Borregaard ASA

OSE:BRG

Earnings Call Transcript 2022-Q4

[Per A Sorlie, executive]

Good morning, and welcome to this fourth quarter 2022 presentation for Borregaard. My name is Per Sørlie, I'm the President and CEO, and I'll be joined this morning by our Chief Financial Officer, Per Bjarne Lyngstad, and we will take you through this agenda that you see on the screen.

I also would like to remind you that you can submit questions throughout the webcast solution, and we will answer -- try to answer them at the end of the presentation. So to start off, we will cover both the fourth quarter specifically and also the full year in this presentation.

And the highlights for the fourth quarter. EBITDA came in at NOK 364 million. This is actually the highest EBITDA for the fourth quarter that we have had, and it was up from NOK 263 million in the previous -- the same quarter last year. We saw a significant improvement, both in BioMaterials and Fine Chemicals. However, in BioSolutions, we saw a reduction that was due to a reduced margin on traded volumes of vanillin -- synthetic vanillin products.

We also, again, saw in this quarter that increased sales prices offset our cost increases, and in addition, we had positive net foreign exchange effects. If we take a look at the full year, we delivered an all-time high EBITDA of NOK 1,643 million, up from NOK 1.372 billion in the previous year, and this was actually the previous all-time high as well.

We had higher sales prices and improved product mix, both in BioSolutions and BioMaterials. In Fine Chemicals, we had increased sales prices throughout and also higher sales volume in Bioethanol. Substantial cost increases affected all business areas. But as we have said before, this was passed on in the pricing more or less.

Positive net foreign exchange impact also across all business areas. The cash flow was affected by an increase in net working capital, mostly due to the steep price increases that we saw throughout the year. The return on capital employed came in at 18.1% pretax, which was well above the 15% target.

The dividend proposal for 2022. I'll just remind you of the dividend policy is that we should pay regular and increasing dividends that reflect the long-term earnings -- expected long-term earnings and cash flows of the group. And the target for the dividend is to be between 30% and 50% of net profit.

The Board proposes a dividend of NOK 3.25 per share for 2022. This is a NOK 0.50 increase from -- in ordinary dividend from the previous year, 36% of net earnings. The dividend yield is 2.1% and the payment is expected to be in the range of NOK 324 million, net of our own holdings in the share.

Then if we take a look at the markets, and we start out with the fourth quarter in BioSolutions. The average sales price came up 7% versus the same quarter last year in sales currency. We had positive development, particularly in applications within oilfield chemicals and construction. I should, however, remind you that in the same quarter last year, we had also a very steep price increase because we had an extraordinarily high deliveries of wood-based vanillin, which is the highest priced product inside this business area. So that artificially took up the price -- average price in the previous -- the same quarter last year.

The sales volume was 6% lower than in the same quarter last year. And this was in line with the outlook that we gave after the third quarter for the fourth quarter. Lower raw material supply affected deliveries to low-value markets in line with our optimization philosophy.

Inside this business area, we had the effects from synthetic vanillin and ethyl vanillin. We do trading in these 2 products. We don't produce them, manufacture them ourselves, but we toll manufacturer and brand them with our own product for trading purposes.

And there was an increased global supply and a significant price decline in the quarter for these 2 products. So both our sales volume and our trading margins came down for these products. And there was -- however, there were strong deliveries of wood-based vanillin in the quarter. But as I said just a minute ago, this was compared to the extraordinarily high deliveries that were in the same quarter last year.

If we take a look at the full year, the picture is slightly different. There, we have price increases year-on-year, is up 20% in sales currency. And this is a combination of price increases and optimization of the product mix. And the market introduction of the new biovanillin capacity is on track. And as I said, we had good deliveries of biovanillin in the fourth quarter.

The sales volume year-on-year is down 9%, and this is, of course, a result of deliveries, very low -- lower raw material supply in this particular year in 2022, but also sales from inventories in 2021. However, the demand for lignin-based biopolymers has generally been strong, and we have optimized our business within all market segments. So that means that both within industrial, construction and specialties, there has been movements in the mix than what we often refer to as the mix within the mix. We have optimized each market segment.

And the trading of vanillin products that I referred to a minute ago peaked during the first half of 2022. We had a significant contribution from this trading business in the first and second quarter. And the market has now, as we explained, normalized, and we are back to normal trading margins again.

