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

Ladies and gentlemen, thank you for holding, and welcome to the Full Year 2020 Analyst Call of IMCD. [Operator Instructions] I would like to hand over the call to Mr. Pieter van der Slikke. Go ahead, please, sir.

Yes. Thank you very much. Hello, everybody, again. As usual, sitting here with Hans Kooijmans, who will later take you through the numbers, and we will both answer your questions on the full year 2020 results. Now as we all know, it's now almost a year after many countries went into first lockdown. And I think we are now in the second or third here in Holland. And the world has changed dramatically. However, we stayed open. IMCD stayed open for business. And I'm very happy to say that our strong and resilient business model helped us through this year. Actually, we can present very good results, achieving again growth in all-important KPIs. I'll also go in more detail. But you have seen in our press release that our EBITDA increased with 13% versus 2019. And even with 16% on a constant currency base. Free cash flow grew with 27% to EUR 282 million. I think that's a record, and cash earnings per share with 13%. Many regions and countries showed strong growth where some who were affected by severe lockdowns, had a more difficult year. Also during this year, where we could not travel, we were able to acquire several attractive businesses. In Israel, China and India, we made important acquisitions, which fit into our strategy to globalize our pharma business. In Mexico, we increased our presence by acquiring 2 companies who will be both integrated into IMCD Mexico, and we expect a lot of that in the future. And in Brazil, we strengthened our presence in the food industry. We are very optimistic about the contribution of all these companies to our overall growth and strategy. I need to say that all this has been possible because of our fantastic people, many of whom work from home. I would also like to mention those who helped us in logistics, in our warehouses and kept our business going. Our IT and digital infrastructure also played a key role, and we have been able to further optimize our capabilities in this field. Yes, despite uncertainties in the outside world, we remain quite positive about our ability to grow also this year. Our business model proved to be strong, and we will benefit once economies turn to normal again. And with this, I would like to hand over to Hans to take you through the numbers of 2020. Hans?

