Mexichem S.A.B. de C.V.

Transcription

1 Conference Call CORPORATE PARTICIPANTS Rule CEO Marcela Muñoz Moheno Investor Relations

2 1 PRESENTATION Good morning and welcome to the Mexichem Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today s presentation, there will be an opportunity to ask questions. To ask a question you may press star then one on your touchtone phone. And to withdraw your question please press star then two. Please note that today s event is being recorded. I would like to turn the conference over to Marcela Munoz of Investors Relations. Please go ahead. Marcela Munoz Thank you, operator. Good morning and welcome to this conference call. We re very pleased to be here today to present the details of our last acquisition. We appreciate your time and your participation in this conference call. Our speaker today will be Mr., CEO of Mexichem. I will now turn the call over to Antonio. Please go ahead. Thank you, Marcela. Good morning, everyone and thank you for joining us this morning on such a short notice. This is a very exciting time for the entire Mexichem organization and we wanted to take this opportunity to share the rationale for acquiring Netafim, to talk about how we change the positioning of the company, and give you a closer look at Netafim s leading edge technology and the synergies we expect to achieve together. Let me start by saying that acquisitions are not easily predictable. In this case the timing could not have been better. We have finished our significant CapEx project, which is now starting to provide returns. We have strengthened our management team substantially. PVC pricing is starting a positive cycle and Fluorspar prices are improving. Within this context a fantastic opportunity became available. A couple of years ago even if Netafim was our dream company we could not have gone for it. Now Mexichem is ready financially in terms of operating discipline and organizational structure and management team. Netafim is a transformational acquisition for Mexichem, but is consistent with our driving to specialty products and positions us as a leader in micro-irrigation, a core element of digital farming. Mexichem already participates in the irrigation market with a business of approximately $120 million in pipe products and we view these as an excellent growth market. As a result of Netafim s acquisition, Mexichem will be a global leader in growth markets that are addressing global issues such as water scarcity where we will have the most efficient method for delivering water to the roots of plants, which reduces water usage; food scarcity where we will have the most efficient method of increasing crop yields; and higher environmental standards for fertilizing where we would be delivering fertilizers and nutrients to plants at the root, we reduce the collateral damage and lower costs. What is key to understand is that all of the advantages of drip irrigation bring clear economic benefits to the farmer. Slide 4 shows the well-known demographic forecast that point out to major food and water shortages in the horizon. As you can see, scientists and economists are predicting that population growth will require a 50% increase in food production by 2050, when the reduction in arable land and limited water resources will result in a significant water deficit. One of the most important drivers for this acquisition is our firm belief in the strong growth fundamentals of the business. The world s increased urbanization and population growth will require significant productivity improvements in food production and important efficiencies in water usage. Netafim has the technology and the products to address these issues.

