Ladies and gentlemen, thank you for holding, and welcome to the Analyst Call First Half Year twenty nineteen Results from IMCD. At this moment, all participants are in listen only mode. After the presentation, there will be an opportunity to ask questions. I would like to hand over the conference to Mr. Diet van der Schleicher.
Go ahead please, sir.
Yes. Welcome to everyone. Hans Karmals 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 Q1, the 2nd quarter, in particular towards the end, saw the market softening, resulting in reduced growth of our results.
Overall, however, the 1st 6 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 sentiment weakened in the 2nd 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, IMCP business model is resilient and strong, and we expect EBITDA growth in 2019. And with this, I give over to Hans for additional remarks on the numbers. Thank you, Pete. Good morning, ladies and gentlemen.
And I would like to give you a short summary of the results of IMCD in the first half of twenty nineteen as reported earlier today. I would like to start on Page 9 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, and gross profit increased 19%. Most of this growth profit growth as a result of the first time inclusion of businesses acquired in 2018, adding 15% of the 'nineteen. This acquisition growth is the full year impact of 3 acquisitions made in the second half of twenty eighteen: Ichthorn in the U.
S, Felix in EMEA and Aroma in India. Gross profit as a percentage of revenue slightly decreased to 22.3% year to date. This decrease is, as explained before, mainly the result of an average lower gross profit margin percentage in the recently acquired businesses. Further, we saw 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 percent, up €18,000,000 to €153,000,000 This increase was a combination of organic growth in the first time inclusion of acquisitions.
Further, the application of IFRS 16, the new lease accounting standard, had a positive impact of about €1,700,000 in EBITDA. Operating EBITDA as a percentage of revenue slightly decreased to 8.8%. And the recently acquired businesses of Velos and Horn with a lower EBITDA margin than IMC average are the main drivers of this increase. The same applies for the conversion margin, calculated as operating EBITDA as a percentage of gross profit, where we saw similar small margin decrease of about 1.5%. On the next page, Page 10, you will find a summary of the financial details for operating segment.
In EMEA, we reported an 11% forward suggested gross profit growth and 3% operating EBITDA growth. The EBITA margin dropped 0.9% to 10.2%. The main reason of the drop in EBITA and conversion margin is the impact of the VLOF business that we acquired in the second half of twenty eighteen. Just to rephrase memory, this business had about €155,000,000 revenue and an EBITDA margin of about 3%. Excluding the acquisition impact of Velox, the EBITA and conversion margin in EMEA were more or less in line with the first half of twenty eighteen.
The Americas ForEx adjusted gross profit increased 36% and operating EBITDA increased 42%. That increase was a combination of healthy organic growth and the first time inclusion of MTRO acquired end of August last year. Operating EBITA 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 foreign business. Good growth in North America in our North America organization, strict cost control and improved performance in Brazil more than compensated for the negative impact of Ityhorn on ratio of slight conversion and EBITDA margin and further resulted in a substantial organic increase of the operating results in this region. In Asia, we realized double digit gross profit and EBITDA growth in constant currency basis.
This growth was a combination of organic growth and the first time inclusion of Aroma, admissions in India that we acquired as 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 call, 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 and the U. S. The cost saving that you mentioned earlier As mentioned earlier, this new lease accounting standard had a positive impact on EBITDA of 1,700,000 and most of it ends up in the 2nd 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 and L lines between operating EBITDA and net result for the period. A few general remarks. Net finance costs improved amongst other 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 €2,000,000 cash cost as a result of the implementation of IFRS 16. And 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, Page 13, a summary of IMCD's balance sheet. And for your convenience, I added a restated December 2018 balance sheet, including the IFRS 16 impact, adding, amongst others, our leased officers and other leased assets to our balance sheet.
As you will notice, the implementation of this new lease standard resulted in €64,000,000 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 augmentations 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 and A and our history as private equity owned company. There is an equity position of €840,000,000 covering 54% of capital employed.
