Corbion N.V. (CRBN) Earnings Call Transcript & Summary

Welcome to the Corbion Q1 2022 call on the 29th of April 2022. [Operator Instructions] Please note that this call will be recorded. I'd now like to hand the conference over to Jeroen van Harten, Investor Relations Director. Please go ahead, sir.

Thank you, Emma. Good morning, everyone. Welcome to the First Quarter 2022 Conference Call for Corbion. With us today are our CEO, Olivier Rigaud; and our CFO, Eddy Van Rhede. My name is Jeroen van Harten, Investor Relations. Just as a reminder, you can find a presentation on our website at www.corbion.com-investorrelations, where you can find backup slides. As usual, at the first quarter, Olivier will give a brief introduction, after which we'll open the lines for Q&A. And with that, I'd like to hand over to Olivier.

Thank you, Jeroen, and good morning, everyone. I'm happy to present Corbion Q1 2022 results. I think by now you've been able to have a look at our numbers and results announcement. One of the first things you probably noticed is the high-top line growth. This quarter was clearly driven by a successful and disciplined price increase round, which we had to implement after the huge cost inflation we faced last year. Even though there are still some lagging effects when it comes to implementing this level of price increases, we are making good step there. As you might recall, we switched most of our customers from annual to quarterly pricing so that any additional pricing actions can be implemented now much quicker than before. We are still seeing inflationary pressures in a variety of categories, but not at the rate we saw last year. Next to price increases, our biggest challenge is probably logistics as you can see all around. Getting everything in the right place at the right time is still a major challenge for many companies these days. But so far, our team have done an excellent job to keep the business continuity there. On the business side, the momentum is still strong with very solid project and innovation pipeline across our 3 BUs. Our expansion projects are all progressing according to our plans, being absolutely the construction of our new lactic acid plant in Thailand, but also the major debottleneck in our Blair operation in the U.S. Next to these 2, we're also making good progress to improve our algae fermentation plant in [indiscernible] to prepare for the next phase and our high specialty fulfillment expansion in our plant in Peoria in the United States. Looking at the remainder of 2022, we see a very healthy sales pipeline. As our prices are now catching up with the higher input cost, I think we can expect to see a significant step-up in our adjusted EBITDA for the year. And with that, I'd like to open the call for questions. Operator, back to you.

[Operator Instructions] The first question comes from Wim Hoste from KBC Securities.

Yes. A couple of questions. Maybe first on raw materials and energy. Can you maybe update us on, yes, how you see raw materials availability in general logistics issues? Do you expect that to come down? And maybe elaborating also a little bit on energy, can you explain us how your energy contracts are structured, how they are hedged, whether there will be any inflection points that might lead to cost increases from that angle? So that's the first bucket of questions. And the second one I would like to ask is on PLA. Can you maybe also elaborate a little bit on the offtake you were seeing and the uptake in top line momentum? Is that coming from existing customers? Are there new customers, new applications? Which one are driving the growth and also the pricing dynamics versus polystyrene, if you could update a little bit on that because in the last number of months, also polystyrene prices have increased and how you see PLA pricing momentum versus that? Those are my questions.

So Eddy will take up the first question and I will get the second thing.

So first of all, your question on the energy. First of all, energy is not our biggest input cost factor as such. Before that and we have very much covered by hedge contracts and you can imagine electricity, the kind of -- and these factors we are able to financially hedge them pretty much forward. So I would say energy volatility is not the biggest component in the exposure we have on all the variable costs as such. On raw materials, the availability, that depends a bit where we're looking at. So some of the markets are very deep for us, meaning easy access, think about sugar markets or corn, where we are based on the site in Nebraska. So there we do not have any availability issues. It is more in the smaller categories where indeed, every so often, we have tight situations where sometimes also some of the suppliers are playing force majeure on us. That is very often of a temporary nature, say 1 month or sometimes 2 months. By and large, so far we've been able to maintain and continue with our production processes as such show me they have not had a situation that already had to be deeply impacted, except maybe for the -- in most of our business, which we talked to in Q4 last year. There we did have a situation where that was already getting on a temporary basis quite disrupted at that stage.

