Good morning, ladies and gentlemen. Thank you for holding and welcome to the Analyst Call first three months 2019 results, IMCD. At this moment, all participants are in listen-only mode, there will be an opportunity to ask questions. I would like to hand over the conference to Mr. Piet van der Slikke. Please go ahead, sir.
Yes, good morning, everybody. As usual, I'm sitting here with my colleague, Hans Kooijmans, CFO. As customary in our first quarter update, we go immediately to questions, we don't have a presentation, we will give you the opportunity to ask us questions. Madam Operator, maybe you can ask who will be the first.
Okay. Ladies and gentlemen, we will start the question and answer session now. If you have a question, please press star one on your telephone. The first question is from Mr. Peter Olofsen, Kepler. Your line is open. Please go ahead, sir.
Yes, good morning. My question is on the EMEA region. You don't provide organic gross profit growth by region, it seems to me that in Q1, the organic growth in EMEA was fairly modest. Was that indeed the case, could you shed some light on what you're seeing in the EMEA region? Do you see somewhat slower growth across the board? Is it that some regions, markets, or end markets are fairly strong while others are more weak? A bit more color there, please.
Yes. About EMEA, growth has slowed a bit versus last year. That's a difference. We see in particular, I would say, in certain countries slow down, in particular in Germany and in France, and to a lesser extent, Italy. Other countries still strong. It's not across the board, but some slowdown in these regions in particular.
Is that more in industrial end markets or is it across the board?
Yeah. Always, of course. If you look at our life sciences business, that contains also pharma, and that's, of course, always steady growing. Personal care and food as well. It's more in the industrial sector.
Okay. A quick follow-up on the North American operations. I remember from the Q4 call that you said that December was a bit softer, but we should not read too much into that because it's always a bit volatile and difficult to predict that particular month. Looking at Q1, is it fair to say that the North American operations continue their positive trajectory that we have seen for most of 2018 and that December as such was a bit of a one-off?
Yes. I think I can confirm that. Again, December is a special month, which is very difficult to predict, depending on holidays, et cetera. Yes, confirmed. It's in good health in North America.
Okay. It came back in January, and it has remained solid so far this year.
Yeah.
Okay. Thank you.
Okay.
The next question is from Mr. Henk Veerman, Kempen. Your line is open. Please go ahead, sir.
Hi. Good morning, guys. First question on some of the macro developments in the market on pricing. A couple of players have also talked about chemical price deflation. Would you say that had a negative impact on your growth in Q1? Do you expect that to have an impact in the remainder of the year? Secondly, on your acquisitions, but I'll come back to that.
No, I wouldn't say across the board. Again, we have so many different product lines that you cannot give a generic answer to that. I wouldn't say that we see price deflation now as a trend. Maybe in certain product lines, but no, I wouldn't say that that is now, let's say, a turning point. I don't see that.
Okay. Second question on your acquisitions. You're now busy integrating three targets and are still building the U.S. business, right?
Yeah.
At the same time, I think there's still a lot of opportunity in the market, but is the organization ready, or do you expect 2018 to be, or sorry, 2019 to be a bit of a more quieter year when it comes to growth via acquisitions?
Listen, as I said in the past also, we never more or less try to explain when or what timing is of acquisitions because we constantly are in discussions with possible targets, and we cannot time it ourselves too well because it's not only dependent on us. We have the capacity to do acquisitions, and we will if the opportunity arises. We are, at the same time, of course, also cautious in the sense that the targets need to fit. We will see if we will be successful this year. Let's say there is no change in policy because of the acquisitions that we did in 2018. Perfect. Thank you.
The next question is from Mr. Tom Burlton of Berenberg. Your line is open. Please go ahead, sir.
Morning. Thank you. It's Tom Burlton from Berenberg. Just a couple questions from me. The first one was on your acquisitions and specifically the gross profit contribution from the three big acquisitions. Just because to the point earlier, you don't give organic gross profit growth by region, but just trying to back that out. When I look at the M&A contribution from the three acquisitions, it looks like it was a little bit smaller than I had in my numbers because I thought you had a full quarter of each consolidated. Are you able to give what the gross profit contribution in the quarter was for each of the acquisitions, please?
