Ladies and gentlemen, thank you for holding, and welcome to the IMCD Analyst Call Full Year 2019 Results. At this moment, all participants are in a listen only mode. After the presentation, there will be an opportunity to ask questions. I would like to hand over the conference to Pete Van Slicker. Go ahead, please, sir.
Thank you very much. Hello, everybody. I'm here as usual with Hans Kormals, our CFO, and we will answer your questions in a few minutes. First, some remarks from my side and then Harald will take you through the key financial numbers. We are happy with our achievements in 2019.
We delivered another year of growth of all important KPIs, not as spectacular as in 2018, but then again, our growth pattern has never been linear. Notwithstanding this, we grew EBITDA with 11 percent and produced record cash flow of €222,000,000 Cash earnings per share increased again double digits with 13%. Perhaps more importantly, we prepared ourselves in 2019 for future growth. In the U. S, we finalized the integration of Ityhorn into IMCD U.
S, and we operate now as one organization in this continent with 1 IT platform. In Europe, we completed the integration of Velox, Not an easy operation if we had to reduce the number of staff of the Velox organization and change working methods. We were able in 2019 to acquire businesses that opened up new regions like Colombia and South Korea and or strengthened existing market segments and regions. We are positive about the number of potential new projects with suppliers, which will drive future growth. And finally, we made good progress on our digital infrastructure, which will enhance and improve our ability to serve our principles and customers.
All these aspects make us positive about future growth. Looking to the outside world, there are, of course, the usual uncertainties, but this time also a very unusual one, which we're all familiar with is the corona virus, and we have to see how that develops in the future. I'm now giving the floor to Hans to take you through the numbers. Thank you, Chris. Good morning, ladies and gentlemen.
Earlier today, we published our full year results in the form of a short press release. We further published our annual report and legible documents with information about various aspects of IMCD's business, including a lot of details about our financial performance. The annual report is a document that I would like to recommend partly. In this call, I will give you a short summary of the 2019 numbers, where I would like to start on Page 10 of the presentation. As you can see, revenue increased 13% and gross profit 12%.
The increase in gross profits was a combination of 1% organic growth, 10% acquisition related and a positive ForEx impact of 1%. The acquisition growth is mainly the full year impact of 3 acquisitions in 2018, Ityorn in the U. S, Felix and EMEA and Aroma in India. Further, acquisition growth includes the limited impact of 2019 acquisitions. And as you could see on Page 8 of the presentation, most of the 2019 acquisitions were either relatively small or have been done towards the end of the year.
Gross profit as a percentage of revenue slightly decreased from 22.5% in 'eighteen to 22.3% in 'nineteen. During the year, we experienced the usual fluctuations and differences in margin percentage between regions and quarters. And this was as usual caused by product mix differences, local market circumstances, currency fluctuations and last but not least, the impact of the newly acquired businesses. For your convenience, we also included a line with operating EBITDA comparison and as mentioned in previous calls for IFCG's asset light business model, the EBITDA development shown in the next line is more relevant. However, EBITDA seems to be an important KPI despite the enormous impact of IFRS 15, the new lease accounting standard on this KPI.
What you will notice is a substantial improvement in EBITDA margin from 8.7% to 9.2% and much more EBITDA growth than EBITDA growth. And this has to do with about €20,000,000 additional EBITDA as a result of the implementation of IFRS 16. For further details on the impact of IFRS 16 on our 2019 figures, I would like to refer to Page 110 and further in IMTT's annual report. Operating EBITA increased 10% on a constant currency basis to €225,000,000 The operating EBITA as a percentage of revenue remained more or less stable at 8.4%. The same applies for the conversion ratio with 37.5% this year compared to 37.7 last year.
This means that the expected substantial negative impact on these two ratios as a result of the acquisition of Wharton and Velox. Acquisitions with on average much lower EBITDA margins than group average has been compensated by a combination of improved performance in the acquired businesses and EBITA margin improvement in the rest of the group. On the next slide, Page 11, you will find a summary of the financial details for operating segments. EMEA figures in the first column were impacted by more difficult market conditions in several important countries and the full year impact of the Glilox acquisition. Gross profit increased 6%, a combination of minus 2% organic growth and plus 8% acquisition growth.
