希悅爾 (SEE) 2010 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the first quarter 2010 earnings conference call. After the speaker's remarks, there will be a question and answer session. (Operator Instructions) Thank you. I would now like to turn the call over to Norm Clubb, Executive Vice President and Chief Financial Officer of Diversey, Inc.

Thank you. Good morning, everyone. This ism Norman Clubb. And thank you all for participating in this call. I am accompanied today by Ed Lonergan, who is the President and Chief Executive Officer of Diversey. As we mentioned during our last investor call, we are now providing quarterly updates on our financial results. Today's discussion covers the first quarter of fiscal year 2010, the period beginning January 1 and ending April 2, 2010. In a moment, Ed will provide an overview of our strong performance and continued momentum during the quarter. But first, let me provide some important information on our financial disclosure. On this call, we intend to provide an added on general status of the business and the financial results for the first quarter, ended April 2, 2010, an overview of the balance sheet at April 2, and an update of the results for Diversey Holdings.

Some of the statements that will be made in this presentation are not historical facts and are forward-looking. These forward-looking statements are subject to risks and uncertainties, some of which are beyond our control. Please refer to the risk factors and cautionary statements concerning forward-looking statements, in our Form 10-Q and Form 10-K reports, for certain risks and uncertainties that we face. The discussion today includes reference to EBITDA for various periods. EBITDA is a non-GAAP measure within the meaning of the SEC's Regulation G. In accordance with Regulation G, our Form 10-Q reports include a reconciliation of EBITDA for the first fiscal quarter, ended April 2, 2010, to net cash provided by operating activities, which we believe to be the GAAP financial measure most directly comparable to EBITDA.

Except for comments regarding EBITDA, net income and cash flow, or where specifically indicated, today's discussion reflects the results of continuing operations, excluding divested DuBois Chemicals and polymer businesses, which are accounted for as discontinued operations in our financial statements. Our Form 10-Q reports for Diversey and Diversey Holdings were filed with the Securities and Exchange Commission on May 13, 2010. They are also posted on our Website at Diversey.com and can be accessed by clicking on the investors link at the top of the page and looking under the public reporting section.

Filings for both Diversey Inc. and Diversey Holdings Inc. are available for viewing. Diversey Holdings is a holding Company whose sole asset is its shares of Diversey. The main differences between the results of Diversey Holdings and Diversey are interest expense and the provision for income taxes. Accordingly, we will address the results of both Companies on this call. I would now like to turn the call over to Ed for a general business update.

Thanks, Norman. And good morning, everybody. Today, I will provide an overview on our first quarter results and share some thoughts on how Diversey is responding to the economic challenges in many of our markets. I'll also review a recent major event in our industry and then hand it off to Norm, who will give you a more detailed financial review. Diversey's first quarter continued the pattern established in the second half of 2009, with flat sales but strong margin and profit delivery. We've continued to soft consumption in most markets, influenced mainly by macroeconomic trends, and particularly, the ongoing economic turmoil in Europe and constrained spending among many customers in the US, is dampening consumption in our core businesses. As a result, our net sales in the first quarter were essentially flat year-on-year, when adjusted for foreign exchange and the impact of one less selling day.

We've maintained stable sales through effective pricing, improved contract compliance and a focus on customer retention and new customer acquisition. Underlying these actions is a compelling value proposition, in which Diversey delivers efficient and effective cleaning and hygiene solutions for our customers. Our market insights and innovations have given us the foundation to build value propositions that address our customers' most pressing concerns, including the costs and sustainability of their operations. Therefore, even under stressed economic conditions, we've been able to gain share through incremental applications and customers, to offset the impact of consumption declines in existing customers.

In addition, we've begun to see accelerated growth in emerging markets, as those economies appear to be re-emerging from the recession. In particular, China and India are returning to growth, as lodging properties see improved room occupancies, restaurants enjoy more traffic, and the public increases its consumption of food and beverage products. We do not see a noticeable improvement in developed markets, however, so we anticipate ongoing challenges in net sales as we move through the year.

While sales old steady, our actions to improve margins and profit have delivered strong year-over-year results. Diversey's gross profit percentage improved 420 basis points versus a year ago, from 38.2% to 42.4%. This strong performance is a result of successful pricing management, as well as the decline of certain raw material prices. In addition, our margins benefited from restructuring actions in prior years, including more effective materials purchasing, more efficient manufacturing and logistics operation, and elimination of low margin products. We also implemented internal processes and systems to give us a clear line of sight to customer and product profitability, enabling more targeted margin and mix improvement actions.

