希悅爾 (SEE) 2010 Q4 法說會逐字稿

Good morning. My name is Sarah, and I would like to welcome everyone to the Diversey, Inc. and Diversey Holdings, Inc. fiscal 2010 year-end investor conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions) Thank you.

I would now like to hand the call over to Norm Clubb, Executive Vice President and Chief Financial Officer of Diversey. Mr. Clubb, you may begin.

Thank you, Sarah, and thank all of you for participating in today's call. I'm accompanied today by our President and Chief Executive Officer, Ed Lonergan, who will provide an overview of our performance in fiscal-year 2010 in a few minutes. We are also joined today, as usual, by Lori Marin, our Vice President and Treasurer, and by Todd Herndon, our Vice President of Finance.

But first let me provide some important information about the disclosures we will make today. On this call, we intend to provide an update on the general status of the business and the financial results for the fiscal-year ended December 31, 2010, an overview of the balance sheet at December 31, 2010, and as well, an update on 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 references to credit agreement EBITDA for various periods. Credit agreement EBITDA is a non-GAAP measure within the meaning of the SEC's Regulation G. In accordance with Regulation G, our Form 10-K reports include a reconciliation of credit agreement EBITDA for the fiscal-year ended December 31, 2010, to net cash provided by operating activities, which we believe to be the GAAP financial measure most directly comparable to credit agreement EBITDA. Our Form 10-K reports for Diversey and Diversey Holdings were filed with the Securities and Exchange Commission on March 17, 2011. 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 assets are cash and its shares of Diversey. The main differences between the results of Diversey Holdings and Diversey are interest expense, financing costs, 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, Norm. I'd like to provide a brief overview of our 2010 financial results, as well as the broader trends we're seeing in the industry. I'll also review our new corporate organization design, and our expectations for it. And then I'll turn the call back over to Norm for more detailed financial information.

First, I'd like to pause and say we're pleased to report that all our employees in Japan are safe, and most of them were able to quickly return to work and begin helping our customers respond to the massive disruption caused by the earthquake and tsunami. I'm deeply impressed by how our team has responded to this crisis. We've spent years preparing for the potential of a major earthquake in Japan, but of course, we can never be completely prepared for a crisis of this magnitude. The quick action of our team to protect our people, and then turn their attention to our customers has been a proud moment for Diversey. Our hearts go out to the people of Japan who are enduring this great tragedy, and we hope to see the nation recover as quickly as possible. The full impact to our business from the crisis in Japan is unknown at this point, but we will be sharing more with you in the future as it becomes clear.

Now I'd like to share some comments on the broader business. The market trends that began in 2009 continued through 2010, with ongoing pressure on net sales, offset by strong margin performance. Our net sales were essentially flat in 2010. Adjusted for H1N1 sales in fiscal 2009, we grew about 1%. We've had no material customer losses, but we've continued to experience weak consumption patterns in most of our developed markets.

The primary pressure points on net sales were in Japan, in the US government, and education sector, among small distributors in the US, and in our western European institutional and laundry business. As well, we experienced consumption declines in a number of our existing beverage and brewing customers, though generally offset by share gains from new plants and applications. In a moment I'll give you some examples of how we're responding to these challenges with innovation and broader solutions that directly meet customer needs in challenging economies.

On the profit side, we continued to improve gross profit margin with a year-over-year gain of 120 basis points. This improvement primarily resulted from pricing and mix improvements, and the benefits of the fifth year of our global strategic sourcing initiative. We also achieved a strong improvement in credit agreement EBITDA, delivering $453 million in 2010, versus $403 million in 2009. We continue to maintain strict controls on operating costs, and we benefited in 2010 from a reduction in certain raw material prices. As a result of our margin improvement and EBITDA generation, we enhanced our net income, and paid down significant debt. Norm will share more details on this in a moment.

One need only read the news to understand our challenges in developed markets. From Greece, Spain, and Portugal to our own Madison, Wisconsin, governments are under intense financial pressure, and are responding with unprecedented controls on spending. Political leaders across the spectrum are instituting new austerity measures in an effort to restore fiscal health. In some cases, these measures result in generally reduced consumption as wages stagnate, and people spend less on travel and hospitality. In addition, these measures can also specifically pressure our core building care business because governments in developed markets have historically been important users of our solutions. But we also view this as an opportunity to protect and grow our business by selling new, cost-saving building care technologies.

