Citi 2016 Basic Materials Conference

Nov 29, 2016

Slides

Thanks, Dan. Thanks, everybody. Crowded room, always good to see. I'm also joined by Carrie Dorman, who's our Director of Corporate Development here at Platform. I'm going to do a couple of things. First, I will walk through the company, for those of you who are newer to the story, give a couple of recent updates and then some concluding remarks, leaving plenty of time for Q and A. So first, Platform. So Platform is a diversified specialty chemicals company focused on asset light, high touch businesses. We currently have two segments: McDermott Performance Solutions, our Performance Solutions segment and Arista Life Sciences, which is our agricultural solutions business. McDermott is a mix of industrial and electronic chemicals companies, about half of the business. The products go into industrial surface treatment. About 50% of that business is automotive. These are products that help with corrosion resistance for cars, decorative plating on plastic fashion finishes in the automotive industry, but also in aerospace and in home products. That's about 30% of the Performance business. Electronic Solutions is the large business within Performance. This is circuit board metallization and through hole and in hole plating. So again, we're plating plastic, but in this case, the plastic is a printed circuit board. And this goes into high end electronics, mobile devices, tablets, Internet infrastructure and so forth. The Alpha business is assembly materials. This is for basically putting components onto circuit boards, so semis and other components that get put onto an integrated circuit. And there's a lot of synergy between the Electronic Solutions business and the Alpha business and also the Industrial Solutions business, which I'll get to shortly. The two smaller businesses are a Printing business and an Offshore business. The Ag business, which is also about half of the about half of platform, is a full and global portfolio of agricultural crop protection products. Notably, it has leadership positions in fast growing end markets like biosolutions and seed treatment. And the focus here is really on specialty crops and specialty applications, which we'll get into shortly. The business is not just diversified between end markets, it's also diversified geographically. I just went through fifty-fifty ag performance, but also about 75% of our sales are international. The big end markets for Ag are Latin America and Europe. And for the Performance business, it's North America, Europe and Asia. This slide is available, and I'm sure most of you guys have seen it before. You may ask why these businesses came together. And just a reminder of the thesis that brought us here. I mentioned asset light, high touch. That is the unifying thesis for the platform business, right? Asset light, high touch specialty chemicals businesses are businesses that rely on formulation as opposed to molecule synthesis. So there's less asset intensity. We're not making molecules and big explosive reactions in big expensive facilities. We're formulating special products customized for our customers. We're buying molecules from others and blending them to come up with custom solutions. That means that there's less capital intensity. But if you're just asset light, you're not going to have a moat. The moat is based on the high touch aspect of this business. We have a high people component and professional services aspect to our offering. Our people are on-site with the manufacturers and the performance business. They're close to regulators. They're close to distribution and farmers, creating pull for our products, providing technical service to ensure they're being used properly. What that translates to is high EBITDA margins and low CapEx, ultimately, higher free cash flow. This is a business that's focused on maintaining and growing leading positions in niche and diversified end markets. We talked about the diversification already. The Performance business is in leading positions both in the electronics side and the industrial side. The Alpha business is number one in that space. And we've got access to faster growing subsectors, subsegments of the electronics space through, our investment in some semi technologies and also, our ability to win share of electronic content going into automotive, which is a nice secular tailwind as we think about the medium term. In the ag business, I talked about, biosolutions market and also being focused on nichier crops and nichier applications, fruits, vegetables, nuts and staying away from row crops where there's a bit more volatility. Ultimately, this translates into defensible free cash flow margins, and this niche market focus allows us to grow faster than our end markets. So with that, what have we been up to lately? First, I'll give a brief update of our Investor Day. We talked about our segment strategy there, and we set some long term objectives, talk a little bit about our third quarter results, which we announced three weeks ago an update on synergies. We brought six businesses together. We're making them better, and we've got demonstrable evidence of that an update on guidance, just refreshing the guidance that we provided in Q3 and then a balance sheet update. We've been very active in that regard. So at the Investor Day, first business unit strategy. While these businesses are similar in terms of their characteristics from an operational perspective, the strategies are different. The way we win is different in performance versus ag. From a Performance Solutions perspective, we brought together three highly synergistic businesses. We started with the McDermott business. We acquired Allent and the OM and certain businesses from OM Group in 2015. What that's enabled us to do is be closer to the customer than any of our competitors. Our touch points in the supply chain, be it with the OEMs in automotive or the OEMs in mobile devices, are far more and deeper than any of our competitors. Take the automotive, for example. With the Industrial