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Corbion N.V. (CSNVF) CEO Olivier Rigaud on Q2 2022 Results – Earnings Call Transcript

Corbion N.V. (OTCPK:CSNVF) Q2 2022 Earnings Conference Call August 10, 2022 5:00 AM ET

Company Participants

Jeroen van Harten – Investor Relations

Olivier Rigaud – Chief Executive Officer

Eddy Van Rhede van Der Kloot – Chief Financial Officer

Conference Call Participants

Alex Sloane – Barclays

Sebastian Bray – Berenberg

Patrick Roquas – Kepler

Reg Watson – ING

Robert Vos – ABN Amro

Operator

Welcome to the Corbion Half Year 2022 Results Conference Call on the 10 August, 2022. [Operator Instructions] I would now like to hand the conference over to Jeroen van Harten, Investor Relations Director. Please go ahead sir.

Jeroen van Harten

Thank you, operator. Good morning everyone. Welcome to the Corbion 2022 First Half Results. With us today are CEO, Olivier Rigaud; and our CFO, Eddy Van Rhede van Der Kloot. My name is Jeroen van Harten, Head of Investor Relations.

Proceedings for today. We are going to start with a presentation that Olivier and Eddy will walk you through, after which we will move into Q&A. The presentation you can find either on the webcast or you can download it from our website from the Investor Relations section.

And with that, Olivier, please go ahead.

Olivier Rigaud

Good morning, everyone and really pleased to present our first half results. So starting with the first slide, I am really pleased to, let’s say, explain the business activity and the strong momentum we saw over H1 with organic sales growth on our core activities of 23% and that was driven by the three business units.

During the period, we delivered an adjusted EBITDA of €89.9 million, so this EBITDA increased by 16.6% year-on-year corresponding to 13.1% margin, with an organic growth of minus 0.4%. But for the period we’ve seen continuous inflationary cost development and the fact that we moved to quarterly pricing really helped us to pass on these cost to the market. As we speak, we have had, I mean, the first increase in Q1, as you might remember. And the second round – successful round across Q2. We’ve also implemented a further round in Q3. So this has helped us really to, let’s say, go for adjusted EBITDA improvement across the period.

I am also pretty happy to report that June was the first month where we reached breakeven for our AlgaPrime DHA business, Algae business and we see very promising business environment there. I will come back to that in a minute. Across the period, we also continued a quite high investment level to support growth. And really next to the biggest project we have in our new lactic acid plant in Thailand, we are further developing into specialty food ferments in the U.S. and Algae Ingredients in Brazil. Last but not least, on sustainability. We made a lot of progress and actually, we decided to apply for renewed size-based target and to increase our ambition level to the 1.5 degree in line with the Paris agreement.

Now diving into the next slide and discussing about business development and starting with the SFS, Sustainable Food Solutions. Looking at the sub-segment within Preservation, we saw a shift in terms of projects pipeline and shifting from purely new innovation to helping customers reformulate either to improve their cost or to overcome some of the raw material shortage. During the period, we also accelerated the launch of new natural antioxidant platform primarily working on ascorbic acid – natural ascorbic acid from acerola and carnosic acid from rosemary. These are two very nice complements to the current Preservation portfolio of Corbion.

Within Functional Systems, the focus continued on shelf-life expansion in promoting food ferments for natural mold inhibitors. And we are also I mean, adding preservation see some shift really helping customers to overcome some raw material shortage with gluten replacement or fat. So this is a big trend we see happening in the market right now. We also executed on our strategy by launching a new very stabilizing platform and we see first traction and first promising sales in that area as well.

Moving to Lactic Acid & Specialties, we saw growth in all segments, primarily driven by a strong recovery in medical biopolymer post-pandemic. We do not only see a resume of elective surgery, but we also see a strong development in slow-release drug delivery there. Across the second quarter, we saw also a nice momentum into the semiconductor with our green solvent and our pharma sub-business segment. We’ve also had robust lactic acid sales to our PLA joint venture over H1, but I will come back on this at a later stage as well on the PLA dynamic.

