IMCD NV

AEX:IMCD

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen. Thank you for holding and welcome to the analyst call first 3 months 2019 results, MICD (sic) [ IMCD ].[Operator Instructions]I would like to hand over the conference to Mr. Piet van der Slikke. Please go ahead, sir.

[Pieter C.J. van der Slikke, CEO & Member of Management Board]

Yes. Good morning, everybody.As usual, I'm sitting here with my colleague Hans Kooijmans, CFO. As customary in our first quarter update, we'll go immediately to questions. So we don't have a presentation, and we will give you the opportunity to ask us questions.So madam operator, maybe you can ask who will be the first?

[Operator]

[Operator Instructions] The first question is from Mr. Peter Olofsen, Kepler.

[Peter Olofsen, Analyst]

Yes. My question is on the EMEA region. You don't provide organic gross profit growth by region, but it seems to me that in Q1 the organic growth in EMEA was fairly modest. Was it indeed the case? And could you shed some light on what you're seeing in the EMEA region? Do you see somewhat slower growth across the board? Or is it that some regions -- markets or end markets are fairly strong while others are more weak? A bit more color there, please.

[Pieter C.J. van der Slikke, CEO & Member of Management Board]

Yes, yes. About EMEA. Growth has slowed a bit versus last year. So that's a difference. We see in particular, I will say, in certain countries a slowdown, in particular in Germany and in France and to a lesser extent Italy; other countries still strong. So it's not across the board but some slowdown in these regions in particular.

[Peter Olofsen, Analyst]

And is that more in industrial end markets, or is it across the board?

[Pieter C.J. van der Slikke, CEO & Member of Management Board]

Yes. It's more in -- it's more always, of course -- I mean, if you look at our life science business, that contains also pharma. And it's, of course, always steady growing, personal care and food as well. So it's more in the industrial sector.

[Peter Olofsen, Analyst]

Okay. And then quick follow-up on the North American operations. I remember from the Q4 call that you said that December was a bit softer but we should not read too much into that because it's always a bit slowdown and difficult to predict that particular month. Looking at Q1, is it fair to say that the North American operations continue their positive trajectory that we have seen for most of 2018 and that December as such was a bit of a one-off?

[Pieter C.J. van der Slikke, CEO & Member of Management Board]

Yes, I think I can confirm that. And again, December is a special month which is very difficult to predict, depending on holidays, et cetera. So yes, confirmed it's good health in North America.

[Peter Olofsen, Analyst]

Okay. So it came back in January and has remained solid so far this year.

[Pieter C.J. van der Slikke, CEO & Member of Management Board]

Yes, yes.

[Operator]

The next question is from Mr. Henk Veerman, Kempen.

[Henk Veerman, Research Analyst]

First question, on some of the macro developments in the market. On pricing. So a couple of players have also talked about chemical price deflation. Would you say that, that had a negative impact on your growth in Q1? And do you expect that to have an impact in the remainder of the year? And then secondly, on your acquisitions, but I'll come back to that.

[Pieter C.J. van der Slikke, CEO & Member of Management Board]

No. I will say across the board -- I mean again we have so many different product lines that you cannot give a generic answer to that, but I will say that we see price deflation now as a trend. So maybe in certain product lines, but -- no. I will say that there is now, let's say, a turning point. I don't see that.

[Henk Veerman, Research Analyst]

Okay. Second question, on your acquisitions. You're now busy integrating 3 targets and are still building the U.S. business, right? At the same time, I think there's still a lot of opportunity in the market, but is the organization ready? Or do you expect 2018 to be -- or sorry, 2019 to be a bit of a more quieter year when it comes to growth via acquisitions?

[Pieter C.J. van der Slikke, CEO & Member of Management Board]

Yes. Listen. I mean we -- as I said in the past also, we never, more or less, try to explain when or what timing is of acquisitions because we constantly are in discussions with possible targets. And we cannot time it ourselves too well because it's not only dependent on us. So we have the capacity to do acquisitions, and we will, if the opportunity arise, but we are at the same time, of course, also cautious in the sense that we -- the targets need to fit. And so we will see if we will be successful this year, but let's say there is no change in policy because of the acquisitions that we did in 2018.

