Ladies and gentlemen, thank you for holding and welcome to the IMCD Analyst First Three Months 2017 Results Event 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.
Thank you. Good morning, everybody. Hans Kooijmans and I will be happy to answer your questions regarding our press release of this morning containing our Q1 results. Just a few remarks to start with. Our Q1 results were robust, with operating EBITA increasing with 9% to EUR 42.7 million, which is +8% on a constant currency basis. In particular, EMEA, our European Middle East Africa business, performed very well with revenue growth of 7%, gross profit and operating EBITA growth of 9% and 14% respectively. We were very happy with that. Asia Pacific had a satisfactory Q1 with gross profit and EBIT growth of 17% and 10%, respectively. Finally, the Americas had a disappointing start, in particular because of a tightening of margins in Brazil. As a consequence, this region underperformed versus a strong Q1 2016.
Summarizing, we are positive about the start of the year based on these Q1 achievements and the strong fundamentals of the business. We expect EBITA growth in 2017. Now I would like to give over to Hans for additional remarks on the numbers.
No, we just do Q&A, Pieter.
We just do Q&A. I think we need to keep it relatively short also in light of our general meeting later this morning. Who can we give the floor first?
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. Your questions will be answered in the order that they are received. If you have a question, please press star one. The first question is from Mr. Pieter Olieslagers, Kepler Cheuvreux. Go ahead, please, sir.
Good morning, gentlemen. Two questions from my side. First on the EMEA region. Already last year, but also in Q1, we continue to see a pretty decent gross profit growth, also on a currency-adjusted basis. Just trying to understand what's driving this growth. Is it mainly driven by increased customer demand? Or is there also some element from your internal measures? Because the gross profit as a percentage of revenue is also showing a nice increase. To what extent is it driven by customer demand, and to what extent is it driven by product and mix effects and margin management? Then on the Americas region, can you confirm that the U.S. business, excluding acquisition effects, was showing positive gross profit growth? Thank you.
Okay. Thank you very much. The first question on EMEA is, I think the answer is always a bit mixed, which makes it maybe a little bit unsatisfactory. Of course, there is an effect of increased customer demand. That's obvious. Secondly, there's also an effect of adding product lines, keeping cost under control and let's say product mix effect. It's a combination of these factors. I think it's safe to say that our EMEA organization is, of course, a very strong integrated business that benefits quickly from positive macro signs and where we also constantly are working on adding product lines. I would say it's a combination of all, and in addition, of course, product mix is an element in that as well. The U.S. business is, I would say flattish. It's still not where we want. You have to see that we also invest in that business.
We change the business. We invest in lab facilities. We have opened a lab in Florida, and we are in the process of opening a lab on the East Coast in coatings. We are busy changing these organizations. We're also rearranging here and there our product mix. It's a little bit difficult, let's say, to indicate exactly to you why it's flattish. On the other hand, and I think that one of our competitors also showed that industrial demand is still relatively flat in the U.S., and we are, of course, very much dependent on that. Nevertheless, we do not feel in any way that is structural. I think we have still a very strong business for future growth. Also for that business, we are quite optimistic for the coming periods. I hope this answers your questions.
Yeah. Maybe one follow-up on the EMEA region. The gross profit as a percentage of revenue showed a nice increase in 2016 and a further increase in Q1. What's the upside there? Where could that eventually go as you continue to improve your mix and manage your margins?
I said already, I think during the IPO that I didn't expect a lot of margin expansion possibilities. So far, we have been able to contradict that. I still feel that in the region where we are now, that there is not a lot of upside potential. I think that we have been extremely efficient. We continue to work hard also on those areas where we still can improve, that are below average of our group. I don't want to make a forecast or prediction, but we do our best to increase our productivity day by day.
Okay. That's helpful. Thank you.
The next question is from Mr. Joost Pudden, Berenberg. Go ahead, please.
Yeah. Hi, good morning. My first question is on the Easter effect. I wondered if you could quantify how much that maybe benefited your gross profit and margin performance in EMEA in Q1. Secondly, if you could maybe give a bit more color on what's happening in Brazil. If you can perhaps quantify how much of a headwind that's been to your Americas EBIT performance. Also when you'd expect either the comps to get easier or the environment to get a little bit more supportive in that region. Thank you.
I think the Easter effect, what we have tried to avoid starting as a listed company is to count working days.
Yeah.
It's an additional talking point that we want to avoid. Yeah, there will be some effect of that in the first quarter, but it's not a dominant effect. I don't think it's a dominant effect.
Okay.
