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Taminco Corp (NYSE:TAM)

Q4 2013 Earnings Conference Call

February 25, 2014 08:00 AM ET

Executives

Laurent Lenoir - CEO

Kurt Decat - CFO

Analysts

Laurence Alexander - Jefferies & Co

John Roberts - UBS Securities LLC

Robert Koort - Goldman Sachs

PJ Juvekar - Citigroup

David Begleiter - Deutsche Bank

Charles Dan - Morgan Stanley

Robert Betz - Credit Suisse

Jeff Zekauskas - JP Morgan

Operator

Good morning, and welcome to Taminco’s Conference Call to discuss the results for its Fourth Quarter and full fiscal year of 2013. Today’s call is being recorded and we have allocated an hour for prepared remarks and Q&A. We ask that all participants limit themselves to one question and one follow up. At this time I would like to turn the conference over to Jeff Grossman, investor relations at Taminco.

Jeff Grossman

Thank you, operator. I am joined on today’s call by Taminco’s Chief Executive Officer, Laurent Lenoir; and Chief Financial Officer, Kurt Decat. During this call the company may make statements about its projections or expectations for the future. All such statements are forward-looking statements, and while they reflect current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review the company’s filings with the Securities and Exchange Commission for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. The company does not plan on updating or revising any forward-looking statements during the quarter. In addition, the company also refers to non-GAAP financial measures such as adjusted EBITDA and adjusted pro-forma EBITDA. You can find reconciliations to the most directly comparable GAAP financial measures in the earnings release, which has been posted to the company’s website at taminco.com. We’ll be referencing slides during this call which are also available on our website. I would now like to turn the call to Laurent to walk through the results.

Laurent Lenoir

Thank you, Jeff. Good morning everyone and thank you for joining us today on our fourth quarter and full year 2013 earnings conference call, we published our earning press release earlier this morning and posted the slide presentation to the investors relations portion of our website at Taminco.com. As a reminder, Taminco is the world’s largest producer of alkylamine and their derivatives. We hold a unique niche position in the specialty chemical industry with a number one or number two global market share position for the vast majority of the chemical that we produce. I will start with a discussion of some of our key strategic goals and how we executed against those goals in 2013 and later in the call we’ll come back on to discuss our growth strategy and some recent developments.

Kurt will walk you through our financial performance for the fourth quarter and full year 2013 in more detail, and give an update on our outlook for 2014. Finally we will open the lines and take your questions.

Going on slide three you see that this slide highlights four of our key strategic goals. First one, in the best interest of Taminco stakeholders we aim to invest in accretive projects. Taminco invested significantly in gross CapEx during the past three years. We are continuing to realize the positive benefit of this investment and in 2013 generated meaningful performance from projects for downstream derivative products in the US. In late December, we announced our intention to acquire the formic acid business from Kemira for $190 million. This is an exciting and logical acquisition that puts Taminco as a leader in an attractive adjacent market with a similar industry structure to a core and in some derivative businesses. We expect the transaction to be immediately accretive when it closes later this quarter. In addition, last month we announced the strategic manufacturing joint venture with Balchem Corporation to build and operate choline chloride facility in St. Gabriel, Louisiana. The JV will allow us to serve the growing North American markets and is expected to come on stream in 2015 by the end of that year. But we’ll get into more detail on both the acquisition and the JV later in the call.

Second point, we took a number of steps to optimize our capital structure during the year. You may have noticed that first we completed our IPO in April at $15 per share using the proceeds to drive our leverage down to 3.6 times. Leverage has continued to decline since and it is in line with our expectations, communicated when we went public. In December, we also completed a secondary offering at $20 per share increasing our public float to just under 50%. Finally, earlier this month we re-priced our credit agreement which lowered the interest rate by 100 basis points and is expected to reduce our annual cash interest payments by approximately $5 million.

Third, we maintain our leadership position in our niche specialty chemical markets. We delivered a predictable earnings stream that we generated across our global footprint and we outperformed the broader markets due to a focus on end markets that are benefiting from favorable megatrends. We expect these desirable and line market characteristics to continue and believe that we can continue on the same trend given our recent investments in the US and Asia as well as the potential for product development and accretive bolt-on acquisitions. Fourth point, solid execution during the year resulted in strong performance across all of our divisions which ultimately drove adjusted EBITDA to a record $255 million for the year and the recurring free cash flow of $116 million.

With that I would like now to turn the call over to Kurt, to walk you through the results in more detail. Kurt?

