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Stern School of Business Chemtura
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Chemtura (CHMT: NYSE)
Seth Shevlin, Wei Ming Wong, Subeg Singh,Manan Bhandari
1. Industry Overview
2. Company Overview
3. Thesis
4. Risks
5. Conclusion
2
Chemtura has emerged from successful restructuring in the 2010 to become a global powerhouse in the specialty chemicals space. Now, Chemtura is streamlining its business by capitalizing on divestitures to improve capital structure and position for further growth as a pure play IPP and IEP company.
Even without sale of the business the IEP and IPP businesses are set to perform very well long term
Once the market notices this the company will be valued more in line with peers
Potential sale of the business could drive over 40% upside
Weak IEP business has been overblown and driven down stock price to make to an attractive entry point
3
Thesis
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Recent Share Price Decline
1. Industry Overview
The Chemical Industry
The chemicals industry converts raw materials such as oil, natural gas, air, waster, metals and minerals into various different products
The global chemical industry had sales of $3.6 trillion (as of 2010), where US sales amounted to $689 billion (19% of global sales)
Four general categories: Basic and intermediate chemicals, Specialty chemicals, Life science chemicals, Science and technology chemicals
Outperformed the market and most of its customers in recent years, is very profitable, still growing and earning its cost of capital
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KPMG, McKinsey, Innovest, ValueLine
Industry Overview
2
Chemical Industry - ProductsIndustry Overview
Basic and Intermediate Specialty Life Sciences Science and Technology
Largest segment by sales Employs one-third of the
workers in the industry Produces polymers, bulk
petrochemicals and intermediates, fertilizers, and inorganic chemicals
End uses: plastic for packaging, home construction, appliances, PVC, piping, toys and games
High value-added, low volume products with many differentiations
Produces fine chemicals, adhesive sealants, catalysts, dyes and pigments, industrial gases, resins and plastic additives
Strength measured upon intellectual property and R&D capabilities
Differentiated biological and chemical substances used to induce specific outcomes in humans, animals, plants or other life forms
Produces agrochemicals, pharmaceuticals and biotechnology products
Enhance the characteristics of traditional specialty or life science chemical products
Produces advanced materials that transform current technologies
Highly valued by specialty chemical companies to remain innovative and adaptable to changing consumer preferences
Sources: KPMG
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Processing Strategies
Required inputs vary between raw materials, natural gas, crude oil, among others
Renewable feedstock and cleantech/green chemistry strategies have been developed by over twenty specialty chemical companies over the past seven years due to increasing regulation
Such strategies include: smart plastics, nanomaterials, oxidation of alkanes, etc.
Future value to come from the first movers within the cleantech space
DuPont Focus on revenues from non-depletable resources
BASF move towards alternative plasticizer to reduce toxicity within toys
The process in which specialty chemicals are created is called batch processing - a finite quantity of product is made during a period of a few hours or days
Manufacturing Facilities
Scale of manufacturing (from largest to smallest): basic and intermediate life sciences specialty chemicals fine chemicals
Elevated feedstock prices and rapid growth of Asian markets have caused many companies to expand production into China, Malaysia and other low-cost emerging markets
Manufacturing locations are often clustered, share utilities and large scale infrastructure, in order to promote industrial symbiosis and achieve economies of scale
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Production of Chemical GoodsIndustry Overview
Sources: KPMG, Innovest, Bain Insights, BASF Investor Presentation, Pbworks, SOCMA
The Specialty Chemicals industry is a mature and cyclical sector that develops specialized chemical products such as adhesives, industrial gases, lubricants, agrichemicals, and polymers for various sectors including aerospace, agriculture, and manufacturing
Traditionally a fragmented industry now moving towards consolidation
Currently an industry in international transition with a focus on expansion into Asian markets
With improving economic conditions, posits the industry to capture cyclical upswing
Revenue Drivers - Intangible value from innovation, improvements towards resource efficiency, access to scarce raw materials
Major Players - Dow Chemicals, Chemtura, AkzoNobel, BASF, DuPont, Bayer
Outperforms similar sectors (8.8% vs 8.0% vs 7.8%)
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Sources: McKinsey, Innovest, KPMG, ValueLine
Industry OverviewSpecialty Chemicals
2. Company Overview
Revenue Segments
Leading diversified global developer, manufacturer and marketer of performance-driven engineered specialty chemicals for industrial manufacturing customers
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Investor Relations
44%
36%
20%
Sales by Segment
Industrial Performance Prodcuts Industrial Engineered Products
Chemtura AgraSolutions
