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Edited Transcript of CRBN.AS earnings conference call or presentation 7-Aug-19 9:00am GMT

Half Year 2019 Corbion NV Earnings Call

Diemen Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Corbion NV earnings conference call or presentation Wednesday, August 7, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Eddy Van Rhede van Der Kloot

Corbion N.V. - CFO & Member of Management Board

* Jeroen Van Harten

Corbion N.V. - Director of IR

* Olivier Rigaud

* Tjerk de Ruiter

Corbion N.V. - Chairman of Management Board & CEO

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Conference Call Participants

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* Emmanuel Carlier

Kempen & Co. N.V., Research Division - Research Analyst

* Katy Hutchinson

Davy, Research Division - Food Analyst

* Patrick Roquas

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Wim Hoste

KBC Securities NV, Research Division - Executive Director Research

* Xian Deng

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Corbion Half Year 2019 Results Conference Call on Wednesday, the 7th of August 2019. (Operator Instructions) Please note that this call will be recorded and will be available by webcast on the website of Corbion.

I will now hand the conference over to Mr. Jeroen van Harten, Investor Relations. Please go ahead, sir.

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Jeroen Van Harten, Corbion N.V. - Director of IR [2]

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Thank you. Good morning, everybody. A warm welcome to the Corbion First Half 2019 Results. With us today are: Tjerk de Ruiter, Eddy Van Rhede van Der Kloot and also Olivier Rigaud.

As a reminder, you can find the PowerPoint presentation on our website under the Investor Relations/Financial Publications heading and you can also, as a reminder, follow along through our webcast on the Investor Relations page of our corbion.com website.

And without further ado, Tjerk, please go ahead.

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Tjerk de Ruiter, Corbion N.V. - Chairman of Management Board & CEO [3]

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Thank you, Jeroen, and welcome, everybody. As you know, it's a special day for me because this will be my last call with you. I certainly hope that I get to meet you in the next few weeks as we make rounds to introduce Olivier also to our investors and maybe I get to see you in some other times. If not, it's been a great pleasure to work together.

Turning to the first half results. As you can see, the overall growth of 0.9% organic is a good result, given the strong performance in food, which actually is something I'm really pleased to see. Not only the 2% but also the fact that now the growth is coming from all businesses and also Bakery has now become a consistent contributor to that growth. It's very nice to see.

On the flip side of that, we had a more difficult quarter in Biochemicals where it was nice to see that again our Pharma/Biomedical business had a very strong performance but we struggled in the chemical sector, especially in the areas of Electronics and Agrochemicals. And quite honestly, that was unexpected to us. So we had expected, especially Electronics, to recover. But clearly, due to the geopolitical changes in the market, we saw a significant destocking in that market.

On the Innovation Platforms, we see a nice 10% growth for the first half. If you look deeper in the numbers, you can actually see that the second quarter was weaker. That is really driven by the fact that we had a shutdown in our plant in Rayong to line the manufacturing site up for the new investment in lactic acid capacity expansion. But overall, the business is actually developing very nicely.

Despite the difficulties in Biochem, it is nice to see that the enterprise is holding at our guided levels and I think that's a good reflection of the strength of the business. When you look at it net-net, it is a 0.1 decline as our organic growth and positive currency effects are offset by the acquisition effect, which in this case was mainly the consolidation of the Solazyme Bunge oils, our Brazilian operation for the algae business. But the Granotec, as you might remember, has just been in there for 2 months so had actually very small effect in that.

And turning to the next page to give you a little deeper view on how we look at the businesses, beginning in Ingredient Solutions with Food. As I already mentioned, it's nice to see that in Bakery, we now have several consistent improvements by quarters. So I'm always careful to call something a recovery but it's clearly nice to see that we're making progress. And that progress is actually happening despite the headwinds, as we can say it, in the enzyme area where we continue to see price pressures on the off-patent enzyme. But really, by driving new growth in our Pristine and Ultra Fresh areas and also seeing the first fruits of our hard work to find new markets for lactic acid in this area has started to pay off, where lactic acid, for example, is used in mold inhibitors.

Meat continued growth as we have now seen for quite some quarters, really driven by the strong demand for clean-label applications in North America. But also Asia and Latin America actually started to show some nice growth in those markets.

The other segments in Food saw a small increase, have been very much in line with our expectations as we operate in very mature markets, but it's nice to see that also there we continue to find new markets that help us grow this business.

On the Biochemicals side, as I already mentioned, strong growth in Pharma and Biomedical. Pharma, of course, with our lactic acid for the pharma-grade insulin type of solutions. On the biomedical polymers, it's, of course, our business working on the result of all polymer business and medical applications.

Nice part of this growth is, of course, is that this is a very profitable business and, as you can see in the results, helped offset some of the weaknesses in the other markets, which are not all that profitable.

In the Chemicals segment, where we had the most surprise, there were 2 main events that we actually saw happening. You know first quarter was weak. We clearly expected the second quarter to return, especially in the Electronics field. The overall market was talking that they saw a general restore of the market in the second half. As we are now seeing, that clearly is not happening and I think this sector is feeling the pressures of the China trade dispute.