So on the PLA momentum, basically as you've seen, we still have a very strong uptake. What we see in terms of dynamic is a continuation of some of the categories we decided to diversify to make sure we would prepare for, first of all, a different geographical spread as well as a wider category spread. So right now, when we look at the portfolio, it is quite well balanced in between reagent packaging, flexible packaging, but also very specific categories like battery or disposable items. Having said that, we've seen quite some shift in terms of consumption and demand, primarily related as well to the logistic impact you see globally. As an example, China used to be one of our large markets. And we see that our Chinese customers have been struggling to remain competitive to supply the global market. Hence, they lost market share to their U.S. or European competitors. And we've had, I mean, then to reorient some of the businesses from China to other regions. So that is a dynamic we've seen that is still playing as container rates are still very high. And this is a bit of the expense from Chinese producers and producers of various plastics to the benefit of U.S. or European ones. But we've not seen any changes in business momentum, still a very decent growth. As you've seen in members, the joint venture is still, let's say, growing very nicely and strongly. On pricing, what is important is that indeed, so far, we've been able to increase to a level that we are substantially above the $3,000 and even closer to $3,500. At the same time, we saw polystyrene price, back to your question, going up very, very strongly, we've seen even polystyrene price, I mean in the $3,000 range. That gives indeed, I mean, further room for us to continue to improve our pricing. But -- so we have to indeed manage that carefully because it's not a simple one-to-one substitution. It also depends on the functionality you bring. And to the premium, you can, of course, also afford from a category to another. The last part I want just to mention on PLA is that obviously we have received in the geographical spread. We are continuing investing in terms of application to diversify into these new categories, but also to prepare end-of-life options for clearly, whether it is through a compostability improvement or a recycling. And so when these are absolutely happening in also still a very unclear regulatory environment, we can see because there is yet no harmonization globally about what are the best end-of-life options for plastic and for bioplastics. But again, still very good momentum on the PLA front.

The next question comes from Mr. Patrick Roquas from Kepler.

The first one is on volume growth, both for Sustainable Food Solutions and Lactic Acid and Specialties. So in SFS, there was no volume growth while some of your peers commented that demand for preservation remains strong. So what should we expect for the remainder of the year for the volume of SFS? Then on Lactic Acid Specialties, you indicated in the presentation volume growth limited due to capacity constraints. I think this is not a new comment, but what you expect for the rest of the year. And as your new LA plant is up to start production mid-2023 I think, how much could it contribute next year? And then I have a question on PLA. So did I understand correctly that there was some pricing in Q2? How much was it? And how much do you expect it could be? And then your initiatives in Thailand seem on track. But the expansion in Europe, I can imagine, can be on hold given that prices for CapEx go through the roof. So how do you look at this? And what could it imply for the longer term, if you postpone expansion in Europe, both on LA and PLA?

Yes. Thank you, Patrick. So I will answer the number one and Eddy going to take the second question on PLA. So on volume growth, indeed, I mean, you've seen SFS was flattish. There is a number of reasons and that are not coming from primary business. Basically one thing about it is that if you look to the 3 key blocks we have in SFS, one is around functional systems, second is around preservation and the third is what we call order ingredients. What we have decided in terms of capacity constraints and also related to the Blair outage after that we had in Q4 was to, let's say, deprioritize the category we call other ingredients, which is also structurally less strategic and lower margin. So there is part of an impact that we've seen there primarily affecting the other ingredient subcategory. The rest, whether it is a functional systems or preservation, we still have a solid and encouraging growth rate there. So there is no specific worry on our SFS, let's say, growth momentum. Obviously, also as you know, when you go for such high level of price increase, our priority has not been to change the volume. I think for us the priority was indeed to just, I mean, go for pricing and margin recovery as well. And as a critical role in terms of discipline, getting this type of price through the system, it's, I mean, again not to go after volume. So on LAS, basically we have also some of the indirect consequence of the Blair aftermath as well there. But again, if we look to the critical let's say, categories we have being the pharma industry. We've had a very strong quarter, one of the best record ever quarter in our biomaterials business as well with a very strong recovery possibility as well as the electronics segment, where we see a very nice pool related to all the investments in semiconductors around the world. There as well, I mean, the growth is pretty good and the pipeline is very healthy in LAS. You mentioned a lot about debottlenecking. We are benefiting from what we've accomplished so far. If you remember, we had quite a sizable one in Thailand last year. And the next one is coming in Blair ahead of the Thai expansion. In Blair, we are investing as we speak and the commissioning of this big, big debottleneck is expected for the end of this year, so around November, December time line, and this is a well on plan to enable us to benefit from this additional capacity already from early '23. So this is what I can say about the business momentum and volume. Eddy, can you take the theory question?

