Imcd Group Nv U/Adr

Hello and welcome to IMCD Q1 2024 results. My name is Alan. I'll be your coordinator for today's event. Please note this call has been recorded and for the duration, your lines will be on listen only. However, you will have the opportunity to ask questions at the end. This can be done by pressing star one on your telephone keypad. If you require assistance at any time, please press star zero and you'll be connected to an operator. I'll now hand you over to your host, Valerie Dale Brown, to begin today's conference. Thank you.

Good morning, everyone, and welcome to the IMCD Q1 2024 call. As usual, I'm here with my colleague, Hans Klermans, the CFO of IMCD, who will lead you through the financial results after my preliminary remarks. And then we are open to answer your questions, of course. Q1 2024 was a quarter marked by volatile markets across geographies and business groups, Having delivered an exceptionally strong Q1 2023, we recorded in Q1 2024 revenues of €1.16 billion and operating EBITDA of €127 million, a 13% decrease on a constant currency basis. On the positive side, we saw during this quarter excellent commercial momentum, suppliers wanting to expand with us in new geographies and markets, new suppliers interested to collaborate with IMCD, and a healthy project pipeline. Further, our M&A pipeline and execution continue strongly with six closed acquisitions in the first three months and three new acquisitions signed. On the adverse side, geopolitical tensions and weak global economies did not support the expected start of recovery of markets. Whilst costs increased due to inflation and investments in our digital markets, and technical lab infrastructure. We currently see a lot of positive momentum for the IMCD business model, which in terms of outsourcing trends is often counter-cyclical. Additionally, and based on the digital and regulatory needs of customers and principals, we see an increasing need for our capabilities in terms of commercial and technical selling skills, as well as just-in-time delivery. Going into more detail on the business segments and regions, In Q1, we saw volatile months and developments across the regions with rather uncertain ordering patterns and erratic and smaller orders, just-in-time deliveries and postponement of orders. In our life science segment, personal care continued to perform very nicely, while food and nutrition experienced in the less differentiated areas pricing pressure. The business group pharma suffered from temporary less demand. In our industrial segments, we saw across the board a better performance than in the second half of 2023. Inventory rundown seems to have come to an end here. However, we believe full confidence still needs to return to customers in order to return to more consistent and normal order terms and stock levels. As for the regions, EMEA was relatively stable in terms of gross profit with some negative FX effect, whilst Asia Pacific declined slightly. The Americas were impacted by pricing pressure and low demand in certain market segments. In terms of our developments, we continue to invest in operational excellence and digital efficiencies, which we consider to be important for future growth. As mentioned in our full year 2023 call, our digital solutions allow for more customer interactions and to drive share of wallet further. This includes the development of new tools, as well as the continued rollout of our uniformed ERP-CM IT's infrastructure to newly acquired companies to ensure full transparency and drive for growth and absolute margin improvement. Additionally, we intensified our work on sustainability as we continue to see a lot of interest by customers on formulatory support and resulting commercial opportunities in this area. We are confident that our investments made, our strong commercial teams, our digital and logistic infrastructure combined with further driving operational excellence and cost control, will deliver future growth and efficiencies. Hans will now give you a short update on the numbers.