Industrial Performance Products (IPP)
Provides synthetic base-stocks,petroleum additives, synthetic finished lubricants and greases for a diversified set of industries
Industrial Engineered Products (IEP)
Offers catalyst components, surface treatments, flame retardants and a bromine based product line for industrial intermediates
Chemtura AgraSolutions Provides seed treatments and other key products for the agriculture and health industries for use in their core operations
Company Overview
Chemturas 3 Operating Segments
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Investor Relations
Industrial Performance Products
Industrial Engineered Products Chemtura AgraSolutions
Key Products Synthetic Lubricants and Greases Synthetic Basestocks Lubricant Additives Urethanes
Key Products Brominated Performance Products Flame Retardants Fumigants Organomettalics
Key Products Seed Treatment Fungicides, Miticides, Insecticides Growth Regulators Herbricides
End-Use Markets Automotive Aviation Consumer Products Energy Refrigation
End-Use Markets Agriculture Construction Electronics Furniture Pharmaceuiticals Transportation
End-Use Markets Agriculture Public and Animal Health
Company Overview
Competitors and Products
Key Competitors
Branded Products
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Company Wesbite
Company Overview
Chemturas Geographic Reach
Chemtura is a global leader in its 3 operating segments and is looking to continue to expand in emerging markets
In 2014, in order to better serve our customers in growth markets for our products, we opened new capacity in Nantong, China; Ankerweg, the Netherlands; and Bergkamen, Germany; and we operate major development centers in North America, Europe and Asia
Geographic Reach
North America
EMEA
Latin America
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Annual Report
44%
28%
9%
19%
Sales By Geography
North America
Europe/Africa
Latin America
Asia Pacific
Company Overview
Recent Events: Restructuring
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Investor Relations
March 18, 2009
Chemtura and its 26 US based affiliates filed for Chapter 11 Bankruptcy looking for voluntary reliefs
"Like other companies in our industry and around the world, Chemtura's order volumes have declined markedly in recent months due to the impact of the global economic recession. This has led to a significant decrease in our liquidity and cash flow. Despite our efforts to increase liquidity, including through the potential sale of a business, our reduced liquidity position, combined with the anticipated expiration of our bank waiver, led us to determine that a court-supervised restructuring was the best course of action. - Craig A. Rogerson, CEO of Chemtura
Received $400 million in expensive DIP financing from Citibank at LIBOR plus 750 basis points, advised by The Shearman & Sterling Group
November 10, 2010
Chemtura announces a successful financial restructuring
With the successful completion of our financial restructuring, we have significantly reduced our debt, improved our cost structure and resolved a considerable amount of environmental and other liabilities.- Craig A. Rogerson, CEO
TURNAROUND: Focus on Electronics and Energy, Transportation and Agriculture
Company Overview
Recent Events: Discontinued Operations
Chemtura underwent major divestitures in the past couple of years to focus on its core businesses and discontinue non-essential / underperforming business segments
Sale of Consumer Products- October 2013
Developed, manufactured and sold performance chemicals to consumers for in-home and outdoor use, such as recreational water treatment products, brandedcleaners and degreasers
Sold Consumer Products segment including dedicated manufacturing plants toKIK (private label manufacturer of consumer products) for $300 million in cash
Sale of Antioxidants and UV Stabilizers Business- April 2013
Sold Antioxidants and UV Stabilizers segment, including dedicated plants, to SKCapital Partners (private investment firm) for $200 million
Proceeds from the sale will be used for repayment of debt and investment inChemturas continued growth.
This divestiture simplifies our business portfolio as we continue to invest in businesses with less economic sensitivity that make greater contributions to our strategy of focusing on specialty products and applications with greater growth potential
- Craig A. Rogerson, Chemtura, President and CEO
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Press Release
$18.00$19.00$20.00$21.00$22.00$23.00$24.00$25.00
Share Price ImpactPost Sale of Antioxidants and UV Segment
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Share Price Impact:Post Sale of Consumer Products Segment
Company Overview
Management
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Investor Relations
Craig A. Rogerson, President, CEO- Mr. Rogerson came to Chemtura in December 2008 after serving as President, CEO and Director of Hercules Inc. untilits acquisition by Ashland Inc. in November 2008. Mr. Rogerson joined Hercules in 1979 in the firms Water Management Chemicals Division. In April 1997, heleft Hercules to join Wacker Silicones Corporation, where he served as President and CEO. In May 2000, he rejoined Hercules as Vice President, businessoperations of their BetzDearborn Division. He was eventually named Vice President and General Manager of that division in August 2000. Mr. Rogerson serveson the Boards of Directors of PPL, the Society of Chemical Industry, and the American Chemistry Council.
