Borregaard ASA

OSE:BRG

Earnings Call Transcript 2018-Q2

[Unknown Executive]

Okay. Yes, when we are ready, [indiscernible] is presenting 2Q numbers for 2018. So please welcome, CEO, Per Sørlie. The floor is yours.

[Per Arthur Sørlie, President & CEO]

Thank you, and welcome to this Q2 presentation for Borregaard. I will be joined this morning by our CFO, Per Bjarne Lyngstad, and we will take you through the following agenda. I'll touch upon the highlights, the market situation for the business areas, also comment on the recent press releases that we have sent out in the last couple of weeks and then the outlook for the remainder of the year. And then Per Bjarne will come back and talk about the financial figures. To start with the highlights, the EBITA adjusted for the second quarter was NOK 164 million compared to NOK 243 million, which was an all-time high quarter a year ago. We saw an increased total sales volume in Performance Chemicals that I will come back to later on. And -- but on the negative side, we saw continued price pressure for construction products. Also, as earlier communicated, there were lower acetate sales in Specialty Cellulose that has a negative impact on the mix. On the positive side, we saw again higher sales prices in Ingredients for our vanillin products but seasonally low deliveries in Fine Chemicals. Cost increases have been communicated during the recent quarters, and they were related to wood supply, caustic soda and the Florida ramp-up before the start-up of the facility. Finally, at the end of the quarter, we had a successful start-up of the new Florida plant and the lignin operation there.Then to move on to the market side. First, Performance Chemicals, the lignin business. As I mentioned, the sales volume increased by 3% versus the same quarter last year. We saw higher sales, particularly in the Miscellaneous group, which is industrial binders, but also again in Specialties products but not as strong growth as we saw in the first quarter but still positive development also in Specialties in the quarter. The -- at the same time, we also saw a healthy reduction in the finished goods inventories, which, of course, is partly expected as this is usually the high-volume quarter when it comes to sales during the year. The average price in sales currency came down 1.5% versus the last -- same quarter last year. And there is price erosion and has been for some time in construction in certain regional construction markets. Usually, this is compensated by the positive mix development and increased sales we have in Specialties and Miscellaneous, but in this particular quarter, which is the high-volume quarter for construction, it was not fully compensated. So that's why in sales currency we had a slight reduction in the average sales price.Also, when you look at the Norwegian price curve -- the price curve in Norwegian kroner, that came down more than the 1.5%, and that's due to the negative currency development. The currency accounted for minus -- roughly minus 4% on the Norwegian price curve development that you see on the graph here.Then on to Specialty Cellulose. As we have said for this year, we expect a weaker product mix because we are selling -- have a lower sales volume of acetate cellulose. This also goes for the second quarter. However, at the same time, the ether market continues to be very strong and grow in demand. We had a lower average cellulose price in sales currency. Our guidance for the full year is that we will have an unchanged average cellulose price in sales currency. In this quarter, it was down 2%, and that is explained by a lower textile cellulose price than we saw in the same quarter last year but, overall, more or less as expected on the price curve. And then on the positive side, we saw now higher sales prices in Bioethanol because, at the end of the -- or in the first quarter, we started up our new dehydration plant, which means that we can now sell more or less all our volume into fuel-grade bioethanol, which commands a premium price compared to other applications for that particular product. So that had a positive impact on the results in this particular business area.Then on to Ingredients and Fine Chemicals. Ingredients had, again, a quarter with higher sales prices and increased sales volume. We commented after the first quarter that the extraordinary high volume we saw in the first quarter could not really continue so -- because we don't have production or inventory levels to sell more than we produce. But in the second quarter, we still had a volume growth, but more so the improvement was explained by a positive price development for the bio-based vanillin that we offered to the market, the wood-based vanillin. We saw this positive trend that has gone on for some time, and it's starting to be reflected in the both the sales and results of this business area.Fine Chemicals, on the other hand, had lower deliveries of a key product in the quarter compared to the similar deliveries that we had a year ago. As you may have noticed, the Fine Chemicals division has a variable delivery pattern, which means that this is not really related -- market related. It was an unusually high delivery in the second quarter last year, and it was a more normal or even on the low side, as you can see from the historic sales figures in this particular quarter. So those variations will happen from -- between quarters. The end markets for x-ray contrast media continues to be healthy and with positive growth.Then we sent out a couple of press releases at the end of the quarter with important milestones that took place in the second quarter. First of all, the LignoTech Florida plant was opened up officially at the end of June. This project was completed on time and below the estimated cost, and it has the plant capabilities in terms of capacities that were planned for, for this facility. We started producing saleable products in June, and as a matter of fact, I think we sold roughly 1,000 tonnes of commercial products already in June. But the plant hits the second -- or third quarter running and capable of producing commercial products.When it comes to the market introduction, it's our impression that that's on track. It means that compared to where