Good morning, ladies and gentlemen. Thank you for holding and welcome to the IMCD Analyst Call for the 1st 9 months 2016 results. During the presentation, all lines will be in listen only mode. And later, we will conduct a question and answer session. I would like to hand over the conference now to Mr.
Van der Slicker. Go ahead, please, sir.
Good morning to you all. I'm sitting here with Hans Koormandz, and we will be happy to answer your questions regarding our press release of this morning containing our 1st 9 months results for 2016. I start to with some highlights. Our gross profit growth was 15%, 19% on a constant currency basis. Our operating EBITDA increased with 17% to €112,800,000 which is an increase on a constant currency basis of 21%.
Happy to report that our cash earnings per share increased by 23% to €1.48 And last but not least, we completed in the 3rd quarter a small acquisition in Kenya, which will complement our existing successful operation in South Africa. The results in EMEA over the 1st 9 months period were satisfactory with a 3% EBITDA growth, 7% on a constant currency basis. The 3rd quarter was flat, mainly due to weak July, as indicated by me in the previous call we had with you in August. Asia Pacific's EBITDA grew with 1%, 4% on a constant currency basis and has continued to improve its results after the 1st week quarter. The Americas are in line with what we reported earlier in the year.
Our Industrial business in Brazil continues to be impacted by the difficult economic situation in this country. And now I give the word to Hans, who will give additional remarks on the numbers. Good morning, ladies and gentlemen. I would like to give you a short summary of the IMCD financials of the 1st 9 months. I would like to start on Page 9 of the presentation, where you could see that reported revenue and gross profit both increased 15 percent compared to the same period of last year.
On a constant currency basis, IMCD reports 18% revenue growth and 19% gross profit growth. The 19% gross profit increase is a combination of the first time inclusion of acquisitions, adding 14% to our gross profit and an organic growth of 5%. Gross profit €12,800,000 On a ForEx adjusted basis, operating EBITDA increased 21% compared to the same period of last year. This increase was again a combination of organic growth and the first time inclusion of acquisitions. The operating EBITDA margin increased from 8 0.5% in 2015 to 8.6% in the same period in 2016.
The conversion margin further improved from 38.6% in the 1st 9 months of 2015 to 39.3% in 2016. As indicated in previous call, please be aware that IMCD calculates the conversion margin as operating EBITA, so without it as a percentage of gross profit. Net result before amortization and non recurring items increased 28% to €97,200,000 Our free cash flow was strong, whereby the cash conversion margin of close to 90 percent was relatively high for the 1st 9 month period of the year. Main drivers of the strong cash flow were a higher operating EBITDA combined with lower working capital investments. As indicated before, our year to date cash earnings per share of €1.48 a currency adjusted increase of 27% compared to the same period of last year.
On the last line of this page, you could see a 10% increase in our number of employees and the majority of this increase is, of course, the result of the first time inclusions of acquisitions made. If we then move to Page 10, you will find revenue, gross profit and EBITA split per operating segment. The activities in EMEA include all IMCD operating companies in Europe, Turkey and Africa. This EMEA segment generates about 62% of IMCD's total revenue and 66% of total gross profit. Despite modest macroeconomic circumstances, uncertainty due to the Brexit and some turmoil in Turkey, IMCD generated in the EMEA region 6% organic growth profit growth.
Gross profit margin further improved from 23.2% in the 1st 9 months of 2015 to 23 0.6% this year. On a constant currency basis, operating EBITA increased 7% and the EBITA margin further improved from 9.4% to 9.6%. As the small acquisition in Kenya in September hardly had an impact on year to date figures, it's fair to say that all EBITA growth in this region was organic growth. In the second column, the results of Asia Pacific. The slow start in Q1 was followed by stronger quarters, resulting in 7 in 7% year to date revenue growth and 6% gross profit growth on a constant currency basis.
Gross profit in percentage of revenue slightly decreased from 18.9% to 18.7%. Local market circumstances, currency fluctuations and the usual fluctuations in the product mix were the main drivers of this decrease. Operating EBITDA increased 4% on a constant currency basis. Then the next column, Americas. Americas consist of the operations in Brazil and the United States, whereby the comparison of the 1st 9 months of 20 16 with the same period of 2015 is rather difficult due to the 3 recent acquisitions in this region.
