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 a listen only mode. After the presentation, there will be an opportunity to ask questions. Would like to hand over the conference to Mr. Piet van der Schliche.
Go ahead please, sir.
Yes. Good morning, and welcome to everyone. Hans Kormals 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 €84,600,000 And going to the segments, EMEA performed very well with revenue growth of 7%, gross profit and EBITDA growth of 8% 12%, respectively. Asia Pacific had modest EBIT growth of 3% and Americas had slight EBITDA decrease of 2%, but recovering from a poor Q1.
We were happy to announce 3 acquisitions, 1 in the first half of the year and the other 2 thereafter. Nail Vendors 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. Bosco in Texas helps us in that region, and this company has already been integrated in IMCD U. S.
And LV 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 1st 6 months. And based on these achievements and the strong fundamentals of the business, we expect EBITDA growth in 2017. And now I give over to Hals for additional remarks on the numbers.
Good morning, ladies and gentlemen. I would
like to, as Piet indicated, a short summary of the financial results of IMCEB in the first half of twenty seventeen. 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 twenty seventeen compared to the same period of 2016. On a constant currency basis, IMCD's revenue growth was 4%, whereby this increase could be split fifty-fifty between organic growth and first time inclusion of acquired companies. Perhaps just to rephrase memory, acquisition impact relates to 3 small add on acquisitions in the second half of last year.
Moetzler, with activities in the U. S. And Puerto Rico, acquired in July the Chemicals and Solvents business in Kenya acquired in September and Faiza in Turkey acquired end of December. On the next line in the P and 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%, thereby margin improved in all reporting segments. Changes in gross margin percentage are most other the 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 €84,600,000 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 twenty sixteen to 9% in the same period in this year. The conversion margin of close to 40%, calculated as operating EBITA in percentage of gross profit was slightly lower than last year.
On Page 11, the next page, you will find the P and L lines from operating EBITA to net result for the period. Net finance costs of €9,400,000 are about €1,800,000 lower than the same period of last year. These net finance costs include, amongst others, about €5,000,000 of bank interest costs. Other items included on this line changes in deferred considerations, non cash costs related to the amortization of finance costs and currency exchange results. Income tax expenses in the P and L are about €4,000,000 higher than last year, but by 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 €1,000,000 higher than last year, mainly due to additional amortization as a result of small add on acquisitions mentioned earlier. The nonrecurring items mainly relate to cost of successful and unsuccessful acquisitions. And finally, IMCD's net result in the first half of twenty seventeen was close to €43,000,000 with cash earnings per share of €1.09 in this period. This is an increase of 8% compared to the same period last year. On the next slide, Slide 12, you will find revenue, gross profit and EBITA split per operating segment.
The activities in EMEA still generate about 2 third of IMCD's total revenues and gross profit. In the first half of twenty seventeen, EMEA reported 10% ForEx adjusted gross profit growth. Gross profit in percentage of revenue further improved from 23.6 percent in the first half of twenty sixteen 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.
The 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 in percentage of revenue increased from 18.5 percent in 2016 to 20.8 percent in the first half of twenty seventeen. 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 United States.
In the first half of twenty seventeen, Americas reported 3% ForEx adjusted revenue growth and 4% gross profit growth. Gross profit in percentage of revenue further improved from 19.6% in the first half of twenty sixteen to 20% in the first half of this year. ForEx adjusted operating EBITDA in the first half of twenty seventeen 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. And 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 June 2016 and further as a reference to 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 and A activities combined with a history as private equity owned company before the IPO.
IMCD's equity position of €740,000,000 covers about 64 percent 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 €28,000,000 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 'sixteen and at year end 2016. In this overview, we summarize the absolute working capital amounts at the end of the period, and this absolute amount translated in days of revenue. Total working capital in 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 twenty seventeen. End of last year's starting position of €398,000,000 €75,000,000 cash generated from operating activities, cash out related to interest and tax, investing activities, including M and A and CapEx and dividend payments adding up to a net debt position at the end of June of close to €400,000,000 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. And 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.
So 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 twenty sixteen 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 €1,400,000 was mainly IT related.
So far, a short summary of the financials of IMCD in the first half year. And I think, please, we are happy to take your call. Question. Question. Question, sorry.
Who
will have the first question?
Yes. Thank you, sir. Ladies and gentlemen, we will start the question and answer session now. The first question is from Mr. Josh Budl from Berenberg.
Go ahead please, sir.
Yes. 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?
And then just 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? And then just final question on APAC, wondering what drove the slowdown there. Thank you.
Okay. Strong growth in EMEA. What drives it? I think in first of all, of course, market circumstances are favorable. But I think also our portfolio is strong.
So we benefit from demand in the markets, and we are also able to add product lines to our portfolio. So it's a mix of these three things. I think that if you look at EMEA and almost all, if not all, operating companies contribute, some more than others. We see, of course, strong growth in regions like Spain, but also other regions we see also face difficulties with currencies that nevertheless overcome, for example, in the U. K.
