Good morning, ladies and gentlemen. Thank you for waiting and welcome to the IMCD full year results 2015. At this moment, all participants are in the listen only mode. Later, we will conduct a question and answer session. I would like to hand the conference over to Mr. Piet van der Slikke, CEO, and Mr. Hans Kooijmans, CFO. Please go ahead.
Yeah. Thank you very much. Good morning to everybody, and welcome. I am here with Hans Kooijmans, CFO, and we will be happy to answer your questions regarding our press release of this morning containing the 2015 results. Before we go to questions, I would like to make a few remarks. We all know that 2015 has been politically and economically extremely turbulent, and despite this, we have achieved organic EBIT growth close to our long-term guidance of 6%. That is a satisfactory result from our perspective. In addition, we made important steps in the execution of our strategy by acquiring a key specialties player in the U.S., M.F. Cachat, and expansions of our presence in Brazil and India. Before further elaborating on our acquisitions, I would stress that circumstances in our most important markets have not been easy.
According to the Chemicals Trends Report published by CEFIC, which is the organization of chemical producers in Europe, the chemical output growth in the EU, which is our most important market, in 2015 was a meager 0.3%. Chemical prices were down 4.7%, and chemical sales were down 3%. I remind you that, of course, the chemical industry has, let's say, two meanings to us. On the one hand, they are our suppliers. On the other hand, many of them are also our customers. The biggest impact on prices apply to petrochemicals due to the drop in oil prices. Although our portfolio of products is very diversified, we are also active in petrochemical derivatives. Other factors we had to deal with was the economic crisis in Brazil, where GDP contracted with more than 3%, and of course, currency swings in emerging markets, which required extreme vigilance to keep our margins intact.
Given all these circumstances, we are very happy to be able to come close to our long-term organic growth target of 6%. I mentioned earlier the acquisitions which we made. In the beginning of 2015, we acquired a food distributor in India, and during the year, we were able to integrate this company into our existing organization. We are very optimistic in the way we can continue to build our position in the subcontinent. The acquisition of M.F. Cachat, based in Cleveland, Ohio, and active in a large part of the U.S., represents an important milestone for IMCD. It has been our first acquisition in the U.S., and this company offers a great platform for further growth as we want to become a leading specialty chemical distributor in this region. M.F. Cachat will be renamed IMCD US as of the 1st of April 2016.
To help us grow in North America and to exploit synergies, we have opened an office in New Jersey under the leadership of Marcus Jordan, who is a member of our Executive Committee. Marcus will, together with the excellent management of Cachat, work on expanding our presence in North America. Finally, on acquisitions. In December, we acquired Selectchemie in Brazil from its management and its Swiss shareholder. Selectchemie is exclusively focused on sales of pharmaceutical ingredients in Brazil and has a leading position in this market. IMCD's position and expertise in the sales of pharma ingredients is strong, and we enjoy relationships with the world's leading manufacturers. We spoke about Europe and the U.S. Looking at Asia Pacific, we saw good growth in almost all markets. Australia and New Zealand delivered solid performances.
In Asia, we continue to focus on the quality of the organizations and on margin improvement. This can sometimes affect revenues as we discontinue low-margin product lines. Other emerging markets, Brazil, South Africa, and Turkey, performed generally well, despite the contraction of the Brazilian market and the sharp drop of the currencies in these regions. Ladies and gentlemen, as I said in the press release, the foundation of our business is strong. Our model is resilient, also in more difficult times. Our cash flow is very healthy, and you are by now used to the fact that we refrain from giving a quantitative outlook. However, we look with confidence to the future, and we remain focused on growth of gross profits and EBITDA. With this, I would like to ask Hans to take us through the presentation regarding the numbers for 2015.
Thank you, Piet, for the introduction. Ladies and gentlemen, what I would like to do is give you a short summary of the income statement, the balance sheet, and the free cash flow of the company in 2015. Of course, all the underlying details, you can find them in the annual report and the press release that are both available on our website. On page seven of the presentation, you'll find a summary of the highlights 2015, in line with the press release. What I suggest is that I take you through the underlying details and start on page nine with a summary of the income statement. On page nine, what you see there is this revenue increase 13% compared to the outcome 2014. The organic revenue growth, however, was modest, mainly due to the difficult market macroeconomic circumstances, as just described by Piet.
Further, we saw in 2015 the usual changes in the product mix and rationalizations here and there in our portfolio offsetting the positive impact of new suppliers coming on board. Overall, acquisitions were the main contributor to the revenue growth with 11%. The majority of this 11% is coming from M.F. Cachat, acquired end of June 2015. Initially, IMCD acquired 80% of the shares, and the remaining 20%, also owned by management, will be acquired the latest in 2017. The accounts of M.F. Cachat are fully consolidated in our 2015 accounts for the period under our ownership. This means, of course, that you will not find minority shares, and on the other hand, the deferred purchase price related to this 20% that we need to buy in 2017 is included in our net debt position.
