Imcd Group Nv U/Adr

Hello and welcome to IMCD NV first half year 2023 results. My name is Alicia and I will be your coordinator for today's event. Please note this call is being recorded and 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 one on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you will be connected to an operator. I will now hand you over to Piet van der Slijk, CEO, to begin today's conference. Thank you.

Thank you very much, Alicia. Good morning, everybody. I'm here with Hans Kormans, as usual, and we will answer your questions in a moment. In 2022, we reported an unprecedented growth of 48% of our operating EBITDA under exceptional circumstances. The exceptional circumstances were the result of strong price increases and high demand, partly caused by supply issues. This year and the first six months, we see the reverse. Soft demand and price pressure in certain segments. This resulted in the first six months of 2023 in a flat revenue and a decrease of our operating EBITDA of 6%, and forex adjusted minus 3% to 280 million euro. Q2 was in particular weak, which was mainly driven by lower demand in our industrial segments across all regions. Notwithstanding this, our gross margin percentage increased to 25.5%, and gross profit increased forex adjusted with 2%. Cash flow more than doubled versus the same period as last year to 241 million. As reported by many companies in the chemical sector, global chemical production declined resulting from low customer demand and ongoing inventory reduction. Many in our industry expect that a tough economic environment in the second half of the year will remain, but that demand will gradually improve as further reduction of inventory is not expected. Despite the challenging conditions, we remain positive about our superior growth potential, both organically and by acquisitions. Our organic growth percentage over a number of years lies significantly above our target of on average 6%, and we have a healthy acquisition pipeline. Until now, Until now, this year, we have closed 13 acquisitions with a combined annualized revenue of $400 million. In summary, as soon as demand picks up, we are in a great position to benefit from this with our strong portfolio of products and from the quality acquisitions that we have made this year. And with this, I give you to Hans, who will lead you through the numbers in more detail.

