Corbion NV

Good morning, everyone. Welcome to the Corbion first half conference call. Today with us on the call, our CEO, Olivier Rigaud, and our CFO, Eddie van Geelen van der Kloot. My name is Jeroen van Harten, Investor Relations. Today's call will start with a presentation by Olivier and Eddie, a deck, a slide deck that you can find on the Investor Relations website under Financial Publications. So please download that deck if you want to follow along. You can also follow along on the webcast, the link you have, hopefully, in your inbox. We'll start with the presentation of about half an hour, followed by Q&A. So with that, I'd like to hand over to Olivier.

Thank you, Jeroen, and good morning, everybody, and welcome to the SELFIA results conference call. I will start highlighting some key points over this first part of 2021. First of all, about the impressive organic sales growth on our core activity of 16.4%, reflating our investment in primarily go-to-market capabilities, frontline sales and key accounts, technical support, R&D application and innovation. And as you can see, sustainable food solution at a growth over 15.5% across all segments coming from a much improved pipeline. Lactic acid and specialties as well had a very strong growth, I mean 12.6% over the period, with a noticeable recovery in our bi-polymer business in the second quarter. And finally, an incubator, primarily composed of our DHA omega-3 algae business, a very strong growth with over 161% there. On the other side, we faced a significant and unprecedented raw material and freight price increase that requires firm pricing action. We already initiated in the second half of 21 to, I mean, again, pass that on to the market. However, over two-thirds of our business is contracted on yearly basis. So most of the impact would come as from 22 onwards. Across the first half, we continued to invest in our nation's capacity and capabilities. So following an addition of another 9% headcount we had across You know, last year we are continuing with a 4% FTE increase across the first half of this year compared to end of 2020. In terms of adjusted EBITDA, we ended at 77.1 million or a 15% EBITDA margin, showing an organic growth of 4.7%. But we see, of course, EBITDA margin under pressure and we see pressure going on in the second half of the year related to these higher input costs and investment into the organization. So now, moving to the sustainable food solution, we see a strong sales growth acceleration with an impressive 18.7% organic growth across Q2. It's important to note that when we look at our end markets, and a couple of examples that are related to meat and bakery in the U.S. market, we see, I mean, basically, this is returning to normal post-pandemic as food service is recovering. But despite this return to normal, we see a continuous strong performance of our business. And I will come into further detail. Basically, we've been still able to strengthen a lot our sales pipeline. Our application apps and tech support sales force remained open and people on the ground even during this pandemic. And this, I believe, did help a lot in continuing to build and strengthen our commercial pipeline across the period. At the same time, what we've seen in terms of customer behavior is a much increased win rate compared to previous years. And that's also paying off right now. We also believe this is coming from the very strong execution we've had across the period. If you remember and if you see what's happening in the market in terms of logistics, supply constraints, you know, and hurdle, we've been able to keep our customers and deliveries uninterrupted across the period. And we are pretty proud not to have let any customer down during the period as well. So in terms of pipeline, you could see on the bottom right chart, At one point, I was insisting over the last quarters about, you know, the need to strengthen our pipe in SFS. And although we've seen a slight, you know, erosion during the pandemic in 2020, we've seen, I mean, a very nice improvement over the last quarters and on the first half of the year, where now we have not only, I mean, a much higher absolute value in our pipe, but also a very healthy one with very nice opportunities. And this came from accelerated investment in SFS resources, primarily application labs, where we had to play some catch up. In the period we completed the construction of an application lab in China, we are currently doubling our Singapore capabilities, but we also heavily invested in the US in Lenexa on natural antioxidants in dairy stabilizers. And the next one in line is coming in Mexico recently. We made an acquisition acquiring the Granolife assets, and we aim to improve our lab capabilities over there. So what is the impact of the COVID on our business and how did it impact consumer behavior? Just as an example, I will only show an illustrative example, for instance, on the health and wellness. There, our COVID has accelerated some of the consumer behavior changes when describing choice for health and wellness, consumer see and are aware of the importance of our ingredients. So no need to say, I mean, it's about acceleration of natural, organic, fresh, but also, I mean, a very consciousness on basically a safe food replacing, you know, synthetic and artificial ingredients. When we look at what it means for Corbion, we can see three very big important drivers. The first is about extended shelf life, and it's, of course, about providing freshness, but it's also about waste reduction in the sustainability value proposition where we play. The number two is around clean label, and we only see an acceleration. This is not new, but as I mentioned, people want to see on the label ingredients they trust, and they want us to help them removing artificial and synthetic forces-based products. And last but not least, When you speak about the wider theme around food preservation, it's about food safety. It's about preventing food illness. But it's also, I mean, safety through delivery. And we've seen an important increase of, of course, e-buying, you know, and at-home delivery in the period. And we believe that some of these changes are structural and going to stay post-COVID. So now, how it does translate into SFS? We are working on five key strategic pathways to generate growth in our advanced 2025 plan. And I will not