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

Good day, and welcome to today's IMCD N.V. First Half Year 2024 Results Conference Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] And now I'd like to hand the call back -- like to hope -- call over to Valerie Diele-Braun, CEO. Please go ahead.

Good morning, everyone, and welcome to the IMCD's First Half of 2024 Call. As usual, I'm here with my colleague, Hans Kooijmans, the CFO of IMCD, who will lead you through the financial results after my preliminary remarks. And then we are open to answer your questions. During the first half of 2024, the recorded revenues of EUR 2.385 billion and operating EBITA of EUR 270 million. On a constant currency basis, this is a 2% EBITA decrease versus first half '23. This decrease can be mainly attributed due to a weak first quarter, whilst we return to gross profit and EBITA growth in Q2. During the second quarter of this year, we were able to deliver a ForEx adjusted gross profit growth of 11%, resulting in an 11% EBITA growth on a constant currency basis versus the same quarter last year. This result was mainly based on the performance of first-time inclusion of acquisitions as well as on some organic growth. Markets remained sluggish in the Americas, where reported gross profit increased only slightly, while EMEA saw gross profit growth of 4% and Asia Pacific, a gross profit growth of 9%. In the Americas, we were mostly affected by lower demand and some temporary pricing pressure for Food & Nutrition. Whilst in APAC and in EMEA, we experienced an improving environment, but not yet on a continuous basis and not in all countries. In terms of our Life Science business versus our Industrial businesses, we continue to maintain a balanced portfolio where revenue of Life Science was EUR 1.2 billion, and revenue in Industrials was EUR 1.1 billion. In our Life Science segment, Personal Care, with the exception of China continued to perform very nicely, while Food & Nutrition and Pharma have not yet fully seen the expected recovery. In our Industrial segment, we continue to see a better performance and specifically coatings and constructions are seeing increasing demand and a slow but steady recovery. In terms of general market development, we continue to see volatile months across all regions and business lines with little visibility beyond 6 weeks due to the desire for low inventories and just in time orders by a substantial part of our customers. To support these customer needs, whilst controlling net working capital and ensuring optimal coverage simultaneously, we continue to invest further in our digital network and commercial excellence. New customer care tools as well as commercial support programs are currently being rolled out, and we're excited to share the details on some of these systems in our upcoming event in Milan. For those who cannot attend, we will make a short presentation available via our website as we get closer to the date. In terms of effective business development, we were able to acquire new principles and to expand with existing ones. Our principles are excited about the volumes we have been able to gain, and we continue to work closely with them to develop additional opportunities. As far as our M&A pipeline is concerned, we maintain a healthy attractive target list and delivered year-to-date 11 acquisitions across all 3 regions and in various business segments. And last but not least, we continue to do our stability programs throughout our organization on which I'm excited to provide an update later in the year. We are confident that our investments made our strong commercial teams, digital and logistics infrastructure, combined with further driving operational excellence and cost control will deliver further growth and efficiencies. Hans will now give you a short update on the numbers.

