Element Solutions Inc (ESI) 2014 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Platform Specialty Products Corporation third quarter 2014 results conference call.

(Operator Instructions)

I'll now turn the call over to Kelly Gawlik, Vice President at 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 is strictly prohibited.

Before we begin, please take note of Platform's cautionary statement regarding forward-looking statements at the end of the 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's actual results could differ materially from those predicted. However, Platform undertakes no obligation to update any such statements whether as result of new information, future events, or otherwise.

Please refer to Platform's SEC filings including its annual report on form 10-K and quarterly report on form 10-Q for more detailed description of the risk factors that may affect Platform's results. In accordance with Regulation G, Platform has provided reconciliation of certain non-GAAP to comparable GAAP financial measures in its earnings release and its current report on form K filed in connection with the earnings release. Following management's remarks there'll be time allotted for Q&A.

Now, I would like to turn call over to Platform CEO, Dan Leever. Dan, please go ahead.

Thank you Kelly, and good morning everyone. Quarter three was a very busy one for the Platform team. We've performed diligence and announced the acquisition of Agriphar which closed on October 1, we continued the work associated with the closing of Chemtura AgroSolutions, which closed on November 3, and performed diligence on Arysta, which we announced last week and will close Q1 of 2015.

Through all this, MacDermid operations turned in an all-time record EBITDA quarter and EBITDA margin performance. The management team that leads our MacDermid operations is to be commended for their performance not only for this quarter, but also for the year they're having thus far.

Overall, our financial expectations were exceeded with adjusted earnings per share of $0.19, up 18.9%, and adjusted recurring free cash flow of $0.14, up 16.7%. Organic top line growth increased 4.4% to $197 million for the quarter, with continued revenue growth in our electronic solutions, industrial solutions, and offshore solutions product lines leading the way.

Gains that we made in the quarter relating to our patching product lines were offset by the anticipated headwinds we experienced in our publications and coating plates product line. The overall mix that we enjoyed in the quarter had a positive effect on our results from the gross profit line down the adjusted EBITDA and our adjusted EPS. Frank will speak more to the overall financial results in a few minutes.

Let me first update you in regards to our previously announced acquisitions and progress that has been made to date. In April, we announced the agreement to acquire the agrochemicals business of Chemtura or as it's called, CAS, for approximate $950 million in cash and 2 million shares of our common stock, then valued at $50 million.

The Platform team has been working diligently since October, or since April, pardon me, to ensure that we've met our targeted close date of November 3, and that the in the infrastructure required in supporting the business was operational for day one of the close. During the period between signing and close of the business, continued to perform with an LTM September sales number of $461 million, up 2.7% or $12 million for the reported 2013 sales. From adjusted EBITDA standpoint, LTM September, adjusted EBITDA of $109 million represents an increase of 7.9% or $8 million over the 2013 adjusted EBITDA number. We feel the business is well-positioned as we enter the final quarter of the year and look forward to updating you accordingly as we close out 2014.

In August, we announced the agreement to acquire a second business in the agricultural chemical space, Agriphar group, for approximately EUR285 million in cash, and 711.5 million shares of our common stock, then valued at EUR15 million. The Agriphar business is a premier European focused agrochemicals group headquartered in Belgium with direct sales operations in Italy France, Spain, and Greece.

Year-to-date September sales were approximately $169 million, adjusted EBITDA of approximately $40 million, have positioned this to be a very successful business for us within our AgroSolutions segment. We believe that Agriphar is a high-quality bolt-on to the CAS acquisition, and we will generate real synergies once combined with CAS. Their strong presence in Western Europe is something that we will begin to leverage across our new AgroSolutions business segment.

Last week we announced the agreement to acquire our third acquisition in the agrochemicals base, Arysta Life Sciences, for approximately $3.51 billion, with $600 million of that amount paid via two-year preferred convertible stock. Arysta is the leading global provider of crop protection and plant nutrition solutions that add IFRS pro forma 2013 revenue and adjusted EBITDA of $1.5 billion and $294 million respectively. Arysta's innovative farmer focused solutions for high-value niche crops and their 1,300-person sales and marketing team fits hand in glove with our asset-light, high-touch strategy.