Thank you, Piet. Good morning, ladies and gentlemen, and I would like to start as usual on page 10 of the presentation, where you will find a summary of the first half-year income statement. As mentioned by Piet, and as you can see on this slide, Forex adjusted revenue increased 1%, which is a combination of an organic decrease of 6% and 7% increase due to the acquisitions. In the press release, you could read that there were differences in growth rates per region and per activity. As an example, revenue in our life science activities increased with 11%, and our industrial activities had a tougher start of the year with a 12% revenue decrease. Gross profit increased 2% compared to the same period of last year. This 2% increase was a combination of 5% as a result of the first time inclusion of acquisitions and negative organic growth of 3%. Gross profit in percentage of revenue increased 0.3% to 25.5%. Forex adjusted operating EBITDA decreased 3%. And this decrease was a combination of the positive contribution of acquisitions of 5% combined with negative organic EBITDA growth of 8%. Operating EBITDA in percentage of revenue decreased with 0.6% to 12.2%. The conversion margin calculated as operating EBITDA in percentage of gross profit slightly decreased to 48.1%, and the decrease in conversion margin is the result of higher gross profit being more than offset by the growth of our personnel costs and other operating expenses. As mentioned in previous calls, we experience the impact of higher than usual cost inflation in most of our companies. Then on the next slide, page 11, a bit more detail on the year-on-year development of gross profit EBITDA conversion margin per operating segment. In the first column, we report 1% Forex-adjusted gross profit growth. we were able to increase our gross margin percentage with 0.7% to 27.3%. Operating EBITDA of $131 million was 4% lower than last year. Inflation-driven on-cost growth was the main driver of this small decrease. In the Americas, a bit of a similar picture. As a positive, we increased gross profit with 40 BIPs. However, this could not fully compensate the decrease of revenue. And as a result, we report 6% lower operating EBITDA and a slightly lower conversion margin. Asia Pacific is the only region where we reported gross margin percentage slightly lower than last year. However, when including the impact of the acquisitions done in the second half of 2022 and the first half of 2023 in this region, And so companies like Trade Impacts, Parkash, Welex, the gross margin, if you exclude for these acquisitions, the gross margin of our legacy business would have gone up with about 30 pips. The gross margin in these acquired businesses was on average substantially lower than the average 24% that we reported last year. And holding costs remained stable Then on page 12, a summary of the P&L lines between operating EBITDA and net result for the period. A few general remarks. Net finance costs increased from $8 million last year to $26 million in the first six months of 2023. On page 23 of our press release, there was a breakdown of the different cost components whereby the 18 million increase could be split in two categories. First, an increase of about seven million on bank interest. We reported nine million bank interest last year versus 16 million this year. And this increase in bank interest is a combination of higher base rates in our revolving bank facilities combined with, on average, a higher debt amount. And the second reason for the increase on this line is currency exchange results and changes in deferred considerations. They moved from a positive $3 million last year into a negative $7 million of this year. So the $18 million increase in finance costs is a combination of $7 million real bank interest costs and about 10 million non-cash movements reported on this line. Then income tax expenses more or less decreased in line with EBITDA, and the tax cash out in the first six months of this year was about 56 million. Amortization of intangible assets are mainly non-cash costs related to the amortization of supplier relations, distribution rights, and other intangibles. Then non-recurring items These are costs related to acquisitions that we did, and also the acquisitions that we did not do, and a bit of cost related to one of adjustments to the organization. And then when looking at 2022, that year, the cost also included the estimated financial impact of the winding down of our operations in Russia. And then last but not least, on the bottom of this page, you could see net results for the period of 153 million and a Forex-adjusted 9% decrease in cash earnings per share to a healthy 3 euro and 28 cents. Page 13, a summary of IMCD's balance sheet. Property, plant, and equipment of 30 million, still relatively low as a result of the asset-light business model. Then we have, thanks to IFRS 16, 86 million right-of-use assets. So these are capitalized operational leases Then there is the combination of intangible assets and the related deferred tax liabilities of about 2 million in total. As you can imagine, these are the result of acquisitions done since July 2014 and a bit that we carried over on the basis of the history as a private equity-owned company. And then on the financing side of the balance sheet, there is 1.3 billion of debt. I will come back on that in a minute. and 1.7 billion of equity and this substantial equity position covers about 57% of our capital employed. Then working capital summarized on this 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 and as you can see The absolute amount of working capital end of June 2023 is more or less similar to the amount end of June last year. And compared to last year, June, the overall working capital days were stable at 65 days. And when looking at the individual components, so inventories, debtors, trade and other payables, we see small differences when comparing June with June. However, no major changes there. The debt side, a summary of our net debt position on this slide, leverage ratios and maturity profile. Net debt increased with about $200 million to $1.3 billion, and this increase is, amongst others, influenced by a dividend payment of $135 million that we did in May and considerations paid for acquired businesses of $167 million. The $1.3 billion of debt includes $600 million of bonds at a 200-bit percent fixed interest rate. Then in that $1.3 billion, there is about $330 million of considerations related to acquisitions, so deferred considerations. And then the remainder, about $350 million, is the balance of cash and bank facilities. The leverage ratio at the end of June, based on our loan documentation, was 1.6 times EBITDA, which is well below the maximum set in our loan documentation. And the reported leverage, based on IFRS, was 2.1 times EBITDA. And then on the right side of this slide, you can see the maturity profile of our debt position. Then I would like to finish this short summary with a cash flow overview. As you can see, free cash flow increased with 123 million to 241. The main driver of this increase was lower level of business activities, which resulted in a substantially lower working capital investment. And a further capex of about five million was more or less similar to last year, and mainly relates to IT investments, office improvements, some lab-related equipment that we bought. On page 18, the outlook for this year, whereby we felt it's prudent not to give a near-term trading outlook, given the microeconomic uncertainties. I would like to hand over to the operator to open the lines for Q&A. So, Alicia, the floor is yours.

Yeah, so as a reminder, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone keyboard. To withdraw your question, please press star two. We'll take now our first question from Suhasimi Baranasi from GS. Your line is open now. Thank you.

