Taminco

Business Description
Taminco is the Largest producer of Alkylamines and their derivatives in the world (50% market share for US
alkylamines and 75% EU Share for ~ 60% global share). Alkylamines are organic compounds that are produced through the
reaction of alcohol with ammonia in a pressurized system and in the presence of a catalyst and then distilled to produce raw materials
(intermediates and finished products) that are used in everything from herbicides, feed additives, water treatment, personal care
and energy. Higher Alkylamines primarily work to neutralize acidity (feed) and remove contaminants (soaps, water treatment,
oil & gas). The reaction of methanol with ammonia in a catalytic reactor creates methylamines (largest building block by volume of
higher alkylamines) which can be reacted with other chemicals to produce alkylamine derivatives. The company currently has 1,273k
tons of production capacity. HQ is Allentown, PA and primary US plants are in TX and FL
 Products are mostly produced and consumed locally due to shipping costs (upwards of 200-300/ton on truck cross
continent vs 1k-3k mkt prices or 8-25% of price to ship) and product stability issues (high vapor pressure) as
methylamines are sold as liquefied compressed gasses (like propane) or diluted in aqueous solutions (40% methylamine). EU
prices are 10-20% higher than US
 Apollo bought TAM from CVC 12/11 for 1.4b (6.3x), outbidding Bain and Pamplona.
o CVC paid 800m Euro for TAM 7/07 and tried to sell it to Lanxess (LXS), but couldn’t reach an agreement
o Apollo took out 250m of 540m equity via Dividend 12/12

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Positives
 # 1 or #2 market share in consolidated and niche industry and vertically integrated
 Raw material cost pass troughs on 50% of Revenues
 TAM products represent a small portion (~10-15%) of their customer’s end product cost structure.
 Fair/Cheap multiple at 8.0x 14E (7.6x incl FCF) to more specialized chemicals in the 9.0-12x range
o Mitigant: if you assume favorable contract not replaced multiple is 8.6x 2014E
o EMN and CE are being used as comps and they trade low 8x fwd (similar margins, size, intermediate products).
 Mitigant: Difference is cyclicality in the end market exposure where TAM is less cyclical than paint, auto,
plastics and construction where CE and EMN have the majority of their exposure
 Good end market exposures to secular growth areas expected to be +5-7% CAGR in mostly defensive markets (Personal
& Home and Water treatment, agrochem, animal feed, energy)
 Ability to generate strong HSD FCF that has been obscured by one time cash costs (debt extinguishment, IPO costs,etc)
 Benefitting from low natural gas prices (“significant part of raw material and consumables expense” – Unhedged)
 Winner of manufacturing renaissance in US
o Significant investment going into Texas and the Gulf for chemicals production (Methanol specifically)
 Favorable raw material contracts driving margins (set to expire in 19)
o Estimated to cover 90% of NA methanol requirements and 45% of total methanol requirements and is
driving an estimated 40-60m of annual EBITDA favorability
o Given significant capacity coming online before 2019 its expected that the company will be able to renegotiate at
reasonable terms

Negatives
 Volatile raw materials and favorable contracts expire in 19 (estimate is they contribute 40 -60m of annual benefit)

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 o Significant increase in methanol production domestically could drive prices lower and be a headwind to the
topline (margins should benefit and help offset on the bottomline)
o Lower methanol prices due to capacity increases could lead to more competition entering amine market
 Apollo ownership (55%) overhang
 Multiple not cheap to other commodity chems (CE and EMN)
 Ag sector uncertainty this year. We could see some lower demand/destocking
 Levered to global GDP and will trade on sentiment changes (could be very volatile and stock is volatile given low volumes)
 Company will have a large shutdown prior to going live with Pace Expansion which presents a risk
 Top 10 Customers are 42% of sales
 35% of 851 employees covered by collective bargaining in the Belgium plant under an agreement which ended 12/31/12
o Waiting on government to conclude inter-professional agreement before employee discussions can start
 FX exposure: majority is EU with only 17% Asia/Latam so impact shouldn’t be too significant
 Limited trading history and volatile stock with a 1.4x beta inline with other commodity chems
 Stock up a lot from IPO +34% since 4/13

Catalysts / Possible Overhangs

 Refinancing of 400m 9.75% notes callable 3/15 @ 107.31. 9.75% notes are approximately 45% of total debt and
refinancing will drive meaningful interest savings
 Methylamine expansion in Pace, Florida is completed Q314. Increasing capacity by 60% (+100k tons)
o Capacity will be used for functional amines and converting them to specialty to support organic growth
o Complete as of 6/30
 M&A drives portfolio repositioning (4.3x post synergy paid for Kemira is attractive)
o 5-7m near term synergies expected from kemira
 Institution of Dividend inline with peers that pay in the 1.5%-3% range
 Acquisition target for large chemical, which Apollo may push for to Exit
o Company competes with BASF and DuPont, which may make acquisition difficult from antitrust perspective
o Company’s NA focus and plants would be attractive to foreign buyers (Akzo, Ineos, Sasol)
o CVC could NOT get Lanxess deal done although that may not have been the best fit and that was just at the
beginning of the fracking boom which has changed the landscape for TAM cost structure with Nat Gas and
Methanol projects now coming online
 Balchem Choline Chloride JV in St Gabriel expected to come on stream in 15
 Negative Overhang: Secondary Sales from Apollo (currently own 55% of share)
o Secondary’s would improve float, liquidity and likely open up the company to new investors
o Apollo sold 10m shares at 20.00 on 12/11/13

