Ladies and gentlemen, thank you for holding and welcome to the IMCD Analyst Half Year Results 2017 call. At this moment, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. I would like to hand over the conference to Mr. Piet van der Slikke. Go ahead please, sir.
Yeah. Good morning and welcome to everyone. Hans Kooijmans and I will be happy to answer your questions regarding our press release containing the half year 2017 results. Our half year results were strong, with operating EBITDA increasing with 8% to EUR 84.6 million. Going to the segments, EMEA performed very well with revenue growth of 7%, gross profits and EBITDA growth of 8% and 12% respectively. Asia Pacific had modest EBIT growth of 3% and Americas had a slight EBIT decrease of 2%, but recovering from a poor first quarter. We were happy to announce three acquisitions, one in the first half of the year and the other two thereafter. Neuvendis in Italy will strengthen our industrial business and is very complementary to our current supplier portfolio. The other two acquisitions are strategic for our North American activities.
Bossco in Texas helps us in that region, and this company has already been integrated in IMCD U.S. L.V. Lomas in Canada with a significant presence in the U.S., in particular in food, but also in industrial. Summarizing, we are positive about the first six months and based on these achievements and the strong fundamentals of the business, we expect EBITDA growth in 2017. Now I give over to Hans for additional remarks on the numbers.
Good morning, ladies and gentlemen. As Piet indicated, a short summary of the financial results of IMCD in the first half of 2017, and I would like to start on page 10 of the presentation. On this page 10, you will see that revenue increased 6% in the first half of 2017 compared to the same period of 2016. On a constant currency basis, IMCD's revenue growth was 4%, whereby this increase could be split 50/50 between organic growth, first time inclusion of acquired companies. Perhaps just to refresh memory, acquisition impact relates to three small add-on acquisitions in the second half of last year. Mutchler, with activities in the U.S. and Puerto Rico, acquired in July. The chemicals and solvents business in Kenya, acquired in September, and Feza in Turkey acquired end of December.
On the next line in the P&L, the gross profit line, whereby gross profit is defined as revenue minus cost of goods and cost of inbound logistics. Gross profit increased 8% on a constant currency basis. This increase was a combination of first time inclusion of acquisitions, adding 3% and around 5% organic growth. Gross profit in percentage of revenue further increased from 21.9% to 22.7%, whereby margin improved in all reporting segments. Changes in gross margin percentage are, amongst others, a result of local market circumstances, competitiveness of our product portfolio, currency changes, and the usual fluctuations in the product mix. Reported operating EBITDA increased 8% to EUR 84.6 million. This increase was a combination of organic growth and the first time inclusion of the small acquisitions. The operating EBITDA margin increased from 8.8% in the first half of 2016 to 9% in the same period in this year.
The conversion margin of close to 40%, calculated as operating EBITDA in percentage of gross profit, was slightly lower than last year. On page 11, the next page, you will find the P&L lines from operating EBITDA to net result for the period. Net finance cost of EUR 9.4 million are about EUR 1.8 million lower than the same period of last year. These net finance costs include, amongst others, about EUR 5 million of bank interest costs. Other items included on this line are changes in deferred considerations, non-cash costs related to the amortization of finance costs and currency exchange results. Income tax expenses in the P&L are about EUR 4 million higher than last year, whereby tax cash out, as you could see in the cash flow statement, was slightly lower than last year.
The amortization of intangible net of tax was about EUR 1 million higher than last year, mainly due to additional amortization as a result of small add-on acquisitions mentioned earlier. The non-recurrent items mainly relate to cost of successful and unsuccessful acquisitions. IMCD's net result in the first half of 2017 was close to EUR 43 million, with cash earnings per share of EUR 1.09 in this period. This is an increase of 8% compared to the same period last year. On the next slide 12, you will find revenue, gross profit and EBITDA split per operating segment. The activities in EMEA still generate about two-third of IMCD's total revenues and gross profit. In the first half of 2017, EMEA reported 10% Forex-adjusted gross profit growth.
