IMCD NV

AEX:IMCD

Earnings Call Analysis

IMCD Faces Market Volatility but Sees Positive Momentum

In Q1 2024, IMCD faced volatile markets resulting in revenues of EUR 1.16 billion and an operating EBITDA of EUR 127 million, marking a 13% decrease. The company closed 6 acquisitions and signed 3 new ones, contributing significantly to its revenue. Despite geopolitical tensions and cost increases, there was excellent commercial momentum and a strong M&A pipeline. While Personal Care performed well, Food and Nutrition faced pricing pressure. The Americas saw pricing pressure and low demand in certain segments. IMCD continues to invest in digital and technical infrastructure for future growth, remaining cautiously optimistic about the commercial pipeline and positive business model momentum.

Introduction

IMCD's Q1 2024 earnings call showcased a mixed bag of results amidst a volatile market environment. The company's revenue clocked in at EUR 1.16 billion with an operating EBITDA of EUR 127 million, marking a 13% decline on a constant currency basis when compared to the same quarter last year【4:0†source】.

Market Trends and Challenges

The quarter was heavily influenced by geopolitical tension and weakened global economies, which hindered expected market recoveries. Additionally, inflation added to cost pressures. Despite these challenges, IMCD saw positive commercial momentum and a robust M&A pipeline with six acquisitions closed and three more signed during the quarter【4:0†source】.

Business Segments Overview

In the Life Science segment, the Personal Care division performed well, but Food and Nutrition faced pricing pressures. The Pharma division experienced a temporary decline in demand. For the Industrial segment, performance improved compared to the latter half of 2023, though full confidence from customers to normalize order patterns is still lacking【4:0†source】.

Regional Performance

The EMEA region remained relatively stable despite some negative forex effects, while Asia Pacific experienced a slight decline. The Americas faced pricing pressures and low demand in specific market segments. Overall, investments in digital efficiency and operational excellence are seen as crucial for future growth【4:0†source】【4:6†source】.

Financial Metrics

The gross margin percentage for Q1 was 25.4%, 0.5% lower than the same period last year but slightly up from the full year 2023 margin. Adjusted operating EBITDA decreased by 13% to EUR 127 million, while the operating EBITDA margin decreased to 10.9%【4:6†source】.

Impact of Acquisitions

IMCD's acquisitions had a mixed impact on its financials. While acquisitions drove growth, the acquired businesses had a lower-than-average gross margin of around 15%, contributing to the decline in overall gross margin percentage【4:0†source】【4:3†source】.

Employee and Operational Costs

The company experienced a 10% increase in headcount, primarily due to acquisitions. Organic growth in employee numbers was negligible. Increased operational costs further impacted the margins, primarily driven by inflation and acquisition-related expansions【4:0†source】【4:2†source】.

Outlook and Future Prospects

IMCD remains cautiously optimistic about future growth. The company sees a positive momentum driven by their commercial capabilities and digital infrastructure. However, given the volatility and uncertainty in market demand, the company refrains from making strong predictions for the rest of the year【4:0†source】【4:9†source】.

Earnings Call Transcript 2024-Q1

[Operator]

Hello, and welcome to IMCD Q1 2024 Results. My name is Alan. I will your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]

I will now hand you over to your host, Valerie Diele-Braun to begin today's conference. Thank you.

[Valerie Diele-Braun, executive]

Good morning, everyone, and welcome to the IMCD Q1 2024 call. As usual, I'm here with my colleague, Hans Kooijmans, the CEO -- CFO of IMCD, who will lead you through the financial results after my preliminary remarks. And then we are open to answer your questions, of course.

Q1 2024 was a quarter marked by volatile markets across geographies and business groups. Having delivered an exceptionally strong Q1 2023, we recorded in Q1 2024, revenues of EUR 1.16 billion and operating EBITDA of EUR 127 million, a 13% decrease on a constant currency basis.

On the positive side, we saw during this quarter, excellent commercial momentum, suppliers wanting to expand with us in new geographies and markets, new suppliers interested to collaborate with IMCD and a healthy project pipeline. Further, our M&A pipeline and execution continued strongly with 6 closed acquisitions in the first 3 months and 3 new acquisitions signed.

