Corbion N.V. (CSNVF) CEO Olivier Rigaud on Q2 2021 Results - Earnings Call Transcript

Corbion N.V. (OTCPK:CSNVF) Q2 2021 Results Conference Call August 10, 2021 5:00 AM ET

Company Participants

Jeroen van Harten - IR, Director
Olivier Rigaud - CEO
Eddy van Rhede van der Kloot - CFO

Conference Call Participants

Robert Vos - ABN AMRO
Patrick Roquas - Kepler Cheuvreux
Fernand de Boer - Degroof Petercam
Sebastian Bray - Berenberg
Alex Sloane - Barclays
Reg Watson - ING

Jeroen van Harten

Thank you, operator. Good morning, everyone. Welcome to the Corbion first half conference call.

Today with us on the call are CEO, Olivier Rigaud; and our CFO, Eddy van Rhede van der Kloot. My name is Jeroen van Harten, Investor Relations.

Today’s call, we’ll start with a presentation by Olivier and Eddy, a deck, a slide deck that you can find on the Investor Relations website under Financial Publications. So please download that deck if you want to follow along. You can also follow along on the webcast, the link you have, hopefully, in your inbox.

We’ll start with the presentation of about half an hour, followed by Q&A. So with that, I’d like to hand over to Olivier.

Olivier Rigaud

Thank you, Jeroen, and good morning, everybody, and welcome to the half year results conference call. I will start highlighting some key points over this first part of 2021. First of all, about -- I mean the impressive organic sales growth on our core activity of 16.4%, reflecting our investment in primarily go-to-market capabilities, front-line sales and key accounts, technical support, R&D application and innovation. And as you can see, Sustainable Food Solution at a growth over 15.5% across all segments coming from a much improved pipeline. Lactic Acid & Specialties as well had a very strong growth, I mean, 12.6% over the period, with a noticeable recovery in our biopolymer business in the second quarter. And finally, in Incubator, primarily composed of our DHA omega-3 algae business, a very strong growth with over 161% there.

On the other side, we faced significant and unprecedented raw material and freight price increase that requires firm pricing action. We already initiated in the second half of ‘21 to, I mean, again, pass that on to the market. However, over 2/3 of our business is contracted on a yearly basis. So most of the impact would come as from ‘22 onwards.

Across the first half, we continued to invest in our organizational capacity and capabilities. So following an addition of another 9% headcount we had across last year, we are continuing with a 4% FTE increase across the first half of this year compared to end of 2020.

In terms of adjusted EBITDA, we ended at EUR 77.1 million or a 15% EBITDA margin, showing an organic growth of 4.7%. But we see, of course, EBITDA margin under pressure and we see pressure going on in the second half of the year related to these higher input costs and investment into the organization.

So now moving to the Sustainable Food Solution, we see a strong sales growth acceleration with an impressive 18.7% organic growth across Q2. It’s important to note that when we look at our end markets, a couple of examples there related to meat and bakery in the U.S. market. We see, I mean, basically, this is returning to normal post pandemic as food service is recovering. But despite this return to normal, we see a continued strong performance of our business, and I will come into further detail.

Basically, we’ve been still able to strengthen a lot our sales pipeline. Our application labs and tech support sales force remained open and people on the ground even during this pandemic. And this, I believe, did help a lot in continue to build some and strengthen our commercial pipeline across the period.

At the same time, what we’ve seen in terms of customer behavior is a much increased win rate compared to previous years. And that’s also paying off right now. But we also believe this is coming from the very strong execution we’ve had across the period. If you remember and if you see what’s happening in the market in terms of logistics, supply constraints and hurdle, we’ve been able to keep our customers’, I mean, deliveries uninterrupted across the period. And we are pretty proud not to have let any customer down during the period as well.

So in terms of pipeline, you could see on the bottom right chart, at one point, I was insisting over the last quarters about the need to strengthen our pipe in SFS. And although we’ve seen a slight erosion during the pandemic in 2020. We’ve seen, I mean, a very nice improvement over the last quarter and in the first half of the year. We are now -- we have not only, I mean, a much higher absolute value in our pipe, but also a very healthy one with very nice opportunity. And this came from accelerated investment in SFS resources, primarily application labs where we had to play some catch-up. In the period, we completed the construction of an application lab in China. We are currently doubling our Singapore capabilities, but we also heavily invested in the U.S. in Lenexa on natural antioxidants, in dairy stabilizers. And the next one in line is coming in Mexico recently. We made an acquisition acquiring the Granolife assets, and we aim to improve our lab capabilities over there.

So what is the impact of the COVID on our business and how this impact consumer behavior? Just as an example, I will only show an illustrative example, for instance, on the health and wellness, there COVID has accelerated some of the consumer behavior changes. When describing choiceful health and wellness, consumer see and are aware of the importance of our ingredients. So no need to say, I mean, it’s about acceleration of natural, organic, fresh, but also, I mean, a very, I mean, consciousness on basically safe food, replacing synthetic and artificial ingredients.

When we look at what it means for Corbion, we can see 3 very big important drivers. The first is about extended shelf life. And it’s, of course, about providing freshness. But it’s also about a waste reduction in the sustainability value proposition where we play.

Number two is around clean label, and we only see an acceleration. This is not new. But as I mentioned, people want to see on the label ingredient they trust, and they want us to help them removing artificial and synthetic fossil-based product.

And last, but not least, when you speak about the wider theme around food preservation, it’s also food safety. It’s about preventing food illness, but it’s also, I mean, safety through delivery. And we’ve seen an important increase of, of course, e-buying and at-home delivery in the period. And we believe that some of these changes are structural and going to stay post-COVID.

So now how it does translate into SFS. We are working on 5 key strategic pathways to generate growth in our Advance 2025 plan. And I will not detail them all. But when we look at these big blocks, expanding preservation beyond meat, we used to be our biggest category. Now we are able to leverage our capabilities, our technical capabilities into moving this from meat to bakery, but also to savory.

