Ladies and gentlemen, thank you for holding, and welcome to the IMCD Analyst First Half Year 2018 Results Conference Call. During the presentation, all lines will be in listen-only mode, and later we will conduct a question and answer session. I would now like to hand over the call to Mr. Piet van der Slikke. Go ahead, please, sir.
Yeah. Good morning to everyone. Hans Kooijmans and I will be happy to answer your questions regarding our press release containing the half year 2018 results. I will give a very brief factual summary of the numbers. Our half year results were strong, with Operating EBITDA increasing 24% to EUR 105.2 million. In the different segments, EMEA performed very well with revenue growth of 8%, gross profit and EBITDA growth of 12% and 15% respectively.
The Americas showed very strong growth with EBITDA growth of 70%, seven, zero, and even 91% on a constant currency basis. This is partly the result of the first time inclusion of L.V. Lomas, but also our existing business across the region had strong organic growth. Asia Pacific did also very well with an EBITDA growth of 9% and 19% with constant currency. Summarizing, if I summarize, let's say all the segments, then you will see that strong growth has come organically, and on top of that we have, of course, also in particular, because of the L.V. Lomas acquisition, additional growth. On the 31st of July 2018, we closed the acquisition of the company E.T. Horn, based in La Mirada in California, which will be an important further step to execute our strategy in North America. E.T.
Horn is active in the Western and Southwestern U.S., which is a territory where we, at this moment, we're not present, so it's a very good fit with our existing activities. Summarizing, we're positive about the first six months, and based on these achievements and the strong fundamentals of the business, we expect EBITDA growth in 2018. With that, 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 2018, as reported earlier today. I would like to start on page nine of the presentation, where you will find a summary of the income statement. In the first half of this year, revenue increased 23% compared to the same period last year.
This increase is a combination of 11% organic growth, the first time inclusion of acquisitions adding 18%, and a negative impact of foreign exchange differences of minus 6%. The acquisition growth is the full year impact of three acquisitions made in 2017. L.V. Lomas, acquired in September last year, had the biggest impact. Further acquisition growth includes the full year impact of Neuvendis in Italy and Bossco in the U.S., both acquired mid last year. E.T. Horn, as just mentioned by Piet, our most recent acquisition in the U.S., was closed end of July 2018, and as a consequence, this acquisition has no impact on the results or balance sheet in the first half of 2018. Gross profit increased 24%, whereby organic gross profit growth was 14%. The 10% remainder was the balance of 16% as a result of acquisitions and minus 6% currency impact.
Gross profit and % of revenue improved slightly in 2018. For your convenience, I included the line Operating EBITDA. However, for asset-light business models like IMCD, it makes more sense to focus on the next line, EBITDA development. Forex-adjusted Operating EBITDA increased by 30% to EUR 105 million. This increase was a combination of substantial organic growth and the first time inclusion of acquisitions. The Operating EBITDA margin slightly increased from 9% in 2017 to 9.1% in 2018. We realized EBITDA margin improvement in EMEA and Asia Pacific and acquisition-related EBITDA margin erosion in the Americas. The conversion margin, calculated as Operating EBITDA in % of gross profit, was 40% in 2018, which was slightly higher than in the same period last year.
On the next page 10, you will find a summary of the P&L lines from EBITDA to result for the period and some general remarks about this page. The net finance costs include, amongst others, interest expenses, currency exchange results, and amortization of finance costs related to the setup of today's financing structure. The accelerated amortization of EUR 4.6 million related to the prepayment of all term and revolver loans is reported as a one-off non-recurring item. The non-recurring items of EUR 5.3 million in total include the EUR 4.6 million and further include costs related to acquisitions and one-off adjustments to the organization. Amortizations of intangible assets and non-cash costs related to the amortization of supplier relations, distribution rights and other intangibles. Most of these intangible assets relate to the acquisitions made in our history with private equity ownership before the IPO.