Finally, on incubator we have seen a significant traction in this new customer adoption of AlgaPrime DHA. And again, as we stated, really proud of adding in June the first breakeven moment for this business, despite higher variable costs we faced and that was primarily related to some freight cost from Brazil as well as some of the ingredients we are using for this product line as rapeseed oil.

Moving on to the key investment projects. We mentioned obviously the biggest one being our new gypsum free lactic acid plant, and this is progressing nicely today. As you can see or might see in the picture. We are progressing well on the construction, and we are still on track to deliver, even though the commissioning has we planned in the later part 2023. The second investment, which is more specialty oriented around full ferments and mold inhibitors is again to serve the SFS business segment from Peoria in the U.S., where the investment is going on as we planned, and we are expecting a commissioning for the end of 2022 to have this capacity available to sustain our sales development in that segment in 2023. The same is valid in the Algae plant in Brazil, Orindiuva. We are also there. We have a project that is bringing more flexibility to the plant and also will enable us as from 2023 to go from a breakeven situation to a profitable future in this plan by also helping us improving the product mix significantly.

So moving on the sustainability comment I made earlier. You might remember at the time Corbion was a frontrunner when we applied for the below delivery in our commitment. But what we’ve achieved over the last couple of years is principally a very nice reduction in our carbon emission. We are already at a 24% in Q2 emission reduction, so we believe that we need to set a more ambitious target. And we have our game and so we recently submitted actually last month, new target based on the 1.5, and hopefully, we’re going to wait for the outcome of these SBTs in organization by the 4, and we will revert on that to you later on this year.

On this, I’d like to give the floor to Eddy to take you through the financial performance in detail.

Eddy Van Rhede van Der Kloot

Thank you very much, Olivier. Good day, everybody. So we are on the page on the profit and loss. So as you can see, for the first half year, the net sales for the total company have increased by 33%. And within that, about 23% has been the organic growth. So we did also have support from stronger currencies. The adjusted EBITDA level, an increase of close to 17% for the first half year, and again, quite some support from currencies. The underlying organic growth was more or less flat for the first half year.

Margins that for the total company is 13.1% first half year. And please note that there is a margin increase in Q2 versus Q1 because Q2, we had a slightly higher margin profile of 13.6% and that reflects the good momentum we are making and passing through earlier cost increases and increased sales prices. The gain that we made in the adjusted EBITDA level up to 16.6%, we could not fully translate to the result after tax at the bottom line of the P&L because there you see a minus 23%. And that has really been caused by 2 key drivers.

One is to be found on the adjustments line in the middle of the table, where last year, we had quite a sizable positive contribution on adjustments really being related to the divestments we made in the frozen dough activities in U.S. and the plot of land in the Netherlands and Breda. So that was a sizable book profit and the majority of the contribution of the €23.5 million of last year. This year, we also had a smaller size divestment, and that contributed to about €5.5 million on the adjustment line, and that is related to warehouse we had in the U.S., the Totowa warehouse sale in January this year.

The second item I’d like to highlight in terms of comparison to last year is on the taxes line. Read this year’s tax line to be more kind of normal tax level of a good 25% with minus €18 million. But if you compare it to last year, we there had a much lower tax expense, and that is again related to the sale of the Breda plot of land where we put value tax asset. That was a sizable one-off benefit in last year’s P&L.

So now we move to the next piece. That’s really one of our key themes. Of course, it is about the firm pricing actions that we have implemented, and we continue to implement, by the way. By now, you are kind of used to our – on a 2 quarterly basis to update our outlook of all the cost increases. I’m talking here about the variable cost increases, what we have already experienced and what we do expect to experience over a 2-year period, as it is measured. So it is 2022 versus 2020.

Top right hand side gives you the composition of the table. And if you compare the situation with the current outlook to the last table, and the previous one that we shared late February, then the total cost increase for the company have increased from €165 million measured over this period to €240 million. So that means another €75 million step-up. And that, of course, is what we’ve done with our quarterly pricing structure – contract structure is what we are passing through to the market. Within that €75 million, a big share is, of course, everything to do with raw materials and energy, but also afraid that about a third of that increase is really caused by freight. So that’s the sizable component of itself.

