Ladies and gentlemen, thank you for holding, and welcome to the Analyst Call First Half Year 2019 Results from IMCD. At this moment, all participants are in listen-only mode. After the presentation, there will be opportunity to ask questions. I would like to hand over the conference to Mr. Piet van der Slikke. Go ahead, please, sir.
Yes. Welcome to everyone. Hans Kooijmans and I will be happy to answer your questions regarding our press release containing the half year 2019 results. We have reported 17% EBITDA growth in the first half year. After a strong first quarter, the second quarter, in particular towards the end, saw the market softening, resulting in reduced growth of our results. Overall, however, the first six months were satisfactory with strong free cash flow and growth of cash earnings per share of 22%. Looking at the different regions, EMEA reports a 1% growth of EBITDA and 3% Forex adjusted. Business sentiments weakened in the second quarter, which is most strongly felt in Germany. The Americas showed good growth, plus 49% operating EBITDA growth, although demand in Q2 was a bit lower than expected. Asia Pacific is performing in accordance with expectation.
Summarizing, the economic environment is challenging and given the geopolitical turbulence, visibility is low. Notwithstanding these negative factors, IMCD's business model is resilient and strong, and we expect EBITDA growth in 2019. With this, I give over to Hans for additional remarks on the numbers.
Thank you, Piet. Good morning, ladies and gentlemen, I would like to give you a short summary of the results of IMCD in the first half of 2019, as reported earlier today. I would like to start on page nine of the presentation, where you will find a summary of the first half year income statement. As you can see, revenue increased 21% compared to the same period last year, gross profit increased 19%. Most of this gross profit growth is a result of the first-time inclusion of businesses acquired in 2018, adding 15% of the 19%. This acquisition growth is the full year impact of three acquisitions made in the second half of 2018. E.T. Horn in the U.S., Velox in EMEA, Aroma in India. Gross profit and percentage of revenue slightly decreased to 22.3% year to date.
This decrease is, as explained before, mainly the result of an on average lower gross profit margin percentage in the recently acquired businesses. We saw the usual fluctuations and differences in margin percentage between regions and quarters caused by changes in local market circumstances, product mix differences, product availability, and currency fluctuations. Operating EBITDA increased 17% of EUR 18 million to EUR 153 million, and this increase was a combination of organic growth and the first-time inclusion of acquisitions. The application of IFRS 16, the new lease accounting standard, had a positive impact of about EUR 1.7 million in EBITDA. Operating EBITDA in percentage of revenue slightly decreased to 8.8%, and the recently acquired businesses of Velox and Horn, with a lower EBITDA margin than IMCD average, were the main drivers of this decrease.
The same applies for the conversion margin, calculated as operating EBITDA in percentage of gross profit, where we saw a similar small margin decrease of about 0.5%. On the next page 10, you will find a summary of the financial details per operating segment. In EMEA, we report an 11% Forex-adjusted gross profit growth and 3% operating EBITDA growth. The EBITDA margin dropped 0.9% to 10.2%. The main reason of the drop in EBITDA and conversion margin is the impact of the Velox business that we acquired in the second half of 2018. As a refresh memory, this business had about EUR 155 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 in line with the first half of 2018. The Americas' Forex-adjusted gross profit increased 36% and operating EBITDA increased 42%.
This increase was a combination of healthy organic growth and the first-time inclusion of E.T. Horn, acquired end of August last year. Operating EBITDA margin and conversion margin both further 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. Good growth in our North America organization, strict cost control, and improved performance in Brazil more than compensated for the negative impact of E.T. Horn on ratios like conversion and EBITDA margin, and further resulted in a substantial organic increase of the operating results in this region. In Asia Pac, we realized double-digit Gross Profit and EBITDA growth on a constant currency basis. This growth was a combination of organic growth and the first-time inclusion of Aroma, a business in India that we acquired end of last year.
