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Continuing strong growth in Europe with revenue growth of 8% and gross profit and EBITDA growth of 10% and 13% respectively. Asia Pacific showed modest growth, EBITDA growth of 1%, and the Americas had revenue and gross profit growth of 15% and 4% respectively. This all resulted in a very satisfactory EBITDA increase of 10% versus the same period last year. As you know, in the third quarter, we closed the acquisition of L.V. Lomas in Canada and the U.S., and we are working hard to integrate this business into IMCD. Summarizing, we are positive about the first nine months, and based on these achievements and the continuing strong fundamentals of the business, we expect EBITDA growth in 2017. Now Hans will go into the numbers more thoroughly.
Thank you, Piet. Good morning, ladies and gentlemen. As indicated, I would like to give you a short summary of the IMCD financials of the first nine months of this year. As usual, I would like to start on page 10 of the presentation with a summary of key figures for the first nine months. Revenue increased 8% in the first nine months of 2017 compared to the same period of 2016. This 8% increase was a combination of 3% organic growth and 5% as a result of the first-time inclusion of acquired companies in 2016. Currency fluctuations had an impact on the various operating segments. However, on a consolidated level, the outcome was more or less neutral. Gross profit, defined as revenue minus cost of goods and cost of inbound logistics, increased 11%.
This increase was a combination of 6% organic growth and 5% as a result of acquisitions made. Gross profit and percentage of revenue improved from 22% to 22.5%. Changes in gross margin percentage are, amongst others, the result of local market circumstances, the first-time inclusions of acquisitions, currency changes, and the usual fluctuations in the IMCD product mix. Operating EBITDA increased 10% to EUR 123.8 million. This increase was a combination of organic growth and the first-time inclusion of acquisitions. The operating EBITDA margin increased from 8.6% in the first nine months of 2016 to 8.8% in the same period this year. The conversion margin, calculated as operating EBITDA in percentage of gross profit of 39%, was slightly lower than the same period last year. Lower conversion margins in Asia Pacific and the Americas were more or less compensated by a higher conversion margin in EMEA.
Net results before amortization and non-recurring items increased 8% to EUR 85.5 million. As you could see, free cash flow was strong, whereby the cash conversion ratio of close to 91% was relatively high for a first nine months period of a year. Main drivers of the strong cash flow were a higher operating EBITDA combined with relatively modest working capital investments. Year-to-date cash earnings per share is EUR 1.60, an increase of 8% compared to the same period of last year. On the last line of this page, you could see a 22% increase in our number of employees. The majority of this increase is the result of the first-time inclusion of acquisitions made, then mainly the Lomas acquisition. On the next page, slide 11, you will find revenue, gross profit, and EBITDA split per operating segment.
The activities in EMEA in the first column include all IMCD operating companies in Europe, Turkey, and Africa. In the first nine months of 2017, EMEA reported 11% ForEx-adjusted gross profit growth. Gross profit, a percentage of revenue, further improved from 23.6% in the first nine months of 2016 to 24% this year. On a constant currency basis, operating EBITDA increased 15%, and operating EBITDA in percentage of revenue improved from 9.6% to 10.1%. The first nine months include the impact of the acquisitions of Feza in Turkey from the 1st of January and Neuvendis in Italy from July onwards. It is fair to say that most of the reported growth is organic growth. In the second column, the results of Asia Pacific. A reasonable Q1 was followed by a weaker second and third quarter, resulting in flattish revenue and 9% gross profit growth on a constant currency basis.
Gross profit and percentage of revenue increased from 18.7% in 2016 to 20.7% in the first nine months of 2017. The increase of gross profit was not translated into EBITDA, amongst others, as a result of startup cost in the region of new IMCD ventures in Japan and Vietnam. Reported operating EBITDA was more or less flat. Americas consist of the IMCD operations in Brazil, the U.S., Canada, and Puerto Rico. In the first nine months of 2017, Americas reported 13% ForEx-adjusted revenue growth and 12% gross profit growth. Growth figures include the impact of Lomas from the 1st of September onwards. Gross profit and percentage of revenue was stable at 19.8%. ForEx-adjusted operating EBITDA in this segment increased with 4% to $26 million. Operating EBITDA, in percentage of revenue, decreased from 9.5% last year to 8.6% in 2017.
