IMCD N.V.

Hello and welcome to IAMCD and the full year of 23 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 Valerie Diel-Brown, CEO, and Hans Kuhlman, CFO, Head of Investors Related. Sorry, CFO. Thank you.

Good morning, everyone, and welcome to the first IMCD Analyst Call since I started as CEO of IMCD on the 1st of January. As used from the past, I'm here with my colleague Hans Kuhlman, the CFO of IMCD, who will lead you through the detailed financial results after my preliminary remarks. And then we are open to answer your questions. Let me start by sharing with you what pleasure it is for me to be with you today and to be part of this exciting company, which I had the honor to accompany in the past years as supervisory board member before joining the management board in October and then becoming the CEO two months ago. Based on my 27 years of working within the specialty chemicals industry, first with the Unilever Quest International Division, which eventually became Giverdan, Then with DSM, and later at the clarion carport of SK Capital, Acroma, and the CEO of Cap Group, I could and can strongly see the benefits that IMCD brings every day to its suppliers and customers, and I look very much forward to developing this further. But let's for the moment focus on 2023. This has been a year of solidifying the strong growth we saw in 2022, and to continue working on the foundation to be able to absorb growth also in the future. IMCD showed resilience despite difficult markets, After an exceptionally strong 2022, we recorded revenues of 4.4 billion euro and operating EBITDA of 550 million euro, a 3% decrease on constant currency basis. Ensuring, however, stabilization of the business despite challenging market conditions and partially reduced demand. And we continue to invest strongly into our business to ensure a healthy platform for future growth. Here are some examples of our initiatives. Strong investment in new and omni-channel digital solutions to further improve the buying process and customer intimacy, continuous investment and upgrading of our global integrated ERP and CRM platforms to further optimize internal processes and reporting for our principals, acquisitions of 13 companies over the course of the year 2023, and having signed an additional five transactions to be closed in 2024 to accelerate the spread and breadth of IMCD geographically as well as in business areas. And last but not least, the development of tools to facilitate the collaboration of our people and to ensure continuous learning and further improvement. Based on these investments and our proven resilience throughout our history, we remain very positive about our ability to grow organically and by adding businesses. Given the macroeconomic circumstances, it is, however, prudent not to give a near-term outlook. Hans will now give you a short update on the numbers. Hans, thank you.

Thanks for the introduction. During Valerie's opening remarks, we clicked through a couple of slides with a few highlights of 2023, some key financials, an overview of the 18 acquisitions that we either signed or closed during the last year. And further, we summarized progress made on various ESG topics. While preparing for this call, I came to realize that 2023 marks IMCD's 10th anniversary as a listed company. And over this 10 years period on Euronext Amsterdam, we transitioned from a small cap entity to a mid cap and eventually secured a position among the top 25 listed companies in Amsterdam. And this remarkable journey was made possible by a robust financial performance throughout these 10 years. And this slide captures in a nutshell this decade by showing you the development of our EBITDA and cash earnings per share. And as shown on this slide, we reported an impressive 18-19% growth CAGR on both metrics over the entire listed period. Earlier today, we published our first integrated report, an informative, colorful document about IMCN's business and a lot of details about our financial and non-financial performance. Key financial figures from this integrated report are summarized in a press release that we issued this morning. And in this call, I will quickly take you through the financial numbers before we move to Q&A. On page 13 of the presentation, a summary of a few key figures, and you could see that Forex adjusted revenue more or less equal to last year and growth profit increase of 2% compared to record year 2022. The 2% increase in growth profits was a combination of 3% organic decline and 5% growth as a result of the first time inclusion of acquisitions. And for an overview of the acquisitions that we closed in 2023, I would like to refer to page seven, eight and nine of this presentation. Growth profit, percentage of revenue increased 0.4% to 25.3%. And the segment EMEA was the biggest contributor to the improved margin percentage. The increase in gross margin percentage is the result of internal margin improvement initiatives, the in general negative impact of newly acquired businesses, the usual changes in local market circumstances combined with product mix and currency fluctuations. And on this page for your convenience, we included the line with operating EBITDA comparison. However, the development of EBITDA shown in the next line seems more relevant to us As you know, IMCD is a people organization, has an asset-light business model with outsourced logistics and a very low fixed asset base. Operating EBITDA decreased 3% on the constant currency basis to 550 million, as mentioned before by Valerie. And this decrease was a combination of minus 7% organic, partly compensated by 4% growth as a result of the first-time inclusion of acquisitions. Operating EBITDA in percentage of revenue slightly decreased from 12 to 11.6%. The conversion margin calculated as operating EBITDA in percentage of gross profits decreased from 48.3 last year to 45.8 in 2023. This