Verbio SE (VBK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome, and thank you for joining VERBIO's Publication of Interim Report 1 Half Year 2020/2021 Conference Call. [Operator Instructions] The presentation will be followed by a question-and-answer session. [Operator Instructions] And I would now like to turn the conference over to Chief Executive Officer, Mr. Claus Sauter. Please go ahead.

Thank you very much, Haley. Welcome, ladies and gentlemen, for the Analysts' Conference Call for VERBIO for the Interim Report for the First Half of the Business Year 2020/2021. So we prepared a presentation. First of all, I would like to talk about the performance of the last 6 months. So the group sales for the first half of the business year increased by 10% compared to the previous year period due to higher production and sales volumes. The higher production is mainly coming from the biodiesel production based on our plant in Canada. The sales are higher, among other things, due to this production and higher prices for bioethanol. The Other segment, primarily sales for transport and logistic services. So the sales went up to EUR 479 million compared with EUR 437 million the previous year. The operating cash flow was primarily affected by higher profits for the period and by the reduction in trade receivables. Cash outflows for property, plant and equipment were EUR 32 million compared with EUR 43 million in the previous period. So the EBITDA went up by nearly 50% from EUR 53.9 million to EUR 80.4 million, which is quite significant. And also the EBIT increased by 62.9%. The margins, what you can see on Slide 7 is, the green Balkan is the production in biodiesel and ethanol. And as I said, the volumes increased mainly of the biodiesel production in Canada. And also the production in biomethane went up significantly. We have there an ongoing increase, and this we will continue for the biomethane production. And where I want to focus most is the EBITDA margin. The EBITDA margin was benefiting from comparatively high sales prices for ethanol and also improved environment for biomethane sales. So with 13.6%, we have the highest margin ever for a half year report. Now let's look on the segment. Biodiesel production went up by 9.3%, the sales by 11.4%. And also the EBITDA was steadily increasing despite the fact that Canada is not making money right now. So once again, it was possible to increase the sales and the EBITDA. And the production capacity utilization for Biodiesel Germany remains high. Production increase is primarily due to the higher utilization for biodiesel plant in Canada. The amount of biodiesel what we were producing was 307,230 tonnes. EBITDA went up to EUR 27 million. And here, we have no nonrecurring effects in this period as, for example, in the first half of 2018-2019, where there was the effect of low water levels in Rhine. But you see that our EBITDA even in difficult environmental situation is continuously improving. So we have a stable, continuous growth in the segment. Bioethanol and biomethane, EBITDA primarily affected by higher bioethanol margins, which were the highest margins for ethanol production ever. The cost of raw materials for grain generally were constant compared to the previous year period. We have a light fall in capacity utilization in bioethanol production. It is minus 2.8% compared to the first half of 2019/2020, and that was due to lower demand in the transport sector. Gasoline is mainly used in cars, and this was due to the COVID-19 situation. For biomethane, we have a further increase of 9.9% in biomethane production compared to the previous year. And this was mainly affected by improving yields and improvement in the utilization of the existing plants. No additional capacity was coming online during the first half of 2020/2021. Now let's have a look on the current projects, and I would like to say this is the most important slide. So at the moment, we have the implementation -- in Germany, we have the implementation of the RED II in national law. And here, Germany lies ahead of current planning. And now let's have a look on some details. So the greenhouse gas quota, which was 6% in 2020, is going to increase in the transport segment up to 22%-plus by 2030. And here is the significant change. Till 2020, there was no double or triple counting for any greenhouse gas savings in the system. And for the new period until 2030, there will be multiple credits for special kinds of biofuels. For example, advanced biofuels, there is a relatively -- or still relatively low obligation target for advanced biofuels for the obligated parties. But if these low target is overfulfilled for the obligated parties, these amounts of biofuels -- of advanced biofuels are counting double for their quota. Anyway, the sub-quota regarding Appendix IX Part A, which is the appendix for advanced biofuels, advanced biofuels are biofuels made from waste and residues and residues like straw, manure and other agriculture residues. And these sub-quota will increase until 2030 to 2.6% energetic. There will be a cap for biofuels from cultivated biomass, from biofuels from food feedstocks by 4.4%. And electricity in a -- in e-mobility will count triple to the greenhouse gas quota. Anyway, this contribution will be limited because, right now, the overall electricity mix, which has bad greenhouse gas reduction still now because of the high amount of electricity coming from coal, so the contribution will be not so significant. But it will increase over the years with a higher contribution of renewable energy. Next point, cessation of credits for fossil natural gas from January 1, 2022. This is a very significant point. Germany is the only country worldwide where fossil natural gas and fossil liquefied petroleum gas is counting for the greenhouse gas quota. And there will be a cessation from January 1, 2022. And this will improve the margins from biomethane by about 20% to 25% because from January 2022 onwards, quotas from fossil natural gas are not counting for the quota anymore. Also, additional subsidy programs, especially