Imcd Group Nv U/Adr

Good morning, ladies and gentlemen. Thank you for holding, and welcome to the IMCD event hall regarding first half year 2021 results. At this moment, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. I would now like to hand over the conference to Mr. Piet van der Slikker. Please go ahead, sir.

Thank you, operator, and welcome, everybody. I'm here with Hans Kormans, as always, and together we will answer your questions on our results over the first six months. The strong demand which we reported after Q1 continued in Q2 to such an extent that our EBITDA grew with 46% over the full six months, and even with 52% on a constant currency basis. Cash earnings per share increased with 44%. All regions contributed to this organic growth and all acquired companies performed in accordance with expectations. We remained active in executing our strategy by acquiring companies in various regions and market segments and we strengthened our position in Mexico, Colombia, Central America and China. I want to thank our staff who delivered a remarkable performance under difficult circumstances, and we look with optimism to the remainder of the year. Now, Hans will take you through the first half year numbers, and after that we will answer your questions. So, Hans? Go ahead. Thank you for the introduction. Morning, ladies and gentlemen, and I would like to start on page 9 of the presentation. Now, you will find a summary of the first half year income statement. As you can see, Forex Adjusters revenue increased 23% and gross profit increased 28% compared to the same period of last year. This 28% gross profit growth was a combination of 9% as a result of the first time inclusion of acquisitions and 19% organic growth. Gross profit in percentage of revenue increased 0.9% compared to last year to 24.5%. And this increase was a combination of the contribution of newly acquired businesses, product mix effects, changes in local market circumstances, and successful internal cross-margin improvement initiatives. Forex suggested operating EBITDA and EBITDA both increased with 48% and 52% respectively.

This increase was a combination of strong organic growth and first-time inclusion of acquisitions.

Operating EBITDA in percentage of revenue increased to 12.3%, and operating EBITDA in percentage of revenue increased with 2.2% to 11.5%. The conversion margin, calculated as operating EBITDA in percentage of gross profit, improved substantially to 46.8%. When using EBITDA instead of EBITA as the numerator, when calculating the conversion margin, like most of our peers, we would have reported a 50-50% conversion margin. On the next page, page 10, you will find growth profits, EBITDA and conversion margin per operating segment. In EMEA, we report 19% Forex-adjusted growth profit growth and an operating EBITDA of 93 million versus 70 million in last year. The EBITDA margin of 11.6% is 1.4% higher compared to the same period of last year, and most of the EBITDA and growth margin growth in EMEA was organic. In the Americas, we also report double-digit growth profit and operating EBITDA growth, respectively by 18 and 24%. Operating EBITDA in percentage of 50% improved 0.6% to 10.3%. And like EMEA, most of the growth was organic. In Asia Pacific, we realized 80% growth profit growth and more than doubled EBITDA. Operating EBITDA in percentage of revenue improved 6.4% to 15.8%. This growth was a combination of substantial organic growth and the first-time inclusion of acquisitions like Cignet. the farmer business in India that we acquired at the end of last year. In all segments, we report substantial improvements in conversion margin compared to the same period of last year. And this improvement in conversion margin is the result of substantial organic EBITDA growth, whereby organic growth profit growth more than compensated the un-cost growth. Further, the positive impact of the Signet acquisition helped to improve this ratio. In the last column all non-operating companies including the head office in Rotterdam and our regional support offices in Singapore and the US where we report slightly higher costs mainly as a result of further strengthening of support functions in these offices. On page 11 a summary of the P&L lines between operating EBITDA and net results for the period. A few general remarks. Net finance costs reduced significantly and I will show a breakdown in a minute Income tax expenses increased and relate to the countries where we generate taxable income. The tax cash out in the first six months was about 25 million. Amortization of intangible assets are mainly non-cash costs related to the amortization of supplier relations, distribution rights and other intangibles. And last but not least, as mentioned already by Piet on the bottom of this page, you will you could see a Forex adjusted 48% increase in cash earnings per share to €2.43. As promised on page 12, a specification of the net finance cost, where we report a decrease of €7.3 million compared to the first half of last year. Main driver of this decrease is €1.8 million positive currency exchange results this year, compared to 3.2 million cost last year, reducing overall finance costs to 5 million. Further interest costs of our loan structure were 1.6 million lower than the same period of last year. On page 13, a summary of a balance sheet. Property, plant and equipment of 96 million is a combination of a limited amount of fixed assets that we own ourselves and more than 70 million right-of-use assets. In other words, capitalized operational leases as a result of the application of IFRS 16. The combination of intangible assets on the one hand and related deferred tax liabilities are a result of acquisitions done since July 2014 and our history as private equity owned company. On the financing side, there is 870 million of debt and 1.3 billion of equity. This substantial equity provision covers about 62% of our capital employed. The leverage ratio end of June based on our loan documentation was 1.6 times EBITDA, which was well below the maximum set in our loan documentation. Reported leverage based on IFRS was 2.6 times EBITDA. and differences in definitions of what is real debt between IFRS and the loan documentation are the main reason for the difference in these two leverage ratios. Working capital at the end of June is summarized on the next page, where you will find a summary of the absolute amounts of the various working capital components, and these absolute amounts translated in days of revenue. As you can see, the absolute amount of working capital end of June increased with 84 million compared to year-end 2020. And this increase is a combination of additional working capital due to the increased business activities, working capital that we added as a result of acquisitions in the first half of 2020, and currency changes on working capital positions. Compared to last year June, the overall working capital days improved and decreased four days from 60 to 56. I would like to finish this short summary with a cash flow overview on page 15. Free cash flow and cash conversion ratio were both substantially higher than the same period last year as a result of increased operating EBITDA combined. that more than offset the higher working capital investment as a result of the increased business activities. Further, CAPEX was about 2 million lower than last year. Then I assume that you all read our outlook on page 17, the outlook in the press release, in which we expressed our expectation of EBITDA growth in 2021. And I would like to hand over to the operator to open the lines for Q&A.

