Quarterly Report • Jan 31, 2019
Quarterly Report
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1 Non-GAAP measure, see page 22 for definition.
2 Figures in parentheses are for the corresponding period in the previous year.
| 334 | 1.10 - 31.12 171 |
1.1 - 31.12 350 |
|
|---|---|---|---|
| 175 2018 |
2017 | 160 2018 |
2017 300 |
| 150 199 1,219 125 |
131 1,137 |
4,785 | 250 4,618 |
| 183 100 |
105 191 |
101 903 |
200 1,055 |
| 94 75 |
109 | 580 | 150 749 100 |
| 84 50 |
89 | 562 | 715 50 |
| 0.80 25 |
0.90 | 4.76 | 5.66 0 |
| -7 1,297 0 |
845 | 1,297 | -50 845 |
| Q4 Q3'15 Q4'15 Q1'16 55.8 |
Q2'16 Q1 Q2 56.2 |
Q3 Q4 55.8 |
56.2 |
| Cash flow operations EBITDA 1.44 |
2015 0.80 |
2016 1.44 |
0.80 |
| 12.7 | 19.1 | 12.7 | 19.1 |
Borregaard's operating revenues reached NOK 1,219 million (NOK 1,137 million)2 in the 4th quarter of 2018. EBITA adj.1 was NOK 94 million (NOK 109 million). Other Businesses' result improved significantly compared with the corresponding quarter in 2017, whereas Performance Chemicals and Speciality Cellulose had a decline.
Performance Chemicals had a 3% increase in total sales volume driven by diversification and growth for Industrial and Specialities. EBITA adj.1 decreased, due to higher fixed costs and depreciation from the Florida ramp-up, increased lignin distribution costs and continued strong price competition in the concrete admixture market. Higher wood costs and weaker product mix affected Speciality Cellulose negatively. Higher sales prices and sales volume in Ingredients were the main reasons for the improved result in Other Businesses. The net currency impact was positive.
Other income and expenses1 were NOK 0 million (NOK -9 million) in the 4th quarter. Net financial items were NOK -9 million (NOK -10 million). Increased interest expenses were off-set by favourable foreign exchange effects. Profit before tax was NOK 84 million (NOK 89 million). Tax expense was NOK -19 million (NOK -4 million), giving a tax rate of 23% (4%) in the quarter. The tax rate is affected by accounting treatment of partly owned companies and carryforward losses not recognised as deferred tax assets, see Note 4.
Earnings per share were NOK 0.80 (NOK 0.90).
Cash flow from operations1 was NOK 81 million (NOK 268 million). The reduction was mainly a result of a less favourable development in net working capital compared with the 4th quarter of 2017.
For the full year of 2018, Borregaard's operating revenues increased to NOK 4,785 million (NOK 4,618 million). EBITA adj.1 was NOK 580 million (NOK 749 million). The result in Other Businesses improved, whereas Performance Chemicals and Speciality Cellulose had a decline. Higher wood and caustic soda costs, increased lignin distribution costs, Florida ramp-up as well as lower sales of acetate cellulose affected EBITA adj.1 negatively. In Other Businesses, the improved result was due to increased prices and sales volume for bio-based vanillin. The net currency impact, including hedging, was in total positive.
In 2018, Borregaard continued to implement its strategic initiatives and priorities. The new lignin plant in Florida started production, the new dehydration plant for bioethanol at the Sarpsborg site was completed and increased capacity for Ice Bear products in Speciality Cellulose was installed. The NOK 500 million investment programme to upgrade and specialise the production facilities for lignin products at the Sarpsborg site is ongoing and will be completed in the 3rd quarter of 2019. Borregaard and Borg Havn (The Port of Borg) have agreed that the Port will build and own a 19,000 square metres warehouse for lignin products from the Sarpsborg site. The construction of the warehouse will be completed mid-2019.
The Group had a lost-time injury rate (LTI3 ) for 2018 of 3.5 (1.1). The number of total recordable injuries (TRI4 ) ended at 8.6 (8.8).
Other income and expenses1 were NOK 0 million (NOK -9 million). Net financial items amounted to NOK -14 million (NOK -21 million). Profit before tax was NOK 562 million (NOK 715 million). Tax expense was NOK -137 million (NOK -157 million), giving a tax rate of 24% (22%). The tax rate is affected by accounting treatment of partly owned companies and carry forward losses not recognised as deferred tax assets, see Note 4. The corporate income tax rate in Norway was reduced from 23% to 22% from 1 January 2019.
