Good evening, ladies and gentlemen. Thank you for holding, and welcome to the analyst call of IMCD NV. During this call, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. I would now like to hand the call over to Mr. Piet van der Slikke, CEO. Go ahead, please, sir.
Good night, everybody. I'm sitting here with Hans Kooijmans. In front of you, I guess you have the IMCD analyst presentation regarding the acquisition of Signet. I don't want to take you through the whole presentation, but we'll give you some headlines about the strategy and the rationale of this acquisition. As you know, our business group pharma is a very strong part of IMCD. We are, in many parts of the world, present in the distribution of pharmaceutical excipients, products that are used in tableting and all kinds of creams and gels. Our supplier base are mostly companies based in the U.S., in Japan, in Europe, and we have a lot of formulation expertise in this field. Our strategy has been to globalize this business as much as possible. We have, in the last 12 months, done quite some acquisitions in this space.
You can see that also in the pack. We acquired businesses late last year in South Korea, in Switzerland, in Colombia, in Israel, recently in China, and also recently in South Africa. We have very strong technical capabilities. We have labs in Shanghai, in New Jersey, in the U.S., in Germany, and in India. Our central pharmaceutical business group is quite strong. One of the largest, if not the largest market for pharmaceutical manufacturing is India. Although we have a presence in India, it's not large, and we always have looked for opportunities to expand our presence there. The company that we speak about today is Signet. Signet is a company that has been formed and founded in 1986, and has grown into becoming one of the leading pharmaceutical excipient distributors in the country, in India.
It has done so organically. It hasn't done itself any acquisitions as far as we know. We know this company, the founder, and the key management already for many years. We have always contemplated the possibility to acquire the business if it would come for sale. This year, that was the case, so we participated in the process, and that fortunately has been successful. Signet is, as IMCD, an asset-light company. It is based in Mumbai. It is working with all the leading excipient producers, suppliers in the world, or many of them, not all of course, and is serving the Indian pharmaceutical manufacturing markets. It's a company with a very similar DNA as IMCD, so it fits perfectly in our global setup. Now, the deal structure, Hans will probably say something about that in a minute.
The deal structure is that we buy the company in two pieces. The first tranche is 70% of the shares, and the second tranche is 30% and that will be acquired finally, at the latest, in 2024. Sorry? The founder of the company will continue to supervise the company and the key management will be in place. Finally, on this part of the presentation, I can say that the company will continue as Signet for a few years. Will be part of our global business group pharma. Hans, do you want to add something to the deal structure? No, I think everybody could read in the data pack that we provided a summary of the transaction details, and I don't think it makes sense to read them out loud.
If there are any questions around it, then perhaps most important is that we expect the closing of this transaction, subject to the customary closing conditions and regulatory approvals, is expected to take place in the Q4 of this year. Perhaps to add to that, the company is predominantly active in India, but has also some business in adjacent territories in Bangladesh and the Middle East and in Africa. We don't expect cost synergies in this business. As often within IMCD and its acquisitions, we hope to benefit from each other's knowledge of course, the market, but also of the supplier relations that we have. We hope we can also expand in adjacent markets jointly. I guess that's a short summary of the deal. Great strategic rationale, a fantastic company, a great fit for the business group pharma.
It makes us a leader in pharmaceutical excipients distribution in many parts of the world. What I would suggest is that we now give the floor to you for additional questions.
Thank you, sir. Ladies and gentlemen, we're starting the question- and- answer session now. If you have a question or remark, please press star one now on your telephone. Star one for your questions or remarks. Go ahead, please. Our first question is from Mr. Mutlu Gundogan of ABN Amro. Go ahead, your line is open.
Yes. Good evening, guys. Congrats on the acquisition. Looks like a nice one. I have four questions. If it's okay, I'd like to go through them one by one. The first one is the profitability of Signet. They have an EBITA margin of 26%, which is 3x more profitable than yourself. Can you explain how they are able to be so profitable?