Valerie, thank you for the introduction. During Valerie's opening remarks, you could have seen a couple of slides with a couple of highlights of the first quarter 2024. You saw a few key financials and an overview of the six acquisitions that we closed during the year and what Valerie referred to. And apart from the six closed acquisitions, we also signed three acquisitions this year that we expect to close in the second quarter. And as you all know, the closed acquisitions will be included in our consolidated numbers from the closing date onwards. These, in total, nine acquisitions in Q1, generated 235 million of revenues with about 355 employees in the last full year before we acquired them. About 75% of the revenue of these nine acquired businesses is in life science, so in food, pharma, and personal care. And the remainder, so the about 25%, is generated in industrial markets. We are, of course, happy to answer any questions that you might have around M&A in the Q&A section later this morning. On page 10, you'll find, as usual, a short summary of the key financial figures that we published earlier today. Forex adjusted revenue and gross margin were more or less similar to last year, and when looking at gross margin, we report an organic decline of 8%. This was more or less compensated by the positive impact of acquisitions. When looking at this decline, it's fair to realize that we compare Q1 of 2024 with an all-time high Q1 in 2023 and also the best quarter of last year. Nevertheless, Q1 of this year was also for us a rather disappointing quarter. A quarter with what Valerie just mentioned, challenging market condition, often unpredictable customer demand and quite some volatility between the various months. And so when comparing months in this quarter, March was this year by far the weakest month when comparing with 2023. However, when looking at April, we see the reverse. April this year seems to be much better than April last year. The gross margin percentage in Q1 is 25.4%, which is 0.5% below Q1 last year. and 0.1% higher than the full year 2023 margin of 25.3%. Differences between and within the regions are caused by local market conditions, product mix variances, product availability, and foreign currency fluctuations. Further, the gross margin percentage of newly acquired businesses were on average lower than group average, resulting in a negative margin percentage impact. When excluding the impact of the acquisitions, the gross margin percentage in Q1 would have been 26%, so more or less similar as last year. Forex adjusted operating EBITDA decreased 13% to 127 million. The operating EBITDA margin decreased to 10.9% and the conversion margin dropped to 42.9%. And the decline in conversion margin is the result of missing gross profit growth to compensate our inflation-driven own cost growth. And when talking about own cost growth, you could see on the bottom of this slide that we increased the number of employees with 441, an increase of 10%. It's important to mention that this whole increase is the result of acquisitions. It's the impact of newly acquired businesses in the course of 2023 and the first quarter of 2024 resulted in the reported increase of headcount. The organic number of people growth was neglectable. Then you see the 23 million absolute amount difference in net result, which is more or less similar to the shortfall in operating EBITDA. And this indicates that the lines between EBITDA and net results, so mainly amortization, financing costs, and tax, add up to a similar 66, 67 million amount as last year. And later, I will come back on the cash flow in a separate slide. On the next slide, page 11, a few key figures from P&Ls per operating segment, with a focus on gross margin and EBITDA development. As promised last year, we started sharing on the quarterly basis the split in organic growth, acquisition growth, and the currency impact per segment. A few general remarks from my side on the data that we see on this slide, whereby I don't want to talk each and every line. Starting perhaps with the currency impact. As you can see, currency impact was limited in Q1 and had in most regions no real material impact on the overall outcome. When looking at the acquisition impact, we saw both in absolute numbers and in percentage the biggest contribution of M&A in Asia Pacific. The revenue growth in Asia Pacific as a result of acquisitions was 25%, whereby the contribution to gross profit was only 14%. And based on these growth numbers, it's easy to calculate that the average growth profit of the business that we acquired was around 15% only. This 15% acquired gross margin percentage is at the same time the main reason for the drop in gross margin percentage, not only in this region, but also on group level. When looking at growth profit, The biggest shortfall compared to last year, both in percentage and in absolute amount, was in the Americas. As mentioned by Valerie, food and pharma played a role, combined with a bit of pricing pressure on what I would call the more commoditized industrial products in our portfolio. As you might remember, in North America we do quite some industrial business, and it's nice to see that volume started to pick up in this segment. The shortfall of gross margin of 14%, more than doubles when looking at the 31% shortfall in EBITDA. Own cost growth in the Americas region was limited. However, as we divide the amount of shortfall in gross profit by EBITDA, and that's of course a much smaller denominator, you automatically get a much higher percentage. The decline in operating EBITDA, EBITDA margin and conversion margin, is the result of lacking profit growth in Q1 to fully compensate inflation-driven organic on-cost growth. And then in the last column, as usual, you will find in the holding companies, all non-operating companies, including the head office in Rotterdam and our regional support offices in Singapore and the US. In Q1, we spent close to 0.8% of revenue on holding costs. Then on the next slide, an overview of free cash flow. Compared to last year, both free cash flow and cash conversion ratio were lower than last year, and the reported decrease was a combination of lower operating EBITDA and higher investment in working capital. If you translate working capital, so working capital translated in days of revenue, the outcome was 63 days, and it is close to the 61 days reported end of December. by amongst other timing of new working capital of acquisitions played a bit of a role. When looking at our working capital cycle during the year, we typically see December as the lowest point in the cycle due to relatively low debtors at year end as a result of lower sales in December. As a consequence, the investment in working capital in Q1 is mainly debtor related as March sales are typically higher than December sales. Then slide 13, a summary of the development of net debt and leverage. Debt increased mainly as a result of purchase prices paid for the six acquisitions that we closed in Q1. IFRS leverage, including the IFRS 16 lease liabilities, et cetera, was 2.7 times EBITDA, and the leverage ratio based on loan documentation was 2.5 times EBITDA. If you look at the big difference between the 1.7 end of December 23 and the 2.5 of Q1, this difference is mainly the result of the payment for the remaining 30% of the shares of Cignet in February 2022. Then, as you might remember, the deferred consideration, so in this case the 30% of Cignet, are always included when calculating IFRS debt and IFRS leverage. And these same debt positions are excluded in the leverage calculation for the calculation that we need to do for our loan documentation. And then moving to the last slide of this short presentation, you will find as usual our outlook. I assume you already read this yourself when reading our press release. In summary, based on the healthy commercial pipeline, we are positive, but as usual, cautious. Then in that same press release, there was a financial calendar that you might have noticed. You might have seen that we will organize a small event in our office in Milan on September 24. It's a day for investors and analysts. It's the first time that we do this since our listing, and we do not have the intention to make this a typical full-blown capital market day, but you should more expect a business-slash-strategy update, an update on ISG, and we would like to show the digital tools that we always talk about and that we use in our business, whereby we will combine it with a lab experience in the labs that we operate in our Milan office. Next week we will circulate a save to date and a request to register for people that are seriously interested. Unfortunately, we can only host a limited number of participants, and we think about 50 to 60 people max, though I'm afraid that we have to work on a first come first serve basis in case of a lot of interest. So far, my Q1 remarks, and I would like to hand over back to Ellen and do the Q&A together with Valerie.

