Ladies and gentlemen, thank you for holding and welcome by the EMCD Analyst Call Third Quarter Results. At this moment, all participants are in a listen only mode. And after the presentation, there will be an opportunity to ask questions. I would like to hand over the conference to Mr. Van der Slicker.
Go ahead, please.
Yes. Good morning, everyone. I'm sitting here with Hans Cormans, a little bit in a different setting as usual because we are in a van in Paris.
We departed from our hotel to the office and
then 1.5 hours ago, and we're still not at the office. So we call you from the van, and I hope that the reception is okay. It could be that if we reach the office that we need to step out and put you on hold for a couple of minutes, but we felt that we should just start. So I will give a short introduction and then give over to Hans as usual to give a comment on the numbers. And of course, after that, we are happy to answer your questions.
So we are so you have seen the press release, and we are positive about the results over the 1st 9 months with gross profit growth of 15%, increase of EBITDA of 12% and cash earnings per share plus 15%. And also during this period, we produced €30,000,000 more cash. The Americas and Asia Pacific performed in accordance with plan. EMEA's results were affected by slowing of demands. We acquired the businesses of Matrix in Singapore and Monahem in India and signed agreements to acquire DCS Pharma in Switzerland and Wahvom in South Korea.
We expect to close the transactions regarding the last two companies later in the year before the end of the year, which means that the last two companies will possibly not contribute this year to our profits line. All these companies fit into our strategy and the Vaubom transaction is in particular pleasing as it offers us a very strong pharma business in South Korea, but also platform for growth in other market segments in these large markets. We are positive about the development of the group and confident that we will continue to achieve our targets. And with this, I will get back to Hans to take you through the numbers.
Thank you, Pete. Good morning, ladies and gentlemen. I would like to give you a short summary of IMCD's first 9 months results, but I would like to start on Page 10 of the presentation. As you can see, revenue increased 17% compared to the same period of last year and gross profit increased by 15%. About 13% of the gross profit growth was the result of the first time inclusion of businesses acquired in 2018 2019.
This acquisition growth is the full year impact of the 3 acquisitions made in the second half of twenty eighteen: Ityore in the U. S, Felix, EMEA and Aroma in India to refresh your memory. The impacts on year to date gross profit and results of the 2 acquisitions closed in 2019, so Matrix in Singapore and Monashm in India, was neglectable due to the timing of these acquisitions at the end of Q3. Gross profit as a percentage of revenue slightly decreased to 22.2 percent and this decrease, which is comparable to the 1st 6 months of this year, is mainly the result of, on average, lower gross profit margin percentages in the acquired businesses. Further, we saw the usual fluctuations and differences in margin percentage between the quarters and regions caused by changes in local market circumstances, seasonal product mix differences and currency fluctuations.
Operating EBITDA increased 12% to $6,000,000 and this increase was a combination of organic growth, first time inclusion of acquisitions. Further, the application of the new lease accounting standard, IFRS 16, had a positive impact of about $3,700,000 in EBITDA. Operating EBITDA in percentage of revenue slightly decreased to 8.5%. The full year impact of acquired businesses Velox and Horn with a lower EBITDA margin than IMCD average were the main drivers of the decrease. The conversion margin calculated, as you know, by IHCD as operating EBITA, so without a d, a percentage of gross profit was 38.4% in the 1st 9 months of 2019.
It's fair to assume that all these three ratios, so gross margin, EBITDA margin and conversion margin, are negatively impacted by the acquisition of G Logs and Horn. It's further fair to assume that excluding these acquisitions, all three ratios would have been slightly better than the 2018 year to date September ratios. The net results before amortization and nonrecurring items increased $11,000,000 to $120,000,000 Free cash flow and cash conversion ratio both increased substantially compared to the same period of last year. Operating EBITDA growth in 2019 combined with a lower investment in working capital in the 1st 9 months were the main drivers of this improvement.
The year
to date cash earnings per share were €2.26 an increase of 15% compared to the same period of last year.