Gross profit and percentage of revenue further improved from 23.6% in the first half of 2016 to 24% in the first half of this year. On a constant currency basis, operating EBITDA increased 14% and operating EBITDA in percentage of revenue improved from 9.8% to 10.4%. In the second column, the results of Asia Pacific. A reasonable Q1 was followed by a slightly weaker Q2, resulting in flattish revenue and 8% gross profit growth on a constant currency basis. Gross profit and percentage of revenue increased from 18.5% in 2016 to 20.8% in the first half of 2017. Local market circumstances, currency fluctuations, and the usual fluctuations in the product mix were, amongst others, the main drivers of this increase. Reported operating EBITDA increased 3% and was flat on a constant currency basis. Americas, in the next column, consists of the IMCD operations in Brazil and the U.S.
In the first half of 2017, Americas reported 3% Forex-adjusted revenue growth and 4% gross profit growth. Gross profit and percentage of revenue further improved from 19.6% in the first half of 2016 to 20% in the first half of this year. Forex-adjusted operating EBITDA in the first half of 2017 was slightly below the same period last year. A relatively weak Q1 was followed by a slightly better Q2, resulting in an operational Q2 EBITDA that was slightly better than last year. In the last column, you will find the cost of the holding companies, and this includes all non-operating companies, including head office in Rotterdam and the regional offices in Singapore and New Jersey in the U.S.
On page 13, you will find a summary of the IMCD balance sheet at the end of June 2017 and June 2016, and further, as a reference, the year-end balance sheet as of December 2016. Property, plant, and equipment is relatively low as a consequence of the asset-light business model. Intangible assets and related deferred tax liabilities are rather material balance sheet positions as a result of IMCD's M&A activities, combined with a history as private equity-owned company before the IPO. IMCD's equity position of EUR 740 million covers about 64% of our capital employed, whereby the increase compared to the end of 2016 is the balance of net result generated in the first half of 2017, a dividend payment in 2017 of EUR 28 million, and negative currency fluctuations. A bit more detail on working capital and net debt on the next two slides.
On page 14, you will find an overview of the working capital components at the end of June 2017 and '16, and at year-end 2016. In this overview, we summarize the absolute working capital amount at the end of the period and this absolute amount translated in days of revenue. Total working capital and days of revenue at the end of June 2017 is 51 days, which is slightly higher than the 49 days a year ago and the 50 days at the end of December. On page 15, you will find a summary of the movements in our net debt position in the first half of 2017.
End of last year, starting position of EUR 398 million, EUR 75 million cash generated from operating activities, cash out related to interest and tax, investing activities, including M&A and CapEx, and dividend payments adding up to a net debt position at the end of June of close to EUR 400 million. The reported leverage ratio, defined as net debt divided by operating EBITDA, was 2.5 at the end of June 2017. The same leverage ratio calculated on the basis of definitions used in IMCD's loan documentation was slightly lower, with 2.4x EBITDA at the end of June 2017. After the closing of the Lomas transaction at the end of August, IMCD's reported leverage ratio is expected to increase to 3x EBITDA.
As you perhaps remember, the maximum leverage as agreed in our loan documentation is 3.5x EBITDA, with an acquisition spike up to 4x EBITDA. Based on expected leverage level of 3x EBITDA, it's fair to say that there is a comfortable safety margin. To finish the summary, on page 16, you will find an overview of our free cash flow. The cash conversion ratio further improved 6% from 79% in the first half of 2016 to close to 85% in the first half of this year. Main drivers of this increase were a higher operating EBITDA combined with lower working capital investments. CapEx of EUR 1.4 million was mainly IT related. Far, a short summary of the financials of IMCD in the first half year, and I think, Piet, we are happy to take your calls.
Questions.
Questions. Sorry. Who will have the first question?
Thank you, sir. Ladies and gentlemen, we will start the question and answer session now. To be registered for the question and answer queue, please press star one on your telephone. Go ahead, please. The first question is from Mr. Joost van den Bussche from Berenberg. Go ahead, please, sir.