A good example we see is in big, big potential in expanding in more inhibitors in bread across the globe. And this is replacing synthetic calcium propionate as an example. We are also pushing on expanding preservation, what we call beyond micro. So far, we’ve been acting by preservation and primarily acidifying foods with our lactate derivatives or other ferments. We also, I mean, invest now in natural antioxidant. And we opened in Lenexa a dedicated lab to support this adjacency to play not only in acidification in terms of preservation but also on anti-oxidation with natural products.

We’re also developing as the third block, new preservation technologies, and we are investing in our plant in Peoria, close to Chicago, in developing a very nice library of additional food ferments, tackling more application. So -- and this is happening as we speak and tackling, I mean, as well some of the other challenges you see in natural preservation with a much wider range of products.

Moving now to Functional Systems, which used to be primarily focused on bakery and bakery remains a key area for us. But we are moving to dairy, as I mentioned before, not forgetting also success in confectionery or savory systems, where we bring adding functionality again. We are thinking about shelf life, but also functionalities could be, I mean, those strengthening of orders.

And last, but not least, is expanding our partnership globally in terms of formulation and blending. So I mentioned the recent acquisition in Mexico, but we have also concluded a very nice strategic exclusive partnership in the field of natural antioxidant, as an example.

So now diving into the SFS numbers. As I said, strong consumer demand for natural preservation. In a lot of geographies, this being supported by regulation that is, of course, helping us in moving from synthetic to natural. Within the Functional System, we see a very nice growth actually and a very strong pipeline coming up with both, and this is what’s interesting, our key accounts but also new customers. So a very nice widely spread pipeline across, I mean, our customer base with, again, not only the bakery application but also very strong in confectionery, clean label, but also driven by the plant-based trend we see in the food space.

I mentioned the high project win rates. We believe that as we’ve been able to maintain a very high on-time and full supply chain and service during the pandemic that we get, I mean, the right benefit of it and the trust from customers.

We also see a very nice positive impact from the acquisition we made in Brazil a couple of years ago, acquiring Granotec in Brazil that is contributing also nicely to our growth. So as you can see on the chart, over the last quarters, we’ve seen, I mean, a very healthy and sustained increasing growth pattern into, let’s say, the SFS. We will come back later with Eddy into the financials and the details on the EBITDA margin development there.

Moving to Lactic Acid & Specialties. There, also a very nice momentum. All the segments grew in the first half of ‘21. When we say with the exception of esters, basically, esters are being sold in 2 major categories, the semiconductor and the agrochemical for biopesticides. But -- so there, the overall semiconductor is doing very well, and we see there a sustained growth, but we’ve seen a decline in agro also driven by regulatory changes. And I think this is in structural decline going forward. But we see a very, very strong momentum in the semiconductor industry there.

Obviously, PLA has been continuing a very strong growth and lactic to PLA showed, I mean, very important growth numbers as well as some nice development in hygiene and cleaning markets where we have positioned some lactic derivatives. And we start to see also a very nice growth being driven, of course, by the COVID impact and need for more sanitization there.

On biopolymer, we, of course, I mean, if you remember the past quarters, had quite some impact from COVID and the postponement of elective surgeries. We’ve seen rebouncing primarily in orthopedics in Q2 with over, I mean, 20% growth there in that part.

Overall, in the first half, it remains modest, but we see a very nice uptake in Q2 on this high-margin business. So on the Q2 margin, basically there, as in SFS, we have an impact on, let’s say, due to the increased input prices and costs. Also mentioning the pipeline there, as in SFS, we see a very healthy pipeline, and the team has been very active in creating the pipeline for the next year’s growth.

Now moving to our third business pillar within Incubator, and you know this is primarily composed by our omega-3 AlgaPrime DHA, again, still a very strong momentum there, building on what we developed last year, expanding into more aquafeed companies, but also growing into new categories as pet food which is, again, a nice development that we see today. And we are, I mean, again, very, very happy and increasingly confident to achieve our EBITDA breakeven point in 2022 as we committed into the Advance 2025 strategic plan.

Now moving to the joint venture. We continue, I mean, to have a very strong relationship with Total Energy, our partner on this joint venture. And we’ve seen a very nice sales increase through a combination of price and volume growth that has been partly by negative currency effect. We are actively working on our second plant in Grandpuits, France, where we started the front-end engineering. And although you see some Q2 lower margin, we will come back on that. This is not representative on how, let’s say, the margin evolution is in that business. And finally, so my highlight our noncore activity basically, which is now comprising only of our emulsifier U.S. business. Strong organic growth in there as well. The frozen dough business was divested in January 2021 for an EUR 18 million sales and a book profit of EUR 8.4 million. So -- but there, again, we are facing primarily some steep increase in oil -- soybean oil that we are passing on to the market.

Now let me hand over to Eddy, our CFO, to go through the P&L, and I will be back, I mean, for the outlook.

Eddy van Rhede van der Kloot

Thank you, Olivier. Good morning, good day to everybody.

We start by looking at the P&L for the first half of the year. So as Olivier already alluded to, we’ve been growing our business on the top line for close to 5% for the first half of the year. But that 5% growth has really been adversely impacted by negative currency impacts and also the divestment of the frozen dough business. So if you extract for that underlying organically, the total business has been growing by 15.5%.

And I think it’s good to note that the far majority of the growth is really catered for by volume growth of 12%. That growth development did not completely translate into margin development. You see the EBITDA reducing from 17% last year to 15% this year. Two main factors that we will talk about later on is causing this. One is the continued investments in the organizational capabilities that is really expressed by about 200 additional FTEs people will account to our company. So we’re investing for growth. And secondly, it is really the inflation -- the price inflation that we see on a broad range of our input factors. We’re going to talk about it later.