And as you might remember, in Q2, we paid a dividend of €0.80 per share, resulting in a total dividend payment of €42,000,000 The leverage ratio end of June, based on our loan documentation was 2.7x 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 €46,000,000 compared to year end 2018.
Compared to last year, the overall working capital base increased with 2 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 movements in our net debt position in the first half of twenty nineteen. End of last year's starting position was €611,000,000 €91,000,000 cash generated from operating activities, and you see cash outs related to interest, tax and investing activities, further the €42,000,000 dividend payment and the new IFRS lease obligations adding up to a net debt position at the end of June of €694,000,000 I would like to finish this financial summary with the cash flow overview on Slide 16. And as you can see, year to date free cash flow and cash conversion ratio substantially increased in the first half of twenty nineteen compared to last year.
Substantial operating EBITDA growth and lower increase in working I would like to take you to Page 18, where we summarize the outlook for the full year. And based on the performance in the first half of twenty nineteen and 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 and A.
Thank you, sir. Ladies and gentlemen, we will start the question and answer session now. The first question is from Mr. Peter Olofsen, Kepler Cheuvreux. 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 fillings in the U.
S. Midwest? Maybe some more clarification there. And then you briefly touched on this in the introduction. Can you shed some more light on what you have seen during the Q2?
Some other companies talk mainly about a rather weak June. So did you also see it more slowing towards the end of the quarter? And what are you seeing so far in the Q3?
Yes. Thanks very much for this. And to give you a bit of color, I think what 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. And in the Q2, we see also strong differences.
I wouldn't attach too much importance to that. I mean, in terms of these quarterly results, I've always been not a great fan of these quarters, as you know, and you follow me. If you look at our, let's say, business in the 1st 6 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 this year has worsened, has deteriorated. And 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 Q1. It's still strong. And 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.
So it's you have to be careful not to attach too much value to these quarterly moments. That doesn't take away, of course, that as you can all read in the papers, that the macroeconomic environment has worsened, has deteriorated. And that is something that we all have to see how that will play out in the next period. But basically, in ICD business model, internally, nothing has changed. We are integrating the businesses in the U.
S. And in Europe that we acquired last year in the quarter as we planned. We keep our margins on good levels. We have to see what the demand in the market is, and in particular, in the industrial market. As you know, we are a diversified company.
We have businesses in many market segments. And where we particularly see slowing down is in the markets that are related to end markets like car industry, construction, etcetera. So I hope this gives a bit of color and answers your question. Yes, it does. And maybe to briefly follow-up
on this, to check whether my math is correct. So you reported 3% organic growth for the first half, and you did 8% in Q1. Then I come from something like minus 2%, minus 3% for Q3. Is that correct?
For Q2, Peter. And then you look at
margin or even The organic gross profit growth. You mentioned in the press release it was 3% for the first half. Yes. So it was 8% in Q1. Yes.
So then doing some stock calculations, I get
to a minus 2, minus 3 for Q2.
So I just wanted
to check whether that's consistent,
with No. The second quarter is slightly better, but it was more flattish. Okay.
And then 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 €1,000,000 and amortization charge of €21,000,000 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 an acquisition, at that moment, you create the deferred tax liability, and you start releasing them and you amortize. So basically, it has to do in which jurisdiction we had the control amounts, the intangible amounts, is it tax deductible or not, and that then leads to a release. But this is a bit of a more technical explanation, and I'm not sure if I should put it in this call.
But 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.
The next question is from Mr. Tom Wilson, Daimler. 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 positive outlook.
But I suppose at this stage, the outlook is expecting EBITDA growth for the full year, given we've already seen 17% absolute EBITDA growth in the first half, I guess, becomes sort of less useful. So I wonder whether you can help us out maybe fleshing out the guidance for the second half, and in particular, as far as 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, I think, Jeremy, if I'm wrong, I think comps get a little bit easier in the second half. So if all things remain equal, would you expect a slight acceleration, at least in the organic gross profit line, in the second half? And then the second question I had was just relating to the M and A contribution, particularly at the EBITDA line.