We also continue to closely manage our costs. Adjusted for currency impacts, our SG&A expenses decreased in the first quarter by $3 million, compared to the first quarter 2009. SG&A, as a percentage of net sales, declined from 33.5% in 2009, to 33.3%. We continue to capture costs efficiencies as we reorganize around three regions and streamline our operations. Our focus on creating a nimble, efficient management and support structure has enabled us to invest in customer-facing capabilities, at the same time as saving overall SG&A costs. We believe refocusing on our organization on customers has also improved helped preserve our sales in the challenging economy.

While reducing SG&A, we invested in key capabilities in research and development. In particularly, we spent an additional $2.6 million in engineering resources, which differentiate our Company as a solution provider for our customers. We're very careful with where we invest, keeping our focus on the long-term vitality of this business. Therefore, we took this opportunity to build on our strengths and enhance the capabilities that differentiate Diversey in a fragmented industry. Our strong margin performance and cost containment drove delivery of $75 million in EBITDA. This is a $29 million year-over-year improvement, after currency adjustments, representing 53% growth.

While margins, pricing and cost containment are critical elements of our EBITDA improvement, another important driver of performance is our sustainability commitment. For Diversey, sustainability motivates us to address waste all its forms, from an unnecessary pay-per-use to limitations on travel and non-customer meetings. And we include greenhouse gas in our definition of waste, which is central to our Climate Savers commitment to reduce greenhouse gases by 25%.

We recently reported on our sustainability achievements in our Annual Global Responsibility Report. Among the highlights of this year's report, was our support of World Wildlife Fund's global water roundtable to address water stress, river pollution and declines in freshwater related wildlife. We also reported significant improvement against key environmental measures, including a 17.1% reduction in energy and a 16.1% reduction in waste disposal. And we detailed our efforts with our customers to help them improve the sustainability of their operations.

We're also providing sustainability through thought leadership to our industry. During the last week of April, our industry's attention was focused on Amsterdam and the Biennial Interclean trade show, the largest event in the building care industry. On the eve of the show, Diversey conducted a climate change summit, were more than 100 executives from leading global companies convened to share their strategies on mitigating climate change, as well as how they are building sustainable business practices into their enterprises. The essential conclusions from the summit were that sustainability is a driving force across our world. And all companies need to be prepared to address the dynamics of a changing environment, as well as public demand for corporate responsibility. Now, I'll ask Norm to share some more details on our financial information, followed by Q&A.

Thanks, Ed. I would to remind you that a reconciliation of EBITDA to net cash provided by operating activities, can be found in our Form 10-Q reports for the three months ended April 2, 2010, which can be accessed from our Website. On an as-reported basis, net sales for the three months ended April 2, 2010, were $747.6 million, as compared to $704.6 million in the prior year. After adjusting for currency, our net sales decreased by 1.1% compared to the prior year, substantially due to there being one last selling day in the first quarter of 2010, as compared to the same period last year. Ed provided a summary of the overall trend's impact on our sales for the quarter.

Now, let me provide some highlights of the performance of our regional businesses. In Europe, Middle East and Africa, net sales decreased by 1%, substantially due to one less selling day during the quarter. Our sales in the region continued to be effected by the depressed economic conditions, resulting in lower volumes that were substantially offset by price increases in a stable essential customer base. Our lodging and food service sectors were particularly effected. However, we experienced favorable increases in equipment sales. We expect that the challenging economic environment will pressure sales growth. At the same time, we believe that successful execution of our sales strategies will mitigate these economic challenges.

In our Americas region, net sales decreased by 4.4%. Although key emerging markets achieved sales growth during the quarter, sales in the United States and Canada were adversely effected by the exit from underperforming applications in the food and beverage sector, as well as the pacing of certain purchases in consumer branded channels. We expect consumption growth in emerging markets to be largely offset by ongoing softness in many sectors of the US marketplace.

In our greater Asia-Pacific region, net sales improved by 3.8%, mainly due to strong volume improvements in China and India, where we experienced sales growth in the food and beverage sector, primarily due to key customer acquisitions. This region reported growth in the lodging sector related to improved occupancy rates, as well as a general improvement in equipment sales across various customer sectors. We continue to expect sales growth, as economic recovery and confidence is restored and as we focus on key customer acquisitions and driving emerging markets.

Based on net sales, as reported, our gross profit percentage improved by 420 basis points versus the prior year period. The 420 basis point improvement was largely the result of price increases and a reduction in certain raw material costs, including phosphorus materials, caustic soda and chelates. These cost reductions were achieved mainly through successful implementation of our restructuring program, along with structural improvements to our global sourcing activities. These improvements include more efficient materials purchasing, improvements in our manufacturing and logistics footprint, rationalization of product offerings, elimination of low margin products, and the implementation of internal processes to more effectively monitor customer profitability.