On the
last line of this page, you could see a 13% increase in our number of employees, and the majority of this increase is the result of the first time inclusions of the acquisitions that we did. Then on the next page, Slide 11, you will find gross profit, EBITDA and conversion margin per operating segment. EMEA in the first column reports a 9% ForEx adjusted gross profit growth and a little minus percentage on operating EBITDA growth. The EBITDA margin decreased 1.1% to 9.7 percent. The main reason of the drop in EBITDA margin and conversion margin is the impact of the VLOGS business that we acquired in Q3 2018.
To refresh your memory, this business had about $150,000,000 revenue and an EBITDA margin of about 3%. Excluding the acquisition impact of Velox, the EBITDA and conversion margin in EMEA were more or less comparable with the 1st 9 months of 2018. Velox has been fully integrated in the IMCD organization by the end of Q3. In the second column, the results of Americas, where ForEx adjusted gross profit increased 24% and operating EBITDA increased 29%. This increase was a combination of organic growth and the first time inclusion of E.
T. Horen acquired end of August last year. Operating EBITDA margin and conversion margin both improved compared to the same period last year despite the negative impact on these ratios as a result of the relatively low profitability of the acquired Oren business. Growth in our Americas organizations, strict cost control and improved performance more than compensated for the negative impact of Ityhorn or ratios like conversion and EBITDA margin. Asia Pacific, in the 3rd column, reported 13% gross profit growth and 10% operating EBITDA growth.
This growth was a combination of organic growth and the first time inclusion of acquisitions. Operating EBITDA margin and conversion both slightly decreased compared to the same period of last year as a result of slightly lower gross margins in the regions and additional investments to strengthen local organizations. And in the last column, you will find the cost of holding companies. All non operating companies, including the head office in Rotterdam and regional support offices in Singapore and New Jersey in the U. S.
The cost saving in holdings is mainly the result of the application of IFRS 16. The new lease accounting standard had a positive impact on EBITDA of $3,700,000 and most of it ends up in the segment holding companies. On Page 12, you will find a summary of the allocation of the IFRS 16 impact on operating EBITDA per segment. 13, there we have a lot of noise in the back unfortunately, a summary of IMCD's free cash flow. Free cash flow and cash conversion ratio were both better than the same period of last year.
Excluding the impact of IFRS 16, the reported cash conversion ratio of 73% would have been 5.5% higher. So the real like for like improvement on this cash conversion ratio compared to the same period of last year is about 10%. Main drivers of this improvement are increased EBITDA combined with a lower working capital investment. CapEx of $3,500,000 was mainly IT and application lab related. Then on Page 14, a short update on the net debt and leverage.
Compared to the end of September last year, net debt increased to about $52,000,000 to $672,000,000 The net debt position increased with $71,000,000 as a result of the adoption of IFRS 16 with the new lease accounting rules. Further, we saw healthy operating cash flows, reducing net debt and cash outflows as a result of acquisitions made and dividend payments. Reported leverage ratio, defined as net debt divided by operating EBITDA, including the full year impact of acquisitions made, was 2.8x EBITDA at the end of September 2019 and 2.6x based on the definition used in our bank loan documentation. And last but not least, on Page 15, you will find our outlook for 2019. And based on the performance in the 1st 9 months of 2019 and the strong fundamentals of the business, IMCD expects operating EBITDA growth in 2019.
Now, I would like to hand over to the operator to open the line for Q and A.
Thank you. First question is from Mr. Mutluk Gundogan, ABN AMRO. Go ahead please.
Yes. Good morning, Peter. Good morning, Hans. I have a few questions. I would like to ask them 1 by 1, if that's okay.
The first one is on the organic gross profit growth. That slowed down from minus 3% in Q2 to minus 4% in the current quarter. Can you tell us what drove such a slowdown?
Well, basically, Mukulov, this speaks basically. We speak in particular about EMEA. And so we see in a few countries in EMEA, we see really a slowing down of demand. I think that if you look at the general economic information that comes to us that manufacturing indexes are down. We see that in Germany in particular.