detail them all, but when we look at these big blocks, you know, expanding preservation beyond meat, we used to be our biggest category. Now we are able to leverage our capabilities, our technical capabilities into moving this from meat to bakery, but also to savory. A good example we see is in a big, big potential in expanding in mold inhibitors in bread. across the globe, and this is replacing synthetic calcium propionate as an example. We are also pushing on expanding preservation, what we call Beyond Micro. So far, we've been acting, you know, by preservation on primarily acidifying foods with our lactate derivatives or other ferments. We also, I mean, invest now in natural antioxidant, and we opened in the next dedicated lab to support these adjacencies to play not only an acidification in terms of preservation, but also an anti-oxidation with natural products. We're also developing as the third block, new preservation technologies, and we are investing in our plant in Peoria, close to Chicago, in developing a very nice library of additional food ferments, tackling more application. So when this is happening as we speak, and tackling, I mean, as well, some of the other challenges you see in natural preservation with a much wider range of product. Moving now to functional systems, which used to be primarily focused on bakery, and bakery remains a key area for us. But we are moving to dairy, as I mentioned before, not forgetting also success in confectionery or savory systems, where we bring adding functionality. Again, we are thinking about shelf life, but also functionalities, could be, I mean, those strengthening orders. And last but not least is expanding our partnership globally in terms of formulation and blending. So I mentioned the recent acquisition in Mexico, but we have also concluded very nice strategic exclusive partnership in the fields of natural antioxidant as an example. So now diving into the SFS members, as I said, strong consumer demand for natural preservation in a lot of geographies. This is being supported by regulation that is, of course, helping us in moving from synthetic to natural. Within the functional system, we see a very nice growth, actually, and a very strong pipeline coming up with both, and this is what's interesting, our key account, but also new customers. So a very nice, widely spread pipeline across our customer base with, again, Not only the bakery application, but also very strong in confectionery. A clean label, but also driven by the plant-based, you know, trend we see in the food space. I mentioned the high project win rates. We believe that, you know, as we've been able to maintain a very high on-timing full supply chain and service during the pandemic, that we get, I mean, the right benefit of it. and the trust from customers. We also see a very nice positive impact from the acquisition we made in Brazil a couple of years ago, acquiring Granotec in Brazil, that is a contributing also nicely to our growth. So as you can see on the chart over the last quarters, we've seen a very healthy and sustained and increasing growth pattern into, let's say the SFS. We will come back later with Eddie into the financials and the details on the EBITDA margin development there. Moving to lactic acid and specialties there, also a very nice momentum. All the segments grew in the first half of 21. When we say with the exception of esters, basically esters are being sold in two major categories, the semiconductor and the agrochemical for biopesticides. So there, the overall semiconductor is doing very well, and we see there a sustained growth. But we've seen a decline in agro, also driven by regulatory changes, and I think this is in structural decline going forward. But we see a very, very strong momentum in the semiconductor industry there. Obviously, PLA has been continuing a very strong growth, and Lactica C2 PLA showed very important growth numbers. As well as, you know, some nice development in hygiene and cleaning markets where we have positioned some lactic derivatives. And we start to see also a very nice growth being driven, of course, by the COVID impact and need for more sanitization there. On biopolymer, we, of course, I mean, if you remember the past quarters, had quite some impact from COVID and the postponement of elective surgeries. We've seen rebouncing primarily in orthopedics in Q2 with over 20% growth there in that part. Overall, in the first half, it remains modest, but we see a very nice uptake in Q2 on this high margin business. So on the Q2 margin, basically there, as in SFS, we have an impact on, let's say, due to the increased input prices and costs. Also mentioning the pipeline there, as in SFS, we see a very healthy pipeline, and the team has been very active in creating the pipeline for the next year's growth. Now moving to our third business pillar, the wind incubator, and you know this is primarily composed by our omega-3 alga prime DHA. Again, still a very strong momentum. They are building on what we developed last year, expanding into more aquafit companies, but also growing into new categories as pet food, which is, again, a nice development that we see today. And we are, I mean, again, very happy and increasingly confident to achieve our EBITDA breakeven point, you know, in 2022. as we committed into the advanced 2025 strategic plan. Now, moving to the jump venture, we continue to have a very strong relationship with Total Energy, our partner on this jump venture. And we've seen a very nice sales increase through a combination of price and volume growth that has been partly offset by negative currency effects. We are actually working on our second plant in Grand Prix, France, where we started the front-end engineering. And although you see some Q2 lower margin, we will come back on that. This is not representative on how, let's say, the margin evolution in that business. And finally, so my light on our non-core activity, basically, which is now comprising only of our emulsifier US business, Strong organic growth in there as well. The frozen dough business was divested in January 2021 for an 80 million sales and a book profit of 8.4. So, but there again, we are facing primarily some steep increase in soybean oil that we are passing on to the market. Now, let me hand over to Eddie, our CFO, to go through the P&L, and then we'll be back for the outcome.

