IMCD N.V.

Good day and welcome to today's IMCD and the first half year 2024 Results Conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. Later, we will conduct a question and answer session. You may register for questions at any time by pressing star 1 on your telephone keypad. And now, I'd like to call over to Valerie Dill-Brown, CEO. Please go ahead.

Good morning, everyone, and welcome to the IMCD first half of 2024 call. As usually, I'm here with my colleague Hans Koimans, 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. During the first half of 2024, we recorded revenues of €2.385 billion and operating EBITDA of €270 million. On a constant currency basis, this is a 2% EBITDA decrease versus first half 23. This decrease can be mainly attributed due to a weak first quarter whilst we return to gross profit and EBITDA growth in Q2. During the second quarter of this year, we were able to deliver a Forex-adjusted gross profit growth of 11%, resulting in a 11% EBITDA growth on a constant currency basis versus the same quarter last year. This result was mainly based on the performance of first-time inclusions of acquisitions, as well as on some organic growth. Markets remained sluggish in the Americas, where reported gross profits increased only slightly, while the EMEA saw a gross profit growth of 4% and Asia-Pacific a gross profit growth of 9%. In the Americas, we were mostly affected by a lower demand and some temporary pricing pressure for food and nutrition. Whilst in APAC and in EMEA, we experienced an improving environment, but not yet on a continuous basis and not in all countries. In terms of our life science businesses versus our industrial businesses, we continue to maintain a balanced portfolio where revenue of life science was 1.2 billion and revenue in the industrials was 1.1 billion. In our life science segment, personal care, with the exception of China, continued to perform very nicely, while food and nutrition and pharma have not yet fully seen the expected recovery. In our industrial segment, we continue to see a better performance, and specifically coatings and constructions are seeing increasing demand and a slow but steady recovery. In terms of general market development, we continue to see volatile months across all regions and business lines, with little visibility beyond six weeks due to the desire for low inventories and just-in-time orders by a substantial part of our customers. To support these customer needs, whilst controlling networking capital and ensuring optimal coverage simultaneously, we continue to invest further in our digital network and commercial excellence. New customer care tools, as well as commercial support programs, are currently being rolled out, and we're excited to share the details on some of these systems in our upcoming event in Milan. For those who cannot attend, we will make a short presentation available via our website as we get closer to the date. In terms of effective business development, we were able to acquire new principles and to expand with existing ones. Our principles are excited about the volumes we have been able to gain, and we continue to work closely with them to develop additional opportunities. As far as our M&A pipeline is concerned, we maintain a healthy, attractive target list and delivered year-to-date 11 acquisitions across all three regions and in various business segments. And last but not least, we continued with our sustainability programs throughout our organization, on which I'm excited to provide an update later in the year. We are confident that our investments made, our strong commercial teams, digital and logistic infrastructure, combined with further driving operational excellence and cost control, will deliver further growth and efficiencies. Hans will now give you a short update on the numbers.