As you all know, we acquired MF Cache in the U. S. In June 2015, Select Remy in Brazil end of December 2015 and recently, Muotzler lower in the U. S. In July 2016.
When considering difficult market circumstances in the U. S, IMCD U. S, the former MF Cashet, had a reasonable result in the 1st 9 months, thereby gross margin was slightly higher compared to the same period in 20 15. Mudsler, with a focus on the pharma market and acquired on the 1st July this year, performed in line with expectations. The same applies for Selectomy, our pharma business in Brazil.
As indicated by Pete, our industrial activities in Brazil have a more difficult time. Price erosion, difficult market, difficult economic industrial climate had a severe negative impact on our local Brazilian industrial results. 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, the regional support offices in Singapore and New Jersey in the U. S. On Page 11, a summary of the IMCD free cash flow.
As mentioned before, free cash flow was strong, very strong in the 1st 9 months, resulting in a cash conversion ratio of close to 90%. Main drivers of the strong cash flow and high conversion ratio were increased operating EBITDA combined with lower working capital investments. CapEx of about €4,000,000 was mainly IT related. Then by the end of October, we finalized 2 different processes to further improve the flexibility and conditions of IMCD's loan structure. First, we initiated a so called amend and extend of the existing €500,000,000 syndicated bank facilities.
On Page 12, you will find a summary of the most important amendments, being the extension of the maturity, the swap or reallocation between term loans and revolver facilities and some improvements in the leverage covenants. Following this amend and extend, we did a DCM issuance. We issued so called Schulzchein der Leyen of €100,000,000 plus €90,000,000 with partly fixed, partly floating interest rates and various tenors of 5 7 years. The proceeds of this new loan were used to repay most of the drawn revolver facilities from our syndicated banking loans. The changes made in the financing structure are summarized on Page 13.
Here you will find on the left hand side a specification of our net debt position end of September. You can see the maturity dates of the launch in black, net debt positions in blue and the undrawn revolver in the red bar. On the right hand side of the sheet, a pro form a overview summarizing the situation as if the Amant and Extent and subsequent DCM transaction would have happened end of Q3. Total net debt, of course, still the same €404,000,000 with the change in maturity date in red, a new fuel chain loan and a large undrawn revolver position. We believe that the new debt structure will provide further flexibility with appropriate cost levels and leverage ratios.
And last but not least, on the next slide, the outlook on Page 15, where you can read that we expect operating EBITDA growth in 2016. And that was a short summary of our year to date financials, and Peter and myself are happy to answer any questions. Okay. Who has a question?
The first question is coming from Mr. Montlu Gundogan, Avian Amro. Go ahead please.
Yes. Good morning, Pete. Good morning, Hans. I have a couple of questions. Let me start with the Americas first.
If I look at your gross profit, that grew 8% quarter on quarter, which is more than what I would have expected much lower to add. So can you tell us what drove that growth as I think the business is usually seasonally weaker in Q3 versus Q2? That's the first question. And then secondly, relating to that, sticking with the Americas, the conversion margin shows actually a significant drop year on year of 880 basis points to 44.3 percent, and that's solely looking at Q3. Can you tell us why that was?
3rd question is on EMEA. What was the currency impact from the British pound and the Turkish lira? And how do you see that evolving in the next few quarters assuming current spot prices? And then finally, getting to the outlook. Pete, you said it yourself, you sounded a bit cautious, I must say, on the macro picture at the H1 results.
And today, you reported 1% increase year on year in operating EBITA in the Q3. Can you tell us how you see the 2 most important drivers going forward, I. E, organic growth and currencies? Thank you.
Mutlu, I'm looking at Pete who will answer what. Perhaps start with the easiest one, the drop in conversion margin in Q3 in the Americas. That is a combination of a couple of things. First of all, the acquisition of Mutzler was a company that we bought with a conversion margin, which is on average low is lower than the average conversion margin of the group. So that had a negative impact.