Thanks for the introduction, Valerie. And good morning, ladies and gentlemen. And as usual, I would like to start on Page 10 of the presentation, where you will find a summary of key figures taken from the first half year press release. I'm furthering a bit with a call. So if you hear me sniffing, that's not because of emotions but because of technical issues. As you can see on this slide, ForEx adjusted revenue increased 5%, which is a combination of 4% organic decline and the positive impact of the first-time inclusion of companies acquired in 2023 and 2024 which added 9%. The ForEx adjusted gross profit increased 5% compared to the same period of last year. And this increase was a combination of 7% as a result of the first-time inclusion of acquisitions, a negative organic growth of 2%. There's quite a difference when comparing the 2 individual quarters. In the first quarter, you might remember, we reported organic gross profit decline of 8%. And in the second quarter, we report 11% ForEx adjusted gross profit growth, which is the combination of acquisition growth and 4% organic. Gross profit in percentage of revenue in Q1 and Q2 of this year were more or less similar. But we did 25.4% in Q1, 25.5% in Q2 and adding it to around the 25.4%, which is more or less equal to the 25.5% in the first half of last year. The ForEx adjusted operating EBITA decreased with 2%. And this decrease was a combination of positive contribution of acquisitions of 9%, combined with negative organic EBITA growth of 11%. Similar to gross profit, we reported for operating EBITA, a soft Q1 with a ForEx adjusted 13% EBITA decline, followed by a stronger second quarter with an 11% increase which is a combination of M&A impact and a modest organic growth. Operating EBITA in percentage of revenue decreased to 11.3%. The conversion margin in the second quarter was 46%. And this second quarter conversion margin was more or less similar to the second quarter of last year. Further, it was a substantial improvement compared to the 42.9% reported in Q1. And due to the soft first quarter, the year-to-date conversion margin of 44.5% and is still lower than last year's 48%. And the difference in conversion margin is the result of higher gross profit being more than offset by inflation-driven organic on cost growth. And with respect to the down cost growth, it's obvious that in an asset-light business model, so a people organization like IMCD, the employee-related cost is one of the most important cost drivers. And on the bottom of this slide, you could see the IMCD employs about 5,000 full-time employees. Compared to the end of June of last year, we added 465 new colleagues. And this increase in the number of employees is a combination of about 500 people joining IMCD as a result of acquisitions done in the last 12 months. In the same 12-month period, we report an organic decline of about 50 people. And as mentioned in previous calls, we have been and still are very prudent filling vacancies or adding people given current volatile market conditions. On the next slide, you will find a bit more color on the year-on-year development of gross profit, EBITA and conversion margin per operating segment. In EMEA, in the first column, we report 6% ForEx adjusted gross profit growth. We were able to increase our gross margin percentage with 0.6% to 27.9%. The soft first quarter with negative organic growth was followed by a stronger second quarter with 6% organic gross profit growth. We saw a similar trend in EMEA when looking at organic EBITA growth. Negative organic growth in Q1, followed by a 5% organic EBITA growth in Q2. Year-to-date, operating EBITA of EUR 129 million was still just below last year. In the Americas, more or less a similar picture, a soft first quarter, followed by limited organic gross profit growth in the second quarter, which was unfortunately not enough to cover the inflation driven on cost growth. As a positive, we increased the year-to-date gross profit margin percentage with 50 bps compared to last year. And this margin percentage increase was one of the drivers of organic gross profit growth in the second quarter. However, this could not compensate the decrease in revenue totally. As a result, we report year-to-date 11% lower operating EBITA and a lower conversion margin. Organic EBITA growth is still negative, but improving from a minus 31% in Q1 to a minus 5% organic in Q2, adding up to the minus 19% year-to-date. In Asia Pacific, we reported in the second quarter a return to organic gross profit and EBITA growth of 4% and 2%, respectively. Unfortunately, not enough to compensate for the soft start for the year. But further, this is the only reason where we report a lower gross margin percentage. However, when excluding the impact of acquisitions done in the second half of '23 in the first half of '24 in this region, the gross margin of our legacy business would have been stable compared to last year. The average gross margin in the acquired businesses was substantially lower than the average 23.8% that we reported last year. Then on Page 12, let me go there. A summary of the P&L lines between operating EBITA and net results for the period. Few general remarks there. You can see that net finance cost increased EUR 1 million from EUR 26 million last year to EUR 27 million in the first 6 months of 2024. On Page 22 of our press release, there is a breakdown of the different income and cost components driving that change. I would like to mention the main items responsible for this reported limited change. First, on bank loans and bonds, the interest on bank loans and bonds increased about EUR 30 million from EUR 16 million last year to EUR 29 million in the first half of '24. And this increase is a combination of higher base rates in our revolving banking facilities combined with, on average, a