We showed a slide at the Capital Markets Day in September that sort of demonstrates or visualizes the effect of the specialization strategy over time in this particular business area. And previously, we have usually shown the volumes that you see on the left-hand side here, split between the specialties volume, the industrial products and the construction-related products.

But we also introduced, at the Capital Markets Day, the revenues comparable to these volumes. And this is an updated slide the slide at Capital Markets Day was up until the 30 June last year, the last 12 months as of 30 June. We have now completed the full 2022.

And as you can see, the positive development in specialization has continued. As a matter of fact, in 2022, the specialization volume was approximately 25% of the volume, but it's now approaching 60% of revenues. So this is sort of visualizing the strength of the specialization strategy over time and the optimization of the portfolio.

And if you look at this, you can see that even though we had an abrupt change in 2020 with the loss of volume in South Africa and Spain, you can see that the specialization development has been stable throughout this period with strong revenue growth. And you can also see that the industrial portfolio has doubled in value even at a fairly stable volume over this 10-year period.

And the construction value has stayed in place, even though we have reduced the volume by more than 50% in this 10-year period. So I think this demonstrates very well the philosophy of specialization and how we are developing the company over time.

Then let me turn to BioMaterials. The average price in sales currency in the fourth quarter was 39% higher than in the comparable quarter in 2021. And this is a combination of price increases and surcharges for specialty cellulose. If you look at this price development here, you can roughly say that we had price increases as of January 1 last year.

And then we introduced surcharges in the second half of 2022. So it's a combination of the 2 effects. There was a very favorable product mix in Specialty Cellulose that added to the average price development, and we also had increased sales volume and sales prices in cellulose fibrils, although this is a small volume, that also is included in the average gross sales price.

The fourth quarter saw quite high deliveries of Specialty Cellulose. In total, we had strong demand in the quarter. However, we saw a slight slowdown from the construction market, which is not surprising. But of course, this was then covered by an uptake in other -- in demand from other market segments.

Then if we look at the full year, year-on-year, the price increase in sales currency is 28%. And again, it's the same explanations, 3 explanations driven by price increases due to market balance, is driven by surcharges due to increased escalating costs in the -- that kicked in, in the second half, and it is also a result of improved product mix.

As you can see, the sales of highly specialized grades reached 85% of total volume, which is also very close to the highest percentage ever in highly specialized grades. We, however, year-on-year, we saw significantly lower deliveries of Specialty Cellulose.

And this was due to the fact that we, in 2021 -- or in 2022, we have had to replenish our inventories a little bit because they were very low at the beginning or end of '21 going into 2022. Generally, we have -- and we sold a lot from inventories in 2021. However, there has been strong demand for Specialty Cellulose. But as I mentioned earlier, we saw a slight slowdown in orders from the construction market for cellulose ether grades in the fourth quarter. Cellulose fibrils increased, both in volume and sales prices in 2022.

Then Fine Chemicals. On the left-hand side here, the quarter, we saw both higher sales volume and good sales prices for bioethanol in the quarter. The Fine Chemical Intermediates had higher sales prices but normal deliveries in the quarter. The sales revenues, if you look at the full year, we had increased sales prices in all categories in Fine Chemicals, but also higher sales volume in bioethanol and the bioethanol volume, more or less, all of it goes into biofuels, a lot of it on -- in the European market. The -- also a positive net foreign exchange impact in this business area.

Then I would like to update you on our climate ratings and sustainability status. Three things to report here in the middle of 2022, our revised science-based targets were approved by the Science Based Targets initiative.

We changed the target from a well below 2-degree centigrades to 1 point in line with the 1.5 centigrades goal in the Paris Agreement and also in line with the Norwegian climate law. So these revised targets were approved in July last year, and we also changed the base year to 2020.

And the reduction targets is that we will take down CO2 reductions by -- or emissions by 42% by 2030 and net-zero target for 2050, which means an absolute reduction of at least 90%. Also in December of last year, we received the revised ratings from CDP, which is much directed to the -- our investors in the stock market.