2019 gross profit margin of 24.7% was close to the 24.8% in record year 2018. Operating EBITDA in EMEA decreased 1% and by the EBITDA, EBITDA margin decreased from 10.3% in 2018 to 9.6% in 2019. The full year impact of the Velox acquisition with a 3% EBITDA margin of €150,000,000 full year revenue, which is much lower than IMCD's average EBITDA margin, was one of the main drivers of the decrease in EBITDA and conversion margin. Gross margin growth in the Americas in the second column is a combination of 2% organic growth and 16% as a result of the first time inclusion of acquired companies. Most of the acquisition growth relates to Ityhorn acquired in August 'eighteen.
Operating EBITA increased 24% on a constant currency basis, and it's fair to assume that half of this EBITA growth is organic growth. Operating EBITA margin and conversion margin in the Americas improved in 2019, despite the substantial full year impact of the horn business with a relatively low 4% EBITDA margin in the year of acquisition. Asia Pacific had another good year and realized 10% organic gross profit growth, and the gross profit slightly decreased from 20.9% last year to 20.5% in 2019. This decrease in margin percentage was mainly the result of the sale of the Musc Vale business in Australia. A small business with 60% gross profit on €4,000,000 sales.
Operating EBITDA increased 13% on a constant currency basis, and more than half of this growth was organic. EBITDA margin slightly decreased and conversion margin stayed at the high 2018 level of 44.4%. And in the last column, you will find in the holding companies all non operating companies, including the head office in Rotterdam and regional support in Singapore and New Jersey in the U. S. The absolute amount of holding costs decreased from €17,000,000 to €15,000,000 This decrease is a combination of the positive impact of about 4,000,000 as a result of the first time application of IFRS 16 and about 2,000,000 additional cost as a result of a further strengthening of IT and other support functions in both Rotterdam and the regional head offices.
Holding costs as a percentage of revenue decreased from 0.7% in 'eighteen to 0.6% in 2019. And on the next page, there you will find a summary of the P and L lines between EBITDA to the net results for the period and some general remarks. The development of recurring net finance costs and income tax expenses are summarized on the next two slides. But before we go there, first, amortization of intangible assets are non cash cost related to the amortization of supplier relation, distribution rights and other intangibles. And most of these intangible assets relate to acquisitions made.
Non recurring income and expenses in 'nineteen include about 2,000,000 income related to sale of real estate and the divestment of Moskvaal. Further, it includes nonrecurring costs related to M and A activities and costs related to one off adjustments of the organization. The nonrecurring tax expenses in 2019 are one off tax costs related to restructuring and reorganization of acquired businesses. And last but not least, nonrecurring net finance costs in 2018 had to do with IMCD's refinancing in Q1 of last year. Then on the next slide, Slide 13, a breakdown of the net finance costs.
In 2019, finance costs were about €8,000,000 higher than previous years. And this increase is, as you could see, a combination of €2,400,000 higher interest cost related to, on average, higher net debt positions in 2019.
That is
of course mainly as a result of the timing of acquisitions during the year. €1,700,000 finance costs and further, we had unfavorable currency exchange results in 2019 adding another €2,700,000 to the 1st. On Page 14, a summary of our income tax expenses. The 20 2.2% blended tax rate based on regular income tax as a percentage of EBITA minus finance and non recurring cost is about 3% lower than previous years. This is mainly a combination of mix effects and the fact that we did good well for tax purpose in certain countries where we did substantial acquisitions.
And the mix effect is a combination of changes in local tax rates and lower profit than last year in countries with relatively high tax rates and vice versa. Tax cash out in 2019 was €44,000,000 compared to €43,000,000 in 2018. And I would like to refer to the annual report for further details on the tax calculations. On the next page, the calculation of cash earnings per share and our dividend proposal. And as you can see on this slide, we report €2.85 cash earnings per share in 2019, which is 32% or 13% increase compared to last year.