On the adverse side, geopolitical tensions and weak global economies did not support the expected start of recovery of markets, whilst costs increased due to inflation and investments in our digital and technical lab infrastructure.

We currently see a lot of positive momentum for the IMCD business model, which in terms of outsourcing trend is of the counter cyclical. Additionally, and based on the digital and regulatory needs of customers and principles, we see an increasing need for our capabilities in terms of commercial and technical selling skills as well as just-in-time delivery.

Going into more detail on the business segments and regions. In Q1, we saw volatile months and development across the regions with rather uncertain ordering patterns and erratic in smaller orders, just-in-time deliveries and postponement of orders. In our Life Science segment, Personal Care continued to perform very nicely, whilst Food and Nutrition experienced in the less differentiated areas, pricing pressure. The business group Pharma suffered from temporary less demand. In our Industrial segment, we saw across the board a better performance than in the second half of 2023. Inventory rundown seems to have come to an end here. However, we believe full confidence still needs to return to customers in order to return to more consistent and normal order turns and stock levels.

As for the regions, EMEA was relatively stable in terms of gross profit with some negative FX effect, whilst Asia Pacific declined slightly. The Americas were impacted by pricing pressure and low demand in certain market segments. In terms of our development, we continue to invest in operational excellence and digital efficiencies, which we consider to be important for future growth.

As mentioned in our full year 2023 call, our digital solutions allow for more customer interactions and to drive share of wallet further. This includes the development of new tools as well as the continued rollout of our uniform ERP, CRM, IT infrastructure to newly acquired companies to ensure full transparency and drive for growth in absolute margin improvement.

Additionally, we invest intensified our work on sustainability as we continue to see a lot of interest by customers on formulatory support and resulting commercial opportunities in this area. We are confident that our investments made, our strong commercial teams, our digital and logistic infrastructure combined with further driving operational excellence and cost control will deliver future growth and efficiencies.

Hans will now give you a short update on the numbers.

[Hans Kooijmans, executive]

Valerie, thank you for the introduction. And during Valerie's opening remarks, you could have seen a couple of slides with the -- a couple of highlights of the first quarter 2024. You saw a few key financials and an overview of the 6 acquisitions that we closed during the year, that Valerie referred to. And apart from the 6 closed acquisitions, we also signed 3 acquisitions this year that we expect to close in the second quarter.

And as you all know, the closed acquisitions will be included in our consolidated numbers from the closing date onwards. This, in total, 9 acquisitions in Q1 generated EUR 235 million of revenues with about 355 employees in the last full year before we acquired them. About 75% of the revenue of these 9 acquired businesses is in Life Science, so in food, pharma and personal care. And the remainder, so the about 25%, is generated in industrial markets.

We're, of course, happy to answer any questions that you might have around M&A in the Q&A section later this morning.

On Page 10, you'll find, as usual, a short summary of the key financial figures that we published earlier today. ForEx adjusted revenue and gross margin were more or less similar to last year. And when looking at gross margin, we report an organic decline of 8%. This was more or less compensated by the positive impact of acquisitions. When looking at this decline, it's fair to realize that we compare Q1 of 2024 with an all-time high Q1 in 2023 and also the best quarter of last year.

Nevertheless, Q1 of this year was also for us a rather disappointing quarter. Acquirer with what Valerie just mentioned, challenging market condition of an unpredictable customer demand and quite some volatility between the various months. And so when comparing months in this quarter, March was this year by far the weakest month when comparing with 2023. However, when looking at April, we see the reverse in April this year seems to be much better than April last year.

The gross margin percentage in Q1 is 25.4%, which is 0.5% below Q1 last year and 0.1% higher than the full year 2023 margin of 25.3%. Differences between and within the regions are caused by local market conditions, product mix variances, product availability and foreign currency fluctuations. Further, the gross margin percentage of newly acquired businesses were on average lower than group average, resulting in a negative margin percentage impact. When excluding the impact of the acquisitions, the gross margin percentage in Q1 would have been 26%, so more or less similar as last year.