Stephen Forsyth, CFO- Before joining Chemtura in 2007, Mr. Forsyth served for 26 years with Hexcel Corporation in a variety of executive capacities, the last11 years as Executive Vice President and Chief Financial Officer. Prior to becoming Hexcels CFO, he had held positions of increasing responsibility includingserving as the General Manger of their specialty chemicals and specialty resins businesses, Vice President of International Operations and leading a number oftheir major M&A initiatives.
Simon Medley, SVP of Industrial Performance Products- Mr. Medley joined Chemtura in 2012 as General Manager and President of Chemturas PetroleumAdditives Business, after 18 years with BASF, where he built a track record of international success in diverse industries leading sustainable, profitable growththrough market-driven innovation, strategic portfolio management and transformational cultural change. Between 2004 and 2010, Mr. Medley engineeredsignificant profitability improvements as SVP of BASFs Fine Chemicals and Care Chemicals.
Anne P. Noonan, SVP Industrial Engineered Products- Most recently Anne served as Vice President of strategic business development for ChemturaCorporation. In this role, Anne was responsible for developing and executing on a comprehensive corporate portfolio strategy. She led several transactionsresulting in portfolio transformation, positioning Chemtura as a future pure-play specialty industrial chemical company. Prior to the merger of CromptonCorporation and Great Lakes Chemical Corporation to form Chemtura, Ms. Noonan worked for Great Lakes Chemical for 19 years, where she held a variety ofbusiness, research and advocacy positions.
Dalip Puri, VP of Investor Relations- He joined from Hewitt Associates in Chicago, Illinois, where he also served as Corporate Treasurer, overseeing thefirms capital structure strategy and client banking activities. Prior to that, he spent eight years at Delphi Corporation in Detroit, Michigan, in various rolesmanaging and overseeing capital planning, foreign exchange and commodity risk management, investor relations, regional treasury activities, and cashmanagement.
Company Overview
3. Thesis
Streamlining Business
Divesting non-core assets Improving balance sheet Cutting costs
Strong Industrial Business
Industrial Performance Products (IPP)
Industrial Engineered Products (IEP)
Overblown weakness of IEP business
Cost cuts Improvements in 2014
Thesis
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Sale of AgroSolutions
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Streamlining BusinessDivesting Non-Core Assets
I. Pay down $200 million in debt II. Return cash to shareholders
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Divesting Non-Core Assets Fast-growing provider of agricultural chemicals and seed treatment products including fungicides, herbicides,
insecticides, plant growth regulators and seed treatments Broad global service chassis in North America, Latin America, Asia Pacific, Indian Subcontinent, Europe, Middle East
and Africa Currently in a definitive agreement to be acquired by Platform Specialty Products Corporation for $950 million in cash
plus 2 million shares of Platforms common stock Chemturas NOLs will allow it to offset taxes and receive $850 million out of the $950 million in cash it will receive Sale expected to be completed in November 2014
Sources: Chemtura AgroSolutions, MarketWatch
Thesis: Streamlining Business
CHMT is evolving into a pure play specialty chemical company following the sale of its crop chemicals business, scheduled to close in 2H14. We expect the company to use a portion of around $1 billion of proceeds and cash on the balance sheet in a tender offer for the shares. Due to significant shareholder value creation, we rate CHMT a Buy. -(James Sheehan, Suntrust Equity Research)
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Improving Balance Sheet
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Return to Net-Cash Position
Has net-debt position since re-emergence from bankruptcy in 2010
Weak balance sheet may have previously resulted in discounted valuation
Investors may re-value the company more in-line with peers due to improved liquidity position
Plans to Pay Down Expensive Debt
Plans to use excess cash and proceeds from AgroSolutions sale to pay down $200 million in debt
7.875% Notes, which are callable at 104% of par
$100 million of 5.75 % Notes
Company will save $13.6 million in annual interest expense
Thesis: Streamlining Business
2
Improving Balance Sheet
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Capitalization ($ MM)Pre-Merger Post-Merger After Debt Paydown
Cash $400 $1,250 $1,046
PSP Stock - $50 $50
Cash & Equivalents $400 $1,300 $1,096
5.75% Notes$450 $450 $350
Term Loan$206 $206 $206
7.875% Notes$100 $100 $0
Other Debt$32 $32 $32
Total Debt $788 $788 $588
Net Debt/(Cash) $388 ($512) ($508)
Thesis: Streamlining Business
2
Improving Balance Sheet
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Aggressive Share Repurchase
Company has bought $110 million of stock since 2011
Projected to repurchase $700 million - $1 billion of stock by year-end 2014
Openly acknowledged that it will need to look at other options in order to repurchase a significant amount of the float after completion of AgroSolutions transaction
Considering a Tender Offer, a special dividend of up to $7 per share, or a combination of the two
