Verbio SE (VBK) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to today's earnings call of Verbio following the publication of the half year figures of 2023, 2024. The CEO, Claus Sauter; and the CFO, Olaf Troeber will speak in a moment and guide us through the presentation and the results. And, as always, we will move on to our Q&A session afterwards. So, with this, yes, let's jump straight into the presentation. Mr. Sauter, the stage is yours.

Thank you very much, Mrs. Mallock. Good afternoon, ladies and gentlemen. Good afternoon, everybody, and welcome to our earnings call for the first half year results from Verbio SE. I'm here with, Olaf Troeber, our CFO, and we will cover our first half year and the Q2 of our running fiscal year 2023, 2024. As always, we will also give you an update on what is new and what moves us forward for the rest of the business year. So, let me start an overview of our key figures in the first half. So, first, we are pleased that we were able to continue to deliver strong production volumes, especially in Europe. This shows that our processes are running smoothly and stable. Thanks to our technology, we can operate all year around setting us apart from competitors, especially in the biodiesel and HVO space. The bioethanol volume increase was mainly driven by the acquisition of South Bend Ethanol in Indiana. Despite the increase in volumes, group EBITDA for the first half reached close to EUR 75 million, down year-on-year from EUR 170 million. The main reasons therefore are, in the first half of last year, we still benefited from exceptional contribution of the biodiesel segment. We made more than EUR 90 million in the first quarter alone with our biodiesel, which was, of course, very beneficial cash-wise. But the flip side is that these are tough comparables that we have to compare ourselves to. Meanwhile, we are setting up for further growth, which led to EUR 20 million to EUR 30 million additional fixed costs year-on-year in the first 6 months alone, considering that our European operations still have to cover all the growth investments mainly in the United States and that we are facing short-term headwinds in the European biofuel market. The results are solid, in my view. Net debt came in at EUR 14 million, investments in growth projects of close to EUR 100 million weighed against our positive operating cash flow. Still, our equity ratio continues to be stable on a high level at 69.3%. Let me hand over now to Olaf for the detailed segments result. Olaf, go ahead, please.

Thank you, Claus, and a warm welcome also from my end. Now, let's look at the Q2 results in more detail. The chart shows the EBITDA bridge from Q2 '22, '23 to Q2 '23, '24, left to right. What stands out most is that the biodiesel segment has protected our earnings for all shown quarters here, including Q1 '23, '24. In the quarters that are not pictured, dynamics look quite the opposite, underpinning the beauty of our diverse product portfolio, as mentioned before. Overall, we posted an EBITDA of EUR 26 million in Q2 '23, '24, down from EUR 49 million in Q2 last year and sequentially. But let us dive a bit deeper and look at the key drivers. While we managed to grow our production year-on-year, sales came down by 30% year-on-year. The main reason for the sales development in the biodiesel segment were the lower biodiesel prices in Europe compared to the same quarter of the previous year. The price decline year-on-year was caused not only by lower feedstock prices, but also by allegedly incorrect declared biodiesel and HVO imports from China. Our EBITDA came in at approximately EUR 29 million, the attractive but still overall lower absolute product margin due to slightly lower sales volumes year-on-year was additionally burdened by the low greenhouse gas quota prices. Market spreads in that respect, biodiesel prices per tonne minus rapeseed oil prices per tonne are below previous year's spreads. Decline in biodiesel prices linked to a generally lower energy complex, mainly on the back of the overall lower economic activity and lower feedstock prices, as you see here from the chart. Bioethanol/Biomethane segment. Now let's move to the ethanol and RNG, altogether the Bioethanol segment. Volumes increased mainly thanks to the acquisition of South Bend Ethanol in May last year, but also further efficiency improvements here in Europe. With this, revenues are up despite lower ethanol sales prices in Europe. Product margins increased year-on-year, thanks to lower grain purchase prices. Improved margins could not be fully compensated for the burden of start-up costs for Verbio's growth projects in United States and adjustments in the valuation of inventories due to lower greenhouse gas quota prices. Spreads improved year-on-year due to more favorable grain prices. Average ethanol prices were below prices in the previous year. Decline in bioethanol prices throughout the quarter was linked to larger-than-expected imports of bioethanol recently, especially from Brazil. These volumes led to an increase in stocks and orders done. The result is a price drop of around 30%. Fossil crude oil and fossil products are currently too cheap to increase consumption of ethanol at gas stations in Brazil. Geopolitical tensions in the Middle East remain a significant risk factor for global oil supplies. Nevertheless, the effect on oil prices formation has so far been very limited. What is positive for the pricing, the production capacity for bioethanol is already being withdrawn from the market in Europe -- some of the production capacity. Nevertheless, the low greenhouse gas quota prices are slowing the recovery of bioethanol prices. Why? Because there is no need for oil majors to exploit the maximum plant walls for liquid biofuels. That means for biodiesel and bioethanol. Claus, I hand over to you.