1 Non-GAAP measure, see page 22 for definition.
2 Figures in parentheses are for the corresponding period in the previous year.
3 Number of lost time injuries per million hours worked
4 Number of total recordable injuries per million hours worked
Earnings per share were NOK 4.76 (NOK 5.66). EBITA ADJ.1
Cash flow from operations1 was NOK 709 million (NOK 960 million). The reduction from 2017 was due to the cash effect of a lower EBITDA adj.1 and an unfavourable development in net working capital. At the end of 2018, the Group was well capitalised with an equity ratio1 of 55.8% (56.2%) and a leverage ratio1 of 1.44 (0.80). 109 145 200 177 164 243 100 150 200 250
| 1.10 - 31.12 | 1.1 - 31.12 | ||||
|---|---|---|---|---|---|
| Amounts in NOK million | 2018 | 2017 | 2018 | 2017 | |
| Operating revenues | 552 | 521 | 2,237 | 2,176 | |
| EBITA adj.1 | 42 | 76 | 314 | 449 | |
| EBITA adj. margin1 (%) |
7.6 | 14.6 | 14.0 | 20.6 |
Performance Chemicals' 4th quarter operating revenues increased to NOK 552 million (NOK 521 million). EBITA adj.1 was NOK 42 million (NOK 76 million). The lower EBITA adj.1 was mainly due to NOK 22 million higher fixed costs and depreciation for the Florida plant as well as higher distribution and other operating costs. However, distribution costs were slightly reduced from the high level in the 3rd quarter of 2018. Total sales volume was 3% higher than in the 4th quarter of 2017. The average price in sales currency was in line with the 4th quarter of 2017. Growth in Industrial and Specialities compensated for a challenging concrete admixture market for lignin products. Net currency effects were insignificant.
For the full year, Performance Chemicals had operating revenues of NOK 2,237 million (NOK 2,176 million). EBITA adj.1 was NOK 314 million (NOK 449 million). The EBITA adj.1 reduction was mainly due to increased costs and depreciation in the start-up year for the new Florida plant and higher distribution and other operating costs. LignoTech Florida had an EBITA adj.1 of NOK -75 million (NOK -7 million) in 2018. Increased sales volume, diversification and specialisation off-set the effect of continued strong competition and weaker prices for lignin products to the concrete admixture market. Total sales volume was 4% higher and the average price in sales currency was 1% lower than in 2017. Unfavourable net currency effects had a slightly negative impact compared with 2017.
GROSS AVERAGE SALES PRICE5
GROSS AVERAGE SALES PRICE5
1 Non-GAAP measure, see page 22 for definition.
5 Average sales price and sales volume reflect 100% of sales and volume from the J/V in South Africa. Average sales price is calculated using actual FX rates, excluding hedging impact.
6 Metric tonne dry solid.
| 1.10 - 31.12 | 1.1 - 31.12 | |||
|---|---|---|---|---|
| Amounts in NOK million | 2018 | 2017 | 2018 | 2017 |
| Operating revenues | 427 | 435 | 1,669 | 1,698 |
| EBITA adj.1 | 50 | 67 | 257 | 350 |
| EBITA adj. margin1 (%) |
11.7 | 15.4 | 15.4 | 20.6 |
Operating revenues in Speciality Cellulose were NOK 427 million (NOK 435 million). EBITA adj.1 was NOK 50 million (NOK 67 million). Increased wood costs and weaker product mix as a result of lower sales of acetate cellulose were the main reasons for the EBITA adj.1 reduction. Net currency effects were positive. The sales volume was lower than in the 4th quarter of 2017, while cellulose prices in sales currency were stable.
The Bioethanol result was in line with the corresponding quarter in 2017. A lower sales volume was off-set by higher prices and improved product mix.
In 2018, operating revenues for Speciality Cellulose were NOK 1,669 million (NOK 1,698 million). EBITA adj.1 was NOK 257 million (NOK 350 million). The reduced EBITA adj.1 was due to higher wood and caustic soda costs and weaker product mix as a result of lower sales of acetate cellulose, partly off-set by positive net currency effects and lower energy costs. The wood costs increased by NOK 80 million from 2017. Cellulose prices in sales currency were stable compared with 2017. The cellulose ether market continued to develop positively, while the cellulose acetate market remained challenging. The volume share of highly specialised cellulose grades decreased to 62% (72%) due to lower acetate cellulose sales. Production output was in line with 2017.
The result for Bioethanol improved mainly due to improved product mix and increased sales prices. The new dehydration plant for bioethanol at the Sarpsborg site started production in the 1st quarter of 2018. With this investment, Borregaard has sufficient capacity to deliver its entire production as water-free bioethanol. This market is growing, mainly driven by increased demand for bioethanol in automotive fuel.
1 Non-GAAP measure, see page 22 for definition.
GROSS AVERAGE SALES PRICE7
GROSS AVERAGE SALES PRICE7
7 Average sales price is calculated using actual FX rates, excluding hedging impact.
8 Metric tonne.
| 1.10 - 31.12 | 1.1 - 31.12 | ||||
|---|---|---|---|---|---|
| Amounts in NOK million | 2018 | 2017 | 2018 | 2017 | |
| Operating revenues | 253 | 190 | 927 | 783 | |
| EBITA adj.1 | 2 | -34 | 9 | -50 | |
| EBITA adj. margin1 (%) |
0.8 | -17.9 | 1.0 | -6.4 |
Operating revenues in Other Businesses increased to NOK 253 million (NOK 190 million) in the 4th quarter. EBITA adj.1 improved to NOK 2 million (NOK -34 million), mainly due to a stronger result in Ingredients.