Further in the Americas, we have the impact of our industrial activities in Brazil that suffered. And the other thing is that usually due to the seasonal pattern, the holiday period always leads to a lower conversion margin in a third quarter. The combination of these four elements explained the drop in the result there. I think on your first question on the margin increase or the gross profit increase, I think it's 2 factors. You indicated yourself already, of course, there's an inclusion of Muschler.
The second element is that we work very hard to get our gross margins up in IMCD U. S. And we have some success there. And that's a continuous process not only there by the way, but also elsewhere in the group. On average, the margins in the U.
S. Gross margin percentages are a bit lower than elsewhere that has specific country specific reasons, but we still feel that there's also room to improvement. So that's part of the effect. I think the third question is on currency impacts. I'm not sure if we're going to specify that at all.
No. Not country by country, quarter by quarter. But I think, Martin, you can imagine that our UK operations is sizable in Europe, like France and Germany. And the drop in pound has a negative impact on the on two ways, on the one hand, translating pounds into the euro, so a translation effect. And the other thing is that the people in the U.
K. Need to work harder to keep the margins where they are. Turkey is much smaller. And I think it's fair to say, Pete, that Turkey came back to normal. Yes.
I think of these two areas, which we, let's say, briefly touched in our previous call, first of all, in the U. K, I can say that we have worked very, very hard to keep our percentage margins intact. I think that we have been successful so far. Nevertheless, of course, we have a significant translational impact that Hans indicated. And in Turkey, we see that after the July events, business got back to normal although of course there's a significant let's say cautiousness with customers.
And so we have to work hard to do our job and also to see that we are getting paid. On your 4th question, I think it has to do with outlook. Can you repeat that, Mudlou?
Hello? Apologies. That was the mute button. So you sound a little bit cautious at the H1 results indeed on Brexit, on Turkey. And then in Q3, you report a 1% increase in operating EBITA in the Q3 alone.
Can you tell us how you see the 2 most important drivers going into Q4, I. E, organic growth and currencies?
Well, currencies, if I knew, I would immediately take appropriate measures. I don't know, of course, the currencies, but I we feel that there will not be a significant difference with what we have seen in earlier this year or in Q3. I'm not going to give a forecast about Q4. You say I'm cautious. I'm always cautious.
I'm a cautious person. And but I'm relatively relaxed about the state of our business. I think the business remains a very strong business. And unless we have events like we had in July, it's business as usual. Okay.
Thank you. Can I just follow-up with a quick question? On the Americas, I also know that you announced a contract with BASF
No No. Well, the investments is are related to recruitment of people. So that's and yes, we did that in Q3. And that's, of course, a continuous cause.
Right. Okay. Thank you.
Okay.
The next question is coming from Ms. Silvia Fonte of Deutsche Bank. Go ahead please.
Hi, good morning. A few just clarifications and a few questions please. If I could start with the clarifications. So your Q3, is it possible just to kind of get an idea of what the Q3 group and EMEA organic gross profit growth was? Apologies.
But was it about 3% in both? Is that fair? And then the other clarification is, just to confirm, in the U. S. Business, did you see gross profit up organically?
Or was it just the margin that went up?
Silvia, Hans here. EMEA margin growth was organic. As indicated, it was Kenya had hardly an impact. I missed your other one, to be honest. Americas.
The Americas. Yes, that's why I indicated in the call that the biggest business there is the former MF Perche where we saw margin growth
in the first 9 months
compared to the year before. And the other 2 is just 2 acquisitions that were not included. So the Select Chemie and Muzdla were not included the year before. And in the Brazilian activities, the industrial activities, we struggled with the market circumstances.
But if I say then, then the gross profit organically within the MS Cashier business would have been down a little bit or
No, in MS Cashier.
In Q3.
It went up.
It went up. Okay. And so just going back to the previous one. So the group, if because obviously you gave us kind of rounded up 6% for organic gross profit growth in the first half. So we're going from kind of around 6% now to the rounded number in the 9 months.
So is it fair to say that it's about 3% for the quarter? Is that kind of the run rate that you're seeing?
I did not do the math, but I think that will be close.
Okay. And then you obviously spoke about within EMEA. On the previous call, you spoke about July being quite weak and then seeing a little bit of a better kind of August. Was September then better than August? Or what was the actual
kind of run rate through that? September, that's an easy one. September is always better than August. But that's because August
Year on year kind of if you look at?
