Ladies and gentlemen, thank you for holding, and welcome to the IMCD Analyst First Half Year twenty eighteen Results Conference Call. During the presentation, all lines will be in a 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 Sliche. Go ahead, please, sir.
Yes. Good morning to everyone. And Hans Kornals and I will be happy to answer your questions regarding our press release containing the half year twenty eighteen results. I will give a very brief factual summary of the numbers. Our half year results were strong with operating EBITDA increasing to 24% to €105,200,000 In the different segments, EMEA performed very well with revenue growth of 8%, gross profit and EBITA growth of 12% 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 LD Lomas, but also our existing business across the region had strong organic growth. Finally, Asia Pacific did also very well with an EBITDA growth of 9% and 19% with constant currency. So summarizing, if I summarize, let's say, all the segments that 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 LV Lomas acquisition, additional growth.
On the 31st July 2018, we closed the acquisition of the company ET Horn based in La Mirada in California, which will be an important further step to execute our strategy in North America. Ityhorn is active in the Western and Southwestern United States, which is a territory where we at this moment were not present. So it's a very good fit in our existing activities. Summarizing, we are positive about the 1st 6 months. And based on these achievements and the strong fundamentals of the business, we expect EBITDA growth in 2018.
And with that, I give over to Hans for additional remarks on the numbers. Thank you, Fried. Good morning, ladies and gentlemen. I would like to give you a short summary of the results of IMCD in the first half of twenty eighteen as reported earlier today. And I would like to start on Page 9 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 3 acquisitions made in 2017. LV Lomas acquired in September last year had the biggest impact. Further acquisition growth includes the full year impact of Novendis in Italy and Bosco in the U.
S, both acquired mid last year. E. T. Oren, as just mentioned by Pete, 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 twenty eighteen. 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 in percentage of revenue improved slightly in 2018. And 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 €105,000,000 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 percentage of gross profit was 40% in 2018, which was slightly higher than in the same period last year.
On the next page, Page 10, you will find a summary of the P and L lines from EBITDA to results 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 €4,600,000 related to the prepayment of all term and revolver loans is reported as a one off nonrecurring item. The nonrecurring items of €5,300,000 in total include the €4,600,000 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 results. The blended tax rate in the first half of twenty eighteen was 24% compared to 25% in the first half of last year. And last but not least on this space, cash earnings per share increased 20% to €1.31 On the next slide, Page 11, you will find some financial details for operating segments. As mentioned by Peter, activities in EMEA had a strong start of the year, but by most of the growth was organic growth.
Positive market consensus combined with the strong IMCD organization resulted in double digit organic gross profit and EBITDA growth. Further, the full year impact of Novemdus in Italy acquired in June 2017 added a bit to the bottom line. ForEx adjusted operating EBITA increased 17% in EMEA, whereby the EBITA margin improved from 10.4 percent in 2017 to 11.1% in 2018. We realized the same all 0.7% improvement in conversion margin in this region. In Asia Pac, the 2nd column, we realized double digit gross 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. Next column is Americas, a segment where 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 Bosco and Elvylomas. The conversion margin in the first half of twenty eighteen was in line with our indications in previous calls, lower than the same period last year as a result of the Lomas acquisition, a company 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 of 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 officers in Singapore and New Jersey and the U. S. On the next page, 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.
Then intangible assets related deferred tax liabilities relatively high, as indicated before as a result of M and A and our history as private equity owned company. There's an equity position of €739,000,000 covering about 59% of capital employed. In Q2, we paid a dividend of €0.62 per share, resulting in a total dividend payment of €33,000,000 The leverage ratio at the end of June was 2.7x EBITDA and it was well below the required maximum as said 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 to €42,000,000 compared to year end 2017.
And it's clear that healthy organic revenue growth of 11% is the main driver of this increase. Overall, the average working capital base 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 twenty eighteen. And at the end of last year, you see the starting position was €419,000,000 €494,000,000 cash generated from operating activities using 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 €506,000,000 I would like to finish the financial summary with the cash flow overview on Page 15. And as you can see, the year to date free cash flow and cash conversion ratio both decreased in the first half of twenty eighteen compared to last year.
