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

Hello, and welcome to the IMCD First Half Year 2022 Results. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand over to your host, Piet van der Slikke, CEO, to begin today's call.

Thank you very much, Jess, and hello, everybody. Hans Kooijmans and I've dialed in from different places this time. And after a few words from me, Hans will take you through the numbers and then there's an opportunity to ask questions. You have seen in the press release that we continued the trend of the first quarter with strong growth of all leading indicators resulting in an increase of gross profit of 42% and operating EBITA of even 58%. Most of that growth has been organic and all regions contributed to that and also on business segments. Demand remained strong and prices remained on a high level. As shown in our numbers, we were able to pass price increases on to the market and strengthen our margins. Business-wise, we were able to expand cooperation with leading international suppliers adding important product lines. We're also proud to report that IMCD received a top-rated badge from Sustainalytics ESG Risk Rating, recognizing us as a top performer in the industry. Sustainalytics is a leading Morningstar company in ESG ratings. Actually, IMCD ranked 1st, meaning with the lowest risk among over 180 international peers in trading and distribution, placing us in the top 7% of almost 15,000 companies, which were assessed worldwide. We all know that we live in extraordinary macroeconomic times, heavily influenced by the pandemic and the war in Ukraine resulting also in very high energy prices. So nobody can predict how economic circumstance will develop in the coming periods. We continue to execute our strategy and trust on our strong business model, which will produce growth and has produced growth in the last 8 years. So we will continue to do that not only this year in a spectacular way, but also in the medium and long term. Our focus remains on organic growth and consolidation of the market. Our pipeline is strong. And so there's enough, let's say, feedstock for future growth. And with this, I will hand over to Hans to take you through the numbers. Hans?

