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

Ladies and gentlemen, thank you for standing by, and welcome to Corbin Q3 Results 2022. The first speaker to hand over is to Jeroen van Harten. I would now like to hand the conference over to Jeroen van Harten, Investor Relations Director. Please go ahead, sir.

Yes. Good morning, everyone. Welcome to the Corbion Q3 2022 call. With us today are Olivier Rigaud, our CEO; Eddy van Rhede van der Kloot, our CFO; and my name is Jeroen van Harten, Head of IR. As usual, for our third quarter call, Olivier will start with a short introduction on the numbers, after which we'll move pretty quickly into Q&A. One other point. On December 1, we will have our Capital Markets Day. You will hopefully receive a registration link shortly for that. So we really hope to welcome you all for that event. So again, December 1 in Amsterdam. And with that, I'd like to hand over with -- to Olivier. Olivier?

Thank you, Jeroen, and good morning, everyone. So I think you've had a chance to have a look at our Q3 results. And as you probably saw, our 3 BUs line are performing well. The necessary price increases that we implemented are clearly having a positive effect on both our top line and EBITDA recovery. In the Sustainable Food Solution, the volume and mix combination continued at around 4% to 4.5%, the same rate we saw in the first half of this year. We see a continued strong momentum in natural preservation and then to microbial solutions. And on the Functional Systems, actually, we see an acceleration in reformulation projects to help our customers to first mitigate inflation impact, but also address some of the raw material shortages. And sometimes, this is not helping volume. However, these are high margin. You can take a quick example on gluten reformulation we are doing with enzymes that is really helping nicely the growth we have in Sustainable Food Solutions. In the Lactic Acid & Specialties division, volumes were obsolete down due to the reset we had to do in deliveries to the PLA joint venture. But if you look at the other business lines in this division, they grew quite nicely when you look at volume and mix and particularly the high growth we have in our medical polymer division. This is a very encouraging pattern. As we flagged earlier, PLA is clearly going through a slowdown, mainly in China as the lockdown are impacting us, but also related to the high energy prices we see in Europe, and this is impacting the market negatively. However, we remain strong believers in the PLA value proposition and are working really hard in the reinvigoration of the sales pipeline and enhanced application reach. You might have seen over the last days, a couple of press release related to this FDA approval of PLA-based face masks, but also recycled PLA range that we've just launched early this week. Within the Incubator, we saw our omega-3 again coming in at a very high growth rate, and that is also reflected in the higher EBITDA contribution from that product line. Our omega-3 product is now being considered the key ingredient by the aquaculture industry, so you can understand that we are working hard to unlock more production capacity from our Brazilian plant. Expansion being completed as we speak, and that will bring strong benefits as from 2023. Now for the outlook. We are keeping the earlier P&L outlook in place, and that means that as a positive consequence, we should be seeing the leverage ratios coming down by year-end. And with that, I'd like to open the lines for Q&A. Operator, back to you.

[Operator Instructions]. And the first question from Patrick Roquas from Kepler Cheuvreux.

Couple of questions. The first one is on the non-core, which had an excellent third quarter. So how long do you expect -- what are your expectations for Q4 and 2023? Is it sustainable in 2023? Then second, on the leverage ratio, kind of indication what kind of level you expect it to fall back by year-end? And then on PLA, is it true that once China lockdowns are over, and we enter in kind of a normalized level of raw mats, energy prices, et cetera, would you expect the growth in PLA to resume?

