Bank of America Merrill Lynch, Global Agriculture & Chemicals Conference 2017

Mar 1, 2017

Slides

Thank you everyone for joining. My name is Ian Bennett on the U. S. Chemicals team. Very happy to have here today Ben Quicich from Platform as well as Gary Dorman on Ben is Platform's Executive Vice President of Operations and Strategy. He was appointed this role in April 2016 after acting as Platform's Chief Operating Officer from October 2015 to April 2016 and Platform's Vice President, Corporate Development, Finance and Investor Relations from January 2015. He joined Platform as a Director of Corporate Development in May 2014. And prior to joining Platform, he was a senior associate at General Atlantic, a private equity firm. Ben, very happy to have you. Yes, everybody. Thank you, Bank of America, for hosting me. Thank you to those in the audience for taking some time to hear the Platform story. I'm going do three things today. First, introduce platform for those of you who are new to the story. Second, talk a little bit about our accomplishments and results in 2016. We released earnings yesterday, so that's new news. And third, talk a little bit about our outlook for 2017 and our guidance which was also introduced yesterday. Okay. So first platform, we're a diversified global specialty chemicals company focused on what we call asset light high touch businesses. These are businesses that don't engage in molecule synthesis rather molecule or product formulation where we come up with solutions using other people's molecules to meet our customers' needs. Currently, we're split about fifty-fifty between an ag business, Arista Life Science and McDermott Performance Solutions, which is an industrial and electronic chemicals business. McDermott is organized along five verticals, industrial solutions, which is metallization, plating on plastic and corrosion resistant for industrial products. The big driver there is automotive. Electronic solutions, which is metallization of printed circuit boards and semiconductors. Alpha assembly, which is assembly materials for integrated circuitry. And then we have a small graphics business, which is engaged in flexographic printing and offshore solutions, is for oil and gas industry for the production of oil and offshore oil and gas. The Ag business is a global differentiated crop chemical business. It's got a global and broad product portfolio, but it's really focused on specialty segments and specialty crops. So that could be specialty applications of chemistry or niche crops, and talk a little bit more about that later. This business is extremely diversified, not just across the different end markets we just walked through, but also across geographies. More than 75% of our sales are overseas. We have a big presence with both businesses in Europe. We're large in Asia primarily in the performance side of the business and Africa and Latin America driven by the Ag business. So turning to 2016 results. We released our earnings yesterday morning and it was a strong year for us in 2016. Despite challenging end markets, particularly in Ag and offshore energy, we grew 2% on the top line and that growth accelerated in the back half of the year. That's organic growth. So we exclude the modest divestitures, the impact of currency and volatility in metal prices from the Alpha business. EBITDA grew 6% organically. And again, we saw nice acceleration as some of the end markets turned towards the end of the year, particularly on the performance side of the business. We can talk more about results in Q and A if you have further questions. From a qualitative perspective, what you see on Slide seven are the priorities that we laid out going into 2016. These were the four things that we were focused on accomplishing last year and we believe we did a good job of accomplishing. The first is integration and synergy realization. So in 2014 and 2015, we completed six acquisitions and we outlined a target of $150,000,000 of synergies we would get from those acquisitions. There were three acquisitions in the Performance Solutions side of the business, three acquisitions on the Ag Solutions side of the business. The Ag Solutions synergies were $80,000,000 We exited 2016 with a run rate cost synergies of $85,000,000 So we've exceeded that target from on a run rate basis within two years. We did it faster than we said we would. The Performance Solutions integration, 2016 was the first year and we exited with $32,000,000 of synergies, a run rate of over 40 out of a target of 70. So we're clearly executing on synergy realization and from an integration perspective, really making these businesses better. We've really combined all six of these businesses into their unique verticals and we're going to market with an organized commercial sales force and back office that's supporting them. Second is focusing our commercial efforts on fast growing niches. As a diversified company, we have the opportunity to pursue some really interesting niches to drive the top line. And top line growth has been a major focus since our new CEO, Rakesh Dutshteh, he's not that new anymore, he's been here for a year, has been on board. As I said, we grew 2% despite some challenging end markets last year, and we accelerated that growth in the back half. We're seeing the fruits of our investments in these niche segments really come to fruition right now. In the performance business, we've made targeted investments in semiconductor metallization, which is an interesting fast growing niche where we have made established a foothold, I think we can grow very nicely. And in the ag business, really focusing on our five strategic segments that were introduced at our Investor Day back in September, and the two more exciting niches there are biosolutions, which we grew 30% last year and seed treatment. The third point is establishing an operating rhythm and momentum. So in 2015, we had significant strategic acquisition strategic activity. We talked about all the acquisitions we made and some leadership turnover. And the goal this year was really to get into a group. And we did