Thank you very much. So, on this slide, Page 9, you can see the development of the quota prices from October 2022 to January 2024. You can see that we came from close to EUR 500 per tonne of CO2 savings down to EUR 100, EUR 150. This is a significant decline. It looks a little bit like a hangover after the very high prices at the end of 2022. So, in 2022 and 2023, the oil companies in Germany were able to create a buffer of approximately 6 million tonnes of CO2 savings through allegedly mislabeled biodiesel from China, which roughly correspondent to 30% of the saving targets to 2024. So, the phase out, and that we'll show in the next slide, the phaseout of likely fraudulent biodiesel imports from China and higher greenhouse gas saving targets will support quota prices. What does it mean? We see now after a decrease in imports from China on the one hand side. And, on the other side, especially in Germany and in other European countries in 2024 the biofuel obligations, the greenhouse gas reduction quota, especially in Germany, rose by 1.25%, which is about 1.6 million tonnes of additional CO2 savings, which are needed for 2024. So, on the one hand side, higher obligations on the one hand side, a significant decrease in imports. Potentially, we have there some short-term catalysts because the EU announced after they published their investigation that elimination of fraudulent quotas can be retrospectively possible. Our next slide. So, that chart shows how was the development of the biodiesel imports. So, in 2022-2022 (sic) [ 2022-2023 ], there were always imports, but the amount was in the average about 75,000 to 100,000 tonnes. It rose extremely by the end of 2022. And in January 2023, we had a hike at 250,000 tonnes per month. So, now when the anti-circumvention investigation in August started, especially from Hainan, an island in the Chinese Sea, these exports where we highly think that it was imported palm oil methyl ester from Indonesia, these export came down to 0. With this success of the European Biodiesel Board, who requested the investigation, now focuses on the second investigation because there was now a second investigation launched. It was published by the European Commission in December, an anti-dumping investigation, with provisional tariffs on Chinese biodiesels and these provisional tariffs we expect for July 2024. And, as I said before, there is also a chance that these provisional tariffs can be drawn retrospectively to the announcement back to December, 2023. So then, let's head over to our guidance. The guidance could or cut -- our guidance cut reflects short-term headwinds. So, in the last earnings call, I said that we expect for the second quarter to have a result at least at the same level as the first quarter, as the backwardation in ethanol continue to slide sideways. Instead, our EBITDA came down below Q1. And, as I explained earlier, bioethanol and greenhouse gas quota prices remain under pressure. I didn't expect that it takes longer. What we see now, actually, last weeks now, storage capacity or storage in Rotterdam, especially with ethanol, is coming down. And immediately, we see an increase in prices, but it took longer than we expected. Hence, we reduced our guidance for the running year. So, while in the short term, the market disruptions represent a burden. In the medium to long term, our strategy will have a positive impact on the company's success in view of increasing greenhouse gas quota obligations in Germany and growing global demand for green molecules. When I say market