Thank you, Piet. Thank you. Good morning, ladies and gentlemen. And earlier today, we published our full year results in the form of a short press release. And we further published our annual report, legible document. There's information about various aspects of IMCD's business model, including a lot of details about our financial performance. In this call, I will limit myself to a summary of the 2020 numbers, but I would like to start on Page 10 of the presentation. As you can see on this page, ForEx adjusted revenue increased 6% and gross profit increased with 11%. The increase in gross profit was a combination of 6% acquisition-related growth and 5% organic. The acquisition growth is the balance of the full year impact of acquisitions done in 2019, like DCS in Switzerland and Whawon, South Korea and more recent acquisitions done in 2020. For an overview of the 2020 acquisitions, I would like to refer to Page 8 of this presentation. Gross profit in percentage of revenue increased with 1% point from 22.3% in 2019 to 23.3 in 2020. And this increase is the result of gross margin improvement initiatives, the usual changes in local market circumstances, currency fluctuations and newly acquired businesses. All regions contributed to the margin growth and improved gross margin percentage. For your convenience, we included a line with an operating EBITDA comparison. And however, for IMCD's asset-light business model, combined with the impact of IFRS 16, the EBITA development shown in the next line seems to be more relevant to our opinion. Operating EBITA increased 16% on a constant currency basis to EUR 254 million. This increase was a combination of healthy organic growth and the first-time inclusion of acquisitions. The operating EBITA in percentage of revenue increased by 0.7% point from 8.4% in 2019 to 9.1% in 2020. The conversion margin, calculated as operating EBITA in percentage of gross profit, increased from 37.5% last year to 39.2% in 2020. The improvement in conversion margin is, amongst others, the result of improved gross margins in combination with lower operational expenses. On the next slide, Page 11, you will find a few key figures from the P&L for operating segment. Gross profit of EMEA in the first column increased 5%, a combination of 1% organic growth and acquisition growth as a result of the acquisitions of DCS in 2019 as Zifroni and Kokko-Fiber in 2020. 2020 gross profit margin percentage increased with 0.7 points to 25.4%. Operating EBITA in EMEA increased 6%, but the EBITA margin increased from 9.6% in 2019 to 9.9% in 2020. Gross margin in the Americas increased 11%, which is a combination of 10% organic growth and 1% as a result of the first-time inclusion of acquired companies. Margin growth, combined with disciplined cost control, resulted in a further improvement of the EBITA and conversion margin with respectively, 1.2% and 1.9% points. Then Asia Pacific, we had another good year, whereby they realized 36% gross profit growth. And this was a combination of 11% organic and 25% as a result of acquisitions like Maroon, Develing and Signet. The gross profit margin increased from 20.5% last year to 21.1% in 2020. Operating EBITA increased 53% on a constant currency basis, which was a combination of healthy organic growth and acquisitions done. EBITA margin increased to 10.5% and and conversion margin further improved to close to 50%. 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 increased from EUR 15 million to EUR 17 million and holding cost as a percentage of revenue remained stable at 0.6%. On the next page, you will find a summary of the P&L lines from EBITA to the net result for the period. Some general remarks about the sheet. The development of net finance cost and income tax expenses are summarized on the next 2 slides. But before we go there, amortization of intangible assets and related tax credits are both noncash cost items related to the amortization of supplier relations, distribution rights and other intangibles. The increase is mainly the result of acquisitions done. Then nonrecurring income and expenses of about EUR 5 million in both years, includes cost of M&A activities and costs related to one-off adjustments of the organization mainly as a result of post-acquisition integration processes. On the next slide, Slide 13, a breakdown of the 2020 finance costs, adding up to EUR 26 million, which is about EUR 1 million lower than previous year. This decrease is, as you could see, a combination of EUR 2.8 million lower interest cost related to our financing structure. Further positive changes in deferred considerations of EUR 2 million are reported on this line, and we experienced unfavorable currency exchange results, adding EUR 7.5 million to the 2020 finance cost. On Page 14, a summary of our income tax expenses. The reported increase of our regular income tax expense is EUR 5 million, which is an increase of 12% more or less in line with our reported EBITDA growth. 2020 tax [ credits ] of EUR 46 million compared to EUR 44 million in 2019. I would like to refer to our annual report for further details on tax and tax calculation. On the next page, the calculation of cash earnings per share and our dividend proposal. As you can see on this slide, we report EUR 3.22 cash earnings per share in 2020, which is EUR 0.37 or 1-3, 13% increase compared to 2019. At the AGM in June, we will propose a dividend of EUR 1.02 in cash per share, which means an increase of 13% compared to last year. This dividend proposal leads to a payout ratio of 34%, an increase of 2 percentage points compared to last year. Then on Page 16, a summary of IMCD's balance sheet. Property, plant and equipment slightly decreased and it's as a result of the asset-light business model still relatively low compared to the size of our business. Right-of-use assets is a result of the application of IFRS 16, and this EUR 68 million reflects capitalized operational leases. Intangible assets and related deferred tax liabilities are mainly a result of acquisitions made. Then there is a growing equity position of close to EUR 1.3 billion, covering 63% of capital employed. The increase in 2020 is a combination of a share capital increase the addition of net profit minus a dividend payment in cash in July last year of EUR 47 million. In September last year, IMCD successfully raised $400 million in share capital by issuing 4.4 million new shares. And the net proceeds of this new capital has been used to finance the acquisition of 70% of Signet and for general corporate purposes. So other balance sheet 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, the absolute working capital amount increased EUR 7 million. And this increase is a combination of EUR 74 million additional working capital related to 2020 acquisitions and a minus EUR 31 million as a result of exchange rate differences. Further, we report an operational decrease in 2020 of EUR 35 million of working capital. Working capital days based on year-end's balance sheet positions, end of 2020, slightly lower than end of 2019. On Page 18, a summary of our net debt position. At the end of 2020, we reported EUR 739 million of net debt, which means an increase of EUR 4 million compared to year-end 2019. Apart from the usual bond loans, Schuldschein and bank loans, net debt includes EUR 81 million of operational lease liabilities as a result of the application of IFRS 16. Further, under net debt, we reported about EUR 194 million of deferred consideration. Most of these deferred considerations relates to the remaining 30% of Signet that we will buy in 2024. On the same page, an overview of the maturity profile of our debt structure as per December 2020. Compared to a similar overview in last year, you may notice the increase in contingent consideration and the change in our revolving credit facility. We were able to increase the borrowing capacity on this revolver facility in March last year from EUR 400 million to EUR 500 million and extended the maturity from March 24 to March 25, combined with better terms. Reported leverage at the end of 2020 was 2.3x EBITDA, and the leverage ratio calculated based on definitions used in the loan documentation was 1.6x EBITDA. And which was well below the required maximum as set in 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 60 million to EUR 282 million, as mentioned before by Piet, whereby the cash conversion ratio increased to 109%. And this increase in conversion ratio is the result of higher operating EBITDA, combined with relatively low CapEx and a negative working capital investment. And on the last slide of this presentation, you will find the outlook in which, amongst other, indicate that IMCD sees interesting opportunities to increase its global footprint and expand its product portfolio, both organically and by acquisitions in 2021. So far, my summary of the 2020 figures, and Piet and myself are happy to answer your questions.