that. We stabilized our leadership team. Our integrations went well. We've completed a corporate organizational build. And so the back office functions are humming and we've made meaningful progress from a talent management perspective. Finally and importantly, cash flow generation. This has been a major effort for us and we in our results yesterday showed progress in that regard. Dollars 185,000,000 of operating cash flow, over $100,000,000 of free cash flow, that's a product of both earnings growth and also some cash tax structuring improvements, good working capital management and we've done some balance sheet management. We'll see the fruits of that more in 2015. On Slide nine, we're just introducing or reintroducing our strategic organic long term goal. You would have seen these at our Investor Day back in September. First on the top line, we think our Ag business can grow a point or two faster than the long term average of the Ag market. So that business is about a 5% top line on average over the next five years. The performance business, which is more linked to global GDP, we think we can grow a bit faster than that as well, saying 3% to 4% on the top line for a five year long term average CAGR of 4%. We also think there's about 400 bps of operating margin improvement we can get by taking cost out of COGS and SG and A. And so the sum of those variables gets you to high single digit EBITDA growth. Combine that with balance sheet management, prudent capital expenditures and some tax management, we've got a robust tax opportunity. Our goal is to get to adjusted EBITDA, debt to EBITDA ratio of 4.5 times within three years. We introduced that to we brought that up to put our guidance for 2017 into context. So as we look at 2017, we'll go through each of the two segments. On the Performance Solutions side, we expect a better year than the past year from an organic growth perspective. We saw momentum shift in the electronics market in 2016 and we've got a better comp in the offshore market, which difficult for us. That translates to low to single digit, low to mid single digit top line growth in the performance. The Ag side, we're really expecting about a flat year in the Ag market. The macro headwinds there persist. We've said we can grow about a point or two faster than that market and we expect to do so net of some restructuring we're doing in our Africa business. There's also about a $15,000,000 FX headwind as we roll forward to next year and we'll do a look at a bridge in a second, but all of that translates to our adjusted EBITDA guidance for 2017 based on FX rates at January 31 of $800,000,000 to $830,000,000 Just a little bit more in numbers to see how we get there. You'll see we start with the $769,000,000 that we generated in 2016, net of that $15,000,000 FX headwind based on January 31 rate, we'll be growing $20,000,000 or so from organic growth, top line growth I just spoke to. We've got about $40,000,000 of synergies we're expecting. The preponderance of those are coming from the Performance Solutions business. On balance, you get to that midpoint of $815,000,000 of EBITDA. We've also provided on the bottom of Slide 10 some help as we do the cash flow walk from EBITDA to free cash flow. Before questions, the new priorities for 2017, so I walked through what our 2016 priorities were and how we did against those. On Slide 11, you'll see our 2017 priorities. They're very similar to what we introduced last year, but there are some meaningful slight differences. First is execution. We built momentum through the course of 2016, we saw an acceleration in growth in 2017 and we want to continue to build on what we accomplished in 2016 this year. Next is the same one we had last year, which is focus our commercial efforts on fast growing niches. We have a mindset of grow, grow, grow. And while we have some headwinds in some of our end markets, we also have some real opportunities and we're going to exploit those to the best of our powers in 2017. Finally, third, synergy realization and continuous cost improvement, so the modification here is continuous cost improvement. Yesterday, we introduced in our Ag business that despite the fact that we've completed our integration, we've we've identified $100,000,000 of cost savings we can take out of that Ag business over the next five years. Diego Lopez Espanello, our President of Ag was not present when we built the integration plan that he joined last year. And he's got some really interesting ideas about how we're going to drive continuous cost improvement. And importantly, we're going to target this cost improvement regardless of what happens in that end market, regardless of the market growth rate. The synergy realization on the performance side, as I mentioned earlier, generated $32,000,000 synergies in that business in 2016. Our target is $70,000,000 over three years. We should be most of the way there on a run rate basis by the end of this year. And finally, generate free cash flow and reduce leverage. We've made commitments to our shareholders, we're going to improve the balance sheet and we are laser focused on doing so by driving not just earnings, but also managing the balance sheet tax structure and our liability to improve our conversion of earnings into free cash flow. So that was quick, Hit the three points I said I would. And now let's turn it over to questions. Excellent. Thank you, Ben. And I'll kick it off here, I encourage anyone to ask questions as we go along. Just raise your hand, and we'll get a mic to you. I guess just to kick it off on the synergy side, ag synergies have been better than expected this year. Maybe talk a little bit about where the upside versus expectations came? What was in that first layer? And what's in this $100,000,000 over the next five years? Sure, of course. So the ag integration went really well. We set out a conservative target, we thought, and we've executed against it. The first rung of integration, we do a customer first integration in both businesses, right? So we really don't want to disrupt our relationships with our customers. The first thing