On Brazil, we have two businesses there. We have a business that is focused exclusively on the pharma industry, and we have a business on the industrial industry. The pharma business is a very well-performing business but is subject to the currency fluctuations, particularly because most of the business we do in US dollars. That has an effect. There's nothing, let's say, structurally wrong with this business. It's a strong business. We have a strong position. They have experienced, particularly in the first quarter, some margin reduction. At the same time, we also have been able to grow our top line, we are optimistic about the possibilities of that business. The other business is focused on the industrial markets. I think we spoke about that last time or previous times, that business is in restructuring. We are well, let's say, advanced.
We hope that we can improve the results. I would also point out that although the results versus Q1 last year were disappointing, we're not speaking about a huge difference here in terms of EBITDA. It's EUR 0.6 million. Nevertheless disappointing. Structurally, we are positive about our opportunity there in the next part of this year. I think that should answer it.
Yeah. Can I just follow up? That EUR 0.6 million, is that year-over-year EBITDA decline in the Brazilian business?
No, that is the reported EBITDA decline in Americas Q1 this year versus Q1 last year. I think the indication is more that although we talk about a change of 7% negative, the absolute amount is not that big.
Yeah, sure.
I think that was the message that Piet wanted to bring across.
Okay. That's very helpful. Thank you.
The next question is from Mr. Mutlu Gundogan, ABN AMRO. Go ahead please, sir.
Yes. Good morning, Piet. Good morning, Hans. A couple of questions. Coming back to EMEA, just wondering how sustainable is that growth? Obviously it is above the market growth. Do you think that this will continue for a couple of quarters, or is it simply because the strength that you continue to win new business? Secondly, it's a little bit linked to that. Your conversion margin, obviously very strong, a record 43.3%. Is that simply good cost control on your end, or should we expect that you will be hiring more people and because of that, the conversion margin might come down a little bit? Thirdly, on Asia Pacific, a strong increase in your fixed cost base. Just wondering how quickly will that be offset by additional business, by gross profit growth. Two questions on Americas, if I may.
A 30% increase in your fixed cost base. Piet, you mentioned opening labs and things in the U.S. Just wondering, is that increase in the fixed cost base solely U.S. or is it also Brazil? Thirdly, Hans, you were talking about the margin pressure in Brazil in the pharma business. Just wondering why you are not able to pass that on to your customers.
Okay. Maybe we split the questions or the answers. Mutlu, thank you for the questions. In EMEA, I think that's the easiest. You ask about the next quarters. I think we gave an outlook. I'm not going to try to figure out what the next quarters will be in EMEA. It's difficult for us to, I always say that to look into the future in our business. I'm not going to speculate about the next quarters. I think the environment in Europe is positive. Let's hope that we can continue to benefit. Will it be in the same pace? Let's see. It's of course a 14% increase in EBITDA in this quarter is quite strong, spectacular almost. I'm not sure if we can hold that up. The next question is about Asia Pacific, Hans.
Yeah. I think, Mutlu, in general, you had three questions related to cost base. The increase in the fixed cost base, Asia Pacific and the Americas, and the impact on the conversion margin. A couple of reasons there. On the one hand, in the Americas, there is, yes, we invest what Piet just indicated. What you also see there is a little impact of the Mutchler acquisition on our cost base in the U.S. That was a company that we acquired in the course of the year, last year. In Asia Pacific, there we are investing in the structure. As indicated before, we are building a position starting in Japan, starting in Vietnam, investing in the operations that we have there basically to prepare for future growth. These two elements have, as a combination, a negative impact on the overall conversion margin.
Whereby our conversion margin still is relatively high with around about 40%, especially when you remember that we calculated on the basis of EBITA instead of EBITDA, like most of our peers. The pharma margin in Brazil. I think your question was, is it possible to pass on that currency impact to your customers? Yes, in the end it is, but there's always a bit of a time lag there. It needs some time to adjust prices in the market. That is basically what we see happening in the moment in Brazil.
Okay. That's clear. On the conversion margin in EMEA, the 43%, what do you think of that? Is that sustainable?
Time will tell, Mutlu. Time will tell. We don't know. We do our best to keep it at that level. If we need to make an investment to cater for new suppliers or additional business line, we will certainly do, and that could have an impact on the conversion margin.
Understood. Thank you very much.
The next question is from Ms. Nathalie De Bruycker, Degroof Petercam. Go ahead, please.
Yes. Good morning, gentlemen. Thank you for taking my questions. Actually, just a follow-up on what you have said earlier on the margin upside potential. You mentioned obviously EMEA is already very efficient. You see limited room to expand margins further in the coming years. I was wondering, since you are investing in Asia and in the U.S., where do you exactly see margin expansion potential? Would that be rather in emerging markets? What can we expect from Brazil as well in the coming years, both in terms of business and investments? You seem to remain pretty confident about the future of the business in that country. I was wondering what we can expect. Thirdly, if I can add to that, could you update us on your M&A pipeline? Just a word on it.