The positive part is our application and microprocessors is actually longer term, I believe, a very strong growing market as the Internet of Things and G5 will only increase the demand for these type of products. There's some takeaway that the current weakness really created by destocking of our supplies has hit us pretty hard and unexpected.

On the Agrochemicals side, we had some customers dialing back on products. That actually will run out of approval next year. We had not expected that. We actually expected it to happen later next year and then hope that at that point, we will actually see some replacement as our lactic acid will find new applications and new products. But by a proactive move of our customers, we did get a hit in the quarter, which will affect all our business.

In Home and [household] care, it's really a phasing of the business. And in Animal Health, we feel the pressure of alternative assets. As you might remember, this is really a high-volume, low-margin business, which can actually create quite a bit of noise on the line but, at the bottom line, does not affect us too heavily. I expect that we can correct this by adjusting our prices. So this will -- this market will remain choppy.

If you look at the Innovation Platforms, it's without a doubt, and you heard me say that before, we're very pleased with the progress that our joint venture with Total is making. And as a result, we have strong supplies of lactic acid.

As I already said, in the second quarter, you actually see a 10% decline that's really reflected because of a 2-week shutdown and the fact that last year in the second quarter, we had the start-up of the lactide production where they actually took 40% of their volumes in that one quarter.

You should then also expect to -- for this business to pick up again in the next quarter and you'll -- and it will continue to be choppy as we progress our investments in this area and we'll also shutdown the plant on several occasions. But underlying, and I believe that's the key message I want to give you, you should look -- we should look at the longer-term progression of these sales, strong sales. And as you will see, we're also guiding that for this year.

What is happening there is really a nice development in the market with a lot more customers than we had expected looking in general for new applications. So very strong in this space.

The Algae Ingredients is developing okay but not as fast as we had hoped. We really had expected a quicker uptake of the omega-3 for salmon. We have very good response, very good recognition in the market. Everybody is talking about it. Everybody likes the product. But they're just not buying as much as we had planned in our annual planning. Reality is, this is a strong business and we're getting more and more convinced that this will be successful. It's frustrating that it always takes longer than we had hoped. But overall, good progress.

The other areas, FDCA, we continue to work with potential customers to test the quality of our product.

With that, I'll hand it over to Eddy.

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Eddy Van Rhede van Der Kloot, Corbion N.V. - CFO & Member of Management Board [4]

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Thank you very much, Tjerk. Good day, everybody. So I will take you through the financials for the first half year in Q2. So let's start with the P&L. Net sales growing by 7.4% for the half year. I comment on the next sheet on the composition for that. So we will talk about that at that stage. Adjusted EBITDA, flat at EUR 71.4 million. Again, we will address that in a later sheet when we talk about the EBITDA bridge, giving the main drivers.

Quite an uptick on the depreciation line, from EUR 19.5 million to EUR 28.4 million, really much driven by 2 factors. We had there now the SB Oils, so that's the acquisition we did in Brazil after the Algae Ingredients acquisition. So for this year, 6 months included in the depreciation line. Last year, it was only for 1 month because we consolidated that in June last year. So that is an increase. And secondly, we have the impact of IFRS 16. That's the lease accounting so we're depreciating now the leases through the P&L depreciation line.

Adjustments are positive, EUR 3.4 million for the half year. The main positive contributor here is a change in one of our pension schemes. You may remember, when we had the split of CSM into Corbion, we continued with an exposure in the U.K. pension funds. There, we have agreed and negotiated a change in indexation for future pension adjustments, if you will, that is to a more favorable level than it used to be prior to that. So that reduction in liabilities we have now as a benefit in our P&L.

Then below EBIT, we have financial income/expense. Result joint ventures, more or less same level as last year. Taxes also flat at [EUR 11 million]. I do want to point out that taxes, if you take that as a tax rate on the profit before tax, it is relatively high at 30, 3-0, percent, and big explanation there is that we don't value tax losses that we have in the Brazil JV acquisition. So we take a conservative approach for the moment. So therefore, we are relatively on the high side in our effective tax rate.

That brings us on our result on after-tax level of EUR 26.2 million, which is close to 90% reduction compared to first half of last year. And that translate in an earnings per share level of EUR 0.45 versus EUR 0.55.

Next, we will have the sales breakdown. Like -- so the top part of the page, you're familiar with that, is half year figures. Bottom part is quarter comparison figures. So if you look at half year sales development, so 7.4% increase total growth. Very much, if you then looking in the 2 businesses, let's start with Ingredient Solutions, so 6.3% growth in Ingredient Solutions. Yes, we are still benefiting from strong tailwinds of the currencies, most notably the stronger dollar this year versus last year. So that contributed to about 5%. And we also have the acquisition -- the positive acquisition impact of the Granotec business. So that's the Latin America bakery position we acquired and it's incorporated for 2 months in the results. So that was about 1%-plus. So that leaves us with an organic growth for the first half year of 0.4.

In organic growth, positive momentum in food, 2% growth for the food business organically, while biochemicals, like Tjerk also alluded to, is on the decline organically with close to minus 4%.

The composition of those organic developments are positive price mixes in both businesses, both in Food and in Biochemicals. So that means we're selling, on average, more higher-priced products in those businesses while the volume development is now positive in Food while a negative in Biochemicals, and I come to that later why.