The three companies combined will have approximately 64% of their revenues from high-growth regions and a strong focus on specialty crop end-market such as fruits and vegetables. We believe this business is well-positioned to capitalize on future global yield improvement demands as the world population grows against a backdrop of finite amount of variable land and water.

During our quarter two call we held in August, you heard me speak about our investment in people, now we've been attracting talent to Platform over the last several months. These new additions share our collective vision of creating a world-class organization that provides a permanent home for businesses. To date, along with SOX cost, we added approximately $3 million in incremental costs versus the same period 2013.

The announced acquisition of Arysta brings with it a highly talented management team. Upon closure of the transaction, Wayne Hewett, the current CEO of Arysta, will be joining Platform as our new Corporate President, responsible for all business lines, but concentrating initially on the integration effort in the AgroSolutions segment.

Wayne's resume is a very impressive one. Prior to joining Arysta in 2009, Wayne enjoyed a 20-year career at GE, holding such positions as President and CEO of GE Advanced Materials, President of GE Plastics Pacific, and Vice President of GE Supply Chain and Operations, while being a member of GE's Corporate Executive Council. His addition to the Platform corporate suite gives us additional talent and capacity as we continue our accelerated growth strategy.

With regards to our third-quarter results, you will see that we posted our financials in two formats, GAAP as defined and as adjusted, although the GAAP financials are important we believe the adjusted financials represent a better picture of the business when you eliminate the noise related to our acquisitions and the purchase accounting entries that are required. The following commentary will focus on as-adjusted financials.

Q3 tied a record adjusted gross profit margin percent of 52.5%, and a new record adjusted EBITDA of $52.5 million and a margin of 26.7. Our Q3 adjusted recurring free cash flow of $20 million was an increase of 11.7% year-over-year and brought our year-to-date September total to $80.5 million, an increase of 31.6% versus the same period of 2013.

As I mentioned earlier in the call, adjusted recurring cash flow of $0.14 represents a 16.7% increase year-over-year and the year-to-date amount of $0.54 represents 31.7% increase over the same period 2013. LTM September adjusted recurring free cash flow and adjusted recurring cash flow per share reached a record level of $114.9 million and $0.77 respectively.

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

Good morning everyone, and thank you, Dan. We are pleased to report a record quarter for Platform Specialty Products in a record nine month period at the adjusted EBITDA and adjusted EBITDA margin lines. As Dan stated earlier, I will be discussing our results for the quarter and selected year-to-date numbers on an as-adjusted basis as we believe that our reported results do not fairly represent the true ongoing operations of the Company as they include deal related costs associated with Platform's acquisition strategy. We believe that our investors will find our adjusted results do provide a clearer picture of the underlying businesses.

In conjunction with the closing of the CAS acquisition, we drew down on our previously announced incremental term loan facility, which included an additional $130 million in US dollar borrowings and EUR205 million. This financing allowed us to take advantage of a continuing low interest rate environment and lock in the required financing associated with the Chemtura deal. Our belief is that the European debt will allow us to naturally match our future cash flows associated with the Agriphar and CAS acquisitions.

For the three months ended September 30, our net sales grew organically 4.4% or $8.4 million to $196.8 million versus $188.4 million for the same period in 2013. Net sales in our performance materials segment increased by $9 million or 6.2% as compared to the same period in 2013. The increase in net sales is primarily attributable to strong demand for core industrial solutions products in North America and Europe, which are focused on automotive related end-markets.

Our electronic solutions products also increased year-over-year and our offshore solutions products posted a record quarter from a revenue standpoint, recovering from the softness that we experienced in Q2 due to the World Cup effect in South America. The net sales in the graphics solutions segment were flat as compared to the predecessor quarterly period with gains in our packaging product line offset by anticipated headwinds in the publication and coating plates product line which we had anticipated for 2014.

Net sales of new products, which represent opportunities to enter adjacent markets to those we currently serve, were $24.2 million for the three months ended September, compared to $19.8 million for the same period in 2013 and were instrumental in further expanding both the gross profit dollars and gross profit margins that we realized in the quarter. Quality of the underlying earnings is key in an asset-light, high-touch strategy, and our mix represents a very high quality portfolio.

