Good morning, and welcome to this first quarter twenty nineteen presentation for Borregaard. We lost the picture here, but maybe we can recover it. So there it is. So my name is Pear Serle. I'm the President and CEO.
I will be joined this morning by our CFO, Pebe Arne Lindgster, and we will take you through the following agenda. I'll take the highlights for the quarter. I'll go into the business areas, the market situation, but also touch upon some of the key projects that we are working on right now. Then I will go on to talk about the outlook, and Pebe Arne will take over and cover the financial numbers. First of all, the highlights for the first quarter.
EBITDA adjusted came in at NOK157 million compared to NOK177 million in the first quarter last year. We saw 7% volume growth in Performance Chemicals, and this is in line with the Florida ramp up, so that ramp up is going according to plan. Higher wood cost and lower deliveries was the situation in Specialty Cellulose, while we saw a strong improvement in the businesses inside other businesses. Also, the net currency impact was positive in the quarter. So to go on to Performance Chemicals.
First, on the left hand side, if we look at the sales price development, the average gross sales price came up 3% in Norwegian kroner year on year. However, the currency impact is positive with 6%. So therefore, the average price in sales currency is down approximately 3%. And this is due to a slightly weaker mix in specialties and also slightly lower prices to concrete admixture. And most importantly, the sales volume growth that we have is going into medium and low value applications, and this will automatically have a negative impact on the average sales price.
As we talked about, the volume came up 7%. We saw a very strong volume growth in the Industrial segment of our portfolio, while Specialties and Construction were much in line with the first quarter last year. I should also mention then that Specialties had a particularly strong quarter in the first quarter in twenty eighteen. And of course, underlying here is that the Florida ramp up is on the margin supplying the volumes that we grow within the marketplace. Then I will take one step back and look at the larger picture on the market side.
Basically, we are trying to achieve three different things at the same time here. First of all, if you look on the right hand side here, you will see that from the period 2017 to 2021, 2021, we would like to grow the absolute volume in this business area by roughly 100,000 tonnes up to 550,000 tonnes. Also in this period, we would like to achieve two different things. One is diversification. And diversification means that historically, we have been too dependent on the Construction segment, and we would like to take it down to roughly 30% of our volume by the 2021.
In terms of revenues, that will represent between 1520% of the Business Area's revenues. So by then, we think that we will have a good balance between the different segments. This will mean that we will take the Industrial segment from 35% up to 50% in the same period. Then the third thing we would like to achieve is to have growth in the specialties part of our portfolio, which was around 18% in 2017. This will come up to the target is to bring it up to 20% but on a higher basis because the basis is 100,000 tonnes higher.
And when we set this target and when we say what we say here, we are quite confident that we can deliver on this because if you look on the left hand side of this slide, you can see the recent five year development here from starting from 2015. We have taken the Construction share down from 65 percent to roughly 45% last year. And we have taken the Industrial share up from below 30% to just below 40% in the same period, and we have grown the specialties share of the business. So based on the last four years' performance, we should be well on track to deliver on the 2021 target for diversification and specialization of the Performance Chemicals business. And just to touch upon one more slide on diversification.
Compared to the Construction segment, in Construction, the bulk of the business is in the concrete admixed area, but also there are a few other segments as well. But if you go into the Industrial segment, that is an extremely diversified portfolio between dispersing agents and binding agents. And you can see here a snapshot of the markets where we have seen that have contributed to the strong growth that we have seen in the last three, four years and that we have also seen in the first quarter this year. So as you can see some examples here, coal gasification, where we sell dispersant and rheology control industrial dust control, which is a dust binder pelleting, which is, again, a feed binder paper sizing, going into the pulp and paper industry or the paper industry and a number of other industrial dispersions. Those areas are the ones that have really contributed to the growth that we have seen in recent years and in the first quarter as well this year.
