AlzChem Group AG

XETRA:ACT

Earnings Call Transcript 2021-Q1

[Operator]

Dear ladies and gentlemen, welcome to the conference call of AlzChem Group AG. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Andreas Niedermaier, who will lead you through this conference. Please go ahead.

[Andreas Niedermaier, CEO & Chairman of Executive Board]

Yes. Thank you. Good morning, everybody. Thank you for joining us today, and welcome for the Q1 analyst call. As always, we start with an executive summary here and then move on to the figures after some strategic topics. At the end of the presentation, we will be available for question. And so let's skip the disclaimer here and go directly to Page 4. So yes. So Page 4 should be available now. Here, we'll start with our presentation. So this year has started extremely positive for us despite some background noise. With record sales and a very strong EBITDA, we started the year with a strong tailwind.We are seeing a noticeable recovery in the market environment across board, especially in the automotive and the steel industry. We are equally successful in further developing our pharmaceutical portfolio products with Bioselect for RNA test and our dicyandiamide for metformin. Creapure, hard hit last year by the sudden decline in training activities, is back on the growth path because customers shifted their purchases to the high-quality Creapure available from us, from AlzChem. And even our fertilizer business, Perlka has grown compared to last year because farmers appreciate more and more the various positive aspects of Perlka.What we also see, however, are turbulences in the commodity and logistic markets. When a ship is stuck in the Suez Canal, you hold your breath for a moment. But we have been able to absorb everything so far through forward-looking management of the supply chain. And this is, of course, where the strength of our [indiscernible] comes into play because we produce our essential raw materials in [indiscernible] production in-house and can steer them through all production stages to the products with highest demand. What continues to bother us is, of course, the pandemic, with home office testing arrangements and other organizational measures, this is increasingly putting a strain on the team, but motivation is high, and we have started into one of the best quarter ever. And what happens next, you may ask. And therefore, I hand over to Georg.

[Georg Weichselbaumer, Chief Sales Officer & Member of Executive Board]

Yes. Thank you, Andreas. As frequently reported in recent quarters, the NITRALZ business has developed very favorably. In summer 2019, we successfully commissioned the first expansion phase, which we were able to utilize very, very quickly. Ongoing inquiries from the pharmaceutical and biotech industries have prompted us to start the next expansion step.The CapEx is expected to be around EUR 12 million, which will result in a capacity increase of about 50%. The annual sales potential associated with that depends on the product mix and is comparable to the investment amount at least, but in any case, more than EUR 10 million and up to EUR 20 million, depending on the product portfolio.In addition, our team has achieved sensational things despite corona. We are on time and on budget for the investment. The plant is technically complete. The test runs are currently underway, and we will be commissioning the plant on time in May. The capacity utilization for the second half of the year is largely secured. So this will be done one of our next growth areas. But what was the investment rationale and what are the products and in particular applications behind the name NITRALZ.We have vast experience in this [indiscernible] process, and via ongoing improvement, we make certain that we are a benchmark for the market. Our process is continuous, solvent free and, therefore, sustainable. We are seen by our customers as a very reliable source of raw materials made in Germany. But production aspects are only the basis.On the market side, there are developments that support our decision. Many customers search for a robust supply chain and AlzChem as the sole non-Asian supplier of nitriles is a central piece of this strategy. Nitriles are in high demand for various aspects of our daily life. They are used in pigments in automotive coatings. The brilliant colors, for example, of the Pigment Red 254 are still replacing older and highly toxic heavy metal-containing pigments. PR 254 even has a premium name. It's called Ferrari Red. As population grows, innovative crop protection solutions are required. Nitriles serve as building blocks or even solvents in a multitude of established and novel insecticides, fungicides, herbicides or biocides.Temperature is on the rise and so are the numbers of sun hours per day. UV absorbers have become established to protect from sunlight. Many of those require nitriles as raw materials. But the most important and ever-growing end market for nitriles are active pharmaceutical ingredients. Available for many years, but still a preferred solution for cardiovascular diseases are the class of the so-called sartans. They are based on nitriles as key starting material. The excellent purification possibilities implemented in the first expansion phase give also access to a class of new HIV drugs. So you can see an exciting field of applications, but let's get back to the numbers now with Andreas.

