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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 Q3, we closed the acquisition of LV Lomas in Canada and the U. S.
And we are working hard to integrate this business into RMCD. Summarizing, we are positive about the 1st 9 months. And based on these achievements and the continuing strong fundamentals of the business, we expect EBITDA growth in 2017. And now Hans will go into the numbers more thoroughly. Thank you, Pete.
Good morning, ladies and gentlemen. As indicated, I would like to give you a short summary of the IMCD financials of the 1st 9 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 1st 9 months. Revenue increased 8% in the 1st 9 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 in a control. 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 in 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 EIMCD product mix. Operating EBITA increased 10% to €123,800,000 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 1st 9 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 €85,500,000 As you could see, free cash flow was strong, whereby the cash conversion margin of close to 91% was relatively high for the 1st 9 months period over year. Main drivers of the strong cash flow were higher operating EBITDA combined with relatively modest working capital investments. And year to date, cash earnings per share is €1.60 an increase of 8% compared to the same period of last year. And 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 and then mainly the LOMOZ acquisition.
On the next page, Slide 11, you will find revenue, gross profit and EBITA split per operating segment. The activities in EMEA in the first column include all Amstrad operating companies in Europe, Turkey and Africa. In the 1st 9 months of 2017, EMEA reported 11% ForEx adjusted gross profit growth. Gross profit as a percentage of revenue further improved from 23.6% in the 1st 9 months of 2016 to 24% this year. On a constant currency basis, operating EBITDA increased 15% and operating EBITA in percentage of revenue improved from 9.6% to 10.1%.
The 1st 9 months include the impact of the acquisitions of FEZSA in Turkey from the 1st January and Novendis in Italy from July onwards. However, it is fair to say that most of the reported growth is organic growth. In the second column, the results of Asia Pacific. 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 in percentage of revenue increased from $18,700,000 in 2016 to 20.7% in the 1st 9 months of 2017.
The increase of gross profit was not translated into EBITDA, amongst others, as a result of start up 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 United States, Canada and Puerto Rico. And in the 1st 9 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 September onwards.
Gross profit in percentage of revenue was stable at 19.8%. ForEx adjusted operating EBITDA in this segment increased by 4% to €26,000,000 And 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 1st 9 months, resulting in a cash conversion ratio close to 91%. Main drivers of this strong cash flow was a high conversion ratio and high conversion ratio were increased operating EBITDA combined with modest working capital investments. CapEx of €2,500,000 was mainly IT related.
On the next page, Page 13, a short update on net debt and leverage. Compared to the year end 2016, net debt increased with about €110,000,000 to a bit more than €500,000,000 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 3.5x EBITDA or 4x EBITDA when using the acquisition spike. So with an actual leverage of 2.9 times, there is a comfortable safety margin.
And on the last but not least, on the last page, Page 15, you will find an outlook for 2017, which was already summarized by my colleague, Piet van der Lindke. This was, from my perspective, a short summary of our year to date financials. And Pieter and myself are happy to answer any of your questions. Who will be the first?
Yes. Ladies and gentlemen,
we will start the question and answer session now. The first question is from Mr. Madlu Gundogan from ABN AMRO.
Yes. Good morning, Peter. 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 be would you continue to be willing to sacrifice margin conversion margin for future growth? That is the first question. Secondly, on the Americas.
So gross profit showed a small organic decline. Can you tell us whether that was driven by North America or Latin America? And then thirdly, the slight decline in gross profit is more than offset by your lower operating expenses. So I'd have been down 7% in the 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. Yes, Muju, basically you're 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. And 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%.
And 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. Yes. The second question about the Americas, I was not completely sure if I could follow you. Could you repeat the question?
Yes, sure. So if I look at gross profits and if I exclude acquisitions and currencies, I guess a slight decline in organic growth year over year for the Q3 that is. So I was just wondering whether you could break that down for us in North America and Latin America.