ForEx adjusted operating EBITDA decreased 13% to EUR 127 million. The operating EBITDA margin decreased to 10.9% and the conversion margin dropped to 42.9%. And the decline in conversion margin is the result of missing gross profit growth to compensate our inflation-driven on cost growth. And when talking about on cost growth, you could see on the bottom of this slide, that we increased the number of employees with 441, an increase of 10%. It's important to mention that this whole increase is the result of acquisitions. It's the impact of newly acquired businesses in the course of 2023 and the first quarter of 2024 resulted in a reported increase of headcount. The organic number of people growth was neglectable.

Then you see the EUR 23 million absolute amount difference in net results, which is more or less similar to the shortfall in operating EBITDA. And this indicates that the lines between EBITDA and net results, so mainly amortization, financing costs and tax add up to a similar EUR 66 million, EUR 67 million amount as last year. And later, I will come back on the cash flow in a separate slide.

On the next slide, Page 11, a few key figures from P&L per operating segment with a focus on gross margin and EBITDA development. As promised last year, we started sharing on a quarterly basis, the split in organic growth, acquisition growth and the currency impact per segment. A few general remarks from my side on the data that we see on this slide, but I don't want to talk each and every line.

Starting first with the currency impact. As you can see, currency impact was limited in Q1, and in the most regions, no real material impacts on the overall outcome. When looking at the acquisition impact, we saw both in absolute numbers and in percentage the biggest contribution of M&A in Asia Pacific. The revenue growth in Asia Pacific as a result of acquisitions, was 25%. And whereby the contribution to gross profit was only 14%.

And based on these growth numbers, it's easy to calculate that the average gross profit of the business that we acquired was around 15% only. This 15% acquired gross margin percentage is at the same time, the main reason for the drop in gross margin percentage, not only in this region but also on group level.

When looking at gross profit, the biggest shortfall compared to last year, both in percentage and in absolute amount, was in the Americas. As mentioned by Valerie, pharma played a role combined with a bit of pricing pressure on what I would call the more commoditized industrial products in our portfolio.

As you might remember, in North America, we do quite some industrial business, and it's nice to see that volume started to pick up in this segment. The shortfall of gross margin of 14% more than doubles when looking at the 31% shortfall in EBITDA. On cost growth in the Americas region was limited. However, as we divide the amount of shortfall in gross profit by EBITDA, and that's, of course, a much smaller denominator you automatically get a much higher percentage. The decline in operating EBITDA, EBITDA margin and conversion margin is a result of lacking gross profit growth in Q1 to fully compensate inflation-driven organic on cost growth.

And then in the last column, as usual, you will find in the holding companies, all nonoperating companies, including the head office in Rotterdam and our regional support offices in Singapore in the U.S. In Q1, we spent close to 0.8% of revenue on holding cost.

Then on the next slide, an overview of free cash flow. Compared to last year, both free cash flow and cash conversion ratio were lower than last year. And the reported decrease was a combination of lower operating EBITDA and higher investment in working capital. If you translate working capital, so working capital translated in days of revenue, the outcome was EUR 63 days, and it is close to the 61 days reported at end of December, but by amongst other timing of new working capital of acquisitions played a bit of a role.

When looking at our working capital cycle during the year, we typically see December is the lowest point in the cycle due to relatively low debtors at year-end as a result of lower sales in December. As a consequence, the investment in working capital in Q1 is mainly debtor-related as March sales are typically higher than December sales.

Then Slide 13, a summary of the development of net debt and leverage. Debt increased mainly as a result of purchase prices paid for the 6 acquisitions that we closed in Q1. IFRS leverage, including the IFRS-16 lease liabilities, et cetera, was 2.7x EBITDA, and the leverage ratio based on loan documentation was 2.5x EBITDA. If you look at the big difference between the 1.7 end of December '23 and 2.5 of Q1, that this difference is mainly the result of the payment for the remaining 30% of the shares of Signet in February 2022.

Then as you might remember, the deferred consideration, so in this case the 30% of Signet, are always included when calculating IFRS debt and IFRS leverage and these same debt positions are excluded in the leverage calculation for the calculation that we need to do for our loan documentation.