The stronger result in Ingredients is explained by increased sales prices and higher sales volume for bio-based vanillin. Fine Chemicals had higher sales but also increased costs. The result was in line with the 4th quarter of 2017. Cellulose Fibrils had a slight improvement in EBITA adj.1 . Net corporate costs were in line with the corresponding quarter of 2017. The net currency impact in Other Businesses was slightly positive.
For the full year, operating revenues in Other Businesses reached NOK 927 million (NOK 783 million). EBITA adj.1 was NOK 9 million (NOK -50 million). A positive market trend and higher prices and sales volume for bio-based vanillin were the main reasons for the increase both in operating revenues and EBITA adj.1 in Other Businesses. Fine Chemicals had sales in line with 2017, but higher costs resulted in an EBITA adj.1 reduction. Cellulose Fibrils had a positive pipeline development in 2018, but continued to experience long lead-times for conversion of sales prospects. The positive effect of increased sales was off-set by plant optimisation and marketing costs, and the result was in line with 2017. Net corporate costs were similar to the 2017 level. The net currency impact in Other Businesses was insignificant.
1 Non-GAAP measure, see page 22 for definition.
Borregaard has a significant currency exposure which is hedged according to the company's hedging strategy. The impact of currency rate fluctuations will be delayed as a result of the currency hedging policy. Compared with the 4th quarter of 2017, the net impact of foreign exchange on EBITA adj.1 , including hedging effects, was NOK 25 million positive. Hedging effects were NOK -1 million (NOK -10 million) in the 4th quarter.
In 2018, the net impact of foreign exchange on EBITA adj.1 , including hedging effects, was NOK 45 million when compared with 2017. Hedging effects were NOK -11 million (NOK -72 million).
Assuming currency rates as of 30 January 2019 (USD 8.48 and EUR 9.69) and based on currency exposure forecasts, Borregaard expects a net impact of foreign exchange on EBITA adj.1 of approximately NOK 30 million in the 1st quarter of 2019 and NOK 70 million for the full year of 2019.
Cash flow from operating activities in the 4th quarter was NOK 70 million (NOK 176 million). The decrease was mainly a result of a less favourable development in net working capital compared with the 4th quarter of 2017, partly off-set by lower tax payments. Investments amounted to NOK 213 million (NOK 339 million). Expansion investments1 were mainly related to the upgrade and specialisation of the lignin operation in Norway and the Ice Bear project in Speciality Cellulose.
Cash flow from operating activities was NOK 558 million (NOK 780 million). The decline from 2017 was due the cash effect of a lower EBITDA adj.1 and an unfavourable development in net working capital partly off-set by lower tax payments. Investments amounted to NOK 762 million (NOK 968 million). Expansion investments1 , totalling NOK 416 million, were
mainly related to the Florida project, the upgrade and specialisation of the lignin operation in Norway and the Ice Bear project in Speciality Cellulose. Dividend of NOK 199 million (NOK 349 million) was paid out in the 2nd quarter. Realised effect of hedging of net investments in subsidiaries was NOK -22 million (NOK 8 million). The Group has sold and repurchased treasury shares with a net payment of NOK 9 million (NOK 18 million).
At year-end, the Group had net interest-bearing debt1 totalling NOK 1,297 million (NOK 845 million), an increase of NOK 201 million from the 3rd quarter of 2018 and an increase of NOK 452 million from yearend 2017.
The Group was well capitalized with an equity ratio1 of 55.8% and a leverage ratio1 of 1.44.
The Board of Directors of Borregaard ASA will propose a dividend for 2018 of NOK 2.25 (NOK 2.00) per share to the Annual General Meeting. This corresponds to 47% of net profit. Dividend payment is estimated at
NOK 224 million. The exact amount will depend on the number of treasury shares held at the date of the General Meeting.
During the 4th quarter of 2018, 20,000 share options were exercised at a strike price of NOK 44.49 per share.
Total number of shares outstanding on 31 December 2018 was 100 million, including 450,215 treasury shares.
Total number of shareholders was 8,093. Borregaard ASA's share price was NOK 74.80 at the end of 2018, compared with NOK 83.40 at the end of the 3rd quarter and NOK 81.50 at the end of 2017.
Borregaard and Eidsiva Vannkraft have entered into a new long-term supply contract for electric power for a total of 2.8 TWh to be supplied to the Sarpsborg site in the period 2020 to 2029. The new contract replaces the existing contract between the parties for the period 2020 to 2024, with a gradual reduction of annual deliveries from about 420 GWh in 2020 to about 130 GWh in 2029. See notification to the Oslo Stock Exchange on 12 December 2018.
In 2016 a consortium of European companies and research institutions, with Borregaard as a lead member, was granted financial support from the Bio-Based Industries Joint Undertaking for the development and
commercialisation of Borregaard's Exilva microfibrillar cellulose under the European Union's Horizon 2020 Flagship programme9 . The support was given for the three-year period 1 May 2016 - 30 April 2019. In this period, 60% of Borregaard's costs would be covered up to a maximum support amount of EUR 25 million.