At the AGM in May, we will propose a dividend of €0.90 in cash per share, which means an increase of 13% compared to last year. And this dividend proposal leads to a payout ratio of 82%, which is similar to last year. Then on Page 16, a summary of IMCD's balance sheet. Property, plant and equipment slightly increased, but still relatively low compared to the size of our business as a result of the asset light business model. And right of use assets, that's a new one in 2019 and the result of the application of IFRS 16 and this €61,000,000 reflects capitalized operational leases.
Intangible assets and related deferred tax liabilities are a result of acquisitions made in our history as private equity owned company. Thunder is a growing equity position of €867,000,000 covering 54% of capital employed. And the increase in equity is mainly the balance of a net result of €108,000,000 on the dividend payout in May last year of €42,000,000 A few other lines, working capital and net debt are summarized in the next two pages. On Page 17, you will find a summary of the absolute amount of the various working capital components and these absolute amounts translated in days of revenue. As you can see, the absolute amount increased with €36,000,000 which is a combination of €30,000,000 related to the 2019 acquisitions and €6,000,000 exchange differences.
The operational increase in 2019 working capital was negligible. Working capital days based on year end balance sheet positions were more or less stable compared to 2018. Then on Page 18, a summary of our net debt position. At the end of 2019, we reported €735,000,000 net debt, which means an increase of €125,000,000 compared to year end 'eighteen. This increase includes €75,000,000 of new debt as a result of the application of IFRS 16.
Further, it includes €38,000,000 of deferred and contingent considerations related to acquisitions made. And on the same page, an overview of the maturity profile of our debt structure as per the end of December 2019. Reported leverage at the end of 'nineteen was 2.8x EBITDA. The leverage ratio calculated based on the definitions used in the IFRS loan documentation was 2.6x EBITDA, and it was well below the required maximum as said in the loan documentation. I would like to finish the financial summary with the cash flow overview on Page 19.
As you can see, the absolute amount of free cash flow improved with €56,000,000 to €222,000,000 whereby the cash conversion ratio increased to 97%. The increase in conversion ratio is the result of higher operating EBITDA combined with relatively low CapEx and working capital investments. The changes in depreciation and lease payments that you see on the sheets are IFRS 16 related. And then on the last slide of the presentation, you will find the outlook in which we, amongst others, indicate that IMCD sees interesting opportunity to increase its global footprint and extend its product portfolio both organically and by acquisitions. I would like to give back to the operator to open the lines for questions that we are happy to answer.
Thank you, sir. Ladies and gentlemen, we will start the question The The first question is coming from Mutlu Gundogan, ABN AMRO. Go ahead, sir.
Yes. Good morning, Pete. Good morning, Hans. Three questions, if I may. First on EMEA.
Your OpEx is down 4% in the Q4 to 47,000,000 Was that because Q4 2018 was exceptionally high or because you were able to bring down your cost? So that's the first question. Secondly, on the outlook. Can you talk a little bit about your outlook for the year? I mean, you already made some remarks about corona.
Do you expect organic EBITDA growth? And if so, do you expect it to be in line with your long term average, especially considering that the last three quarters have been below that? And if I may add to that, how do you expect that growth to develop throughout the year as most chemical companies expect an earnings decline in the first half and hope for a recovery in the second half? I know that's a very long second question. So bear with me.
The third question on acquisitions. Can you update us on the integration of D. T. Horn and VLOC? You said a few words in your opening remarks.
I mean, what kind of further costs and revenues do you expect?
Mudljung, perhaps I should take the first one on OpEx Q4 in EMEA. Indeed, a bit lower than last year in the same period. 2018 was a record year, and it also meant that we paid a bit more bonuses to our employees, and you'd see that a bit more in the last quarter of last year. So we saved a bit on bonuses, careful in filling vacancies in the last quarter, and we saw a little bit of the benefit of the Velox integration in the existing cost structure in EMEA. That helped us to save a bit on the cost side.
Outlook? Yes. Outlook is of course very difficult to answer because we don't give an other outlook than the one we worded out in our press release. And I don't want to elaborate on that further. You mentioned that many companies see the first half as depressed in the second half.