3 2 On Slide 5, you can see that adding to the problem is a fact that most of the world s water is being used in irrigation. As we mentioned, demographic trends will require more efficient irrigation methods and drip irrigation; Netafim s core competency is the most efficient solution. Today, drip irrigation is only been used in 5% of the arable land being irrigated. The great news is that the growth potential is huge. This approach that delivers economic value for farmers reduces water and fertilizer costs and significantly increases crop yields. On Slide 6, we described the four global trends that drove Mexichem to the acquisition of Netafim. First, water shortage, as I ve mentioned, Netafim has the best solution to deliver water to the roots of the plants and reduces water usage significantly. Second, increased food demand, as we ve mentioned before the world s population growth will require significant demand for food and Netafim s technology has the best solution for this. Environmental restrictions will also be a driver for drip irrigation making sure that the fertilizers get delivered only to the areas that require it. And finally, smart digital solutions, Netafim has the best solution for digital farming and this is a steppingstone for Mexichem s digital transformation in the rest of the businesses. In addition to the direct position of Mexichem will have as a global leader in this market, on Slide 7, we illustrate the vision we have for accelerating our company s evolution from a product supplier to a leader in providing solutions to the markets we serve, leveraging the specific expertise in water and end-to-end solutions that Netafim brings to Mexichem s organization. Today, we re a global leader in PVC pipe fittings and certain specialty products and solutions for our team markets infrastructure, housing and datacom. With Netafim s deep domain expertise in water and their technical know-how as a leading solution provider, we will be the leaders in the environmentally sound delivery of water and nutrients for food production. Netafim not only brings the products and technology required, but also brings significant project sales expertise, which is required to be successful in moving from product supplier to solution provider. Also, Netafim adds significant project financing expertise, which is also a prerequisite to be successful in selling solutions. All in all, great products by both companies, fantastic global platforms to leverage and the required capabilities are a recipe for success. Now, please move to Slide 9 so I can give you a closer look at Netafim s operations. From a business standpoint, Netafim is a pure play on irrigation technology offering a full range of drip lines and sprinklers and system components that are used in their digital farming and large scale turnkey projects. In fact, you can find products that Mexichem makes in the majority of their projects. Netafim s expected revenue for 2017 is in the range of $956 million to $999 million, and their expected adjusted EBITDA for 2017 is in the range of $131 (million) to $136 million. They currently have 17 manufacturing plants located in key markets, 4300 employees and they re selling in over 110 countries. Their platform is highly complementary to Mexichem s. The only facility they have where we re not present are in Australia and Israel. The rest of the facilities are in the region for Mexichem is already present. On Slide 10 is a look of Netafim s industry positioning. Public level information indicates that Netafim is the world s largest micro-irrigation company with approximately 30% of world s market share. They have the number one position in all markets they serve with the exception of India where they re growing share and China where they just began to penetrate, both of which represents areas of significant potential growth for Netafim s current offerings, even their large populations. And they have done all this without having facilities in many of these countries. Mexichem adds significant geographic scale for Netafim to take advantage of.

4 3 Slide 11 provides an overview of the three major irrigation methods: flood, pivot and micro. Micro has clear advantages by resulting in greater crop yields, saving water and other inputs, and giving the farmers more control. Moving to the Slide 12 is a review of the key market drivers supporting increased adoption of microirrigation, which is currently the fastest growing segment of the irrigation market. In addition to the micro issues of water and food scarcities, increased professional farming more land becoming equipped with irrigation and greater demand for fresh foods are important trends on [indiscernible] the growth of microirrigation. Also, as micro-irrigation becomes more prevalent, the replacement market is developing and will continue to grow providing further sales opportunities. In the near-term alone the market growth potential [indiscernible] growth rate is over 10%. Slide 13 takes a closer look at specific country by country opportunities for increased penetration of microirrigation. As you can see, the opportunity in both developed and emerging markets are huge, and with Netafim we re entering markets that are in the very early stages of adopting a new technology, and we re entering as recognized market leader with an impressive portfolio and successful project completed infrastructure to support continued growth. Slide 14 shows a scope of the products and end-to-end solutions that Netafim offers based on its environmental knowledge and best practices in implementation of advantaged irrigation technologies for a wide variety of crops. Their experience with almost every type of climate, soil, landscape and water source and culture provides a significant competitive advantage that has played a pivotal role in the success of their projects. Netafim produces only a small fraction of the products in the picture, but important ones, which are the drippers and the lines. Many of the products that Netafim doesn t [audio skip], Mexichem does. Mexichem is really the production company; Netafim puts them together into a high value solutions. Some others, which are not produced by either Mexichem or Netafim, represent new adjacent opportunities. Moving to Slide 15, which includes a snapshot of Netafim s automatic irrigation system, we see the benefits of digital farming for the grower: increased yields, improving crop quality and consistency in reducing costs. Netafim s top quality technology is at the foundation of the intelligent planning, managerial and maintenance practice that lead to effective irrigation. They have developed several technologies that let farmers control and manage their crops based on valuable real-time field data. Agronomic management is conducted through the intelligent integration of three main tools: controllers, sensors and knowledge. Netafim offers the only fully integrated irrigation management solution that combines monitoring, control and utilization, and is supported by professionally centered agronomists, engineers and drafters and irrigation assistant technicians. This is truly a unique company. As we all knew technology this is just starting. We believe the technology, as it penetrates the markets, will become a key factor in increasing productivity in agriculture. Also as I ve mentioned before Mexichem s vision is to move into smart technology and other products. This acquisition is a first step in Mexichem s digital transformation. Now, let s look at basic themes. As with all our previous acquisitions Mexichem always looks for talent and capabilities. We believe that Netafim s management team is truly unique and brings significant new capabilities to Mexichem. We also believe that Mexichem will be a great home for Netafim s talent. Slide 17 describes the ways in which we believe that Netafim strengthens Mexichem investment thesis. It positions Mexichem as a major player in the market that s growing at double digit rates, and significantly expands our portfolio of specialty products as well as increase our scale. The acquisition diversifies and expands our end markets, positioning us in the worldwide agricultural sector; extends Mexichem s reach