Operating EBITDA margin and conversion margin both slightly decreased compared to the same period of last year, mainly as a result of additional investments to strengthen local organizations. In the last column, you will find under 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 that you will notice here is mainly the result of the application of IFRS 16. As mentioned earlier, this new lease accounting standard had a positive impact on EBITDA of EUR 1.7 million, and most of it ends up in the segment holding companies. For your convenience, I added page 11, in which you will find a summary of the allocation of the IFRS 16 impact on operating EBITDA per segment. On page 12, a summary of the P&L lines between operating EBITDA and net results for the period.
A few general remarks. Net finance costs include, among others, interest expenses, currency exchange results, and amortization of finance costs related to the setup of today's financing structure. Further, it includes part of IFRS 16 lease expenses. Income tax expenses increased in line with the increased results. Amortizations of intangible assets are mainly non-cash related to the amortization of supplier relations, distribution rights, and other intangibles. A further amortization includes about EUR 2 million cash costs as a result of the implementation of IFRS 16. Last but not least, on the bottom of this page, you could see a substantial 22% increase in the cash earnings per share to €1.60. On the next page 13, a summary of IMCD's balance sheet.
For your convenience, I added a restated December 2018 balance sheet, including the IFRS 16 impact, adding, amongst others, our leased offices and other leased assets to our balance sheet. As you will notice, the implementation of this new lease standard resulted in EUR 64 million additional assets and debt on our year-end 2018 balance sheet. The property plant and equipment that we own ourselves, so excluding leased assets, slightly decreased and is still relatively low because of the asset-light business model. The increase that you see is mainly due to increased lease obligations because of renewals or expansions of lease contracts. Intangible assets and related deferred tax liabilities are, as usual, relatively high as a result of M&A and our history as a private equity-owned company. There is an equity position of EUR 840 million, covering 54% of capital employed.
As you might remember, in Q2, we paid a dividend of EUR 0.80 per share, resulting in a total dividend payment of EUR 42 million. The leverage ratio end of June, based on our loan documentation, was 2.7 times EBITDA, which was well below the required maximum as set in the loan documentations. Reported leverage was slightly higher due to the additional lease-related debt as a result of IFRS 16. Working capital and net debt development are summarized on the next two pages. On page 14, 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 of working capital increased to EUR 46 million compared to year-end 2018. Compared to last year, the overall working capital days increased with two days from 56 to 58.
Stock days were more or less flat compared to June last year and slightly better than December 2018. On page 15, a summary of the movement in our net debt position in the first half of 2019. End of last year, starting position was EUR 611 million, EUR 91 million cash generated from operating activities. You see cash outs related to interest, tax, and investing activities. Further, the EUR 42 million dividend payment and the new IFRS lease obligations, adding up to a net debt position at the end of June of EUR 694 million. I would like to finish this financial summary with the cash flow overview on page 16. As you can see, year-to-date free cash flow and cash conversion ratio substantially increased in the first half of 2019 compared to last year.
Substantial operating EBITDA growth and lower increase in working capital were the main drivers of this healthy cash flow. Before we move to Q&A, I would like to take you to page 18, where we summarize the outlook for the full year. Based on the performance in the first half of 2019 and the strong fundamentals of the business, we expect operating EBITDA growth in 2019. I would like to hand over now to the operator to open the line for Q&A.
Thank you, sir. Ladies and gentlemen, we will start the question and answer session now. To be registered for the question and answer queue, please press star one on your telephone. That's star one for your questions. Go ahead, please. The first question is from Mr. Peter Olofsen, KBC Securities. Go ahead please, sir.
Good morning, gentlemen. My first question is on the organic Gross Profit growth. There was a clear slowdown in Q2 compared to what we saw in previous quarters. Is that mainly due to the more challenging macroeconomic environment, or are there also other factors that may have caused some slowdown, maybe some loss of clients or suppliers, or maybe some disruption from the floods in the U.S. Midwest? Maybe some more clarification there. Then, you briefly touched on this in the introduction. Could you shed some more light on what you have seen during the second quarter? Some other companies talked mainly about a rather weak June. Did you also see it more slowing towards the end of the quarter? What are you seeing so far in the third quarter?