This reduction was due to the first-time inclusion of Lomas and investments made to further strengthen the commercial structure in the Americas. In the last column, you will find the cost of holding companies. This includes all non-operating companies, including the head office in Rotterdam and the regional support offices in Singapore and New Jersey in the U.S. On page 12, you will find a summary of IMCD's free cash flow. Free cash flow was strong in the first nine months, resulting in a cash conversion ratio close to 91%. Main drivers of this strong cash flow were a high cash conversion ratio and increased operating EBITDA, combined with modest working capital investments. CapEx of EUR 2.5 million was mainly IT related. On the next page 13, a short update on net debt and leverage.
Compared to the year-end 2016, net debt increased with about EUR 110 million to a bit more than EUR 500 million. This increase was a combination of, on one hand, healthy operating cash flows, and on the other hand, a substantial cash outflow as a result of acquisition made and dividend payments. Reported leverage ratio, defined as net debt divided by operating EBITDA, including the full year impact of acquisition made, was 2.9 at the end of September 2017. The leverage covenant in our loan docs require a maximum leverage of 3.5 times EBITDA, or four times EBITDA when using the acquisition spike. With an actual leverage of 2.9 times, there is a comfortable safety margin. On the last but not least, on the last page 15, you will find an outlook for 2017, which was already summarized by my colleague, Piet van der Slikke.
This was, from my perspective, a short summary of our year-to-date financials, and Piet and myself are happy to answer any of your questions.
Thank you.
Who will be the first?
Yeah.
I'll get you-
Ladies and gentlemen, we will start the question and answer session now. To register for the question and answer queue, please press star one. Go ahead, please. The first question is from Mr. Mutlu Gundogan from ABN AMRO. Go ahead, please, sir.
Yes. Good morning, Piet. Good morning, Hans. Three questions, please. First, on Asia Pacific, can you tell us how you think about the conversion margin in that region? Is there a certain floor that you are thinking about, or would you continue to be willing to sacrifice conversion margin for future growth? That is the first question. Secondly, on the Americas, gross profits showed a small organic decline. Can you tell us whether that was driven by North America or Latin America? Thirdly, the slight decline in gross profit is more than offset by your low operating expenses. I have them down 7% in a quarter. Can you tell us what you did to drive the expenses down and in which region? Thank you.
The conversion margin in Asia Pacific, Hans. Yeah, Mutlu, basically, you are asking is there a floor. I think what we do at the moment in that region is strengthen our position, partly due to greenfielding operations in countries like Thailand, Vietnam and Japan. That has an impact on the cost structure and that has an impact on the conversion margin. Overall, the average conversion margin in the region is still relatively high, with around about 42%, it's difficult to say that there is a floor, but what you could expect in the future is that these greenfield operations will at a certain moment add to the contribution margin and will help us to further improve it again.
Yeah.
The second question about the Americas, I was not completely sure if I could follow you. Could you repeat the question?
Yeah, sure. If I look at gross profits, if I exclude acquisitions and currencies, I get a slight decline in organic growth year-over-year, for the third quarter that is. I was just wondering whether you could break that down for us in North America and Latin America.
Yeah. I'm not sure if I agree with your conclusion that there was a slight decline in gross profit. I had the impression that we show a little improvement in that region. I think it's fair to say that we see improvement in the region, both in Latin America, Brazil and in North America. The region was, in that quarter, a little bit impacted by weather circumstances.
There is always something happening somewhere, so this is not an excuse, but that, of course, had a bit of an impact on the region. Overall, organically, we saw a little improvement in the region.
Okay.
The third question is? What was the third question, Mutlu?
Yes. It's on the operating expenses. Maybe my calculations are wrong again, but the way I calculated is that it looks like your operating expenses were down 7% in the quarter. Very strong achievement. Just wondering what you did in which region that helped that number come down.
No. I'm a bit afraid, Mutlu, that the calculation is not completely right. I think that had to do with the way you estimated the impact of the acquisitions.
