Borregaard ASA

OSE:BRG

Earnings Call Transcript 2019-Q4

[Per Arthur Sørlie, President & CEO]

Okay. So then I think we are ready to start. Welcome to this fourth quarter 2019 presentation for Borregaard.My name is Per Sørlie. I'm the President and CEO. And I will be joined this morning by our CFO, Per Bjarne Lyngstad. And we will take you through the following agenda. I'll take you through the highlights in the quarter and for the year, the dividend proposal from the Board, the market situation for the business areas, a slight strategic update on our key projects and also a few slides on sustainability and finally the outlook. Per Bjarne will then take over and go through the detailed financials for the fourth quarter and the year.First, for the fourth quarter, came in an EBITA at NOK 73 million and compared to NOK 94 million a year ago. Included in that number is NOK 35 million impact from the operational incidents that we had at the Sarpsborg site in the fourth quarter, where we sent out a release to the stock exchange in December. And this has mainly affected the EBITA in Speciality Cellulose. The Performance Chemicals business had a favorable product mix but reduced sales volume and higher costs and depreciation, so net effect was slightly negative for that business. The Ingredients business continued to perform very strongly. We had a positive net currency impact and also notably for the quarter, a very strong cash flow that corrected some of the deviations we have had earlier in the year.If you look at the full year. The EBITA came in at NOK 589 million compared to NOK 580 million, again a favorable product mix in the Performance Chemicals business but also higher costs and increased depreciation. The Speciality Cellulose business had a fairly strong improvement in the product mix but also had higher wood costs and, again, this operational incident in the fourth quarter that had an impact on the result overall. The Bioethanol business had a strong progress in the year as well as the price development in wood-based vanillin that gave a strong improvement in that result. Also the net currency impact was positive for all business areas.The dividend proposal from the Board, just to remind you about the policy, is that we should pay regular and progressive dividends. And the dividend should be targeted between 30% and 50% of net profit. The Board has proposed a dividend of NOK 2.30, which is 55% of net earnings, so the proposed dividend, in other words, is slightly above the 30% to 50% target. However, the Board's assessment has been that, when you take into consideration the extraordinary events, particular in the fourth quarter, there is room for a small increase in the dividend compared to last year, so hence the proposal of NOK 2.30 to the AGM that will take place in April this year. If that is approved, it's a total dividend payment of NOK 229 million.Then on to the development in the market. First, Performance Chemicals. The price in Norwegian kroner is increasing -- has increased year-on-year approximately 7%, but if you look at the price development in sales currency, that is fairly flat. So the price, average price, in currency is in line with the same quarter last year. This is achieved through price pressure in the concrete admix area. It's compensated by a more favorable product mix. And also specifically inside the construction area, the sales to concrete admixture is declining, but it's more than compensated by growth in other construction applications. Sales volume overall declined by 4%, and this is driven by lower Industrial volumes. Specialties and Construction is comparable to the same quarter last year.The raw material from one of our suppliers, Flambeau, ceased late in the third quarter, in September in the third quarter, so hence there has been no raw material deliveries from Flambeau in the fourth quarter. The supply, this has no impact on our ability to supply customers because we can supply from other manufacturing units, but on the other hand, this has an impact on the overall balance between raw material in and the sales volume. The positive cash effects -- FX effects are also relevant for Performance Chemicals.If we look at the full year development, again the same development in pricing. The sales currency -- price in sales currency is slightly below 2018, but it's fairly flat; again the same drivers behind the price development, strong competition in concrete admixtures and certain of the low-value industrial applications. And this is compensated by a more favorable product mix and growth in other construction applications that have or -- have better prices than the concrete admixture. The sales volume is fairly flat and growth in industrial products, but slower growth than we have seen in recent years and stable volumes of specialties and a slight decline in Construction. Again to remind you that inside Construction there is a decline in concrete admix but growth in the other better-priced construction applications.The Florida sales volume is in accordance with the ramp-up plan, which means that we have a speed of approximately 50,000 tonnes per year at the end of 2019. So this is in line with the ramp-up plan, but the profitability is below expectations. And this is explained by a weaker product mix; and also geographically longer distances to deliver products, which gives -- drives the distribution costs. So both mix and distribution costs and certain fixed costs are higher than expected.Then on to Specialty Cellulose, 7% lower average sales price in currency than we had done the last year, the year before. And this is driven solely by the operational incidents we had in the fourth quarter which led to lower production and also declassified material that had to be sold at lower prices. We think that we have cleaned up most of these effects in the quarter itself. You can see that we had a slightly higher sales volume in the quarter compared to last year, and this has led to a significant reduction in inventory because we had a lower production than the same