Hi, good morning, everyone. A couple of questions, please. Firstly, I just wondered if you could say what's driving that strong organic gross profit growth in Europe, whether it's particularly if you can break it down and talk about the cycle versus what you think you're doing in terms of share gains and then outsourcing. Secondly, on the Americas, obviously improving gross profit growth into Q2. Any comments on what you're expecting there in the second half? Do you think you'll be growing that business organically in the second half? Final question on APAC, wondering what drove the slowdown there. Thank you.
Okay. Strong growth in EMEA, what drives it? I think first of all, of course, market circumstances are favorable. I think also our portfolio is strong. We benefit from demand in the market, and we are also able to add product lines to our portfolio. It's a mix of these three things. I think that if you look at EMEA, almost all, if not all, operating companies contribute, some more than others. We see, of course, strong growth in regions like Spain. Also other regions, we see also face difficulties with currencies that nevertheless overcome. For example, the U.K. is doing excellent. The whole picture is favorable, and I think that we are a real good specialty distributor adding a lot of knowledge, and that is, let's say, positively encountered by both our suppliers and customers. On the America-
Can I just interrupt? Is it safe to say that you saw an underlying improvement in Q2 there, given Q2 had a negative effect from Easter, but actually you still managed to maintain the same growth rate? Is that fair?
Yes, I think it's fair to say. We try to avoid holiday effects in our comments, as you know. I think it's fair to say that this first half year, both first and second quarter, continued in a strong pace. On the Americas, we have spoken about that, of course, before, and we spoke in the first quarter also about Brazil. I'm positive that in the second quarter we see improvements. This is, of course, a longer-term effort to improve our business there. I see positive signs. In the U.S., we are building on a very strong base. Sometimes we need to add costs to accelerate in the future. We do that also, but I'm very positive about the future of both regions. APAC, basically, as you know, half of that business is in Australia and New Zealand, and that's humming along.
I think we also have very good positions in China, India. Southeast Asia is a bit weaker. There's no specific company-related reason to mention. It's more demand of the market. As we are not huge there, swings in demands or in demand for certain product lines have an effect on our profitability. Nothing, let's say, special to report about that region. I hope this answers your question.
Yeah, that's very clear. Thank you.
The next question is from Miss Sylvia Barker from the Deutsche Bank. Go ahead, please, ma'am.
Yes. Hi, good morning.
Good morning.
Firstly, can we just confirm within the Americas segment, did you see the improvement mainly in Brazil, and what were the trends within the U.S. business, please? Secondly, obviously, L.V. Lomas is almost closed. I was just wondering whether you can comment at all around how that might impact investment decisions elsewhere now that you are in the process of opening labs around the U.S. Can you maybe use some of the L.V. Lomas labs instead of opening your own? Also within the margin for that business, do you see any obvious gains where you can improve that margin going forward? Thank you.
Americas improvement was on both sides, both the U.S. and in Brazil. It's encouraging what's going on there. On L.V. Lomas, it's a bit early to speak about that. Lomas has a strong food base and has also labs for that. That doesn't need immediate further investment. What we do in the United States is invest in pharma and personal care, but also industrial. We will continue to do that. On the future of Lomas and its margins, I think it's a bit early to speak about that. We first have to close the deal and then involve ourselves in the company and deeper dive into it. I'm very happy with this acquisition that was, let's say, on our radar screen for quite some years.
It's a strong company with strong supplier relations in Canada, but also in the U.S., with very good staff, a very technical approach, and it fits culturally very well, I think, with IMCD.
Thank you very much. Can I just ask a quick modeling question? Could you just give us a little bit of guidance around the interest for the full year? Thank you.
I think we reported about EUR 5 million in bank interest cost in the first half of this year. Normally I would have said it would slightly double, Lomas will have a bit of an upside pressure there as we need to borrow some money to finance that transaction.
Okay. Very clear. Thank you very much.
Ladies and gentlemen, if there are any additional questions, please press star one. The next question is from Mr. Sarikonda from HSBC. Go ahead, please, sir.
