Good evening, ladies and gentlemen. Thank you for holding, and welcome to the analyst call of IMCDN. V. 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 Zwicker, CEO. Go ahead please, sir.
Good night, everybody. I'm sitting here with Hans Gormals. And in front of you, I guess, you have the IMCD analyst presentation regarding the acquisition of Sigve. 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, and 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 is mostly 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. And we have in the last 12 months, we have done quite some acquisitions in this space.
And you can see that also in the back. 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.
And our central Pharmaceutical business group is quite strong.
One of the largest,
if not the largest markets for pharmaceutical manufacturing is India. And 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 distributors in the country in India.
It has done so organically, so 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. And we have always contemplated the possibility to acquire the business as and if it would come for sale. And 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, 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, but the deal structure is that we buy the company in 2 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? Somebody 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 Cygnus for a few years, but will be part of our business group 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. So if there are any questions around it, and 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 the Asian territories in Bangladesh, in the Middle East and in Africa. We don't expect cost synergies out of this business in this business. But as often in within IMCD and its acquisitions, we hope to benefit from each other's knowledge of, of course, the market but also of the supplier relations that we have. And we hope we can also expand in adjacent markets jointly. So I guess that's a short summary of the deal.
So great strategic rationale, a fantastic company, a great fit for the business group pharma, and it makes us a leader in pharmaceutical excipients distribution in many parts of the world. So 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. Our first question is from Mr. Muklu Gundogan of ABN AMRO.
Congrats on the acquisition. I have four questions. If it's okay, I'd like to go through them 1 by 1. So 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?
Yes. Mutlu, Hans here. It's the 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. And these 2 create an EBITDA margin that is above group average.
Right. And I saw in the presentation that Signet is also asset like just like yourself. Does that mean that the returns are also 3x higher than IMCDs?
Good question, Jonathan. Sorry. I missed you there as well.
Yes. So 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, is it asset light as well? I mean, you are asset light, Signet is asset light. Does that mean because their EBITA margin is 3 times higher than you that their returns are also 3 times higher?
Yes. That is so you're right with respect to the EBIT margin. They don't they outsource logistics. And that means that basically, if you look at their balance sheet, the most important thing that you find there is working capital. And that is basically the only investment people need to make in case they grow their business.
Right. Okay. And then a question about growth rates. So 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's based in India, emerging markets, it might have a rather high growth rate.
Yes. I think there is you can find some of that on the website of the company. Maybe as an addition to, let's say, the market that they serve, they serve the markets for with customers that produce for overseas, so for export. So Western markets, U. S, Europe, so that are their customers.
Certainly, you could you can expect higher growth rates than in the mature markets in Europe and the U. S. Past growth rates were very high. I would say I can't predict, of course, let's say, the future growth rate, but it's higher than usual in our business group.
Yes. Yes. Okay. And then final question. No price has been mentioned in the press release and the presentation.
We know that you historically have paid around 10x EVEBITDA, but obviously that can differ depending on the type of business. Can you give us an idea of what you're paying here?
Yes. Mudlova, Hans here. We agreed with the seller not to disclose the purchase price. But 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 668,000,000 of net debt.
This transaction will add an EBITA level of €39,000,000 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. But at the same time, you need to include the remaining 30% of the purchase price as a net debt obligation on your balance sheet. So in the pro form a leverage of 2.8 times that we report, that includes the 30% the expected valuation of the 30% that we will pay in the second tranche in 2024. So 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 Olsten of Kepler Cheuvreux. Go ahead please.
Yes. Good afternoon, gentlemen. A brief follow-up on this question
on the
leverage. So it includes the contingent payments. But is it based on the definition in your loan documentation, I. E, before 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 in the loan documentation.
Yes. So this is including IFRS 16. But then you referred to the 2.9 times at the end of the first half. So basically, you're maintaining the leverage at the same level where it was. Have you considered going higher or also considering the room that you have based on your covenants, also considering the track record that you have built in recent years as a list of companies in terms of growth and cash generation.
So 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 I mean we can debate what is the ideal number that we felt given also our future ambitions that this is the right number.
And then when you refer to future ambitions, basically that means you want to keep some firepower for other deals?
Yes.
Okay. Clear. Thank you.
Next question is from Mr. Matthew Yates of Bank of America. Go ahead, please.
Hey, good evening everyone. Apologies, I'm sort of trying to play catch up on some of the documentation. I have 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.
So in this instance, you're obviously buying something that much more profitable. So any value creation has to come from the top line opportunity. So are you able to elaborate a little bit on that? And then secondly, to the extent you can comment just on the transaction process, it's not unusual for owners to retain minority stakes in some of the assets you've bought over the last few years. But can you just talk a little bit about maybe their motivation for wanting to retain some exposure?
And 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 U. S. With also very high EBIT margin, not as high as this one, but also high.
But you're right, it's clear that future, let's say, growth and synergies need to come from growth of revenue, but also to from addition of new suppliers to the business because we have a fantastic franchise there that allows also to plug in new suppliers. And also the benefit that we will hopefully get from this company in other markets. And 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. And I'm pretty sure that so we also have will see synergies there, Bangladesh. So I think you should see this growth local market, but also growth in adjacent markets as our objective.