[Operator]

The next question is from Mr. Tom Burlton of Berenberg.

[Thomas Edward Burlton]

Yes. It's Tom Burlton from Berenberg. Just a couple of questions from me. The first one was on your acquisitions and the -- specifically the gross profit contribution from the 3 big acquisitions just because, to the point earlier, you don't give organic gross profit growth by region but just trying to back that out. When I look at the M&A contribution from the 3 acquisitions, it looks like it was a little bit smaller than I had in my numbers because I thought you had a full quarter of each consolidates. Are you able to give what the gross profit contribution in the quarter was for each of the acquisitions, please?

[Hans J. J. Kooijmans, CFO & Member of Management Board]

Tom, Hans here. We see that always the Q1 was a bit of a trading update, and as usual, we don't break down regional growth numbers into organic and M&A. I think, if you look back at what we showed last year, these -- the 3 acquisition targets, of course, all had their contribution in the regions. I think what we explained last year is that all 3 targets had an EBIT margin lower than the group average, with the exception of the new additional one in India; and that we work hard to increase and optimize the structures there by integrating them into the IMCD organization and to try and to get their margins quickly in the neighborhood of what we are used to. We are still working on that. We are not really there yet. And the breakdown will follow when we do the half year figures.

[Thomas Edward Burlton]

Okay. And then maybe a follow-on from that, which is related to the Americas conversion margin which looked very strong. And I appreciate you don't want to give all of the detail here, but in terms of that improvement in the Americas conversion margin, is that more maybe turning around some of the acquired businesses acquisition? Is that improvement on net acquired business? Or is it improvement on the existing business or a combination of both?

[Hans J. J. Kooijmans, CFO & Member of Management Board]

I think it's fair to say it's a combination of both.

[Operator]

The next question is from Mr. Steve Goulden, Deutsche Bank.

[Steven James Goulden, Research Analyst]

Yes. I just -- all my questions have been answered apart from one. I wanted to just dig into the industrial side versus the food and nutrition. So obviously if we look at the sort of -- your major chemical, don't know what are the names, food and nutrition volumes have been sort of ballpark 3%, 4% this quarter and very healthy outlook. So on the industrial side, not so much, in some cases down mid-single digit sort of volumes. Can you give us a bit of color on sort of how you're seeing both sides and maybe whether or not some of the weaker numbers that we're seeing from industrials reflect destocking, which your customers maybe don't have because obviously they -- these are distributor. Any kind of view that you could give us there would be really helpful.

[Pieter C.J. van der Slikke, CEO & Member of Management Board]

Yes, yes. We have -- of course, we deal with, let's say, the macro environment in our end markets. So if we talk about industrial, end markets are typically car industry; and so to say, building industry; it had been in the painting, coatings; in advanced materials, with composites and plastics, et cetera, as well; but also other industries. Those -- so that is, to a certain extent, of course, also affecting the demand for our products. At the same time, growth in our business is not only determined by the macro factors but also in our ability to gain share in the markets and to add additional product lines. So it's a combination of that. So it's -- I mean we are not one-on-one translators of the macro numbers, but it is clear that in these end markets we are a bit more sensitive for demand. So it's -- that's clear. In the life sciences, you mentioned food and nutrition. Also there, of course, you need to differentiate quite significantly about -- among the different, let's say, product groups in the food industry. And I think that we are very, very well positioned to benefit from the higher-growth areas in that industry. Pharma, we mentioned, is more a steady growth. And personal care is for us always a strong growth engine, although, of course, there we could be exposed to the high-end markets if that would develop slump. So it's actually very diverse picture, but it's partly determined by the macro factors but also partly determined by our ability to benefit from those trends and those share gains that -- yes, that help us then to beat a little bit, let's say, slowing markets. Not easy, but that's of course something that we try to do in each of these business groups. I hope that gives you a bit of a color on...