We're also offering strong profit improvement opportunities to our food and beverage customers who are responding to weak economies and sluggish consumer spending. Let me give you a few examples. Historically, the cleaning and finishing of floors has been done by janitorial crews using a mop and a bucket. This process hasn't changed for generations. The problem with this process is that it is highly labor intensive, it inflicts strain on workers resulting in increased Workers' Compensation costs, and it also creates a great deal of wasted product during application and clean up. In a word, it's inefficient.

So we invented a new mouse trap. Our system uses proprietary floor cleaning and refinishing systems to speed the process, reduce waste, and improve results, all without ever touching a mop or bucket. The results are dramatic in terms of economic and environmental savings, as well as appearance outcomes. We've saved customers literally millions of dollars with this system, allowing them to maintain and improve the appearance of their facilities while also saving money.

In addition, our system provides significant water savings, which is also becoming a key expectation of our customers. So while many of our building care customers in developed markets are under serious cost controls, we've been able to protect our business for the long term. Tangible benefits of this unmatched innovation include the contract renewals of our two largest global retail floor care customers in 2010 without tender. We've also launched a new technology we call RENEW, which is a major improvement to how air scrubbers are cleaned at rendering plants. Rendering plants tend to emit noxious odors, which require special air permits and air scrubber technology. Historically, these air scrubbers have been cleaned with massive amounts of oxidizers, and repeated flushing with water. RENEW uses a patented combination of chemistry and a dosing system that replaces the oxidizers, and reduces water use by about 60%. As a result, odors are minimized and the plants are safer, more environmentally friendly, and more efficient. We refined and reformulated this technology in 2010, and we are seeing strong customer response. This is a great example of how we're delivering customer solutions that respond to our customers' economic, social, and environmental challenges.

Our food and beverage business is taking a similar approach, as our bottling customers in particular, have had to cut costs as a result of stressed economies and consumption declines in developed markets. We've grown our food and beverage business in Europe, for example, with a powerful proposition around sustainable solutions. Essentially, we're promising and delivering measurable savings in water, energy, and waste, while enhancing plant hygiene and operations. We're so confident in our ability to deliver these savings that we're building cost and environmental efficiency targets into our customer contracts. For example, its common for us to save between 20% and 30% in water use, and 30% in energy costs per year in a typical carbonated soft drink plant. These results have allowed us to grow our food and beverage business even in the face of stressed economies where consumer purchasing has declined.

Our strongest growth opportunity, both near and long term, remains our extensive presence and capabilities in emerging markets. While developed markets remained under stress in 2010, emerging markets have broken loose from the grip of recession and returned to growth. All across our key emerging markets, from Brazil to India, China, Turkey, and Africa, we're seeing encouraging signs of growth, and are benefiting from our historic investments in these markets. Our near-term growth potential is somewhat restrained by the political unrest in Africa and the Middle East, Egypt in particular, but we're excited about the growth we expect in these markets in the coming years.

China, for example, is expected to have 42 billion square meters of commercial built space, and is adding another 2 billion square meters annually according to the US Green Building Council. Yum Brands is opening more than one new KFC restaurant in China every day. And the burgeoning middle class across all of Asia Pacific is creating new opportunities for our lodging, and food and beverage customers. Dietary shifts to proteins, requirements for safer foods, and more hygienic facilities are becoming the expectation of these new middle-class populations, and create opportunity for Diversey and our industry.

These vast opportunities we see in emerging markets are a primary reason we decided to reorganize our Company around four new geographic regions in key global sectors. Earlier this year, we announced that we would establish four geographic regions. We are not yet reporting within this four-segment structure, but we expect to begin doing so in the second half of this year. The four regions are as follows -- Americas, covering all of North, Central, and South America; Europe, including all of Western and Eastern Europe, as well as Russia; Japan, as a stand-alone region; and we're launching a new emerging market region we're calling APAT comprised of Asia Pacific, Africa/Middle East, and Turkey. This region comprises roughly 70% of the world's population, and is expected to account for a significant portion of global infrastructure and GDP growth well into the future.