Segments and End Markets:

 Higher alkylamines (C2-C6 alkylamines) is similar to producing methylamines except for ammonia is reacted with other
alcohols other than methanol (ethyl, buyl, propyl, isopropyl, cyclohexyl)
 Approximately 75% of global consumption of alkylamines by volume was methylamines with the remainder made up of
higher alkylamines (higher methylamines:7%, isoprpylamines: 13%, butylamines: 2%)
 Functional Amines (51% of 2013 volumes)
o 40% of segment sales is AG end mkt selling intermediates to AG mfg for use in herbicides for row crops
(corn, soybean, sugarcane). Remainder is sold upstream to specialty amines in vertical integration
o Functional Amines segment produces and sells methylamines, salts and solvents to merchant customers that use the
chemicals for industrial processes and as building blocks for their own derivative production.
 30-40% of functional amine productions is used upstream for TAM to produce Specialty Amines
o Majority of business on cost pass through contracts with automatic pricing adjustments (quarterly)
o NA and EU functional amines markets are supplied primarily by Taminco, BASF and DuPont
 EU: methylamine capacity: Taminco 51% of market capacity, BASF 38%, Balchem (6%) and CEPSA
(5%)
o Offered as a liquefied gas (100% potency) or an diluted in an aqueous solution (40% potency)
 The company has its own container fleet for 100% solutions of liquefied gas to ensure high quality service
o 2nd Highest margins behind crop
 Specialty Amines (40% of volumes)
o Majority of business on cost pass through contracts with automatic pricing adjustments (quarterly)
o Specialty amines produces amine and alkylamine derivatives from the functional amines for use in water
treatment, personal care, coatings and oil and gas

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 o Water treatment: intermediates for flocculants (products that cause solids and impurities in liquids to aggregate
so they can be easily removed)
o Personal care: TAM products primarily used for the production of surfactants which create the cleaning
effect for soaps and shampoos by lowering the surface tension between two liquids
 TAM amines are used in the synthesis of surface-active molecules. Amine oxides are surfactants
created through the oxidation of amines with hydrogen pyroxide
 Oxidation: loss of electrons or Increase in oxidation state by a molecule or atom(ex: oxidation of carbon to
carbon dioxide)
o Oil & Gas products: intermediates for absorbing and removing sulphur contaminants, intermediates for the cooling
and lubrication of drilling heads, dispersion of rock fragments and prevention of pressure blow-outs, and enhanced
recovery systems consisting of complex surfactant blends for facilitating recovery of oil & gas in reservoirs
o EBITDA margins in the high teens
 Crop Protection (9% of volumes)
o Largely annual contracts as opposed to pass throughs
o Crop protection upgrades alkylamines from functional amines segment into finished product ag chemicals
such as fungicides, plant growth regulators and soil fumigants for use in cash crops like fruits and vegetables
o DEET insect repellant
 Made by converting m-toluic acid to the corresponding acyl chloride and allowing it to react with
Diethylamine
o Triethylamine is used as an extraction solvent and in the synthesis of pesticides.
o Amines represent ~15% of the end product cost structure for Ag chemicals in general (growth regulators, herbicides,
etc)
o Highest per ton margin business due to the higher proportion of final and proprietary products sold
 Acid based solutions for bacterial and mold control in feed as well as anti microbial products for
reducing stomach PH (Pro GIT)
o EBITDA margins in the high 20s
 Specialty amines and Crop protection source building block chemicals from functional Amines.

