Imcd Group Nv U/Adr

Hello and welcome to the IMCD NV Analyst Call Quarter 3. Results. My name is Caroline. I will be your coordinator for today's event. Please note this call is being recorded. For the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your questions. If you require assistance at any point, please press star zero and you'll be connected to an operator. I will now hand over the call to your host, Mr. Pete Wende, the CEO, to begin today's conference. Thank you.

Yeah, thank you very much, Caroline, and good morning, everyone. I'm here as tradition is with Hans Corriman, CFO. We will run you through the Q3 financial results, after which we will be happy to answer your questions. First nine months have produced excellent results in all regions under increasingly difficult macroeconomic circumstances. We spoke in our last call about increasing inflation and supply chain constraints. And I don't need to mention the geopolitical difficulties that we are in. Notwithstanding this, we have been able to show strong organic growth and furthermore we have been able to continue to do strategic acquisitions. Our resilient business model which operates across regions and markets will help us to navigate the challenging environment. As of now, we expect the current business momentum to continue in Q4. And with these few remarks, I would like to give over to Hans for leading you through the Q3 numbers.

Hans. Thank you, Peter. Good morning, ladies and gentlemen. And I will briefly summarize IMCD's first nine-month result before we go to Q4. And I would like to start on page nine of the presentation. And as you can see, Forex adjusted revenue increased 31% compared to last year, and gross profit increased with 35%. And this 35% is a combination of 29% organic growth and 6% as the result of the first time inclusion of acquired businesses. Gross profit in percentage of revenue increased 0.6% from 24.5% to 25.1%. This increase is the result of changes in local market circumstances combined with various local cross-margin improvement initiatives. Further, currency exchange rate developments and the usual fluctuations in the product mix play the role. adjusted operating EBITDA increased 51% to $443 million, an increase of $164 million compared to the same period of last year. For sure, there was a bit of acquisition impact. However, the vast majority of this increase was substantial organic growth. The conversion margin calculated as operating EBITDA in percentage of gross profit increased to 50.2%. which is a substantial improvement compared to the 45% in the same period of last year. An even bigger increase for our net result, where we report a growth of more than 74% to 264 million. On free cash flow, we report an increase of 48 million compared to last year, and a cash conversion margin of 55%, which was lower than the same period of last year. Substantial organic growth of IMCD's business activities not only resulted in higher results, but also in higher working capital positions. Organic working capital increase was 197 million, and this means a 31% increase, which is more or less a similar percentage as the organic revenue growth before currency adjustment. And this working capital investment is mainly due to increased debtor and stock positions. a larger consequences of the increased business activities. Year-to-date cash earnings per share were €5.34, an increase of 57% compared to the same period of last year. And on the last line of this page, you will notice a 17% increase in our number of full-time employees, and most of this increase is the result of new employees as a result of the acquisitions done. On the next page, slide 10, you will find gross profit, operating EBITDA, EBITDA margin and conversion margin per operating segment. EMEA in the first column reported 34% Forex adjusted gross profit growth and 50% operating EBITDA growth. Q3 was another strong quarter for EMEA, whereby most of this growth was organic. Further, operating EBITDA in percentage of revenue improved from 11.3% to 12.9%, and the conversion ratio increased to 48.7%. In the second column, the Americas, where we report 39% Forex-suggested growth, profit growth, and 57% operating EBITDA growth. Also in the Americas, most of this growth was organic. Operating EBITDA margin and conversion margin both improved with 2.2 and 6% respectively. Asia Pacific in the third column reported 34% growth, profit growth and 36% operating EBITDA growth at constant currencies. Operating EBITDA in percentage of revenue was more or less flat at a high 15 plus percent number. And conversion margin improved slightly compared to the same period of last year. And then in the last column, you will find the cost of the holding companies. And this includes all known operating companies, including head office in Rotterdam and the regional support offices in Singapore and the US. Page 11, summary of IMCD free cash flow. As mentioned before, free cash flow was 48 million higher than last year with a cash conversion ratio lower than last year. And I explained the logic reason of the higher working capital investment due to strong organic business growth earlier in this call. And CAPEX was low as usual in line with our asset-light business model. Slide 12, a short update on net debt and leverage. Compared to the end of December last year, net debt increased with about $180 million, and this increase was a combination of positive operating cash flows combined with cash outflows as a result of acquisitions done and the $92 million of dividend that we paid in the first half of this year. The reported leverage ratio, defined as net debt divided by operating EBITDA, including the full year impact of acquisitions, was 1.9 times EBITDA at the end of September. And leverage based on the definitions of our loan documentations was 1.4 times EBITDA. And then last but not least on page 14, you will find our outlook for 2022, where you could read that we expect operating EBITDA growth in this year. And that was a short summary of our year to date financials. And Pieter and myself are happy to answer your questions. So back to the operator to open the lines for Q&A.

