Borregaard ASA

OSE:BRG

Earnings Call Transcript 2022-Q2

[Per A Sorlie, executive]

Good morning, and welcome to the Second Quarter 2022 presentation for Borregaard. My name is Per Sørlie, I'm the President and CEO of the company, and I'll be joined this morning by our Chief Financial Officer, Per Bjarne Lyngstad, and we will take you through this agenda, the highlights of the quarter, the business segments, market situation, the outlook for the remainder of the year, and then Per Bjarne will come back and talk about the financial performance in more detail.

First, the highlights for the second quarter. We are pleased to deliver an all-time high EBITDA for a single quarter of NOK 445 million. The same quarter last year was NOK 416 million, which was also the previous all-time high for a single quarter.

We believe that this quarterly result shows that the company has a very resilient business model. The Borregaard specialization strategy with leading market positions and a very diversified product portfolio is a good foundation for management of cost inflation and the challenges that we have experienced in the value chain due to COVID-19 and the war in Ukraine.

Now the highlights for the business areas. In BioSolutions, we saw increased sales prices and strong product mix in BioSolutions. We had higher sales prices both in BioMaterials and Fine Chemicals, but also lower deliveries in these business areas.

On the cost side, we saw cost inflation with higher energy, raw material, and freight costs, and also a positive net currency impact in the quarter.

The cash flow was negatively affected by a significant increase in net working capital. However, this is not market related; higher receivables due to price increases from our side, higher inventory values due to cost inflation, and also delayed timing of sales recognition. So no market-related issues.

Then if we go on to talk about the markets. In BioSolutions, the average price in sales currency came up 23% compared to the same quarter last year, which is a similar development to what we saw in the first quarter of 2022. This is driven by higher sales prices, but also in this quarter, more influence from an improved product mix.

We have a positive development across several applications, but we are mentioning particularly here, agriculture, construction, oilfield chemicals and batteries had a positive influence on pricing in this quarter, also driven by more sales and a positive product mix.

The FX impact was positive also in this business area. The sales volume, however, was 10% lower versus the same quarter last year. This was primarily driven by sales from inventories a year ago. We were still optimizing the business and still building down inventories following the closure in South Africa and Spain a year ago. But now we are more in line, selling what we produce.

Also, I should mention as a side matter that the tight market that we see for oil-based synthetic vanillin and ethyl vanillin continued to have a positive impact on our Vanillin business in this quarter.

Then if we move on to BioMaterials. The average price in sales currency came up 23% also in this business area, and this was driven by higher sales prices. The market continued to be tight during this quarter with very strong demand. Also here we see a positive FX impact.

Lower deliveries than last year, obviously, because we were selling much more than we produced, particularly in the first half of 2021. So we sold out of inventories to achieve the high volumes last year, but also slightly below average in this quarter on volume because of timing of shipments. So sales recognition was delayed due to timing of shipments.

Then on to Fine Chemicals, favorable product mix. As you can see, sales revenues were down, but it was a favorable product mix for fine chemical intermediates, and also price increases in bioethanol, but lower deliveries in both segments of this business area. But in total, a positive result development.

Then I'll close out with the outlook for the remainder of the year and the positive development that we have seen in the first half for BioSolutions is expected to continue in the second half. Starting from July 1, we have also implemented price increases on a selective basis throughout this business area.

The total sales volume is expected to be slightly below the 2021 volume, as we have predicted earlier, and the new biovanillin capacity will continue to be phased into the market. Also, we think that the mention that we have had indirectly from the synthetic vanillin, in ethyl vanillin, we expect the market balance for these products to be affected by increased supply in the second half. We are seeing new capacity coming online in China and probably India as well.

Then on to BioMaterials. We have guided earlier that we have a 20% year-on-year price increase in this area. However, for the third quarter, we are now guiding that the price increase will be 30% above the 2021 level. And this is due to the fact that we have had an ongoing dialogue with our customers, and we have agreed with our customers on a 10% additional price increase, a surcharge due to cost increases for the third quarter. This is an ongoing dialogue. And depending on the developments in the third quarter, there will be a new revision for the fourth quarter.

The total sales volume for the full year is expected to be lower than in 2021, and aligned with the production volume. However, the volume of highly specialized grades is expected to be in line with the last year. And the sales growth is expected to continue for cellulose fibrils.

On to Fine Chemicals, the favorable market conditions for biofuel in EU is expected to continue with increased sales prices, and most of our sales will be into these markets in 2022. And in the second half, we expect higher deliveries, both in fine chemical intermediates and in bioethanol compared to the first half of 2022.

