Synthomer PLC

LSE:SYNT

Earnings Call Transcript 2019-Q1

[Operator]

Hello, and welcome to the Synthomer plc Q1 Trading Update Call. [Operator Instructions] Just to remind you, this conference call is being recorded.Today, I am pleased to present Calum MacLean, Chief Executive Officer. Please go ahead with your meeting.

[Calum G. MacLean, CEO & Executive Director]

Thank you very much, and welcome everyone to the Q1 2019 call. As always, I'm joined today by Stephen Bennett, CFO; and Tim Hughes, Head of Investor Relations, so they'll also get involved with Q&A at the end of the brief introduction.Key messages this morning trading update is that the business is performing in line with our expectations as set out in Synthomer's full year results presentation, which we gave you on March 4. And accordingly, our full year 2019 outlook remains unchanged.As we set out in March and very much factored into our plans, the demand environment in Europe was more subdued in the early part of the quarter. Whilst that impacted all 3 divisions, we've seen an improving demand trend through the second half of the quarter with April returning to more normalized levels. Margins during quarter 1 have been strong.Q1 2019 represents the first trading statement on Synthomer's new reporting structure. We've introduced 3 new business groups to mirror the way in which we run the business today and to help drive the future growth. That change to the structure is going well.Looking at each of the divisions just quite briefly, Performance Elastomers solid quarter. Nitriles continued to benefit from the additional capacity that we brought onstream in quarter 4. So volumes were up year-on-year and unit margins were also ahead of what was a strong comparative period in Q1 2018.SBR, the styrene-butadiene, remained challenging, particularly a slower start to the year, which continued what happened in quarter 4, but we have seen improvement in the exit of the quarter going into -- and going into April.Functional Solutions or what some of you may recognize as dispersions business saw lower volumes again against a stronger comparative period, mainly due to, firstly, the sale of our 50% stake in Dubai business, which happened in the middle of 2018 and a slower start in Europe. But unit margins were up and we will benefit from the extra capacity coming online in both Germany and the U.S. during the course of quarter 2.Industrial Specialities, again, weaker volumes compared to a strong quarter 1 in 2018, but the demand environment is improving in Europe and the trend going into the second quarter is encouraging. Overall, good progress across the board with some improving momentum within Europe.Bodes well for the rest of the year. And together with -- this together with the benefit of the additional capacity in Performance Elastomers and Functional Solution underpins our outlook for the full year. That's the sort of brief summary, so happy to take Q&A. Operator, if you're ready now.

[Operator]

[Operator Instructions] And our first question comes from the line of Kevin Fogarty from Numis Securities.

[Kevin Christopher Fogarty, Analyst]

Just a couple from me. I note this morning there's no sort of mention of the balance sheet or debt levels at the end of the quarter. I just wondered if there was anything you could say on that and particularly, sort of working capital perhaps during the quarter. And just -- if I think about the dispersions capacity that's due to come on. I mean given what you're saying about the sort of market backdrop, are you sort of anywhere -- sort of more cautious in terms of the benefit of that capacity as it comes on Q2 and beyond, given that sort of market backdrop? Or is there any reason why we shouldn't take a bit more of a cautious view on the contribution that might make? Just those 2 from me at the moment.

[Calum G. MacLean, CEO & Executive Director]

Yes. Kevin, let me take the second question first and then I'll say a few words on working capital, et cetera, and then pass to Stephen to say after that. Dispersions is clearly a different business to our NBR. So I think everyone's familiar that NBR, which we brought on at the end of last year has got a growth profile well in excess of GDP. In fact, it's in double digits and it continues to do so and grows.So dispersions has always been a sort of GDP type growth business. And capacities globally as well as Europe and U.S. where we are bring extra capacities on, they're all pretty balanced anyway. So they're neither short nor are they long, so it wasn't brought on -- it was brought -- the capacity was brought on because of a number of reasons for us. One is that, yes, we needed more capacity in the U.S. So that was to be able to continue to enjoy the growth in the market, but also because we're trying to do some cost optimization as well on these assets. So we sold an asset, as you know, in Leuna in Germany and we still toll manufacture product there. And at some stage, we'll pull that product back into our own assets once we've expanded them in Worms.So these debottlenecks were more about the long-term growth with growth in true volumes being GDP order of magnitude plus some consolidation work that we're internally, which the combination of both of those things gives us a reasonably good return on the capital that we've invested, so nothing's changed there in terms of our outlook on how that will play out once the capacity comes online.Just talking about that capacity, both assets are mechanically complete. Worms is probably a month ahead of the U.S. asset. Both assets are now being commissioned, so they will then subsequently go through first product production, which will then go out to some of our customers for approval. So we don't expect a big impact in quarter 2 on that. But clearly, the capacity will be there for the second half of the year. So that was the dispersion discussion.Around working capital and balance sheet, I think we sort of changed the structure of the business a little bit, which -- at the same time, we sort of relooked at what information that we put on the table at the quarter and what information we put on at the half year, so tried to sort of put everything together and try and make this more a consistent format now certainly at the end of quarter 1 and quarter 3, which gives you a little bit more around the trends and a little bit less of the detail at quarter 1 and quarter 3, and then you get more of the hard numbers at the half year. But my general comment to you on working capital is that nothing's changed. So we are broadly speaking 10% of sales. That hasn't changed. I think you saw at the end of last year that we absorbed some cash into working capital not because the 10% changed, but because prices -- unitary prices, raw material prices were higher. And therefore, our selling prices were higher. That -- going into quarter 1, prices clearly fell at the end of quarter 4 into quarter 1, so that would have an impact. So the 2 things that impact working capital really here are seasonal demand, which is higher in quarter 1 as you know, but also unitary pricing, which has actually come down.So I think with that in mind, you can get a flavor that working capital is where it is, but bottom line is no change really 10% of sales. Stephen, do want to say anything else on...

