Borregaard ASA

OSE:BRG

Earnings Call Transcript 2018-Q3

[Per Arthur Sørlie, President & CEO]

Good morning, and welcome to this Third Quarter 2018 Presentation for Borregaard. I will be joined this morning by Per Bjarne Lyngstad, our CFO, that -- who will come back with the financial numbers later on. I'll go through the highlights for the quarter, the market situation for the business areas and the outlook for the remainder of the year and slightly into next year as well.To start out with the highlights for the third quarter, the EBITA came in at NOK 145 million, down from NOK 197 million in the same quarter last year. We saw a negative impact in the quarter from the Florida start-up. The company is now coming in with full fixed cost and depreciation, and also some one-off costs related to the start-up. And we also saw higher lignin distribution costs in the quarter, which was due to interruptions in raw material supply at some of our facilities, leading to a different supply pattern and their, hence, increased distribution costs.On the positive side, we saw a strong development in the sales in the Performance Chemicals area. Both the industrial, formerly known as miscellaneous, and also the specialties area, grew by more than 10% in sales volume.In Speciality Cellulose, it was more the same story as we have seen earlier this year. Lower acetate sales and cost increases because of increased input factors, particularly wood cost, but also caustic soda. On the positive side again, we saw improved result in Ingredients and also a NOK 15 million positive net currency impact quarter-on-quarter.So to move into the market situation, the volumes -- sales volume in Performance Chemicals came in at 122,000 tonnes, that was a 9% increase versus the last quarter -- same quarter last year. The volume growth was strong both in industrial and specialties with more than 10% growth in both those areas, which is very much in line with our strategy to diversify out of the construction segment.We also saw a slight reduction in the finished goods inventories but also remember that in the quarter we had some interruptions in our raw material supply so we had a slightly lower supply of raw material than we expected. And combined with the increased sales, that gave a slight reduction in the finished goods inventories in the quarter.The average price came in at minus 3% in sales currency. If you look at the sales curve in Norwegian kroner, it's down approximately 1% quarter-on-quarter. But the currency movements, they amount to roughly 2% in Norwegian kroner. So altogether, when you take a look at the sales currency, it's minus 3% on average over the portfolio.The price pressure is still there in the construction sector, but then specifically in the concrete ag mix segment of the construction sector. At the same time, the increased sales in specialties and the diversification towards industrial has a positive impact on the average sales price.Then if we move on to the Speciality Cellulose markets, the volume in the quarter was slightly lower than we had expected, but it doesn't really have a big impact on the results. It -- both in this year and last year, we had lower-than-expected sales in the third quarter, but this usually evens itself out. We usually sell what we produce in this particular business area.Regarding the market situation, the acetate market is still challenged, whereas the ether markets continue to be strong.The prices across the portfolio in sales currency is stable, which means that when we have a negative development on the market side here, it's because of the mix changes where we sell less into the acetate and have an increase in ethers, but overall, a lower specialty -- high specialty ratio, which gives a lower average sales price.The Bioethanol business continued to improve and deliver better than last year, so they had a positive contribution inside this business area.Then into Other Businesses and in Ingredients, the positive sales development continues in Ingredients, and it's mostly driven by higher sales prices inside the wood-based vanillin market segment. And this has now been going on for -- all throughout the first 3 quarters of 2018.In Fine Chemicals, it was -- sales were in line with last year, but it was slightly more unfavorable product mix and that gave us a lower result in Fine Chemicals compared to the same period last year.Then if we try to summarize this in the outlook, the market situation in construction and especially in the ag mixture to concrete segment of the construction market will continue as we see it with price pressure and strong competition. The diversification strategy will, however, drive growth away and into industrial products, so we expect that[Audio Gap]this will end in the fourth quarter. The distribution cost that we saw in the third quarter related to both this supply interruption[Audio Gap]giving higher distribution cost and also related to the start-up in Florida where you sort of have a dual supply chain for a start-up period will gradually decline over the next quarters as we fill up the Florida plant, but also as we expect to have a more normalized supply chain on the other factories.In the fourth quarter, the fixed cost and depreciation for the Florida plant will be approximately NOK 20 million higher than in the same quarter last year. We were in the build-up of fixed costs a year ago. Now there is a full fixed cost and depreciation, so that's a difference by NOK 20 million quarter-on-quarter.In Speciality Cellulose, the price in sales currency will continue to be in line with what we saw in 2017 for each grade, both for the quarter and for the full year. However, the sales volume is expected to be at the same level as last year, but with a weaker product mix due to the reduced sales into acetate.In Other Businesses, the strong development that we see -- have seen now for several quarters in wood-based vanillin will continue also in the fourth quarter. And the Fine Chemicals will come back with a higher deliveries in the fourth quarter compared to the third quarter. And also, the Cellulose Fibrils result and the net corporate costs will be in line with the third quarter that we just reported.Also, I should say that for the -- on the cost side, the wood and caustic soda costs that we had now, we had a step-up especially in the wood costs, starting 1st of July. So that came in the third quarter, that will continue at the same level in the fourth quarter.Also, the energy prices that we have seen this year have been quite favorable for Borregaard because of hedging strategies and so forth. But there, we are expecting to have somewhat higher energy prices in the fourth quarter, which is also, I should remind you, a seasonal quarter. We have the large maintenance stop every year in October, and we have seasonally higher energy consumption and payroll also in the 2 winter quarters, if you like. So that -- but that's a seasonal thing that comes every year.So that completes the outlook for the fourth quarter, and I will hand over to Per Bjarne for the financial figures.