Yeah. Mutlu, Hans here. You're right, the EBIT margin is higher than the group average. It's a combination of, on the one hand, a cost structure in India that is on average much lower than what we typically see elsewhere in the group. The other thing that we see is a gross margin percentage that is slightly higher than the group average. By in itself, that is not an abnormal margin. It is also a margin that we see in various other countries and territories in the group. These two create an EBITA margin that is above group average.
Right. I saw in a presentation that Signet is also asset-light, just like yourself. Does that mean that their returns are also 3x higher than IMCD's?
Good question. Sorry. Okay. I missed you there as well.
Yeah. If we, for example, look on return on invested capital, what I'm actually wondering is the capital intensity, given the fact that you mentioned it is asset light as well. I mean, you are asset light, Signet is asset light. Does that mean because their EBITA margin is 3x higher than you, that their returns are also three times higher?
Yeah. You're right with respect to their EBIT margin. They outsource logistics, and that means that basically, if you look at their balance sheet, the most important thing that you'll find there is a working capital. Yeah. That is basically the only investment people need to make in case they grow their business.
Right. Okay. A question about growth rates. Can you talk a little bit about historical growth rates, about future growth rates that you expect from the business? I assume that since it is based in India, emerging markets, it might have a lot of high growth rates.
Yes. I think you can find some of that on the website of the company. Maybe as an addition to the market that they serve, they serve the markets with customers that produce for overseas, so for export. Western markets, U.S., Europe. They are their customers. Certainly, you can expect higher growth rates than in the mature markets in Europe and the U.S. Past growth rates were very high. I can't predict, of course, let's say, the future growth rate, but it's higher than usual in our business group.
Yeah. Okay. Final question. No price has been mentioned in the press release, in the presentation. We know that you historically have paid around 10x EV/EBITA, obviously that can differ depending on the type of business. Can you give us an idea of what you're paying here?
Yeah. Mutlu, Hans here. We agreed with the seller not to disclose the purchase price. I think based on the data that we provided in our half year results and in this press release, I think you could calculate easily what the valuation was. Perhaps to help you there a bit, at the end of June, we reported 2.9x leverage under IFRS with EUR 768 million of net debt. This transaction will add an EBITDA level of EUR 39 million. As you know, in the IFRS, if you have control, that on the one hand, you need to fully consolidate the company and the results of the company. At the same time, you need to include the remaining 30% of the purchase price as a net debt obligation on your balance sheet.
In the pro forma leverage of 2.8x that we report, that includes the expected valuation of the 30% that we will pay in the second tranche in 2024. I think with these data points, you could make a bit of a guess of the valuation.
Okay. Thank you very much.
Next question is from Mr. Peter Olsthoorn of Kepler Cheuvreux. Go ahead, please.
Yes. Good afternoon, gentlemen. Brief follow-up on this question on the leverage. It includes the contingent payments, but is it based on the definition in your loan documentation, i.e.?
No
IFRS 16?
No, this is IFRS-based. It's all IFRS.
Okay.
Under the loan documentation, the definitions are, of course, different, and that results in a much lower leverage level under the loan documentation.
Yeah. This is including IFRS 16. You refer to the 2.9x at the end of the H1 . Basically, you're maintaining the leverage at the same level where it was. Have you considered going higher? Considering the room that you have, based on your governance. By considering the track record that you have built in recent years as a listed company in terms of growth and cash generation. Why not maybe going a bit higher?
We considered all options, Peter, but we felt in the end that this is the best choice and we can debate. I'm not sure if we should do that now for everybody, but we can debate what is the ideal number that we felt, given also our future ambitions, that this is the right number.
When you refer to future ambitions, basically, that means you want to keep some firepower for other deals.
Yes.
Okay.
Yes.
Clear. Thank you.
Next question is from Mr. Matthew Yates of Bank of America. Go ahead, please.
Hey, good evening, everyone. Apologies, I'm still trying to play catch up on some of the documentation. I got two questions. I guess the first one is around the margins. It is somewhat unusual that we're used to you buying a lower margin business and bringing it up to your level. In this instance, you're obviously buying something that much more profitable. Any value creation has to come from the top-line opportunity. Are you able to elaborate a little bit on that? Secondly, to the extent you can comment just on the transaction process, it is not unusual for owners to retain minority stakes in some of the assets you've bought over the last few years. Can you just talk a little bit about maybe their motivation for wanting to retain some exposure?