Thank you. If you'd like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. To withdraw your question, please press star 2. You'll be advised when to ask your question. Our first line of questions come from the line of Your line is open. Please go ahead.

Hi, good morning. Thank you for taking my questions. Two from me, please. Both you and your peer yesterday also highlighted pricing pressure. I suppose the commentary on pricing pressure was a bit less from you, but it would be great to understand how the pricing developments have been in EMEA and in Americas in particular, and has that improved sequentially or not going into the second quarter? And secondly, on a GP basis, you've mentioned that the pipeline looks a little bit healthy. How are the trends sequentially placed in Q2, and what are your expectations for Q2 versus Q1? Thank you.

I mean, the total granularity, I think, is a bit much expected in terms of, you know, the trend. Let me start with the pricing pressure. we don't see across the board pricing pressure. We see in very specific markets with more commoditized, less differentiated products that there is pricing pressure, and we discuss that with our principals, and together we then take a decision in terms of what kind of volumes we want to go after. And in those markets specifically, we see something. We see actually also pockets where the prices are moving up, which is very positive, and we see a lot of stability or stabilization, let's say, of the pricing at a very high level, because, I mean, you always have to think about 2022 was a super year, and in terms of pricing, not so much has happened since then. So, I think in terms of pricing pressure, we would not be very strong in our comments. In terms of GP and our healthy pipeline, I mean, I think I was I said in the script what we see, which is there is a lot of interest by principles based on the tools that we offer, based on the fact that from a cyclicality and from a market condition, our commercial skills are very much in request. So that gives us a lot of positivity in terms of the market. We always have said that we see only four to six weeks in terms of real order book. And that remains the same. So we cannot tell you about the full Q2. But signs are very promising. And we are doing what we can in terms of commercial excellence and holding out our tools and bringing our excellence to the acquired companies, as we have always done.

I understand. Just a quick follow-up, please. So based on the limited visibility that you have, which is four to six weeks, are the trends sequentially improving then?

I think Hans said that we are seeing... Yeah, perhaps I should take this one. But what we see, we have seen quite some volatility between the individual months. I mentioned that specifically this year, March was this year very weak compared to a very strong March in 2023. At the same time, we see still that what I would call average order size is relatively low. People order not so frequent or very frequent, but then with the possibility also to postpone. So there is a healthy order book. April looks promising and for sure stronger than what we have seen in March, whereby we saw exactly the opposite last year. But for me, as we are cautious people and we have learned our lessons in the past, we try to stay away from making strong predictions. But let's hope that it continues what we see in April.

No, of course. I understand.

Thank you so much.

Our next question comes from the line of Rikin Patel, BNPPE. Your line is open. Please go ahead.

Hi, good morning. Thanks for taking my questions. Firstly, I just had a follow up on the topic of pricing. So you mentioned, I think that you saw most of the pressure in pricing in the Americas on the industrial side, now that volumes have come back. Now that we're starting to hear signs of some demand improvements in Europe and I suppose availability of products as well increasing, do you expect to see more pricing pressures emerge here in Q2 as well? And secondly, on conversion margins, the Q1 result for the group was pretty much flat on

on q4 um so should we be now thinking about that conversion margin as being a run rate for um the rest of 2024. thank you i think the second part of the question i will leave to trans in terms of the pricing i mean i think i i said we saw it in america we actually saw it last in industrials i would say um we actually see it more on the food side at the food and nutrition side at this point in time in terms of pricing pressure. So I think our expectation is not that we will see this coming into EMEA. And if you look at the mix, I think if Hans maybe can give a little bit more granularity there.