Thanks for the introduction, and good morning, ladies and gentlemen. And I would like to start on Page 9 of the presentation, where you will find a summary of the first half year income statement. And as you can see, ForEx adjusted revenue increased 33% and gross profit increased 36% compared to the same period of last year. And this 36% gross profit increase was a combination of 6% as a result of the first-time inclusion of acquisitions and 30%, so 3-0 percent, organic growth. Gross profit in percentage of revenue increased 0.7% compared to the same period last year to 25.2%. And this increase was a combination of product mix currency and M&A effects, changes in local market circumstances, and successful internal gross margin improvement initiatives. ForEx adjusted operating EBITDA and EBITA both increased with 49% and 52%, respectively. And the increase of operating EBITA was a combination of strong organic growth of 45% and 7% as a result of the first-time inclusion of acquisitions. Operating EBITDA in percentage of revenue increased to 13.4% and operating EBITA increased with 1.6% to 12.8%. The conversion margin, calculated as operating EBITA in percentage of gross profit, improved substantially to 50.8%. And when using EBITDA instead of EBITA, when calculating the conversion margin as a numerator, like most of our peers do, we would have reported a 53.4% conversion margin. On the next page, Page 10, you will find a bit more detail on the year-on-year development in gross profit EBITA and conversion margin per operating segment. In all segments, we report on a constant currency basis, more than 30% gross profit growth. In EMEA, we are happy to report a 36% gross profit growth and an operating EBITA of EUR 140 million versus EUR 93 million last year. And the EBITA margin of 13.3% is substantially higher compared to the same period of last year. And most of this EBITA and gross margin growth in EMEA is organic. In the Americas, in the next column, we report double-digit gross profit and operating EBITA growth, respectively, by 39% and 53%. Operating EBITA in percentage of revenue improved 1.7% to 12%. And like EMEA, most of this growth is organic. In Asia Pacific, slightly lower growth percentages, but still very impressive growth numbers with 34% gross profit growth and 38% EBITA increase. This is the only segment where gross margin percentage didn't improve, and this is mainly the result of the impact of recent M&A in the region. And operating EBITA in percentage of revenue improved 0.3% to 16.1%, and this growth was a combination of substantial organic and the first-time inclusion of acquisitions. In all segments, we report substantial improvement in conversion margin compared to the same period of last year, and this improvement is the result of substantial organic EBITA growth, but by organic gross profit growth more than compensated the on-cost growth. Then in the last column, all nonoperating companies, including the head office in Rotterdam and regional support offices in Singapore and the U.S. Reported costs were slightly higher, mainly as a result of further strengthening of support functions in these offices. Holding cost in percentage of revenue decreased from 0.8% last year to 0.7% in the first half of 2022. Then on Page 11, a summary of the P&L lines between operating EBITA and net results for the period. And a few general remarks. Net finance costs more or less stable, some fluctuations on the individual cost lines, and I will come back on that in the next slide. Then income tax expenses increased in line with EBITA and the tax cash out in the first 6 months was about EUR 57 million, as you could have seen in the cash flow statement in the press release. Then nonrecurring items turned from a positive EUR 2 million last year in a negative EUR 7 million this year. Perhaps you remember the positive in 2021 was mainly due to the sale of Nutri Granulations activities in the U.S. in the first half of 2021. And this year, we had the usual costs related to acquisitions, a bit of cost related to one-off adjustments to the organization. And further, the 2022 cost include the estimated financial impact of winding down of the IMCD operations in Russia. The amortization of intangible assets are mainly noncash costs related to the amortization of supplier relations, distribution rights and other intangibles. And then last, but not least, on the bottom of this page, you could see net results for the period increased 60% to EUR 177 million, and ForEx adjusted 50% increase in cash earnings per share to EUR 3.68. On Page 12, specification of the net finance cost -- by cost this year were similar to last year. Main fluctuations were higher interest cost of about close to EUR 2 million, which were offset by positive currency exchange results. End of March, IMCD issued a EUR 300 million rated corporate bond with a fixed coupon of 2 1/8% and the combination of this bond and the EUR 300 million bond with a fixed coupon of 2.5% issued in 2018 will make our future interest cost pretty stable and pretty predictable. Then on Page 13, a summary of IMCD's balance sheet. Property, plant and equipment, EUR 32 million, relatively low as a result of the asset-light business model. Then right-of-use assets of EUR 78 million that these are the capitalized operational leases as a result of the application of IFRS 16. But the big number, the combination of intangible assets and related deferred tax liabilities of about EUR 1.8 billion in total are a result of acquisitions done since July 2014 and our history as PD-owned company. On the financing side, there is EUR 1.1 billion of debt and EUR 1.6 billion of equity, and this substantial equity position covers about 59% of our capital employed. Then a few words about working capital summarized on this next page, where you will find 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 220 million compared to year-end 2021. And this increase is a combination of additional working capital due to increased business activities combined with the usual seasonal pattern. Further, it includes working capital as a result of acquisitions in the first half of 2022 and currency exchange impacts on working capital positions. Compared to last year, June, the overall working capital days increased 9 days from 56 to 65. And when looking at individual components, debtor and creditor days end of June are more or less stable compared to June last year with 66 and 39 days. A main driver of the overall increase is the absolute amount of the impact of our increased capital position as a result of the very strong sales growth, combined with increased stock positions to cater for the Q3 order book and the usual fluctuations in other payables. Then on the next slide, a summary of our debt position, leverage ratios and maturity profile. When I mentioned before, debt increased with about EUR 200 million to EUR 1.1 billion. The increases, amongst others, influenced by -- on the positive side by the cash flow and the negative side by a dividend payment of EUR 92 million and considerations paid for acquired businesses of EUR 93 million in the first half of this year. The leverage ratio end of June, based on our loan documentation, was about 1.5x EBITA, which was well below the maximum set in our loan documentation. And then reported leverage based on IFRS was 2.2x EBITA. On the right-hand side, our debt maturity profile, which improved due to the new bond issued in March. I would like to finish the short summary with a cash flow overview on Page 16. Free cash flow more or less similar to last year as increased EBITA was more or less compensated by the working capital investment as a result of the substantial business growth. Further CapEx was about EUR 3 million higher than last year, mainly due to IT-related investments and some office changes and related CapEx. On Page 18, the outlook for this year in which we express our expectation of operating EBITA growth in 2022. And with this, finish on this summary, I would like to hand over to the operator to open the lines for Q&A.

[Operator Instructions] The first question comes from the line of Matthew Yates from Bank of America.

A couple of questions. The first is pretty short term in nature, but perhaps just going back to Slide 14 around the working capital. I see your inventory days are up from 44 to 50 versus a year ago. Is that mathematically distorted by trailing revenue not fully reflecting the amount of price inflation we've seen? Or does it tell me something about the health of your order book going into Q3?

Matthew, I think it's a combination of both. We finished the half year again, with a strong order book for Q3. At the same time, we also see quite some supply chain-related issues. And there, we took a bit more stock onboard as usual to make sure that we can serve the needs of our customers. So it's a combination of both. The -- again, we finished the quarter with a strong order book.

