IMCD N.V.

Ladies and gentlemen, hello and welcome to the IMCDNV full year 2024 results conference call. 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 your host, Valerie Dyle Brown, CEO, to begin today's conference. Thank you.

Good morning, everyone, and welcome to the IMCD 2024 Full Year Results Call. As usual, 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. 2024 was a challenging but successful year for IMCD. The global economy continued to grow at a modest pace, whilst geopolitical tensions and economic shifts influenced customer behavior. Nevertheless, we were able to recover from a rather weak first quarter to return to gross profit and avatar growth in all following quarters. During 2024, we recorded a gross profit of €1,202 million, and operating EBITDA of Euro 531 million. On a constant currency basis, this is a 5% EBITDA increase versus the previous year. Our net result was Euro 278 million, and our free cash flow, Euro 450 million, leading to a cash earnings per share of Euro 634. In 2024, we strengthened our presence across all segments and regions by completing 12 acquisitions and signing an additional tool, Of these additions to our portfolio, 11 acquisitions were in life science and three in industrials. Our M&A pipeline is looking healthy, and we have the financial means to execute on targets in a diligent way on our strong balance sheet combined with a reasonable leverage level. Having defined our six strategic growth pillars, which we presented during our Investor Day with many of you in Milan in September, we are happy to report on our execution on them in the past few months. People We continue to ensure an inclusive and highly professional employee base by investing in our people through excellence in recruitment and in training. Portfolio. We continue to strengthen our presence across all segments and regions through acquisitions, expansion of existing principles, and addition of new principles. Commercial excellence. We added new functionalities and tools to our digital commercial infrastructure, such as the sales assistant. This enables our sales force to further increase the number and types of products we sell to customers and thereby we can increase the share of wallet at our customers by selling multiple products from different suppliers. Operational excellence. We reviewed our supply chain and growth efficiencies where possible while focusing on growth. Digital excellence. We continue to review the utilization of AI wherever possible and beneficial and and we invested in existing tools and the development of new tools. And last but not least, sustainability. We have improved versus our 2019 baseline and are working hard to further reduce our emissions intensity. Our latest initiative here is our commitment to SPTI. For more information on what we do, I would refer to our integrated report which we published this morning. Here you will find great stories on what we do. In terms of markets, After a poor start of the year, we recovered in all subsequent quarters based on continued strong performance of our teams and strong supplier and customer collaborations. In EMEA, we were able thereby to maintain or to grow volumes despite various negative macroeconomic factors affecting European industries. Inflation and related cost increases could not yet be fully compensated. In the Americas, we delivered a very solid second half of the year and could grow volumes while carefully managing our cost structure. In APEC, we had an overall very positive performance, but we were impacted by China's continued weakness. In terms of our life science business versus our industrial businesses, we continued to maintain a balanced portfolio, where revenue from life science was $2.5 billion and revenue in industry was slightly above $2.2 billion. In our life science segment, personal care continued to perform very nicely and food and nutrition had a very good second half of the year. Pharma continued to be weaker due to destocking taking customers longer than expected, but we started to see a recovery at year end. In our industrial segments, all areas have started to see better performance. We believe that this was not due to preemptive actions because of the potential terrorists, as we did not experience substantial moves of volumes or pre-ordering in a material way. In terms of general market development, we continue to see volatile months across all regions of the business lines, with little visibility beyond six weeks, and movement of volumes from month to month. Inventories are probably also in pharma, now at a low to normal level, but the impact of tariffs on consumer behavior, inflation, and interest rates is leading to cautious behavior in parts of our customers. While geopolitical and macroeconomic conditions continue to often be challenging, We are confident that our investments made, our strong commercial teams, digital and logistic infrastructure combined with us driving operational excellence and cost control will deliver further growth and efficiencies. Our order book and M&A pipeline is healthy, and we are excited about our ongoing work with suppliers and customers. Hans will now give you an update on the numbers.