Tender will most likely be at a premium to its current priceforecasted to be in the $30 range
Thesis: Streamlining Business
Improving Balance Sheet
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Tender Offer ScenariosBear Case Base Case Bull Case
Current Shares Outstanding 90,570,000 90,570,000 90,570,000
Total Repurchase Amount 700,000,000 850,000,000 1,000,000,000
Tender Offer Price $25.00 $30.00 $35.00
Shares Repurchased 28,000,000 28,333,333 28,571,429
Remaining Shares Outstanding $62,570,000 $62,236,667 $61,998,571
Thesis: Streamlining Business
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Industrial Performance Products
Pending capacity expansion and technological innovation should drive revenue growth and improved operating margins
Has made big investments in the synthetic lubricants business, which should now start to pay off
Management highlights high customer demand for more capacity
Exxon Mobil is the only other major player in this space, but has historically put its synthetics into its Mobil One product instead of selling it in the open market
Added capacity from new synthetic lubricants facility in the Netherlands (located near BP, one of its largest customers), and in China
Increase in buyer demand for industrial foam, general industrial applications, and material production applications
Sources: Chemtura AgroSolutions, MarketWatch
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2010 2011 2012 2013
Industrial Performance Products
Thesis: Strong Industrial Business
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Industrial Engineered Products
Oligopoly with Albemarle Corporation and Israel Chemicals Limited (ICL) Leader in the foams market and mercury emissions prevention market Poor 2013 foams performance because of ICL price cutting
Company is pushing into new technology that commands higher prices
Segment will benefit from cost reduction and capacity management in the near term
Increase in net sales due to demand for the Emerald Innovation 3000 product
Chemtura said customers continue to switch to this greener alternative from the traditional HBCD flame retardant used in styrene based insulation foam applications
Revenue growth from mercury control, MOCVD, MAO, bromine and oil and gas applications
GeoBrom product should benefit from 2015 Mercury Air Toxics Standardsx
Sources: Chemtura AgroSolutions, MarketWatch
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50
100
150
200
2010 2011 2012 2013
Industrial Engineered Products
Thesis: Strong Industrial Business
CEO Craig Rogerson has a history of selling and monetizing business and has publicly stated that he may pursue that option with future business
Craig Rogerson has a history of monetizing businesses:
2002 Sale of BetzDearborn
Rogerson, as General Manager, lead the sale of BetzDearborn, an industrial water treatment company, a subsidiary of Hercules, to General Electric
$3.1 Billion sale; 8.5x EBITDA
2008 Sale of Hercules
Rogerson, as CEO, led the sale of Hercules to Ashland, the largest chemical distributor in the U.S. and coincidentally, a competitor for Chemtura
$3.5 Billion Sale; 8.5x EBITDA
Rogersons Chemtura Share-based compensation structure creates a vested interest in the business:
Currently owns 423,796 shares of the company, an additional 315,000 shares that have not vested, and 400,000 options that have not been exercised
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Investor Relations
Thesis: Strong Industrial BusinessPotential Sale: Craig Rogerson
Further investment into Chemtura by David Einhorns Greenlight Capital in August 2014
$76 million and 1.06% of shares
Price declined on earnings and revenue Q2 miss
Industrial Performance Products
Improved volume in urethane products
Increased demand for industrial foam, general industrial applications, and material production applications
Improved selling prices for petroleum additive products offset by declines in urethane prices
Industrial Engineering products
Selling prices remained very weak due to competitive pressures in electronics applications and organometallic catalyst components
AgroSolutions
Strong soybean market in Latin America and growth in cultivated acreage
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Equity Research
Thesis: Strong Industrial BusinessRecent Buyside Interest
Catalyst Calendar
Events:
Q3 Earnings- October 28th
AgroSolutions Deal Finalization- December, 2014
Share repurchase information- January 2015
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Thesis: Overblown weakness of IEP business
October 2014
October 28th- Chemturawill report Q3 Earnings
January 2015
Chemtura will begin share repurchase program with proceeds from sale
December 2014
Chemtura AgraSolutions Deal set to finalize in Q4
4. Risks
Inability to close the AgroSolutions divestiture would harm our ability to look at this business as a pure play investment
Decides against strategy of divesting additional assets which would limit but not eliminate our significant upside potential
Inability to drive sales growth out of its IEP foams business would decrease our free cash flow and implied share price
Raw materials inflation could negatively impact margins by increasing cost of goods sold inputs
Delayed openings of international facilities will push back streamlining of manufacturing (China synthetics or Netherlands)
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Risks
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