Innovation Platforms then, organically, an 11% growth for the first half year, and that's again split in a negative price mix because we're selling this year lactic acids rather than lactides. So last year, we sold a bit more lactide, which is relatively higher priced than lactic acids. So that explains the negative in the price mix development while the volume, we see a very nice ramp-up, close to 30% volume growth for the first half year.

Next sheet bring us to Ingredient Solutions. Again, a point for organic sales growth for the first half year. After the decline in Q1, we have been able to turn it into positive again in Q2, so with 1.3% growth. Later I will address the composition into 2 subsegments, Food versus Biochemicals. The margins, we have been able to hold on strongly, even a small uptick versus last year. And also, ROCE with mid-20s is still way above the 20% that we set ourselves as a floor for this total book of the business.

Then the Food segment. 2% organic sales growth first half year. A further acceleration in Q2 versus Q1. I think because Q2, we had a growth of 2.3%. Really driven by all 3 businesses where we had indeed also Bakery contributed strongly in the performance in the both quarters but also in Q2. And we had very good traction on the lactic acid base, natural anti-mold agents being applied in Bakery Products and those are fresh, had extended shelf life. We're getting more traction there. And also, the whole clean-label positioning is helping us in those markets.

Meat, continued good performance in the natural and clean-label positions we have there. So that is a continued nice performance. And also the other food categories, we turned into slight growth over the quarter.

That brings us for the margin development, more or less a flat type then for the first half year and also for the quarter.

Biochemicals, the organic growth in first half year, minus 3.9%. Also Q2, we turned in a negative organic growth with minus 1.8%. So slightly less negative than Q1, but still we've not been able to turn it yet in the positive territory. We had really 2 submarkets playing against us in this half year but also very much in the second quarter.

In the Electronics markets where we really saw, yes, fast turnarounds, so I would say deeper downturn based on market conditions in the Electronics markets very much related to the memory side of the semiconductors. This has really to do with the faster and also an expected, I would say, destocking in the value chain, bringing that to our customers in this -- the order pattern. We tend to see this as a temporary thing, but the difficulty here is nobody knows at this stage how temporary will temporary be. So the recovery is, of course, expected in general in the markets latter part this year. I think we're now more looking to next year.

Second is, indeed, the Agrochemicals, where Tjerk already explained the reformulation in one of the categories of the products we're applying, where some of our customers pulled out already out of that market exactly where also our products are being applied. That hit us also in that market.

At the same time, we also had very nice performance in the Pharma and Biomedical businesses. And basically, also that explains why the margin is really showing a very nice uptick with close to 28% for the first half year. So that's nice from a margin-wise development for this segment.

Innovation Platforms. Organic sales growth, 11%. Of course, what's probably helping us here is the lactic acid sales into the joint venture with the PLA joint venture as a successful start-up at the latter part of last year and continue to do so. So that brings us higher lactic acid flows. The Q2, to be honest, in the comparison, and you would say, "Hey, why is the organic sales growth for Q2 a negative?" That is really because from a comparison sake, last year, Q2 was very much helped that we had strong lactic acid sales in the joint venture because we were, I'd say, filling up the whole pipeline of the joint venture to cater for start-up and lactides sales. This year, we see exactly the opposite in Q2. We had to temporarily shut down -- this is a plant shutdown, by the way -- our lactic acid plant because we are preparing ourselves, as you know, for lactic acid capacity expansion and we have to allow sufficient time to make in the physical tie-ins for pipeworks and what have you. So that we did in this quarter, and yes, that shows then in the lactic acid activity. But that's, again, a short, dynamic, only playing out in Q2.

The underlying increased EBITDA losses compared to last year, of course, here again, very much caused by the impact of the full consolidation of the Brazil plant in the Algae Ingredients. So this year, again, 6 months in the P&L, while it was last year only for 1 month, only the month of June. So that explains basically this gap.

Let me come to the EBITDA bridge for the first half year. So adjusted EBITDA half 1 2018, that's EUR 71.5 million on the left side. The 0.9 volume reduction in Ingredient Solutions translates to EUR 1.8 million less EBITDA contribution. Then we had a positive mix, so that both pricing impacts and mix effects contributed EUR 5 million. Compared to last year, fixed expenses cost increased by 5%, very much general indexation, approximately 2.5% across the board.

Currency impacts, a positive of close to EUR 3.5 million. So again, the dollar is the main cause of this. Debt impact, by the way, becomes less dramatic as we go through the year because already in last year, the dollar started to strengthen in second half of 2018.

Innovation Platforms, a small negative, excluding the acquisition impact. And then the IFRS, that's the lease accounting. So some of the costs last year are not included in the EBITDA level anymore in this year's P&L. So that's a EUR 4 million positive, if you will, if you make the comparison to last year.

So that brings us to EUR 76 million. Then we have the acquisition impact, minus EUR 4.6 million. That's the net outcome of a small positive on Granotec, 2 months' contribution of Granotec, and the negative of these, 6 months now, 5 months more than last year for the SB Oils Brazil acquisition. So than that effect is close to minus EUR 5 million, and that brings us to the EUR 71.4 million. So that explains the more or less flat.

Then adjustments is, again, the impact of the different items, most notably the U.K. pension impact.

