AlzChem Group AG (ACT) Earnings Call Transcript & Summary

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

Yes. Hello, thank you for the introduction. Good morning, everybody. Thank you for joining us today, and welcome to our year-end analyst call. As always, we start with an executive summary and then move on the figures after some strategic topics. And at the end of the presentation, we will be available for questions as always. So then we skip the disclaimer and start with Page 4. I'll go through the slides and hopefully, we will see the Slide 4. Yes, now the Slide 4 is available at my desk here. So let's start with a brief overview of the overall situation. All in all, we have experienced a challenging year. And under completely changed conditions, as you may all better know than we know, we experienced many ups and downs, 2 good quarters, 1 and 2, and then a very weak quarter 3; and finally, an excellent and strong quarter 4. So our NITRALZ business has been stable, strong and reliable throughout the year and has grown into a very positive part of our overall business. Agro applications like Perlka and Dormex were stable. Pharmaceutical applications such as DCD as a raw material for metformin, were high in demand. So also for our Bioselect products, we saw continued high demand for the COVID-19 test kits and even Creamino has grown also, the COVID-19 environment worldwide has been anything but easy for farmers and the meat industry. Steel and automotive industries were the main source of fluctuations in sales and earnings, but this market is in recovery mode as we think and started to provide significant support for growth in the fourth quarter as well. So far, we have managed to control direct COVID-19 disease cases. Also, the pandemic is an ongoing challenge and will continue to be of high importance. Throughout the year, only 1 shift had 1 of our more than 20 production plants was briefly affected. We were able to close these gaps quickly, thanks to our flexible workforce. And ultimately, we did not lose any production day last year. So far, our hygiene concepts have fueled and protected us from a domino effect and the further propagation of cases in our company. Thus, despite corona, we can report a very good year in terms of sales and earnings. So let us now analyze the figures on the next page in specific terms right away. This is the Page 5, and I have turned the page here. In the fourth quarter of 2020, sales jumped to 13.8% year-on-year to EUR 100.6 million. Compared to the quarter 3, growth in Basics & Intermediates and Specialty Chemicals segment was well over 20%. Supported by very strong sales and raw material prices, we also had a very strong quarter in EBITDA, which is also well above the recent years. In a quarter comparison, with the previous year EBITDA increased by around 46%. Looking at the entire year, we have now managed to achieve EBITDA of EUR 53.8 million, which is very close to the upper end of our original forecast. Supported by the positive product mix in terms of margin and favorable raw material prices, the EBITDA margin has now reached a level of 14%, to be precise. The figure is 14.2% now. Earnings per share rose from EUR 1.77 to EUR 1.94 per share, and the increase is mainly caused by the very good earnings situation overall despite rising depreciation as a result of high CapEx projects in the past year. All in all, we are doing quite well despite COVID-19 crisis situation, which has now lasted longer than initially anticipated. Once again, we were able to increase sales and EBITDA despite the adverse circumstances. So much for the big picture, and now the overview and let us analyze more details in the segments. And therefore, I turn the page to Page 8. So the Basics & Intermediates segment comprises the production of Basics & Intermediates product, only to remember you that are either required for the manufacturer of Specialty Chemicals or market as stand-alone products. Sales in the Basics & Intermediates segment totaled to EUR 146.4 million. The metallurgy and automotive business was hit very hard by the pandemic, with decline in some cases, reaching close to 50% and with -- which was visible -- or this effect was visible mostly in the quarter 3 last year. In quarter 4, this area started a strong recovery with total sales bouncing back significantly to EUR 39.8 million. The segment was mainly driven by the business development of the NITRALZ product range. The plant was running flat out. And the commissioning of the next expansion step in quarter 2 2021 will come at exactly the right time. In addition, the basic business from the Perlka and dicyandiamide, and here the pharmaceutical applications, product groups were able to close in part significantly above the prior year level due to strong European agro and pharma demand here. And on the cost front, the segment benefited significantly from falling raw material prices, in particular, on the coal market and for AlzChem favorable electricity prices due to advanced purchases. This enabled the margin to stabilize at a really good level at EUR 9 million. EBITDA was around 70%, better than in the previous year. The margin increase was also supported by initial results from the AlzFit 2025 optimization project launched in 2020 as well. So some words about this project later on. This segment can, therefore, be summarized as sales almost stable and margins significantly approved. So much for this segment. Then I think it's worth to turn the page to Page 10, the Specialty Chemicals segment. So now you should see the slide. Only to remember as well, the Specialty Chemicals segment produces and sells high-quality specialty chemicals, such as Creamino, Creapure, Bioselect, DYHARD and Dormex. So as we moved into the fourth quarter, we gained some momentum for those products on broad base. Almost all product groups recovered strongly, resulting in sales of EUR 54.4 million for the quarter 4 and total sales of EUR 207.4 million. This means that despite corona, we are almost 15% up on the prior year quarter and almost 4% up overall for the year. So Bioselect, being a part of the COVID-19 test kit, has experienced a very strong growth push. Here, we increased the production capacities at short notice so that we could meet the entire demand. Our contribution to healthy and efficient animal nutrition with Creamino continued to grow in volume despite the unfavorable economic environment. Relatively hard hit in quarter 