Yeah. Most likely, yeah.
Yeah. We saw more or less the same organic growth pattern in our own cost as what we saw in the previous quarters.
Right.
There are no specific actions to make additional cost savings or things like that.
Okay. Well, thank you for answering my questions that were not that correct.
No problem.
The next question is from Mr. Josh Priddle from Berenberg. Go ahead please, sir.
Yeah. Hi, good morning. My first question on EMEA. I wondered if you can talk about the main drivers behind your strong organic growth in EMEA. Any comments on volume pricing, outsourcing, or market share gains would be very helpful. Second question, slightly related to before, but on the conversion margin contraction in Q3 in the Americas. I know there are a lot of moving parts in that, but I wondered if you can give us an idea of what the organic trajectory there is. Finally, one of your competitors in the U.S. has talked about increasing freight rates in that region. Can you talk about what you're seeing there and comment on cost inflation in general in EMEA? Thank you.
Okay. On EMEA, I think generally, as a general remark, of course, our IMCD position in EMEA in specialty chemicals and food ingredients is strong. Most portfolios, and product lines, are tier 1 and quite strong. We benefit quite significantly from healthy market circumstances. If you look specifically over the whole region, I could say most of the region is performing quite well. I think exceptional performances in Southern Europe. Do also great in Turkey. We integrated the acquisition and that went very well. Also countries like Germany, U.K. are doing quite well. Overall, we have a strong portfolio that benefits from growth and with strong management everywhere. Generally, a position that benefits from market circumstances very well. We integrated and added to our portfolio, of course, Neuvendis in Italy. Our position there is also quite strong.
We see a very positive towards the EMEA region. On the Americas, maybe generally about freight costs, we hear sounds as you know, freight costs have for many years not increased really. We hear now some rumors that because of the improving economies, that freight rates will increase. We will have to see that. I think we didn't notice it yet. We monitor it closely. In the end, it is, of course, a cost part, but it is not a significant part of our cost. On the conversion margin in the Americas, Hans, do you have something?
Josh, there is a combination of a couple of things. It's on the one hand, the inclusion of companies like Lomas, working on a lower EBIT margin than the average of the group in that region, as announced in the press release. The other thing is that we are investing ourselves in further strengthening the commercial structure in that region, mainly adding cost. That also has a bit of an impact on the conversion margin there.
Thank you. Maybe just to follow up on that last point, is that investment, how long would you expect that to continue before, let's say, the movement of the top line kind of catches up to compensate?
Okay. We have in the Americas, we speak of course about North America, maybe some general remarks about that. Our strategy very much aimed at forming a national organization in the U.S., as a specialty company, which would be quite unique. You have, of course, full liners like Brenntag and Univar and Nexeo. You do not really have a relatively integrated national specialty chemical distributors, and it's really our goal to become one. That means, of course, that we have to invest in presence in the United States. We have to acquire in areas where we are weak. That's the process that we are now in. Of course, Lomas has helped enormously in furthering these goals. We're very busy integrating and combining these activities of this great company with what we already have in the United States. That's going well and it's growing rapidly.
We will see benefits, I think, in the near future of that. As to Brazil, again, to fresh memories, we have two activities. We have our pharma activity that runs well, and we have our activity in industrial chemicals that is still an activity that we want to skew more to specialties than it is. That means that we have to invest in quality people, more expensive people than we had. We also have to add product lines, which we also will do and have done. This will also significantly increase the top line. I think the challenge is to also further increase our growth margins in the industrial part of our Brazilian business. Overall, I think we make very good progress in both areas, and someday we have to show for it, Josh.
Okay. Thank you very much.
The next question is from Ms. Nathalie Debruyne from the Degroof Petercam. Go ahead please, ma'am.
Yes, good morning. Perhaps two questions, if I can follow up on the integration of Lomas. I understand that it's well on track and that you actually rely on it to improve your presence in North America. Also I see the fact that structurally the company had lower EBITDA margin, and I was wondering where you see potential cost synergies to actually move it towards the group's average in the region. That's the first question. If I can raise a second one afterwards, that would be easier, right?