decrease in conversion margin is mainly the result of less gross profits and to a lesser extent, the impact of the first time inclusion acquisitions. Acquisitions with an average lower conversion margins than the average of IMCD. In the organic increase of own cost, a 2% cost increase was modest, especially modest given the impact of higher-than-usual cost inflation in most of the regions IMCD operates in. Then on the next slide, a few key figures from the P&L per operating segment. As you can see, we focus here on gross profit and EBITDA development. On gross profit and EBITDA, you will see the difference between the two years 2022 and 2023, and I've split it in organic growth, acquisition growth, and currency impact. But first, looking at the currency impact, it's fair to say that we had quite some headwinds last year. at a 4% negative currency impact on gross profit and EBITDA, and a negative impact of more than $40 million on gross profit, and about $25 million negative on EBITDA. It's fair to say that this negative currency impact more or less wiped away the positive contribution of acquisitions. And when looking at the segments, we report an organic decline on both gross profit and EBITDA in the Americas. And a decline, of course, is not something to be proud about. However, I think we should keep in mind what happened in 2022 to bring this decline a bit in perspective. To refresh memory, in 2022, we reported record growth figures in the Americas with 53% gross profit growth and 73% EBITDA growth, 73% in 2022. And in the course of 2022, we saw all kinds of supply chain issues coming to an end, resulting in huge demand, customers massively overstocking. And in 2023, we saw more or less the opposite, a decrease in final customer demand, combined with massive destocking, resulting in difficult market conditions, especially in the more industrial segments. So the The 155 million EBITDA reporting for 2023 is still way above the 130 million EBITDA reported in 2021. So in the Americas, in the period 2021-2023, we reported a healthy 37% EBITDA growth. Same for America's conversion margin, which is slightly below 2022, but still better than 2021. In EMEA and Asia Pacific, the other two columns here, performance was solid despite challenging market conditions. Organic growth was flat in EMEA, and in Asia Pacific, we report mid-single-digit organic growth on both gross profit and EBITDA. The EMEA conversion margin was more or less equal to 2022, and in Asia Pacific, we report a slight decrease in EBITDA margin and conversion ratio, and This decrease in Asia Pacific is mainly the result of acquisitions completed in 2022 and 2023 with lower than average IMCD margins. And then in the last column, you will find in the holding companies, all non-operating companies, including the ad office in Rotterdam, the regional support offices in Singapore and the US. And as you can see, holding cost as a percentage of total revenue remains stable at 0.7% of revenue. Then on the next slide, you will find a summary of the P&L lines from EBITDA to the net results for the period, and a few general remarks, whereby I would like to start on the bottom half of this slide with amortization of intangible assets and the related tax credits. As you know, these are the non-cash costs related to the amortization of supplier relations, distribution rights, and other intangibles as a result of the acquisitions that we did. Then there is 5 million of non-recurring items. This 5 million is a combination of cost related to realized and non-realized acquisitions, cost of one-off adjustments to the organization, partly offset by a 7 million positive result of a sale for warehouse that we still have in the US. If I move to the other two lines, net finance and tax costs, first a breakdown of the finance costs. On slide 16, the breakdown where you could see that the finance costs are adding up to 25 million, which is about a million lower than previous year. And this one million decrease is, as you could see, a combination of 20 million higher interest costs related to our finance infrastructure. and a positive change in deferred considerations of 22 million, a more or less similar negative currency results compared to the last year. The higher interest costs on the financing structure is mainly the result of increasing interest rates during 2023, combined with an on average high in debt amount. And when looking at our debt position, it's fair to say that our future exposure to interest rate fluctuations further reduced to 2023, during 2023. Maybe about 1.1 billion of our actual debt positions. I should phrase it slightly different. If you look at our net debt position, there is a position of about 1.1 billion there that consists of corporate bonds with fixed coupon. As you might have seen, we have two, 300 million bonds. With an average interest rate of 2.3% a further be issued in September last year, a new 500 million bolt rate just below 5%. So the blended interest rates on these bonds is just below three and a half percent. Then A bit more complicated line, that's the change in deferred considerations. As you might remember, part of our net debt refers to deferred purchase price considerations, like, for instance, the 30% for SIGNET in India and Sunrise in China. The nominal values of these deferred considerations are debt items and discounted with an interest rate triggering additional interest costs. Further on this line, we need to reflect changes of the expected value of the deferred consideration as a result of changes in expected financial performance of the companies the deferred consideration relates to. And as you know, the purchase price of these minority shares are linked to the actual performance. The IFRS treatment of differences between estimated and actual performance resulted this year in a rather, at least for us, confusing accounting treatment. First, we