Yes. Thanks very much for this. To give you a bit of color, I think where you see in the second quarter a slowdown in particular also towards the end of that quarter. Throughout the year, I think we have seen volatility in our monthly results. In the second quarter, you see also strong differences. I wouldn't attach too much importance to that. In terms of these quarterly results, I've always been not a great fan of these quarters, as you know, when you follow me. If you look at our business in the first six months, then it has been going fine. What we see, of course, is that the macro environment, in particular, let's say, the middle of the year, has worsened, has deteriorated. We particularly see that in Europe, and then in particular also in Germany. We didn't lose any suppliers or customers.
It's purely a matter of demand in the market. Other than that, I think, our fundamentals, our business model, it hasn't changed in this quarter or in the first quarter. It's still strong. On your last question with respect to July, I want to be cautious about giving you signals that that was a better month again versus June. You have to be careful not to attach too much value to these quarterly moments. That doesn't take away, of course, that, as we can all read in the papers, that the macroeconomic environment has worsened, has deteriorated. That is something that we all have to see how that will play out in the next period. Basically, in the IMCD business model, internally, nothing has changed. We are integrating the businesses in the U.S. and in Europe that we acquired last year in accordance with plan.
We keep our margins on good levels. We have to see what the demand in the market is, and in particular, in the industrial markets. As you know, we are a diversified company. We have businesses in many market segments, and where we in particular seem slowing down is in the markets that are related to end markets like car industry, construction, et cetera. I hope this gives a bit of color and answers your question.
Yes, it does. Maybe to briefly follow up on this and to check whether my math is correct. You reported 3% organic growth for the first half, and you did 8% in Q1. I come to something like -2%, -3% for Q3. Is that correct for Q2?
Peter, you look at margin or EBIT?
No, the organic Gross Profit growth.
You mentioned in the press release it was 3% for the first half.
Yeah.
It was 8% in Q1.
Yeah.
Doing some back calculations, I get to a -2, -3 for Q2. I just wanted to check whether that's consistent with?
No.
Not.
No. The second quarter is slightly better, but it was more flattish.
Okay. Maybe one thing on the calculation of the net profit before amortization. It seems that the tax credit related to the amortization was rather low. It's only EUR 1 million on an amortization charge of EUR 51 million.
Yeah.
Can you explain why it's that low?
Basically, that has to do with Where it comes from is that when you add the goodwill or the intangibles to the balance sheet at the moment of the acquisition, at that moment, you create the deferred tax liability, and you start releasing them, and you amortize. Basically, it has to do in which jurisdiction we had the.
The goodwill amounts or the intangible amounts, is it tax-deductible or not? That then leads to a release. This is a bit of a more technical explanation, and I'm not sure I should do it in this call.
Given that the acquisitions took place second half last year, we should then assume something similar for H2 as what we saw in H1?
Most likely, yes.
Okay. Thank you.
The next question is from Mr. Tom Sheridan, Berenberg. Go ahead, please, sir.
Hi. Thanks very much for taking my questions. I've got a few if I could. The first one is just in terms of your outlook. I know you don't tend to give quantitative outlook, but I suppose at this stage, the outlook of expecting EBITA growth for the full year, given we've already seen 17% absolute EBITA growth in the first half, I guess becomes sort of less useful. I wonder whether you can help about maybe fleshing out the guidance for the second half, and in particular, I suppose looking at the organic gross profit line. In H1, we had 3% organic gross profit growth, and I appreciate there's not great visibility, but looking into the second half, correct me if I'm wrong, I think comps get a little bit easier in the second half.
If all things remain equal, would you expect a slight acceleration, at least in the organic Gross Profit line in the second half? Then the second question I had was just relating to the M&A contribution, particularly at the EBITA line. If I'm right in terms of when your acquisitions annualize, I guess the contribution in the second half would be quite a bit lower than in the first half. I'm thinking around the order of about 3% EBITA growth from M&A in the second half. I know you don't like to give exact guidance on that, but are you able to help in terms of the operating profit contribution from M&A just in the second half in order to help flesh out that guidance? Thank you.