Yeah, or coming back on your question on the conversion margin, I think basically you're asking is the current level, is that the new normal going forward? If you look at the two most important drivers, that is the development of gross margin and the on-cost structure. To start with the second one, I think I indicated that we have been very cautious on the number of people that we employ and the cost increase that we saw this year is mainly inflation related. If you don't grow the top line, you need to be very, very careful what you do in your cross-site and that is something that we do and we focus a lot on there where possible. There should be a real business case behind adding cost to the structure and where we can take cost out, we certainly do. But at the same time, we also realize that in the current environment, we need to keep investing in technical capabilities, in our commercial tools and Because in the future, that will be one of the most important growth drivers. And that is something where we don't compromise at the moment. So we keep investing there. On the margin side, that's the other big lever. Ideally, of course, you generate much more margin than what we did in Q1. That was what I said. It was disappointing. I think we are partly disappointed because of the developments in the market, partly because we had to beat very high comparables last year and the dairy expressed a bit of optimism on what we see happening. Also listening to calls of production companies that all see that most of them are very positive about the second half of this year and that translates and should translate in more demand in the market and a stronger and healthier growth in the rest of this year. So let's see what the new normal becomes, but I hope better than what we do at the moment.

Okay, thank you both.

Our next question comes from the line of Eric Wilmer, WAN Lanshot Campaign. Your line is open. Please go ahead.

Hi, good morning. Thanks for taking my questions. First question, focus has been a lot on inorganic expansion in APEC. To what extent do you see scope for operational cost savings in the region? And is there anything in the APEC division that is perhaps somewhat more commoditized, as the challenge seems to be more in the gross margin, as you highlighted, than in OPEX? And then maybe, if I may, also a question on consolidation. To what extent, yeah, what's your take on the potential size for consolidation to take place in the market, if that would happen? as rumored one and a half week ago. How would this, if actually at all, reshape the business environment? Thank you.

Okay. In terms of inorganic expansion and APAC and costs, I mean, I think one effect that we have seen in APAC is, you know, China has been weak last year. we saw that some of the regions that are living to China definitely have also had an effect, as an example, Australia, for example. And this clearly has led to a performance in APAC, which is below. We have seen that our acquisitions in APAC have been really performing very nicely. I mean, if you think of Cygnet, you see some of these results. And APAC continues to be a very important region for us. with also some promising developments. In terms of consolidation in the market, I mean, I think it would be speculative for us to comment. We have always said we do what IMCD always does. We continue to acquire. We continue to strengthen our commercial excellence, our relationship with principals and developing markets, plus, of course, putting customers at the focus. And we will continue to do that. In terms of who else is going to come together, We can speculate, and I think it will for us in terms of our relationship with principals and all the activities that I said not change too much.

Understood. Does it answer your question? Yes, it does. Thanks very much.

Our next question comes from the line of Matthew Yates, Bank of America. Your line is open. Please go ahead.

Hey, come on in. I've got a couple, maybe the first one. Just on your working capital days, which you said were up slightly versus a year ago, is it possible to isolate the distortion from the closing of acquisition timing? I'm just wondering whether there's anything more detailed specifically around inventory levels at the end of the quarter going into Q2, given that you're saying It seems a much different trajectory this year where you're going into a stronger April versus a year ago you were going into a softer April. The second question, just to come back to the messaging on costs, really. So it looks like you're making some very significant investments in your cost base. Can you discuss if this is defensive in nature in terms of having to give sizable wage increases to protect your people or is it more offensive and that these are business investments to drive future growth and if so how patient do we have to be before we see sort of the payback on that and driving higher volumes through the business thanks

Matthew, perhaps I should take the first one on working capital. If I look at the breakdown, and that is something that we did not show in the press release, but compared to year-end, stock days were more or less similar, and it's really the debtor position that drove working capital. I mentioned the impact of acquisitions, and that played a bit more a role this year because we structured a couple of the transactions in Q1 as asset deals. So that means that we completely integrate the acquired working capital of the target in our own structure. And that then leads to the situation that it's very difficult to separate it out from the numbers that we report. You can imagine that a lot of these customers that we add and a lot of stock that we add If that flows into your system, it's very complicated to say this specific one is part of that acquisition and the other one not. And therefore, there is a bit of an inflation in the days that typically should have been normalized as a result of acquisitions. Other than that, I think we typically hover around the normal run rate that we saw during last year, so nothing specific there. Valerie, you wanted to take the one on the cost side?