Borregaard kept all its ratings from the previous year, which means that we have an A score in climate change, an A score in forests, and we have an A- score in water security. There were 15,000 companies that were rated by CDP last year, up from 13,000 in the previous year. Borregaard kept its position among the top 20 companies out of the 15,000 reporting. So we are quite pleased with that outcome.

Also in the supply chain, the EcoVadis rating is quite important. We rate our suppliers along the EcoVadis rating and our customers usually rate us in line with the Ecovadis rating. We were upgraded from a gold status to a platinum status last year, which means that we are among the top 1% out of the 90,000 companies that are rated by EcoVadis.

So altogether, it was a very satisfactory year on the sustainability, and this was proven through the external ratings that you see on this slide. Then on to the more investment CapEx side of sustainability. And we showed this slide at the Capital Markets Day in September. As you can see, it's the same environmental targets, but we also said that in order to deliver the targets in 2030, we estimate that we will invest in the range of NOK 650 million to NOK 850 million from 2023 to 2025.

We think it's important to start these investments early to be well in control of delivering on these targets. These investments will not be solely for the improving the environmental footprint. It will also support specialization and value growth investments. We will leave or make headroom for increased specialization from a sustainability aspect. There will also be increased flexibility between energy sources. And generally, these will increase barriers to entry into our kinds of businesses.

So we announced this morning, and this was dealt with at the Board meeting yesterday that we approved an investment of NOK 230 million, which is part of this NOK 650 million to NOK 850 million investment. So this will improve the environmental footprint. It will -- for some part of our energy use in -- at the Borregaard refinery in Norway, we are absolutely now dependent on LNG. As you can see on the picture here, it's the big spray dryer in biopolymers.

We will now remove this absolute dependency. This -- in the process, we will also open up for a reduction of 30,000 tonnes of CO2 emissions. But this will also give some other benefits in terms of increased energy flexibility and efficiency. And there is a significant cost reduction potential related to this investment. It, of course, will depend slightly on price or cost development on different energy sources going forward. But this will introduce more options to switch between alternate energy sources, that's electricity, LNG or light oil. And this will also improve the energy efficiency by taking down the overall energy consumption in this part of Borregaard.

This investment -- because of the cost reduction potential, this investment has been prioritized among the different environmental investments and the completion is expected in the first half of 2024. Then I will complete my part of the presentation with the outlook.

In BioSolutions, we expect that the total sales volume will come in at approximately 350,000 tonnes, which is in line with what we also reported at the Capital Markets Day. This will, however, depend on stable raw material supply and the global economic development at large. The sales volume in the first quarter is expected to be in line with the fourth quarter and the portfolio optimization that we have seen now over the last 3 years in biopolymer applications will continue also into 2023.

And as we have talked about earlier in the presentation, the market for synthetic vanillin and ethyl vanillin, which is a trading market for Borregaard is expected to remain normalized as we go into 2023.

In BioMaterials, we expect to sell more than we produce. The sales volume of highly specialized grades is also expected to increase in absolute volumes. In the first quarter of this year, the average price is expected -- in sales currency, is expected to be a rollover from the fourth quarter of 2022.

As we told -- said earlier, the construction market for cellulose ethers is the main uncertainty here on the demand side. However, other applications are expected to compensate for a potential slowdown in this market segment.

The sales growth will continue for cellulose fibrils. In Fine Chemicals, we expect both sales volume and a product mix that is stronger in Fine Chemical Intermediates and the favorable conditions that we have seen now for some time in the advanced biofuels in several of the EU countries is expected to continue and sales prices, therefore, are expected to increase for bioethanol also in 2023.

Energy and raw material costs. The wood costs will increase between 10% and 15% in the first half of 2023 compared to the second half of last year. The energy and other raw material costs are expected to be slightly below what we saw at the end of 2022 and the energy spot prices continue to represent the largest uncertainty here.

However, as we explained throughout the second half of last year, Borregaard will benefit from our ability to switch between different energy sources like electricity, LNG or light fuel oil to minimize energy costs. And of course, as a disclaimer, the war in Ukraine and still and other -- especially the cost escalations, has an impact on the global economy that could also have an impact on Borregaard's markets. So that completes my part of the presentation. I will now hand over to Per Bjarne for the financial figures.

[Per Bjarne Lyngstad, executive]

Thank you, Per, and good morning, everyone. Borregaard's operating revenues increased by 22% compared with the fourth quarter of 2021, mainly as a result of higher prices and positive currency impact.