I will answer your first question, which can be very short and brief. As you know, since we have been listed, we are not giving specific forecasts for the year other than very generic ones like we did also for this year, and we stick to that. Unfortunately, I can't give you more details. Like we did also in the previous four or five years of our listing. Hans, on number 2?
Tom, on the M&A side, when you look at the full year impact of, you had three acquisitions last year, E.T. Horn, Aroma, and Velox. E.T. Horn was acquired end of August, what you could expect is another two months of M&A impact, and then it should sit in our comps of last year. To remember the numbers there, when we acquired E.T. Horn, we announced that they made an EBITDA of about $12 million. That means an EBITDA of around sort of between 10 and 11 on a full year basis.
There will be a few millions of M&A impact in the P&L. Velox, with an EBIT margin of 3%, acquired last year, was it September? Another three months, that would be another million of M&A impact. Aroma was pretty small. We acquired at end of November. This was at EUR 25 million, EUR 26 million of revenue, and as we indicated then, around 8% EBIT margin. You can do the math, I think, yourself.
Okay. That's really helpful on the M&A contribution. Thanks very much.
The next question is from Mr. Mutlu Gundogan, ABN AMRO. Go ahead, please.
Yes. Good morning, Piet. Good morning, Hans. Let me try to also have a swing at the organic gross profit growth. I understand, I know from history that you always say that there's a lot of volatility from one quarter to the next, but the decline from Q1 to Q2 is significant. We all know that the third quarter should be this tactic period, but nevertheless, such a decline seems to indicate that there was more going on. Was there a potential benefit of client wins filling the channels in Q1, which can explain the decline from Q2? Maybe adding to that, is Q1 then the base we should look at? Is that what you're saying when you say, "Don't look at all this"? Is Q1 a good base to base our forecast on for the remainder of the year, maybe 2020 as well?
That is a big first question. Secondly, on America. The conversion margin has shown quite some volatility here in the last few quarters, so Q1 very strong and now Q2 a little bit weaker. Can you tell us why that is and what we should expect going forward? Finally, third question on acquisitions. There seems to be a few million EUR cash inflow, and that seems to indicate that you sold something. Is that correct? If so, can you explain that? Perhaps to add to that, so far this year has been relatively quiet in terms of M&A. Can you update us on the pipeline, how things are evolving? Thanks.
Yeah. I'll try to.
Answer all your questions. First, on your questions with respect to Q1 and Q2, whether or not there was inflow of suppliers in Q1 and not in two, the answer is no. No difference. We have a consistent business that is not, let's say, so dependent per quarter, of course. We have long-term relationships with our suppliers. That's not a difference, that's not an explanation. I would also like to point out, by the way, that the second quarter last year was extremely strong. I think if I'm not incorrect, the strongest quarter that we had. I think you should also take that into account if you look at the numbers now. I think we should not over interpret, again, the quarterly results, either on the positive side, but also not on the negative side.
On your question on forecast, whether or not we should take the first half as an indication of the second half. I'm not going to say more than I said, and we said in our press release, on what we expect on the development of our EBITDA. I think the second question also answered, the third question is on the capital inflow. Yes, we have sold small business, it's also in the press release on page four, last paragraph, where we indicate that we sold a small business that we had in Australia in flavor formulation, which is really non-core for us. On the pipeline, also here, I don't want to be boring, it is what it is in terms of what comes out and what goes in. Sometimes, we always, throughout our 25 years almost of existence, we are busy on M&A.
This year, I can't predict what will come out, but we expect something will come out this year. Our business doesn't change over quarters, I hope that you understand. Our business stays resilient, strong. We grow our customer base. We try to grow our supplier base. Of course, like anybody else, we are also dependent on demand from the market. It's clear that we see here and there in certain regions, demand slowing. Will that continue? We don't know. We will see. That makes it also difficult, of course, to make a forecast.
Yeah.
Okay. Did you leave one on the table? One more. I think you answered them all.
Okay.
Is that okay for you?
Yeah. That's fine. Thank you.
The next question is from Mr. Steven Golden. Deutsche Bank. Go ahead, please.