But I don't know how they know that. It's very difficult to tell. Historically, of course, our company has another pattern. First half is better than the second half. And I think I would be surprised if we see a change in that depending, of course, on what happens in the outside world today.
Growth, the company, ICD always has been on a growth path. And we have given long term guidance on that and we don't change that. So we are still positive about the possibilities of growth. And then acquisitions, Ity Hore and Vaelox. Yes, I think to integrate in the U.
S. To become 1 company from coast to coast, to build market segments from coast to coast, to put everybody on one platform to ensure that our compensation schemes are uniform, etcetera, has been, of course, an enormous amount of work. And what we now do is, of course, try to convince our partners, suppliers to work with us in the U. S. On a nationwide basis.
And I think we are set for that. We are organized for that. And that makes a big difference. So that is an important step and over time and you can never predict how fast that is, we will see the benefits of that. Velox is a for us a bit of an unusual sense that we felt that this company was overstaffed and had also a model that was different from ours.
So we have reduced the staff members quite considerably throughout the year and that has been realized. So also there we would see positive benefits in the future.
Thank you. Maybe a small add on on those 2 acquisitions. I know you don't break it out once you have integrated the businesses. But can you talk a little bit about the margin of these acquisitions versus the old business that you had both in Europe and in the U. S?
Yes. I think for it's easier one is the Velox integration. I mean, the margin there, the gross margin has been relatively on a level that we found satisfactory. We tried to increase it, of course, more. I think in the U.
S, we have more work to do on the E. T. Horn side, E. T. Horn suppliers to maximize the value of the products that we have and make good progress.
So that continues for us to be, let's say, a challenge and also an opportunity to increase margins further. But we work hard on
The next question is coming from Peter Olofsen, Kepler Cheuvreux.
My question is actually a follow-up on Mutluk's question on the integration efforts. So first, in the media, you put out this press release, I think, in October about the integration, which I think mainly relate to the commercial augmentation and the back office systems. But I think you still had to deal with the former headquarters of Filox. Has that been addressed in the meantime? And if so, does that mean that there is a further improvement in the cost level going into Q1?
Yes. So Felix has his head office in Hamburg. Of course, a number of people, the staff numbers have been reduced. We are looking at, let's say, the possibility to further optimize, so to say, the cost situation. So there may be some more change to be made.
But that is not let's say, the bulk of cost savings has been done. And some further optimization is always possible, and that's what we're looking at. We will keep an office in Hamburg like we had already. So we combine these 2. But of course, we still have a number of people there.
Okay. And then on the U. S. Integration, which is also completed in Q4. To what extent has resulted in lower cost levels?
Or have these savings been reinvested in the business, for instance, in commercial people, etcetera?
Yes. I think the integration in the U. S. Is less cost saving operation and much more, I would say, strategic move, so to say, to so cost savings have been made, but that has not been the purpose of this whole exercise. And indeed, we are looking very, very carefully at our, let's say, sales power, so to say, in the U.
S. In the different important centers of where our customers are located. And yes, we add salespeople because that, of course, increases our attractiveness and our credibility in that market. So again, this has not been a big cost saving operation.
Okay. That's helpful.
Then maybe on the gross profit development, organic development there. It seems that in Q4, the organic gross profit growth was like stable to maybe slightly positive. Can you confirm that was indeed the case? And can you also shed some light on how it developed by region?
It was indeed slightly positive. And the breakdown per region, I think it's if you read through the numbers, then it's fair to assume that in North America and also in the Americas and APAC, we saw a positive growth number and a very small negative one in EMEA in Q4.
Okay. And then my final question is on industry trends. Clearly, 2019, from an economic perspective, was a difficult year. Have you sensed in your conversations with suppliers any changes? Are they now maybe more open, more actively looking to outsource more?
And maybe they become yes, they seek further options to rationalize their distribution and looking to reduce the number of distributors they work with? If you sense any change in 2019 compared to earlier years?
It's a good question. It's also very difficult to answer. It was because this is, of course, a very big market with many, many actors on that market. I think it's safe to say that we feel that and that's also what I said in my opening remarks that we see positive traction in projects that we have. I am convinced, but this is a remark that I've made earlier also.