Hi, good morning. Thank you for taking my questions. I have a few, please. You mentioned that given the macro uncertainty, it's prudent not to give a near-term trading outlook, which is fair. Does this mean that you're effectively worried about EBITDA decline on a reported basis this year? If so, can you maybe talk about what you can do on the cost side to help mitigate the margin impact? That's my first question. And I'll take it one by one, if that's okay.

Yeah, thank you very much for your question. Yeah, we are always, as you know, throughout our history, very, very prudent about giving outlooks, and in today's environment, I think it's even more prudent to be careful in that. That also means that I do not, let's say, give predictions about our future EBIT development, because otherwise I would give an outlook, so I don't have to do that. On the cost side, First of all, I think it's important to emphasize again that our people are, of course, our biggest asset, if not our only asset together with our IT systems, and they're highly motivated and highly capable of doing their business. So on the cost side, what we do is, Of course, we are very prudent in hiring new people, so we won't do that. On the other hand, on the cost side, we will be very careful in not expanding on other operating expenses, like travel, et cetera. And also, there will be a component of bonuses that will, of course, be affected if we don't make our results And that's the usual levers that we have. Again, our staff is productive and ready to also to gear up again. And I think it's important to emphasize also that this is a blip in technology. a long history of growth and that the company is totally ready when demand picks up to grow again. So we need to be ready for that. I hope that answers your question.

Yes, it does. Thank you very much. My second question is on pricing, please. Specialty normally doesn't have a lot of pricing volatility unlike commodity chemicals. But I think when your peer yesterday mentioned that they had seen some pricing unwind in America since 2Q. Is this something that you have seen either in Americas or in other geographies, please? And is that a risk? Thank you.

Well, I think it's not so much region dependent. I think that generally our prices have been holding up quite well. So we are happy with that. Always in this broad portfolio, there are product ranges that are a little bit more price sensitive. And there, of course, we see some pressures, for example, also because China opened up again and caused an additional competition. But I would say by and large, because we are so specialty focused, our prices have held up quite remarkably well.

Thank you. So given your commentary around APAC, would you say that maybe pricing was a component in the gross margin decline year-over-year that we saw in 2Q?

No, I think that's very often a mix, and it's very difficult to pinpoint exactly where that comes from.

Perhaps to add to that, the message that I tried to pass on is that we We did three acquisitions in that region, so Parkas, Baylex, and Trade Impacts, where the average gross margin in their business was substantially lower than the average margin in what I would call our legacy business in that segment. And so if you would exclude for these three acquisitions, we would have reported an increase in gross margin percentage in Asia Pacific.

That's very clear. Thank you. And the last one for me is just on some of the counter-cyclical elements in distribution. Sometimes we find that there is a little more mandate wins that happen, which can add to volumes during these periods. Is this something that you have seen and maybe that can help some of your volume trends in the second half in any region? Thank you.

Certainly. And I think it's a very important question. And of course, one of the let's say, focuses of our business is always to increase our mandates. And we have been successful in that. And it certainly will also contribute to in the near future. So we are very positive about that. And I think, again, it's important to emphasize that we didn't lose any businesses so much. It's really a demand question. And we are expanding our portfolio as well. So in that sense, I'm optimistic.

Thank you very much. That's all for me.

We'll take now our next question from Annelies Vermeulen from Morgan Stanley. You can go ahead now. Your line is open. Thank you.

Hi, good morning. I just have two, please. So firstly, could you talk a little bit in more detail about some of your end markets and geographies the performance in the second quarter relative to the first quarter. I recall at the Q1, you know, certain areas like U.S. industrials were a little bit weaker, and we talked about destocking and, you know, flavors and fragrances, etc. So I'm just wondering if anything has sequentially deteriorated or improved in the second quarter. I think you mentioned in your opening comments, Pete, that these, you know, the stockings seem to be bottoming out, if I've understood that correctly. And then Lee, just on Asia, whether you're seeing any improvement in China as of yet, or is it, again, about a similar story to the Q1? Thank you.