A bit deeper the P&L, I’d like to spin out a couple of key points there. On the adjustment level, you see the positive of close to EUR 24 million for the first half year. That is indeed referring to the book gain that we made on 2 divestments. That’s the frozen dough business and the Breda, that’s the plot of land in the Netherlands that we have that we divested. So that were positives. And there was also a negative to be mentioned here that’s the impairment we’ve made in the first half this year related to the FDCA initiative. That was one of the last remaining activities that we had managed for exit part of our portfolio, a biopolymer that we don’t think we are the better owner to further develop that on our own account. So we fully impaired the book value on that.

Then we come to the financial income and expenses. Quite a negative last year, very much caused by negative currency impact from the Brazilian reais. This year, you see a more normalized interest development of minus EUR 6 million there. Then a positive result joint ventures, that is really the joint venture results of PLA, including about a EUR 2 million dividend contribution for us in the first half of the year. So that gives that positive momentum there.

Taxes, much less negative than last year. That is because as part of the divestment of the Breda land, we had quite a favorable tax loss that we could value now, and that’s about a EUR 9 million positive on the tax line recognized in the first half of this year. So without that, you’re looking at a tax line that’s more in line with last year and normal effective tax rates.

So then next page. The usual growth matrix for our sales development. Let’s not talk through too much detail here, but in a nutshell, again, 5% growth -- total growth, negative currencies minus 9%, so dollar has been weaker, reais has been weaker, Japanese yen has been weaker, so that all plays into the 9% reduction. You see a 2% negative divestment impact from frozen dough and organically at 15.5%.

And if you then look at the core, especially in the core, we see a 16.4% organic growth rate. And like I said, very much carried by a positive volume effect, close to 14% for the first half of the year. In the bottom part of the table, similar pattern, which you see an even more expressed growth profile for the second quarter.

That brings us to the next page on the EBITDA bridge for the core business. So this close to 14% volume growth clearly increased our EBITDA contribution, close to EUR 28 million and negative pricing mix effect for the first half year. This is related to an increased level of lactic acid asset sales to PLA. You may remember that, that is not the highest margin for us in our net sales and EBITDA recognition. And on top of that, we also had quite a work and a sizable increase of input cost inflation across a broad range, and we could not fully offset that by price increases. So that is also explaining part of that negative minus EUR 4 million.

Then there is a sizable increase in costs, you have to read that as fixed cost by EUR 22 million. We decomposed that clearly to show what we are investing in the company, so about half of that EUR 9 million is really the increase of the people base. Like I said, 200 more FTEs as per June this year versus June last year. So a sizable divestment, really, of course, a broad range in our organization to capable future growth. And then the rest is other cost components. It’s the usual inflation and some negative phasing effects we also had in -- especially in Q2.

Currency impact, like I explained, a lot of the imported currencies for us were weaker than last year, and that brings us to the EUR 66 million EBITDA for the quarter for the first half of the year.

Let me move on to the net debt bridge, net debt over EBITDA. So on the top of the chart, you see we have increased our leverage, which we also explained and anticipated from 1.7 to just over 2 by June this year. The key components are explained here in waterfall. The sort of cash income, that’s the EBITDA minus the tax, of course, working capital increase; CapEx about EUR 53 million of CapEx outlays. The dividends that we’ve paid, dividend level of EUR 33 million that’s paid in June. Some dividends we received from the joint venture, about EUR 4 million. Then the contributions from the frozen dough divestment, EUR 20 million; the Breda divestment in itself, that’s a good EUR 20 million divestment that we get at in a phased payment schedule over a 10-year period, that a good EUR 8 million has been received already this year. Then we did do an acquisition at Granotec, Mexico in the latter part of the first half year. So that has been a cash-out of EUR 9 million.

And then because of the strengthening of the dollar versus the end of last year, the loans and user fees are more, I would say, more highly valued in terms of euros. So that explains the last part.

Next page is the free cash flow. So here, we try every time, every column is a 12 months running position. If we look to the far right-hand side, you see that we had a positive of EUR 31 million free cash flow in the last 12 months. That is a combination of a positive cash flow in the second half last year and a negative cash flow of minus EUR 14 million in the first half this year.

Going forward, you really have to expect a big reduction of our free cash flow and really turning into negative territory because we do anticipate a major CapEx outlay acceleration in the second half of this year due to all the expansion programs we had in place, especially related to lactic acid.

The next page covers the investments. So here, you see the -- a lot of the investment in the last years, especially the purple one, that’s the first overview of the investments we’re making in new lactic acid plant in Thailand. So about EUR 13 million cash outlay in the first half this year. And that one will further accelerate in the second half of this year. The recurring CapEx of EUR 38 million, that is including our debottlenecking program. You may remember that in addition to the new lactic acid plant in Thailand, we also are debottlenecking, that means increasing capacity in all the other existing lactic acid plants. So that has been quite a cash outlay also in this first half year. Any continuation of our ERP investments in our platform with some multiyear investment program we talked about before. And again, that acquisition is related to the Granotec Mexico acquisition.

All in all, our CapEx outlook, by the way, remains unchanged for the full year, so EUR 165 million to EUR 180 million. And we also have shared in our press release that the CapEx and the total CapEx for the new lactic acid plant in Thailand has been increased from $190 million to $230 million, and that is really reflecting increases because of higher rates for steel. You probably also have seen what steel has been doing lately, but also engineering rate that’s higher and also a broader scope for site infrastructure investments we have to make there.

Next is, I don’t think we need to spend much time about working capital. It shows you, if you compare June to June, this has expressed as days a pretty flat development, 82 days versus 80 days June last year.