3 by the effect of the pandemic was the DYHARD and the Creapure business, as suppliers for light wide aircraft and automotive applications on the one hand and lower training and exercise possibilities on the other hand were the reasons for the significant declines in sales. The specialty agro application, Dormex, was able to continue the positive development of the previous year. Good sales translated into good earnings and with EUR 10.1 million for the quarter, up almost 30% year-on-year and EUR 44.1 million EBITDA for the full year, putting us at around 6% ahead of the previous year here. All in all, we were able to increase annual volumes by about 3% and prices by about 1.1%. In average only, the currency had a small negative effect of 0.3% in sales. As a result, despite corona, we were largely able to achieve our targets and grew against the trend. So let us now move on to the third segment. This is Other & Holding on Page 12. So the -- you should already see the page here. Only to remember, again, the Other & Holding segment comprises all activities not allocated to the other segments, mainly the services on the chemical parts. And despite a relatively stable business, volume at the chemical parks in Trostberg and Hart, the previous year's results could not be matched here. On the one hand, there was a performance-related noticeable decline in the amount of electricity purchased from our electricity grid for third parties. On the other hand, the decline in sales could not be fully offset by a reduction of personnel costs within short notice. In the previous year, the segment also benefited from lower periodic maintenance measures. And this year, slightly increased maintenance measures within the chemical park contributed to the negative EBITDA variance. Over the year as a whole, we suffered a drop in sales of around 7.1% on the volume end, but we are able to compensate for this by raising the prices by 2.4%. All in all, sales of EUR 25.4 million were approximately 5% below the previous year, and earnings of EUR 1 million were in line with our expectations and our outlook. Okay. That's the P&L analysis, more or less. Let's now take a look at the balance sheet, and we will see this information on Page 13. So the balance sheet in total increased from EUR 342 million up to EUR 354 million. What has been the main effect here, in line with our CapEx program, tangible assets increased by EUR 8.3 million to EUR 194.6 million. Compared to December 2019, we managed a heavy drop in inventories to EUR 67.4 million, which means a reduction of approximately 10%. Our action plan to minimize the stock levels have, therefore, been very successful, and we will see this success again in the cash flow statement. As already indicated in summer, receivables have returned to the low level of the previous year, and we can see this effect even more clearly in our cash flow later on as well. So what does -- or has been changed on the liabilities side? Equity increased by EUR 7.4 million to EUR 68.7 million. This led to an equity ratio of 19.4% compared to 17.9% in previous year. The long-term evaluation -- interest rates decreased from 0.9% last year and are now down on the level of 0.5%. This had the effect that the pension provision shows yet another increase, namely at the level of EUR 141.8 million. But the good information is that interest rates have been increasing in the last weeks and the last months, and therefore, we will see hopefully a positive effect in the next balance sheet reporting day on quarter 1, I think. So with the good cash flow, it was also possible to reduce current liabilities, which are now again below the previous year. And I think that is it what I have to say for the balance sheet and what is it for the analysis on this page. So let's go to the cash flow statement here. The cash flow development continues to be really very positive. The cash inflow from operating activities increased from EUR 43.6 million to EUR 48.7 million year-on-year. This reflects a decrease in net working capital and a strong operating business as well. So at EUR 28.8 million, the cash outflow from investing activities was approximately 2/3 of the previous year. And the main reasons are, of course, the break in major projects and more or less no impact due to COVID-19. Thank God. As a result, we have a clearly positive free cash flow compared to the previous year in the magnitude of EUR 20 million. And AlzChem's financing activities in the last 12 months, we are focused on the scheduled repayment of loans and the repayment of leasing liabilities, overall, including dividend payment. This led to a cash outflow from financing activities by EUR 11.7 million for the last year. And despite the cash outflows from CapEx and financing activities, cash and cash equivalents were turned from minus EUR 3.9 million up to EUR 8.1 million due to the strong cash inflow from the operating business. Okay. I think that's more or less the figure work. After this analysis of the cash flow, a few words to our targets this year and what we want to do. Of course, we have also set ourselves goals for '21 and -- which we would like to present briefly here. With the general development towards sustainability, we have also included this topic at the top of our target list. As this topic is already very strongly rooted in our DNA, we have, for example, had an environmental report for a long time and are also very committed to it, which, among other things, also clearly distinguishes us from our direct competitors, which are mainly located in China. Clearly, this topic will be a major significance to us in the future, especially, with regard to financing or approval and authorization topics, which is why we need to pay even more attention to in the future. So otherwise, there are topics on our list that you probably already know, starting with the commissioning of the next capacity step of NITRALZ product group, increasing our involvement and sales in the pharmaceutical market, working on the topic of creatine for healthy nutrition through LIVADUR and as well as staying on top of the growth of Creamino. And this against, as you know, the background of the lasting pandemic events of COVID-19, and therefore, we have to manage these effects as well. So -- but let's maybe analyze a few more details about the targets on the next page. And therefore, I have with me Georg Weichselbaumer, and he will take over the discussion now for these topics.