Net debt, we have geared up slightly more first half of the year from 1.8x to 2.1x. You can see here the different components in that increase. So cash income, of course, is a strong contributor. Operating working capital have increased, not so much if you express it in days. I'll come to that in a later sheet, but also currency impacts played negatively here.

CapEx, EUR 30 million spent, very much under control, slightly lower than what we have for the full year in terms of run rate. We've, of course, paid our dividends in May, EUR 33 million. JV investments were pretty low at the moment. So there's more in the last parts of the working capital trending, I would say, in especially the PLA joint venture.

IFRS 16. So that's now the lease accounting hitting our net debt as well. So that is incorporated for this impact. And then, of course, we did acquisition of Granotec in Q2. So that's translated to net debt, a EUR 29 million increase. And that small other components is really the U.S. dollar strengthening had an impact on our USPP loans.

But if you go back to the -- going forward, we see a further slight increase in our net debt-to-EBITDA ratio. We expect that to be staying below 2.5x by the end of the year. Big components -- big drivers there is, one, further increase in our CapEx program, which will have a slightly higher run rate than what we've seen in the first half of the year but very much to our original planning. And secondly, we are working on an optimization in our distribution center in America. And there we are making use of a long-term lease. So it's an external warehouse, if you will, where we will enter in a long-term lease and those IFRS impact, the lease impact will also, as we currently see it, be hitting the balance sheet and thus the net debt position before the end of the year. So those 2 components, all things being equal, will notch up slightly higher our net debt-to-EBITDA developments.

Free cash flow on the right-hand side, more or less neutral. Continued stable to strong performance in operating cash flow with over EUR 100 million. But in purple, an increasing investment cash flow and, of course, the Granotec acquisition is part of that loss, the half year position of close to a good EUR 30 million.

Operating working capital are now expressed in days. So you're familiar with the graph. If you look to the right-hand side, the trade receivables, after an increase in sometime ago, we have stabilized that so we're increasingly able to capture the more aged profile of the debtor positions. So we're stable at 47 days. The inventory positions were stable in the last half year at 63 days. And trade payables came down slightly lower, but that's very much if you look at the seasonal pattern happening every single year. So I would say it's a pretty stable position we have currently with the working -- operating working capital developments.

CapEx, EUR 28 million for the first half of the year. The composition is at the bottom part of the sheet. So the bigger drivers there is the lactic acid capacity expansion we talked about and most notably in Thailand. We have investments going on also in the Algae Ingredients plant in Brazil. So those are captured in the Innovation Platforms bucket.

And then ERP, you are aware that we entered in a multiyear building of new SAP-based ERP platform. And for this half year, we have capitalized close to EUR 7 million expenses on the balance sheet for that.

All in all, we have an outlook of EUR 70 million to EUR 80 million CapEx for the full year. So there's slightly higher run rate for the second half of the year exactly according to earlier expectations.

With that, I will turn it over -- hand it back to Tjerk.

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Tjerk de Ruiter, Corbion N.V. - Chairman of Management Board & CEO [5]

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Thank you, Eddy. So for the outlook for this year, we expect our organic sales growth for Corbion near the low end of the 3% to 6% range. That means in Ingredient Solutions, an organic sales growth of 1% to 2%. Where in Food, we actually see an acceleration in the second half versus the first half. First half, for your memory, was 2%.

In Biochemicals, although we see an improvement of the group in the second half, the full year will still be a decline. EBITDA margin will be as guided before, with an improvement of 19% over 18% and we should be hitting our guided target of 19%, having reflecting the strong cost control of our business and the fact that we clearly said in our strategy, we'll drive for future growth while maintaining the profitability.

In Innovation Platform, we're guiding EBITDA for around [EUR 35 million]. (sic- see press release "Negative EUR 35 million") Input costs should have no impact on 2018, with sugar being favorable, with chemicals being negative. CapEx, as Eddy said, EUR 70 million to EUR 80 million and just for your help, if I could say so, the IFRS impact for the full year will be EUR 8 million.

With that, before I open up the floor for some questions, as you heard when Jeroen made the announcement, Olivier has been joining us in this call and we thought it would be nice to give him a chance to say a few things. Just to warn you, he's not here to answer questions but very much looking forward to working with you. And if I could share from my perspective, it's been a great pleasure working so far with Olivier. I think we brought in an excellent person and I'm very glad he's taking over from me. Olivier?

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Olivier Rigaud, [6]

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Thank you, Tjerk, and hello, everyone. So I'm really happy and excited to join Corbion and to lead Corbion for the years to come. So actually, I've been visiting a few places but I still have a lot more to do in coming weeks and months. So to learn about the company and the business, to meet, of course, customers, our employees but also probably a lot of the investors and yourself as well. This is the plan for the weeks and months. And hopefully, with all these, I will fine-tune my findings and come back at a later stage, but the plan is really to get acquainted and really to have a deep dive into the business in the weeks and months to come.

So I hope to meet you at -- in the -- over the next weeks. Be looking forward to our upcoming discussions.

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Jeroen Van Harten, Corbion N.V. - Director of IR [7]

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Thank you, Olivier. Okay. And with that, operator, could you please open the lines for polling for Q&A, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Mr. Wim Hoste from KBC Securities.