Income tax expenses increased as a result of increased reserves. The blended tax rate in the first half of 2018 was 24%, compared to 25% in the first half of last year. Last but not least, on this page, cash earnings per share increased 20% to EUR 1.31. On the next slide, page 11, you will find some financial details for operating segments. As mentioned by Piet, the activities in EMEA had a strong start of the year, whereby most of the growth was organic growth. Positive market consensus combined with a strong IMCD organization resulted in double-digit organic growth, profit, and EBITDA growth. The full-year impact of Neuvendis in Italy, acquired in June 2017, added a bit to the bottom line. Forex-adjusted Operating EBITDA increased 17% in EMEA, whereby the EBITDA margin improved from 10.4% in 2017 to 11.1% in 2018.
We realized the same 0.7% improvement in the conversion margin in this region. In Asia Pac, the second column, we realized double-digit growth profit and EBITDA growth on a constant currency basis. All growth in this region was organic. Operating EBITDA margin and conversion margin both improved compared to the same period of last year. The next column is Americas. As a segment, the Forex-adjusted gross profit more than doubled, and Operating EBITDA increased with about 91%. Reported growth in this region is a combination of strong organic growth with the full-year impact of the acquisitions of Bossco and L.V. Lomas. The conversion margin in the first half of 2018 was in line with our indications in previous calls, lower than the same period last year as a result of the Lomas acquisition, accompanied with an EBITDA margin below 4.5% at the moment of the acquisition.
Good growth in our North America organizations, strict cost control, improved performance in Brazil helped to reduce this negative impact on the conversion margin and to substantially increase the results. In the last column, you will find in the 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. On the next page 12, a summary of IMCD's balance sheet. Property, plant, and equipment slightly decreased, still relatively low because of the asset-light business model. Intangible assets and related deferred tax liabilities, relatively high. As indicated before, as a result of M&A and our history as private equity-owned company. There is an equity position of EUR 739 million, covering about 59% of capital employed. In Q2, we paid a dividend of EUR 0.62 per share, resulting in a total dividend payment of EUR 33 million.
The leverage ratio, at the end of June, was 2.7 times EBITDA, it was well below the required maximum as set in the loan documentations. For working capital and net debt, I would like to move to the next two pages. Whereby on page 13, you will find a summary of the absolute amount of the various working capital components and these absolute amounts translated in days of revenues. As you can see, the absolute amount of average working capital increased with EUR 42 million compared to year-end 2017. It's clear that healthy organic revenue growth of 11% is the main driver of this increase. Overall, the average working capital days of the individual components are more or less stable. On page 14, a summary of the movements in our net debt position in the first half of 2018.
At the end of last year, you see the starting position was EUR 490 million, EUR 54 million cash generated from operating activities. You see cash outs related to interest, tax, investing activities, CapEx, and dividend payments, adding up to a net debt position at the end of June of EUR 506 million. I would like to finish the financial summary with the cash flow overview on page 15. As you can see, the year-to-date free cash flow and cash conversion ratio both decreased in the first half of 2018 compared to last year. The substantial operating EBITDA growth could not fully compensate the increased working capital. An increase as indicated before, as a result of the substantial organic revenue growth. Before we move to Q&A, I would like to take you to page 17, where we summarize the outlook for the full year.
I think Piet already, in his introduction, summarized what we have put on paper there. Now I would like to hand over to the operator to open the line for Q&A.
Thank you, sir. Ladies and gentlemen, as said, we will start the question and answer session now. If you have a question or remark, please press star one. Star one for your question or remark. Go ahead, please. The first question is coming from Mr. Mutlu Gundogan, ABN AMRO. Go ahead, please.
Yes. Can you hear me?
Yes. Yep.
Okay, good. Good morning, Piet. Good morning, Hans.
Let me start first with a few operational questions. On EMEA, organic growth, profit growth, again, very high, and that has been the case for a few quarters now, actually for quite a while now. Can you tell us how you are able to show this growth? For a region that has, in terms of IP, has been a bit lackluster. Are these contract wins? Are these expansions into new regions? Any flavor you can add to that would be appreciated. Sticking to EMEA, just looking at Q2, conversion margin of 44.9%. It has never been higher than that number. Can you tell us what that means? Is that a number that you are happy with, or does it mean that you need more salespeople, as it shows that you have a too limited cost base, I'm saying?
