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Taminco Corp (NYSE:TAM)

Q2 2014 Results Earnings Conference Call

August 07, 2014, 8:00 am ET

Executives

Kevin Doherty - Investor Relations

Laurent Lenoir - Chief Executive Officer, Director

Kurt Decat - Chief Financial Officer, Director

Analysts

PJ Juvekar - Citigroup

George D'Angelo - Jefferies

Jermaine Brown - Deutsche Bank

Robert Koort - Goldman Sachs

Bill Carroll - UBS

Jeff Zekauskas - JP Morgan

John Roberts - UBS

Operator

Good morning, and welcome to Taminco's conference call to discuss the results for its second quarter of 2014. 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 Kevin Doherty, Investor Relations at Taminco.

Kevin Doherty

Great, and 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 SEC 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 recurring free cash flow. 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 will 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, Kevin, and good morning and thank you, everyone, for joining us today on our second quarter 2014 earnings conference call. We published our earning press release earlier this morning and posted the slide presentation to the Investor Relations portion of our website at taminco.com.

As you know by now, Taminco is the global specialty chemical producer with a clear focus on niche markets and the world's largest producer of alkylamines and their derivatives. We hold a unique niche position in the specialty chemical industry with number one or number two global market share position for the vast majority of the chemicals that we produce.

I will start with a discussion of some of our accomplishments during the second quarter and a summary of our financial results. Kurt will walk you through our financial performance for the quarter in more detail. And then I will come back on to provide closing remarks. Finally, we will open the lines and take your questions.

Slide three highlights some of our key accomplishments during the second quarter of 2014. We are very pleased with our performance in Q2, resulting into a new record adjusted EBITDA. We will discuss our business performance in more detail, but at the high-level, we continued to execute our strategy and deliver growth in volume, sales and adjusted EBITDA Q2 2014 and we expect to continue to do so in the second half of the year.

We delivered 20% year-over-year volume growth to 182,000 metric tons and 17% year-over-year adjusted EBITDA growth to a record $77 million at 21% margin level for the second quarter. Net sales grew 21% to $370 million. These results were driven by an excellent performance in all divisions. Functional Amines achieved a recovery from the first quarter, Specialty Amines accelerated its growth path thanks to continued strong performance in personal and home care, water treatment and energy end markets, while Crop Protection confirmed the strong trend from Q1.

Growth in net sales and volume occurred across our largest markets of North America and Europe as well as Latin America and, to a lesser extent, in Asia. Results this quarter includes the Formic Acid Solutions business. However it is to be noted that even excluding the contribution of formic acid solutions we sill achieved double-digit adjusted EBITDA growth within the Specialty Amine division. The integration of the Formic Acid Solutions business remains on track and we feel comfortable with the anticipated synergies and growth opportunities.

Equally, we continue to proceed with the Balchem joint venture for choline chloride, which is expected to come on stream in the second half of 2015. During the quarter, we also successfully completed the methylamine expansion project at our Pace, Florida facility. The unit is now fully operational and we will support the growth of our methylamines and derivatives customers for the foreseeable future.

The company generated net cash from operations of $93 million and recurring free cash flow of $50 million for the six months ended June 30, 2014. With the majority of our large capital expenditures behind us for the year, we are now well positioned to drive strong free cash flow and adjusted EBITDA growth also in the second half of 2014. Following the strength of our first half results, we are reiterating our full year adjusted EBITDA guidance of $290 million to $295 million.

Let's now go to slide four. Here we illustrate the diversification of our net sales mix by end markets, by region and by division. We continue to focus on our top five end markets, which accounted for 82% of our net sales in the second quarter and which are driven, as you know, by favorable underlying megatrends. There has been some further diversification of our portfolio following the Formic Acid Solutions acquisition. However, agriculture remains our largest end markets representing about one third to a quarter [ph] of the net sales. Personal and home care come second with about 20% and has grown significantly in recent years. Animal Nutrition, energy and water treatment have also good prospects.

On a regional standpoint, net sales in North America, were at 10% year-over-year, primarily due to the higher volume in Specialty Amines. Our European business was up 42% year-over-year due to strong sales across all divisions and of course the contribution of the Formic Acid Solutions business. The balance of our sales is in the emerging markets of Latin America and Asia which accounted for 16% of our net sales in the second quarter. Emerging markets increased 10% from the prior period, primarily due to strong sales in Latin America both Specialty Amines and Crop Protection.

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

Kurt Decat

Thank you, Laurent. Slide five through seven present an overview of the performance of our three key divisions.