EBITDA reached NOK 364 million, NOK 101 million above the fourth quarter of 2021. BioMaterials and Fine Chemicals had significant result improvements, while BioSolutions had a decrease. Increased sales prices, higher volume and positive net currency effects more than offset cost increases and reduced margin on traded vanillin products.

The net currency effect was positive by approximately NOK 55 million compared with the fourth quarter of 2021. The EBITDA margin ended at 20.6% in the fourth quarter, 2.4 percentage points above the corresponding quarter in 2021.

Earnings per share increased to NOK 1.85 compared with NOK 1.02 in the fourth quarter of 2021. In the fourth quarter, we made an accrual of NOK 20 million for estimated costs for precautionary measures related to ground conditions at the site in Norway. The accrual was accounted for as other income and expenses and had a negative impact on earnings per share in the quarter.

For the full year, Borregaard's operating revenues increased by 19% compared to NOK 6.9 billion. Price increases and currency effects were partly offset by lower sales volume for the full year. EBITDA reached, as Per said, an all-time high of NOK 1.643 billion compared with NOK 1,372 million in 2021.

All business areas improved our results. Higher sales prices and positive net currency effects more than compensated for substantial cost increases. The net currency impact was positive by about NOK 195 million for the full year.

The EBITDA margin ended at 23.9% for the full year, a slight improvement from 2021. Return on capital improved by 2 percentage points to 18.1%, and well above our targeted level of minimum 15% pretax. Earnings per share increased by close to 30% to NOK 8.95.

Operating revenues in BioSolutions increased by 7% compared with the fourth quarter of 2021 and by 17% for the full year. For both, may -- the increase was mainly due to increased sales prices and positive currency effects, partly offset by reduced sales volume.

In the fourth quarter, the EBITDA was NOK 159 million compared with NOK 214 million in the fourth quarter of 2021. The EBITDA decrease was mainly due to reduced margin and volume for traded vanillin products.

For lignin-based biopolymers, higher sales prices and positive net currency effects offset their increased costs. For the full year, EBITDA reached NOK 986 million, NOK 44 million above 2021. Increased sales prices, positive net currency effects and a slightly improved product mix were the main reasons for the EBITDA improvement for the full year.

These effects were partly offset by substantial cost increases. The Q4 EBITDA margin of 15.9% was 7 percentage points below the margin in the fourth quarter of 2021. The lower margin was mainly due to reduced margin and volume for traded vanillin products. For the full year, the EBITDA margin was 24.3% compared with 27.2% in 2021.

In BioMaterials, operating revenues increased by 53% compared with the fourth quarter of 2021, mainly due to increased sales prices and positive currency effects. For the full year, operating revenues increased by 20%, mainly due to higher sales prices and positive net currency effects, partly offset by reduced sales volume for Specialty Cellulose.

EBITDA increased significantly in the quarter, NOK 238 million, NOK 111 million above the fourth quarter in 2021. The improvement was mainly due to higher sales prices, surcharges and net currency effects. Higher sales volume, a favorable product mix, higher production output, a shorter annual maintenance stock compared with the one in the fourth quarter of 2021 and lower maintenance costs contributed positively. However, raw material and energy costs increased.

For the full year, EBITDA increased to NOK 427 million, NOK 143 million above 2021. Increased sales prices, net currency effects, higher production and improved product mix were partly offset by lower sales volume and increased energy and raw material costs for this area.

The EBITDA margin also increased significantly in the fourth quarter to 22.3% compared with only 6.7% in the corresponding quarter in 2021. For the full year, the EBITDA margin reached 19%, close to 4 percentage points above 2021.

Increased sales prices and higher bioethanol deliveries resulted in a 19% increase in operating revenues in Fine Chemicals in the fourth quarter. For the full year, operating revenues increased by 29%. EBITDA reached NOK 67 million, NOK 45 million above the fourth quarter of 2021.

Fine Chemical Intermediates improved due to increased sales prices and a higher production output, partly offset by increased raw material costs. Both sales volume and sales prices were higher for bioethanol compared with the corresponding quarter in 2021.