[Stephen G. Bennett, CFO & Executive Director]

I'll just endorse what Calum said. We're sort of refocusing the trading update to focus more on the trading and P&L side of the business and less on the balance sheet and keeping those comments to qualitative rather than quantitive. There's nothing unusual in the balance sheet at the end of March that should concern you. It's very much business as usual as Calum said.

[Operator]

Our next question comes from the line of Anthony Manning from Berenberg.

[Anthony Manning, Analyst]

Could you give us an idea about all the Nitrile capacity expansions going on in the market, in particular from Kumho? And how much insight you have on that?

[Calum G. MacLean, CEO & Executive Director]

Yes. Anthony, I think we sort of -- we've always said with Nitriles that it's fairly invisible in terms of what is coming on. And normally, you get 18 months to 2 years of warning of what's coming on and when it's coming on. I sort of will remind you that as a market today, this is about 1.4 million tonnes and it's growing on average just about, we say, 8% to 10% per annum. So you need sort of a 140,000 tonnes a year of additional capacity just to get the -- to absorb the growth of the market. And a matter of fact, in the last 2 years have probably grown at more like 14% to 15% rather than this 8% to 10%. So we've had a couple of quite strong growth years.So with that backdrop, clearly, we brought 90,000 tonnes on in quarter 4. And our expectation is, let's say, that will be sold out certainly by the end of the year. And we'll sort of build it up between now and then and that's sort of where you should see that. And of course, during that period of time, we are the company with the additional capacity in the market.Our latest understanding, and it is market intelligence from customers, et cetera, is that Kumho have confirmed that they will bring on 150,000 tonnes during the course of 2019, so that feels like it's more delayed to the back end of the year, so whereas they were talking middle of the year, it's certainly talking -- our view now is it's more like the end of quarter 3. That sort of time frame is the best view we've got.I would highlight to you, however, that Kumho are the market leaders today and they have an excess of 30% of that market, so just how they bring that on and how they behave, bearing in mind, this market's growing quite quickly is open to views.

[Operator]

Our next question comes from the line of Geoff Haire from UBS.

[Geoffrey Robert Haire, Managing Director and Equity Research Analyst]

Just wanted to ask 2 questions. First of all, just on your comments on margins. I wonder if you could sort of help us, obviously, not quantitatively, but at least qualitatively put, where you think margins are in Q1 relative to what we saw margins -- EBIT margins in the second half and the first half of last year. I also was wondering if you could just give us an update on what you're seeing in some of the key end markets, particularly in Europe would be helpful.

[Calum G. MacLean, CEO & Executive Director]

Geoff, let me pick that up. So quarter 1 margins are indicated in the sort of introductory comments that they were reasonably strong or robust. I think it's quite -- people understand quite well how the dynamics of this market -- these markets work, so we negotiate -- raw materials can be relatively volatile and they have been. You know that in quarter 4 they came down, which was our input cost was coming down. We have a reasonable proportion of our business, which is formulaic, which means on a monthly basis, they automatically change by raw material pricing. And then we have a reasonable amount, which are freely negotiated. And freely negotiated means that we have the opportunity to increase or decrease, for that matter, prices likewise on a monthly basis.So what normally happens is in an environment where raw materials are falling that you get -- for a period of time, you get inflated margins. And that comes from: a, the time lag of the month, where your prices follow your raw materials; or b, from the fact that you negotiate on a monthly basis or not if you can avoid it, of course. So I think what that means is in a falling environment, you do expect to see margins sort of stretch a bit for a period of time, albeit they will normalize quite quickly once raw materials stabilize.And I think if you look across our businesses, that's kind of where we are. So I'm a little -- we've said volumes have been slightly slow, which has got more to do with the fact that some of it is raw material price is falling, some of it particularly in SBR is a little bit more around underlying demand at this moment in time, but margins are reasonably strong. So sort of it's a bit of a natural hedge really in the form of falling raw material environment, but it quite quickly stabilizes. So that was the first question.The second one was more around what are the markets doing. I think what I would say to you just taking a step back is, remember that we are very, very diverse as a company, so we're selling into adhesives. We're selling into coatings. We're selling into textiles. We're selling into paper. We're selling into automotive. So we're very diverse and we don't have a huge exposure to any particular market area. And all markets are behaving differently to a degree at any one time. So the fact that we're diverse means that we take the ups and downs. And the general discussions around Europe today are that things like automotive were slow at the beginning of the quarter, but have come back reasonably to normalized levels. That's something we wouldn't disagree with.If you look at coatings markets today, so read into that sort of paints, you can see some of the commentary coming out from the likes of Akzo over the last few days and even the likes of Wacker. Well, we're not immune from these things as well in terms of the coatings market, which I think we reflect to you in our commentary around a slow start to the 2019, but coming back reasonably strongly. So across the board, there are other areas I could highlight to you that are doing better. Things like the adhesive side of our business is doing better and some of our specialty textiles are doing quite well as well.So overall, there's a few ups and a few downs. And Europe was fairly sluggish at the beginning, but it was across the board more than a particular area that was suffering. And therefore, the commentary around coming into a more normalized quarter 2 is kind of where we're feeling this thing is landing at the moment -- where it's landed. And not too unconcerned as a result of that for our full year forecast and update.