Yes. 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. But I think it's fair to say that we see improvement in the region in both in Latin America, Brazil and in North America. The region was in that quarter a little bit impacted by weather circumstances, but 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. But overall, organically, we saw a little improvement in the region.
Okay.
The third question is what was the third question, Rudolf?
Yes. It's on the operating expenses. So maybe my calculations are wrong again, but the way I calculated is that your it looks like your operating expenses were down 7 I'm a bit
I'm a bit afraid, Mutlu, that the calculation is not completely right. But I think that had to do with the way you estimated the impact of the acquisitions.
Yes, most likely, yes.
Yes, because we saw more or less the same organic growth pattern in our own cost as what we saw in the previous quarters.
Right, right.
But there are no specific actions to make additional cost savings or things like that.
Okay. Well, thank you for answering my questions. They were not that correct.
The next question is from Mr. Josh Prado from Berenberg. Go ahead please sir.
Yes, 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. And then second question, slightly related 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.
And then 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 is in specialty chemicals and food ingredients is strong. And most portfolios and product lines are Tier 1 and quite strong. And so we benefit quite significantly from healthy market circumstances. If we look specifically over the whole region, I can say most of the region is performing quite well. I think exceptional performances in Southern Europe.
We're also great in Turkey. We integrated the acquisition and that went very well. Also countries like Germany, U. K. Are doing quite well.
So overall, we have a strong portfolio that benefits from growth and with strong management everywhere. So generally a position that benefits from market circumstances very well. We integrated and added to our portfolio, of course, new vendors in Italy. Our position there is also quite strong. And so we will see we see a very positive towards the EMEA region.
On the Americas, maybe generally about freight costs, we hear sounds that as you know, freight costs have for many years not increased really. You hear now some rumors that because of the increasing improving economies, the trade 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 not a significant it is, of course, a cost part, but it is not a significant part of our cost. And on the conversion margin in Americas, Hans, do you have something? Yes. There is a combination of a couple of things. That's on the one hand, the inclusion of companies like Lomos 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 commercial structure in that region, mainly adding costs. And that also has a bit of an impact on the conversion margin there.
Thank you. And just maybe just to follow-up on that last point. Is that investment, how long would you expect that to continue for 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 is very much aimed at forming a national organization in the U. S. As a specialty company, which is which will be quite unique.
You have, of course, full liners like Bramtak and Univar and Nexeo, but you do not really have a relatively integrated national specialty chemical distributors. And really our goal to become 1. That means, of course, that we have to invest presence in the United States. We have to acquire in areas where we are weak. And that's the process that we are now in.
Of course, LOMAS has helped enormously in furthering these roles. We're very, very busy integrating and combining this great company or activities of this great company with what we already have in the United States. And that's going well and it's going rapidly. And we will see benefits, I think, in the near future of that. As to Brazil, again, to fresh memories, we have 2 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 have. We also have to add product lines, which we also will do and have done.
And this will also significantly increase the top line. I think the challenge is to also further increase our gross margins in the industrial part of our Brazilian business. But overall, I think we make very good progress in both areas and something we have to show for it, Josh.
Okay. Thank you very much.
The next question is from Ms. Nathalie de Bruyne from The Peter Group, Petercam. Go ahead please, ma'am.
Yes, good morning. Perhaps two questions, if I can follow-up on the integration of Lomas. So I understand that it's well on track and that you actually rely on it to improve your presence in North America. But 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.
So that's the first question. If I can raise the second one afterwards, that will be easier, right?
Yes. No, it's very good points. We it's you're right that the margins and the operating margin of Globals is significantly lower than that of our group. And I mean, there's several reasons, but one of the reasons is certainly that the cost structure is heavier than what we are used to. And we will make the necessary corrections in that.
At the same time, we will also invest further in the very, very strong franchise that they have in the several market segments, not in the segment, both in Canada and in the U. S. And we feel that we should invest further resources. So 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. But there's absolutely room for improving the performance of that company.
Okay. That's helpful. And 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?