And then finally, a roundup of costs. Energy and raw material costs will increase further in the second half compared to the first half. And the largest uncertainty is the energy spot prices. And energy spot prices is really the driver of all our cost increases directly or indirectly. We have roughly 20% of our energy volume exposed to energy spot prices, but we see that the chemicals that we procure and also the wood that we procure is indirectly related to the energy value or the energy costs in the manufacturing of those products. So the wood costs will increase by 25% to 30% in the second half compared to the first half, and this is primarily driven by the energy value of that raw material.

Cost inflation and consequences of the war in Ukraine may impact, of course, the global economy in general and also Borregaard's markets in particular. Therefore, we will continue to monitor cost inflation and also market development both on the purchasing side and on the sales side and implement relevant measures if and when required.

So that completes the outlook for the remainder of the year and also my presentation. So then I will hand over to Per Bjarne for a more detailed financial discussion. Thank you.

[Per Bjarne Lyngstad, executive]

Thank you, Per, and good morning, everyone. Price increases, improved product mix, and currency effects were the main reasons for the 15% increase in Borregaard's operating revenues in the second quarter compared with the second quarter last year.

EBITDA increased by NOK 29 million to an all-time high of NOK 445 million. Improved results in BioSolutions and Fine Chemicals were partly offset by a slightly weaker result in BioMaterials.

Energy, raw material and freight costs continued to increase in the second quarter. However, we were more than able to compensate for increased cost by price increases, improved product mix and the currency effects. The net currency impact was positive by NOK 60 million compared with the second quarter of last year. The EBITDA margin was 25.5%, 2 percentage points lower than last year.

Earnings per share ended at NOK 2.52, an 8% improvement compared with the second quarter last year.

Earnings per share was positively affected by NOK 12 million in other income, mainly related to a gain on sale of assets the closed-down lignin operation in South Africa.

Operating revenues in BioSolutions increased by 24% compared with the second quarter last year. Higher sales prices and a strong product mix more than compensated for lower sales volume.

EBITDA increased by NOK 33 million to NOK 305 million. The EBITDA improvement was mainly due to higher sales prices, strong product mix and positive currency effects, partly offset by cost increases and lower sales volume. The EBITDA margin was 27.5%, in line with the first quarter, but 2 percentage points below the second quarter of last year.

In BioMaterials, operating revenues increased by 12% compared with the second quarter of last year, mainly due to higher sales prices for Speciality Cellulose, partly offset by lower deliveries. EBITDA was NOK 91 million, NOK 11 million below the second quarter last year.

Lower deliveries and increased energy and raw material costs were partly offset by higher sales prices and positive currency effects. And the EBITDA margin was close to 17%, 4 percentage points below last year.

Fine Chemicals had 23% lower operating revenues compared with the second quarter last year, mainly due to lower deliveries. EBITDA increased by NOK 7 million to NOK 49 million. The EBITDA improvement was mainly due to higher sales prices and a favorable product mix, partly offset by lower deliveries and increased costs.

Fine chemical intermediates had a favorable product mix and high production volume. Raw material costs have increased substantially for this product group, driven by energy prices. Prices for bioethanol increased compared with last year. And the net currency impact in Fine Chemicals was slightly positive. The EBITDA margin was 41%, about 14 percentage points above last year.

The net currency impact on EBITDA was approximately NOK 60 million positive compared with the second quarter of 2021. The positive impact was mainly a result of a 7% weaker Norwegian kroner, using Borregaard's currency basket.

Hedging losses were reduced by NOK 1 million to minus NOK 3 million in the second quarter.

Using currency rates as of yesterday, the net currency impact in the third quarter is estimated to be approximately NOK 60 million compared with the third quarter of 2021. The corresponding impact for the full year of 2022 is estimated to be approximately NOK 215 million compared with 2021.

The cash flow from operating activities was NOK 182 million in the second quarter compared with NOK 458 million in the second quarter last year. The cash flow in the second quarter was negatively affected by an increase in net working capital, mainly due to increased sales prices, which affected accounts receivable and higher inventory values related to cost increases and timing of shipments and some volume increases. But we don't see the volume increases as market related. So we think that the sales will normalize and the inventories will normalize in the coming months. However, the ratio of net working capital over operating revenues is still well below our 20% target.

Tax payments were higher than in the second quarter last year.

Investment spending were lower than in the second quarter last year and ended at NOK 81 million, of which NOK 24 million was related to expansion investments.

Net interest-bearing debt increased by NOK 570 million in the second quarter, mainly due to the dividend payment of NOK 499 million in April, of which NOK 224 million was related to an extraordinary dividend.

At the end of the second quarter, Borregaard was well capitalized with an equity ratio of 51.8% and a leverage ratio, which is net interest-bearing debt over EBITDA of 1.4.

And that concludes today's presentation. If you have questions, please contact Borregaard's Investor Relations by phone or mail.

And finally, we would like to use the opportunity to promote Borregaard's Capital Markets Day, which will be held on the 21st of September at the Felix Conference Center in Oslo. Thank you for your attention.