Thank you, Olivier. Good morning, good day to everybody. So, we start by looking at the P&L for the first half of the year. So, as Olivier already alluded to, we've been growing our business on the top line for close to 5% for the first half of the year. But that 5% growth has really been adversely impacted by negative currency impacts and also the divestment of the frozen dough business. So if you expect for that underlying organically, the total business has been growing by 15.5%. And I think it's good to note that the far majority of the growth is really taken for by home growth of the 12%. did not completely translate into margin development. You see the EBITDA reducing from 70% last year to 15% this year. Two main factors that we will talk about later on is causing this. One is the continued investments in the organizational capabilities that is really expressed by about 200 additional FTEs people will account to our company, so investing for growth. And secondly, it is really the inflation, the price inflation that we see on a broad range of our input factors. We're going to talk about it later. A bit deeper in the P&L, I'd like to single out a couple of key points there. On the adjustment level, you see a positive of close to 24 million for the first half year. That is indeed referring to the boot gain that we made on two divestments. That's the frozen dough business and the DREDA, that's the public land in the Netherlands that we have that we divested. So those were positives. And it was also a negative to be mentioned here that the impairment we've made in the first half of this year related to the FDCA initiative. That was one of the last remaining activities that we had in the manage for exit part of our portfolio by a follower that we don't think we are the better owner to further develop that in our own account. So we fully impaired the book value on that. Then we come to financial income and expenses. Quite a negative last year, very much caused by negative currency impact from the Brazil REI. This year you see a more normalized interest development, so minus six million there. Then a positive result joint ventures, that is really the joint venture results of PLA, including about a two million dividend contribution for us in the first half of the year. So that gives that positive momentum there. Taxes, much less negative than last year. That is because as part of the divestment of the Vreda land, we have quite a favorable tax loss that we could value now. And that's about 9 million positive on the tax line recognized in the first half of this year. So without that, you're looking at a tax line that's more in line with last year and normal effective tax rates. So then the next page, The usual growth matrix for our sales development, let's not talk through too much detail here, but in a nutshell again, 5% growth, total growth, negative currency is minus 9, so dollar has been weaker, AI has been weaker, Japanese yen has been weaker, so that all plays into the 9% reduction. You see a 2% negative divestment impact from frozen dough, and organically a 15.5. And if you then look at the core, especially in the core, we see a 16.4 organic growth rate, and like I said, very much carried by a positive volume effect, close to 14% for the first half of the year. The bottom part of the table, similar pattern, but you see an even more expressed growth profile for the second quarter. That brings us to the next page on the Ida Da Bridge for the core business. So this close to 14% volume growth, clearly increased our EBITDA contribution, close to 28 million. A negative pricing mix effect for the first half year. This is related to an increased level of electric asset sales to PLA. You may remember that that is not the highest margin for us in our net sales and EBITDA recognition. And on top of that, we also have quite an abrupt and sizable increase of the input cost inflation across a broad range, and we could not fully offset that by price increases. So that is also explaining part of that negative minus four. Then there's a sizable increase in costs. You have to read it as fixed costs by 22 million. We decomposed that in clearly to show what we are investing in the company. So about half of that, 9 million is really the increase of the people base. Like I said, 200 more FTEs as per June this year versus June last year. So a sizable investment, really across the broad range in our organization to cater for future growth. And then the rest is all our cost components. It's the usual inflation and so on. negative phasing effects we also had in, especially in G2. Current impact, like I explained, lots of the important currencies for it were weaker than last year, and that brings us to the 66 million EBITDA for the core for the first half of the year. Then we move on to the net debt bridge, net debt over EBITDA. So on top of the chart you see we have increased our leverage, which we also explained and anticipated from 1.7 to just over two by June this year. The key components are explained here in the waterfall. The cash income is the EBITDA minus the tax, of course. Working capital increase, CAPEX, about 53 million of CAPEX outlays. The dividends that we've paid, the usual dividend level of 33 million paid in June. Some dividends we received from the joint venture, about four million euros. Then the contributions from the frozen dough divestment, 20 million. The Breda divestment in itself was a good 20 million divestment that we gathered in a phased payment schedule over 10 years periods, but a good 8 million has been received already this year. Then we did do an acquisition at Granotec Mexico in the latter part of