[Steven James Goulden, Research Analyst]

Yes, yes. So just a quick follow-up, if I may. Just you mentioned there about share gains. I mean, if we think about the U.S., is it fair to assume that you are still adding new suppliers in a kind of material way that helps you hit the roughly high single-digit organic GP, which seems that you've done this quarter? Or is that more macro driven, would you say?

[Pieter C.J. van der Slikke, CEO & Member of Management Board]

No. I will say that it's both, but it's -- we also add product lines, some suppliers. And it's -- what you see in the United States is a bit of a realignment because of the consolidation that's going on partly by us, partly by our competitors whereby suppliers have to also rethink their sales channel strategies. So we sometimes, of course, are on the wrong side of that reconsideration but more often than not on the right side. So it's both. It's macro and it is ability now to benefit from our new position.

[Operator]

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

[Mutlu Gundogan, Analyst]

A few questions. I'd like to ask them one by one, if that's okay with you. So first of all, on price/mix, I know it's more pass-through for you, but it appears to be down 4% year-on-year. And that has quite a big impact, especially for specialty chemicals. So can you tell us what drove that?

[Hans J. J. Kooijmans, CFO & Member of Management Board]

Mutlu, when you said the mix is 4% down, Pieter and myself, we both looked at each other with a question mark in front of us. What do you mean with 4% down?

[Mutlu Gundogan, Analyst]

Yes. Because if I look at the organic revenue growth, it's up 4%, whereas the organic gross profit growth is 8%. So it seems to be that there was some deflation on your top line of 4%. I know it's...

[Hans J. J. Kooijmans, CFO & Member of Management Board]

Okay, okay. No, that is more a mix effect. So it is -- and that is the danger of looking quarter-to-quarter, that you always see changes in the mix during a quarter.

[Mutlu Gundogan, Analyst]

Yes. I mean, given that you have so many products, it's quite a big impact, so can you maybe explain a little bit why you have such a big mix effect?

[Hans J. J. Kooijmans, CFO & Member of Management Board]

I think it's not abnormal, compared to previous quarters, that there is another real fixed correlation. Of course, there is a relation between revenue growth and margin growth. Within the mix in the regions there are different margin and percentages. And what you see over a longer period of time, I think, the average gross margin in our business is relatively stable over the last year. This year, we have a little bit of a dip, the first quarter lower than last year. The 22.4% is slightly lower than last year. And that is mainly the impact of the acquisitions that we did adding additional revenue at a lower gross margin level. If you then start to improve gross margin percentage in these newer acquired businesses, and then you'll see more margin growth and revenue growth. But this is, I think, one of the outcomes of working hard on the acquired companies, to improve the margin percentages there.

[Mutlu Gundogan, Analyst]

Yes. And to stick to this point. So I know it's -- it can be volatile from quarter to quarter, but minus 4%, is it something a mix effect? Should we expect that in the coming quarters as well?

[Hans J. J. Kooijmans, CFO & Member of Management Board]

No. Basically what you said, the minus 4% is the result after the margin grows quicker than the revenue growth. That is your minus 4%.

[Mutlu Gundogan, Analyst]

No.

[Hans J. J. Kooijmans, CFO & Member of Management Board]

And basically that means that in -- let's call it, in existing business, we were in a position to improve our margin quicker than that we grew the revenue.

[Mutlu Gundogan, Analyst]

Right, okay...

[Hans J. J. Kooijmans, CFO & Member of Management Board]

And that's partly in the acquired companies. So if we increase the margin in the acquired companies, then as a consequence, your margin grows quicker than your revenue base.

[Mutlu Gundogan, Analyst]

Yes, okay. Then on the Americas, I have a few questions there. So first of all, your gross profit was up 17% quarter-on-quarter. I know that Q4 was a bit weak-ish with December but also, comparing to Q3, still very good growth. Just wondering. Is that -- are those contract wins? Are those additional lines you've added from supplies?

[Hans J. J. Kooijmans, CFO & Member of Management Board]

I think, Mutlu, what Pieter just mentioned is it's a bit of a combination of these kind of things: adding business lines, rationalizing in the market, benefiting from our presence in the different areas due to the acquisitions that we did.