higher debt demand. And this increase is in line with the guidance that we gave you when we discussed the full year 2023 results. And secondly, the negative currency exchange results that we also have to report on this line, they increased from negative EUR 3 million last year to negative EUR 9 million this year, adding EUR 6 million additional cost to the finance cost line. And last but not least, the change in deferred considerations that we have to report on this line moved from a minus EUR 4 million last year to a positive EUR 14 million in our year-to-date numbers. And this positive change related mainly to adjustments to the fair value of contingent considerations and then mainly to Symrise. So the EUR 1 million increase in finance cost is a combination of EUR 30 million real bank bond-related interest costs and about EUR 12 million noncash movements of an IFRS-related reported on this line. And income tax expenses, they are based on the actual tax rates in the countries where we maybe generate taxable profits. The tax cash out, as you could have seen in the press release, in the first 6 months was about EUR 52 million. And the blended tax rate, the one that we report in the half year figures is slightly lower than the guidance that we gave to you in the past. Amortization of intangible assets are noncash costs related to the amortization of supplier relations, distribution rights and other intangibles often coming with the acquisitions that we did. And last but not least, on the bottom of this page, you could see net result for the period of EUR 141 million and the ForEx adjusted 1% decrease cash earnings per share to EUR 3.33. Then a summary of the balance sheet, Page 13, Property Plant and equipment of EUR 42 million is, of course, relatively low as a result of the asset-light business model. And the increase that we report includes EUR 7 million of new fixed assets that came with recent acquisitions. So when we bought businesses, there were some warehouses in the structure that we got. Then there is a right of use assets of EUR 109 million. These are the capitalized operational leases as a result of IFRS 16. Then there is a combination of intangible assets and related deferred tax liabilities of about EUR 2.3 million in total, and they are the result of acquisitions done since July 2014 and our owned history of the company. Then on the financing side of the balance sheet, there is EUR 1.6 billion of debt. I will come back to that in a minute. And then there is EUR 1.8 billion of equity and this substantial equity position covers more than half of our capital employed. Working capital is summarized on this slide. But you will find a summary of the absolute amount of the various working capital components, and these absolute amounts translate in days of revenue. And as you can see, the absolute amount of working capital end of June 2024 is more or less similar to the amount end of June last year. Compared to last year, June, the overall working capital days were a bit lower with 63 days. And it's fair to say that Q2 and Q3 are typically the highest point in our working capital cycle during the year, and Q4 is typically the lowest point in the cycle. And when looking at the individual components, we see small differences on inventories and other payables may comparing June to June. We see a rather big jump in days, both on the trade receivables and the trade payables. And this change is primarily due to the fact that we had a situation that the last day of the second quarter fell on a Sunday this year. And as a result, many customers took advantage of this by paying invoices, which were typically due by the end of the month. Just 1 day later on the first day of July, causing the reported increase in debtor days. And if you look at the credit today, you could see that we also learned from the habit ourselves. Then on the next slide, a summary of our net debt position, leverage ratio and the maturity profile of our debt portfolio. Net debt increased with about EUR 300 million to EUR 1.6 billion, and this increase is, amongst others, influenced by a dividend payment of EUR 128 million and considerations paid for acquired businesses of about EUR 250 million. The EUR 1.6 billion of debt includes EUR 1.1 billion of bonds, and these bonds have a blended fixed coupon just below 3.5%. Further, there is EUR 112 million of deferred considerations related to the acquisitions then. And the remainder, about EUR 400 million is the balance of [ Case ] bank facilities and IFRS 16 related operational lease liabilities. The leverage ratio end of June, based on our loan documentation, was 2.7x EBITA, which was, as you can see, well below the [ Maxeon ] documentation. Then there is the reported leverage based on IFRS, which was 2.9x EBITA. And then on the right side of the slide, you could see maturity profile of the different debt components when you see a nice split of the coming years. Then I would like to finish this short summary with a cash flow overview on Page 16. As you can see, free cash flow decreased with EUR 20 million to EUR 221 million. And the main driver of this decrease is a combination of slightly lower results with a little bit of higher working capital investment. The increase in working capital was, as what I mentioned before, mainly due to temporary high debtor days that were resolved within a few days after the month end. Additionally, capital expenditure of approximately EUR 6 million were largely in line with last year spending and primarily directed towards IT investments, office improvements and lab equipment that we own. Page 18, you will find the outlook for this year, and I assume everybody has already read the text in our press release, and therefore, I won't repeat it aloud. And I would like to hand over to the operator, Sergio, to open the lines for Q&A.