Then if we dive into different businesses. Sustainable Food Solutions, so there organic growth for the first half year is close to 19%. Within that, the volume development was pretty much flat. But I would say that’s a nice result because basically, we made quite some market share gains last year, and we’ve been able to hold on to those positive volume developments in earlier periods in this period when we are passing through price increases. So that’s a good result, I would say, and Olivier already talked a bit to a couple of the drivers that we have in different sub-segments within food, the new product introductions, the reformulations, et cetera.

Margin profile came down a bit compared to last year and again, Q2 slightly stronger than Q1 in terms of margin development. And I’d like to highlight also that’s true for OR businesses wherever we are passing through these sizable cost increases mathematically, you’ll have this, what we call this margin dilutive impact. So that is true for OR businesses and also for food.

Next page, lactic acid. Again, very sizable sales growth organically, 26% for the first half year, a small polymer uptick, a good 1% for the first half year. And it’s really, again, the price increases plus some mix improvements that are driving the organic growth. And couple of elements to be mentioned there in terms of sub-segments is indeed the semiconductor industry, which holding firm and of course, the good recovery and further above prospects that we are having a space and seeing for the medical biopolymers, which is of course a high value sub-segment in this business unit.

Then incubator, next page, there, we continued to invest in incubator within the incubator. Like Olivier stated we have turned around the DHA business of LG as per June into a positive territory. We continue to invest, of course, in other initiatives in this portfolio and that we have all this, yes, booked between 0.5% and 1.5% of our total cost. So that is the bracket that we like to operate in incubator. And also by the way, there is also quite some currency impacts in this comparison to last year because the dollar has strengthened quite a bit, also reais, but also the dollar and we have quite some dollar cost also in this part of the cost little bit.

The next one is about the PLA joint venture results. EBITDA up by about 10% margin more or less capital closing in the good 30s. Underlying sales growth organically has been 23%, but within that, again, quite supported by currencies. So outside of the currencies, underlying organic growth has been good 11%. Non-core activities. So this is comprising our U.S. based emulsifiers business really developed very nicely. We managed that for value as you are aware. So really the prime focus is here to hold on as much as possible to EBITDA delivery. And as you can see in this picture, is we already have outperformed in that sense also compared to last year. So a very strong delivery here in absolute EBITDA terms, also margin-wise and really successful dynamic, I would say, and again, also handling, managing the cost increases that are also impacting this business, especially soybean oil, for example, is a known one in this area. So we’re happy with the delivery of this business.

Then the net debt bridge. As indicated in earlier conversations in the investment phase we are in, we are expecting to increase the net debt-to-EBITDA leverage. So that’s also what happened according to expectations from the 2.6x in December last year to 3.3x as per June. The bridge you can find in this sheet or what has been causing the net debt development given time, I don’t think we need to go for the whole bridge. Going forward, the outlook that’s also what we shared in the press release is that we do not see the current outlook of further increase in this net debt-to-EBITDA ratio development. As a matter of fact, we’ve seen improvements towards the end of the year. And yes, the EBITDA delivery is one component in that of course.

Then we bring it back to the year outlook.

Olivier Rigaud

So just having to conclude this presentation and before opening to Q&A on the outlook. You may have seen in the press release, so we are upping our guidance on net sales organic growth for the core activity from 20% to 25% for this year. As Eddy just mentioned, we see, of course, further cost increase for the core in the range of €190 million. It used to be €130 million. And as we explained, we are very close goal on a price increase quarterly, so we are preparing the next one for Q4.

An adjusted EBITDA margin there, we see the loans into the lower end of our 12% to 15% range. Obviously, the more we are increasing our prices, the higher the diluted effect on margin, we do see but we are really on track to substantially improve our absolute adjusted EBITDA compared to last year. CapEx wise, we are guiding in the range of €200 million to €230 million there with all the key projects being on track. And as Eddy just explained on our ratio – on our net debt EBITDA ratio, we also foresee an improvement from the 3.3x we had at the end of H1 by the end of the current year.

On this, I’d like to open the call for Q&A.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] The first question comes from Alex Sloane from Barclays. Please go ahead.