Yeah. No, it's a very good point. You're right, that the margins and the operating margin of Lomas is significantly lower than that of our group. There are several reasons, but one of the reasons is certainly that their cost structure is heavier than what we are used to. We will make the necessary corrections in that. At the same time, we will also invest further in that very strong franchise that they have in the several market segments. Not in the least, also in the foods market segment, both in Canada and in the U.S. We feel that we should invest further resources. On the one hand, we will look, let's say, critically to the cost base, and on the other hand, we will invest where we feel that it is, let's say, helpful to also grow our top line.
Overall, I think we have acquired a quality business, where we can learn from them and they can learn from us. There's absolutely room for improving the performance of that company.
Okay. That's helpful. Thank you. Secondly, I was wondering, what kind of potential do you see actually to lever up on that acquisition with your current supplier and customer base? For example, in Canada, where you didn't have a presence yet.
Yeah. Also very good question. Of course, what we all the time try to do is to leverage our relations to all our new regions, and we are also in process of doing that by bringing a business that we have in the U.S. also to Canada. The first promising results we already see. It is not something that, as you know, we do not want to disclose too much about individual supplier relations. We are very hopeful that we can benefit from also on that level on synergies. I can confirm the possibility that we will do that.
Okay. Can you perhaps indicate in what market segment that would be the most pronounced?
Yes, I think it would be most relevant in the industrial market sectors. Coatings, Construction, Plastics, these sectors.
Okay. Thank you.
The next question is from Sylvia Barker from the Deutsche Bank. Go ahead please, ma'am.
Yes. Hi, good morning.
I've got a few questions, please. Firstly, on L.V. Lomas, could you just indicate if there's any seasonality it's been? Should we assume that September is basically just the 12th of the overall revenue that you would've generated from that? Can you talk about the gross margins on that business? Secondly, in North America, building the national coverage, obviously you have invested in labs already, and now you've got another platform for growth. You still have some white spaces on the map. Do you think that M&A or greenfields or lab investments are more likely at this stage? Are you seeing any appreciation perhaps of assets that you are looking at because other competitors and private equity are looking as well?
Finally in EMEA, could you talk a little bit about how much of the pickup in Q3 versus Q2 is just, there are some working day impact in Q2 and that's a bit stronger, have some of the regions and industries perhaps accelerated a little bit? Thank you.
Okay. The last question, Sylvia, I say it every time, but I'm not going to count working days. I don't know exactly. I haven't count.
Okay, fair enough.
On seasonality. The seasonality of Lomas, based in Canada, I think it's fair to say that December and January are normally their weakest months of the year. Mainly due to, first of all, the Christmas period and the winter season that they have there. Normally the second and the third quarter are the strongest quarter in their year. September is a pretty strong month for them normally.
Okay, thank you. Do they have any agri exposure which skews them to the summer as well, or?
No.
Okay, thank you.
Yeah. On white spaces in the U.S. labs. We of course improved our position in the western part of the U.S. because of Lomas, but still are modest. In the strategy, we need to also fill up our presence and credibility in the west and southwest of the United States. In Canada, we have a national coverage because we also have offices outside of Toronto, of course, also in Vancouver and Montreal. Labs, we have a few now in the United States, and we have a few in Canada. We are looking for a pharma to also have a pharma lab later in the next six months, I think. Basically, there remains work to do, in particular in building up an organization also in the western United States. Was that the answer, Sylvia?
Yes. No, that's very helpful. Thank you. Is it more likely that you do some more bolt-ons in the west and southwest, or would you prefer to do that via opening your own kind of labs greenfield?
I think, yeah, we will look at both. If we can find, let's say something that would really fit with us in terms of acquisition, we would do that also.
Okay. Just on the Lomas question, what is the gross margin of that?
It's lower than the average in the Group.
Okay. Thank you very much.
The next question is from Mr. Rajesh Kumar from HSBC. Go ahead, please, sir.