If I'm right in terms of when your acquisitions annualize, it's just 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% EBITDA growth from M and A in the second half. Is that I know you don't like to give exact guidance on that, but you're able to help in terms of the operating profit contribution from M and A just in the second half in order to help flush out that guidance? Thank you.
I will answer your first question. This 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. So unfortunately, I can't give you more details like we did also in the previous 4, 5 years of our listing. Hans on number 2?
Yes. Tom, on the M and A side, when you look at the full year impact of the 3 acquisitions largely, Ityhorn, Aroma and Velox. Ityhorn was acquired end of August. So what you could expect is another 2 months of M and A impact, and then it should sit in our comps of last year. To remember the numbers there, when we acquired Etion, we announced that they made an EBITDA of about $12,000,000 So that means an EBITDA of around sort of between $10,000,000 $11,000,000 on a full year basis.
So there will be a few millions of M and A impact in the P and L. VLOCs, with an EBITDA margin of 3% acquired last year. Was it September? So another 3 months. So that could be another €1,000,000 of M and A impact.
And then our overall market was pretty small. We acquired at the end of November. This was a €25,000,000 €26,000,000 of revenue. And then I think we indicated then around 8% EBIT margin. So then you can do the math, I think, you showed.
The next question is from Mr. Mutu Puneugan, ABN AMRO. Go ahead please.
Yes. Good morning, Pete. Good morning, Hans. When you try to also have a swing at the organic gross profit growth, I understand that gross profit growth. I understand, I mean, I know from history that you don't know how you always say that there's a lot of leverage in the volatility from what's going to be next.
But the decline from Q1 to Q2 is significant. And we all know that the macro picture indeed is time to period, but nevertheless, such a decline seems to indicate that there was more going on. So was there a potential benefit of client wins selling the channels in Q1, which can explain declines in Q2? And then maybe adding to that, is H1 then the base we should look at? Is that what you're saying when you say don't look at all the sales?
Is H1 a good base to base our forecast on for the remainder of the year, maybe 2020 as well? So that is a big first question. And then secondly, on Americas. The conversion margin has shown quite some volatility here in the last few quarters. So Q1 is very strong and now Q2 a little bit weaker.
Can you tell us why that is and what we should expect going forward? And then finally, third question, on acquisitions. There seems to be a €3,000,000 cash inflow, and that seems to indicate that you sold something. Is that correct? If so, can you explain that?
And perhaps to add to that, so far this year has been relatively quiet in terms of M and A. Can you update us on the pipeline, how things are evolving?
Yes. I'm trying 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 Q2, the answer is no difference. I mean, we have a consistent business that is not, let's say, so dependent per quarter, of course. I mean, we have long term relationships with our suppliers.
And so that's not a difference. That's not an explanation. I would also like to point out, by the way, that the Q2 last year was extremely strong. And I think, if I'm not incorrect, the strongest quarter that we had. So 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. Again, on your question on forecast, whether or not we should take the first half as an indication in 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, Halter, also the third question is on capital inflow. Yes, we have sold a small business, and it's also in the press release on Page 4, last paragraph, where we indicate that we sold a small business that we have in Australia in flavor formulation, which is really more core for us. On the pipeline, also here, I mean, I don't want to be boring, but it is what it is in terms of what comes out and what goes in.
And sometimes, we always, throughout our 25 years almost of existence, we are busy on M and A. Also this year, I can't predict what will come out, but expect something will come out this year. So there's no I mean, our business doesn't change over quarters, I hope that you understand. I mean, our business stays resilient, strong. We grow our customer base.
We try to grow our supplier base. But of course, like anybody else, we are also dependent on demand from the market. And it's clear that we see here and there in certain regions demand slowing. Will that continue? We don't know.
We will see. And that makes it also difficult, of course, to make a forecast. Okay. Did you leave one of the table? I think you answered them all.
Okay. So is that okay for you?
Yes. That's fine. Thank you.
The next question is from Mr. Stephen Goulden, Deutsche Bank.