These new geographic segments will enable a keen new focus on both emerging market growth as well as more effective leadership of large developed markets where we still see significant potential. In Japan, for example, we have strong market share, but it has been a tough economy for 20 years. Our new Japanese regional President, Nobuyoshi Yamanaka, joined us in January, is an exceptional leader with tremendous experience growing Japanese businesses. He has served on our Asia Advisory Board for several years, and we're delighted to have him leading this business directly. We're confident he's the right leader at the right time for this important operation, particularly in light of the impacts of the devastating earthquake and tsunami of last week.

We've returned Moreno Dezio in Europe, after about five years of strong performance in Latin America and Asia Pacific. Moreno is the ideal leader to continue to grow our market share in Europe, and respond to the unique opportunities in our largest region. John Alexander will continue to lead our Americas business. John and his team have developed new models for growth in this highly competitive region. We're excited about new opportunities in what has been a difficult environment for us in the past.

And I've named Yagmur Sagnak to lead our new APAT region. Yagmur has proven himself in emerging market settings, having led our Turkey, Middle East, Africa, and Eastern European businesses, and most recently, the institutional and laundry business in Europe. Yagmur is making great progress in building his team, and ramping up growth in these highly strategic geographies. While each region beyond Japan will still include emerging markets, we believe having the major markets in APAT under a single leader will create focus, and result in compelling new growth strategies and the right investments. We have a tremendous base from which to grow in APAT, thanks in large part to the legacy of Diversey's investments in these geographies.

At the same time as we're realigning our geographic segments, we're also creating a new global growth focused organization we call Customer Solutions and Innovation. These team, led by foreign European President, Pedro Chidichimo, will be the source of new innovation and refined globally-aligned sector-based value propositions. Pedro's team will also manage global strategic customers, and collaborate with our regions to execute customer management tactics within the regions.

There's a simple rationale behind this new organization. Diversey has world-class capabilities in pockets around the world. One of our best opportunities for growth is to deploy these capabilities everywhere. In addition, we can become much better at global innovation management, ensuring full deployment of our differentiated solutions. We can also speed growth by developing more effective sector strategies that generate growth in both emerging and developed markets. While this new structure is a significant change for our business, we're confident we can accomplish it without disrupting our current business, or incurring significant costs.

In summary, we improved the underlying health of our Company in 2010, growing our profitability, generating cash, and paying down debt. We protected our business in tough economic environments through customer focus and compelling value propositions. But we're not content with flat sales, even in the face of tough economies. So we are redesigning our Company for growth, and investing in more focused leadership and broader capabilities in our growth markets. Thank you.

Now I'd like to turn it over to Norm for additional financial detail.

Thanks, Ed. I would like to remind you that a reconciliation of credit agreement EBITDA to net cash provided by operating activities can be found in our Form 10-K reports for the fiscal-year ended December 31, 2010, which can be accessed from our website.

On an as-reported basis, net sales were $3.1 billion for the fiscal years ended December 31, 2010, and 2009. After adjusting for currency, our net sales were also flat as compared to the prior year, decreasing by 0.3%. When adjusted for the reduction in H1N1 pandemic-related volume previously discussed, net sales increased by 1% over the prior year. Ed provided a summary of the overall trends impacting our sales for the year, now let me provide some highlights of the performance of our regional businesses.

In EMA, our Europe, Middle East, and Africa region, net sales decreased by 0.5% in 2010 compared to the prior year. When adjusted for H1N1 virus-related sales in the prior year, net sales increased by 0.7%. Our emerging markets within EMA continued their growth trend, but we experienced pressure on sales volume in Western Europe primarily due to stressed economic conditions driving lower consumption patterns. Adjusted for H1N1-related sales, growth was largely driven by pricing and customer acquisitions in the food and beverage, and lodging sectors. Additionally, equipment sales grew despite the challenging marketplace. We will continue to pursue the successful execution of our sales strategies to mitigate continuing economic challenges.