the first half year, so that has been a cash out of 9 million. And then because of the strengthening of the dollar versus the end of last year, the loans they use for peace are more highly valued in terms of dollars. So that explains that last part. Next page is the free cash flow. So here we try every time, every column is a 12 months running position. If we look to the far right hand side, you see that we had a positive of 31 free cash flow in the last 12 months. That is a combination of a positive cash flow in the second half last year and a negative cash flow of minus 14 in the first half this year. Going forward, you really have to expect a big reduction of our free cash flow and really turning into negative 30. because we do anticipate a major capex outlay acceleration in the second half of this year due to all the expansion programs we have in place, especially related to the electric asset. The next page covers the investments. So here you see the world of the investments in the last years, especially the purple one gets the first overviews of the So the investments we're making in a new electric acid plant in Thailand, so about $13 million cash outlay in the first half of this year, and that one will further accelerate in the second half of this year. The recurring pay tax of $38 million, that is including our de-bottlenecking program. You may remember that in addition to the new electric acid plant in Thailand, we also are de-bottlenecking. That means increasing capacity in all the other existing electric acid plants. So that has been quite a cash outlay also in this first half year. And the continuation of our ERP investments in our platform. That's a multi-year investment program we talked about before. And again, that position is related to the Granotec Mexico position. All in all, our CAPEC outlook, by the way, remains unchanged for the full year. So 165 to 180. And we also have shared in our press release that the CAPEX, and that's the total CAPEX for the new electric gas plant in Thailand, has been increased from $190 million to $230 million, and that is really reflecting increases because of higher rates for steel. I've seen what steel has been doing lately, but also engineering rates that's higher, and also a broader scope for site infrastructure investments we have to make there. Next series, I don't think you need to spend much time without working capital, it shows you if you compare June to June, this is expressed as days, a pretty flat development, 82 days versus 80 days June last year. Then a key topic to discuss is on the next page is about the input prices, and this is about the price inflation that we see. We really are experiencing, and we are not the only company around there, I think, is that we have really experiencing a broad-based inflation in basically all our input factors. So this is about key raw materials. It is about helping raw materials. It is about packaging. It is about energy. It is about the freight, all the freight tariffs. We've tried to give you some flavor of some of the developments in just a few of them. But we can add lots of other graphs like that to this, all showing similar curves. And basically, this is really something that, yes, we are able to hedge a portion of these input factors, and that's especially related to soft commodities like corn and sugar and soybean oil and energy. So those are really input factors that we can hedge, and we do hedge over time. But that's only about one-third of our total raw-mat energy bill. And all the others are really exposure and are not hatchable. And that is really what we're being faced with. And I would say the position is more pronounced than we even have seen coming towards us when we had our earlier conversation back in April. So this is really further deteriorated since then. And on top of that roadmap, it's really the whole situation about logistics, freight rates, that's international sea container freight, it's about U.S. domestic freight. All these components are really on the rise. And that's really urging us, requiring us to really have firmness from private actions going forward to mitigate these effects going forward. To give you then some flavor about the order of magnitude, that's what we do on the next sheet in the right hand side table. So basically we decompose that in what do we see hitting this year's and then what do we see hitting also next year's, so that's the second column. And then we split it in what is going to impact our core business and what's going to impact our non-core business. So in the aggregates we're talking about an 80 to 90, 80 to 90, Euro million increase over this two-year period in increased input costs. And again, this is only price inflation, yes. Out of that 8 to 90, about 50 to 55 is going to hit our core business. So if you look at the size of what it does in terms of the size of the business, you're typically looking at about 5.5 to 6%. Price increases that we would require if you want to offset that amount of price increases. And then the remaining 30 to 35 million is going to hit our non-core business. And there, the main component is soybean oils. On the previous sheet, you probably have seen that soybean oils has really gone through the roof. And we can talk about that later why. But that is really a phenomenal increase in that input cost. And that is really hitting our non-core email-surfing business and not impacting the core research. So again, this whole dynamic will require, and we are taking actions on the price dynamics in our portfolio. And based on that, we aim to restore our adjusted EBITDA margin into next year for the core activities, again, to above 15%.