[Operator Instructions] And we will now take our first question from [ Zack Alpert ] from Morgan Stanley.

I have two questions, please. First, could you please comment on how pricing dynamics evolved since Q1? And maybe call out any end markets where you're seeing persistent pricing pressure? And secondly, could you please elaborate on the drivers in underperforming end markets and also call out were you seeing any outperformance or any green shoots?

I think, as I said in the script, we continue to see that Personal Care is doing really well. Coatings and Construction is coming back. Advanced Materials also I think where we are starting to see green shoots is Food that was pricing, a market that really suffered from very low pricing, more competition and also volumes being a bit down. We see that is coming back. That was what affected Americas, I think the most ended -- then in terms of the others, they are not as sizable except for pharma. And on pharma, I think I said in Q1, pharma, this is not a pharma here. You see it also with a lot of pharma companies that they're post-COVID inventory run down, but I would say, yes, it's in a normal course of action. So does that answer your question?

Yes. And then kind of any pricing pressure kind of broad base sort of how of those dynamics evolve? Or is it kind of just by end market? Yes.

It's mostly the end market and what I mentioned. And I would say we really pride ourselves of being a specialty company and a specialty company should not have such reflections of a lot of pricing. So I think we can see that we are keeping our pricing pretty stable with some dips in some end markets where there's a specific one like on Foods, for example.

We will now move to our next question from Suhasini Varanasi from Goldman Sachs.

Your organic GP growth has turned positive in the second quarter. Can you maybe talk about whether you saw any volatility over the months in the quarter? Any trends that you saw in July so far? And what are your expectations for the trajectory of improvement that you expect in second half this year on an organic basis? The second one is on the order book.

Before you ask a quick one on the -- were you asking about the second quarter or the third quarter? Because you talked about July, which would be the third quarter? Or were you referring how it has moved in the second quarter?

The first part of the question was on the second quarter, whether you saw any volatility. And if you could comment on any current trading in July.

Okay. Then let me answer that one before we come to your second question. I think in the second quarter, we saw a strong April. I think we indicated that in our Q1 call. May was not as strong, and it was surprising. That's why we are talking about the fact that it is still volatile, and we don't see a continuous trend. At the same time, it was definitely much better than what we had seen, particularly in Q1 and in some parts of 2023. So I would say, volatility -- within demand volatility in the markets, July is not looking so bad. But I would not talk about we are in a great market yet and things foreseeable. So we have, as we said in our outlook, political situations in the world that make things a bit difficult to predict.

Just the second question is on the order book actually. Is there a way you can comment on how the order book looks like sitting here today versus how it was at the end of 1Q, have you seen a kind of sequential improvement on volumes?

It's always nice. So I think we explained in the past that typically when we talk about the order book, we have visibility of 5, 6 weeks of sales roughly. At the same time, we offer customers the flexibility to postpone delivery dates if they need so or to break orders in 2 or 3. And that drives a bit the volatility and uncertainty and makes it rather unpredictable to say in the course of a month, if it will be very strong or very weak. If we look at the development, then when we did the Q1 call, we were pretty positive about April, that materialized. But at that moment in time, we were at the end of April. I think Valerie was also more negative about July to put it like that. So we started the quarter well, but the market is so volatile. And we see, of course, different trends in different parts of the world. And also there's a holiday season going at the moment, people drive the stock levels down in the summer period. And that makes it very difficult to predict. And we learned a bit that it's better to be cautious than to create an expectation now that everything is back to normal because the market is still not normal, but it is stronger than last year in general.