Thank you, Andreas. Good morning, everybody. I'd like to start with what we have implemented already and what we have set out to do. We have installed a team dedicated to all topics around sustainability. No later by the end of the year, we want to define our path to CO2 neutrality amongst other things. And as always, we keep the goal of 0 accidents in mind. On the subject of NITRALZ expansion, custom acquisition is already underway, and the feedback from the market makes us believe that the plant will be very well utilized right from the start. The external financing has been completed and installation work is in its final stages. So we look forward to commissioning at the end of Q2. Regarding our creatine as an essential nutritional supplement, we see a strong recovery of the traditional business. The biggest challenge this year will be to find the right customer approach for LIVADUR, which is both efficient and affordable for us. The sales logistics are in place. However, we do not expect sales that are significantly visible in the P&L in 2021, as we are still looking for a scalable concept. With regard to raw materials for the pharmaceutical industry, we are joining the efforts to bring production back to Europe. And in the area of our biggest growth opportunity, Creamino, we hope to quickly move past the COVID-19 effects. The signs are looking positive, and we will stay on the ball and report back. Continued development of the market for Creamino is and will remain our top priority. So far, we are on schedule with this goal, but we had to accept delays especially in testing the product within our customers due to COVID-19. The meat pipeline is full. Slaughterhouses had to close down temporarily in some cases, which is why our customers are more concentrating in their basic processes rather than on optimizations with Creamino. Nevertheless, we are confident that the growth process around Creamino will pick up speed again. Corona unfortunately continues to dominate a large part of the day-to-day operations, and we have procedures in place to meet all hygiene regulations. So far, all our facilities are up and running, and we have some -- come through the pandemic without interruption. With the utmost attention, we'll take special care of the health of our employees and overcome the challenges. On the next slide, there's a small advertising block on the subject of pharma raw materials. With AlzChem innovation meets tradition. AlzChem has more than 60 years of experience in the development and manufacture of advanced, high-quality intermediates for pharmaceutical applications. Premier example is DCDA, as a direct precursor for the active ingredient metformin, which is the first-line treatment for all diabetes type 2 patients. Pharmaceutical applications were also amongst the main drivers for the expansion of the NITRALZ capacity. NITRALZ are starting materials for essential drugs to treat cardiovascular diseases as well as HIV. Our Bioselect product range is involved in the production of the growing number of biopharmaceutical drugs, which allow the fine-tuning of the treatments to the needs of patients. Thanks to our deep market and customer understanding and our stable supply chain, we're able to develop highly reliable, customized solution and offer comprehensive service. Our customers traditionally benefit from the following advantages: Reliability and high quality. Under the sign Made in Germany, we are the only western producer for most of our product groups and have and benefit from a highly integrated European supply chain. Second, our customer focus. We offer our partners a high, flexible and agile standard of service, including technical support. Our focus is on long-term customer relationships and most importantly, we speak our customers' language. Third, innovation. We have new ideas in advanced intermediates and actively support our customers' product development. Sustainability, health and safety. Our manufacturing processes are environmentally friendly and we focus on sustainable production. And as already mentioned, we have a zero-tolerance philosophy when it comes to safety. Our know-how. AlzChem successfully positions itself in the Specialty Chemicals market with proven and new products. Not only around NCN chemistry, but based on many years of experience and core competence. AlzChem products for the pharmaceutical industry are very complex, as are the areas of applications such as vital drugs for type 2 diabetes and heart disease and as a component of corona tests. So much for the former materials advertising block. On the next page, a few words about the new product at AlzChem. For quite some time now, we have been reporting on our research pipeline and emission reduction products. The development has reached a stage now where we can rise the curtain and report here in more details. EMINEX is the name of the new product, which is based on calcium cyanamide. We have very solid evidence that by adding EMINEX through liquid manure, the bacterial activity can be controlled and thus, the harmful methane generation during storage can be suppressed and controlled. A patent has been filed and studies are in full swing. All our findings are confirmed by external institutes. Currently, we are in coordination with the authorities, and we plan to sell first test quantities till this year. From a sustainability point of view, this is an outstanding product. Depending on the storage period and the origin of the liquid manure, more than 1 million tonnes of CO2 equivalents could be saved in case of widespread application. The product even has the potential to put AlzChem in a position where our products can have significantly more CO2 than the entire AlzChem produces. As a side effect, EMINEX will increase nitrogen efficiency and control the release of highly toxic hydrogen sulfide from manure. We will continue to report on the project -- progress of this very interesting project. We also have another very interesting topic to report on today, the AlzFit 2025 project. And for this, I return back to Andreas.

