Second Annual General Meeting Petrotec AG Borken, Stadthalle ...

Second Annual General Meeting
Petrotec AG
Borken, Stadthalle Vennehof, Germany
June 6, 2008
Address reported by
Roger Böing, CEO
- The spoken version is legally binding -
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Dear Shareholders, Dear Ladies and Gentlemen,
I would like to warmly welcome you, the co-owners –
also on behalf of my fellow Management Board
members Sven-Roger von Schilling and Bernd
Wasserrab – to the second Annual General Meeting of
Petrotec AG in Borken.
The first full business year of Petrotec AG as a listed
company went hand in hand with extremely severe
economic conditions. While Petrotec raised sales slightly
on the previous year by 9 % to EUR 61 million, we
sustained a loss before interest, taxes, depreciation and
amortization in excess of EUR 5 million. Thus, we did
not succeed in achieving the profit and sales targets set
for the reporting year.
A year ago on this same occasion I specifically warned
of the possible risks and uncertainties for our business
model resulting from the feedstock markets and in
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particular the regulatory framework, not to mention
dampened expectations for business year 2007.
As you know, the German government has not taken
any steps to adapt the legal framework to the altered
market conditions facing the biodiesel industry a step
that would go to support this fledgling sector.
As such, the government is effectively risking the fact
that though this sector is a global leader as regards
technology and know-how, its very lifeline is being
severed. Many of you will be aware that a great many
biodiesel producers had to declare bankruptcy in recent
weeks and months. Only last week, for example, the
largest biodiesel producer in Southern Germany –
incidentally a German biofuel industry pioneer, had to file
for receivership. This situation is highly regrettable for
the companies concerned, not to forget the potential for
protecting the global climate that thus goes untapped as
a result.
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That said, this consolidation of the sector also offers
opportunities for Petrotec. It will significantly reduce the
supply of biofuels in the German market. In a commodity
market this automatically translates into higher market
prices, which will make it possible mid-term to produce
biodiesel profitably again. Already in recent weeks the
price of biodiesel has shown signs of recovery.
Despite the tough market conditions in 2007 we made
crucial investments and achieved strategic milestones
vital to the future profitable development of Petrotec AG.
Allow me to give you a short overview of the key events
in 2007:
• The annual losses of EUR 40 million can largely be
attributed to one-off write-backs arising from the so-
called Impairment Test pursuant with IFRS.
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• Petrotec has built a new biodiesel plant in the
seaport of Emden with a production capacity of
100,000 tons. Though we are somewhat behind
schedule, work on start-up is proceeding apace.
• Petrotec has secured large international mineral oil
corporations as customers in the important diesel
blending market.
• In 2007, our subsidiary Vital Fettrecycling increased
the volume of used cooking oils it had collected by
23 %.
• Through participations and cooperations Vital has
also gained a foothold in markets outside Germany
such as Poland, France, Austria and Switzerland.
• Petrotec has almost doubled its payroll to 90 and
secured qualified and motivated specialists and
executives with a view to expanding the used
cooking oil and biodiesel business.
As regards operating activities, Petrotec sought to
respond flexibly in a market environment that was much
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tougher than in 2006. Fundamentally, three factors
impacted on the course of business, which affected the
entire biodiesel industry in 2007:
1. New legislation in Germany
2. The continued rise in raw material prices and
3. Excess capacities and highly subsidized biodiesel
imports from the United States, which led to
biodiesel sales prices sagging to below production
costs.
The entire industry underwent a classic "margin
squeeze": In other words, higher procurement costs
coupled with falling sales prices squeezed returns.
Simultaneously, the energy taxation legislation and the
German Biofuels Quota Act had a negative impact. The
legislators’ planned transition from active promotion of
biodiesel through a tax incentive to a regulatory
framework led to a dramatic fall in demand. As
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mentioned earlier despite politicians repeatedly
announcing and even negotiating amendments to
existing legislation ultimately these were not
implemented, sparking confusion among producers and
customers alike, who were deprived of any sort of
planning or investment security.
An emotionally charged public debate is being
conducted on the pros and cons of biofuels. I will come
back to this in greater detail later.
Petrotec responded flexibly to the dramatically altered
state of the market.