disruptions, just to give you a feeling, we were talking -- or we are talking about approximately 2 million tonnes of product coming from China. Not everything is fraudulent, but a significant share. And 96% of these exports from China are heading into Europe, 96%. So, speaking of the global demand or let's -- yes, the guidance is there, yes. Now, let's come to the next. In the U.S., there is no China fake biofuel. The reaction of EPA, the Environmental Protection Agency when they saw that there is, yes, some increase in imports, reacted very fast. So, if I'm speaking now about our investment in the United States, and here, you can see a picture of our plant in Nevada, the global demand of green molecules is still increasing. And, yes, we are facing big interest, especially on green renewable natural gas in Nevada. As you know -- and how we published it, the commissioning started at our Nevada plant at the end of 2023. And we said that we would expect more significant volumes from spring 2024 onwards. But during the commissioning phase, some quality issues were detected with the sulfur separation containers that were provided by American suppliers. And this is really a pity situation because we are producing nearly 2 years renewable natural gas at this location, feedstock is corn stover. So, all the equipment which is needed to produce and clean up renewable natural gas and feed it into the pipeline is already there. The only thing that was missing was the sulfur separation. And yes, we ordered that equipment, which is our own technology and our own engineering from an American company, and that was exactly the problem for the start-up. So, the last 2 months at minus 30 degree Celsius, we were not able to do something because we are dealing with liquids and at minus 30 degrees, this is really difficult. So, this week, with reasonable temperatures, we tried to fix this sulfur separation equipment. But parallel, we ordered already in January, the same equipment, what we are using in Germany. So, now, there are 2 possibilities. One is that we are able to fix the containers in the U.S. and that we will know during the next 2 weeks. Then we can continue our plan to start up the plant, and we will see the first amount in spring. If we have to wait on the import for the German equipment, it can take 2 months longer. So, we would see the first larger volumes in summer. So, we will keep you informed. Nevada has -- apart from stopping the fraudulent imports from China and, hopefully, reaction on the quota prices, Nevada has the biggest priority which is not only that we want to start the production there. It has also a strategic priority to show that we are able to do the same what we are doing in Germany to produce ethanol and renewable natural gas in one plant. Next slide. So, all of our strategic projects are progressing apart from the U.S. investment, strategic projects are our special chemicals and the groundbreaking ceremony for the specialty chemicals production facility in our German biodiesel plant in Bitterfeld, is expected for spring 2024. And we also expand our retail gas station network in Germany. To sum it up, while there are broader factors that may drive volatility in the markets, we remain focused on things that we can control. This includes operating our assets efficiently and maintaining capital discipline by responsibly investing in our growth projects. So, thank you very much, ladies and gentlemen, for your attention. And now, I want to hand over to Sarah Mallock to manage the Q&A session. Thank you very much.