Okay. And maybe it follows up on those supply chain issues. I'd like to ask you a bit about the gas crisis in Europe. Can you share us what percentage of group products are sourced from Germany? And maybe what percentage of group sales are in Germany? And then more broadly, if we do get in the future into production curtailments from chemical producers in Europe. How worried are you this is going to lead to a significant decline in profitability for the company? Or does it actually present opportunities in a supply shock to help customers find alternative products or suppliers?

Yes. Perhaps I answer -- try to answer that question because it's a very difficult one. Let's say, the percentage of products sourced from German companies is a number that I don't have now for you to produce because it's also difficult to say. I mean we have, of course, relations with a lot of German companies. As you know, Germany is a major producer of chemicals, but some of these chemicals are also produced outside of Germany. So it's a very difficult question. But it's obvious, and I think you can also read that in the report of, for example, BASF what they are doing to mitigate any risk with respect to natural gas shortages. So -- and Germany as a percentage of sales, it's a significant company, but it's not -- let's say, in percentage-wise, it's not it's below double digits. Far below, I would say. And so yes, if Germany as a chemical producing company -- country is affected by the gas crisis, I think it will affect worldwide supply chains. So also in what way we have to see. I would like to point out that we are also quite strong in our life science segments, very strong on the pharma side and they are not dependent so much on, let's say, German production far more relationships with American suppliers. We have very strong food serve business and we have a very strong personal care business as well. So I would say -- that's again a testimony to the resilience of our model that we are quite spread, our risk is quite spread. But again, I don't think that we can estimate all of us the effect of a major crisis in natural gas in Germany. So I wouldn't consider that as an opportunity if something drastic happens there. So let's hope that it doesn't come to that, Matthew.

Next question comes from the line of David Kerstens from Jefferies.

I've got 2 questions, please. First of all, on -- clearly, no sign of a slowdown in momentum in the second quarter in contrast to the chemical sector, and particularly in the overall economy. I was wondering if you can please comment on the momentum during the quarter and what you're currently seeing at the start of the second half in terms of organic growth and particularly volume growth? And then the second question, what is driving the strong growth in demand? Is it fair to assume that volume growth is still roughly half of organic growth? And you highlighted the extended cooperation with leading suppliers, do you see outsourcing trends materially picking up in the current weak economic environment in the second quarter?

Thank you, David. I think, let's say, the signs of -- and I think Hans also indicated that for the next period, we see still very strong demand, so also going forward in the next quarter and not really slow down. So also in this quarter, I didn't see a significant difference between, let's say, the different months of the quarter. So it's the trend that we saw is still going on. But as you know me, predicting the farther future is not very -- so it's (sic) [not] very easy. It's a mix of -- our growth is a mix of volume and price. We don't -- we're not able to specifically say if it's 50-50. I would say it's a bit more price than volume, which in itself is not bad because if we hope if we can hang on to this higher prices then it would, of course, be good for the group. Outsourcing again, I mean, that's the difficulty of our business to quantify that totally is not easy. I would say though, again, that larger chemical distributors like IMCD also focused very much on specialties have an advantage. I would say that, let's say, the consolidation of -- on the supplier side with companies like ours is increasing, and we benefit from that. And I would say that where we, in the past, spoke about regional alliances, we also see more, let's say, traction for more global cooperation. So I would say that the benefit is there for bigger focused chemical groups chemical distribution groups like ours. I hope this answers your question, David.

Next question comes from the line of Chetan Udeshi from JPMorgan.

A few questions. First, I was just wondering, historically, you guys never gave us organic EBITA growth. So I think I'm hearing for the first time from you guys, organic EBITA growth, which is great. But I'm just curious, why did you decide to give that number now than historically you did not? The second question was I mean I'm just looking at the contingent consideration, that number seems to be going up almost every period, it was EUR 194,000, I think at the end of 2020, now it's EUR 325,000. I think there was already an increase last year as well. I'm just -- just trying to understand, is this associated with Signet or is there additional amount associated with recent acquisitions? That would be the second question. And third question, maybe this is for Piet. Is there a way you can isolate the impact from new or additional supply relationships that you might have got in the last 12 months in terms of growth contribution because I guess that should be a bit more easier to isolate given that, that would be completely new business?

Perhaps, shall I take the first 2 ones?