Is there any kind of earn-out payment here that could influence the ultimate price you're paying?
Yes. On your first question, I think it's not, let's say, normal or always the case that we only buy companies with a lower EBIT margin. I bring to memory also the business we bought and the first business we bought in the U.S. was also very high EBIT margin. Not a size this one, also high. You're right. It's clear that future, let's say, growth and synergies need to come from growth of revenue, but also from addition of new suppliers to the business, because we have a fantastic franchise there that allows also to plug in new suppliers. Also, the benefit that we will hopefully get from this company, in other markets. I point out that we started in the Middle East a few years ago in Egypt, also in pharma, which is doing very well, but also in the Gulf region.
I'm pretty sure that, so we also will see synergies there, Bangladesh. I think you should see this growth local market, but also growth in adjacent markets, as our objective.
On the retained stakes?
Yeah. Sorry, I forgot that one already. We like in this kind of case where the company has been in the hands of the founder for so long. It's our wish to create a situation that we have continuity on all fronts, so to say, but also within the company, having the ability for us to learn a bit more about it and have then a more gradual transition to us. As you know, we did that also in the U.S. when we started in the U.S. It's a policy that works well for us. I think the founder has also an interest in seeing to it that his child, so to say, also flourishes in another surrounding. These are the major factors for us to structure the deal as we did.
I'll just squeeze in a last one. In the context of asking shareholders for new capital today, is there any comment you can make around current trading and how it's developed since the last earnings call?
No, that's not possible, unfortunately.
All right, guys. Thanks very much.
Our next question is from Mr. Tom Burton of Berenberg. Go ahead, please.
Hi. Good evening. Good evening, guys. Thanks for taking my questions. I've just got follow-up questions really. The first one is regarding the new supplier relationships that I guess you're acquiring with this transaction. You've talked about the business representing the world's leading excipient producers. I just wondered, in terms of what you're getting that's new there, are you able to give us a share of what proportion of those you already work with versus which supplier relationships are new, for example? I'm just interested in the magnitude of the access you're getting to new suppliers and a bit more color around the revenue synergy there would be helpful, please. Just another question regarding, I suppose, India specifically. Clearly, what's going on more broadly regarding the pandemic and obviously the extent of case numbers and so forth in that country.
I just wondered from a risk profile perspective, whether you could reassure us or give us any color as to whether the business has faced any noteworthy issues vis-a-vis the pandemic and so forth, and whether it's seeing any issues at present. Just any color around the potential risks there and perhaps putting our minds at rest would be helpful as well, please.
Maybe to start with your last part of your question. By and large, they have not faced difficulties there. In the very initial start of the lockdown, when also logistics broke down in India, I think every company faced the problem to get the stuff out. That has been solved quickly. Of course, this company is considered a essential industry in India. They have not suffered any negative consequences of COVID, as has our own pharma business elsewhere didn't suffer those consequences. On your first question with respect to supplies, I don't want to dwell too much on that because I find that a bit confidential. Also, I don't want to presume that suppliers, just by mentioning them, would work with us elsewhere. There are certain suppliers with which we work, important suppliers elsewhere, but also certain where we don't work with and vice versa.
I don't want to put a number on it, nor mention names.
Okay, thanks. If I could just ask one final follow-up, just to find a modeling point. You've given us the revenue and the EBITDA numbers, which is helpful. Are you able to tell us what the gross margin of the business is? You mentioned it's higher than average group gross margin.
No, I think, Tom, in this phase, we need to limit ourselves to the data provided at the moment.
Okay. Thank you very much.
Our next question is from Mr. Chetan Desai of J.P. Morgan. Go ahead please.