With the current run rate the granted amount will not be fully utilised within the three-year period. The consortium has therefore applied for a 12-months prolongation of the grant period without increasing the total amount. The application has been approved by the Commission, and the grant period will therefore be prolonged until 30 April 2020. See notifications to the Oslo Stock Exchange on 22 April 2016, 16 March 2016 and 13 December 2018.
9 This project has received funding from the Bio-Based Industries Joint Undertaking (BBI) under the European Union's Horizon 2020 research and innovation programme under grant agreement No 709746.
Continued strong competition and further price pressure for lignin products to the concrete admixture market is expected to be partly compensated by diversification and specialisation in 2019. Total sales volume in 2019 is forecast to increase by about 10%, mainly due to the ramp-up in Florida. The higher distribution costs will gradually decline over the next quarters. Fixed costs and depreciation for the Florida plant is expected to be approximately NOK 40 million higher in 2019 compared with 2018.
The average cellulose price in sales currency is expected to be in line with the 2018 level. Improved product mix will compensate for weaker prices for acetate and textile cellulose. Wood prices will increase further from the beginning of 2019, and Borregaard's wood costs in the
first half of 2019 will increase by about NOK 50 million compared with the first half of 2018. In the 1st quarter of 2019, total sales volume is expected to be lower than in the corresponding quarter of 2018, with similar product mix.
Ingredients is expected to increase its result in 2019, driven by the positive market trend for bio-based vanillin. No major changes are expected in the market conditions for Fine Chemicals. Sales will gradually increase for Cellulose Fibrils, but lead-times for conversion of sales prospects are long. The remaining grant from EU Horizon 20209 will cover a smaller share of costs than in previous years. Corporate costs will remain at the same level as in 2018.
Sarpsborg, 30 January 2019 The Board of Directors of Borregaard ASA
| 1.10 - 31.12 | 1.1 - 31.12 | ||||
|---|---|---|---|---|---|
| Amounts in NOK million | NOTE | 2018 | 2017 | 2018 | 2017 |
| OPERATING REVENUES | 2 | 1,219 | 1,137 | 4,785 | 4,618 |
| Operating expenses | -1,036 | -946 | -3,882 | -3,563 | |
| Depreciation property, plant and equipment | -89 | -82 | -323 | -306 | |
| Amortisation intangible assets | -1 | -1 | -4 | -4 | |
| Other income and expenses1 | 3 | - | -9 | - | -9 |
| OPERATING PROFIT | 93 | 99 | 576 | 736 | |
| Financial items, net | -9 | -10 | -14 | -21 | |
| PROFIT BEFORE TAXES | 84 | 89 | 562 | 715 | |
| Income tax expense | 4 | -19 | -4 | -137 | -157 |
| PROFIT FOR THE PERIOD | 65 | 85 | 425 | 558 | |
| Profit attributable to non-controlling interests | -15 | -5 | -51 | -8 | |
| Profit attributable to owners of the parent | 80 | 90 | 476 | 566 | |
| EBITDA adj1 | 183 | 191 | 903 | 1,055 | |
| EBITA ADJ1 | 2 | 94 | 109 | 580 | 749 |
| 1.10 - 31.12 | 1.1 - 31.12 | ||||
|---|---|---|---|---|---|
| Amounts in NOK | 2018 | 2017 | 2018 | 2017 | |
| Earnings per share (100 million shares) | 5 | 0.80 | 0.90 | 4.76 | 5.66 |
| Diluted earnings per share | 5 | 0.80 | 0.90 | 4.76 | 5.66 |
| 1.10 - 31.12 | 1.1 - 31.12 | ||||
|---|---|---|---|---|---|
| Amounts in NOK million | NOTE | 2018 | 2017 | 2018 | 2017 |
| PROFIT FOR THE PERIOD | 65 | 85 | 425 | 558 | |
| ITEMS NOT TO BE RECLASSIFIED TO P&L | |||||
| Actuarial gains and losses (after tax) | 5 | -6 | 5 | -6 | |
| TOTAL | 5 | -6 | 5 | -6 | |
| ITEMS TO BE RECLASSIFIED TO P&L | |||||
| Change in hedging-reserve after tax (cash flow) | 7 | -196 | -108 | -103 | 82 |
