Ladies and gentlemen, thank you for holding and welcome to the Q3 2021 Analyst Call of IMCD. During the presentation, all participants are in listen only mode, and later we will conduct a question and answer session. I would like to hand over the conference to Mr. Piet van der Slikke. Go ahead, please, sir.
Yeah, thank you. Welcome, everybody. As usual, I'm here with Hans Kooijmans, our CFO, and together we will answer your questions on our results over the first nine months. The message of strong demand that we spoke about at the half year results continued in the Q3. The acquired businesses last year and this year performed fully to expectations, and this resulted in an outstanding result in this quarter and year-to-date. Operating EBITA grew 51% over the full first nine months, and on a constant currency base, even 54%. Cash earnings per share increased 44%. All regions contributed to the growth, and this growth was in a strong way organic, and of course also the result of acquisitions, and was also the result of volume and price increase.
As you know, the markets are highly volatile and we experience, like everybody else, supply chain and availability issues. Prices of many of the products we deal with increased, as did logistics costs. However, we coped quite well with these difficulties. We were most of the time able to serve our customers and price increases could be passed on to the market. We will continue to do strategic acquisitions in order to enter new markets and to strengthen our product offering. IMCD advanced IT and digital infrastructure has been a key factor in our success as a company and has, of course, been crucial during these exceptional times. It enables us to reach out to our customers in various ways and continue to help with the formulation of their products.
IMCD has this year been the first to organize virtual exhibitions in all our business segments in this, and we were able to, in this way, connect with many thousands of customers discussing trends in the market and product advice. We will continue to invest in IT and digital capability. We need to see how long these exceptional market circumstances will continue, but it looks like well into next year. Markets can change, but we keep relying on our strong business model and are confident that we can keep on growing through cycles. In this way, we look very optimistically to the next period. Now, Hans will take us through the numbers.
Thank you, Piet. Good morning, ladies and gentlemen, and as usual, I will briefly summarize IMCD's first nine months results before we go to the Q&A session. I would like to start on page nine of the presentation. As you can see, FOREX-adjusted revenue increased 24% compared to last year, and gross profit increased with 30%. This 30% gross profit increase is a combination of 19% organic growth and 11% increase as the result of the first time inclusion of acquired businesses. Gross profit and percentage of revenue increased 1.2% to 24.5%. This increase is the result of gross margin improvement initiatives inside IMCD, changes in local market circumstances, the impact of newly acquired business and the usual fluctuations in our product mix.
FOREX-adjusted operating EBITA increased 54% to EUR 286 million, an increase of close to EUR 100 million compared to the same period of last year. This increase was a combination of substantial organic growth and the first time inclusion of acquisitions. The conversion margin, calculated as you know by IMCD as operating EBITA in percentage of gross profit, was 46.1% in the first nine months of 2021. A substantial improvement compared to the 39.1% in the same period of last year. The same positive trend we saw for the net result before amortization and non-recurring items, where we report an increase of more than 50% to EUR 202 million. Free cash flow of EUR 205 million was healthy, but we report an increase of EUR 36 million compared to last year.
In the first nine months, we report EUR 82 million of working capital investment. An investment that is more than logical, considering 14% organic revenue growth. This working capital investment is mainly due to increased debtor positions as a consequence of increased business activities at the end of this quarter. Cash conversion margin of 71% was lower than the same period last year, again, because of the substantial organic growth of IMCD's business activities. Year-to-date cash earnings per share were EUR 3.54. A FOREX-adjusted increase of 47% compared to last year. On the last line of this page, you will notice a 16% increase of our number of full-time employees, and most of this increase is the result of new employees as a result of the acquisitions done.
On the next slide 10, you will find gross profit, operating EBITDA margin, and conversion margin per operating segment. EMEA, in the first column, reported 21% FOREX adjusted growth, profit growth, and 37% operating EBITA growth. Q3 was another strong quarter for EMEA, whereby most of the reported growth in EMEA was organic. Further, operating EBITA and percentage of revenue improved from 9.9% to 11.3%, and the conversion ratio in EMEA increased to 43.8%. In the second column, the Americas, where we report 22% FOREX adjusted gross profit growth and 27% operating EBITDA growth. Also in the Americas, most of this growth was organic. Operating EBITDA margin and conversion margin both improved. Asia-Pacific, in the third column, reported 80% gross profit growth and 148% operating EBITDA growth at constant currencies.