Thank you. Thanks for the introduction, Valerie, and thanks Good morning ladies and gentlemen and as usual I would like to start on page 10 of the presentation where you will find a summary of key figures taken from the first half year press release. I'm struggling a bit with the call so if you hear me sniffing that's not because of emotions but because of practical issues. As you can see on this slide, Forex-adjusted revenue increased 5%, which is a combination of a 4% organic decline and the positive impact of the first-time inclusion of companies acquired in 2023 and 2024, which added 9%. Then forex-adjusted gross profit increased 5% compared to the same period of last year, and this increase was a combination of 7% as a result of the first-time inclusion of acquisitions and negative organic growth of 2%. There's quite a difference when comparing the two individual quarters. In the first quarter, you might remember we reported organic gross profit decline of 8%. And in the second quarter, we report 11% Forex-adjusted gross profit growth, which is the combination of acquisition growth and 4% organic. Gross profit in percentage of revenue in Q1 and Q2 of this year were more or less similar. We did 25.4% in Q1, 25.5% in Q2, and adding up to around the 25.4%, which is more or less equal to the 25.5% in the first half of last year. The Forex adjusted operating EBITDA decreased with 2%, and this decrease was a combination of positive contribution of acquisitions of 9%, combined with negative organic EBITDA growth of 11%. Similar to gross profit, reported for operating EBITDA a soft Q1 with a Forex-adjusted 13% EBITDA decline, followed by a stronger second quarter with an 11% increase, which is a combination of M&A impact and a modest organic growth. Operating EBITDA and percentage of revenue decreased to 11.3%. The conversion margin in the second quarter was 46%, and this second quarter conversion margin was more or less similar to the second quarter of last year. Further, it was a substantial improvement compared to the 42.9% reported in Q1. And due to this soft first quarter, the year-to-date conversion margin of 44.5% is still lower than last year's 48%. And the difference in conversion margin is the result of higher gross profit being more than offset by inflation-driven organic own cost growth. And with respect to that own cost growth, it's obvious that in an asset-like business model, so a people organization like IMCD, the employee-related cost is one of the most important cost drives. And on the bottom of this slide, you could see that IMCD employs about 5,000 full-time employees. Compared to the end of June of last year, we added 465 new colleagues, and this increase in the number of employees is a combination of about 500 people joining IMCD as a result of acquisitions done in the last 12 months. In that same 12-month period, we report an organic decline of about 50 people. And as mentioned in previous calls, we have been and still are very prudent filling vacancies or adding people given current volatile market conditions. On the next slide, you will find a bit more color on the year-on-year development of gross profit, EBITDA, and conversion margin per operating segment. In EMEA in the first column, we report 6% Forex-adjusted gross profit growth. We were able to increase our gross margin percentage with 0.6% to 27.9. The soft first quarter with negative organic growth was followed by a stronger second quarter with 6% organic gross profit growth. We saw a similar trend in EMEA when looking at organic EBITDA growth. Negative organic growth in Q1 followed by 5% organic EBITDA growth in Q2. Year-to-date operating EBITDA of 129 million was still just below last year. In the Americas, more or less a similar picture. A soft first quarter, followed by limited organic growth profit growth in the second quarter, which was unfortunately not enough to cover the inflation-driven own-cost growth. As a positive, we increased the year-to-date gross profit margin percentage with 50 BIPs compared to last year. And this margin percentage increase was one of the drivers of organic gross profit growth in the second quarter. However, this could not compensate the decrease in revenue totally. As a result, we report year-to-date 11% lower operating EBITDA and a lower conversion margin. Organic EBITDA growth is still negative, but improving, from a minus 31% in Q1 to a minus 5% organic in Q2, adding up to the minus 19% year-to-date. Then Asia Pacific. In Asia Pacific, we report in the second quarter a return to organic gross profit and EBITDA growth of 4% and 2% respectively. Unfortunately, not enough to compensate for the soft start for the year, but further, this is the only reason where we report a lower gross margin percentage. However, when excluding the impact of acquisitions done in the second half of 23 and the first half of 24 in this region, the gross margin of our legacy business would have been stable compared to last year. The average gross margin in the acquired businesses was substantially lower than the average 23.8% that we reported last year. Page 12, let me go there. A summary of the P&L lines between operating EBITDA and net results for the period. A few general remarks there. You can see that net finance cost increased 1 million from 26 million last year to 27 in the first six months of 2024. On page 22 of our press release, there is a breakdown of the different income and cost components driving the change. I would like to mention the main items responsible for this report in limited shape. First, on bank loans and bonds, the interest on bank loans and bonds increased about $30 million from $16 million last year to $29 million in the first half of 2024. And this