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Wim Hoste, KBC Securities NV, Research Division - Executive Director Research [2]

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Yes. I have 2 questions, but before asking them, maybe just I wanted to thank Tjerk for all these years and having the open communication, there has been, from your side to the investor community, so many thanks for that and all the best. And obviously, I think also for Olivier joining Corbion, all the best and we look forward, I think, the investor community to get to know you and to hear your thoughts about the future of Corbion and all of that. So all the best to both of you.

Then maybe turning to the questions. First one I wanted to ask is on Granotec. Can you maybe elaborate a little bit more on the integration? How is it going? What are the prospects of this business? Do you see synergies? Can you put numbers on that? Can you merge client bases? Can you bring in new clients from, yes, Corbion's other geographies into this business? Any thoughts about that? It would be helpful, I guess.

And my second question is on DHA. You mentioned that it is taking off a little bit slower than expected. But I wanted to have your thoughts about, yes, about what is the reason for that. Is there also an increase, for example, in competitive pressure now that DSM-Evonik is coming into the market? Any thoughts about your product positioning versus their DHA-EPA combination? Can you maybe elaborate a little bit more on that? That will also be helpful.

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Tjerk de Ruiter, Corbion N.V. - Chairman of Management Board & CEO [3]

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Okay. Thank you, Wim, for your kind words. The one thing I would say, open communication is also created by Jeroen. I believe he's a very good partner of yours. So knowing Olivier, knowing Jeroen, I don't think you have to worry about that changing. Eddy feels a little left out at the moment. It wasn't mean that way, Eddy. I just gave the 2 others a compliment.

With regards to your question on Granotec, it's, of course, very early in the process. But you can clearly see that this was a great acquisition for us. Why did we make this acquisition is to really create a bakery platform in South America. That was part of our strategy. And really, with the Granotec, we succeeded in one fell swoop to put a business in scope, a product and a great production plant in scope. And what has really been the positive effect is that the quality of the people that we bring in. That's, of course, always difficult to see when you do the acquisition. But based on the interactions that we've had, I think we've added a great team to our Brazilian team that, quite honestly, is quite good ourselves. So I think we have a very nice position in Brazil.

When you look at where should the benefits come, very much Granotec was very strong in the Brazilian market. Corbion had a stronger position at large multinational accounts. We believe, with now having a local production in South America, we can actually strengthen that relation at our large South American players. So it's the blend of the 2 companies.

Then you get into specific products. Yes, not unlike -- we touched on a little bit with the new solutions that we are developing with mold inhibition. I would say those, for example, rolling out in South America. But of course, also strong shelf life extension products.

So overall, I think a good start. It's too early. And as you already would expect from me, I'm not going to give you any numbers on what that would mean. But overall, we're very happy.

Now with regards to your question on DHA and why it's not growing, I think it's not growing as fast as we expected. I think it's really a relation to -- when you talk to everybody in the industry, people realize that the sustainable solution for the salmon industry is important. Reality is also that fish oil is still significantly cheaper and a lot of the -- of our customers, the manufacturers of feed and the salmon farmers, as they call them, are very much cost-oriented. It's a market to really gain momentum. We need the consumers to start to ask them. But it's nice to see that some of the higher-value applications, consumers are recognizing that. But we need to get a stronger pull and that's why we've also said we're working hard with the retailers to develop that.

When we look at the competitive perspectives, I think we're actually quite comfortable in the market with our position. And as you well know, Veramaris has opened their facility. And I believe 2 players in the market is better than 1. And I actually personally believe that we have a very nice competitive position. So I think this will be a great market. As always, it takes a little longer than you hoped. That's frustrating. But I think looking back, you will see that this was a great addition for Corbion.

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Operator [4]

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Our next question comes from Emmanuel Carlier from Kempen.

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Emmanuel Carlier, Kempen & Co. N.V., Research Division - Research Analyst [5]

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I have 2 questions. First of all, on your organic EBITDA growth in Ingredient Solutions. So if you strip out the positive FX effect and also IFRS 16, then organic EBITDA is actually down a little bit, I think 2% to 3%. Could you explain why that is and how and when you believe you could turn this around? That's the first question.

And then secondly, a couple of questions on PLA. So first of all, how strong -- how does the strong demand and the low sugar price impact the PLA pricing? And how long would it take to add PLA capacity? Because it looks like demand is a bit stronger than you initially expected.

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Tjerk de Ruiter, Corbion N.V. - Chairman of Management Board & CEO [6]

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Okay. Thank you, Emmanuel. Now first, starting with the organic EBITDA. As you might remember, in our strategy creating sustainable growth, we actually guided that we would keep our EBITDA around the -- or above the 19% with the idea that additional funds would be invested to drive growth. What you clearly see in this quarter is that we're executing that. We have not decided to trim that back to drive the growth of the EBITDA. What we're focusing on is driving the growth of sales. And if you delve deeper, you can actually see that our cost increase, as Eddy showed in the chart, has been slightly higher than the added value so far created in the quarter. Longer term, this is the right decision. Right now, it is -- it's costing a little bit of money. But as I guided you in the markets, you can rest be assured that we're watching that target very closely and we will deliver the 19%.

