Borregaard ASA

OSE:BRG

Earnings Call Analysis

Borregaard Reports Strong BioSolutions, Challenges in Other Segments

Borregaard's second quarter performance showed strong results in its BioSolutions segment, achieving a record EBITDA of NOK 318 million due to higher sales volume and an improved product mix. In contrast, BioMaterials faced a 6% decline in operating revenues and a significant drop in EBITDA to NOK 90 million, impacted by lower sales prices and higher wood costs. Fine Chemicals had a stable performance but saw a slight decrease in operating revenues and EBITDA due to higher costs and negative currency impacts. The company anticipates higher sales volumes and modest price increases for the second half.

Steady Performance in Q2 2024

In the second quarter of 2024, Borregaard reported operating revenues that remained consistent with the previous year, amounting to NOK 510 million. This was slightly below the record of NOK 537 million from the same period in 2023. The EBITDA margin stood at a solid 26.2%, although this reflects a decline of about 2 percentage points compared to last year due to increased costs across various segments.

Segment Performance Breakdown

The performance varied significantly across Borregaard's segments. BioSolutions saw a 3% increase in operating revenues, attributed to higher sales volume and an improved product mix. This segment achieved an all-time high EBITDA of NOK 318 million, with an EBITDA margin of 28.5%, showing a notable improvement over last year. Conversely, BioMaterials experienced a 6% decline in revenues, with lower sales prices impacting the EBITDA, which fell to NOK 90 million from NOK 143 million last year. The EBITDA margin in this segment plummeted to 14.5%, a stark drop of 7 percentage points year-over-year. In Fine Chemicals, revenues dipped by 2%, resulting in an EBITDA of NOK 102 million, just below last year’s record of NOK 110 million.

Currency Impact and Future Guidance

Borregaard faced a negative impact of NOK 30 million from currency fluctuations compared to the prior year, primarily due to increased hedging losses. Looking forward, the company anticipates a similar negative currency impact of about NOK 15 million for the full year of 2024, contrasting with a projected positive impact of NOK 15 million for the third quarter compared to last year.

Strong Cash Flow and Investment Activity

The company reported strong cash flow from operating activities, totaling NOK 546 million, supported by a decrease in net working capital. Investments for the quarter were NOK 172 million, earmarked largely for smaller projects and a major one focusing on enhancing specialization within BioSolutions. The company’s equity ratio remains healthy at 54%, with a leverage ratio of 1.23, indicating a solid balance sheet position.

Outlook for Q3 and Beyond

For the third quarter of 2024, Borregaard expects sales volume between 42,000 and 44,000 tonnes, a significant increase from Q2. Price increases implemented for the second half are projected to elevate average sales prices by 1% to 2% compared to the first half. In BioSolutions, the anticipated full-year sales volume remains at roughly 330,000 tonnes, with no significant changes expected in the biovanillin market. The market conditions for Fine Chemicals continue to look stable, and the company expects to maintain sales prices and volumes largely in line with 2023.

Cost Pressures and Future Pricing Strategies

Cost pressures continue to escalate, particularly within wood costs, which are expected to rise roughly 8% in the second half compared to the first half. However, Borregaard expects lower energy and raw material costs to mitigate these pressures in Q3. The management believes the ongoing market dynamics will support future pricing discussions, especially as sales are projected to outstrip production.

Strategic Investments and Market Adaptations

Borregaard has also shown commitment to strategic investments, including a significant stake in Alginor worth NOK 419 million, reflecting a proactive approach to capture market opportunities. Additionally, the company is closely monitoring antidumping investigations regarding synthetic vanillin, which could influence market dynamics significantly. The company's adaptability and investment strategy position it well against potential market fluctuations.

Earnings Call Transcript 2024-Q2

[Per A Sorlie, executive]

Good morning, and welcome to this second quarter 2024 presentation for Borregaard. My name is Per Sørlie. I'm the CEO of the company. And I will be joined this morning by our CFO, Per Bjarne Lyngstad. And we will take you through this agenda.

We'll talk about the highlights for the quarter, the business segments and the market situation. Some are a couple of other matters that were reported in the quarter and the outlook for the remainder of the year. And then Per Bjarne will take over and talk about the financial performance.