[Pieter C.J. van der Slikke, CEO & Member of Management Board]

I think we're also, maybe to add to what Hans is saying, of course, working very hard to increase our margins in the acquired business, which were on the low side. So it's a refocusing organization. Just it's a combination of all, but we are, of course, very, very focused on margin. And the businesses that we bought recently were, of course, lower-margin businesses, so you're seeing the effect of our hard work here.

[Mutlu Gundogan, Analyst]

Yes. No, no. We -- I -- you said it earlier than I could ask the question. Because I want to talk a little bit about the margins, which are indeed impressive, especially that your operating expenses are flat in the last few quarters, while you're definitely growing the top line. So how should we think about that going forward? Do you think that you can maintain or have limited inflation while you grow the top line in -- especially in the Americas?

[Hans J. J. Kooijmans, CFO & Member of Management Board]

Time will tell there, Mutlu. Time will tell. And we try to be as efficient as possible, so -- and if we need to add costs to further grow, we will certainly do, but if we can do without, it's always better.

[Pieter C.J. van der Slikke, CEO & Member of Management Board]

Yes. And I think...

[Hans J. J. Kooijmans, CFO & Member of Management Board]

And we also agree, I will say, Mutlu, that we have reduced in acquired businesses over the last, well, I would say, 2 years, we have reduced our costs. So okay, in itself, this is not a normal pattern because, when you grow our business, then we add costs because we need more people. And the people that we need are expensive, in a sense, high earners and high-quality people. So normally, you see always our costs grow, but I think that this is also an effect of the -- let's say, the overstaffing of some of our acquisitions and a reduction in that.

[Mutlu Gundogan, Analyst]

Yes. No, fairly clear. I think just one final point on this then and conversion margin. A few of my colleagues already touched upon that. I mean it was really strong at almost 44% above EMEA. I mean, is this a temporary high, do you believe? Or do you believe there's more upside? And maybe as a sidestep, for example, how do you know that, if we look at some of your peers that are also active in Europe and in U.S., we've seen that U.S. usually has higher conversion margins. Do you think that you can go higher based on that?

[Pieter C.J. van der Slikke, CEO & Member of Management Board]

Again, I'll -- I'm a little bit cautious here to predict what could happen. I mean this is a very good quarter. It's in itself not a indication, as far as I can see, because as I always say, I don't have a crystal ball, but for the rest of the year, we constantly try to improve our businesses. But I think you should not, let's say, linearly, how do you say that, see these results for the rest of the year and see this growth continuing. We have to be also -- I mean, this is quite a spectacularly growth but for the first quarter. Let's see what happens in the next couple of quarters, but a bit of caution is also warranted, I will say.

[Mutlu Gundogan, Analyst]

Yes. Okay, that's good. Final question, a very boring one, apologies, but the IFRS 16 had a positive impact of EUR 1.2 million on the quarter. Is that something that we should take forwards for the next few quarters, Hans?

[Hans J. J. Kooijmans, CFO & Member of Management Board]

Yes. So if you look back at what we presented there in our annual report 2018, we've made a -- we gave a specification of the impacts of IFRS. And basically what we said that if you'll add 4.5 -- EUR 4 million to EUR 5 million to the operating results in 2019, though they have no material impact on net results, it will add about EUR 65 million additional debt to the balance sheet as a consequence of IFRS 16. And the impact on EBITDA will, of course, be bigger because, yes, part of the cost will be presented as either depreciation or amortization. But I would like to refer to what we specified there in the annual report 2018.

[Operator]

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

[Rajesh Kumar, Analyst]

Just a quick follow-up on the inventory question and your -- what sort of discussions are you having with customers and suppliers regarding inventory availability? I'm just interested in the color of or the nature of the discussions, if any. Or is it still too early in your supply chain for this to be a concern? And the second one would be on the supplier synergies between Europe and Americas. Could you give us some color on what run rate of incremental product addition or volume growth can we expect from such cross-selling in the next, say, 3 years? I'm not talking about next quarter but over a period of time.