Operating EBITDA as a percentage of revenue and conversion margin both improved substantially compared to the same period last year, due to a combination of very strong organic growth and the impact of acquisitions done in this region, like Signet in India. In the last column, you will find the cost of the holding companies. On page 11, a summary of IMCD's free cash flow. Free cash flow was EUR 36 million higher than last year, with a conversion ratio a bit lower than last year. I explained the logic of this higher working capital investment due to strong organic business growth earlier in this call. CapEx was low, in line with our asset-light business model. On page 12, a short update on net debt and leverage. Compared to the end of December last year, net debt increased a bit.
This increase was a combination of, on one end, healthy operating cash flows and on the other end, cash outflows as a result of acquisitions made and a dividend payment of about EUR 58 million. Reported leverage, defined as net debt divided by operating EBITDA, including the full year impact of acquisitions made, was 2x EBITDA at the end of September. Leverage based on the definitions in our loan documentation was 1.5x EBITDA. Last but not least, on page 14, you will find our outlook for 2021, where you could read that we expect operating EBITDA growth in this year. That was a very short summary of our year-to-date financials, and Piet and myself are happy to answer any questions that you may have. Back to the operator. Yeah.
Thank you, sir. Ladies and gentlemen, we will start the question and answer session now. To be registered for questions, please press star one on your telephone. So that's star one for your questions. Go ahead, please. The first question is from Mr. Matthew Yates, Bank of America. Go ahead, please, sir.
Hey, good morning, gentlemen. A few questions, please. The first one just around logistics. On Univar's earnings call, they made the point, I think it was four times in fact, that they really benefited from owning trucks. Can you talk about whether you found actually your model to be a disadvantage in the quarter or how you're able to cope with that? The second question, just on the sequential evolution of the business.
Looking at Q3 versus Q2, you managed to grow EBITA in the Americas. I'm guessing that's not the usual seasonality. If you can just talk about to what extent that is market conditions versus the way IMCD was executing. In Asia, the margins are down about 150 basis points at the EBITA level sequentially. I guess we're still trying to get to grips with how something like Signet operates. Is that normal seasonality or is there something going on with the mix or the cost base in Asia in the last three months? Thank you.
Yes. Thank you, Matthew. On your first question, logistics, I'm not totally sure how, let's say what the facts are behind the statement of Univar. I also heard it from Brenntag. I think we have experienced, as you can see also in our results, no particular issues with our model of using third-party logistics. You have to ask Univar what the big benefit has been, because you have to compare that then to what others do. We have experienced no particular problems with logistics other than that. Of course, prices go up, but we pass these price increases on to the market. For us, no specific, let's say, negative results from the fact that logistics is tight. I think in the Americas, Hans, you take that question.
Yeah. I was not sure if I exactly understood your question there, Matthew.
That's all right. I'll repeat it. Usually, we would expect Q3 profits to be lower than Q2 because of seasonality. I guess that was the case in EMEA, but it wasn't necessarily the case in the Americas. I'm just wondering to what extent. I know it's not a normal year by any means. Is that market conditions or is that something more specific about the way IMCD is executing?
No, I think it was a combination of, I think the way we executed. I think we added a couple of new businesses to that structure that where we benefited from. You're right with respect to, typically, the ratios in Q3 are a bit lower than what you see in the previous quarters as a result of having the same fixed cost base and having the holiday period in July, August in most countries. That is what you also saw in EMEA. Other than that, nothing special in the Americas.
I think the same goes for Asia in terms of margin, slightly lower operating margin.
No, I think.
I guess.
No, I think.
Sorry, Asian revenue was up in Q3 versus Q2. You didn't have a sequential decline in revenue. Therefore, I'm wondering why the margin was sequentially lower.
No, I think there's a bit of local changes in product mix. I think also comparing it a bit with the strongest quarter last year, Q3. Asia Pacific was pretty strong in Q3 already, but nothing specific there.
Okay. All right. Thank you, guys.
The next question is from Mr. Piet Olofsen, Kepler Cheuvreux. Go ahead, please.
Yes, good morning. I have two questions. The first is on the organic gross profit growth. For the first nine months, you mentioned a number of 19%, the same number you mentioned for the first half. For Q3, it has remained around the 19%. Given the global supply chain challenges, could you provide some insight how much volume growth contributed to this 19% organic gross profit growth? Then the second question I had is related to variable compensation. We heard Brenntag talking about this, significantly up from last year, given the strong results. How is that for IMCD? Do you see a significantly higher variable compensation compared to last year? And if so, could you quantify that?
