concrete admixtures and certain low-value industrial applications. This was countered by the favorable product mix that we saw in specialties where we had a strong mix and growth, which altogether balancing out the negative impact from concrete admixtures and low-value industrial applications. So on average, sales price came down 1%. The sales volume was in line with last year. Growth in specialties, I already mentioned, but also construction volumes increased somewhat, whereas we had lower industrial volumes. Also, in the middle of the first quarter, our raw material supplier in Spain, Sniace, filed for liquidation. So from that point on, from middle of February, we had also a supply interruption, raw material interruption in Spain. And this business is now stopped indefinitely in -- awaiting the outcome of the liquidation process. This business also had positive foreign exchange effects in the first quarter. Moving on to biomaterials markets. We saw a 3% lower average price in sales currency versus the last -- same quarter last year. Again, price increase in Norwegian kroner, but that is driven by the positive FX impact. I said that we had an unfavorable product mix in this area. That's driven by -- especially in the ether grades. We have many different products that are combined in the ether category, and the pricing differential there is quite large. So depending on how the mix is inside that element, you will have an impact on the pricing. So in this particular quarter, that came out negative compared to what we had guided for. The sales volume, on the other hand, was quite good in the quarter, 40,000 tonnes. We also had quite good growth in the sales of cellulose fibrils but from a low level, so still at a fairly low level, also positive foreign exchange impact in this business area. Then on to Fine Chemicals. As you can see, we had a fairly good sales revenues in this area, both driven by higher sales revenues in bioethanol but also decent sales revenues in pharma intermediates. However, the mix inside the pharma intermediates was unfavorable compared to a average normal quarter. So that had an impact on the result from this business area. Then on to the outlook, and let me pick up again on the coronavirus situation. I mentioned that as we entered the second quarter, we were -- we sent a stock exchange release informing the market that the raw material supply in Lignotech South Africa had been interrupted. Some -- also, at the same time, roughly the same time, we sent out a coronavirus status update to the market. There, we inform that where we expect to see some effects from the coronavirus situation and the impact on the overall economy is in the construction sector. That's usually our experience in global downturns. We sometimes see a reduced demand from the construction sector. What we have seen so far is that certain areas inside biopolymers and then primarily, again, the construction segment, we have seen some cancellations and some postponements of orders. However, as long as South Africa is out of operation, demand is expected to be higher than supply in this particular business area. And the challenge at the moment and going forward is actually then to manage a short supply situation to the market. We also have to just caution that the possibility of lower growth in the world economy and the indirect consequences of that is still present. Some of our suppliers could be affected. Some of our business partners could be affected like we have seen in South Africa. And there could be problems with infrastructure, especially logistics out to our customers. But -- so we are closely monitoring the situation, and we are making sure that we have good financial capacity to mitigate any negative potential effects from this. But in conclusions, so far, the only effects that we have seen and that we are coping with is the -- what we have seen inside the lignin area with reduced production in Lignotech South Africa and some cancellations in construction but to a much smaller degree than the volumes going out in South Africa. So then if we go specifically into that business area, BioSolutions, what we are guiding for now is that total sales volume for the full year will decrease by 5% to 15%. Being 2 changes since we last discussed this, one is that our Spanish operation has gone into liquidation. The raw material supplier there has gone into liquidation. And we have the business -- the interruption of supply in South Africa. So depending on the latter, depending on how long this supply interruption will stay in place, we will expect a decrease in volume by between 5% and 15%, 15% in worst case for the full year. And like I said, we are in the process of managing this situation, short supply situation with -- towards the market and towards our customers. Cost savings in Norway and Germany that we have announced earlier are expected to continue as planned. This is in connection with the large investment upgrade in Norway and the restructuring of the German operations. So they are on time or on schedule and will continue as planned. Also, the ongoing capacity expansion that we have in biovanillin will be gradually realized throughout 2020 and have full effect from second half of '21, as earlier communicated. Then if we move on to BioMaterials. The average price in sales currency for the full year is still expected to increase by 2%, and this will mainly be from improved product mix. There will be more sales of specialties, and this should even itself out across the full year. The sales volume in the second quarter is expected to be lower versus the second quarter last year but with a similar product mix. The wood costs in the second quarter forecast to be NOK 10 million to NOK 15 million lower than we saw in the same quarter last year. And just to remind you that the EU Horizon 2020 grant in cellulose fibrils will end in April 2020. But I should also say that in the first quarter of 2020, this grant was a fairly low number compared to previous years. Finally, Fine Chemicals. No major changes expected in the market condition for pharma intermediates. In bioethanol where most of our production usually sold into biofuel, we are seeing, of course, a reduced demand for biofuel now with the coronavirus situation. But on the other hand, we are seeing an increased demand in disinfectants, which is an alternate use of our bioethanol. And we expect that new demand from -- or increased demand from disinfectants to more than compensate for any effects of reduced deliveries to biofuel. So that completes the outlook for the rest of the year. And I will hand over to my colleague, Per Bjarne, for a more detailed follow-up of the financial performance. Thank you.