5 4 in key global markets like the US, India and LatAm; opens new regions including the Middle East, Africa and Australia; and Netafim brings us R&D and technology we can utilize across our company to create industrial solutions for our worldwide customer base that is the first step in Mexichem s digital transformation. Moving to Slide 18, you can see where we stand with respect to market diversification on our product portfolio. We will integrate our existing agricultural products under Netafim, and for reporting purposes Netafim will be consolidated under our Fluent Business Group where agricultural products will now account for 26% of the group s revenue, up from 4% prior to the acquisition. The key takeaway from this slide is that Mexichem is well diversified by end markets across our business groups, which provides growth opportunities as well as resilience to downturn in any one industry. Slide 19 speaks to the business and geographic diversity that Netafim acquisition brings. Our Fluent Business Group will account for just under 60% of Mexichem s total revenue and 50% of pro forma EBITDA. The regional mix of our business will remain similar to what has been, except that Asia, Middle East and Africa region will double in size representing 8% of our total revenues. On Slide 20, the summary of our synergy expectations. First, on the sale side Netafim is already addressing a high growth market and will benefit from Mexichem s resources to accelerate their market penetration. Also Netafim can benefit in Mexichem s significant distribution network in Latin America to increase their relevance of the replacement part market, which is at the moment small. Additionally, they will have access to our sales channels and large customer base, and their know-how will help us drive incremental project sales growth in the Fluent Business Group. On the cost savings side, we expect to benefit from economies of scale particularly in procurement of raw materials like polyethylene and reduce logistical cost and optimization of the footprint. And of course the sharing of the technological capabilities and best practices will be a win/win to enable sales growth as well as efficiency gains. Now to the details of the transaction. On page 21, Mexichem will have 80% stake in Netafim, which has an enterprise value of $1.895 billion. Kibbutz Hatzerim, which co-founded Netafim more than 50 years ago, will retain 20% stake. We will fund the transaction with the combination of cash in hand for about $300 million, short-term debt for about $200 million to be paid within the first year from the date of the transaction, and the bridge loan that will be substituted by a long-term bond in the short-term. The transaction is subject to shareholder approval and approval by customary anti-trust regulators. We expect the transaction to close sometime in the fourth quarter of this year. Having Kibbutz Hatzerim as a partner is important for Mexichem. Deciding to stay as a partner indicates that they believe in the future of the company. Also, they will help us navigate doing business in Israel. And finally, they would provide some services for the local plants as they do today. We re honored to have Kibbutz Hatzerim as a long-term partner. We have spent several months analyzing the fit for Mexichem and are convinced that the synergies we have identified and the opportunity this provides us will expand Mexichem s margins and returns over time making this an excellent investment for Mexichem. It is important to mention that Mexichem continues to be committed being below 2x net debt-to-ebitda as its leverage ratio, and have clear and precise plans for achieving that in less than 18 months after the closing of the transaction through internally generated funds. Mexichem and its management team continues being committed to maintaining its investments grade ratings. We re pleased to have the resources and the infrastructure to move forward in such a transformational acquisition, which we expect will significantly expand Mexichem s growth potential.