| Change in hedging-reserve after tax (net investment in subsidiaries) |
7 | -27 | -17 | -25 | 13 |
| Translation effects | 53 | 39 | 20 | -7 | |
| TOTAL | -170 | -86 | -108 | 88 | |
| THE GROUP'S COMPREHENSIVE INCOME | -100 | -7 | 322 | 640 | |
| Comprehensive income non-controlling interests | -8 | -10 | -42 | -11 | |
| Comprehensive income owners of the parent | -92 | 3 | 364 | 651 |
1 Non-GAAP measure, see page 22 for definition.
| Amounts in NOK million | NOTE | 31.12.2018 | 31.12.2017 |
|---|---|---|---|
| Intangible assets | 12 | 100 | 111 |
| Property, plant and equipment | 12 | 3,623 | 3,126 |
| Other assets | 8 | 230 | 93 |
| Investments in joint venture | 100 | 118 | |
| NON-CURRENT ASSETS | 4,053 | 3,448 | |
| Inventories | 856 | 734 | |
| Receivables | 8 | 956 | 971 |
| Cash and cash deposits | 10 | 86 | 180 |
| CURRENT ASSETS | 1,898 | 1,885 | |
| TOTAL ASSETS | 5,951 | 5,333 | |
| Group equity | 9 | 3,123 | 2,889 |
| Non-controlling interests | 198 | 107 | |
| EQUITY | 3,321 | 2,996 | |
| Provisions and other liabilities | 271 | 277 | |
| Interest-bearing liabilities | 8,10 | 1,115 | 743 |
| NON-CURRENT LIABILITIES | 1,386 | 1,020 | |
| Interest-bearing liabilities | 8,10 | 272 | 283 |
| Other current liabilities | 8 | 972 | 1,034 |
| CURRENT LIABILITIES | 1,244 | 1,317 | |
| EQUITY AND LIABILITES | 5,951 | 5,333 | |
| Equity ratio1 | 55.8% | 56.2% |
| 1.1 - 31.12.2018 | 1.1 - 31.12.2017 | |||||||
|---|---|---|---|---|---|---|---|---|
| Amounts in NOK million | NOTE | Controlling interests |
Non controlling interests |
Total equity |
Controlling interests |
Non controlling interests |
Total equity |
|
| Equity 1 January | 2,889 | 107 | 2,996 | 2,679 | 34 | 2,713 | ||
| PROFIT/LOSS FOR THE PERIOD | 476 | -51 | 425 | 566 | -8 | 558 | ||
| Items in Comprehensive Income | 6 | -112 | 9 | -103 | 85 | -3 | 82 | |
| THE GROUP'S COMPREHENSIVE INCOME | 6 | 364 | -42 | 322 | 651 | -11 | 640 | |
| Paid dividend | -199 | - | -199 | -349 | - | -349 | ||
| Buy-back of treasury shares | -32 | - | -32 | -29 | - | -29 | ||
| Exercise of share options | 6 | - | 6 | 0 | - | 0 | ||
| Shares to employees | 23 | - | 23 | 15 | - | 15 | ||
| Option costs (share based payment) | 6 | - | 6 | 6 | - | 6 | ||
| Transaction with non-controlling interest | 66 | 133 | 199 | -84 | 84 | - | ||
| EQUITY AT THE END OF THE PERIOD | 3,123 | 198 | 3,321 | 2,889 | 107 | 2,996 |
| 1.10 - 31.12 | 1.1 - 31.12 | ||||
|---|---|---|---|---|---|
| Amounts in NOK million | NOTE | 2018 | 2017 | 2018 | 2017 |
| Profit before taxes | 84 | 89 | 562 | 715 | |
| Amortisation, depreciation and impairment charges | 90 | 89 | 327 | 316 | |
| Changes in net working capital, etc. | -102 | 80 | -194 | -92 | |
| Dividend (share of profit) from JV | - | 13 | 6 | 11 | |
| Taxes paid | -2 | -95 | -143 | -170 | |
| CASH FLOW FROM OPERATING ACTIVITIES | 70 | 176 | 558 | 780 | |
| Investments property, plant and equipment and intangible assets * |
-213 | -339 | -762 | -968 | |
| Other capital transactions | 2 | 2 | 13 | 10 | |
| CASH FLOW FROM INVESTING ACTIVITIES | -211 | -337 | -749 | -958 | |
| Dividends | - | - | -199 | -349 | |
| Proceeds from exercise of options/shares to employees | 9 | 1 | - | 23 | 11 |
| Buy-back of shares | 6 | - | - | -32 | -29 |
| Gain/(loss) on hedges for net investments in subsidiaries | -40 | -35 | -22 | 8 | |
| NET PAID TO/FROM SHAREHOLDERS | -39 | -35 | -230 | -359 | |
| Proceeds from interest-bearing liabilities | 10 | 39 | 288 | 1,292 | 668 |
| Repayment from interest-bearing liabilities | 10 | -24 | -126 | -960 | -258 |
| Change in interest-bearing receivables/other liabilities | 10 | 14 | 12 | -2 | 46 |
| CHANGE IN NET INTEREST-BEARING LIABILITIES | 29 | 174 | 330 | 456 | |
| CASH FLOW FROM FINANCING ACTIVITIES | -10 | 139 | 100 | 97 | |
| CHANGE IN CASH AND CASH EQUIVALENTS | -151 | -22 | -91 | -81 | |
| Cash and cash equivalents at beginning of period | 231 | 198 | 180 | 265 | |
| Change in cash and cash equivalents | -151 | -22 | -91 | -81 | |
| Currency effects cash and cash equivalents | 6 | 4 | -3 | -4 | |
| CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD |
10 | 86 | 180 | 86 | 180 |
| *Investment by category | |||||
| Replacement investments | 189 | 144 | 346 | 344 | |
| Expansion investments1 | 24 | 195 | 416 | 624 |
Borregaard ASA is incorporated and domiciled in Norway. The address of its registered office is Hjalmar Wessels vei 6, Sarpsborg.