quarter last year. The Bioethanol business did well in the fourth quarter, high sales volume. And also this business has a positive FX impact.If we look at the full year. The cellulose prices were slightly below in currency compared to the last year, but this is solely explained by the declassified material in the fourth quarter. The price level in the ordinary markets is on average flat from year-to-year in currency. However, we had a good improvement in the product mix. It came up to -- from 62% to 73% in highly specialized grades. And the volume was also at a normal level, 153,000 tonnes sales. The Bioethanol had an excellent year both with higher sales and production volume and improved product mix and lower production costs. And this is, of course, driven by the investment that we completed a couple of years ago in the ethanol facility that has led to reduced energy consumption and also a stronger product mix. In this area, also positive currency effects.Then Other Businesses. First, the Ingredients business, high sales of wood-based vanillin in the quarter driven by strong demand. If we look at the full year, sales revenues have gone up 24% compared to 2019 (sic) [ 2018 ], and this is more or less only driven by higher sales prices for wood-based vanillin. So this also has a comparable effect on the bottom line. In Fine Chemicals, the sales volume in the quarter was in line with the same quarter last year, but a slightly weaker product mix. Sales revenues year-on-year increased by 5%, so fairly stable development year-on-year.Then I'll talk a few slides on the strategy.This -- back in 5 years ago in 2014, just over 5 years ago, we presented our strategic agenda for the next 5-year period; and we have completed a number of investment projects now to execute on that strategy. And first, we said that we would do changes in the Performance Chemicals business both to be able to grow especially specialties and to diversify the business away from concrete admixture into other applications and reduce the dependency on that particular application and also put in place the ability to grow with the market. So the first place in plant -- first phase in Florida was completed back in the middle of 2018. Last year, in the second half, we completed the upgrade and put in more equipment to specialize in the Sarpsborg facility. And also we -- a couple of years ago, 1.5 years ago, we extended the joint venture agreement in South Africa until the end of 2032 in this -- at this time.Then we have made several targeted investments in Norway, at -- in the Sarpsborg facility to increase specialization. I already mentioned the high-end bioethanol expansion. That is giving good results already, was completed in 2018. The Ice Bear capacity expansion was completed in at the end of 2018. You can see also some results of that in the strong increase in the high-value cellulose share of our sales. And we are now in progress to increase the capacity of wood-based vanillin. That will be completed in the first half of 2021, but it will go on throughout 2020.And finally, in 2016, we completed -- late in 2016, we put into production our first commercial-scale production facility for the Exilva cellulose fibrils. And the market introduction is ongoing there. So all in total, this investment program has had a total CapEx of NOK 1.7 billion between the years 2015 and 2019. So all the investments have been completed on time and within budget, so now the focus is primarily on market execution. We will certainly do some smaller expansion CapEx also going forward, but it will be in the interim period. Now it will be of a different magnitude than what we have had in this period from 2015 to 2019.Cellulose Fibrils has a small part that is called SenseFi. And in the fourth quarter, we made a decision to discontinue this particular part of the fibrils business. The SenseFi project is an advanced texture system for food, a texturizer that gives the right mouthfeel and can replace fat -- milk fat in different food products. We do have -- we have established a number of customers and sales in this area, but we feel that the market potential is not sufficient to move the project from demonstration phase into commercial operation. So we have written down NOK 11 million under other expenses in the fourth quarter. And the EBITA impact last year was minus NOK 9 million from this business, so then that also tells you that it was a fairly small operation in our total, in the context of Borregaard's total operations.The main part of the Cellulose Fibrils is related to the Exilva microfibrillar cellulose business. And this is an additive for industrial applications. It improves flow, stability, flexibility; and not least, gives strength in different industrial formulations and materials. The market introduction is ongoing here. We have reached roughly 50 regular customers, but most of these customers take fairly small volumes. That's indicated by the fact that this is an additive. An additive can be added from anywhere around 1% down to very small levels. It's a very potent product. However, we have an incredibly strong pipeline here. More than 1,800 prospective customers, in addition to the 50 regular customers, are working on this product either through samples in their lab or in different trial phases; in piloting in large-scale, full-scale trial phase. And the pipeline has an exponential growth. In the last 6 months, more than 500 new prospects have been added. However, long lead times, we have now been working for close -- roughly 3 years on this. And we typically see that lead times are 3 to 5 years on -- from the time a customer starts to look at it until they become a regular customer. But very optimistic on the pipeline for this business. This, of course, is also an Horizon 2020 project that has received a significant grant from the EU. The grant runs until April 2020. It has been gradually taken down throughout 2019, but it will end completely at the end of 2020.Then a few slides on sustainability. Borregaard has worked with sustainability