Alex Sloane

Yes. Hi, good morning. Thanks for talking the questions. I’ve got three, if okay. The first one, I mean, clearly, you’ve had a very strong price mix performance in the quarter. I wondered if you could help us within SFS and Lactic Acid & Specialties in particular, maybe breaking out the rough mix contribution versus pure pricing, given you have, I guess, very different margin profiles, particularly within Lactic Acid & Specialties, that would be helpful. And second one, just on the PLA, the lower volume outlook there from your business. I guess the question would be, how do we think about this from the broader lactic acid market perspective? I mean, clearly, there is more capacity coming on stream, including your own Thai plant. So is the lower PLA outlook, is it a one, two quarter phenomenon or is there anything more structural that’s going on there that could actually have implications for supply/demand in lactic acid more broadly over the next year or two? And then if I can squeeze in a third, just on the non-core, as you said, a very strong first half performance and decent outlook there. So I mean given you are perhaps closer than you would like to covenants on leverage, how do you think about this business and your options for this business as potentially a means to accelerate deleverage going forward? Thanks.

Olivier Rigaud

Thank you, Alex. So I will cover the PLA and Eddy will cover the price mix and the non-core question. So maybe you start, Eddy?

Eddy Van Rhede van Der Kloot

Yes. So the question on the price mix and I think the question was especially geared to the second quarter. So for the food business, as you’ve seen, we have organically been growing the business with 21% in Q2, volume has been already modest 0.4%, so the remaining is indeed from price and mix. The far majority is price mix is somewhere in the order may be 3% to 4%. So a solid single-digit positive mix effect in the food business. On Lactic Acid & Specialty business, slightly more pronounced. So they are out of the 29.4% organic sales growth in Q2, close to 9% to 10% has been mix effects. And then biopolymers, medical biopolymers is always known to be – known big one in these mix effects when you’re having a good development for months in there. So I think that addresses your price mix questions on the non-core. Yes, I’d like to say, it is always an option, but it is not the fair development of non-core. The investors probably will be very happy with good delivery, the solid EBITDA delivery of this business. It proves again how robust and resilient this business is even in the current highly dynamic cost inflationary environment. So in that sense, it’s a solid part of our portfolio and there is no immediate need to take a different position on non-core as we have done in earlier conversations.

Olivier Rigaud

On just the PLA lower volume outlook. So what is happening in PLA, we’ve seen them in a couple of impacts, the biggest one coming from the Chinese lockdown. You might remember, China used to be NSB and was a very nice market for PLA. And serving this market out of our Thai operations is, I mean, again, giving us a nicely competitive position in China, but we really faced a slowdown in China because of primarily the lockdown. Another indirect impact we suffered from also related to China is that the freight rate from China to the U.S. and to Europe went dramatically up, although they are relaxing now. But during the period, we’ve seen a lot of the Chinese customers getting out of business because simply, I mean, the freight rate was penalizing their business massively and being able to export these products over the world. And the last impact we are seeing now is that because of the surge in energy cost and prices. If you might remember, PLA in a lot of cases is compounded with other type of polymers, whether they are bio-based or non-bio-based. But the two we are thinking about, for instance, PBAT or is biodegrade fossil-based or PHA, which is a bio-based as well as biodegradable. We have quite some, let’s say, important customers that are co-compounding these polymers together. And the dynamic into these products is much slower on the fossil based one, as you can imagine, this is related to the high input cost, they also face and high energy prices to produce these polymers.

In the case of PHA, this is based on vegetable oil, primarily canola oil. And with this type of business following the Ukraine situation is also facing not only a massive shortage, but a huge inflation increase. So back to – also to your question on capacity development, we do not see, let’s say, any negative from new competition or extra competition. On the opposite, we’re not giving a specific name. One of the biggest projects in China that was – and became on stream early on this year, we understand from our competitive intelligence that this plant has been mothballed since April on PLA. So we don’t see I mean that as an immediate reason or impact. So we believe – just to conclude on this PLA questions that, obviously, now that there is a deep primary impact us in the second half. However, when we look at the pipeline, we are working a lot to diversify our mix from single use plastics or food packaging also to some new categories. I’m thinking, for instance, about building materials or new markets where there is today a massive use of synthetic polymer for binders where PLA I mean has a great feature. Now difficult to tell you, you know how fast this could materialize, but the pipeline is looking pretty good. It’s a matter of time. So yes, we are preparing to lower sales across H2 that’s the [indiscernible].