For the full year, EBITDA reached NOK 230 million, more than 50% above 2021. Also, for the full year, the result for Fine Chemical Intermediates improved due to increased sales prices and a high production output, partly offset by increased costs.

For bioethanol, EBITDA for the full year improved due to increased sales prices and a higher sales volume, partly offset by increased costs. The net currency effect was positive for the full year in this area. The EBITDA margin was close to 40% in the fourth quarter, 20 percentage points above the corresponding quarter in 2021. For the full year, the EBITDA margin was 36.4%, close to 7 percentage points higher than in 2021.

The net currency impact was, as I said, positive by NOK 55 million compared with the fourth quarter of '21. The positive impact came from a weaker Norwegian kroner, which weakened by 12% compared with the corresponding quarter in 2021 using Borregaard's currency basket.

The impact from our weaker NOK was partly offset by increased hedging losses. Hedging losses in the quarter were NOK 34 million compared with a gain of NOK 6 million in the fourth quarter of 2021. For the full year, the net currency impact on EBITDA was positive by about NOK 195 million. Hedging losses were NOK 50 million compared with a loss of NOK 29 million in 2021.

Using currency rates as of yesterday, the net currency impact for the full year of 2023 is estimated to be positive by NOK 135 million compared with 2022. The corresponding impact for the first quarter is estimated to be about NOK 50 million compared with the first quarter of 2022.

Borregaard had a cash flow from operating activities of NOK 316 million in the fourth quarter. The cash flow in the quarter was positively affected by a strong EBITDA and a reduction in net working capital. For the full year, the cash flow from operating activities was NOK 738 million compared with NOK 1.431 billion in 2021.

The reduced cash flow for the year was mainly due to increased net working capital from higher inventory values, both volume and cost increases and from higher sales prices, which affected accounts receivable. The average net working capital of our operating revenues ratio ended at 20.3% for the full year, in line with our 20% target level.

Investments were NOK 212 million in the fourth quarter and NOK 464 million for the full year. The high investment level in the fourth quarter was mainly related to equipment installed during the annual maintenance stop in October. Expansion investments were NOK 105 million in 2022 and were mainly related to specialization projects within BioSolutions. Net interest-bearing debt decreased by NOK 158 million in the fourth quarter.

For the full year, net interest-bearing debt increased by NOK 419 million, mainly due to cost and price increases affecting net working capital. At the end of 2022, Borregaard is well capitalized with an equity ratio of 55% and a leverage ratio, which is net interest-bearing debt over EBITDA of 1.12.

And that concludes today's presentation. Per Sørlie and I will now be ready to answer any questions, both from the audience present here in Oslo and from those who follow the webcast. Our Investor Relations Director, Knut-Harald Bakke, will moderate the webcast questions.

[Knut-Harald Bakke, executive]

I'm happy to say that there are several questions through the webcast solution. First question from Fabian Jorgensen of Carnegie regarding dividend. Total dividend is down since 2021, with a fairly positive outlook for 2023. Why have you chosen the low end of your dividend policy?

[Per A Sorlie, executive]

Well, it's right in line with the dividend policy. In 2021, we gave an extraordinary dividend, which we have done on 2 occasions since we were listed. This year, we are keeping in line with the dividend policy, which is to give stable and increasing dividend and -- in between 30% and 50% of earnings per share.

This means that if you have result well above 15% return on capital employed, which we have this year, it should be in the range of 30% to 40% to be stable. If you have a -- below a 15% rate of return, you will typically dividend out 40% to 50% in order to secure stability over time.

So the increase in the ordinary dividend this year is NOK 0.50, up from NOK 2.75 last year to NOK 3.25 this year. So I think it's well within the stated policy.

[Knut-Harald Bakke, executive]

Thank you. Next question is from Andres Castanos-Mollor of Berenberg regarding synthetic vanillin trading. Could you please quantify the contribution of synthetic and ethyl vanillin trading to BioSolutions' revenues and EBITDA? Has it been dilutive to the division's EBITDA margins?

[Per A Sorlie, executive]

Well, I think the simple and straightforward answer is that if you look at the difference between the expected result in BioSolutions in the quarter and the reported result, it's more or less explained by this change. The change includes also a write-down of inventories. So it's both the realized trading margin in the quarter plus an adjustment of inventories. And in total, that explains the deviation in the business area.