And on the retained stakes?
Yes. Sorry, I forgot that one already. We like I mean, in these kind of cases 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 that gradual more gradual transition to us. As you know, we did that also in the U. S.
When we started in the U. S. We do it in other cases. And it's a policy that works well for us. And I think the founder is also has also an interest in seeing to it that his yes, his child, so to say, also flourishes in another surrounding.
So these are the major factors for us to structure the deal as we did.
And I just squeeze in the last one. But 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 is that's not possible, unfortunately.
All right, guys. Thanks very much.
Our next question is from Mr. Tom Broughton 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 sort of the new supplier relationships that I guess you're acquiring with this transaction.
You've talked about the business representing the world's leading Xfinity and producers. I just wondered in terms of what you're getting this new deck. Can you give us a sort of a share of what proportion of those you already work with versus which supplier relationships are new, for example, I'm just interested in sort of 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? And then just another question regarding that's where India specifically, clearly what's going on more broadly regarding the pandemic and obviously the sort of extensive case numbers and so forth in that country. I just wondered from a risk profile perspective, whether you could sort of reassure us or give us any color as to whether the business has faced any issues, noteworthy issues visavisa pandemic and so forth and whether it is seeing any issues at present.
Just any color around the sort of potential risks there and perhaps putting our minds at rest would be helpful as well, please.
Maybe to start with your last question 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 a problem to get the stuff out That has been solved quickly. Of course, this company is considered an essential industry in India. And so 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 it's yes, I find that also it's a bit I find it a bit confidential.
And also, I don't want to presume that suppliers just by mentioning them would work with us elsewhere. So there are certain suppliers which we work, important suppliers elsewhere, but also certain where we don't work with and vice versa. But I don't want to put a number on it nor mention names.
Okay. Thanks. And if I could just ask one final follow-up, just a sort of final 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 sort of 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 Udeshi of JPMorgan. Go ahead please.
Yes, hi. Thank you. Just a couple of questions. 1st, sort of following up on the previous question. I mean, is there a risk of any revenue dissynergies from this deal, maybe because you guys have some common suppliers and they might want to have some multi sourcing?
That's number 1. And second question is, there is a lot of discussion at the moment about in sourcing some of the production from places like India to local countries. How have you evaluated that risk at all for Cygnet's future growth? Or you don't see that necessarily as a key risk?
Yes. The last question, of course, part of the question is a valid one, of course, because of the, let's say, the news around provision of medicines, etcetera. Of course, we have considered it. We still feel that India will remain a very, very important manufacturing country for pharmaceuticals and so important that we don't think that, that will affect us too much. On the first question, negative synergies, I think on the in a general way, and that's also what we said in the back, these transaction risks of loss of suppliers or currency risk of customers, etcetera, of course, always exist.
But we don't see now, let's say, other risks that we mentioned here in the pack.
Understood.
Our next question is from Mr. Crerarijn Mulder of ING. Go ahead please.
Yes, good evening everyone. A couple of questions. With regard to the gross margin, you say, okay, it's higher than let me say, somewhat higher than the group. But if you have an EBITA margin of 26%, your growth margin should well above the 30%. Can you confirm that?
And then with regard to the to your press release, you speak in your press release about the normalized EBITA. Can you maybe elaborate on your adjustments on that EBITA? And then with regard to the transaction, you say in your presentation the transaction expected to have a single digit cash EPS accretion in the 1st full year. How did you calculate that? Because 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?
Kvaeraj, I cannot confirm gross margin being over 30%, first of all, for the reason mentioned before. When we normalize EBITDA, but what you typically see in a privately owned company, there are all kind of costs related to the former ownership structure, and these costs have been normalized as usual. And when we calculated the I missed it in your last question, that was about if
you took in the additional equity in
No, let me say it let me put it differently. If you do an acquisition then for a certain amount, then you take into account the extra costs related to the interest costs related to the transaction. But given that you do an equity issue, it's probably not that much debt related. So and I think you did not take into account any dilution effects. So you take into account some interest.
Otherwise, you cannot say it you cannot do it without interest. It's all interest cost or it's in a dilution effect. So maybe you can explain there what you have taken.
The good news there is that current interest levels, the additional costs are pretty low. But basically, we did a bit of a combination there to be brutally honest. So we normalized it in such a way that we I think we made a fair calculation there to come up with this statement.
Okay. So we had to make our own calculation there.
Yes. I would do so. And I think if you do, you will see that the that you could end up with minor differences in both ways.
Okay. Okay. Perfect. And then 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 terms, 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. And 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. So 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. Those were my questions.
I guess, unless this is a very pressing question that we need to finalize this. Anybody with very, 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, Sameh, for taking the question. Totally appreciate. It's not a good point to disclose what the supplier opportunity is.
But when you evaluated the acquisition, I'm assuming you thought about it like you thought when you bought Airbus Cashaa and others in terms of the longer strategic supplier opportunity. Is that a part of your core thinking when you do
that situation? Yes. That is the most important part, Rakesh. That's for us vital. So 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.
So yes, the answer is absolutely yes. We evaluate the supplier base thoroughly.
Appreciate the answer. 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. And 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 lines.