Thank you so much, Mr. Sauter and Mr. Troeber for your kind presentation. So, we will now move on to our Q&A session in which you will be allowed to ask your question. [Operator Instructions] And we already received the first question from [ Tim ].

My question would be, could you elaborate on the cost headwinds that you talked about. I think you said EUR 20 million to EUR 30 million in the first half of the year, maybe I got that right, yes, could you give us a bit more detail? How much came from the inventory revaluation? How much came from the ramp-up in South Bend? And then also what you expect in the -- what kind of cost headwinds from these, do you expect in the second half of the fiscal year?

Yes. Olaf, would you take the first part of this question, especially about the EBITDA and then I take over about what we expect further?

Okay, yes. In line with the organic growth of Verbio, the first significant increase is with respect to the labor costs. As I recall it correct, alone in the first half of this financial year, costs increased by approximately EUR 10 million. The revaluation, as mentioned before, is approximately EUR 16 million with respect to the overall stocks and goods we have in storage for Verbio. So, it's altogether a small figure, but still a substantial figure. Claus, will you elaborate further on SPE or shall do I -- shall I go forward?

No, I'll take it over. So, the EUR 20 million to EUR 30 million, what you mentioned, [ Tim ], is correct. Some came from the down writing, as Olaf mentioned. On the other hand, our U.S. -- that is coming from the U.S. mainly, the EUR 20 million to EUR 30 million and 2 things which are important. The first thing is that the South Bend Ethanol plant is not performing like we expected. The idea is to do there also RNG production. But, anyway, we are able to run the plant in the existing setup that at least we are not losing money. But the plant was owned by a former trading company. So, absolutely, no technical know-how also with the team. So, yet we were not able to have continuous production because this is the first step. It's not only the combination with RNG, it's also our ability to run the plants differently like U.S. companies are doing it, but there are still always every month, some technical hiccups, let's say, stupid things, what we do not have in our German plants. And that causes production losses of 1 million, 2 million gallons every month, where we have no margin and related to our fixed cost position, we are losing money. So, why I don't think we are not facing this in the second half, first of all, the winter period is always difficult for ethanol production because there is no driving season in the U.S., margins are squeezed, and now we are heading into summer time, spring, summer, the driving season in the U.S. starts. Gasoline consumption goes up, ethanol demand goes up and usually also the margins. So, the combination is now we are heading into a better margin situation in the U.S., and we are doing progress in our technical fit-ups to ensure that we are coming up on a stable process near to nameplate capacity. Nameplate capacity right now is between 7 million and 8 million gallons per month, which is about 20,000 cubic meters, something like this, 15,000 to 20,000 cubic meters.

Okay. Maybe a follow-up. Now, you're starting to ramp Nevada, and you said you've been having some issues with the sulfur. Now, let's assume the ramp starts for real in summer, so the later date. And then how quickly do you think can you achieve a satisfactory utilization rate? I mean, how many months is that going to take? What is your plan in this regard?

Well, the plan was at least for commissioning, starting up and getting into full production, we usually take 1 year. So, that would mean we expected full utilization at the end of 2024. So, at least, we are now talking about 3 months, minimum more 3 to 6 months. That would mean nameplate capacity spring 2025 or summer 2025.

Okay. And my last question regarding your renewable natural gas. I mean, you disclosed your production, but is production equal to what you're selling in the market at the moment? Or are you keeping a lot in inventories, especially regarding the CO2 certificates?

Well, right now -- yes. Well, RNG volumes, let's say, we are in the market. We have some ideas where the quota prices should be. But just to give you a feeling, we are talking about approximately 450,000 tonnes of CO2 savings, approximately, and about 850 gigawatt hours of gas, what we have into the grid. So, with the gas, what we have in the grid with our growth in LNG filling stations, the plan is to decrease this volume to bring more molecules in the market. That would mean at the first step that our CO2 saving is growing because once it's in the filling station, we are realizing the CO2 savings. And our strategy to bring CO2 savings in the market is dependent on the further development. As I mentioned, during the presentation, if the EU is really considering to withdraw or let's say, to put there the anti-dumping duties on the volumes, which had it already into the EU, there would be some short-term impact. So, right now, we are observing the market and the development of the quotas. We see already a slow recovery because the volumes came down. But right now, it's not the right time to go with big volumes of CO2 savings into the market. The oil companies have to fulfill their 2023 obligation and to fix it until the end of March. So, let's see what is really additional demand in the market and what amount of quotas we can supply to obligated parties. But this is the status quo, approximately 450,000 tonnes of CO2 savings and 850 gigawatt hours of gas.

So, we will now move on with the questions from Niklas Yannik.

It's Niklas Becker from Deutsche Bank. A couple of questions from my side as well, please. Concerning your new guidance, could you please quantify the level of the spreads you foresee for H2? And also, have you made any changes to your quota assumptions, i.e., depending on where the price in China...

Just a second. You said the spreads as of H2. It's not hydrogen, it's the second half. Okay, sorry. Yes, okay, understood.

Yes. So, could you just clarify whether you've made any changes to your spread assumption for H2?

No. So, we were now calculating -- and I think you also see it now on the Q2 result, we are calculating with the actual CO2 prices with the forward curve on ethanol, which came already up a little bit the last days. And we expect that the spread for RME, Rapeseed Methyl Ester, will continue for the rest of the year, of the business year.

At what levels or what kind of spreads are you talking about?

Forward curve, the forward curve. Okay.