Thank you, sir. Ladies and gentlemen, we will start the question and answer session now. If you have a question or remark, please press star one on your telephone. So star one for questions or remarks. Please go ahead. And the first question is coming from Radhees Kumar, HSBC. I'm going to connect you. Please hold the line, sir. Your line is open now.

Morning. First of all, when you look at your financial tiering it's now at 1.6 times as per the loan document this is lower than your typical range clearly there are opportunities in the market so could you update us on how you're thinking about your acquisition and how are you seeing the valuation trend in that area The second question is obviously on the performance you have done really strongly. A lot of people are worrying that, you know, chemical prices have been a tailwind. So could you help us understand how much of it was cross-selling new products in different geographies versus, you know, part two of higher freight cost and price increases? And which of those will reverse in the second half when we are looking at our forecast? What are things we need to be cautious on? Thank you.

Yes, thank you very much, Rajesh. On your first question, acquisition pipeline, basically what we always say is that we continue to acquire businesses that fit into the strategy. It's clear that also in this time we have been able to do that although of course it would help if we could travel again. We are very positive nevertheless about the possibility to acquire companies also in the future and not sure if you want to say anything on the gearing house but No, I think the conclusion is right that the 1.6 according to the phone documentation is low compared to what we reported in the past. On the other hand, I think the market also looks at the IFRS leverage, the 2.6 time, and we all should realize that in that leverage there is, for instance, also burnout obligations. There is the debt related to the operational leases that we have to put on the balance sheet. So the 1.6 should be more relevant, but I remain in doubt if the market sees that the same way. But there is plenty of potential upside to do M&A there. On your second question, volume price cross-selling, that's of course a mix. I'm not going to totally try to dissolve this mix or analyze this mix, it's clear that the current results is the sum of all three, that significant volume growth, significant price increase, and of course we always are trying to cross-fertilize our business in terms of bringing new product lines of existing suppliers or new suppliers to new regions. And that remains a very positive trend as to how let's say volume growth and price growth will continue and nobody knows. For the time being, let's say for the remainder of the year we remain positive. But it's a combination of the three of these factors and for us of course it's very important to continue to develop our business in the different market segments and to add product lines, to offer a complementary product range. And I think what helps us is if we enter new territories, for example, now in Central America, that we are able to also use our relationships, our supplier relationships to bring new product lines to these regions. or to take them over from competition. So it's about strongly executing our model, stay close to suppliers and customers, and, of course, being able to also pass price increases to the market. So I would summarize it in this way, Ajis.

Understood. Thank you.

And the next question is coming from Matthew Yates, Bank of America. Please go ahead, sir. Mr. Yates, please go ahead.