The remainder of the acquisition growth in 2015 is the full year impact of the two small food distributors that we acquired, and just described by Piet. Selectchemie in Brazil, which was acquired in the second half of December last year, did not generate any revenue or result in 2015 as a consequence of the timing of this transaction. More important for us is the next line, the gross profit line. Gross profit increased 16% compared to last year. An increase which was a combination of organic growth of a bit more than 5%, acquisitions generating 9.1%, and a positive contribution of Forex exchange differences. Our gross profit margin, so the gross profit in percentage of revenue increased from 21.2% to 21.8%. This margin percentage increase was a combination of a further optimization of the product portfolio, first-time inclusion of acquisitions, and some currency impacts.
On top of that, we have the usual local market circumstances and fluctuations in the product portfolio. As you know, IMCD operates an asset-light business model whereby we outsource most of our warehouse and transportation to third parties. In this cost-efficient and flexible model, we pay a fee for the service rendered by our logistic business partners. Cost of these logistic services are reflected in the line third-party cost. In 2015, this third-party cost slightly reduced from 3.4% to 3.2% of revenue. Operating EBITDA increased 17% to EUR 128.3 million. I guess that most of you will remember that in 2014, EBITDA included the positive impact of a change in Dutch pension legislation. This resulted in 2014 in a one-off positive pension result of EUR 2.7 million.
Excluding this one-off and non-cash pension profit in 2014, the 2015 EBITDA increase was even more impressive, with EUR 21 million or 20% compared to 2014. This increase was a combination of acquisitions made, positive impact of exchange differences, and organic growth, which was, as indicated by Piet, close to our long-term guidance. The Operating EBITDA margin increased from 8.1% in 2014 to 8.4% in 2015, or excluding the pension adjustment in 2014, from 7.8% to 8.4%. In 2015, we realized EBITDA and EBITDA margin growth in all IMCD segments. The conversion margin further improved from 38.2% in 2014 to 38.5% in 2015. Please be aware that we calculate the conversion margin as Operating EBITDA, so without a D, as percentage of gross profit. In the market, we noticed that more asset-intensive peers use Operating EBITDA as percentage of gross profit as their definition to calculate the same conversion margin.
Before I take you through the remainder of the P&L, I would like to summarize the results of the individual segments first. If you move to slide 10, you will find revenue, gross profit, and EBITDA split per operating segments. Due to the acquisitions made in 2015 and subsequent changes in the internal organization, this is the last time that we will present these four segments. Other emerging markets consisting of Brazil, Turkey, and South Africa will disappear as a separate segment. From the first quarter 2016 onwards, we will use the following segments: EMEA, including Turkey and South Africa, Asia Pacific, which will stay unchanged, and the Americas, being at the moment U.S. and Brazil. The European activities still generate about more than 60% of IMCD's total revenues and performed reasonably well, given the modest macroeconomic circumstances.
2015 revenue in Europe was more or less equal compared to 2014. Gross profit increased by 5%, and this organic growth was the balance of the usual changes in the product mix, currency differences, adding new supplier relations, or expanding relations with existing suppliers. The gross profit margin in Europe improved from 22.2% to 23% in 2015. Growth of operating EBITDA of 5% was a combination of organic growth and a positive impact of exchange differences. As there were no acquisitions in 2015 in this segment, and the full-year impact of the small 2014 acquisition of Euka Pharma in Sweden was negligible, all growth was organic growth. Operating EBITDA in Europe in percentage of revenue further improved from 8.7% to 9%. In the next column, you will find Asia Pacific, where market circumstances were rather volatile.
We experienced substantial fluctuations of local currencies versus the US dollar and the euro, having a negative impact on competitive positions in certain areas. The focus on organizational and margin improvement, in particular in more recent acquired businesses in the regions, impacted the result positively. Further, the Australian business performed well despite difficult market conditions. In this region, revenue increased 9%, which was a combination of 2% organic growth, 5% acquisition growth, and 2% positive currency impact. The acquisition growth was the full-year impact of Danasia in the Philippines, acquired in 2014, and the acquisition of Kushalchand in India this year. Gross profit increased 17%, whereby 9% of this 17% was organic growth. The gross profit margin increased from 17.4% to 18.7% in 2015. This increase was preliminary due to a strong focus on market margin improvement and adding new supplier relations.
Operating EBITDA in Asia Pacific increased 19%, the operating EBITDA margin substantially improved from 8.3% to 9% in 2015. In the next column, you will find other emerging markets, the operations in Turkey, South Africa, and Brazil. Here, we were able to increase the revenue with 9% and gross profit with 12%. Gross profit in percentage of revenue increased from 21.6% to 23.8%. All growth is organic growth and a result of adding new supplier relations and focus on margin improvement. Operating EBITDA increased 14%, this increase is the balance of gross profit growth on the one hand and further investments in our local structure to strengthen the organization. The next column is the U.S., where you will find the outcome of the activities of M.F. Cachat since the acquisition end of June 2015. M.F. Cachat generated $132 million revenue with a gross profit margin of 17.9%.
Despite the lower than IMCD average gross margin percentage, the EBITDA margin itself is a healthy 10.2%. This indicates that they operate a quite efficient cost structure. In the last column, you will find the holding companies where you will notice a cost increase of EUR 4.1 million. As you remember, in 2014, holding cost benefited for an amount of EUR 2.2 million of the Dutch EIS pension adjustment. The real cost growth in 2015 is EUR 1.9 million. This EUR 1.9 million is a combination of strengthening the support functions in Rotterdam and Singapore. Further, the full-year impact of the additional cost related to the listing on the Euronext, and cost related to the implementation of a long-term incentive plan of about EUR 0.7 million.