have the result of Signet in India, which developed much better than anticipated. And this positive development resulted in a 50 million increase in the fair value of the deferred consideration related to the remaining 30% of the shares in these companies. And then based on the requirements of IFRS, we had to report this increase not as cost, but direct against equity. And where Cygnet had better results than expected at the end of 2022, we saw the opposite in companies like Sunrise and Megastatia. And that resulted in a decrease of the fair value of their deferred considerations. And this decrease combined with the usual interest costs related to the discounted value of the deferred considerations, add up to a benefit of 29 million Euro. A benefit that is reflected in the P&L as interest, and that is based on IFRS requirements. So when making your financial model, I could imagine to adjust for these IFRS related adjustments. Then on the next page, our income tax expenses, where we report a decrease of our regular income tax of 12 million. As a guidance for our tax costs, we indicated to you to expect a blended tax rate in the range of 24 to 28% of results before tax. I calculated as EBITDA minus finance and more recurring costs. And as you will notice in the summary on the bottom of this page, It indicates that IMCD's blended regular tax rate was 24.7%, which is slightly below the 2022 level and still at the low end of the guidance that we gave you. The tax cash out that we paid in 2023 was $124 million compared to $130 million in 2022. And I would like to refer to the integrated report for further details on the tax calculations. Then on the next page, the calculation of cash earnings per share and our dividend proposal. As you can see on this slide, we report €6.41 cash earnings per share in 2023. And at the AGM in May, we will propose a dividend of €2.24 in cash per share, which means a payout ratio of 35%, which is at the top end of the range that we set ourselves as a policy that we also propose. shared with you and we like to be consistent in our messaging there since our listing in 2014 we increased our dividend from 20 cents in 2014 to the proposed 2 euro 24 in 2023 which means a growth kegger of 31 during the period that we are listed on the stock market Then 19, page 19, a summary of the balance sheet of IMCD. Property, plant, and equipment slightly increased, still relatively low compared to the size of our business, which is, of course, logic as a consequence of the asset-like business model. Then we have a variety of used assets. That is the result of the application of IFRS 16. So this 100 million basically reflects the capitalized operational leases, and more or less the same amount you will find back as a net debt item later on in the balance sheet. Then intangible assets and related deferred tax liabilities are mainly the result of the acquisitions made. You could see a growing equity position of about 1.7 billion, covering 57% of capital employed. And the increase in 2023 is, amongst others, the result of the addition of the net profit for the year of 292 million euros and a minus for the dividend payments in cash of 135 million. The two other balance sheet lines, working capital and net debt, are summarized in a separate slide. On page 20, a summary of the absolute amounts of the various working capital components, and then these absolute amounts translated in days of revenue. And as you can see, the absolute working capital amount decreased 6 million. And this decrease is a combination of 57 million additional working capital related to the 2023 acquisitions. We report a minus 19 million as a result of exchange rate differences and calculating this on a year-end basis. Further, we report a 44 million operational decrease in 2023, which is mainly a result of lower activity levels that we reported. If you look at the days, we improved on the year when stock and credited days whereby debtor days came back to a more normal historic level. Then on the debt side, page 21, a summary of our net debt position. At the end of 2023, we report 1.3 billion of net debt. This net debt position includes the 1.1 billion of corporate bonds and the bonds that I explained before. Further, it includes one of the 3 million operational lease liabilities, the result of that IHR is 60, and about 345 million of deferred considerations. About 70% of this deferred consideration position relates to the remaining 30% of SIGMET, which we paid and acquired on the 1st of February this year. On the same page, an overview of the maturity profile of our debt structure, as per December 2023. And with the new bond and the extended term of the revolver, we created a nice maturity profile in our debt portfolio. And the 700 million revolver facility bar on this sheet reflects the maximum amount we can use as per today. The reported leverage at the end of 2023 was 2.3 times EBITDA, And the leverage based on the definitions in the loan documentation was 1.7 times EBITDA, which was well below the required maximum as set in the loan documentation. Then the last financial slide, cash flow, perhaps one of the most important slides. As you can see, the absolute amount of free cash flow in 2023 was 554 million. whereby the cash conversion ratio increased from 77% to 105%. And this increase in conversion ratio is a combination of lower operating EBITDA, which is more than compensated by 161 million cash coming out of lower working capital investments. And then as a last slide in this deck, you will find the outlook in which we, amongst others, indicate that IMCD sees interesting opportunities to increase its global footprint and to expand its product portfolio both organically and by acquisitions in 2024. So far, a summary of the 2023 figures, and Valérie and myself are happy to answer any questions you might have and would like to give back to Alicia, the operator.