[Andreas Niedermaier, CEO & Chairman of Executive Board]

Yes. Thank you, George, for this market information. I think that's a very interesting thing always where these chemicals are really used. Yes, now we are back on the facts and figures. In the first quarter of 2021, sales jumped by 10% year-on-year to EUR 104 million. And in absolute terms, the 2 segments, Specialty Chemicals and Basics & Intermediates contributed almost equally to the sales growth. The significant increase in turnover also had a positive effect on EBITDA. In the first quarter of '21, this has EUR 16.7 million, and that's EUR 4.4 million or 35.8% higher than in the same period of the previous year. In addition to pleasing revenue development, especially for the high-margin products, the decline in cost of materials ratio and a moderate increase in other expenses items also had a positive effect on EBITDA.Supported by the positive product mix in terms of margin and still favorable raw material prices, the EBITDA margin has now reached at a level of 16%. Earnings per share rose from EUR 0.43 to EUR 0.78, and the increase is mainly caused by a very good earnings situation. The overall growth is volume-based with a growth rate of almost 13%, what cost us profitability compared to the previous year, however, were unfavorable exchange rates, especially the U.S. dollar. This single effect was minus EUR 1.7 million in the P&L. All in all, we can be quite satisfied with the start, even if there is still potential for further optimization.So much for the big picture and the overview. Let us now analyze in more details the different segments. And therefore, we jump directly to Slide 10. Starting with the Basics & Intermediates segment. This segment comprises the production of basic and intermediate products that are either required for the manufacture of specialty chemicals or marketed as stand-alone products.The products are used in a variety of applications, for example, in agricultural, steel production and the automotive industry. The Basics & Intermediates segment also achieved more than a pleasing growth in sales in the first quarter of '21. Here, too, we succeeded in convincing the market of our products on a broad basis, starting with our solutions for hot metal desulfurization and acetylene production through Perlka for farmers and dicyandiamide as an essential raw materials in the pharmaceutic industry, up to our NITRALZ product range as well.The background here is a stable, reliable and efficient product network within the NTN chain mainly. Even after more than 100 years of production experience, we were able to implement further process cost optimizations extremely successfully in the last 6 months and thus continue to positively influence the segment results. Through digitalization and big data evaluation, we managed to achieve a higher output from constant raw materials and capacities.We are critically observing the extremely volatile development on the raw material and electricity markets so that we can minimize the risk on our purchasing process here. At the same time, we ask our customers to share the burden of input cost increases. In this overall environment, we managed to stabilize margins on a good level. At EUR 2.8 million, EBITDA was around 47% better than in the previous year. And this segment can, therefore, be summarized as sales are largely driven by volume and margins significantly improved mainly by economy of scale.So that's it for the Basics & Intermediates segment. Let us now move to the next page on Page 12. This is the Specialty segment. Only to remember is always the Specialty segment produces and sells high-quality specialty chemicals such as Creamino, Creapure, Bioselect, DYHARD and Dormex to name but a few. And the development within this segment was extremely pleasing. We were able to further increase the utilization of almost all plants compared to an already high level in the fourth quarter of 2020, so that we are increasingly stretching the capacity limits in some plants and additional business requires investments in capacity expansion. In addition to the consistent implementation of the Creamino strategy, including a significant intensification of our market presence, we successfully drove forward the strategic realignment of our market presence in the area of nutritional supplements in the first quarter of '21, so that we can report sustainable growth rates for Creapure among assets.Beyond Creapure, we continue to work hard on the marketing of LIVADUR and core products intended for end customers, and we are convinced that we will be able to offer interesting end customer products with good growth rates, even though we may not see significant returns for a few years to come.In the area of chemical solutions, we were able to successfully continue the made of Bavaria trend from the previous quarter in quarter 1 '21 and place new products on the market as well as win new customers for existing chemical solutions. Comprehensive, sustainable process cost optimization support the segment's positive EBITDA margin development as well as we have already heard from the Basics & Intermediates segment.We were able to deliver the pharmaceutical and agricultural specialty products Bioselect and Dormex worldwide at a stable and high level. Changes in the COVID-19 test procedure will not leave our Bioselect quantities unaffected and have continued to establish a further application for those products in parallel.On the one hand, the EBITDA reflects the strong operational business development across all our business units in the segment and on the other hand, process cost optimization can further underpin this trend. Increases in raw material costs as well as an unfavorable euro-U.S. dollar exchange rate burned the result but have been successfully compensated so far.So let us now move on to the third segment here. This is Other & Holding. This segment comprises all activities not