Okay, all right. That's very helpful. And then a question also regarding the quota. During Q2, how much volume of quotas have you actually sold? Can you just clarify that, please?

Actually, it's related to our contracts and we are not going to disclose.

And finally, we cannot do it. Let me explain. There is a standard CO2 saving for biodiesel and ethanol, which is about 65% compared to fossil fuels. So, the standard is 65%. But our contracts are different. We have contracts with 80%, with 90%, even with 110% CO2 savings. So, for example, we sell ethanol and we guarantee our customers that with the amount of ethanol, we are delivering 120% of CO2 savings. So, 110% of CO2 savings is not possible. And with the different -- and the CO2 efficiency of ethanol, the same with biodiesel is related to the CO2 freight what we are getting in with the feedstock, which is also permanently floating. So, that means we guarantee our customer 110% CO2 savings. Then we are making the calculation based on our feedstock because that is the highest contribution. And then we see how much additional volume we need to supply to our customer to ensure this 110%. So, I cannot tell you. What I can tell you is that we were not selling big volumes, CO2 savings really on the free market because this didn't happen yet. This is now happening until the end of March because now the oil companies are making their calculation, they look how much CO2 savings they have on their book. They have their expectation where it will go 2024, 2025. And then they ask us if we are able to contribute more CO2 savings and then it's a question of price. And it's not the right timing to ask this question. So, you should ask now after the Q3 call and then we can tell you, yes, how much we were selling at additional prices. But what I can also tell you is that, our price is what we are getting for the CO2 savings, which are linked to our liquid contracts are higher than the level what you have seen on the pure quota market. And don't ask me exactly the number because this, I cannot tell you, but it is significant.

Okay. Appreciate it. And then just one last question. Back in the first quarter, we also discussed about your contract fixing for the calendar year 2024, and you said that negotiations actually took longer than usually. I suppose they now have finally concluded. And I just have the question, could you clarify how much of the order volumes for 2024, you have fixed at certain prices? And how much of that is actually flowing?

Okay. First of all, we were able to fix all the amounts, the volumes, ethanol and biodiesel, what we wanted to fix. So, let's say, from this point, we are out-sold. But we have there still some amount available, but at least 90% is sold. So, the second point is, I don't want to tell you exactly the amounts, just for your feeling about 90% of the CO2 quotas, which we sold together with the liquids to the oil companies are at fixed prices, only less than about 10%, 11% are just variable prices. So, okay maybe there is some reason why you ask it, but that means that at least we have a good feeling with our guidance because what was possible to do at fixed prices, we did. And with now the -- what we see now, Chinese imports are going down, there is no arbitrage for ethanol from Brazil at these price levels, amounts of ethanol in Rotterdam are going back. So, we don't see at the moment that there will be, again, a significant impact from additional volumes, which are coming from somewhere. But it doesn't mean that we are 100% sure. I don't see where it should come at the moment. But if there is, again, let's say, a revival that China is going again up to 250,000 tonnes per month, that for sure, will impact the European biofuel business. But we saw the amounts coming down. We expect now that it will continue on that level. We see some short-term catalyst if it really has consequences of the amounts which we are heading already to Europe and the same with ethanol, where the lion's share at the moment is coming from Brazil or were coming from Brazil, okay? So continue, please.

[Operator Instructions] Thomas did this, so, his question goes around PCK Schwedt. So, what is your position on the future of the plant? And a follow-up question on that, Rosneft, how do you think -- or what is your opinion on the ownership change in March?