First on slide five. Volume for Functional Amines for the second quarter was 75,000 tons, which was flat compared to the prior year, but up 7% from the first quarter. This was driven by stronger demands in solvents and higher amines, but offset by declines in methylamines and solvents. Net sales were up 2% for the quarter to $140 million and adjusted EBITDA declined $2 million year-over-year to $30 million for a 21% margin. The increase in net sales was primarily due to positive momentum in energy and personal and home care markets and also mix effects. The agriculture market continued to recover from the first quarter with some improved inventory levels in the U.S. markets. The decline in adjusted EBITDA was primarily driven by lower margins due to negative regional and product mix effects.

Moving to slide six, Specialty Amines volume for the year grew by 59% to 92,000 tons, primarily due to the contribution of the Formic Acid Solutions business and strong demands in personal and home care, energy and water treatment, both in the U.S. and Europe. Animal Nutrition was slightly weaker year-over-year due to some increased competition in China and Europe, partly offset by growth in Latin America, but overall prospects remain positive. Net sales were $188 million and represented 44% growth over the same quarter in 2014. Specialty Amines generated 48% growth in adjusted EBITDA to $34 million due to a full quarter's contribution from the Formic Acid Solutions business, increases in volume, higher pricing, as well as product mix effects. Even without the Formic Acid Solutions, we estimate that the division would have grown about 5% in volume, 15% in net sales and 25% in adjusted EBITDA.

Finally to close out the segments on slide seven. The volume in Crop Protection increased by 15% to 15,000 tons in the second quarter primarily due to strong European and Latin American performance in fungicides and plant growth regulators. This was only partially offset by lower volumes in soil fumigants in North America, which we expect to recapture in the second half of the year. Net sales grew by 14% to $42 million while adjusted EBITDA expanded by 18% to $13 million primarily due to higher pricing and positive mix effects, confirming also the strong performance already achieved in Crop Protection in the first quarter of the year.

We then move on to slide eight, which highlights some of the key balance sheet and cash flow items. We ended the quarter with a cash position of $67 million. For the six months ended June 30, we generated net cash from operations of $93 million and recurring free cash flow, defined as net cash from operations less CapEx adjusted for non-recurring items, of $50 million. Our recurring free cash flow was limited by $54 million of capital expenditures during the first half of the year driven mainly by the methylamine expansion project, as well as some smaller growth projects. And we have $30 million of interest payments on the senior secured notes and the term loan facilities.

Free cash flow generation is expected to be robust in the second half of the year as well, following the completion now of the methylamine capacity expansion at the Pace facility. Total tangible capital expenditures for 2014 is expected to be around $85 million. Net debt totaled $978 million as of June 30. The company's net debt to adjusted EBITDA ratio was 3.4 times on a pro forma basis, which shows that leverage has only moderately increased from the prior year periods due to the formic acid acquisition.

I would like to now turn the call back over to Laurent for some closing remarks.

Laurent Lenoir

Thanks, Kurt. I am very pleased with the progress Taminco has made so far this year, thanks to a solid strategy execution. Sine our IPO, we have been able to demonstrate year-over-year volume, net sales and adjusted EBITDA growth in every quarter. As I previously stated, given the results in the first half of the year, we are confident with our adjusted EBITDA outlook for full year 2014. As we move forward, we continue to focus on new opportunities to deploy our significant cash flow and drive growth for Taminco, both organically and through bolt-on M&A.

Let me also take this opportunity to announce that we will be hosting an Investor Day mid-September during the week of September 16 in New York City. Details on exact timing and location will follow shortly and we are looking forward to meet you there.

With that, we are ready to take your questions and I would like to turn the call back to the operator to open up the line.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from the line of PJ Juvekar of Citigroup. Please go ahead with your question.

PJ Juvekar - Citigroup

Yes, sorry, good morning.

Laurent Lenoir

PJ, good morning to you too.

PJ Juvekar - Citigroup

Hi, Laurent. You mentioned more Chinese competition in the specialty amines. Can you expand on that? What kind of competition? Who are the players?

Laurent Lenoir

Well, in fact, it was very specifically directed at our feed additives business. You may remember, PJ, that during the first quarter we mentioned that there has been bird flu epidemic in China which has impacted the volume of feed additive in that region and then it had some more pressure on the local producers which have the directed more sales into the export market and put some pressure into pricing. However when we look at the volume in the second quarter, we see that they are back in China at normal level, and we expect this to continue in the future since the bird flu outbreak has now ended up to a large extent. So that's why we also stated that overall we feel positive on the prospects also of the Animal Nutrition business on a yearly basis.

