Ladies and gentlemen, thank you for holding and welcome by the IMCD Analyst Call Third Quarter Results. At this moment, all participants are in 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 Slikke. Go ahead, please.
Yes. Good morning, everyone. I'm sitting here with Hans Kooijmans. 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 one and a half hours ago, and we're still not at the office. 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. I will give a short introduction and then give over to Hans, as usual, to give a comment on the numbers. Of course, after that, we are happy to answer your questions.
You have seen the press release, and we are positive about the results over the first nine months with gross profit growth of 15%, increase of EBITDA of 12%, and cash earnings per share plus 15%. Also during this period, we produced EUR 30 million 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 Monachem in India and signed agreements to acquire DCS Pharma in Switzerland and Whawon 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 Whawon Pharm Co. Ltd. transaction is in particular pleasing as it offers us a very strong pharma business in South Korea, but also a 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. With this, I will give back to Hans to take you through the numbers.
Thank you, Piet. Good morning, ladies and gentlemen. I would like to give you a short summary of IMCD's first nine-month results, and 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 with 16%. About 13% of the gross profit growth was the result of the first-time inclusion of businesses acquired in 2018 and 2019. This acquisition growth is the full year impact of the three acquisitions made in the second half of 2018. E.T. Horn in the U.S., Velox in EMEA, and Aroma in India, to refresh your memory. The impact on year-to-date gross profit and results of the two acquisitions closed in 2019, so Matrix in Singapore and Monachem in India, was negligible due to the timing of these acquisitions at the end of Q3.
Gross profit and percentage of revenue slightly decreased to 22.2%. This decrease, which is comparable to the first six 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 EUR 176 million. 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 EUR 3.7 million in EBITDA. Operating EBITDA in percentage of revenue slightly decreased to 8.5%. The full year impact of acquired businesses of 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 IMCD as operating EBITDA, so without the D, in percentage of gross profit, was 38.4% in the first nine 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 Velox 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 non-recurring items increased EUR 11 million to EUR 120 million. 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 first nine months, were the main drivers of this improvement.
The year-to-date cash earnings per share were EUR 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. 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%. The main reason of the drop in EBITDA margin and conversion margin is the impact of the Velox business that we acquired in Q3 2018. To refresh your memory, this business had about EUR 150 million 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 first nine 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. Horn, 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 Horn business. Growth in our Americas organization's strict cost control and improved performance more than compensated for the negative impact of E.T. Horn on ratios like conversion and EBITDA margin.
Asia Pacific, in the third 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 margin 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. 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 account extended had a positive impact on EBITDA of EUR 3.7 million, 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. On page 13, 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. 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 EUR 3.5 million was mainly IT and application lab related. On page 14, a short update on the net debt and leverage.
Compared to the end of September last year, net debt increased with about EUR 52 million to EUR 672 million. The net debt position increased with EUR 71 million as a result of the adoption of IFRS 16 with the new lease accounting rules. 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. Last but not least, on page 15, you will find our outlook for 2019. Based on the performance in the first nine 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&A.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one. For questions, star one. Go ahead, please. First question is from Mr. Mutlu Gundogan, ABN AMRO. Go ahead, please.
Yes. Good morning, Piet. Good morning, Hans. I have a few questions. I would like to ask them one by one, if that's okay. The first one is on the organic gross profit growth that slowed down from minus three in Q2 to minus four in the current quarter. Can you tell us what drove such a slowdown?
Well, basically, Mutlu, this speech, basically, we speak in particular about EMEA. In a few countries in EMEA, we see really a slowing down of demands.
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 effects, a bit up and down. Still very strong, but nevertheless, influenced by dates of Brexit. I would say, not something that is company specific, but is really something that is driven by the market.
Right. Okay. Just to confirm, in the past, you spoke about Germany, France, and indeed, Great Britain. Is it isolated to those countries, or are the other countries weak as well?
No. I think generally, I would say it's weaker. These countries step out a little bit more than the others.
Okay.
Generally, overall, you see a softer demand.
Yeah. The second question relates to the first question. Looking at Q4, do you think we should be penciling in another quarter of negative organic gross profit growth?
That is something that if I would know, I would tell you or not. It's very difficult to predict. We see strong months changed by weaker months. It's very difficult to see and to predict. I'd rather look overall to the year than to quarter per quarter.
Yeah. I understand. The reason why I was asking is that you roughly have one and a half 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.
Yeah. We are not pessimistic, but I don't want to say more about it. That's what happens.
Okay.
As I've always said.
Okay. Fair enough. Just a few more questions. A bit more detailed on the region. First on EMEA, your conversion margin in the third quarter came down significantly. It's something like 570 basis points. Are you looking to take out costs to offset this?
Yes. This has been, of course, a bit of a special year, particularly in EMEA, because of the integration of Velox. We have taken out costs already, but we will take out more costs. We will see the effect early next year. I give over to Hans now.
Yeah. Mutlu, the reason for handing over is that if you would take out the Velox acquisition with an EBIT margin of a bit more than 3% out of the EMEA numbers, the conversion margin would be around roughly 42%. One of the big drivers of the drop in conversion margin is basically because of doing an acquisition with a pretty low EBIT margin.