Borregaard ASA was listed on the Oslo Stock Exchange on 18 October 2012 and was incorporated as a public limited liability company on 22 August 2012.
These unaudited Interim Condensed Consolidated Financial Statements are prepared in accordance with IAS 34 Interim Financial Reporting. Borregaard ASA is the parent company of the Borregaard Group presented in these Interim Condensed Consolidated Financial Statements.
The same accounting principles and methods of calculation have been applied as in the Consolidated Financial Statements for 2017 for the Borregaard Group.
IFRS 15, Revenue from contracts with customers, and IFRS 9, Financial Instruments, were implemented from 1 January 2018. As described in the Consolidated Financial Statements for 2017, implementation had no significant impact on the income statement, the statement of financial position or on equity.
The same use of estimates has been applied as in the Consolidated Financial Statements for 2017.
Borregaard will apply the following transition methods when implementing IFRS 16 from 1 January 2019:
| 1.10 - 31.12 | 1.1 - 31.12 | |||
|---|---|---|---|---|
| Amounts in NOK million | 2018 | 2017 | 2018 | 2017 |
| BORREGAARD | 1,219 | 1,137 | 4,785 | 4,618 |
| Performance Chemicals | 552 | 521 | 2,237 | 2,176 |
| Speciality Cellulose | 427 | 435 | 1,669 | 1,698 |
| Other Businesses | 253 | 190 | 927 | 783 |
| Eliminations | -13 | -9 | -48 | -39 |
There is limited intercompany sales between the different segments and eliminations consist essentially of allocations from the corporate headquarter.
| 1.10 - 31.12 | 1.1 - 31.12 | |||
|---|---|---|---|---|
| Amounts in NOK million | 2018 | 2017 | 2018 | 2017 |
| BORREGAARD | 94 | 109 | 580 | 749 |
| Performance Chemicals | 42 | 76 | 314 | 449 |
| Speciality Cellulose | 50 | 67 | 257 | 350 |
| Other Businesses | 2 | -34 | 9 | -50 |
| RECONCILIATION AGAINST OPERATING PROFIT & PROFIT BEFORE TAX |
||||
| EBITA ADJ.1 | 94 | 109 | 580 | 749 |
| Amortisation intangible assets | -1 | -1 | -4 | -4 |
| Other income and expenses1 | - | -9 | - | -9 |
| OPERATING PROFIT | 93 | 99 | 576 | 736 |
| Financial items, net | -9 | -10 | -14 | -21 |
| PROFIT BEFORE TAXES | 84 | 89 | 562 | 715 |
| 1.10 - 31.12 | 1.1 - 31.12 | |||
|---|---|---|---|---|
| Amounts in NOK million | 2018 | 2017 | 2018 | 2017 |
| BORREGAARD | 1,200 | 1,116 | 4,705 | 4,522 |
| Performance Chemicals | 537 | 508 | 2,183 | 2,117 |
| Cellulose | 399 | 398 | 1,548 | 1,566 |
| Bioethanol | 29 | 37 | 120 | 121 |
| Fine Chemicals | 65 | 52 | 247 | 242 |
| Ingredients | 138 | 95 | 471 | 358 |
| Other | 32 | 26 | 136 | 118 |
Operating revenues consist of sales revenues and other revenues such as commissions, revenues from waste received for incineration etc.
There are no Other income and expenses1 in the 4th quarter of 2018.
The tax rate of 24.4% (22.0%) for the twelve months of 2018 is a compilation of the tax rates in the various countries in which Borregaard operates and has taxable income. The corporate income tax rate in Norway was reduced from 23% to 22% from 1 January 2019. The reduction in tax rate is reflected in the calculation of deferred tax as of 31 December 2018.
Borregaard's tax rate for 2018 is higher than previously expected and there are several reasons for the increase: LignoTech Florida is a limited liability company (LLC)
which is taxed on the owners' hand. Profit before tax is 100% consolidated in the Borregaard Group, whereas the tax expense is calculated based on Borregaard's 55% ownership. Consequently, profit attributable to non-controlling interests for LignoTech Florida (45%) is calculated on profit before tax. Share of profit after tax from the joint venture, LignoTech South Africa, is accounted for as part of operating profit and profit before tax (due to IFRS 11). In additon, there are carry forward losses in the Group which will not be recognised as deferred tax assets, and hence increase the Group's tax rate.
The share capital consists of 100 million shares. The company holds 450,215 treasury shares. As of 31 December 2018, there are 99,901,117 diluted shares (99,957,469 as of 31 December 2017). Earnings per
diluted share were NOK 0.80 in the 4th quarter of 2018 and NOK 4.76 for the full year (NOK 0.90 in the 4th quarter and 5.66 for the full year of 2017).