PJ Juvekar - Citigroup

Thank you, and in your ag and crop protection end market, some of your customers have disappointing results in second quarter and they have complained about volumes. I was wondering if you have seen any of the impact from your customers? Or is it that you have already felt it last year?

Laurent Lenoir

Well, indeed that's an important question and maybe it's worth just taking one step back and explain again what is our exposure to the agricultural market. In fact, we have two different channels to the agricultural market. One is within the Functional Amines division. We are selling there some intermediates that are used into herbicides formulation and these herbicides are sold on row crops. So mainly corn, soybean, to some extent sugarcane and they are sold by our customers in the Americas, U.S.A. and Latin and South America.

This part of the business in the first quarter has been affected and was below expectations and that's in line with, I guess, what you see as a result of certain crop company. During the second quarter, we still have seen some of our customer in the herbicide markets continuing to be affected and, let's say, having lower level of purchase at what we have been anticipating up at the beginning of the year. However this negative impact has really decreased and we have seen some improvements compared to the first quarter. So if you look at ag into the Functional Amines, we have been in second quarter still below last year, which was, by the way, a very good year, but to a lower extent than during the first quarter. And we see things normalizing.

The level of inventory, which was very high during the first quarter has gradually improved and has been decreasing. Therefore I think we are slowly getting back to a more normalized type of an environment. So that's the first half of our business and that's pretty consistent with may be the communication that you would receive from Crop Protection company who have a large exposure into herbicides and into the Americas.

The other part of our business is really related to what you are seeing in our Crop Protection division. And there it's different drivers. First of all, we are not speaking of intermediates, but of finished products. That we monitor in terms of inventory management, in terms of going into the market. We have much more insight. These are not herbicides, but fungicides, plant growth regulators and soil fumigants. So they are addressing niches with a different, let's say, driver then the herbicides.

And on top of that, they go into some high cash crops like fruit and vegetables, for example, which have also different dynamic than what you see with the herbicide. And they are sold globally in Europe, which is the largest region for us, but also of course in North America, Latin America and Asia. So a global reach versus a very American reach, for the Functional Amines.

And this Crop Protection product had this year a very good trajectory. You have seen our first quarter which has been very good in terms of volume and also margin wise we have been able to increase our pricing and increase our margin. So the EBITDA has been up quite significantly and in the second quarter, because the weather continue on a global basis to be favorable to our plant growth regulator and to our fungicides, we have also been able to achieve a good performance.

So we have a contracted results in terms of agricultural market approach this year. It's not always like this but we have into functional herbicide related business in the America which has been in the first half below expectations with some improvements gradually and we have the Crop Protection business with fungicide, plant growth regulator on a global basis performing very well, both in terms of volume and margin. So globally overall, I would say that our exposure to ag this year is still showing some slightly positive results compared to the previous year.

PJ Juvekar - Citigroup

Thank you for the comprehensive answer. So just to recap, you felt the impact in the first quarter what these companies are seeing in the second quarter, but you don't expect any lingering impact in the second half. Is that correct?

Laurent Lenoir

Yes, if you recall what -- that's correct, PJ. If you recall what we said during the first quarter, at the end of the first quarter, during the earnings release, was that we were not expecting to be able to recover the loss that we incurred in the ag market in Q1 during the rest of the year, but we were expecting to be able to trail in line with our expectations for the remainder of the year. And I think that's our expectations also at that point in time.

PJ Juvekar - Citigroup

Thank you.

Operator

Our next question is from the line of Laurence Alexander with Jefferies. Please proceed with your question.

George D'Angelo - Jefferies

Hi, good morning. This is George D'Angelo, on for Laurence. Given the recent news on Russia, the pending ban on meat, fish, dairy, fruit, vegetables from the U.S. and the EU countries, can you just give us some color on how that would affect your business?

Laurent Lenoir

Well, from a timing standpoint, we are really at the end of the application pattern for the year in terms of fungicides for the fruit and vegetable markets, both in Europe and in the U.S. And this soil fumigation market is not really going to be affected by this element. So we are expecting for the remainder of the year only a very minimal if any in fact effect on our sales.

George D'Angelo - Jefferies

Okay, thanks, and can you give us some more color on the M&A pipeline?