Solutions business, we're providing corrosion resistance and plating on plastic and fashion finishes for the interior and exterior of a car. We're also now providing circuitry as cars become more electronic, and we're providing assembly materials. No one else can offer that breadth of solution. And that enables us to be part of the design process, be it for a braking system or for a sensor system, and that wins us specifications. That's the strategy and performance. It's leveraging all of these touch points to build better relationships with the folks who are making the specifications while also being closer to the applicators, Tier three suppliers and ensuring the quality of the product follows through from the specification. On the ag side, it's a focus on the fast growing niche crop segments where we can win with differentiated solutions. We are a partner of choice for research driven organizations to help them monetize molecules through focused R and D and formulation development. We do not develop new molecules, we develop new formulations, which you can put IP around and earn proprietary margins on without the upfront investment of $200 plus million to develop that new molecule. That having been said, we've got a pipeline right now of formulations and new product development in excess of $700,000,000 Long term financial objectives, this was also an important point of the Investor Day. We are talking about a blended average top line growth over the next five years of 4%. That's driven by an ag growth rate of two points better than the market. And we say the market over the long term is a 3% to 4% grower, so we're roughly 5% grower. The Performance business is more of a GDP grower, and we think we can do a point or two better there as well. That blends to a 4% top line CAGR. We also think that we've got 400 bps over the next five years of cost improvements, roughly two hundred and two hundred between COGS and SG and A. That's both through finishing the synergies we've been realizing, and we'll talk about that shortly, and through being a better procurer of raws and better managing the businesses. There's a continuous improvement mentality that Rakesh, our new CEO, has put in place, which all sort of translates to a high single digit EBITDA CAGR, and our goal is to be levered at our leverage target of 4.5x debt to EBITDA within three years. Very quickly on Q3 financials, which we released three weeks ago, I would say the key takeaways is that we were able to generate organic growth on the top line in both of our businesses, and margin improvement as well. The margin improvement is evidence of the synergy realization, which we've been talking about and working so hard to get. This is despite pressure in our end markets, pressure in the ag end market, I think, is, well discussed. And the Performance business has some strength spots and some weaker spots. Overall, we're growing faster than our markets for sure. Looking at headwinds and tailwinds by segment, I would point to our share gains in the Asian automotive market as something that's very important to note. This is a quasi revenue synergy. We don't really talk about revenue synergies. They're not included when we talk about $150,000,000 of synergies from the Ag and Performance business integrations. That's all cost. We were very concerned when we acquired Allent that by taking the industry from three to two in some places, our customers would bristle. What we found is that our customers actually viewed this as bringing the industry from one to two because the McDermott business and the Enfthome business were not perceived as real global competitors to Adotech. And that was evidenced by the fact that while we had significant statements of work in the industrial business in Europe or in North America, when our global customers opened in Asia, they didn't buy from us. Now they're buying from us. And so that's a market share opportunity that is translating into revenue growth this year and was a major tailwind in the Performance Solutions business in Q3. On the ag side, we have improved our price position with suppliers. That's been driven by our better procurement and by some currency, which has helped offset some of the pricing pressure we've seen driven by currency volatility in Latin America and Central Europe. That price pressure was a bit of a headwind in the ag business. And the headwind I'd point to in the performance business is that the currency headwinds, despite a generally, and this is talking about Q3, stronger, weaker dollar relative to the prior year, the Chinese yuan and the pound continued to be weak. We can talk about that more in Q and A if you like. Quickly on synergies, I'll just make two quick points. We are trending ahead of our full year guidance for synergies. We came out this year saying we're going to get about $40,000,000 and we will do better, and we are almost done with our ag synergies. So we committed to $80,000,000 of synergies in the ag business. And on a run rate basis, we should just about be there by the end of this year. We said we'd get them over three years. We said we'd get 20,000,000 Last year, we got nearly 30. And this year, we'll have we said we'd get 20, and we're going to get more than 20 again. Just to remind you for full year guidance. In Q3, we tightened our guidance range to seven fifty million to $765,000,000 of EBITDA for the year. That bridge is based on $551,000,000 of year to date EBITDA. And then to help you triangulate what that implies for the rest of the year, you'll see on the bridge 184,000,000 That was EBITDA we did in 2015. So to get to our the midpoint of our range, we need $22,000,000 of organic growth. That's coming from three vectors. Obviously, organic performance, we've grown these businesses organically and we will continue to. FX at ninethirty rates was a tailwind in the mid to high single digit millions of dollars. And then synergies, which we've talked about, we've been realizing and will continue to be a driver of organic growth in terms of EBITDA. Finally, on the balance sheet, to