No, we don't quantify it, I think. No, basically, our structure, our bonus structure is very often, of course, if you make your budget and you get your full and you make your targets, then you make your full bonus. It is no surprise that many people will make a full bonus. I guess that is the short answer to it. We are happy with that, of course. Hans, anything to add to that?
No, no.
No.
On volumes, Piet, that is always a bit] of a more difficult question in specialties, because we always talk about a mix with an enormous amount of small volume products and a few products with a bit of a higher volume. I think in general, it's fair to say that we sold much more quantities than last year. There is quite some volume growth in the portfolio if we look at individual suppliers, market segments and regions. To put a percentage on that is something that we don't do. At least we don't publish these volume type of things because it hardly makes sense in our business.
Because if we do a food flavor where we sell in kilos and we do a coating resin where we sell in tons, then you could win a substantial food flavor business, adding a lot of margin and lose 1% of your volume on the resins, changing more or less the whole picture that you then present to the market. On the specialty side, it hardly makes sense to talk about, in general, the volume component. If we look at individual businesses and suppliers, it's not only pricing impact that we saw, but also quite some volume growth year to date in the first nine months compared to last year.
Okay. When you would look at the demand in Q3, would you say it was reasonably strong across the board? Or, have there been exceptions in some areas where you saw some softness?
No, I think it's strong across the board, whereby the strongest segments, the industrial segments, were. Also the life science sections showed strong demand.
Okay.
Most of it. Yeah.
That's helpful. Thank you.
The next question is from Mr. Chetan Udeshi, JP Morgan. Go ahead, please.
Yeah. Hi, thanks. So three questions, maybe two. So first one was, I'm just looking at the contribution from acquisitions on gross profit. You know, it was 9% in first half 2021. But I think in the release today, it's mentioned to be 11% for the first nine months, which suggests that in Q3, the acquisition contribution was probably 15%-16%. I'm just wondering what drove that step up in acquisition contribution on gross profit line in Q3 versus what we had seen in first half. Because I don't think there has been any material new acquisition done in Q3. So that was the first question.
The second question was, you know, if I again, you know, when I look versus Q2 and to some extent, maybe similar question to Matt's question, but the gross profit is actually on an absolute basis, down EUR 3 million versus Q2, but the OPEX is up EUR 4 million versus Q2. Now, I know these are small numbers, but I'm just wondering, is there any shift in maybe just the pricing versus OPEX evolution between the two quarters, will be good to know. Thank you.
Perhaps to answer your last question, that we just spoke about, increased bonus payments. What you typically see during a year is that people build their bonus accruals during the year, and the closer they get to year-end, the more they put it up to more realistic numbers based on the assumptions for the remainder of the year. In Q3, there was a bit of an uptick on bonus accruals. I think your first question about the M&A growth, margin growth, I think you're right that if you look at the additional acquisitions that we did, perhaps do really move the needle. As you can imagine that we acquired Signet last year, that came into our numbers from September onwards. Signet plays a quite important role of the M&A impact that we report here today.
No, I think it's just a question of there was a step up on contribution from M&A on gross profit line in Q3 versus the first nine months of this year, and Signet was clearly contributing to that step up in first six months, and it is contributing to the step up in Q3 as well. I don't know why we suddenly see this bigger contribution in Q3 versus first six months of the year. I don't know.
Yeah. I think that has to do among others with the, let's call it the seasonality or the COVID impact on the business numbers of companies like Signet in the year before.
Mm.
What we do is a company like Signet, as an example, was pretty hard hit in the Q2 last year because of shutdowns and they had a very strong Q3 last year, and that is reflected also in comparable numbers. There's a bit of seasonality in the acquired businesses, how we spread that over the year. That could perhaps explain a bit your question. On top of that, for sure, the other acquisitions that we also had during these periods.
Okay. Thank you.
The next question is from Mr. Dominic Edridge, Deutsche Bank. Go ahead, please.
Hello. Thanks for taking the questions. Just two from myself. Just firstly, with regard to going back to sort of customer demand, would you feel you're in a position at the moment to sort of fulfill all customer demand, i.e., from both existing and new customers? Or are there still constraints where you're having to sort of turn away, as it were, certain amounts of business, just because of supply chain issues? Secondly, just in terms of thinking about margins and about how your business develops going forward.
