Element Solutions Inc (ESI) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Platform Specialty Products Corporation Second Quarter 2014 Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

I will now turn the call over to Kelly Gawlik, Vice President of Weber Shandwick. Please go ahead.

Good morning. Please note that in accordance with Regulation FD or fair disclosure, we are webcasting this conference call. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Platform Specialty Products Corporation is strictly prohibited.

Before we begin, please take note of Platform Specialty Products Corporation's cautionary statement regarding forward-looking statements at the end of our earnings release issued earlier today. Some of the statements made today during this conference call will be considered forward-looking.

All forward-looking statements are based on currently available information. Platform Specialty Products Corporation's actual results could differ materially from those predicted. However, Platform Specialty Products Corporation undertakes no obligation to update any such statements whether as a result of new information, future events or otherwise.

Please refer to Platform Specialty Products Corporation's SEC filings for a more detailed description of the risk factors that may affect Platform Specialty Products Corporation's results.

Please note that Platform Specialty Products Corporation has posted supplemental financial data slides to its Web-site and is providing reconciliation of certain non-GAAP to comparable GAAP financial measures in its earnings release, its current report on Form 8-K in connection with the earnings release and on its Web-site at www.platformspecialtyproducts.com

The presentation can be downloaded in the section Investor Relations on Platform Specialty Products Corporation's Web-site under the Events & Presentations.

Following management's remarks, there will be time allotted for Q&A. Now, I would like to turn the call over to Platform Specialty Products Corporation's CEO, Dan Leever. Dan, please go ahead.

Thanks, Kelly, and good morning everyone. This has been a busy year for Platform Specialty Products. We announced the Chemtura acquisition and just this morning we announced Agriphar. We finalized an equity offering and initiated our bank refinancing and added key personnel to strengthen our bench as we continue to grow.

Overall, the MacDermid business has achieved our financial expectations with results, adjusted earnings per share of $0.18, up 12.5%, and adjusted recurring free cash flow of $0.22, up 16%.

Top line growth was affected by anticipated headwinds in our Publication and Coating Plates business and the softness in Brazil accentuated by the World Cup. In the quarter our Publication and Coating Plates product line and overall Brazilian operations were down a combined $6 million in revenue versus the same period in 2013, but continued revenue growth in our Electronic Solutions, Industrial Solutions and Packaging product lines, all with higher margins, mitigated this top line decline from gross profit down to EBITDA and EPS.

The strength of our asset-lite/high-touch business model creates a natural hedge as major cost component of our business is variable. Frank will speak more to this in a few minutes.

Next let's talk about acquisitions that we've announced so far. In April, we announced the agreement to acquire the Agrochemicals Business of Chemtura, or as is called CAS, for approximately $950 million in cash and 2 million shares of our common stock then valued at $50 million.

CAS is having a strong year. When we announced the deal in April, this acquisition was already expected to be around 38% accretive to our EPS and only looks to become even more so as we progress towards the Q4 closing, and that 38% was on 2013 numbers.

Today, we announced our second acquisition in the agricultural chemical space, Agriphar Group, which we will acquire for approximately $400 million, and which we also expect to close in Q4.

The Agriphar business is a premier European focused agrochemicals group headquartered in Belgium with additional direct operations in Italy, France, Spain and Greece. Their 2013 revenue was approximately $170 million and their adjusted EBITDA margin was slightly above 20%.

This is a high-quality bolt-on to the CAS acquisition and we believe it will generate real synergies, 25% or more, of the underlying EBITDA once the business units are combined.

Their strong presence in Western Europe and wide range of product applications and expertise will strengthen our newly formed AgroSolutions segment as we move forward into 2015 and beyond.

This transaction illustrates our core acquisition strategy, acquire high-quality new verticals at a reasonable valuation that is accretive to our per share intrinsic value and then add bolt-ons that have much higher returns due to synergies which we target 25% to 50% of the underlying EBITDA.