6 5 I will now open the call for questions. QUESTIONS AND ANSWERS We will now being the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press the star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Alejandra Obregon of Morgan Stanley. Please go ahead. Alejandra Obregon Hi, good morning, everyone and thank you for the call. I have couple of questions. The first one is on profitability since at first glance that profitability for Netafim is fairly in line to your Fluent margins, and my question is how should we think of margins after consolidation, particularly since you mentioned some synergies? I know it might be too early to measure or quantify this, but where should we think these efficiencies could come from, when and how should we think of profitability going forward? And then my second question would be regarding the leverage and the debt that you re trying to acquire to complete the acquisition. Perhaps if you could give us some details on the cost of the debt and when should we see this bond coming out. And thank you that will be it. Alejandra, thank you and good morning. So, let me start with your first question. I can tell you that based on the analysis first of all, something I did not mention. We did a very significant due diligence on this acquisition. We spent, I would say, an enormous amount of time and resources doing this, which has been a very good I think it gave us an advantage in this very competitive process in the sale of this company understanding the company well. I think also the bonds we ve created with both our new partner and with management team are very good. So, I think we exchanged significant information to understand where the synergies can come from. Also as I mentioned in my script, we already participate in the irrigation business, so we understand what is required in terms of products and processes. We re not the leader and I would say we re not as good as Netafim by a longshot, but we understand the business. What I m trying to tell you is that I think the synergies that we have come up are very significant, let me put it that way. But at the same time because we ve been in the transaction mode at the moment, the next step I need to do is sit down with the management of Netafim because they ve also made their analysis of synergies, and I think they ve come up with similar conclusions, but we need to sit down and put our heads together to make sure that we present a plan, and I think it will be ready to show in the next few months something very clear. But I can tell you that we believe there are significant opportunities, we believe that the margin expansion is something that s very doable in the short-term, and I have engaged a couple of consultants to help us manage and be very disciplined about extracting the synergy. So, I think we re going to have a good process here and I m excited about the prospects of increasing the profitability, generating the synergies. And as I mentioned, the key ones are, of course, we will give access to Netafim to our sales channels, which are very important in Latin America especially Latin America. We will give Netafim access to all our facilities to improve their footprint and we will have reductions in cost of raw material from the polyethylene. And finally, as I said, a significant portion of their sales, there s a chart in the presentation that shows that they sell a lot of products that they don t produce and that pulls their margin down because

