IMCD NV

AEX:IMCD

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for holding, and welcome to the IMCD analyst call. [Operator Instructions] I would like to hand over the call to Mr. van der Slikke. Go ahead, please.

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

Yes. Good morning, everybody. As usual, I'm here with Hans Kooijmans, my colleague, and together, we will answer your questions on our first quarter results. As reported in our press release, we had a strong first quarter with an EBITA growth of 28% and 34% on a constant currency basis. Growth consists both from organic growth and growth from acquisitions in 2020, and most notably Signet in India. As said in earlier calls, our business model is robust, also under difficult economic circumstances. We saw in the first quarter strong demand from our customers, and we must assume a preparation of economies that will open up after COVID. Across many markets, we experienced delays in deliveries because of product shortages or supply chain issues. We also saw price increases over a wide range of products. Notwithstanding this, we were able to cope with all these factors successfully, and we look with optimism to the remainder of the year. Now Hans will take you through the Q1 numbers, and after that, we will answer your questions. Hans?

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

Thank you, Piet. Good morning, ladies and gentlemen, and I will give you a short summary of IMCD's first quarter 2021 results. And as usual, I will start on Page 10 of the analyst call presentation. We are happy to report a ForEx-adjusted revenue increase of 13% and 17% gross profit increase in the first quarter of the year. The gross profit increase was a combination of 9% organic growth and 8% as a result of the first-time inclusion of companies acquired in 2020 and 2021. Gross profit in percentage of revenue improved by 0.8percent point from 23.6% to 24.4%. This increase in percentage 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 operating EBITA increased 34% to EUR 90.6 million. This increase was a combination of substantial organic growth and first-time inclusion of acquisitions. The operating EBITA margin increased by 1.7 percent point from 9.5% in the first quarter of 2020 to 11.2% in the same period this year. The conversion margin, calculated as operating EBITA in percentage of gross profit, was 45.9%, which is 5.7 percent point better than the same period of last year. In all regions, we saw an improvement of this ratio. ForEx-adjusted net result before amortization and nonrecurring items increased 32% to EUR 64 million. Free cash flow and cash conversion ratio both increased compared to the same period of last year. Substantial operating EBITA growth in 2021 more than fully compensated for the increase in working capital in the first 3 months. This working capital investment of about EUR 27 million was mainly the result of increased business activities. Net working capital, translated in days of revenue, were of 54 days, similar to the first quarter of last year. Year-to-date cash earnings per share were EUR 1.11, an increase of 18% compared to the same period of last year and a 22% increase when adjusting for ForEx differences. On the last line of this page, you could see a 10% increase in our number of employees, and most of this increase is the result of the first-time inclusion of acquisitions. On the next slide, Slide 11, you will find gross profit, EBITA and conversion margin per operating segment. EMEA reported 8% ForEx-adjusted gross profit growth and 18% operating EBITA growth. Operating EBITA, in percentage of revenue, improved from 10.5% to 11.3%. As most of the acquisitions in this region were relatively small, it's fair to assume that most of the growth is organic growth and the impact of the acquisitions is limited. A bit of a similar story in the second column with Americas Q1 figures. However, weakening of local currencies in this region had quite an impact on reported euro numbers, as you can see. ForEx-adjusted gross profit in the Americas increased 10% and operating EBITA increased 11%. Most of the EBITA growth is organic and, amongst others, driven by an increased gross profit percentage. Asia Pacific in the third column reported 70% gross profit growth and more than doubled operating EBITA. This was a combination of substantial organic growth and the first-time inclusion of acquisitions. Operating EBITA in percentage of revenue and the conversion margin further improved. This increase was a combination of the acquisition of Signet in India in November last year and a healthy organic gross profit and EBITA growth. And in the last column, as usual, you will find the cost of holding companies. And this includes, as you know, all operating companies, including the -- all nonoperating companies, including the head office in Rotterdam and the regional support offices in Singapore and in the U.S. On Page 12, a summary of IMCD's free cash flow. Free cash flow and cash conversion ratio were both substantially higher than the same period of last year as a result of increased operating EBITA, combined with a lower working capital investment. Further CapEx was about EUR 2 million lower than in the same period of last year. Then on Page 13, a short update on the net debt deleverage, and as you can see, reported leverage ratios and leverage based on the definitions in the loan documentation stayed at 2.3x and 1.6x LTM EBITA. The 1.6x leverage ratio is well below the lowest 3.5x leverage threshold in IMCD's loan documentation. And last but not least, on Page 15, you will find our outlook for 2021. So far, the short summary of our year-to-date financials, and Pieter and myself are happy to answer your questions.

[Operator]

[Operator Instructions] First question is from Mr. Mutlu Gundogan from ABN AMRO.