Drilling down to the core business, MacDermid standalone pro forma adjusted 2013 per our pre-CAS balance sheet would have been $0.75. Layering on the acquisition of CAS and the financing for that transaction and including the dilution from our equity offering, pro forma adjusted 2013 EPS would have been $1.02. Adding on Agriphar, the pro forma adjusted 2013 EPS would've been $1.10.

All these numbers are before synergies. We expect to realize synergies in excess of $20 million for these two acquisitions over the next three years which would add additional $0.10 to our EPS. No new equity will be required to close these transactions and stay within our leverage targets. We continue to evaluate acquisitions using our asset-lite/high-touch business strategy and look forward to updating you all as we progress.

Next I'd like to discuss our investment in people. We have continued to strengthen our bench at Platform and we have recently added several key positions into our corporate ranks in advance of closing the acquisition candidates. In this past quarter, we've added a Chief Accounting Officer, a Director of Business Development, several heads of our inter-corporate finance and tax teams and an integration specialist.

To-date along with the Sarbanes-Oxley costs, we have added approximately $2 million incremental cost versus the same period in 2013.

By adding these positions in advance of our closing of the currently announced acquisition, we're in fact laying the infrastructure to allow us to move quickly in doing the diligence, financing and integration work. All these individuals bring with them years of experience from high-quality organizations. We look forward to working with all of them.

On May 21, we completed $300 million PIPE or private placement offering where we issued 15.8 million shares of our common stock at $19 per share with proceeds to be used for general corporate purposes. The shares were registered quickly and strengthened our capital structure while rewarding new shareholders. Part of our strategy is to use our equity as a currency to support our acquisition strategies but we'll do so judiciously.

Another noteworthy event in the quarter for long-term MacDermid followers was the recent multimillion dollar jury verdict in MacDermid's favor in the case involving Cortron Corporation concerning alleged illegal activities with E.I. DuPont. Although Cortron itself closed its doors in 2008, the investigations surrounding the lawsuit found DuPont had agreed to indemnify for the lawsuit and has paid Cortron's litigations cost.

In regards to our Q2 results, you will see that we have posted our financials in two formats, GAAP as-defined and as-adjusted. Although GAAP financials are important, we believe the as-adjusted financials represent a clearer picture of the business when you eliminate the noise related to purchase accounting entries that are required.

Q2 represented a record gross profit margin of 51.1% and adjusted EBITDA of $48.2 million and a margin of 25.5%. You will note a new cash flow presentation. Our adjusted recurring cash flow is designed to clearly show the cash generation and the uses thereof. Platform is a very high cash generator.

Our acquisition strategy will consume cash. We will break out the growth and acquisition outflows so you can better understand our underlying cash flow which ultimately becomes available to shareholders.

Our adjusted recurring free cash flow of $33.5 million and 70% adjusted EBITDA conversion rate also represents records for us for a quarter. As I mentioned at the start of the call, adjusted recurring free cash flow of $0.22 a share represents a 16% increase versus same period in 2013.

Since the formation of PAH, we have been working to refine our tax strategy with the intent of maximizing efficiency and lowering the Company's tax rate from our initial 33%.

This quarter we delivered ETR of 25% and year-to-date ETR of 29%. This is just the beginning as far as I am concerned. I'm inspired by leaders like John Malone who have shown the creativity and drive in this area. We can really improve cash generation through tax planning.

This is a major focus at Platform. With every additional acquisition, one of our focus points will be for our team to integrate the acquisition in a way that continues to improve our ETR.

I will now turn you over to Frank Monteiro, our CFO, who will discuss the financial results in more depth. Frank?

Good morning, everyone, and thank you, Dan. We are pleased to report a strong start to 2014 as this quarter represented record adjusted gross profit margins, record adjusted EBITDA, record adjusted EBITDA margins and record adjusted recurring free cash flow levels.

As Dan stated, I'll be discussing our results for the quarter and year-to-date on an as-adjusted basis as we believe that our reported results have noise in them due to the impact of purchase accounting and deal related costs associated with Platform's acquisitions strategies. We further believe that our investors will find our adjusted results to provide a more clear picture of the underlying business.