Thank you for that question. Maybe somebody saw the article in Handelsblad yesterday that was quite interesting that -- the article said that now the Ministry of Economy is preparing to overtake the share from Rosneft. That is a very interesting development from my point of view. That would mean that something -- it's the same happening like with Gazprom when -- in 2022, the German Ministry overtook the assets from Gazprom Germania. So, a lot of things are going on in Schwedt. Shell, but that was an open issue, wanted to sell and they sold the share to a British company, but for all transactions regarding oil and energy assets, an approval by the German Ministry of Economy and Climate Protection is necessary. So, right now, nothing happened regarding the shareholder structure in Schwedt. And that was always our position that we said. We have some ideas what we can do in Schwedt. But as long as there is no clarity about the shareholder structure and at least the shareholders, it doesn't make any sense to do some proposals or develop some ideas. And, saying that, I want to repeat that I was very much surprised about that article yesterday in Handelsblad. I cannot imagine that the German Ministry now, at this stage, will be successful to overtake the Rosneft share because we have now the 18 months the trusteeship from the ministry. So, the German Ministry of Economy is leading Rosneft Germany, and we didn't see any distortions in Schwedt and around Schwedt. There was always enough gas oil, gasoline, heating oil, the refinery, thanks to the actions of Rosneft Deutschland was able at least to run the plant at a very high utilization. I think it was about 80%. And why it was possible? It was possible because these guys managed to buy crude oil from Kazakhstan. So now, the crude oil for Schwedt is coming from Kazakhstan, something from Gdansk through Poland and something from Rostock. And, yes, right now, I don't know what is going to happen in Schwedt. Let's see what will be the further development. The Ministry of Economy and Climate Protection is in the driver's seat. Let's see what is happening until the end of March because as far as I know, the actual trusteeship is ending end of March.

So, we will now move on with the virtual hand-up [ break ]. So please go ahead and ask your questions. Can you hear us? Then I would say we just move on with the questions from [ Simon ] because he has his virtual hand raised up as well.

Can you explain why the income tax expenses was so high in Q2?

Olaf?

Yes. It's -- you cannot deduct the costs of the ramp-up phase in Nevada tax-wise. So you have to pay full taxes, approximately 30%, 32% here in Germany on the profit you make minus then the losses you aggregate in the United -- especially in the United States.

Let's call it costs. Costs, yes ramp-up costs, yes. Yes. So the U.S. costs are not reducing our tax bill regarding profits we are making in Germany. But hopefully, we will be able to change this short term. And I don't know if we mentioned it already, but Nevada is -- there is possible to get an ITC. So we are already negotiating the ITC, which will be approximately USD 30 million to USD 35 million. And that cash stream will be Brutto of your Netto. So there will be no taxes on the ITC coming from the U.S. That is a positive contribution. But it's impacting not the tax bill, but it will increase our cash contribution.

So we will now try it again with [ Rike ]. So [ Rike ] can you hear us? You just need to unmute yourself. Or it seems like it's not working. Anyway, we have a question in our chat box from [ Markus ]. Who or where is reducing the production capacity of bioethanol in Europe right now?

Sorry, who?

Who or where is reducing the production capacity of bioethanol in Europe right now.

Okay, okay, okay. Maybe you saw the last announcement from our listed competitor, CropEnergies and there, it was written that they reduced their production at about 100,000 or 110,000 cubic meters already. These are the information which are public, but we hear especially from producers in Rotterdam and Eastern Europe as well as mainly in U.K., that at these price levels, it is not possible to make any margin with their setup. So, volumes are decreasing significantly by nearly all producers.

So, by now, it seems everything is discussed. There are no further questions left so far. So, I guess we will come to the end of today's earnings call. So thank you, everyone, for joining, listening, you've shown interest in Verbio. So, should further questions arise at a later time, so please feel free to call [ Mrs. Schiller ] from Investor Relations or us from Montega. So, I wish you all from my side, a lovely remaining week. I hope to see you on the next call again and hand over again to Mr. Sauter for some final remarks.

Yes. Thank you very much for your charmant leadership. Thank you very much from our side to everybody who was joining this call. Thank you very much for your questions, for your contributions. I hope we were able to answer your questions in a reasonable way and that you get all the informations what you expected. Yes, we are happy to hear you again on our call for the third quarter results, which should be in line with our guidance, maybe even better. But we are positive, things are going forward, quotas are increasing, investigations are started. This is quite a positive outcome from that second quarter. Let's see what we can do. Thank you very much again, and I hope to hear you again. Thank you. Goodbye.

Thank you.