I'm convinced that, let's say, the model that we have is, let's say, positively received. And let's say, also from that point of view, we will further consolidate. I'm pretty convinced about the fact that suppliers want to rationalize further their channels and want to use those parties that are able to work with them in partnership in bigger regions than only, let's say, part of the U. S. Or part of Europe or whatever.
So in that sense, I think we have, let's say, we are very positively established to receive or to benefit from this trend.
Okay. That's very clear. Thank you.
The next question comes from Mr. Matthew Yates, Bank of America.
Good morning, gents. Straight quick one, and I get you after running the business. But the margins in Q4, I know the business doesn't have significant amounts of operating leverage. And as you said in your introductory remarks, the margins are usually driven by mix more than anything. But was there any benefit in the quarter from falling input costs?
Or is this principally to see the acquisition synergies coming through that explain the margin development?
Yes. Matthew, it is always more complicated. There is an enormous amount of things having an impact on the quarterly margins for the regions. I think what we saw in general that the gross profit margin was was slightly higher than the same period as last year. We saw that in most of the regions.
And what you see there, it's a bit mix, it's a bit the impact of optimizing your portfolio, it's a bit availability of products and so on and so forth. So if I look at the underlying details, I always see a lot of fluctuations there. And the outcome was pretty positive in Q4 compared to the last quarter last year.
Great. All right. Thank you.
The next question is from Stephen Holben,
Deutsche Bank. Go ahead, sir.
Just in terms of the
Q4 growth, just trends that you're seeing now, can you give
us a little bit of
a feel for underlying health and resilience within the life sciences market and then what you might be seeing on the industrial side? And within that, it'd be really interesting to get any color on whether or not you're seeing a bottleneck in autos,
Well, your line was very bad, but I, let's say, picked up that you want to hear a little bit about the Life Science versus Industrial markets and the underlying trends. I think
That's right. That's right.
Yes. Okay. Yes. If we talk about Life Science, we talk about, of course, in our definition, 3 different segments, foods, food ingredients and then pharma and personal care. Also there, of course, different dynamics.
We're very much growing also in the food ingredients direction in terms of investing in capabilities to also work on the trends that we see in the food market, which is, of course, clean label, meat replacing, etcetera. So we're very busy positioning ourselves and also working with our suppliers to catch that trend. In pharma, that is a of course, 2019 has been a very, let's say, important year for our Pharma segment in the sense that many of our acquisitions have been in that space, both in establishing a position in active pharmaceutical ingredients, but also acquiring a business in South Korea that is predominantly the pharma space, big position there. Yes, this is a strong, steady position that grows over the years and that we want to globalize further. And then finally, Personal Care, we have new management there.
I think also here a little bit more dependent on markets that are important for luxury goods, in this particular case also China. But also they have of course good growth. Industrial markets, broad applications, end markets, but it's clear that automotive plays a role there. The construction industry, machine industry, lubricants, etcetera. Yes, and that's you know yourself what the developments are, particularly in automotive is of course a bit more restructured.
So that is something that now the chain where we are, we also will notice or notice. So it's a mixed picture, but it also then demonstrates the resilience of our business because we pretty spread over different markets and also so end markets, but also different regions. So all in all, yes, some more difficulties maybe we saw in 2019 in the industrial markets. More positive signs, I would say, towards the end of the year. Now we have to see what happens, of course, with the program.
Everybody there?
There's no answer to your question, sir.
Okay. The question
is from Mr. Rajesh Kumar, HSBC. Go ahead, sir.
Hi. Good morning, gents. Thanks for taking the question. It is in the same lines as the previous question. You're trying to if you look at the pace of decline in the more cyclical product, would you say you commented that sequentially that looks like it's stable now and end of year was slightly better.
Are you seeing any change in the future growth of more defensive products like pharma or food or paravarian agents? That's the first question. And the second one is, what is the typical duration of discussion you have with your suppliers and customers in terms of planning? Do you decide 3 months in advance that the need of product just in time or a 6 or 8 months in advance? And once you are in that product workflow, does it differ dramatically by industry, How long you're supplying into the product?
Or is it more of a consistent that you sell about the same product to the same client for about a year?