round out recent updates. The Series B settlement may be old news already, but we had a Series B preferred security that was issued to the seller of Arista that matured originally October 31. We negotiated an extension of that last year and then we negotiated an alternative settlement, which will drive about $100,000,000 of savings in terms of economic value. Rather than issuing 22,200,000.0 shares to Premier and paying them a make whole equal to the difference of the value of those shares and $600,000,000 we have an option to issue them 5,500,000.0 shares and pay them $460,000,000 in cash. The due date for that payment is December 15. The value of that 5,500,000.0 shares plus $460,000,000 is $100,000,000 roughly less than the $600,000,000 of economic value we owed them. We raised $400,000,000 to provide liquidity for that payment and shore up the balance sheet a little bit. That also enabled us to improve our cost of debt. And so that's the last update here. In October, we were able to reprice and extend about $2,000,000,000 in term loans. We extended the maturity from 2020 to 2023 and have about $11,000,000 in annualized interest savings from that repricing. That also we also shifted our currency mix of term loan, about $165,000,000 moved from dollar to euro, to optimize our FX profile. And then, just last month, we or this month, we priced this. It will close in December, but we repriced the remaining $1,300,000,000 of term loans for savings of about $15,000,000 of annual interest expense. And we also shifted a bit more dollar into euro. So all in, this is a $25,000,000 interest savings, which is pretty material in the context of our free cash flow and offsets, when you think about free cash flow per share dilution from that equity offering, more than all of the dilution that we incurred from that offering. To conclude, I will just remind you of the 2016 priorities that Rakesh published in his first earnings call. That was the Q4 twenty fifteen earnings, where we were focusing this year and where we believe we've made meaningful progress. The first is integration and synergy realization. We just walked you through our progress in that regard. We've got over $100,000,000 of run rate synergies at this point within one years, point quite frankly, if you sort of do the weighted average of these acquisitions. Focusing the commercial efforts on fast growing niches, we are growing faster than our end markets. That's most notable in Ag, where you can see sort of what the benchmark is a lot better than in the Performance, given the Performance business, given that diversification establishing an operating rhythm and momentum, becoming a little bit more ho with regard to delivering on expectations and generating free cash flow. Q4 is the biggest quarter for free cash flow, and, it's coming along well. So with that update and reminder, I am happy to open the call for the meeting for questions. Sure. So maybe we can focus just a bit on the near term first. I guess, you highlighted a little bit about FX, but there's been a lot of change in sort of the FX outlook since you last provided an update. So maybe just can you walk us through how a stronger dollar has an impact on you and how some of the swings in currencies we've seen in the last couple of weeks may have an impact on your fourth quarter guidance? Yes, sure. So our fourth quarter guidance is based on ninethirty rates, and there clearly has been a bit of volatility in that regard. If our guidance were to have changed materially due to FX, we would have said so. We have been living in an FX in a volatile currency environment for two years now. The preponderance of our earnings are coming from overseas. We've taken actions to mitigate the impact of FX, be it through where we're placing our debt, cash flow hedging and other mechanisms. Last year, in 2015, in an incredibly volatile currency environment, we were able to offset 70% of our FX headwind in the ag business, both through taking price where we can, moving cost where we can and negotiating with our suppliers. So it's just a reality of the environment in which we're operating. And I think that our teams are acutely aware of the need to drive earnings in dollars, and that is a focus for them. As you think about some near term drivers, obviously, Q4 is a big quarter for Brazil in ag. I talked about this before, but we've seen we took a lot of price last year, and we were benefiting from taking having taken price when the dollar strengthened. As the dollar has weakened, we've seen the reverse dynamic where our customers are trying to take price back from us. We've been fighting to maintain that price. And as the real has sort of moved materially, that helps our fight. So the translational impact is there. The transactional impact is mitigated because of our ability to hold that price. Okay. And then actually just sticking with Brazil and Latin America, maybe just since tomorrow is the Ag Day here, maybe just a preview of what you're seeing in Brazil. Fourth quarter is obviously very important, maybe a little bit less so for you because you're not as heavy in some of the row crops. But what are you seeing in Latin America so far this season? Yes. It remains a big driver, and we do have soy exposure in Latin America. Our business is delivering in line with what we expected it to deliver. The environment is okay for us. Okay. And then you talked a bit about sort of your organic growth expectations. And one of the themes of the conference, I think, has been the challenge of growing organically in this type of environment. And so I think you highlighted, at least in performance, some of the opportunities you have to accelerate organic growth in the next year. But can you maybe kind of dive into some other opportunities you see to let you outgrow the give you confidence that you can outgrow the market going into next year? Yes, absolutely. So our long term objectives are not intended to be guidance for next year. That having been said, our CEO, Rakesh, as such, did sort of indicate in an earnings call that we're