Hey, good morning, everyone. Maybe just to follow up on one of the prior questions around the margin development we saw sequentially, and maybe just leaving Asia to one side, given the Signet deal, but very, very strong margin expansion in Europe. and the U.S. And I was listening to the Univar call yesterday, and they did call out a few things that maybe weren't so sustainable for the rest of the year, given the market tightness. So is there anything that you're seeing that would give reason not to necessarily extrapolate this sort of profitability that you delivered in Q2, I guess, particularly given there is some seasonality to your business? Thank you.

I would say that as far as the margin percentage is concerned, let's say seasonality, it is clear that our margin percentage fluctuates. It depends on the mix. It depends on certain aspects in the market. that could fluctuate also in the future as it has done in the past. How and when is very difficult to predict. As you know, we are in specialties, so I'm not totally sure if we can compare ourselves in that respect to Univar, which is, of course, a little bit more skewed to commodity. So our margins are relatively stable, but with this fluctuation element in it. So I can't promise that they will stay forever at this level or go... may go higher, may go a bit lower, but we are of course a very margin focused organization and we hope that we can, and we are constantly also working on improving them by offering our services, by being relevant to our customers and let's see if we can sustain them.

Can I ask a follow-up question around pricing? And forgive me for dumbing down. What I know is a very complex and diverse portfolio. Can you just explain to me your approach to pricing? I was under the impression that a lot of your supply contracts have fixed annual pricing. How much flexibility or frequency do Do you review the price you are in turn charging to your customers to capture that market tightness?

Yeah, I think we do not have contracts with fixed prices. So our suppliers determine, let's say, their price to us on a regular basis and that differs from supplier to supplier. But they are free in most cases to change their pricing to us. And of course that depends from their view on competitiveness, on their cost prices, etc. So that is something that we need to be very alert on, because most of the time, of course, these prices go up. So we need to then execute price increases also to the market. That is, of course, something that we, I would say, work very hard on, how to execute that, because that's not always easy, and it's also... complicated sometimes also IT wise but we've done that well so let's say our ability to price the products in the right way in the market also anticipating on what our suppliers are doing is one of our should be one of our core competences and in a very sort of inflationary environment

Do you have positive inventory revaluation gains going through your numbers?

That could be a bit but basically we don't take speculative positions so we often buy on the basis of expected demand from our customers and that means that we hardly have very big positions in, for instance, a specific grade of strawberry flavor, because you expect the customer to buy. And that is, because if you do more than 50,000 different products, it will be a very difficult game to play. But there could be something in it.

Thank you, guys.

And the next question is coming from Chetan Udeshi, J.P. Morgan. Please go ahead, sir. Mr. Udheshi, please go ahead.

Yeah, hi, sorry. What's the news? I just had a question on firstly, can you just talk about what you have seen in terms of demand trends by different end markets, you know, both from a Q2 point of view and also if that has changed at all from 2Q to the end of 2Q in terms of different and markets within industrial and life sciences that would be useful. And secondly, you know, it's clear in general, and I don't want to ask specifically on pricing for you guys, but how customers in general do you think are accepting the price increases? Because it's not only price increases that are going up for chemicals, really for a lot of other commodities and products, the prices are going up as well. In your conversation with customers, do you sense any sort of pushback, concern that this could eventually lead to some sort of a demand destruction in the next few quarters?

Jeff, thank you for these questions. I think on end markets we can say if you look at life science and the industrial markets that In particular, the demand of industrial markets has been exceptionally strong. On the life sciences, we have different markets. If you look at, for example, personal care markets, they have come back since last year. When of course there were many many lockdowns, not much flying around and they have come back to a certain level but that's very positive. Food is of course a more stable growing market, very nicely growing but more stable. So I would say if you look at the whole spectrum, then the growth in the industrial markets in this quarter and this half year has been very significant. And I think that that concurs with what we read about chemical industry reports from chemical producing manufacturing companies as to accepting price increases. That, of course, is differentiated. I mean, nobody likes to receive price increase. It depends on competition. It depends on the... Yeah, there's an element of course also of restocking, there's an element of people really wanting to have the products or needing the products, but what we should do is to be reasonable We have to explain it. Why? Because we are in this, of course, for the long term with our customers and our suppliers. And this is not a game of just doing a quickie. I mean, we need to explain it to our customers. And then most of the time we can. So I would summarize it like this.

Thank you.

And the next question is coming from Kurain Mulder, JP Morgan.