[Knut-Harald Bakke, executive]

Next question from [ Adam ], an investor regarding biovanillin. Could you elaborate on the dynamics in price you see between biovanillin and synthetic vanillin? Are some customers more sticky and prefer biovanillin regardless of price, or are they, in general, very price sensitive?

[Per A Sorlie, executive]

Well, I mean, that's -- these are -- since 3, 4 years ago, these are 2 different market segments in practice. I mean most -- because the price difference between biovanillin or plant-based vanillin and synthetic oil-based vanillin is as much as -- can be as much as 3 to 4x. So there is a significant difference.

So either you buy biovanillin and preferred by biovanillin or you -- if you are a cost sensitive and can accept oil-based vanillin, you buy oil-based vanillin. For a while, if you go back 1, 1.5 years for a while, there was a lack of oil-based vanillin in the market.

So that's why we have said at different reporting incidents that the demand for biovanillin may have been affected by the lack of oil-based vanillin because if there is not enough oil-based vanillin in the market, I mean, then you will accept the price differential -- significant price differential just to get the biovanillin or vanilla flavor that you require. But in an ordinary normal situation, there are other reasons than price that makes the difference or the buying decision between oil-based and bio-based.

[Knut-Harald Bakke, executive]

Thank you. Next question from Niclas Gehin of DNB Markets regarding the environmental investment. Several questions here. Could you specify where the significant cost reduction potential comes from in the NOK 230 million investment?

Electricity prices are generally twice as high as natural gas prices on a euro per megawatt hour basis along the future curves today. Will you be able to switch energy sources more on a daily basis to take advantage of temporarily lower electricity prices? What are the energy sources that you say you will be able to switch between that you cannot already do today?

[Per A Sorlie, executive]

Okay. Just to start with the last one. As I mentioned in the presentation, we have certain equipment that is totally dependent on LNG at the moment. And I showed one example on the picture. It's the big spray dryer that we have in biopolymers, inside BioSolutions.

So there, we will go from having no flex to having full flex in this investment. And to say where the revenue comes from or where the savings, the cost reduction potential comes from, the -- it's twofold. It's from introducing flexibility between LNG and other end resources. That's the major part of the potential cost reduction.

The second part is energy conservation as I said. This is giving improved energy efficiency. So we will actually consume less energy after this investment. So that's one effect. And then I also said that the size of the potential cost reduction depends on the future price development between these flexible energy sources. And this new energy investment means that we will depend on energy from our boiler house and the boiler house is fully flexible between electricity, oil, light fuel oil and LNG.

And you can switch within hours if necessary. So there is full flexibility also in the short term to benefit from optimizing the cost.

Of course, the end game for this kind of an investment is to benefit from the reduced CO2 emissions, which means that in the longer term, depending on Borregaard's total need for energy, this will probably be fixed through a long-term energy contract for electricity. But in the short to medium term, you can use any energy source. Long answer to a long question.

[Knut-Harald Bakke, executive]

Yes. Very good. Thank you. Another question from Andres Castanos-Mollor of Berenberg regarding BioMaterials. In BioMaterials, you expect pricing in Q1 2023 in line with Q4 2022. Could you please describe the length of the contracts you have in place and when they are due to the reprice?

[Per A Sorlie, executive]

Okay. The historical practice in BioMaterials in Specialty Cellulose has been to have multiyear volume-based contracts with annual pricing discussions.

Typically, the length of the contract would be 3 years, on average, but like I said, with annual pricing discussions. And if you don't agree on the pricing, the product will -- the contract is not valid. I've been in Borregaard for 32 years, and I've never seen a case where we haven't agreed on the price. So that's really an exception that we haven't seen up to now.

Throughout the cost escalations that we saw last year, we went to biannual or quarterly discussions on the price because of the huge movements on the cost side. So that means when we say there is a rollover into the first quarter, it means that some contracts, there will be a discussion at the end of the first quarter.

Other contracts, there will be probably a discussion at the end of the first half. That's -- but until we get to a more normal situation, where I assume that we'll go back to annual pricing.

[Knut-Harald Bakke, executive]

Then we open up for questions from the physical audience. It seems like there are none, then we say thank you.

[Per A Sorlie, executive]

Okay. Thank you. Thank you for attention.