Borregaard ASA

OSE:BRG

Earnings Call Transcript 2020-Q3

[Per Arthur Sørlie, President & CEO]

Good morning and welcome to this Third Quarter 2020 Presentation for Borregaard. I'll be joined this morning by our Vice President, Finance, Veronica Skevik Frey, who is standing in for our CFO this morning. I'm Per Sørlie, the President and CEO, and we will take you through the following agenda this morning. Highlights for the quarter, the business segments and the market situation, the outlook for the remainder of the year. And then Veronica will take over and go through the financial performance. First, the highlights for the third quarter. Our EBITDA came in at NOK 266 million, down NOK 20 million from the same quarter last year. This was primarily explained by a negative COVID-19 effects on demand in BioSolutions and BioMaterials. And we'll come back to the more -- that in more detail in the presentation later on. The reduced lignin raw material supply that we have seen throughout this year affected sales through concrete admixtures and low-value industrial applications in BioSolutions. We also had some reduced sales volume in BioMaterials, but this was offset by lower wood and energy costs. The positive development in bioethanol continued both in terms of high sales volume and better prices also in the quarter. And the net currency impact was quite neutral, slightly negative on EBITDA. Then to look at the market situation. First of all, for BioSolutions. The sales volume came down 17% compared with the same quarter last year. The lower raw material supply that -- where we did not get raw material from South Africa, the Spanish operation and also the Flambeau operations in -- former Flambeau operations in the United States. That reduction was partly offset by an increased sales volume coming out of Florida and also continued inventory reduction throughout this year.Again, the reduced raw material supply, which then net -- reduced in net reduction in sales of 20,000 tonnes came primarily out of concrete admixtures and low-value industrial applications, which is where we would plan to take out those volumes in the first place. However, we also saw lower sales to oilfield chemicals and slightly reduced demand also from the automotive industry, but all this was primarily seen in the U.S. market. But this is certainly then, again, the COVID-19 effect on reduced activity in those industries. The average sales price in sales currency came up 10%. And this was due to the improved product mix, the management of the reduced volumes, taking the reduced volumes out of concrete admixture and low-value value industrial applications, indirectly improves the product mix and shows that the business area has managed to optimize the reduced sales volume in a proper way, taking the price up 10% on average. Then on to BioMaterials. Again, this -- in the quarter, we saw some reduced sales volume, and this was mainly related to COVID-19 effects. And it also happened mostly in less-specialized grades and -- but we also saw a reduced demand growth, not necessarily reduction in demand, but a reduced demand growth for cellulose ethers to construction. And this was, again, for sure, driven by the coronavirus situation. On the other hand, sales for food and pharma applications continue to show strong growth throughout the quarter. In this particular business area, the average sales price in sales currency came up 1% compared to the same quarter last year. Also in BioMaterials, the Cellulose Fibrils business area reported increased sales, but still from a fairly low level overall. Then finally, on the market side, the Fine Chemicals markets. As you can see, a strong sales revenues also in the third quarter, and this was driven by the high sales volume and sales prices in bioethanol. And in this quarter, it was driven by deliveries to the Biofuel segment. So as we reported after the second quarter, we expected the market for bioethanol to normalize in the sense that the peak we saw in disinfectants in the second quarter would normalize in the third quarter and the Biofuel segment would pick up its offtake. And as we can see, that has continued to give good sales and results in the quarter. The pharma intermediates, which is also included in the Fine Chemicals business, delivered a result in line with the same quarter last year. Then we will move on to the outlook for the remainder of the year. In BioSolutions, the total sales volume in Q4 is expected to be between 10% and 20% lower than in the same quarter 2019. Again, we expect the reduction to come out of concrete admixtures and low-value industrial applications. And again, this should have a positive impact on the average price in sales currency. In total, we expect that the demand will continue to be higher than supply also in the fourth quarter. However, in certain applications -- certain specialty applications, there is a reduced demand from the COVID-19 situation, and this is particularly seen in oilfield chemicals and automotive. So we expect that to continue also throughout the fourth quarter. The market conditions for biovanillin will be fairly stable from the third quarter into the fourth quarter. Then in BioMaterials, the average price in sales currency for the full year is expected to come out between 0% and 1% above 2019. The coronavirus effect here on economic activity will continue to have an influence on the demand for certain specialty cellulose grades and in particular, that is related to the ether grades going into construction that will have a slower growth curve than expected. Cellulose fibrils [ex-wholesales] volume is expected to continue to grow. And also in this area, wood costs in Q4 is forecast to be between 10% and 15% (sic) [ NOK 10 million - NOK 15 million ] lower than in the same quarter last year. In Fine Chemicals, we expect stable market conditions, both in pharma intermediates and bioethanol from what we have seen now in the third quarter. The COVID-19 pandemic. Of course, as we have seen and reported now, there are -- there is a slowdown in economic activity that has an impact on some of our markets, like oilfield chemicals, like automotive, like construction. And if this situation gets worse, it will definitely have an impact, but it's hard to foresee that at the moment. And what we can do is to focus on maintaining sufficient financial capacity and be prepared for any potential effects of the situation. But as of today, the outlook includes what we are aware of and the developments that we see right now. So that completes my presentation, and then I will hand over to Veronica for a run-through of the financial data.