I've got a few as well. Just on the organic gross profit,
could you give us a bit of
a feel for how the Life Sciences business did versus industrial? Because obviously, you're saying organic GP was flattish and we're seeing more than 4% organic growth from the likes of Gevaudan. Is that suggests that industrial may have been particularly weak? And obviously, you said before that Germany surprised negatively toward the end of the quarter.
Just do you see this as
potentially driven by a short term destocking across your customer base? Or would you say that it's more therefore, could potentially correct itself in 1 to 2 quarters given that you deal with smaller customers with less working capital, which they outsource to you? Or is it just too difficult to say? And can you not really give much commentary there? Over the medium term, do you still think that the sort of 6% to 7% organic GP target that you've got is reasonable?
Or is this changing a thing? And lastly, sorry, just on the margins. Thinking about operational leverage, it looks like Velox probably in Europe took off maybe 70 to 80 basis points of margin. And I think you did slightly worse than 100 basis points in EMEA. So are you seeing some negative operational leverage there?
And in general, given cost inflation, what do you need to grow at in a region to maintain margins on a like for like basis? Thanks a lot.
Yes. 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 growth has a higher growth rate than our industrial business. And 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.
And then on VLOGS, Hans, you have maybe a
few Yes. What I was
trying to say, Stephen, in the call that if you normalize the EMEA numbers for the impact fee logs, then the EBITA margin that we generated in the other companies is flat compared to last year. So the rule was then around at 11.1%, as we also showed last year. If you add a business with a 3% EBIT margin, then it takes a bit of time to bring it up to a decent level. So if you think that out, then it's flat compared to last year. Then your other question is more complicated.
It had to do with cost inflation and how much margin you need to keep ratios the same. And I think it's more a mathematical exercise. If you grow your cost base of 3%, then you should also grow your margin.
The next question is from Mr. Rajesh Kumar, HSBC Bank. Go ahead please.
First,
can you give us some idea of exposure you have to segments where you have seen some slowdown. So for example, you earlier called out autos, you called parts of industrial segments in Germany. So which particular industries are seeing greater degree of slowdown than the more resilient food flavoring, that sort of thing. So that would be quite helpful. 2nd, when you look at 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. But what do you need to start any cost action in terms of how many quarters or how what trend do you need to see before you say, okay, we need to now start cutting a bit of cost? And 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 and A looks like when added to your balance sheet. So can you give some flavor on what sort of or the nature of the discussions you're having with your suppliers and customers about maintaining the inventory levels or planning for the future?
Okay. On the first question, Andreas, exposure to end markets, yes, I answered it more or less already. Very much aimed at these industrial end markets like the car industry. And of course, we are not delivering directly to car to the car industry, but just to people who deliver to the car industry. So the coatings markets, painting coatings, and that goes, of course, for these baking products, but also for advanced materials like plastics or composites that have a function in these industries.
I think that's the most important 2 markets that are affected. Cost action. We have a business that depends on the quality of our organization and quality of our people. So it's very important that we maintain under all circumstances, of course, a strong organization. And we are not in the business of reorganizations, etcetera, other than the integrated businesses.
On the cost side, so we have the possibility, of course, to not fulfill vacancies or to look at the variable parts of our compensation schemes. But 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 organization, specialty chemical distribution and food ingredient distribution, and we will continue to do so. I mean, I found it a bit I mean, it's I think we all tend in many respects to overreact on the positive side, but also on the negative side.
I mean, come on.
I mean, we have an organization that has been growing for the last for a couple of decades. And of course, and I said that also earlier when we did so well in the quarter, we never always grow, never always grow. But the underlying trend of our business model and of IMCD has been continuous growth over the years. And that's how you have to look at our business. So we are not in the business of immediately cost cutting.
So 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, Rajiv, what we saw at year end 2018, we had relatively high stock positions. You see the stock base coming down slightly.
As indicated before, we are not in the business to take speculative positions on stocks. And if we try to buy based on expectations of what our customers need, we monitor carefully business line to business line what we have and what we need. Could always be lower. That's also the internal push that we have in the organization. We can always optimize and do better on that.
It is affordable with the levels where we are at the moment. Understood.