Yes.
Yes. Okay. Okay. So the U. K, obviously, you were speaking to us probably when people are still very much panicked by Brexit.
So that's all kind of come back to normal a little bit. And you said that Turkey has come back to normal. So it's just kind of the July panics basically. Yes. Okay, okay.
So that 3% potentially could be a higher or around it could be a higher exit rate would be kind of fair to say. And then on the BASF agreement that you signed on Personal Care in the U. S, could you talk a little bit I'm not sure that you can say very much, but in terms of personnel investment within the sales force? And then is it actually going to be material on the organic growth in the Americas for next year even if you can't quantify it?
Yes. I mean I'm not going to quantify individual contracts. So we have to see. But what I think the message was is that it's an important, let's say, signal that we are able to diversify our business from purely industrial to also the other market segments that we are strong in. This is an example of that.
And the other example is, of course, Muetzler, which is strong in pharma, has strong suppliers. We have been able to also and replace some of the existing Mutler suppliers with our core suppliers for the U. S. Now for the U. S.
So we're very happy with that development. And the message was more we are diversifying into other markets and not so much now to specify what that exactly means.
Okay. Sure. And in terms of investing in the sales force for Pharma and Personal Care, I guess, Mutlu would have come with the sales force already. But is that done kind of end of Q3 or you're still selecting the team? That was done already.
So that would have been partially why the conversion rate was a little bit weaker, I guess.
Yes. There's a little bit more cost in the without the business because the business started later.
Yes. Yes. Yes. Right. Okay.
So that conversion rate, just going back to the previous kind of caller question, then the conversion margin potentially should improve a bit in Q4 kind of in terms of the year on year run rate of way?
Let's see when we present Q4,
Okay. Okay, sure. Thanks very much.
The next question is coming from Mr. Pavel Berenberg. Go ahead please.
Yes, hi, good morning. So my first question is on the new loan structure. I just wondered what impact that might have on your coupon going into next year. Secondly, on working capital, can you are you able to say what components drove that improvement in working capital? And was there an underlying improvement?
Or was there anything just on timing issues? Thirdly, on M and A, your leverage is falling pretty rapidly. I wondered if you can comment on what you're seeing with regard to the pipeline for further deals. And then just a final question on the U. S.
I wondered if you could give an initial assessment of what a Trump presidency might how that might affect your U. S. Business? Thank you.
Yes. First, coming back on the coupon of the new loan structure, it won't move the needle a lot. It will be slightly higher, but not a big amount. Working capital, two reasons: partly timing issues having a positive impact and partly in a couple of territories some additional focus helping us to reduce working capital. And also to be completely honest, they're partly also a bit of currency tailwinds that we have.
Also the weakening of the pound leads to in euro terms a slightly lower working capital amount helping us a bit there. Okay. Peter, you are the expert on Trump. Trump. And the other one was?
M and A pipeline. M and A, yes. Okay. The first one is easy, the Trump. But I can talk with you half an hour about it, if not longer.
I don't know exactly, and we all do not know. The only thing you can say maybe is if he is really successful in investing heavily in the infrastructure in the U. S. That, that will have a positive impact on many industries, including the chemical industry and then subsequently, of course, also for ours. Construction is good for the chemical industry.
Other than that, I don't know what kind of other benefits or dangers Mr. Trump will bring us. On M and A pipeline, I start to hesitate a little bit to give every quarter a comment on that, whether or not it's full or not full. What you need to understand is, first of all, that this company has always is always active in finding opportunities and talking to potential acquisition candidates. The problem we have or let's say the fact that is out there is that very often we talk to SMEs, to private individuals or families and that the pace, let's say, is determined by as normally, of course, by the sellers.
So we cannot predict when we are successful. But you can rest assured that we are constantly talking, constantly have projects and that it is up to, yes, circumstances whether or not that shows, let's say, very abundantly in 1 year or a little bit more less abundant in another year. But I don't let's say in the history of this company, I don't see any change in our activity level. And so you can rest assured that we will come with projects that are closed in the future. But I'm not sure if I should say it's full or empty or whatever.
There are always projects that we are working on.
Okay. Thanks very much for that. The next question is Mr. Paneris Kempen. Go ahead please.