For the three months ended September, adjusted gross profit of $103.2 million increased in the period by $4.2 million or 4.2% as compared to the same period in 2013. Adjusted gross profit percentage for the period remained at record levels of 52.5%, as compared to the 52.5% that we experienced in Q3 last year.

Included in our adjusted gross profit for the quarter was an incremental $1.7 million of depreciation expense that related to the asset step-up associated with the MacDermid acquisition. If we were to adjust for this accounting entry, our quarterly gross profit would've been $104.9 million and represented a gross profit percentage, which would've been a record, at 53.3%.

For the three months ended September 30, adjusted EBITDA grew 10.3% to $52.5 million from $47.6 million in the same period of 2013, representing a record level for adjusted EBITDA for the Company. Adjusted EBITDA margin climbed to 26.7% versus 25.3% in the prior-year period as well.

Adjusted EBITDA in the performance materials segment grew 18.2% to $40.2 million from $34.1 million in the same period of 2013, with their adjusted EBITDA margin climbing to 26.2% versus 23.5% in the prior year. For the graphics solutions segment, adjusted EBITDA decreased 8.9% to $12.3 million from the $13.5 million in the same period of 2013, representing an adjusted EBITDA margin of 28.6% versus 31.4% in the prior year period. Our net debt to adjusted EBITDA leverage ratio was one time at the end of the third quarter.

Cash on hand of $596.7 million offset gross debt of $796.7 million with the cash balance reflecting the $315 million of cash that we had in escrow for the CAS deal at the end of the quarter. Adjusted net income for the quarter grew $3.5 million or 14.3% year-over-year to $27.9 million from the $24.4 million that we had in 2013, which translates to an adjusted earnings per diluted share of $0.19 versus $0.16 that we had in 2013. This is an 18.8% increase. Adjusted recurring free cash flow for the quarter increased $2.1 million or 11.7% year-over-year, finishing at $20 million versus the $17.9 million that we had in 2013 and represented an adjusted EBITDA conversion ratio of 38%.

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

Thank you, Frank. Our quarterly nine month performances represent high watermarks for the Company. Both results really underscore the core business operations that we have and stress the importance of the asset-light, high-touch business model.

Our electronics solutions product line has had some late installations that will be running at full production levels starting 2015. Industrial solutions product offerings have been gaining business in the automotive supply chain that we expect to see a full run rate in revenue in 2015, and the offshore solutions product offerings have been -- have rebounded from a soft first half and have gained momentum as we finish 2014 and enter 2015. Our graphic solutions segment will benefit for the new production line, it has been installed to support growth prospects in the patching end-markets, and the headwinds we faced in publications and coating plates for newspapers we hope will be more stabilized.

Finally, we are expecting big things from our newly formed AgroSolutions segment as we enter 2015, and believe that the team we have in place to lead this segment is among the best in the industry. We continue to build out our senior management team, have been adding headcount along the way to support our accelerated growth. In addition to Wayne Hewett who will join us at the Arysta closing, we continue to increase staffing within our finance, treasury, and tax functions, with the intent of having world-class organization as we move forward.

As we begin to integrate our announced acquisitions and explore further opportunities, rest assured that cash generation and tax plan will remain high on our list of value creation items. None of us are resting on past accomplishments as we know there's always room for improvement.

I look forward to updating all of you on our progress on future calls. With that, Frank and I will take your questions. Operator?

Thank you.

(Operator Instructions)

Our first question comes from John Tanwanteng from CJS Securities. Please go ahead.

Good morning gentlemen, very nice quarter.

Thank you.

How should we think about the timing of the $65 million in synergies you are targeting? Will we see the bulk of that next year or spread out more evenly, and I know it's a bit early, but now that you have both CAS and Agriphar onboard, have you already begun that process or are you waiting until Arysta closes?

We haven't really begun the process, to answer the last part of the question first. It really makes more sense to do it in conjunction with all three businesses. We are doing the planning now, for sure. So what we hope to be able to do is essentially, at closing, put as many of these things in place as possible. We said they're going to be over three years, and I think that it's fair to say that it will be a little bit backend loaded, if I had to guess. It's a little bit too soon to know -- so it's a little too soon to know, to be honest with you, I just don't know.