Yes. Also very good question. Of course, what we all the time try to do is to leverage our relations to other our new regions. And we're also in process of doing that by bringing a business that we have in the U. S.
Also to Canada and the first promising results we already see. But it is not something that, as you know, we do not want to disclose too much about individual supplier relations. But we are very hopeful that we can benefit from also on debts on that level on synergies. So I can confirm the possibility that we will do that.
Okay. And can you perhaps indicate in what market segment that would be the most pronounced?
Yes. I think it would be most, let's say, most relevant in the industrial market sectors, coatings, construction, plastics, these sectors.
Okay. Thank you.
And the next question is from Silvia Barker from the Deutsche Bank. Go ahead please ma'am.
Yes. Hi, good morning. I've got a few questions, please. Firstly, on LVLomas. Could you just indicate if there's any seasonality?
It's been so should we assume that September is basically just the 12th of the overall revenue that you would have generated from that? And then could you talk about the gross margins from that business? Then 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. So do you think that M and A or greenfields or kind of 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? And then finally, in EMEA, could you talk a little bit about kind of how much of the pickup in Q3 versus Q2 is just there are some working that impact in Q2 and that's a bit stronger or have some of the regions or 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 have to count. 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 the, first of all, the Christmas period and the winter season that they have there.
And normally, the second and the third quarter are the strongest quarter in their year. So September is a pretty strong month for them normally.
Okay. And did they have any agri exposure which skews them to the summer as well?
No. No.
Thank you.
Yes. On white spaces in the U. S. Labs, we, of course, improved our position in the western part of the U. S.
Because of low mass, but still modest. And 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 in outside of Toronto, of course, also in Vancouver and Montreal. Labs, we have 1 in 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 6 months, I think.
And so basically, it remains there remains work to do, in particular, in building up an organization also in the Western United States. Was that also Sylvia?
Yes. No, that's very helpful thing. Is it more likely that you do some more bolt ons in the West and Southwest? Or would you prefer to do that by opening your own kind of labs, greenfield?
I think, yes, we will look at both. But if we can find, let's say, something that would really fit with us in terms of acquisition, then we would do that also.
Okay. And 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, what is the typical type of wage inflation
are you seeing in the market?
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 low mass staff churn after the acquisition? I mean, how is the whole cost inflation from labor looking? Just following up on the cost earlier cost inflation question.
Yes. You were a bit difficult to understand, but what I could catch is that you've asked about wage inflation in America and Canada. I would say that there is wage inflation, I would say, in our type of business generally. And maybe I should limit that only to the United States or Canada, but also to all areas in the world 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.
So 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 is just people that are difficult to find. And we have lots of competition for these people. So generally, I would say that we need to be very alert to how the market develops. And I think that everywhere the market develops in, let's say, for them in a positive direction, it's hard to say. So yes, there is inflation in this respect.
So would it
be fair to say that as we 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? Or do you have an advantage because of your scale and 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.
Yes. So basically, what you say is what we look very, very closely at is, let's say, what we call our own costs versus our the added value that we generate. And you're completely right that we if our cost would be under pressure And at the same time, we are not able to also maintain AV level or even increase it, and we then of course there's a certain squeeze. We have not 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.
So it's not only the wage inflation for those people that with the skill set that I just explained. It's, of course, also how efficient we can process orders in the future. And of course, we're working on that also continuously. So I think that we are capable of maintaining, let's say, the KPI in the way that we want. On 3rd party costs, I'm still very, very happy that we have this flexibility that we have.
We don't expect major effects of that on our growth on bottom line.
Thank you very much. That was really helpful.
The next question is from Mr. Mutlu Gunther Ghan from ABN AMRO. Go ahead, please sir.
Yes. Thank you for the follow-up question. So the first is, Hals, 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 4th quarter?
Then secondly
We should apply for the weather. We don't have first of all. About the weather, Mutlu, I think what Hans mentioned, we have 2 effects here. We have a pharma business on Puerto Rico. That has been affected.