Tom, Hans here. We see that always. The Q1 is a bit of a trading update, and as usual, we don't break down regional growth numbers into organic and M&A. I think if you look back at what we showed last year, the three acquisition targets, of course, all had their contribution in the regions. I think what we explained last year is that all three targets had an EBIT margin lower than the group average, with the exception of the smaller one in India, and that we work hard to increase and optimize the structures there by integrating them into the IMCD organization and to trying to get their margins quickly in the neighborhood of what we are used to. We are still working on that. We are not really there yet. A breakdown will follow when we do the half year figures.
Okay. Thank you. Then, maybe a follow-on from that. It was just related to the Americas conversion margin, which looked very strong, and I appreciate you don't want to give all of the detail here, but in terms of that improvement in the Americas conversion margin, is that more maybe turning around some of the acquired businesses acquisition? Is that improvement on that acquired business, or is it improvement on the existing business or a combination of both?
I think it's fair to say it's a combination of both.
Okay. Thank you.
The next question is from Mr. Steve Golden, Deutsche Bank. Your line is open. Please go ahead, sir.
Hello there. All my questions have been answered apart from one. I wanted to just dig into the industrial side versus the Food & Nutrition. If we look at your major chemical bellwether names, Food & Nutrition volumes have been sort of ballpark 3%, 4% this quarter, and very healthy outlooks. On the industrial side, not so much. In some cases, down mid-single digits for volumes. Can you give us a bit of color on how you're seeing both sides and maybe whether or not some of the weaker numbers that we've seen from industrials reflect destocking, which your customers maybe don't have because obviously they use a distributor. Any kind of view that you could give us there would be really helpful.
We deal with, let's say, the macro environment in our end markets. If we talk about industrial end markets are typically car industry, building industry, in the painting coatings, in Advanced Materials, which is composites and plastics, et cetera, as well, but also other industries. That is to a certain extent, of course, also affecting the demand for our products. At the same time, growth in our business is not only determined by the macro factors, but also in our ability to gain share in the markets, and to add additional product lines. It's a combination of that. We are not one-on-one translators of the macro numbers, but it is clear that in these end markets, we are a bit more sensitive for demand. That's clear. In the life sciences, you mentioned Food & Nutrition.
Also there, of course, you need to differentiate quite significantly among the different, let's say, product groups in the food industry. I think that we are very, very well-positioned to benefit from the higher growth areas in that industry. Pharma, we mentioned it's more a steady growth. Personal Care is for us, always a strong growth engine. Although, of course, there we could be exposed to the high-end markets if that would slump. It's a very diverse picture that is partly determined by the macro factors, but also partly determined by our ability to benefit from those trends and those share gains that help us then to beat a little bit, let's say, a slower market. Not easy, but that's, of course, something that we try to do in each of these business groups.
Sorry.
I hope that gives you a bit of a call on-
Yeah. Sorry, just a quick follow-up if I may. You mentioned there about share gain. If we think about the U.S., is it fair to assume that you are still adding new suppliers in a material way that helps you hit the roughly high single-digit organic GP, which it seems that you've done this quarter, or is that more macro-driven, would you say?
I would say that it's both, but we also add product lines, some suppliers. What you see in the United States is a bit of a realignment because of the consolidation that's going on partly by us, partly by our competitors, whereby suppliers have to also rethink their sales channel strategy. We sometimes, of course, are on the wrong side of that reconsideration, but more often than not on the right side. It's both. It's a macro and it is ability now to benefit from our new position.
Thanks a lot.
The next question is from Mr. Mutlu Kundogan, APM. Your line is open. Please go ahead, sir.
Good morning, Piet. Good morning, Hans. A few questions. I'd like to ask them one by one, if that's okay with you. First of all, on price mix, I know it's more pass-through for you, but it appears to be down 4% year-on-year, and that is quite a big impact, especially for specialty chemicals. Can you tell us what drove that?
Mutlu, when you said the mix is 4% down, Pete and myself, we both looked at each other with a question mark in front of us. What do you mean with 4% down?
Yeah, because if I look at the organic revenue growth, it's up 4%, whereas the organic gross profit growth is 8%. It seems to be that there was some deflation on your top line of 4%.
Oh, okay. No, that is more a mix effect.
Okay.
That is the danger of looking quarter to quarter, that you always see changes in the mix during a quarter.