[Per Bjarne Lyngstad, Chief Financial Officer]

Thank you, Per, and good morning, everyone.Borregaard's operating revenues increased by 6% in the third quarter, mainly as a result of higher sales in Performance Chemicals and Ingredients.EBITA adjusted was NOK 145 million, compared with NOK 197 million in the third quarter last year. Other Businesses improved, but both Performance Chemicals and Speciality Cellulose had a decline.Performance Chemicals had a negative impact from the start-up in Florida and from higher distribution costs, while higher costs for wood and caustic soda and weaker product mix was negative for Speciality Cellulose.The net currency impact was positive by NOK 15 million compared with the same quarter last year, and this effect was mainly affecting Speciality Cellulose. The lower result hurt our EBITA adjusted margin, which ended at 12.6%.In the third quarter, Borregaard had a NOK 20 million gain on sale of a minority stake in a chemical company in U.S.A. The gain was recorded under financial items.The bottom line effect of losses incurred in Florida and Spain was reduced by NOK 22 million through minority interests, affecting earnings per share positively by NOK 0.22. And based on that, the earnings per share ended at NOK 1.27, compared with NOK 1.47 in the same quarter last year.9% higher sales volume was the main reason for revenues in Performance Chemicals increasing by 7% compared with the third quarter 2017. Both specialties and industrial had more than 10% growth in sales volume.Fixed cost and depreciation related to the new plant in Florida increased by NOK 30 million, including NOK 5 million in various one-off start-up costs. Distribution costs increased by approximately NOK 15 million as a result of the interruptions in raw material supply and the ramp-up in Florida. The currency-adjusted average sales price was, like Per said, down by 3%. Increased sales of specialties and diversification compensated for the negative impact from continued strong price competition in parts of the construction sector.The net currency impact for Performance Chemicals was insignificant, and the EBITA adjusted margin declined to 9.8% in the third quarter with the additional costs.In Speciality Cellulose, operating revenues were in line with the same quarter last year. [Audio Gap]cellulose products was largely offset by increased Bioethanol sales. EBITA adjusted ended at NOK 76 million, compared with NOK 91 million in the third quarter 2017.Higher wood and caustic soda prices affected Speciality Cellulose negatively by slightly more than NOK 30 million.In addition, a weaker product mix from lower sales of acetate cellulose contributed to the decline in EBITA-adjusted. Cost increases and weaker product mix was partly offset by lower energy costs and in [Audio Gap]from higher prices and improved product mix.EBITA-adjusted margin declined to 19.9% in the third quarter, approximately 4 percentage points below the third quarter 2017.Revenues in Other Businesses increased by 13% compared with the same quarter last year, mainly from higher sales in Ingredients.EBITA-adjusted improved to NOK 14 million compared with NOK 6 million in the same quarter last year. Ingredients had a stronger result due to higher sales prices and continued positive market trend for wood-based vanillin, partly offset by the impact of higher caustic soda prices.Fine Chemicals result declined due to an unfavorable sales mix and higher raw material costs. Cellulose Fibrils result and net corporate costs were in line with the same quarter last year. And net currency effects were negligible in Other Businesses compared with the same quarter last year.In the third quarter, the net currency impact on EBITA adjusted was positive by NOK 15 million compared with the third quarter 2017.Hedging losses were approximately in line with last year, which means that the positive impact from a 3% weakening of the Norwegian kroner came from the weakening -- from the same quarter last year.Year-to-date, the net currency impact on EBITA-adjusted was positive by NOK 20 million compared with the first 9 months of 2017. And hedging losses were minus NOK 10 million, a NOK 42 million improvement -- or reduction in hedging losses compared with last year.Applying currency rates as of yesterday, the net currency impact in the fourth quarter is estimated to be positive by NOK 15 million compared to the fourth quarter 2017.In the third quarter, Borregaard had a lower cash flow from operation compared with the third quarter 2017, but above the EBITDA benchmark. The reduction from the third quarter 2017 was due to the reduced cash effect from EBITDA-adjusted and a less favorable development in net working capital. Investments in total were lower than in the third quarter 2017 due to lower expansion investments. Expansion investments were mainly related to the lignin operation upgrade and specialization in Norway and the Ice Bear project in Speciality Cellulose.Payments related to the Florida plant investment is close to being finalized.Net interest-bearing debt decreased by close to NOK 100 million in the third quarter due to a reduction in net working capital, low tax payments, a gain on sale of shares in the chemical company and lower investments.And at the end of the third quarter, Borregaard is well-capitalized with an equity ratio of 56% and a leverage ratio, that is net interest-bearing debt over EBITDA, of 1.2.And that concludes today's presentation. Now Per Sørlie and I will be ready to answer any questions.