Yes. So on PLA, so let's start with the PLA pricing. As you know, Patrick, the PLA price has seen a phenomenal ramp upward in the last 1.5 years, 2 years or so from levels of say more or less 2 levels to about $3.50 below. I will not say that in Q2 specifically, there has been major changes compared to the levels that we've seen before more recently. Of course, the PLA joint brand is always looking for ways to further optimize that don't pencil in any major governments there at this stage on average. When it comes to PLA 2 capacity in Europe, that's your other question. Yes, obviously, as per today, this is not the most friendly environment to do major massive CapEx outlays that is still pretty hard market circumstances when ell it comes to steel prices, contractor rates, freight rates, whatever you. So what we're looking at here is really to see how can we be disciplined on our CapEx outlays and that also means for PLA 2, that we will see how we can optimize the excess timing for such potential extension. Now as per today, we have not taken a final decision on that. Otherwise, we would have shared it with the markets, obviously.

[Operator Instructions] We'll go to our next question now from Robert Vos from ABN AMRO.

I have a few questions. The first one, it's about the comment on the front page of the press release. I think Olivier corrected this a little bit in the prepared remarks, but it's mentioned here that Corbion is on track to improve the absolute adjusted EBITDA for the year. At the first read, I thought it was slightly confusing you beat EBITDA expectations in Q1. And if I'm not mistaken, the comparison base will be a lot easier as the year progresses. Also, when looking at consensus, it's quite a bit ahead 23% of last year's EBITDA. So can you reassure me here, please? I think I heard you say in the prepared comments, a significant increase in adjusted EBITDA. That's my first question. Second, when looking at the mix between volume growth and price mix as organic growth, volume growth was a bit below what I had expected. What can you say in general about the negative volume impact from the price increase that you put through? Was there any impact in the quarter or is the volume as you reported them the volumes? Is it simply demand that is not impacted by the steep price increases that you put through? And related to this, you moved to quarterly contract structure, as you mentioned also in today's press release, what can you share about the first discussions in -- for Q2? And then lastly, I know that you do not specifically provide cash flow and balance sheet numbers in Q1. But can you perhaps provide some comments, maybe Eddy, on the development in financial leverage compared with the 2.6 that you reported at the end of last year. Those were my questions.

I will tackle the volume and the quarterly pricing and Eddy will come back on the EBITDA and the cash flow question. So on the volume and on the price mix, actually, if you look at the -- again, the price run we had late last year for Q1, the business losses have been very, very limited. If I think about what we lost because of price reasons, this is, I wouldn't say neglectable, but very minor. So the thing that happen is that we have to make some choices. I can give you an example as we are capacity constrained. We also were looking in terms of priority #1, restoring our margin to say, to do that mix improvement where we get better mixes -- so we decide, for instance, to let go higher volume category. One example is we are selling lactic acid into a brewery application in Latin America, as an example, which historically and traditionally, the differentiation in terms of functionality to acidify beer is not really one of the great functionality you can bring. That's quite basic. So these are businesses we decided to basically let go to even different alternatives than lactic acid to have more of the higher-end products that maybe are lower in volume, some derivatives that are, let's say, indeed, I mean, more longer-term sustainable and where we have a better margin. So this I mean, again, in the front of a volume dynamic could look like indeed as an impact, but it's very minor in terms of margin. So we've done a few of these adjustments on optimization. So that was one angle we took to favor the mix. The other, as we said, okay, following the Blair outage, we had to reorient and redo some volume at a time from a region to another. And this, of course, you won't be the current logistics turmoil shipping a container for instance, from time into the U.S. to help out Blair. In normal days, it would take a few weeks and now it has been up to 8 weeks or 10 weeks to some extent to reach the market. So this is what the new world is looking like on that. So -- but what we've seen again, if we look to the quarterly dynamic within the quarter, basically, the volume we missed early in the year because of the Blair consequences. In Jan and Feb, we're compensated in March and we saw a strong uptick by the end of the quarter in March. So not really specifically worried about that. On the quarterly pricing, as we told last time, we think we had a big first chunk in Q1. And we said last time we were preparing also the next round in Q2. Now usually, of course, we're now disclosing in more detail at that stage. Yes, we've had them another round in Q2 on pricing. So this is progressing as per our plans. And Eddy you can comment on the EBITDA and cash flow.

