IMCD N.V. (IMCD) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for holding, and welcome to the IMCD Analyst Call Full Year 2019 Results. [Operator Instructions] I would like to hand over the conference to Pieter van Slikke. Go ahead, please, sir.

Thank you very much. Hello, everybody. I'm here as usual, with Hans Kooijmans, our CFO, and we will answer your questions in a few minutes. First, some remarks from my side and then Hans will take you through the key financial numbers. We are happy with our achievements in 2019. We delivered another year of growth of all important KPIS. Not as spectacular as in 2018, but then again, our growth pattern has never been linear. Notwithstanding this, we grew EBITDA with 11% and produced record cash flow of EUR 222 million. Cash earnings per share increased again double digit with 13%. Perhaps more importantly, we prepared ourselves in 2019 for future growth. In the U.S., we finalized the integration of E.T. Horn into IMCD U.S. and we operate now as one organization in this continent with one IT platform. In Europe, we completed the integration of Velox. Not an easy operation, as we had to reduce the number of staff of the Velox organization and change working methods. We were able in 2019 to acquire businesses that opened up new regions like Colombia and South Korea and/or strengthened existing market segments and regions. We are positive about the number of potential new projects with suppliers, which will drive future growth. And finally, we made good progress on our digital infrastructure, which will enhance and improve our ability to serve our principals and customers. All these aspects make us positive about future growth. Looking to the outside world, there are, of course, the usual uncertainties but this time also a very unusual one, which we're all familiar with, is the coronavirus, and we have to see how that develops in the future. I'm now giving the floor to Hans to take you through the numbers.