Thirdly, on Americas, again, organic growth, profit growth here, very high now for two quarters. What is behind that, and how sustainable is that? Finally, also on Americas, also the conversion margin, that jumped almost 600 basis points quarter-on-quarter. That's a huge jump. Was that due to cost savings, and how sustainable is that? Thanks.
Thank you, Mutlu. I think if you look, maybe before I go specifically into your question, if you look back at our history, then you have years in our history where everything comes together in a positive way. Let's not forget that we, on the one hand, are very well established, strong organization in EMEA, and on the other hand, that we see very good economic growth in the region. These two coming together are the resulted in a very positive growth. When you ask about do we need additional people, that's always a pressure when things go quite well, and it's always lacking a little bit. Let's see how that develops now. It's, of course, an exceptional growth in EMEA, and this is not something that we will accomplish always. It should be nuchter, as we say in the Netherlands.
We should be, let's say, with our feet on the ground. It's a very good result based on a very strong organization, but it's not something that, of course, that will be going on for years and years. Nevertheless, what's also the result of is of a very strong organization. The Americas, we've said already for some time that we need to work hard in the Americas to, let's say, optimize our organization, to make it more efficient, to add supplier lines and product lines. You see a little bit of all of that now. Again, also backed with very strong local economic backwinds, so to say. Also there things come together. We have very high hopes with respect to North America and the Americas in general.
We feel that we made some good moves in building and creating a future organization that is strong and that can deliver the services that our suppliers and our customers want. Again, it's a combination of favorable economic circumstances and building strong organizations locally. I hope that gives a good answer to your question. On the supplier front, yes, the whole environment on the chemical production side, of course, is constantly changing, and we have to react to that. There's constantly also revisiting of sales channels. So far we come good out of that. We also add product lines to our business.
Understood. I have to ask, I know you don't like the question from quarter-to-quarter, but we at (MSA), we have sometimes said that we extrapolate life. The good growth that we're seeing both in EMEA and both in Americas in terms of organic growth plus the conversion margin, so good cost control, how long do you think that you can keep on at this rate?
That's an impossible question to answer because that would mean that I would be able to look into the future. I think that there are now not, at this moment, no signs that it will come to an immediate end. Again, external circumstances, of course, also change rapidly every day, more or less, because of political or circumstances or currencies. We all read the papers. I want to be extremely cautious about, let's say, looking ahead farther away. I leave it with that, I think.
Okay. Thank you very much.
The next question comes from Ms. Nathalie De Bruycker with KBC Securities. Go ahead, please.
Yes, good morning. Thank you for taking my questions. First of all, if I can come back to EMEA and North America, particularly. You highlight very strong organic growth, but at the same time, we have seen the pricing of raw materials coming up in the first part of the year. I was wondering if you could give us a bit of an idea of whether it was more price-driven or volumes-driven. That's the first question. Secondly, I know that you don't like talking about working capital and et cetera, but I was wondering, given that it seems to be higher this year driven by the organic growth and the integration of the recently made acquisitions, while you typically guide for a cash conversion margin in the region of 90% plus, what does that mean for this year?
Does that mean that cash conversion could be lower than the 90%?
Could you answer the question? Nathalie, Hans here. Perhaps to answer your working capital question. First of all, we talk a lot about working capital also inside our company, because it's an important subject. At the end of the day, it's cash that should come out. What you typically see that in a quarter with very strong sales, you have a substantial increase in things like debtor positions, and you build up stocks to support the sales there. On the one hand, I would love to give a guidance of a very high cash conversion ratio at year-end, but at the same time, that would mean that I would expect a drop in sales in the last quarter.