Clearly, we're in a very particular situation with demand and with supply and with pricing at the moment in terms of what that does to the both margins and conversion ratios. Once we adjust for the likes of Signet, would you say there's anything that's fundamentally different today to where you were in 2019 in terms of either the product mix or the way that you operate that should fundamentally shift the balance of where you'll be as and when things maybe start to get more normal again in the future? Thank you very much.
Yes, Dominic, on your first question, customer demand and whether or not we had to turn away customers, I think that's not the case. What is the case, of course, is that sometimes we have to delay, because of deliveries to us, the fulfillment of orders. In the end, of course, everybody gets their products. It's clear and everybody knows it from the market that markets are tight. Availability is a problem. There are force majeure calls by principals, by suppliers. So far, fortunately, we also because of our strong position with our suppliers, we are able to fulfill their demands, albeit not always, within the, let's say, period that everybody would like to see.
On your second question on our business model and let's say there's exceptional circumstances and what happens if these return to more normal. I don't think that there's a crucial change now in the markets for forever, so to say. I guess that markets will come back to a more normal situation sometimes in the future. Then, of course, as I said also in my remarks starting this conversation, is that you know, the business model that we have is strong. Is consistently executed. We are aiming for growth and focusing on growth through these cycles.
Now, of course, we have exceptional growth, but also when markets turn back to more usual patterns, then we absolutely will also see growth in our business. I think the important message is that the business model of IMCD remains extremely strong, that we are very positive that we can also grow in normal circumstances. Yeah, I think the good thing of the story is that we thrive in good, very good times, but also when times are less good, we also do very well. I think that's evidence of the strength of the model and the execution of our strategy.
Thanks. Can I just ask?
Yes.
Yeah. I just have one follow-up on, just on the conditions question. I mean, in terms of thinking about, you know, when what will drive that return, is it just one of those things when we stop talking about it, is probably when things will get better again, in terms of just all these things that are currently blocking the supply chain? Is it just one of those things where it'll just take time, at the end of the day rather than anything, a big bang solution, as it were?
Yeah. I think your guess is as good as mine. I think that we all were surprised in suddenly seeing these supply chain issues and shortages, a very high demand and maybe also triggered by the fear of missing out, to a certain extent. I think it very much depends on probably on the willingness of the major economies to open up again. China, of course, is an example, but also you see also these clogging up of imports in the United States. Yes. I think at a certain stage, this will return to normal, but I'm not sure how fast that will go and how long this will take to normalize in 2022.
Okay. Thank you very much.
The next question is from Mr. James Rose, Barclays. Go ahead, please.
Hi there. I've got two, please. The first is just to touch on what was asked before. When there are no longer product shortages or availability issues in the market, do you think your current gross margin levels, say 24.5%, and conversion ratio is about 45%, do you think those figures are sustainable in the longer term? Secondly, just on the APAC business, are you seeing any particular impact from the lockdowns or China's restrictions on electricity and environmental regulations? Appreciate your thoughts there. Thank you.
We will, of course, on your first question, work very hard to keep these margins. I think we have to be careful not to give predictions about the future, as I always am careful about that. I think our focus as management is very much on strengthening our margins, on adding value in the chain, allowing us also to keep these margins, to align with the winners in our industry, to offer digital solutions to our customers. I think this whole package will give us at least the strength to also justify the margins that we have and even maybe improve them. It's not only a function of the present day circumstances, I think.
The second question was about shortages, Asia Pacific, the impact of lockdowns. Yeah. I think certainly this is a drag on also on our suppliers and principals that rely on raw materials, for example, coming from China. In the chain, that certainly plays a role. It depends on the product line, but it plays a role. Of course also it explains the availability issues and allocation that different customers and different partners get. That certainly is part of this whole situation we're in.
Okay, thank you.
The next question is from Mr. Rajesh Kumar, HSBC. Go ahead, please.
Hi. Good morning. Thanks for taking my question. The first one is on the margin front. At the moment, your industrial sector is seeing sequential recovery. I'm assuming that's still a bit faster than healthcare. That should have had some dilutive effect. Can you run us through some of the moving parts of that mix headwind versus what are the other factors that might have offset it? The second question is on you always talk about growth has potential to cross-sell products across different suppliers. I'm assuming that sort of you know synergy has been a bit tricky in the last 18 months with a lot of travel restrictions.