Yes, I think on the cost side, I think we can state that it is not defensive. We really believe in our possibility of growth, as we have mentioned. And if you look at the different topics that we have mentioned, focusing on digital, first of all, because digital clearly is a big investment. We think that the market will look and the purchasing patterns of customers will very much look for digital solutions in terms of data download, in terms of search of products, in terms of omnichannel possibility. So clearly our lab infrastructure and our expertise and our people will remain there as a sales force, but we will move more and more in a world in which there will be also a digital component and considering the economy of scale that we have we see a real benefit there in doing this and with that of course also creating efficiencies midterm in terms of sustainability we have always said we are looking at sustainable solutions in this area we will talk also in september in more detail this is a focus area in terms of the customer interest because the portfolios are changing as well as the principles in terms of their portfolio promotion Again, an area in which lab expertise and lab capabilities are very relevant and have commercial benefit. And then in terms of operational excellence, we continue to look at our footprint. We are looking at how we can convert it also from a sustainability standpoint. And again, this should lead to efficiencies. So in terms of your question, Matthew, for patients. I would say we're doing our investment in a cautious thing. Unfortunately, sometimes you have to pre-invest before you get the benefit, and it would have helped if there was more volume in Q1, but we are very confident about what we are doing.

Thank you both.

Our next question comes from the line of Alex Stewart, Barclays. Your line is open. Please go ahead.

Hello, good morning. Thank you for the interesting discussion. I don't want to labor this point, but just to come back to margins, I hear what you're saying that acquisitions were dilutive to gross margins, especially in Asia. And I hear what you're saying about cost inflation. That's a problem across the market. But your operating margin in the first quarter was very similar to what it was in the fourth quarter. which is very unusual. That's not your usual seasonality where normally you have a big step up. So could you explain why there's that sequential lack of improvement when presumably the cost of inflation and presumably the acquisitions were also weighing on the Q4 margin? So I'd like to just hear the discussion for a moment quarter to quarter rather than year to year and interested to know what your comment on that is. Thank you.

Yeah, so perhaps I should take the one on the cost side. We also hear two reasons. There's something on the commercial side and something on the cost side. If you look at the cost side, last year in Q4, we... During the year, last year, we started realizing that in a lot of cases we would not make budget and as a consequence we started releasing bonus accruals and reducing additions to the bonus provisions during the year and the biggest impact was there in Q4. For this year we set challenging targets for commercial people and based on where we are now and their view on the market, people see that still as realistic targets and there was no reason for them to basically, and also not for us, to release or reduce what I would call the bonus accrual additions. So if I compare the purely Q4 cost structure on the people cost versus Q1 this year, I think there is the usual what I would call salary inflation addition. And on top of that, a bit related to the difference in bonus accruals that drive a slightly higher percentage than what you would expect. If I look overall, because the number of people are more or less stable, And when I do the math, so when I look at the difference, gross profit and EBITDA, and then I look at the amount in between, and that's, of course, not only wages and salaries, but also third-party costs and other operating expenses, depreciation, whatever you have there. But if I look at the growth there, I see an organic growth of 7% compared to last year. In that 7%, of course, a big part is wages and salary, and these are the two effects that I just mentioned, because the number of people are similar compared to last year. So we didn't add additional headcount. The other part, I think this is the most important answer of your question, because I think on the margin side, we did not see that many fluctuations between this year and last year if you normalize for the M&A impacts.

Okay, thank you so much. Sorry, if I could just add another part to that. So is it possible for you to give us some sense of what the bonus provision release was in the final quarter of last year? Apologies if you gave it at the time, by the way. I may have missed it, but it would be interesting to know roughly what that was.

No, we did not disclose. What I typically say is that if you look at the bonus component in our salary structure, then I would say it's fair to assume that on average we talk about somewhere between one and a half and two and a half month salary that people can make when they reach their targets. And that is for sure related for salespeople, for management roles, and also here and there for other layers in the organization.

Very interesting. Thank you.

Our next question comes from the line of Nicole Manion, UBS. Your line is open. Please go ahead.

Hi, good morning. Thanks for taking my questions. The first, please, just a bit more detail, if you can, on the unpredictable customer demand and what you may be seeing change there at the start of April. Is it kind of just orders picking up, order sizes? Yeah, any kind of sense you could give us there, our customers coming to you and asking for you to help them find sort of cheaper solutions, and what impact is that having? Any detail on that would be great. And then the second question, I'm not sure you ever gave this as guidance anyway, but is it still your expectation to deliver profit growth in the year overall?

Thanks. Yeah. Second part, I will leave to Hans, and I think I know the answer, but First one, I would say, in terms of customer demand. I mean, the most problematic we dealt with in 23, and particularly also Q1 24, was this erratic behavior of volatile between the bonds and then volatile in terms of order postponement and smaller orders going forward. And in terms of April, I would say, confidence has returned to some of these markets. And confidence is key for inventory to come to normal level. And the confidence means that the orders are not as much postponed and are more stable in what we'll see. In terms of volumes, it is so different across the markets, the geographies, different product groups, it's very difficult to make their one statement. But I would say that confidence seems to start to come back to some markets. And as I said in my intro, personal care is an example where there is a lot of confidence. I was just in cosmetics. You can feel it there, and you can see it in the numbers. Some other markets have been too scared to already go to these same kind of levels. Hans, on the second part.