Before moving on to our adjusted results, we are in the process of entering the European debt market and finalizing our debt raise associated with the CAS deal. If and when signed, amendments to our existing credit facility would include an additional $130 million in U.S. dollar debt, a EUR205 million tranche which represents approximately $275 million.

We also intend to use this time to upsize our undrawn revolving credit facility from its previous limit of $50 million to a new limit of $175 million, keeping it completely undrawn.

If and when completed, this refinancing would allow us to take advantage of the continuing low interest rate environment and lock in the required financing associated with the Chemtura deal. We believe that European debt would allow us to naturally match our future cash flows from our announced acquisitions.

There can be no assurance for these amendments will become effective either on these terms or at all. Further details on these transactions will be reported under a current report on a Form 8-K if and when closed.

For the three months ended June 30, our net sales were $189.1 million versus $190 million, a decrease of $0.9 million or 0.5% compared to the prior year period. Net sales in our Performance Materials segment increased by $1.8 million or 1.2% as compared to the same period in 2013.

The increase in net sales is primarily attributable to strong demand for core Industrial Solutions products, both in our North American and European markets which are focused in automotive related end markets.

Our Electronic Solutions products also increased year-over-year and continue to gain market share in the smartphone and tablet end markets. These gains helped to offset softness in our Offshore Solutions and Industrial Solutions product offerings which were primarily in the South American region.

The net sales in the Graphic Solutions segment decreased by $2.7 million or 6.1% as compared to the predecessor quarterly period. The decrease in net sales is primarily attributable to lower demand for newspaper plating products which we had anticipated entering 2014.

Net sales of new products would represent opportunities for the Company to enter markets adjacent to those that we currently serve were $22.4 million for the three months ended June 2014 compacted to $18.6 million for the same period in '13 and were instrumental in further expanding both our gross profit dollars and gross profit margins during the quarter.

The quality of the underlying earnings is the asset-lite/high-touch business component and our mix represents a very high quality product line at this point.

Turning to address the gross profit for the three months ended June 30, gross profit of $96.7 million increased in the period by $0.1 million or 0.2% as compared to the same period in 2013. Gross profit percentage for the period was 51.1% as compared to 50.8% for the prior year and represented a record period for the Corporation.

Included in our gross profit was an incremental $1.4 million of depreciation expense related to the asset step-up associated with the MacDermid acquisition that was completed last October.

If we were to adjust for this accounting entry, our quarterly gross profit would have been $97.9 million and represented a gross profit percentage of just under 52%. The variable cost component within our COGS has once again shown through. As we have stated previously, approximately 80% of our COGS is raw material cost driven.

Of the remaining 20%, approximately 12% of that is variable in nature. In other words, if we do experience softness on the top line, we have elasticity that preserves gross profit margins.

Turning to adjusted EBITDA, for the three months ended June 30, the adjusted EBITDA grew 2.3% to $48.2 million from $47.1 million in the same period of 2013, which represented a record level for adjusted EBITDA for the Company.

Adjusted EBITDA margin climbed to an all-time high of 25.5% versus 24.8% in the prior year period. Adjusted EBITDA in the Performance Materials segment grew 5.7% to $37.1 million from $35.1 million in the same period of '13 with adjusted margin climbing to $25.2 million versus 24.2% in that same period as well.

For the Graphic Solutions segment, adjusted EBITDA decreased 7.5% to $11.1 million from $12 million in the same period of 2013, representing an adjusted EBITDA margin of 26.4% versus 26.8% for the same period last year. Included in this $0.9 million decrease in adjusted gross profit for this quarter within this segment, we actually experienced approximately $1.5 million of one-off headwind type items within our Publication and Coating Plates business that will not repeat in the second half of '14.

These items primarily related to rework of material and under-absorption associated with the manufacturing facility that we were winding down during the quarter and was actually closed in the last week of June. This process is now completed and the noise in disclosure is definitely behind us.