In the Americas region, net sales decreased by 1.1% in 2010 compared to the prior year. When adjusted for prior H1N1-related sales, net sales increased by 0.7%. Strong growth in our emerging Latin American markets, primarily in food and beverage, healthcare, and lodging, were partially offset by sales declines in the US and Canada. These declines resulted primarily from our voluntary exit from underperforming food and beverage sector applications, as well as a decrease in consumption in the government and education sector due to budgetary pressures.

In the Greater Asia Pacific region, net sales increased by 1.7%, or 2.4% when adjusted for H1N1. The increase is mainly due to strong volume improvements in emerging markets, particularly in India and China, partially offset by volume decreases in Japan. I would remind you that Japan is approximately 10% of total sales of Diversey, so its impact on Asia Pacific is considerable. The region delivered growth in the lodging sector related to improved occupancy rates in addition to improved equipment sales across various consumer sectors. We expect our growth to improve as economic recovery and customer demand is restored, and as we continue to focus on key customer acquisitions.

I will now turn to the overall financial performance. Our gross profit percentage improved by 120 basis points in 2010 compared to the prior year. The 120-basis point improvement was largely the result of continued implementation of price increases, and reductions in certain raw material costs. Savings were also achieved through global sourcing initiatives and cost containment measures, including more efficient materials purchasing and product offering rationalization. We also continued to benefit from the prior implementations of our restructuring program, which resulted in structural improvements to our manufacturing and logistics footprint.

It is reasonable to expect some volatility and an increased cost pressure in the first half of 2011 due to raw material inflation caused by uncertainty and geopolitical events. In anticipation of this, we are planning to implement incremental pricing actions, and accelerate cost savings initiatives to help mitigate the potential impact of these expected cost increases.

SG&A expenses as a percentage of net sales were 32.2% in 2010 as compared to 31.8% in 2009. Excluding the impact of foreign currency, SG&A increased by $9.2 million in 2010 compared to the prior year. This increase is substantially due to a net increase in non-recurring costs such as employee termination costs, and costs associated with the Company's name change, which are partially offset by the recognition of pension-related net settlement and curtailment gains, and lower period costs associated with the November 2005 plan. Excluding the impact of foreign currency, restructuring expenses decreased by $34.1 million during the year ended December 31, 2010, compared to the prior year, primarily due to the winding down of restructuring efforts, and adjustments of previously recorded restructuring reserves.

Credit agreement EBITDA, which is adjusted for various non-recurring and non-cash items, was $453 million in 2010 compared to $403 million in 2009. This improvement was primarily due to increased gross profits, a favorable reduction in certain raw material costs, and decreases in our operating expenses. The Company reported net income of $64.4 million in 2010 compared to $7.9 million in the prior year. Excluding the negative impact of foreign currency of $3.2 million, our net income increased by $59.7 million. This increase was primarily due to an increase of $39.5 million in gross profit, and a decrease of $21.6 million in operating expenses.

Diversey Holdings reported net income of $32.7 million in 2010 as compared to a net loss of $48.6 million in the prior year. As previously mentioned, the main differences between the results of Diversey Holdings and Diversey are interest expense, financing costs, and the provision for income taxes. Capital expenditures in 2010 were $94.7 million compared to $94.3 million in 2009. As of December 31, 2010, Diversey, Inc had total indebtedness of approximately $1.2 billion, consisting of $400 million of senior notes, $815 million of borrowings under our senior secured credit facility, and $24.2 million in other short-term borrowings.

We held cash and cash equivalents of $158 million as compared to $249 million at December 31, 2009. The decrease in our cash balance resulted primarily from $134 million in mandatory and optional repayments of long-term borrowings, partially offset by improved cash flows from operations. Our favorable operating performance and cash flow allowed us to make $125 million in optional debt repayments during the year. In addition, we repaid the $18 million outstanding under our European securitization program, and terminated the program along with the US securitization program. We also paid $15.8 million in dividends to Diversey Holdings, allowing Holdings to make the $13.8 million cash interest payment on the Holdings' senior notes in November 2010. We have also provided notification of our intent to pay cash interest on the Holdings' senior notes in May of 2011.