Yeah. Thank you for your question. I think end markets, if you compare our industrial sector, which is consisting of... as the main ones, coating and construction chemicals, advanced materials, and also lubricants, then versus the life-size markets, food, personal care, and pharma, then it's obvious that we see the decline in particular in the industrial side, and we see positive developments in the life science, very strong performance of our pharma business, also beauty and personal care, and food very stable and doing well. And on the industrial side, we see a significant decline in the industrial markets, and I would say in North America more than in other markets. We see also a slight glimmer of light there, so I hope that that glimmer will become more bright. On your question on China, it is true that in China there is really stagnation. It's for me difficult to say if that will improve in the next six months. I don't see signs of it yet. I also rely a bit on what the big chemical industry says about that. They are also not seeing a clear change in what's going on there. I think that summarizes it. I hope I answered your question with it.

Thank you for the detail. Thank you.

We'll take now our next question from Ricky from BNPP Exxon. You can go ahead now. Your line is open. Thank you.

Good morning. Thanks for taking my questions. Firstly, just to follow up on your comment just now, you mentioned you're seeing some glimmers of light in North America, I think. Could you maybe give some indication on whether you've seen destocking trough in Europe and maybe what the order book looks like across the business? And secondly, just going back to the sort of price volume dynamic, could you maybe sort of give us some detail on what this looks like there for the sort of 10% organic decline on gross profits in Q2 specifically? Thanks a lot.

Yeah. I think all this talking... I think, again, it's very difficult, of course, to totally be sure about this, but I think a common opinion on this is that inventory reduction has come to a stage where it won't go further, that we probably have bottomed out there. Yeah, in the United States, you asked also about the glimmer of light that we see there. It's just about, it's just, let's say, the feeling that orders will also in the industrial sector will pick up somewhat. But let's see if that happens, actually, and all the growth profits decline yeah also is there anything to say about that although other than yeah it is what it is I mean I can't I can't change that thanks thank you very much so we'll take now our next question from Tita Odesi from JP Morgan your line is open now thank you

Yeah, hi, thanks. Maybe the first question I had was on working capital and particularly if I look at your receivables. I mean, your receivables have gone up by 125 million euros, give or take, between end of last year and first half this year. And I'm just curious, why is that the case? Because, you know, demand, as you talk about, is weakening. So I'm just curious, is this more a reflection of maybe the end of Q2 might have been very strong or stronger, and hence you ended up with these receivables at the end of Q2, or is the receivable cycle in terms of collection sort of lengthening, and that's being reflected in this number? I'm just curious why this number did not, you know, went up so much when inventories actually has stabilized at the levels at the end of last year. That's the first question.

Perhaps should I answer this one first before we move to the next one? Yes. Because the answer is in the end pretty simple. It's a combination of two things. One reason for the increase is the impact of the acquisitions that we did. For sure every company that we acquire also brings additional debtor to our balance sheet, and that is part of the increase. But perhaps more important is that typically December is always a very slow month. A lot of companies stop buying somewhere, what is it, the second or the third week of December. So December is typically a very low month with respect to sales. By June, it's just an ordinary month. And lower sales automatically results in lower debtor positions. So if you look at the trend line during the year, the working capital cycle, typically the year-end position is in most years the lowest point in the cycle. And then around the summer period, we typically talk about the highest point in the cycle. Does that make sense to you?

No, no, I understand the seasonality. I just thought given what we've seen in terms of demand, which frankly – it doesn't seem like things have necessarily stepped up a lot versus Q4. And hence, I thought maybe it was quite high. But anyway, I understand the seasonal point. That's clear. The second question was just going back to the comments you made about the deferred consideration and stuff like that. And I think, if I'm not mistaken, the deferred consideration on the buyout of is due to be repaid or to be paid rather in 2024. And I think this is just a broader question. Your balance sheet is good, but my question is, are you seeing the incremental funding costs even to raise a debt today stepping up significantly for even IMCD? And I'm just curious, let's say if you had to raise 400, 500, 600 million euros today in the market, like what sort of interest rates we should be considering in terms of future debt increases that you might have to do, both to fund future acquisitions, but also to pay this deferred consideration maybe in the future. I think the broader question is clearly the funding cost is going up. Is the acquisition multiple also coming down at the same time, or are you just taking the funding cost increase under your belt and maybe taking some dilution, if you will, on the returns from these acquisitions in the future.