[Mutlu Gundogan, Research Analyst]

Three questions, if I may. The first one on EMEA. So your operational costs were rather low this quarter, I think as a percent of sales, 13.6%. So just wondering, is that a temporary effect. And if so, how quickly do you think that it should normalize to the historical average? That's the first one. Then secondly, on Asia Pacific, I'm really surprised to see that OpEx was nearly up 1% -- sorry, EUR 1 million year-on-year to EUR 13.2 million. Is that the new run rate per quarter for this year? And if so, does this mean that our conversion margin of 65% is too low for Signet? And then thirdly, on the sentence in the press release where you talk about product shortages and disturbances in supply chain. Just wondering, was that overall a positive or a negative for IMCD as a whole.

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

Thank you, Mutlu. The first question on operational cost in EMEA. We have, of course, compared to last year, lower operating cost because of COVID, in particular, on travel executions. And as you all remember, last year, COVID started more or less in the course of March. So there we have a normal level of cost. So we have some benefit of that. The question whether or not it will return in the, let's say, in the usual form is, of course, something that we think about. And it will, of course, increase a bit if it -- the situation normalizes again. Whether it will come back to the original level, we doubt that we will see because we also learned a lot during this period. So yes, some positive cost effects because of the situation we are in. Then OpEx Asia, Hans, is that something you want to...

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

Yes. I first try to understand, Mutlu, what you are referring to there, to make sure that there is a common understanding about the numbers that you've just mentioned. I think basically, if I look at the cost trends in Asia Pacific, organic cost growth is a bit similar as Piet just indicated. So there could be a little bit of a positive impact of lower travel cost. But other than that, we just see in that region normal cost inflation and a bit of growth to -- of our own organization to cope with the healthy organic growth in that market segment. And I'm not sure if I completely followed your conclusion on conversion margin of segment, but perhaps I -- is your question there?

[Mutlu Gundogan, Research Analyst]

Yes, maybe to add. So if I look at the OpEx, so operating EBITA minus gross profit, and if I asked you something on depreciation, I see that, that number was EUR 13 million, EUR 13.2 million versus something like EUR 12 million last year in Q1. And I had expected that, that would increase more mainly on the back of the acquisition of Signet. So maybe the operational cost of Signet is significantly lower than what I have or maybe other analysts have.

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

That could be the case. Yes. You're very, very efficient. On your -- but maybe that is something to address maybe offline instead.I think the -- with respect to your last question, product shortage, that's a good question, actually. Is that good or bad? Well, actually, of course, it is -- causes us many headaches, in particular, our order processing staff, salespeople because we have delivery dates, we have commitments. So that -- in that sense, it is not good. I think generally, of course, we see also a part of that will be product shortages. We see prices increase generally. And that is, yes, generally good for us because, of course, our absolute gross margin -- gross profit will increase. So it's a mixed picture, Mutlu, I would say. And it's of course -- it causes us a lot of problems also with customers. But in the end, deliveries will take place because then, of course, we need to postpone. But in particular, I would say, in term of additional burden for our staff.

[Mutlu Gundogan, Research Analyst]

Understood. Can I just follow up? That is the second time that you mentioned higher prices. Just wondering, if you assess the situation, where do you think you or your supply stand in terms of higher prices or putting in higher prices. Is this -- did it just start? Are we halfway through? How long do you expect it to last?

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

That's a very difficult question, again. I mean what we see with very -- with a lot of industrial products, let's say, more base products, quite significant increases for our principles, which make them more sophisticated products for that, that they deliver to us. Yes, are we through that? It's difficult to say. I think it will depend very much on how demand will develop in the course of this year. And the other factor in this is that -- I mean there are multiple factors that played a role. We had force majeures in many places, for example, because of the Texas harsh winter situation, that caused problems. So it's partly -- it was, let's say, climate-related and partly, it is the demand in the market and disturbance of supply chain. But how long this will continue, I think I would be a very valuable person if I would be able to predict that. So I don't know.

[Operator]

Next question is from Mr. Matthew Yates from Bank of America.

[Matthew John Peter Yates]

Are you able in any way to quantify how much sales you maybe missed out on in Q1 from those delayed deliveries? And does that spill over into Q2? Or have those sales effectively been lost to a competitor? And if we just think about the regional dynamics, following up what you were saying about Texas, is it fair to assume that those shortages were more acute in the U.S. and that would be why perhaps organic growth there was less than Europe? The second question, just curious in terms of the significant rise in COVID cases in India, whether that is having any impact operationally on Signet thus far.