Working capital increased by $62.7 million during the year ended December 31, 2010. This increase primarily reflects a decrease in accounts payable due to the decision to take advantage of negotiated discounts with vendors driven by our global sourcing initiative, offset by an increase in inventory relating to new product offerings, and a decrease in accounts receivable reflecting our continuing efforts to aggressively manage our collection programs. Diversey Holdings' consolidated net debt balance at December 31, 2010, was $1.5 billion, which includes Diversey Holdings' $262 million in senior notes. As of December 31, 2010, the Company had total credit availability of $246 million under our revolving credit facility. Of the total credit available at the end of the year, we could borrow this full amount and still be in compliance with our financial covenants.

So this concludes our presentation. I would like to remind you that we have a robust investor 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 this site. Documents related to the Diversey and Diversey Holdings senior notes, as well as both companies' 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 investor section of the Company website at Diversey.com. Please direct questions related to our financial results to Lori Marin, and John Matthews is a contact for all non-financial matters. Our contact information can be found in the investors section of our corporate website.

So now we'll move to the question and answer section of the presentation.

(Operator Instructions) Your first question comes from the line of Reza Vahabzadeh from Barclays Capital. Your line is open.

Good morning. Are you surprised that volumes in many of your segments away from the government segment have remained so subdued?

Reza, I think it's a tale of many stories over the course of the world. If you look at the emerging markets, we saw significant return to growth over the course of 2010 from about flat markets in 2009. And even within markets like Europe, Southern Europe performed very differently from Northern Europe, with the economies of Greece and Portugal and Spain underperforming the northern economies of the Nordics and Netherlands, for example. So it's hard to have a blanket statement to say that they're broadly underperforming.

And in terms of being surprised, obviously we watched the events unfold in government and education over the course of last year, and began planning for those early in the year in driving new innovations and insuring that our cost structure was in line with the revenues that we would have over the course of the year. So I think over the course of the year, we saw volumes migrate toward positive. And as we look forward, we do anticipate that volume will continue to recover. Of course, with the Middle East and Japan, you never know what will happen there over the next few months.

And I forget, what portion of your business is in Japan and the Middle East?

Japan is about 10% of our revenues. We don't report the Middle East separately. But we have a strong business in the Middle East.

Got it. And then on pricing, it's been three years of pricing gains for the Company, and '09, '08 input costs were rising. Can you just comment on your continued pricing gains, given the fact that input costs were relatively stable to deflation during the last 12 months?

We had hydroxides and chelates declined in '09 but we saw inflation in packaging, polymers, solvents and surfactants over the course of the year. So while it was more benign than late 2008 and early 2009, we still saw inflation. As we look forward, obviously, the impact of oil will have some incremental impact on the business. We also see consolidation in the supply industry having an impact. So at present we're seeing inflation across all of our inputs, although probably less than 100 basis points ahead of what we'd planned for in the course of the year. And that will require us to take additional pricing in the course of the year and we're in process of implementing that now.

And I'm sorry, on the commodity cost, maybe we can dig into it a bit more. Where are you seeing cost inflation? And if you could talk about the magnitude, as well.

As I said, the incremental inflation beyond what we planned for the year is less than 100 basis points at the moment. Of course the world markets are pretty volatile at the moment. But we are seeing inflation in hydroxides, so in caustic, more so in Europe than in North America, as an example. Obviously with the (inaudible) going down in Japan, we'll see some disruption in that market but we're already moving raw materials from elsewhere in the world to Japan at the moment so as not to disrupt production. We see HTPE increases, so packaging inflation, more so in Europe than in North America, generally driven by differential feedstocks. So an oil market versus a gas market. But at present, nothing that we can't handle with the pricing disciplines that we have in place. As our competition has said, of course it takes some time to get those prices rolled out and so we're in process now of making that happen.

Fair enough. And then my last question as far as the use of your free cash flow going forward. How should we think about that as well as any thoughts you might have on potential acquisitions?

Let me ask Norm to comment.

