IMCD N.V.

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.