Yeah. Fair enough.
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. That also allows us to optimize the structure of the group in EMEA.
Okay. Then final question, then I'll give the floor to someone else. On Americas, here, the conversion margin did very well. 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?
Yeah. It is a combination of a couple of these things. Also there, we are in the process of integrating all the American organizations into one. There was a press release announcing that at the 1st of November, that process was more or less done. That means that we are in the process to optimize the setup and the structure on the cost side, and that we also see commercial synergies in the organization helping us to grow the margin. These two things help us to improve the overall financial performance in the region.
Okay. Thank you very much for your answers.
Next question is from Mr. Peter Olofsen, Kepler Cheuvreux. Go ahead, please.
Yes, good morning. I wanted to follow up on Mutlu's question on the conversion margin in EMEA. I do understand that the integration of Velox has an impact for the nine months. Still, if I look at Q3, and I compare the conversion margin with the first half, still Q3 looks much weaker. 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? Was it just entirely Velox, which caused a somewhat weaker Q3?
I think it's a combination of both, whereby the lower demand in Q3 certainly played an important role.
If you look at the integration of Velox, 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 and the operating results. Yeah, you could call that one-off. Basically, before you integrate, you have a period whereby you just have double structures. We are going through the process of rationalizing the setup, and that should lead to cost savings coming months.
Yeah. Okay. These double cross structures you also had already in the first half, so that didn't really change in Q3. No, I was more referring to maybe some cost to lay off some overhead, people in overhead functions or something. That is not really capital.
Both having an important impact on the Q3 results.
Okay. 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? Mutlu mentioned minus four, I come to minus three. What do you think it was?
You look at margin or EBIT?
No, the organic gross profit decline. The growth was 1% for the nine months. It must have been slightly negative then in Q3.
Yeah. I think maybe I call it flattish.
Like it was in Q2?
Yeah.
Okay. That flattish, it was then slightly positive in the America and Asia Pacific, and also in Asia Pacific and then negative in EMEA?
Yeah. If you look at the negative in EMEA, it was close to zero.
Okay. My last question is on Asia Pacific. You indicated you were satisfied with 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?
One moment please. This is the operator. One moment, please.
Operator?
Yes, can you hear me?
Yeah. Can you put people on hold for a couple of minutes, then we go upstairs and we call in.
Okay, no problem.
Yeah. Could you tell them that?
Yes.
We'll be back in a couple of minutes.
Yes, they've heard you already.
Okay. All right.
Ladies and gentlemen, I will put you on hold for a few minutes. One moment, please. Ladies and gentlemen, you are back in the call. Go ahead, Chairperson.
Yeah, sorry for this. Next question.
Next question is from Mr. Matthew 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 for me exactly what the Americas organic number for the quarter was, please?
For gross profit.
We talk gross profit. In EMEA, we reported a low single-digit organic growth number on the gross profit line.
Perfect. Thank you.
You need to ask the Americas.
For the Americas.
Americas, yeah.
Yeah.
Americas was low single digit, yes?
Yeah.
Okay. Just as a follow-up, 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 has had on margins being dilutive. Can you just talk about broadly as you make these more recent deals, are they also margin dilutive? What sort of back from these segments and geographies?
We have individual strategies for all our market segments. Both in coatings, construction, advanced materials, but also in life science, in food, pharma, and personal care. These particular two acquisitions that we announced are predominantly focused on the pharma industry. Our pharma business is pretty much starting to become a more global franchise, a more global operation. This will help us also, in particular the Swiss one, to strengthen our position in active pharmaceutical ingredients. The one in South Korea, is very much similar to the businesses that we have elsewhere. It's a strengthening of our pharma business, and it is not dilutive as to margins. I would say no, on the contrary. It's very much geared to executing our strategy also in the pharma and so we are very positive about these latest additions.
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 will you just book your net share?
You mean Korean one.
Korean one. The South Korean one.
Yes.
No, we will fully consolidate them in our numbers.
Got it. All right. Thank you, gents.
Yep.
Next question is from Mr. Steve Golden, Deutsche Bank. Go ahead, please.
Hi, there. Just on the growth point. Sorry to labor the point. Just on the numbers I've got for the first half are 3% organic GP, and I think the 9-month was 1. I just wanted to confirm that those are the right numbers from the press release, which again, gets me to sort of down 2-3 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. 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?
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? Also, any kind of steer you could give us maybe on how life science has fared versus the industrial products.
Number wise, Steve, I keep on repeating what I said. If the flattish is around nil, slightly plus or slightly minus, depending on the regions, 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 on price. We keep the price where it was, hopefully also to further improve. Life sciences, that's always, of course, more stable. Also here, you will also see some regional effects. Predominantly, I would say, still holding up pretty well.
Okay, great.
Again, Steve, if you look at the margin percentage that we show, the drop of 0.5%, if you would take out Velox and Horn there, then the margin before these two acquisitions would have been at least as high as last year.
Okay, great. Thanks.
