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

Good evening, ladies and gentlemen. Thank you for holding, and welcome to the analyst call of IMCD N.V. [Operator Instructions] I would now like to hand the call over to Mr. Pieter van Slikke, CEO. Go ahead, please, sir.

Good night, everybody. I'm sitting here with Hans Kooijmans. In front of you, I guess you have the IMCD analyst presentation regarding the acquisition of Signet. I don't want to take you through the whole presentation, but we'll give you some headlines about the strategy and the rationale of this acquisition. As you know, our business group pharma is a very strong part of IMCD, and we are in many parts of the world present in the distribution of pharmaceutical excipients, products that are used in tableting and all kinds of creams and gels. Our supplier base is mostly companies based in the U.S., in Japan, in Europe, and we have a lot of formulation expertise in this field. Now our strategy has been to globalize this business as much as possible. And we have -- in the last 12 months, we have done quite some acquisitions in this space. And you can see that also in the pack. We acquired businesses late last year in South Korea, in Switzerland, in Colombia, in Israel, recently in China and also recently in South Africa. We have very strong technical capabilities. We have labs in Shanghai, in New Jersey, in the U.S., in Germany and in India. And our central pharmaceutical business group is quite strong. One of the largest, if not the largest, markets for pharmaceutical manufacturing is India. And although we have a presence in India, it's not large. And we always have looked for opportunities to expand our presence there. The company that we speak about today is Signet. Signet is a company that has been formed and founded in 1986 and has grown into becoming one of the leading pharmaceutical excipients distributors in the country, in India. It has done so organically, so it hasn't done itself any acquisitions as far as we know. We know this company, the founder and the key management already for many years. And we have always contemplated the possibility to acquire the business as and if it would come for sale. And this year, that was the case. So we participated in the process, and that fortunately has been successful. Signet is, as IMCD, an asset-light company. It is based in Mumbai. It is working with all the leading excipient producers, suppliers in the world -- or many of them, not all, of course, and is serving the Indian pharmaceutical manufacturing markets. It's a company with a very, very similar DNA as IMCD. So it fits perfectly in our global setup. Now the deal structure, Hans will probably say something about that in a minute, but the deal structure is that we buy the company in 2 pieces. The first tranche is 70% of the shares, and the second tranche is 30%. And that will be acquired, finally, at the latest in 2024. Sorry? Somebody -- the founder of the company will continue to supervise the company, and the key management will be in place. Finally, on this part of the presentation, I can say that the company will continue as Signet for a few years but will be part of our business group pharma -- global business group pharma. Hans, do you want to add something to the deal structure?

No. I think everybody could read in the data pack that we provided a summary of the transaction details, and I don't think it makes sense to read them out loud. So if there are any questions around that -- and perhaps most important is that we expect -- the closing of this transaction, subject to the customary closing conditions and regulatory approvals, is expected to take place in the fourth quarter of this year.

Perhaps to add to that, the company is predominantly active in India but has also some business in adjacent territories in Bangladesh, in the Middle East and in Africa. We don't expect cost synergies out of this business -- in this business. But as often in -- within IMCD and its acquisitions, we hope to benefit from each other's knowledge of, of course, the market but also of the supplier relations that we have. And we hope we can also expand in adjacent markets jointly. So I guess that's a short summary of the deal. So great strategic rationale, a fantastic company, a great fit for the business group pharma. And it makes us a leader in pharmaceutical excipients distribution in many parts of the world. So what I would suggest is that we now give the floor to you for additional questions.

[Operator Instructions] Our first question is from Mr. Mutlu Gundogan of ABN AMRO.

Congrats on the acquisition. It looks like a nice one. I have 4 questions. If it's okay, I'd like to go through them one by one. So the first one is the profitability of Signet. They have an EBITA margin of 26%, which is 3x more profitable than yourself. Can you explain how they are able to be so profitable?

Yes. Mutlu, Hans here. You're right, the EBITA margin is higher than the group average. It's a combination of, on the one hand, a cost structure in India that is, on average, much lower than what we typically see elsewhere in the group. The other thing that we see is a gross margin percentage that is slightly higher than the group average. By in itself, that is not an abnormal margin, and it's also a margin that we see in various other countries and territories in the group. And these 2 create an EBITA margin that is above group average.

Right. And I saw in the presentation that Signet is also asset-light just like yourself. Does that mean that the returns are also 3x higher than IMCD's?

I'm not sure I've got...

Sorry.

I missed you there as well.