Kurt Decat

Thank you, Laurent. On Slide 4, you will see an overview of the performance in the fourth quarter and for the full-year 2013 for Taminco as a whole. We’ll go over our business performance in more detail were at the high-level Q4 2013 was another very strong quarter for us and contributed to a record 2013 for Taminco. We continue to execute our strategy and deliver growth in volume, sales, adjusted EBITDA and free cash flow.

We grew our volume to 131,000 tons in Q4 and 565,000 tons for the year which both grew by 3% on a year-over-year basis. We generated net sales of $283 million during the quarter and $1.2 billion for the year which both increased by 8% versus the prior year. Adjusted EBITDA expanded to $57 million in Q4 which represented a 16% year-over-year growth rate while the full-year reached a record $265 million, up 6% year-over-year.

Our Specialty Amines division in particular performed extremely well this quarter and for the year driven by improved demand pricing and favorable product mix and supported by the new DIMLA unit in U.S.

Let’s now go to slide 5; here we illustrate the diversification of our net sales mix by end markets, region and division. Our growth is a reflection of our strategic focus on stable growing end markets that are benefiting from megatrends despite continued debit growth in the broader global economy. In fact, our top five end markets accounted for 91% of our 2013 net sales and agriculture remains our largest end markets representing more than one thirds of our sales.

Strong retail demand in growth in our derivatives capacity helped drive 11% net sales growth in North America represents almost half of our business. Our European business continued to perform well and outpaced the broader European economy with 5% net sales growth over 2012. The balance of our sales is in the emerging markets of Latin America and Asia which accounted for 15% of our sales in FY13.

Slide 6 through 8 presents an overview of the performance of our three key divisions. First on slide 6; the volume for Functional Amines for 2013 expanded by 1% over the prior year to 288,000 tons due to a strong herbicide season offsetting some year-end softness in methylamine and solvents. Net sales were up 6% for the year to $529 million due to a favorable pricing environment and mix. And adjusted EBITDA was unchanged at $122 million. During the fourth quarter, volume ticked down by 2% to 65,000 tons due to some softness in methylamines and solvents during the period while net sales and adjusted EBITDA were unchanged from the prior year at $119 million and $26 million respectively.

Moving to slide 7; specialty Amines volume for the year grew by a healthy 10% to 228,000 tons due to strong demands in personal and home care in the U.S. and Europe. Net sales were $531 million and represented 11% growth over 2012. Specialty Amines generated 14% growth in adjusted EBITDA to $91 million during 2013. For the quarter, growth was even more impressive with volume expanding by 12% to 56,000 tons, net sales growth of 17% to $135 million and 28% adjusted EBITDA growth to $23 million driven by strong volume growth generating operating leverage.

Finally to close out the segments on slide 8, volume in Crop Protection contracted by 4% to 49,000 tons in 2013 had strong sales in soil fumigants; offset somewhat softer demands, in the fungicides and formulation businesses. Net sales grew by 2% to $140 million while adjusted EBITDA expanded by 11% to $42 million due to higher pricing and mix effect and strong recovery in the second half of the year following some weather-related issues earlier in the year. During the fourth quarter, volume was flat again due to some softness in fungicides and formulation, however, net sales were up 7% to $29 million and adjusted EBITDA grew by 60% to $8 million, given strong leverage from higher pricing and favorable mix.

Laurent will now discuss our growth strategy and some key developments.

Laurent Lenoir

Thank you, Kurt. Moving on to slide 9, you can see that at the high level the four drivers of our growth strategy remain similar to what we described to you before. The first one is really leveraging the mega trends that are driving our key end-markets. The second one, invest in our capital, in project that will drive organic growth. Third, develop new products both internally and with key partners. And fourth, pursue strategic and accretive acquisition to widen our footprint and our product offering, focusing on bolt-on acquisitions. The record year we delivered in 2013 was fully consistent with this plan and this is really the blue-print for our growth in 2014 and beyond.

Going to slide 10, you see on the left hand of the slides, some of the capital investments we have made in some of our key regions, notably our methylamine expansion project in Pace, Florida which is expected to come online by the end of the third quarter of 2014 and will allow us to better pursue growth for our derivatives in a personal and homecare, agriculture and oil and gas markets in the U.S. The right side of the slide highlights some of our new products across our key end-markets. Typically, we do not get into very much detail on new product strategy for competitive reasons.

