AlzChem Group AG (ACT) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the conference call of AlzChem Group AG. At our customer request, this conference will be recorded. [Operator Instructions] May I now hand you over to Andreas Niedermaier, CEO. Sir, please go ahead.

Yes. Hello. Good morning, everybody. Thank you for joining us today, and welcome to our second analyst call for this year. As always, we'll start with an executive summary and then move on to the figures after some strategic issues. So at the end of the presentation, we will be available for questions. And I think let's skip the disclaimer and go directly to Page 4. So Page 4 would be already presented in front of you. Let's start here with some COVID-19 topics. Despite COVID-19, production, sales and earnings are stable due to resilient product portfolio and compensation possibilities within the AlzChem Group. The impact on supply chains were only limited. From time to time, we had slight delays in shipments or postponement, but overall, the supply chain was and is stable. So which we are particularly pleased about is the expected very strong growth -- very strong Creamino growth was successfully realized in quarter 2 2020 and developed within the forecasted range here. So Bioselect rises to the start of the year, as we have always been represented in the DNA analysis kit. Due to the increased analysis triggered by COVID-19, the demand has risen significantly across all customers here. So we are delighted that the Basics & Intermediates segment is performing very well in a challenging market environment. This quarter was again better than the previous year, both in sales and EBITDA. So we had a positive aspect, but what already bothers us is the steel and automotive industry products for these sectors are, in some cases, showing significant declines. And so far, we do not see any improvement, rather a more tense situation for the next weeks or some months. So overall, we can report a successful first half of 2020 so far. EBITDA is in line with our forecast. But we also managed to master other challenges in the first half of the year. We were, thus, among the first companies to master a virtual general meeting in the middle of the corona crisis, I tell you, an interesting experience. And this is also where we delivered on our dividend promise as well. So let us now go into a few more details on the next page, it's Page #5. On the major success factors of AlzChem is our widely developed and branched NCN product family tree. Here, a product area with high-growth rate has developed in recent years, our Bioselect portfolio. We have grown steadily with a DNA diagnostic applications and have thus always been a recognized European supplier and partner for diagnostic customers. With COVID-19, the demand for DNA diagnostics increased disproportionately. Within short notice, we have strengthened personnel and invested in additional plant equipment and thus increased capacities. Through this measure, we were and we are in the position to accompany the strong market growth here. Now this, in turn, puts us in a position to balance as a business, which we see on the next page. So on the basis of a highly diversified product portfolio, it was possible to almost completely offset the effects of the global economic disruption in connection with COVID-19 pandemic in quarter 2, some of which were significant. Nonetheless, we have seen a clear downward trend for the steel and automotive industries in the second quarter and for some products, for example, for Creapure, as there was significantly less training due to COVID-19. On the other hand, the current environment also shows business opportunities for the AlzChem Group. In particular, these areas, nutrition and agro as well as pharma are system relevant. And because of their systemic relevance, these areas in particular have shown stable or even very good growth and have more than compensated for declining business. Based on a long-term and thus reliable and stable suppliers relationship, the group has been able to maintain all major supply chains to date. And the raw material supply of the AlzChem Group is, with a few exceptions or supply bottlenecks, robust and thus supports a continuously production process. But now what are the specific figures? Let us analyze them on the next page. In the second quarter of 2020, sales increased by 6.6% year-on-year to EUR 102.5 million. Most of the sales growth was achieved in the Specialty Chemicals segment, although the Basics & Intermediates segment contributed slightly as well. In this quarter, we grew structurally above all by 5% in volume, 1% in price and 0.6% in currency. The EBITDA increased by approximately EUR 2.2 million to 16.8% compared to the same quarter of the previous year, following the good sales. Thus, we were able to compensate for the somewhat weaker quarter 1 and quarter 2, as we had already promised in the first call this year. The very good second quarter has now resulted in revenues for the first half of the year of plus 4.8% above the previous year, followed by an EBITDA of EUR 29.1 million, which represents an increase of 4.6% here. Earnings per share fell from EUR 1.16 to EUR 1.09. The decline is due to the significantly higher depreciation following high level of investment in the past, especially last year. So overall, we think we have made a very good first half year compared with the current environment. It's hard to imagine as it might have gone if we hadn't seen COVID-19 crisis. Nevertheless, on the next page, we can present to you that the second quarter was the best of the last 10 quarters. So thus -- and this was not only the best quarter in terms of revenue, but also in terms of EBITDA. However, you can also see that we regularly have seasonality in sales and earnings. Thus, in the first half of the year is regularly somewhat stronger than the second half. This year, we may