for the last, I will say, 12, 13 years. We started doing life cycle analysis of our production processes and all our finished products back 12, 13 years ago. And this is a very schematic presentation of the value chain. If you start with the raw materials: All our raw materials come from sustainable and certified wood according to the PEFC and FSC standards. And this also goes for the lignin raw material that we receive at our facilities around the world. The pulp mills that receive -- that deliver raw materials are all using certified wood. The life cycle analysis is mostly focused on the production processes that we have, where we have worked diligently over the years to reduce emissions to water and air, particularly CO2 reductions; and also looked at greener logistical solutions. So the climate footprint of our different products have come down significantly throughout this 12-, 13-year period that we have been working on sustainability.However, when it comes to the products that we are offering to the customers, we think about sustainability in a broader context than just the CO2 footprint. As we see it, there are 3 different things that we can offer to our customers. On the one hand is the climate part. The life cycle analysis demonstrates the favorable greenhouse gas footprint of our products and can also give the customer comparable numbers for the synthetic alternatives that he has as an option. But we also offer bio-based products. It's becoming more and more obvious that customers and markets prefer natural starting materials. And we have 100% natural raw materials. And this is especially evident in recent times in the biovanillin, wood-based vanillin offering that we have to the market. And particularly inside the lignin business, we offer a number of products that have a favorable environment, health and safety profile. So especially for the agricultural markets that are quite important for our specialties and lignin, we offer nontoxic, harmless products as an alternative to petrochemicals that are giving an undesired exposure to the farmer as the end user. So all across these different areas, we think that sustainability is important.So lot of discussion around the standardizing measurements of sustainability. We are rated by a number of different agencies. The largest one, I would say, is CDP. CDP is a global nonprofit organization that is owned, among others, by UNs Global Compact and the WWF. And Borregaard has reported to CDP for several years. And 2 areas really. First, last year, second half last year, our science-based targets for greenhouse gas emissions were approved by CDP. We have targeted reductions of 53% in CO2 emissions by 2030 and 100% by 2050. And the start year, starting year base here is 2009. We are already well on the way to achieving the 53% by 2030. We -- the other thing that CDP is doing is that they have a rating every year of different companies. And there are more than 8,000 companies that report to CDP and are evaluated by CDP; and it's roughly 2% of the companies, 179 companies, last year that were awarded A rating. And Borregaard has an A rating. And I don't think there are many chemical companies among the 179. There are 5 companies in Norway. Storebrand, DNB, REMA 1000 and Veidekke are the other 4 companies in Norway that have an A rating. And we had an A rating also in 2018.Then I will round off by taking a look at the outlook for 2020.The market dynamics in the Performance Chemicals business are expected to be roughly the same, strong competition and price pressure in lignin to concrete admixture and also into certain low-value industrial applications, but again we expect that this will be partly compensated by diversification and specialization. So a favorable product mix will to a large extent equalize the effect of this price pressure. The sales volume is forecast to increase somewhere in the range of 0 -- between the range of 0% to 5%. And also to remind you that the -- in NOK 500 million investment that we have just completed in Norway will also have a significant cost-reduction effect. First of all, NOK 40 million in cost savings will be realized in Norway. This will be gradually realized through 2020, with full effect from '21. In addition, NOK 20 million in cost savings from restructuring in Germany as an indirect effect of the Norwegian investment, and this restructuring will have full effect from 2020.In Specialty Cellulose, the average price in sales currency is expected to increase by roughly 2% from 2019. Again, this is driven by -- more by improved product mix than by price increases. The wood cost in the first half will be down to -- between NOK 25 million and NOK 30 million compared to the same time in 2019. Pricing for the second half will be negotiated just before July 1. The sales volume in the first quarter will be comparable -- or expected to be higher than in the same quarter in '19 but with a similar product mix.Then under Other Businesses, the price level that we have reached for wood-based vanillin is expected to continue. We think that it is flattening out at the current level. So that means that the good results we saw in 2019 should continue into 2020. And we are also doing a capacity expansion in Ingredients that will be -- have full effect from the second half 2021, but already in 2020 we will see some volume effect from this capacity expansion because it's a number of different investments that are being made in the existing facility in order to raise capacity. Fine Chemicals will have another stable year, no major changes in the market conditions. Sales are gradually increasing for Cellulose Fibrils. We expect to increase the number of customers and the volume, but the lead times is, like I said before, is in general quite long. And this EU Horizon grant will end in April 2020, so it means that it's important that we increase sales so that we can compensate for the reduction in support from the EU.So that completes the presentation on the market and strategy, and I will hand over to Per Bjarne for the financials.