Thank you, Pieter. Good morning, ladies and gentlemen. Earlier today, we published our full year results in the form of a short press release. We further published our annual report and legible documents with information about various aspects of IMCD's business including a lot of details about our financial performance. The annual report is a document that I would like to recommend heartily. In this call, I will give you a short summary of the 2019 numbers, but I would like to start on Page 10 of the presentation. As you could see, revenue increased 13% and gross profit 12%. The increase in gross profit was a combination of 1% organic growth, 10% acquisition-related and a positive ForEx impact of 1%. The acquisition growth is mainly the full year impact of 3 acquisitions in 2018: E.T. Horn in the U.S.; Velox in EMEA; and Aroma in India. Further, acquisition growth includes the limited impact of 2019 acquisitions, and as you could see on Page 8 of the presentation, most of the 2019 acquisitions were either relatively small or have been done towards the end of the year. Gross profit in percentage of revenue slightly decreased from 22.5% in '18 to 22.3% in '19. During the year, we experienced the usual fluctuations and differences in margin percentage between regions and quarters, and this was, as usual, caused by product mix differences, local market circumstances, currency fluctuations and, last but not least, the impact of the newly acquired businesses. For your convenience, we also included a line with operating EBITDA comparison. And as mentioned in previous calls for IMCD's asset-light business model, the EBITA development shown in the next line is more relevant. However, EBITDA seems to be an important KPI despite the enormous impact of IFRS 16, the new lease accounting standard, on this KPI. What you will notice is a substantial improvement in EBITDA margin from 8.7% to 9.2% and much more EBITDA growth than EBITA growth, and this has to do with about EUR 20 million additional EBITDA as a result of the implementation of IFRS 16. For further details on the impact of IFRS 16 on our 2019 figures, I would like to refer to Page 110 and further in IMCD's annual report. Operating EBITA increased 10% on a constant currency basis to EUR 225 million. The operating EBITA in percentage of revenue remained more or less stable at 8.4%. The same applies for the conversion ratio with 37.5% this year compared to 37.7% last year. This means that the expected substantial negative impact on these 2 ratios as a result of the acquisition of Horn and Velox, acquisitions with, on average, much lower EBITDA margins than group average, has been compensated by a combination of improved performance in the acquired businesses and EBITA margin improvement in the rest of the group. On the next slide, Page 11, you will find a summary of the financial details per operating segment. The EMEA figures in the first call were impacted by more difficult market conditions in several important countries and the full year impact of the Velox acquisition. Gross profit increased 6%, a combination of minus 2% organic growth and plus 8% acquisition growth. 2019 gross profit margin of 24.7% was close to the 24.8% in record year 2018. Operating EBITA in EMEA decreased 1%, whereby the EBITA margin decreased from 10.3% in 2018 to 9.6% in 2019. The full year impact of the Velox acquisition with a 3% EBITA margin on EUR 150 million full year revenue, which is much lower than IMCD's average EBITA margin, was one of the main drivers of the decrease in EBITA and conversion margin. Gross margin growth in the Americas, in the second column, is a combination of 2% organic growth and 16% as a result of the first time inclusion of acquired companies. Most of the acquisition growth relates to E.T. Horn acquired in August '18. Operating EBITA increased 24% on a constant currency basis, and it's fair to assume that half of this EBITA growth is organic growth. Operating EBITA margin and conversion margin in the Americas improved in 2019 despite the substantial full year impact of the Horn business with a relatively low 4% EBITDA margin in the year of acquisition. Asia Pacific had another good year and realized 10% organic gross profit growth, and the gross profit slightly decreased from 20.9% last year to 20.5% in 2019. This decrease in margin percentage was mainly the result of the sale of the Muskvale business in Australia, a small business with 60% gross profit on EUR 4 million sales. Operating EBITA increased 13% on a constant currency basis, and more than half of this growth was organic. EBITDA margin slightly decreased and conversion margin stayed at a high 2018 level of 44.4%. And in the last column, you will find in the holding companies all nonoperating companies, including the head office in Rotterdam and regional support offices in Singapore and New Jersey in the U.S. The absolute amount of holding cost decreased from EUR 17 million to EUR 15 million. And this decrease is a combination of the positive impact of about EUR 4 million as a result of the first-time application of IFRS 16 and about EUR 2 million additional cost as a result of a further strengthening of IT and other support functions in both Rotterdam and the regional head offices. Holding cost as a percentage of revenue decreased from 0.7% in '18 to 0.6% in 2019. Then on the next page, there, you will find a summary of the P&L lines between EBITA to the net result for the period and some general remarks. The development of recurring net finance cost and income tax expenses are summarized on the next 2 slides. But before we go there, first, amortization of intangible assets are noncash costs related to the amortization of supplier relations, distribution rights and other intangibles. And most of these intangible assets relate to acquisitions made. Then nonrecurring income and expenses in '19 include about EUR 2 million income related to the sale of real estate and the divestment of Muskvale. Further, it includes nonrecurring costs related to M&A activities and costs related to one-off adjustments of the organizations. The nonrecurring tax expenses in 2019 are one-off tax costs related to restructuring and reorganization of acquired businesses. And last but not least, nonrecurring net finance costs in 2018 had to do with IMCD's refinancing in Q1 of last year. Then on the next slide, Slide 13, a breakdown of the net finance cost. In 2019, finance costs were about EUR 8 million higher than previous years. And this increase is, as you could see, a combination of: EUR 2.4 million higher interest costs related to, on average, higher net debt positions in 2019. That is, of course, mainly as a result of the timing of acquisitions during the year; EUR 2.7 million finance cost; and further, we had unfavorable currency exchange results in 2019, adding another EUR 2.7 million to the growth. On Page 14, a summary of our income tax expenses. The 22.2% blended tax rate based on regular income tax as a percentage of EBITA minus finance and nonrecurring cost is about 3% lower than previous years. This is mainly a combination of mix effects and the fact that we didn't do well for tax purpose in certain countries where we did substantial acquisitions. And the mix effect is a combination of changes in local tax rates and lower profit than last year in countries with relatively high tax rates and vice versa. Tax cash out in 2019 was EUR 44 million compared to EUR 43 million in 2018. And I would like to refer to the annual report for further details on the tax calculations. On the next page, the calculation of cash earnings per share and our dividend proposal. And as you can see on this slide, we report EUR 2.85 cash earnings per share in 2019, which is 32% or 13% increase compared to last year. At the AGM in May, we will propose a dividend of $0.90 in cash per share, which means an increase of 13% compared to last year. And this dividend proposal leads to a payout ratio of 32%, which is similar to last year. Then on Page 16, a summary of IMCD's balance sheet. Property, plant and equipment slightly increased but still relatively low compared to the size of our business as a result of the asset-light business model. Then the right of used -- right-of-use assets, that's a new one in 2019 and the result of the application of IFRS 16, and this EUR 61 million reflects capitalized operational leases. Intangible assets and related deferred tax liabilities are a result of acquisitions made in our history as private equity owned company. Then there is a growing equity position of EUR 867 million covering 54% of capital employed. And the increase in equity is mainly the balance of a net result of EUR 108 million and the dividend payout in May last year of EUR 42 million. The two other lines, working capital and net debt, are summarized on the next 2 pages. On Page 17, you will find a summary of the absolute amount of the various working capital components, and these absolute amounts translated in days of revenue. As you can see, the absolute amount increased with EUR 36 million, which is a combination of EUR 30 million related to the 2019 acquisitions and EUR 6 million exchange differences. The operational increase in 2019 working capital was neglectable. Working capital days based on year-end balance sheet positions were more or less stable compared to 2018. Then on Page 18, a summary of our net debt position. At the end of 2019, we report EUR 735 million net debt, which means an increase of EUR 125 million compared to year-end '18. This increase includes EUR 75 million of new debt as a result of the application of IFRS 16, and further, it includes EUR 38 million of deferred and contingent considerations related to acquisitions made. And on the same page, an overview of the maturity profile of our debt structure as per the end of December 2019. Reported leverage at the end of '19 was 2.8x EBITDA. The leverage ratio, calculated based on the definitions used in the IMCD loan documentation, was 2.6x EBITDA, and that was well below the required maximum as said on the loan documentation. I would like to finish the financial summary with the cash flow overview on Page 19. As you can see, the absolute amount of free cash flow improved with EUR 56 million to EUR 222 million by the cash conversion ratio increased to 97%. The increase in conversion ratio is the result of higher operating EBITDA combined with relatively low CapEx and working capital investments. The changes in depreciation and lease payments that you see on the sheets are IFRS 16 related. And then on the last slide of the presentation, you will find the outlook in which we, amongst others, indicate that IMCD sees interesting opportunity to increase its global footprint and expand its product portfolio, both organically and by acquisitions. I would like to give back to the operator to open the lines for questions that we are happy to answer.