Our net debt to adjusted EBITDA leverage ratio was 0.6 times at the end of the second quarter. Cash on hand of $642.8 million offset gross debt of $748.5 million with the cash balance reflecting the $300 million of proceeds that we received from our May equity offering. We intend to use our cash on hand to finance our announced acquisitions to date.

Adjusted net income for the quarter grew $2.9 million or 12.2% year-over-year to $26.7 million from the $23.8 million in the previous period which translates to an adjusted earnings per diluted share of $0.18 versus the $0.16 in 2013, an increase of 12.5%. Adjusted recurring free cash flow per share for the quarter increased $4.9 million or 17.1% year-over-year to $33.6 million from $28.7 million and represented an adjusted EBITDA conversion ratio of 70%.

As Dan noted earlier, year-to-date June, we have incurred $2 million of incremental cost in 2014 associated with headcount additions and bench strength and other public company cost to better prepare the Company for our acquisition strategy, none of which has been adjusted out of the numbers. We will strategically add incremental headcount as warranted on a go forward basis but will ensure that the revenue is there to support it.

I would now like to turn you back over to Dan for some closing remarks. Dan?

Thank you, Frank. We recently completed our first half business reviews and discussed in great detail what the second half of the year is going to look like from the revenue line all the way down to EBITDA and beyond.

The first half had several one-offs as Frank mentioned in the results from top line noise driven by the World Cup and softness in South American market to absorption issues in the Graphic Solutions business, and as we began the process of commissioning a new manufacturing line as Frank mentioned.

These items will not repeat themselves in the second half. During the month of July, we signed up several long-term customers that will begin to drive revenue growth almost immediately.

We will commercialize a new product in Industrial Solutions product offering which should surely increase sales and gross margins in that space. Our Electronic Solutions product offerings had some late installations in the first half which will be running at full production in the second half, and the Graphic Solutions segment will benefit from a new production line that has been installed as mentioned above to support growth prospects that we've been mining for some period now.

By all accounts, we are expecting second half to be stronger than the first half.

Second half of 2014 should also see us close on these two acquisitions, the AgroSolutions solution business and Agriphar, both of which have strong momentum at the revenue and EBITDA lines. Our new AgroSolutions segment is something that we are spending significant time on as to ensured that the synergies are realized as we move into 2015 and beyond.

Our tax planning strategy is starting to gain momentum and we anticipate further decrease in the Corporation's effective tax rate. This is something our corporate team will focus heavily on as it gives us an instant benefit in the form of cash to support our longer-term objectives. As we begin to integrate our announced acquisitions and explore further opportunities, rest assure that tax planning and structure is high in our list of value creation items.

We are always looking for ways for optimizing structure and believe that a long-term goal of in the 20% is achievable.

None of us are resting on our path of accomplishments as we know that there is always room for improvement. Martin and I will continue to evaluate acquisition opportunities in this target rich environment and we are looking forward to updating all of you on our progress in future calls.

With that, Frank and I will be happy to take your questions. Operator?

(Operator Instructions)

Our first question comes from Jon Tanwangteng with CJS Securities.

Congratulations on the Agriphar announcement. Just looking through your adjusted gross margins, it seems you had some one-time items in the Graphics business.

Backing that out gets me actually closer to maybe 52% or 54%. Is that how we should think about it going forward?

If you were to take into account the incremental depreciation as well as the one-offs, yes, that's about right.

Okay, great. And then, Dan, you mentioned the tax improvements, what can we expect as the tax rate heading into the second half?

Frank, you want to speak to that?

We truly believe that the tax rate as it pans out for this year will definitely be in the call it high-20s range. I mean we got down to 25% in this quarter and on a year-to-date basis we're running 29% and we believe there's still some room for improvement in that 29% as the year pans out.

But as Dan mentioned, our long-term goal going forward with acquisitions and so forth is to get to a rate that is in the low 20s. That is something that we will definitely focus on and tax structure is definitely key to any acquisition we do undertake going forward.

Okay, great. And then could you talk about the business trends in MacDermid heading into Q3 kind of by segment or maybe geography? Specifically, are you still experiencing challenges in South America or in the Graphics business?