7 6 they are just resellers, and most of those products Mexichem makes. So, I think there are significant synergies in increasing our sales to the irrigation market now through Netafim. On the second point on the cost of the transaction, the revolver facility is a little over I think it s 150 basis points over LIBOR our rate and as I said, we re going to take about $200 million of the revolver facility and the bridge facility that we have negotiated is about 45 basis points above LIBOR. So, those are the two short-term rates that we re going to take, which gives you more or less a rate of 60 basis points above LIBOR if you combine those two rates. The bond we have a commitment internally to our board and to ourselves to start working as soon as possible on the bond issuance so that we can repay the bridge facility as soon as possible. And we re not going to issue an equity. It s important to mention there s absolutely no plans for issuing any equity. Alejandra Obregon Perhaps just a follow-up. You mentioned an 18 month period for deleverage. Is this coming completely out of your free cash flow? Do you have any other plans? What are you thinking in terms of the deleveraging process? It s basically coming out of our free cash flow we expect deleveraging. If you look at today we have we closed the quarter with about $735 million in our cash balance sheet at the moment. If you look at Mexichem s seasonality, the first half of the year we never generate cash. It s always negative or very close to negative because of the seasonality of some of our businesses. The second half is when we deliver most of the cash flow and we expect very significant cash flow in the second half and then a very strong 2018 in terms of cash flow. So, the 18 month I think is a very doable commitment to you. Alejandra Obregon Okay, thank you very much. This was very helpful. Again, if you have a question please press star then one. Our next question comes from Luis Miranda of Santandar. Please go ahead. Luis Miranda Hi, good morning, everyone. A couple of questions. The first one, on the due diligence and understanding that you talk about seasonality on the business, can you tell a little bit about the volatility or the seasonality that we have on Netafim and what would we expect going forward? And the second one is more on the strategic front. Clearly, you re taking very strong change in mix towards agricultural products and irrigation that was important, but now it is going to be very material within company. What do you think about the timing in terms of the integration process of Netafim and what could you expect going forward in terms of new acquisitions or new products for Mexichem overall? Thank you. Yes, so let me start with the seasonality. What we have learned in the due diligence, Netafim is split in four regions similar to Mexichem, so they measure themselves in North America, Latin America, Europe and then EMEA. And each one of them has different seasonality aspects to them. So, this is a seasonal business; it does have seasonality. I would not say it s significantly higher volatility than Mexichem. I cannot tell you that. I think it s relatively similar to our seasonality in terms of magnitude.

8 7 To be honest, we will have to work with the management to understand now that you put region over region with Mexichem to see if any region specifically has something more dramatic than Mexichem today, but what I can tell you is that maybe for our next conference call we can give you a lot more detail on seasonality if you give me that time to really understand more your question and I commit to you that I ll get back to you with some additional information on seasonality. On the change in mix, you re absolutely right, agricultural products will now represent about 26% of our sales, if I remember correctly from the presentation I just gave. What you have to understand is that there s two components to this acquisition. One is the products itself, and a large portion of the sales will come from products that Mexichem already makes. What s changing is the market driver. The market driver is a different one or we are, let s say, jumping on a market driver that s different than what we normally talk about. Probably the biggest constant I like to give you is that Netafim does not consider itself a product company. They consider themselves a solutions company and a water delivery company, and Mexichem is more a product and manufacturing company. So, the combination I think is what s key here. We re going to be jumping on a different set of drivers, which is agriculture, which as I mentioned repeatedly in my presentation we believe have extremely strong fundamentals for growth over the next 10, 20, 30 years with a fantastic technology, fantastic capabilities, and with the manufacturing footprint that Mexichem has. So, yes, it s a slight change in terms of we re going to now be talking more about agriculture because it s a big driver, but the products are the same. It s just that the company we bought does not see they re delivering products, they deliver solutions and that s something that we need to bring to Mexichem in terms of the rest of the product line [indiscernible] on the water management, the heating and the cooling, the hot and cold. How we do deliver solutions to our customers? I think that s where the world is moving and what the world requires from a company like Mexichem. And finally, on the acquisition integration. So, for the moment as you can imagine we re going to be very busy with this one. The integration, we have all own internal plans, but as I said we just finished negotiations with the seller and with the management, and the one thing I can commit to you and to all our investors is we re going to do it with a lot of care. This is a different company with different drivers, with different ideas of how to approach the market and the last thing I want to do is create a problem for the company. I think the synergies are huge and I think many of the synergies have nothing to do with the integration, it just simply has to be done fast and we have discussed with them, but the integration has to be done with a lot of care. They have significant capability that we want to take advantage of and we should have an integration plan over the next three months ready. As you can also imagine, we re still waiting for approval for this acquisition from both our shareholders assembly and also from the antitrust authorities. So between here and closing there s limited amount of work we can be doing, but I think we re very aligned with management that what we want to do is increase margins, generate synergies, and setup Netafim inside Mexichem to be fairly independent in terms like we handle most of our business with a lot of discretion from management, but at the same time taking advantage of synergies. Luis Miranda Thank you, that was very helpful. If I could ask a follow-up. When do you think that you will be able to give us some baseline information in terms of synergies that we can start to work with in modeling the company? I would say that right after the closing I can give you more information. And the reason I cannot give you more detail, from here to closing we re limited in the amount of things we can discuss with them because, as you can imagine, we are also competitors at the moment in Latin America. So, we re limited in the