Yeah. Hi, this is Srini from HSBC. A couple of questions, please. In Asia Pacific, is this one-off quarter due to the slowdown in the growth, do you expect this to pick up in the coming quarters? Second on M&A, what is the pipeline now that the leverage ratio has reached 3x? Do you still see further acquisitions coming in, or will you wait for some time? Thank you.
Okay. On Asia Pacific, is this slowdown continuing? Quite frankly, I don't want to give specific forecasts for specific regions. I just said that relatively small swings can influence quarterly results. I think overall, we remain also positive for this region. I think that we have good opportunities in the pipeline and whether they materialize next or next six months, we will see, but we are positive about this region. On the acquisition, I think it's a good question. The problem, of course, with acquisitions is that you not totally can time it yourself. We feel, of course, that we have a lot on our hands right now, and we will work hard to integrate these businesses in our existing structure. We will continue to speak with candidates that fit with IMCD, and we will see in terms of the timing when that needs to happen.
As you know, that is not totally dependent on us. We have not an accelerator or a decelerator in acquisitions. As you know, last year was a very, let's say, modesty in acquisitions. Now we have done these three ones. It's not really something that we totally have in our own hands. We have our preferred candidates, and we will have to see when that comes.
I understand. One follow-up on Asia Pacific. Could you give us color on how the investments in Japan and Vietnam coming along?
Well, in Japan, we work very hard to build an infrastructure. I'm pretty sure that we will gain product lines early next year, and we are preparing ourselves for that. That's still very early days, but positive about that. Vietnam, same, but these remain very small startups for the immediate future. Not something spectacular that you can expect there.
Okay. Got it. Thank you. Thanks a lot.
The next question is from Mr. Quirijn Mulder from ING. Go ahead, please.
Yeah, good morning. Can you hear me?
Yeah.
Yep.
Okay, perfect. Quirijn Mulder from ING. A couple of questions here. Can you maybe give me the organic growth per region, if there to verify whether this still what we think is there? The second question is, on the conversion margin, somewhat behind, let me say, the growth of EBITDA margin improvement is somewhat behind the growth margin improvement. Is that purely because of the setting up the cost for Asia, for example, for Japan, or is there more in these numbers?
Okay. Hans, perhaps first taking your first question about split organic versus M&A growth. We disclosed in the press release, the split on the revenue and the gross margin side, that is what we usually do. I mentioned the three small add-on acquisitions and these three add in total on an annual basis, something between EUR 35 million and EUR 38 million of revenue. As we integrate these companies, it's very complicated to talk about the exact impact on operating EBITDA, that's the main reason that we, from the beginning, do not disclose the exact split there. Based on the data that we provided, it's easy to do the math. Talking about conversion margin, your remark is right.
A little bit of a decrease there, basically as a result of adding a bit more cost, to facilitate further growth and to strengthen the organization here and there, having that impact. On the other end, if you look at the absolute percentage, around about 40% calculated on the basis of EBITDA with a T and without the D, in the industry it's still a pretty high level where we operate on.
Is there anything to mention about, let me say, your product groups? Which product group is doing very well and which groups are somewhat been lagging behind? Only in Europe.
Yeah. Exactly. Here, we're pretty happy with the performance overall of all our different product groups. Certain regions are stronger. Europe has a broad spread.
In the U.S., we are more dependent on industrial, more coatings and plastics and just still a bit of personal care, now also adding pharma. Industrial is by far the largest. Overall, we are happy with the development of all market segments and you see growth in all of them. It's very good to see.
Okay. Thank you.
The next question is from Sander van Hoorn from Kempen & Co. Please go ahead. Sorry, one moment, please. Go ahead, please, sir.
Yes. Good morning. It is Sander van Hoorn from Kempen. Quick question on Europe. Maybe you can elaborate a bit more on the specific developments by region, and maybe especially highlight Turkey and the Nordics versus the mid and the central part of Europe. Secondly, I was wondering, I think the EUR 10 million improvement in free cash flow reported for the first half. I think if I am right, it is fully realized in the first quarter and to a lesser extent or hardly any free cash flow growth in the second quarter. Maybe you can elaborate where this is coming from. Thank you.