Hello?

Caroline still there?

Yes, sorry. As a reminder, if you would like to ask a question, make a contribution on today's call, please press star one on your telephone keypad. We will take the first question from Matthew Yates from Bank of America. The line is open now. Please go ahead.

Hey, good morning, gentlemen. Hope you can hear me okay. I've got two questions. One's pretty short term, one's much more longer term. Perhaps we'll do them one after the other. The short term one, Brentag yesterday said that volumes would understandably be seasonally weaker in Q4. But we've heard broad comments about destocking across the chemical industry. They were, however, pretty upbeat that margins were holding up nicely into Q4, at least so far. It wasn't clear to me if they were referring to the supply side dislocations and some of their more commodity portfolio like ammonia and chlorine, or whether this statement also applied to the more specialty part of their portfolio. So I appreciate if you can share your perspective on how Q4 seems to be evolving. Thanks.

Yeah. could concur with what apparently Brett has said. I think the prices will hold up, most of them, in the coming few months. I'm only talking about the coming few months, I can't of course see further ahead. So I think that, as I also said, that we expect business momentum in Q4 to be following the current momentum. So, yeah, I think prices will hold up across the board. Okay.

Let me do the more longer-term one. It looks like Advent have mastermind the merger of Cornell and Caldic to create another sort of global specialty platform. Is this a growing challenge to IMCD that there seem to be a few more players capable of offering such a multi-regional proposition to the principles? I'm conscious that the publicly listed company is obviously only a tiny fraction of the overall market. I'm just trying to understand if IMCD is still confident that your business model and culture is going to enable you to keep outperforming the industry.

That is a very important question. But it is true that if we look back over the years that we have seen a further professionalization of the sales channels through companies like ours and that we have seen competitors coming to the markets. So certainly also Caldic together with Cornell Brothers and also the more commodity oriented business that they have in Latin America. is again a competitor. I think what will make the difference is the focus on your business model, on specialties, on your technical capabilities, not to dwell too far apart from your core. And furthermore, business culture and investments in IT capabilities. So, I mean, that's the short answer to a far-reaching question. But, of course, we have seen competitors coming to the market. And, yeah, that's an extra challenge. It's as in the Champions League, if you have a few good ones, then it also helps you to get your game up.

It's obviously very difficult for us from the outside to analyze a portfolio of 40,000 plus products. When you look at your win rate over the last couple of years, Are you still comfortable that you're adding the right products to the portfolio to keep up growing the industry, i.e. are win rates a proxy for market share gains in due course?

Yeah, I think so. I think our strategy always has been to align with, let's say, the leaders in the various industries that we're working in. I think that we have been able to quickly gain a very strong position in the Latin American markets, also in the business segments that we favor. And I think also if you look at acquisitions that we have done in Asia, that it really fits into what we want in the different segments. But also, let's say aligning with those suppliers that are willing to work with us on a more regional or global level, we'd be very happy how that has evolved. I think generally, strategically about, let's say, the focus of producers, then we continue to see, of course, a wish and a need to limit their sales channels in favor of the bigger ones. So in that sense, I think all the bigger ones will benefit more than the smaller ones. Very good.

Thank you, Jen.

Thank you. We will take the next question from line David Kirsten from Jefferies. The line is open now. Please go ahead.

Good morning, gentlemen. Thank you for taking my questions. I've got two. First, maybe on free cash flow. It seems that the improvement in free cash flow that you reported was largely driven by an improvement in the third quarter. And is it fair to assume that that is mainly the result of a release of working capital as a result of easing supply chain disruptions? And then secondly, when reading the press release, it reads almost identical to the completely different macroeconomic environment and outlook. Can you indicate what has changed during the quarter, maybe in terms of volume and price momentum? And did I hear you say in the beginning of the call you expect similar momentum going into the fourth quarter or based on what you've seen so far in October and November? Thank you very much.