Alex Sloane

Thanks very much.

Operator

We will now take our next question from Sebastian Bray from Berenberg. Please go ahead.

Sebastian Bray

Hello. Good morning, everybody. And thank you for taking my questions. I have three, please. The first is on the balance sheet situation of the company. And I’m not so much asking about how to get to a reduction in net debt to EBITDA for H2. But I have a question on the definition of covenant net debt and some lease liabilities that appeared in the full year report 2021. As that for the full year, there were €67.8 million of lease liabilities that were not included in the covenant net debt to my understanding because it, not reasonably certain that the leases will be extended. If these were included, the company would get uncomfortably close to its covenants, is there any more visibility on whether these lease liabilities will be included at the time of the full year 2022 results. I’ll pause there.

Eddy Van Rhede van Der Kloot

So part of our net debt definition does include lease liabilities. So basically, it says if we – and as an example, we are leasing not only office spaces, but also for example, warehouses for our operations. So those lease liabilities are included in our net debt definition. And every time when we renew or extend such leases, they are included in the net debt definition. So I’m not exactly sure what other elements you’re referring to. So maybe we need to take that in a separate call to see exactly what you’re referring to in terms of certain lease that we don’t capture because we are consistently applying last year, this year and going forward the definition on the application.

Sebastian Bray

I appreciate we can take offline. But the Annual Report states that potential future cash outflows of €67.8 million undiscounted have, not been included in the lease liability because it is not reasonably certain that the leases will be extended. Does that mean that the lease liability could go up at the end of 2022, if they were included or is it best we take this offline?

Eddy Van Rhede van Der Kloot

No like I said, so if that’s the situation, there is no need for us to include it in the net debt definition because of this too remote. So there is always a – I’d say that a different way how we can apply those leases. So it’s probably better to take it off-line because we need then also to look at the specifics of your question.

Sebastian Bray

Okay, thank you, Eddy. And the second question is on Incubator. What are the costs? Is it about €10 million to €15 million of non-DHA business-related costs in here? What are these for?

Eddy Van Rhede van Der Kloot

Yes. So a big share of that is as we said within the Incubator, the Algae platform, the Algae Ingredients platform is the prime activity we have in there. Within Algae, we always say that the prime focus is to be first turning breakeven, the DHA related business. Now that is where we have been making in the last 1, 2 years, very successful development through. And as per June that has now turned into positive. That means we can now focus the R&D capability we have in the Algae space to also look at other opportunities based on Algae Ingredients. So that is indeed a strong R&D capability, very much related to the acquisition we made quite some years ago in San Francisco as part of the TerraVia acquisition. So yes, we have quite a strong R&D capability, and that all costs of that group is captured in Incubator. Besides that, we also have some non-Algae ingredients developments, the big component at this moment is this R&D capability in the U.S.

Sebastian Bray

That is helpful. And my last question is on capital structure and CapEx for 2023 more broadly. The company hasn’t commented on what it wants to spend in terms of CapEx for 2023. And looking at potential investments, how much Corbion wants to allocate to lactic acid facility expansion for PLA, be that in Thailand or France. The range of outcomes here is probably something between €100 million and €210 million to €220 million. So I have two questions. Firstly, are there any indications on which of those numbers is more reasonable? And secondly, if it turns out that the projects the company has to invest in 2023 are very compelling. Olivier, what does your gut tell you about the potential to raise equity to make the net debt situation more comfortable? Is this something you would consider? Thank you.