[Operator Instructions] And the first question is from Mr. Matthew Yates, Bank of America.

I wanted to ask about your outlook statement and the reference to interesting opportunities, both organic and externally. I guess, from memory, following you guys for a while, is that the same statement you've generally made at this time of year? Or is there anything about the opportunity set you're looking at, at the moment, that's particularly stronger or weaker than you thought in the past? And maybe as a somewhat related question. The Q4 results, obviously very distorted from the catch-up effect from shutdowns earlier in the year and, I guess, widespread restocking. You mentioned you did 10% organic profit growth in the U.S. last year. Any sense of the traction you're getting as we annualize now a year of your platform launch. I would imagine that profit growth is stronger than the end markets, so your competition would have realized.

Okay, Matthew. On the outlook, as far as I know, I think it's the same wording as we use. And we have discussed it in the -- let's say from the start of our listing, we don't give both outlook statements. I mean we have to emphasize the strength of our business model our track record, our ability to grow even in the difficult circumstances. And that's as far as we go. And I think in the course of the year, we become slightly more specific, but we don't see any, quite frankly, any benefit in forward-looking statements, also, let's face it, because of the limited visibility in the future. But nevertheless, I've indicated also in my contribution that we look positively to the world. On your second question, I'm not totally sure if I got it. You mentioned that in the fourth quarter, you -- element of restocking. I think these elements are always very difficult for us to gauge. But I think there could be truth in that. We had a particularly strong fourth quarter. We have to see how that evolves in this year. But until now, I don't have indications that, that -- let's say, that, that trend is reversed, so to say.

Can I just follow-up then on a the opportunity set, as you said, that's standard language that you use. Do you do you think, at the moment, that opportunity set is bigger than it's been generally in the past, i.e., the crisis is creating opportunities you can take advantage of? Or is it just normal course of business?

No, I would say, normal course of business. It is, of course, the case that as we become more global and more stronger in certain regions that we get opportunities to add product lines in those regions. So we have definitely a positive traction with new product lines and suppliers. So in that sense, we remain optimistic about the opportunities that we get. Our organization in North America, countries like Brazil, where we have a very strong setup or Canada, so we have a lot of opportunities, I would say, in many regions, Asia, as I mentioned, the new opportunities we get through our acquisitions. I mean, as you know, the synergies that we get from acquisitions are very often not so much direct cost synergies, but very often, synergies, top line synergies, supplier synergies shall be really positive about the possibilities that, that gives us going forward.