for heavy-duty vehicles, are coming onstream. So there is a scrapping bonus for heavy-duty vehicles. The toll exemption for gas-powered heavy-duty vehicles in Germany is prolonged until the end of 2023, which is very important for the haulers, which gives them yearly advantage up to EUR 20,000 compared with the diesel heavy-duty vehicle because these natural gas-powered heavy-duty vehicles, there is no highway toll. And we are expecting -- or there are expectations of further EU rules for emission-based tolls. Since January 1, 2021, Germany has a CO2 tax. So apart from the normal energy tax for fossil fuels, we have a CO2 tax. And biofuels in general and also biomethane is exempted from this CO2 tax. This CO2 tax is EUR 25 per tonne of CO2 emission. It will increase until 2026 to EUR 60. And EUR 25 is approximately EUR 0.07 to EUR 0.09 per liter of gas oil or gasoline. We have a further strong growth due to bio-CNG and LNG trucks. And the Ministry of Economy released a new hydrogen strategy. And among this strategy, there will be additional subsidies, other things, the production of green hydrogen representing -- is representing an opportunity for our biomethane and potential industrial use. Biomethane is CH4. I mentioned this in the past 2 years a few times. Biomethane is CH4. And if today hydrogen is needed for chemical or industrial applications, then it's done by natural gas, by CH4. So you take CH4, you remove the C molecule, and then you have hydrogen. So this hydrogen strategy will open us for the future new applications outside the transport sector, new applications in industries like chemistry, steel industry or cement. So this is quite significant for us and will create new markets for renewable, advanced biomethane. The actual RED II implementation is based on the RED II which was disclosed in 2018 and what -- which was based on the EU target for 40% CO2 reduction. Recently, we had the decision from the European Union that they want to go from 40% to 55%. So the increase in the EU climate target from 40% to 55% will create RED III. So in the next 2 years, we will see additional higher targets to be able to fulfill the 55% greenhouse gas reduction in transport until 2030. So RED II is significant for the development of our business. But also this 22% by 2030 is not the last target for 2030. It has to go higher. Also in the U.S., U.S.A. power handover and rejoining of the Paris Climate Accord is -- affected our business, so we also expect for the United States further increase in biofuel obligations, especially the part of cellulosic biofuels, where we are targeting with our actual investment. The RIN price, the price for cellulosic biofuel, went up from $0.55 per gallon in 2019 to $2.70 right now. So this is significantly and is a perfect environment for starting up our production. So in autumn 2021, we are going to start up our straw biomethane plant in the United States and in India. Where we are standing, in Germany, we are expanding right now our biorefinery at Pinnow. The actual capacity was 10 megawatts, and we are going to double this capacity to 20 megawatt. Here on the slide you see a picture from November. So the new digesters are already commissioned. So the plan is also to start up this production till the end of 2021. We also moved forward transferring our heavy-duty vehicle fleet, our truck fleet, from diesel to CNG and also LNG trucks. So recently, we got new 20 Scania trucks. They are right now CNG trucks. And in 2 months, we are getting our first bio-LNG trucks. Until the end of 2021, our whole fleet of approximately 80 trucks will be transferred to bio-CNG and bio-LNG vehicles. On Slide 18, this is the construction progress of our 20-megawatt biomethane plant in Punjab, India. This picture is from January, so quite actual. So there, you can see our 8 digesters. And in the background already the first stocks for rice and wheat straw as the feedstock for our biomethane production. The biomethane will be sold at filling stations. In India, we have a partnership with IOCL, which is the biggest Indian oil company. On Slide 19, also the 8 digesters in Nevada, Iowa are finished. Right now, we are building the next 8 digesters. As I said, in autumn, we will start -- we will first start up biomethane production based on corn stover, based on corn straw. And we are going until the end of 2022 to finish the ethanol plant and to be also able to make biomethane, to make renewable natural gas from corn stillage. So here in Iowa, in Nevada, Iowa, we are realizing our fully biorefinery concept what we have in Schwedt in our flagship. Finally, I come to the outlook for the next 6 months. Plant utilization for the second half of the business year, we expect good utilization for the German operations and increasing utilization for biodiesel in Canada. And we are going to start our first technical improvements or, let's say, significant improvements for our biodiesel plant in Canada to be able to compete the market and to realize margins what we are familiar with in our German productions. The market margins for the next 6 months for biodiesel, we expect good margins over average compared with the former years. For ethanol, ethanol is very much depending on the further development of COVID-19. But right now, we are expecting average margins for the next 6 months with some hope of improved margins like we saw in the first half year. But as I said, everything here in ethanol is very much dependent on COVID-19. The CapEx for the financial year overall is about EUR 85 million. So for the first half, we realized EUR 31.6 million invested in cash. So there will be another EUR 50 million in the second half of the business year. We have still our guidance. The guidance is still open. So the EBITDA for the whole business year, we expect at approximately EUR 130 million. And the net cash at the end of the business year, so June 2021, will be at approximately EUR 50 million. So thank you very much, ladies and gentlemen, for your attention. And now I am open for your question. So Haley, please overtake and ask for the questions.