And then -- moving to the last slide of the short presentation, you will find, as usual, our outlook. I assume you already read this yourself when reading our press release. In summary, based on the healthy commercial pipeline, we are positive, but as usual, cautious.

Then in the same press release, there was a financial calendar that you might have noticed. You might have seen that we will organize a small event in our office in Milan on September 24. It's a day for investors and analysts. It's the first time that we do this since our listing, and we do not have the intention to make this a typical full-blown Capital Market Day, but you should more expect a business strategy update, an update on ISG. And we would like to show the digital tools that we always talk about and that we use in our business. [indiscernible] we will combine it with a lab experience in the labs that we operate in our Milan office.

Next week, we will circulate the safe to date and the request to register for people that are seriously interested. Unfortunately, we can only host a limited number of participants, and we think about 50 to 60 people max. So I'm afraid that we have to work on the first come first basis in case of a lot of interest.

So far, my Q1 remarks, and I would like to hand over back to Alan and do the Q&A together with Valerie.

[Operator]

[Operator Instructions] Our first line of questions come from the line of Suhasini Varanasi, Goldman Sachs.

[Suhasini Varanasi, analyst]

Two from me, please. Both you and your peer yesterday also highlighted pricing pressure. I suppose the commentary on pricing pressure was a bit less from you, but it would be great to understand how the pricing developments have been in EMEA and in Americas, in particular? And has that improved sequentially or not going into the second quarter?

And secondly, on a GP basis, you've mentioned that the pipeline looks a little bit healthy. How are the trends sequentially placed in Q2? And what are your expectations for Q2 versus Q1?

[Valerie Diele-Braun, executive]

I mean the total granularity, I think but it is a bit much expected in terms of the trend. Let me start with the pricing pressure. I -- We don't see across-the-board pricing pressure. We see in very specific markets with less different -- more commoditized, less differentiated products, that there is pricing pressure, and we discussed that with our principles. And together, we then take a decision in terms of what kind of volumes we want to go after. And in those markets specifically, we see something.

We see actually also pockets where the prices are moving up, which is very positive, and we see a lot of stability or stabilization, let's say, of the pricing, at a very high level because I mean you always have to think about 2022 was a super year. And in terms of pricing, not so much has happened since then. So I think in terms of pricing pressure, we would not be very strong in our comments.

In terms of GP and our healthy pipeline, I mean, I think I was -- I said in the script, what we see, which is there is a lot of interest by principles based on the tools that we offer based on the fact that -- for cyclicality and from a market condition, our commercial skills are very much in request. So that gives us a lot of positivity in terms of the market. We always have said that we see only 4 to 6 weeks in terms of real order book. and that remains the same. So we cannot tell you about the full Q2, but signs are very promising. And what we are doing, what we can in terms of commercial excellence and rolling out our tools and bringing our excellence to the acquired companies, as we have always done.

[Suhasini Varanasi, analyst]

Understand. Just as a quick follow-up, please. So based on the limited visibility that you have, which is 4 to 6 weeks, are the trends sequentially improving then?

[Valerie Diele-Braun, executive]

I think Hans that we are seeing...

[Hans Kooijmans, executive]

Perhaps, I should take this one. What we see, we have seen quite some volatility between the individual months. I mentioned that specifically this year, March was this year very weak compared to a very strong March in 2023. At the same time, we see still that what I would call average order size is relatively low. People order not so frequent or very frequent than with the possibility also to postpone. So there is a healthy order book, April looks promising. And for sure, stronger than what we have seen in March. But we saw exactly the opposite last year. But for me, as we are cautious people, and we have learned our lessons in the past, we try to stay away from making strong predictions, but let's hope that it continues what we see in April.

[Operator]

Our next question comes from the line of Rikin Patel BNPPE.

[Rikin Patel, analyst]

Firstly, I just had a follow-up on the topic of pricing. So you mentioned, I think, that you saw most of the pressure in pricing in the Americas on the industrial side, now that volumes have come back. Now that we're starting to hear signs of some demand improvements in Europe, I suppose, availability of product as well increasing. Do you expect to see more pricing pressures emerge here in Q2 as well?