Hi. Good morning, Hans. Thanks for taking the question. Just on the U.S. business, just what is the typical type of wage inflation are you seeing in acquisitions? Some of the labor market data shows that it's getting a bit difficult to get people in. Have you seen a bit of churn in Lomas staff churn after the acquisition? How is the whole cost inflation from labor looking? Just following up on the earlier cost inflation question.
You were a bit difficult to understand. What I could catch is that you've asked about wage inflation in America and Canada.
Yeah.
I would say that there is wage inflation, in our type of business generally, and maybe I should limit that only to the U.S. or Canada, but also to other areas in the world that people with qualifications that we are looking for have on the labor market, a very good position. That goes also for Asia and also for Europe. People with, let's say, skills in specific, let's say, areas of, be it Coatings or food technology or pharmacist type of people combined with commercial skills. It's just people that are difficult to find, and we have lots of competition for these people. Generally, I would say that we need to be very alert to how the market develops. I think that everywhere the market develops, let's say, for them in a positive direction, so to say.
Yes, there is inflation in this respect.
Would it be fair to say that, I mean, just leave the quarterly run rate apart, but on a more medium-term basis, you're comfortable that the level of inflation you can get in selling specialty chemicals will outpace the inflation you get? Do you have an advantage because of your scale in specialty or because you outsource your freight? I mean, the differential inflation, could you give us some color on that bit? That would be quite helpful.
Yeah. Basically what you say, what we look very closely at is, let's say, what we call our own costs versus the added value that we generate.
Okay.
You're completely right that if our costs would be under pressure and at the same time, we are not able to also maintain AV level or even increase it, then of course there's a certain squeeze. As you know, and as you've seen our numbers over the period, you have not seen that. We have been able to still grow and keep that KPI in the right corner. It's not only the wage inflation for those people with the skill set that I just explained. Of course, we're working on that also continuously. I think that we are capable of maintaining, let's say, that KPI in the way that we want. On third-party costs, I'm still very happy that we have this flexibility that we have.
We don't expect major effects of that on our growth or bottom line.
Thank you very much. That was really helpful.
The next question is from Mr. Mutlu Gundogan from ABN AMRO. Go ahead please, sir.
Thank you for the follow-up question. The first is, Hans, I think you said you don't like to discuss weather. I understand that. Just wondering, will there be any impact of weather in the fourth quarter? Secondly,
We should apply for the weather. We don't have crystal ball. About the weather, Mutlu, I think what Hans meant is we have two effects here. We have a pharma business over Puerto Rico.
Yeah.
That has been affected. We have, of course, a smaller business in Texas, that has also been affected.
At the same time, we have a few suppliers claiming force majeure who have their production locations also used.
Yeah. True.
Yeah.
That is basically the main impact that we saw in the third quarter. Will that impact Q4? A little bit, perhaps.
Yeah.
Also, Mutlu, there is always something going wrong somewhere in the world.
Yeah, I know. It's just that, if there was an impact that in Q3 and you don't want to disclose it, maybe just wondering what is also the impact without disclosing the impact that is there. Second question. What is your exposure to China, by the way, in Asia Pacific?
That's a good question. I think we talk and we speak with each other, we also, of course, segmented it as Asia Pacific, but we speak about a huge area, whereby we, as you know, have a very significant business in Australia and New Zealand. That's humming along. That's doing well. Then we have, I would say, North Asia, China, and Japan. Whereby Japan is a greenfield startup, and China is a smaller established business, but doing quite well and growing very satisfactorily. Mainly, we really try to stay above, let's say, the commodities very much here. We have a strong Pharmaceuticals business in China, but also increasing food ingredients and specialty food ingredients. That's a business that does quite well, and we also expect to further grow that. If you look further into Asia, we have also a growing and increasingly significant business in India.
I expect good things also from India in the coming periods. By the way, one of the reasons that also we spoke a bit about conversion margin is that we also have to invest significantly in India and product lines because we gained product lines. That has a short-term effect on that. We have Southeast Asia, consisting of course of various countries where we have, I would say, a few good positions, but also positions that are quite small and let's say the size makes them, of course, quite susceptible to little changes in product lines or customers, et cetera. Let's say our challenge is, and also opportunity of course, is to get stronger positions in Southeast Asia. This is maybe a longer answer to your question, but I think that in Asia, China is growing business, and with really good profitability. India as well.