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

Okay. I think it's very difficult to say how much, let's say, of our turnover's affected by that product shortages. It's certainly not lost. What we see is that it is pushed over to -- yes, to the next month or the next quarter. And that is an effect that we've seen today as well. So the turnover and the sales is not lost. So that is a positive. I think you're right that the United States, particularly U.S., have more problems because of the Texas situation, which is, I guess, more or less, most of the things are now solved. So that certainly had an effect on our first quarter results there. And India, yes. Until now, we have not -- let's say until -- in the first quarter, we have not noticed it yet. Of course, the -- let's say, the wave that we now see is of the last, what is it, 2 weeks that is really a breakthrough. And we have to see what the effect is. But it certainly is serious. I'm not sure if this will affect the production capacity of the Indian pharmaceutical industry. I mean it -- the effect could be, of course, because of logistic problem. But until now, we haven't seen it yet.

[Matthew John Peter Yates]

And sorry, if I can just follow up. Maybe around the outlook and the guidance, to the extent you can give it, usually Q1 is a fairly elevated quarter for the company in terms of activity. And if I look back historically, sometimes Q2 has been down, sometimes it has been flat, sometimes it's been up. Any -- directionally, is there anything you can indicate in terms of your expectation for Q2 sales versus Q1 at this juncture?

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

It's, of course, very difficult because we don't give a forecast for quarters. But I think generally, I can say that the trend that we see is still there.

[Operator]

Next question is from Mr. Rajesh Kumar, HSBC.

[Rajesh Kumar, Analyst]

The first question is on cross-selling. Prior to the pandemic and even last year, one of the growth drivers for IMCD has been the ability to bring new products to new markets from existing suppliers. How has the pandemic, and especially as we go through 2021, the first quarter, how has that changed? And is the product availability slowing that process up a bit? The second question is on -- a follow-up on the product shortages. Has your service been disrupted to any of the segments, be it customer segment or geographic segment, because of these shortages? Or have you managed so far to deliver the service, as you would have anticipated, but with difficulty? And finally, basically, if you look at your generic pharma footprint, are you happy with the shape it is in? Or do you still see some gaps which you could potentially target with M&A?

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

Yes. Okay. Thank you very much for the questions. On the first one, cross-selling. Yes, one of the, let's say, elements of our model is, of course, that we want to, what we call, cross-fertilize, cross-sell, let's say, our supplier relations across the territories where we work. That is a process. That is part of our DNA and that goes on, and that is not interrupted because of COVID. I think that in the context that we have with our suppliers and principles, we always speak about possibilities to further expand cooperation in other territories. So that is not really interrupted. And in this particular case, product shortages have not played a role. Service interruption because of product shortages, yes, of course. And that is -- well, what does that mean exactly? It means delays, I would say, and sometimes in certain product categories, even our allocation. And that means that we have to very carefully consider who -- which orders we can confirm and which not. That's not with every product category, of course, the case. So -- but we need to be very diligent in ensuring that we can deliver in time, on time and in the volumes that are required. So it's a much more -- yes, demand on our internal staff to take care of that.The last question are now the pharma footprint. Pharma footprint. The pharma footprint is -- that's a good question. As you know, we have a global strategy in pharma. There's still some gaps, geographical gaps. I don't want to elaborate too much on that. But yes, we -- I think we cover many, many, many major markets, but there's still some wishes that we have, which we are look -- and for that, we will continue to look for opportunities in acquisition.

[Operator]

Your next question is from Mr. Quirijn Mulder from ING.

[Quirijn Mulder, Research Analyst]

My congratulations, you start to see results. But I have a couple of questions here. Now my first question is about -- was there anything visible from the Brexit on the first of January? I know it's a long time ago, but -- and my second question is, and we have posed it already last time, is there any impact from the vaccine production related to them saying -- especially in India, related to your raw materials, excipients, et cetera, which had an influence on your business in the first quarter? And then on your organic growth, it's correct to assume that your organic growth in the Far East was double digit? Those were my questions.

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

Okay. I can handle your first on Brexit. My answer would be no, not yet. Other than, of course, internally, we have a lot more work. It -- because of the Brexit. But in terms of, let's say, the quality of our business and the growth, we have not seen an effect in these first couple of months. On vaccine, let's say, are we able also to contribute to vaccine production? It has not had an effect on our results. We are looking for potential products that could help produce vaccines. But at this moment, our results have not been influenced by that. Finally, the overall organic growth. I think behind the question was, was it double-digit organic growth in Asia Pacific, and the answer is a clear yes.

[Quirijn Mulder, Research Analyst]

Yes. My estimate is 15%. Maybe that's -- you can confirm that?

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

It's a bit on the conservative side.

[Operator]

[Operator Instructions] There's a question from Ms. Suhasini Varanasi from GS.