Raw Materials/CommodityExposure
 Primary raw materials (in order of importance) are methanol, ammonia, ethylene oxide and acetone.
o Main raw materials for methylamines and higher alkylamines are ammoia, methanol and acetone
 Key sources of energy are electricity, steam and natural gas
 50% of revenues are done through cost pass through contracts that adjust quarterly based on changes in key raw
materials and the remainder of revenues is done under contracts that are renegotiated quarterly.
o Raw material resets are done on the previous quarter so there will be a lag from raw material increases and the
corresponding price increases
 Methanol: clear liquid commodity chemical that is produced from natural gas (and coal in china). It takes roughly
32Bcf of natural gas to produce 1mmty of methanol. 60% of methanol demand is used to produce traditional chemical
derivatives including formaldehyde, acetic acid and others. The other 40% is used for energy related applciations such as
blending into gasoline (primarily China), feedstock for dimethyl ether and biodiesel, methanol to olefins (MTO) and MTBE
(gas component)
 Purchase and supply agreement with Methanex Methanol for purchase of 45% of TAM methanol requirements at
favorable rates that expires in 2019
o It is estimated that the contract covers 90% of US methanol requirements and adds 55m/yr of EBITDA (BofA
analyst initiation report)
o Methanex has declared force majeure in the past and limited supply, forcing the company to go elsewhere and pay
higher market prices
o Original agreement was signed in 2001 and gives TAM unspecified favorable pricing
o Given the capacity additions coming online in NA, TAM should be able to renegotiate the contract at reasonable
prices. Capacity coming online from:
 Methanex is currently the worlds largest producer with 7.3m tons and 15% global market share
(total global market size of 49m tons)
 In the process of debottlenecking to increase capacity by 2m to 9.3m tons
 LYB: +780k tons: Channelview TX plant was restarted to take advantage of low natural gas. The
plant had been closed since 04 and was restarted 1/14
 Celanese: +1.3m tons greenfield at Clear Lake, TX in 2015. Currently under construction
 Currently investigating another greenfield methanol plant in South Texas and applying for
permits. It would be similar in size to Clear Lake at +1.3m tons of annual capacity

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  South Louisiana Methanol: +1.8m ton greenfield in Louisiana in 2016
 Dutch Fertilizer company OCI NV has plans for the largest ever domestic US methanol plant with 1.8m
tons per year capacity planned for Beaumont TX and could be operational by 16
 Total US methanol production is expected to increase by 26% by 2020 (http://www.aogr.com/web-
features/exclusive-story/u.s.-methanol-on-the-comeback)
o Methanol and its derivatives tend to move with Oil

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Acquisitions
 12/13: Purchased Formic acid business of Kemira (Finnish water chem company, publicly traded with 2b Euro market
cap) for 190m (6x pre synergies and 5x post) 32m annualized EBITDA pre expected 10m synergies.
o No significant overlap with TAM current operations but TAM has familiarity with formic acid chemistry, end
markets and production.
o Formic acid, like methylamines is a methanol derivative, but it has small methanol content. It is used as a
preservative and antibacterial agent in animal feed markets.
o Reasoning for acquisition is end market commonalities with TAM core business, niche characteristics and
reasonable growth profile.
o Annual expected synergies 10-14m with 5-7m in the first 12 months and 5-7m longer term.
 Synergies will come from operational enhancements such as cost saving sfrom operatingal excellence and
mfg optimization and sourcing optimixzation.
o Closing by 1Q14

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The Market/Market Share
 Industry has been consolidated over the years due to decreased methanol production in US with natural gas prices
uncompetitive relative to the rest of the world
 Most producers tend to focus on a small number of higher alkylamines which results in a limited number of producers of
each type in each region

 US competition for methylamines: Dupont, BASF, Celanese. TAM has 50% share in 2012 with Dupont #2
 EU competition for methylamines: BASF, Balchem, Ak-Kim Kimia, CEPSA. TAM has 52% share and BASF large #2
 US competition for higher alkylamines: US Amines. TAM has 75% share in 2012


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Company Strategy
 Further vertical integration strategy by producing alkylamine derivatives at facilities around the world that currently do not.
US and EU facilities are largely integrated into derivatives.

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Management Team
 Laurent Lenoir (47) CEO since 1/07. Prior various roles at TAM since 1991
o Life Sciences Engineering decree from Ecole Nationale Superieure d’Agronomie de Montpellier in France
 Kurt Decat (48) CFO since 2003. Prior worked at PWC and Fedex.
o MBA Katholieke Universiteit Leuven.
 11 member BOD with 9 external members (CFO and CEO internal)
o 4 members from Apollo, CEO Ceva, CEO Sequana (paper producer), operating partner Golden Gate Capital, Prior
TAM CEO, prior COO Solutia

4Q Results
 Sales +8% with volumes +3% and price/mix +5%. EBITDA +16%
 EBITDA inline at 57m vs 57m, but EBITDA +16% YoY
o Functional amines ebitda flat
o Specialty amines EBITDA +28% on better margins +140bps and strong volume growth +12% with strong demand
in personal and home care in US and EU
o Crop Protection +60% with margins +900bps on price/mix

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 Vols +3% with double digit growth in NA derivate capacity and EU.
o Higher vols in specialty amines and strong mix in crop protect tion
o Vols by region: NA48%, EU 37%, EM 15% (Latam 7%, Asia 8%)
 14 EBITDA guidance +14-16% (+6% organic) at 290-295, slightly above 285m consensus. Includes 20-25m from
Formic Acid Acq. Without the acq, guidance would have been a miss
o Paid 7x for Kemiras formic acid business or 190m for 27m annualized EBITDA pre synergies (JPM).
Synergies could be in the 10m range
 Methylamine expansion in Pace, FL on track for 3Q startup
 Acquisition of Kemiras formic acid biz will close March and contribute 20-25m EBITDA in 14
 Choline Chloride (used for animal feed) JV with Balchem should contribute 3m in EBITDA in 16 and 5m in 17

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