Yes, thank you, Georg. I really want to report about the new strategy and this project. So sorry, I have to turn the page to Page 20. As you have already heard, one or the other time, the AlzFit 2025 project has been in progress since last year. Sorry, we have some technical problems here. But should be solved in a short notice. Yes, now it's solved. No problem. So the world has changed dramatically in the recent years. Things that seemed out of this world 20 years ago are now reality. We use smartphones worldwide for many everyday activities. We do our shopping and banking over the Internet, and Alexa or Siri supports us at home. Our cars already drive almost autonomously, and robots support us in housework. Modern technology, hardware, software, artificial intelligence has changed our lives. So we greatly appreciate these advantages and has quickly become accustomed to them. The social framework has changed significantly, and we all become aware of climate change. And the current pandemic is determining our lives and its consequences will keep us busy for a long time as we think. So our way of working our organization and our processes have already changed in the recent years, but probably not yet to a large enough extent. And so we have been able to achieve growth rates in sales over the last 10 years with the help of high investments and a significant increase in personnel, and these investments must now be amortized. In the meantime, we on the Board of management have made it our task to gear our company even more closely to the future. And we have, therefore, launched the AlzFit 2025 project. The aim and the target of this AlzFit project is to increase the efficiency and the effectiveness of our work and our innovative strength. And as part of this, we also reviewed our strategy and identified 4 key topics here. The first one is the efficient production process. What does we understand about efficient production process? This is the modernization and to increase the efficiency of the production. We do big data analysis, for example, and we try to adapt our multipurpose plants to be more flexible. The second most important point, we have already heard from Georg, is the topic sustainability. There, we have more or less 3 main topics: it's a sustainable production, the sustainable product and to be compliant with all compliant issues. The third point, the customer focus is very important for us. So what do we think about this? We try -- or we think about developing new regions because you may know, we have sales organizations in the U.S. and in China, and we think about new sales organizations worldwide. So what do we do? Additionally, we do data analysis, and we try to train our sales staff and, I would say, competencies more in the direction of, yes, the new topics we have to fulfill here. And the last point is the agile AlzChem. We see change as an opportunity and use it consistently. And what do we think about this? We try to select our staff. Yes, we want only to have agile people in our organization. We want to be agile because this is the main difference to the big chemical companies. So this is only a short overview about the project. If you are interested, we would be happy to share more about this at the next meetings or the personal meetings we could organize. So from this point of view, I think it's now the time to have a few words about the outlook on the next page. So it's Page 21. Yes, on this page, we would like to present our outlook for 2021. And 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, at least. 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 -- or we are rather cautious in our forecast here and expect an EBITDA of around EUR 57 million. We have taken on some critique in one place or another and have now made a forecast more precise in numerical terms, and we hope that you see this positively. So that's it for the start of the year. 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 Instructions] And the first question we received is from Markus Mayer of Baader-Helvea.

