Good morning, welcome to this first quarter 2019 presentation for Borregaard. We lost the picture here, maybe we can recover it. There it is. My name is Per Sørli. I am the President and CEO. I will be joined this morning by our CFO, Per Bjarne Lygstad, we will take you through the following agenda. I will take the highlights for the quarter. I will go into the business areas, the market situation, also touch upon some of the key projects that we are working on right now. I will go on to talk about the outlook, Per Bjarne will take over cover the financial numbers. First of all, the highlights for the first quarter. EBITA adjusted came in at NOK 157 million, compared to NOK 177 million in the first quarter last year.
We saw 7% volume growth in performance chemicals, this is in line with the Florida ramp-up, that ramp-up is going according to plan. Higher wood cost, lower deliveries was the situation in speciality cellulose, while we saw a strong improvement in the businesses inside other businesses. The net currency impact was positive in the quarter. To go on to performance chemicals. 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. The currency impact is positive with 6%, the average price in sales currency is down approximately 3%.
This is due to a slightly weaker mix in specialties, slightly lower prices to concrete admixture, the sales volume growth that we have is going into medium and low-value applications, 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 that specialties had a particularly strong quarter in the first quarter in 2018. Underlying here is that the Florida ramp-up is on the march in supplying the volumes that we grow within the marketplace. I will take one step back look at the larger picture on the market side.
Basically, we are trying to achieve three different things at the same time here. If you look on the right-hand side here, you will see that from the period 2017 to 2021, end of 2021, we would like to grow the absolute volume in this business area by roughly 100,000 tons up to 550,000 tons. In this period, we would like to achieve two different things. One is diversification means that historically we have been too dependent on the construction segment, we would like to take it down to roughly 30% of our volume by the end of 2021. In terms of revenues, that will represent between 15%-20% of the business area's revenues. 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. 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 tons higher. 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 starting from 2015. We have taken the construction share down from 65% to roughly 45% last year. We have taken the industrial share up from below 30% to just below 40% in the same period.
We have grown the specialties share of the business. 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. 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 admixture area, but also there are a few other segments as well. If you go into the industrial segment, that is an extremely diversified portfolio between dispersing agents and binding agents. You can see here a snapshot of the markets 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.
As you can see some examples here, coal gasification, where we sell a dispersion 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. 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. 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. I will spend just a few minutes on updating you on some of our large investment projects.
The last large investment project that we are about to finalize this year is the upgrade that we have of the lignin facilities at the Sarpsborg site. This project was announced and approved having a NOK 500 million budget, and the latest estimate right now is that we will come in on NOK 450 million, 10% below the original budget. This project, to remind you, is a combination of an expansion project and a replacement project. It's an upgrade of the existing facilities, but it also puts in equipment to prepare for more specialization of the lignin business. 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. 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 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 about NOK 40 million. That will be an optimization of production campaigns and especially a reduction in the logistics costs. This will gradually be realized through next year with the full impact from 2021. The second cash flow stream coming out of this investment is, of course, for further specialization. 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 Sarpsborg is also a new lignin warehouse at the Port of Borg. 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 Sarpsborg in powder form. Today, it's a blend of powder and liquid. Going forward, the majority of the production will be powder. Today, we have a number of storage areas in the vicinity of Sarpsborg. In the future, this will all be done through this new warehouse 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. It will come onto our balance sheet through the IFRS 16 regulations or rules.
This warehouse will also go into operation in June of this year. There will be a transition period where we have to move out of between 10 and 15 different external warehouses in Sarpsborg 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 the logistics, but it will also improve the environmental footprint for Borregaard 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.
Since it's all powder, it will also. Powder is half the volume of liquid, that also means that there will be a huge reduction in road transport coming out of this particular new warehouse. That's an update on this large project that we are just about to finalize in Sarpsborg. On to specialty cellulose. The major factor here in the first quarter was that we had low deliveries. Of course, that's variations that naturally take place between quarters, and I would say on a random basis. For the full year, this will even itself out. 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 NOK here came up 5%.
4% of that was from currency and one percentage point was from the average sales price in currency. 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 foreign exchange impact in this area. Then on to ingredients and Fine Chemicals, two areas that had a 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 a high level that we saw in the fourth quarter last year, and a strong improvement from the first quarter last year. This is driven primarily by increased sales prices, but also, in this particular quarter, a favorable product mix versus the same quarter last year.
