Imcd Group Nv U/Adr

Ladies and gentlemen, thank you for holding, and welcome to the Q3 2021 analyst call of IMCD. During the presentation, all participants are in listen-only mode, and later we will conduct a question-and-answer session. I would like to hand over the conference to Mr. Piet van der Stikke. Go ahead, Peter.

Yes, thank you. Welcome, everybody. As usual, I'm here with Hans Cormans, our CFO, and together we will answer your questions on our results over the first nine months. The message of strong demand that we spoke about at the half year results continued in the third quarter. The acquired businesses last year and this year performed fully to expectations and this resulted in an outstanding result in this quarter and year to date. Operating EBIT grew with 51% over the full first 9 months and on a constant currency base even did 54%. Cash earnings per share increased with 44%. All regions contributed to the growth and this growth was in a strong way organic and of course also the result of acquisitions and was also the result of volume and price increase. As you know, the markets are highly volatile and we experience, like everybody else, supply chain and availability issues. Prices of many of the products we deal with increased as did logistic costs. However, we coped quite well with these difficulties. We were most of the time able to serve our customers and price increases could be passed on to the market. We will continue to do strategic acquisitions in order to enter new markets and to strengthen our product offering. ICD advanced IT and digital infrastructure has been a key factor in our success as a company and has of course been crucial during these exceptional times. It enables us to reach out to our customers in various ways and continue to help the formulation of their products. ICD has this year been the first to organize virtual exhibitions in all our business segments And we were able to, in this way, connect with many thousands of customers, discussing trends in the market and product advice. We will continue to invest in IT and digital capability. We need to see how long the international market circumstances will continue, but it looks like well into next year. Markets can change, but we keep relying on our strong business model and are confident that we can keep on growing through cycles. So in this way, we look very optimistically to the next period. And now Hans will take us through the numbers. Thank you, Piet. Good morning, ladies and gentlemen, and as usual, I will briefly summarize IMCD's first nine-month results before we go to the Q&A session. I would like to start on page 9 of the presentation. As you can see, Forex adjusted revenue increased 24% compared to last year and growth profit increased by 30%. And this 30% growth profit increase is a combination of 19% organic growth and 11% increase as the result of the first time inclusion of acquired businesses. Growth profit in percentage of revenue increased 1.2% to 24.5%. This increase is the result of gross margin improvement initiatives inside Binance CD, changes in local market circumstances, the impact of newly acquired business and the usual fluctuations in our product mix. Forex adjusted operating EBITDA increased 54% to $286 million, an increase of close to $100 million compared to the same period of last year. This increase was a combination of substantial organic growth and a first-time inclusion of acquisitions. The conversion margin, calculated as you know by IMCB as operating EBITDA on percentage of growth profits, was 46.1% in the first 9 months of 2021, a substantial improvement compared to the 39.1% in the same period of last year. The same positive trend we saw for the net result before amortization and non-recurring items, where we report an increase of more than 50% to $202 million. Free cash flow of $205 million was healthy, whereby we report an increase of $36 million compared to last year. In the first nine months, we report $82 million of working capital investment. an investment that is more than logic considering 14% organic revenue growth. And so this working capital investment is mainly due to increased debt deposition as a consequence of increased business activities at the end of this quarter. Cash conversion margin of 71% was lower than the same period last year, again because of substantial organic growth of RCD business activities. Year-to-date cash earnings per share were €3.54, a forex-adjusted increase of 47% compared to last year. And on the large line of this space you will notice a 16% increase of our number of full-time employees, and most of this increase is the result of new employees as a result of the acquisitions done. Then on the next slide, slide 10, you will find gross profit operating EBITDA margin and conversion margin per operating segment. EMEA in the first column reported 21% Forex adjusted gross profit growth and 37% operating EBITDA growth. Q3 was another strong quarter for EMEA whereby most of the reported growth in EMEA was organic. Further, operating EBITDA and percentage of revenue improved from 9.9 to 11.3%, and the conversion ratio in EMEA increased to 43.8%. In the second column, the Americas, where we report 22% Forex-adjusted growth, profit growth, and 27% operating EBITDA growth. Also in the Americas, most of this growth was organic. Operating EBITDA margin and conversion margin both improved. Asia Pacific in the third quarter reported 80% gross profit growth and 148% operating EBITDA growth at constant currencies. Operating EBITDA in percentage of revenue and conversion margin both improved substantially compared to the same period last year. due to a combination of very strong organic growth and the impact of acquisitions done in this region like Cygnet in India. And then in the last column you will find the cost of the holding companies. On page 11, a summary of IMCD's free cash flow. And free cash flow was 36 million higher than last year, with a conversion ratio a bit lower than last year. And I explained the logic of this higher working capital investment due to strong organic business growth earlier in this call. CAPEX was low, in line with our asset-light business model. On page 12, a short update on net debt and leverage. And compared to the end of December last year, net debt increased a bit. And this increase was a combination of, on the one hand, healthy operating cash flows, and on the other hand, cash outflows as a result of acquisitions made and a dividend payment of about 58 million. Reported leverage, defined as net debt divided by operating EBITDA, including the four-year impact of acquisitions made, was two times EBITDA at the end of September. And leverage based on the definitions in our loan documentation was one and a half times either graph. And then last but not least, on page 14, you will find our outlook for 2021. You could read that we expect operating either that graph in this year. That was a very short summary of our year-to-date financials. And Peter and myself are happy to answer any questions that you may have. So back to the operator. Yeah.