Valerie, thank you for the introduction, and good morning, ladies and gentlemen. And as Valerie already indicated, earlier today we issued a press release summarizing our IMCD's financial results for 2024. But at the same time, we also released IMCD's integrated 2024 report. A comprehensive, about 350-page document that, as a result of all reporting legislation that we have to comply with, looks like a real book. This informative and visually engaging report provides insights into IMCD's business, covering both financial and non-financial performance in more detail. In this call, I will take you through a summary of only the financial numbers before we move to Q&A. I'll start on page 9 of the presentation where you see Forex adjusted revenue increase of 8% and a gross profit increase of 9%. And this increase in gross profit was a combination of 1% organic growth and 7% as a result of the first time inclusion of acquisition. The year started with a relatively soft first quarter, if you remember, with negative organic growth. And this was followed by 4% organic growth profit growth in the second quarter and about 6% organic growth in the second half of the year. And the acquisition growth that we report is the balance of the full year impact of acquisitions done in 2023 and more recent acquisitions signed and closed in 2024. And for an overview of the 2024 acquisition, I would like to refer to the pages five and six of this presentation. Then growth profit in percentage of revenue had slightly increased to 25.4% in 2024. The segments EMEA and Americas both report an increase in gross profit margin. And in Asia Pacific, we report a decrease. And this decrease is mainly driven by lower than IMCD's average gross profit margin of the acquisitions that we completed in 2023 and 2024. Then for your convenience, we included the line on this slide with operating EBITDA in a people organization like IMCD with an asset-like business model with outsourced logistics and a low fixed asset base. The development of EBITDA, shown in the next slide, seems more relevant to us. When looking at operating EBITDA, you can see it increased 5% on a constant currency basis to 531 million. And this increase was a combination of an organic decline of 3% and a positive 8% impact. as a result of the first time inclusion of acquisitions. On EBITDA we saw a similar trend as mentioned before when talking about growth profit. Negative growth in the first half of the year followed by 5% organic EBITDA growth in the second half. Operating EBITDA in percentage of revenue slightly decreased to 11.2%. Same for the conversion margin which decreased to 44.2% in 2024. The full year decreasing conversion margin. This is mainly the result of gross profit growth that could not fully compensate inflation driven own cost growth. At the 2024, own cost growth was just below 5%. Compared to 2023, the number of full-time employees, if you would normalize for the impact of acquisitions, decreased by 2%. It's further worthwhile mentioning that in the second half of 2024, the conversion margin was a bit better than in the same period of 2023. On the next slide, slide 10, a few key figures from the P&Ls per operating segment. And on the slide, the main focus is on growth profit margin and the EBITDA development. And as you can see, it includes a split in organic acquisition growth and currency impacts. In the integrated report, there is much more segment information that you can find in there. Perhaps first of all, the overall currency impact. We had a bit of headwind in 2024, resulting in a minus one on gross profit and a minus two on EBITDA. And although it sounds like a low percentage, in absolute numbers, we still lost about 10 million of EBITDA as a result of negative translation differences due to currency fluctuations. Then the EMEA column, gross profit of EMEA, the first column, increased 5% Forex adjusted, which is a combination of 2% organic and 3% acquisition growth. The gross profit increase could not fully compensate for inflation-driven on-cost growth in this segment, and as a consequence, there was a little negative organic EBITDA growth and a lower EBITDA and conversion margin in the EMEA region. In the Americas, as you will remember, we reported a weak start of the year with negative organic growth profit and EBITDA growth in the first six months of 2024. The second half of the year was strong in the Americas. Organic EBITDA increased close to 15% in this period compared to the second half of 2023. Strict cost management combined with high single-digit organic growth profit growth were the main drivers of this double-digit organic EBITDA growth. We were happy with the strong recovery in the second half of the year. Unfortunately, the second half of the year was too short to fully compensate for the soft first half. Then Asia-Pacific, we report another growth year, whereby we realized 16% forex-adjusted growth, profit growth, and 14% EBITDA growth. And as you can see, most of this growth was the result of acquisitions done. Operating EBITDA increased to 170 million, whereby EBITDA margin and conversion margin both slightly decreased. And then in the last column, you will find the holding companies, all non-operating companies, including the head office in Rotterdam and our regional support offices in Singapore and the U.S., Holding cost as a percentage of total revenue slightly increased from 0.7% in 23 to 0.8% of revenue in 2024. Then moving to the next page. On this page, you will find a summary of all the P&L lines from EBITDA to the net results for the period. Some general remarks, whereby I will summarize net finance costs and income tax expenses on the separate slides. Amortization of intangible assets are non-cash cost items related to the amortization of supplier relations, distribution rights and other intangibles. The increase that you see is mainly the result of the acquisitions done. Then the 11 million of what I would call non-recurring expenses and this cost It includes costs related to successful and unsuccessful acquisitions. And it further includes severance costs related to one-off adjustments of the organization. And if you look at the increase compared to 2023, this increase is mainly the result of a one-off income in 2023. As you might remember, last year in 2023, we reported a one-off income of $5 million on this line. as a result of the sale of a warehouse building in the US. Then on slide 12, a breakdown of the 2024 net finance costs, adding up to 45 million, which is about 20 million more than previous year. This increase is a combination of 19 million higher interest costs related to our financing structure. Then there is a positive change in deferred conscious considerations of about 7 million. I'll come back on that later. and the 6 million more negative currency exchange results. The higher interest cost on the financing structure is mainly driven by, on the one hand, on average higher debt levels combined with slightly increased interest rates. When looking at our debt position, it's fair to say that our future exposure to interest rate fluctuations further reduced during 2024. But the majority of our actual debt position consist of rated corporate bond loans, and the total amount of outstanding bonds is 1.6 billion euro, with an average fixed coupon of about 3.5%. Then, changes in deferred considerations. In the call last year, we spent quite some time on