Sure. We expect to continue to have strong cash flow throughout 2011, with the refinancing of our Term B that we accomplished with the help of many of you, most of you, recently. Of course we got a greater flexibility going forward. Our intent would be that as we look towards the middle of the year, we're a net user of cash in the first half of the year and we build up our cash reserves in the second half of the year. To the extent that we do not have any good use for that cash, we would intend to recommend to our Board to continue repaying debt as we can. The only significant use of cash that could potentially come on to the horizon would be acquisitions but we do not expect any acquisitions of major size to be featuring this year in our outlook towards the year. So all things remaining equal, we would expect to continue repaying debt this year. But as I said, if good opportunities present themselves we will review them accordingly and determine if that's a better use for our cash rather than repaying debt.

Thank you.

Your next question comes from the line of [Ryan Bucrest] from Citigroup. Your line is open.

Hi, Ryan.

Could you just provide maybe some brief commentary? I know it's only been about a week since the tragedy in Japan but how directionally do you see your business participating in the clean up relief efforts and so forth? Is it going to be something similar to an increase like the H1N1 situation a couple years back?

It's hard to say at this moment. Let me give you some perspective on where -- we said Japan is about 10% of our business. The affected prefectures are less than 10% of the Japanese business. And obviously the business in those areas is quite disrupted at the moment. Our plant is fine. Our facilities are fine. Most of our distributors are fine. There's one distributor that we still haven't been able to contact. We have a phenomenal third party distribution partner in Japan and we have been collaborating since about the hour after the earthquake to determine smart ways to serve the impacted parts of the country. And, in fact, we have government approval to put trucks into those areas, now. I think 15 trucks went yesterday.

We have also established collection points for our customers in those areas so they can, even if we can't get to them because the roads are closed, they can get to us from inside the area. I think the wild card at the moment is what's happening in the other cities of Japan as the nuclear situation unfolds and as people are scrambling for food and so on. So, we're sitting with all of our customers at the moment. We are producing. There are shortages of materials. We have a crisis team in place that's been in place since the hour of the earthquake. We have products air freighting into Japan. We have raw materials shipping into Japan from a variety of locations across Asia and Europe.

So I think at the moment we're doing pretty much everything possible to support our customer base. I think there will be demand for sanitizers. There will be demand for general purpose cleaners and we are shifting production in our facilities in order to meet that demand. How much, we are not exactly sure. We're actually studying now our response in Izmir and Turkey, our response just south of Santiago and Chile in learning from that. We have provided our building service contractors, for example, with disaster recovery plans and kits to help them help their customers. And our people are going out into the field and assisting our customers in doing that. So I think it will be weeks if not months before we know the true impact, but at present, we think that our team has it in pretty good stead.

Thank you very much.

Your next question comes from the line of Reza Vahabzadeh from Barclays Capital. Your line is open.

Yes, in your comments you mentioned that you had voluntarily exited some customers in the food and beverage space. Just was wondering if you could elaborate on that?

Yes, I think we've talked to this a number of times over the last couple of years, but we've been shifting our business from a bulk business to an additives business in many parts of the world, ranging from the US to Japan. We had accomplished that some time ago in Europe and we were completing that process in North America and in the Japanese market in 2010. We had a little bit left to do in Europe. And so we are not shipping straight tank trucks of commodity chemicals anymore and we are shipping additives in concentrated quantities. So sales are down but margins are up, and one of the reasons you see improvement in the gross margins of the Company is that shift in our business.

So is it industry-related? Is the food industry historically used more of the bulk version and that's why you're having this shift more pronounced in that segment?

No. Where we are is that Diversey adds more value and value-added products. So there are plenty of producers out there that can ship straight trucks of caustic to customers. There are very few producers out there that can take the chemistry that we've developed in our labs that have appreciable impacts on the efficiency and efficacy of the process and put that into the process. So we've shifted our focus away from what everybody can do to what only we can do.

Got it. Thank you.

With no further questions in queue, I'll turn the call back to Mr. Clubb for closing remarks.

Thank you, Sarah.On behalf of everyone here at Diversey and Diversey Holdings, I would like to thank you for attending this conference call and for your continued support of our companies.Thanks very much.

This concludes today's conference call. You may now disconnect.