You move to the next page, to page 11, you will find the P&L lines between operating EBITDA and the net result for the period. Some remarks here. There is a strong reduction of the net finance cost, I will come back on that in a minute. The next line is income tax, Income tax is always quite complicated in an international group. In the annual accounts, if you look in our P&L, you will find income tax expenses for an amount of EUR 16 million. I will try to give you a bit of an understanding about how that is built up, that's what I try to do on this sheet. What you will find there is EUR 27.8 million income tax expenses.
An income of EUR 4 million related to the amortization of intangibles, you will see a line EUR 7.8 million recognition of deferred tax assets. These three add up to the EUR 16 million that you find in the P&L. During the IPO process, we gave you guidance that the blended tax rate of IMCD will be in the range of 25%-28% of operating EBITDA minus interest. The actual outcome in 2015 is EUR 27.8 million, resulting in a blended tax rate of 24%, which is slightly below the guidance that we gave you. The actual tax cash out that you could find in the cash flow statement is always close to this number, in 2015 this was about EUR 24 million. Further in this tax line, you will find EUR 4 million tax credit income. This is non-cash and relates to the non-cash, non-tax-deductible amortization of intangible assets.
The other one, the EUR 7.8 million deferred tax asset, has to do with a first-time recognition of previously unrecognized tax losses in the Netherlands. Another line that you find on this sheet is an impairment loss of EUR 8.4 million. This has to do with the impairment on the goodwill related to the acquisition of Makeni in Brazil. This loss is mainly the result of worsening macroeconomic circumstances in Brazil, having a negative impact on the parameters used to assess the value of future cash flows. The cash flows itself did not change. I promised that I would come back on the net finance cost. You can find them on slide 12.
What you will see there is an explanation of all the lines included in the net finance cost, whereby I deduct the lines that have nothing to do with the real finance structure of the company, showing that the interest related to the post-IPO financing structure is close to EUR 9 million. What else will you find in the net finance cost is changes in deferred considerations, amortization of finance costs, currency exchange results, and so on and so forth. You move to the next slide, a short summary of cash earnings per share and proposed dividend. I think you will see a bridge that you are familiar with, starting with results from the year, adding back the amortization of intangible assets net of tax, leading to cash earnings of close to EUR 93 million, substantial growth compared to last year.
Average cash earnings per share ended up to EUR 1.79 per share, an increase of 26% compared to last year. In the IPO process, we gave you guidance that the dividend proposal would be in the range of 25%-35% of the cash earnings per share. We will propose to the AGM a payout ratio of 25%, being on the low end of the range. Main reason for that is that we feel we have a healthy acquisition pipeline that we could use the cash for. I think it makes sense to slightly reduce leverage over time. Another thing is that if you look at the dividend payout that we proposed, the EUR 0.44, if we translate it on a full-year basis compared to last year, we show an increase on the cash dividend of 10%.
On the next slide, page 14, you will find a summary of the balance sheet. You see there is a substantial increase of capital employed, mainly due to the impact of acquisitions. The acquisitions added roughly EUR 300 million to capital employed, and the remainder is bits and pieces. We finance capital employed for 60% with equity, and the remainder net debt, and I come back on the net debt in a later slide. Property plant and equipment, still relatively low, EUR 18 million, has to do with the asset light business model, as indicated before. Substantial increase in intangible assets, mainly due to acquisitions made in our private equity history, and a working capital increase of EUR 48 million. To have a closer look at the working capital, I would like to ask you to move to slide 15.
What I try to show there to you is the working capital expressed, calculated in days of revenue, whereby the revenue is normalized for the full-year impact of acquisitions made. What you could imagine is that in the year-end balance sheet positions, you have the full working capital impact of the Selectchemie acquisition done in December, the Cachat acquisition, whereby in our revenue, only part or even no revenue was included. If you would normalize for these acquisition impacts, overall working capital days are more or less on the same level as last year. We slightly improved on inventories and debtor days, lost a bit on the trade payables, and the other payables were stable. On page 16, a few words about our net debt position. An increase in loans and borrowings.
The $408 million mainly consists of a fully drawn term loan of $350 million and about $54 million of deferred considerations related to the acquisitions done. If you look at the short-term line, the $86 million is a combination of drawn revolver of $58 million. As indicated before in another press release, we have a revolver line of $150 million at its year-end. We have drawn $58 million on that. In the $85 million, further, there is $10 million related to deferred considerations and some local bits and pieces. Leverage ratio, including the full-year impact of the acquisitions, 2.9x EBITDA versus 2.4x last year. If you look at the covenants related to the senior bank facilities, all covenants are easily within the bandwidth given by the banks and substantial headroom there.
If you move to the next slide, free cash flow, basically a summary of numbers that you saw before. Healthy EBITDA growth, depreciation more or less in line with the investment in fixed assets. The EUR 700,000 related to the share-based payment, the long-term incentive stream, and an investment in working capital of EUR 10 million, resulting in EUR 119 million free cash flow and a cash conversion ratio of close to 91%. All in all, I think what Piet said before, it was a fairly good year. I would like to hand over back to my colleague.