Then a key topic to discuss is on the next page, is about, yes, the input prices and this is about the price inflation that we see. We really are experiencing, and we are not the only company around there, I think, is that we have really experiencing a broad-based inflation in basically all our input factors. So this is about key raw materials. It is about helping raw materials, and it is about packaging. It is about energy. It is about the freight tariffs. We’ve tried to give you some flavor of some of the developments in just a few of them, but we can have lots of other graphs like that to this all showing similar curves. And yes, basically, this is really something that, yes, we are able to hedge a portion of these input factors and that’s especially related to soft commodities like corn and sugar and soybean oil and energy. So those are really input factors that we can hedge, and we do hedge over time. But that’s only about 1/3 of our total raw mat energy bill. And all the others are really, yes, exposure and are not hedgeable. And that is really what we are being faced with and I would say the position is more pronounced than we even have seen coming towards us when we had our earlier proposition back in April. So this has really further deteriorated since then.

And on top of that raw mats, it’s really the whole situation about logistics, freight rates, that’s international sea container freight. It’s about U.S. domestic freight. All these components are already on the rise that that’s really, yes, urging us, requiring us to really have further strong price actions going forward to mitigate these effects going forward.

To give you some flavor about the order of magnitude, that’s what we do on the next sheet in the right-hand side table. So basically, we decompose that in what do we see hitting this year’s? And then what do we see hitting also next year’s? So that’s the second column. And then we split it in what is going to impact our core business and what’s going to impact our noncore business. So in the aggregate, we’re talking about an EUR 80 million to EUR 90 million, 8-0 million to 9-0 million, increase over this 2 years’ period in increased input costs. And again, this is only price inflation, yes. Out of that EUR 80 million to EUR 90 million, about EUR 50 million to EUR 55 million is going to hit our core business. So if you look at the size of what that does in terms of the size of the business, you’re typically looking at about 5.5% to 6% price increases that we would require if you want to offset that amount of price increases. And then the remaining EUR 30 million to EUR 35 million is going to hit our noncore business. And there, the main component is soybean oils. On the previous sheet, you probably have seen that soybean oils has really gone through the roof and we can talk about that later why, but that is really a phenomenal increase in that input cost. And that is really hitting our noncore emulsifier business and not impacting the core as such.

So again, this whole dynamic, yes, will require, and we are taking actions on that, on the price dynamics in our portfolio. And based on that, yes, we aim to restore our adjusted EBITDA margin into next year for the core activities, again, to above 15%.

So that brings us to the outlook, Olivier.

Olivier Rigaud

Yes. Thank you, Eddy. So on the outlook, on the top line side, we are raising our organic sales growth guidance from 12% to 15% coming from the 7% to 10%. And there, obviously, we are accelerating some initiatives now that business travel resumes, and we can intensively visit our customers to further enhance the pipeline for ‘22 and ‘23. But on the remaining part of the year, we’ve seen increased, I mean, benefit from our SFS pipeline, combined with a higher win rate I mentioned before. We’re also still very confident on the PLA joint venture ramp-up. This is progressing very well in terms of adding new customers as well as developing new applications, an increased confidence in our algae-based omega-3 business development with, I mean, new customer conversion happening across the second part of this year. And not forgetting the majority of this across the 3 businesses’ majority volume growth, although we expect to see the first contribution from the pricing actions on the open contract.

However, on the adjusted EBITDA margin, there, we are revising our target between 13% and 15%. It used to be above 15%. We expect, as I said, to pass on these higher input costs with some delay. And we aim to restore this margin level above 15% for 2022. This is requiring a very rigorous and strong discipline and we are ready with a team in full action mode to make it happen for next year.

On this, thank you for your attention. We will move to the Q&A.

Jeroen van Harten

Operator, could you poll for questions, please?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Mr. Robert Vos from ABN AMRO.

Robert Vos

I have a couple of questions. I appreciate all the explanations you gave, but I’m still a bit puzzled why the visibility of increasing input prices apparently is so low that you have not seen this coming at your last trading update on Q1. So maybe a bit more color there. And then a specific detailed question for Eddy. You mentioned 5.5% to 6% price increases are needed to offset the higher costs. Is that for core only? And if so, what will be the strategy for the noncore? Because the soybean prices are increasing also quite steeply. That is my first one.

The second one, you mentioned $40 million higher costs for the construction of the lactic acid plant in Thailand. Yet, if I look at all the CapEx guidance mentionings, they maintain the same. So can you elaborate on this please? Is that maybe a currency effect? Or why have you not increased your midterm guidance for CapEx?

And then finally, on Incubator. If you look at Q2, both year-on-year and also compared with the first quarter, sales was significantly higher but the losses remained stable at around EUR 3.4 million in the second quarter. What exactly is the reason for that? Why is there not more benefit from operational leverage? Those are my questions.

Eddy van Rhede van der Kloot

So let me take all 4 questions. So the first question on the raw mats. So indeed, in the previous call in April, I have mentioned the EUR 15 million to EUR 20 million total hit, where now, we say EUR 40 million. So indeed, that’s quite a step-up, absolutely. But again, I’d like to reiterate that, yes, there are quite a couple of factors that really did not materialize at all. If anything, if you look at logistics, for example, freight rates, the whole situation logistically worldwide has even deteriorated since earlier this year. And while lots of indications were that things would normalize, that is not taking place at all.

And so if you take, for example, also U.S. road transport, that is a further hiccup in cost development, these the international freight rates. So it’s really, yes, really broad based. Again, where we did maybe anticipate some normalization, we don’t see that yet. So it’s also in all the raw mats related more to maybe the chemicals we’re using like sulfuric acid, where we anticipated a reduction. If anything, that has stayed stable or even increased. It is about all the other components that we use. Packaging, I don’t know if you follow the polymer markets, but polymers are really on the rise, so that’s also expressed in packaging prices. So it’s really broad based. And again, we are quite open here that the amount of hedges that we can apply is, in that sense, limited. This current percentage, about 1/3 of raw mat bill. So means we do have exposure on all these components. And it’s really the aggregate of it that makes it so pronounced.

In the past, we’ve had earlier hikes, but it was always more focused or maybe on only one key raw material. In this current global environment, it is really broad based and that’s why it’s so pronounced.