Okay. I will take the first question, developments Nordic, Turkey. I am not sure what is the Nordic exactly. What triggers that question? Trying to guess, but Nordic is doing fine. We have no issues. Turkey is very strong. Has, of course, added Feza Kimya late last year in its organization. We have integrated that now, and our Turkish activities are doing very well. I think overall, our European business, but also our business in Africa, both in North Africa, the Maghreb region, in Kenya, and in South Africa, perform exceptionally well. Let's say we do not have regions in EMEA that worry us. Overall strong. Hans, you have the second question. Talking about free cash flow, I am not sure if I really follow your question.
If you look at the way we report free cash flow, operating EBITDA minus CapEx and working capital, then it is clear that the working capital investment has the biggest impact on the cash conversion ratio. If you look at the working capital cycle, during the year, I think it is fair to say that December is always by far the lowest position in the year. You build up working capital during the year, because of, let's call it, revenue per month is the main driver there because the debtors' position is the main working capital position that changes during the year. It is quite normal that at the end of June and at the end of Q3, working capital positions are much higher than at year-end, and then it should come down again towards the year-end December positions.
I am not sure why you think that the growth was mainly coming from Q1. Perhaps I missed something there.
I think if you One second. I think if you look at the front page of the first quarter press release, there's a EUR 10 million increase
In free cash flow to EUR 10.6, that's also the growth reported for the full half year.
Yeah. I think that mainly had to do with a little bit of swings in working capital positions by a quarter and position is just a snapshot of a certain moment in time. Thinking about the guidance that we gave in the past, I think it's fair to expect a cash conversion ratio for a company like us in the high 80%, low 90% for the full year, and that guidance is still valid, and we hover a bit around that number at the half year figures.
Yeah. Okay. Very helpful. Thank you.
The next question is from Miss Sylvia Barker from the Deutsche Bank. Go ahead, please, ma'am.
Hi. Morning again. Just a few quick follow-ups, please. Firstly on EMEA, I'm guessing that you're not going to say very much, you did mention that you've had some new product lines added. I was just wondering if they are material within the scope of the division and whether these will continue to drive that growth going forward. Obviously what I'm trying to get at is just what do you think might happen in the second half from what you've seen now? Is there any obvious reason that the trends change? Secondly, just on the U.S. again, can you just confirm that you were growing organically at the GP level?
Finally, just to check on the conversion margin question with the investments, do you think that, again, sequentially, the investments are maybe increasing a little bit just as you are setting up in the U.S. and maybe in Asia? Or is that level going to be fairly consistent going into the second half and into next year? Thanks.
Okay. First question about EMEA. We don't want to, as you already anticipate, go too much into specific product lines. I think what we do is for each segment, we look always where do we have gaps in our product portfolio, where we can add complementary product lines. We sometimes issue a press release about that, and I think that we issued a press release about our food flavor business, Givaudan. We don't do that to, let's say, trigger immediate responses on, well, what does that exactly mean financially? It's more commercial press release. It shows that we add product lines for our customers. I think it's fair to say that we feel very comfortable in our specialty approach and that, again, it's recognized by suppliers and customers.
On the Americas, your question about organic growth, I think Hans already mentioned that we do not want to go into that question per segment. The last question, Hans, was?
Yeah, it was basically a question about the conversion margin going forward. I think, Sylvia, you are used to the way we give our outlooks, and I don't think I should specify now what we expect as a conversion margin for the upcoming quarters.
Yeah. Okay. Thank you. Are we right to think that maybe in the U.S. is the place where you will be putting more investment, while in Asia the pace shouldn't necessarily change? Is that the right way to think about it? Just in terms of putting actual labs and people on the ground. Is that just fair-
No
from an operational point of view?
No, we don't favor one above the other. I think what everybody needs to be done. What we need to do is, of course, to put the resources in that are necessary for our suppliers and customers. We do that both in all the regions that we work in. That makes no difference.
Okay, sure. Thanks very much.
The next question is from Mr. Quirijn Mulder from ING. Go ahead, please, sir.