Substantial operating EBITDA growth could not fully compensate the increased working capital, an increase as what I indicated before as a result of the substantial organic revenue growth. Now before we move to Q and A, I would like to take you to Page 17, where we summarize the outlook for the full year. And I think Pete already in this introduction summarized what we put on paper there. And now I would like to hand over to the operator who will open the line for Q and A.
Thank you, sir. The first question is coming from Mr. Mukher Gundogan, ABN AMRO. Go ahead, please.
Yes. Can you hear me? Yes. Okay. Good morning, Pete.
Good morning, Hans. Let me start first with a few operational questions. So on EMEA, organic gross profit growth, again, very high. And that has been the case for a few quarters now, actually for quite a while now. So can you tell us how you are able to show this growth, I mean, for a region that has in terms of IP has been a bit lackluster.
So are these contract wins? Are these expansions into new regions? So any flavor you can add to that would be appreciated. And then sticking to EMEA, just looking at Q2, conversion margin of 44.9%, I mean, 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 that mean that you need more salespeople as it shows that you have a too limited cost base on sale? And then thirdly, on Americas, again, organic growth profit growth here, very high now for 2 quarters. What is behind that and how sustainable is that? And then finally, also on Americas, also on the conversion margin, That jumped almost 600 basis points quarter on quarter.
That's a huge jump. I mean, was that due to cost savings? And how sustainable is that?
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 where in our history where everything comes together in a positive way. And 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. And these 2 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, as we say, in the Netherlands. So 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 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.
And you see a little bit of all of that now and again also backed with very strong local economic backwinds, so to say. So 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. So again, it's a combination of favorable economic circumstances and building strong organizations locally.
And I hope that gives a good answer to your question. And as on the supplier front, yes, we are, of course, constantly I mean, the whole environment in 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. And so far, we've come good out of that. So we also add product lines to our business.
Understood. I mean, I have
to ask, I know you don't like the question from quarter to quarter, but we as Alan said, we have sometimes said that we extrapolate lines. So the good growth that we see 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?
Yes. That's an impossible question to answer because that would mean that I would be able to look into the future. But I think that there are now not at this moment, no signs that it will come to an immediate end. But again, I mean, external circumstances, of course, also change rapidly every day more or less because of political circumstances or currencies. We all read the papers.
So I want to be extremely cautious about, let's say, looking ahead farther away. But I leave it with that, I think.
Okay. Thank you very much.
The next question comes from Ms. Natalia de Bruyne, Degroof Petercam.
First of all, if I can come back to EMEA and North America particularly, so you highlight very strong organic growth. But at the same time, we have seen the pricing of raw materials coming up in the 1st part of the year. So I was wondering if you could give us a bit of an idea of whether it was more price driven or volumes driven? So that's the first And then secondly, I know that you don't like talking about working capital and etcetera, 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 percent?
Could you answer that, Nathalie, answer 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 because at the end of the day, it's cash that should come out. But 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. So 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.
So 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 Bill always gave is a cash conversion ratio being a high 80% or a low 90%. And I think that is still doable. And again, I hope to end up at a I prefer to end up at a higher 80% and have a very strong last quarter. Then the volume and price question.
The 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. But it's that means, of course, the prices to us have increased. So we have to be able to pass them on and we have been able to do that. So that's a factor.
At the same time, volumes have also grown significantly. So I would say it's both elements of the growth are present.
Okay. All right. And perhaps if I can follow-up touching a little bit on Asia Pacific because I remember that you flagged that you have some startup costs this year, especially in Japan and Vietnam, if I remember correctly. But you used to manage to show margin expansion in the region. What does it say for the future?
I mean, for the 2nd part of the year, are these startup costs now Is there more to come?
I think we spoke in the past about Japan. We have now we have an organization there. We have now to add product lines in Japan. But 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. But generally, I would say, we made good progress some of the key regions of the area. So start up costs are now not a real factor, I would say, anymore.
Okay. Thank you. Very helpful.
The next question comes from Mr. Srinivasa, Sarikonda, HSBC. Go ahead please.