That's fair.

Yes. And what I said also in the script, I think we actually pride ourselves also the fact that we are very flexible in terms of moving the volumes. And the important thing is to, at the same time, keep net working capital under control. So yes, I would say the important thing is to manage the expectations, manage also our volumes and to ensure that our customers and principles are happy.

We will now move to our next question from Matthew Yates from Bank of America.

A couple of questions, please. Looking back over my note, Symrise, the fair value was already written down, I think, at the end of 2023. So you've taken another change to the deferred consideration today. Should we assume that this reflects a weak Personal Care market in China, which is impacting the business? Or is there anything specific about this deal? I know you have sometimes a healthy skepticism the business plans pitched by sellers and then structure deals accordingly to protect yourself. But I'm wondering whenever the business is underperforming and whether that has any broader implications for your willingness to do other deals in China? And then the second question, just back on the quarterly development. So I was looking at the degree of operating leverage, and it's always a little bit random, I guess, because of mix changes I guess, we've seen a nice rebound in your high-margin Asian business. My question is, did you proactively do anything on the cost side of the business? I mean we talked a lot in Q1 about that cost inflation trends, I think you gave a number, what, 50 lower headcount organically. Did you do something on the cost base to improve the results in Q2? Or is this more just a bit more volume coming through the business?

Valerie, should I pick up the volume one, you about the cost. Matthew, when we acquired Signet, they came out of a fantastic year 2022 and for sure...

Not Signet.

Sorry, Symrise. Yes, I got mixed the two. Personal Care business in China coming out of a fantastic year and created a hockey stick towards the future and they wanted us to pay for that. And that is why we structured that transaction in a way that we said we are a bit careful about valuation and let's leave 30% with the owner and reward them for the hockey stick as long as it materializes. And what you typically see is that you -- under IFRS on the basis of that hockey stick, you need to create that earnout obligation and that valuation of the remaining 30%. Now what we saw in the Beauty and Personal Care market in China, specifically, and that is something that is different than what we see in the other parts of the world because we see Beauty and Personal Care market as indicated by Valerie in most markets and strong rebounds and a strong performance with the exception of China. And there, it now pays off the fact that we were so conservative in valuation. And then for me, the only unfortunate thing and that is what I already said when we discussed the full year figures is that these conservative earnout obligations on the one hand, inflate my debt. And at the same time, when I need to release them because they don't materialize, it flows through my P&L. And that's why I mentioned already at the full year figures that you should normalize for these releases. But it shows that being careful to value your acquisition targets and to take a prudent approach there pays off. The Personal Care market in China is -- I think it's fair to say it's still pretty soft. It is improving compared to last year. But by far, not where the former owner of Symrise expect that the market will be at this moment in time.

And then Matthew, coming back on your cost question. I mean, clearly, as you have seen, we have been cautious in adding people. And with the acquisitions, of course, we are happy to get good people. In general, our strategy is not about a cost decrease per se but about efficiency increase. We are striving for growth and we are striving for being an efficient company with the growth that we generate. That's why we have continued our investment in digital and we invest in sustainability in our labs and where we can be cautious, of course, we should be cautious because in the past, we have been a bit more efficient and that clearly should be our target.

We will now move to our next question from Chetan Udeshi from JPMorgan.

I just wanted to follow up on previous questions. I know you don't like to give guidance, but just given that you have turned the corner on organic growth in Q2, do you think Q3, Q4, you will be able to generate organic growth both on gross profit and earnings line. And maybe one for Hans, is there an impact that you see in your numbers today from maybe Valerie, this may be also business related, but we've seen the shipping costs have gone up. And I'm just wondering, both operationally in terms of supply chain disruptions. And also for Hans on costs. Is it relevant? Is it material in any shape or form?

So on the outlook, I think we can only reiterate what we say is which is that we are confident with our tools and people, we will deliver further growth and efficiencies. But how much that will be in this year is very difficult to predict.