The next question is from Mr. Mutlu Gundogan, ABN AMRO.

Yes. A few questions. The first 2 on Asia Pacific. So the first question is your organic gross profit growth was 18% in Q4 versus 10% in Q3. Can you talk about the phasing throughout the quarter? And which countries product categories you saw this acceleration of growth? The second question is also in Asia Pacific. So if my numbers don't fool me, I think your OpEx declined 25% year-on-year organically. Is that correct? And if so, can you tell us what that was? And then thirdly, on inventories, I'm a bit surprised to see lower inventories, both year-on-year and sequentially, especially considering the acquisition of Signet and the reflation we're seeing in the world. Can you tell us why that is?

Yes. So maybe I'll take the first question, and then Hans will go on with the other ones. I think on Asia Pacific, I think, overall, we saw very good growth, both in Australia and New Zealand. Although a country that was subjected to lockdowns as in the Asian countries, China, particularly. I think that if you look at categories, as you know, we are more, let's say, skewed to life sciences in Asia Pacific. Pharma is strong, food is strong. And we consider the [ goals ] in this area. So I would say in most of the countries, we are active. We saw this trend. And it's very positive. And of course, pharma contributed considerably to this. Mutlu, I missed you a bit on your calculation of the OpEx around cost side. But I think if you look -- if you compared your own cost structure this year versus last year, as on the one hand, we slightly increased the number of people, adding additional cost to the structure. At the same time, we saved quite some cost on cost lines like travel, exhibitions, PR and these type of things. And as a balance, I'm not sure if you were referring to Asia Pacific specifically, but I don't see a decrease of 25% organically in Asia Pacific.

Yes, let me take that and maybe get back to you on that one.

Yes. Looking at stock levels, I think we -- during the COVID crisis, we made a big effort in optimizing and originalizing internally about stock levels that we have and try to become more efficient. So they've helped us to -- in certain areas to bring stock levels down for quite an amount. At the same time, we benefited from exchange rate differences. I indicated more than EUR 30 million of exchange rate gains. And what you also could see on my working capital base, is that on the debtor side, we did pretty okay given the market circumstances. The combination of that resulted in the working capital position that we reported at year-end.

The next question is from Mr. Qurijin Mulder, ING.

Yes, a couple of questions. My first question is about the sectors in, let me say, in the more industrial parts, did you see the recovery of the automotive taking place in the latter part of, let me say, 2020? That's my first question. And then my second question is, you're also doing a lot of excipients and a lot of things in the pharmaceutical industry. Is there anything to say about excipients are you're delivering for big pharmas who are involved in these whole vaccinations? Is there anything you can say about that?

Okay. On the first question, Quirijn, I think, as you know, we -- let's say, the automotive because that was the question on the industrial sector is, of course, a very important sector in many countries and has also an effect on our business because of the advanced material sector that we have, but also its growth in sector, that has been affected, of course, over the years, but we saw indeed both sectors strengthening in the latter part of the year. Of course, we are a bit farther away from the direct automotive sales so -- in the chain, but we saw positive traction in the latter part of the year. So -- and I guess that will be continued going forward. On the pharma, I can -- I mean, we would have reported, I guess, if we would have a big boost from vaccine production, but we are not -- as far as I know, not in any let's say, vaccine production involved with our products.

Okay. And my final question is about Brexit. Was there any impact in the fourth quarter because of the Brexit for you in terms of...

I think you could say that as many other companies also outside of our sector have reported that there was stock building, in the U.K., going on. So that should have also a positive effect on our results. But generally, so we saw that, but it's not so material that, that has, let's say, materially affected our total results.

The next question is from Mr. Rajesh Kumar, HSBC.