I'll give it to you piece by piece. Latin America continues to struggle for sure. This is, the general industrial business in Latin America is very soft. There even the offshore business is soft in Brazil. That continues.

We don't see a big change in the second half although it's a little bit uncertain relative to the offshore demand, it could be better, but we're not anticipating that at this point. Asia is really strong.

So our business in Asia is extremely good, margin at all time record, new installations, product introductions and it's really, really strong. Europe is having a great year and revenues are well up in Europe and North America is doing really great too.

So it's really from a geographic standpoint the only really trouble spot is Brazil and Latin America in general. From a product line standpoint, Electronic Solutions is having a banner year, Industrial is doing really well, offset a little bit by the -- there's an important part of that business in Brazil which is soft but the rest of it is doing quite well.

The Coating Plates business is really suffering. That business continues to decline and will continue to decline, although we think there are lot of first half costs that are related to closing down our San Marcos, California facility, they are behind us now. So the earnings flow from that should be much better.

And then the Packaging business really was constrained in the first half because we were putting online this new production facility and that's now pretty well done. So that's going to release our ability to be able to add more business in the second half which we have done. That should be quite a bit better in the second half than it was in the first half.

So all in all, we think second half can be a fair amount better than the first half.

Okay, great, that's very helpful.

And I will say this, Jon, that July was really strong and what we're not sure of is did we borrow some from August or did we shipped some from June. So the month to month order cycle is sometimes hard to get exactly right in our business, but I can just say that the month of July was very strong.

Okay, got it. And then just turning to Agriphar, over what timeframe do you expect to realize those 25% synergies from both CAS and Agriphar together?

Three years.

Three years, okay. And is that from close?

Yes.

Okay. And then finally, how should we think about the rate of future acquisitions, now that you are working on both CAS and Agriphar at the same time?

I could tell you, my partners Martin and Frank would. So we're not sleeping on it (inaudible) I can tell you that. There's a lot of work to be done but we've added a lot of high-quality people and we are acquiring two strong management teams. So we are I would think -- if we didn't do something next year, I'd be shocked.

Our next question is a follow-up question from Jon with CJS Securities.

Just could you detail what he expected financing plan is for Agriphar, is it going to be all debt or you'll use some cash as well?

Our plan would be to use a combination of the cash on hand plus perhaps some incremental debt. I mean we've run some numbers and even if we were to do all debt for it, our debt-to-adjusted EBITDA ratio pro forma for everything in this year would still be under 4. So it would still be under our self imposed 4.5 limit.

Okay, great. And then just could you provide a little more detail on what Agriphar actually does and kind of what the overlap might be between them and CAS?

They are very similar business to CAS in that they are niche crop producer and that they specialize in non-row crops if you will. So they are very similar in many respects to CAS, and focusing more on Europe. I mean CAS is in 100 countries around the world, so they are much more broadly distributed relative to the revenue stream.

This is more concentrated in Europe, although not only in Europe. And there are some really nice product synergies where we can look at their technology and the CAS technology and do some combining of molecules and formulations to create some really value enhancing products.

So very high-quality business, margins similar to CAS, slightly less but similar, and strong registration teams particularly in Europe, strong technology group. They're really high quality business.

Our next question comes from Rosemarie Morbelli with Gabelli & Company.

I was wondering if you could help me understand the coating plate business. I mean with more and more people reading the paper online and so on, is this business you are planning in staying in or the California plant shutdown is the first step into exiting it?

I think this is a steadily declining business and it's our challenge to manage the cost to keep the profitability as the revenues decline and I don't expect this to be the end of that. The business was once a $100 million revenue business way back, this is going way back, but now we're down to -- what revenues, Frank?

They're going to be under $30 million.

So I don't expect this business to ever be a strong business. That's going to be a declining business. We have long-term contracts and relationships, relationship is a better word than contract actually, with several European user with fairly new equipment.

So that should run for a long period of time but we're hoping that we may get to a point where we could stabilize the revenues around where it is now but that hope is not a strategy.