we do is we take out and we organize the commercial organization such that we continue to have good touch points with our customers and full coverage and we target G and A, that back office functions and so forth. Then we were able to rationalize some of the commercial efforts, but really we focused on procurement and COGS. And so the bigger business was able to do a lot better procuring active ingredients from our suppliers and rationalizing the back office functions. These are global businesses that are evidenced by having a lot of people around the world and those people require people to manage them. And when you bring three down to one as we did in the Ag business, some of that back office support was easy to take out. So that's where most of the synergies came from. Were some distribution synergies where we were using third party distributors and we were able to get out of those arrangements and use our own go to market. But overall, it was mostly people and procurement. As we look at the $100,000,000 opportunity rolling forward, it's actually somewhat similar, mostly procurement and supply chain. We have some formulation facilities that we could exit. We have third party suppliers that we can leverage our larger scale over to improve some of the cost of goods. And we have an indirect procurement and SG and A opportunity. So we haven't fully pursued an indirect procurement structure strategy, and that can be a pretty ripe vein of savings for a company of our size. And is the timeline a bit slower just because there are more contracts with some of these or we're getting into a layer of further complexity? Yes, I'd say that that's exactly right. Contracts around procurement, so we have long term agreements with some of our active ingredient suppliers that we need to restructure. And it is slightly more complex at this level, not simply we have three country managers in a country and we only need one. We have a couple of questions from the audience. Some commercial assets, perhaps some pipeline assets that are forced divestitures. What's your interest level in participating in that in your bandwidth for going after it? Sure. So we do very well feasting on the margin of the big six or big four, playing in areas where they're not focused and being a partner for them where we can license active ingredients from them to target niches that they're not really focused on. The divestitures that we've seen coming out tend to be more run of the mill row crop focused and that's not really in our power, Allen. In addition to that, we've got so much we can do organically to grow. That's not just the cost opportunity we talked about, there's a real top line opportunity here by taking the active ingredient portfolios of the three businesses we've combined and bringing them to regions where they were underserved previously. So Agrofar had a nice portfolio in Western Europe. We haven't brought we need to bring that to Latin America. The biosolutions businesses we own are more European and Latin America focused. We can bring that to North America. So our focus right now is really on driving organic growth and driving the top line through that as opposed strategic activity. We'll always take a look, but that's not really going to be a priority for us. So somebody new to this business, can you maybe explain the strategic alignment of the two divisions? Why point is there that they are together, are there distribution synergies or else maybe you can do that? Yes. Thesis underlying platform was that there are businesses that fit this asset light high touch framework scattered across different end markets within specialty chemicals. And we wanted to build a diversified portfolio of businesses like that that require a similar management philosophy. These are not, as I said, manufacturing assets, this isn't molecule synthesis. We are a people based business and so where all of the businesses regardless of the end market spend their time is on R and D prioritization and customer proximity, incenting people and having the right people in the right seats. And so we've built what we think are two verticals with very high quality businesses that meet that threshold and we're focused on allocating capital across both of them to drive growth and generate the best returns on that investment. From a commercial perspective, these businesses are run separately. So there isn't a commercial synergy. There is some operational synergy and that we have shared corporate functions and we have a corporate team that manages the table stakes being a public company. Company. Can you address a little bit the latest stories regarding separation of these two businesses? And if so, are you considering targeting any other new verticals to enter or how should we think about? Yes. So, got that question yesterday on our earnings call as well and the answer is the same. We really like both of the businesses we own. As I walk through on both sides of the business, we have meaningful opportunity to drive organic growth. We're focused on generating the best results of these portfolio we have, and we're not going really comment on rumors and speculation. Just one more over here and while she's going to the mic. Just on the synergies in ag, better than expected, are there any learnings from that at the performance side? Is there any read through? How do you think about that? Yes. So I would say that on the performance side of the business, the first leg of synergy realization was similar, right? It was people based, back office. And the second leg is slightly different. We do more formulation, actual formulation manufacturing in the performance business than we do in the ag business. We use tollers mostly in the ag business. And in the ag business, the cost of goods, the active ingredients and higher percentage of COGS versus the performance business where we're buying mostly commodity. So where we're getting the second leg of synergies in the performance business is from our formulation facility rationalization. So I think we learned from what we did in that first rung of back office rationalization in