[Suhasini Varanasi, Equity Analyst]

Just a few, please. Could you maybe give some color on how the growth has trended across the verticals, especially industrial versus nonindustrial verticals? That would be helpful. And any trends that you're seeing there? And just a couple of housekeeping questions after that. Any nonrecurring charges that you've taken in 1Q that we should be aware of? And the impact of the disposal of Nutri Granulations business, the manufacturing efforts, for 2021?

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

Do you want to do the last 2, Hans?

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

Yes, perhaps the impact of Nutri Granulations. We closed the sales transaction in early April, so there was no impact in the Q1 figures and as well has a limited impact on Q2. As what we disclosed, there is -- revenue was about USD 11 million of this activity. Then your other question, I think referred to one-offs that you should be aware of in Q1. Is that the question? I...

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

Nothing to report. Nothing to report there. Yes. And then your first question about, let's say, the dynamics around the different business groups that we have, in particular, industrial, life science, we saw a strong demand as I also, I think, we reported in the press release in the industrial sectors. So advanced materials, which is basically covering plastics and composites and all kinds of products around that, saw a strong growth. I must also point out though that, that was, of course, the sector that last year decreased the most. So it's also regaining, so to say, strength. Coatings, construction did well. I think in life science, we saw a recovery of at least a partly recovery of our personal care sector, which had suffered also significantly because of COVID. So a bit, let's say, life science, of course, very stable business segment, but we saw in particular, strong dynamics in the industrial sector.

[Operator]

There's an additional question from Mr. Quirijn Mulder from ING.

[Quirijn Mulder, Research Analyst]

Yes. Two questions. So Piet, you made a remark about maybe for supplies of excipients for vaccines production. So can you maybe elaborate on that, what your plans are there and what the possibilities are there? And probably a new market for you, so maybe you can give me some idea. And the other question is about -- yes, you spoke about advanced materials. The biggest acquisition in Europe was Velox a couple of years ago. So how is that going in Velox? Is that now in line with the returns of the rest of the business? Is the -- and the cost savings are, let me say, completely finished with that one? Those were my 2 questions.

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

Yes. On your last question on the Velox acquisition a few years ago, that has been fully integrated and let's say, all the positive cost effects have been absorbed. And of course, that part of the business has done also, in this situation, quite well. We have a significant medical application part of Velox that is doing also quite well. On your vaccine question. Again, yes, I don't want to elaborate too much on it. I mean there are various, let's say, supporting substances that go -- need to go into vaccine production. And of course, these -- we are looking at possibilities to interest suppliers to work with us. But there is nothing to report on that in a concrete way at this moment.

[Operator]

[Operator Instructions] There's a question from Mr. Fernand de Boer from Degroof Petercam.

[Fernand de Boer, Research Analyst]

Yes. Maybe you have already answered it, but I missed part of the presentation, I was kicked out. But regarding this industrial demand, in your view, is that a lot of the restocking or also recurring business?

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

Yes. That is, of course, a million-dollar question always. I think part of that will be -- at this point, I guess -- because of course of 40,000 or 50,000 customers exactly understand what the motivation is, but I guess it's partly restocking. It's maybe partly also a fear of losing out because of the shortages. But it is also driven by demand on, let's say, of our customers. We see, of course, in the end markets, in coating, construction, we see car industry, automotive also going up. So we see -- in various industries, we see growth. And of course, these are the, let's say, customers of our customers. So part will be restocking but part will also be continuous demand.

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

And then perhaps, too, to add from my side. Hans here. So for me, this is always a bit of a funny question because I remember the first quarter call of last year whereby we had a very strong quarter. And the million-dollar question in that call was is the strong demand in Q1 the result of stocking of customers because of COVID. And the answer at that moment was we don't know. We see it every time when we have a strong quarter, people think it's related to restocking of customers. And...

[Fernand de Boer, Research Analyst]

Yes, probably that will always be the case. Then I had another question. On the gross profit margin, you stated it's something from acquisitions, M&A-driven, but also from mix and massive stake in -- and you also mentioned, okay, on the question of Mutlu that price -- that this was helpful for pricing. Could we conclude through that, that actually price was the major part of your organic growth? Or is it simply most was volume-driven?

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

No, it's both. It's absolutely both. It's volume growth and price growth or price increase. We see certainly volume growth as well.

[Operator]

[Operator Instructions] Mr. van der Slikke, there are no more questions. Please continue.

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

Okay. Well, then thank you very much again for your attendance, for your questions, and look forward to see you all in the next quarter, and enjoy the day. Thank you very much.

[Operator]

Ladies and gentlemen, this concludes today's analyst call from IMCD. You may now disconnect your line, and have a very nice day. Thank you.