Hi, good morning. Srini from HSBC. A 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?
And also what is helping and what still weighs on negative side there? And the second one is a bit related to it, like 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 will help. Thank you.
Pierre, perhaps, Cindy, 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 EBITDA margin of a little bit below 4.5% with a revenue of CAD 383 1,000,000 or that is about EUR 250,000,000. If you would add that to the first half of last year, then the normal outcome would be EBIT margin of around about 7%, and we report about 8%. So basically, what you see, we see 2 things. We see improvement in the existing organization and in the Lomos organization helping us to grow the percentage.
And then your question about how much time do you need to bring them back to more, that's a very difficult question. Very 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 Lomos and now also ET 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 bring that and to melt that into one organization without disrupting existing businesses is a delicate patient work that we have to do. And 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 etcetera.
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 and what 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 greenfielding, but that requires that we acquire also businesses. But very much with the intention to then accelerate organic growth. And 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. But we are here for the long term.
We are not for the very short term. And it has to, let's say, translate in good organic growth. And what you see in Europe now is the fruit of a long labor over many years in building very strong organizations and that helps. So we will create synergies. We won't put a number on it, but you can be assured that we have a plan also for the Americas to become the strongest specialty distributor in that region.
And that's the long answer to your short question.
Yes.
There's an additional question coming from Mr. Mukluo Gundogan, ABN AMRO. Go ahead please.
Yes. I had a few, let's say, housekeeping questions. First, if I look at your P and L at the wages and salaries, I see that is up as a percentage of sales compared to 8.1.17. And that surprised me because of the obviously the inflation that we've seen in the whole chemical chain. So 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 U. S. Where you are maybe paying a higher variable component?
Or is it just bonuses in general? So that's the first question. The second question is on the net finance cost. Obviously, a few changes here and there. So would it be possible to give some guidance on line going forward?
And then thirdly, on the tax rate, Hans, you said it yourself, I think it's rather low at 24%. Is that due to the better contribution from the U. S? And 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? And then 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? And then finally, apologies for long listed questions. And you gave net debt and net debt EBITDA at the end of the period.
1 has been closed end of July. Would it be possible to get the pro form a net debt and net EBITDA including Horn?
That's a lot of questions, Mutlu. I know, I know. Your wage is a seller expense. I think it's a bit of a mix of all the items that you mentioned. It is change in the mix 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 and could I get some guidance? It is on the one hand, it's our normal debt structure with the interest margins that we mentioned in the previous press releases. And that is, I think, easy to calculate. But on the other hand, on that same line, you also find, for instance, currency exchange differences, and that is difficult to predict what will be the outcome there for the full year.
But 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 process, a blended tax rate in the range of 24% to 28%. Last year, we were at 25%, 25.5%, if I remember well. At the moment, we are at the low end of that range. And 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, no, no, no. Then on the stock conversion, I think the question was about restocking and destocking. That's always difficult. Yes. I think maybe in general, to a certain extent, you're right.
There is there are shortages, which sometimes require us to take extra stock to overcome turnarounds of plants, etcetera. 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. So some of these factors are also in our numbers today. Yes.
Is that a big piece?
Yes. For local organizations, that can be significant, yes.
Okay. Is it possible your free cash conversion, if I look at Q2, that 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. And I think if you look at stock days, Hans, then we are more or less in line, a little bit higher, I think, in the 1st 6 months than last year. But yes, it's circle is always in the low 40% number, and we are still there. We're still there. So 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, and that has to do with more sales in the last quarter, very strong May June. And then your question with respect to leverage including E. T. Horn. E.
Horn is closed the end of July. So to do a bit of a pro form a, Out of the top of my head, I think we will arrive then somewhere around 3 times EBITDA.
3x EBITDA. And would we get possible to get the net debt number?
No, because then I should also disclose the cash generation in July and the result in July and so on and so forth.
Okay. Okay. All right. No, I'm asking obviously because it's a big acquisition. Okay.
Thanks a lot for the answers. Very helpful.
There seems to be no further questions.
Okay. Then 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 twenty eighteen results of IMCD. You may now disconnect your line. Have a nice