see some COVID-19 effects in quarter 3. So much for the big picture and the overview. Let us now analyze some more details in the different segments and go directly to Slide 11. So I wait a second because there is some delay sometimes in the slide show, but now it should be available for you. So only to remember, the Basics & Intermediates segment comprises the production of Basics & Intermediates products that are either required for the manufacturer of specialty chemicals or marketed stand-alone product. The products are used in a variety of applications here, for example, in agriculture, steel production and automotive industry. In the Basics & Intermediates segment, the robust basic structure in the AlzChem Group was particularly evident in the first half year. Despite volume declines in some cases of around 30% in the steel and automotive sectors, overall sales growth was at the level of 1.1%. This development is supported by the market performance of NITRALZ following the CapEx in 2019, the expansion of the application areas and countries of Perlka as well as growing basic materials for pharmaceuticals end products. The raw material and especially the electricity spot price effects had a positive impact on the segment's EBITDA margin as well. And in line with good sales, we were also able to convert the whole into an EBITDA of EUR 2.5 million here, which already represents a significant improvement compared to the previous year on the level of 0.6. So the increase in sales was driven on the one hand, by more or less stable volumes, 0.3%, and on the other hand, by price increases and the change in product mix which stands for 0.5%. Additionally, there was a positive currency effect of plus 0.4% as well. Thus, even for the first half of the year despite the COVID-19 crisis, we are up 1.3% in revenues and 163% better EBITDA than last year. So much for the Basics & Intermediates segment. Let us now move on to the Specialty segment. This is Page 3 -- 13, sorry, 13. So there is some mismatch in the slide show but we will come back. Yes, Specialty segment. So it's Page 13. Only to remember, the Specialty Chemicals segment produces and sells high-quality specialty chemicals such as Creamino, Bioselect, DYHARD and Dormex, only to name but a few here. Within the Specialty segment, there are extraordinary success to report as well as significant decline in volumes. As already reported, one of the growth drivers is Bioselect. However, our custom manufacturing business and especially our Creamino also showed pleasing volume development in both quarter 2 and in the first half of the year. Our plant growth regulator, Dormex, was able to completely make up for the delivery backlog reported in the first quarter and even posted growth for the first half of the year here. In a difficult market environment partly influenced by COVID-19, marketing activities of our derivatives, LIVADUR and Your Encour! were intensified once again. So that these future investments and weaker affected both earnings and sales in this segment. We were severely or very severely affected by the COVID-19 pandemic in the automotive and renewable sector, particularly in the DYHARD business unit and our solutions for airbag production. So despite these influences, total sales were 11.9% higher in quarter 2 and 8.2% higher for the first half of the year than a year ago. Due to the effects described above, EBITDA for the quarter was also 11.9% higher, partly through the catch-up effect at Dormex, but for the first half of the year on par with the previous year. The growth in sales was mainly driven by volume growth, 7.2% at more or less stable prices, which stands for 0.2% in the sales analysis and in addition, there was a slight support in sales and results from positive currency effects compared to the previous year. So let us now move on to third segment. This is Other & Holding on Page 15. So we have some problems here in the slide steering, but we will solve the problem. Please go to Page 15. Yes. Now Page 15 should be presented to you. Hold on a second because there is always some delay for presenting the slide to you. So but now I think it should be available. So the Other & Holding segment comprises all other activities, not allocated to the other segments, these services are mainly related to the chemicals parks, Trostberg and Hart which AlzChem operates also for the third parties. And in addition, administrative services are allocated to the segment as well. So the business volume at the chemical parks in Trostberg and Hart remained essentially stable. Sales revenues totaled EUR 6.4 million compared to EUR 6.6 million in the previous year's quarter. So this looks like more or less stable. The segment's earnings reflect price increase based on plant cost increases. Earnings are affected by ongoing renovation and maintenance work on the plant's own infrastructure. Cost savings in this area could not fully but partially offset this effect in the first half of the year. So much for the segment analysis, I think now it's time to look at the balance sheet. This is the Slide 16. So the balance sheet in total increased from EUR 342.6 million, up to EUR 354.3 million. The essential changes to report within the assets is the first in line with lower CapEx; tangible assets decreased by 4.1 to EUR 182.2 million compared to December 2019 inventories came more or less at the same level with a slight decreasing trend. Receivables always rise in the first half of the year due to product mix and reached a level of EUR 50 million. Compared with June 2019 reporting, the receivables are even slightly lower. So what is there to discuss on the liability side, equity increased by EUR 1.4 million to EUR 62.7 million. This leads to an equity ratio of 17.7% compared to 17.9% in the previous year. The dividend of EUR 7.6 million was distributed to the shareholders after the first virtual Annual Meeting in May. The