Please go ahead, sir. Kurain Mulder from ING. I thought you switched. No, this is right. Okay, fine. Good morning, everyone. question on Chignet so can you give me an idea about the organic rows of Chignet in the last year maybe you can give me some some flavor on that and with regard to pharmaceuticals there is somewhat slow down as I remember in the first quarter because of the the lack of let me say the fluid flu, I think. So maybe you can give me an idea about the situation with regard to pharmaceuticals, especially with regard to the development of Cignet.

Yeah, clearly we can't, let's say what we don't do is give individual comments or individual companies. I think let's say the general comments that Cygnet performed in accordance with our expectations, and our expectations were of course also on the basis of growth, is as far as we can go. So we're very happy with the development with Cygnet. I think on your other question Farma, As you remember, last year, particularly in the first six months, pharma, of course, had strong growth figures that leveled off a bit. And we, of course, now also have strong growth figures here. also because of the acquisition but it is true that generally let's say the initial strong growth has become a bit slower and one of the factors and I think we mentioned it last time is for example that because of the COVID measures some other transmissible diseases by shaking hands and hugging, etc., like flu, has decreased enormously. So that decreased also certain medicines there, which of course is a factor as well. And also the postponement of certain treatments, etc. But pharma is, as you know, very stable now.

uh business how um we're still very happy with uh with what we see in terms of growth although not as exuberant as last year okay my second question and final question is about the lockdown impact in the second quarter did you still feel that effect and is there where some cost involved and logistics uh hindrances and and other things

Yes, so of course also in the Q2 most people were against from home in many places or partly from home. That is an additional burden of getting orders out. and handling orders that's why I'm also very very grateful for our people and the work they've done also of course to our IT people that kept the systems going on the supply chain and I think that We are not special there, because we see that also with many of our colleagues, peers, and in other segments of the market, the supply chains are still disturbed. That's an additional burden on our people to get the products at all, or in time, and then get it in time with customers. So that's not easy and that remains difficult also during the second quarter. So we have to see when that goes back to normal. So yes, the COVID pandemic has still had, let's say, a negative impact. Of course, yes, of course, less travel. Compared to last year, I don't think it makes a very big difference. Exhibitions are not taking place yet, so certain positive effects, but compared again to last second quarter, of course, that was also not there. So in that sense, a limited effect.

Yeah, so in terms of cost of limited impact, but in terms of, let's say, if it gets normalized next year, for example, that could enhance further volume growth with some higher cost. Is that a correct conclusion?

I'm careful to predict volume or price next year. I think if the situation totally returns, then we should do a bit more travel again. But hopefully then that results also in new business. We will hang on to our strategy and growth perspective. Okay, thank you.

My apologies, Mr. Mulder from ING. And the next question is coming from Fernand de Boer, the South Bay to come. Please go ahead.

Yes, good morning. I have one question on the auto income line, which seems to be exceptionally high in my view. Anything specific to mention there?

Yeah, I think what you will find there is the proceeds of the sale of the neutral granulation business in the U.S.

and that drives the operations line a bit up.

But if I look at, let's say, the adjusted figure, because you gave a non-recurring figure of, I believe, only 1.6 million, so that still should leave then quite an amount in that order of income, which is then in, let's say, the adjusted figure.

So to be very specific there, what you can find in the consolidated cash flow statement is a one of other operating income of 6.2 million, positive, and that is mainly related to the sale of the neutral granulation business. And the number that you refer to is the balance between extraordinary income, so one of income and one of cost. And the one of cost then relates to M&A activities, restructurings, and all these type of one-off items.

Okay. And maybe you have to come back on, let's say, the second half, because expecting a higher EBITDA after plus 52% again in the first half is, of course, in our view, obvious. But if you listen also, I listened yesterday to the call of DSM, and on their engineering business they were quite cautious because of all the disruptions. They say, okay, there is demand, but we are not sure, and that was actually the end message, we can deliver. How does that work for you? How can you be sure that you are going to deliver the demand the companies are going to need in the second half?

No, we can of course never be sure, because we are one of, let's say, customers I would say, we don't say that, but the distributors also of DSM. So we can never be sure. Nevertheless, because of, I think, the wide variety of products that we have that very often levels out. So we are of course not dependent on one product range or one product line. So that helps a lot. I think the situation will not, as far as I can see, worsen in the second half versus the first half. I hope that it improves a bit. But we will see. So I don't think that there will be a major difference in the second half versus the first half.

