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

Good morning, ladies and gentlemen. Thank you for holding, and welcome to the IMCD event call regarding first half year 2021 results. [Operator Instructions] I would now like to hand over the conference to Mr. Pieter van der Slikke. Please go ahead, sir.

Thank you, operator, and welcome, everybody. I'm here with Hans Kooijmans, as always, and together we will answer your questions on our results over the first 6 months. The strong demand, which we reported after Q1, continued in Q2 to such an extent that our EBITA grew with 46% over the full 6 months and even with 52% on a constant currency basis. Cash earnings per share increased at 44%. All regions contributed to this organic growth, and all acquired companies performed in accordance with expectations. We remained active in executing our strategy by acquiring companies in various regions and market segments, and we strengthened our position in Mexico, Colombia, Central America and China. I want to thank our staff who delivered a remarkable performance under difficult circumstances, and we look with optimism to the remainder of the year. Now Hans will take you through the first half year numbers. And after that, we will answer your questions. So Hans, go ahead.

Piet, thanks for the introduction. Good morning, ladies and gentlemen. I would like to start on Page 9 of the presentation, where you will find a summary of the first half year income statement. As you can see, ForEx adjusted revenue increased 23% and gross profit increased 28% compared to the same period of last year. This 28% gross profit growth was a combination of 9% as a result of the first-time inclusion of acquisitions and 19% organic growth. Gross profit in percentage of revenue increased 0.9% compared to last year to 24.5%. And this increase was a combination of the contribution of newly acquired businesses, product mix effects, changes in local market circumstances and successful internal gross margin improvement initiatives. ForEx adjusted EBIT -- operating EBITDA and EBITA both increased with 48% and 52%, respectively. This increase was a combination of strong organic growth and first-time inclusion of acquisitions. Operating EBITDA in percentage of revenue increased to 12.3%, and operating EBITA in percentage of revenue increased with 2.2% to 11.5%. The conversion margin calculated as operating EBITA in percentage of gross profit improved substantially to 46.8%. When using EBITDA instead of EBITA as the numerator when calculating the conversion margin like most of our peers, we would have reported a 50%, 5-0%, conversion margin. On the next page, Page 10, you will find gross profit, EBITA and conversion margin per operating segment. In EMEA, we report 19% ForEx adjusted gross profit growth and an operating EBITA of EUR 93 million versus EUR 70 million in last year. The EBITA margin of 11.6% is 1.4% higher compared to the same period of last year. And most of the EBITA and gross margin growth in EMEA was organic. In the Americas, we also reported double-digit gross profit and operating EBITA growth, respectively, by 18% and 24%. Operating EBITA in percentage of revenue improved 0.6% to 10.3%. And like EMEA, most of the growth was organic. In Asia Pacific, we realized 80% gross profit growth and more than doubled EBITA. Operating EBITA in percentage of revenue improved 6.4% to 15.8%. This growth was a combination of substantial organic growth and the first-time inclusion of acquisitions like Signet, the pharma business in India that we acquired end of last year. In all segments, we reported substantial improvements in conversion margin compared to the same period of last year. And this improvement in conversion margin is the result of substantial organic EBITA growth, thereby organic growth, profit growth more than compensated the own cost growth. Further, the positive impact of the Signet acquisition helped to improve this ratio. In the last column, all nonoperating companies, including the head office in Rotterdam and our regional support offices in Singapore and the U.S., where we report slightly higher costs, mainly as a result of further strengthening of support functions in these offices. On Page 11, a summary of the P&L lines between operating EBITA and net results for the period. A few general remarks. Net finance costs reduced significantly, and I will show a breakdown in a minute. Income tax expenses increased and related to the countries where we generate taxable income. The tax cash out in the first 6 months was about EUR 25 million. Amortization of intangible assets are mainly noncash costs related to the amortization of supplier relations, distribution rights and other intangibles. And last but not least, as mentioned already by Piet, on the bottom of this page, you could see a ForEx-adjusted 48% increase in cash earnings per share to EUR 2.43. As promised on Page 12, a specification of the net finance cost, where we reported a decrease of EUR 7.3 million compared to the first half of last year. Main driver of this decrease is EUR 1.8 million positive currency exchange results this year compared to EUR 3.2 million cost last year, reducing overall finance cost by EUR 5 million. Further interest cost of our loan structure were EUR 1.6 million lower than the same period of last year. On Page 13, a summary of our balance sheet. Property, plant and equipment of EUR 96 million is a combination of a limited amount of fixed assets that we own ourselves and more than EUR 70 million right-of-use assets. In other words, capitalized operational leases as a result of the application of IFRS 16. The combination of intangible assets on the one hand and related deferred tax liabilities are a result of acquisitions done since July 2014 and our history as private equity owned company. On the financing side, there is EUR 817 million of debt and EUR 1.3 billion of equity. This substantial equity position covers about 62% of our capital employed. The leverage ratio end of June, based on our loan documentation, was 1.6x EBITA, which was well below the maximum set in our loan documentation. Reported leverage based on IFRS was 2.6x EBITA and differences in definitions of what is real debt between IFRS and the loan documentation are the main reason for the difference in these 2 leverage ratios. Working capital at the end of June is summarized on the next page, where you will find a summary of the absolute amounts of the various working capital components, and these absolute amounts translated in days of revenue. As you can see, the absolute amount of working capital end of June increased with EUR 84 million compared to year-end 2020. And this increase is a combination of additional working capital due to the increased business activities, working capital that we added as a result of acquisitions in the first half of 2020 and currency changes on working capital positions. Compared to last year June, the overall working capital days improved and decreased 4 days from 60 to 56. I would like to finish this short summary with a cash flow overview on Page 15. Free cash flow and cash conversion ratio were both substantially higher than the same period last year as a result of increased operating EBITA combined that more than offset the higher working capital investment as a result of the increased business activities. Further CapEx was about EUR 2 million lower than last year. Then I assume that you all read our outlook on Page 17, the outlook in the press release, in which we expressed our expectation of EBITA growth in 2021. And I would like to hand over to the operator to open the lines for Q&A.