And this growth is happening all over the world, but particularly Asia is at the forefront when it comes to increasing the volumes at the moment. Then I will spend just a few minutes on updating you on some of our large investment projects. And the large the last large investment project that we are about to finalize this year is the upgrade that we have of the Lignin facilities in at the Salisbury site. This project was announced and approved having a NOK500 million budget. And the latest estimate right now is that we will come in on NOK $450,000,000, 10% below the original budget.
This project, to remind you, is a combination expansion project and a replacement project. So it's an upgrade of the existing facilities, but it also puts in equipment to prepare for more specialization of the lignin business. And it's particular the largest component is an additional dryer, and you can see a picture here of the building. The dryer is about to be finalized in a few weeks. And there are also a lot of logistics investments connected to this business and infrastructure and energy.
We now expect that this equipment will go into operation in June, July of this year, which is slightly ahead of the original schedule. Also to remind you that this is since this is a combination of an upgrade replacement investments and an expansion investment, it has two sort of positive cash flows. The replacement part has a cost reduction cash flow, and the annual cost savings are estimated to be above NOK40 million. And that will be an optimization of production campaigns and especially reduction in the logistics costs. And this will gradually be realized through next year with the full impact from 2021.
The second stream of cash flow stream coming out of this investment is, of course, for further specialization. And this equipment will make it possible for us to continue to grow the specialized portfolio in the lignin area. Connected to this investment and upgrade in Zaesborg is also a new lignin warehouse at the Port Of Borg. And this warehouse is a new modern warehouse for dried lignin because a key feature of this upgrade is that going forward, we will produce more or less all our lignin in Sarisborg in powder form. Today, it's a blend of powder and liquid.
But going forward, it will be and the majority of the production will be powder. Today, we have a number of storage areas in the vicinity of Salisborg. In the future, this will all be done through this new warehouse in at the Port Of Borg in the city of Fredrikstad. This warehouse will be built, owned and operated by the Port Of Borg, so we will have a lease agreement on this warehouse. And of course, this will but it will come on to our balance sheet through the IFRS 16 regulations or rules.
This warehouse will also go into operation in June. There will be a transition period where we have to move out of between ten and fifteen different external warehouses in Salisborg and eventually end up using this warehouse. The financial impact of this warehouse is included in the numbers that I talked about on the previous page. This will have several benefits. Like I said, this is important to contribute to the optimization of logistics, but it will also improve the environmental footprint of for Borrevagard out of Norway because there will be a lot less transportation because there will be just one warehouse, and that warehouse will be located next to where all the shipments going out of Norway will take place.
And since it's all powder, it will also powder is half the volume of liquids, so that also means that there will be a huge reduction in road transport coming out of this particular new warehouse. So that's an update on this particular this large project that we are just about to finalize in Seisborg. Then on to specialty cellulose. We sort of the major factor here in the first quarter was that we had low deliveries. But of course, that's variations that naturally take place between quarters, and I would say, a random basis.
So for the full year, this will even itself out. But as you can see from the staples on the left hand side, the deliveries in the first quarter was below the average level that we normally have. The price in sales currency increased slightly. The price in Norwegian kroner here came up 5%. 4% of that was from currency and one percentage point was from the average sales price in currency.
And this was driven primarily by mix. We also saw a good result in bioethanol, where we have an improved mix due to the investments that we made completed last year in the bioethanol area. Also positive exchange foreign exchange impact in this area. Then on to Ingredients and Fine Chemicals, two areas that had strong improvement in the quarter compared to last year. First, Ingredients.
As you can see, the Ingredients revenues came up to a high level. It continued at the high level that we saw in the fourth quarter last year and strong improvement from the first quarter last year. And this is driven primarily by increased sales prices, but also in this particular quarter, a favorable product mix versus the same quarter last year. And the underlying trend here is the strong market positive market trend for bio based Vanillin that I will come back to in a second. Also at the same time, we saw also strong result in Fine Chemicals.