And then maybe to come back on the very first question on your, let's say, capital allocation and looking for acquisitions. Could there be a point that you say, apart from acquisitions, we're also going to return money? It's been quite easy for you also to raise capital in the past few years. or maybe to put it the other way around and to return more to the shareholders?

No, I think we are not at that point. I'm also not greatly in favor of that. I think that we need to execute our strategy. I think shareholders have benefited from that and they will benefit in the future. We have sufficient opportunities to use our cash and our balance sheet. So, no, I don't think that that is on the agenda at all.

But does that also then mean that you are going to look for more bigger acquisitions or for more acquisitions, more smaller ones?

Well, listen, we are looking at acquisitions, whether or not they fit into our strategy, whether big or small. And as you know, we always have done a number of smaller ones. Let's say if we have the ability to acquire a bigger one or bigger ones that fit into what we do and we stick to our strategy, let's say, core of specialty chemical and food ingredient distribution, yeah, then we will do that. But let's say we are not... I think when we were listed we were asked how much I could spend on acquisition and we have not given that number and we don't know it because what we do is execute our strategy. So we do not deviate from that course and so far I would say it has served us well and it has served Sharehold as well. Thank you.

And the next question is coming from Henk Veerman Kempen. Please go ahead, sir.

Hi, good morning, all. I got disconnected for a bit, so I hope I don't repeat any of the other analysts. But three questions from my side. Firstly, has stocking from clients in the second quarter, is that an anticipation of price increases? Did that have any material effect on the volume growth in the second quarter? The second question is on shortages. I know that you're very diversified across products and across markets, but I'm wondering if that has been sort of a bigger theme as the quarter and a half year proceeded and if that could have any effect on the remainder of the year? And then the third question is on, I think you already commented briefly on continued travel restrictions, but do these travel restrictions and also in combination with, let's say, very strong markets, has that been sort of, does that make it more difficult to engage with potential acquisitions, potential targets?

Yeah, thank you for the questions. I think restocking affects certainly that has played a role. in combination with, I would imagine, and what we also sometimes hear from customers, let's say the fear of shortages, of course also triggers them ordering, and maybe ordering a bit more than necessary. I think I said, I answered the question of shortages, so I don't want to repeat myself again. on travel restrictions certainly has an effect I think fortunately travel in Europe is more or less possible travel overseas is still very difficult if not impossible and that hasn't I think for all of us in business has a negative effect because we need to see our people and we need to, you know, we can do a lot through the screen but not everything. And to meet new people and to connect you need to see people face to face so certainly that has an effect. On the other side, the world adapts quickly, so also the connection through the screens is more easy than maybe before the pandemic. But we all would love, and I think I speak for everybody, would love to see the world reopening again and have more opportunity to speak to people. A lot can be done on the screen. We want to travel again nevertheless. And let's hope that that is in the cards in the next 6 months to 12 months. Okay, thank you.

Ladies and gentlemen, if there are any additional questions or remarks, please press the star 1. And there's a follow-up question coming from Mr. Rajesh Kumar, HSBC. Please go ahead.

Good morning. Sorry. When you are looking out next year or second half of this year, obviously healthcare, life sciences, that segment has been reasonably strong and has continued to be strong. as we get the recovery in industrials, but also there was supply shortage, which has sort of given a price in tailwind. Should we think of it like you are at the sweetest spot and what we see is a bit of tapering of growth in healthcare, life sciences, exposure, while a bit more coming from the industrials in the second half?

I'm not totally sure if I get your question. Could you? I mean, no, I don't really get it.

So life sciences was quite strong last year, and we had a typical impact from industrials. We are at that point where both life sciences and industrials are kicking quite strongly. So should we expect second half to be more of an industrial-cured quote?

Well, what I said about the first six months is that industrial is not so good. has shown very significant growth, and I think that you see that also with manufacturers, yesterday DSM, and I think that that will probably continue. At the same time, if you look at lifestyles, and they are, of course, not all the same, and what I said about personal care, that had a very difficult year last year, because of the pandemic and that's coming back so it's a bit of a mixed picture and let's see how long let's say the growth of industrial is continuing but overall we see for both bigger segments a very positive development also for the second half Thank you very much

There are no further questions. Please continue, sir.

Well, then I would say to everybody, enjoy the summer like we do, and enjoy your holidays you have, and I look forward to speak to you after Q3. Thank you very much.

Ladies and gentlemen, this concludes this IMCD event call. You may now disconnect your line. Thank you very much.