Yeah, so if I look at funding costs, you might remember that we issued a bond, what is it, March last year at an interest rate of two and a bit percent, so a low two percent rate. I think if I would go to the market today, I will experience an increase of I think close to 3%. So the interest levels for new bonds would be around about 5% if I need to go to the market to refinance. Will that have an impact on valuations? Typically, that should have an impact on valuations. And that is, in the end, yeah, that should translate in lower multiples that we pay for the targets that we talk to. Because also through these people, we explain that if we acquire their businesses, making your valuation calculations, interest plays a role there.

But are you seeing that? Are the multiples coming down already in the discussions that you have in terms of future acquisitions? Because that's not what I hear, but maybe it's happening now based on what you seem to be saying.

It is happening. It is happening. It is also explainable to owners. In the end of the day, if you are in a competitive process, then you always need to compete with somebody else, and then you need to find an agreement on price anyhow. In the one-on-one discussions, it's certainly a subject that we bring to the table as a reason to offer lower multiples than what we did in the past.

Okay. Thank you.

We'll take now our next question from Nicole Manion from GBS. You can go ahead now. Thank you.

Hi, good morning, everyone. Thanks for taking my question. I just wanted to ask one on conversion margins, which obviously came down in the half overall, but also clearly notably in Q2. Could you maybe help us understand that move a little bit better in terms of sort of how much is driven by volume and operating leverage, how much is sort of the like-for-like pricing impact working through, and so on, just to help us understand those margin dynamics and how that might evolve a little bit better. Thank you.

Yeah, I think if you would do a pure mathematical exercise, then what you see is that we did not grow our gross margin enough to fully compensate the inflation-driven own cost growth. That is, let's call it, the technical answer to your question. And what we saw, what Peter already indicated, on the cost side, we used the usual lever, so we were prudent in filling vacancies We were careful with our travel and exhibition costs and things like that. But at the moment, the demand in certain segments dropped a bit, whereby you get lower gross margins. It's difficult to quickly reduce fixed cost base if you want to do that anyhow, because you need to keep your sales structure in place, as we see this as a temporary drop in demand. Got it.

Great. Thank you.

As a reminder, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone. To withdraw your question, please press star two. We'll take now our next question from Kevin Muller from ING. You can go ahead now. Thank you.

Yeah. Good morning, everyone. Good morning. On speed. Three questions from my side. First of all, with regard to the the growth profit margin, which was even up. And I would like to know, I've seen that the reasons that portfolio change, et cetera, but there was some negative impact at the group level. So not only in the Far East, but also at group level, probably. So can you elaborate on that effect there? And then my second and my third question about the cost levels. On the cost, we have seen I see that you are somewhat reluctant to take measures to adapt to the growth-profit decline. And is that the reason that you see this whole story as a temporary dip, in fact, that it only takes maybe nine to 12 months further and that's it and you don't want to intrude on your IT costs, personnel, because you're afraid for that you can't hire people when the market is going to recuperate and you have just reduced the situation. And then with regard to your assumption on bonuses, is that conservative? Is there some uptick there in terms of lower costs thanks to the lower bonuses at the end of the year because you have a conservative view on that? Is that possible to give some more idea about it?

Yeah, the first question I leave to Hans, but maybe he can think about it.

I was just struggling to understand what the question there is, because what we report is year-to-date, on average, a higher gross margin percentage. We saw a bit of a negative impact in Asia-Pacific as a result of acquisitions that we did, companies that we acquired with a lower margin. And then during the year... I would call the usual fluctuations in margin percentage depending on the product developments and so on and so forth.

Okay, but there were also acquisitions in Europe, so that had not a negative impact on the growth profit margins.