[Per Bjarne Lyngstad, Chief Financial Officer]

Thank you, Per. And good morning, everyone.Borregaard's operating revenues increased by 1% in -- compared with the fourth quarter of 2018. EBITA adjusted was NOK 73 million compared with the NOK 94 million in '18. We had an improvement in Other Businesses, but both Performance Chemicals and Speciality Cellulose declined. The operational incidents at the Sarpsborg site had a negative impact on EBITA adjusted of about NOK 35 million in the quarter.Net currency effects were positive by NOK 15 million compared with the same quarter in 2018.The EBITA adjusted margin was 5.9% in the fourth quarter, 1.8 percentage points lower than the corresponding quarter in 2018.Earnings per share were NOK 0.38 compared with NOK 0.80. And earnings per share were negatively affected by several items in the quarter. The NOK 11 million in write-downs and costs related to the SenseFi project was recorded as other expenses. Net interest expenses increased by NOK 7 million, mainly from the implementation of IFRS 16 regarding leases. And then other financials -- other financial items had a negative change of NOK 12 million, mainly from an increase in committed return on an unfunded pension plan.For the full year of 2019, Borregaard's operating revenues increased by 6%, mainly from currency effects and increased sales in Ingredients. EBITA adjusted ended at NOK 589 million compared with NOK 580 million in 2018. Also for the full year, Other Businesses result improved, while Performance Chemicals and Speciality Cellulose had weaker results.The net currency effect or impact was positive by NOK 95 million for the full year.The EBITA adjusted margin ended at 11.6% compared with 12.1% in 2018.Return on capital employed was 10.9%, down 1.8 percentage points from 2018. And the reduction was mainly due to high investments and a higher net working capital level.Earnings per share decreased to NOK 4.17 compared with NOK 4.76 in 2019 (sic) [ 2018 ].NOK 27 million in restructuring costs related to the German lignin operation and the SenseFi project. Increased interest expenses, partly from IFRS 16, and the increase in committed return on a pension plan all affected earnings per share negatively.Operating revenues in Performance Chemicals were 1% below the same quarter in 2018 mainly as a result of 4% lower sales volume. For the full year, operating revenues increased by 4%, mainly from net currency effects. EBITA adjusted was NOK 36 million in the fourth quarter compared with NOK 42 million in 2018. A favorable product mix and positive net currency effects were more than offset by reduced sales volume and higher operating costs and depreciation. Sales volume declined by 4%, mainly for low-value industrial products and sales to concrete admixtures.For the full year, EBITA adjusted was NOK 297 million compared with NOK 317 million in 2018. The result declined due to increased depreciation both in Florida and in Norway and from higher costs in the Florida operation. These effects were largely offset by positive net currency effects and a more favorable product mix. The EBITA adjusted margin was 6.6% in the fourth quarter and 12.7% for the full year, both decreasing by about 1 percentage points compared with the corresponding period last year.In Speciality Cellulose, operating revenues were in line with the fourth quarter of 2018. For the full year, operating revenues increased by 3%, mainly from currency effects and an improved product mix. EBITA adjusted was NOK 33 million (sic) [ NOK 23 million ] compared with NOK 50 million in the fourth quarter of 2018. The operational incidents at the Sarpsborg site affected Speciality Cellulose in particular and resulting in reduced production volume and declassified products which have been sold at lower prices. The sales volume was slightly higher than in the fourth quarter of '18, resulting in a significant reduction in inventory. The result for Bioethanol increased mainly due to higher sales volume in the quarter. And the net currency impact was positive also on the EBITA level.For the full year, EBITA adjusted was NOK 188 million compared with NOK 257 million in 2018. And the reduced result was mainly due to increased wood costs and the fourth quarter operational incidents. Net currency effects were positive. The result for Bioethanol increased due to higher sales and production volume, improved product mix and lower production costs. The weaker result in Speciality Cellulose led to the EBITA adjusted margin decreasing to [ 5.6% ] in the fourth quarter and 10.9% for the full year.For Other Businesses, operating