Thank you, sir. Ladies and gentlemen, we will start the question and answer session now. To be registered for questions, please press star 1 on your telephone. So that's star 1 for your questions. Go ahead, please. And the first question is from Mr. Matthew Yates, Bank of America. Go ahead, please, sir.

Hey, good morning, gentlemen. A few questions, please. The first one is just around logistics. So on Univar's earnings call, they made the point, I think it was four times in fact, that they really benefited from owning trucks. Can you talk about whether you found actually your model to be a disadvantage in the quarter or how you were able to cope with that? The second question, just on the sequential evolution of the business, so looking at Q3 versus Q2, you managed to grow EBITDA in the Americas. I'm guessing that's not the usual seasonality. So you can just talk about market conditions versus the way IMCD was executing. And then in Asia, the margins are down about 150 basis points at the EBITDA level sequentially. I guess we're still trying to get to grips with how something like Cygnet operates, but is that normal seasonality or is there something going on with the mix or the cost base in Asia in the last few months? Thank you.

Yes, thank you, Matthew. On your first question, logistics, yeah, I'm not totally sure how... Let's say what the facts are behind the statement of Unifar. I also heard it from Brenda. I think we have experienced, as you can see also in our results, no particular issues with our model of using third party logistics. So you have to ask Unifar what the big benefit has been. because we have to compare that to what others do and we have experienced no particular problems with logistics other than that of course prices go up but we pass these price increases on to the market so for us no specific let's say negative negative results from the fact that logistics is tight. I think only America has asked you to take that question. I was not sure if I exactly understood your question there, Matthew.

I'll repeat it. So, usually we would expect Q3 profits to be lower than Q2 because of seasonality. And I guess that was the case in EMEA. but it wasn't necessarily the case in the Americas. I'm just wondering to what extent, I know it's not a normal year by any means, but is that market conditions or is that something more specific about the way IMCD is executing?

I think it was a combination of the way we executed. We added a couple of new businesses to the structure where we benefited from. You're right with respect to typically the ratios in Q3 are a bit lower than what you see in the previous quarters as a result of having the same fixed-cost days and having the holiday period in July orders in most countries, and that is what you also saw in Romania. But other than that, nothing special in the Americas. And I think the same goes for Asia in terms of margin, slightly lower operating margin.

I guess Asian revenue was up in Q3 versus Q2, so you didn't have a sequential decline in revenue, therefore I'm wondering why the margin was sequentially lower.

No, I think there's a bit of local changes in product mix. I think also comparing it a bit with a stronger quarter last year, Q3, Asia Pacific was pretty strong in Q3 already, but nothing specific there.

Okay. All right. Thank you, guys.

The next question is from Mr. Peter Olofsson. Go ahead, please.

Yes, good morning. I have two questions. The first is on the organic gross profit growth. So for the first nine months, you mentioned a number of 19%. The same number you mentioned for the first half, so for Q3 it has remained around the 19%. Given the global supply chain challenges, Could you provide some insight how much volume growth contributed to this 19% organic cross-profit growth? And then the second question I had is related to reliable compensation. We heard Brentak talking about this significantly up from last year given the strong results. How is that for IMCD? Do you see a significantly higher reliable compensation compared to last year? And if so, could you quantify that?