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. As you can see from the right-hand side staples here, the sales level, sales revenues in the first quarter was quite high. Just to remind you on the bio-based vanillin trend. The vanillin market 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 vanillin. 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 the orchid 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 percent of all the vanilla flavor consumed in the world. 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. That has developed into this bio-based vanillin segment. In this presentation here, we only show our wood-based vanillin in this segment. However, there are a few other types of vanillin that can be made from other raw natural starting materials than wood. But on the wood side, Borregaard is currently, and has been for a long time, the only supplier of wood-based vanillin. The selling points for wood-based vanillin is that bio-based means that the starting material should be a natural raw material.
In our case, that's wood, biomass. We have a sustainable process in term from a climate footprint. 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. If you buy a wood-based compared to an oil-based, you immediately have a 25% better performance in smell or taste. 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 vanillin. In today's market, the premium is significantly higher. As you can see here, there's a big price range splitting up here, $25-$100 per kilo for bio-based vanillin.
The Borregaard vanillin, I would say, is just below the mid-range of that price range. Then, as you can see, that's a significant premium compared to the oil-based vanillin market. In recent quarters, the market has stabilized, if you say, at a higher level for bio-based vanillin. 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, 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.
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-over-year from the Florida plant will be NOK 40 million 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. Normally the second quarter is a pickup in terms of volume into construction. For speciality cellulose, same guidance as we gave last quarter. The average cellulose price and 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 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. Altogether, a fairly flat price development. The wood costs have only been set and agreed for the first half of 2019. As we said last time, the cost increase in the first half will be NOK 50 million, NOK 25 million 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. 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. As I said, we have driven the price, raised the price up to a higher level now, and we expect it to stay at that level going forward. No major change is expected in the market condition for Fine Chemicals. 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. The continuing through this year, we will have the grant from the EU Horizon 2020, but it will cover a slightly smaller share of the cost than it did in the previous years. That completes the outlook, and I'll hand over to Per Bjarne for the financial numbers.
Thank you, Per, good morning, everyone. Borregaard's revenues in the first quarter increased by 3% compared with the same quarter last year. EBITDA adjusted was NOK 157 million, compared with NOK 177 million last year. We had a strong improvement in other businesses, both in ingredients and Fine Chemicals. Both the performance chemicals and speciality cellulose had a lower result compared with last year. Higher costs and depreciation, mainly related to the Florida startup, were only partly offset by higher sales volume in performance chemicals, and higher wood cost and low deliveries affected speciality cellulose negatively compared with last year. The net currency effects were in total NOK 30 million positive compared with the first quarter last year. The impact was positive in all our business segments. The impact from the implementation of IFRS 16 on leases on the EBITDA adjusted was marginally positive with NOK 1 million.
Earnings per share ended at NOK 1.26 compared with NOK 1.37 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 NOK 87 million compared with NOK 115 million last year. The lower EBITDA adjusted was mainly due to higher 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 high levels we had in the second half of 2018. The net currency impact was positive for performance chemicals compared with last year.
The EBITDA 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 speciality cellulose's revenues in the first quarter. EBITDA adjusted ended at NOK 35 million, compared with NOK 64 million last year. A NOK 25 million increase in wood cost, in addition to low deliveries, were the main reasons for the decline in the result for speciality cellulose. On the positive side, the cellulose product mix improved, and also bioethanol's result improved from a better product mix. 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.
Again, it's mainly cost related, and wood cost related, that the margin comes down. Higher sales in both ingredients and Fine Chemicals resulted in a 15% increase in revenues for other businesses. EBITDA adjusted improved to NOK 35 million, compared with minus NOK 2 million in the first quarter last year. Ingredients had a strong result from higher prices for bio-based vanillin 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 first quarter of 2018. 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 NOK 30 million compared with the first quarter of 2018.