Laurent Lenoir

Yes. Well, you know that we have completed the acquisition of ChemSolutions earlier this year. This is, for us, a significant acquisition and our priority has been really to integrate that business into our existing Taminco business, which is going well and progressing according to the plan. At the same time, I think we have conveyed that we will continue to be active in terms of M&A, but with clear focus on bolt-on acquisition into our core markets, meaning alkylamines and formic acid. The fact that we have now two niches to look at increases the number of potential opportunities but we continue to look at these bolt-on opportunities in a very disciplined way. And at the moment are not focusing on new adjacencies or transformational type of deals.

George D'Angelo - Jefferies

Thank you very much.

Operator

Thank you. Our next question is from David Begleiter of Deutsche Bank. Please proceed with your question.

Jermaine Brown - Deutsche Bank

Hi, good morning. This is actually Jermaine Brown, filling in for David Begleiter. So you had pretty strong growth in Europe, 42%. Can you parse out the organic versus inorganic growth and where you are seeing the strength regionally and then within your product lines?

Kurt Decat

I would say that if you exclude the impact from the Formic Acid Solutions business, we believe growth in Europe was still double-digit around, say between 10% and 15%. So a nice quarter this year and really across all the three divisions and product groups and end markets for that matter.

Jermaine Brown - Deutsche Bank

Understood. Most of my other questions have been answered, but just fro housekeeping, can you remind what your target leverage ratio is?

Kurt Decat

Well, in a couple of years from now, the target would be between 2 and 2.5. So you know we were at 3.2 at the end of last year and so with the recent acquisition, we increased that a little bit. So leverage moderately increased and is now back down to 3.4. We expect it to be back where it was last year by the end of the year and then target a further decrease in the next two to three years to somewhere between 2 and 2.5 times.

Jermaine Brown - Deutsche Bank

Understood, and finally in your table that reconciles your EBITDA to adjusted EBITDA, what's the tax effect of these one-time items?

Kurt Decat

It's a good question but it's technically difficult to answer the question given the structure of our tax and what ultimately drives the ultimate tax rate. So I would say that the best guess I can make is that you would just have to deduct the effective tax rates to it and that will bring you closest to the ultimate tax effect.

Jermaine Brown - Deutsche Bank

Understood. Thank you. I will hop back in queue.

Operator

Our next question comes from the line of Robert Koort with Goldman Sachs. Please proceed with your question.

Robert Koort - Goldman Sachs

Thanks, good morning. Laurent, could you talk a little bit about the expansion and whether that gives you any expense burden from depreciating that asset in the short run? And then as it starts to fill out, should we expect you to express the earnings from that expansion in the functional business or ion the downstream business?

Laurent Lenoir

Bob, good morning. I could not hear you think very well, but let's say completion of this methylamine investment is not expected to have any specific effect for us also on the depreciation stand point. We see that really as a way to continue supporting the growth that we have which is primarily in the U.S. driven by our derivatives business. There is of course organic growth type level for our methylamine business and our methylamine market, but most of the growth is related to derivatives with some capacity fill up on new investments that we have been announcing and are hopeful to continue to announce in coming future.

Kurt Decat

And just to make one small comment on it also there, I mean total D&A for the year will go up a bit from last year, partly because of the addition of the Formic Acid Solutions business. In general though, if you look at our recent investments, D&A will slightly increase, but it's not a significant impact from the Pace expansion we also added additional projects in last year and others run out in terms of depreciation. So the biggest increase is really going to be driven by the formic acid business.

Robert Koort - Goldman Sachs

Thanks, could you also address, there has been some massive volatility in methanol. Have you seen any issue from raw materials on your business during the last 90 days?

Laurent Lenoir

Bob, one of the characteristic of business is that because of the structure of the market with our long-term contract, the cost pass through for 50% of our sales plus I think a very disciplined pricing approach in the remaining part of the market. We have historically been able to show very low sensitivity to raw material fluctuations and specifically, if we look at Q2 and methanol, I think overall there are different small effects playing in there but the overall effect is very neutral on to the margin. So no impact from methanol fluctuation overall on the margin level in the second quarter.

Robert Koort - Goldman Sachs

And my last one, if I might. Have you seen any progress or opportunity for sales towards that Dow contract that you talked about previously for their new product?

Laurent Lenoir

Well, that Enlist project remains a very key projects for Dow. I think they communicated and continue to communicate around that. I would say we are still having a very good prospects around this project from an operational standpoint. Everything is ready at our end to accompany the first wave of growth. However I think in terms of timing regulatory wise, there has been some slight delay. The full approval has not yet been granted, but it seems to be progressing well. Therefore, we do not expect a significant impact this year and next year, but a gradual ramp up over that time that will allow for a more important impact after that time.