From a commercial and operational perspective, I hope that we still need a lot of working capital at year-end due to the fact that we sell a lot. I think if you look at the overall picture, the guidance that we always gave is a cash conversion ratio being a high 80% or a low 90%, and I think that is still doable. Again, I prefer to end up at a higher 80% and have a very strong last quarter.
The volume and price question, please.
Volume, price, always a difficult one. We don't monitor it per product line or I think as a general answer, of course, prices have increased, which is always good for us. That means, of course, that prices to us also have increased, so we have to be able to pass them on, and we have been able to do that. That's a factor. At the same time, volumes have also grown significantly. I would say it's both elements of the growth are present.
Okay. All right. Perhaps if I can follow up, touching a little bit on Asia-Pacific, because I remember that you flagged that you have some start-up costs this year, especially in Japan and Vietnam, if I remember correctly. You still managed to show margin expansion in the region. What does it say for the future? I mean, for the second part of the year. Are these start-up costs now incurred? Is there more to come?
I think we spoke in the past about Japan. We have an organization there. We have now to add product lines in Japan. It's still, of course, a very small part of our business in Asia-Pacific. Generally, the bigger, let's say, regions like Australia, New Zealand, China, India, have performed very well. In Southeast Asia, we are generally smaller and a little bit more, let's say, dependent on local circumstances, so that can be a bit more volatile. Generally, I would say we made good progress in some of the key regions of the area. Start-up costs are now not a real factor, I would say anymore.
All right. Thank you. Very helpful.
The next question comes from Mr. Srinivasa Sarikonda, HSBC. Go ahead, please.
Hi, good morning. Srini from HSBC. Couple of questions for me, please. First, in terms of Americas conversion, the rate of decline has eased there. Could you give us some color on what's underlying conversion, excluding the acquisition effect there? Also what is helping and what still weighs on negative side there? The second one is a bit related to it, what is the typical time it takes for the acquired companies to catch up with the segment margins? If you could draw some lines from the previous acquisitions, and also some color on areas where you could realize the synergies. If possible, with some quantification it'll help. Thank you.
Yeah. Perhaps, Srini, to answer your first question. When we acquired Lomas, in the press release we spoke about a company with an EBITDA margin of, I think, 4.7%, and an EBITDA margin of a bit below 4.5%. With a revenue of 383 million CAD, so that is about EUR 250 million. If you would add that to the first half of last year, then a normal outcome would be EBIT margin of around 7%, and we report about 8%. So basically, what you see, we see two things. We see improvement in the existing organization and in the Lomas organization, helping us to grow the percentage. Then your question about how much time do you need to bring them back on board? That's a very difficult question. A lot of factors playing a role there. Maybe to add on that one.
I think it's very helpful to understand that when we acquire these businesses like Lomas and now also E.T. Horn, that these are established business for a very long time with a very specific own history and culture, and with also their own supplier base. To melt that into one organization without disrupting existing businesses, is a delicate, patient work that we have to do. With the teams, with the local teams. In the end, we are here for the long term, and we cannot promise from quarter to quarter that we integrate and add synergies and et cetera.
We build organizations, and I think also for those people that think that we only acquire companies, it's good to understand that what we do is, that we have done, for example, also in Europe, is with a specific view on how we can serve our markets, build organizations, and that requires, not green fielding, but that requires that we acquire also businesses. Very much with the intention to then accelerate organic growth. I can't say how long it will take. It will take a certain amount of time to put this all together, to take our suppliers with us, because they have a very important say also in, let's say, how they want to work with us. We are here for the long term. We are not for the very short term.
In the end, it has to, let's say, translate in good organic growth. What you see in Europe now is the fruit of a long labor over many years in building very strong organizations. That helps. We will create synergies. We won't put a number on it. You can be assured that we have a plan also for the Americas, to become the strongest specialty distributor in that region. That's the long answer to your short question.
Thank you. Thanks a lot. Understand. Cheers.
There is an additional question coming from Mr. Mutlu Gundogan, ABN AMRO. Go ahead, please.