Thanks. This is on Theo. 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? Yes. That I don't know exactly. But I think if you look at our industrial business, we do about first, our Life Science is about 55 versus 45. But that's a general indication.
The next question is from Ms. Nathalie de Bruyne, Degroof Petercam. Go ahead please. Hi, good morning. Thank you for taking my questions.
A few, if I may. Starting again, I'm very sorry about that, with organic growth. You mentioned a 3% organic growth in the Q1 of the year, so it was much more pronounced in H1, obviously. But if I discuss the issuance, I would assume it was in negative territory in the EMEA, still somewhat positive in North America and also positive in Asia Pac in Q2. If you could confirm that, that would be helpful.
And secondly, I'd like to go to the EBITA margin in the Americas. Again, sorry about that looking at the quarters, I'm just trying to understand. I guess, what I see is that you had, yes, an important margin compression in the second half second quarter story of the year. So I'm curious to hear about why that is. Is there any specific reason for that?
Is the general slowdown the reason for it? Because in the Q1, I mean, the EBITDA margin was quite solid despite the fact that you were busy integrating the latest acquisition for Ituran. But then it came down in Q2, so I'm just curious to hear about your thoughts about that.
The organic growth figures that you mentioned, the different segments, I think I can confirm them. It is right. The second question is a bit more complicated because I don't really follow you there. But that is could you repeat the question there? Yes.
It's about the EBIT margin in the Americas.
Exactly. The EBITDA margin in the Americas, because if I did the calculations, I see in Q1, EBITDA margin was 8.7%, which was positively surprising given the fact that C1, obviously, is a low margin business. But you also had a solid quarter on the organic side in Q1. And then Q2, I see our margin is now at 7.8%, so down versus the Q1. So just curious to hear about why that is.
Yes. Basically nothing specific. I think also in the quarter, we had a slightly lower gross margin percentage compared to the Q1. And that basically has to do with mix effects in what we sold in that quarter. And that is why we try to avoid talking about quarters because before you know, you sort of 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. So for the year, what should we think of? Because it was yes, I mean, I guess, it was also mix driven in Q1, and you have mix effect probably in Q2, but then what's happening for the remainder
of the year?
If you could predict what the demand in the market, I could help you. We don't know. We will say. We're not in a business of forecasting.
No, got that. Appreciate it. But just was just wondering compared to last year, what you see given that you're progressing with the integration of T. C. Horn.
And I'm actually surprised to see that mix has such big impact on margins because it doesn't seem to be as big in the other regions. That's purely mix. The next question is from Mr. Thierryne Mulder, ING. Go ahead, please.
Good morning, everyone. On the Far East, you say it was in line with expectations, but that's also somewhat heavy physical there from the macro environment. And then on Elog, you acquired a firm with revenues of €165,000,000 in EMEA 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?
Yes. If you look at the where we are with the integration of VLOGS, what we said earlier is that we we are in the process VELOGS 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. And expect that we will finish the process more or less in this quarter. And that means that we have the existing cost structure in the 1st 6, 7 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. But what we see there is that we hold up nicely. The big blue and the suppliers are critical, so everything on track. It's further a bit with demand, but so far so good.
Okay. And then on Far East 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. And of course, that's also a bit more volatile if something happens. We don't 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, but the rest of Asia is doing quite well.
So we don't see there very specific reason to comment on macro factors yet. On the cost side, we saw a little bit of reduction of conversion margin, and that is basically driven by adding a bit of additional cost in the region just to strengthen sales forces and local organizations. And that is what Peter said here, I guess if you do that in a small region, if you immediately see a back in the ratios. No, the question here is, of course, on the background,
you had some extra costs for setting up the organization in Vietnam and in Japan, for example, and that was not the case anymore. So I'm interested where is that why did you, of course, then start up the higher cost now if that isn't the reason? It's a detailed question, how can I know?
Yes. It's adding few people here and there.
Next question is from Mr. Tom Bolton, Berenberg.