We are going to get a bunch of the G&A savings from the CAS integration upfront, or early on, say I'll call it in the first quarter or two, so that's not immaterial by any means. So if you look at all the things probably -- it's probably more likely it will be split over three years pretty evenly.

Okay thank you. And then Frank, can you outline your expectations for one-time cost in items or the next quarter or two given all the deals coming together?

So taking into account this next quarter, there was infrastructure spend that we had to put in place as it related to taking CAS on board, which is going to be one-time capital cost of about $8 million. That started hitting, for lack of a better word, in October and the bulk of it will be paid by the end of November. As it relates to other one-time costs, they're all deal related, and if you if you look at the sheet that we put out for the recurring free cash flow and so forth, you're going to see the acquisition related expenses that we've taken so far of about $18.8 million.

There's a fair amount that actually hits in quarter four as it relates to CAS and so forth. So I would say, you know, maybe within this quarter you're looking at minimum of, call it, another $6 million that's going to hit as a one-time charge. Then as for Q1, a lot of it depends on bringing in Arysta and how it plays out with our synergy analysis there.

Okay thanks and then Dan, you mentioned bringing Wayne and his team on board, actually gives you a lot more bandwidth to continue pursuing M&A, can you talk about more about the pipeline and the pace of acquisitions going forward?

Sure, I would say the way that I would look at it now is that our hurdle rate is higher than it was, which we think was a pretty attractive hurdle rate to start with. But given as much as we have to do, and we haven't closed Arysta yet, we are taking a pretty strong look at better returns in order to really do anything right now.

Having said that, there's some things that are there that are pretty compelling that we're looking at, so there would -- they would easily be table-pounding kind of deals if we did one. There's work that continues to be done in that regard, so I wouldn't discount more deals in the relatively near future.

Okay and one final one, can you update us on the ideal or target capital structure once you get past the Arysta acquisition?

So from an ideal structure, the key is to raise the equity piece associated with Arysta. So if you notice we filed two S-1s this past week. The first one is to register some shares that we previously did via a pipe early in the month of October, and the second S-1 relates to a public-style offering that we would like to put out there in order to raise funds associated with our acquisition strategy going forward.

Once the equity piece is locked in, our hope, or I should say our intent, is to backfill the rest of the funds that are needed for Arysta via additional term loan of loans as well as perhaps some senior note paper, you know, 7-, 8-year tenure type paper because we think it's important to start layering that in with this acquisition forward.

But we haven't changed our view relative to 4.5 times debt to EBITDA, I can tell you that. We fully intend to sell for that, short-term. You know, short-term being when we're able to access the public markets which will be dependent on when our numbers are -- go stale and when the SEC comments are finished and all that sort of thing.

Historically, if you were to look at the underlying business, we generate enough cash over the course of a year that turns down leverage about one turn per year. So our belief is that with the cash that we're going to be generating, we will be able to easily handle the additional debt structure and quickly reduce the leverage ratios down.

Got it, thank you very much, and we look forward to having you at our conference in January.

Your next question comes from John McNulty of Credit Suisse. Please go ahead, sir.

Yes good morning, thanks for taking my question. So I guess a few questions. One, I know it's a little bit early, you haven't -- come anywhere near closing on Arysta but can you give us your thoughts in terms of cash generation in 2015 and how we should be thinking about that with all the moving parts that you got?

So I mean our modeling -- let me start out by saying this, our modeling of the ag space with the core MacDermid business, we're anticipating it to be roughly about $300 million in 2015 and that's our quote-unquote cash after everything. So that's after CapEx, after interest, after taxes.

But not one time costs --

But not one-time costs related to it. So I do want to point that out, we're still in the process of calculating what that number is going to be. Historically from a G&A reduction standpoint, that's usually a one-for-one in the first year. You know, cash spend in order to get the synergies associated with it, so we'll have more clarity on that as we move forward but the base number we're forecasting would be $300 million before those one-time charges.