Olivier Rigaud

Yes. So I think for CapEx, we are, of course, working on our projections. But as you know, the biggest project we need to complete is the Thai operation, and we are in the middle of it. And there is still, I mean, of course, important terms that we need to spend next year to complete the investment and stocks. So we understand and we know that the biggest share is, of course, I mean, again, behind us, but they are still indeed this completion to realize. And then, okay, we have to make, of course, on some closes primarily on some of the derivatives and what we’re going to do further if indeed, we want to do further. And at that stage, we are not considering any massive equity raise unless we would have a transformational M&A, coming on stream something similar. We don’t see that immediate need as we see, I mean, the situation on our net debt, as Eddy just mentioned, improving as we are going forward. So this is not something we are considering short-term.

Sebastian Bray

And in terms of – would you consider dipping your toe i.e., something a bit smaller, but that makes the balance sheet a little more comfortable in 2023 or it’s too early to say?

Olivier Rigaud

I think it’s a bit too early to say. I mean today.

Sebastian Bray

Okay. That is helpful. Thank you for taking my questions.

Operator

We will now take our next question from Patrick Roquas from Kepler. Please go ahead.

Patrick Roquas

So good morning, all. I’ve got three questions. The first one is on inflation. And just to check, in order to fully recover all of the cost increases, you obviously need a further price increases in the second half. But to what extent do you also need it in the first half next year or even in the second half next year. And then on PLA, yes, previously, the JV was expected to run at full capacity this year, what should we now expect.

And related to that, you will not or hardly supply lactic asset to the JV in Q3. Could you give any indication on the magnitude of the volume decline for Lactic Acid & Specialties overall in the second half? And then finally, on SFS, yes, you indicated in the press release that the market for processed meat was in a decline, any indication on your volume performance in Q2? What we should expect for a process need in the second half? Thank you.

Olivier Rigaud

So thank you, Patrick. So maybe starting with the inflation in the pricing, so as you stated, I mean, we have to continue our efforts. Although what we see now is that the level of price increase are more modest than what we had to do in the first part of the year. So, this is of course, we see now in terms of inflationary costs things are leveling off. So, we do not see that across the board fully. What is becoming clear, of course, to us, primarily relates to your questions on 2023, is that we really like to grow in, I mean anyhow further on in terms of covering some basic inflation as well in the 2023 pricing round. So, we are monitoring very closely this type of dynamic. We are looking exactly to, I mean the key variable cost components to see how this might develop. Right now, we have to say that we have still little visibility because we see, for instance, as I said, some relaxation on trade. But this is on certain routes. Well, obviously, to take a couple of real examples, it seems your entire algae business from Brazil to Norway. This is a very specific route where you do not see any relaxation. But we expect to see primarily the freight from Asia to Europe and to the U.S. to relax in the coming months. But again, let’s not speculate. There is still very little and short-term visibility on this. So, we want to stay very focused and be as close to the ball as we can to pass that through. But yes, we are already considering what we are going to do as from Q1 2023 on this. Just on the SFS process, there are a couple of things that we see because one thing is, of course, we see the entire category development, but also what is the current dynamic within the move to pre-level. And in that, we see still, I mean quite a lot of activity. But if you look to the volume momentum that was impacting us, again, without going into too many details for SFS, part was related to meat, but the biggest part of the volume, the negative volume impact in SFS came primarily from the beverage industry and to be more specific, the brewing industry, which is not a key category for us, where we deliberately decided to abandon some of these businesses in favor of the price increase. I already mentioned a couple of times when you have to go to market with such a substantial level of price increase, what I have experienced in the past is that you need to be very disciplined on not changing for volume, but making sure we prioritize pricing. And this is what we have done. And in categories like the brewery industry, which is usually at the low end of our margin profile. This is what we have in the tail. We prefer to just step out of that business. This is a type of business you can come back, I mean tomorrow morning if you want to. It’s just a price play. But we said, yes, let’s not only compromise anything on pricing in that current period. So, this is a business we deal between that goal. And I am not concerned today, we need to have more volume, we can go back anytime. In the meat industry, it is more a mix thing and also we still have, if you remember, some negative impact from the Blair incident that was more affecting us Q1 and a little bit Q2. That was also what is paying in the meat sector. But I am pretty confident that as we speak, we are recovering most of this, let’s say, shortfall we have seen across the first half in the meat. On the PLA to just end on that one, as you said, I mean we were planning to be running close to full capacity. Now, we are reassessing in terms of plant balance. As you know, Thailand is our most cost-effective and efficient plant. So for us, what’s important is to see exactly how we can maximize our network and that’s also the beauty of our network is that as we face a significant increase in carbohydrate cost in Europe, we are prioritizing production in Thailand versus Europe. To give you an example to make sure we max up our profit and do not compromise our profit simply because we might have a short-term softness in PLA. So, this is what we are doing. Now, it’s about yes, we are looking very closely at, as I said, the pipeline in PLA looks still pretty good, the speed of recovery and new category materialization that’s going to tell us the capacity occupation over the next month. But again, no very big worry on that front, I mean to-date.