Quirijn Mulder again from ING. My final question is on, you say you predict 3x net debt over EBITDA for the end of 2017. What is the-
No, sorry to interrupt. Not at the end of 2017, after the closing of L.V. Lomas.
Okay. That's end of August. In fact, that is next week.
Correct.
Okay. That's the pro forma numbers. Thank you. That's all my questions then.
Yeah.
Thank you. Ladies and gentlemen, if there are any additional question, please press star one. Go ahead, please. There's another question from Mr. Rajesh Kumar from HSBC. Go ahead, please.
Hi. Morning. Hans, just trying to remember when you build a big U.S. platform, you said you're trying to do cross-region supplier deals between Europe and Americas. You've rebranded IMCD in the U.S. How is that progressing? Have you been able to attract some of the European suppliers to the U.S. and vice versa? Could we get an update on that one? Just a follow-up on the conversion margin. You made a point that when you anticipate growth, you put in additional costs. Could you give us some flavor on how do you plan that cost addition? Is it usually through inventory addition or is it headcount addition? Just so that we understand what's happening, what are the moving parts with the conversion ratio, please.
On the first question, U.S., North America, our strategy is very much to build a national organization there, and that is able to serve that market nationally, and also to align ourselves with top manufacturers of the industry. Of course, as these worlds of chemicals and food ingredients and pharmaceutical ingredients, almost a global world, where you see formulations worldwide not always be similar, but depending on the market segment, pretty similar. You see all the players in every region of the world. It's of course natural for us becoming also more global that we try to convince and work with our partners in several regions. That's coming along fine. I can't give specifics about that.
We are, of course, constantly speaking with the major players on the chemical side and on the food ingredients side to work with us on a more, how you say that, interregional basis. That's a constant process, and we are very positive about the response that we get from our suppliers. I want to leave it with that. On the conversion margin, or let's say the adding of cost, it's never about adding inventory. If we can avoid that, of course, we avoid it. Sometimes we have to do it, but always in relation to market demands. That's the only natural way of adding cost. I think you should think more about adding resources. Our business is a business of people. It's a business of knowledge and of knowledge transfer. If we add costs, then it's very much in that area.
As you know, to add people with knowledge is an expensive matter. These people are high-level people. That is our business. Our business is to find the best people to help us to sell the products and to help formulations of customers. You always have to think in that area.
That sounds very interesting. Could you just give us a flavor of what sort of capacity in terms of people have you added in second quarter or first half of the year, whichever is a more suitable picture?
Yeah, I don't want to go into specific numbers. You will probably understand that. For us, it's a constant, I think for everybody, a battle for talent. In some regions, it's a bigger battle than in other regions. It's clear that, for example, in emerging markets, the battle of talent is significant. That's good for the talents, I would say. I don't want to go into specifics because I think it's too anecdotal, let's not do that.
Thank you.
The next question is from Miss Nathalie Debruyne from Degroof Petercam. Go ahead, please.
Yes. Good morning. First of all, I would like to apologize. I had difficulties to join the call, so sorry if I ask you to repeat things that have already been said. I'm just trying to understand what happened in Asia-Pacific over the second quarter. I guess this was a question at the beginning, but I didn't hear the answer. If you could help me understand what the drivers are of the decline in Q2 and what is kind of your, well, I would not say outlook, but your feeling for the remainder of the year. Thank you.
Yes, I answered that question, and what I explained is that half of that business is, as you know, generated in Australia and New Zealand. That's doing fine. Where we see some weakening in the market, it's in Southeast Asia, particularly Indonesia. We don't have any specific company issues there. As we are not huge in that region, fluctuations in demands and product lines is reflected in the numbers. I don't think it's a major thing. I remain positive about the immediate future also of that region.
Okay. Thank you.
Ladies and gentlemen, if there are any additional questions, please press star one. Go ahead. Gentlemen, there are no further questions, please continue.
No, we are finished.
That's great. Ladies and gentlemen, this concludes the IMCD analyst half-year results. You may now disconnect your line.