Yeah, Nicole on outlook, I think you know our position there. We don't have a crystal ball that can predict demand, and therefore we are very cautious in what we say about the future, and therefore we ended up with the outlook that you saw in the press release. Understood. Cautious, positive, I would call it.

Great, thanks.

Our next question comes from the line of Thibault Linu, KBC Securities. Your line is open, please go ahead.

Good morning. I have two questions, one on the short term, one on the long term. With respect to the short term, I was wondering if you saw any impact from Red Sea disruptions, containers being delayed, etc.?

So I think I answered that one. Yes, we have seen some, but We cannot really quantify it, and therefore we have not mentioned it.

Yeah. And then a second question is more on the long term, and I know it will be rather difficult to give a straightforward answer, but I'm more looking for a ballpark. You are improving the product offering. You're increasing the lateral supply chain, the value chain. Now, I was wondering, given all the industrial chemicals, the life science chemicals, In what kind of range do you think that currently your product offering is complete? And I'm just more looking for like a ballpark. Do you think that the product offering is 50, 60, 70% complete or for in the long run you want to go?

That's a really difficult question because honestly, I cannot answer it as a total because we have eight business groups. We have 69,000 customers, you know, or 49,000 products, I mean, it is really difficult for us to answer there holistically. I would say we, as we have seen in the last 28 years or whatever, we are bit by bit expanding in geographies, expanding current principles, acquiring new principles, getting new product portfolios, developing some new business areas as they come along, and we will continue to do that. I think, what does our slogan say? Unlimited opportunities. I mean, in terms of the world, everybody who needs a specialty chemical is a customer of IMCD. So we are pretty much covering all areas. And there are some where we are not very strong. Yes, there are some ones that maybe in home care we don't have a big portfolio as an example. But honestly, to say that across the board is very difficult for us.

And then maybe as a follow-up, in certain regions, I assume that the lateral value chain more or less is complete. And in such a case, what kind of margins, EBITDA margins, are you able to achieve?

If you look at the way we are structured, then we talk about We have market segments, so food, pharma, personal care, et cetera, that drive the commercial strategy per market segment. What these people do, they look at per country what is the ideal, and even per group, for the whole group, what is the ideal product portfolio that we want to have? What is the suppliers that we want to work with? And how do we get these products and suppliers on board? And then they create maps with white spots, and there are an enormous amount of white spots already in the existing segments. And then on top of that, we have a lot of what we call sub-segments, things like nutrition, things like electronics, like water treatment, like agro, and so on and so forth. So segments where we hardly have a presence at the moment. And what we then don't do, because your question then is around EBITDA, we judge these business groups on margin and margin development. But we don't want to allocate the uniform back office of, for instance, for regulatory, for IT, for finance, also to these business groups. So we never calculate an EBITDA per segment, per commercial segment. And that is at the same time the beauty of the model. Suppose we would enter a new market. Suppose we come to the conclusion that electronics would be a fantastic market for us. And we don't need to build a complete new back office. We can use the infrastructure, the uniform IT setup that we have across the group. We can use all these type of facilities and services and structures that we have also to start building something in a complementary market or an adjacent market. And we don't want to end up in a bureaucratic process of allocating all these costs to the individual cost drivers and then say the EBITDA of that and that business group is that amount. For sure we register a cost directly related to it, but we don't go to an EBITDA level, if you don't mind. Does that help you a bit to explain the rationale behind what we do? But I think the most important message here is that we operate in a market with so many opportunities that every now and then we need to focus on certain market segments to avoid that we spread thin. But at the same time, it opens so much opportunities for future growth that I'm not worried about what we can do. in that part of the world. The market is huge. If you look at all kinds of consultancy reports, they talk about multiple hundreds of billions, and we only do on an annual basis five. So still a lot to win, and we're open to do so.

Thank you.

Our next question comes from the line of Chetan Udeshi. JP Morgan, your line is open, please go ahead.

Yeah, hi, thanks, morning. I was just following up on the comments on pricing pressure and just wanted to understand in practical terms, how does it actually work? Because we've seen numbers from some of the, at least a couple of FNF companies, and they've been reasonably good. I mean, no pricing pressure. So how does it work? So if you see pricing pressure in the industry, do you see that first in your books and then you go to your strategic principals to push them to cut their pricing to you? Or how does it work? Because clearly at the moment from FNF companies, we are not seeing them talk about any pricing pressures. We're just curious when you talked about food and nutrition pricing pressure. And second, just on this bonus accruals point, is it fair to say then that if things don't improve from where we are in Q1, that is a flexibility that you guys have in terms of, you know, maybe releasing some of these bonus provisions that you've taken in Q1, or is that not really material in grand scheme of things to protect the numbers or earnings? Thank you.