So on the EBITDA, indeed in the press release, we did not put any qualification of statement. So you have observed that rightly in all these commands. I can confirm indeed that as you could read it if you want to qualify a significant increase as an absolute amount that we talk about here. So that should give you some further background on that one. When it comes to the leverage. So yes, we came out of last year at 2.6%. We have shared in the guidance on earlier occasions, our CapEx program this year, EUR 230 million, so still we're cruising at. Also knowing that we have our cash dividend coming up once approved by the AGM in a few weeks' time from now. So we expect us to leverage up compared to the 2.6 million that we came out of last year. Our current visibility is for this year that we will be cruising over the year in the range of high 2s, low 3s in terms of leverage. So still comfortably away from the 3.75 million, which is, of course, the government level that we have.

[Operator Instructions] We now go to our next question from Patrick Roquas from Kepler.

Yes. Final question on the incubator. You confirmed to reach breakeven AlgaPrime DHA. But the loss increased in Q1. I know that Q1 tends to be a bit of a softer quarter. But what should we -- was there an exceptional and how big was it? And what should we expect with regard to pricing in view of, let's say, the relative price of fish oil and FX?

Let me start on absolute amounts. So yes, there was a small benefit last year, which we did not have this year. But maybe more importantly, it is the FX effect. So you probably noted that real, the Brazil currency appreciated a big time in the first quarter, about 50%, so that in itself, you're still running losses, of course, translate in a loss comparing last year. And on top of that, we also had a negative impact currency wise from a media valuation of debt acquisitions because we are invoicing in dollars, and we are collecting it and translated in the AI. So it's basically the currency impact that has caused this major deviation. If you would strip out for that, you will see a slight improvement even compared to last year. And then you're right, underlying business wise, Q1 is always the weaker quarter for this type of business -- with the quarters to come, so it's always coming in little stronger and gives us also confidence that we will break even for the DHA business in the industry. I think just to also add, Patrick, to this, the reason why also Q1 is in the lowest quarter for this algae business, one is on the, of course, a major salmon market, which is also traditionally not the highest quarter. The other is an internal reason where we have a major maintenance stop in the first part of the year related to the fact, as you know, we are sharing the site with a sugar mill from Guney, that is our supplier there. And we align our stock with their stock, maintenance stock. This is something that is probably the last year is going to happen as we are investing to be able to run in that month of January as from next year. Not to have that, let's say, obligation to have to stop in face with the sugar supply as well. So that's important because that effect would disappear from next year onwards. It's part of the investment we are doing during July, right now.

Just a quick follow-up. Salmon prices are also substantial year-on-year where price for fish I didn't track, but that must be supportive for you to pass on pricing in the rest of the year.

That's correct. We have already like in the other deals been able to increase our prices in Alga DHA. So -- and basically, the new contracts we've finalized and we are discussing are also at the premium prices. I think the future has been really also going up quite strongly. If you look now and again, it depends on the origin that you can find the fish oil price above $3,000, which historically, it has been fluctuating in a bandwidth of 1,500 to 3,000, but now it's really even above the high end. So this gives us indeed further confidence in our ability to pass on higher cost into this. More importantly, as well, now it's the first time we have also the opportunity, as we said last time, to diversify our customer base within the salmon aquaculture, but also moving into pet nutrition, which has a substantially higher margin as well. And again, we are feeling very confident as again, we've been able to also finalize new contracts, new major deals for '22 and even for 23 onwards. So that's also -- last time, we had a level of confidence. But in the meantime, we've seen very good delivery in terms of getting new contract on finalizing new contracts. And that's important also in the frame of the capacity expansion we are finalizing, as you know, by November, December or in -- will have completed its investment program.

Our next question comes from Fernand de Boer from Degroof Petercam.

It's Fernand de Boer, from Degroof Petercam. And I've actually -- maybe I've missed it because I was disconnected. But on the cost side, at the full year results, you gave an indication of cumulative 165. With the knowledge of today, is that more going to be, let's say, EUR 200 million and also somewhat coming through next year? That's the first question. And then the second one is on PLA. If I take your price of, let's say, 3,400 to $3,500 per tonne, then I arrive, let's say, a capacity utilization at this moment of around 80%, 85%. So the first question on this is, is that correct? And if so -- what holds you back from ramping it up earlier to the 100% as I think demand is there or is it simply a matter of price? And then maybe going back to the volume question in Sustainable Food Solutions. If I look at the retail space, food retailers at this moment are really trending at negative volumes. So in my view, it came in better than expected. What do you see there on the food retail side or is it compensated offset by a better out-of-home market, although that is relatively small for you?