allocated to the other segment. And this segment was also able to essentially repeat the development of comparable quarter of 2020 in the first quarter of '21. The customers of our chemical parks purchased our services in the first 3 months of '21 at a similar level as in the previous year. There were shifts between some services. For example, in quarter 2 and 3 of the last financial year, we saw higher demand for storage capacity. While in this quarter, we saw more production volume-related services.The segment's results reflect a price increase based on planned cost increases, and it also shows that the cost discipline measures introduced are having the desired effect. All in all, sales of EUR 6.5 million were approximately at the previous year's level and earnings of EUR 0.4 million were in line with our expectations here.So then we have prepared some additional information on our balance sheet. In total, balance sheet increased from EUR 354 million, up to EUR 359 million and what has been the major changes within assets. So tangible assets were more or less stable on the level of EUR 194 million. Therefore, this is a good sign that CapEx was more or less on the level of depreciation.Inventories were stable despite good sales. And in the area of receivables, in addition to reporting wage-related reasons, among other things, the considerable increase in quarterly sales led to a significant increase in trade receivables up to EUR 47 million here. So what was -- or what can we discuss on the liability side. Equity increased by EUR 14 million to EUR 82.7 million. This led to an equity ratio of 23% compared to 19.4% in previous year. The long-term evaluation interest rates increased from 0.5% last year and are now up at the level of 0.8%. And this results in a decrease in the pension provision, namely on the level of EUR 132.9 million, and the cash effect was only at the level of EUR 0.4 million for the pension. So I think that more or less the balance sheet analysis. Let us now show or have some words on the cash flow. This is printed down at the Page 16 here. So the cash flow development continues to be very positive. Cash flow -- cash inflow from operating activities was more or less on the same level as previous year. This reflects, on the one hand, the strong operating business, and on the other hand an increase in net working capital and here in especially the receivables. The cash outflow from investing activities increased sharply by EUR 5 million compared to the same period of last year, almost doubling. The main investment projects in the first quarter of '21 related to the expansion of capacity and the improvement of the AlzChem's sustainability. The capacity expansion of the nitriles plant was significantly advanced and is nearing completion, as we have already heard from Georg. And the construction of the new regenerative thermal oxidizer plant called RTO plant supports AlzChem's path to greater sustainability and investment activity in the same quarter of the previous year was not influenced by major individual investments.So AlzChem's financing activities in the last 3 months were focused on a scheduled repayment of loans and the repayment of leasing liabilities. Overall, this led to a cash outflow from financing activities of minus EUR 4 million. So from my point of view, that it's for the cash flow analysis. Let us have now a few words to our targets and the situation here. On the target list, we are well on our way with the general development towards sustainability. We have also included this topic at the top of our target list. Here, all analysis are running at full speed, and we expect to be able to present the detailed goals and an initial implementation plan here as well by the end of the year at the latest.And here, a few comments on the other targets on the list starting with the commissioning of the next capacity step of NITRALZ product group. We have talked about NITRALZ. The project is on time and on budget and will go live in May, increasing our involvement in sales in the pharmaceutical market here we have already delivered in quarter 1. So we are good on the way here and working on the topic of creatine for health and nutrition via LIVADUR. We are on the track, but we are in the process of finding the right B2C market approach as well.And we think that we can report additional information latest on September, I think, to this topic. As well as staying on top of the growth of Creamino, we expect growth to pick up significantly after the corona topic. And not to forget this, against the background of the pandemic event of COVID-19. Unfortunately, this still has a significant impact on our day-to-day business, but we are still high motivated.So finally, let us move to the outlook on Page 18 here. On this page, we would like to confirm our outlook for the year '21 with regard to sales and EBITDA development. On the sales front, we assume that the start-up of NITRALZ production and the topic of Creamino will again ensure significant growth from the second half of the year.The first months of this year have already confirmed a very positive sales trend, and we, therefore, believe that we can move into the direction of EUR 400 million in sales. On the earnings side, we will also grow. However, we already noticed that prices on the raw material markets are rising significantly across board, which is why we were so rather cautious in our forecast here and expect an EBITDA of EUR 57 million. With an excellent start to the year, turnover and EBITDA are expected to develop at the upper end of this forecast and eventually could be a little bit higher as well at the end of the year. So that's it for the quarter 1 analysis from us. At this point, we would like to thank you for your -- appreciate attention and are now at your disposal for possible questions, if there are any. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Stefan Orgonas, Berenberg.