Yeah, also a bit, but less significant than what we saw in Asia-Pacific. And in Asia-Pacific, especially the fact that The size of the region is, of course, much smaller, and then the acquisition impact is much bigger.

Yeah. Yeah, Quirijn, on the other two questions, cost measures, they are reluctant to take them. I think, first of all, yes, we see this as a temporary, let's say, small decline. I want to remind everybody also that this company has grown on average in the last five years with 29% EBITDA, last year with 48%. And we tripled, more than tripled, our cash earnings per share in this period. So it has been a very, very successful growth story. And this year is a bit of, this first six months is a bit of a small dip. And therefore, there's no reason to panic or to suddenly take drastic measures. We have a very, very efficient sales structure. We have a fantastic IT infrastructure. We work very hard to further digitalize our operations, and we see fantastic opportunities there. So if you look at the potential of this company, then it is very, very strong. And we don't let, let's say, our strategic growth story be influenced by a quarter that is not as satisfactory as we hoped for. So yeah, I think that's the answer to your question. On bonuses, we all have in our company, we all have targets. And if you make the target, you get your bonus, you don't make it, then there will be some consequences. We are not going to disclose what we talk about. We will see at the end of the year what the results will be. And hopefully for everybody, they will be better than, let's say, in such a way that we can pay bonuses. So let's see what happens in the next six months.

Okay, my final question is then, how long do you think you will take to raise the gross profit margins in the Far East of these recently acquired firms?

Yeah, I think there are a couple of things there. If I look, for instance, in a country like India, on the industrial side there, on average growth margins in that part of the market are lower than group average, but also the cost structure is much lower. So that EBIT margin. So there I don't expect a huge substantial increase in margin percentages. In areas like China, for instance, there is quite an upside. It will take a bit of time, but we will get there.

Yeah, I think maybe to add to what Hans is saying, we have, of course, invested quite significantly in India. These companies will be integrated. That will take time. But I think we will improve their operational qualities, and let's see if that then also translates in better margins. I think on China, we made some fantastic acquisitions, also the beauty and personal care space. So we expect a lot of that going forward. So again, I think we're very well positioned for growth. And in that sense, I'm totally optimistic.

Thank you. We'll take now our next question from Stefano Tofano from ABN AMRO. You can go ahead now. Thank you.

Yes, good morning. Last question from my part. Talking with your competitor yesterday, they mentioned obviously also industrial is very weak, but particularly a very strong acceleration of this weakness in June. compared to the first two months of the quarter and then continuing into Q3. Did you see a similar dynamic or was it more spread out over the quarter, talking about the weakness in industrials? Thank you.

Well, I don't want to comment month per month, to be honest. I think you see, of course, some changes from month to month. but you don't see a pattern in that in particular. So I don't want to further speculate about what will happen then in the next quarter or in the next six months, as I've said before. For months to months it changes, but it is not one, let's say, very recognizable pattern. Some months are better, some months are a bit worse.

Thank you. And if I may add one last question regarding the impact of the higher debt pricing and the influence it has on acquisition multiples. So you're saying that you are indeed seeing or can explain to potential targets about what is happening and you're seeing lower acquisition multiples. Do you see some delays maybe in a potential new acquisition or in your pipeline? Or is there no difference compared to, say, a quarter or two quarters ago?

It's a good question. But of course, these processes take time. So it's not, I mean, before you start conversations and finish, it can take a long time. As you have seen we have done a lot of acquisitions in this first six months and the pipeline is still good so we expect to do more and so far we don't see a slowing down but it's maybe too early to tell. I think it's always a bit counter cyclical how much targets come on the market but to be honest we see healthy pipeline still.

That's it. Thank you, Hans and Pete.

We currently have no questions coming through. As a final reminder, if you would like to ask a question, please press star 1 now. There are no further questions, so I will hand you back to Pete to conclude today's conference. Thank you.

Yes, Dan, I want to thank everybody very much for your attendance. It was very good to talk to you and actually to close to tell you that here in Rotterdam the sun is actually shining, which is in the Netherlands the last couple of weeks an exception. But I wish you a good day and have a nice day. Bye.

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