Excluding the impact of foreign currency, selling general and administrative costs decreased by $3 million during the first quarter of 2010, compared to the same period in the prior year. EBITDA in the first quarter of 2010 was $75.5 million, compared to $46 million in the same period in the prior year. Net of a positive foreign currency impact of about $300,000, EBITDA increased by $29.2 million. This was primarily due to increased gross profits arising from pricing actions and a favorable reduction in certain raw material costs. The Company reported net income of $0.1 million for the first quarter of 2010, compared to a net loss of $16.6 million in the same period the prior year. Excluding the negative impact of foreign currency exchange of $1.5 million, our earnings improved by $18.2 million. This improvement was primarily due to increased EBITDA, partially offset by increases in interest in income tax expense.

Diversey Holdings reported a net loss of $6.2 million in the first quarter of 2010, as compared to a loss of $28.7 million in the same period in the prior year. As previously mentioned, the main difference between the results of Diversey Holdings and Diversey are interest expense and the provision for income taxes. Capital expenditures in the first quarter of 2010 were $16 million, compared to $17.1 million in the same period in the prior year.

As of April 2, 2010, Diversey Inc. had total indebtedness of approximately $1.4 billion, consisting of $400 million of senior notes, $952.3 million of borrowings under our senior secured credit facility, $17.5 million in borrowings under our accounts securitizations facility, and $34.7 million in other short-term borrowings. We held cash and cash equivalents of $192 million, as compared to $249 million at December 31, 2009. A working capital increase of $125 million during the quarter was primarily driven by a $112 million decrease in accounts payable, resulting from taking advantage of the negotiated discounts with vendors, in combination with the effect of foreign currency movements.

Diversey Holdings consolidated debt balance at April 2, 2010, was $1.6 billion, which includes Diversey Holdings $250 million senior notes. Given our stable debt structure, strong liquidity and cash flow profile, we have elected pay cash interest on the Holdings 10.5% notes on November 15 of this year. We will continue to evaluate whether we pay interest on this, our most extensive piece of debt, taking into consideration our liquidity and cash flow needs, potential alternative investment options, and restrictions within our credit agreement and indentures. As of April 2, 2010, the Company had total credit availability of $245 million under our revolving credit facility. Of the total credit available at the end of this year, we could borrow this full amount and still be in compliance with our financial covenants.

This concludes our presentation. I would like to remind you that we have an investors section of our Website, at our Company Website, Diversey.com. We consider this Website to be a key communication tool with the investment community and we encourage you to periodically access the site. Documents related to the Diversey Diversey Holdings senior notes, as well as both Company's financial results, can also be found in the investors section of our Corporate Website.

A recording of this conference call will be available for replay for the next two weeks in the investors section of the Company Website at Diversey.com Please direct any questions related to our financial results to Lori Marin. John Mathews is our contact for all non-financial matters. Our contact information can be found in the investors section of our Corporate Website. We will now move onto the question-and-answer session. For this session, we will also be joined by Lori Marin, who is the Vice President and Treasurer of the Corporation; and Todd Herndon, who is the Vice President and Controller.

(Operator Instructions) And there are no questions at this time.

I think with that, we then wrap up. So, on behalf of everyone at Diversey and Diversey Holdings, I'd like to take --.

I do apologize. We do have a question.

Okay, almost got out.

Your first question comes from the line of Reza Vahabzadeh. And she's with Barclay's Capital. Reza, your line is open. You may have your phone on mute. Your next question comes from the line of Bob Franklin with Prudential Financial.

Can you hear me?

Yes, we can.

Good. Can you go over what's going on in the Americas region in sales? You said, you're exiting underperforming applications. What's going on and how long do you expect that to last?

Bob, thanks for the question. This is, Ed. In Americas, I think there's a few things that are playing out in our business. In the food and beverage business, through most of the world, we had previously converted from a significant focus on selling bulk commodity chemicals to selling high-value additives in replacement of those bulk chemicals. The US was the last market that moved to the new model. So, what you see in the US, is a change in overall net sales into that space over the course of the last 12 months but a significant improvement in gross margin results, which are, of course, impacting the gross margins of the US. So, we're just about completed with that process and cycling through the base period, net sales we had in the higher volume bulk chemicals. But we think we have a much better business model going forward in food and beverage.