we were when we originally approved this project, we have now a broader range of end uses for the products coming out of this facility. And the original assumption that construction would be most -- or the volume coming out has now been changed to this in the sense that we expect to sell below 50% of the volume from this facility into the construction application, which we think is good because it gives a more diversified and robust product mix.Also to remind you that this project is a 2-phase project. The capacity put in place now is roughly 100,000 tonnes, and the investment is just below $110 million. We have the possibility and the ambition to increase this capacity by another 50,000 tonnes as soon as the market requires that material. And that will be a fairly low CapEx proposition because we have put in place the infrastructure already in the first phase. So we expect to invest up to $25 million to add another 50,000 tonnes of capacity later on.Then we sent out a second press release in the beginning of July regarding our joint venture in South Africa, LignoTech South Africa, again a lignin business. This is a long-term joint venture that we have had in place with the Sappi group since the '90s, and the current agreement expires at the end of 2027. This is sort of an evergreen agreement that is extended from time to time. The parties are now agreed and are happy to extend the current agreement until the end of 2032. At the same time, the Sappi group have announced that they plan to do some reconfiguration and capacity expansion investments at this particular site. Part of that means that the reconfiguration means that the capacity of calcium sulphite will be pulled down from roughly 180,000 down to 130,000, and which means that by -- from 2021, the capacity in lignin also will come down to 130,000 because we take our raw material from the calcium sulphite pulp line.The situation when you have a lignin facility is that you have to adjust your capacity to whatever comes out of the pulp mill that supplies the raw material. We believe that this capacity reduction is good for the lignin business because this size is a better size, taking into consideration the quality of the raw material and the location of this particular facility. So we think that the new size and concept that will go forward from 2021 is more optimal. And the reason for that is that, in addition to what I already mentioned, is that there will be sufficient drying capacity in place with the existing equipment to dry more or less all the material. And the powder form is a better basis for portfolio diversification. So we think that, with a lower volume in place, there will be more opportunities to place this material in good markets for us from 2021 going forward. So we are happy with this extension and with this change in capacity. Finally, the outlook. The Performance Chemicals. We still expect, as we have now had now for 3 years, that there will be pretty strong competition and price pressure in the construction sector. As I mentioned, we saw quite strong momentum in the Miscellaneous sector, which is mostly industrial binders in the second quarter, and we think that, that volume growth will continue. And it's a good opportunity for us to diversify and optimize the product portfolio versus the construction sector. At the same time, we also expect a positive development for Specialties in the second half this year compared to the same period last year. And if we look at the full 2018 sales volume, we expect that to go between -- to increase by between 5% and 10% versus full 2017. Just to remind you that, after 6 months, we are approximately up 2% on the volume compared to last year. And for the full year, we expect to be up between 5% and 10%, and this is, of course, partly explained by the ramp-up that will now take place at the new Florida facility that will add to the sales volume. At the same time, the depreciation of the Florida plant will commence from 1st of July 2018. We have had a ramp-up -- gradual ramp-up, and we had full, let's say, fixed cost in this facility in the second quarter. But the depreciation will actually now kick in as we have commercially started up the facility at the end of June.Then in Other Businesses, we don't expect any changes in the market condition for Fine Chemicals. There will be variations between quarters, as I already discussed and mentioned. But overall, for the full year, it will be a normal year for Fine Chemicals. The positive market trend for wood-based vanillin will continue and will gradually have an effect on the results. For Cellulose Fibrils, there's really nothing new to report. The -- there's a strong interest in the market, but the sales will gradually increase. And there are long lead times for conversion, although the number of prospects is continually increasing by approximately 50 new prospects per month. And the fixed cost and depreciation is expected to be largely in line with last year, so any increase in sales will have a positive effect on the overall results.Then, finally, we have -- Borregaard is a company that buys commodities and sells specialties. And as we speak, commodities prices are fairly high for the type of commodities that we buy. So wood and caustic soda costs, which are the major input factors that we buy externally, have now a high price compared to what we saw in 2017, and we have reported on this on several locations also in a separate press release just recently. So this will have, of course, an impact on the results also going forward. And more particularly, we just reported that in the second half. From -- starting from July 1, there will be another spike in the price of wood cost. That will, on an annualized basis, mean roughly NOK 60 million, but then for the second half will be a NOK 30 million increase over and above what we saw last in the first half this year. It's too early to have any indications on what will happen after the end of the year because these contracts are -- wood prices are negotiated on an annual or biannual basis, so this is just a statement regarding the second half of 2018.So that completes the outlook statement for the remainder of the year. Then I will hand over to Per Bjarne for the financial numbers.