When it comes to PLA, first, what is happening in the market? I think the positive part that you heard me talk about at several calls already is really the high level of interest of PLA. Let me try and explain that a little bit to you. When we started this project, we're clearly focused on a couple of -- or couple -- 15 large customers that were doing the large purchase of PLA that were also, of course, supplied at that point by our competitor, who we proposed or asked them to commit a certain volume of their purchases to us, really on the basis of a second source. That strategy is working well. What's really going better than we have expected is the general interest into PLA beyond these large players. And I think that's a reflection of what's happening in general with the whole industry trying to address the issues around plastic. And PLA is actually one of the few solutions out there. As I've always explained to you, it is not the magic bullet but it has its niches where it can play. And what we truly see is a wide range of different customers, often compounders, that are using PLA in more sustainable plastic solutions. And that's, I think, the biggest change in the market that we see. We see that as a positive development. And if you read to the announcement, I think we now mentioned, we're supplying to over 200 customers. That was certainly not expected when we originally sat down.

We're clearly ahead of our original plan in PLA for this year. Because of that, secondly, as you already indicate, low sugar price helps the profitability. And thirdly, because the market has been tight, we actually, despite the growth, have been able to raise some of the prices.

So right now, I think it's a very positive scenario. Not so positive though as what you're saying that you now need to build new capacity. I think that is going a step too fast. But it's nice to see that the decision we made 4 years ago turned out to be the exact right time. So I think we're in a nice place.

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Emmanuel Carlier, Kempen & Co. N.V., Research Division - Research Analyst [7]

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Okay. That's very clear. If I may add on maybe on that topic, how long would it take to expand capacity? Or is that really depending from many different scenarios? And related to that, how quick does competition can increase capacity on PLA?

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Tjerk de Ruiter, Corbion N.V. - Chairman of Management Board & CEO [8]

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Yes. So when we first started with ourselves, and I think that actually will help you then also about what it means to competition, as you know, as the PLA plant will start to get to full capacity, we will have to build a new lactic acid plant. The new lactic acid plant will take 2 to 3 years to build. I think that is actually the same for everybody in the market. All our competition will also have to build a lactic acid plant. Next to that, you need to build a polymer plant. So as you can see, it took us 2 years to build that plant. I think that's a reasonable estimation. So if we really wanted to decide now and build, I would say 3 years is a positive time, at which point you build your lactic acid capacity and a new PLA line.

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Operator [9]

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Our next question comes from Patrick Roquas from Kepler.

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Patrick Roquas, Kepler Cheuvreux, Research Division - Equity Research Analyst [10]

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Also firstly, I'd like to say to Tjerk, sad to see you leaving. I think the JV with Total, I think that has been a very big contribution to the company. And also I'd like to welcome Olivier. Looking forward to meet in person soon.

So now my questions. To start with Biochemicals. I think aside from, let's say, the cyclicality in Electronics and Agrochemicals, isn't it time to kind of reset your sales guidance here for the midterm, yes, which still is between 3% to 10%, whereas, I think over the last 6 years, it was more like 4% to 5%? So that's the first question. Isn't that sales growth target of 3% to 6% for Biochem more realistic?

Then secondly on algae, a follow-up question from Wim. Yes, how does your outlook compares to, let's say, the recent very bullish statements made by Veramaris? And what to do if DSM is right and is running at full capacity next year? And then also, what would prevent you to kind of cut more aggressively in the cost base of your U.S. business, of the Algae platform in order to kind of, yes, bring the top line and the cost base more in line?

Then if I may, a question for Olivier. Obviously, not on the business, but I'm interested to hear what made you decide to opt for Corbion, and also perhaps given the experience that you have with Naturex?

And then finally, a question on -- there was news on DuPont disposing the nutrition business or, let's say, exiting the nutrition business. I think long expected by the market. Is there any implication for your business? Because I think DuPont is a competitor in your bakery business.

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Tjerk de Ruiter, Corbion N.V. - Chairman of Management Board & CEO [11]

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Okay. Thank you, Patrick, and as I said, we're not going to let Olivier talk. Give him the time to get to know the business. Plus, as I was thinking, there's also some things he has to be able to share when he meets you the first time to break the ice. So I know you were going to try, but (inaudible) right there.

When it gets to the -- to Biochemicals, I'd like to remind you why we went to the 3% to 10%. I fully agree with you. If you look longer term, it's probably been more in the 4% to 5% range, but this business has been extremely choppy, right? We've had it all over the map. And that was really the reasoning why we thought the wider guidance would be better. Of course, now when you look at it, you would say, "Was that the right choice?" And I think it's a fair thing to ask for Olivier. I'm sure he will be starting to think about that. But I think from my perspective, remember, this business will be choppy, right? And so as a result, it is difficult to give guidance. That's how we widened the boundary. That was really the underlying -- yes. And of course, maybe a better way to look at it is, "Can you actually drive, despite those swings, a good margin improvement?" I think that we've been able to show.

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Patrick Roquas, Kepler Cheuvreux, Research Division - Equity Research Analyst [12]

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Evidently, there's no reason to kind of see Electronics and Agrochemicals coming back, let's say, once the downturn is over?

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Tjerk de Ruiter, Corbion N.V. - Chairman of Management Board & CEO [13]

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There's no reason for them not to come back, right? That's what you're saying?