Given that you have so many products, it's quite a big impact. Can you maybe explain a little bit why you have such a big mix effect?
I think it's not abnormal compared to previous quarters that there is not a real fixed correlation. Of course, there is a relation between revenue growth and margin growth, but in the mix, in the regions, there are different margin and percentages.
Yeah.
What you see over a longer period of time, I think the average gross margin in our business is relatively stable over the last year. This year, we have a little bit of a dip the first quarter, lower than last year. The 22.4% is slightly lower than last year, and that is mainly the impact of the acquisitions that we did, adding additional revenue at a lower gross margin level. If you then start to improve the gross margin percentage in these newer acquired businesses, then you see more margin growth than revenue growth.
Yeah.
this is, I think, one of the outcomes of working hard on the acquired companies to improve the margin % there.
To stick to this point, I know it can be volatile from quarter to quarter, -4, is it something Mix effects, should we expect that in the coming quarters as well?
Basically what you said, the -4 is the result of the margin growth quicker than the revenue growth. That is your -4.
Yeah.
Basically, that means that in, let's call it, in existing business, we were in a position to improve our margin quicker than we grew the revenue.
Right. Okay. That's clear.
Partly in the acquired companies. If we increase the margin in the acquired companies, as a consequence, your margin grows quicker than your revenue does.
Yeah. Okay. On the Americas, I have a few questions there. First of all, your gross profit was up 17% quarter-on-quarter. I know that Q4 was a bit weakest with December, but also comparing to Q3, still very good growth. Just wondering, are those contract wins? Are those additional lines you've added from suppliers?
Well, I think, Mutlu, what Pete just mentioned is that it's a bit of a combination of these kinds of things. Adding business lines, rationalizing in the market, benefiting from our presence in the different areas due to the acquisitions that we did. I think we also, maybe to add to what Hans was saying, of course, working very hard to increase our margins in the acquired business, which were on the low side. It's a refocusing organization. It's a combination of all. We are, of course, very focused on margin, and the businesses that we bought recently were, of course, lower margin businesses. You see an effect of our hard work here.
No, you said it earlier than I could ask the question, I wanted to talk a bit about the margins, which is indeed impressive, especially that your operating expenses are flat in the last few quarters while you are definitely growing the top line. How should we think about that going forward? Do you think that you can maintain or have limited inflation while you grow the top line, especially in the Americas?
Time will tell there, Mutlu. Time will tell. We try to be as efficient as possible. If we need to add cost to further grow, we will certainly do. If we can do without, it is always better.
Yes.
We also, here, I would say, Mutlu, that we have reduced in acquired businesses over the last, I would say two years, we have reduced our costs. In itself, this is not a normal pattern, when you grow our business, then we add costs. We need more people, and the people that we need are expensive, in a sense, high earners and high-quality people. Normally, you see always our costs grow. I think that this is also an effect of, let's say, the overstaffing of some of our acquisitions and a reduction in that.
No, very clear. Just one final point on this then. Conversion margin, a few of my colleagues already touched upon that. It is very strong at almost 44% above EMEA. Is this a temporary high, do you believe, or do you believe there is more upside? Maybe as a side step, for example, we know that if you look at some of your peers that are also active in Europe and in U.S., we see that U.S. usually has higher conversion margins. Do you think that you can go higher based on that?
I'm a little bit cautious here to predict what could happen. This is a very good quarter. It's in itself not an indication as far as I can see, because as I always say, I don't have a crystal ball. For the rest of the year, we constantly try to improve our businesses. I think you should not, let's say, linearly, how you say that, see these results for the rest of the year and see these growth continuing. This is quite a spectacular result, but for the first quarter. Let's see what happens in the next couple of quarters. A bit of caution is also warranted, I would say.
Okay. That's good. Final question. A very boring one, apologies. The IFRS 16 had a positive impact of EUR 1.2 million on the quarter. Is that something that we can take forward for the next few quarters, Hans?
Yeah. If you look back at what we presented there in our annual report 2018, we gave a specification of the impact of IFRS. Basically, what we said there, it will add EUR 4 million-EUR 5 million to the operating result in 2019. It will have no material impact on net results. It will add about EUR 65 million additional debt to the balance sheet as a consequence of IFRS 16. The impact on EBITDA will, of course, be bigger because part of the cost will be presented as either depreciation or amortization.