explaining the mechanics, and as you might remember, a part of our net debt that we report refers to deferred purchase price considerations of acquisitions done and the related potential earn-out obligations. At the end of 2024, we reported deferred consideration of $99 million as a net debt item. And this reported deferred consideration is based on estimated conditional payments to former owners. Changes in these estimates lead to adjustments, and these adjustments could end up either direct in equity or flow through the interest line of the P&L. This year we had, similar to last year, a combination of pluses and minuses based on the changes in these estimates with an unbalanced positive impact, the impact that you see here on the P&L. In 2024, this positive impact mainly relates to SennRise and Megasatia, leading to a non-cash income. So, if I would be honest, when making your financial model, I could imagine to adjust for these non-cash IFRS-related adjustments. Then, on the next page, a summary of our tax expenses. On the regular income tax expenses, we report a decrease of 5 million. The tax credits related to amortization, that is a non-cash tax component, increased in line with the amortization that you saw earlier. And then as a guidance for our tax cost, we always indicated to expect a blended tax rate in the range of 24% to 28% of result before tax. And then this result before tax, we always calculated as EBITDA minus finance and non-recurring costs. On the bottom of this page, you could read that the IMCD's blended regular tax rate in 2024 was 24.2%, and this is slightly below the 2023 level and still at the low end of our guidance. In the integrated report, there is a lot more details about the way we calculate tax, our tax position, our tax policy, and I would like to refer to this report if you want to do a deep dive on taxes. On the next page, the calculation of cash earnings per share and our dividend proposal. And as you can see on this slide, we report six euro and 34 cents cash earnings per share in 2024. And at the AGM in April, we will propose a dividend of two euro and 15 cents in cash per share, which means a small 4% decrease compared to last year. The company has a dividend policy whereby with an annual target dividend in the range of 25 to 35% of adjusted net income, and this dividend proposal leads to a payout ratio of 35%, which is like last year at the top of the range that we set ourselves in this policy. Then a few words on IMCD's balance sheet on the next slide. Property, plant, and equipment slightly increased, and it's as a result of the asset-like business model still relatively low compared to the size of our business. The right of use assets is a result of the application of IFRS 16, so this 103 million reflects capitalized operational leases, and the related lease liabilities of about 109 million is included in our net debt position, which we will see later. Then the increase in intangible assets and related deferred tax liabilities are mainly the result of the acquisitions done. Then working capital, I will come back on that in a minute. And then you see a solid equity position of close to $2.2 billion, covering 63% of capital employed. And the increase in 2024 is amongst others the result of the, you can imagine, the addition of the net profit for a year of $278 million. Then there is positive other comprehensive income, $43 million, a minus, of course, for the dividend payment in cash of $128 million, and further it includes the net proceeds from the issuance of the new share capital, which contributed close to $300 million. For working capital and net debt, Let's go to the summary on the next page. On page 16 you will find the summary of the absolute amount of the various working capital components and these absolute amounts translated in days of revenue. The absolute amount of working capital increased with 143 million and this increase includes 41 million additional working capital related to 2024 acquisitions. then the majority of the remaining increase, so about 100 million, is the result of higher level of business activities in 2024 compared to last year. And this increase of business activities combined with additional stock to cater for a strong order book for the start of 2024 was one of the main reasons of the increase that you see. When looking at the days in the bottom of this slide, The stock days increase to result, what I said earlier, of these increased business activities combined with that strong order book. And the other factor that we always see, and we spoke about it in previous calls, is that we often see at quarter end that customers push their orders or part of their open orders into the next month or next quarter, and that there's also something that happened at year end. And then, of course, IMC is, I'm going to call it this type, but still needs to take care of the stock position of these orders. Then the receivables. When we report this, we always report this as a combination of trade and other receivables. If you break it in two, the trade receivable days end of 2024 were 55 days compared to the 54 end of last year. So the increase in receivable days that we report is mainly driven by other receivables. Other receivables include positions like prepaid taxes, prepaid social security charges, where we increased in total a bit more than two days. I think it makes sense in future reporting that we will split our trade receivables to give you a bit of a better insight in the actual development of our debtor days. On page 17, summary of our net debt position at the end of 2024 we report 1.3 billion of net debt and as mentioned before this net debt position includes the 1.6 billion of corporate bonds and one of the bonds in there, a 300 million bond is due for repayment in Q1 this year and this due date is one of the reasons of the substantial cash provision that you also see on the balance sheet Further net debt includes 109 million of the operational lease liabilities and about 98 million of deferred consideration. Then on the same page, an overview of the majority profile of our debt structure as per the end of 2024. With the new bond and the extended term of the revolver, we created a nice maturity profile in our debt portfolio. The 600 million revolver facility bar that you see on the right hand side reflects the maximum amount we can use as per today. Then reported leverage at the end of 2024 was 2.2 times EBITDA and this leverage ratio or the leverage ratio based on the definitions used in the IMCD loan documentation was slightly lower as 2.1 times EBITDA. And that is well below the required maximum as said in the loan documentation. Then I would like to finish the financial summary with the cash flow overview on page 18. As you can see, the absolute amount of free cash flow was $450 million, which results in a cash conversion ratio of 83%. The change in conversion ratio versus last year is a combination of higher operating EBITDA combined with higher working capital investment compared to last year. And then on the last slide of the presentation you will find the outlook in which we, amongst others, indicate that we remain confident that we will continue to contribute value to our stakeholders and to sustain our growth trajectory. our summary of the figures, and Valerie and myself are happy to answer your questions, so let's go back to Ben, the operator. Ben, the floor is yours.