This is an additional pillar to our growth that keeps our portfolio fresh and highly competitive. I think it’s important to note that some of the key projects identified a year ago are now coming into the market. Slide 11, lays out some of the key highlights from acquisition of Kemira formic acid business. This is a business that shares many attractive characteristic with Taminco, given its similar industry structure and the fact that Kemira status as a leading player in a niche specialty chemical markets serving end markets benefiting from mega trends. We believe the acquisition is highly attractive, given the opportunity we have identified to drive significant value creation, given a favorable purchase price of $190 million which represented multiple of less than 5 times synergized EBITDA and given expectation that the transaction will be immediately accretive. We will fund the acquisition with a combination of attractively priced incremental debt and cash. We anticipate closing of the transaction prior to the end of this quarter and expect an adjusted EBITDA contribution of $20 million to $25 million for the approximate 10 months of ownership in 2014.

Going on slide 12, we provide some insight into our joint venture with Balchem, which we announced late last month. We will work with Balchem to build and operate state-of-the-art facility in St. Gabriel, Louisiana which will allow more companies to bring new capacity to the growing market for choline chloride. As we look to capitalize on increasing demand from end-markets including shale gas in North America, we will benefit from scale advantages and state-of-the-art technology while customers will benefit from world-class products delivered from a highly reliable supply chain at competitive cost.

We anticipate the new plants to come online during the second half of 2015. Now, Kurt will provide some additional financial details on Taminco balance sheet and concludes with our outlook on 2014.

Kurt Decat

In the slide 13, highlights some of the key balance sheet and cash flow items. We ended the year with a cash position of $88 million. We generated recurring free cash flow, defined as net cash from operations plus CapEx adjusted for non-recurring items incurred during the year of $116 million. Or viewed another way, adjusted EBITDA net of CapEx totals $189 million during 2013. Our net debt totaled $826 million as of December 31, 2013 and consisted of $507 million in term loan facilities, $400 million in senior secured notes and $7 million of capital lease obligations. We invested $66 million in capital expenditures during the year. Construction continues on our methylamine expansion project in Pace, Florida and we remain on track for completion in the third quarter of this year 2014.

Of that total capital expenditures for the year of $66 million, as we indicated in a previous call, there is about $10 million that was moved from 2013 into 2014 due to a shift in timing of certain projects. Freight working capital was $98 million which was a $20 million improvement versus last year, due to better working capital management.

Then to wrap up with slide 14, we are providing our outlook for the full year 2014. We’re building off of strong 2013 results; we anticipate another record year for volume, adjusted EBITDA and net sales and continue to see strong free cash flow generations with contributions from our attractive end markets, recent capital investments and the integration of our formic acid business acquisition.

We are forecasting adjusted EBITDA to grow from $255 million in 2013 to a range of $290 million to $295 million in 2014, including a $20 million to $25 million contribution from approximately 10 months of the acquisition of the formic acid business. Therefore, that means we anticipate adjusted EBITDA growth from the core to main core business that is consistent with last year’s growth rate and maintaining leading EBITDA margins. Broadly, we continue to focus on new opportunities across the globe to actively deploy our significant cash generation and will continue to drive results across our four key pillars of growth as Laurent has explained during the presentation.

With that we’re ready to take your questions, and I would like to turn the call back over to the operator to open up the lines.

Question-and-Answer Session

Operator

Thank you. We’ll now begin the question-and-answer session. (Operator Instructions). Thank you. Our first question comes from the line of Laurence Alexander, Jefferies. Please proceed with your question.

Laurence Alexander - Jefferies & Co

Two quick questions, first can you give an update on what you’re seeing in the crop protection chemical market in terms of inventory levels at your customers. And secondly on the JV with Balchem, what would be the earnings accretion on a fully loaded basis in 2016 or 2017? And how does that compare to your return on capital targets for your own growth CapEx?

Kurt Decat

I think in terms of crop inventory if we speak about our crop protection business and selling direct product into the market we don’t see any specific limitation in terms of inventory, it seems to be very normal so we’re expecting there a normal season for crop protection products. With regards to the other part of the crop protection exposure that we have, we have seen in North America slightly higher level of inventory compared to previous year, which is consistent in fact with the announcement that we made previously that we’re expecting slightly lower sales performance in terms of herbicides versus 2013.

Laurence Alexander - Jefferies & Co

And on the Balchem joint venture, which is expected to come on stream in the second half of 2015, so 2016 will be the first year of operation. And it is fair to say order of magnitude it will add about $3 million to $5 million of EBITDA, so growing from $3 million to $5 million in ‘16 to ‘17 and then obviously ramping up in the years thereafter as we anticipate continued growth in particular in the shale gas applications. And this is a project that fits well within our typical return on investment criteria for growth capital, so a payback of around three to four years.

Operator

Our next question comes from the line of John Roberts with UBS. Please proceed with your question.

John Roberts - UBS Securities LLC

Methanol has been pretty volatile over the past quarter; are there any issues in passing this through or how you’re managing in?