thinking about high single digit EBITDA growth next year. What gives us confidence that we can grow faster than the market is our weightings relative to the market. And this is more of a long term comment than a next year comment. Just to pinpoint on next year, we also have the benefit of synergies next year, right? And so those are coming through in both the Ag and Performance business, which allows us to have not as robust a top line as our long term objectives suggest next year. Over the longer term, we think that the ag we're not counting on an ag market recovery to meet our long term objectives, right? We are counting on stabilization and a return to sort of long term average growth rates, not long term average levels. So that doesn't mean a rebound, a violent rebound as the ag market tends to after a prolonged downturn. It just means the ag market is going go 3% to 4% as it has on an average basis going back thirty years. The reason we can grow faster than that is our exposure, both geographic and product specific. We are overexposed relative to the industry in faster growing markets like Asia, Africa and Latin America, less in North America. And we have some really interesting products and exposures to things like BioSolutions, which we think is a major driver of long term secular growth. BioSolutions are organically occurring compounds that stimulate plant growth or, provide biocontrol. These are as regulation ratchets up on crop chemical residues, farmers are forced to consider alternatives that don't leave residues, that are not synthetic chemistries. We have a product portfolio that's leading in that, area. And we have come up with nifty combinations of conventional chemistry and biosolutions products that get a one plus one equals three impact with less residue than conventional chemistry. And that is something that is growing double digits every year and will supplement our ability to grow faster than the market. Just one area, but one that we're particularly excited about. And then maybe just one last one, and we can see if there's any other questions from the audience. But there's obviously a lot of consolidation going on in the agriculture market right now. And so can you talk about how you think that you are positioned should some of these mergers go through and the competitive and innovation impact you think that you can bring to the marketplace in that type of consolidation environment? Our ag business makes its money at the margins of the big six, big four, whatever it may be. The strategy is not to go head to head with basic research organizations, but to help them monetize molecules, to help them with life cycle management. So they have a molecule coming off patent, we can formulate it into something. They get a royalty from that. We get a proprietary margin from IP around the formulation. They have products that targeted towards big row crops. We can find ways to apply that chemistry to niche your crops. So the consolidation to us necessarily is a scary thing. It creates more white space. As the big get bigger, the margins get wider. That having been said, we're not blind to the risk around distribution and think that, that is something that we need to work hard to manage our distribution partners and our power within the distribution chain. Just on the balance sheet front and M and A. You're targeting lower leverage going forward, 4.5x. Are you able to do M and A currently? Or do you need to get leverage down to a certain level for you to feel comfortable actually raising additional debt down the road? Yes. So we've got a huge opportunity to improve this business organically, right? We're integrating these businesses. We're driving cost out. We're investing in new product categories and in faster growing niche segments. That's our priority. We have committed to improving our balance sheet. We're going to improve the balance sheet. We've done it already this year. We plan to continue to. M and A is not a priority for us. We have spoken about the fact that there might be some interesting products coming regulatory fouled assets coming out of ag consolidation. Nothing jumps out at us. It would have to be a real table pounder for us to look at acquisition opportunities, and it's not something we're spending time on right now. And then on the Series B settlement, the alternative, is that a 100% likelihood that, that will happen on or before December 15? Is that the way we should be thinking about it? Never say 100%. If the stock gets to $27.14 we don't have a cash make whole, and that would be probably an economic an economically wise outcome. But given the facts as they lay, it's very likely. And then in terms of broad M and A that's happening in this space in terms of agriculture and in terms of other product lines with some of the major players, where do you see the next opportunities for Platform? Would it be more in the Performance Solutions side of the business that you'd like to add eventually or the Agricultural Solutions? I think we have to be opportunistic in that regard. We're really not focused on bolt on acquisitions right now. We're focused on improving these businesses. We've got sort of a tough slog ahead in terms of driving earnings, and that's what we're going to be focused on. It depends on what becomes available. We can be flexible. And post the term loan repricings, what would your annual cash interest expense We've taken $25,000,000 out. So this year, it's about $360,000,000 call it $335,000,000 next year. Okay. Thank you. Maybe I'll jump in. One of the things that you highlighted on in your slide deck was your R and D pipeline in ag. And I think that sometimes investors for companies that don't develop new molecules, R and D pipelines have a little bit they're trying to figure out exactly how it impacts you. And so can you walk us through just how you see innovation and how you see the R and D pipeline and the formulation development that you're doing? How are seeing that impacting kind of a medium and longer term opportunity in the ag market? Absolutely. And it's a