The second question, yes, that’s purely arithmetically. Mathematically, I just want to give you some connotation. So the EUR 50 million to EUR 55 million relates to the increase in input costs for the core only over this 2 years’ period. If you take that on the current H1 sales level for core, you multiply that sales level by 2 as an estimate, then you come to that order of magnitude. So I think it shows you what it should be at least, but that’s across the whole business, of course, of core. And of course, it differentiates. And we make our choices with the business where we go much more aggressively than this and where we have to stay maybe more along those lines.

That’s not to say that we don’t do anything with non-core, absolutely. Non-core, the EUR 30 million to EUR 35 million, also has to be covered. The only thing is we drive these 2 businesses strategically in a different way as you remember -- may remember. So the core, we drive for the combination of sales growth and a certain margin profile. The noncore, we really drive or manage for value. And manage for value, we have to weight as much for cash. So they are really -- will drive the whole business to get to at least an absolute amount of cash, which is an absolute amount of EBITDA out of the business.

But certainly also there, as we also with the current pricing and the dynamics that we’ve seen, has to be passed on to the market, absolutely.

Then the EUR 40 million higher dollar CapEx for Thailand. So that is really related to the total CapEx program for that one plant. And those CapEx outlays are not only taking place this year, but it’s also in ‘22 and also in the earlier part of ‘23. So that plant becomes operational by mid-’23 as we guided before. So the whole CapEx over this 3-year period is now up from EUR 190 million to EUR 230 million. For this year, it is not really impacting our guidance because in ‘21, the CapEx outlay is very much what we had already anticipated. So it’s more increasing the ‘22 and the ‘23 in that sense. So that’s why we did not change or had to change our guidance for this year.

Then the Incubator losses, a good question. It becomes maybe a bit technical here. But here, we are producing the LG-related business that is comprising here in Incubator related to DHA in one plant in Brazil. And basically, we have in the first half of the year sold more than that we produced. And if you sell more than what you produce, then your inventory levels comes down and the fixed cost component in those inventories is coming as a hit in your P&L. So that is typically what we see also in some other parts of the business, but that was quite pronounced for the Incubator. So quite a negative in the first half of the year. And we do anticipate a reversal of that in the second half of this year.

Robert Vos

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

Eddy van Rhede van der Kloot

Okay, we did not adapt our guidance for ‘22 onwards. So that is more something that we will do towards the end of this year when we come out the -- a review of our guidance for those years. So again, for this year, no change. For the next years, but that -- this is one element, that we will look at the total CapEx program, of course, if we have to make that kind of adjustments.

Operator

The next question comes from Mr. Patrick Roquas from Kepler Cheuvreux.

Patrick Roquas

A couple of questions from my side. The first one is on the raw material issue. So let’s assume that you need a price increase of around 10% this year and next year combined. First half saw pricing of around 2.5%. So the question is, what kind of pricing do you foresee for the second half? And what price increase do you need to pass on next year? Is that around 6%?

And following up on that, based on pricing as well as volume growth, I think Olivier had a pretty bullish story on SFS and L.A. Your guidance for organic sales growth for ‘22 most likely will also then be above the 4% to 7% range.

And then yes, obviously, the margin in the first half is impacted by raw material price inflation. But on an absolute level for the EBITDA, the impact from raw mat seems largely compensated by faster growth for now as well as some pricing coming in later. Is that fair to say?

And then the final question is on -- is a follow-up on Robert Jan’s one. The higher CapEx for the L.A. plant in Thailand, is that something that we can also expect for the potential expansion in France? And is there any implication for the model or, let’s say, in terms of the pricing as you will -- your investments will rise? Obviously, I still assume that you will kind of capture a minimum return, but happy to hear your thoughts there.

Olivier Rigaud

And maybe I will take the volume and the price increase and Eddy, the other 2. So Patrick, so basically, on the guidance for ‘22, I mean, again, as I said before in the presentation, indeed, I mean, again, we see a very high growth momentum that we’ll not stop on the second half. Obviously, again, we want to see this project materializing, but the confidence level in being in this high end is there, yes? So we’ll not commit on percentage at that stage. But I’m pretty confident that we’re going to continue on a very strong momentum across the 3 businesses.

So, on the price increase, all in all, when you look to the absolute number, of course, it looks and it is big. However, when you see what’s going on, not that this is coming to -- as a surprise to the market or to the customers. Even when you look at our emulsifier business on noncore and soybean oil, this is a widely used product in most of categories. Recently, you might have seen an announcement from the big FMCG companies that are active in dressings, sauce and culinary. They’re all facing a huge, I mean, pressure impact. And what’s happening on the renewable fuel standard in the U.S., and this is pretty clear. People do see the order of magnitude that is happening. I have to say that, first, back to this noncore, we are leaving very little, if any, room for discussion in passing that on. I mean, we are very strict on that. And I think there, I’m also confident we’re going to have some results.

On the rest, it’s widely spread. And of course, there is also a mix impact. But we are going in -- I mean, for next year, again, largely above 10%. Now I cannot predict the success rate. I mean it will depend on a lot of other factors and things that can happen between now and the end of the year. However, what we see is that we are starting discussions very early on this year. So usually, this, let’s say, negotiation will start in Q4. We are expecting and we see now a discussion happening already as from now for next year. So -- and again, I’ve been myself through several price increase in my career, even, I mean, a lot higher than this one in the cereal sectors. It’s about maintaining a very strong discipline. At the same time, we see still a continuation of a tight supply and demand on our core lactic acid market going into next year. So there are no massive new capacity coming up. And the bigger new capacity coming up next year is the one coming actually from Corbion announcement. If you remember, we announced this, let’s say, EUR 65 million investment into various debottleneck for lactic acid that will come on stream in Q1 and in, let’s say, late Q2 next year, both in the U.S. and Brazil.

Eddy, maybe you can take the, let’s say, other 2 points?