long-term evaluation interest rates increased from 0.9% to 1.7% in the first quarter and are now back on the level of 0.8%. This had the effect that the pension provision was again significantly higher, namely at the level of EUR 138.2 million, as you can see on this slide on the right bar graph. So in addition, the scheduled repayment of loan liabilities led to a reduction in noncurrent liabilities of approximately EUR 5.7 million and within the higher current liabilities of EUR 73.1 million. We see the short-term financing effect of higher seasonal receivables on the asset side. So that's it for the balance sheet analysis. Let us now have some word to the cash flow. So the cash flow development continues to be very positive. A cash inflow from operating activities increased from EUR 2.7 million up to EUR 11.7 million year-over-year, and this reflects the decrease in net working capital and the strong operating business, the most positive aspect after previous year, the cash flow being burdened by the increase in stocks. This year, the decrease in stocks has boosted the cash flow almost twice. So at EUR 9.6 million, the cash outflow from investing activities was lower than half of the previous year, and the main reasons are, of course, the absence of major projects for the time being and somewhat lower CapEx activities due to COVID-19 as well. So as a result, we have a clearly positive free cash flow compared to the previous year. AlzChem's financing activities in the first half of the year 2019 were still largely characterized by the payment of the remaining loan amount to finance the new Creamino plant in the amount of EUR 30 million. And in contrast, financing activities in 2020 forecast on the scheduled repayment of loans and a repayment of leasing liabilities. Overall, this led to a cash outflow from financing activities of EUR 1 million. And despite the cash outflow from CapEx and financing activities, cash and cash equivalents were overall stable due to the strong cash inflow from operating activities. So after this short analysis of the cash flow, a few words to our targets on Page 18. So today, we have some troubles with the steering issue of the slides. But now the slide turned, so at least on our screen, I hope on your screen as well. So before the coronavirus determined everything our goals were and are the following, further development of the market for Creamino will be our main priority. And so far, we are on schedule with this goal, but we do notice some delays, especially in testing the product due to COVID-19. The further development of NITRALZ strategy with the next capacity expansion on CapEx is also an important topic for this year. Here, we are in the negotiation phase with potential customers and can possibly say more about in the next report or a few weeks earlier eventually. So we also intend to intensify the topic of sustainability, the 2 most important topics are 0 accidents and the goal of CO2 neutrality, in terms of accidents, we started lower than the last year, thanks to the accident safety work of our employees. And as far as CO2 are concerned, we are in the middle of the analysis phase and may be able to say more about this on the next report as well. And as already described at the beginning, we are trying to generate our first sales in LIVADUR and implement our strategy here. In detail, this will be the following topics: training pharmacists; push various promotion activities in Germany; and do first test sales in the U.S.A., branded by Your Encour!. Here, we are also on the planned route. We can probably tell you more about the success in the next report as well. So corona unfortunately controls a big chunk of the complete daily routine, and we are in the process of meeting all hygiene regulations. So far, our plants are up and running, and we have made a good start to the year also due to the important product portfolio. For example, we sell raw material critical for essential drugs, and we supply chemicals for the virus test kits. We are well positioned with our agro products even in the crisis and have a stable raw material base due to our backward integration. Nevertheless, if corona cases occur more frequently, we cannot rule out that our plants are shut down by the health authorities despite a good order situation. If this happens, it will be very difficult to make a forecast at all. If this does not happen, and we work for this story, we can imagine the forecast as follows on the next page. So it's the Page 19. Now I think the page turns quite well. So the sales growth is planned to be achieved organically. Volume effects are anticipated to be the primary growth driver. Business development in the segments could show good growth depending on the duration of the corona situation. In the Specialty Chemicals segment, we expect the main growth within the Creamino business and the Bioselect part. The Basics & Intermediates segment will be supported by further growth in the NITRALZ product area. The agricultural part of the business is expected to remain at least stable. The steel sector could suffer even more with the recent closure of production in the automotive sector, but we see already first positive signs of business uptake in the airbag industries, especially in the U.S.A. So the Other & Holding segment is expected to generate stable sales at the chemical parks in Trostberg and Hart and the profit, and we see positive signs from the raw material sector. Under these conditions, we are basically sticking to our previously communicated forecast however, we also see signs of a slower overall economic recovery and anticipate a U-shaped rather than a V-shaped rebound of the market. Therefore, we see our outlook at the lower end of our guidance for the time being. So at this point, we would like to thank you for your appreciated attention and are now at your disposal for possible questions if there are any. Thank you.