great question. It's something that we're trying to educate investors more on. That's why we included that slide. We made a press release about a recent partnership we've announced. Just because we're not developing new molecules doesn't mean we don't have great science. Our science is around formulation and our pipeline is around getting access to new molecules. So our molecules aren't just coming from the big six, they're coming from J makers, which are Japanese research organizations that don't have the ability to monetize these their molecules and their technology. So we partner with them, get access to their molecules and monetize them for them. What's our pipeline? It's a mix of nearer term label expansions or geographic expansions. So you're selling a product in North America and you get it registered in Canada. You're selling a product in apples and you get it registered in pears. Those are smaller but nearer term opportunities. And then there's some new formulations and new molecules that we are bringing to market bringing to market over the medium term and in the early stages of getting registered. Okay. And then maybe just one more for me. On the tax front, the policy outlook in The U. S. Might be a little bit different on taxes, and taxes is clearly one of the items that your CFO has talked about in terms of optimizing. And I also think that you have a lot of your cash held overseas and repatriation of cash might be a topic for debate. So kind of any sense as to how we should be thinking about the implications if there's changes in tax policy in The U. S. In the coming year? Yes. All good. If there's a repatriation holiday, obviously, that makes it easier for us to get some of our cash from overseas back to The U. S. If the corporate tax rate comes down, it's not as meaningful for us because we're not a taxpayer in The U. S. For the most part. But when we do repatriate some cash, we do have to top up some of the taxes that we've paid. And so if it comes down, that top up is less. Overall, it should help. Thanks. Can you just dive a little deeper into your automotive business in terms of I think you said it was half of your McDermott business, so roughly 25% of your operations. In terms of where sort of what OEMs or parts suppliers and what geographies are you Yes. Absolutely. So just to clarify, automotive is half of business. The industrial business is about 30% of the McDermott business. So in the context of all of platform, it's not huge, but that's just the automotive industrial side. So that's corrosion resistance and plating on plastic for cars. There's also a component of the electronics and the Alpha business that are going into the automotive end market. This is a business that is more weighted to North America and Europe across all of the major OEMs. We are growing in Asia. The content per vehicle is higher in luxury cars. So our products create the metallic finish that you see on plastic things on cars. So the grille of a Ford F-one 150 or the handle in a Range Rover. There's more fashion finishes in higher end cars, so our content is higher. Just to give you a sense of where we play. Electronic content is going up across all OEMs as you have more sensors and more technology in the CPU, and that's a driver of content growth as well for the business. Just to get back on that science point you had made, how big is your R and D budget? How many scientists how deep is the bench there? We've got real scientists, formulation expertise, crop expertise and product expertise. We've sort of reoriented the strategy of the Arista business. Diego talked about this at length at our Investor Day, where we're targeting sort of five key segments, and we've got science allocated to each of them. Some of our best science is around seed treatment formulation, which we acquired with CAS, which is a really interesting growth vector for us and BioSolutions, which I talked about earlier, where we're a leader and we're innovating. But the formulation expertise is really resident across the business in the regions and at corporate. And, just like in the performance business, where we talked about sort of 50% of the people being in the bookends, which is technical service or innovation, it's the same in the ag business. But technical service looks a little different. It's regulatory expertise, getting registrations, which has a science aspect to it and also innovation around formulation and product development. Just one last one then. On performance, can you talk a little bit about your consumer electronics exposure? And sort of how lumpy does that go with new wins? And how do you see that evolving into next year? Yes. So the electronics business is a great business. It's had some headwinds as you look back on the past year. We're not in we sort of play across electronics, the Alpha business in particular, some exposure to some of the lower end electronics. But the Electronic Solutions, the Circuitry business, it's really focused on higher end applications. We've got dense circuits, smartphones, tablets and so forth. That market was under pressure in the back half of last year and the first half of this year. We expected it to rebound a bit in the back half of this year. It did, not as much as we would have anticipated. I wouldn't call it a lumpy business because mobile device units and we're across pretty much all mobile platforms are a very, very big number. Growth has been modest, but that number that unit number is big. And so I wouldn't call it lumpy. I would say that market share has been we've been winning market share to drive growth. So even though units didn't grow as much as we would have liked, we were able to continue to grow better than the market just by virtue of winning share. That share win is not quite a revenue synergy the way the Asian Automotive share win was. That was just there were new platforms coming out, and we won more than our proportionate market share in the industry on these new platforms. But we pointed to that early in the year. We saw it coming, and it did materialize in Q3.