Corbion Nv Unsp/Adr

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%.

On the outlook, on the top line size, we are raising our organic sales growth guidance from 12 to 15% coming from the 7 to 10. And there, obviously, we are accelerating some initiatives now that business travel resumes and we can intensively visit our customers to further enhance the pipeline for 32 and 33. But on the remaining part of the year, we see an increase in, you know, benefit from our SFS pipeline combined with a higher win rate I mentioned before. We also still very confident on the PLH on venture ramp up. This is progressing very well in terms of adding new customers as well as developing new applications. An increased confidence in our Algae-based Omega-3 business development with new customer conversion happening across the second part of this year. And not forgetting the majority of this across the three businesses Majority volume growth, although we expect to see the first contribution from the pricing actions on the open contract. However, on the adjusted EBITDA margin there, we are revising our target between 13% and 15%. It used to be above 15%. We expect, as I said, to pass on these higher input costs with some delay. And we aim to restore this margin level above 15%. for 2022. This is requiring a very rigorous and strong discipline, and we are ready with a team in full action mode to make it happen for next year. On this, thank you for your attention. We will move to the Q&A.

Operator, could you call for questions, please?

Thank you, sir. If any participant would like to ask a question, please press the star followed by the one on your telephone. If you wish to cancel this request, please press the star followed by the two. There will be a short pause while participants register for a question. The first question comes from Mr. Robert Voss from AMB AMRO. Please state your question, sir.

Yes, hi, good morning all. I have a couple of questions. I appreciate all the explanations you gave, but I'm still a bit puzzled why the visibility of increasing input prices. Apparently it was so low that you had not seen this coming at your last trading update on Q1. So maybe a bit more color there. And then a specific detailed question for Eddie. You mentioned 5.5% to 6% price increases are needed to offset the higher costs. Is that for core only? And if so, what will be the strategy for the non-core? Soybean prices are increasing also quite steeply. That is my first one. The second one, you mentioned $40 million higher costs for the construction of electric acid plant in Thailand. Yet, if I look at all the Capex guidance mentionings, they maintain the same. So can you elaborate on this piece? Is that maybe a currency effect or why have you not increased midterm guidance for CAPEX. And then finally on incubator, if you look at Q2, both year on year and also compared with the first quarter, sales was significantly higher, but the losses remained stable at around 3.4 million in the second quarter. What exactly is the reason for that? Why is there not more benefit from operational leverage? Those are my questions, thank you.

Okay, so let me take all four questions. So the first question on the roadmap, so indeed in the previous call in April, I've mentioned the 15 to 20 million total hits, where now we say 40, so indeed that's quite a step up. Absolutely, but again, I'd like to reiterate there are quite a couple of factors that really did not materialize at all. If anything, if you look at logistics, for example, freight rates, the whole situation logistically worldwide has even deteriorated since earlier this year. And while lots of indications were that things would normalize, that is not taking place at all. And if you take, for example, also U.S. road transport, that is a further hiccup in cost developments. It is the international freight rates. So it's really, yeah, really broad-based, again, where we did maybe anticipate some normalization. We don't see that yet. So it's also in all the role maps related more to maybe the chemicals we're using, like sulfuric acid, where we anticipated a reduction in anything that has stayed stable or even increased. It is about all the other components that we use. Packaging, I don't know if you follow the polymer markets, but polymers are really on the rise, so they're also expressed in packaging prices. So it's really broad-based. And again, we are quite open here that the amount of hedges that we can apply is, in that sense, limited. It's 30 percentage, about a third of our own bill. So that means we do have exposure on all these components. And it's really aggregate of it that makes it so pronounced. In the past we've had earlier hikes, but it was always more focused or maybe on only one key raw material. And this current global environment is really broad-based and that's why it's so pronounced. The second question, yeah, that's purely arithmetically, mathematically, I just want to get you some connotation. So the 50 to 55 relates to the increase in input cost for the core only over this two years period. If you take that on the current H1 sales level for core, you multiply that sales level by two as an estimate, then you come to that order of magnitude. So I think it shows you what it should be at least, but that's across the whole business, of course, of core. And of course, we differentiate and we make our choices with the business where we go much more aggressively than these and where we have to work to stay maybe more along those lines. That's not to say that we don't do anything with non-core, absolutely. Non-core in the 3035 also has to be covered. The only thing is we drive these two businesses strategically in a different way, as you may remember. So the core we drive for the combination of sales growth and a certain margin profile. The non-core we really drive or manage, manage for value. And manage for value, you have to read as manage for cash. So there we really will drive the whole business to get to at least an absolute amount of cash, which is an absolute amount of EBITDA out of the business. But certainly also there, as the oils with the current pricing and the dynamics that we've seen, has to be passed on to the market, absolutely. Then the $40 million higher CAPEX for Thailand. So that is really related to the total CAPEX program for that one plant. And those CAPEX outlays are not only taking place this year, but it's also in 22 and also in the early part of 23. And so that plant becomes operational by mid-23, as we guided before. So the whole CAPEX over this three-year period is now up from 190 to 230. For this year, it is not really impacting our guidance because in 21, the capex outlay is very much what we had already anticipated. So it's more increasing the 22 and the 23 in that sense. So that's why we did not change or had to change our guidance for this year. Then the incubator losses, yeah, a good question. It becomes a bit technical here. But here we are producing the algae related business that is comprising here in the incubator and related to DHA in one plant in Brazil. And basically we have in the first half of the year sold more than that we produced. And if you sell more than what you produce, then your inventory levels comes down and the fixed cost component in those inventories is coming as a hit in your P&L. So that is typically what we see also in some other parts of the business, but that's what's quite pronounced for the incubator. So quite a negative in the first half of the year. And we do anticipate a reversal of that in the second half of this year.