We are ambitious people, as you know. So talking about increased shipping costs and supply chain issues. Yes, for sure, that has an impact on business in certain markets or regions that it drives cost prices up because higher transportation costs are translated in a higher cost price for customers. And as you can see on our margin development, we passed pretty well to the market. We have seen in various regions delayed deliveries. For instance, our pharma business in India struggled a bit with goods coming out of Europe. It took longer to get them into India. And these type of operational things, but I don't think in the end, it had a material impact on the numbers that we present, but it plays a role. And that -- but we are good in dealing with this type of potential issues.

Our next question comes from Luuk Van Beek from the Degroof Petercam.

I have a question about the acquisitions that you've done in H1 because it appears it has been somewhat more expensive. Can you confirm that in also, if so, indicate what's driving that? Furthermore, can you comment on the acquisition -- sorry, the competition that you're seeing for new drivers? Is there any change there?

I'm not sure if I agree with your observation that the acquisitions were more expensive. I'm not sure where that's based on to be brutally honest. If I look at the multiples that are typically paid in this industry day that I mentioned before, they hover somewhere between 6, 7x EBITA on the low end and 11x on the high end. And then depending on the quality of the supplier base, the target, the breadth of the portfolio, the interest that there is for a target, you either entered at the low or the high end of the range. And I think the blended mix that we saw in the first half was not different than the previous years. And look, I missed your second question.

Do you see a difference in the competition for new targets or any change in there?

No. There is always -- I think if you look at the market, there are typically similar players being active. And what you see in the specialty business, most owners that look for an alternative ownership of their company, they typically talk to people whereby their supplier portfolio fits in the portfolio of a potential buyer. So as an example, if we do, given our food flavors in Europe, then if somebody has a business in Europe, representing Symrise as his most important supplier, he will never ever talk to us and vice versa. So there is also a bit of -- often logic combinations and sometimes there are more possibilities for owners, but then it's all based on building a relation, building trust with people. And that's why we are very active always in the market and talking to people building those trust relationships and making sure that you are well positioned at the moment that the owner wants to change ownership. And then looking at the pipeline and looking at recent transactions, I think we do pretty well there as a company.

Will now move to have our next question from Dominic Edridge from Deutsche Bank.

Three questions from myself, please. Firstly, Hans, maybe just to clarify on the net finance costs. I think you said it's about sort of minus 32, I think, is the underlying number in H1. Is that a good starting point to think about for H2 or any sort of other moving parts you should be highlighting there? The second question is about Signet. I know that you've appointed a new managing director there. Could you maybe just talk a little bit about the change process, although that obviously -- that's probably due to that change in shareholding the -- could you just maybe say if you've seen any other movements there or what your plans are for the business? Is it's fully integrated into IMCD India? And then the last point, and apologies for this. I'm going to have to try and make an attempt to get to comment on the second half. If we look at normal seasonality IMCD typically being 52% to 54% of your EBITA has been in H1 historically. Is there any reason to think it should be any different this year?

Shall I take the one on finance call? When we spoke about full year results, I gave a guidance on what to expect on normal interest during the year. And then I said something around somewhere between EUR 50 million and EUR 60 million based on the [indiscernible]. If you look at components and that help EUR 1.1 billion of bonds at a fixed rate of roughly 3.5%. And then the rest of the debt is typically revolver-related as the rate with market rates as the margin of the base rate and the margin is below 1%. And I think the number that we reported in the first half year is normal interest. We won't do any additional acquisitions, you could more or less double that amount. And that would see that in the ballpark, you guided at the start of this year.

I think I'll take that one structure. Maybe you can elaborate a bit further afterwards. But yes, I mean, we are very pleased about the succession of [ Ares ] because we were able to get executive of the pharma industry in India, who is extremely well known in the market and who knows our product already for many years and therefore, could fit in perfectly. We feel that there is a lot of positive momentum. She joined in May, has already participated clearly in the second quarter, which was a good quarter also for Signet. So I think we are very confident about the way forward.

