Hello, and welcome to the IMCD N.V. Q1 2022 results call. My name is Courtney, and I'll be your coordinator for today's event. Please note that 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, and this can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any time, please press star zero, and you will be connected to an operator. I will now hand you over to your host, Piet van der Slikke, CEO, to begin today's conference. Thank you.
Thank you, Courtney, and welcome everybody. I'm here with my colleague, Hans Kooijmans, traditionally, and we will be pleased in a minute to answer your questions. You will have seen that the Q1 results were very strong, with EBITDA growth of 59% to almost EUR 140 million. Most of the growth was organic and based on strong demands, increasing prices, an ability to strengthen our margins, and expansion of our business with new product lines. All regions and business segments contributed to the growth. Supply chains and lead times remain challenging. Also, in this quarter, we have been able to execute our strategy by doing acquisitions to complement business segments and regional presence. In this respect, I want to mention that we acquired a business in China, in the attractive personal care market.
In Central America and Mexico, we have quickly obtained a strong position which will be an engine for future organic growth. I want to emphasize again that notwithstanding the quarterly excitement of a listed company, we consistently, over the years, are building a global company which is focused to serve the top suppliers in the world and to help our customers to formulate their product. IMCD has unique knowledge of many applications in various market segments, which is supported by an extensive network of application labs and technicians across the world. It makes us robust in downturns and, as we see today, extremely successful, under favorable market conditions. Through all cycles, we will continue to focus on organic growth, and we will continue to be a consolidator.
We continue also to invest significantly in our IT and digital infrastructure, which will help us to manage a global business and connect with our customers in their preferred way. Finally, we have many sustainability initiatives running, both aimed at reducing our own footprint, but also helping our customers to use more sustainable products. With that, we remain optimistic about the immediate and long-term future and, I will now give over to Hans to guide you through the quarter one numbers. Hans?
Thank you, Piet. Good morning, ladies and gentlemen, and as usual, a short summary of IMCD's Q1 2022 results, whereby I will start on page nine of the analyst call presentation. As Piet indicated, we are happy to report another quarter with strong growth on most of the financial key figures. Forex-adjusted revenue increased 32% and gross profit increased 36% in the Q1 of this year compared to the same period of last year. This gross profit increase was a combination of 31% organic growth and 5% as a result of the first time inclusion of the companies that we acquired in 2021 and 2022. All in all, this was the Q5 in a row with more than double-digit organic gross profit growth.
Gross profit in percentage of revenue improved by 0.7 percentage points to 25.1%. This increase in percentage was a combination of product mix effects, changes in local circumstances, and successful internal gross margin improvement initiatives. Now, FX-adjusted operating EBITDA increased 54% to EUR 140 million, and most of this increase was organic growth. The operating EBITDA margin increased by 1.7 percentage points to 12.6%. The conversion margin, calculated as operating EBITDA in percentage of gross profit, was 50.4%, which is 5.8 percentage points better than the same period of last year. In all regions, we saw an improvement of this ratio. FX-adjusted net result increased 62% to EUR 79 million. The free cash flow.
Free cash flow increased 5% and was, as you might have seen in the press release, impacted by additional working capital, which is an obvious and logical consequence of very strong revenue growth in the Q1 . Further, we finished this quarter with a strong order book leading to additional stock. Net working capital translated in days of revenue were 58 days, four days more than the Q1 of last year. The clear logic behind this increase is the substantial revenue growth, which automatically leads to higher debtor position. As you might remember, reported debtor days, a low 16 number, are typically higher than average working capital days. Substantially increased sales automatically leads to higher debtor positions. Increase working capital days. Year-to-date cash earnings per share were EUR 1.65, an increase of 56% compared to the same period of last year.