Good morning and thanks for taking my questions. Just first on the new financing structure, you now have your inability to go up to 4 times net debt to EBITDA. Does that sort of signal a willingness to run with higher leverage than before in a publicly listed environment?
Yes. What we basically did is we created the flexibility to get a bit higher than the maximum that we had in the previous structure. The maximum leverage we could have under the loan documentation was 3.25 coming down in the upcoming half years. So what we did is we created a structure with a base leverage of 3.5 times and some flexibility, what they call of acquisition spikes to move up to 4 times for subsequent periods of 2 years. It is not the intention to lever up to 4 times, but it's always good to have a bit of headroom there, a kind of safety cushion.
But only because previously when you did a big acquisition, you issued a bit of equity. Would you sort of now be comfortable with slightly more leverage than back then?
I think, yes, it's Peter. I think that what we will try to do in the future is to optimize, let's say, our balance sheet for the benefit of our shareholders. And we will listen very carefully to our shareholders in this respect. And but we feel that depending on the opportunity that it is not impossible, but it's not now also the intention. I mean, I don't want to signal now that we go to do it, but it's obvious, as Hans said, that if we have the possibility and there is an opportunity that we would really like to have then we'd rather leverage up a little bit than issuing shares.
Perfect. And then just a follow-up question. In previous calls, we sort of talked a little bit about price deflation in the chemical industries and how that made your ability to grow, especially in the U. S, quite difficult. Has that picture started to improve in Q3 and perhaps into Q4?
No, not really, a little bit. I think there are now little bit signals that prices are going, let's say, not decreasing anymore. But too early to tell. I think it will be very good news for everybody if there's some price flexibility upwards. But it's still early days.
There are some signals, but not noticeable at least in our results that we now present.
And should we track the oil price for that? Or how can we track that return to production?
No. I think that's very difficult. For us, it's also very difficult. We have tried to link these all these products that we have to some effect of the oil price. But of course, in petrochemicals, somewhere down the line, there is an effect.
But at the same time, of course, there's also demand that plays a role. So it's I think I don't think that you can put it in a graph and then make predictions for that for our business.
All right. And perhaps one last question. On the previous call, we talked about, for instance, the win that you had with Gevaudin, which seems like a nice win. How is this portfolio performing in terms of new product and supplier additions currently?
Yes. It's a project that is, let's say, being implemented. These projects are significant in terms of making yourself ready to do the job. And that is in full process. So and the cooperation is going well.
But it's not a switch of a KNOP and then it happens. But we're very happy with the progress that we make.
And in terms of new product and supplier wins that, that pipeline is still very sort of full as it has been in the past?
Yes. We have some interesting projects and working hard on that. So I hope that, that will deliver, let's say, the growth of the future.
Perfect. That's very helpful. Thank you.
The next question, Ms. Milubank, Goldman Sachs. Go ahead please.
Hi, good morning. Thank you for taking the questions. A couple coming back to the North American margin sorry, the Americas margin. I was just wondering if there was also an impact transactional impact in Brazil in that? And then also second one on FX.
Within the U. K, you said that you managed to keep your margins stable. Can you just allude to how much of your product you import into the U. K? And if that's still also the case now running into sort of the Q4 that you see stability in this margin?
Okay. But the last question, most of our products, I think, are important. I don't think that we have I should really dig in my mind to find products that we source in the U. K. In pounds and sell in pounds.
I don't think it's much. It's so assume that most of our products are imported either in euros, dollars, sometimes in pounds, sometimes in yen, So a myriad of currencies and that they have been, of course, becoming more expensive and that we have to pass on that price increase to our customers. And that so far has been successful. And I have no indication to believe that, that will not be successful in the Q4. Your first question, Hans, is that something you want to I didn't get it.
Milo, also for me to your question related to Brazil and then the industrial activities. And then I'll look The
Brazil, yes, so just the conversion margin that we see saw some deterioration in the Q3. Was any of that related to a transactional impact in Brazil? Or was that not
Yes. That was also absolutely impacted by transactional issues and mainly strong price erosion in the industrial market segments in Brazil that had a negative impact on profitability and conversion margin.