Southeast Asia is mixed, and we need to further strengthen individual businesses there.
That's very clear, Piet. Just wondering whether you saw any impact from the environmental checks that are currently going on in China, and whether that is positive or negative, i.e., is it impacting your competitors or is it impacting your own suppliers? Just wondering if you see any impact there. Maybe also looking into the future, whether you see opportunities there.
Yeah. We haven't seen it, Mutlu, because we don't work, I think, in these specific market segments. Of course, the regulatory environment of China is tightening. It's getting more, rightly so, I would say, more strict. We, of course, have to comply to the strictest possible guidelines that are also affecting our Pharmaceuticals work and also our food ingredients. We are not so strong. We want to become much more stronger in, let's say, construction chemicals and coating chemicals. There, we don't have that experience that you just mentioned. How our competitors fare there, I can't say. In particular, those who have, of course You have to ask companies like Brenntag, but that have also facilities, storage facilities, and tank facilities, and we don't have that in China.
Okay. Thanks for clearing that up. Thank you.
Welcome.
The next question is from Sylvia Barker from the Deutsche Bank. Go ahead, please, ma'am.
Hi. Thank you for taking the follow-up. I just want to check, on construction chemicals, could you give an indication of how much that is of your existing businesses, kind of across the group? It sounds like it's something that you would like to increase the proportion of in a couple of the regions.
No. Well, I don't think we're going to give these numbers, because I don't even know them by heart. Basically, what you have to see is that, let's say what we group under Coatings is also construction adhesives. This is another important sub-market segment, and inks. What we strive to do, Sylvia, it's very important for us, is to have a complementary product portfolio for these different market segments. Construction is an interesting big market, and we have been able to, let's say, increase our, let's say, the portion of product lines that go into that segment. We are not going to split it out now between Coatings and Construction, et cetera, because that is information that we do not want to share with others.
Okay. Sure. No, that's understandable. I guess if you think about Construction just from a general view, that would seem like quite a cyclical end market, but is that different when you're in the specialties?
No.
What are the dynamics?
That's more cyclical. I think if you look at our business in total, then of course, let's say the more industrial markets are more cyclical than markets like food or personal care or pharma. That's also what we saw in the earlier crisis. Yes, like anybody else, we also are subject to a certain cyclicality in the economy.
Okay. Thank you very much.
Ladies and gentlemen, if there are any additional questions, please press star one. The next question is from Sander van Oort from Kempen & Co. Go ahead, please, sir.
Hi. Good morning. Sander, Kempen. Two questions if I may. First of all, on the working capital, which increased slightly year-over-year. I was wondering, is it all organically or is it also the result of acquisitions which have a higher than average working capital usage? Secondly, I was wondering on M&A. Today's net debt to EBITDA is close to three times, which obviously is comfortably within your covenant. In case there's any new targets on the horizon, do you feel comfortable in further leveraging up to, let's say, three and a half times? Will you use other sources of capital to finance such a potential deal? Thank you.
Sander, first on working capital. If I look at things like working capital days, so debtor days, stock days, and creditor days, over time, these days are more or less flattish. Of course, the absolute amount of working capital go up as a result of the acquisition made. On the M&A side and leverage, as you know, we have, under our loan documentation, the possibility to lever up to four times EBITDA. I'm looking at Piet at the moment, that I don't think the two of us feel comfortable with leveraging it up to that maximum level. I could see a shorter period whereby leverage levels are starting with a three up to max three and a half times.
What you typically see in our business is that we generate so much cash that leverage will come down quickly as we generate a lot of cash in this business.
Okay. Thank you. Very helpful.
Ladies and gentlemen, if there are any additional questions, please press star one. Go ahead. Gentlemen, there are no further questions. Please continue.
Yes. I think we can conclude our call and with the message from our sides to thank you very much for being there, and concluding with that we remain optimistic and happy people. Have a good day.
Ladies and gentlemen, this concludes the IMCD call. You may now disconnect your line. Thank you.