No, I don't quantify it, I think. But it is considerably... Basically, our structure, our bonus structure is very often, of course, if you make a budget and you get your full and you make your targets and you make your full bonus, and it is no surprise that many people will make their full bonus. I guess that is the short answer to it. And we are happy with that, of course. And on volumes, Peter, there's always a bit of a more difficult question in specialties, because we always talk about a mix of an enormous amount of small volume products and a few products with a bit of a higher volume, but I think in general it's fair to say that we sold much more quantities than last year, so there is quite some volume growth in the portfolio if we look at individual suppliers, market sectors and regions. To put a percentage on that is something that we don't do. At least we don't publish these volume type of things because it hardly makes sense in our business. Because if we do a food flavor where we sell in kilos and we do a coating resin where we sell in tons, then you could win a substantial food flavor business, adding a lot of margin, and lose 1% of your volume on the resins, changing more or less the whole picture that you then present to the market. On the specialty side, it hardly makes sense to talk about, in general, the volume component. If we look at individual businesses and suppliers, it's not only pricing impact that we saw, but also quite some volume growth. the first nine months compared to last year.

And when you would look at the demand in Q3, would you say it was really strong across the board? Or have there been exceptions and some areas where you saw some softness?

No, I think it's strong across the board. segments, the industrial segments were, but also the lifestyle sections showed strong demand.

The next question is from Mr. Chetan Udesi. JP Morgan, go ahead please.

Hi, thanks. Three questions for me too. So first one was, I'm just looking at the contribution from acquisitions on gross profit. You know, it was 9% in first half 21, but I think in the release today, it's mentioned to be 11% for the first nine months, which suggests that in third quarter, the acquisition contribution was probably 15 to 16%. I'm just wondering what drove that step up in acquisition contribution on cross-profit line in Q3 versus what we have seen in first half, because I don't think there has been any material new acquisition done in Q3. So that was the first question. The second question was, again, when I look versus Q2, and to some extent maybe similar question to Matt's question, but The gross profit is actually on an absolute basis down 3 million euros versus second quarter, but the OPEX is up 4 million euros versus second quarter. Now, I know these are small numbers, but I'm just wondering is there any shift in maybe just the pricing versus OPEX evolution between the two quarters? It would be good to know. Thank you.

To answer your last question, we just spoke about increased bonus payments. What you typically see during the year is that people build their bonus accruals during the year and the closer they get to year end, the more they put up to more realistic numbers based on the assumptions for the remainder of the year. So in Q3 there was a bit of an uptick on bonus accruals. I think your first question about the M&A growth margin growth, I think you're right that if you look at the additional acquisitions that we did, we did not really move the needle. As you can imagine, we acquired Chignet last year that came into our numbers from September onwards. and Siglent plays quite an important role in the M&A impact that we report here today.

I think just a question of there was a step up on contribution from M&A on gross profit line in Q3 versus the first nine months of this year and Siglent was really contributing to that step up in first six months and it is contributing to the step up in Q3 as well, so I don't know why we suddenly see this bigger contribution in Q3 versus first six months of the year.

I don't know, maybe... Yeah, I think that has to do amongst others with the, let's call it the seasonality or the COVID impact on the business members of companies like SIGNET in the year before. So what you see, what we do is a company like Cygnet as an example was pretty hard hit in the second quarter last year because of shutdowns and they had a very strong Q3 last year and that is reflected also in comparable numbers. And so there's a bit of seasonality in the acquired businesses, how we spread it over the year. And that could perhaps explain a visual question. And on top of that, for sure, the other acquisitions that we also had during these periods.

Okay, thank you.

The next question is from Mr. Dominique Edrich, Deutsche Bank. Go ahead, please.

Hello, thanks for taking the questions. Two for myself. Just firstly, with regard to going back to the customer demand, would you feel you're in a position at the moment to sort of fulfill all customer demand, i.e. from both existing and new customers, or are there still constraints where you're having to sort of turn away, as it were, certain amounts of business just because of supply chain issues? And secondly, just in terms of thinking about and about how your business develops going forward. Clearly, we're in a very particular situation with demand and with supply and with pricing at the moment in terms of what that does to both margins and conversion ratios. Once we adjust for the likes of Cignet, would you say there's anything that's fundamentally different today to where you were in 2019 in terms of either the product mix or the way that you operate that should fundamentally shift the balance of where you'll be as and when things maybe start to get more normal again in the future. Thank you very much.