During the 4th quarter of 2018, 20,000 share options were exercised at a strike of NOK 44.49.
The Group Executive Management and other key employees hold a total of 1,577,000 stock options in four different share option programmes in Borregaard.
The first option programme, comprising 365,000 stock options granted in October 2014, has a strike price of NOK 41.00 adjusted for dividends in 2015-2018, NOK 8.25. The second option programme, comprising 460,000 stock options granted in October 2015, has a
strike price of NOK 44.49 adjusted for dividends in 2016- 2018, NOK 7.00. The third option programme, comprising 352,000 stock options granted in February 2017, has a strike price of NOK 98.61 adjusted for dividends in 2017 and 2018 of NOK 5.50. The fourth option programme, comprising 400,000 stock options granted in February 2018, has a strike price of NOK 78.00 adjusted for dividend in 2018. The share options in the four different programmes will expire after five years, the vesting period is three years and the options can be exercised during the last two years.
The statement of comprehensive income shows changes in the value of hedging instruments, both cash flow
hedges and hedges of net investments in subsidiaries (hedging reserve). These figures are presented after tax.
| 31.12.2018 | 31.12.2017 | |||
|---|---|---|---|---|
| Amounts in NOK million | Cash flow hedges |
Hedges of net investments in subsidiares |
Cash flow hedges |
Hedges of net investments in subsidiares |
| Tax effect year-to-date | -39 | -40 | -11 | -32 |
| Hedging reserve after tax | -138 | -110 | -35 | -85 |
For financial instruments that are recognised at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation at the end of each reporting period.
The following measurement levels are used for determining the fair value of financial instruments:
• Level 3 — Valuation techniques (for which the lowest level input that is significant to the fair value measurement is unobservable)
There were no transfers from one level to another in the measurement hierarchy from 2017 to the 4th quarter of 2018. Borregaard has no items defined as level 1. The bond is determined as measurement level 3. The fair value of the bond is deemed to equal its book value.
Set out below is a comparison of the carrying amount and the fair value of financial instruments as of 31 December 2018:
| 31.12.2018 | 31.12.2017 | ||||
|---|---|---|---|---|---|
| Amounts in NOK million | LEVEL | Carrying amount |
Fair value | Carrying amount |
Fair value |
| Non-current financial receivables | 2 | 224 | 224 | 36 | 36 |
| Non-current derivatives | 2 | 3 | 3 | 48 | 48 |
| Current derivatives | 2 | 16 | 16 | 58 | 58 |
| TOTAL FINANCIAL ASSETS | 243 | 243 | 142 | 142 | |
| FINANCIAL LIABILITIES | |||||
| Non-current financial liabilities | 2,3 | 1,116 | 1,116 | 753 | 753 |
| Non-current derivatives | 2 | 116 | 116 | 61 | 61 |
| Current financial liabilities | 2 | 272 | 272 | 283 | 283 |
| Current derivatives | 2 | 79 | 79 | 75 | 75 |
| TOTAL FINANCIAL LIABILITIES | 1,583 | 1,583 | 1,172 | 1,172 |
| Amounts in NOK million | LEVEL 1 | LEVEL 2 | LEVEL 3 | |
|---|---|---|---|---|
| FINANCIAL INSTRUMENTS 31.12.2018 | -1,340 | - | -740 | -600 |
| FINANCIAL INSTRUMENTS 31.12.2017 | -1,030 | - | -830 | -200 |
The financial instruments are measured based on observable spot exchange rates, the yield curves of the respective currencies as well as the currency basis spreads between the respective currencies.
| Amounts in NOK million | 31.12.2018 | 31.12.2017 |
|---|---|---|
| Share capital | 100 | 100 |
| Treasury shares | - | - |
| Share premium | 1,346 | 1,346 |
| Other paid-in capital | 645 | 418 |
| Translation effects | 93 | 82 |
| Hedging reserve (after tax) | -248 | -120 |
| Actuarial gains/losses | -17 | -22 |
| Retained earnings | 1,204 | 1,085 |
| GROUP EQUITY (CONTROLLING INTERESTS) | 3,123 | 2,889 |
As of 31 December 2018, the company held 450,215 treasury shares at an average cost of NOK 78.87.
| Amounts in NOK million | 31.12.2018 | 31.12.2017 |
|---|---|---|
| Non-current interest-bearing liabilities | 1,115 | 743 |
| Current interest-bearing liabilities including overdraft of cashpool | 272 | 283 |
| Non-current interest-bearing receivables (included in "Other Assets") | -4 | -1 |
| Cash and cash deposits | -86 | -180 |
| NET INTEREST-BEARING DEBT1 | 1,297 | 845 |
The members of the Group Executive Management of Borregaard held a total of 920,000* stock options in the Company as of 31 December 2018.
* Including stock options held by Liv Longva who has acted as a member of the Group Executive Management in 2018 during Tuva Barnholt's absence.