Robert Koort - Goldman Sachs

Okay. Thanks very much.

Operator

Our next question is from the line of Bill Carroll of UBS. Please go ahead with your question.

Bill Carroll - UBS

Thank you. I just had a follow-up on that Enlist question. How big a product could that be for you? And are you the sole supplier on that?

Laurent Lenoir

Hi, Bill. What we communicated previously and that remains true, is that we believe this product has potential to be one of our top five products going forward, when the full potential will be realized. And let's say yes, there is an exclusive relationship with Dow with regard to that specific application.

Bill Carroll - UBS

Okay, thanks, and one more question on the high coupon debt issue that you are carrying. I believe that becomes callable fairly soon. So can you let us know what the cost of calling that debt early would be and what you are thinking with regards to that?

Kurt Decat

Well, we are definitely looking into that as an opportunity. Indeed those notes are callable in March 2015 at 7% premium approximately. And we are obviously looking into any opportunity to do some of that sooner. That depends on market circumstances and some other considerations. So no final decision. It is just something that's on our radar and we can update you with and when we have reached a decision, but there is no final views on it yet.

Bill Carroll - UBS

Great, thanks.

Operator

Thank you. Our next question is from the line of Jeff Zekauskas with JP Morgan. Please go ahead with your question.

Jeff Zekauskas - JP Morgan

Hi, good morning. What was the source of the negative mix effect in Functional Amines? Why were the margins lower?

Laurent Lenoir

Hi, Jeff. That was high-level. There were two main effects. On the one hand, because of still some weakness in agriculture market compared to previous year, our methylamine has been lower in terms of volume, compared to previously. And at the same time, the solvents have been performing quite well this quarter. So in terms of product mix, we had a shift, let's say, compared to what is a normal mix in Functional Amines and the margin in solvents is typically lower in average than the other product family. So that explains part of the discrepancy.

And the other elements is that if you look at some products that go into agriculture, this year during the second quarter, we had more sales in Latin America than what we typically have and we had less in the U.S. because of this all environment and therefore, the proportion of sales into Latin America versus the U.S. has been significantly higher than also in normal year. And margin in Latin America is slightly lower than in the U.S., which also affected the Functional Amines margins.

Jeff Zekauskas - JP Morgan

Is this a trend that should continue in the next two quarters? Or is it not a trend that would continue in the next two quarters?

Laurent Lenoir

No, that was really, if you think in terms of this agricultural element, that was really related to inventory level in the U.S., which was very high at the beginning of the year and winter, which has been particularly abnormal. But as we said previously, we see now things normalizing and so we expect also from a volume standpoint that these will go back to a more historical mix. So that was really more punctual situation rather anything structural.

Jeff Zekauskas - JP Morgan

Okay. Thank you so much.

Operator

(Operator Instructions). The next question is from the line of John Roberts with UBS. Please go ahead with your question.

John Roberts - UBS

Good morning.

Laurent Lenoir

Hi, John. Good morning, John.

John Roberts - UBS

I think you make some comments earlier about inventory levels affecting your business. Does the deicing business have normal channel inventory going into what would be its normal seasonal build and was the fumigants and some of the other agricultural businesses left with any excess inventory in the channel, given the weak spring?

Kurt Decat

On the deicing, we believe in general inventory levels are relatively limited. Typically, going into the winter season, airports would keep a certain first inventory to be able to cope its sudden weather changes. But it's more something that then gradually during the season gets ordered on a relatively short term basis, just in time. And also if you look in our particular case, it's really somewhat shifting season, but we have contracts that ensures certain volumes for the total year. So here also its not a matter of inventory level issues, but just some seasonality that can occur from quarter-to-quarter.

Laurent Lenoir

And basically for soil fumigants, we do not build a lot of inventory ahead of time. So we react pretty quickly when the demand is there. So there is no risk of accumulating inventory ahead of the season.

John Roberts - UBS

Thanks very much.

Operator

Thank you. At this time, I would like to turn the floor back to Mr. Laurent Lenoir for closing comments.

Laurent Lenoir

Well, thank you. I would like again to thank everyone for attending our second quarter earning call and reiterate Taminco's dedication to generate continuous growth opportunity and to create value for our shareholders. Thank you and good bye.

Operator

Thank you. This concludes today's teleconference. You may now disconnect your lines at this time. We thank you for your participation.

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