And then Dominic, your last question about -- your line is a bit noisy, by the way, Dominic. I'm not sure if that is on your side. If you look at the split over the years, this year, we started with a soft Q1, a stronger Q2. Typically, historically, we always made a bit more of the result in the first half than in the second half of the year. And that typically has to do with always related weak December month, which drives lower sales as we see at that moment in time. I have no idea how this will develop this year due to the uncertainties and the volatility in the market. Let's see.

We will now move to our next question from Eric Wilmer from Kempen.

Two questions from my side. Some of the food and beverage ingredient manufacturers have indicated softer food service volumes in Q2 in the U.S., which were mostly compensated by stronger retail. I was wondering to which extent this dynamic had an impact on your U.S. Food and Beverage business in Q2? And secondly, to what extent do you see smaller distributors using availability of product to support sales in these volatile markets and hence, impact your cash performance?

I think considering the first one, we saw that Food is rebounding in the second quarter. We don't split by Food service versus Retail. So therefore, I think I cannot really answer that question in terms of if there was a shift. But I can say in general, we are starting to see that in Americas, Food is coming back, both in terms of pricing as well as in terms of volumes. So in general, I think a better development. In terms of your second question, which was on -- can you help me again -- the smaller distributors. I mean, we are selling a specialty portfolio. It's very difficult that somebody is replacing it, I think, in '22 that probably happened because there was a lot of stock out in the market and people were desperate and replaced whatever they could. I don't think we see this at this point in time, not in a material way.

That's very helpful. Could you perhaps on my first question answer whether any shift in one or the other. So in Food, Service or Retail, which would benefit you more? Or is that very difficult to say?

I think that's really difficult to say. I cannot -- I will try to answer that for the next quarterly call, but this one, really, I cannot because we don't do the split. I will look into it.

Will now move to our next question from Quirijn Mulder from ING.

I have questions about the U.S. So it looks like that finally that you are a little bit cautious on that market. If I look at the second quarter numbers, I see the gross profit. The gross profit, let me say, from -- organically from minus 14% to plus 2.4% in the second quarter keeping your minus 6% you said in your press release. And I think there's a substantial improvement, especially with the second half coming. So how do you look at the situation with regard to the gross profit in U.S.? That's the question I have on this number, yes.

Before Valerie answers, Quirijn. First, Americas for us is more than just the U.S. First, that's the region from Canada up to and including Brazil, it was quite...

Or sorry, yes, Americas and Brazil, yes.

Hans reported in the right direction, which is it is so -- I mean there are so many different countries in there. And then you have 8 business groups, some more substantial in some countries, some are in others. I think that's where the caution was coming in because you might have some large ones that are doing really well. But you have maybe an aggregate of several others that where there are movements happening in the market due to all kinds of circumstances. So I think being over optimistic, I find a bit dangerous in such volatile markets. But I think as you pointed out, it is pointed in the right direction and that gives us a positive feeling.

Let's then zoom in on, let me say, Latin America. That was clearly double-digit down in terms of revenues and gross profit. So is there any visibility on [indiscernible].

Yes. In part, there's definitely a recovery going on.

Yes. Okay. So it's only a part. So that makes that you're a little bit uncertain about the second half, that's okay. We see some release -- we see some improvement here and there, and we don't know whether it is sustainable.

We see light at the end of tunnel and we hope it's not the train.

No, it's like at the end of the tunnel...

We will now move to our next question from Dario Dickmann from HSBC.

Could you maybe add some additional color on the quite substantial EBITA conversion margin improvements in APAC and Americas between Q1 and Q2?

Yes. Basically, it is a combination of a couple of factors that is you might have seen that we were able to improve the blended gross margin percentage. You heard Valerie saying something about it being a bit more positive on volumes, volumes coming back in certain market segments. And if you then are, at the same time, cautious on the cost side, then you automatically see an improvement on the conversion ratio. And that is basically what we saw happening, and that drives the improvement as we reported.