[Operator Instructions] The first question is coming from Mutlu Gundogan, ABN AMRO.

Three questions, if I may. First on EMEA. Your OpEx is down 4% in the fourth quarter to EUR 47 million. Was that because Q4 '18 was exceptionally high or because you were able to bring down your cost? So that's the first question. Secondly, on the outlook, can you talk a little bit about your outlook for the year? I mean you already made some remarks about corona. Do you expect organic EBITA growth? And if so do you expect it to be in line with your long-term average, especially considering that the last 3 quarters have been below that? And if I may add to that, how do you expect that growth to develop throughout the year as most chemical companies expect an earnings decline in the first half and hope for a recovery in the second half? I know that's a very long second question, so bear with me. The third question on acquisitions. Can you update us on the integration of E.T. Horn and Velox? You said a few words in your opening remarks. I mean what kind of further cost and revenue synergies could we expect?

Mutlu, perhaps I should take the first one on OpEx. Q4 in EMEA, indeed, a bit lower than last year in the same period. 2018 was a record year, and that also meant that we paid a bit more bonuses to our employees, and you've seen that a bit more in the last quarter of last year. So we saved a bit on bonuses, and we were careful in filling vacancies in the last quarter. And we show a little bit of the benefit of the Velox integration in the existing cost structure in EMEA, and that helped us to save a little bit on the cost side. Outlook, Pieter?

Yes. Mutlu, outlook is, of course, very difficult to answer because we don't give any other outlook than the one that we worded out in our press release, and I don't want to elaborate on that further. You mentioned that many companies see the first half as depressed than the second half, but I don't know how they know that. It's very difficult to tell. Historically, of course, our company has another pattern. First half is better than the second half. And I think I will be surprised if we see a change in that, depending, of course, on what happens in the outside world today. Growth. The company -- IMCD always has been on a growth path. We have given long-term guidance on that and we don't change that. So we are still positive about the possibilities of growth. And then acquisitions, E.T. Horn and Velox. Yes, I think to integrate in the U.S., to become one company from coast to coast, to build market segments from coast to coast, to put everybody on one platform, to ensure that our compensation schemes are uniform, et cetera, has been, of course, an enormous amount of work. And what we now do is, of course, try to convince our partners and suppliers to work with us in the U.S. on a nationwide basis. And I think we are set for that. We are organized for that and that makes a big difference. So that is an important step. And over time, and you can never predict how fast that is, we will see the benefits of that. Velox is a -- for us a bit of an unusual integration in the sense that we felt that this company was overstaffed and had also a model that was different from ours. So we had to reduce the staff numbers quite considerably throughout the year, and that has been realized. So also there, we will see positive benefits in the future.

Maybe a small add-on on those 2 acquisitions. I know you don't break it out once you have integrated the businesses, but can you talk a little bit about the margin of these acquisitions versus the old business that you had both in Europe and in the U.S.?

Yes. I think for us, it's a bit easier with the Velox integration. I mean the margin there, the gross margin, has been relatively on a level that we found satisfactory. We tried to increase, of course, more. I think in the U.S., we have more work to do and -- on the E.T. Horn side, E.T. Horn suppliers, yes, to maximize the value of the products that we have, and we made good progress. So that continues for us to be, let's say, a challenge and also an opportunity to increase margin further, but we work hard on that.