We see also a little bit of Brexit effect, a bit up and down, still very strong, but nevertheless influenced by dates of Brexit. So I would say not something that is company specific, but is really something that is driven by the market.
Right. Okay. And just to confirm, I mean, in the past, you spoke about Germany, France and indeed Great Britain. Those are the is it isolated to those countries? Or are the other countries weak as well?
No, I think generally, I would say it's weaker. But these countries do have stepped out a little bit more than the others.
But generally, overall,
you see a softer demand.
Yes. And the second question relates to the first question. So looking at Q4, do you think we should be penciling in another quarter of negative organic gross profit growth?
Well, let's I mean, that is something that if I would know, I would tell you or not. But it's very difficult to predict. And we see strong months change by weaker months. So it's it would look very difficult to see and to predict. And so I'd rather look overall to the year than to quarter per quarter.
Yes. I understand. I mean, the reason why I was asking is that you roughly have 1.5 months of trading now in your books with potential orders and December usually being a slower month. I thought you would be able to give an indication about Q4?
Yes. But we are I mean, we are not pessimistic, but I don't want to say more about it. That's what happens. Okay.
As
Trump always said.
Okay. Fair enough. Just a few more questions on a bit more detailed on the region. So first on EMEA, your conversion margin in the Q3 came down significantly. I mean, it's something like 5.70 basis points.
Are you looking to take out cost to offset this?
Yes.
I mean, this has been a year, of course, a bit of a special year, particularly in EMEA because of the integration of VLOCs. We have taken out costs already, but we will take out more costs. And so we will see the effect early next year, but they give out to Hans now.
Yes. And Mutlu, the reason for ending out is that if you exclude so if you would take out the Velox acquisition with an EBIT margin of a bit more than 3% out of the EMEA numbers, then the conversion margin would be around roughly 42%. And so one of the big drivers of the drop in conversion margin is basically because of doing an acquisition with a pretty low EBIT margin.
Yes, fair enough.
And then
what we said before, we
went into the process to fully integrate these activities in the IMCD organization that is done by the end of September. And that also allows us to optimize the structure of the group in
the bank.
Okay. And then final question and then I'll give the floor to someone else. On Americas, here the conversion margin did very well. I mean, it was up 110 basis points year on year despite, I would say, weaker top line. Can you tell us how you were able to achieve this?
Is it synergies? Is it cost synergies solely? What is it?
Yes. It is a combination of a couple of these things. Also, there we are in the process of integrating all the American organizations into 1. We announced there was a press release announcing that at the 1st November, that process was more or less done. And that means that we are in the process to optimize the setup and the structure on the cost side and then we also see commercial synergies in the organization helping us to grow the margin.
And these two things help us to improve the overall financial performance in the region.
Okay. Okay. Thank you very much for your
Next question is from Mr. Peter Olofsen, Kepler Cheuvreux. Go ahead please.
Yes. Good morning. Yes, I wanted to follow-up on Mutlu's question on the conversion margin in EMEA. I do understand that the integration of Filox has an impact for the 9 months. But still, if I look at Q3 and I compare the conversion margin with the first half, still Q3 looks much weaker.
So is it fair to say that in Q3, also in your existing business, there was some pressure on the conversion margin because of the lower demand? Or was it just entirely VLOCs, which caused a somewhat weaker Q3? I
think it's a combination of both whereby the lower demand in Q3 certainly plays an important role.
And if we look at the integration of Filox, did you incur some one off or incidental costs in Q3 that are included in the operating EBITA? Or is the operating EBITA really a clean figure?
There were some costs related to the integration in the operating results. So yes, you could call that one off. But basically before you integrate, you have a period whereby you just have double the purchase. And we are going through the process of rationalizing the setup and that should lead to cost savings and double costs.
Yes, okay. But these double cost structures, you also had already in the first half, so that didn't really change in Q3. I know I was more referring to maybe some costs to lay off some overhead people and overhead ventures or something? But that's not really debaterals.
It's all having an important impact on the Q3 results.