Fine Chemicals also, as you know, have variations between quarters. And as you can see from the right hand side, Staples here, the sales level, sales revenues in the first quarter was quite high. Then just to remind you on the bio based Vanlin trend. The Vanlin market has can be segmented into three different categories. On the left hand side here is sort of the volume part of the market is based on oil based Vanlin, and this is a very competitive field where you usually sell on price and cost.
At the other end, on the right hand side, you have the natural vanilla, which is made from and the vanilla beans. This is labeled as natural and has a unique taste profile. However, the total supply coming out of this particular segment is well below 1%. It's roughly half a percentage half a percent of all the vanilla flavor consumed in the world. So over time, the market has seen a need for more to distinguish itself from the oil based Vanillin, you need to have a different segment, and that has developed into this bio based Vanillin segment.
In this presentation here, we only show our wood based Vanlin in this segment. However, there are a few other types of Vanlin that can be made from other natural starting materials than wood. But on the wood side, Borgard is currently and has been for a long time the only supplier of wood based vanillin. The selling points for wood based vanillin then is that bio based means that it should be the starting material should be a natural raw material. In our case, that's wood biomass.
We have a sustainable process in terms from a climate footprint. And also in this case, we also have quite an interesting taste profile. More specifically, the taste profile on wood based vanillin is 25% stronger, better than oil based vanillin. So if you buy a wood based compared to an oil based, you immediately have a 25% better performance in smell taste. But in today's market, the pricing difference is much bigger than what's reflected in the taste profile.
It's more the natural raw material factor that is coming into play over time, and people want to get out of oil based So in today's market, the premium is significantly higher. As you can see here, the there's a big price range putting up here, 25 to $100 per kilo for bio based vanillin. The Borreugard vanillin, I would say, is just below the midrange of that price range. But then as you can see then, that's a significant premium compared to the oil based vanillin market. And in recent quarters, the market has stabilized, if you say, at a higher level for bio based vanillin.
Then I will round off with the outlook. In Performance Chemicals, we continue to forecast that the volume will go up approximately 10% compared to last year, and this is mainly driven by the Florida ramp up. However, even we just said that the pricing was slightly down, not really much down in the first quarter, but we still expect that the market for concrete admixtures will be quite difficult in terms of competition and price pressure. So this will continue to be compensated by the diversification efforts that were quite successful in the first quarter and also specialization of the portfolio that I went through in detail earlier. Fixed cost and depreciation year on year from the Florida plant will be $40,000,000 above 2018.
When it comes to the second quarter, as such, we expect higher sales volume and a weaker product mix because of the seasonality. The winter is normally a slow season for the construction products. And this year, also, there was a cold winter. So normally, the second quarter is a pickup in terms of volume into Construction. Then for Specialty Cellulose, same guidance as we gave last quarter.
The average cellulose price in sales currency expected to be roughly in line with the 2018 level. This is a combination where we see that we have an improved product mix that will increase the price average price. And at the same time, we will sell less into acetate weaker prices in acetate and textile cellulose that will take down the average price, but altogether, a fairly flat price development. The wood costs have only been set and agreed for the 2019. And as we said last time, the cost increase in the first half will be $50,000,000 $25,000,000 per quarter in the first half.
In the second quarter, the volume forecast is in line with the same quarter last year, which means that we expect to sell a higher volume in the second quarter than we did in the first quarter. And the product mix is expected to be stronger than what we saw in the same quarter last year. In other businesses, Ingredients result will continue to be strong going forward into 2019 as well. But as I said, this is driven by the positive trend for bio based Vanillin, but and as I said, we have driven the price raised the price up to a higher level now, and it will most we expect it to stay at that level going forward. No major change is expected in the market condition for Fine Chemicals.
And when it comes to cellulose fibrils, it's still the same message that it's strong interest from the market, but sales conversion takes time, quite long lead times. And the continuing through this year, we will have the ground from the EU Horizon 2020, but it will cover a fairly a slightly smaller share of the cost than it did in the previous years. So that completes the outlook. And I'll hand over to Pebjorn for the financial numbers.