- We have rigorously switched production from a
capacity to order-driven volumes.
- We temporarily discontinued production at the
Oeding facility.
- We successfully sold an interim product and in this
way generated a contribution to profits.
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- Unfortunately, 25 employees were temporarily on
short time during the halt in production.
Let me outline for you the major factors affecting
Petrotec earnings:
Petrotec faced a roughly 25 % rise in the cost of its
feedstock, used cooking oil. Consequently, the cost of
materials as a ratio of sales climbed from 72 % in 2006
to 88 %. The situation was not much alleviated by the
fact that we increased the volume of used cooking oils
collected ourselves to over 20 %, as production capacity
rose from 55,000 to 85,000 tons, meaning we required
appreciably more used cooking oils. Sales prices
plummeted from around EUR 745 a ton in 2006 to just
under EUR 700 a ton.
The drastically altered market conditions for the
biodiesel industry and the decline in the price of Petrotec
shares necessitated an impairment test and one-time
write-downs amounting to over EUR 23 million.
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It follows that the earnings figures for the year are
distorted and do not accurately reflect the operating
performance of Petrotec AG.
We remain firmly convinced of the company’s efficiency
and profitability.
The Petrotec business model has three key levers or
instruments for achieving a return above the industry
average:
1. Through the vertical integration of our value-added
chain we have an instrument at our disposal in the
collection and purchase of untreated used cooking
oils that enables us to some extent to influence our
material costs and be more independent of
developments on the commodity markets.
2. In addition, our proprietary flexible multi-feedstock
technology is a further tool thanks to the relatively
low investment and process costs involved.
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3. But the most important lever will be the CO2
capping that can be achieved using Petrotec
biodiesel. Since Petrotec makes its biodiesel from a
waste feedstock it has an extremely high CO2
reduction potential. The EU Commission has
certified our reduction potential to be at least 77 %.
By way of comparison: Biodiesel from rapeseed oil
is only certified as having a 36 % reduction
potential.
Petrotec assumes that in future rather than trading a liter
of biodiesel we will pay to avoid a kilo of CO2 emission.
In other words, sustainability will become a value driver
and will enable Petrotec to generate revenues above the
industry average. I will elaborate on this point later.
I would now like to talk about the development of the
Petrotec share.
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The performance of the Petrotec share in 2007 and
since that time remains disappointing for all of us. The
sharp fall in the price last March/April was followed by
sideways movement with a continually sinking level. We
cannot gloss over this unsatisfactory performance.
Why is the current share price just EUR 2.45? Not
enough investor relations work, poor communication?
These are definitely not the reasons. The Management
Board has actively engaged in talks with many analysts
and investors. In 2007 alone, we attended four
conferences on renewable energies in Frankfurt, Paris,
Vienna and Zurich. In addition, we went on roadshows to
various banks in London, Edinburgh, New York and in
Germany. I am convinced that with our highly
transparent and ongoing communications we enjoy a
excellent reputation amongst investors.
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And indeed, we have securing several new investors for
Petrotec, including some "big fish". As you can see from
the slide, they include GLG Partners with a share of over
16 % not to mention BlackRock or Austrian firm ACM
Projektentwicklung. To complete the picture I would like
to emphasize that Management Board, Supervisory
Board and management have retained their own stakes.
Nor – as far as we know – has existing shareholder
Warburg Pincus sold any of the shares from its portfolio
as managed by Petrotec S.à r.l.
Two key factors are responsible for the slump in the
price of all biofuel shares: lower profit expectations given
the severe operating conditions just outlined and the
uncertainty affecting the sector as a whole, but also the
risk discounts allowed by capital market participants.
Notwithstanding this unsatisfactory performance allow
me to point out that compared with its competitors since
prices plummeted in March /April 2007 until today the
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Petrotec share has remained the most steady biodiesel
equity and has put in the best performance relatively
speaking. The chart on the slide shows this very clearly.
We are convinced that our excellent communications
and the special nature of our biodiesel product will
secure a higher return potential.
Before I elaborate on the topic of biodiesel and climate
protection as the value driver as promised, my colleague
on the Board Sven-Roger von Schilling will inform you
on earnings trends and the company’s financial and
assets position.