Okay. And then also on follow-up on Mutlu's question on the organic growth based on your own calculations, what do you think the organic growth was in Q3? Muglu mentioned minus 4%, I come to minus 3. What do you think it was?
I mean, you look at margin or is it?
No, the organic gross profit decline. So the growth was 1% for the 9 months. It must have been slightly negative then in Q3.
Yes. I think it will
be I call it flattish.
Like it was in Q2? Yes. Okay. And that flattish, it was then slightly positive in the Americas and Asia Pacific and also in Asia Pacific and a negative in EMEA?
Yes. If you look at the negative in EMEA, it was close to 0.
Okay. And then my last question is on Asia Pacific. You indicated you were satisfied the overall performance there. Could you break out the performance in Australia versus the rest of Asia? Do you see clear difference there?
Peter, I think we lost the line.
Can you hear me?
Hello?
Hans? Chairperson? Hello?
Hello?
Vamont, please. This is operator. Vamont, please.
Operator?
Yes. Can you hear me?
Yes. Can you put people on hold for
a couple of minutes, then we go upstairs and we call in.
Okay. No problem.
Yes. Could you tell them that? Yes.
They've heard you already. Ladies and gentlemen, will put you on hold for a few minutes. One moment, please. Ladies and gentlemen, you're back in the call. Go ahead, Chairperson.
Yes. Sorry for this. So next question.
Next question is from Mr. Mathieu Yates, Bank of America. Go ahead please.
Hey, good morning gentlemen. Good morning. Sorry, just for the clarification, you kindly gave the EMEA organic number. Can you just clarify me exactly what the Americas organic number for the quarter was, please?
Gross profit.
And we talked gross profit. So in EMEA, we reported a
low single digit organic growth number on the gross profit line.
Perfect. Thank you.
And you
have the Americas for the Americas.
Americas, yes. Americas was low single digit, yes? Yes. Okay. Just then as a follow-up, the can you talk about the couple of deals you've announced recently in Switzerland and Malaysia?
Just in terms of taking the business increasingly in the direction of Life Sciences, you've spoken earlier on the call about the impact something like a Velox had on margins being dilutive. Can you just talk about broadly as you make these more recent deals, are they also margin dilutive? Are they what sort of growth profile do you expect from these segments and geographies?
No. I think I mean, we have individual strategies for all our market segments, so both in Coatings, Construction, Advanced Materials, but also in Life Science, in Food Pharma and Personal Care. These particular 2 acquisitions that we announced are predominantly focused on the pharma industry. Our pharma business is pretty much starting to become a more global franchise, more global operation. This will help us also, in particular the Swiss one, to strengthen our position in active pharmaceutical ingredients.
And the one in South Korea is very much similar to the businesses that we have elsewhere. So it's a strengthening of our pharma business and it is not dilutive as to margins, I would say, no on the contrary. So it's but it is it's very much geared to executing our strategy also in pharma. And so we are very positive about these latest additions.
And just a technical point on the Malaysian one because it's a slightly unusual structure in terms of the ownership that's been retained. Do you intend to fully consolidate that business? Or we just book your net share?
You mean the Korean one. Korean one, the South Korean. Yes.
Yes. We will fully consolidate them in our numbers.
Got it. All right. Thank you, Jens.
Next question is from Mr. Steve Gordon, Deutsche Bank. Go ahead, please.
Hi, there.
Just on the growth point, sorry to labor the point. So just on the numbers I've got for the first half of 3% organic GP, and I think the 9 month was 1%. So I just wanted to confirm that those are the right numbers from the press release, which again gets me to sort of down 2 to 3 organic for this quarter. We were talking earlier on about minus 4%. You were saying sort of flattish.
I know that that's generally a sort of relatively rough read. But at the group level, is that sort of right? Or could you just give us a little bit more color there in terms of working out how we get there? And within that, is there anything you could say about volumes potentially versus any kind of price benefit that you might have had from any chemical pricing weakness over the last quarter? And also any kind of you could give us maybe on how life sciences fared versus the industrial products?