revenues were 9% above the same quarter in 2018, mainly from higher sales in Ingredients. For the full year, operating revenues increased by 16% in Other Businesses, again mainly from higher sales in Ingredients. EBITA adjusted was NOK 14 million in the fourth quarter compared with NOK 2 million in the fourth quarter of 2018. For the full year, EBITA increased significantly to NOK 104 million compared with NOK 9 million in 2018.The improvement in Other Businesses both in the fourth quarter and for the full year was mainly due to a significantly strong result in Ingredients from increased sales prices for wood-based vanillin. Fine Chemicals had a weaker product mix and result in the fourth quarter, but for the full year, Fine Chemicals had a slightly better result than in 2018. Cellulose Fibrils had a weaker result compared with the fourth quarter of 2018, as reduced cost coverage from the EU grant was not fully compensated by higher sales and improved productivity. For the full year, Cellulose Fibrils had a result in line with 2018, which means that we managed to fully compensate for the reduced cost coverage from the EU grant in the year.Net corporate costs were at the same level as in both the fourth quarter and the full year of 2018. And also for Other Businesses, net currency effects were positive both in the quarter and for the full year.The net currency impact on EBITA adjusted was, as I said initially, positive by about NOK 15 million compared with the fourth quarter of 2018. The positive impact came from a weaker Norwegian krone, which weakened by about 7% compared with the fourth quarter of 2018 if we use Borregaard's currency basket. Hedging losses in the fourth quarter were NOK 32 million compared with NOK 1 million in the fourth quarter of '18, partly offsetting the positive impact from a weaker Norwegian krone.For the full year, the net currency impact on EBITA adjusted was positive by about NOK 95 million. Hedging losses were NOK 76 million compared with NOK 11 million in 2018. And using currency rates as of yesterday, the net currency impact for the full year of 2020 is estimated to be positive by about NOK 30 million compared with 2019, and the corresponding impact for the first quarter is estimated to be positive by NOK 5 million compared with the first quarter of 2019.Borregaard's cash flow from operations improved significantly in the fourth quarter compared with the previous 4 quarters, as you can see on the graph to the left. And the good cash flow was mainly from a significant reduction in net working capital. For the full year, cash flow from operation increased by close to NOK 200 million due to the cash effect from an improved EBITDA adjusted and less unfavorable development in net working capital compared to 2018. However, the average net working capital-over-operating revenues ratio ended at close to 23%, which is above our 20% target.Investments were in line with the fourth quarter of 2018 and slightly lower than our latest forecast. As we can see on the graph, we put a lot of replacement investments in the fourth quarter, and that's related to that we have our annual maintenance stop in the fourth quarter. And we also use that to put in a lot of new equipment. The investments carryover to 2020 is limited and has not led to any changes in our forecast.Net interest-bearing debt decreased by NOK 87 million in the fourth quarter mainly as a result of the NOK 171 million reduction in net working capital.And at the end of 2019, Borregaard is well capitalized with an equity ratio of 51%; and a leverage ratio, which is net interest-bearing debt over EBITDA, of 1.59% if we exclude IFRS 16 impact.We have updated our investment forecast for 2020 slightly. In addition, we are now presenting our first forecast for 2021.For 2020, total investments is forecast at NOK 575 million, with an uncertainty of plus/minus NOK 55 million. For 2021, the forecast is NOK 100 million lower, NOK 475 million, with plus/minus NOK 75 million uncertainty. Over time, replacement investments are targeted at depreciation level. However, due to the NOK 207 million upgrade of the caustic soda production facility, we believe it's likely that we will be above the target both in 2020 and 2021. The main expansion project in 2020 and 2021 is the capacity increase for wood-based vanillin, which is we're expecting to be fully operation mid-2021. And potential new projects, which so far are unknown or have not been communicated, may lead, of course, to additional investments.And that concludes today's presentation. Now Per Sørlie and I will be ready to answer any questions.