On the last line of this page, you could see an 80% increase in our number of employees. This increase is a combination of organic growth and the first time inclusion of acquisitions. On the next slide 10, you will find gross profit, EBITDA, and conversion margin per operating segment. EMEA reported 37% Forex adjusted gross profit growth and 56% operating EBITDA growth. Operating EBITDA as a percentage of revenue improved 2% to 13.3%. As most of the acquisitions in these regions were relatively small, it's fair to assume that the impact of the acquisitions is limited, and most of the growth is organic. A bit of a similar story in the second column with Americas Q1 figures. Forex adjusted gross profit in the Americas increased 36% and operating EBITDA increased 51%.
Most of the EBITA growth is organic. Reported growth numbers in Europe were even more impressive due to some currency tailwind. Asia Pacific in the third column reported 34% gross profit growth and 40% operating EBITA growth. Like the other segments, most of the reported growth is organic. Operating EBITA and percentage of revenue and conversion margin further improved. In the last column, the cost of the holding companies, and this includes, as you know, all normal operating companies, including the head office in Rotterdam and the regional support offices in Singapore and the U.S. On page 11, a summary of IMCD's free cash flow. Adjusted operating EBITA increased with EUR 53 million, which is in line with reported operating EBITA growth. 2,000,000 of CapEx, followed by EUR 75 million working capital investment.
As mentioned before, this working capital investment was mainly the result of increased business activities. On page 12, a short update on net debt and leverage. Reported leverage ratios and leverage based on the definitions in the loan documentation slightly decreased to 2.2x and 1.5x LTM EBITA respectively. The 1.5x leverage ratio is well below the 3.5x leverage threshold in the IMCD's loan documentation. In March, IMCD issued a EUR 300 million rated corporate bond loan with institutional investors. This five year senior unsecured bond, maturing in March 2027, has a fixed coupon of 2.125%, and the proceeds of this bond loan issue will be used for general corporate purpose, including the refinancing of existing indebtedness. Last but not least, on page 14, you will find our outlook for 2022. Far, the short summary of our year-to-date financials, and Piet and myself are happy to answer your questions. I would like to hand over to the operator.
Thank you. As a reminder, if you would like to ask a question on today's call, please press star one on your telephone keypad. Please ensure your line is unmuted locally, and you will be advised when to ask your question. That was star one on your telephone keypad. The first question comes in from the line of Matthew Yates, calling from Bank of America. Please go ahead.
Hey, good morning, gentlemen. Couple of questions, please. I haven't seen a full balance sheet, so can you just help me understand a little bit better this working capital move? As you said in your introductory remarks, to some extent, it's fairly mathematical given the higher top line and the inflation that comes from the inventory value. But I'm curious, did you also make conscious decisions here to build up stocks? 'Cause I think typically you wouldn't be making speculative bets into that degree. But does that tell me something about your confidence on the order backlog going into Q2? The second question is around profitability. I know there's various drivers of the margin, like mix and volume leverage. Conceptually, you had the biggest margin expansion in Europe, which we would typically consider a more mature region, so to speak. How would you explain the development of that European margin, versus perhaps what's been happening in the other regions? Thank you.
Shall I do the balance sheet? Yeah. Matthew, basically it is what you rightly said, more or less a mathematical exercise. The fact that the substantial increase in revenue drives our debt to volume up, so not so much our debt to days, they are still in the low 60s. What we typically see if you look at the balance sheet is that most of the inventories are financed with trade payables. The more you drive up your trade receivables, the higher the absolute amount of working capital is. The biggest part of the increase is coming from increased debtors.
When we issued our full year results, we finished the year with quite an impressive inventory amount in our opinion based on the fact that we had a very strong order book for Q1. You're right, we never take speculative positions on stock, and we still report pretty high stock levels, basically to cover the open orders that we have in the books for Q2. We also see quite a strong start of Q2. The margin question, Pete, is that something you want to say, something you
Yeah. It's Matthew, it's of course always a difficult equation, so to say. It's a mix as you also mentioned. I think what you also see, of course, is demand in Europe has been very strong, and certainly also in countries where we have traditionally higher margins. I don't think that there is a very specific reason why we see that now, other than that we focus very much so on the specialty products. I think what plays out is that we have aligned with great suppliers, with great products, and the demand of these products is high. That is something that you see back in margins. Do you have anything to add there, Hans?
