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Arxada’s unhygienic result puts pressure on margins; Refinancing of acquisition debt expected in early 2022
Josh Latham
•3 min read
Arxada’s revenues in the third quarter were up 12% YoY whilst profitability remained flat due to a softer performance seen in the Microbial Control Solutions (MCS) segment. The Hygiene unit, which had propped up the company's results during the pandemic, was the main contributor to MSC’s disappointing quarterly result. Management for the microbial products producer (formerly known as Lonza Speciality Ingredients) were quick to point to customer destocking and softer demand in the travel industry as reasons for the 42% YoY revenue decline in the segment. A 20% rise in input costs was also destined to affect the Group’s result, however growth in their Specialty Products Solutions (SPS) markets managed to offset the reduction in margins.
Raw materials made up 62-66% of COGS over the past three years, with the key raw material being petrochemical feedstocks, ethylene, copper and chrome ore. Costs were particularly impacted by the rise of copper in Q3, but Increased logistics and tolling costs also played their part in reducing gross profit margins by 3%.
CEO, Mark Doyle, insisted they were able to pass through all inflationary pressures to customers in their SPS segment, which represented 42% of revenue for the quarter. However, problems developed in their MCS segment (58% of revenues), as they struggled to pass 50% of rising costs onto end customers. This was mainly due to their competitive situation in the wood treatment segment in Northern America and the pace at which they were able to renegotiate pass throughs in their customer contracts.
Although management estimated that price action will stabilise in early 2022, reduced demand in their Hygiene market, which has notoriously higher margins, presents the company with undesirable headwinds. Fortunately their SPS segment, which saw 44% YoY growth, is currently benefiting from higher shipping costs for Chinese competitors which has deterred US customers. The industry is also realising strong demand in Vitamin B3 and Performance Intermediates – helping their Performance Intermediates & Chemicals sub-segment.
Troy Merger
The Group’s B2/B (Moody’s/S&P) CFR rating reflects Arxada's heightened debt profile following the LBO by Bain and Cinven earlier this year. Liquidity at the end of Q3 was impacted by CHF 126m drawn from their RCF and cash balances stood at CHF 78m. Since the transaction, Net Leverage has remained fairly stable, however, at 6.3x and was unchanged following the Troy acquisition.
Arxada completed the strategic acquisition of Troy Corporation in Q3, purchasing the company at a 12.5x EBITDA multiple, or ~CHF 675m. The Troy acquisition hopes to complement Arxada’s product portfolio and geographical diversification. Two thirds of the transaction will be funded by underwritten bank debt, which they hope to refinance in early 2022, and the rest through roll-over equity from Troy’s management. Mark Doyle mentioned that there is still room for M&A, and they have a ‘particularly good pipeline’ in their MSC segment.
Bonds still down
The bonds have traded down since issuance. Since the Q3 earnings release, the 4.25% SSNs have fallen -1 pt to 97.4 (5.2% YTM), while the 5.25% SUNs remained level, at around 93.4 (6.4% YTM).