All right, Eddie, that's very clear. One follow-up on the CAPEX. I was not specifically referring to this year, but I think you also kept your 55 million per annum for the new electric asset plant in Thailand unchanged. So where do you gain the 40 million that you lose on the higher engineering costs, et cetera? That was the question, not specifically for this year, but maybe for the years thereafter.

Okay, we did not... adapt our guidance for 2022 onwards. So that is more something that we will do towards the end of this year when we come out with a review of our guidance for those years. So, again, for this year, no change. For the next year, this is one element, but we will look at the total CAPEX program, of course, if we have to make that kind of adjustments.

All right. Very clear. Thanks.

The next question comes from Mr. Patrick Rocha from Kepler. Please state your question, sir.

Yes, good morning all. A couple of questions from my side. The first one is on the raw material issue. So let's assume that you need a price increase of around 10% this year and next year combined. First offshore pricing of around 2.5%. So the question is what kind of pricing do you foresee for the second half and what price increase do you need to pass on next year? Is that around 6%? And following up on that, based on pricing as well as volume growth, I think Olivier had a pretty bullish story on SFF and LA. your guidance for organic sales growth for 2022 most likely will also then be above the 4% to 7% range. And then, obviously the margin in the first half is impacted by raw material price inflation, but on an absolute level for the EBITDA, the impact from raw material seems largely compensated by faster growth for now, as well as some price inflation. coming in later, is that fair to say? And then the final question is a follow-up on Robert John's one. The higher CAPEX for the LA plant in Thailand, is that something that we can also expect for the potential expansion in France? And is there any implication for the model or let's say in terms of the pricing as your investments will rise? Obviously, I still assume that you will kind of capture a minimum return, but happy to hear your thoughts there. Thank you very much.