Yes. Organic EBITA reporting, we started with that last year. so that -- and basically, what we try to do is show organic EBITA growth twice a year in the half year and in the full year figures. The contingent consideration growth, it's a combination of, on the one hand, the result of recent acquisitions. So when we acquired Megasetia in Indonesia, there it was also a 70-30 transaction. So the remaining 30% is included in the contingent consideration. At year-end last year, we had to increase the amount of contingent consideration because of the very healthy performance of Signet. We didn't make a change there in the half year figures. And other than that, what we also need to do is we need to show that the discounted value of the contingent consideration what you see happening there is that every year you need to add a bit to compensate for interest cost on that contingent consideration. And as a result of that, it also grows. And then there was a bit of currency impact in there, but that is, I think, EUR 6 million, EUR 7 million, as you could see in the press release and that drives the amount that we have on the balance sheet there.

Okay. Yes, on your last question there. I'm sorry that I can't give you that because, I mean, new supply relation, of course, part of the organic growth that we have, and we not going to split that now also. Also often because our suppliers don't want to publish it or we are in the process of implementing deals. So that is something that's a number that we're not going to give.

Next question comes from the line of Henk Veerman from Kempen & Co.

I have 2 for today. So you already mentioned that a large part of the organic growth is driven by prices, and this is also visible in the gross profit margins, which are now standing above 25% year-to-date. So the question is, will -- is it logical to assume that this sort of pricing effect will somewhat normalized if global supply chain issues fade and perhaps price inflation of chemicals normalizes? Or is also anything being done within the organization to lock up the higher markups that are currently being realized?

Yes. That's, of course, the let's say, the goal and the intention and it will -- whether or not we will succeed depends also on the product ranges we're talking about, also the market segments. It will be easier in market segments like pharma and probably food than in some other managed segments. I think if you look historically, Henk, that we have been pretty good at, let's say, keeping this level of pricing. I hesitate to predict because, of course, part of this increase is also related to energy because our producers use, of course, a lot of energy. So it could also mean in the future some sort of erosion. I would say that we will do everything to keep this level and normalize it, so to say, in the market. And we don't see any signs at this moment for most of our product lines that a reverse trend has been started. So in that sense, we are pretty confident for the near future.

Okay. That's great to hear. Second question is on the conversion margins, which in recent years always showed sort of a difference between the first half and second half, a difference of about 4 percentage points, but is it -- would it be logical to assume that this year, because of the very strong performance in the first half that the seasonal pattern of the conversion margins like the difference between the first and second half would be somewhat higher because of for example, employee bonuses and other factors related to the strong performance year-to-date?

Yes, I think Henk, what we, of course, do, we, during the year, we accrue for expected bonus cost. But I think the main driver of a bit of an erosion of the conversion margin in the second half of the year basically has to do with the fact that December typically is a slower month in our industry -- in all industries because all the factories shut down somewhere half December and then reopen in January. So if you look at the revenue split and as a result also the margin split over the year, we always make a bit more than 50% in the first half of the year and a bit less in the second half of the year. And that leads then automatically because most of the cost base is fixed, we accrue for bonuses and so on and so forth on a monthly basis. And that leads then that you typically talk about more or less a similar cost structure and a slightly lower margin profile, resulting in a slightly lower conversion ratio.

Okay. So no significant changes to the historical seasonal as far as you can predict?

Yes, as far as we can predict because no one, of course, knows what is -- what will be the gross margin profile in the coming months.

Next question comes from the line of Suhasini Varanasi from Goldman Sachs.

I have 3, please. The first one is one of the components of gross margins is probably the requirement for -- or the need for customers for reformulation services. So I would have to know if you can give some color on how the seasonal or sequential trend on demand for the formulation services has been and if there are any trends to point out by geography?

Yes, it's a good question, an interesting question, but we do not -- so we charge a margin for the products that we sell, but we do not separate, let's say, service components leading to that price. So you should see our formulation services, our labs, our technical centers, our technical people as an integral part of our selling efforts. So -- and also to, let's say, make the relationships with our customers sticky. So we don't really separate and we can't separate and we don't charge separately part of the margin based on reformulation services.

Understand. Sorry, I was just wondering whether the demand for the services, reformulation services, has maybe accelerated into the quarter because of the inflation of the supply chain constraints that you've been seeing this year?

No, I don't think there's a difference from -- in that sense, there's no difference because of the economic environment.