Thank you, Hans. I think that concludes the presentation from our side. I invite you to ask questions now.
Ladies and gentlemen, we will start a question and answer session. When you have a question, please press star one. The first question is from Mr. David Tailleur from Rabobank. Please go ahead.
Good morning, Hans and Piet. A couple of questions. First of all, on the U.S., can you confirm that there was organic growth in the U.S. M.F. Cachat over 15, but also in the last two quarters? If so, if I calculate correctly, you have a sales level of about EUR 125 in H2. That would imply that your H1 sales level has been around EUR 150, something like that. Is that a seasonal pattern you recognize? Secondly, on your working capital free cash flow, you arrived at the very high end of your targeted range of 80%-90%, but you also mentioned measures to further improve working capital. Would that imply that you would target again at that higher end or maybe even above that level into 2016?
In Europe, I calculate an EBITDA margin decline in Q4 of around 40 basis points, and also the margin conversion comes down, adjusted for pensions from 37 to about 35. Is that a comparison base effect or something else? Thanks.
David, perhaps first reflecting on the U.S. business. The revenue of M.F. Cachat in the year 2015 increased compared to the years before. However, when we did the acquisition, we told the markets that over the recent years, the average growth rate of Cachat was somewhere between 5% and 10%. The outcome of 2015 was below the 5% of revenue growth. By the second half of the year was more difficult than the first half of the year. If you talk about working capital targets, I think we have to keep in mind that the numbers that we show at year-end is always a snapshot of a certain moment in time, and quite often the lowest point in the cycle.
What you could expect is that during the year, capital positions will go up, mainly driven by the fact that debtor positions will go up, as December is always relatively low in sales, and if sales pick up, that leads to additional debtors. The target is always to further improve where possible, but difficult to predict where we will exactly land. Coming back on EBIT in Europe. For us, it's difficult to comment on quarters, because before you know, you end up in anecdotes about number of working days or specific things happening in specific quarters, and that is something that we try to avoid. To be honest, I don't really remember the exact question, I want to be consistent and not to react on quarters.
I fully understand, Hans, I'm more than willing to reiterate that. What I just want to know is that the margins coming down in Q4 year-on-year, is that basically more like a one-off effect in your view? Do you see increasing difficulties in some European countries?
No, I think what we had last year in Q4 in Europe is about EUR half a million of that pension adjustment.
If I remember well, EBITDA Q4 was EUR 17.8, and this year EUR 17.6. It's more or less flattish in Q4, but nothing specific there.
Okay. To go back, to be very precise on the U.S., so you said H2 was more difficult, but there was still growth year-on-year in Q4 also? Was that more flat?
I don't have the number for Q4 in my head, but what I saw in their management reporting is that in the second half of the year, they still increased their revenue compared to last year.
Okay. Also to be clear, thanks for that, by the way. On the sales level, H1 was indeed about EUR 150? Is that correct to assume?
That is a bit complicated because what we talk about is a cutoff moment somewhere in the middle of the month June or in the end of the month June. I don't have the exact split, and before we know, we start debating about the number of working days in the first half of the year and the period under our ownership. David, I don't have these numbers at hand, to be honest.
To put it maybe easier for you, if you look at seasonality effects, is it fair to assume that H1 is usually about 55% of revenues and H2 about 45%? Something like that?
H1 is always stronger than H2, that has to do with the summer season and the Christmas periods that have a negative impact on the business volumes.
Okay, thanks. Thanks, gentlemen.
The next question is from Miss Silviya Ivanova from Deutsche Bank. Please go ahead.
Hi. Morning. Silviya from Deutsche Bank.
Morning.
On Europe, could you just give us maybe a little bit more color around where you're seeing the growth? I know you say that obviously quarterly, you can see lumpiness in profitability, but as the previous question went, it did seem like profitability was down a little bit, even ex the pensions. Can you just talk about maybe whether you've put some investments or is that just something which will normalize as we go through 2016? Is it possible to give us any idea of the exit rate for organic gross profit, which obviously you provided was 5.2% for the full year. Finally on North America, could you talk a little bit about any progress with supply relationships perhaps being transferred from Europe and Asia to your North American business? Thank you.
Okay. This is Piet. Again, I would like to stay away as much as possible from quarter-to-quarter comments. Let's say the fourth quarter has, let's say, no meaning for predicting the first quarter of this year. Let me put it like that. I think that we fool ourselves if we like to judge this business from quarter to quarter. The timing differences, there are all kinds of effects that play a role in whether or not a quarter is better than the others. I think if we look at our business in total, then we look at that with optimism and we see positive trends.
If I go back to your question on the U.S., of course, we have worked very hard this last half year to integrate the business, to get to know each other better, to speak with the suppliers of Cachat in the U.S., which by the way, are also, to a certain extent, suppliers that we have in Europe. We see very, let's say, positive effects and discussions, not only, by the way, by introducing suppliers from Europe to the U.S., but also the other way around. We are talking with suppliers also of Cachat that we didn't know before in terms of with whom we didn't work for other areas in the world. We see very positive opportunities. This will take time. It's not that we cannot turn around suppliers like this, but we see very positive things going on.