Yes, Dominique, on your first question, customer demand and whether or not we have to turn away customers, I think that's not the case. What is the case, of course, is that sometimes we have to delay because of deliveries to us, the fulfillment of orders. But in the end, of course, everybody gets their call. It's clear, and everybody knows it from the market, that markets are tight. Availability is a problem. There are force majeure calls by principals and suppliers. But so far, fortunately, Also because of our strong position with our supply, we are able to fulfill their demands, albeit not always within the, let's say, period that everybody would like to see. Let's say your second question on our business model and let's say the exceptional circumstances and what happens if these return to more normal. I don't think that there is a crucial change now in the market for forever, so to say. I guess the market will come back to a more normal situation sometimes in the future. remarks starting this conversation is that the business model that we have is strong, is consistently executed, we are aiming for growth and focusing on growth through these cycles, so now of course we have exceptional growth, but also when markets turn back to more usual patterns, then we absolutely will also see growth in our business. So I think the important message is that the business model of IMCD remains extremely strong, that we are very positive, that we can also grow in normal circumstances. I think the good thing of the story is that we thrive in good, very good times, but also when times are less good, we also do very well. So I think that's evidence of the strength of the model and the execution of our strategy.

Thanks very much. I just have one follow-up just on the conditions question. I mean, in terms of thinking about what will drive that return? Is it just one of those things when we stop talking about it, it's probably when things will get better again in terms of just all these things that are currently blocking the supply chain? Is it just one of those things where it will just take time at the end of the day rather than anything? A big bang solution, as it were.

Yeah, I think your guess is as good as mine. I think that we all were, I think, surprised in suddenly seeing these supply chain issues and shortages at very high demand and maybe also triggered by the fear of missing out to a certain extent. But I think it very much depends probably on the willingness of the major economies China, of course, is an example, but also you see also these clogging up in ports in the United States. Yes, I think at a certain stage this will return to normal, but I'm not sure how fast that will go and how long this will take to normalize in 2022. Okay, thank you very much.

The next question is from Mr. James Rose. Barclays, go ahead, please.

Hi there. I've got two, please. So this is just a touch on what was asked before. So when there are no longer product shortages or availability within the market, do you think your current growth margin levels, say 24.5% and conversion ratio is about 45%, do you think those figures are sustainable in the long term? And then secondly, just on the APAC business, are you seeing any particular impact from the lockdowns or China's restrictions on electricity and environmental regulations? Appreciate your thoughts there.

Thank you. We will, of course, on your first question, we will, of course, work very hard to keep these margins. I think we have to be careful not to give predictions about the future, as I always am careful about that. But I think our focus and management is very much on strengthening our margins, on adding value in the chain, allowing us also to keep these margins, to align with the winners in our industry. So I think to offer digital solutions to our customers. So I think this whole package will give us at least the strength to also justify the margins that we have and maybe improve them. So, it's not only a function of the present day circumstances, I think. The second question was about shortages. Asia-Pacific, the impact of slowdowns. Yeah, I think certainly this isn't a drag also on our suppliers and principles that rely on raw materials, for example, coming from China. So in the chain that certainly plays a role and it depends on the quality, but it plays a role and then of course also it explains the availability issues and allocation that different customers and different partners get. So it certainly is part of this whole situation here.

Okay, thank you.

The next question is from Mr. Rajesh Kumar, HSBC. Go ahead, please.

Hi, good morning. Thanks for taking my question. The first one is on the margin front.

At the moment, your industrial sector is in sequential recovery. I'm assuming that's still a bit faster than healthcare, that should have had some dilutive effect. Can you run us through some of the moving thoughts of that mixed headwind versus what are the other factors that might have offset it? The second question is on you always talk about growth has potential to cross-sell products across different suppliers. I'm assuming that sort of synergy has been a bit tricky in the last 18 months with a lot of travel restrictions. You're not able to go and see a lot of suppliers and customers physically as you would have normally. Would you see some of those elements to improve as you go through the next couple of years? And finally, on... M&A, I appreciate that you have done M&A during the pandemic, which is incredible, but there are also certain geographies where you need to do physical due diligence. Has it been a bottleneck in executing some of the ideas you might have had in those geographies?