Patrick Roquas

Just as a follow-up, Olivier. So, if the situation in China and freight costs would stay as it is today, would that imply that you would also not need to supply lactic acid to the JV in Q4?

Olivier Rigaud

No, I don’t think that would be that extreme, no.

Patrick Roquas

Okay. Clear. Thank you very much for your answers.

Operator

We will now take our next question from Reg Watson from ING. Please go ahead.

Reg Watson

Good morning all. I just have a quick question about the Total JV proposal to build the PLA plant in France at Grandpuits. I noticed that steel prices in France have risen dramatically in the last year. And I was just wondering if you could update us, please, on the latest CapEx estimates for that project.

Olivier Rigaud

Sure, Reg. So, actually, if you remember what we said in the Q1 and the full year results announcement is that see the highest inflation on steel, stainless steel engineering cost and freight. When we look at the project in Grandpuits, we have said again, it’s probably a better and wiser decision to wait and postpone the decision knowing that we were, I mean still very much on time according to our development scenario and strategy. So, with that, I mean very constructive, and we are very well aligned with Total Energy on this type of decision. In the meantime, we continue to work really hard on a couple of different scenarios, whether we can also maximize the CapEx level and look for different optionalities in terms of the scope of the product mix that these plants will produce in the future as you can move more or less complex or decide to do remove certain products in Thailand and others in France as you were looking forward. But we said, okay, let’s not – let’s say, you go too fast, if you see the current inflation because it’s the worst moment to take a decision. As everything costs 30% to 40% more than in normal times. And also what we are expecting, and we start to see that in some of the other projects is that the steel prices are softening as well. So, we are really well aligned and continuing to work as I mean again, we had to do, but saying we have a bit more time before making a final decision. So, that is done with full agreement with Total, and yes, so we are going to keep you posted on the next steps. But so far, we have tasked the team to continue to work on pre-engineering and everything as you know with the different optionalities for this site, knowing that we gave ourselves some flexibility in terms of date. So and that will come probably in the course of next year. So, we have ample time to make a final call.

Reg Watson

Okay. I understood that. Because I guess what I am trying to get out of this is that there is clearly a balancing act between the delays to that project pushing further price increases into the PLA end market, which then starts to make IRR on the project look more acceptable lead despite the high – despite the increased steel costs, etcetera?

Olivier Rigaud

Yes. No. And this is correct, Reg. And also let’s not forget that if you look at the size of investments, I mean for Corbion when we take clearly PLA 2 decision, means we need also to take a lactic acid capacity decision for Europe, which in the current market environment wouldn’t be wise to think because for us, the impact is not just I mean when you look at inflation, impact is not just on PLA 2, but will be also on what do you do to serve these PLA 2 plans in terms of lactic acid capacity. And the risk level to take decisions combined is too high in the current volatile market environment. So, this is not a risk we are willing to take as we speak, because the visibility is too low and – so we will have exactly the same impact if you believe, you have to build a new lactic capacity in Europe as we said intentionally. As you can see that the cost of lactic acid plant in Europe is much bigger than a PLA 2 investment in Europe. And then we are not ready to make that type of decision in this environment.

Reg Watson

Okay. Understood. Thank you very much.

Operator

We will now take our next question from Robert Vos from ABN Amro. Please go ahead.