[Pieter C.J. van der Slikke, CEO & Member of Management Board]

Okay. On your first question, inventory. Basically we, I mean, talking with -- I'm trying to understand exactly what you mean when -- about the inventory question because also that is, of course, quiet anecdotal. I mean there's not, in our business, not a general trend that is then applicable to the whole company in terms of what happens with inventories. And it's very, very much business-to-business, customer-to-customer related. And I would say that we see at this moment a difference -- different behavior versus, let's say, earlier periods and which means that we keep inventory as efficiently as possible but that we sometimes, of course, have discussions with customers to keep inventory for them on a higher level. So we don't see now a change in that behavior. Is -- does that give a bit of an answer to your question?

[Rajesh Kumar, Analyst]

Yes, it does. Yes.

[Pieter C.J. van der Slikke, CEO & Member of Management Board]

The cross-supplier further, Rajesh, I think it's very good question, again not easy to answer. What you see, I think, maybe as a general remark is that with our big suppliers and within our suppliers that are global companies, like DuPont or Dow or BASF, et cetera, we have discussions, of course, regionally and sometimes globally. And it depends a bit on the -- or globally or Europe and U.S. And it depends a little bit again on the product lines. Typically, in certain areas, like pharma, you'll talk a bit more globally, whereas with other product lines you'll talk more regionally, but let's say, as in the DNA of our group, we always are very much focused on cross-fertilizing and leveraging our supplier relations and trying to come into discussion with our suppliers to work with them also elsewhere. I can't put a number on that or -- because that is very dependent on timing, et cetera, so let's not -- that's not to -- I can't predict that, but it is a key element also of our business, that we try to work with suppliers in regions all across, let's say, the IMCD working territory. So it's something that we're very focused on our whole organization, but again it's difficult to predict when we have success where.

[Operator]

There's an additional question from Mr. Mutlu Gundogan.

[Mutlu Gundogan, Analyst]

Yes. Sorry. Just one more question, on the Americas again. I mean, obviously, if I look at versus my forecast and, I think, also versus some of my peers, I think that probably the Americas in the past few quarters and again this quarter has surprised positively. I'm just wondering. I mean you've done a lot of acquisitions, Pieter and Hans, with strength into the U.S. Have they surprised you positively as well? I'm just wondering where did the positive -- if so, where did the positive surprise come from? Did it come from the supply relations that you have or would the U.S. market may be different? The fact that you've been able to show this impressive growth and also the fact that you've been doing so well on the margins.

[Pieter C.J. van der Slikke, CEO & Member of Management Board]

Yes. So we talk -- Mutlu, we talk about the whole of the Americas. We also speak about Canada here and also Brazil. I would say in all these regions -- and if we'd limit us -- ourselves a bit to North America, first, I think what we -- the other 2 bigger acquisitions that we did in the last couple of years were L.V. Lomas and E.T. Horn. And both companies, we have been able to -- yes, these were companies with EBIT margins half of what our group average was. And we have been able and are working hard to change that because in -- essentially there is nothing in these companies that doesn't make them as productive or profitable than our own companies or our heritage companies. And that's something that we work hard on and are successful in. At -- on another level, we are also organizing, we have not finished yet but organizing ourselves as an American organization, which means that we hope to convince suppliers to work with us in bigger territories. And here and there, we are successful in that. So that's an important element. And then of course, the general good circumstance on the American market helps us as well. In Brazil we are constantly trying to improve our business, and so far, that is also, let me say, going reasonably well. And so that helps also. So it's, let's say, positive signs in the -- in our Americas region. And well...

[Operator]

[Operator Instructions] There are no further questions.

[Pieter C.J. van der Slikke, CEO & Member of Management Board]

Okay. Fantastic. Then I wish everybody a nice day, and we see each other or hear each other next quarter.

[Operator]

Ladies and gentlemen, this concludes the conference call. You may now disconnect your line. Thank you for your participation, and have a very nice day.