No.
No. That's basically the summary, Matthew.
I guess, just to follow up, the question would be then, is the margin expansion we're seeing very much a cyclical phenomenon of the current trading environment versus more structural measures that you may have been implementing?
No, I think, well, let's see that in the future. I think that we have consistently been able to increase our percentage margin. There will undoubtedly be some effect of the current circumstances, but it is also very much our policy to drive up the margin also by adding services in terms of formulation help, formulation expertise, further specialization in certain market segments. Be it in the industrial sector, very much so, for example, in construction and coatings, but also in the medical part of advanced materials, and similar trends in food, where we help our customers to formulate, for example, plant-based products. There's always an element of the current environment, but it is also a policy of our business.
Very good. Thanks for taking the time.
The next question comes in from the line of Rajesh Kumar, calling from HSBC. Please go ahead.
Hi, good morning. Thanks for taking my question. The first question is, when you, in your prepared remarks, you described gross margin increase due to mix and other factors. One of the factor was your own actions. You briefly alluded in response to Matthew's question what some of the actions could be. But if you could give some more color, that would be super helpful. Second question is, on the mix of growth. We've got a reasonable amount of color on the geographic mix. If you could give us some color by the end market mix, that would be helpful. If you find some growth surprising, I mean, I'm sure this level of growth is surprising in its own right. But just something that surprised you as a management team.
Finally, I mean, a lot of investors are nervous that at the moment, the comps are easy. Comps get more difficult. Chemical prices and shortage means that your gross margins have gone up, which cyclically will reverse in the coming years. You know, these earnings are sort of, they are frosted out by the supply chain shortages and price increases. We would love to hear your thought on the matter. Thank you.
Thanks. Thanks, Rajesh. Maybe to start with your last question, everybody's always afraid of the future, and that's concerning. That's why I also emphasized in my introductory remarks the strength of our business model and the focus that we have on helping our customers to formulate the significance of our IT and digital infrastructure that enables us to really see through all the markets that we are working in. I think also the megatrends in the world help us a lot to further organically grow. There are many factors inside and outside of our company that help us to grow organically, and we do that consistently for a number of years, or for many, many, many years, even.
Yes, this situation, these market conditions are exceptional. I think the underlying growth profile of IMCD is very strong. I'm always a little bit concerned about people that talk about cycles. Yes, of course, we are not immune to the economy around us, but I would like to emphasize again the strength of the business model. The mix of growth, your second question, and in particular, end markets, I would say, I make it easy on myself, but it is also true that, I would say all our markets, both the industrial and the life science markets, show very good growth. I wouldn't say that one segment of science do better than industrial or vice versa.
I would say that we across our business segments, we see this growth continuing. Also regionally, as Hans also pointed out, we see that same pattern. Now, I'll talk about our own actions on margins. I mentioned something already in answering your previous questions. Again, it has always been focus of IMCD and of our management, our team, our staff, you know, to add as much as possible value to both our principals and our customers. Also then enable us to deliver relevant services, and hopefully then also get a better price for that. Will the margin be always at this level or being better? We will see, but we will do our utmost to accomplish that. It's a focused, concentrated effort of IMCD to increase our margin profile. I hope this gives a bit of answers to your questions.
This is very helpful. Thank you very much. Really appreciate that. Just one follow-up on the first answer. When you normally talk about your growth rate, you say underlying market growth or mid to high single-digit growth, depending on the segment you're looking at. Right. We have been growing for five quarters, much faster than that on an organic basis. Have the underlying market exposures changed sufficiently that might be the norm, or do we start thinking of getting back to the underlying rates which you always refer to?