[Operator Instructions] And the first question comes from the line of Florian Pfeilschifter of Stifel Europe.

Claus, I have a couple of questions. And the first one is on the bioethanol segment. And I was wondering, due to the "weaker" result in the second quarter, at least to what I expected, was there a decline in greenhouse gas emission quota demand in the second quarter, hence that certificate prices decline or did you stock certificates for later use? Or was it rather decline at the bioethanol product that caused the decline in overall margins quarter-over-quarter compared to the first quarter this year?

Okay. Thank you, Florian. Well, it's a combination. Mainly it's caused by the drop of the ethanol prices. We came down from EUR 800 per cubic meter, below EUR 500 in December, so it was quite a significant decrease. And on the other hand, also lower demand from the oil companies because there is a lower demand in gasoline. So as I said, ethanol is very much dependent on the further development of COVID. It's based on gasoline consumption, which is mainly cars. And with the lockdown, people are not driving so much. Completely different picture in biodiesel. Biodiesel margins are very good and very stable because industry production continued and all the value chain, logistic, trucking is not very much affected by COVID-19. But ethanol is weaker than also we expected, but it is mainly driven by the decline in the oil price -- in the ethanol prices.

Okay. So the demand for the certificates you are selling for the biomethane business was rather stable?

Yes, it was -- sorry, the demand for?

The certificates you're selling for the biomethane.