And we have, of course, a smaller business in Texas, and that has also been affected. But And at the same time, we have a few suppliers claiming force majeure who have their production locations already used. Yes. Yes. And that is basically the main impact that we saw in the Q3.
Will that impact Q4 availability perhaps?
Yes.
But I thought there is always something going wrong somewhere in the world.
Yes, I know. It's just that if there was an impact within Q3 and you don't want to disclose it, maybe I'm just wondering what is also the impact without disclosing the impact that is there. 2nd 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 and we also, of course, segmented this as Asia Pacific, where 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. And then we have, I would say, North Asia, China and Japan, whereby China is Japan is a greenfield startup and China is a smaller established business, but doing quite well and growing very satisfactory.
Mainly, we really try to stay above, let's say, the commodities very much here. We have strong pharma business in China, but also increasing foods ingredients, specialty food ingredients. And that's a business that does quite well. And we also expect to further grow that. If we look then further into Asia, we have also a growing and increasingly significant business in India.
And 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 the product lines because we gained product lines. So that has a short term effect on that. Then 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 that let's say, the size makes them, of course, quite susceptible to changes in little changes in product lines or customers, etcetera.
And we are let's say, our challenge is and also opportunity, of course, is to get stronger positions in Southeast Asia. So this is maybe a longer answer to your question, but I think that in Asia, China is a growing business. It's with really good profitability, India as well. Southeast Asia is mixed, and we need to further strengthen individual businesses there.
Yes. That's very clear, Pete. 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.
And maybe also looking into the future, whether you see opportunities there?
Yes. We haven't seen it, Muddu, because we don't work, I think, in these specific market segments. Of course, the regulatory environment of China is tightening, is getting more rightly so, I would say, more strict. And we, of course, have to comply to the strictest possible guidelines that also affecting our pharma work and also our food ingredients. But we are not so strong.
We want to become much more stronger in, let's say, construction chemicals and coating chemicals. So 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 Bernhardt, but that have also facilities, storage facilities and tank facilities. We don't have that in China.
Okay. Thanks for clearing it up. Thank you.
The next question is from Silvia Barcar 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 they 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 then I have to 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, which is another important market submarket segment and inks. It is what we strive to do, Sylvia, and it's very important for us is to have a complementary product portfolio for these different market segments. And 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. But we are not going to split it out now between coatings and construction, etcetera, etcetera, because that is information that we do not want to share with others.
Okay. Sure. No, that's understandable. And I guess if you think about construction just on from a general view, that would seem like quite a cyclical end market. But is that different when you're in what
are the dynamics? That's more cyclical. I think if you look at our business in total, then of course, let's say, more industrial markets are more cyclical than markets like food or personal care or pharma. And that's also what we saw in the earlier crisis. So yes, like anybody else, we also are subject to a certain cyclicality in the economy.
Okay. Thank you very much.
The next question is from Sandler van Oort from Kempen and Co. Go ahead please sir.
Hi, good morning Sandler van 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? And secondly, I was wondering on M and A.
I mean, today's net debt to EBITDA is close to 3 times, which obviously is comfortably within your confidence. But in case there's any new targets on the horizon, do you feel comfortable in deleveraging up to, let's say, 3x, 3.5x? Or will you use all the 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 debt today, stock days and creditor days, over time these days are more or less flattish. And of course, the absolute amount of working capital go up as a result of the acquisition made. On the M and A side and leverage, as you know, we have under our loan documentation, the possibility to lever up to 4x EBITDA. I'm looking at pieces at the moment, but I don't think the 2 of us feel comfortable with leveraging it to that maximum level.
But I could see a shorter period where my leverage levels are starting with a 3 up to max 3.5 times. But 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.
Gentlemen, there are no further questions. So please continue.
Yes. Well, then I think we can conclude our call and with a message from our side to thank you very much for being there and concluding with that we remain optimistic and happy people. So have a good day.
Ladies and gentlemen, this concludes the IMCD call. You may now disconnect your lines. Thank you and have