[Operator Instructions] And the first question is coming from Rajesh Kumar, HSBC.

First of all, when we look at your financial gearing, it's now at 1.6x after the loan document. This is lower than your typical range. Clearly, there are opportunities in the market. So could you update us on how you're thinking about your acquisition pipeline? And how are you seeing the valuation trend in that area? The second question is, obviously, on the performance, you have done really strongly. A lot of people are worrying that chemical prices have been a tailwind. So could you help us understand how much of it was cross-selling new products in different geographies versus pass-through of higher freight cost and price increases? And which of those will reverse in the second half when we are looking at our forecast, what are the things we need to be cautious on?

Yes. Thank you very much, Rajesh. On your first question, acquisition pipeline. Basically, what we always say is that we continue to acquire businesses that fit into the strategy. It's clear that also in this time, we have been able to do that, although, of course, it would help if we could travel again. We are very positive, nevertheless, about the possibility to acquire companies also in the future. And not sure if you want to say anything on the gearing, Hans, but...

No, I think the conclusion is right that the 1.6 according to the bond documentation is low compared to what we reported in the past. On the other hand, I think the market also looks at the IFRS leverage to 2.6x, and we all should realize that in that leverage there's, for instance, also earn-out obligations. There is the debt related to the operational leases that we have to put on the balance sheet. So the 1.6 is -- should be more relevant because of every now and then doubts of the market sees it at the same way. But there is plenty of potential upside to do M&A there. On your second question, volume price, cross-selling, yes, that's, of course, a mix and we're not going to totally try to dissolve this mix or analyze this mix. It's clear that the current results is the sum of all 3. There are significant volume growth, significant price increase and, of course, we always are trying to cross fertilize our business in terms of bringing new product lines of existing suppliers or new suppliers to new regions. And that remains a very positive trend as to how, let's say, volume growth and price growth will continue, yes, nobody knows. For the time being, we -- for the -- let's say, the remainder of the year, we remain positive. But it's a combination of the 3 of these factors. And for us, of course, it's very important to continue to develop our business in the different market segments and to add product lines to offer a complementary product range. And I think what helps us is if we enter new territories, for example, now in Central America, that we are able to also use our relationships -- our supplier relationships to bring new product lines to these regions or to take them over from competition. So it's about strongly executing our model, stay close to suppliers and customers and, of course, being able to also pass price increases to the market. So I would summarize it in this way, Rajesh.

The next question is coming from Matthew Yates, Bank of America.

Maybe just a follow-up on one of the prior questions around the margin development we saw sequentially and maybe just leaving Asia to one side, given the Signet deal. But very, very strong margin expansion in Europe and the U.S. And I was listening to the Univar call yesterday, and they did call out a few things that may be weren't so sustainable for the rest of the year given the market tightness. So is there anything that you're seeing that would give reason not to necessarily extrapolate this sort of profitability that you delivered in Q2, I guess, particularly given there is some seasonality to your business?

Yes, I would say that as far as the margin percentage is concerned, that there is, let's say, seasonality. It is clear that our margin percentage fluctuates, it depends on the mix, it depends on certain aspects in the market. So that could fluctuate also in the future as it has done in the past. How and when, is very difficult to predict. As you know, we are in specialties. So I'm not totally sure if we can compare ourselves in that respect to Univar, which is, of course, a little bit more skewed to commodity. So our margins are relatively stable, but with this fluctuation element in it. So I can't promise that they will stay forever at this level or go -- may go higher, may go a bit lower, but we are, of course, a very margin-focused organization, and we hope that we can -- and we are constantly also working on improving them by offering our services, by being relevant to our customers and let's see if we can sustain them.

Can I ask a follow-up question around pricing. And forgive me for dumbing down what I know is a very complex and diverse portfolio. But can you just explain to me your approach to pricing? I was under the impression that a lot of your supply contracts have fixed annual pricing. How much flexibility or frequency do you review that the price you are in turn charging to your customers to capture that market tightness?