Hi there. Thanks for taking my question. I've got a few as well. On the organic Gross Profit, could you give us a bit of a feel for how the life sciences business did versus industrial? Obviously, you're saying, organic GP was flat-ish, and we're seeing ballpark 4% organic growth from the likes of Givaudan. That suggests that industrial may have been particularly weak, and obviously you said before that Germany surprised negatively towards the end of the quarter. Do you see this as potentially driven by a short-term de-stocking across your customer base? Would you say that it's more And therefore, could it potentially correct itself in one to two quarters, given that you deal with smaller customers with less working capital, which they outsource to you? Is it just too difficult to say? Can you not really give much commentary there.
Over the medium term, do you still think that the 6%-7% organic GP target that you've got is reasonable? Does this change anything? Lastly, sorry, just on the margins. Thinking about operational leverage, looks like Velox probably in Europe, it took off maybe 70 to 80 basis points of margin. I think you did slightly worse on 100 basis points in EMEA. Are you seeing some negative operational leverage there? In general, given cost inflation, what do you need to grow at in a region to maintain margins on a like-to-like basis? Thanks a lot.
Yeah. Okay. First question on industrial versus life science. It's clear that our life science business consisting of food, pharma, and personal care, is more resilient and has a higher growth rate than our industrial business. Of course, the volatility of our industrial business is a bit larger, higher than the other ones. On destocking, very difficult question. It's very difficult to have visibility on that. We have, of course, been asked about stocking in the U.K., waiting for Brexit. Probably some effect. I'm not sure if they have now destocked or are stocking up or have been fully stocked. It's difficult to say. I don't have an answer to that. Our guidance with respect to our organic growth remains the same, doesn't change. That's over the, let's say, on average, a 6% organic growth in the medium term is something that we stick to.
On Velox, Hans, you have maybe a few.
What I tried to say, Steven, in the call, that if you normalize the M&A numbers for the impact of Velox, the EBITA margin that we generated in the other companies, is flat compared to last year. The rule was around that 11.1% that we also showed last year. If you add a business with a 3% EBITA margin, it takes a bit of time to bring it up to a decent level. If you pinch that out, it's flat compared to last year. Your other question is more complicated. That had to do with cost inflation and how much margin you need to keep ratios the same. I think that is more a mathematical exercise. If you grow your cost base with 3%, you should also grow your margin.
Okay. Thanks a lot. Yeah, that's it for me. Thank you.
The next question is from Mr. Rajesh Kumar, HSBC Bank. Go ahead, please.
Hi. Good morning, gents. Thanks for taking the question. First, can you give us some idea of the exposure you have to segments where you have seen some slowdown? For example, you earlier called out autos, you called parts of industrial segments in Germany. Which particular industries are seeing greater degree of slowdown than the more resilient food flavoring, that sort of thing? That would be quite helpful. Second, when you look at the slowdown you've seen in Q2, obviously quarterly data can be quite volatile, so making long-term decisions just based on quarterly data would not be prudent. What do you need to start any cost action in terms of how many quarters, or what trend do you need to see before you say, "Okay, we need to now start cutting a bit of cost"? The third one is just on the inventory inflow.
It seems like there have been some destocking. It could be an impact of how M&A looks like when added to your balance sheet. Can we get some flavor on what sort of, or the nature of the discussions you're having with your suppliers and customers about maintaining inventory levels or planning for the future?
Okay. On the first question, Rajesh, exposure to end markets. Yeah, I answered it more or less already. It's of course very much aimed at these industrial end markets, like the car industry. Of course, we are not delivering directly to the car industry, but just to people who deliver to the car industry. The coatings markets, paints and coatings, that goes of course for these paint and coat markets, also for advanced materials like plastics or composites that have a function in these industries. I think that's the most important two markets that are affected. Cost action. We are a business that depends on the quality of our organization and quality of our people.