David, if you look at the cash flow cycle during the year, then we typically report the lowest conversion ratio in the first quarter and the second quarter, and then it should, what I would call, normalize towards year end. At year end, always the highest cash conversion ratio, and that typically has to do with December in most years being the weakest month of the year due to holiday seasons. And the trend that you saw now in Q3 is I think more or less similar as what we saw in previous years.

But last year you had a large increase in working capital in the second half, right? But that was maybe due to exceptional market circumstances, is that correct?

Yeah, it was coming out of a COVID period and a lot of businesses restarting after a very soft period.

Right, understood.

Yeah, on your second question, David, Our present releases are very similar over the years. That's maybe a bit boring. But I think we still see, as I said in my introductory remarks, that the business momentum will continue in Q4 nevertheless. And I think that... that is shared across the industry, we see, first of all, that supply chains are getting more relaxed, so improving, and we also see, I would say, that volumes are not as abundant as they were earlier. I guess that we probably have read also what Brentek has said about that. Now, there, of course, you have also a strong commodity lack, which we don't have. But I think that you will see a destocking trend. In any event, towards the end of the year, we have to wait and see what happens next year. I think the macroeconomic predictions are not great. as we all know. So that will have an effect and we will see what that means. But so far we see business continuing also in quarter four more or less in the same pace.

And does that mean you see a larger contribution from price in your organic revenue and gross profit growth?

Yeah, price is a larger contributor than volume.

Okay, great. Thank you very much.

Thank you. We will take the next question from line Matthijs Meijenhout from Kepler-Cheroux. The line is open now. Please go ahead.

Yes, good morning. Thank you for taking my questions. Maybe two. First one is on the M&A environment. If I look, your competitors also seem to be coming more vocal on their willingness to do M&A in the specialty segment. So how do you see this competitive intensity? Is it a threat or is it rather benign and why? And then a second question is on inflation. As you already mentioned, inflation is still very present. Could you maybe give us an indication on what we should expect for next year in terms of your fixed cost categories for inflation? Thank you.

On the first question, acquisitions, I would say that what I answered on the question before of increasing competition, we will see that also and see that also in potential targets. On the other hand, I think that these processes are long-term take a long time and let's say relationships are also built over time so I think that there's ample opportunity to acquire the business that you want to acquire. So we are always on guard but we have not, let's say the feeling that we are now under additional pressure. On inflation and rising fixed costs, yeah, no doubt we will see that as our wages and salary component will be influenced by the inflationary pressures. How much that will be, I don't think that we will be able to say that right now, but we certainly will see a significant increase also in our fixed cost base.

Okay. Thank you.

Thank you. We will take the next question from line Chetan Odishi from JP Morgan. The line is open now. Please go ahead.

Yeah. Hi. Thanks. Hi, Pete. I just wanted to follow up on the previous comment you made about Q4. And I'm To be honest, I'm a bit surprised that there's no acknowledgement of any sign of demand weakness.

You're very difficult to understand. Very difficult. There's some noise on the line.

Is this better now?

Try it.

Okay, let me ask this. I was just wondering if you can maybe touch upon the demand dynamics, because it feels like you guys are not acknowledging any signs of material weakness, given the data points we've been seeing really indicate that. And I'm more curious about the life sciences market because we just saw recently one of the big cosmetic player had a massive profit warning. So maybe you can elaborate on what you see just broadly even in the life sciences. Will this business be as resilient as you might have seen historically overall? Thank you.

Yeah. Yeah, I think... talking about demand dynamics, I think that we will see going forward that demands will decrease. But we feel that still in our order position for quarter four, let's say that momentum that I talked about will continue. How this will progress, we have to see. It is clear that signs indicate that stock levels will come down from our customers. So I don't want to, let's say, ignore or deny, let's say, the trends that we see. I only talked about the next few months here. On your life science question, as you know, life science consists in our definition in food, pharma, and personal care. Personal care is, of course, quite influenced by demands from China, as we know, in particular in the, let's say, upscale brands. So far, we have not seen yet an impact. We have to wait and see, in particular, how the developments in China are. On our food and, let's say, pharma markets, we still see quite strong momentum and demand.

Thank you.

Thank you. We will take the next question from line 11. Lauren from BNPXM. The line is open now. Please go ahead.

Yes, good morning. Two questions, please. The first one is regarding the momentum in conversion ratio in the Americas. I think already in the first half and even more so in Q3, you had the biggest improvement there. I was wondering if you could talk about perhaps what you're doing differently in the business or whether there are some major trends that are influencing that. this improvement in the ratio compared to other regions? That's my first question. And the second one is about M&A. Given all that's happening in the macro, I was wondering if you could talk about valuation multiples for M&A and whether you think that you might be able to accelerate the pipeline of deals given, I guess, private equity retrenching a little bit, or whether actually sellers are reluctant to sell given what's happening and they want to wait for better times. Thank you.