Hedging losses were 8 million NOK, compared with a hedging gain of 3 million NOK in the first quarter last year. However, the Norwegian kroner weakened by approximately 7% compared with the same quarter last year using Borregaard's currency basket on the EBITDA 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 30 million NOK compared with the second quarter last year. The corresponding impact for the full year of 2019 is estimated to be approximately positive by 85 million NOK compared with 2018. The cash flow from operations improved compared with the first quarter of 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 lignin operation upgrade project in Norway. Net interest-bearing debt, excluding the IFRS 16 impact, increased by 82 million NOK in the first quarter. At the end of the first quarter, Borregaard 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 Borregaard's balance sheet and P&L in the first quarter.
The consequence of the implementation is that leases, which previously had 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&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 Borregaard. EBITDA adjusted improved by 15 million NOK 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 more than 1 million NOK in EBITDA adjusted. Assets and net interest-bearing debt increased by approximately 220 million NOK, affecting Borregaard'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. 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 12 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 NOK 155 million, increasing the difference between the new and the old standard further. That concludes today's presentation. Per Sørlie and I will be ready to answer any questions.
Thank you, and good morning. Some questions on the market. On the specialties. You mentioned in Q1 2019, specialties looked similar to Q1 2018. Can you elaborate a bit more on which segments that you're currently seeing demand strong and not so strong, and which regions? Also, in the construction market, 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, et cetera? Finally, on Sarpsborg expansion or investment. How should we think about the phasing of cost savings there in the second half of 2019 and into 2020, and especially with regards to activation of depreciation, et cetera? Thank you.
I'll just
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. You have approximately the annual depreciation. 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. 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 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.
We will also have a depreciation and an interest cost from the warehouse at the Borg port. You can use the NOK 155 million, as I said, and do the same 20-year calculation on depreciation there. We will see quite an increase on depreciation from these projects from June, July.
Okay. First, the specialties in the performance chemicals, the 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 specialties portfolio is quite diversified, but it's quite known that the three large categories with the highest pricing is the battery segment, it's the I-Chem segment, and it's the oilfield chemicals. 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. I wouldn't say that this is a sign that something has happened. That's why I mentioned particularly that last year was a very strong quarter for the specialties in the first quarter.
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. If you look again at the slide that I made on the diversification and the specialization, you can see that we have contributed significantly to balancing the construction market. 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 Borregaard has restarted Spain, and Borregaard has started up the Florida plant. As you can see from our numbers, we have been successfully managing not to overload the construction segment with those volumes.
Mikael Mead, Carnegie.
First question on the vanillin side, because prior to this recent improvement on the vanillin, it was probably 5 years of worsening in the vanillin 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? 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. Of course, you have this recent development, if you're thinking in very long terms now, that people want to get out of oil-based products. You can easily find out that there is not enough 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. In that sense, this is a fairly recent and new development. 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. 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. That's why I said that for now, our perception is that at least for this year, this will 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, 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. I think it's an exciting development, and it's not exactly like you said. We have said that when our product was competing head-on with oil-based vanillin, of course, then you are in a different. This is a repositioning of the product.
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. As I said, wood-based is clearly, at the moment, the largest producer of natural or bio-based vanillin, but there are some other producers as well. 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. 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. I think that the big thing is that there has become a clear distinction between oil-based and bio-based. I think that will remain.
Clear answer. Number 2, the at least NOK 40 million in cost savings expected in Sarpsborg, is that net of depreciations, or is it excluding depreciations?
That's excluding depreciation.
It means the actual cost saving on the income statement will be lower then?
Yes.
All right. 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. Depending on whether we will start up in June or July, it will be in the range of NOK 10 million as combined depreciation and interest expense. Maybe a little bit more if we start in June, a little bit less if we start in-
10 in total or 10 per quarter?
10 for the rest of the year.
All right.
For 2 quarters or for 7 months.
Lastly, the reallocation costs and redistribution costs taken in Performance Chemicals. The redistribution costs you did a good job on breaking down or granulating in the last quarterly presentation. 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?
I think if I remember correctly, we said it was about NOK 15 million higher in the third quarter and a little bit less in the fourth quarter. We are back to the zero point again in the first quarter. From what we see now, we expect that to continue at that level. The additional NOK 25 million-NOK 30 million that we had in the second half should now be gone. Moving forward with the new warehouse, with the optimized logistics, maybe an improvement in Florida. We might see also further reductions in distribution costs, but that's including in the return of those projects.
All right. Thank you so much.
Very good. Thank you very much.