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Patrick Roquas, Kepler Cheuvreux, Research Division - Equity Research Analyst [14]

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Yes, okay.

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Tjerk de Ruiter, Corbion N.V. - Chairman of Management Board & CEO [15]

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Yes. I think what we did, which you see in our guidance, we have said we don't expect it to come back this year, right? I would say, Patrick, that because we're at the end of the supply chain, the upswing and the downswing are very steep. So when the recovery comes, I expect it actually to be fairly steep again, yes? But we said we don't expect it to come this year. I think that's the guidance we try to give you, yes? And any further than the year, good luck for anybody in this market.

How does the outlook compare to Veramaris? Let's say it like this. I've, of course, read the same article that you did and I certainly hope that DSM is correct because if that is the forecast, we'll have a fantastic year next year. We're ready for it. We have the product. I think we have a very competitive product to play. So I would want nothing more than them to be correct and that's a great thing. As we start to show with our PLA business, it's good interest to play in the market and I think it's good for the market to grow. So let's hope their projections are in line.

And then with your question of, "Can you control the cost base?" The hard and ugly answer is it's actually very simple to reduce the cost, right? The question really is, "What is the damage that has to do with this?" So that's why I always said, if the Algae platform turns out not to be successful, we can shut it down, right? What we're really working towards is to create a platform that drives us, that gives us an opportunity to create multiple new products. I believe it can be done and I think that's where the focus is. If this turns out not to be positive, yes, then we'll have to take actions. But that's not in the space right now.

Now your last question on DuPont and as you can imagine, having some history in that business, I read it with as much interest as you did, maybe even more, but I think it's pure speculation. This has been hanging over the market for the last 3, 4 years now. And as you had -- as you heard me say before, I think if that plays out, depending on how it plays out, actually can create some opportunities for Corbion maybe to pick up some pretty attractive businesses and I can probably help Olivier indicating which businesses he should be focusing on. But let's first see what happens.

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Patrick Roquas, Kepler Cheuvreux, Research Division - Equity Research Analyst [16]

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Yes. Perhaps if I may then, one follow-up. But on the Algae business, lots of clients are asking and I've also read the articles. So they're asking lots of questions. And one of those questions then is, "Do you need to invest a lot in R&D in order to keep track with what the knowledge that DSM and Veramaris have on omega-3?" Is it that if your sales start to grow, that is a good base to improve EBITDA and then you can sustain, let's say, the high-level R&D spend? Or is it that if you don't start to work, we'll rapidly start to cut down on R&D. Yes, so I think the key question is -- yes?

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Tjerk de Ruiter, Corbion N.V. - Chairman of Management Board & CEO [17]

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I get you. So the key part is, we keep the R&D to develop multiple product lines and to be able to drive the cost down of the DHA platform, right? In a biotech business, one of the key investments you make is in continuous improvement of the process, which is actually -- have given that we're in an early stage, that's quite a way to go, I believe, and that's actually one of the nice things of this type of business. I believe that we have the tools for that and I believe that we -- our DHA is market-competitive now. I think our DHA can be, with the right investments in R&D, even more competitive down the road. The balancing act is exactly as you say. When do you say (inaudible) R&D? I think if you make that decision, you really make the decision that this platform is only going to deliver 1, maybe 2 products. And I believe that it has much more in it.

Do not, at this point, need to invest significant to compete with Veramaris. What we will need eventually, and you heard us talk about that, is a product that can make an EPA. For the time being, our belief is that the market will much more known for partial replacement instead of a full replacement. At which point, you really do not need the EPA. It might actually have a cost effect -- cost-competitive advantage by just using DHA.

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Operator [18]

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We will now take our next question from Xian Deng from Berenberg.

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Xian Deng, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [19]

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First of all, I would like to thank Tjerk and wish you all the best in your future endeavor.

I have 2 questions, please. So first one is related to PLA. Just wondering, since now you have so much more interest and over 200 customers now, just wondering if you could comment on the geographical split. Are you still mainly selling to EU or you have actually seen more growth in the U.S. as well? So that's the first question.

The second question is just to elaborate on what you commented before on Algae platform. So Algae has been picking up slower than you expected. But just wondering, how about the other product pipelines? For example, how about AlgaVia, the algae protein and any other products?

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Tjerk de Ruiter, Corbion N.V. - Chairman of Management Board & CEO [20]

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Okay. So first, your question on geographical split. We're not going to give specifics on the breakdown of sales. But I can give you certainly some color. As you can imagine, the main competitor being in North America, that is our biggest focus market. Our best competitive position is in Europe and Asia because of the location of our plant and the cost of our product. That doesn't take away that we also have some nice developing business in North America. And I think that's truly reflective of the fact that people like to have multiple sources of supply. We, as -- with the joint venture, are enjoying that first flow. I think over time, what really will make this business attractive is driving new growth. And it's that new growth, as I said, with the multiple of customers now showing interest into the market that really gets me excited.

With regards to the Algae platform, yes, the DHA is not developing as fast as we expected. We're working very hard on the other product. But they are relatively small. As you might remember, we said it is important to focus. The first real profit contributor will be DHA. That's where our main effort goes. That doesn't take away that we get more and more excited, for example, about our protein capabilities in this space or some of the industrial applications of our oil, but we believe that DHA will be the largest first market for it. Would be great day that we can report that proteins is now taking the lead. That would be nice.