Congrats to this very strong results. I have 3 questions, if I may. I think it's best to ask them one by one. The first one is on the outlook. You're considering or assuming a stable agro business, why is this the case? If I look at other -- or other agro fertilizer companies, they are quite bullish for this year. So my question is, why only stable?

I think we -- it's hard to compare AlzChem overall with other agro companies. Our businesses, which we have, is Dormex and is Perlka. And for both of them, we are already at the higher point in the life cycle. And therefore, I do not expect that there will be additional growth, but that's the basis for us. They will stay at the very favorable level, which we have achieved in the last years.

And what you have to have in mind, we had no sales drop more or less within this product group, as you have seen, for example, within fertilizer business in other ag companies. So therefore, we had a more or less stable business last year as well.

Okay. Okay. Understood. My second question would be on this Creapure improvement. Is this something you see globally across -- in Europe, at least in Germany, the gyms are not yet open. And also, I guess that most of the other athletes are not yet where they have been before the pandemic, so maybe some words on Creapure will be also helpful?

Yes. This is a very, very important topic for us as well. I'd like to start a little bit different because what we see is that the interest for creatine and the positive effects of creatine are gaining more attention. And this is not a local trend, but a global trend. In the past, it was mainly, as you said, for exercising, for endurance sports, but creatine can do much more than that. It increases cognitive functions. It has also shown positive effects, for example, also in recovery of COVID. And we are developing creatine also in that direction. We have -- and that's part of the presentation, also some new products in functional food. We have, for example, already some -- examples for vegetarians who suffer significantly from low creatine levels. So it is, I think, a trend, which is not just limited to what we had in the past. Although that business is also recovering, we see a broader application scope for creatine, and this is a big focus for us this year.

Yes, we have changed some sales staff in this group as well, and we sell this product more worldwide than in the past. So we have seen a good sales growth in South America as well because we invented more or less the product there.

Okay. Okay. That's helpful. And then another question would be on Bioselect. How do you see -- or are there any effects of this COVID test kits for private use, having just sold over at discounters or over the Internet for Bioselect? That would be my next question.

Unfortunately, here, the market is moving in the wrong direction for us because in that OTC test kits, our products are not included. Our products are part mainly of the PCR kits and some antibody tests, which are done by medical people. And as such, as I said, the trend is not favorable for us, but still has quite some business also on the PCR kits. And I'd like also to keep you in mind that it was part also of the presentation that test kits and COVID is not the only driver for our Bioselect product range, we see increasing sales also from biochemical applications in the development and also commercialization of biochemical drugs.

[Operator Instructions] And we received a follow-up of Mr. Mayer.

It looks like I'm the only one who has a lot of questions. Then I still have several questions to ask. Regarding this start of the year, you said very positive trend continued in the first quarter of this year. I guess this is coming, of course, from automotive and the steel industry. My question would be, A, is this continuation of the fourth quarter? Or do you even see acceleration of the demand? And also in this respect, how does your order book visibility look like? Has there been an improvement of your visibility? And has there also been less volatility in your order book, at least, that is also something we hear from other chemical companies?