I would like to refer to what we specified there in the annual report 2018.
That's clear, Hans. Just checking. Thank you.
Sure.
Those are my questions.
The next question is from Mr. Rajesh Kumar, HSBC. Your line is open. Just go ahead, sir.
Hi. Morning, gents. Just a quick follow-up on the inventory question earlier. What sort of discussions are you having with customers and suppliers regarding inventory availability? I'm just interested in the color or the nature of the discussions, if any, or if it's still too early in your supply chain for this to be a concern. The second one would be on the supplier synergies between Europe and Americas. Could you give us some color on what a run rate of incremental product addition or volume growth can we expect from such cross-selling in the next, say, two years? I'm not talking about next quarter, but over a period of time.
Okay, on your first question, inventory. Basically, I'm trying to understand exactly what you mean about the inventory question. Because also that is, of course, quite anecdotal. There's not, in our business, not a general trend that is then applicable to the whole company in terms of what happens with inventories. It's very much business-to-business, customer-to-customer related. I would say that we see at this moment, a different behavior versus, let's say, earlier periods, which means that we keep inventory as efficiently as possible. That we sometimes, of course, have discussions with customers to keep inventory for them on a higher level. We don't see now a change in that behavior. Does that give a bit of a answer to your question?
Yeah, it does. Thank you. Okay.
The cross-fertilization. I think it's a very good question. Again, not easy to answer. What you see, I think maybe as a general remark, is that with our big suppliers and suppliers that are global companies like DuPont or Dow or BASF, et cetera, we have discussions, of course, regionally, and sometimes globally. It depends a bit on the or globally or Europe and the U.S. It depends a little bit, again, on the product lines. Typically, in certain areas, like Pharmaceuticals, you talk a bit more globally, whereas with other product lines, you talk more regionally. Let's say, as in the DNA of our group, we always are very much focused on cross-fertilizing and leveraging our supplier relations and trying to come into discussion with our suppliers to work with them also elsewhere.
I can't put a number on that, because that is very dependent on timing, et cetera. I can't predict that. It is a key element also of our business that we try to work with suppliers in regions all across, let's say, the IMCD working territory. It's something that we're very focused on our whole organization. Again, it's difficult to predict when we have success where.
Understood. Thank you. Thanks for the call.
Yeah.
There's an additional question from Mr. Mutlu Kundogan. Your line is open.
Yeah. Sorry, just one more question. On the Americas again. Obviously, if I look at versus my forecast, and I think also versus some of my peers, I think that probably the Americas in the past few quarters, and again, this quarter has surprised positively. I'm just wondering, you've done a lot of acquisitions. Has Piet and how the [H.M. Royal] into the U.S., has this surprised you positively as well? Just wondering, if so, where did the positive surprise come from? Did it come from the supply relationship that you have or was the U.S. market maybe different? The fact that you've been able to show this impressive growth and also the fact that you've been doing so well on the margins.
Yeah. We talk, Mutlu, we talk about the whole of the Americas, right? We also speak about Canada here and also Brazil. I would say in all these regions, and if we limit ourselves a bit to North America first, I think what we had two bigger acquisitions that we did in the last couple of years, L.V. Lomas and E.T. Horn. These were companies with EBIT margins half of what our group average was, and we have been able and are working hard to change that, because essentially, there's nothing in these companies that doesn't make them as productive or profitable than our own companies or our heritage companies. That's something that we work hard on and are successful in. On another level, we are also organizing.
We have not finished yet, organizing ourselves as a U.S. organization, which means that we hope to convince suppliers to work with us in bigger territories. Here and there, we are successful in that. That's an important element. Then, of course, the general good circumstance in the U.S. market helps us as well. In Brazil, we are constantly trying to improve our business, and so far it's also, let me say, going reasonably well. That helps also. It's, let's say, positive signs in our Americas region.
Yeah. Okay.
Yeah.
Thank you, Piet.
Yep.
Ladies and gentlemen, for questions, you can still press star one on your telephone.
Okay.
There are no further questions.
Fantastic. I wish everybody a nice day, we see each other or hear each other next quarter.
Ladies and gentlemen, this concludes the conference call. You may now disconnect your line. Thank you for your participation, have a very nice day.