Okay great and then just a little bit into one of the divisions. The Performance Materials margins took a noticeable leap up, I guess I'm wondering what was driving that and maybe how we should be thinking about that line or that level going forward?

It's really all good news. There's really several things that drive it. Number one is you have the electronics business in Asia which -- where our penetration of the smart phones and tablets continues to build and at the expense of older product lines, and there's a huge difference in margins between the two. We had a better quarter in offshore fluids at high margins, and we have an increase in the automotive penetration at the -- that is at a higher margin than some of the older historical businesses that this replaces.

So it's really a mix thing, but it's largely really driven by a better quarter for offshore and really strong penetration in electronics in Asia. You know, I don't know if we're done yet. It's hard for me to even say those words, to be honest with you, because these are levels that I don't think I ever thought we would get to. But keep in mind our gross margin percent, although we called it equal to a record, but that's after 1.5 points of purchase accounting effect. So I mean, really was substantially better than we've ever seen before and we don't think it's a flash in the pan by any means.

Great thanks very much for the question

Pleasure.

Our next question comes from Zach Gober of Gates Capital Management. Please go ahead.

Thanks for taking my question. Two questions for you here. One, just a clarification, when you say debt to EBITDA 4.5 times is that gross debt or net debt?

Net debt.

Okay. Great. Then just on the -- taking a look at the Graphic Solutions business, it looks like, I don't know, over the past year or two you maybe had a little bit of a peak it seemed it was growing up the past couple years and now things are slowing down a little bit. Is that a business that you hope to keep long-term or I guess what are your thoughts there in terms of growth, because I know that the newspaper space is certainly challenged.

Yes, the newspaper space is -- challenge is the understatement. So we love the business. We think that the overall packaging business is really attractive and we really were in a situation last year where we were capacity-constrained in production. And we added a new production line that's come on line this year, and we haven't really seen the full benefit from that, but again we're really confident we're going to see that.

So my guess is you're going to see a back to a better growth rate next year. Although we still have -- these headwinds that we have in the newspaper business are really ugly. And it continues to get worse, to be honest with you. So I mean, I don't want to try to sugarcoat that. But having said that, there's not much we can do about it. It's not an asset we can sell, the newspaper piece, because it's declining at a rate and we're managing the cost so it's still profitable, and so I think we just ride it out. And at some point it probably hits bottom, because there are a few assets out there that customers have installed in recent years which are unlikely to be changed. So as older assets perhaps come off, and at some point that runs out of space, so I think it's going to be better for sure next year than it was this year.

Okay thanks.

Definitely not a candidate for divestiture though.

Okay.

(Operator Instructions)

And our next question comes from Marcelo Lima from Heller House.

Good morning guys, thanks for taking the question. In terms of raising capital, you've been having a lot of success doing these pipes. I'm wondering if, in the future, you would consider doing a rights offering where existing shareholders could participate at a discount to the current market price. Also if you would consider doing preferred share issuances which I think -- it might be interesting for you because, you know, no maturity date, there is no know liens, very few covenants, if any, that could be an interesting addition to your capital structure.

Sure. Well, first I would say that we have been successful with these pipes, and we've been particularly successful with having really deep-pocketed, loyal shareholders that are willing to put up money for attractive acquisitions and that is something we taken advantage of, for sure. I think that we're -- our next focus is going to be on a broader shareholder base. So I think what you'll see next from us is a more normal classic equity raise where we go out more broadly, so I think that's our next step.

We still have the interest in having more sort of lead shareholders that are sophisticated and can see an attractive transaction and want to put capital to work. So expanding that base from our current set of shareholders would be attractive to us. You know going down the other routes relative to preferred and those other issues, I mean I think those are really not the next thing on our agenda. I think the next thing on our agenda is a more classic equity raise.

Okay and as far as deals -- your next deals, are you looking more to fill in your current verticals, or are you looking at adjacent verticals where you still don't have any businesses?