Thank you, Pierre, and good morning, everyone. Bornegrard's revenues in the first quarter increased by 3% compared with the same quarter last year. EBITDA adjusted was million compared with NOK177 million last year. We had a strong improvement in other businesses, both in ingredients and fine chemicals. Both Performance Chemicals and Specialty Cellulose had a lower result compared with last year.
Higher costs and depreciation, mainly related to the Florida startup, where they were only partly offset by higher sales volume in Performance Chemicals. And higher wood cost and lower deliveries affected specialty cellulose negatively compared with last year. The net currency effects were in total million positive compared with the first quarter last year. And the impact was positive in all our business segments. The impact from the implementation of IFRS 16 on leases on EBITDA adjusted was marginally positive with million.
And earnings per share ended at NOK1.26 compared with NOK1.37 last year. In Performance Chemicals, revenues increased by 8% compared with the same quarter last year, mainly from higher sales volume and a positive currency impact. EBITDA adjusted was NOK87 million compared with NOK115 million last year. The lower EBITDA adjusted was mainly due to higher cost, fixed cost and depreciation for the Florida plant. The effect of higher sales volume was largely offset by the lower average price in sales currency, which is related mainly to product mix and more sale of low and medium value products.
Distribution costs, which has been an issue for this business area for some time, were now normalized compared with the higher levels we had in the 2018. And the net currency impact was positive for Performance Chemicals compared with last year. The EBITA adjusted margin was 14.5% in the first quarter, about six percentage points below last year and of course affected by the higher cost and depreciation, mainly related to the Florida plant. Low deliveries was the main reason for the 10% decrease in specialty cellulose's revenues in the first quarter. EBITDA adjusted ended at million compared with NOK64 million last year.
A 25,000,000 increase in wood cost in addition to low deliveries were the main reasons for the decline in the result for specialty cellulose. On the positive side, the cellulose product mix improved and also bioethanol's result improved from a better product mix. And also in this area, the net currency impact was positive compared with last year. EBITDA adjusted margin ended at 8.9%, about six percentage points lower than last year. And again, it's mainly cost related that and wood cost related that the margin comes down.
Higher sales in both Ingredients resulted in a 15% increase in revenues for other businesses. EBITDA adjusted improved to million compared with minus NOK2 million in the first quarter last year. Ingredients had a strong result from higher prices for bio based valvoline and a favorable product mix. Fine Chemicals had higher sales revenues and hence an improvement in EBITDA adjusted. Cellulose fibrils and net corporate costs were in line with the 2018.
And we have managed to compensate the reduced support from EU with cost reductions in cellulose fibrils. Also, other businesses had a positive net currency effect compared with last year. The net currency impact on EBITDA adjusted was positive by approximately million compared with the 2018. Hedging losses were NOK8 million compared with a hedging gain of NOK3 million in the first quarter last year. However, the Norwegian kroner weakened by approximately 7% compared with the same quarter last year using Borregard's currency basket on the EBITA adjusted level.
Using currency rates as of yesterday, where the Norwegian kroner weakened, the net currency effect in the second quarter is estimated to be positive by NOK30 million compared with the second quarter last year. And the corresponding impact for the full year of 2019 is estimated to be approximately positive by NOK85 million compared with 2018. The cash flow from operations improved compared with the 2018, mainly from a slightly more favorable development in net working capital than we had in the first quarter last year. Investments in the first quarter were at a notably lower level than in the previous two years, the previous eight quarters. Since the larger expansion projects in Norway and Florida are now close to completion.
In Q1, expansion investments were mainly related to the Linden operation upgrade project in Norway. Net interest bearing debt, excluding the IFRS 16 impact, increased by million in the first quarter. And at the end of the first quarter, Borregard is well capitalized with an equity ratio of 54% and a leverage ratio of 1.55. The implementation of IFRS 16 regarding leases had limited impact on Borregoard's balance sheet and P and L in the first quarter. The consequence of the implementation is that leases, which previously have been treated as operating leases with no balance sheet impact and with the lease or rent being fully expensed as a cost in the P and L, now will be included in the balance sheet as assets and liabilities.