Permit me to continue with information relating to the
public discussion on whether it makes sense to use
biodiesel to protect the climate.
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To use a German expression: Are we cutting off the very
branch we are sitting on by promoting biodiesel? Nobody
would deny that it is not in the interest of climate
protection if large sections of the rainforest are
destroyed to farm palm oil or cultivate soybean plants for
biodiesel. Nor is it conducive to social peace if vegetable
oils such as rape, oil palm or soybean are diverted into
biodiesel production rather than providing a source of
food.
Which is why we need to differentiate in the public
discussion and on a political level, when we talk about
biodiesel and the raw materials used to produce it.
Every feedstock must be examined and assessed for its
sustainability and its actual contribution to CO2 emission
avoidance.
It has been undisputedly proven in many scientific
studies that biodiesel based on residual and waste raw
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materials such as used cooking oils or animal fats and
oils achieves the best values. The information on this
slide illustrates this fact. It shows the results of the study
conducted by Swiss institute EMPA, which analyzed the
climate impact of biofuels and fossil fuel.
Fossil fuels are depicted on the bottom right as a petrol-
colored circle. The red diamonds stand for biodiesel
made of various raw materials. Both via the x axis on
which CO2 emissions are shown but also on the y axis
depicting sustainability it is clear that biodiesel from used
cooking oils is by far the most ecological and climate-
friendly biodiesel that can be produced industrially today.
Biodiesel made from rapeseed oil, which dominates the
German and European market, fares much worse as
regards both criteria. Though in terms of CO2 avoidance,
diesel from rapeseed oil does somewhat better than
diesel made from mineral oil owing to the intensive
farming involved in its production, it has a much more
negative environment impact.
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At the end of this January the EU Commission
summarized these findings in a proposal for the directive
on the promotion of renewable energies and delivered
specific facts to make the findings tangible for the
general public and politicians.
I would like to show you these EU findings on another
slide.
The overview summarizes the findings of the EU
Commission on CO2 reduction potential. As a minimum
requirement the Commission has proposed biodiesel
should have a 35 % CO2 reduction potential in order to
be sold as such. What is evident is that biodiesel based
on residual and waste raw materials such as used
cooking oils has by far the greatest CO2 reduction
potential – more than twice as high as for biodiesel
based on rapeseed oil, which weighs in at just 36 %.
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In addition, the EU Commission proposes in the directive
that biodiesel based on residual and waste matter
should be charged twice for CO2 capping in meeting the
blending obligations on the sales side, e.g. the mineral
oil industry.
Considered in the context of the de-carbonization
strategy pursued by the German federal government and
the EU this scenario is of seminal importance for the
commercial success of Petrotec AG. This
decarbonization strategy means that in future mineral oil
corporations will no longer have to meet diesel blend
commitments measured in terms of volume (e.g., 5 %
mix of biodiesel in fossil diesel); instead, the mineral oil
industry will be obliged to cut the CO2 emissions
produced by fuel by x percent.
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I would like to draw two conclusions from the above
comments:
1. In assessing the contribution biodiesel can make to
climate protection a key factor is the feedstock used and
consequently the sustainability and CO2 reduction
potential.
Precisely because biodiesel made from residual and
waste raw materials delivers by far the best climate and
eco values we call on politicians to treat it as equal and
permit operation of the diesel blend market in Germany
all year round – as was the case prior to the introduction
of the biofuels quota legislation in January 2007 and
something that is a matter of course with our European
neighbors.
2. The superior CO2 performance of Petrotec biodiesels
is of great economic interest for our customers.
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Today, we are already posting an increase in sales
prices and a marked increase in demand – including for
the winter quarters – given the favorable CO2
performance of our biodiesel. I would like to outline the
economic benefits for our customers with an example
you can see on this slide.
Let us assume that to meet its CO2 reduction
commitment a mineral oil corporation has to add 5 %
biodiesel made from rapeseed oil to a liter of mineral
diesel to achieve the target CO2 reduction. Assuming a
price of 50 cents a liter for diesel and EUR 1 for a liter of
biodiesel this means a total price of 52.5 cents a liter.