And maybe I will take the volume and the price increase and the other two. So, good morning, Patrick. So, basically, on the guidance for 22, I mean, again, as I said before in the presentation, indeed, I mean, again, we see a very high growth momentum here. That will not stop on the second half. Obviously, again, we want to see this project materializing, but the confidence level in being in this high end is there. So we'll not commit on percentage at that stage, but I'm pretty confident that we're going to continue on a very strong momentum across the three businesses. So on the price increase, You know, all in all, when you look to the absolute number, of course, it looks and it is big. However, when you see what's going on, you know, not that this is coming as a surprise to the market or to the customers. Even when you look at our emulsifier business on Encore and soybean oil, you know, this is a widely used product in most of categories. Recently, you might have seen, you know, an announcement from the big FMCG companies that are active in dressings, you know, sauce and culinary. They are all facing a huge, I mean, pressure impact. And what's happening on the renewable fuel standard in the U.S. on this is pretty clear. People do see the order of magnitude that is happening. I have to say that first back to this non-core, we are living very little, if any, room, you know, for discussion in passing. I mean, we are very strict on that. And I think there, I'm also confident we're going to have some results. On the rest, it's widely spread, and of course, there is also mixed impact. But we are going in, yeah, I mean, for next year, you know, again, largely above 10%. Now, I cannot predict the success rate. I mean, it will depend on a lot of other factors and things that can happen between now and the end of the year. However, what we see is that we are starting discussions very early on this year. So usually these, let's say, negotiations do start in Q4. We are expecting and we see now a discussion happening already as from now for next year. And again, having been myself through several price increase in my career, even, I mean, a lot higher than this one in the cereal sectors. It's about maintaining a very strong discipline. At the same time, we see still a continuation of a tight supply and demand on our core lactic acid markets going into next year. So there are no massive, you know, a new capacity coming up. And the bigger new capacity coming up next year is the one coming actually from Corbyn announcement. If you remember, we announced, you know, these, let's say, 65 million investment into various, the bottleneck for lactic acid that will come on stream in Q1 and in, let's say, late Q2 next year, both in the US and Brazil. Eddie, maybe you can take the, let's say, other two points.

So, The last one, let me start with that on your question on the capex in Thailand. So that increase at 190 to 230 million dollars is really a Thailand related impact because like I said, we had to invest more inside infrastructure and we have specific increases on the steel price that are taking place as we are procuring already now and also the engineering rates. And on top of that, by the way, I didn't mention it yet, but the whole COVID situation, I don't know if you follow the Asian countries, but Thailand is one of the countries that it's not an easy call at the moment, if I have to say it in an understated way. So that also gives us a higher cost outlook. So you cannot translate those dynamics directly back to the next PLA plant in France, Grand Prix. At this stage, we do not have indications or new insights that we have to adjust our KPEX predictions on that plant. So we cannot extrapolate those. Oh yeah, an implication for price. Yeah, this investment, so the electric acid plant that we have in Thailand, I've explained before, we are always looking for a minimum investment, which we call an IRR investment, an internal rate of return post-tax of about 15%. And that was already the case on the previous CAPEX assumptions, and that's still the case on these price assumptions. So that is how we judge these investments, because you really do these investments on a very long timeframe, and you don't do it just for a couple of years, as you can imagine. So I don't think you can just make a direct relation between sales price of PLA versus a certain investment level. That directly doesn't work that way. You had a question? Is that the first question or not? So I'm not sure if I fully got your question or if the question is on the wall match. So the 30 million, let's take the 30 million for core. The phasing of the $30 million, I put it a bit rough now, Patrick, but take us in a sense of something 10-10-10, so Q2, Q3, Q4. So more or less stated what we've seen in Q2. And like Olivier and myself are already saying, we are active with pricing actions in the markets. I don't think we want to share here exactly what outcome we do anticipate if that still contributing this year, but we do expect a certain contribution offsetting part of that second half of this year. That is very helpful, gentlemen. Thank you very much.

The next question comes from Mr. Fernand de Boer from the group Petercam. Please state your question, sir.

Yes, good morning. It's Fernand de Boer from Petercam. Also, a number of questions from my side. First of all, you said in your intro that on PLA you should come back on the margin, which was very low in the second quarter. So I probably missed that. But could you give some reason behind it and why it should recover in the second half? That's the first question. Then, Eddie, to come back on your remarks on the warm-up and the step-up in this expectation, you said that, In the first quarter, you assumed some normalization. Is the 80, 90 million you now expect, is that then purely based on the current situation and no expectation of any normalization? Then to come back maybe on PLA, yesterday we saw the final announcement of NatureWorks. saying, okay, we will have a new plant ready for PLA also in 2024. How do we have to look at this with two, the market leaders coming both with, let's say, almost doubling the capacity in that year, in 2024? How do we have to look at that? Do you believe that the demand will be that strong that it can absorb that capacity at that moment? And then also coming back on the pricing, sorry, I'm going all over the places, but in the non-core, we saw already some six, six and a half price mix, if I saw that correctly, in the press release. Is that all price? And could we expect then a third acceleration in the second half to mitigate the impact of the warm-ups? And then last question, you're now going for 12% to 50% organic growth. Also next year you will go for a lot of growth in the core business, but you still have that target of 4% to 7% annual organic growth. So if you take the average 4% to 7% per year, will you also review like that, like the CAPEX figure at the end of this year, that you see some room to step that up? Those are my questions.