And before we start, I would like to remind you that you can submit questions online throughout this presentation, and we will come back at the end of the presentation and try to answer as many as possible.

Then on to the highlights for the second quarter. EBITDA for the company came in at NOK 510 million versus an all-time high of NOK 537 million a year ago. We saw an improved product mix and a strong result in BioSolutions. We are pleased to report that this was an all-time high for a single quarter in this particular business area.

In BioMaterials, we saw lower sales prices and higher wood costs that brought the results down compared to the last year.

In Fine Chemicals, we delivered a solid result, albeit a little bit below last year, but with a very strong EBITDA margin for the quarter. We saw negative net currency effects, and also pleased to report a strong cash flow in the quarter.

If we move on to the market situation in BioSolutions. The average price in sales currency came -- increased 5% compared to the same quarter last year, and this was driven by an improved product mix. Sales prices per product were quite flat in the quarter compared to last year. This product mix was driven particularly by strong sales in agriculture and batteries.

The sales volume also came up. It increased 2%. Again, the increased sales volume was driven by more sales of specialties. The biovanillin market was not a big factor in this quarter either. The market continued to be impacted by high global supply of synthetic vanillin products.

In BioMaterials, the average price in sales currency came down 8% compared to the same quarter last year. This was in line with what we saw in the first quarter this year where the prices also were -- came down to a similar level. So pricing in the first half is quite comparable.

The sales volume was 5% higher than in the same quarter last year, which was a bit lower than we had guided for but this was just coincidental things that happened, and we will come back to this under the outlook later on. Negative FX impact also in this particular business area.

Fine Chemicals had a strong quarter, and we saw a good product mix in fine chemical intermediates. In bioethanol, we had high deliveries, but they were slightly lower than in the comparable quarter last year, but by much higher than what you see normally in the quarter. Prices were stable. And we also had a slightly negative FX impact in this particular business area.

Then on to the other matters and subsequent events. We have published a stock release saying that we have invested further into Alginor. And just to summarize, we participated in a capital raise of NOK 400 million with our pro rata share of 35%.

Subsequently, the company have completed a repair offering towards existing and new shareholders. And after this repair offering, Borregaard has again been adjusted up to 35% of what was allocated in this offering.

So after all these transactions, these 3 transactions, Borregaard now have invested total of NOK 419 million in Alginor. And these offerings were completed now in July, so this is not reflected in the second quarter results and the balance sheet that you see there. But in the third quarter, this will be entered into the balance sheet, NOK 419 million total investment.

Also, as a piece of information, we are reporting that antidumping investigations regarding Chinese vanillin of all qualities have been implemented both in the EU and the U.S. However, it's early days and it's too early to tell what will be the outcome of these investigations.

So there is nothing to report right now, except that these investigations have been started on both these continents. And we will just have to follow it and see what it will mean. But if there are restrictions on Chinese vanillin, obviously, this will have an impact on our opportunities and our potential to sell into these markets.

Then outlook for the remainder of the year. In BioSolutions, we continue with the same outlook, which means that the sales volume for the full year is forecast to be approximately 330,000 tonnes.

The sales volume in the third quarter is expected to be in the range of 80,000 to 85,000 tonnes. And we don't see any big changes in the biovanillin market. That will continue to be impacted by the high supply of synthetic vanillin products.

In BioMaterials, the outlook is also unchanged in the sense that we expect the sales volume in 2024 to be higher than the production output, and we also expect to increase the sales of the highly specialized grades compared to 2023. In the third quarter, the sales volume is expected to be between 42,000 and 44,000 tonnes, which is a significant increase from what we saw in the second quarter.

We have also implemented some price increases for the second half. And if we compare the average price level in hedge currency in the first half to the second half on the overall sales volume, the price is expected -- average sales price is expected to increase by 1% to 2% compared to the first half.

In Fine Chemicals, the sales volume -- I would say, in Fine Chemicals, the outlook is also quite unchanged. The sales volume for fine chemical intermediates will increase compared to 2023. And the market conditions for bioethanol -- advanced bioethanol continued to be favorable, and the sales prices and volume are expected to come in largely in line with 2023.