increase is a combination of higher base rates in our revolving banking facilities combined with, on average, a higher debt amount. And this increase is in line with the guidance that we gave you when we discussed the full year 2023 results. And secondly, the negative currency exchange results that we also have to report on this line, they increased from negative 3 million last year to negative 9 million this year, adding 6 million additional costs to the finance cost line. And last but not least, The change in deferred considerations that we have to report on this line moved from a minus 4 million last year to a positive 14 million in our year-to-date numbers. And this positive change related mainly to adjustments to the fair value of contingent considerations and then mainly to sunrise. So the 1 million increase in finance cost is a combination of 13 million real bank and bond-related interest costs and about 12 million non-cash movements, often IVRS related, reported on this line. And income tax expenses, they are based on the actual tax rates in the countries where we generate taxable profits. The tax cash out, as you could have seen in the press release, in the first six months was about 52 million. And the blended tax rate, the one that we report in the half-year figures, is slightly lower than the guidance that we gave to you in the past. Amortization of intangible assets are non-cash costs related to the amortization of supply relation distribution rights and other intangibles, often coming with the acquisitions that we did. And last but not least, on the bottom of this page, you could see net result for the period of 141 million, and the Forex suggested 1% decrease in cash earnings per share to 3 euro and 23 cents. Then a summary of the balance sheet, page 13. Property plans and equipment of 42 million is, of course, relatively low as a result of the asset-light business model. And the increase that we report includes $7 million of new fixed assets that came with recent acquisitions. So when we bought businesses there were some warehouses in the structure that we got. Then there is right of use assets of $109 million. These are the capitalized operational leases as a result of IFRS 16. Then there is the combination of intangible assets and related deferred tax liabilities of about 2.3 million in total and they are the result of acquisitions done since July 2014 and now PE owned history as a company. Then on the financing side of the balance sheet there is 1.6 billion of debt. I will come back to that in a minute and then there is 1.8 billion of equity. and this substantial equity position covers more than half of our capital employed. Working capital is summarized on this slide, 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 2024 is more or less similar to the amount end of June last year. Compared to last year June, the overall working capital days were a bit lower with 63 days, and it's fair to say that Q2 and Q3 are typically the highest points in our working capital cycle during a year, and Q4 is typically the lowest point in the cycle. When looking at the individual components, we see small differences on inventories and other payables when comparing June with June. You see a rather big jump in days both on the trade receivables and the trade payables, and this change is primarily due to the fact that we had the situation that the last day of the second quarter fell on a Sunday this year, and as a result, Many customers took advantage of this by paying invoices, which were typically due by the end of the month, just one day later on the first day of July, causing the reported increase in debt-to-days. And if you look at the credit-to-days, you could see that we also learned from that habit ourselves. Then on the next slide, a summary of our net debt position, leverage ratio, and the maturity profile of our debt portfolio. Net debt increased with about 300 million to 1.6 billion, and this increase is, amongst others, influenced by a dividend payment of 128 million and considerations paid for acquired businesses of about 250 million. The 1.6 billion of debt includes 1.1 billion of bonds and these bonds have a blended fixed coupon just below 3.5%. Further, there is 112 million of deferred considerations related to the acquisitions done, and the remainder, about 400 million, is the balance of cash and bank facilities and IFRS 16 related operational lease liabilities. The leverage ratio end of June based on our loan documentation was 2.7 times EBITDA, which was, as you can see, well below the maximum set in our loan documentation. Then there was the reported leverage based on IFRS, which was 2.9 times EBITDA. And then on the right side of the slide, you could see the maturity profile of the different debt components, where you see a nice spread over the coming years. Then I would like to finish this short summary with a cash flow overview on page 16. As you can see, free cash flow decreased with 20 million to about 221 billion, and the main driver of this decrease is a combination of slightly lower results with a little bit of higher working capital investment. And the increase in working capital was, as what I mentioned before, mainly due to temporary higher debtor days, which were resolved within a few days after the month's end. Additionally, capital expenditure of approximately $6 million were largely in line with last year's spending and primarily directed towards IT investments, office improvements, and lab equipment . You will find the outlook for this year, and I assume everybody has already read the text in our press release, and therefore I won't repeat it aloud. And I would like to hand over to the operator, Sergio, to open the lines for Q&A.