Thank you, Patrick. So I will take the question on emulsifier and on the PLA, and Eddy will answer on the leverage. So basically, on the non-core, yes, indeed, I mean, we've seen a sustained performance delivery, and we expect this to continue over Q4. To your question, is that sustainable for '23. Obviously, I think we are working and we are running these operations really at higher level of capacity occupation. However, a lot will and is depending on the input cost and how, of course, these vegetable oils, which is the primary raw material we are using in that business will develop and how do you cover these things. But we do not see any, let's say, big changes in the pattern over the next quarters on this non-core business. On the PLA and China lockdown, yes, this is still, of course, today, very volatile. And basically, on the PLA performance, China was a large part of our sales and still is so far, above the 30% of our business in total. So this is what is impacting us today in the second half of this year. When we look at what happened in China, a lot of the initiatives were also frozen waiting for the Party Congress to be completed on October 16 to give further guidance on the packaging strategy and primarily based on bio-based packaging. We are still waiting, I mean, for further guidance from the Chinese government on how this is going to develop and spell out. However, what we see is that in China, still the situation is very uncertain as we speak. So difficult to give you some headlight on how China is going to develop at that point in time. What we are doing on PLA, I think is now really working very hard on our sales pipeline. So - and when I mean sales pipeline, we are working on a few major initiatives. One is, first of all, to improve the application reach. And when I just gave a couple of examples, we are working on some very promising categories. I'm thinking about non-woven, if you think about categories like tea bags, if you think about categories like coffee capsule. But also, we are working on durable goods, where PLA can bring also a better functionality than fossil-based alternative, if you think about resistance. At the same time, we have also reenergized, and that's already in place since Q3, our go-to-market organization. We've increased our feet on the ground as a customer touching points when I speak about sales, business development and marketing with a 40% over the last quarter. And these are new resources that come into play to also increase customer contracts and customer contact points. Last but not least, as you know, we are partnering with a TotalEnergies in that venture, and TotalEnergies is today the #2 player in polymer market. And we are leveraging their application centers. They have 2 major application centers, one in Houston in U.S. and one in Feluy here in Europe, Belgium, where they have capabilities to help out formulate really PLA in more categories and more applications. So right now, we are full steam on just enhancing our pipeline to deliver new business leads over the next quarters. Eddy, maybe you want to take the leverage question.

Yes. On the leverage, Patrick, so I want to reconfirm what we've also shared based on the Q2 call that we had, that we will end the year with a better ratio than the 3.3% that we ended with as per the June position. The biggest contributor in that improvement will be, of course, our EBITDA delivery. You may remember that Q4 2021 was a really soft quarter in terms of EBITDA delivery. And this year, if you see the pace that we're closing at, will turn out much higher EBITDA delivery, and thus, you get a better ratio. At the same time, we're also, of course, actively working on managing on all the other levers that we have that we can influence in terms of this rate of development. Think about disciplined CapEx program, the working capital components that will all together give us a better outcome by the end of the year.

We are now taking our next question, and the next question from Sebastian Bray from Berenberg.

I would have 2, please. The first is on the Incubator segment. Could you give any idea of the level of non-Algae costs currently sitting in on that business on a run rate basis? Is it EUR 10 million, EUR 15 million or higher than that? The profitability has improved quite a bit. And I'm just wondering what is this other cost? And secondly, questions on interest and financing. At current benchmark interest rates, what would you expect the annual interest cost to be in 2023? And can you remind me if there is any refinancing event due to come up in that year?

Okay. I think I'll take both questions. So on the Incubator, indeed, your first figure is pretty much close to what you can see as the run rate costs as the investments we're making in the Incubator outside of the DHA Omega-3 play. So that's around the EUR 10 million ballpark figure that you're referring to. On interest rates, the first refinancing is in 2025, so still quite some years ahead. And the interest rate question, I will come back to that by the year-end figures perhaps later today.

The next question from Frank de Boer from Degroof Petercam.

It's actually Fernand de Boer, Frank de Boer [indiscernible] from the Degroof Petercam. I have 3 questions, if I may. First one on sustainable solutions. You see actually volumes declining to now more than 4% negative, is that marked, because you also mentioned that you have solutions in place, which are actually seeing good demand. So how is it working? That's the first question. Then on to come back on the leverage ratio. I can understand that the second half is going to be better. But I think, at least for me, the main worry is not the end of this year, but is first half of next year, with still a lot of CapEx coming up in the first half, the dividend payment, normally working capital outflow in the first half. So how does this look for the first half, let's say, end of June '23? And then I'm still a little bit puzzled about this PLA thing about new applications. I've been now looking at the company for many years. We have seen sites with a lot of applications possible for PLA. What made it that it takes so long to start looking at new kind of applications?

I think...

[indiscernible] is already there for a long time, et cetera. So they did already had the knowledge, we already saw dashboard of PLA materials a long period ago. So I'm a little bit puzzled about that.