Okay. Maybe the last question first because I don't forget it, although maybe I've beaten the first question. But duration is a very important question. Of course, it differs from market to market. But generally, I would say, you can say that if we are in the formulation in most market segments that has a longer term lifecycle.
And longer term is not 3 months, it's not 6 months, it can be years, so to say. I think maybe the exception is in Personal Care Foods, the cycles are shorter. Also depending a little bit, of course, of the success of that particular product in the on the shelves of the shops. But let's say, in particular, in the industrial markets, the cycles are pretty long. On planning, also very good question, I think, because that is, of course, something that our principles, in particular, our principles want to discuss with us all the time, which means that we have to speak with our customers about that planning.
Not easy. Not easy for us to give some fast planning, but you can speak normally a few months in advance about the planning. And then I think your first question was more about cyclical products. I would say that most of our products are not cyclical in the sense that it goes up and down with some sort of general chemical cycle. It's much more about demand because what we sell specialties into formulations.
And yes, these formulations can be proteins, can be construction chemicals. And if demand of that is increasing or decreasing, we see that, of course, with some slowness in the end also in our demand. So I hope this answers your question, Rajesh?
It does. Thank you very much. Okay.
Yes. There is a follow-up question from Mudlu Gundogan. Go ahead, sir.
Yes. Sorry, I mean, we got disconnected. So maybe this question was asked. But I mean, you're now 2 months in the quarter. Several companies have disclosed an impact from the coronavirus.
Are you seeing an impact on your business? Can you talk a little bit about that? I mean, you don't need to give expectations, but maybe how is the virus so far impacting the business? That would be nice.
We have a small business in China. And so far in January, that was not affected, but I think we will see a little bit of effect in February. But that is in the scheme of IMCD is very, very small, so not noticeable. And that is it for this moment, I will say. Now since last week, we have this report about North Italy, and it's too early to tell what that will mean for our business.
So I would say, as in summary, we've not been affected in any significant way. So and about the future, we know nothing. So thank you. So we have to see what happens, Mudra.
Exactly, exactly. Thanks for the comments.
There's a question coming from Claireijn Milberg, ING. Go ahead, sir.
Yes. Good morning, everyone. On your organic growth of gross profit in the U. S, it looks to me that the second half was clearly weaker than the first half year. And to my view, it was even negative if you had 2 year organic growth topic growth in U.
S. For the full year. Is there something you can comment on it?
Can you talk about organic growth in the Americas?
Yes. That's gross profit.
Yes? Gross profit. Mike, that is speaking during the year, but I think the feeling is correct, but I'm not sure if I agree with the conclusion. I think it was flattish in the second half of the year. If you look at gross profit, I think if you look at the development of operating EBITDA, we saw positive development and in the first and in the second half of the
year. Okay. I understand. Can you give me some quantity of the number of salespeople you're hiring for Horm? And can you also give me some more feeling on the situation with loan loss in Canada and, let me say, the northwestern part of the U.
S? Because I think if you speak about integration, it must be also part of the whole story here.
Yes. We are not going to speak about numbers of salespeople. I mean, we monitor our situation now. We have gone through a major exercise. I think also maybe addressing also your previous question very briefly, I mean, what you also see during this integration period is a shift in certain suppliers during this time.
So that has also an effect positively and negatively. So in that sense, it has been a transition year. On low mass, yes, they have, let's say, also impact on the U. S. Because we have food business that we do across North America, and that is managed by Lomas.
So Lomas is responsible, which is NCD Canada now, is responsible for our food business in North America. And that's it. And we will optimize the number of sales people, inside sales, supporting staff, etcetera, but we're not going to individually comment on these positions.
Okay. But in general, the situation at Lomas is improving since then, say, you entered your acquisition and that you are optimistic on further improvement there?
Yes,
yes. There are no further questions at this moment, sir. Please continue.
Well, if there are no further questions, then I would like to thank everybody for their interest. And I would say until next time, and I wish you a wonderful day. Thank you very much also on behalf of Hans.
This concludes the IMCD event call. Thank you for attending, and you may disconnect your line now.