It's very important that we maintain, under all circumstances of course, a strong organization and we are not in the business of reorganizations, et cetera, other than when we integrate businesses. On the cost side, we have the possibility, of course, to not fulfill vacancies or to look at the variable parts of our compensation schemes. There is also, to be quite frank, no reason at all for us to differ from the path that we are on, which is to continue to build strong organizations, specialty chemicals distribution and food ingredients distribution. We will continue to do so. I mean, I think we all tend, in many respects, to overreact on the positive side, but also on the negative side. Come on. We have an organization that has been growing for a couple of decades.
I said that also earlier, when we did so well in the quarter. We never always grow. The underlying trend of our business model and of IMCD has been continuous growth over the years. That's how we have to look at our business. We are not in the business of immediately cost cutting. We rely on our people, and we will continue to improve the strength of the organization. Now, on inventory, Hans, do you have a remark on that?
No. I think, Rajesh, what we saw at year-end, at 2018, we had relatively high stock positions. You see the stock days coming down slightly. As indicated before, we are not in the business to take speculative positions on stocks. If we try to buy based on expectations of our customers' needs, we monitor carefully business line to business line, what we have and what we need. Could always be lower. That's also the eternal push that we have in the organization. We could always optimize and do better on that. Feel comfortable with the levels where we are at the moment.
Understood. Thanks. Listen, just on the first question, as a proportion of your overall revenues or gross profit, how much is the exposure to the autos and industrial segments which have been weak? Just a ballpark figure. 10%, 20%, something.
On the automotive, you mean?
Yeah.
That I don't know exactly, but I think if you look at our industrial business, versus our life science, it's about 55 versus 45. That's a general indication.
Understood. Thank you.
The next question is from Miss Natalie de Bruijn, Degroof Petercam. Go ahead, please.
Hi. Good morning. Thank you for taking my question. A few, if I may. Starting again, I'm very sorry about that, with organic growth. You mentioned a 3% organic growth in the first part of the year, so it was much more pronounced in H1, obviously. If I did calculations, I would assume it was in negative territory in EMEA, still somewhat positive in North America and also positive in Asia PAC in Q2. If you could confirm that would be helpful. Secondly, I'd like to go to the EBITA margin in the Americas. Again, sorry for not looking at the quarters, but just trying to understand, because what I see is that you had an important margin compression in second half, or second quarter, sorry, of the year. I'm curious to hear about why that is. Is there any specific reason for that?
Is the general slowdown the reason for it? In the first quarter, the EBITA margin was quite solid, despite the fact that you were busy integrating the latest acquisition from E.T. Horn Company. It came down in Q2. I'm just curious to hear about your thoughts about that.
The organic growth figures that you mentioned for the different segments, I think I can confirm them. Let me get this right. The second question is a bit more complicated, because I don't really follow you there. Could you repeat the question there?
Yeah.
It's about the EBIT margin in the Americas.
Exactly. The EBITA margin in the Americas, because I did the calculations. I see in Q1, EBITA margin was 8.7%, which was positively surprising given the fact that E.T. Horn, obviously, is a low margin business. You also had a solid quarter on the organic side of things in Q1. Q2, I see EBITA margin is now at 7.8%, down versus the first quarter. Just curious to hear about why that is.
Basically nothing specific. I think also in that quarter, we had a slightly lower gross margin percentage compared to the first quarter. That basically has to do with mix effects in what we sold in that quarter. Because before you know, you start to talk about seasonality in certain business lines, higher and lower margin products, and so on and so forth.
All right.
There is nothing specific in there, as far as I read it.
Okay. For the year, what should we think of? I guess it was also mix driven in Q1, and then you had mix effect probably in Q2. What does that mean for the remainder of the year?
If you could predict into demand in the market, I could help you. We don't know. We will see. We are not in the business of forecasting.
No, got that. Appreciate it. Was just wondering, just compared to last year, what you see, given that you're progressing with the integration of E.T. Horn. I'm actually surprised to see that mix has such big impact on margins in that region, because it doesn't seem to add that in the other regions.
No.
That's purely mix?
Yeah.
All right.
The next question is from Mr. Tijn Mulder, ING. Go ahead, please.