[Gerhard Orgonas, Analyst]

Hello, is it me Gerhard Orgonas or -- can you hear me?

[Andreas Niedermaier, CEO & Chairman of Executive Board]

Yes. We can hear you, Gerhard.

[Gerhard Orgonas, Analyst]

It's Gerhard Orgonas. I've got a couple of questions, please. Maybe I missed it at the very beginning or at least in your release, you were talking about the repositioning of Creapure and leading to a sales uplift of this product. Can you explain a little bit what you've done here in terms of marketing and strategy?

[Georg Weichselbaumer, Chief Sales Officer & Member of Executive Board]

Yes. Yes. I think we commented on it and it comprises a couple of things. First is the recovery of the traditional business to a very, very big extent. But in parallel, we had also prepared new markets. We look at creatine for vegetarians in functional foods where we have initiated developments. We're also looking for creatine into drinks, where we have initiated development and those have progressed and showing first signs that it is -- can be accepted in the market.

[Andreas Niedermaier, CEO & Chairman of Executive Board]

And what we have seen is a change in the market, a mind change that the market wants to have the high-quality products and ask more on the quality than on the price level.

[Gerhard Orgonas, Analyst]

Okay. And then again maybe on raw materials and electricity. Can you, first of all, tell us maybe year-on-year at the moment in Q2, how -- on average, what do you see as rises in raw material prices and electricity prices? And also in electricity, how far are you hedged at the moment?

[Andreas Niedermaier, CEO & Chairman of Executive Board]

Yes. So the main topics on the raw material prices are the coal prices and the electricity prices, for sure. For electricity prices, we can say that we have prepurchased the main quantity for 2021. So therefore, we are not really influenced from this market increase. So we have seen at the stock exchange EET level last year of approximately EUR 40 per megawatt hour and see actual prices at the level of EUR 60 and therefore, we are only influenced for a very small quantity because we have already purchased a big amount last year. So that's it for the electricity. For the coal information. So from our point of view, we had a real good situation last year and we are back on more or less the level of 2018, '19, where we have already seen this high level of coal prices. So the supply chains are there, and we have the possibility to have all the coal on our production available. So therefore, we -- yes, we have all the raw material available we need for production.

[Gerhard Orgonas, Analyst]

Would you expect a negative impact already in Q2 to be seen, so like a sequential downturn in Q1 because of higher raw materials on EBITDA?

[Andreas Niedermaier, CEO & Chairman of Executive Board]

Yes, we will see a little effect beginning with the quarter 2 because of accounting issues you know. We had very low prices in the stock, and the stock is empty now with the low prices and the higher stock level prices will come into the balance sheet, respectively, into the P&L with beginning of quarter 2. Yes.

[Gerhard Orgonas, Analyst]

Okay. And maybe a last question on electricity. The CO2 certificate, is that included in your electricity cost? Or do you need to buy certificate? Or how do you look?

[Andreas Niedermaier, CEO & Chairman of Executive Board]

So principally, we purchase electricity on the stock market. And there are the -- in that price is the cO2 already included. And we can apply for some -- how to -- for some compensation for this CO2 prices because we are classified as a so-called carbon leakage company. And therefore, we can apply for some compensation here.

[Operator]

Our next question comes from Peter Hasler, Sphene Capital.

[Peter-Thilo Hasler]

Yes. It's also about the supply chain and the inventories. You mentioned that you have reliable supplier relationships, and you also mentioned the importance of [indiscernible] supply. But just later on, you say that -- when you cut back a little bit when you said that in the coming months, it will show whether the constraints in the raw material markets are subject to normalization. So could you give us an indication how normal these markets have been for you in the first quarter?