Well, again, this is a good question, and it's a question that I have difficulty to answer because it would, of course, depend on many factors outside of our control. I think we all agree that today's circumstances and the circumstances in the last quarters have been exceptional. I guess that at a certain point, we will return to some more normal situation. However, I want to emphasize again, let's say that what we can do ourselves in terms of our margin growth is something that hopefully we can continue also going into the future.
Thank you very much.
The next question comes in from the line of Suhasini Varanasi, calling from Goldman Sachs. Please go ahead.
Hello, good morning. Thank you for taking my questions. Just a couple for me, please. I think, there is a general worry about, you know, how GDP and general, economic environment has slowed a bit since the geopolitical situation changed in Europe. Also, there's a bit of concern around China, given the lockdown situation there. Can you give us some color on how the trends have changed through the quarter? Where did you see any kind of slowdown because of these two events in Europe or APAC in March, April? Not looking for numbers here, but just a general sense of how you think the environment has been.
Then the second one is, if you think about the last two years, I mean, definitely inflation has been a key differentiating factor compared to, let's say, the prior years and supply chain challenges. Of course, there's probably been an increasing focus on sustainability. Have you been seeing, let's say, structurally higher services for reformulations as clients maybe look to source alternative materials which are maybe a little bit cheaper or look to source alternative materials that are maybe a little more sustainable, and therefore that part of the service mix is basically increasing in your gross profit? Thank you.
Thank you for your questions. On your first question, I guess, there is, of course, I mean, if you look at China nowadays, of course, the lockdown has an effect on economic activity, and also an effect for us. We have to see how that effect will, let's say, how the lockdown will continue. As China is not a let's say major part of our business, the effect will be limited. Today, we also announced that we will discontinue our activities in Russia. We also have said about that that will not have a significant effect on our results. As to GDP slowdown, we have not seen an effect on that yet. We still have a strong order book.
We see the trends that we saw in quarter one continue also in the Q2 . In that sense, we see no signals that something will change yet. Your second question on basically what would sustainability and formulations, etc., change for us structurally. I think it's a very good question because we ask that ourselves, of course, and we act on that. I mentioned already that we further specialize in business segments and have dedicated teams for example, sustainable solutions in certain markets.
Where can we offer our customers formulations that are more sustainable, have a lower footprint, and hopefully then, of course, attract, let's say, structurally a service relation with these customers, long term. We do that in various business segments. Intensive seminars that we do with customers in business segments. Trying to offer them example formulations that they can use. I would say the... Let's say in that sense, the forward integration of what we do is increasing, and in that sense, also the relevance and the ability to, hopefully then, of course, also bind customers to us long term and, extract the value out of the market. It is a trend in the market and a trend that we definitely also react on. I hope that that gives a bit of an answer to your questions.
Yes, it does. Thank you. If you don't mind me asking a follow-up on that. I mean, does that, does the increase in, let's say, the need for reformulations because of the drive toward sustainability, does that also account for some of the, let's say, margin improvement trends that can probably sustain in the medium term? Thank you.
Yeah. That, of course, we hope that, and of course we also aim for that, but it is not the first, let's say, first reason for doing it, because in the end, we have to also help our customers to stay relevant in the market itself. Very often, it is the case what you say, that we then, you know, natural products in formulations, sometimes less hazardous products in formulations, but more, maybe more expensive ones. It's a mix, but I think a mix that finally also will result in better margins for us.
That's very clear. Thank you very much.
The next question comes in from the line of Chetan Udeshi, calling from JP Morgan. Please go ahead.
Yeah. Hi, thanks. I was just wondering, you know, within the M&A strategy, are you guys adopting it at all? I'm just referring to, you know, one of the U.S. guys announcing their intention to, you know, exit the distribution business, and they tend to do more the polymers and plastic distribution. Is that something that you are, you would be interested in, or are you happy with the current model? Then the second question was. I mean, we saw like, you know, in Q4 last year, I think there was one. I don't remember, was it a Dutch company or at least there was one European specialty chemicals distributor, which was taken over by a private equity company. Do you see for bigger strategic assets, maybe more competition today from private equity companies or other industry participants than was the case in the past? Just given, you know, how well IMCD share price has done, in general over the last three years.