Margin expansion. Yeah. Listen, let's say it's a continuous focus for us to increase the productivity that we have. If you look in, let's say, in the mix of our companies and regions, then there are always possibilities to improve, and we will continue that effort. I think that in EMEA, we have proven to be efficient. I would also say in the U.S., particularly in our industrial business, we are extremely efficient to the point that we now, do we want to grow further, and that's what you see now, that it almost requires first for us to dilute a little bit because we have to add regions, costs, labs, et cetera. Our focus will remain on improving there also our efficiency. Asia Pacific, in particular Asia can, of course, has room to further expand the productivity. I think the question on pipeline.
I try to, also in earlier calls, try to stay away from predictions there or qualifications of that pipeline, it almost triggers then the question, "When comes something out of that pipeline?" That's more important than what is in the pipeline, so to say. It's safe to say that our track record with respect to acquisitions in the last 20 years will continue. I think that's all I want to say about it. We will continue to consolidate, and of course, we have on our radar screen enough potential targets to be able to say what I said just now. Anything else?
Yeah. That was with regard to Brazil.
Yeah, Brazil is, philosophically, I think, promised as a country for decades. I don't want to fall into that trap. No, we are still very positive about opportunities. It requires a strong management in this country. Nevertheless, I think, given the structure of the chemical distribution business, we feel that we have opportunities there. We are in positive discussions with suppliers of expanding, and I hope that we be able to report in the near future, positive news about our business there.
All right. Thank you. That's helpful.
The next question is from Mr. Andy Chu, DB. Go ahead, please, sir.
Yes, good morning, Piet, Hans. A few questions from me, please. Just in terms, starting with the sort of big picture growth rates in terms of 8% FX-adjusted EBITA. You talked about the Easter effect and not being that great, but in terms of M&A, I guess the effect again would not be that large. Could you just maybe just quantify firstly what you think the M&A effect is on that 8% FX-adjusted EBITA growth rate, please. I had questions over sort of Americas and just wanted to try and understand the performance actually of just North America, your sort of Cachat business, which has now been in the group for the best part of a couple of years that has, due to the macro conditions, not really grown.
What is the sort of performance, please, in terms of growth rates within Cachat, or can you give us a flavor of the impact of Brazil and also linked to Brazil. As you restructure Brazil, are there any sort of meaningful restructuring costs that are actually going into Brazil that you're sort of just taking as ongoing, but actually might fall out as you go through that process? Thank you very much.
Andy, Hans here. Your first question is about the split of organic EBITA growth and M&A related. What we normally disclose and also what we did in Q1 is the M&A impact on revenue and gross profit, for the reasons mentioned in previous call, and I would like to stick to that. It's fair to assume, if you look at recent M&A activities, that it did not have a material impact on the first quarter result. The restructuring cost in Brazil, yes, we make some restructuring cost that we take as running cost at the moment. They are not material costs, I would call it, but we are in the process to adapt the organization size and structure and the way they operate more to the needs of the business.
As indicated by Piet earlier, that we hope to see a positive result of that in the course of this year.
North America, is that business growing?
I think.
EBITA level, or is it Sorry, just North America ex Brazil. Is North America actually performing well?
I think I said earlier in the call, Andy, that North America was flattish and that, let's say the negative, let's say the decrease is caused mainly by the Brazilian activity.
Okay, perfect. Could I just ask another numbers question just on the working capital, because obviously the free cash flow generation is very strong, the working capital came down pretty sharply. Is it possible to break out which part of the working capital lines were doing a lot better? Is it falling pricing? Is it just your collecting of receivables stronger, or you're pushing out your payables? What's driven that sort of seven and a half million swing year-on-year in working capital, please?
I think it was a bit on everything. It was a bit reducing stocks, optimizing positions that we have. If you look at debtors and creditors there, it's always a bit of a timing issue there. It's a snapshot of a certain moment in time, and you can be just on the positive side by customers just paying just before or just after a quarter. We slightly reduced the debtor position at quarter end and creditors were just stable.
Thank you very much.
The next question is from Mr. Mutlu Gundogan, ABN AMRO. Go ahead, please, sir.
Yes. Thank you. I had two follow-up questions. We're now a couple of months in the year. Can you tell me what kind of wage inflation we should expect for the year? Secondly, obviously, on the back of the increase in oil price, we've seen higher chemical prices, probably some restocking in the sector. Just wondering, to what extent are you able to pass on, or even more than pass on the wage inflation to your customers? Because obviously I would assume that this is a benign environment to push through price increases. Maybe to add to that, does that differ per region given the various macro situations that we're seeing?