Laurent Lenoir

No actually we have been announcing some price increases in the past quarters, and as you know the structural for methanol supply, we’re slightly benefiting from higher methanol pricing, so far it has been an overall productive for Taminco.

John Roberts - UBS Securities LLC

Kurt could you give us interest expense guidance for 2014 with the acquisition, the deleveraging and some of the refinancing. How do you expect the full year to end up?

Kurt Decat

I think we’ll see interest expenses for ’14 at around $64 million, because actually indeed the incremental interest charges on the incremental debt are more or less offset by the re-pricing which we recently completed and which takes about 100 basis points off of our interest charges or margin. So overall it is more or less washout (Ph) and we expect it to be around $64 million.

John Roberts - UBS Securities LLC

Both tax rates would still be about 40%?

Laurent Lenoir

Yes, hopefully due to the acquisition of formic acid business we’ll be in a position to optimize that rates a little bit, it’ll still be high 30s. I think we expect on a cash basis, taxes for 2014 to be between $45 million and $60 million.

Operator

The next question is from the line of Robert Koort, Goldman Sachs. Please go ahead with your questions.

Robert Koort - Goldman Sachs

Laurent if you could talk a little bit about the Functional Amines, where you stated a little bit of year-end softness, I guess I would have suspected maybe with the run-up in pricing that you just talked about that you might have seen some pre-buying from customers; so could you just give us some more granularity on what end markets might have been weaker and then what you have seen so far here to the first seven weeks of 2014.

Laurent Lenoir

Yes, indeed what we saw in fourth quarter, some slight weakness especially more in the oil and gas markets in the U.S. I think which has affected the performance of the business, and if we look at the beginning of the year with the very cold winter in the U.S. I think this has I think continued on the same trend for the time being. But we expect a rebound and we do not see that as the structural situation.

Operator

Our next question comes from the line of PJ Juvekar of Citigroup. Please go ahead with your questions.

PJ Juvekar - Citigroup

Question on the Ag. The fourth quarter seemed a little weak but the impact 2013 did not show much growth in volumes, when you would think that Ag year was, the decent Ag year. So can you just talk about what’s going on in Ag market?

Laurent Lenoir

In the Ag market as you may recall, the first half of the year has been particularly weak because of some specific climatic events that affected the business such as some tropical storms in countries like Philippines or very cold winter in Europe. We have then I think recovered step-by-step during the year but have not been able to make up the full volume impact. So we’re ending up the year slightly below on volume, but as you would have noticed in terms of EBITDA performance, we have done significantly better over the year and also in the fourth quarter where we have been able to announce some very significant price increase.

PJ Juvekar - Citigroup

Thank you. And then secondly can you just talk about utilization of your new DIMLA plant in then Nanjing joint venture, I mean just give us little overview of which end market you are seeing some weakness?

Laurent Lenoir

I’m sorry, the DIMLA plant in the U.S., you mean?

PJ Juvekar - Citigroup

Yes DIMLA plant in the U.S. and the Nanjing plant, can you just talk about where the utilization is?

Laurent Lenoir

Okay, well as far as the DIMLA plant, we have a very nice ramp up. We continue to develop according to our expectation. We see some positive developments in the U.S. In Nanjing, that’s his part of the joint-venture, so the results are not part of what you see today. But there also we have been developing with a base load customer and expanding step-by-step our presence in the markets according to the expectations that we have set for our sales. So I would say development is pretty in line with what we were expecting overall.

PJ Juvekar - Citigroup

And just lastly, you mentioned earlier oil and gas market is being a little weak; what other markets where you are seeing any weakness?

Laurent Lenoir

I would say so far we do not see any specific weakness in other markets. The only thing is with the cold winter, the herbicide situation in the U.S. show that we are delayed versus, let’s say what could be a normal calendar but especially for herbicide con applications we have at the latest still April or beginning of May to apply the products so there is still some time to catch up.

Operator

The next question is from the line of David Begleiter with Deutsche Bank. Please go ahead with your question.

David Begleiter - Deutsche Bank

Thank you, Laurent. Functional amines EBITDA margins were down about 130 basis points in 2013, should it up in 2014 and still by how much?

Laurent Lenoir

Well, I think the overall margins have been pretty stable, if you look at functional amines and that one of the characteristic of this market. I think if you look at 2014, we will have of course the impact of large shutdown that we will have implement in the U.S. in order to be able to start or new capacity as of Q3 this year, but overall we expecting the margin to be in line with previous year and even slightly better.

David Begleiter - Deutsche Bank

And given that impact in Q4 and Q3, can you talk about the quarterly progression of earnings in 2014 will follow normal seasonality or other factors could impact that?