The next question is coming from Peter Olofsen, Kepler Cheuvreux.

My question is actually a follow-up on Mutlu's question on the integration efforts. So first, in EMEA, you put out this press release, I think, in October about the integration, which I think mainly related to the commercial organization and the back office systems. But I think you still had to deal with the former headquarters of Velox. Has that been addressed in the meantime? And if so does that mean that there is a further improvement in the cost level going into Q1?

Yes. So Velox has its head office in Hamburg. Of course, the number of people, the staff numbers have been reduced. We are looking at, let's say, the possibility to further optimize, so to say, the cost situation. So there may be some more gains to be made, but that is not -- let's say, the bulk of cost savings has been down. And some further optimization is always possible, and that's what we're looking at. We will keep an office in Hamburg, like we had already. So we combine these 2, but of course, we still have a number of people there.

Okay. And then on the U.S. integration, which was also completed in Q4, to what extent has that really resulted in lower cost levels? Or have these savings been reinvested in the business, for instance, in commercial people, et cetera?

Yes. I think the integration in the U.S. is less and a cost-saving operation and much more, I would say, strategic move, so to say, too. So cost savings have been made, but that has not been the purpose of this whole exercise. And indeed, we are looking very, very carefully at our, let's say, sales power, so to say, in the U.S. in the different important centers of where our customers are located. And yes, we add salespeople because that, of course, increases our attractiveness and our credibility in that market. So again, this has not been a big cost-saving operation.

Okay. That's helpful. Then maybe on the gross profit development, the organic development there. It seems that in Q4, the organic gross profit growth was slightly stable to maybe slightly positive. Can you confirm that was indeed the case? And can you also shed some light on how it developed by region?

It was -- it was indeed slightly positive. And the breakdown per region, I think it's -- if you read through the numbers, then it's fair to assume that in North America and -- so in the Americas and APAC, we saw a positive growth number and a very small negative one in EMEA in Q4.

Okay. And then my final question is on industry trends. Clearly, 2019, from an economic perspective, it was a difficult year. Have you sensed in your conversations with suppliers any changes? Are they now maybe more open, more actively looking to outsource more? And maybe they've become -- they seek further options to rationalize their distribution and are looking to reduce the number of distributors they work with? Have you sensed any change in 2019 compared to earlier years?

It's a good question. It's also very difficult to answer. It will because this is, of course, a very big market with many, many actors on that market. I think it's safe to say that we feel that -- and that's also what I said in my opening remarks, that we see positive traction in projects that we have. I am convinced that this is a remark that I've made earlier. Also I am convinced that, let's say, the model that we have is, let's say, positively received, and let's say, also from that point of view, we will further consolidate. And I'm pretty convinced about the fact that suppliers want to rationalize further their channels and want to use those parties that are able to work with them in partnership in bigger regions than only, let's say, part of the U.S. or part of Europe or whatever. So in that sense, I think we have -- let's say, we are very positively established to receive and to benefit from this trend.

Our next question comes from Mr. Matthew Yates, Bank of America.

Just very quick one and I'll get -- let you get back to running the business. But the margins in Q4, I know the business doesn't have a significant amount of operating leverage. And as you said in your introductory remarks, the margins are usually driven by mix more than anything. But was there any benefit in the quarter from falling input costs? Or is this principally to see the acquisition synergies coming through that explain the margin development?

Matthew, it is always more complicated. There is an enormous amount of things having an impact on the quarterly margins per region. I think what we saw in general, that the gross profit margin was slightly higher than the same period as last year. We saw that in most of the regions. And what you see there, it's a bit mixed. It's a bit the impact of optimizing your portfolio, it's a bit availability of products and so on and so forth. So with this -- if I look at the underlying details, I always see a lot of fluctuations there. And the outcome was pretty positive in Q4 compared to the last quarter last year.

The next question is from Steven Goulden, Deutsche Bank.

Just in terms of the main catalyst of Q4 growth, just trends that you're seeing now, can you just give us a little bit of a feel for underlying health and resilience within the life science and art, and then what you might be seeing on the industrial side? And within that, it would be really interesting to get any color on whether or not you're seeing a bottleneck of autos, whether that's potentially been trying to come back? Any comments on the -- what you think about that?

Well, your line was very bad, but I, let's say, picked up that you want to hear a little bit about life science versus industrial markets and the underlying trends. I think...