Yes. I had a few, let's say, housekeeping questions. First, if I look at your P&L, at the wages and salaries, I see that is up as a percentage of sales compared to Q1 2017. That surprised me because of the, obviously, the inflation that we've seen in the whole chemical chain. Can you tell me why that is? Have the base salaries increased at IMCD? Is it the acquisition effect? Is it because you're growing in the U.S. where you are maybe paying a higher variable component, or is it just bonuses in general? That's the first question. The second question is on the net finance cost. Obviously, a few changes here and there. Would it be possible to give some guidance on this line going forward?
Thirdly, on the tax rate, Hans, you said it yourself, I think it was rather low at 24%, is that due to the better contribution from the U.S.? What is your guidance going forward, as it seems that the U.S. will only continue to grow or outgrow the other regions within IMCD? Let me also have a crack at the free cash flow conversion. Inventories. Was there a stocking effect, perhaps related to planned or unplanned maintenance shutdowns at suppliers? Finally, apologies for the long list of questions. You gave net debt and net of EBITDA at the end of the period. Horn has been closed end of July. Would it be possible to get the pro forma net debt and net of EBITDA, including Horn? Thanks.
That's a lot of questions, Mutlu.
I know.
Your wages and salary space. I think it's a bit of a mix of all the items that you mentioned. It is change in the mix of people. It is a bit more bonus accruals, driving up, let's call it, the average cost there, but nothing special. On the net finance cost.
You rightly said it is a bit of a combination of everything. Could I get some guidance?
On the one hand, it's our normal debt structure with the interest margins that we mentioned in the previous press releases. That is, I think, easy to calculate. On the other hand, on that same line, you also find, for instance, currency exchange differences. That is difficult to predict what will be the outcome there for the full year. The cash impact that you see in the cash flow statement, I think that gives you a good indication about what's the real interest cost on that line. The tax rate, the guidance that we gave in the past is a blended tax rate in the range of 24%-28%. Last year, we were at 25.5%, if I remember well.
At the moment, we are at the low end of that range. It basically has to do with the areas where we make profit and the allocation. Based on what I know now, I think it's fair to assume that last year we were at the low end of the range. This year, again, that we could end up again at the low end of the range.
You're not changing the range?
No. On the stock conversion, I think the question was about restocking and destocking. That's always a difficult question.
Yeah.
I think maybe, in general, to a certain extent, you're right. There are shortages which sometimes require us to take extra stock to overcome turnarounds of plants, et cetera. Secondly, if we start with new product lines, significant new product lines, we need to take additional stock initially, and then it plays out over a year. Some of these factors are also in our numbers today.
Yeah. Is that a big piece?
Yeah. For local organizations, that can be significant, yes.
Okay. Is it possible, your free cash conversion, if I look at Q2 there, was probably around 40%. Is it possible to put a number on that, how much that weighed on your free cash conversion?
That's difficult, but I think if you look at stock days, warehouse, then we are more or less in line, a little bit higher, I think, the first six months than last year. Yeah, it circles always in the low 40 number, and we are still there.
You're still there. It's not a major factor, I would say.
The biggest driver of our working capital investment is what you see happening on the debtor side, that has to do with more sales in the last quarter, very strong May and June. Your question with respect to leverage, including E.T. Horn. E.T. Horn is closed the end of July. To do a bit of a pro forma, out of the top of my head, I think we will arrive then somewhere around 3x EBITDA.
3x EBITDA. Okay. Would it be possible to get the net end number?
Because then I should also disclose the cash generation in July and the result in July, and so on and so forth.
I'm asking obviously because it's a big acquisition.
Yeah.
Thanks a lot for the answers. Very helpful.
Ladies and gentlemen, for any additional question, please press star one. Star one for your question or remark. There seems to be no further questions.
Okay. I wish everybody a great Friday and a fantastic weekend. If we close with this.
Ladies and gentlemen, this will conclude the analyst call regarding the first half year 2018 results of IMCD. You may now disconnect your line. Have a nice day.