Eddy van Rhede van der Kloot

So the last one, let me start with that on your question on the CapEx in Thailand. So that increase at $190 million to $230 million is really a Thailand-related impact because, like I said, we had to invest more inside infrastructure and we have specific increases on the steel price that are taking place as we are procuring already now and also the engineering rates. And on top of that, by the way, I don’t mention it yet, but the whole COVID situation, I don’t actually follow the Asian countries, but Thailand is one of the countries that is not an easy call at the moment, if I have to say it in a stated way. So that also gives us a higher cost outlook.

So you cannot translate those dynamics directly back to the next PLA plant in France, can’t we? At this stage, we do not have indications or new insights that we had to adjust our CapEx predictions on that plant. So you cannot extrapolate those.

On implication for price, yes, with investments. So the lactic acid plant that we have in Thailand, I’ve explained before, we are always looking for minimum investments, which we call an IRR, Investment Rate of Return, post tax of above 15%, and that was already the case on the previous

CapEx assumptions, and that’s still the case on these price assumptions. So that is how we judge these investments because you already do these investments on a very long time frame, and you don’t do that just for a couple of years, as you can imagine. So I don’t think you can just make a direct relation between sales price of PLA versus a certain investment level that directly doesn’t work that way.

You had a question -- what’s still left? Is that the first question or not, on the pricing? So I’m not sure if I fully got your question. If your question is on the raw mats, so the EUR 30 million for -- let’s pick the EUR 30 million for core, the phasing of the EUR 30 million, I’d put it a bit rough now, Patrick, but take us an assumption, something EUR 10 million, EUR 10 million, EUR 10 million. So Q2, Q3, Q4. So more or less stable to we’ve seen in Q2. And like Olivier and myself already saying, we are active with pricing actions in the market. I don’t think we want to share here exactly what outcome we do anticipate if that’s still contributing this year, but we do expect a certain contribution offsetting part of that EUR 30 million in the second half of this year.

Operator

The next question comes from Mr. Fernand de Boer from Degroof Petercam.

Fernand de Boer

It’s Fernand de Boer of Petercam. Also a number of questions from my side. First of all, Olivier, you said in your intro that on PLA, you should come back on the margin, which was very low in the second quarter. So I probably missed that, but could you give some reason behind it and why it should recover in the second half? That’s the first question.

Then Eddy, to come back on your remarks on the raw mat and the step-up in this expectation. You said that in the first quarter, you assumed some normalization. Is the EUR 80 million, EUR 90 million you now expect, is that then purely based on the current situation and no expectation of any normalization?

Then to come back maybe on PLA. Yesterday, we saw the final announcement of NatureWorks saying, okay, we will have a new plant ready for PLA also in 2024. How do we have to look at this with 2 -- the market leaders coming both with, let’s say, doubling the capacity in that year in 2024? How do we have to look at that? Do you believe that the demand will be that strong, that it can absorb that capacity at that moment?

And then also coming back on the pricing, sorry, I’m going all over the places. But in noncore, we saw already some 6%, 6.5% price/mix, if I saw that correctly in the press release. Is that all price? And could we expect then a further acceleration in the second half to mitigate the impact on raw mats?

And then last question. You’re now going for 12% to 15% organic growth. Also next year, you will go for a lot of growth in the core business, but you still have that target of 4% to 7% annual organic growth. So if you take the average 4% to 7% per year, will you also review like that, like the CapEx figure at the end of this year, that you see some room to step that up? Those are my questions.

Olivier Rigaud

Yes. So I will first start with the PLA questions and then pass on to Eddy on pricing and raw mats and be back on the last one. So yes. I think on PLM, my comments, basically, if you look at the Q2 margin, why did I say it’s not necessarily representative -- as we are ramping up volume pretty fast, we have, depending on the quarter as we are really ramping up sometimes some maintenance-specific stop, which did happen in Q2 at this time. For instance, that we are not necessarily anticipating because when -- again, don’t forget, this is still a relatively new process and we are going, improving the yields, debottlenecking constantly.

But when we look at it, when we have this couple of days’ sometime maintenance shutdown here, it could have an impact on the volume we produce, but we’ve not seen any decrease or loss of momentum in terms of sales development on one side, but also pricing.

And when we look to the contracted volume for the remaining part of the year, we are feeling pretty good. It’s more, today, can the plant ramp up quick enough to follow demand? So don’t look at a single quarter there because it’s not representative on the PLA.

On the last night, the NatureWorks announcement, I think it was interesting to see the CapEx level for both lactic and PLA. I’m sure you’ve noticed that. So actually, the fact that indeed they are coming at the same year as we are coming, it’s about how do you prepare currently the market because you speak about adding another, I mean, 2 to 3 good years to prepare market development and plant the seeds to absorb these upcoming volume. Let’s remind ourselves that if you compare to indeed the incumbent products we are replacing, polystyrene, still, PLA volume today is a small drop in the oceans of the synthetic polymers. However, I think we need to prepare the market. So what I explained also last time is, for us, it’s very important right now to act upon 2 dimensions, increasing our scope in terms of application and the joint venture is investing heavily in adding resource to develop new applications to diversify the application reach beyond the food service category to 3D printing to more technical, functional bioplastics and of course, through rigid packaging. So we are really spreading out in a lot more categories right now. At the same time, we are also spreading across different geographies, where, right now, we have a much better spread globally. And obviously, we are also, I mean, having an intent to lock on longer-term contracts, as we speak to secure the baseload of our new French operation. And that is already a process that has been initiated a month ago. So this is what we are doing about it. So Eddy, maybe you can take the road map and the pricing?

Eddy van Rhede van der Kloot

Yes. So your question, Fernand, on the EUR 80 million to EUR 90 million input cost inflation. So absolutely, that is basically based on what are the current market rates. So for all the open positions, and we took already into account what have we already hedged. As you know, a couple of the key input factors, we can hedge and we do hedge like sugar, corn, soybean oil, energy. So part of next year’s inputs have been hedged already, but everything beyond that is fully open and exposed. And that is also exactly the unknown or the visibility that you missed, I mean it’s all these broad-based markets in higher levels of volatility that we’ve seen in the past, that is what we’re currently being faced with. And so the EUR 80 million to EUR 90 million, no doubt will be higher or lower as we go into next year from where we are currently seeing it.