Okay, great. I understand. Thank you.

Our next question comes from Paul Sarran, Mesirow Financial.

I was wondering if you could help me reconcile the $19 million in free cash flow that you reported last quarter to the $26.9 million that you have on your slides for Q1. Was there a change in your definition of something and how we should look at free cash flow?

So what we're presenting -- you're looking at the free cash flow schedule, correct?

Yes.

So what we're presenting here. We stripped out noise and so forth that was associated with one-off items to give you a picture of what the actual business generates taking out that noise. The way we were doing it before were strictly in accordance to how the GAAP measurement would be, and the way we're showing it now is on a recurring basis.

So you can see what the recurring businesses are generating, and breaking out separately what we would be doing for acquisitions and other type items. So I can get you a separate detailed piece on that afterwards. If you want to hoop up, you can just give me a call, I can give you the exact items.

Okay. And then last quarter you talked about on the GAAP basis I think about $100 million target for the full year on the recurring free cash flow. Do you have a full year target or run rate target?

I think that we should do better in the second half than we did in the first half, pending some working capital movements at the end. But we've got a year-to-date 2014 $60 million recurring free cash flow, so is it $120 million, $130 million, something like that.

One of the things you need to understand too is when we always talk about that $100 million, that was net of any type of acquisition work because we had not done acquisitions for multiple years. So it's always what the core business is going to throw up and the belief is that it's going to be over $100 million and that's what it was historically.

And as Dan noted, the second half of this year should be just as stronger. I mean on an LTM basis, we are running at 115 here and I could tell you there was noise in quarter three last year because that's when we were still pried it and we were undergoing a debt refinancing, a debt recapitalization. So there is noise in that number related to that. So going forward this year, we expect it to be stronger.

Sure, okay. And then the $20 million in synergies you expect over the next three years, can you give a little bit more detail on where those come from, and specifically, is that all cost synergies or is there some revenue synergies baked in?

No, there's no -- I mean we think there are revenue synergy potential but we don't include those and we never include those in our synergies, these are all hard cost synergies that we think -- I can give you some buckets where that would be. So for instance, Chemtura provides basically the whole back office for the CAS business and we think we can do it for a lot less money than Chemtura did and there's a big chunk of that just there.

And then there are just overlaps between these two businesses that create distribution cost savings potential, that creates reduction in manufacturing cost, opportunities by eliminating total manufacturers and things like that, raw material cost savings is one example, so all hard costs.

We'll get a decent chunk of it in 2015 but it's going to take a couple of years to get it all and these are definitely numbers that we are pounding the table on, this $20 million. So I mean our targets are a lot higher than that, I can tell you.

Okay, that's helpful. Thanks.

Our next question comes from Rosemarie Morbelli with Gabelli & Company.

Looking at the acquisition of CAS, is there any particular reason why you couldn't close on October 1 as opposed to November for example, what would delay it?

No, there is nothing. There is a lot of heavy-lifting that has to happen before this could be closed, and because this is a carve-out, there's a lot of work on the registration side where new entities have to be formed, registrations have to be put into those, and that's just not something you can shortcut. We're not sure when we're going to close. It could be early or late October, we kind of consider that pretty much the same.

Okay. And could you talk to the long-term supply agreement? Now that you have acquired Agriphar, can you make some of those products, the CAS products, in some of Agriphar manufacturing facilities or are you set in buying, I mean having Chemtura supply it for the next four years?

I mean we have some flexibility. It's a supply agreement where we have a commitment to cover overhead. So if we start taking volumes out of Chemtura, it may not advantage us at all.

There is probably not huge amounts of opportunities for at least major products to be made at Agriphar but there are definitely blending opportunities that can be done there and there are some pretty major toll manufacturing on both sides that has some potential of being brought in.

There are some longer-term opportunities I think in this area, but I think that you should think about the Chemtura production as really being a minimum of four year commitment by us.

Okay, thank you.

I'm not showing any further questions at this time. I would now like to end the call. Everyone can disconnect and have a wonderful day.

Thank you, all.

Thank you.