Is doing excellent. So the whole picture is favorable. And I think that we are real good specialty distributor with 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 holidays effects in our comments, as you know. But 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 Q1 also about Brazil.
Positive that in the Q2, we see improvements. This is, of course, a longer term effort to improve our business there, but I see positive signs. In the United States, we are building on a very strong base. Sometimes we need to add costs to accelerate in the future. And so we do that also, but I'm very positive about the future of both regions.
APAC, basically, as you know, half of the 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. So it's more demand of the market.
And as we are not huge there, swings in demand or in demand for certain product very much I hope this answers your question.
Yes, that's very clear. Thank you.
The next question is from Ms. Silvia Barker from Deutsche Bank. Go ahead please, ma'am.
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? And then secondly, we see LV Lomas is almost closed, but I was just wondering whether you can comment at all around how that might impact kind of investment decisions elsewhere.
I know that you are in the process of opening labs around the U. S. So do you maybe can you maybe use some of the LV LOMAS labs instead of opening your own? And also within the margin for that business, do you see any obvious gains where you can improve that margin going forward? Thank you.
Yes. Americas improvement was on both sides, both in U. S. And in Brazil. So 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. So that doesn't need further immediate further investment. What we do in the United States is invest in pharma and personal care, but also industrial. So we will continue to do that.
On the future of Lomar's 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. But I'm very happy with this acquisition that was, let's say, over 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, very technical approach, and it fits culturally very well, I think, with IMCD.
Okay, great. Thank you very much. And can I just ask a quick modeling question? Could just give us a little bit of guidance around the interest for the full year?
I think we reported about €5,000,000 bank interest cost in the first half of this year. So normally, I would have said that would slightly double. But the loan loss will have a bit of an upside pressure there as we need to borrow some money to finance that transaction.
The next question is from Mr. Sarikonda from HSBC. Go ahead please, sir.
Yes. Hi, this is Srini from HSBC. A couple of questions, please. In Asia Pacific, is this 1 off quarter Q2, the slowdown in the growth? And do you expect this to pick up in
the coming
quarters? And second, on M and A, what is the pipeline that the leverage ratio has reached 3x? So 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 mean, I don't want to give specific forecasts for specific regions. I just said that small 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 6 months, we will see. But we are positive about these regions. On the acquisition, I think it's a good question. We the problem, of course, with acquisitions is that you not totally can tighten 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. But as you know, that is not totally dependent on us. We have not an accelerator or decelerator in acquisitions. As you know, last year, it was a very, let's say, modest year in acquisitions.
Now we have done these 3 ones. So 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.
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.
So not something spectacular that you can expect there.
Okay. Got it. Thank you. Thanks a lot.
The next question is from Mr. Khurang Myldar from ING. Go ahead please.
Yes, good morning. Can you hear me?
Yes.
Okay, perfect. Kurijn Mulder from ING. A couple of questions here. Can you maybe give me the organic growth per region, if you have to verify whether this is still what you think is there? And the second question is on the conversion margin.
Somewhat behind, let me say, the growth of EBITA margin improvement is somewhat behind the gross margin improvement. Is that purely because of the setting up the cost for Asia, for example, for Japan? Or is that more in these numbers?
Okay. And Hans here perhaps first taking your first question about split organic
and this is M and A growth. I think
we disclosed in the press release the split on the revenue and the gross margin side, and that is what we usually do. I mentioned the 3 small and these 3 add in total on an annual basis, I think something between €35,000,000 €38,000,000 of revenue. And as we integrate these companies, it's very complicated to talk about the exact impact on operating EBITDA, and that's the main reason that we, from the beginning, do not disclose the exact split there. But I think based on the data that we provided, it's easy to do the math. Talking about conversion margin, I think your remark is right.
A little bit of a decrease there and 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 hand, I think if you look at the absolute percentage, around about 40% calculated on the basis of EBITA, with a T and without the D, I think in the industry, it's still a pretty high level where we operate on.
Yes. And finally, is there anything to mention about, let me say, your product groups? How which product group is doing very well and which groups are somewhat lagging behind? Only in quarter terms, yes.
Yes, exactly. I think there's not also here. I think that we're pretty happy with the performance overall of all our different product groups. Of course, certain regions are stronger. Europe, of course, has a broad spread.
In America, we are more dependent on industrial, more coatings and plastics and just still a bit of Personal Care and now also adding Pharma, but industrial is by far the largest. I think overall, we're happy with the development of all market segments. And I think that you see growth in all of them. So it's very good to see.
Okay. Thank you.
The next question is from Sandler Hoard, Kempen and Co. Please go ahead. Sorry, one moment please. Go ahead please sir.
Yes, good morning. Jason Van Dommel 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 €10,000,000 improvement in free cash flow reported the first half.
I think if I'm right, this is fully realized in the Q1 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'll take the first question. Developments in Nordic, Turkey, I'm not sure what's the Nordic exactly what triggers that question. I'm trying to guess. But Nordic is doing fine.