The first question I think Hans will take, but he will probably come back to you and ask exactly what you mean. But on the second and the third question I will take, the cross-sell is very important for us as a part of our strategy. I think we have been able, despite the lockdowns etc., to to make, let's say, that case for cross-selling. We spent a lot of time on very focused digital marketing. This is not just randomly sending out emails, but focus on needs of customers in the different business segments with detailed, let's say, formulation guidance and advice. As I said before, we have held some very successful virtual events, what we call virtual exhibitions, virtual visitors, where people can enter in a virtual world, so to say, and go to the different offerings in that virtual room. to get advice, to speak with technical people, to get formulation advice, etc. So, the digital tools help us, of course, also to connect with customers, to give us leads, and then also enable cross-selling. And again, that is an important part of it. Acquisitions. We're working on them. We have worked on them. We will no doubt announce more in the near future. Yes, it's always better, of course, also to sit down with potential, let's put it, owners of potential targets. We look forward to do that again. But fortunately, as of now, we're still able to connect And here, of course, also the video conferencing has, to a certain extent, changed the world, and also our world, so that is still a big tool. But that doesn't take away that it is also nice if we could visit again and see people. Also, the first question, maybe you should ask for the clarification. Because the line was so bad in the beginning of your question that I think both Pete and myself, what I think of this headwind on the farmer's side and positive on industrial, but I'm not sure what the question there means.

Yeah, sorry about the line. Just trying to figure out what has been the mixed effect on growth margins and what has been the tailwind from the travel cost reduction you know, costs regarding if the economies would be open, would you be hiring a few more people? So looking at the margins ahead, should we be seeing a bit of mixed-led dilution, a travel-led dilution on margins 2022 and 2023?

Yeah, I think it's fair to assume that given the current COVID situation in most countries is that the travel costs are still lower than what we reported there in, what was it, 2019? That's the last normal year. I think going forward, I doubt if it will go back to that same level of cost. So there will be a bit of consistency on the saving there. that for sure part of the cost will come back in the future if markets open up again and if the exhibition circus will start again and things like that. On the other hand, there's also a strong belief that our commercial and technical people don't travel for fun. That there also should be something coming out of all these travels and meetings and greetings that they do with potential new suppliers and customers. So I think on the one hand, yes, costs will come back to a slightly longer level than what it was in the past. But I think it also should lead to new business. And the net net, I don't know. I hope it will be a positive one. Thank you very much.

The next question is from Mr. Kiran Milder, ING. Go ahead, please.

Yeah, Kiran here. Good morning, guys. On the SIGNET, can you maybe give them an idea about the progression of that firm, given, let me say, the importance of the acquisition, and also to indicate about their expansion and possibilities, and is there also something like involvement in COVID pills or whatsoever, is there anything to say about the development there?

Yeah, maybe again to summarize for everybody, Kiknet is the number one distributor in India to the pharmaceutical industry and represents all the major excipient producers in the world. And as you know, the country is a very important producer of pharmaceutical products. That position is still very, very strong, going very, very well. We expand together with SIGNET in neighboring countries, particularly Bangladesh, but also looking at the Middle East, where our pharma business is strengthening. And I think we should see this as a piece of our global strategy in pharma, where we are, I would say, by far number one in pharmaceutical excipient distribution. And SIGMET is an important piece of that. On your question with COVID medicines, I I'm asking the same question to be honest and I see some very positive development there also in terms of some of the big producers making medicines and no doubt these will also be produced in India with a strong role for us to play there as well. But let's see how that pans out. It's early days. But I'm very, very positive. on thickness position in the markets in South India. So I think we made a very good acquisition there.

Okay, thank you.

Ladies and gentlemen, if there are any additional questions, please press star 1. But at star one, for any additional questions, go ahead, please. There are no further questions at this time.

Okay, then I thank everybody for the interest in the company, and I wish you all a very, very good day. And I see we all see you and hear you and speak to you in the next forum.

Ladies and gentlemen, this concludes the IMCD analyst call. Thank you for attending. You may now disconnect your line. Have a nice day.