How does that then translate in guidance for sales growth next year for the quarter? Absolutely. I think we want to see a bit more proof points of the pricing negotiation phase where we’re active in and we’ll continue to be so in the next good couple of months towards the end of the year. So that will put us in a good position indeed after the year closure that we have and a good look at the guidance that we’ve provided for at least next year. And we, of course, will make an update on that based on those latest insights.

Then your last question on pricing noncore. Noncore is by the way, now only the emulsifier business, as you know, yes, absolutely. So that price/mix is very much to be read as we are already pricing higher in that specific market because the key input factor is soybean also again and that key commodity has a huge price increase. And we still have to continue. So it’s not done yet. So don’t get the wrong message here. We started, but it’s not finished.

Olivier Rigaud

Sorry. Please go ahead. No, I was just also want to emphasize on this emulsifier, let’s say, in soybean oil, sharp raw material increase. There is -- I mean, despite the short-term pressure on this business, there is an important side benefit that is occurring on our core SFS business by moving to alternatives. And that’s not to be neglected despite, I mean, the whole debate on, of course, on this item today in the U.S. on fuel versus food because most of the soybean is now directed to biodiesel, which creates a lot of discussion among the big accounts. There is also a very strong development need where Corbion is very active in offering alternatives. And I have to say we have very good solutions, value proposition on the core business, on enzyme, cocktails, functional systems comprising our other ferments to go for, I mean, other clean label emulsifying solutions. So we’re going to absolutely act on 2 fronts on that emulsifier aspect as well.

Fernand de Boer

One question on this because you say we have, let’s say, 2/3 of our business is on contract annual and you can only 1/3 hedge of your raw materials. Is there -- given this what’s all happening now, any way for you, let’s say, to change your business or try to change your contracts that you can more -- have some more pricing flexibility when these changes come?

Olivier Rigaud

Correct. No, correct. And actually, this is exactly a point of the discussion we are currently having with the business to go for eventually only 6-month cover for next year and shorten that seeing the volatility we’ve seen recently. As long as we don’t have a better visibility, we’re going to go for much shorter contractual terms in ‘22.

Operator

The next question comes from Mr. Sebastian Bray from Berenberg.

Sebastian Bray

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

Olivier Rigaud

Sebastian, maybe on this, if you look to the SFS, maybe to give you some highlights of the SFS business today in total, 40% of the revenue we generate in SFS is coming from lactic acid derivatives and legacy business from lactic where we have this backward integration. The rest, we create value by creating functionality, offering solutions of various ingredients. Some of them we do produce internally. Others, we source externally.

So when we’re getting new products like the antioxidant, the dairy stabilizers, we aim to be in line with the average Corbion margin. We do not dilute margin with this new product. On the opposite, the aim is to enhance margin on these new initiatives. And this is what we see, although the contribution is not yet significant and material to the point that you can see it today. So I think on SFS, what you can see in terms of margin evolution in this first half is that we have a larger impact of indeed investing heavily in the organization in terms of FTE increase. Because to get to the pipeline healthiness and level that we can see today, we had to have this upfront investment to get more people in technical service. People that, let’s say, are in the labs on the bench. And as I said in my earlier comment, I think what’s making a big difference today in our performance is that during the pandemic, despite, of course, the health and safety constraints we had and measures we took. We kept all the labs open and we still answered all the customers’ development needs from a lab prototype buildup and that we’ve seen, I mean, again, really paying off. When a lot of our competitors were shut down totally, we kept running. We kept really running full blast on the innovation and in the technical application side. So -- and of course, this came with all these investments I mentioned before at the expense of the margin development on H1.

Sebastian Bray

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

Eddy van Rhede van der Kloot

Yes. So maybe I can take these questions. So again, please don’t read too much in the individual margin developments per quarter. So just to give you a bit of a feeling what happened, we’ve disclosed those figures to last year. Q1 EBITDA margin was, last year, 30%; Q2, 37%. This year, Q1, 43%; Q2, 30%. So there’s quite some volatility on the individual quarters. I think the better read is to look at the total year’s performance in terms of EBITDA, margin profile for the JV. We came from 11% in 2019, close to 37% last year. And I would say this year, we will be well into the 30s again. So that’s, I think, the better reach. Don’t try to read too many trends, what have you. And of course, underlying, yes, also the joint venture, on the one hand, they have the nice development of the pricing so far of PLA. But on their cost side, also the joint venture is also facing increased cost of freight, for example, and yes, also some increased cost of lactic acid surprise to them. So that’s something in the good 30s for the full year. And I think we were very happy with that kind of profitability development for the JV search.

Your second question was about capacity development. Yes, absolutely, that’s true for any plant that we are running also as Corbion. Wherever you see that you need -- that you’re getting to higher utilization levels, you always have optimization initiatives to get more capacity, more product out and squeezing out more products of plants. So that’s true for our lactic acid plants, and that’s also true for the PLA plant. So that’s constantly what we do. And by that nature, even if it comes to, of course, smaller-sized additional investments because you try to avoid the big next new build, of course, as long as possible, but you need to take those decisions in time like we do.

Sebastian Bray

Just to clarify, if I were to say, well, I think that Corbion can add 25 kilotonnes of PLA capacity in Thailand over the next 2 years, would you say, well, that’s a bit high? Or would you feel comfortable with that number?

Eddy van Rhede van der Kloot

Yes. I won’t get quoted on being too specific here, but a good tens of kilotonnes may be possible.