To push on prices in the market.
Sorry, what was the last thing you said?
It's more a volume than a pricing thing.
Right. Okay. In terms of your ability to add new suppliers and customers, 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? The last one from me, sorry, just on the Velox margin. 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 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. The integration has been completed, but the optimal structure is not there yet. 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 two companies. That meant also this year that we had to put the whole United States on the same IT platform, which was successful. Of course, that creates a lot of work and focus in the organization. We changed also now, let's say with the integration of Horn, of course, it became an IMCD company.
Also in the supplier dynamics in the U.S. because of this integration, but also because of the acquisition of Horn, you see some dynamics, some positive, some negative. 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. We need some time to convince suppliers to get that done. 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. We are optimistic about possibilities that will offer to our customers and suppliers.
Great. Thanks a lot.
Next question is from Ms. Nathalie de Bruyne, Degroof Petercam. Go ahead, please.
Hi, good morning. Well, actually all my questions have been answered. I have no follow-up. Maybe we discussed organic growth in EMEA and in North America. Can you maybe just go to Asia-Pacific and elaborate a bit more on this? What are the dynamics that you were seeing there? Was it different than it was in EMEA and in Americas?
I think, Asia-Pacific is, of course, very large area. If I take it in a couple of parts, then Australia and New Zealand, you see a little bit of the same, let's say, picture as elsewhere. 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 plays a role as well. 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. Also in the Philippines, in smaller countries, Thailand, we also doing well. On a whole in Southeast Asia, we're positive. Also are 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 U.S. into China that has some tariffs on it. We are not very big in China, so it has a limited effect, but we see it a bit. We see very good and positive dynamics in Japan. 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 Monachem, which is based in Gujarat, that we will integrate in our business. 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.
Also more and more capable of serving the market in the segments that are the usual segments of IMCD. Overall, I think good traction in Asia-Pacific, and it's not the same picture as we saw now in particular in Europe.
All right, good. Would you say that when you talk about positive dynamics, is that mostly on the volume or pricing side? 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?
Yeah, I think in Asia-Pacific, and particularly in Asia, we are very much focused on gaining product lines. 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. I would say it's more focused on getting more volume in the market.
All right. Thank you.
Ladies and gentlemen, if you still would like to ask a question, please press star one. For questions, star one. Our next question is from Mr. Mutlu Gundogan, ABN AMRO. Go ahead, please.
Yes, thanks. I had a few follow-up questions. First on M&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. We have seen the M&A contribution to gross profit come down. I think it was EUR 20 million in Q2, now down to EUR 12 million. My question is, could you give us some guidance on the impact on Q4? That's the first one.
Mutlu Gundogan, 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. 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 two are small ones. If I then think about the timing of the acquisitions last year, that could have an impact then. Horn was included in the figures from August last year onwards, Velox from October, and Aroma in India from November. There will be a little bit of full-year M&A impact of the 2018 acquisitions.
Right.
Not as massive as what we saw in the first nine months.
Okay. That's clear. Yeah, apologies for the bit of a nerdy, nitty-gritty question, but on IFRS 16, I think the impact on EBITA was something like EUR 2 million in the third quarter, increasing from EUR half a million in Q2. Can you tell us how this number jumped so much?
Yeah. 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 EUR 4 million and EUR 5 million on the EBITDA level. That guidance is still in place.
Right. Okay. Thank you very much.
Our next question is for Mr. Karel Mulder, ING. Go ahead, please.
Yeah. Good morning, everyone. My question is on Velox. Can you give me an idea about the developments at Velox, especially given its dependence on the automotive industry in Germany?
Yeah, it's not only dependent on the automotive industry, fortunately. It's also dependent on, for example, medical. We have a department that is focused on medical applications, cable industry. It's a wider, let's say, application field than only automotive. It's clear that, of course, automotive has a big impact in Germany on also this business. We also have composites, so that is more related to other type of industries. It's a broad area. Definitely we see, of course, an impact from automotive also on the Velox business.
Do you see, let me say, compared to when you did the acquisition at 3% EBITDA margin, did you see any improvement overall at Velox? 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. What we have to work on very hard also is now to further increase the margin. We are absolutely not at all pessimistic about, let's say, our targets with respect to Velox. We still have too much cost in the organization, so we will work hard to decrease, let's say, our own costs further and bring it to, let's say, the productivity levels that we have. 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 Velox the margins of the group, let me say, the median?
It will depend a little bit on German labor law because that is of course a factor that, let's say, slows us down. I hope that we, let's say, in the course of Q1, we see positive effects of that.
Okay. Thank you.
Ladies and gentlemen, if there are any more additional questions, please press star one. Star one for questions. Go ahead, please.
Hello?
There are no more questions. Please continue.
No more questions. I want to close and also apologize for the bit of unorthodox call because of the traffic, which is still very bad if I look out of the window. I wish you all a very good day and thank you very much for your attention and your interest in our company. Have a good day.
Ladies and gentlemen, this concludes the IMCD Analysts Third Quarter Results call. You may now disconnect your line. Thank you and have a nice day.