Well I think our priority right now from a strategic standpoint is the MacDermid space, and we think that there's some attractive sort of medium-sized, small to medium-sized deals in the MacDermid space. We'd like to see if we can do something there. Having said that, you know, this ag space, an $80 billion industry. In the specialty crop end of that business, there's still lots to do, we think. So I wouldn't discount that but I would say our hurdle rate just went up in those areas because we really have an interest in balancing out the portfolio over time. So as far as a new vertical, I'm never going to say never, but that's not our focus right now, I wouldn't say.

Great. Just one last question if you'll indulge me. On the ag space, a lot of these companies are, at least in the western world, it's a pretty consolidated space. You have the big chemical companies controlling a lot of that. I guess a lot of it is fragmented more in Asia, specifically Japan. Is that where you're looking for deals or are there smaller companies that you can pick up that are located in the US or Europe or Latin America?

Well, I wouldn't say we have a particular focus on that -- if anything, what we've got now with the addition of these three businesses is an amazing footprint and infrastructure in specialty crops globally. Which is almost unprecedented, I think, as far as penetration in other countries around the world with all these specialty crops. 65% of the revenues of these three combined businesses are either in fruits and vegetables or other, which are things like cocoa and tobacco and things like that, specialty crops, ornamentals, et cetera.

What you won't see us do, I guess, is you won't see us do a big deal in the row crops space. That's just not where we want to play, we don't think there's a competitive advantage opportunity in that space, but in the specialty crops area, really anywhere in the world, we would be interested in that.

Awesome thanks a lot.

Our next question comes from Rosemarie Morbelli from Gabelli and Company. Please go ahead.

Thank you. Good morning, all. I was wondering if you could touch a little bit, I mean you kind of did just now, on the ag industry and the fact that everyone is really down on it, and 2015 is not expected to be any better than 2014. Could you touch on what you see?

Sure. When you talk about the ag industry, 80% of the revenues are, more in the ag industry, are row crops in the west. So if you count Brazil, North America, et cetera, Europe -- we have a very small position in that market. So there is no doubt that the commodity prices are down and there's going to be headwinds in that business. I can tell you that all three of our businesses are expecting record years next year. They're all going to finish this year, if it continues the way we see it, with record years this year, the focus that we have is so much on specialty crops that we just don't have the same drivers as the row crop guys. It is just a different model completely.

And we think with the buildout of the field infrastructure, the direct infrastructure around the world, we're going to have even more ability to withstand what's happening to other people in the market, and we just don't see that. I mean there's no doubt that overall next year's going to be a tougher year than it has been, but we fully expect record years in all of our businesses next year. We expect to see an absolute increase in revenues and EBITDA in 2015 in our ag space.

Well thank you. And I was wondering, one last question, you have mentioned hurdle rate several times. Could you remind me what was your previous hurdle rate and where you are and what you are looking at now?

Sure. So we've often thought about it and talked about cash-on-cash returns on equity. So what we think about is our typical capital structure, we've often said, is 4.5 times debt to EBITDA, you then solve for equity in the deal. So if you put 4.5 turns of debt on a deal and notionally put 5.5 times of equity on a 10 times deal, or 4.5 times on a 9 times deal, or 3.5 times on an 8 times deal, we then look for roughly a 10% free cash flow yield on that equity. And that's free cash flow after everything. And that's fully after interest, fully after tax, fully after everything. And that was -- that's what we've said historically, but I would say we're looking to move that up, materially. Particularly in the ag space.

Okay can you give us numbers? Are (multiple speakers) you looking at 10% and you're now looking at 15%?

That's a 50% increase, that's pretty material but (multiple speakers) I don't know that we're saying 50% increase, but we're probably talking 20% increase or something like that.

Okay, thank you.

There are no further questions at this time. I will now turn it back to Dan Leever for closing remarks.

Great, well thank you all for joining the call today. We're really proud of the quarter we had. We're particularly proud of the Management team at MacDermid and the performance that they've had, continued to really perform at the highest level compared to anybody else you look at in our space. So well done to all of them.

We're going to be disciplined. We're not going to run out here and do things that aren't rational. We think we've got three great acquisitions that we're going to make something special out of, and we look forward to updating you all next quarter. Thank you all and have a wonderful day. Bye-bye.

Ladies and gentlemen, this does conclude today's conference. Thank you for your attendance. You may now disconnect. Everyone have a great day.