Laurent Lenoir

I would say overall there is no significant change expected during ’14 and as you have noticed in ’13 obviously and also in ’12, I think there is sort of a trend that the first three quarters are more or less in line and in the fourth quarter is typically somewhat softer and it’s hard to say that there is maybe a small impact of the shutdown in based to preparation around that in Q1 and maybe some impact of colder winder in the U.S. in Q1 as well which might shift a little bit from Q1 to Q2, but let’s say I don’t think we can talk about major movements quarter-on-quarter for the first three quarters. So all in all I think relatively comfortable to 2013 in terms of seasonality.

David Begleiter - Deutsche Bank

And if lastly capital spending in 2014 and 2015?

Laurent Lenoir

For ’14, we expect capital expenditure, so tangible capital expenditures to about $85 million which is higher than in ’13 as explained partly of course we have the second part of the methylamine expansion cash out and then it was also about $10 million shifted from ’13 to ’14, so that’s why ’13 ended bit lower than we anticipated in the beginning of last year and so 2014 will be bit higher. For 2015, I would say we will probably end somewhere between ’13 and ’14 certainly bit down from ’14.

David Begleiter - Deutsche Bank

Thank you very much.

Operator

The next question comes from the line of the Charles Dan with Morgan Stanley. Please go ahead with your question.

Charles Dan - Morgan Stanley

Good morning. Just a clarifying question on the numbers you gave around formic acid business. The $20 million to $25 million in actual EBITDA that you put in your comments, it looks like that includes some restructuring charges so I’m just curious what is the adjusted EBITDA number that you’re using for that’s included in the 290 to 295 guidance for the overall company?

Kurt Decat

No, the $20 million to $25 million of adjusted EBITDA does not include any restructuring charges. It’s just reflecting the 10 months of operations, so as we indicated we expect the transaction to close now on March 4th and so that range reflects 10 month of results realizing that the first two months of the year which are typically a bit higher because of the icing impact will be gone let’s say, so that’s the range excluding any restructuring charges.

Charles Dan - Morgan Stanley

Okay so then for the first 12 months of ownership is your expectation the results would be in line with the numbers you gave when you announced the acquisition?

Laurent Lenoir

Yes, so if you think on an annualized basis the $20 million to $25 million are going to be in the range of about $30 million to $32 million as we refer to before. Again, the ultimate impact of that 12 months period is dependent a bit the icing season which sort of falls between the late November, December and then January, February, early March periods. So that’s somehow impacting the results little bit, but yes we’ll give a bit more guidance after we’ve closed the transaction when our first quarter earnings are released early May then by the time we can have a better grip on that after we close the transaction and made the acquisition accounting and the like we will comment a little bit more.

Operator

The next question comes from the line of John McNulty of Credit Suisse. Please go ahead with your question.

Robert Betz - Credit Suisse

Good morning, guys. This is Robert Betz for John. So free cash flow was pretty big in 4Q obviously it has something to do with seasonality around but was there more to that number, maybe you can give a little color on some of the working cap efficiencies Kurt mentioned in his comments, thanks.

Kurt Decat

I think working capital was positive; just on working capital improvement in general, so I think a number of things came together that made it a good quarter obviously. EBITDA was solid as well so there wasn’t anything really in particular other than the working capital improvements that made Q4 good I think it’s important to look at the total, the total year free cash flow which is indeed about $116 million on recurring basis.

Laurent Lenoir

Not much more to add.

Robert Betz - Credit Suisse

Thanks.

Operator

Our next question is from the line of Jeff Zekauskas of JP Morgan; please go ahead with your question.

Jeff Zekauskas - JP Morgan

Hi, good day. Were the transaction related costs of $4 million the only, I guess nonrecurring item in the quarter.

Laurent Lenoir

That’s correct, in addition there was some foreign exchange impact which you will reflected in the other non operating expenses, so, once you’ll see, you’ll get some more detail also in the 10-K, that’s the only other thing I would say.

Jeff Zekauskas - JP Morgan

Why did you choose not to publish a fourth quarter income statement?

Kurt Decat

No particular reason, I think we were just following and the fact is guess and we can easily deduct the fourth quarter from taking the full year minus the third quarter year to date, but if you would like to see Q4 in isolation we can easily provide it to you no problem.

Operator

(Operator Instructions) Thank you, at this time we have no additional questions would you like to make some additional comment?

Laurent Renoir

Now I would like on behalf of the company to thank everyone for attending this call and earning release, thank you very much.

Operator

This concludes today’s teleconference; you may disconnect your lines at this time, thank you for your participation.

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