Yes, yes, yes. Okay. But -- yes, stable. Also here, the prices came down a little bit. 2021 is very much affected now, what really is coming out from the legislation. And when the targets are really ambitious and -- the final decision in the implementation of the RED II is not done right now, so a lot of also politicians ask for higher quotas in 2022, 2023. So especially the obligated parties, the mineral or oil companies are looking very much how they are able and what will really be the target for 2022, 2023, so the next 1 to 2 years. And this is affecting, for sure, also the prices for the CO2 reduction. Right now, we are around EUR 270 to EUR 300 per tonne of CO2 reduction. And in the summertime, we saw prices up to EUR 350, EUR 400. So also here was -- it was coming slightly down, but this has not such a big effect on the business. Especially the decline in ethanol prices, this was significant, from EUR 800, below EUR 500, which is 60% coming down, this is extreme.

Sure. Another follow-up question then on the quota you were just mentioning and how this will -- going to develop. Do you have any visibility besides the 22% by 2030, but do you have any visibility in the short to medium term? Or is this still in discussion? And is there any sign of increasing fines for quota breaches that could also drive the certificate prices in the future?

It will drive up the prices apart from higher quotas. And you know from -- coming from 6% going to 22% in the next 10 years is challenging. But what for us is the most important thing that the greenhouse gas quota for fossil natural gas will go away. And we are talking here, the value of this quota is about EUR 0.025 per kilowatt hour. And as I said when I made my presentation, for us, that this quota goes away will increase the prices for -- or the revenues and also the margins. But the final price will be increased by 25%. And this is significant for us. And that will make biomethane even more interesting like it is already. So this is -- especially for 2022, this will improve our margins for sure in this segment significantly. And yes, let's come back also to ethanol. This is a short-term situation. But on the long term, the focus on more biomethane as a fuel in transport, the fact that we will be not disturbed anymore by natural gas quotas and also the ambitious increase in greenhouse gas quotas for the next years, this is a situation where we were waiting 15 years, 15 years, nothing happened. So it will improve our margins. And it gives us also the possibility now to invest in new capacities, also in Europe.

But there's nothing decided yet whether the margin will be, let's say, 12% by 2025, so this is still under review?

Sorry. What's -- no, no, no, finally -- no, no, no, nothing is finally decided where the quota will be. There is just -- there is, let's say, a pathway from 2022 till 2030, but the first years are not very ambitious. And how is -- how are the next steps for this legislation? Yesterday, there was a decision in the Cabinet. And there is a draft, and this draft passed the Cabinet. But now this draft goes -- we are a federal company -- we are a federal country, so this draft goes now to Bundesrat. And what we hear is that a lot of countries are not satisfied, especially with the start-up of the increase of the quotas because it is a challenging target until 2030. And most of it is done the last 2, 3 years, so from 2028 until 2030. And at least that makes no sense. So we expect that especially for 2022, 2023 until 2025, 2026, in this period, we will see an increase. And even 1% more every year will drive the demand dramatically, is a big challenge. But nothing is decided yet. There is the draft, which is okay, but I expect something more in the first half of the decade. Okay. Maybe something just for the time line. Now at the end of February, it's going to Bundesrat. Then it will go back to the Parliament. So a final decision, really what is coming out that we have a legislation will not before May 2021.

And maybe 2 short last questions for now. The IPCEI for hydrogen, that is where you can file drafts by end of February, do you intend to participate here, would be my first question. And the second one, how much more expansion that is possible at existing sites in Germany? So you do the Pinnow expansion this year. And how much beyond that is possible at German sites?