We are in constructive dialogue with the management of Cachat to expand the business of this great company into other market segments and also into other territories in the U.S. All in all, I'm very positive about the cooperation. Let's say the profiles of both of our companies, the culture of both of our companies, I think from both sides, it has been viewed as a very positive acquisition from our side. Silviya, you also had a question about gross profit growth, 5.2%, but I'm not sure if you were referring to Europe or to the whole group there.
I was just wondering if you could give us just any idea of what that's trading at the beginning of 2016. Not sure if you can give us just a glimpse.
We will tell you something about 2016 during the AGM, where we will explain our first quarter results.
Okay, sure. If I may just finish with another one, if possible. Just on acquisitions, obviously, you talked about the dividend being at the lower end of the payout ratio because you have quite a strong M&A pipeline. Could you talk a little bit about whether that's, again, the U.S. or just across your regions?
It is across the regions. I think our shareholders are best served if we are able to invest in a good way in the business. We're talking about pipeline of businesses across the regions.
Okay, thank you very much.
The next question is from Mr. Peter Olofsen from Kepler Cheuvreux. Please go ahead.
Good morning, gentlemen. I wanted to come back on the supplier relation topic. If I remember correctly, at the time of the IPO, you said that the top 10 suppliers accounted for something like 37% of your sales. How has that percentage changed with the acquisitions that you have made in 2014 and 2015? Do you foresee any impact from the planned merger of Dow Chemical and DuPont?
That's a good question. To start with the second question. It's difficult to predict. We work with both companies, by the way. We have product lines in various places in the world where we work with both Dow and DuPont. That doesn't conflict in itself, this merger. We don't expect any negative consequences. We have to see how this play out because as you know, it's a very complicated goal that they have put to themselves to first merge and then split up in three different companies. We will see what happens. This is for us, not an issue that will affect us soon.
Then Peter, your other question about the percentage of the top 10 suppliers. To be honest, we don't calculate it on a daily basis. I don't think there is a material change in the percentage of the top 10 suppliers. I think it will fluctuate somewhere between 37%-40%.
Okay, that's clear. Maybe one follow-up on the other emerging markets, where you had a solid improvement in the gross margin in 2015, with Q4 particularly strong. I think it was over 25% gross margin. Early in the call, you've mentioned that we should not read too much into quarterly numbers. The kind of 25%, is that a sustainable figure, you think?
If you look at the whole year where we ended up at above average in the group. What you typically see is that changes in the product portfolio, currency impacts, and so on and so forth, always have an impact on the margin development. It's difficult to say that the percentage at the end of 2015 is sustainable for the near future. Let's see. There is a lot of focus on margin improvement, but it's difficult to pinpoint a fixed number that is the target for next year.
There's at least no reason to look for a meaningful decline.
On total group level, I think you're right. Within the segments, you always see changes between the quarters like you saw in 2015.
Okay, thank you.
The next question is from Mr. Rajesh Kumar from HSBC. Please go ahead.
Good morning, gents. Just trying to understand how the supplier rebate trends have moved through the year, especially given that the input prices were quite weak. Did you find it difficult to hit the supplier rebate levels in certain categories? If so, how are you thinking about 2016 in terms of resetting those arrangements?
You talk about supplier rebates, which is a concept that we not know in Europe and Asia. We do know that in the U.S. It is not a major factor in our business. Basically, our business is like we buy the products, and we sell with a margin, so we don't get rebates from suppliers with exception of certain suppliers in the U.S. That's not a major factor in our business.
I get it. The technical terminology can be different, but the basic economic reality of the question is you do get volume discounts, being a distributor. You get a preferred price which a smaller purchaser can't get. What I was trying to understand is how much of that is volume dependent and how much of that is value dependent. After all, that's your business model, that you do get supplier rebates. That may be a technical term in your industry, but I'm just trying to clarify.
It's not applicable to specialty chemicals. It's really not. We don't get volume rebates.
If I go and buy tomorrow from one of your suppliers, they'll give me at the same rate?
Well, if you buy from our suppliers, you get the same rates. It's a good question.
I won't.
I think most of their customers, most of the customers that buy direct, buy against bigger volumes, because these are the key customers, and they are probably in a position to negotiate a better price. If you look at the medium and small segment of the market, then they will typically pay a little bit higher price.
Perhaps put a few words about the price, the way pricing works in our business. Basically, what happens is, we have an exclusive relation with a supplier.
Supplier sets a list price to us, and he's free to put whatever price on the list that he wants. We are free to price in the market. That is not volume-driven or rebate-driven. It is, we are the extended marketing and sales arm of that supplier, and we try to get the best price out of the market on the one hand, and sell as much as possible to keep the supplier happy. That's where we try to find a balance. The model that you just described is another model, but that's a model that you typically see in the commodity world. Okay. Fine.
Perhaps we could have on a later moment, Rajesh, could we have a longer discussion about the business?
We'll take that offline. The other one was, obviously a lot of chemical pricing is done in US dollar, which has been quite strong through last year. Your costs are local. Why aren't we seeing a bit of conversion ratio expansion due to that? Are the volumes very weak in certain categories?
I think your assumption is that most of the prices are in US dollars. I think it's not the case in our business.
No.
In Europe, most of the prices are in euros. That's already 60% of our business is not only euros, also some dollar-related business, but most is in euros. I think that changes already the assumption of your question.
Okay. We will take that offline. Thank you.