We're, also, as you well know, significantly exposed to the building care sector in the United States, whereas in the rest of the world, we have quite a significant business in kitchen and laundry. In building care, we're the clear number one player but we still see a business that is impacted by reduced [soil] use in facilities due to lesser employment in the United States than previously and extended cleaning cycles that came out of the stresses of 2008 and 2009. And our work here is to change the game in the building care through different solutions that impact the overall cost to clean but deliver better returns to us. TrailBlazer is a fantastic example, where we combined the utensil that reduces labor with our wax programs. And we're in the process of converting out the two largest retailers in America today. And expanding our business model to better serve our kitchen and laundry customers from a global basis.

So today, the change in food and beverage and our exposure to food and beverage, we believe are the key drivers of our US results, as well as some pacing of orders from our key distributors in first quarter. And while we don't see significant changes in building care going forward, we do believe the business model developments that we're making to service our kitchen and laundry customers will have an impact over time.

Okay. And in terms of the conversion from the bulk of the new model, is that about done or do you expect that to last longer?

The last markets globally converted at the end of last year.

Okay. What should we think about CapEx for the year? Is this sort of a good run at -- when I figure at right now?

Yes, this is, Norm. We're fairly confident that run rate is going to continue as we go through the balance of the year.

Okay. And two, what I think are math questions. If your sales benefited from a weak dollar and if the euro is getting beaten up these days, should we expect a similar swing in the other direction for the next quarter's results?

That's a fair way to look at it. As you know, as we do work in multiple markets throughout the world, we do have a robust FX program but our sales are generated in those various currencies. And we can have a stronger conversation about this off-line to help with your model.

Okay, great. And then, one or two real quick ones from a cash flow statement. The accounts payable swing to an $81 million used, is that also kind of a program change, so we should see that level of?

We expect to see that level off. One of the things that we did is that we were much more aggressive in ensuring that we were taking all of the prompt payment discounts that were available to us. And that, as you can see, has had some impact, as well, in the margins that we're having in the business. At the same time, we are implementing new payment terms across the board, which we'll either seek to enhance the level of discount that we can get or to lengthen the payment terms to try and claw back some of that increase that we've seen in the first quarter.

Okay. And finally, on inventories, I think MD&A said that there's a seasonal build this quarter but it was still a smaller use than a year ago. I'm just trying to reconcile that.

This is Lori. How are you? That's a lot to do with the wonderful programs that we've put in to do a lot of SKU rationalization in the Company. So, we've done our normal seasonal build that we normally do. You will see that both in first quarter and in second quarter. But because we are more streamlined now in looking at what our global inventories are and we've been working on this, as one of our key initiatives in the Company, we feel that these inventory run rates for our build are what we will see. And Todd Herndon has a couple of extra thoughts on that.

We've also, as part of a restructuring program and part of our cash multiprocess implemented new tools in things like logility or advanced planning systems, which also structurally changed the way we plan for our inventory levels, which are also helping us get towards targets of world-class turns in the next 12 to 18 months.

Okay, great. Well, thanks very much. I'll look forward to next quarter's call.

Thanks.

Your next question comes from Thomas [Share] with Federated Investors.

Thank you. My questions were already answered.

Your next question comes from Annika Eiremo with the Delaware Investments.

Good morning. Can you hear me?

Yes, we can.

I just have a couple questions. First, could you just give us a little more color on your outlook for raw material costs going through the rest of the year? And along with that, your ability to pass on pricing? And then, my second question, how much of your European sales come from Greece, Portugal, Spain, in that whole troubled region right now? And what kind of trends are you seeing out of them up and is that changing quarter over quarter? Thanks.

Okay, this is, Ed. Let me answer the commodity discussions first. And there's three parts to the answer. First, overall, we see lower than expected commodity increases in 2010, than we anticipated as we went into the year. Two, we have pricing in place to offset the pricing the pricing that we do see coming into the marketplace. And three, there is a change, from the recent past, in the way we see commodities living. We've seen ethylene and propylene decouple from oil and gas pricing in the world and particularly, in the United States. And that's driven primarily by production pressure and the cracker delays in the Middle East.

So, the supply base in our industry, basically made reductions in capacity elsewhere, assuming those crackers would come online, and they have not. And so, as a result, there's a bump in acquisition pricing that was, I think, broadly unanticipated in the marketplace. While ethylene and propylene are moving quite significantly, we think we have those costs covered in our pricing. And we see a more normal return in caustics, phosphorics-based products and phosphates. So, less volatility than we've experienced, I would say, over 2008 and 2009. In relation to the PIGS, if I can call them that, we don't disclose the individual level of sales within those regions. We are certainly seeing softness in overall economic activity, occupancy rates in lodging, things of that nature but we don't expect it to have a material impact on our results and for the balance of the year.

Okay, great. Thank you.

You're welcome.