[Veronica Skevik, Vice President of Finance]

Thank you, Per, and good morning, everyone. Borregaard's operating revenues increased by 2% compared with the third quarter last year. EBITDA was NOK 266 million compared with NOK 286 million in the third quarter last year. There was an improved result in Fine Chemicals, whereas both BioMaterials and BioSolutions were negatively affected by COVID-19 effects compared with the third quarter of 2019. The net currency effects on EBITDA were slightly negative. And the EBITDA margin was 2 percentage points below last year. Earnings per share ended at -- in the third quarter ended at NOK 1.12 compared with NOK 1.31 in the third quarter of 2019. Moving on to the business areas. Operating revenues in BioSolutions increased by 2% compared with the third quarter of 2019. Improved product mix more than compensated for the 17% reduced volume. EBITDA was NOK 132 million compared with NOK 156 million in the third quarter of 2019. The decline in EBITDA was mainly due to higher distribution costs, due to transatlantic shipments and a negative COVID-19 effects for demand for certain biopolymer specialties in the U.S. market. Cost reductions from the upgrade in Norway and the restructuring -- and the restructuring in Germany more than compensated for the negative net currency effects compared with the third quarter of last year. The EBITDA margin was 18%, which is 3.7 percentage points below the same quarter last year. Operating revenues in BioMaterials was 6% below the third quarter of 2019, mainly due to a reduced sales volume. The reduced sales volume was mainly related to COVID-19 effects. EBITDA was NOK 91 million compared with NOK 94 million in the third quarter of 2019. For Speciality Cellulose, the effect of our reduced sales volume was offset by lower wood and energy costs. And the average price in sales currency was 1% higher due to a favorable product mix. For Cellulose Fibrils, higher sales and cost reductions did not fully compensate for the reduced EU grant, which ended in April of 2020. The net currency impact was negligible in the quarter. And the EBITDA margin was 22.6%, which is a slight increase from the third quarter of 2019. In Fine Chemicals, operating revenues increased by 36%, mainly due to higher prices and sales volume for bioethanol. EBITDA increased by NOK 7 million to NOK 43 million for Fine Chemicals. And the bioethanol result improved compared with the corresponding quarter last year, while the result for pharma intermediates were in line with the same quarter last year. There were insignificant net currency effects in the quarter. The EBITDA margin was 33%, a reduction of 4.7 percentage points from the third quarter of 2019. The net currency impact on EBITDA was minus NOK 5 million compared with the third quarter in 2019. The negative impact came from negative changes in hedging effects, partly offset by a weaker Norwegian krone. And NOK was weakened by approximately 4% compared with the third quarter last year when using Borregaard's currency basket. Hedging losses was NOK 51 million in third quarter compared with minus NOK 23 million, the corresponding period last year. Year-to-date, the net currency impact on EBITDA was NOK 35 million. And when we're using yesterday's exchange rates, the net currency impact in the fourth quarter of 2020 is estimated to be 0 compared with the fourth quarter of 2019. And the corresponding impact for the full year of 2020 is estimated to be NOK 35 million compared with the full year of 2019. Borregaard had a weaker cash flow from operating activities compared with the third quarter last year. And that is due to an increase in net working capital, a decline in EBITDA and higher tax payments in the quarter. The tax payments increased in the quarter due to an extended deadline from 1st of April to 1st of September for advanced tax payments in Norway. The investments were in line with the same quarter last year, and the expansion investments were mainly related to the capacity expansion for biovanillin. Net interest-bearing debt decreased by NOK 40 million in the quarter, and the cash effect from the EBITDA more than offset the unfavorable change in net working capital, the investments and the tax payments. At the end of the third quarter, Borregaard is well capitalized with an equity ratio of 47.5% and our leverage ratio, which is net interest-bearing debt over EBITDA, of 2.01. And that concludes today's presentation. If you have any questions, please contact Borregaard's Investor Relations team via e-mail or phone. Thank you for your attention.