[Operator Instructions] Our first question comes from Markus Mayer, Baader-Helvea.

Several questions. I think it's best if I ask them one by one. Mr. Niedermaier said in your presentation that you expect the COVID-19 effect more to hit the second half. Maybe you can shed some more light on what kind of effect you expect for the second half? That would be my first question.

So what we expect is a slowdown in the tests of Creamino. So the problem is that the meat industry takes care of their core business and are not prepared to do tests now in this actual situation. Therefore, we think that the growth will be a little slower than expected when we did the first outlook 2020, I think. So this is more or less, the main effect or one of the main effects. And the second effect is we don't see how the steel industry will be recovered. So yes, we have no -- yes, no good signs for the steel industry at this stage.

Okay. Understood. And then coming to the 0.9% volume growth you had in the second quarter. Could you split up what came basically from Bioselect, Dormex and Creamino? Is this possible?

So for sure, we could do this but we really want to because we try to do a segmentation reporting and not in more details here.

But is it fair to assume that the majority of this growth came from the 3 products?

Yes.

Okay. And then my next question would be, you said already, Creamino, that you expect the growth to come down to growth rates, but nevertheless, not that strong growth rate. But how do you see the sustainability of Bioselect and Dormex in the second half of this year? Do you expect that these very strong growth rates continue despite then, for Dormex most likely also, seasonal effects but for Bioselect in particular?

Yes. For Bioselect, we see the trend continuing as the number of tests stays very high. The expectation is that at least for the second half of the year, we will stay at a level which utilizes our capacity. And going into the next year, we will also continue to see some positive effects. For Dormex, I mean it's a seasonal business, and we see and expect some growth towards the end of the year, maybe the beginning of next year as we extend our label or get sales for an external label in the U.S.

Okay. Understood. And then my add-on question to this would be on Bioselect. You said previously that it would be relatively easy to increase the capacity, not linked to high CapEx spending, it's more than more personnel costs you would have. Maybe you can shed some more light on this? How easy would it be to boost Bioselect capacities further if the strong demand continues or even maybe accelerates further?

Yes. That's a good question, and we have discussed that over the last couple of months. As there was exponential growth, but that growth happened mainly over the last month, and the growth rate will not be as high as it was previously. So our task was, and that's something which we accomplished, to increase capacity quickly. Now we are at a very high level. And since there is very little market growth, and we are not the only supplier in the market, we do not see enough additional demand to establish another investment which then would be with a higher CapEx, and we would not be able to fill a unit with a high CapEx and a high-capacity expansion with the available market.

Okay. Understood. So basically, the additional capacity you had in the second quarter came to a shift onto your multi-purpose plant and basically part of Other Products, certain -- as they had lower demand there, that was not an issue but you would then refrain from further increase in capacity if there's not a visibility for long-term high demand growth? Is this the right summary?

Yes. We still look at the market. But from today's point of view, we don't expect that we could recover a significant investment with the available market as we see it now.

Okay. Understood. And then I have 2 questions. On the cash flow or one on the cash flow and one on the balance sheet. This high receivable cash out, you said this was due to the product mix. Should we expect this to be worse than in the second half? That would be my first question.

Yes. As it always will be. So we always see a very high accounts receivables in the first half of the year because of the type of the business. And this will go down, for sure, in the second half.

Okay. Understood. And the last question would be on the pension provisions. Can you help me on, a, what kind of discount rates you currently have for your pension provision? And what would be basically the further downside as I guess you have already a discount rate, which is close to 0?

So with a thick thumb figure, 1% change in the interest rate within pensions stands for approximately EUR 25 million change in the pension accrual.

Okay. And the discount rate you're currently using for the pension provision? Is this then around 0.5 or where is it right now?

Right now, it's 0.8.

0.8. Okay. Perfect. And congrats for these very strong results, by the way.

Thank you.

[Operator Instructions] We have a follow-up question from Markus Mayer, Baader-Helvea.

Okay. I have tons of questions. I will not ask them one by one, but only 2 further question may be of interest if there are no other questions. I guess the market environment for -- in particular, for Chinese players in the more commoditized segment is extremely tough despite lower coal and electricity prices as they are more exposed to the more commodity segment than the steel industry. Do you expect no matter if in China or are you to expect any kind of market consolidation in this very tough environment for those kind of players?

A very difficult question. I mean, as you indicated, for most of the products, the competition comes from China. And I'm not certain if the mechanisms which we have here always apply to Chinese competitors. We do not see or don't have any signs for consolidation in the market, quite the opposite. We sometimes have signs if they do not function separately, but raise or reduce prices if somebody presses a button.

Okay. Okay. And in Europe, the competitive situation here, which is mainly then for you in the Basics & Intermediates segment. Is there any change, any from your customer -- or any from our competitors or other signs that there might be a consolidation?

We do not see any signs there either. However, what we can see, and that's part of the positive results for the second quarter, we see a strong push from pharmaceutical customers to repatriate production into Europe. And for them, they actually seem to be putting their money where their mouth is because we have received orders for products which have disappeared and have been away for quite some years into China.

[Operator Instructions] We have no further questions. Dear speaker, back to you for the conclusion.

Yes. Thank you very much for the questions. We can now offer you the opportunity to visit us virtually at the Baader Investment Conference on September 21; at the Berenberg and Goldman Sachs Conference at September 22; and at the other conferences that we have listed here on the Page 20; or to return not later than the next quarterly call on November 11 as written down here. So stay well and healthy, and goodbye. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for attending. You may now disconnect.