Thanks.
The next question is from Mr. Andy Chu from Nomura. Please go ahead.
Good morning, Piet. Good morning, Hans. A few questions from me. Just starting with Dow and DuPont. Could you confirm how much combined revenues they are, please, for the group? I think your large supplier, you highlighted at the time of the IPO 6% of revenue. How much do Dow and DuPont contribute together, please? Secondly, on M.F. Cachat, where the growth is clearly in revenues, come down pretty significantly. But at the EBITA level, in terms of year-over-year in constant currency, what has been the growth, please, in the business since you consolidated that from the 23rd, 24th of June? In terms of the tax rate, could you just confirm what we should use as an ongoing tax rate, please, Hans, going forward?
On Makeni in Brazil, could you confirm that that is the first time that you have actually had to take any impairment charges on acquisitions? Obviously, could you just highlight what exactly has gone wrong in Makeni? It is just a macro issue there, but clearly M&A has been, and as you point out, will be a big part of the growth story. Could you just sort of flesh out some of the issues you have had with Makeni, please?
Andy, perhaps to start with your last question, we had no issues at all with Makeni. Makeni, as we call it.
IMCD Brazil.
IMCD Brazil in the meantime. Basically what you have if you do an impairment testing, what we do each and every year, is that you need to discount future cash flows, and you discount the future cash flows against a weighted average cost of capital. Due to the macroeconomic circumstances in Brazil, the overall risk profile in Brazil went up. Terminal growth rates went down. These are numbers not set by us, but by external valuators. If you then plug in the same cash flows as you did the year before, then you end up with a lower discounted value. It has nothing to do with the business. It only has to do with the way external valuators, so the Duff & Phelps or the KPMGs, discount these type of stable cash flows. Nothing wrong there. If guidance on the tax rate, the bandwidth was 25%-28%.
I would like to keep that guidance in place, whereby the Cachat acquisition
The tax structure that we put in place there will help us to stay on the low end of this bandwidth. A bit for modeling purpose, I leave it to you what you put in, but I think the bandwidth is still valid. Coming back on Cachat growth figures, what I said before, revenue increased during the year. If I look at, your question was specific about operating EBITA, I guess. Also there we saw a growth compared to last year. If we normalize the EBIT, basically including the same cost for the former shareholders as what they had last year. Then the DuPont Dow thing. As you know, we don't disclose the size of individual suppliers.
I can confirm that they are one of our top 20 suppliers. We talked about the top 20 before, and individually and together they are a top 20 supplier. Not in a half top category.
Okay. Then, Piet, could you just confirm, you did say right at the beginning that your 2015 organic EBITA growth was at 6%, is that correct?
Close to it. I think it's, what is it? 5.2%, 5.3%.
Around five.
Yeah.
Around five.
Yeah.
The guidance.
Okay
It was on average, on a longer period, around about 6%.
Okay. Sorry, just to come back to Cachat again, just to remind me, what was the growth rate in revenues? You're saying it was below the 5% bottom end of that range in terms of growth. Sorry, could you give us a figure for revenue and EBITA growth? Have the two sort of followed each other in the second half of 2015, please? Are you at a 5% revenue growth or thereabouts on a 5% EBITA growth? Then just to give us a flavor of growth, because obviously EBITA growth in constant currency in 2014 over 2013 was double digits. There's obviously been a big step down in growth. Thank you.
I don't think it was a big step down, the growth path of the company was lower than the years before, revenue and EBITA in constant currencies, in USD, both increased in 2015. Below the 5%-10% that it was in the years before.
That's quite, if I understood correctly from your documents, I think you had shown in constant currency an EBITA growth in Cachat of about 10% for 2014 over 2013. Obviously that is quite a big slowdown, isn't it? If you're below 5%, that's a halving of the growth rate. When you say there's not been, if I understood correctly, not a material slowdown in growth, it's been a halving of the growth. Is that correct in terms of the numbers or am I misinterpreting what you're saying? Thank you.
I think it's correct in terms of numbers. If you compare with 10% the year before. What we said in the call when we acquired the company, is that the average growth rate of Cachat over the recent years was somewhere between 5% and 10%.
Okay. Perfect. No, thank you for that. The last one, just in terms of the oil price and, before you sort of said, obviously you're not that exposed to the oil price and the sort of second derivative knock-on effect. Can you just give us a flavor of the impact to the business in 2015 of the lower oil price? How much do you think that's hurt your operating EBITA in terms of absolute EUR hit, please?
Well, absolute, I cannot say it. What I can say is what you see in the markets is that, if you have, let's say, are dealing with a petrochemical derivative, then your pricing is affected and comes down. What you typically saw all around all markets, but also particularly in the U.S., was an inability to raise prices. Oil price plays a role there. I quoted earlier out of the CEFIC report saying that prices have come down during 2015. That of course, makes it very, very difficult for our business also to raise prices. That is part of the reason why the growth rate, for example, in the U.S. has been a little bit slower than the years before. How that totally affects EUR for EUR, our EBITA levels, I can't say.
Okay, great. Thanks very much.
The next question is from Mr. Jaap Pannevis. Please go ahead.