I think I'll leave the second one to Hans, and I really hope that's not going to happen. But, you know, your question on F&F, I mean, you assume that our nutrition, food and nutrition business is only F&F, and clearly it's not. I mean, we have more than 3,000 principals, and also in that segment we have more differentiated ones like F&F, and we have less differentiated ones where there's more pricing pressure. And that, you know, has an impact in certain regions for certain markets because there is maybe a big principle that is experienced at this moment. So I would not think that you can read from the results of FNF what we are doing in food and nutrition. If you want to take the other, Hans?

Yeah, so your question about bonus accruals, yes, that is, of course, that creates flexibility. But what I mentioned earlier is that The bonuses are linked to targets that we set with people. These targets are typically growth-oriented and people still feel that they can make their targets for this year. We ask people every time to make forecasts for the full year and that gives them basically the comfort that for now we should not do too much on what I would call the bonus provisioning during the year. And that is a bit... similar to what we saw last year in Q1. And also then we had, at least then we had the best quarter of the year. And during the year, we started releasing bonus accruals. And you can imagine that at the moment that you get closer to year end, that people can calculate more precise and release basically more precise to what should be the final outcome of the year. But there is certainly always flexibility there.

I understand, and thanks for the color. So is it fair to say that what you are accruing today is with the view that the business should grow organically? At least that's the target of the team.

Yeah, that is basically the thinking at the moment. And then... I wanted to say, and then let's see how it will materialize. And that is... Then I come back on my... crystal ball and demand prediction. And there, again, I'm too long in this industry that I know that it's difficult to predict. But growing optimism in the market, healthy pipelines, drive a bit of positivism on our side. Thank you.

Thank you, investment.

Our next question comes from the line of Curain Milder, ING. Your line is open. Please go ahead.

Yeah, good morning, everyone. Good morning, Hans and Valerie. A couple of questions from my side. The first one is about the outlook. So you see somewhat green leaves in the first quarter. Can you give me somewhat more details with regard to in the geographical sense? And can you combine that with, let me say, what the company like Guy Vaudon has said on the first quarter developments there, where they're growing by, let me say, I think over 10%, 12% on that range. And my second question is about M&A. So despite the fact that the interest is higher since more than a year, and that it mostly complicates the M&A deals, I saw a lot of, yeah, a serious amount of acquisitions already in 2024, I think six or seven. So can you maybe elaborate on that, how that develops at this moment and can we expect such a run rate to continue?

I think I'll leave the second one to Hans to review. The first one in terms of outlook of some of our principles. I would say that I gave some light in what I discussed in the beginning, and we have to also remember that we don't represent the same principles in all regions, so it will have an impact in one region but not in another, and we have never disclosed really that much who we represent and where, because it also is changing sometimes, and we want to expand even further. In terms of business segments, we can definitely say personal care. has performed very nicely and continues, as I said, you know, in terms of sentiment to be very positive. And sentiment is important in this market because, as I said, people are not building inventories if they don't have a positive sentiment about the future. Where we see a lot of benefit is on the industrial side, where both on the pricing as well as in terms of the volumes in a lot of areas, it looks like, what did you call it, like green leaves or so are coming. and it's stabilizing, and the sentiment is improving, and also that you start to see in some of the principles. I think a 12% increase of Giveran, I think they even said it was more on the fragrant side than on the flavor side. That is a wonderful number, but we don't represent Giveran globally. Second part.

When we look at the pipeline healthy, we have a lot of people we talk to. What we see is that in the discussion with owners, it takes a bit longer than what it did in the past, and that is partly related to coming to the right valuation together, so a valuation that is acceptable for both sides. You're right, we closed six transactions in Q1. We signed three new ones. If you look at the transactions that we closed, sometimes it were projects that really moved fast. Sometimes it was the outcome of something that already started years ago. And even sometimes there is quite a gap between signing and closing. Your chemo is a nice example. The transaction that we did in Malaysia, We announced it already in May last year, but it took us, I would say, close to 10 months to close the transaction due to all kinds of what I would call balance sheet normalizations, local approvals, permits, and so on and so forth. But if I look in general, the pipeline looks healthy, and if I look at the reason for that, It's something more fundamental in the industry. What you see is that suppliers are the ones that want to work with fewer distributors in the bigger part of the market. And that means that if you represent top suppliers only in one country, there is a bit of the fear factor for the smaller players that they might lose suppliers. At the same time, And Valerie spoke a lot about investing in digital and investing in technical capabilities. To do these type of things, you need to have scale. And a lot of the family-owned businesses lack the scale to make these type of investments. But it becomes more and more something that you should have in your toolkit. And so apart from what I would call the typical reason to sell for an owner, the succession issue, At the moment, we see more and more owners reconsidering their future options just because of fundamental changes in the industry. And these fundamental changes will drive further consolidation. And for sure, we want to be consolidators in this industry. And therefore, we are always on the lookout for opportunities to further expand our position and to basically capture the nice family-owned businesses with the suppliers that we would like to have in the portfolios. And we keep doing that. So I hope more to come there.