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Operator [21]

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Our next question today comes from Katy Hutchinson from Davy.

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Katy Hutchinson, Davy, Research Division - Food Analyst [22]

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A couple of questions from my side on AlgaPrime. What are your expectations on the time to break even for that plant? And do you still expect that, that will be around FY '20/'21? And is there anything you can do to accelerate the buy-in from the retailer side? And also you might just give an indication as to your expectations for volumes for the plant this year.

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Tjerk de Ruiter, Corbion N.V. - Chairman of Management Board & CEO [23]

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Okay. So our expectations have not changed. We believe that this business can reach a breakeven in 2021. Let me be clear there. That is in the year 2021. I don't think we expect for the full year to be breakeven. And, of course, that is in combination with the lactic acid business. So the 2 of them should make the Innovation Platforms a great platform.

With regards to the volume, we're not going to devote any volume specifically. What you clearly will see is a better second half than first half and that's really driven by the seasonality of the business. The salmon peak season is really peaking in the third and fourth quarter of this year.

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Katy Hutchinson, Davy, Research Division - Food Analyst [24]

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Okay. And is there anything further you can do to accelerate that buy-in piece from the retailers?

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Tjerk de Ruiter, Corbion N.V. - Chairman of Management Board & CEO [25]

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Sorry, on that area, we've been working very hard with several retailers, driving programs on how they can show sustainability. We believe that the retailer is, for us, the easiest channel to access to get to the consumer and developing several programs to work with them for them to show how much their product can improve its sustainability and with that drive the demand in the market. I think it's going well. And I do expect -- this is a market that will [hold] and what I mean is consumer sentiment can change very, very fast. The difficulty part with that is when will that sentiment change. But maybe back to your earlier question. If our competitor expects to fill their plant, that must clearly be based on a switch of consumer sentiment, which would put us in a very nice position.

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Operator [26]

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(Operator Instructions)

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Tjerk de Ruiter, Corbion N.V. - Chairman of Management Board & CEO [27]

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Okay, if there's...

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Operator [28]

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I'm just going to interrupt you there. We have a follow-up question from Emmanuel Carlier from Kempen.

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Emmanuel Carlier, Kempen & Co. N.V., Research Division - Research Analyst [29]

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Yes. I have one other question on Bakery. So obviously, it's very positive that you returned to organic growth in Bakery. I just want to check if you could provide a little bit more disclosure on what is driving that. Is that mainly driven because of the cost inflation last year and that you are increasing prices as well? Or is it also a big mix effect? So if you could split up a bit the impact from price and the impact from mix.

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Tjerk de Ruiter, Corbion N.V. - Chairman of Management Board & CEO [30]

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Okay. So if you look at the Bakery business, as I indicated when I made my opening statements, in this market, we still see a price erosion in the enzyme market that comes off of patent. Despite of that, we're winning new businesses and those businesses are both in higher value and volumes. It's actually hard to track but I think really what you start to see is that the innovation is starting to take hold with some new products and that helped to stop the bleeding of the overall business. I think it's a good situation to be in. The disappointing part is the enzyme price as you go deeper than what we have seen in Europe. But that's in the end for us more of a pass-through that you might see on the top line but not so much on the bottom line in the business. I think we're in good shape. I would like to see a few more quarters of growth before we claim victory. But we're on the right track.

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Operator [31]

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There are no further questions in the queue at this time.

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Tjerk de Ruiter, Corbion N.V. - Chairman of Management Board & CEO [32]

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Okay. Now then I would like to say thank you to you. I truly had a great time here the last 5 years. I don't know whether some of you knew, but before I joined Corbion, I had already decided that it was time to stop, then Corbion calls and I thought it was too great of an opportunity. Here's a beautiful ingredient business which at that point, I think, was not recognized by people. And it had great capability in large-scale fermentation. And that's really, as you might have found out from me over the last 5 years, where a lot of my passion is. I believe in biotechnology, and I believe that Corbion is actually one of the few companies that can do that on large scale.

It's been great the see how with the team and I think that's really -- team is the key word here, a great group of people. We've been able to improve the profitability. It's been hard work, as you know in every quarter. When you have a moderately growing business, a little hiccup can hurt you very much, but I think we have shown that despite all the setbacks, we can continue to deliver good results. And I believe that in our Innovation Platform, we have tremendous upside. It's nice to see that PLA is gaining momentum. And I am assured that looking back in a couple of years, as a shareholder, the Algae business will be a great value contributor.

And I'd like to thank all of you. I think we had many good discussions with many of you. I had a chance to travel around. I truly enjoyed it. And if we get a chance to have a beer, I'm more of a beer guy than wine, please feel free to invite me and we'll share a good evening. Thank you, and I wish Olivier all the best. You're getting a fantastic company, a fantastic team, and I think you're going to have as much fun as I had. Thank you.

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Eddy Van Rhede van Der Kloot, Corbion N.V. - CFO & Member of Management Board [33]

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Thank you.

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Operator [34]

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Thank you. This concludes the Corbion Half Year 2019 Financial Results Conference Call on Wednesday, the 7th of August 2019. Thank you for participating. You may now disconnect.