I think so I will take that one. So starting with SFS first and your question on volume, and why do I feel pretty comfortable and optimistic when I look to SFS. Basically, this is not specifically a volume-driven business, so usually, we work on this functionality. And when I look to the way we develop, for instance, both in the natural preservation, but also [ functionalities ]. In natural preservation, we go to more sophisticated, what we call antimicrobial solution where sometime you could replace some bulky products by more paper and salt alternatives that's very high margin, which has better functionality. So we are not necessarily driving that on volume, and volume is not the most representative indicator there in preservation. This is usually in recipes incorporated at 0.1%, 0.2% in the final food metrics. So when you look to what is impacting primarily the volume decline in SFS over the last couple of quarters, is actually some proactive decision we've made to shed off some business, we mentioned, the brewery type of business in Latin America, which is the least differentiated business where you could use whatever organic acids in that category. So at that time, favoring a price increase and margin protection was a business we decide to drop proactively. So the same is valid on Functional Systems where I gave the example of dough conditioner that is a big business for us. When you replace a vital wheat gluten, which is today, first of all, unavailable and very expensive. We are coming with enzymes cocktails, so where you could blend 5, 6 different enzymes that are, again, more of a very low incorporation rate where you replace products that are more in hundreds of tons type of inclusion. So this is also something that we are developing very nicely, contributing also to margin improvement, but not showing huge volume impact or even sometimes negative volume consequences. So this is why if you look at the volume mix, basically, we see still in SFS, something, as I said, between 4.5%, yes, 4% over the last at least 6 to 3 quarters, and we are continuing the trend. So there is no decline or a negative trend on that on the opposite. So this is still very, very solid. Back to the PLA and new applications, a couple of comments. If you look at their -- to your question, why do you make it so long? Obviously, the key categories in flexible packaging or rigid packaging, this is the one primarily some of the flexible packaging low-end categories. When we started plastic bags are the one where PLA has been formulated together with other bioplastic as PHA or biodegradable alternatives like PBAT, although fossil-based as blend. And we've seen decline in this category based on the fact that both PBAT and PHA are on also severe slowdown for different reasons. PBAT because of high energy price in Europe, and that's primarily produced in Germany today by big players. And PHA in the U.S., where the feedstock is based on vegetable oils. And this has been facing also huge inflation next to availability issue. So when these 2 compounds are not available or have been not competitive, PLA has indirectly and directly suffered a lot from this. Now back to also what we released in H1 result. We came from a sold-out situation in PLA, where we unfortunately had to refuse, I mean, a lot of new development. We are in the phase of being hand-to-mouth on PLA due to suddenly this Chinese lockdown and inflation in energy prices are impacting us. So I have to say that we entered that with not the required pipeline, and this is what we are fixing now as we speak. But I'm not worried in terms of new application. If you think about the potential we can still see further in some categories where you can play on the fact that PLA has a very nice carbon footprint advantage on fossil-based alternatives. We see as well, polystyrene, which is the major competing product for us. Polystyrene is being formulated out for a number of reasons. The first one being that it is the most difficult plastic to be recycled and sorted out. So when we look at the upcoming trend on polystyrene replacement, we are feeling very optimistic that PLA is a great alternative to that. And this is the market we look at. Next to that, some applications are still growing very highly thinking about 3D printing or durable goods where we can also bring some functionality as carbon capture on durable goods, where I see also a long-term prospect for PLA. Now on leverage, Eddy, maybe you can take that over.

Yes. So especially your question related to the CapEx program. So first of all, I don't forget that this year is a very rich program in terms of CapEx outlays. I think, also we not only have the lactic acid new build in Thailand, but on top of that, we have also significant expansion programs in the food side in Peoria and then in the Algae business in Brazil. So both the Peoria investments or the natural ferments and the Algae investment will come to completion this year, while, of course, the lactic acid built in Thailand will continue into next year. But all in all, it means the CapEx program next year is going to be much lower than what you are seeing this year. So that being said, we do have real confidence that the ratio will not worsen compared to the June and December positions this year. So that will also be the case for the first half of next year.

You mean not deteriorating compared to June '23 compared to June '22?

Yes, it will be better than -- exactly, yes.