[Georg Weichselbaumer, Chief Sales Officer & Member of Executive Board]

So I mean when we look at the raw material and logistics market, that is in quite a turmoil for various reasons, I mean, Andreas spoke about the blockage of the Suez Canal, which is part of it, but it goes further and much beyond that. I think you remember the cold flow into the U.S., which we had in February and impacted many chemical productions in the southern part of the U.S. It impacted, for example, 2 of major acetic acid producers who are still rebuilding their production and had a ripple effect on other raw materials as well. So as a consequence, I mean, in Europe, we have counted, there are more than 40 chemicals now on force majeure, and that pressure will remain.In addition, the charges for containers, in particular, out of China are skyrocketing. So the freight costs are tripled or quadrupled and it remains to be seen to what extent this will ease up and will impact us on the second quarter.So far, we have tried to stay ahead and schedule raw material purchases and logistics early. We don't think that there will be a relief, in particular, on the logistics situation in Q2 or Q3. And sometimes it's even beyond our control because containers are booked on ships and on short notice skipped from those ships, and that are some of the uncertainties, which makes us a little bit cautious on both the logistics and sales side and also on the cost side, and keeps us within the range of the EBITDA expectations.

[Andreas Niedermaier, CEO & Chairman of Executive Board]

So the only information we want to avoid is that the analysts quadruple the first quarter. That's the only information.

[Peter-Thilo Hasler]

Absolutely. Understand it. Well, I mean this force majeure is mentioned by many, many companies right now in their...

[Andreas Niedermaier, CEO & Chairman of Executive Board]

Yes, but, Stefan, we are really safe. We have no problem with force majeure topics. We have all the raw materials available, but we are only a little bit cautious because of the market development here. Yes.

[Peter-Thilo Hasler]

Absolutely. In the Basics & Intermediates segment, you mentioned that you try to pass on costs.

[Georg Weichselbaumer, Chief Sales Officer & Member of Executive Board]

Pass on. Yes.

[Peter-Thilo Hasler]

Yes. But when I look at Page 12, I see that the prices came down by 0.8%. No this is the special chem. It's 0.4% I think. Yes, 0.4%.

[Andreas Niedermaier, CEO & Chairman of Executive Board]

Yes. Usually, we are successful to pass on higher raw material costs to our customers. Yes, but it's not possible for all contracts because sometimes we have contracts running for 1 year or half a year, and therefore, it's not possible to change the prices within short notice. Yes.

[Peter-Thilo Hasler]

So could you tell us about the fraction of the sales that have an escalation to us? Is this more normal? Or is it the exception?

[Georg Weichselbaumer, Chief Sales Officer & Member of Executive Board]

It cannot be assessed with that criteria. I mean, we try to have contracts with customers with raw material clauses as we get closer to the basic raw material chain. So in our initial products, where costs are really the driving factors, we have clauses in the contract where we can adjust prices based on raw materials. But as you add higher value to it, the cost portion is getting lost also in the sales discussion. And the prices then are more made by what is the situation on the market. And they are -- it's hard to pass on each and every increase. I think it's also important to mention that a little -- to a certain extent, the product mix change and that had also an impact on the price development. We have mentioned that, for example, the carbide business has increased significantly. And then there, we are much further -- much closer to raw materials. And the impact of carbide is much bigger in the first quarter than it used to be in the first quarter of last year.

[Andreas Niedermaier, CEO & Chairman of Executive Board]

But if you need the information for your model, I think it's -- yes, you can imagine approximately 1/3 of the contracts or 1/3 of the turnover is linked to price -- direct price increases or raw material clauses.

[Peter-Thilo Hasler]

All right. Okay. And the final question, if I may. You mentioned that you want to achieve your sales targets organically. On the other hand, I read that you want to use the share buyback as an acquisition currency. Does this mean is it solid for me to assess that in '21, you're not planning any acquisitions?

[Andreas Niedermaier, CEO & Chairman of Executive Board]

So there are always some rumor in the market, and there are always some acquisitions under progress. But we don't see a bigger acquisition and a bigger growth topic for 2021 here.

[Operator]

[Operator Instructions] We haven't received further questions. I will hand back to the speakers.

[Andreas Niedermaier, CEO & Chairman of Executive Board]

Yes. Okay. Thank you very much for your questions. Interesting discussion from my point of view. We can now offer you the opportunity to visit us virtually at the conferences as shown above here on the Page 20, 19. And therefore, I think I have to change to the Slide to 19 here. Yes, you can return at the Annual General Meeting on May 12 what is already next week, and we are pleased to invite you to this event as well. Stay safe and sound. Stay in our good graces, and goodbye, and thank you. Bye-bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.