So, good morning, Fernand. So, I will first start with the PLA questions and then pass on to Eddie on pricing and roadmap and be back on the last one. So, yeah, I think on PLA, my comments, basically, if you look at the Q2 margin, why did I say it's not necessarily representative? As we are ramping up volume pretty fast, We have, depending on the quarter, as we are, you know, really ramping up sometimes some maintenance-specific stop, which did happen in Q2 this time, you know, for instance, that we're not necessarily anticipating because when, again, don't forget this is still a relatively new process and we are going, improving the yields, debottlenecking constantly. But when we look at it, you know, when we have this couple of days on time maintenance shut down here, it could have an impact on the volume we produce, but we've not seen any decrease or loss of momentum in terms of sales development on one side, but also pricing. And when we look to the contracted volume for the remaining part of the year, we are feeling pretty good. You know, it's more, you know, today can the plant ramp up quick enough to follow a demand. So don't look at a single quarter there because it's not representative on the PLA. Last night, the NatureWorks announcement, I think it was interesting to see the capex level for both Lactic and the PLA. I'm sure you've noticed that. So actually, the fact that indeed they are coming in the same year as we are coming, It's about how do you prepare, you know, currently the market because you speak about having another two to three good years to prepare market development and plant the seeds, you know, to absorb these upcoming volumes. Well, let's remind ourselves, you know, that if you compare to indeed the incumbent products we are replacing, polystyrene, you know, still. PLA volume today is a small drop in the oceans of the synthetic polymers. However, I think we need to prepare the market. So what I explained also last time is, for us, it's very important right now to act upon two dimensions, increasing our scope in terms of application, and the John Venture is investing heavily in adding resource to develop new applications to diversify the application reach, you know, beyond the food service, you know, cutlery to 3D printing to more technical functional bioplastics, and of course, through rigid packaging. So we are really spreading out in a lot more categories right now. At the same time, we are also spreading across different geographies, where right now we have a much better spread globally. And obviously, we are also, I mean, having an intent to lock on longer term contracts, as we speak, to secure the base load of our new French operation. And that is already a process that has been initiated a month ago. So this is what we are doing about it. So Eddy, maybe you can take the roadmap and the pricing.

Yeah, so your question for now, the 80 to 90 million input cost inflation, So absolutely, that is basically based on what are the current market rates, so for all the open positions, and we took already into account what have we already hedged. As you know, a couple of the key input factors we can hedge and we do hedge, like sugar, corn, soybean oil, energy. So part of next year's inputs have been hedged already. But everything beyond that is fully open and exposed. And that is also exactly the unknown or the visibility that you miss. I mean, if all these broad-based markets in higher levels of volatility that we've seen in the past, that is what they're currently being faced with. So that 8 to 90... no doubt will be higher or lower as we go into next year from where we are currently seeing it. How does that then translate in guidance for sales growth next year for the core? Absolutely. I think we want to see a bit more proof points of the pricing negotiation phase where we're active in and we'll continue to be so in the next, you know, good couple of months towards the end of the year. So that will put us in a good position indeed after the year closure that we have a good look at the guidance that we've provided for at least next year. And we, of course, will make an update on that based on those latest insights. And the last question on pricing non-core. Non-core is, by the way, now only the emulsifier business, as you know. Yeah, absolutely. So that price mix is very much to be read as we are already pricing higher in that specific market because the key input factor is soybean oils again, and that key commodity has been a huge price increase. And we still have to continue. So it's not done yet. So don't get the wrong message here. We started, but it's not finished yet.

Just to comment on the, sorry.

No, no, go ahead.