The assets will be depreciated and the liability will have an interest expense. Key figures like EBITDA adjusted, profit before tax and earnings per share are only marginally affected in Borregard. EBITDA adjusted improved by NOK 15,000,000 in Q1 due to the new accounting standard, increasing the EBITDA adjusted margin by 1.1 percentage point. However, depreciation also increased by almost the same amount, resulting in the marginal improvement of million in EBITDA adjusted. Assets and net interest bearing debt increased by approximately 20,000,000, affecting Boregard's return on capital employed by minus 0.4 percentage points.
The leverage ratio increased by 0.13 to 1.68, if we include the IFRS 16 impact. And the equity ratio was reduced by 1.9 percentage points in the first quarter due to the new standard. Throughout 2019, we will report a rolling last twelve months return on capital employed and leverage ratio excluding the IFRS 16 impact because we don't have exact IFRS 16 values for 2018 and also because our financial targets are set exclusive of IFRS 16 effects. The new rented warehouse at the Port Of Borg will most likely be added to our IFRS 16 assets and liabilities in June with a value of about NOK155 million, increasing the difference between the new and the old standard further. And that concludes today's presentation.
Now Pezzoli and I will be ready to answer any questions.
Thank you, Jan. Good morning. First, some questions on the market. First on the specialties. You mentioned Q1 twenty nineteen specialties looked similar to Q1 twenty eighteen.
Can you elaborate a bit more on which segments that you're currently seeing demand strong and not so strong and which regions? And also in the construction markets, you mentioned slightly weaker pricing for Lignin. Can you provide us an update on what's going on with supply and demand with you guys exiting the market? Is that helping the market balance, etcetera? And finally, on Sarpsborg expansion or investments, how should we think about the phasing of cost savings there in the 2019 and into 2020 and especially with regards to activation of depreciation, etcetera?
I can take the last one first. The depreciation, what you can do there is to take the investment sum and divide it by 20, then you have approximately the annual depreciation. And we will probably gradually start up depreciation in June and some depreciation from July because this project is different equipment. Some equipment have already been installed and are ready to start up now. Some will be gradually taken into operation during June.
So that gives you an indication of the depreciation. We don't expect much of a fixed cost increase from this project as a total, but we will in 2019 in the second half and maybe into even into 2020 have double cost related to warehouses because we will have to empty the old warehouses and take the new one into operation. And of course, you will also have then depreciation and then interest costs from the warehouse at the Borg Port. And you can use the 155,000,000, as I said, and do the same twenty year calculation on depreciation there. So we will see quite an increase on depreciation from these projects from June, July.
Okay. So first, the specialties in the Performance Chemicals, Lignin business. What we reported was that the overall volume was in line with the same quarter last year, but the mix was slightly weaker. The high the specialties portfolio is quite diversified, but it's quite known that the three large sort of categories with the largest price highest pricing is the battery segment, it's the iChem segment and it's the oil well, the Oilfield Chemicals. And so when we say there's a weaker mix, it means that within those three categories, we have slightly lower volumes than we did in the same quarter last year.
Normally, I would say that these are variations between quarters that can be quite arbitrary. So I wouldn't say that this is a sign that something has happened. But that's why I mentioned particularly that last year was a very strong quarter for the specialties in the first quarter. So the overall long term target, like I pointed out, remains that we continue to grow, and we expect to grow these specialties overall also going forward. The Construction segment, I would say that even though the comment on pricing was slightly negative, it was meant to be positive because I think that the price reduction in construction was, I would say, lower than we might have guided for in that particular quarter.