Okay, and does that mean that, let me say, several of these acquisition candidates which were five or ten years ago already, but to fix into family hands, are now coming somewhat in a position where they are reconsidering? Is that something that is now like a volcano erupting, that they

Yeah, it's sort of okay now, but we have certainly more discussions than 15, 10 years ago. It has also to do with the fact that we are active in more countries, so more context and more context in the various markets. But certainly the changes in this industry drive further consolidation one way or the other. And one of the ways to drive consolidation is M&A. The cheapest way still is that suppliers decide themselves to move to us. And also there we see a couple of successes that we generated this year. And that is, of course, the cheapest way to grow organically. And that is also where the focus should be. We do organic growth, and on top of that, we do acquisitions. I hope this answers your question.

No, no, certainly. Thank you, Hans.

Our next question comes from the line of Carl Rainsford, Barenburg. The line is open. Please go ahead.

Yeah, good morning, everyone. Thanks for taking my questions. Just two left from me. So on the comments around weaker demand in pharma that you're seeing, do you have a view on where we are on that cycle at the moment? Are we sort of at or near the bottom in terms of sort of trough levels of demand? You know, if you have any comments on momentum there, it would be helpful. And the second question, again, just relating to pharma and specifically APAC, how much of the pharma side of Cygnet is impacting the lower conversion margin APAC at the moment? Is it fair to think of that material? Going forward, should we see this as kind of a baseline based on a cycle, or should there be room for improvement there? Yeah, thank you.

Cygnet, I leave to Hans. In terms of weaker demand in pharma, Yes, this is something that we have seen now in Q1. We believe it's a temporary effect. We have to also say in Q1 2023, we had a very strong pharma month. So we see it as temporary. I mean, pharma products, as you know, in a lot of cases are done with regulatory confinements. We have always seen this as a very positive market. Inventories are at the moment being run down and our general view on pharma is very positive and it's an important part of our portfolio.

Then perhaps your question on Cygnet. Earlier in this call, somebody raised the question about Red Sea and impact on business. And if I would look at one of the companies that was a little bit impacted, then it was Cignet. They had a bit of delay in deliveries, resulting in a bit of delay in also then deliveries to their customers. But other than that, Cignet is performing in line with plan and expectations and still on a very, very high level.

Okay, thank you. Just a quick follow-up then on that delay. Should we see sort of a bit of a bounce in Q2 then, sort of a build-up of demand, or is it just sort of a phasing issue where everything's moved a bit later?

Yeah, and that is exactly the reason that we didn't want to mention the Red Sea issue ourselves as something, but what you certainly see is that When it happened, it took a bit longer to get stuff from Europe into a country like India. And as a consequence, there was a bit of a delay. And that will, of course, be solved in this quarter. It is already solved.

Perfect. Thank you very much. Very helpful.

Our next question comes from the line of Eric Wilmer. When launch your campaign? Your line is open. Please go ahead.

Yes, thank you very much. Just one follow-up question, if I may. You mentioned that valuation discussions are taking somewhat longer with targets. To what extent is this driven by different views regarding the market recovery between you and targets and enhanced profitability expectations going forward for these targets? Thank you.

Eric, that is exactly often the issue that I'd like to challenge us on what is your normal profit level going forward. We do the same with owners. Owners always refer to 2022 as their new normal. You can imagine that 2023 was typically lower than 2022, looking at results of potential targets in most markets and in most segments. And that is one of the reasons that we structure more and more transactions on the basis of what we see, of course, in the most recent years. So the 2023 valuation is then the basis. And then we top that up with earn out arrangements or we do a 1730 transaction whereby we allow owners that if they rebounce back to the 2022 levels, that they get compensated for that. But to convince owners that these are the right mechanics takes always a bit longer. So it's not about multiples. It's more about what is the underlying baseline.

Understood. Thank you. There are no further questions on the line, so I will now hand you back to your host for closing remarks.

Thank you so much for the call, and we are looking forward to see some of you here, some of you over the next couple of weeks and months, and then to hear you again all in queue for the Q2 call. Thanks so much.

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