Then finally, cost development and impact from recent investments. The wood costs continue to increase, and we expect an increase of roughly 8% in the second half compared to the first half. However, in the third quarter, lower energy and other raw material costs are expected to partly compensate for these increased wood costs versus the same quarter last year.

We will also benefit in the second half from the investment we have made in our system through in -- at our biorefinery in Sarpsborg to reduce CO2 emissions and improve energy efficiency and flexibility.

And finally, there are still uncertainties in the global economy, and we don't see a big upturn yet. So what we have to do is that we have to follow developments, and we will do implement different actions accordingly.

So that completes the outlook, and I will hand over to Per Bjarne for the financial figures.

[Per Bjarne Lyngstad, executive]

Thank you, Per, and good morning, everyone. In the second quarter, Borregaard's operating revenues were more or less in line with the second quarter of 2023. EBITDA was NOK 510 million, NOK 27 million below the all-time high result in the same quarter last year.

The result in BioSolutions improved, while BioMaterials had a lower result. Fine Chemicals had a strong result, but slightly below the second quarter of 2023.

Net currency effects were negative by NOK 30 million compared with the second quarter last year. The EBITDA margin was solid at 26.2%. However, about 2 percentage points below the same quarter last year.

Earnings per share were NOK 2.45 compared with NOK 2.84 last year. Higher depreciation, increased interest expenses and other financial costs were the main reasons for the reduced earnings per share.

Operating revenues in BioSolutions increased by 3% compared with the second quarter of 2023 due to higher sales volume and an improved product mix. EBITDA increased to NOK 318 million, as Per said, an all-time high for the business area. An improved product mix, and reduced energy costs were the main reasons for the strong result.

These effects were partly offset by cost inflation and a negative net currency impact. The EBITDA margin in BioSolutions reached 28.5%, 2.4 percentage points above the second quarter last year.

In BioMaterials, operating revenues were 6% lower than in the second quarter last year. Lower sales prices were partly offset by higher sales volume. EBITDA was NOK 90 million compared with NOK 143 million in the same quarter last year.

Lower sales prices, higher wood costs and an increase in other operating expenses mainly due to cost inflation had a negative impact on the result. These effects were partly offset by a higher sales volume.

Net currency effects were also negative compared with last year. The EBITDA margin in BioMaterials was 14.5%, about 7 percentage points below last year.

In Fine Chemicals, slightly lower deliveries of bioethanol resulted in a 2% reduction in operating revenues. EBITDA was NOK 102 million compared with the all-time high result of NOK 110 million in this business area last year.

A favorable product mix for fine chemical intermediates and high deliveries and stable prices for bioethanol contributed positively to the result. However, higher costs and slightly lower deliveries for bioethanol were the main reasons for lower results compared with last year.

In addition, net currency impact -- the net currency impact was slightly negative. The EBITDA margin in Fine Chemicals was a solid 46% in the second quarter close to the level we had in the same quarter last year.

In the second quarter -- no, sorry, then -- the net currency impact on EBITDA was, as I said, negative by about NOK 30 million compared with the second quarter last year. The negative currency impact was due to increased hedging losses, which increased by NOK 32 million to NOK 97 million in the quarter.

The Norwegian currency was in line with the second quarter last year using Borregaard's currency basket. Using currency rates as of yesterday, the net currency impact for the full year of 2024 is estimated to be negative by about NOK 15 million compared with 2023. The corresponding impact for the third quarter is estimated to be positive by about NOK 15 million compared with the third quarter of 2023.

Borregaard had a cash flow from operating activities of NOK 546 million in the second quarter. The strong cash flow was affected by a significant reduction in net working capital, mainly due to a reduction in accounts receivable.

Investments were NOK 172 million in the second quarter. Replacement investments consist of a large number of smaller and medium-sized projects. The largest expenditure for expansion was related to specialization within BioSolutions.

Net interest-bearing debt was in line with the first quarter. The dividend payment of NOK 374 million in the second quarter was offset by the strong cash flow from operating activities.