Hans, do you want to answer the first question?

Yeah, the development of the conversion ratio in the Americas. And I think what you see there, and we discussed that before, is that in our industry, things like scale matters. So it helps if you grow your market penetration quicker. So if you add complementary supplies to your existing supply, portfolio that helps to improve your ratios. And the other thing that we see in the Americas is that we came from a relatively low level a couple of years ago, that we had a lot of initiatives to improve gross margin, that we rationalized the business setup, especially in North America, and we see that paying off at the moment. And that is one of the reasons that we see increasing conversion ratio still going on in that part of our business.

On your question regarding M&A, I think it's important probably to realize that we often feel that M&A projects, and that's maybe counter indicative, that M&A projects are more abundant in good times than in bad times. I think because owners will want to benefit from the good times and draw the not-sell in bad times, unless the times are so bad that they basically need to sell. If they don't need to sell, they wait for better times. It's maybe a bit counterintuitive, but I think in better times, more projects come to the market than in bad times. And I think we see now quite a lot of projects come to the market or have seen that in the last 12 months because we have, I would say, unprecedented growth, as you can see in our industry. I mean, not only ourselves with excellent numbers, but also our peers and competitors. So it has been a very strong post COVID year for our industry. So that is an impetus for owners to then maybe talk to potential acquirers. And how that will develop going forward, I don't know. I think multiples are as we always say, circling around certain numbers, but I don't want to disclose too much about that because it differs from case to case also. I hope this answers your question.

As much as it will. Thank you.

Thank you. We will take the next question from line Hank Werman from Campaign & Call. The line is open now. Please go ahead.

Hi, good morning, gentlemen, and thank you for the opportunity to ask questions. I have two. The first one is on your gross profit margins, which remain quite robust at 25%. I think there was even an increase in the Americas. But given all the commentary that you just gave on, let's say, your expectation for volumes, the fact that you see supply chains improving, How realistic is it then to, let's say, expect gross margins to remain robust into next year in case we will see a volume decline and in case this outlook that you just gave materializes?

As you know, we refrain always to give outlooks for the coming year, find that difficult to do. Let me put it like this, I think this year has been quite exceptional in our ability to grow our business and also grow our margin. I think it's our assignment and efforts also for the coming period to keep it at that level and whether or not we will succeed is something that we will see next year. I'm sorry that I can't be more concrete because I really do not want to at this moment give guidance or outlook for next year.

But let's say your base case scenario is rather or your target is rather to keep it flat rather than that you expect, let's say, full normalization towards the 22, 23%. Just to give us a bit of more color on that.

Yeah, the target is to keep it at least as it is, of course, and not try to work hard to decline it, to decrease it. So we certainly will work very hard to keep margins at levels that they are today. Whether we will succeed in every product category or in every business segment remains to be seen, but I think that there are opportunities to keep this level that we have today. Let's see.

And the second question is in your cost base. Can you give us an indication how much variable compensation there is in your cost base currently, maybe also compared to the same period last year? And just to give us an indication, like how OPEX could behave in case we will see a material, let's say decline in gross profit next year.

Yeah, Hank, if you look at our fixed cost base, that's wages and salaries, so people related costs and the cost related to our infrastructure, so office rent and IT and travel and these type of things, then the biggest component is wages and salaries. And you can imagine that in this context, Fantastic year that we pay full bonuses to people, or more than full bonuses to people. As explained before to you, the bonus amount differs enormously per country, per what is in the local habits around bonuses. And I would say, on average, we talk about two to three months of salary for the total group as a reasonable bonus level. And bonuses are always linked to targets. And there is a bit of flexibility in case of people not making their bonus, the targets that we have set to make bonuses. On the other cost, Yeah, there is the typical inflation-type related adjustments every year, and we need to be careful there that we don't spend too much and that we work hard to compensate for additional costs. And let's see what that will bring next year. I don't have a hard number on that.

Okay, thank you very much.

Thank you. As a reminder, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. We currently have no questions coming through. Thank you.

Okay. That's great. Then I think we can close, Caroline.

Thank you for joining today's call, and you may now disconnect.

Thank you very much, everybody.