Right now, we are not joining the EPCI (sic) [ IPCEI ]. EPCI (sic) [ IPCEI ] is mainly focused on renewable hydrogen based on electrolysis. We have a different way. We want to do it by our advanced renewable methane, by the way, which is much cheaper and much more robust than electrolysis hydrogen. And at the moment, it is -- nobody really knows how this renewable hydrogen has to be produced. Is it necessary to take pure renewable electricity? Or is it possible to take electricity from the grid with a relatively bad greenhouse gas balance? The electricity right now in our grid is about 140 grams CO2 equivalent per megajoule to compare with 95 for diesel. So at least the greenhouse gas balance of our grid electricity is 50% worse than diesel. So here is a lot of political influence, not economical influence. There are some industrial strategies. And my feeling is that they just want to start up this electrolysis industry. They are searching for business cases. Transport is a business case, but yes, it's not the most economical. So it's a question of time. So IPCEI makes for us no sense. As I said, electrolysis is not our business. We are coming from the biomass. And at least we are able to supply renewable hydrogen, and we can do it more robust and more stable like electrolysis hydrogen. To come to your second part of the question, there is still space for increasing production in the PCK refinery. I think we are able to double the capacity there. But then it's the end because we need to have the biomass. And when we are focusing on straw, it's not possible to transport it over far distances. The costs are too high. So what we are doing is we are searching out for new locations, new sites in rural areas, where is intensive agriculture and where is intensive -- where is a surplus of agriculture residues like straw, like manure, like things like this, agriculture residues. But we have to reach out for new sites.

The next question is from Alina Koehler of H&A.

I actually have 2. One would also be on the biomethane business. So the utilization and production came down a little bit in Q2. Is this due to the effect of carryovers of CO2 reduction of the oil companies? Or what's this about? And what can we expect for the rest of the year in terms of volume?

Okay. You are talking about the second quarter? Not the whole half year?

Yes.

Because in the whole half year, we produced more. Yes, we increased. And the overall production was higher also in the second quarter. What we did now is the utilization went a little bit down because we -- our capacity went up to 900 megawatts -- 900 gigawatt hours. So we did some debottlenecking. So it went up overall. But especially when we are -- when we have less ethanol production because of less demand, then we also see a decrease in methane production because not all the biomethane is made from straw. The lion's share is still made from spillage, okay? So because of this, it came down a little bit. But as I said, in the PCK refinery, there is still place for...

Scope. Okay, understood.

What was the second part of your question? I answered everything?

Well, yes, what do you expect for the remainder of the year? But you basically said that bioethanol is going to go up, then we will also see this...

Going to go up, yes. And so as I said, the plan now is, I think it was 750, 780 gigawatt hours for the last year. And now we set the target higher. We will be able, with the same equipment, to go up to 900 megawatts -- gigawatt hour, 900 gigawatt hours.

Right. And then I do have a second question. And I just want some clarification here. Because you said that if natural gas is not counted towards the GHG quota anymore, prices will increase by 20%. And then you also mentioned a number of EUR 0.025 per kilowatt hour. Is this the price increase that you expect?

EUR 0.025 would be even more like 20%. So yes, this is the space at the moment. The value of the greenhouse gas ticket coming from fossil natural gas is approximately EUR 0.025. And this -- and if we are going today to natural gas filling stations, yes, we have to give them this EUR 0.025, that they are moving from natural gas to our biomethane. And this is what I mean that I don't expect that all the EUR 0.025 will go out in our pocket, but at least, I expect that the final price for biomethane will go up by 20%.

Okay. And EUR 0.025 will be more than 20%.

Yes. So I expect that between EUR 0.015 to EUR 0.02 per kilowatt hour, we will be able to increase our prices. And this is full margin.

And what's the average price you're selling it now? Is it around EUR 0.09?

The average price is below. It's about EUR 0.075 overall.

But that's also because you're selling 50% to the grid?

Yes, not to the grid, to other applications. It's lower, it's already lower, but there's still 40% going to other applications, which are not transport, which are not transport.

All right. And one last question. So if one...

And just to make this clear, with -- we will see higher prices for biomethane, and we will see the focus more on advanced biomethane. There is a lot of biomethane production, especially in Germany, but most of this gas is produced by mice. And this is not an advanced biofuel. So for this kind of biomethane, you cannot achieve the double counting beyond the quota. So the focus will be more on advanced. And the attractivity for using biomethane -- advanced biomethane at the filling station instead of natural gas will improve significantly. But this is from January 2022. So it's not disappearing for 2021, it's still the same regime like in 2020. But from January 2022, this will disappear. And this is significant for the business.