Yes.
So number wise, Steve, I keep on repeating what I said. If the flattish is around nil, slightly close or slightly minus depending on the regions. And then I start repeating on the previous remarks.
On the volumes and price question, it's obvious that when demand is lowering that we have some pressure on volumes. I wouldn't say in price. We keep that the price and where it was and hopefully also to further improve. Life Sciences, it's that's always, of course, more stable. But also here, you will also see some regional effects predominantly, I would say, still holding up pretty well.
Okay.
Great. Again, if you look at the margin percentage that we show the drop of 0.5%, if you would take out Felix and Horn there, then the margin before these two acquisitions would have be at least as high as last year.
Okay. Great. Thanks.
And you should put on prices in the market.
Sorry, what was the last thing you said?
So it's more a volume than a pricing
thing. Right. Okay. And in terms of your ability to add new suppliers and customers, I mean, is it fair to say that there hasn't been really much share gain over the last couple of quarters, particularly in North America? And would you expect that to improve over the next few quarters?
Any kind of color you could give us there? And the last one for me, sorry, just on the Velox margin. So you said that, that had been fully integrated. Would it be fair to assume that, that business is now running at kind of ballpark group EBITDA margin or conversion margins, whatever you want to call it?
No. On the last question, I can say definitely not yet. We need to work on the structure a little bit more. I mean, the integration has been completed, but the optimal structure is not there yet. And so in the next couple of months, we will further optimize that and hopefully get the benefit next year of that.
On your first question, share gain Americas, I think we worked very, very hard in the U. S. Market to integrate these 2 companies. That meant also this year that we had to put the whole United States on the same IT platform, which was successful. And of course, that creates a lot of work and focus in the organization.
We changed also now let's say with the integration of Horne, of course, it became an IMCD company. And also in the supplier dynamics in the United States because of this integration, but also because of the acquisitions that Opform, you see some dynamics, some positives, some negatives. In the end, of course, the purpose of this whole exercise is to accelerate growth and to offer our model to suppliers to work with us on a more national basis. And that's a time we need some time to convince suppliers to get that done. But we are optimistic that we have now an organization that is strong, integrated with a good IT backbone with all the people in the right place.
So we are optimistic about possibilities that that will offer to our customers and suppliers.
Great. Thanks a lot.
Next question is from Ms. Natliete Breune, Degroof Petercam. Go ahead please.
Hi, good morning. Well, actually, all my questions have been answered. I have no follow-up. Maybe you discussed organic growth in EMEA and in North America. Can you maybe just go to Asia Pacific and elaborate a bit more on this?
And what are the dynamics that you were seeing there? Was it different than it was in EMEA and in Americas?
Yes. I think, I mean, Asia Pacific is, of course, a very, very large area. But so if I take it in couple of parts, then Australia and New Zealand, you see a little bit of the same, let's say, picture as elsewhere, so not abundant growth. Of course, a country affected by various influences from the outside, the moving away of industry, but also all kinds of the drought has played a role as well. So but all in all, okay, but not spectacular.
If you look at Southeast Asia, we're very positive about the developments in countries like Indonesia, where we grow very fast, but also in the Philippines. In smaller countries, Thailand, we're also doing well. So on a whole, in Southeast Asia, we're positive. Also positive about, let's say, supplier dynamics. We see good possibilities for growth.
In North Asia, where we have a business in China, there we see a little bit of effect of the trade war because we import stuff from the United States into China that is that has some tariffs on it. Now we are not very big in China, so it has a limited effect that we see it a bit. We see very good and positive dynamics in Japan. And then last but not least, India. I would say it's a success story.
It's doing very well. We have, of course, now acquired a company called Monarchhem, which is in Gujarat, based in Gujarat that we will integrate in our business. And let's say, our strategy in India is to also be able to serve the markets throughout the whole country, and we are more and more capable of doing that and also more and more capable of serving the market in the segments that are the usual segments of IMCB. So overall, I think good traction in Asia Pacific and it's not the same picture as we saw now in particularly in Europe.