Your next question comes from Todd Harkrider with Goldman Sachs.

Yes, congratulations on such a strong quarter.

Thanks, Todd.

How should we look at your nice cash position? As you get past your slightly larger summer months, do you plan to get to get a little more aggressive on debt pay down or do you plan to keep a lot of dry powder on the side in case you find an tuck-in acquisition? And any color there would be helpful.

One of the first steps we've taken, Todd, of course, is the election to pay cash interest on the pick notes at the end of the year. Because our cash flow projections are such that we believe our liquidity is going to be strong for the balance of the year. We will evaluate this as we go through the year, as to what we do with the surplus cash, if I can put it that way. The business will be developing and we'll make decisions, as appropriate, as two whether we choose to invest that or use it to pay down debt.

Okay. And then, with a CD&R on board for a couple months now, can you talk about if they've helped you identify any incremental cost saves or areas of improvement that might not have been as obvious when they first joined the Company? Thanks.

This is, Ed. I would say similar to the discussion we had with this group on the recent call, we found CD&R to be a fantastic partner, exactly in line with what we anticipated when we brought them into the Company, based on their strong understanding of distribution businesses and excellent cultural fit. So we've gotten nothing but good strong business advice as we've worked with the CD&R team. And we've made no significant changes in our strategy at present.

Okay. And then just lastly, can you talk about the change of the name under the Diversey umbrella, the product name? I assume since you deal with a lot of the commercial accounts and sell-through distributors, it shouldn't be much of an issue. But any color surrounding the name change would be helpful.

It's been a wonderful experience, actually. I've been through good and bad name changes over the course of 30 years in this business. And I think this was probably one of the best broad changes that I've seen ever executed. We basically, in the course of three months, changed everything from our invoices to our Corporate communications broadly across the world, with a great degree of excellence and very low cost. And as a result -- when I think about our customers, they by our solutions, not our brand-name. And so, we've had very little, if any, discussion with customers about the impact of the name and their forward selling of our products to their customers, in the event of distribution, or in the purchase of our products from direct users. As a result, I would say, no impact from the change.

Got you. And one more, if you don't mind. I know you have very little customer concentration but should you see much impact from Coke and Pepsi acquiring their bottlers?

No. We already sell to the bottlers directly. So, we don't anticipate any dramatic change.

I appreciate it. Good luck with the rest of the year.

Thanks.

Your next question comes from the line of Reza Vahabzadeh with Barclay's Capital.

All right, we made it work.

Good morning, yes. So, I know you talked -- touched on the currency front but can you give us a bit more detail on your exposure to the euro, as far as percentage of total sales? And then, maybe some details on your hedging on the euro as well?

We again, just as Norm mentioned a few moments ago, we do not provide that type of detail on what it is that we are doing with each one of the currencies in each one of the countries. But as you know, a majority of our business is denominated in currencies other than the US dollar. And wherever there is fluctuations in exchange rates, that will impact the translation of the earnings that we do bring forward. But as you know, we are able to do different things, on a daily basis, looking at all of the flows that we that are have in and out of the various countries. We source within the country and we make certain that we are doing everything as efficiently as we can.

As we look at the overall environment and we look at how we are already retranslating our balance sheet back into USD, we have been showing the fluctuations and the changes to you. And we always report how much that does impact us as we go along. So, that we are able to provide you with that. I think, too, if you look at our Diversey Inc. financial notes, on page 13 of the 10-Q, we go into some very full disclosure on how we handle our FX. And this will help everyone who is on the call, who might have that question. And then, again, you can always contact me for additional information. But again, I can only provide you information that we normally disclose.

Okay. I appreciate that. So, when you look at your outlook for the rest of the year internally, is the weakness in the euro against the US dollar, is that a significant headwind versus everything else that's out there? And I know you have exposure to a lot of different currencies. But I'm just trying to think how you think about it.

No, as we look at it and as we look at what we have planned for this year and the growth we have in other markets, like the emerging markets, there's lots of things going on, levers that are happening throughout the organization. And we are very confident in the numbers that we have provided.

Okay. And would you say that the euro is the largest non-USA and Canadian currency that you are exposed to?

Yes, it is.

Yes, it is.

Okay. Thank you.

You're welcome.

(Operator Instructions) And there are no further questions.

Okay. Well, if there are no further questions, then, I'll wrap this up. Just on behalf of everyone here at Diversey and Diversey Holdings, I'd like to thank you for attending this conference call. And for your continued support of our Company. And we look forward to hosting this call the next quarter. Thank you again.

Thank you all.

Ladies and gentlemen, thank you for participation. This concludes today's conference call. You may now disconnect.