At the end of the second quarter, Borregaard was well capitalized with an equity ratio of 54%. And a leverage ratio, which is net interest-bearing debt over EBITDA of 1.23.

And that concludes today's presentation. We would like to take this opportunity to promote Borregaard's Capital Markets Day, which will be held on the 18th of September at the Oslo Concert Hall.

Per Sørlie and I will now be ready to answer any questions from those who follow the webcast. Our Director, Investor Relations, Knut-Harald Bakke, will moderate the webcast questions.

[Knut-Harald Bakke, executive]

Thank you. First question from Mr. Fabian Jørgensen of Carnegie. Can you comment on the ASP development for BioSolutions quarter-on-quarter? Why does it come down? And what should we expect for Q3?

[Per A Sorlie, executive]

I think that must be BioMaterials, right? Not BioSolutions.

[Knut-Harald Bakke, executive]

BioSolutions quarter-on-quarter, why does the average sales price go down from Q1 to Q2, presumably?

[Per A Sorlie, executive]

Okay. Yes, yes, yes. That is more a -- just a mix issue as well that normally in the winter quarters, construction, which used to weigh heavily into our business has a lot more volume being sold in the summer quarters, in the third -- second and third quarter. So that drives down the average price normally.

This tendency has been reduced as we have reduced our sales into construction, but it's still such that the specialties weigh more in the first and fourth quarter than the second and third quarter. So this is just a mix issue when you calculate the average price.

[Knut-Harald Bakke, executive]

Next question from Mr. [ Marcus Gabelli ] of Pareto Securities. Would you mind elaborating on the price increase within BioMaterials and the potential for further increases? Did you expect this increase moving out of Q1? Or is it more so a reactive response to the improved market balance?

[Per A Sorlie, executive]

Well, it's -- you have to look at this in a historical context. I mean, over the last -- since COVID and following COVID when we had a very, very strong price cost escalations when the war in Ukraine started. We had price increases in the range of 35% to 40% on our speciality cellulose. And it's only to be expected that some of these price increases will be returned to the customer when costs start to normalize.

And -- however, it doesn't necessarily mean that the margins or the absolute profit level should be impacted. If you look at the development this year, it seems like the cost increases, particularly in the wood area, has been higher so that the margins and the price reduction has been more than what the actual cost development has been.

And what we reported after the first quarter is that if we continue to sell more than we produce, obviously, this will have to be a factor in future price negotiations. And if you look to the outlook for the remainder of the year, we still expect to sell more than we produce. And we have seen higher cost increases in wood than we maybe have expected going into the year.

So these are, of course, important factors in future price discussions. And some of that is reflected in the price increases that have been reported for the second half.

[Knut-Harald Bakke, executive]

Third question from [ Elaine Oread ] of Covéa Finance. Could you break down the negative currency effect on turnover and EBITDA by business? Have you expectations on this effect for the year?

[Per Bjarne Lyngstad, executive]

Well, unfortunately, we have not disclosed the effect by business area. We do show the hedging losses by business area. So that's been more of a policy statement for us.

But remember that the hedging mainly goes to the operating revenues. So it shouldn't be that different, the currency effect. But a little larger on the operating revenues than on the EBITDA level.

[Knut-Harald Bakke, executive]

Fourth question from Mr. Niclas Gehin of DNB Markets. You have raised price on cellulose grades with a 1% to 2% effect for the second half already. Are there any more opportunities to reprice further through the remainder of this year? And what is speaking in favor of your ability to send cost increases on to clients for 2025?

[Per A Sorlie, executive]

Now it's much the same that I answered earlier on that -- well, first of all, typically, prices are set for the full year or for 6 months at the time. So there will be limited opportunities to adjust pricing on 1st of October for the fourth quarter, unless something dramatic will happen on price or cost escalations.

However, again, like I said, the market balance is becoming tight due to external incidents that have happened after the negotiations for 2024. And obviously, this will have an impact on negotiations for 2025.

[Knut-Harald Bakke, executive]

That seems to conclude the Q&A session for the second quarter of 2024.

[Per A Sorlie, executive]

Okay. Thank you.