Good morning, Piet and Hans. Thanks for taking my question. First, on the pro forma EBITDA for all the acquisitions which you have done. If I take a leverage ratio of 2.9, and a net debt of the end of the year, I end up at a pro forma EBITDA number of EUR 151. Is that a number which you can confirm as a starting base for 2016?
Out of the top, I think you took your calculator and did the math like that. I think that's the outcome then.
Okay.
I'm not sure, Jaap, if there are rounding differences there.
Yes. Sort of conceptually, that should be a right starting base, including the full sort of pro forma contribution of MF and all these sort of things.
Yeah.
Just on the EM businesses, can you talk a little bit about how you've been able to raise prices, I guess, relatively quickly in Asia PAC and then all the emerging markets, and how you see that going forward? Because I think those businesses actually performed quite well despite these pretty significant EM currency deflations.
Yeah. What we did in some of the markets in Asia is to get rid of businesses that were very low margin. That, of course, affected our revenue line. We were able to add, as a synergistic effect, product lines, in, for example, China, in Indonesia, that had a very positive effect on our margins. Our business in the Philippines is also a very high margin business that we acquired, which we have been able to grow more. It's focus on quality of the organization, quality of the product lines, and introducing our IT system, which gives us a lot of opportunity to incrementally improve the businesses. There's not one golden formula here. It's also hard work, incremental steps, improvement of product lines, improvement of our staff, and that over the years will produce the results that we are looking for.
Sort of on that point, can we say that local market participants are more used to this EM volatility, which allows you to pass on pricing quicker than in the past? Or is that not the right observation?
I think, Jaap, what you should do there is look product by product. What is your competition? What is your market position? What is your position in the formulation? So on and so forth.
Okay.
Of course, people are used to currency fluctuations.
Okay.
That's not only this year.
One more question on the cost base. How do you think about the cost base in sort of the current macro environment? Are you adding cost there? Still very strict on cost? What is your view on that going forward?
That's a good question. It's, of course, a constant debate and a constant point of attention in our business. As you know, most of our cost is determined by our people, unfortunately, let's say better people, higher educated people, better trained people are more expensive than those who are not. What we see in our business, of course, is that we have to work very hard to keep these costs under control because we're working with young high potentials. For example, not only of course in Europe, but also in emerging countries where we compete with, let's say, with the same industry, but also with the chemical industry for talent. Inflation of wages is quite considerable.
We continue to add people to our business, more importantly, what we try to do is to improve the quality of our staff, and that has an effect to increase our costs. It's a fine balance to keep it under control and also to get the talent in. In the end, of course, talent is extremely important in a company where we only have people and no other assets.
If I look at the cost base in recent years, you've been very disciplined on cost because I guess growth has been around the 4%-5% mark. Are you still in that mode of being very disciplined on cost, or is there anything that you're seeing which allows for more cost additions, perhaps from a better macro environment or?
No, I think we continue to be very disciplined on cost. I don't expect this level to change.
All right. That's very helpful. Thanks for taking these questions.
The next question is from Mr. Quirijn Mulder from ING. Please go ahead.
Yes. Good morning, guys. Thanks for the conference call. I have a couple of questions. First, a technical question. With regard to the revenues of the other emerging markets, can you give a breakdown where you leave these under EUR 20 million by percentage in these other regions for our model? If you look at the drivers of 2015 growth margin up, EBITDA margin up, are you expecting the trend to continue or do you see some stagnation because of the slower GDP growth effect there? About the U.S., when do you expect some visibility? Let me say that in the numbers, the results of the cross-selling will come into the numbers.
Okay. Do you want to start with the first question, Hans?
Quirijn, the breakdown other emerging markets, we don't give.
Company splits, as you know. I think it's fair to say that the three countries that we mentioned there, that it's more or less equal. There is not one big outperformer in that group.
That means, of course, let me say, what percentage of the EUR 190 million goes to the U.S., for example, or to the Americas? You will give it anyway.
It's the new segmentation. Sorry, Quirijn, you're talking about the new segmentation.
I want to know how the EUR 190 million is being divided over the three divisions.
I'm a bit.
To get an indication. Sorry?
No. What he says is, in the future, we're going to a new segment and what does that mean for Europe, adding South Africa. Oh, okay. I will give you that bridge at the moment that we disclose next quarter figures. I will help you there to show what is where and how did it move.
Okay.
It's pretty easy to follow because what you will see is that in the comparable figures, in the Americas in Q1, there is only Brazil as comparable figure.
I see.
You can do the math yourself. Yeah?
Yeah.
Okay. When do we see effects of synergies? I can't predict that, but we are working very hard on it, and I hope that we will see something in the course of this year.
About the drivers of 2015, moving into 2016 in spite of the macroeconomic environment.
I think, what we look at is, of course, relentlessly increasing our bottom line, our EBIT number. I think if you look at our margins and our cost base, we will control, as we have said just now. We have no real indication that our gross margins will change considerably. We will work very hard to increase our top line. That's not only decided by macros. Of course, that's an important factor, but also in our ability to add product lines to our business. As I said before, we are positive about where we stand as a company and how we go into 2016.
With your gross margin in 2015 was, in my view, materially up in spite of adding Cachat to your activities.