Please go ahead. No, I was just also want to emphasize on this emulsifier, let's say, and soybean oil, sharp raw material increase. There is, I mean, despite the shortened pressure on this business, there is an important side benefit that is occurring on our core SFS business by moving to alternatives. And that's not to be neglected. You know, despite, I mean, the whole debate on, of course, on this item today in the U.S. on fuel versus food, because, you know, most of the solving is now directed to biodiesel, which creates a lot of discussion among the big accounts. There is also a very strong development need where Corbion is very active in offering, you know, alternatives. And I have to say we have very good solutions, value proposition on the core business on enzyme cocktails, functional systems, comprising our other ferments to go for, I mean, other clean label emulsifying solutions. So we gonna actually act on two fronts on that emulsifier aspect as well.

Maybe one question on this, because you say we have, let's say two thirds of our business is on contract annual. And you can only one-third head of your raw materials. Given this, what's all happening now, any reason for you, let's say, to change your business or try to change your contracts that you can have some more pricing flexibility when these changes come?

Correct. No, correct. And actually, this is exactly your point, sir. The discussion we are currently having with the business to go for eventually only six-month cover for next year and shorten that. Seeing the volatility we've seen recently, as long as we don't have a better visibility, we're going to go for much shorter contractual terms in 2022.

Okay. Thank you very much.

Yeah. The next question comes from Mr. Sebastian Bray from Barenburg. Please state your question, sir.

Hello, good morning, and thank you for taking my questions. My first one would be on the unit margin of these new products and sustainable food solutions. The reason I'm asking this is as follows. The Corbillon did about $40 million of EBITDA in H1 2021. If I take the 15 million or so, that's half of the 30 million raw materials increase you're guiding for for the full year, and assume that this drops into the H1, and assume that half of this dropped into the H1 period, so about 15, and let's say that, as a rough guess, 10 of this was in food, the EBITDA margin that comes out if you do that exercise is roughly flat with last year at 17.5%. And yet the growth drivers for this year appear to have been newer products in antioxidants, fruit ferments, and so on. Do these products come at incrementally higher unit margins than the legacy of the portfolio? And what is roughly the split between what you'd think of as legacy or classic lactic acid-style products and newer ones such as fruit ferments and antioxidants. I'll pause there before asking the other questions.

Yeah. Hi, Sebastian. Maybe on this, the thing, if you look to the SFS, maybe to give you some highlight to the SFS business today in total, 40% of the revenue we generate in SFS is coming from lactic acid derivatives and legacy business, you know, from Lactic, where we have this backward integration. The rest, we create value by creating functionality, offering solutions of various ingredients. Some of them we do produce internally, others we source externally. So when we get in new products like the Antiox or the dairy stabilizers, we aim, you know, to be in line with the average corbium margin. We do not dilute margin with these new products. product on the opposite, the aim is to enhance margin on these new initiatives. And this is what we see, although the contribution is not yet significant and material to the point that you can see today. So I think on SFS, what you can see in terms of margin evolution on this first half is that we have a larger impact of indeed investing heavily in the organization in terms of FT increase, because to get to the pipeline healthiness and level that we can see today, we had to have this upfront investment to get more people in technical service, people that, let's say, are in the labs on the bench. And as I said in my earlier comment, I think what's making a big difference today in our performance is that during the pandemic, despite all, of course, the health and safety constraints we had and measures we took, We kept all the labs open, and we still answered all the customers' development needs from a lab prototype buildup. And that was, again, really paying off. When a lot of our competitors were shut down totally, we kept running. We kept really running full blast on the innovation and the technical application side. So, and of course, this came with all these investments I mentioned before at the expense of the margin development on H1.

That is understood. Thank you. My second question is on PLA. How has the input, I still haven't quite understand why margins would recover in H2 and I'm looking at the sustainable, pardon me, I'm looking at lactic acid specialties and seeing very little price inflation for H1 Is this because of the fact that the lactic acid prices that were sold to the JV were essentially flat, and are these going to be adjusted? And separately to that, when Corbion runs out of capacity at the existing Thailand plant, which I assume will be sometime next year, should we be penciling in a debottleneck for that facility, or do you currently have no plans to expand it?