[Jo Erlend Korsvold, Research Analyst]

Jo Erlend Korsvold, SEB. The negative effect from lower prices in the construction segment has been going on for quite a while, and you're now saying that you're seeing 10% growth, both within specialties and industrial. When do you expect the positives from that to outweigh the negative effect from the price deterioration in the construction segment?

[Per Arthur Sørlie, President & CEO]

Well, if you look across the several recent quarters in -- it's only in the last 2 quarters that the positive development in specialties has not fully compensated for the price decline in construction. But the point here is that also when you grow inside both industrial and specialties is a wide variety of products. So you can also have a situation where you grow the products in specialties that have below average price for specialties, so that's why you can have this kind of a situation. So the -- when we look across our portfolio in the third quarter, we had a slight average price reduction also within specialties and within industrial because the growth came in businesses that took down the average price somewhat. So -- but the general picture is that over time, if you go back to our Capital Markets Day, we have a new target saying that the construction share of our portfolio should come down to 30% by the end of 2021, which means that, by then, surely, long before then, this will have a full effect on the pricing.

[Jo Erlend Korsvold, Research Analyst]

Okay. And just a follow-up on the energy cost, is it possible to quantify the year-over-year effect?

[Per Bjarne Lyngstad, Chief Financial Officer]

In the quarter, it was between NOK 5 million and NOK 10 million positive.

[Per Arthur Sørlie, President & CEO]

Going forward.

[Per Bjarne Lyngstad, Chief Financial Officer]

Going forward? The increase in the fourth quarter compared with the fourth quarter last year will be in the same range. NOK 5 million to NOK 10 million is our best estimate as of today.

[Mikkel Nyholt]

Mikkel Nyholt, Carnegie. Could you give a deeper explanation of the margin picture in Speciality Cellulose? Because I'm a little bit surprised how strong it is.

[Per Arthur Sørlie, President & CEO]

Yes, should you explain why it is so strong?

[Per Bjarne Lyngstad, Chief Financial Officer]

There is one reason that doesn't show up really when comparing to the same quarter last year, but when you compare to the second quarter, you see a strong improvement this year. You see a strong improvement in the margin, and that's a variation in -- variations in fixed cost. In the second quarter, we had more normal -- or fixed cost a little bit on the high side. This quarter, it was a bit on the low side in Speciality Cellulose. So I would say that the margin in the last quarter was a bit influenced by that. On the sales side, it's very much depending on the sales mix. And as Per said, the volume that came down this quarter was more marginal volumes with a lower profitability, which really means that it also brings the overall margin up. And these are more normal swings in our delivery patterns and shipments. And we expect a higher volume in the fourth quarter, and that means also higher volumes of the more marginal quantities or products.

[Mikkel Nyholt]

And on the lignin side and the outlook for the year, do you still expect a 5% to 10% volume increase this year? And possibly, given this quarter, I'd assume you'd end up in the very low end of that range if you stick by it. And in case -- so is -- how much of the -- or that raw material constraint you saw this quarter, how much did that impact your volumes? And -- yes...

[Per Arthur Sørlie, President & CEO]

The -- with the outlook we have now given on the volume side for the fourth quarter, you can sort of calculate that. You will end up very close to the 5% increase year-on-year. And the sales in the third quarter and the impact from interruptions in raw material supply, I will say, is minor. It's more on the cost side that you have to bring product from another location to the customer that could not take it from the closest location. It's more that effect than -- that had a negative impact on the sales. And while I'm saying that, I should also -- I forgot to mention during my presentation that, regarding the Florida position in this sales number, the ramp-up in Florida is according to the plan that we have said where we will ramp it up linearly over a 3-year period, from 0 to 100. So it's following that curve. But that's included, of course, in the 122,000.Okay. So that concludes the presentation. Thank you very much.

[Per Bjarne Lyngstad, Chief Financial Officer]

Thank you.