Two, if I may. When you look at 2020 performance, obviously, it has been very credible in terms of growth. Are there any pockets of growth that were either directly or indirectly driven by the pandemic-related products. be it cleaning -- I know a question about vaccine has been asked earlier, but anything in your mind that comes -- which potentially you need to reflect when you're costing our estimates as a difficult comp and not projected on an ongoing basis? And the second question is on the supplier synergies. Obviously, you now have a next large global footprint. You've always said that you're able to -- one of your growth levers is to cross-sell products between different suppliers. When -- how has the nature of the discussion with the supply changed as your footprint grows on a geographic basis, but also due to the pandemic?

Okay. Rajesh, the first question, in terms of growth, I think we reported also during 2020, that the -- our pharma business has been strong, I guess, in particular, in the first period of the year, maybe the first 6, 7 months. So I guess that is -- there has been some anticipation with pharma companies to ensure that they have sufficient material, it's -- again, it's very, very difficult for us to estimate the volumes and the amounts. But I think that it's fair to say that, that business was positively affected, whereas other businesses, of course, were negatively affected. So -- but that is also, I would say, testimony to our model that we have segments that also dampen downturns or even give us a boost in an upturn. So it's something that we have said all along for many, many years about, let's say, the stability of our business and the resilience of our business. I think 2020 is absolutely an evidence of that. But if you look at the different sectors, I could summarize your question, I think pharma had a good year. On supplier synergies, I think what suppliers are looking at is when they outsource, it's a trustworthy partner. They have credible on-the-ground capabilities. And I think that what we do -- what we try to do when we enter new regions or markets is to have credible organizations. And of course, I mean people ask us sometimes that you're an acquisition machine. I mean, it has -- the objective is, of course, to have a credible local organization and then with IMCD overall capabilities to organically grow locally. And I think in our conversations with suppliers, let's say, the context that we have with our suppliers, to trust that it's -- between us allows us to then expand with suppliers of different parts of the world. And I think that is -- has that changed because of COVID? I don't think necessarily that has changed a lot. I think the conversations are more or less in the same way. And I would maybe only say the capabilities of us to reach out to customers, for example, also digitally, we have invested a lot in that. I mean not so much only to -- for them to place orders because that's not the key of it, but more to have contact with them, to have webinars, to have virtual exhibitions where we show -- where we can invite customers as physical exhibitions are not possible anymore, helps us, of course, to have contact with customers. And that in itself is, of course, also important when you make decisions on outsourcing. So I think the scale that we have here, the IT infrastructure, the digital infrastructure helps us also in this difficult COVID time. I hope this gives you a bit of a flavor of what we do.

No. It does. That really gives us something to go by. Just on the other group of suppliers, you outsourced quite a lot of your freight and warehouse work. Have you had a difference in discussions with them? Because obviously, freight inflation is coming through. So with your scale, do you see any positive discussion in certain environments?

No, I think what we experienced, but I think everybody else as well is on the logistics side, so the transport, in particular, is that we see shortages here and there are increasing prices. And yes, that is something that we have to pass on to the market.

And how quickly are you able to pass it on?

Very quickly. And I think that's also one of the benefits of having our systems. We can do that, I would say, one-on-one, but almost immediately. And I think that -- let's say, the margin shows that also. We don't see a negative effect of that on the margin.

The next question is from Mr. Daniel Hobden, Crédit Suisse.

And already just asked the majority of mine. Just one left from me, please. It's around your gross profit organic growth. I was just wondering if you could say something around what's driving that? Is it new clients you've seen increased outsourcing penetration? Or was it driven mainly from the existing client base?

Well, maybe this is not a very satisfactory answer, but it's a little bit of everything. I think very important, of course, for us always is to benefit from increased outsourcing or to cross-fertilized suppliers into, how do you say that nicely into new regions. It remains, of course, extremely important also for us to grow the business on a customer level. And that's, of course, the whole point in -- for us to increase our penetration in the -- on the customer side. What I forgot to mention is also that we do now quite a lot of digital marketing campaigns to reach out to customers. So I would say, and again, it's -- we have to turn many screws, so to say, suppliers, customers, new product lines, benefit from outsourcing. These are the levers that we use for organic growth.