[Mikkel Nyholtt-Smedseng]

Mikkel here from Carnegie. Just to first ask a couple of questions on Exilva, when you say the number of prospects grew by 500 during the second half of 2019, can you elaborate a bit on how many prospects you have had whom have proceeded not to -- or have decided not to proceed with your product?

[Per Arthur Sørlie, President & CEO]

Yes, I can do that. I mean this is like a funnel where you enter by getting a sample. You start to work on the sample. You progress further to lab trials, pilot trials, large-scale trials; and finally become a customer. And right now, we have, like I said, more than 1,800 in that funnel, plus roughly 50 that have become customers. So let's say close to 1,900. Roughly 20% in addition to that have left the funnel over the first 3 years, so that means that 80% of the ones that come in are still in the funnel. So we think that's a fairly solid number. And the first 2, 3 years that we were working on this were roughly 50, net 50, additions every month. Now that has gone up to 80 new potentials coming in every month, net. That is after deducting the ones that leave in that same period.

[Mikkel Nyholtt-Smedseng]

Do you have a hunch for when you'll see a large contract being signed?

[Per Arthur Sørlie, President & CEO]

Well, there are so many different applications. And like I said, most customers are taking small volumes, but there are a few customers that take larger volumes. And of course, in this big pipeline there are quite a large number of customers that potentially could take large numbers, but it's impossible to predict. But it could be a slow buildup, but it could also be a stepwise if some of those large potentials kick in.

[Mikkel Nyholtt-Smedseng]

And then more in the short term, on the cost effect you would expect for Q2 then and 2020 related to not being having the grants from the EU Horizon program anymore. Just in terms of if you could quantify somewhat what we could expect to see then Q2 when it's phased out and then probably 2020 full year.

[Per Bjarne Lyngstad, Chief Financial Officer]

What we have left, we have just a small amount left on the grant now. We've taken into the accounts most of the grant. The reduction in 2019 in -- how much we took in from the grant was about EUR 25 million, and we have about EUR 8 million left of the grant. So there you see the difference on the years. So we have -- the EUR 8 million we -- will be recorded in the 4 -- first 4 months, and then there will be nothing. So rather small amounts.

[Per Arthur Sørlie, President & CEO]

Very good. I think that concludes the presentation. Thank you very much.

[Per Bjarne Lyngstad, Chief Financial Officer]

Thank you.