So if you look again at the present slide that I made on diversification and the specialization, you can see that we have contributed significantly to balancing the construction market. And eventually, I expect that our contribution will certainly lead to the balance being improved in that particular market because there hasn't been any other major new entrants into that market in this period, with the exception, of course, that Borregoard has restarted Spain, and Borregoard has started up the Florida plant. But as you can see from our numbers, we have been successfully managing not to overload the Construction segment with those volumes.
Mickey Mertz, Carnegie. First, a question on the Vanlan side. Because prior to this recent improvement on the Vanlan, it was probably five years of worsening in the Vanlan markets consecutively each year. I was wondering the levels we are seeing now and the prices you are seeing, have you seen these levels before? Do you expect there to be even further upside eventually?
But where is this vertical going if you try to look two or three years down the road?
Like I said, I think that the development that has taken place is that in the old days, there was a distinction between what you call natural vanilla and industrially produced vanillin. Then, of course, you have this recent development, if you think in very long terms now, that people want to get out of oil based products. And you can easily find out that there is not enough demand or supply out there to go to natural vanilla. The only interim solution is to go to a natural based vanillin, which has a natural starting material. So in that sense, this is a fairly recent and new development.
And I think it's a prime example of what's going on right now in global trends in terms of green solutions and so forth. And we have seen the same in ethanol earlier, where there is also a premium that was not there in the past. Now this premium has arrived. And it's always like when something happens quickly, you wonder if it's forever or whether it's a stable situation. But that's why I said that for now, perception is that, at least for this year, this should be a level that has stabilized for this year.
Going forward, it's very difficult to predict. I think that the trend is very strong. So I think that this is a good opportunity for us. It's one of the first examples together with ethanol where we actually get paid for having a green solution. So I think it's an exciting development.
And it's not exactly like you said. We have said that there is there was a constant when our product was competing head on with oil based vanillin, of course, then you are in a different so this is a repositioning of the product. And that's happened not only to wood based vanillin, but there are also a few other natural based vanillin products out there, but of smaller volumes than wood based. So I said wood based is clearly the high at the moment, the largest producer of natural or bio based vanillin, but there are some other producers as well. And what is difficult to see when things move this quickly is that as prices go up, this, of course, incentivizes a lot of people to look for solutions.
So there could be you have to really have a lot of facts about what's the full cost or marginal cost of these other Vanillin products that can be made from a natural biomass. That's difficult to assess. So but I think that the big thing is that there has become a clear distinction between oil based and the bio based, and I think that will remain.
Clear answer. Number two, the at least €40,000,000 in cost savings expected in Sarpsborg, is that net of depreciations? Or is it excluding depreciations?
That's excluding depreciation.
So it means the actual cost saving on the income statement will be lower then?
Yes.
Alright.
Third, did you quantify the warehouse cost expected for the second half when moving? I arrived a bit late, so sorry if I'm repeating something you already said.
No, I didn't. But depending on whether we will start up in June or July, it will be in the range of million and combined depreciation and interest expense. Maybe a little bit more if you start in June, a little bit less if you start in
So 10,000,000 in total or 10,000,000 per quarter?
10,000,000 for the rest of the year, so for two quarters or for seven months.
And lastly, the reallocation costs and then redistribution costs taken in Performance Chemicals. The redistribution costs, you did a good job on breaking down or granulating in the last quarterly presentation. Could you be and then you also guided for this to fade gradually out. Could you say something about how that has moved now in Q1 and what you're expecting for Q2, hopefully, in terms of or using figures as well?
Yes. I think we if I remember correctly, we said it was about CHF 15,000,000 higher in the third quarter and a little bit less in the fourth quarter. And we are back to the zero point again in the first quarter. And from what we see now, we expect that to continue at that level. So the additional 25,000,000 to 30,000,000 that we had in the second half should now be gone.
And then moving forward with the new warehouse with the optimized logistics, maybe an improvement in Froida, we might see also further reductions in distribution costs, but that's including in the return of those projects.
Very good. Thank you very