Yeah, so maybe I can take these questions. So again, please don't read too much in the individual margin developments per quarter. So just to give you a bit of a feeling what happened, we've disclosed those figures to last year. Q1, even down margin of last year, 30%, Q2, 37%. This year, Q1, 43%, Q2, 30%. So there's quite some volatility on the individual quarters. I think the better read is to look at the total year's performance in terms of EBITDA margin profile for the JV. We came from 11% in 2019, close to 37% last year, and I would say this year we will be well into the 30s again. So that's, I think, the better read. Don't try to read too many trends, what have you. And of course, underlying, yes, also the joint venture, on the one hand, they have the nice development of the pricing so far of PLA, but on their cost side also, the joint venture is also facing increased cost of freight, for example, and yes, also some increased cost of electric asset supplies to them. So, pencil in something in the good 30s for the full year. And I think we were very happy with that kind of profitability development for the JV as such. Your second question was about capacity development. Yeah, absolutely. That's true for any plant that we are running, also Scorpion. Wherever you see that you need and that you're getting to higher utilization levels, you always have optimization initiatives to get more capacity, more product out, squeezing out more products of plants. So that's true for our electric acid plants, and it is also true for the PLA plants. So that's constantly what you do. And by that nature, even if it comes to, of course, smaller-sized additional investments, because you try to avoid the big next new build, of course, as long as possible, but you need to take those decisions in time, like you did.

Just to clarify, if I were to say, well, I think that Corbion can add 25 kilotons of PLA capacity in Thailand... over the next two years, would you say, well, that's a bit high, or would you feel comfortable with that number?

Yeah, I won't get quoted on being too specific here, but a good 10s of kilotons may be possible.

That's understood. And finally, the third question. The incubator, the price cuts have stopped, although some of this appears to be to counteract the impact of FX here. Are you now at a price level where prices effectively can remain flat and you just get operating leverage through the business?

Yeah, so in the incubator, the price mix you see there is indeed what we discussed in the previous call. So there is some invoicing currency impact there. So that means we do invoice quite sizable parts of that in dollars while the reporting currency is Brazil's AI. So that is what you have to read there in that price mix effect. Indeed, we are in the market very much with the prices where we currently have that. But that's not to say that that will be the case going forward, because as we will cruise through higher levels of business utilization, we also will look for ways to further optimize the mix, of course. But currently, this is indeed what you should assume.

It's helpful. Thank you for taking my questions.

The next question comes from Mr. Alex Sloan from Barclays. Please state your question, sir.

Yeah, hi all. Thanks for taking the questions. I've got two which are kind of follow-ups. The first one, just on the volume growth in sustainable food solutions, And actually in the non-core emulsifiers, obviously very impressive volume growth in the second quarter. I'm assuming your customers are also looking at a lot of the same raw material inflation charts you've shared with us and perhaps anticipating that some pricing is coming in the second half. So I wondered what, if any, impact do you think that might have had on the volume growth in Q2 in terms of customers maybe building inventories ahead of those price increases, if that's been a factor at all. And then just a second one on PLA, very helpful context on the margin and not reading too much into Q2. into one quarter and the kind of guide for 2021. Just thinking about over the next few years for PLA and in the context of your comments regarding sort of preparing the market for absorbing more volumes down the line and taking some longer term contracts. or locking in some longer-term contracts, doing that. I mean, does that imply lower prices and perhaps slightly lower margins than the good 30% level over the next few years, or is that a kind of sustainable level that we should be thinking about? Thanks.

Good morning, Alex. So starting with the first one on the price increase and obviously the risk of some customers building inventory. what I mean I see and I think is that this is too early to be seen. However, it's always when you go for such high level of price increase a risk that usually you see across, you know, primarily Q4. What we have in place is indeed, I mean, a close track of order pattern to Q4. to avoid that or not to allow that to happen. This is part of, I would say, the sales discipline I was mentioning before, where basically we will not chase, let's say, easy volume on price. This is not how a price increase does work in that space, specifically one of that order of magnitude. So we'll have during, I mean, you know, the latest part of the year, Yeah, also, I mean, a very close look at these, let's say, potential deviations to avoid that to happen. So, and what we see is that, obviously, in Lactic SC, that we are still quite a lot constrained, and we are the market leader in that space, you know, with over 45% market share, so that there is no real physical possibility for customers to build inventory there. On your question around PLA over the next few years, when we look at the long-term contracts, yeah, we look at, let's say, maintaining the current price level. There is another big element on generating value and more business going forward. And also, again, I think earlier we mentioned about nature works coming in the same year, but we see also some Chinese investment coming maybe mid-term, which will be more, you know, 25, 26, 27. We are also, as we are doing in the legacy Corbian businesses, John Venture is investing massively in application resource with very nice initiatives on how to improve home compostability. How do we, let's say, also create a recycling stream for PLA? Actually, and I think this month they launched a recycled PLA, let's say, product into the market. So that's pretty new. And they're also investing on, let's say, further adding value in terms of compounding solutions, you know, going for a different type of copolymerization technologies going forward. So the aim is, you know, to take advantage of the next two, three, four years before we eventually see more volume coming into the market when some of the Chinese announcement might come on stream. And again, I speak about this with a lot of conditions and conditional, you know, because we're not sure how much is going to come, if they're going to come, and to which extent. But we are preparing ourselves, gearing up for a much improved mix. Major initiatives around recycling of PLA, about uncompressed stability improvement, and also eventually going for more, you know, compound-like solutions from the GD.