Yes. It's a very interesting question because it touches the core of the business forecast, where do we stand and what do we expect from the next month. I mean to answer your first question, it's correct, the business recovery has continued into Q1. And it's a recovery, as we have reported also for Q4, which is on a very broad basis. The first quarter looks pretty good. For the second quarter, that's part of the reason why we are also on the cost side on the EBITDA forecast. We have seen in the last year that sales dropped from one day to the next. And it is hard to expect that sales can remain or continue to be on the level on which they currently are. We have indications on individual products where we have a longer range in forecast, which is also okay. But in particular, on the industries like automotive and metallurgy, it's hard to predict as we had to experience on the very negative side last year.

But to talk about the order book, the order book is still healthy and much better than in the last year and looks real good. But the only topic is that we have not a full order book up to the year-end. We have a few about the next few months and, the next few months will come in quite good. And therefore, yes, that's the basis for our outlook here.

Okay. Understood. Maybe add-on question on this. Until other chemical value chains, particularly in the polymer value chain, but also -- value chains, but also others in the intermediate products, there have been massive supply chain interruptions. And my first question, do you also see the supply chain interruptions? And as an add-on question to this, there are several product groups where customers are on allocation. And is this pricing extremely strong? How do you see this for your products?

Yes. The first point is absolutely valid. We see also interruptions in the supply chain, in particular, on the worldwide supply chain. You could even look at videos in the Internet, on YouTube, when you look at Long Beach in the U.S. There you have tonnes of ships waiting for discharge. All of those ships in -- or mainly all of those ships come from China. And there, we see the heaviest disruption of supply chains because cargo and containers are on a very, very short. And we have to take into consideration lead times on ships of 4 to 8 weeks where we hardly can book anymore. So we have to take a very long-term view on shipping in order to be able to dispatch all the orders, which we have on the books. And that continues on to the second question, which you have, are their products on allocations? I'd say not yet, but on some of the products. And so a very prominent one, for example, we have mentioned this in the presentation, on DCDA -- DCD. We are loaded to the absolute upper level of our capacity. And there we actually benefit from those supply chain disruptions because we are the only manufacturer outside of China, and we are able to reach the destinations with our products better than the competition currently.

So up to now, it's really challenging to have the supply chains in place, but we had no problems with the supplies overall up to now.

Okay. I have another question on the capacity addition at Creamino. Maybe you can say more some of the work on the plans there. I guess the debottlenecking, when this is planned? That would be helpful. And then the second question would be also on this infrastructure modernization and your Other & Holding unit. Maybe also a few more words would be helpful there?

Okay. The topic, Creamino, so I think we have enough capacity available to support the market. So as we have already reported, there was some delay in our testing and testing facilities of our customers. Therefore, we see that the market will come back at least by the end of COVID-19, hopefully. And as we expect, this could be in the second half of the year. Therefore, in our mind or in our expectation, we need additional capacities in the earliest next year or the year to come. So therefore, I think we have no capacity issues here. On the infrastructure, yes. So as you know, we are running 4 chemical parks here in Germany. We have to maintain the infrastructure. And sometimes we have bigger or smaller projects. Actually, we are doing -- or maintaining our electricity grid. And therefore, this was the main reason why we had higher maintenance costs here, last year. But for this year, we don't expect any deviation here or any new information.

[Operator Instructions] As we received no further questions, I hand back to Mr. Niedermaier for closing remarks.

Yes. Okay. Thank you very much for your questions. I think it was an interesting and worthful discussion. We can now offer you the opportunity to visit us virtually at the conferences as shown above, and therefore, I should change the slide that you can see our financial calendar here. And you can return not later in the quarter 1, when we present the Q1 report, on May 6, followed by the Annual General Meeting on May 12. And therefore, we invite you friendly. So we are pleased to invite you here for these events. And maybe we could see us sometimes physically. But for the next months, I think it's only online or here via Internet possible. Yes. So for this, stay well and healthy, and we will see again. Thank you, and goodbye.

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