You're not able to go and see a lot of suppliers and customers physically as you would have normally. Would you see some of those tailwinds to improve as we go through the next couple of years? Finally, on M&A, I appreciate that you have done M&A during the pandemic, which is incredible. There are also certain geographies where you need to do physical due diligence. Has it been a bottleneck in executing some of the ideas you might have had in those geographies? Thank you.
Yeah. Thanks, Rajesh. The line was not great. The first question I think Hans will take, but he will probably come back to you and ask exactly what you mean. On the second and the third question I will take. The cross-sell, very important for us, as a part of our strategy. I think we have been able, despite the lockdowns, et cetera, to make, let's say, that case for cross-selling. We spent a lot of time on very focused digital marketing, which is not just randomly sending out emails, but focus on needs of customers in the different business segments, with details, let's say, formulation guidance and advice.
As I said before, we've held some very successful virtual events. Virtual what we call virtual exhibitions, virtual visitors, where people can enter in a virtual world, so to say, and go to the different offerings in that virtual room to get advice, to speak with technical people, to get formulation advice, et cetera. Let's say the digital tools help us, of course, also to connect with customers to give us leads and then also enable cross-selling. Again, that is an important part of it. Acquisitions, we're working on them. We have worked on them. We will no doubt announce more in the near future.
Yes, it's always better, of course, also to sit down with potential, let's say with owners of potential targets. We look forward to do that again, but fortunately, as of now, we're still able to connect. Here, of course, also the video conferencing has to a certain extent changed the world, but and also our world. That is still a big tool. That doesn't take away that it is also nice if we could visit again and see people. Hans, on the first question, maybe you should ask some clarification.
Yeah. Rajesh, because the line was so bad in the beginning of your question that I think both Piet and myself, what I picked up, is headwind on the pharma side and positive on industrials, but I'm not sure what the question then is.
Yeah. Sorry about the line. Just trying to figure out what has been the mix effect on gross margins and what has been the tailwind from, say, travel cost reduction, you know, or costs regarding if the economies would be open, would you be hiring a few more people? Looking at the margins ahead, should we be seeing a bit of mix-led dilution or travel-led dilution on margins through 2022 and 2023?
Yeah. I think it's fair to assume that given the current COVID situation in most countries is that the travel costs are still lower than what we reported there in, what was it? 2019. That's the last normal year. I think going forward, I doubt if it will go back to that same level of costs. There will be a bit of consistency on the saving there. But for sure, part of the cost will come back in the future if markets open up again and if the exhibition circuit will start again and things like that. On the other hand, there's also a strong belief that our commercial and technical people don't travel for fun.
That also should be something coming out of all these travels and meeting and greetings that they do with potential new suppliers and customers. I think on the one hand, yes, costs will come back to a slightly lower level than what it was in the past, but I think it also should lead to new business. The net net, I don't know. I hope it will be a positive one.
Thank you very much.
The next question is from Mr. Quirijn Mulder, ING. Go ahead, please.
Quirijn here. Good morning, guys. On Signet, can you maybe give me an idea about the progression of that firm, given, let me say, that the importance of the acquisition.
Also to indicate about their expansion and possibilities. Is there also something like involvement in COVID pills or whatsoever? Is there anything to say about the developments there?
Well, maybe again, to summarize for everybody, Signet is the number one distributor in India to the pharmaceutical industry and represents all the major excipients producers in the world. As you know, the country is a very important producer of pharmaceutical products. That position is still very strong. Going very well. We expand together with Signet in neighboring countries, in particular in Bangladesh, but also are looking at the Middle East, where our pharma business is strengthening. I think you should see this as a piece of our global strategy in pharma, where we are, I would say, by far number one in pharmaceutical excipient distribution. Signet is an important piece of that.
On your question with COVID medicines. I'm asking that same question, to be honest. I see some very positive developments there also in terms of some of the big producers making medicines. No doubt these will also be produced in India with a strong role for us to play there as well. Let's see how that pans out. It's early days. I'm very positive on Signet's position in the markets in South India. I think we made a very good acquisition there.
Okay. Thank you.
Ladies and gentlemen, if there are any additional questions, please press star one. That's star one for any additional questions. Go ahead, please. There are no further questions at this time.
Okay. I thank everybody for the interest in the company, and I wish you all very, very good day. I see we all see you and hear you and speak to you in the next quarter.
Ladies and gentlemen, this concludes The IMCD Analyst Call. Thank you for attending. You may now disconnect your line. Have a nice day.