That's true. What you will typically see in 2016 is the full year impact of Cachat. Cachat operates on average lower gross margin than what we see elsewhere in the group. That could have a bit of a negative impact on the overall gross margin. In the end of the day, it's a combination of product portfolio, currency developments, new suppliers. Let's see where we land. Internally, people have their margin targets. They feel comfortable about it, and we will try to further grow the margin.
Thank you.
The next question is from Mr. Testa from One Investments. Please go ahead.
Yes. Hi, it's Peter Testa. I had a couple questions, please. One is just looking at Europe, where the organic EBITDA growth was lower and the conversion margin was very slightly down in 2015. During a very tricky environment, can you give some sort of conversation in terms of how you see the trend evolving through 2015 into 2016, on the conversion margin and on the growth side, what opportunities or concerns you have around growth in Europe, please?
Perhaps, Peter, first to remark on conversion margin. The conversion margin 2015 and 2014 was equal, both 39.2%.
Yeah. Exactly. Yeah.
There was no contraction there. We increased the EBITDA margin. We had some rationalizations in the portfolio. I think, Peter, my colleague, just commented on expectations for the near future, and we don't want to put a number on that.
I wasn't looking for a number, just understanding where you think you've got your biggest opportunities or concerns around Europe, it is still a tricky environment and just trying to look at how you read it.
That's right. I hope and think that what I quoted before in terms of where the chemical sector was in 2015, that has petered out now and that the effects of the lower oil price have been absorbed. We see also some positive trends again. We have seen, as I said before, some positive signs also in Europe in terms of growth. We added some product lines that come to fruition in this year. Overall, we have a positive feeling about where we are today. Again, it's very difficult in this environment of macro environment where central banks try desperately to put some growth in the market, where we have political turbulence to see how that evolves in the year.
I think if you look again to the fundamentals of our business, we feel that they are strong and that we have a lot of opportunity for growth.
Okay. On pricing, the minus four from last year. Can you give some sense of how that was trending through the year and maybe as you had your discussions with your main suppliers on 2016 price lists, how you see that set as you go into 2016?
I know that it's frustrating, this answer, but our product portfolio is so diverse that it differs from supplier to supplier. If you do products like acrylic monomers for BASF, then of course it's more price sensitive than if you do pharma products or personal care products. It's really an individual conversation with each supplier every time. Of course, it's also to a certain extent, dependent on the competitive situation per product line. It's just not a question that I can easily answer.
No, I appreciate that. I didn't know whether, just looking at your overall trends, whether you had any views or at a sort of high level on the trend, how it was going. You suggested that you saw some positive trends again, maybe in Europe as the chemical sector issue petered out and so on. Maybe suggesting-
Yeah. I hope that we have, let's say, possibility again, to increase prices. As I said before, in the U.S., it has been very difficult to increase pricing to the markets, and let's see how that's going forward in 2016.
Okay. Then on your U.S. operation, now that you've been through six months of cooperation and integration of views, can you give a sense as to how you perceive their readiness to support you on the M&A side, both in terms of any projects you may have or also supplying projects of their own?
Yeah, it's a good question. Very ready, I would say. Very excited to work with us to further expand the business. Very knowledgeable management team in Cleveland. Very well into, let's say, the market. There's great cooperation there in terms of identifying targets and going forward from there.
Okay, last, just a very short question. Sorry for the short-term question as well. Given that the market doesn't really know how these things work as well with you yet. Easter being very early, just so we're prepared when you do speak to us at the AGM. Easter being very early, is that something we should be cognizant of as impacting the business?
I don't think so.
Fine.
I don't think so.
Great. Thank you.
The next question is from Ms. Nathalie de Bruyn from Degroof Petercam. Please go ahead.
Yes. Good morning, gentlemen. Thank you for taking my questions. Actually, just an additional question on the holding cost. It increased by a few million this year, mostly due to investments in Rotterdam and Singapore, as you mentioned in the press release. I was wondering, what should we expect for the coming years? Is that something that is expected to further rise, with the company growing, or should we foresee some decline next year? Thank you.
Nathalie, I think fair question. I think there is always a relation between support functions centrally and the size of the group. If we would further, and that's the intention, if we further grow the activities of IMCD, you could expect more holding costs. The example Piet just mentioned in the introduction is that we just opened a support office in the U.S. to help us to further build the U.S. business. That's not for free.
No, certainly not, I was referring more as a percentage of revenue, something like that. Relative terms, not absolute.
No. I think in relative terms, the fixed cost base is there, and it will grow more or less in line with revenue, is my assumption right now.
Fine. Yeah, maybe just one question that pops up in my mind right now. You were talking about petrochemical derivatives, and I know that your portfolio varies from quarter to quarter and region to region, but could you give us a broad idea of the percentage of your products that would be linked to oil derivatives?
I've never done it, Natalie. Maybe we should, but I've never done it. Again, also, that would mean that if we would do it, you also have to look at how far away it is from the, let's say, basic chemical, and some of these products are far away. I don't want to go into there. Obviously, in certain products in our coating sector and general chemical sector, synthesis, as we call it, there are products coming from petrochemicals. Without that, we can't live. I don't have a percentage for you.
All right. That was just in case, thank you.
Gentlemen, there are no further questions.
Okay. Thank you very much.
This concludes the IMCD conference call. Thank you for attending. You can disconnect your line by hanging up the telephone. Have a nice day.