All right. Good. And would you say that when you talk about positive dynamics, is that mostly on the volume or pricing side? Because for the other geographies, you mentioned that it's mostly a lower demand story. What about Asia Pacific?
Do you see price differences as compared to the
other regions?
Yes. I think in Asia Pacific and particularly in Asia, we are very much focused on gaining product lines. So I would say that, let's say, increasing our offering to customers and with that, of course, also volume and keeping our pricing at this higher level. So I would say it's more focused on getting more volume in the market.
All right. Thank you.
Our next question is from Mr. Murtley Gundogan, ABN AMRO. Go ahead please.
Yes, thanks. I had a few follow-up questions. First on M and A, you mentioned that the last two acquisitions of Pharma that they would probably be closed towards the end of the year, so limited benefit. I mean we have seen the M and A contribution to gross profit come down. I think it was $20,000,000 in Q2, now down to $12,000,000 So my question is could you give us some guidance on the impact on Q4?
That's the first one.
If I look at the recent acquisitions that we announced, Switzerland and South Korea, where we did the signing, I think closing there is expected end of this year. So that will hardly have an impact on the numbers of this year other than the changes in the balance sheet that you might expect as a result of that. The other 2 are small ones. And if I then think about the timing of the acquisitions last year that could have an impact then Horne was included in the figures from August last year onwards, VELOG from October and Iveroma in India from November. So there will be a little bit of full year M and A impact of the 2018 acquisitions.
It's not as massive as what we saw in the 1st 9 months.
Okay. Okay. That's clear. Then yes, apologies for a bit of a nerdy nitty gritty question. But on IFRS 16, I think your the impact on EBITA was something like €2,000,000 in the 3rd quarter, increasing from €500,000 in Q2.
Can you tell us how this number jumps so much?
Yes. Basically it has to do with signing on new contracts. The guidance that we gave at the start of the year is that we would expect an impact of somewhere between €4,000,000 €5,000,000 on EBITDA level and that guidance is still in place.
Right, right. Okay. Thank you very much.
Our next question is from Mr. Kranmolder, ING. Go ahead please.
Yes. Good morning, everyone. My question is on VLOCs.
You give me an idea about the developments at VLOCs, especially given its dependence on
the automotive industry in Germany?
Yes. It's not only dependent on the automotive industry, fortunately, but it's also dependent on, for example, medical. We have a department that is focused on the medical applications, cable industry. So it's a wider, let's say, application fields than only automotive, but it's clear that, of course, automotive has a big impact on in Germany on also this business. We also have composites that so that is more related to other type of industries.
So it's a broad area, but definitely we see, of course, an impact from automotive also on the Vaelox business.
Do you see let me say compared to the year when you did the acquisition at the 3% EBITA margin, did you see any improvement overall at Viglock? Or was there still, let me say, it was probably a combination of, let me say, integration against pressure on revenues, in my view?
Yes. That's exactly right. You see some pressure on revenue and you see some positive effects on costs. And what we have to work on very hard also is now to further increase the margin. So we are absolutely not at all pessimistic about, let's say, our targets with respect to Vailox.
We still have too much cost in the organization, so we will work hard to decrease, let's say, our cost our own cost further and bring it to, let's say, the productivity levels that we have. But we are positive that we will get there despite some pressure on the revenue side.
Any idea about the timing when you can reach with VLOCs the margins of the group? Our name is Jaltim E, yes?
So it depends it still depends a little bit on German labor law because that is, of course, a factor that, let's say, slows us down. But I hope that we let's say, in the course of Q1, we see positive effects of that.
Okay. Thank
you.
Hello?
There are no more questions. Please continue.
Okay. No more questions. So then yes, then I want to close and not to apologize for the a bit of an orthodox call because of the traffic, which is still very bad if I look out of the window. But I wish you all a very good day, and thank you very, very much for your attention and your interest in our company. So have a good day.
Ladies and gentlemen, this concludes the IMC Analyst 3rd quarter results call. You may now disconnect your line. Thank you and have a nice day.