Okay. So it was no special mix effects from different products or just really cost control and volume improvements, right?

No. At the end of the day, in our industry, and that makes it so nice, critical mass is important. And if you have a certain cost structure and if you then grow your business either with additional suppliers or new products or better cross-selling at your customers, you use the same structure to do more volume and more business. And that creates that operational leverage that basically people like yourself and also our other stakeholders are always looking for. And that is also the ambition to drive that do more volume with the same structure with your same IT infrastructure, use your digital tools in a more efficient way, and that should further drive efficiency.

We will now move to our next question from Nicole Manion from UBS.

Just one follow-up question really on the outlook, please. I think in your business, there isn't usually lots of forward visibility anyway. But obviously, at the moment, it seems that, that uncertainty has clearly heightened. Could you maybe give us some more detail on maybe just the kind of things that you are tracking that would maybe give you that incremental confidence? And why what you've seen there so far hasn't, so things like customer order sizes and frequency, your conversations with suppliers. I guess that's gotten a little bit more positive into Q2, but not enough for you to extrapolate it. So any more detail, that would be great.

Yes, I think what we said in Q1, it would really help if inventories are being filled, and we don't see that happening because that clearly all of a sudden, you see a big move in the market in a direction where you then also can predict a little bit more what we -- stocking of those inventories means. Now you have sometimes somebody who's out of stock and all of a sudden, you get a big order and then the month after, he's getting cautious. He's getting bit worried. There's negative political news. He said, okay, let me hold it. And then all of a sudden, you get again a request for an order. That's why our digital tools are so important to ensure that we are not stuck with material that is waiting and cannot be shipped. And on the other side, we have material available when customers want and the predictive forecast is really key for us. And I think this is where the difficulty in the market lies. So if you want really one big thing that would change it, I think political stability and people gaining in confidence to restock the inventories in a substantial way would be to really nice things to happen and for the market to become much more foreseeable.

The next question comes from [ Kyle Ransford ] from Berenberg.

Just two quick ones for me, please. First one is the -- just around the refinance [indiscernible] and so refinancing the 2025 bonds next year, I think that's EUR 300 million. Given the idea of how that may impact your interest cost or possibly what sort of rate you're expecting when your refinance that, it is probably a little hard to predict, but it would be useful to know your thoughts on that. And the second one, I see acquisition spend is relatively high in the first half of the year versus last year. Just bearing in mind, leverage is around 2.9x now. What are your intentions in the second half? Can we think that you may be able to continue that momentum? Or should we consider that slowing down? I'm just wondering if covenants may be an issue there?

Yes, Karl, I think two valid questions. I think if I would refinance the EUR 300 million, I'm not sure what today's market price is, but I expect somewhere between 3.8%, 4.2% should be a reasonable pool for bond in the current market for a company of our size and with our structure. So they'll be close to the blended rate that we have now, a slightly higher that the bond that we need to replace because it was one bond with 2-point-something percent. Your second question. If you look at the leverage level and the cash profile of this company, what we always see is that we typically spend more cash than what we earned in the first 6 months of the year. And then we see a lot of cash inflow in the second half of this year. Out of the -- what I would call the operational part of the business, and in the first half of the year, we typically also pay a dividend, we pay quite some interest bonds that we have. At the same time, the bigger known is M&A that is difficult to predict. The pipeline looks healthy, but we also will generate lots of cash in the coming months. So if nothing special happens, I expect leverage to come slightly down and be lower towards year-end. And if we do a lot of M&A, we need to see what we do there. I don't have any concern there, to be honest.

There are no other questions at this time. I'd like to hand the call back over to Valerie Diele-Braun for any additional or closing remarks. Over to you, ma'am.

Yes. It was a pleasure talking with you and we are looking forward to seeing several of you in Milan. And to then our Q3 call later in the year. Thanks so much, and wish you a good summer. Bye.

Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.