the Ag integration for the performance integration, but this next leg is different. But it's the same project management team, it's the same integration team that spearheading in, so we're getting more notches in our belt in that regard. Just to discuss the pipeline opportunity, you talked about the 1,300,000,000 R and D and A and sort of the cadence of how you think about that opportunity? Yes, of course. And that's something that we're really excited about and demonstrable progress in the Ag business and there's some really good case studies of how Arista wins, right, by being asset light and being a partner to research organizations, targeting niche specialty crop categories. That's what's been driving this pipeline expansion. The biggest one of the big contributors are seven new active ingredients in that pipeline. We put out a press release actually, put some more color around that yesterday afternoon. But one case that you'd to talk about is the Rinaxapir agreement we just announced a couple of weeks ago. So DuPont has a blockbuster insecticide called Rinaxapir, and we have been granted a license, one of two partners to help manage Rinaxapir through lifecycle management. And so we have another insecticide in our portfolio we're going to formulate it with targeting fruits and vegetables. This will be a great opportunity for us to show that we can be a partner or to demonstrate once again that we are a choice partner for the research driven organization, the molecule research driven organization to monetize their portfolio. And there are seven new assets in the portfolio that helped grow the portfolio value. The cadence is staggered. So some of that portfolio is geographic expansion of existing molecules. So it's just a matter of getting a registration. Some of it is more we have access to a new molecule, we need to come up with a new formulation and get that formulation registered. What we said in the press release is that we expect that the peak sales potential over it from 2017 to 2025. So that $1,300,000,000 is what we think is sort of the aggregate peak sales of the portfolio in that window, And it's staggered over that window. Following up on that portfolio, you mentioned earlier BioSolutions growing 30%. How much biosolutions is in that pipeline? Is there more opportunity to expand that? Yes. So the biosolutions area is one that's very exciting for us, one in which we have a leadership position and a meaningful opportunity to continue to grow. It's a modest percentage of the overall ag portfolio right now, but as you mentioned, it's growing 30% this year. We have a new biological active in the pipeline and then we have meaningful geographic expansion for the biosolutions portfolio. As I mentioned, we have a biosolutions business that's really strong in Europe, that's growing really nicely in Latin America, it hasn't penetrated North America yet. That's an area for meaningful growth in that pipeline. So again, we have five strategic segments that we articulated at our Investor Day and the pipeline is aligned to those five strategic segments. BioSolutions fits into several of them, things like crop establishment and crop residue management have meaningful biosolutions component to them. And I guess just thinking as well about that pipeline, that 1,300,000,000.0 how much kind of churn is there in the industry where the industry needs to kind of replace, you're losing some sales or should we just add the 1,300,000,000 on to current sales and that's a realistic expectation? So the $1,300,000,000 is a growth number. Some of what we have in that pipeline replaces some of the things we have in our existing sales base. I think the way to think about what the top line growth will be is what we articulated in our outlook and I showed in the slide deck earlier. And we think that we can grow a couple of points faster than the market. We're not assuming a robust recovery in the market in that five year outlook, which is an important point, right? We've said, you look historically, the ag chem market has grown 4% over thirty years with some peaks and troughs. Usually when it comes out of a trough, it rebounds relatively vigorously. But we're saying over the next five years, it's going to be a 4% market and we're going to grow a tick or two higher than that. So if you think about how to think about our top line, it would be saying where are we now with the contributions of our pipeline and some of the losses from replacement of pipeline, we're going to grow roughly 5% over five years. How research intensive is that biosolutions business of yours? How would you characterize the sources of pipeline products? Are you in licensing them? Are you developing them in house? Is it from academia? It's got to be research. Yes. The answer is yes. So we source product in that business through many different areas, right? So we made acquisitions back Arista made several acquisitions about GBM in Mexico, about GoaMar in France. We have partnerships like the Beam Biologics partnership we announced a couple of months ago, and we have partnerships with universities as well. Again, this is not a business that has meaningful new molecule research, but we do invest in formulation research, right? And that's also the case in the biosolutions business. But we have many avenues for new biological ingredients. Moving a little bit, I guess, to the performance side. Organic growth, pretty strong, accelerating in the back half of the year. Guidance for next year is a little bit of moderation. Are there specific markets that are a little bit of concern or is there something else going on? How do you think about the growth rate of that business next year? Yes. The way we triangulated our long term objective growth rate for that business is just a few points higher than GDP, a point or two higher than GDP. It's a very diversified business. And so it's hard to get meaningful growth in excess of GDP. As we look out to next year, there are a couple of variables. First, the electronics market was pretty weak in the back half of 'fifteen and through the first three quarters of 'sixteen. And