Wage inflation, different per region, of course. Lower in Europe, higher in Asia, where we see, of course, that for people that have technical commercial qualifications, the demands are high and the competition is high. We see really wage inflation. In the U.S., I think it's stable. I don't think that the total picture differs a lot from earlier years, which means that we have to compete for talent. What we see here and in overseas is that it is not easy to get that talent. Now, you spoke also about price increases. Yes, we are in a market where it is easier to do price increases, which is, of course, a favorable circumstance. We feel that, these circumstances are favorable for us to pass on cost increase on our side. I think that was it. Mutlu?
Yeah, the question is more passing on and the price increases. Does that differ per region given the more difficult situation, for example, in the U.S. and Latin America?
I think it's easier at this moment here. What we see also in the market, in the chemical market, is that we see scarcity here and there in some product lines, even non-availabilities. That could, of course, also affect us, because demands are pretty high everywhere. I would say Europe is maybe now more open to accept price increases, more so than the United States and Asia.
Could you give an example of the product lines where you see scarcity in the sector?
We go very anecdotal. It depends, of course, very much on, let's say, our specific relationships. It is a variety of products where we see either non-availabilities because elsewhere in the world, prices are better or just sold out. I don't want to go into the details of which product lines, et cetera. I don't think it will be very enlightening also.
Understood. The reason why I was asking is that I know of several outages, more, let's say, in certain commodity chemicals. I was just wondering why it would also impact the downstream chemicals, so to say. Clearly it is.
They're sometimes also dependent on the commodities, as you know.
Yeah.
Yeah.
Okay. Thank you very much.
Yeah.
The next question is from Mr. Quirijn Mulder, ING. Go ahead, please, sir.
Yeah. Good morning. Can you hear me?
Yes.
Good morning. Okay. A couple of questions from my side. The first question is about the labs. What is the number of labs in the U.S., and what number have you in mind for the future? Maybe you can elaborate on that. My second question is about the coming tax rate. It looks to me that the tax rate is somewhat high in Q1 2017. Can you give me some indication of that?
Okay. First question, Quirijn, is number of labs. There were none. As I said, we are now planning two, and maybe a third one. That's probably for the time being where we stand.
Yeah. That has an impact on your cost levels, I think.
Yes.
To start up and to organize everything.
Yeah.
Also to hire the talents there.
Okay. Thank you.
That's right. Your tax question, Quirijn, is a bit more complicated. Indication always is that as a group, we have a blended tax rate somewhere between 25% and 28% of EBITA minus financing cost. Due to where the profit is made in a certain quarter, there could be changes. I don't see any reasons why we should change the guidance there on the tax rate. It could be that it's now slightly higher, perhaps next quarter, slightly lower. I think the guidance is still applicable.
Okay. No, that's fine. Thank you.
The next question is from Mr. Sander van Oort, Kempen & Co. Go ahead, please, sir.
Hi, good morning. Sander from Kempen & Co. Just a question on EMEA. Just wondering whether the strong performance shown in EMEA, is it broad-based or maybe there's regional differences and maybe you can put a bit of additional color on the regional performance. Thank you.
What shall I say about that? I think it's pretty much across the board. Of course, there are certain countries or regions stronger, maybe it's safe to say that we do not have, at this moment, very weak or much weaker territories in EMEA. Whether that holds up, I don't know. I think you see maybe a slight weaker performance in Italy. Still strong, across the board, I would say that our European business, and also our African business, has performed very well. Let's say there's not one outlier and there's not one underperformer here.
Okay, thank you.
Ladies and gentlemen, if there are any additional questions, please press star one. For any additional questions, please press star one. The next question is from Mr. Quirijn Mulder, ING. Go ahead, please, sir.
Okay. There are no outliers in EMEA. Can you maybe update us about Turkey and about the integration and about the situation there for you?
Turkey, end of last year, we have acquired a company called FESA, and we have since March this year, integrated that business into our organization. I would say, the Turkish operation in total is operating very, very well. At this moment, no complaints about it. What politically happens has not so much affected yet.
You have no detained clients, et cetera, that sort of stories?
Well, I hope not. I don't know, Quirijn, and I hope we can collect the checks that they send us. No comment on that. I think there's here and there actually, there is some anecdotal evidence that customers have changed, or at least the ownership has changed because of this political change. No. Business as usual there.
Okay. Thank you.
Ladies and gentlemen, if there are any additional questions, please press star one. For any additional questions, please press star one.
Okay.
No further questions, sir.
Thank you very much. I wish everybody a good day and speak to you next time.
Ladies and gentlemen, this concludes the IMCD event call. You may now disconnect your line. Have a nice day.