[Per Bjarne Lyngstad, Chief Financial Officer]

Thank you, Per, and good morning, everyone. In the second quarter, operating revenues were 5% lower compared with the second quarter last year mainly due to lower sales in Specialty Cellulose and Fine Chemicals. EBITA adjusted was NOK 164 million compared with the all-time high result of NOK 243 million in the second quarter last year. The major part of the result decline came from Performance Chemicals and Speciality Cellulose while Other Businesses was more in line with the same quarter last year.Costs also in this quarter increased by approximately NOK 40 million from higher wood and caustic soda prices and the effect from the increased manning and other ramp-up costs in Florida. The net currency impact was positive by NOK 5 million. The lower result, of course, hurt our EBITA adjusted margin, which ended at 13.7%. And earnings per share were NOK 1.32 compared with NOK 1.81 in the same quarter last year.In Performance Chemicals, revenues were down by 2% compared with the same quarter last year due to lower average sales price and negative currency rates development, partly offset by the 3% higher volume. The volume increase, as Per said, was a result of higher sales of Miscellaneous and Specialties Products. EBITA adjusted was NOK 102 million compared with NOK 141 million last year. The currency-adjusted average sales price was down, like Per said, 1.5% compared with the same quarter last year and, of course, was negatively affected by the continued challenging construction markets. Operating costs increased due to the ramp-up of the new plant in Florida, but also, we had higher maintenance and other costs at the lignin plant in Norway. In total, the cost increase for these 2 factors were close to NOK 25 million this quarter. In addition, net currency effects were slightly negative in Performance Chemicals compared with last year.Revenues in Specialty Cellulose were 9% below the same quarter last year due to lower sales volume and a weaker product mix. EBITA adjusted ended at NOK 67 million compared with NOK 103 million in the second quarter last year. The effect from higher wood prices and a major part of the impact from higher caustic soda prices affected Specialty Cellulose. In addition, a weaker product mix from lower sales of acetate cellulose contributed to the decline in the result. Also, textile cellulose prices were lower than in the same quarter last year and contributed to a lower average sales price. The net currency impact in this area was positive compared with the same period last year. There are more euro sales in this area compared with Performance Chemicals that has more dollar sales. Bioethanol had an improved result from increased sale of fuel-grade bioethanol but also from cost saving from the investments in the new dehydration plant. The EBITA adjusted margin in this area declined by -- declined to 15.7%, about 6 percentage point below the same quarter last year.In total, revenues in Other Businesses were in line with last year. Higher sales in Ingredients offset lower deliveries in Fine Chemicals. EBITA adjusted ended at minus NOK 5 million compared with minus NOK 1 million in the second quarter last year. Ingredients had a stronger result due to higher sales prices and increased sales volume, partly offset by the impact from higher caustic soda prices. And the positive market trend for wood-based vanillin continued in the quarter. Fine Chemicals had a weaker result due to the lower deliveries of a key product compared with the high deliveries in the same quarter last year. Cellulose Fibrils and the net corporate costs were in line with last year. And the currency effects in Other Businesses were slightly negative compared with last year. The net currency impact on EBITA adjusted was positive by NOK 5 million in this quarter. Hedging losses were reduced by NOK 29 million, but the reduced hedging losses were, to a large extent, offset by a similar size negative impact from changes in currency rates. The Norwegian kroner strengthened by approximately 4% compared with the same quarter last year using Borregaard's currency basket. Applying currency rates as of yesterday, the net currency impact in the third quarter this year is estimated to be plus NOK 20 million compared with the third quarter of last year. And the corresponding impact for the full year is estimated to be plus NOK 40 million compared with 2017.The cash flow from operation was NOK 45 million higher than in the same quarter last year. The cash effect from a lower EBITA -- EBITDA adjusted was more than offset by a more favorable development in net working capital compared with the same quarter last year. The net working capital in the quarter was positively affected by the second grant payment from EU's Horizon 2020 program to the commercialization of Exilva. The payment received was close to NOK 100 million.Investments were lower than in the same quarter last year due to lower expansion investments. Expansion investments were mainly related to the Florida project and the lignin operation upgrade in Norway. The net interest-bearing debt increased by NOK 250 million in the quarter, partly due to dividend payment of NOK 199 million. And in June, Borregaard issued a NOK 400 million bond with a tenor of 5 years. And at the end of the second quarter, Borregaard is well capitalized with an equity ratio of 57% and a leverage ratio of 1.25, that is net interest-bearing debt over EBITDA adjusted.And that concludes today's presentation. Per Sørlie and I will be ready to answer any questions. But first, I will give you a reminder of Borregaard's Capital Markets Day that will be held in Oslo on the 18th of September.