Nordic is doing fine. We have no issues. Turkey is very strong. Has, of course, added Feza late last year in its organization. We have integrated that now.
And our Turkish activities are doing very, very well. I think overall, our European business, but also our business in Africa, both in North Africa, the market region, in Kenya and in South Africa performed exceptionally well. So strong. Let's say we don't have regions in EMEA that vary us. So overall strong.
Hans, you had a second question.
Yes. Talking about free cash flow, I'm not sure if I really follow your question. If you look at the way we report free cash flow operating EBITDA minus CapEx on working capital, then it's 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's fair to say that December is always by far the lowest position in the year that you built up working capital during the year because of, let's call it, revenue per month is the main driver there because the debtor's position is the main working capital position that changes during the year. So it's quite normal that at the end of June and at the end of Q3, working capital position numbers higher than at year end.
And then it should come down again towards the year end December positions. I'm not sure why you think that the growth was mainly coming from Q1, but perhaps I missed something there.
I think if you one second. There was an I think if you look at front page of the Q1 press release, there's a €10,000,000 increase
in free cash flow
to €10,600,000,000 and that's also the growth reported for the full half year.
Yes. And I think that mainly had to do with a little bit of swings in working capital positions. But by a quarter end 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 we move a bit around that number to the half year figures.
Yes. Okay. Very helpful. Thank you.
The next question is from Ms. Silvia 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 it very much, but you did mention that you've had some new product lines added. So I was just wondering if these are any if they are material within the scope of the division and whether these will continue to drive that growth going forward.
And obviously, what I'm trying to get is just what do you think might happen in the second half from what you see now? Is there any obvious reason that the trends change? And then secondly, on just on the U. S. Again, can you just confirm that you were growing organically at the GP level?
And then finally, just to check on the kind of conversion margin question with the investments, do you think that kind of sequentially, the investments are maybe increasing a little bit as just as you are kind of 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 product lines, 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 do we can add complementary product lines. And we sometimes issue a press release about that.
And I think that we issued a press release about our food flavor business, Yigal Girl. We don't do that to, let's say, trigger immediate responses on, what does that exactly mean financially. It shows 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's 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. And the last question, Hans, was Yes.
It was basically a question about conversion margin going forward. And
I think Sylvia, you're
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.
Yes. Okay. So as in 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 kind of labs and people on the ground, Is that just
fair to operational point of
view? No. I think we don't favor the one above the other. I think what everybody needs, needs to be done. And what we need to do is, of course, to put the resources in that are necessary for our suppliers and customers.
And we do that both in all the regions that we work in. So that makes no difference.
Okay. Sure. Thanks very much.
The next question is from Mr. Kureijn Mulder from ING. Go ahead, please sir.
Yes. Kryan Mulder again from ING. My final question is on you say you predict 3 times net debt over EBITDA for the end
2017. What is the
Sorry, sorry, sorry to interrupt. Not at the end of 2017, after the closing of lower margin.
Okay. So that's end of August, in fact. That is next week, sir? Okay. Just the pro form a numbers.
Thank you. That was my question.
Yes.
Thank you. There's another question from Mr. Rajesh Kumar from HSBC. Go ahead please.
Hi, good 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. We must be 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? And 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?
Okay. 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.
And 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. And that's coming along fine. I can't give specifics about that, but 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. And that's a constant process.
And we are very positive about the response that we get from our suppliers. But I want to leave it by with that. On the conversion margin or let's say adding of course, it's never about adding inventory. If you can avoid that, of course, we avoid it. Sometimes we have to do it, but always in relation to market demand.
So that's the only natural way of adding cost. So I think you should think more about adding resources. And our business is a business of people. It's a business of knowledge and of knowledge transfer. And if we add costs, then it's very much in that area.
And as you know, to add people with knowledge is an expensive matter. These people are not high level people. And but 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. And so you always have to think in that area.
That sounds very interesting. So 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?
Yes. But I don't want to go into specific numbers. That's you will probably understand that. But so it's for us, it's a constant I think for everybody 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. And that's good for the talents, I would say. But I don't want to go into specifics because it's that I think it's too anecdotal. So let's not do that.
Thank you.
The next question is from Ms. Nathalie de Bruyne 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.
But I'm just trying to understand what happens in Asia Pacific over the Q2. So I guess this was a question at the beginning, but I didn't hear the answer. So if you could help me understand what the drivers are of the decline in Q2 and what is kind of your, I won't say, outlook, but you're feeling for the remainder of the year? Thank you.
Yes. I answered that question. And what I explained is that half of the 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.
And we don't have any specific company issues there. As we are not huge in that region, the fluctuations in demand and product lines is reflected in the numbers. I don't think it's a major thing. And I remain positive about the immediate future also of that region.
Okay, okay. Thank you.
Gentlemen, there are no further questions. So please continue.
No, then we are finished.
That's great. Ladies and gentlemen, this concludes the IMCD Analyst Half Year Results. You may now disconnect your line.