Good morning, everyone. On the Far East, you say it was in line with expectations, that's also somewhat helping the physical there from the macro environment. On Velox, you acquired the firm with revenues of EUR 165 million in September last year. If you look at the revenues today, can you give an indication, and can you also give an indication about the progression on the integration and the cost savings of that business given this environment?
Yeah. If you look at where we are with the integration of Velox, what we said earlier is that we are in the process. Velox is a combination of all kind of local European companies headed by a German head office in Hamburg. We are in the process of integrating these local entities in the IMCD organizations. We expect that we will finish that process, more or less in this quarter. That means that we have the existing cost structure in the first six, seven months of this year, and that we should see the cost savings as a result of the integrations in the last quarter of this year. I think on the commercial side, they operate in the area that we just referred to with difficult market circumstances. What we see there is that we hold up nicely.
We did not lose any suppliers or critical people. Everything on track. We struggle a bit with demand. So far so good.
Okay. On the Far East and the situation there, and also on the extra cost you made in the Far East.
Asia Pacific is, as I said, performing in the course of the plan. It's a smaller region. Of course, that's also a bit more volatile if something happens. We see good growth in the region. I think Australia and New Zealand, in particular Australia, also a bit, let's say, flat and depressed. The rest of Asia is doing quite well. We don't see their very specific reason to comment on macro factors yet. On the cost side, we saw a little bit of reduction of conversion margin. That is basically driven by adding a bit of additional cost in the region just to strengthen sales forces and local organizations. That is what Piet said here, that if you do that in a smaller region, if you immediately see it back in the ratios.
The question here is, of course, on the background that you had some extra costs for setting up the organization in Vietnam and in Japan, for example, and that was not the case anymore. I'm interested, why did you, of course, then start up the higher cost now? If that is the reason. It's a detailed question, I know.
Yeah. It's adding few people here and there.
Okay. Thank you.
Next question from Mr. Tom Bolton, Berenberg. Go ahead, please.
I just had a couple of follow-up questions. One of them has already been answered around Velox, but the other question I had was regarding a comment one of your peers, who's also active in specialty chemical distribution, made that historically, specialty has tended to outgrow commodity distribution by around 1.5% from their view. Currently, it was trending at about 3% ahead of commodity distribution. I'm just trying to reconcile that with the sort of flat performance in Q2, and then just whether or not you can corroborate that's what you see in kind of the specialty market overall underlying. Maybe whether Q2 was really, as you mentioned earlier, a function perhaps of the extraordinarily tough comparables you had at a company level in Q2, or whether or not there's something going on with market share kind of more broadly in specialty chemicals.
Yeah. I'm really not occupying myself to try to compare ourselves with commodity business, let alone that I have to then know what the definition exactly is. I have difficulty to answer this question, quite frankly. Does it help us also if we know this? I'm not totally sure what objective of this question is.
I guess it was more around what was going on underlying in the overall specialty market relative to your growth and whether or not there were any movements in market share gains amongst distributors.
No. Listen, the specialty chemical market is, of course, huge. That's
Which is also sometimes difficult for us, of course, to quantify it. We are working with more than 40,000 product lines in all kinds of different applications, wide different applications of these products. From very small, very expensive products in the personal care industry to more volume products in paints and coatings, et cetera, and in all kinds of applications. It's impossible for us to have a vision and a view of each and every different application of these products, and of the end markets of these products. Don't forget, of course, that we deliver also to customers that export themselves, to, for example, Asia or to China or wherever, and that they could also be affected. That has, in the chain then also, again, an influence on us. It's a complicated, let's say, structure.
It's not so easy to talk about market shares in our business because we have so many different markets. We have also many different market shares. I think what you underlying should look at is, do we keep up our margins? Is it a demand question? Do we lose business ourselves because of loss of suppliers? The answer to that is no. It's purely an effect of demand in the market. That's, of course, then a bit more dependent and a bit more volatile in the industrial markets and a bit less in the life science markets. I stay away from, let's say, the market share discussion.
Okay. That's helpful. I appreciate it. It comes to the market. Thank you very much.