However, if the mineral oil corporation decides to meet
its CO2 reduction commitment with biodiesel made from
used cooking oils it saves 1.25 cents for each liter diesel
sold. The reason: assuming the biodiesel based on a
used cooking oil feedstock delivers twice as high a CO2
saving, it would only be necessary to add half of this
biodiesel to the conventional mineral diesel.
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In a projection for the annual amount of diesel brought to
market by the mineral oil corporations in Germany of 30
million tons this means a possible saving for the mineral
oil corporations of about EUR 440 million.
As we see this absolutely realistic scenario offers
potential for a premium on the sales prices for our
product compared with biofuels based on agricultural
foodstuffs. As such sustainability will become a value-
driver for Petrotec.
As in the previous business year, 2008 will continue to
be shaped by the tight restraints of the regulatory
framework and the imponderables of the commodity
markets. The first quarter has confirmed this
assessment.
With effect from January 1, 2008 the tax on pure fuel
biodiesel, the so-called B100 market, was raised from 9
to 15 cents per liter.
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This has more or less brought sales in this market to a
complete halt. Petrotec sold 90 % of its production in the
diesel blend market. Last year the sales split was still
around 50 % B100 and 50 % diesel blend.
The prices for processed used cooking oils have risen
still further. Even though Petrotec has boosted its own
collection of used cooking oils via participations,
cooperation agreements and its own distribution in first-
quarter 2008 by over 30 % – 700 new customers in the
first three months alone – the feedstock has become
more expensive.
Following the ending of short-time and the re-
commencement of the production plant in Oeding
on January 1, we did not quite succeed in achieving the
budgeted utilization quota. But if you compare our
average capacity utilization in the first quarter of 74 %
with the industry average – according to the industry
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associations it is only around 30 % - we feel we can be
satisfied.
We have almost completed construction of the new
biodiesel plant in Emden and can now begin with trial
operation. Over the short term we are counting on the
full resumption of production. Logically, the start-up of
the Emden plant will produce economies of scale for
fixed indirect costs and consequently improve the
prerequisites for Petrotec’s profitability.
The Q1 loss before interest, taxes, depreciation and
amortization of EUR 6.1 million can be attributed to two
factors. The increased price of our feedstock has kept
material costs at a high level. And Petrotec also had to
create accruals for pending losses of EUR 4.6 million.
These relate to biodiesel sales contracts primarily
concluded in Q4 2007 for periods through to September
2008 at set prices. Given the now higher feedstock price,
it follows that in filling these orders we will incur losses.
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Over the short term Petrotec expects a solution to fix the
pending losses. This gives us the means of conducting
the biodiesel business on a positive margin using the
two key levers, namely biodiesel price and the price of
used cooking oils.
On the sales side the development of the price for crude
oil in excess of 125 U.S. dollars a barrel has in recent
weeks also pushed up the price for biodiesel to between
EUR 850 and EUR 1,000 a ton. Overall, in recent
months the current price trend for biodiesel and used
cooking oils has remained relatively steady by
comparison, allowing biodiesel production on a positive
EBITDA level for "back-to-back" transactions. Moreover,
at the present crude oil price level production for sale in
the B100 biodiesel market remains profitable despite the
higher taxation.
In announcing the quarterly figures at the end of May,
the Management Board had to correct its forecast for
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usiness year 2008. It is probable that the pending
losses will be realized and calculated for the year as a
whole, the share of production from the biodiesel plant in
Emden will be lower than initially budgeted given the
later start-up of operations there, specifically generating
sales of roughly EUR 90 to 100 million, all of which
spells a loss before interest, taxes, depreciation and
amortization of some EUR 5 million.
Despite this, the Management Board of Petrotec AG is
confident that in the mid-term the business model meets
the conditions for profitability and for us to enhance our
value. The value that will attach in future to one unit of
CO2 reduction will translate into higher levels of collected
and refined feedstock and high-quality Petrotec
EcoPremium biodiesel sold, and this will enable us to
meet future profit expectations.
We are firmly convinced that Petrotec AG is operating in
a market with potential for the future.
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Not only are used cooking oils as a waste product a
sustainable resource, we also have at our disposal a
sophisticated procedure for producing tomorrow’s fuel
today – a sustainable method with a low climate impact
that will benefit future generations.
- The end -
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