so when we say we're seeing a recovery in that market, doesn't mean it's a strong market yet, but it's improving, right? And so we've seen that in Q4 of 'sixteen and we've seen that continue into 2017. As electronics goes, so goes our electronics end market, our electronics vertical and the alpha vertical, which is assembly materials for integrated circuits. The other big market is industrial. And so our assumption around industrial is that developed economy SAAR is flattish, very modest growth and Asian SAAR continues to be strong. We have a good presence in the developed market and we're gaining share and have a lot of traction in Asia. So those are the good guys if you look at 2017. On the other side of the equation, we have this offshore business, which had a very tough 2016. That's basically stabilized. And so we're not expecting growth there, but we're not expecting a down year either. And 2016 was a big down year in that business. And our printing business, we expect to be roughly flat. On the electronics side, how much did new customer wins or expanded offerings add in 2016 and what's the expectation for 2017? Yes, that's a good question, which Scott and Rakesh addressed yesterday. Both is the answer. Both of those things helped. We saw contribution from the recovery in the market in Q4 and some new customer wins as well. Break it, Carrie, do you know if Rakesh gave any more clarity around that? The sales cycle is relatively long in that business. So we were counting on new wins when we gave our guidance for 2016 early in the year. We saw them coming, but they didn't really hit until the back half of the year. So we knew that new platforms were going to be launched. We knew our sort of work on each of those new platforms, and it was share gain. Through getting a larger percentage of the work than we held in the industry. But they didn't really hit until the end of the year. So it was I would say it was more driven by market than by market share, but it was driven by both. What are you seeing in the electronics market that's driving the recovery? Is it new gadgets or people buying new Yes. So our exposure in electronics is more towards the high end mobile devices, tablets, cell phones, to some extent wireless infrastructure and it's devices growth. And then where we play in the higher end of those devices, our customers are doing a bit better than the rest of the industry. On free cash flow improving, made some progress this year on or I guess last year on cash taxes, interest expense. How much more is there still to go and what kind of opportunity is that? There's a lot to go, but it's more incremental than step change. So first with regard to taxes, we've got a somewhat wonky tax structure and we are we have a tax planning team that's got great ideas, but they take time and we're executing against them piece by piece. As Sanjeev said, that's not something that gets fixed overnight, but we expect incremental year over year progress for several years with regard to tax rate and cash taxes. On the balance sheet, that's something that we have to be opportunistic around. We did a nice job in Q4 on the back of resolving the Series B and a modest equity raise to reprice our term loan and extend most of them. The credit markets continue to be very strong and we'll continue to be opportunistic if there are more opportunities in that regard. Our bonds aren't callable for about a year and a half at this point, but that's also an opportunity to explore when the time is right if the market behaves. But obviously, as we improve leverage and we improve our credit profile, we should be able to improve our cost of debt. Yes, I'd be pleased to do so. In fact, let me put the slide up that addresses our sources and uses of cash. It's in the appendix here. Here we go. So Slide 19 for those of you on the webcast. So you see the cash, this is balancing cash balance to cash balance. We had $105,000,000 of free cash flow. We raised a modest amount of equity in September and we took out our Series B preferred security, which was a $460,000,000 cash draw. So you'll see that there was a balance of about $70,000,000 that had to come from somewhere and that came from free cash flow. In addition, there was modest amortization of our term loan and then some small other items. So this year, our cash flow went to resolving the Series B amortizing modest amounts of debt and amortizing modest amounts of debt. Next year, the Series B won't be on the table. We should have a meaningful opportunity to take a chunk out of the excess debt. Certainly back on ag and can you elaborate a little bit more on the restructuring or what's going on in Africa through these sales? Yes. So there are some we do business in West Africa through direct market sales, private market and through government tender business. We've restructured our government tender business and so we're not counting on as much of that recurring. Importantly, I'd note that that's a relatively low margin business and so the proportionate impact on EBITDA is far less than it is on the top line. And for the overall portfolio, I think you guys called out some generic pressure. Where is that source of pressure coming from? Are there particular crops or regions where it's more noticeable? Yes, sure. Generic pressure is a reality in the Ad Chem industry. It generally impacts us less than some of our competition because we are diversified. We're not relying on any specific blockbuster product. The way we address generic pressure for the most part is through formulation advancement. So as a generic enters the market, we'll have a formulation, we'll see it coming while the formulation ready that will improve efficacy or improve value for the grower. What happened this year is Brazil introduced a fast track registration process. And so a generic, a couple of generic entrants entered that we had seen coming, but we didn't expect them to come yet because of the fast track. And so we've got formulation in registration to offset that pressure for 2018, but in 2017, we're expecting some modest pressure in Brazil from generics.