The next question is from Mr. Steven Golden, Deutsche Bank. Go ahead, please.
Hi there. Sorry, I've just got a quick follow-up, if you don't mind. You touched before on the cost inflation and operational leverage point, but just off the back of my estimates, it looks like you did about minus 2% of GP in EMEA, from my calculations. You were saying before that underlying margins were basically flat year-on-year. Which is obviously pretty good when you look at what your main European competitor did, with obviously a much more fixed cost base, but they had cost inflation of 3%-4% in EMEA. I just wondered if you could give us a bit more color on how you manage that, and what that kind of says about the flexibility of your cost base, whether or not you maybe took some cost out.
Just any kind of feel you could give us there in terms of cost flexibility and operational leverage as we go forward would be really helpful.
Yeah. What I said before is, cost flexibility is mainly in whether or not we add people. It's also, to a certain extent, of course, trying to prevent our logistic costs to increase, although that's a smaller part of our total cost structure. We also have, of course, variable compensation parts, which we look at during the year. These are the levers that we can touch. Yeah. Far, we have been successful. I think we had questions in the past about our flexibility of our logistic costs, and I think that helps us versus those who have fixed infrastructures.
Great. Thanks a lot.
The next question is from Mr. Henk Veerman, Kempen & Co. Go ahead, please.
Hi, Hans. Thank you for taking my question. Two remaining from my side. Firstly, on the U.S., my question is set on the organic growth that has been still somewhat positive in the first half of the year and maybe also in Q2. How much of that could you Let's say, is it fair to say that a meaningful contribution still came from the cross-selling and the self-help potential of all the more or less recently acquired businesses over the last two, three years? Second question, stepping back from the growth into the role of strategy into the upcoming years. I guess one benefit of the market slowdown as we see it today is that some targets may become a bit cheaper and may also be more inclined to sell. Is that something you're looking at, and in which regions?
Obviously, last year's were more or less focused on the U.S., amongst others. Is it fair to say that the role of strategy is switching towards other regions globally or more emphasis on the regions globally, more core on that would be appreciated. Thank you.
On, let's say, cross-selling in the U.S. or, let's say, the situation in the U.S., in a few words. Very busy, as you know, to integrate our businesses there. That means, of course, that we shift here and there also our supplier portfolio on the principal side, and sometimes also, we have to say goodbye to certain suppliers. Overall, the development is very positive. We hope we can, towards the end of the year, integrate the business in the U.S., and we see very good traction in terms of gaining new businesses on a national scale. I think that the U.S. market, in particular in specialties, is changing in the sense that consolidation, of course, continues and that there are bigger players in specialties like us that hope to benefit from that. I'm positive about that region.
On the question of targets and the impact of, let's say, a decreasing economy, I think you can write books on that in terms of what that means for how owners will decide on whether or not to sell in the downturn market or what the prices will be. I find that difficult to predict. I don't think that that will have an immediate effect on prices or availability of targets. I think that's the answer to that. As to where, in which regions, we stay focused on fulfilling our strategy in each region where we work in. There's no particular preference for any region.
Perfect. Thank you.
The next question is from Mr. Nicoletta Finardi, Bank of America. Go ahead, please.
Yeah, just one follow-up question. On the lower demand in Q2, can you break that down? Is that because the frequency of the orders has come down, or is it the orders signed that are actually smaller?
I would say the frequency. The number of orders.
Okay.
Yeah.
The next question is from Mr. Tijn Mulder, ING. Go ahead, please.
Yeah, Tijn. One surprising here was on my side is that you said we hope to integrate the business in the U.S. end of the year. What do you mean by that? Is there no plan or is there something going on? What causes the delay or something? Is that done?
No. I think we shouldn't catch each other on words. We are rolling out our IT platforms, and we expect that we integrate these businesses end of the year.
Okay, thank you.
Ladies and gentlemen, if there are any additional questions, please press star one. There are no further questions at the moment, sir.
Okay. Thank you very much. I wish everybody a good day.
Ladies and gentlemen, this concludes the event call. Thank you for attending. You may now disconnect your line. Have a nice day.