No impairment indicators have been identified in the Borregaard Group's property, plant and equipment or intangible assets in the 4th quarter of 2018.
| BALANCE SHEET AMOUNT AS OF 31 DECEMBER 2018 |
BALANCE SHEET AMOUNT AS OF 1 JANUARY 2019 |
|
|---|---|---|
| Item | (AFTER IMPLEMENTATION) | |
| Total assets | 5,951 | 6,184 |
| Equity | 3,321 | 3,321 |
| Equity ratio | 55.8% | 53.7% |
Machinery, vehicles and equipment: Incremental borrowing rate Buildings: Implicit interest rate if available
The incremental borrowing rate is based on interbank interest rate (NIBOR, EURIBOR or LIBOR) plus margin plus country risk mark-up.
Borregaard and Eidsiva Vannkraft have entered into a new long-term supply contract for electric power for a total of 2.8 TWh to be supplied to the Sarpsborg site in the period 2020 to 2029. The new contract replaces the existing contract between the parties for the period 2020 to 2024, with a gradual reduction of annual deliveries from about 420 GWh in 2020 to about 130 GWh in 2029. See notification to the Oslo Stock Exchange on 12 December 2018.
In 2016 a consortium of European companies and research institutions, with Borregaard as a lead member, was granted financial support from the Bio-Based Industries Joint Undertaking for the development and commercialisation of Borregaard's Exilva microfibrillar cellulose under the European Union's Horizon 2020 Flagship programme9 . The support was given for the three-year period 1 May 2016 - 30 April 2019. In this period, 60% of Borregaard's costs would be covered up to a maximum support amount of EUR 25 million.
With the current run rate the granted amount will not be fully utilised within the three-year period. The consortium has therefore applied for a 12-months prolongation of the grant period without increasing the total amount. The application has been approved by the Commission, and the grant period will therefore be prolonged until 30 April 2020.
See notifications to the Oslo Stock Exchange on 22 April 2016, 16 March 2016 and 13 December 2018.
1 Non-GAAP measure, see page 22 for definition.
9 This project has received funding from the Bio-Based Industries Joint Undertaking (BBI) under the European Union's Horizon 2020 research and innovation programme under grant agreement No 709746.
In the discussion of the reported operating results, financial position and cash flows, Borregaard refers to certain measures which are not defined by generally accepted accounting principles (GAAP) such as IFRS. Borregaard management makes regular use of these non-GAAP measures and is of the opinion that this information, along with comparable GAAP measures, is useful to investors who wish to evaluate the company's operating performance, ability to repay debt and capability to pursue new business opportunities. Such non-GAAP measures should not be viewed in isolation or as an alternative to the equivalent GAAP measure.
Cash flow from operations is defined by Borregaard as:
EBITA adj. is defined by Borregaard as operating profit before amortisation and other income and expenses.
EBITA adj. margin is defined by Borregaard as EBITA adj. divided by operating revenues.
EBITDA adj. is defined by Borregaard as operating profit before depreciation, amortisation and other income and expenses.
Equity ratio is defined by Borregaard as equity (including non-controlling interests) divided by equity and liabilities.
Expansion investments is defined by Borregaard as investments made in order to expand production capacity, produce new products or to improve the performance of existing products. Such investments include business acquisitions, pilot plants, capitalised research and development costs and new distribution set-ups.
Other income and expenses is defined by Borregaard as non-recurring items or items related to other periods or to a discontinued business or activity. These items are not viewed as reliable indicators of future earnings based on the business areas' normal operations. These items will be included in the Group's operating profit.
Leverage ratio is defined by Borregaard as net interest bearing debt (see note 10) divided by last twelve months' (LTM) EBITDA adj.
Net interest-bearing debt is defined by Borregaard as interest-bearing liabilities minus interest-bearing assets (see Note 10).
Capital employed is defined by Borregaard as the total of net working capital, intangible assets, property, plant and equipment and investment in joint venture minus net pension liabilities and deferred tax excess value.
Return on capital employed (ROCE) is defined by Borregaard as last twelve months' (LTM) EBITA adj. divided by average capital employed based on the ending balance of the last five quarters.
| 1.1 - 31.12 | ||
|---|---|---|
| Capital employed end of | 2018 | 2017 |
| Q4, 2016 | 3,508 | |
| Q1, 2017 | 3,754 | |
| Q2, 2017 | 4,003 | |
| Q3, 2017 | 4,044 | |
| Q4, 2017 | 4,256 | 4,256 |
| Q1, 2018 | 4,454 | |
| Q2, 2018 | 4,578 | |
| Q3, 2018 | 4,620 | |
| Q4, 2018 | 4,937 | |
| AVERAGE | 4,569 | 3,913 |
| EBITA ADJ. (LTM) | 580 | 749 |
| ROCE (%) | 12.7 | 19.1 |
Borregaard ASA P.O. Box 162, NO-1701 Sarpsborg, Norway Telephone: (+47) 69 11 80 00 Fax: (+47) 69 11 87 70 E-mail: [email protected] www.borregaard.com
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