Okay. Okay. And maybe one more on the U. S. I think the Q4 last year was the Q1.
So industrial production really go negatively. So we're now heading into a territory where comps are a little bit easier. Are you seeing current trading improving a little bit that you're turning perhaps some more organic growth than previously?
Yes. But that's I'm not I made a mistake to comment on 1 month ahead of last time on July, but I'm not going to comment on the Q4. Let's see what comes out of that. Too early to tell.
Okay. Understood. Thank you.
The next question, additional question from Ms. Silvia Fotayeva, Deutsche Bank. Go ahead please.
Hi, again. Just
a few follow ups please.
Just a quick one on the 4 times net debt to EBITDA. Can you just tell us how long these spikes are kind of allowed for, just the technicality around it? And then just coming back to the Brazilian weakness, can you just quantify, is it still kind of 2%, 3% of the business Brazil? And why was that price erosion apparent in the Q3? And then finally, just what are your thoughts on high inflation in the U.
S? Should that generally be a good thing for your business? Thanks.
First, the acquisition spike. We are allowed to have 2 times a period of a year over the life cycle of these loans. Great. Thanks. I think the second one, no, we don't want to make the impression that price erosion started in the Q3.
It has been a constant factor in the last, I would say, what, 12, 15 months. But it starts to bite or it starts to bite. It bites already, and we wanted to flag that it is it has an effect on certain effect, smaller effect because it's you said to have I don't know exactly how big the business is in relation to our total, but it's relatively small. Nevertheless, it has an effect.
Great. Thank you. And then just general thoughts on kind of inflation picking in the price?
Inflation, yes. I think, Tru, you always have to be careful there. But I think some inflation is good for us, allowing us to increase prices and often a little bit more than inflation. Of course, if you get a lot of inflation, it's probably bad for the general economy. But I think some inflation is good for everybody and also for us.
Thanks very much.
The next question Mr. Sarikonda, HSBC. Go ahead please.
Hi, this is Srini Sarikonda from HSBC. I have two quick questions please. First one, have you seen any changes in the discussions around the 2017 supply agreements? I mean, are there any of the European suppliers going to the U. S.
With you or vice versa? And the second question, how comfortable are you with the consensus EBITDA of €152,000,000 Thank you.
Well, on the second question, I think we do not make a forecast other than the forecast that we made. So no further comment on that. On the first, yes, we are constantly working on expanding and bringing supplier agreements to other markets. And we are positive about the successful, but I don't want to go into names nor quantify that. But yes, we are.
I mean one example I gave you, we were working with our biggest pharma supplier now also in the U. S. Because of the Mutschland acquisition. And that was not a Mutschland supplier. So that's quite a nice example of that.
But other than that, it's a part of our business model that we constantly try to cross fertilize our supplier relations.
Okay? Understood. Thank you. Yes, thank you.
So additional question from Mr. Gundogan, ABN AMRO. Go ahead please. Yes.
A bit of a general question. I mean, we briefly talked about the contract win from with BASF on Personal Care. Just wondering to what extent is that helping you to win new business? And maybe relating to that, from your experience, how long does it take to win new contracts? So especially in the U.
S. Where you're entering Life Sciences, and I'm leaving much for a second. Just setting up that business, how long do you think it takes to win new contracts? Thank you.
It's a good question, but not easy to answer because it's so first of all, of course, it's important to gain credibility in a certain market over, over let's say overstated, it's in the part of the U. S, but gives us a platform to attract complementary business. How long that will take is very, very difficult to say. That it's normally, you should take into account that, let's say, changes of suppliers for to new distributors is not an easy or quick situation. But again, the fact that we have that platform, that we have a very strong Personal Care business allows us to convince suppliers to work also with us in that new area.
It's a little bit what the previous question was about cross fertilizing our business. And of course, we're very, very much focused on that. And but that requires credibility. And I think that we made a first step in Personal Care in the U. S.
And we made a big step in pharma with Mutschland there.
Okay. Thank you.
Okay. Mr.
Van de Slicker, there seems to be no further questions.
Thank you very much.
Ladies and gentlemen, this will conclude the IAMCITY Analyst call. You may now disconnect your line. Thank you. Have a nice day.
Thank you.