Yes. I think we do not have contracts with fixed prices. So our suppliers determine, let's say, their price to us on a regular basis and that differs from supplier to supplier. But they are free in most cases to change their pricing to us. And of course, that depends from their view on competitiveness or, let's say, on their cost prices, et cetera. So that is something that we need to be very alert on because most of the time, of course, these prices go up. So we need to then execute price increases also to the market. And that is, of course, something that we, I would say, work very hard on how to execute that because that's not always easy, and it's also complicated sometimes, also IT-wise. But we've done that well. So let's say, our ability to price the products in the right way in the market, also anticipating on what our suppliers are doing, is one of our -- should be one of our core competencies.

And in a very sort of inflationary environment, do you have positive inventory revaluation gains going through your numbers?

Hans?

Yes, that could be a bit. But basically, Matthew, we don't take speculative positions. So we often buy on the basis of expected demand from our customers. And that means that we hardly have very big positions in, for instance, a specific grade of strawberry flavor because we expect the customer will buy. And that is because if you do more than 50,000 different products, it will be a very different and difficult game to play, but there could be something in it.

And the next question is coming from Chetan Udeshi, JPMorgan.

I just had a question on -- firstly, can you just talk about what you are seeing in terms of demand trends by different end markets, both from a Q2 point of view and also if that has changed at all from 2Q to, say, end of 2Q just in terms of different end markets within industrial and large sciences that would be useful? And secondly, it's clear in general, and I don't want to ask specifically on pricing for you guys. But how customers, in general, do you think are accepting the price increases? Because it's not only price increases that are going up for chemicals, clearly for a lot of other commodities and products, the prices are going up as well as high. In your conversation with customers, do you sense any sort of pushback, concern that this could eventually lead to some sort of a demand destruction in the next few quarters?

Yes. Thank you for these questions. I think on end markets, we can say, if you look at life science and the industrial markets that, in particular, the demand of industrial markets has been exceptionally high and strong. On the life sciences, we had different markets. If you look at, for example, personal care markets, they have come back since last year, when, of course, there were many, many lockdowns, not much flying around and they have come back to a certain level. That's very positive. Food is, of course, a more stable growing markets. Very nicely growing, but more stable. So I would say if you look at the whole spectrum, then the growth in the industrial markets in this quarter and this half year has been very significant. And I think that, that is -- that concurs with what we read about chemical industry reports from chemical producing manufacturing companies. As to accepting price increases, that, of course, is differentiated. I mean nobody likes to receive price increase. It depends on competition. It depends on the -- yes, let's say, there's an element, of course, also of restocking. There's an element of people really wanting to have the products or needing the products. But what we should do is to be reasonable. We have to explain it. Why? Because we are in this, of course, for the long term with our customers and our suppliers. And this is not a game of just doing it quickly. I mean we need to explain it to our customers and then most of the time we can. So I would summarize it like this.

And the next question is coming from Quirijn Mulder, JPMorgan.

Yes. Quirijn Mulder from ING.

I thought you switched.

But it's okay. Fine. On -- question on Signet. So maybe can you give me any idea about the organic growth of Signet in the last year? Maybe you can give me some flavor on that. And with regard to pharmaceuticals, there is somewhat slowdown, as I remember, in the first quarter because of the lack of, let me say, the flu, I think. So maybe you can give me an idea about the situation with regard to pharmaceuticals, especially with regard to the development of Signet?

Yes, Quirijn, we can't -- let's say, what we don't do is give individual comments on individual companies. I think, let's say, the general comment that Signet performed in accordance with our expectations. And our expectations were, of course, also on the basis of growth, is as far as we can go. So we're very happy with the developments with Signet. I think on your other question, pharma. As you remember, last year, and particularly in the first 6 months, pharma, of course, strongly -- had strong growth figures. That leveled off a bit and we, of course, now also have strong growth figures also because of the acquisition. But it is true that generally, let's say, the initial strong growth has become a bit slower. And one of the factors, and I think we mentioned it last time is, for example, that because of the COVID measures, some other transmittable diseases by shaking hands and hugging, et cetera, like flu, has decreased enormously. So that decreased also certain medicines there, which, of course, are -- is a factor as well, and also the postponement of certain treatments, et cetera. But pharma is, as you know, very stable business. So we're still very happy with what we see in terms of growth, although not as exuberant as last year.

Okay. My second question -- final question is about the lockdown impact in the second quarter. Did you still feel that effect? And is there -- were some costs improved and logistics influences and all of things?

Yes. So of course, also in the Q2, most people worked, I guess, from home in many places or partly from home. That is, let's say, an additional burden on getting orders out as you -- and handling orders. That's why I'm also very, very grateful for our people and the work they have done. Also, of course, to our IT people that kept the systems going. On the supply chain, and I think that we are not special there because we see that also with many of our colleagues, peers and in other segments of the market, the supply chains are still disturbed. That's an additional burden on our people to get the products at all and then also -- or in time and to get it in time with customers. So that's not easy, and that remains difficult also during the second quarter. So we have to see when that goes back to normal. So yes, the COVID pandemic has still have, let's say, a negative impact. On costs, yes, of course, less travel compared to last year, I don't think it makes a very big difference. Exhibitions are not taking place yet. So certain positive effects. But compared again to last second quarter, of course, that was also not there. So in that sense, a limited effect.