9 8 amount of information we can share and talk, so we have to wait for that closing to happen and immediately after that I think we ll come up with a more detailed plan. We ll be working in this two to three months to do it, but we ll have more information at the end. Luis Miranda Thank you. Thank you, Luis. Our next question comes from Pedro Medeiros of Citigroup. Please go ahead. Pedro Medeiros Thank you so much and good morning. Congratulations for the acquisition. I just have like some simple questions about the transaction itself. Do you mind mentioning how is and if we should think of capacity utilization of this company, is there any CapEx required for you to achieve the plans you have on your expected deleveraging process throughout the next 18 months and to acquire the synergies you re expecting and that were met through the diligence process? And my second question is, do you mind to provide a little more guidance on how is the current balance sheet of Netafim s and how was earnings for 2016 and the expected earnings for 2017? Thank you so much. So, let me start with the first one, the CapEx. One of the duties of this acquisition that I did not mention in my script, but I ve heard many of our investors when I go on roadshows, one of the things that worries our investors is the complexity of the company and the complexity of managing this company. One of the things I can tell you is that this acquisition, and that s why I mentioned it in the script, we re already present in most of the regions where their plants are highly complementary to ours. If you go into a plant they have two types of processes. They have injection process mainly in Israel and then extrusion processes. If you go to any of their plants outside of Israel and go into any of our Dura-Line plants that we have, you will not see any difference. It s exactly the same machinery, with some small difference here and there, but it s a very similar setup and that s why I mentioned so much the term of the platform. Right now, for example, Netafim in the US only has one plant in the West Coast. We have many plants in the East Coast. So, there s significant complementary platforms that the company can use. This company is not a high CapEx company. It does not require a significant amount of CapEx. It will depend really on the growth that we can accelerate if we will require CapEx, but the CapEx are really not significantly crucial and injection molding machines, which Mexichem has hundreds and hundreds of. And I don t think you should expect this company to be a significant driver on the cash flow coming from CapEx. I think they will bring great ideas to expand and it will be mainly organic CapEx and I think it will be mainly fit into the Mexichem organic CapEx. On the guide, as I mentioned, that the EBITDA for 2017 is somewhere between $131 (million) and $136 million and the revenue is somewhere between $950 (million) and $990 million for this year and it s growing. One thing I did not mention, which is very important to mention. This company changed management in 2014 and since then the new management has transformed the company in a very significant way and the management I showed you in the presentation is a combination of the new

10 9 management with the technology people that they have had for 50 years, which are the most knowledgeable people in the world in terms of drip irrigation. And this management what they re doing is transforming the company, and they have accelerated the growth on both the revenue and the EBITDA side in a significant way, so this year is that guidance that they have given us and for next year they also have an aggressive budget. So, we will be sharing more of that once we finalize the transaction. Pedro Medeiros Thank you so much and just as a follow-up. Would you mind disclosing how is the debt and equity composition of Netafim currently, and how was earnings in 2016? The debt at the moment is about $130 million and $150 million, somewhere in that range. It depends on the way you re defining debt, but their basic debt is about $130 million to date. Pedro Medeiros Okay, thank you. CONCLUSION This concludes our question-and-answer session. I would like to turn the conference back over to Antonio Carrillo for any closing remarks. Thank you very much for joining us this morning on such short notice. I really appreciate it. I know it s very early in the morning, but we wanted to get you before the market opens and I truly believe this is an exciting opportunity for us and thank you for being with us in this call. Thank you. The conference has now concluded. Thank you for attending today s presentation. You may now disconnect.