[Mikkel Nyholt]

Mikkel Nyholt, Carnegie. I'm still a bit curious on the margin side and the cost level in Performance Chemicals. This was the weakest Q2 margin ever reported for that division ever since listing, as far as I could see. And I'm struggling to see that it's -- or I need a bit more flavor in order to get comfortable about the cost level in Florida and the cost level going forwards given -- well, given that you now have started up. And if you also could give us a bit more flavor on how reallocation efforts are going now and whether those costs have changed significantly year-over-year. A lot of questions and a lot of difficult things to discuss here, but it's -- this quarter was a bit of a shock to me in that division.

[Per Bjarne Lyngstad, Chief Financial Officer]

I can try to give you a little bit more flavor on the cost side. On the Florida side, the costs there are in line with what we have previously said. We have indicated a fixed cost level there of about NOK 50 million, and that's about where we were in this quarter. The costs in Norway. We have variations between quarter for, for instance, maintenance costs. Last year, we had higher maintenance cost in the first quarter, lower in the second quarter. This year, it's partly the opposite. It's hard for us to really see that 1 quarter in advance how those variations will be, but we think that some of those costs we had this quarter is a part of more normal variations. So indeed, I don't see any alarming signs on the cost side for the time being. But that remains to be seen. But of course, in total, those 2 cost element were the main explanation for the lower result in Performance Chemicals. And then in addition, you have the situation in the construction market hurting margins there.

[Per Arthur Sørlie, President & CEO]

Yes, the price down 5.5% in total, 4% on currency and 1.5% on the mix. And remember that the preweakened Norwegian kroner and everything, the expected operating margin in Performance Chemicals is in the 15% to 20% range, and the second quarter is normally the lowest, weakest quarter because that's when you have a lot of construction volume in there. So I don't see it as an alarmingly bad quarter here. But it's pretty close to having an unchanged sales price in currency if we had -- but the positive thing in this quarter is that we had a strong momentum in diversifying, in taking volume from construction and taking it into the Miscellaneous segment, which is comparable in price and margin and is definitely much better than the marginal business in construction. So that was a very strong momentum in this quarter, but it doesn't really show up that much in the margin. It's not comforting to say that it could have been worse because if you haven't been successful in moving things out of construction, it could have been worse. Very good. I think you're still in vacation. So I thank you very much and just reminding you again, 2 months from now, Capital Markets Day here in Oslo. Thank you very much.

[Per Bjarne Lyngstad, Chief Financial Officer]

Thank you.