Yeah. Hi, thank you. Just couple of questions. First, following up on the previous question. Is there a risk of any revenue dis-synergies from this deal? Maybe because you guys have some common suppliers, and they might want to have some multi-sourcing. That's number one. Second question is, there is a lot of discussion at the moment about insourcing some of the production from places like India to local countries. How have you evaluated that risk at all for Signet's future growth? You don't see that necessarily as a key risk? Thanks.
Yeah. The last question, of course, part of the question is a valid one. Because of the, let's say, the news around provision of medicines, et cetera. We have considered it. We still feel that India will remain a very important manufacturing country for pharmaceuticals. Important that we don't think that will affect us too much. On the first question, negative synergies. I think in a general way, and that's also what we said in the pack, these transaction risks of loss of suppliers or currency risk of customers, et cetera, of course, always exist. We don't see now, let's say, other risks than we mention here in the pack.
Understood.
Our next question is from Mr. Quirijn Mulder of ING. Go ahead, please.
Good evening, everyone. A couple of questions. With regard to the gross margin, you say, okay, it's somewhat higher than the group, but if you have an EBITDA margin of 26%, your gross margin should well above the 30%. Can you confirm that? With regard to your press release, you speak in your press release about the normalized EBITDA. Can you maybe elaborate on your adjustments on that EBITDA? With regard to the transaction, you say in your presentation, the transaction expected to have a single-digit cash EPS accretion in the first full year. How did you calculate that? It's only the transaction, but did you take into account some interest, as I sense that you did not take into account the dilution effect from the equity issue.
Quirijn, I cannot confirm gross margin being over 30%. First of all, for the reason mentioned before. When we normalize EBITDA, what you typically see in a privately owned company, there are all kind of costs related to the former ownership structure, these costs have been normalized as usual. When we calculated the I missed a bit your last question, that was about if you took in the additional equity in.
Let me put it differently. If you do an acquisition for a certain amount, then you take into account the extra cost related to the interest cost related to that transaction.
Yep.
Given that you do an equity issue, it's probably not that much debt-related. I think you did not take into account any dilution effects. You take into account some interest, otherwise you cannot do it without interest. It's or interest cost or it's a dilution effect. Maybe you can explain there what you have taken.
The good news there is that current interest levels, the additional costs are pretty low. Basically, we did a bit of a combination there, to be brutally honest. We normalized it in such a way that we I think we made a fair calculation there to come up with this statement.
Okay. We had to make our own calculation there.
Yeah, I would do so. I think if you do, you will see that you could end up with minor differences in both ways.
Okay. Perfect. My final question is, can you say something about the working capital and the days outstanding?
This is basically ordinary distribution business with normal payment term stock days. I think it's fair to assume in a country that represent international suppliers with stock coming from overseas, that the lead times are a bit longer. On the customer side, I think everybody is well aware that the payment terms in countries like India are slightly longer than what we, for instance, see in countries like Germany. On average, I think you could expect slightly higher working capital positions, given the market conditions in a country like India, than the group average.
Okay. Thank you. That were my questions.
I guess unless there's a very pressing question that we need to finalize this. Anybody with very urgent question?
We have one more question, sir, and it's from Rakesh Kumar of HSBC Bank.
Okay.
Go ahead, sir. Your line is open.
Hello. Good evening. Thanks for taking the question. Totally appreciate it's not a good point to disclose what the supplier opportunity is. When you evaluated the acquisition, I'm assuming you thought about it like you thought when you bought M.F. Cachat and others in terms of the longer strategic supplier opportunity. Is that a part of your core thinking when you did that acquisition?
Yes. That is the most important part, Rakesh. That's for us, vital. We evaluate, let's say, the value of the business also on its supplier base, on its customer base, the quality of the staff. How does it fit in our global strategy? Yes, the answer is absolutely yes. We evaluate the supplier base thoroughly.
Appreciate that. Thank you very much.
Okay. Thanks to everybody. I hope you understand that we are a bit under time pressure, and I wish you all well, and have a good evening. With this, we close the analyst presentation. Thank you.
Thank you, sir. Ladies and gentlemen, thank you for your attention for this analyst call of IMCD. You may now disconnect your line.