Yes. So if we, for example, look at return on invested capital, what I'm actually wondering is the capital intensity given the fact that you mentioned it's asset-light as well. I mean you are asset-light. Signet is asset-light. Does that mean because their EBITA margin is 3x higher than you that their returns are also 3x higher?

Yes, that is -- so you're right with respect to the EBIT margin. They don't -- they outsource logistics. And that means that basically, if you look at our balance sheet, the most important thing that you'll find there is a working capital, yes. And that is basically the only investment people need to make in case they grow their business.

Right. Okay. And then a question about growth rates. So can you talk a little bit about historical growth rates, about future growth rates that you expect from the business? I assume that this is based in India, emerging markets. It might have a lot of high-growth rate.

Yes. I think there is -- you can find some of that on the website of the company. Maybe as an addition to, let's say, the market that they serve, they serve the markets for -- with customers that produce for overseas, so for export. So Western markets, U.S., Europe. So their customers. Certainly, yes, you can expect higher growth rates than in the mature markets in Europe and the U.S. Past growth rates were very, very high. I would say -- I can't predict, of course, let's say, the future growth rate, but it's higher than usual in our business group.

Yes. Yes. Okay. And then final question. No price has been mentioned in the press release, in the presentation. We know that you historically have paid around 10x EBITA, but obviously, that can differ depending on the type of business. Can you give us an idea of what you're paying here?

Yes. Mutlu, we agreed with the seller not to disclose the purchase price. But I think based on the data that we provided in our half year results and in this press release, I think you could calculate easily what the valuation is. Perhaps to help you there a bit, at the end of June, we reported 2.9x leverage under IFRS with 600 -- sorry, EUR 768 million of net debt. This transaction will add an EBITA level of EUR 39 million. As you know, under IFRS, if you have control that, on the one hand, you need to fully consolidate the company and the results of the company. But at the same time, you need to include the remaining 30% of the purchase price as a net debt obligation on your balance sheet. So in the pro forma leverage of 2.8x that we report, that includes the 30% -- the expected valuation of the 30% that we will pay in the second tranche in 2024. So I think with these data points, you could make a bit of a guess of the valuation.

Next question is from Mr. Peter Olofsen of Kepler Cheuvreux.

A brief follow-up on this question on the leverage. So it includes the contingent payment, but is it based on the definition in your loan documentation, i.e., before IFRS 16?

No, this is IFRS based. It's all IFRS. And in the loan documentation, the definitions are, of course, different. And that results in a much lower leverage level in the loan documentation.

Yes. So this is including IFRS 16. But then you referred to the 2.9x at the end of the first half. So basically, you're maintaining the leverage at the same level where it was. Have you considered going higher? Also considering the room that you have based on your governance, also by considering the track record that you have built in recent years as a listed company in terms of growth and cash generation, so why not maybe going a bit higher?

We considered all options, Peter, but we felt in the end that this is this is the best choice. And we can debate, and I'm not sure if we should do that now for everybody, but I mean we can debate what is the ideal number that we felt given also our future ambitions that this is the right number.

And then you referred to future ambitions. Basically, that means you want to keep some firepower for other deals?

Yes. Yes.

Next question is from Mr. Matthew Yates of Bank of America.

Apologies, I'm sort of trying to play catch-up on some of the documentation. I have 2 questions. I guess the first one is around the margins. It is somewhat unusual that we're used to you buying a lower-margin business and bringing it up to your level. So in this instance, you're obviously buying something that's much more profitable. So any value creation has to come from the top line opportunity. So are you able to elaborate a little bit on that? And then secondly, to the extent you can comment just on the transaction process. It's not unusual for owners to retain minority stakes in some of the assets you've bought over the last few years. But can you just talk a little bit about maybe their motivation for wanting to retain some exposure? And is there any kind of earn-out payment here that could influence the ultimate price you're paying?

Yes. On your first question, I think it's not, let's say, normal or always the case that we only buy companies with a lower EBIT margin. I bring to memory also the business we bought -- the first business we bought in the U.S. with also a very high EBIT margin. Not as high as this one but also high. But you're right, it's clear that future, let's say, growth and synergies need to come from growth of revenue but also to -- from addition of new suppliers to the business because we have a fantastic franchise there that allows also to plug in new suppliers and also the benefit that we will hopefully get from this company in other markets. And I'd point out that we started in the Middle East, a few years ago in Egypt, also in pharma, which is doing very well, but also in the Gulf region. And I'm pretty sure that -- so we also have -- we'll see synergies there, Bangladesh. So I think you should see this growth in local market but also growth in adjacent markets as our objective.