[Operator]

And our next question comes from the line Charles Webb from Morgan Stanley.

[Charles L. Webb, Equity Analyst]

Just one from my side. Have any -- well, if there's any -- it was a couple of months ago, at the end of full year results, you were talking a bit more positively around M&A and the opportunities out there where multiples currently stood. Have you seen any change to that? Is it still the same -- is activity in that kind of market picking up again? And do you see interesting opportunities earlier? Where do you see transaction multiples today versus just 1 or 2 months ago?

[Calum G. MacLean, CEO & Executive Director]

Charlie, good question. I think nothing has changed from what I said in March and that is M&A is pretty active today in the chemicals industry. You get the feeling that there are a lot of strategic things going on. Some of them are clearly visible because they are public processes and auctions that are going on and quality businesses that are coming to market. And then there are other things going on that are more under the radar as it was where there are more sort of bilateral type discussions and limited processes.So I would say to you, M&A is more active today than it was during the course of, in my view, 2018. And what's sort of driven that. Well, a, I think that some of the big multinational blue chips are getting on with some of the strategic things that they've been talking about for a while. And b, I think there has been a bit of reassessment as well. I mean publicly traded valuations of chemical companies have come down 20% or 30% over the course of the last 6 months. And that's clearly about goes to value at the end of the day. And I think it goes to value of not just public companies, but generally businesses that are for sale. And therefore, multiples have probably come down by 1 or 2 turns. That doesn't change, and so it's probably the ability to raise debt as well, I suspect. So that doesn't -- and indeed appetite for debt.So that doesn't really change our environment a lot. We remain open and ambitious to do M&A. As always, we are talking to various parties. Nothing imminent to announce or anything that, but we remain optimistic that they are open. Those markets are open and, let's say, valuations, as I mentioned, are probably a tad more realistic in 2019 than what they were in 2018.

[Charles L. Webb, Equity Analyst]

And just maybe one more, following up on Geoff's comment around kind of the exit run rates and dynamics you kind of saw in the quarter and how we think of Q2 and moving back to a more normalized level. Can you just -- was Q2 of '18 would you consider that a normalized level. Maybe that would be another way to kind of look at it. And are we getting back to the levels we saw last year? Or was that actually a very healthy -- possibly a little bit above what you would normally consider normalized.

[Calum G. MacLean, CEO & Executive Director]

Yes. I think -- I mean if you look at Synthomer now as well as a lot of it transfers through to the general market. But if you look at Synthomer, we had a stronger first half and a weaker second half. So 2 -- quarter 1, quarter 2 of 2018 were quite comparably strong quarters. Whereas this year, my gut feeling is we'll have a stronger second half and probably a comparative second -- first half compared to 2018. I mean we got off as everybody did in this industry to a slightly slower start in January, February. But coming into quarter 2, I think we are back at the equivalent sort of levels that we had in quarter 2 of 2018. So sort of normalized type levels. However, on top of that, clearly, we've got a little bit of benefit in some of the investments that we've been making. So we are still expecting and we confirmed in our outlook being unchanged that year 2019, we're going to move forward from obviously 2018. And it will be a slightly different year and probably more balanced than it was in 2018. So that's generally where we are.

[Operator]

And it looks like there are no questions registered at this time, so I'll hand the call back to the speakers for their closing comments.

[Calum G. MacLean, CEO & Executive Director]

Thank you very much. Thank you for the questions, and there was a big attendance on today, so I appreciate that, everybody listening in. Just in brief summary, it's a pretty what I would describe as plain vanilla quarter for us. Outlook pretty much unchanged. And like with any of these big diverse chemical companies that are supplying many, many different application areas and geographically well placed, that -- there's always a few ups and downs, but we're not uncomfortable where we are at this moment in time and let's see where the half year lands and I look forward to speaking to you at that time. So thanks very much.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.