So maybe Eddy, you can take the cost, and I will answer on the PLA.

Yes, we will get imports from that on the input cost on a by quarterly basis. So we will not do that every single quarter because this is a picture that develops and changes per day, as you can imagine. So in that sense, we will not give you a new information. So the 165 that was indeed the last position we gave a few months ago when we came out with the Q4 results. So I don't want to leave it at that for this stage.

Okay.

Fernand, just to make sure, your question about utilization rate, does it relates to PLA or algae?

No, but it relates -- PLA, you said...

No, no, I understood well, it was just a mean to be sure. So I think on PLA, we've been able to move indeed and you have to consider maybe without getting into technical discussion, we have the lactide step and the polymerization PLA step. So we now get this capacity buildup, making sure we have not only the final product clearly you see, but the lactide, which is the very critical step before where indeed we go from improvement to improvement because this is the part of the process that is the most critical. So you're right that we are -- I mean, we are getting pretty close in terms of run rate to run flat out when we consider these 2 elements. And as you know as well, in this type of plant, these are some still another technology that we are learning as we grow and move on. So there is constant debottleneck we have in mind and that we basically we see happening in the plant that gives you really room to get further without necessary to put huge CapEx, which is more plant optimization on that. On SFS, you're right. If you look at the retail, we see whether it is in Europe or in the U.S., some negative numbers or when you look at some key categories, whether it is meat, whether it is a bakery and a few others, some decline in end markets. But having said that, we see that we still have opportunities in terms of development so we still grow substantially. I'll give you a couple of examples. We're not doing more crisis, people are looking to formulate things differently. With 2 drivers. One is also to overcome some of the supply issues and availability issues. Take an example, if you see the shortage of vegetable oils, this is triggering very big shortage on emulsifiers, and we have developed some solutions to also replace emulsifiers. So still a very high-margin product, still growing very much on the back of substitution. Another example I can give you, which is driving a lot of growth right now in SFS is vital wheat gluten replacement. There is a massive shortage of wheat gluten for those strengthening. And we've developed enzyme cocktails, so very nice technical solutions that can replace up to 50% brutal in recipes. And there, we see also a very strong momentum in these fields that are driving growth in SFS. So you could have a look at the bakery category is declining or is indeed declining today. But our own sales are still, I mean, still very dynamic in a positive sense. So indeed, obviously difficult to assess what the future months are going to be. But if we look at our pipeline with this type of reformulation, it's pretty healthy. Absolutely, of course, we cannot speculate on any wider recession at that stage, we just done move. But when I look at the pipe in SFS, whether it is on the substitution reformulation related to the crisis or if I look to the new launches we've made last time we discussed about, for instance, natural mold inhibitors and new antimicrobial solutions with a primary antioxidant that we've launched recently. We see a very nice continuation of growth there. Hope that answers your question, Fernand.

Absolutely. I had one follow-up, if I may. Moving to this quarterly pricing from negotiations could also mean that if inflation turns out to be deflation maybe next year or somewhat later in the year, how strong are you then to maintain your current pricing levels? Or we also -- it's fanatic...

No, but you're right. You can imagine, we are also looking at that in detail. In terms of stickiness, I would say, of course, there is no right answer, but it depends on the end market and where we have a high degree of differentiation. So obviously, the more basic QR, if you sell pure lactic acid, the stickiness is going to be low. Now I think one of the strength of Corbion this is the ongoing push we have is that up to 70% of our production is through derivatives. And I think this is the strength of Corbion. I mean, you know actually that the pricing power we demonstrated this quarter for me is primarily related to the fact that you really sell 70% through as derivatives and not as pure lactic. And so the aim is to continue to push that. Difficult to give you a stickiness number because there is nothing scientific about it. But I think if you think about derivatives, 70% of our business, there is stickiness there. To which extent yes, I mean that I cannot tell you. But I think we don't be able to protect some of it.

Mr. Rigaud, there are no more questions. Please continue with any points you wish to raise.

Okay. So thank you all for attending today. And I think the next, of course, opportunity will be for the half year results. So I wish you all have been a very good end of the day and a good weekend anticipation. Bye-bye, everyone.

Thank you. Bye-bye.

Thank you. This concludes the Corbion Q1 2022 call on the 29th of April 2022. Thank you for listening. You may now disconnect.