Yeah. Thank you for these questions. On the first question, the divestment in the U.S., the polymer divestment, let me answer it in a general way. I mean, we look at all possibilities. We look in the framework of does it fit in our strategy? That means that it has to have a specialty focus and it has to fit in the strategies of our underlying business segments. With that view, we look at also at this one, so to say, that you allude to. Competition for M&A. Certainly, private equity, of course, is for a very long time active in the chemical distribution sector.
As a matter of fact, Brenntag was private equity-owned once. Of course we, as you know, now there are others. Azelis has been private equity-owned for a very long time. That competition has been around. I would say that perhaps now, since we were listed, and after us, Azelis has perhaps maybe increased a bit of appetite with others. I would say the level of competition for acquisitions is significant, but it always has been. I would say perhaps a little bit more than in the past, but we still feel that we are able with our strategy and our, let's say, way of dealing with M&A, that we still have a very good potential for further growth also in that area.
Understood. Thank you.
Thank you. Before we move to the next question, just as a reminder, if you would like to ask a question on today's call, please press star one on your telephone keypad now. The next question comes in from the line of Quirijn Mulder, calling from ING. Please go ahead.
Yeah. Good morning, everyone. Hans and Piet, congratulations with the numbers. I think that's a nice start of 2022. After a 20% organic growth last year, starting with over 30%, that is quite amazing for us, but okay. I have three questions. My first question is about the working capital. Can you give me somewhat more detail on, let me say, the breakdown in that working capital? Is that inventory? Is that debtors? Is that somewhat biased toward the debtors, I think? With regard to 2021, when we discussed the shortage of certain products, is that still the case in the market? Are there still products which are not available, where there's some more backlog coming up, that if you were not able to deliver? My third question is about the pharma. Pharma was somewhat lagging behind last year, related to COVID against the flu. Is that picking up? Is that growing faster this year than it was last year? Those are my three questions for this moment.
Hans, will you do the first one?
Yeah. Quirijn, thanks for the questions. It appears the same as what I said before. The biggest driver of the increase in working capital is related to increased debtor positions. If you grow your top line so much as what we did, at the same time, if you keep your debtor days at a low 60, then the debtor position is basically driving the working capital days of the total. Stock and creditors, they are there to fulfill the obligations from open purchase orders. As you might have seen in the past, there is always a bit of a nice balance between what we have on the inventory side and the trade payable side. You can absolutely assume that the increase is mainly driven by increased business activities leading to additional debtor positions. There's no delay in payment from debtors, so a healthy debtor book.
The M&A impact was limited.
No, the EUR 75 million excludes M&A.
Yeah.
This is typically only operational working capital growth. The M&A impact is on another line in the cash flow statement.
Yeah. Okay.
It's like for like.
Okay, on the other two questions, shortages, I would say, there's always in such a large portfolio, some issues. It doesn't really affect us now. What we see though is still lead times that are longer. And so it's more a question of a burden and stress on our customer service departments to deliver orders in time and to plan orders, etc. Because supply chains are still disturbed. Here and there, we have some force majeures still with our suppliers, but I would say that this has eased somewhat over time. It's improving. On pharma, I think generally remark on pharma is that it is of course extremely stable business in terms of growth pattern. Yes, they are totally back also.
Thank you.
Thanks.
The final question comes in from the line of Dominic Edridge, calling from Deutsche Bank. Please go ahead.