Hi. I just had a couple of follow-up questions. One of them has already been answered around VLOC. But the second question I had was regarding a comment one of your peers who's also given Specialty Chemicals Distribution made historically Specialty attended to outgrow commodity distribution by around 1.5% in their view. That, but 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 just whether or not you can cooperate that's what you see in kind of the specialty market overall underlying and then maybe whether Q2 was really, as you mentioned earlier, a function perhaps of the extraordinary tough comparability you had with a company that's been in Q2 or whether or not there's something going on with market share kind of more broadly in Specialty Chemicals?
Yes. I find I mean, 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. So I it's difficult to answer this question, quite frankly. So does it help us also if we know this? I'm not totally sure what the objective of the question is.
I guess it was just it was around 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.
But listen, the specialty chemical market is, of course, huge, right? That makes it also sometimes difficult for us, of course, to quantify it. I mean, 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, etcetera. And in all kinds of applications, it's impossible for us to have a vision and a view on 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 China or wherever, and that they also could also be affected.
And that has in the chain then also, again, an influence on us. So it's a complicated, let's say, structure, and it's not so easy to talk about market shares in our business because we have so many different markets. So we have also many, many different markets here. I think what you underlying should look at is do we keep up our margins? Is it the demand question do we move business ourselves because of loss of suppliers?
The answer to that is no. It's purely an effect of demand in the market, whether or not we and that's, of course, then a bit more dependent in a bit more volatile in industrial markets and a bit less in the life science markets. But I stay away from, let's say, the market share discussion.
Okay. That's helpful. I appreciate the comments with the market. Thank you very much.
The next question is from Stephen Goulden, Deutsche Bank.
Sorry, I just had a quick follow-up, if you don't mind. You touched before on the cost inflation and operational leverage points. But just off the crackers, my estimates, it looks like you did about minus 2% organic GP in EMEA from my calculations. And you're 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 competitors did with obviously a much more fixed cost base, but they have cost inflation of 3% to 4% in EMEA. So I just wondered if you could give us a bit more color on what 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. Yes. So 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 small part of our total cost structure. We also have, of course, variable compensation for us, which we look at during the year.
So these are the levers that we can touch. Yes, and so far, we have been successful. And 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. The
next question is from Mr. Henk Veerman, Societe and Co.
Hi, gents. Thank you for taking my questions. Some remaining 2 remaining from my side. Firstly, on the U. S, as you've said, on the organic growth, there has been still somewhat positive in the first half of the year and maybe also in Q2.
How much of that could you is it fair to say that a meaningful contribution still came from the, let's say, the cross selling and the self help potential of all the more or less recently acquired businesses over the last 3 years, 3 years? And then second question, stepping back from the growth into, let's say, the role of strategy into the upcoming years. I guess one benefit of, let's say, the market slowdown as we see it today is that some targets and some targets may become a bit more cheaper and may also be more inclined to sell.
Is that something you're looking at? And in
which regions? Obviously, last year we're more or less focused on the U. S. Amongst others.
Is it
fair to say that the wallet strategy is switching towards other regions globally or more emphasis on the regions globally More color on that would
be appreciated. Okay. On let's say cross selling in the U. S. Or that's the situation in the U.
S, few words, we're 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 positive side and sometimes also we have to say compliance with 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. So 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 whether or not to sell in the downturn markets or what the prices will be. I find it 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. And as to where and which regions, we stay focused on fulfilling our strategy in each region in where we work in.
So there's no particular preference for any region.
Next question is from Mr. Mr. Mr. Gunther Brondeban, Degene Amlou. Go ahead please.
Just one follow-up question. On the lower demand in
Q2, can you break it down? Is that because the frequency of
the orders have come down? Or is it the order signed that is actually smaller?
I would say the frequency, the number of orders.
Next question is from Mr. Kiran Wilder, ING. Go ahead please.
Yes. Kiran, one striking here was from my side is that you said we hope to integrate the business in U. S. End of the year. What do you mean by that?
Is there no plan? Or is there something going on about the
relative causes a delay or something? Is that
I mean, I think you should catch each other's own words. I mean, we are rolling out our IT platforms, and we expect that we integrate these businesses end of the year.
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.