Thank you.

As a reminder, to ask a question, please press the star followed by one on your telephone. The next question comes from Mr. Reg Watson from ING. Please state your question, sir.

Morning, all. I'd just like to ask a couple of longer-term questions, if I may. Please, you've been very clear in terms of explaining questions. the dynamics of what's going on. And it appears to me that your margin guidance for this year, you've had to cut, but you've effectively pushed forward your previous guidance of above 15% into next year. And I wonder if that has implications for your greater than 17% target for fiscal 25, whether that then gets pushed out as well, because the whole profile shifts sort of one calendar year to the right. And related to that, Eddie, Perhaps you could make some observations on where you expect your peak leverage to come now. I think your previous guidance was two and a half times net debt to EBITDA, but given that the capex cost of the lactic acid plant is going to be higher and clearly EBITDA is going to be lower than originally expected, I would expect that number to rise, but I'm wondering where you think it will get to. Those are my sort of first related questions, and then I have a second one on near return guidance.

So just a reminder on the long-term EBITDA target. So today there is no changes on our ambition to reach over 17% in 2025. So we are still really aiming to get this level. On the debt, Teddy?

Yeah, so the leverage question, I think I also shared on previous occasions that for this year, we do anticipate towards the end of this year to come more to the mid-twos, so the 2.4, 2.5-ish level, so that incorporates the increased CAPEX levels for the second half of this year. Then looking to 2022 and beyond, yeah, As we have all these new builds activities taking place while the delivery of those being operational for those investments is not taking place yet. The Thai Lactic Acid Plant becomes operational in the course of 23. We do see a further ramp up between two and a half and close to three. But that is also depending a bit what the joint venture financing will be, which we shared before in relation to the new build of PLA2. We can have that on a non-recourse basis and we are working on that. So then we will stay still constantly below the three. And I may want to repeat that the covenants are still at a much higher level at 3.75. So it leaves us quite some room to maneuver, but internally we'd like to stay below the three as a peak level.

Okay, that's great. Thank you. And then for my second question on the near-term guidance, you've been very clear on the core business. And we've danced around the subject, I think, during Q&A of the non-core business. But perhaps you could give us a stronger indication of where you expect non-core to end up this year.

Like I said, our non-core is in the managed for value. So we run that for cash. And basically, like we stated in this strategy discussion back in 2020, running for cash, we do not expect a growth profile from the business, but you have to read it at the absolute amount of cash and take it with the same CAPEX level that translates in an absolute amount of EBITDA should be more or less flat. So we really want to run this business at least more or less to a flat performance first last year. It's taken at the same currency because this is a dollar business, so organically.

Okay. And given what's happened with commodity prices, with your ability to push price through, et cetera, are you confident then that you can manage that this year?

That's, of course, what we aim for. Absolutely. We need to defend that cash projection coming out of the business because that's how we want to strategic position it. So it could be, and because we need to pause on quite some substantial pricing there, that you could lose part of the business again, but we are fine with that as long as the total absolute amount of cash flow is stable.

Okay, that's great. Thank you very much.

There are no more questions.

Okay, so I'd like to thank you all for listening to this conference call, and hopefully I wish you all a good rest of the summers and give really you, let's say again, a new appointment for our Q3 release. Hopefully see you soon physically anytime. Thank you. Bye-bye. Have a nice day. Thank you.