Hello. Thanks for taking the question. Just a couple from myself. Just firstly, looking at your employee numbers, obviously, they're up by around, I think, about 18% in the quarter. And I think your gross profit was up around about 36%, FX adjusted. Just on the surface of it, the gross profit per FTE is up significantly. Is that sort of measure that you think about or something that really doesn't make a lot of sense, just given, as you say, all the mixed effects that are going on?
Just on the employee side as well, were there any sort of particular impacts you would highlight in terms of either the lockdowns, particularly obviously in China or, actually, COVID generally with sickness in employees in, say, Europe or North America that had any impact on the operations in the quarter? Secondly, just as a more sort of general point, obviously with everything that's going on on pricing, et cetera, you know, can you just sort of talk about maybe the conversations you have with your customers at the moment, and whether you're seeing any potential impact on what their plans are, given the fact the pricing is very high. Do you get the sense that anyone is slightly pulling back on any new product launches or even, looking at existing products and trying to sort of replace, some of the ingredients, just given the level of cost inflation there? Thank you very much.
Pete, shall I take the first one?
Yeah.
Dominic, thanks for the question about the employees and basically for sure, internally we look at efficiency of our local organizations. I think you might understand that the scale in our business helps. If we can add complementary suppliers to existing product portfolio, you as a company automatically become more efficient because you hardly need to invest in additional new employees joining. What we track of course is the efficiency levels per company. We internally benchmark. We look at where do we add and how do we add people, and yeah, there is a bit of an efficiency impacting there. I think your second question, Piet, you-
Generally of course, looking back at this whole pandemic, of course, we have seen, first of all, of course, that the model of remote working works, but that's not different from many others. Many people coming back. What we see today now of course a severe lockdown in Shanghai, which affects our people. We can all read it in the papers and that's of course something that also they have to undergo. We have daily contact with them, and to conduct businesses under these circumstances is extremely difficult. By and large, COVID has not had a... Fortunately, I mean, everybody almost had it I think, but it didn't mean severe as far as we know, a severe health consequence for our people. I can only say very, very proud and happy with how everybody performed under these difficult circumstances. On pricing or pulling back of products out of formulations, I don't see that. I think that suppliers are very also very responsible in the way they want to service their customers. I think the problem more for them is to predict, you know, insufficient quantities. I don't see the trend that, let's say, the thing that you mentioned here. That's not a problem of ours.
Okay. Thank you very much for your answers.
Thank you. That was the final question in the queue. As a final reminder, if you would like to ask a question on the call today, please press star one on your telephone keypad now. That was star one on your telephone keypad if you would like to ask a question. We do have a follow-up question coming through from the line of Quirijn Mulder calling from ING. Please go ahead.
Sorry, guys. My question is about the organization. Given that immense growth in the last couple of years, how much pressure is there on the organization to handle all this, let me say this bigger size? Is that something you are looking at? Is that something is a concern for you? Maybe you can tell me something about it.
Yes, Quirijn, of course, but of course it's to a certain extent a pressure, but remember that we have a very decentralized model and so local needs will be answered locally. What we have to do, of course, is to offer the right infrastructure, IT wise, but also managerial wise in terms of the regional management and the management of the business groups. Yeah, so far we have been able to do that. We compete for talent. I would say that is a constant in our industry. So far, I think, also emphasizing our open culture, our international culture, our entrepreneurial culture has enabled us to attract very good people in many parts of the world.
I think currently, let's say, liberalization of travel possibilities help us to reconnect. I would say, yes, it's, let's say, the HR part of our business is extremely important, the cultural aspect, but so far we have been able to cope with the growth and, in particular, also our geographical expansion. I hope that gives you some color on this.
That's great. Thanks.
Thank you. That does conclude the question and answer session for today. I shall hand the call back across to yourself, Pete and Hans, for any concluding remarks.
Yes. Well, thanks, Courtney. I thank everybody very much for their interest in IMCD and their questions. Of course, there's always a possibility of one-on-one with particularly Hans. I look forward to see you in the Q2 and wish you a very good day.
Thank you very much.
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