Sebastian Bray

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

Olivier Rigaud

Yes. So in the Incubator, that price mix you see there is indeed what we discussed in previous calls. So there is some invoicing currency impact there. So that means we do invoice quite sizable part of that in dollar as well. The recording -- the reported currency is Brazil reais. So that is what you have to read there in that price/mix effect. Indeed, we are in the market very much with the prices where we currently have that. But that’s not to say that, that will be the case going forward because as we will cruise through higher levels of business and utilization, we also will look for ways to further optimize the mix, of course. But currently, this is indeed what you should assume.

Operator

The next question comes from Mr. Alex Sloane from Barclays.

Alex Sloane

I’ve got 2, which are kind of follow-ups. The first one, just on the volume growth in Sustainable Food Solutions, and actually in the noncore emulsifiers, obviously, very impressive volume growth in the second quarter. I’m assuming sort of your customers are also looking at a lot of the same sort of raw material inflation charts you’ve shared with us and perhaps anticipating that some pricing is coming in the second half. So I wondered what, if any, impact do you think that might have had on the volume growth in Q2 in terms of customers maybe building inventories ahead of those price increases, if that’s been a factor at all?

And then just a second one on PLA. Very helpful context on the margin and not reading too much into 1 quarter and the kind of guide for 2021. Just thinking about over the next few years for PLA and in the context of your comments regarding sort of preparing the market for absorbing more volumes down the line and taking some longer-term contracts or locking in some longer-term contracts doing that, I mean, does that imply lower prices and perhaps slightly lower margins than the good 30% level over the next few years? Or is that a kind of sustainable level that we should be thinking about?

Olivier Rigaud

So starting with the first one on the price increase. And obviously, indeed, the risk of some customers building inventory. What I mean I see and I think is that this is too early to be seen. However, it’s always when you go for such a high level of price increase, a risk that usually you see across primarily Q4. What we have in place is indeed, I mean, a close track of order pattern to avoid that or not to allow that to happen. This is part of, I would say, the sales discipline I was mentioning before, where basically we will not chase, let’s say, easy volume on price. This is not how a price increase does work in that space, specifically one of that order of magnitude. So we’ll have during -- I mean, the latest part of the year. Yes, also, I mean, a very close look at this, let’s say, potential deviations to avoid that to happen. So -- and what we see is that, obviously, in lactic acid that we are still quite a lot constrained. And we are the market leader in that space with over 45% market share so that there is no real physical possibility for customers to build inventory there.

On your question around PLA over the next few years, when we look at the longer-term contracts, yes, we look at, let’s say, maintaining the current price level. But there is another big element on generating value and more business going forward. And also, again, I think earlier we mentioned about NatureWorks coming in the same year, but we see also some Chinese investment coming maybe midterm, which will be more ‘25, ‘26, ‘27. We are -- also, as we are doing in the legacy Corbion business, a joint venture is investing massively in application resource with very nice initiatives on how to improve home compostability, how do we, let’s say, also create a recycling stream for PLA actually. And I think this month, they launched a recycled PLA, let’s say, product into the market. So that’s pretty new. And they are also investing on, let’s say, further adding value in terms of compounding solutions going for a different type of co-polymerization technologies going forward. So the aim is to take advantage of the next 2, 3, 4 years before we eventually see more volume coming into the market when some of the Chinese announcement might come on stream. And again, I speak about this with a lot of conditions -- conditional because we’re not sure how much is going to come if they’re going to come and to which extent. But we are preparing ourselves, gearing up for a much improved mix, major initiatives around the recycling of PLA, about home compostability improvement and also eventually going for more compound-like solutions from the JV.

Operator

[Operator Instructions] The next question comes from Mr. Reg Watson from ING.

Reg Watson

I’d just like to ask a couple of longer-term questions, if I may, please. You’ve been very clear in terms of explaining the dynamics of what’s going on. And it appears to me that your margin guidance for this year, you’ve had some cut, but you’ve effectively pushed forward your previous guidance of above 15% into next year. And I wonder if that has implications for your greater than 17% target for fiscal ‘21, whether that then gets pushed out as well because the whole profile shifts sort of 1 calendar to the right. And related to that, Eddy, perhaps you could make some observations on where you expect your peak leverage to come now. I think your previous guidance was 2.5x net debt to EBITDA. But given the CapEx cost of the lactic acid plant is going to be higher, and clearly, EBITDA is going to be lower than originally expected, I would expect that number to rise. But I’m wondering where you think it will get to. Those are the my sort of first related questions, and then I have a second one on nearer-term guidance.

Olivier Rigaud

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

Eddy van Rhede van der Kloot

Yes. So on the leverage question, I think I also shared it on previous occasions that for this year, we do anticipate towards the end of this year to come more to the mid-2s, so the 2.4, 2.5-ish level. So that incorporates the increased CapEx levels for the second half of this year. Then looking to ‘22 and beyond, yes, as we have all these new build activities taking place, while the delivery of those being operational for those investments is not taking place, the Thai lactic acid plant becomes operational. And of course, for ‘23, we do see a further ramp-up between 2.5 and close to 3. But that is also depending a bit what the joint venture financing will be, which we shared before in relation to the new build of PLA 2. We can have that on a nonrecourse basis, and we are working on that so then we will stay still constantly below the 3. And I may want to repeat that the covenants are still at a much higher level at 3.75. So it leaves us quite some room to maneuver. But internally, we’d like to stay below the 3 as a big level.

Reg Watson

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

Olivier Rigaud

Like I said, noncore is in the managed for value. So we run that for cash. Basically, like we stated in the strategy discussion back in 2020 [indiscernible] cash, we do not expect a growth profile from the business, but you have to read it, that the absolute amount of cash and take it with the same CapEx level that translates in an absolute amount of EBITDA should be more or less flat. So we really want to run this business at least more less to a flat performance first last year and taken at the same currencies because this is a dollar business. So organically [indiscernible] here.

Reg Watson

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

Eddy van Rhede van der Kloot

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

Operator

Mr. Rigaud, there are no more questions.

Olivier Rigaud

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

Eddy van Rhede van der Kloot

Thank you.