Robert Vos

Yes. Hi. Good morning. I have a couple of questions. First, on non-core, the EBITDA margin was 17% and despite inflation and the dilutive impact of price increases. As far as I can see, based on your provided disclosure, this is the highest margin in the second quarter. Are you not pushing this a bit too much with pricing? That’s the question. And secondly, €14 million EBITDA in the first half. Any reasons to assume that it will be completely different in the second half, the EBITDA contribution of non-core? That is my first question. Secondly, working capital investments were some €60 million in the first half. Will there be any reversal in the second half or can you say anything on working capital going forward? And thirdly, sorry to get back on CapEx for next year. But based on the old guidance of maintenance CapEx of €60 million to €70 million, per year on average and the €50 million that is still in the pipeline for the lactic acid plant in Thailand, so that adds up to €110 million to €120 million. Are there any main components that we should be aware of for next year? And related to this, what about general inflation for your investments? Is the €60 million to €70 million still a valid number? Thank you.

Eddy Van Rhede van Der Kloot

So, if I can take these questions, Robert now. So, first on the non-core, so you are right, the margin profile development looks very weak. I don’t think we are pushing prices too much, that’s your question because really the volume development, yes, there is a small negative, as you can see in our sales table, but that has no consequence because of our pricing dynamics. It’s much more that there were a few earlier in the year, a few disruptions in supply chain, some of our suppliers saw some temporary issues. So, that is more explaining the Boeing retraction versus the last year and also it’s out of pricing. The margin is, I would say, in this part of the year, also slightly supported by still some favorable procurement contracts that we could roll over from last year into this year, again, related to this supplier disruptions we have seen. Going forward, I cannot give the indication here that we hold on to this margin profile for the full year. But that being said, the business of this business is very comfortable, and we do expect, of course, positive contributions also in the second half of this year. When it comes to working capital investments, yes, a couple of dynamics, we had a reversal. The big reversal, I would say, is really when inflationary cost environment really reverses globally. So, talking about really the [indiscernible] revenue in terms of pricing. So, yes, the big question is when will that happen, like you have seen in our by-quarterly update on the input cost, variable cost dynamics, so we don’t see that yet. So, it is not for this year, could it happen next year potentially. But that’s one question. I would say underlying the volume component in our working capital, especially inventory, there we did step up a bit in terms of reducing the risk of supply. So yes, we stacked up a bit in our safety stock levels and I don’t think it is wise to reverse on that given the continued volatility in the global dynamics. So that, I would say, we hold on for structural reasons for the time being. And debt component, I think our hopes were pretty nice. There is some reduction that we can still get in collecting the tail ends of that first in terms of origin. But I would not expect unless the input cost inflationary environment really developed more favorably, I would not expect big reversals in the foreseeable quarters. And on the CapEx, yes, those are indeed indicated. So, on top of the recurring level, you are absolutely right. The Thai lactic acid plants, where we are just beyond halfway the total CapEx outline about half of the remaining CapEx is still projected this year, about half still next year. So, that’s a €50 million to €60 million outlay for next year on top of the recurring level. And then there are other, say, the opportunities for us to invest in for supporting our growth, but those are more that we have to take a decision one-by-one to see is the market development section, the growth outlook section that we will push those with us. So, that’s also potentially going to be a sizable component of the total CapEx program. But probably that’s a better moment in time to further discuss that in the – later this year as well as when we come back with the Capital Markets Day projections that is fully a better moment in time to give indications for next year in terms of total CapEx program.

Robert Vos

Okay. Thank you. And if I can come back on the non-core, I was not exactly you referring to EBITDA margin, but are you – well, the EBITDA absolute level was also quite encouraging. Is there any reason to assume a big difference second half, first half or what can you say on that?

Olivier Rigaud

No big reason, but you never know exactly how that margin develops. So, like I said, we had some support from favorable procurement contracts in the first half, which will not fully translate in the second half of this year. And so in that sense, I would not automatically double the current level.

Robert Vos

Okay. That’s very clear. Thank you.

Operator

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

Olivier Rigaud

Okay. So, I want to thank everyone for joining this call. And obviously, we will give you, I mean a rendezvous to the Q3 results, and as Eddy just alluded, also as you might have seen, that we will host the Capital Markets Day early December, but more information to come on that. Thank you, everyone and speak to you soon. Bye-bye.


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