[Per Bjarne Lyngstad, Chief Financial Officer]

Thank you, Per, and good morning, everyone. Borregaard's operating revenues increased by 10% compared with the first quarter last year mainly as a result of currency effects and high sales volume of Speciality Cellulose. EBITDA was NOK 242 million compared with NOK 255 million last year. BioSolutions and BioMaterials had results in line with last year, while Fine Chemicals had a decline. BioSolutions had a positive development within specialties, while both Biomaterials and Fine Chemicals had an unfavorable product mix. Operating costs were higher compared with the first quarter last year due to increased transatlantic shipments, higher maintenance costs and costs related to an IT transition project. Wood costs were gradually reduced during the quarter but less than expected. Net currency effects on EBITDA were positive by NOK 10 million compared with the same quarter in 2019. The EBITDA margin was close to 3 percentage points lower than last year. Earnings per share ended at NOK 1.02 compared with NOK 1.26 last year. Earnings per share were affected by higher depreciation and higher interest expenses partly due to the new leased warehouse at the Port of Borg. In BioSolutions, operating revenues increased by 6% compared with the first quarter last year mainly from positive currency effects. The total sales volume was in line with the first quarter last year. EBITDA was NOK 170 million, a marginal improvement compared with last year. A favorable product mix within specialties and cost reductions from the upgrade in Norway and the restructuring in Germany partly compensated for higher distribution costs, other operating costs and continued strong competition in concrete admixtures and certain low-value industrial applications. The net currency effect were positive compared with the same quarter last year. The EBITDA margin was 21.3%, 1 percentage point below last year. High sales volume for Speciality Cellulose and the currency impact were the main reasons for the 15% increase in Biomaterials revenues in the first quarter. EBITDA ended at NOK 46 million compared with NOK 45 million last year. For Speciality Cellulose, high sales volume and positive currency effects were offset by an unfavorable product mix and higher fixed costs, mainly from maintenance and the IT transition. Wood costs were gradually reduced during the quarter. However, cost carryover from 2019 had a larger negative impact than was expected. For cellulose fibrils, higher sales and cost reduction compensated for reduced cost coverage from the EU's Horizon 2020 Grant. The average price in sales currency for BioMaterials was 3% below the same period last year mainly as a result of the unfavorable product mix. The EBITDA margin was 10.1%, 1.3 percentage points lower than last year. Higher sales of bioethanol and positive currency impact resulted in a 16% increase in revenues for Fine Chemicals. EBITDA was NOK 26 million compared with NOK 42 million in the first quarter last year. The lower result was mainly due to an unfavorable product mix and uneven delivery patterns for pharma intermediates. The result for bioethanol improved compared with the same quarter last year. And the net currency impact within Fine Chemicals was insignificant. And the EBITDA margin was 20.3%, significantly below the high level in the first quarter last year. The net currency impact on EBITDA was, as I said previously, positive by about NOK 10 million compared with the first quarter 2019. The positive impact came from a weaker Norwegian kroner, which weakened by about 9% compared with the first quarter 2019 using Borregaard's currency basket. Hedging losses were NOK 62 million compared with NOK 8 million in loss last year, partly offsetting the positive impact from a weaker Norwegian kroner. Using currency rates as of yesterday, the net currency impact in the second quarter is estimated to be positive by NOK 35 million compared with the second quarter of 2019. And the corresponding impact for the full year of 2020 is estimated to be positive by NOK 95 million compared with 2019. Cash flow from operations was negative in the first quarter mainly from a significant increase in net working capital. Net working capital increased mainly due to higher accounts receivable as a result of currency effects and high sales towards the end of the quarter compared with low sales towards the end of the previous quarter. Investments were low in the first quarter. Expansion investments were mainly related to the capacity expansion for biovanillin. The significant weakening of the Norwegian kroner towards the end of the quarter has affected net interest-bearing debt and equity significantly. Net interest-bearing debt increased by NOK 497 million from year-end 2019. Currency effects from revaluation of balance sheet items in foreign currency, net of balance sheet hedging and the impact from hedging of net investments in subsidiaries, explain about NOK 270 million of the increase from year-end. The leverage ratio, net interest-bearing debt over EBITDA, including IFRS 16 leases effects increased from 1.86 at year-end to 2.39 at the end of the quarter. And this was above our revised target of 2.25, which are taking the impact of IFRS 16 into consideration. In the appendix to this presentation, Slide 24, we show an updated slide with updated financial objectives, including the IFRS 16 effects. Borregaard's equity and equity ratio was also significantly negatively impacted by the change in our unrealized hedging losses after tax. Borregaard's equity ratio at the end of the first quarter was 38.3% compared with 51.4% at year-end. Change in unrealized hedging losses explain 10.7 percentage points out of the 12.8 percentage points reduction. When looking at the significant impact on the equity ratio, you have to take into consideration that Borregaard sales are primarily in U.S. dollars and euro, and a weakening of the Norwegian kroner will over time be positive for the group's competitive position. In accordance with the company's hedging strategy, a substantial part of this exposure is hedged for up to 3 years. As of today, we think that Borregaard has a sound financial position with sufficient liquidity reserves. And that concludes today's presentation. If you have questions, please contact Borregaard's Investor Relations by phone or mail, and you see the contact information on the slide. Thank you for your attention today.