And secondly, on conversion margins, the Q1 result for the group was pretty much flat on Q4. So should we be now thinking about that conversion margin as being a run rate for the rest of 2024?

[Valerie Diele-Braun, executive]

I think the second part of the question, I will leave to Hans. In terms of the pricing, I mean, I think I said we saw it in Americas. We actually saw it last year in industrial. I would say, we actually see it more on the food side, the food and nutrition side at this point in time in terms of pricing pressure. So I think our expectation is not that we will see this coming into EMEA.

And if you look at the mix, I think if Hans maybe can give a little bit more granularity there?

[Hans Kooijmans, executive]

Coming back on your question on the conversion margin, I think basically, you're asking is the current level is that the new normal going forward? And if you look at the two most important drivers that is the development of gross margin and the own cost structure.

To start with the second one. And I think I indicated that we have been very cautious on the number of people that we employ and the cost increase that we saw this year is mainly inflation related. And if you don't grow the top line, you need to be very, very careful what you do on your cost side. And that is something that we do and we focus a lot on there but possible. There should be a real business case behind adding cost to the structure and where we can take cost out, we certainly do.

But at the same time, we also realize that in the current environment, we need to keep investing in technical capabilities in our commercial tools and because in the future, that will be one of the most important growth drivers. And that is something where we don't compromise at the moment. So we keep investing there.

On the margin side, that's the other big lever. Ideally, of course, you generate much more margin than what we did in Q1. That was what I said it was disappointing. I think we are partly disappointed because of the developments in the market, partly because we had to be at very high comparables last year. And there, we expressed a bit of optimism on what we see happening. Also listening to calls of production companies that all see -- that are -- most of them are very positive about the second half of this year, and that translates and should translate in more demand in the market and the stronger and healthier growth in the in the rest of this year. So let's see what the new normal becomes, well I hope better than what we do at the moment.

[Operator]

Our next question comes from the line of Eric Wilmer, Van Lanschot Kempen.

[Eric Wilmer, analyst]

First question, focus has been a lot on inorganic expansion in APAC. To what extent do you see scope for operational cost savings in the region? And is there anything in the APAC division that is perhaps somewhat more commoditized as the challenge seems to be more in the gross margin as you highlighted then in OpEx?

And then maybe, if I may, also a question on consolidation. To what extent -- what's your take on the potential sizable consolidation to take place in the market if that would happen as rumored 1.5 week ago. How would this -- if actually at all reshaped the business environment?

[Valerie Diele-Braun, executive]

Okay. In terms of inorganic expansion and APAC and costs, I mean, I think one effect that we have seen in APAC is China has been weak last year. We saw that some of the regions that are living to China definitely have also had an effect, as an example, Australia, for example, and this clearly has led to a performance in APAC, which is below. We have seen that our acquisitions in APAC have been really performing very nicely. I mean if you think of Signet, you see some of these results. And APAC continues to be a very important region for us with also some promising developments.

In terms of consolidation in the market, I mean, I think it would be speculative for us to comment. We have always said we do what IMCD always does. We continue to acquire. We continue to strengthen our commercial excellence. Our relationship with principles and developing markets plus, of course, putting customer at the focus and we will continue to do that.

In terms of who else is going to come together, we can speculate, and I think it will for us in terms of our relationship with principles and all the activities that I said not change too much.

[Operator]

Our next question comes from the line of Matthew Yates, Bank of America.

[Matthew Yates, analyst]

I've got a couple. My first one, just on your working capital days, which you said were up slightly versus a year ago, is it possible to isolate the distortion from the closing of acquisition timing? I'm just wondering whether there's anything more details specifically around inventory levels at the end of the quarter going into Q2, given that you're saying it seems a much different trajectory this year, where you're going into a stronger April versus a year ago, you were going into a softer April.

The second question, just to come back to the messaging on costs really. So it looks like you're making some very significant investments in your cost base. Can you discuss if this is defensive in nature in terms of having to give sizable wage increases to protect your people or is it more offensive in that these are business investments to drive future growth? And if so, how patient do we have to be before we see sort of the payback on that and driving higher volumes through the business?

[Hans Kooijmans, executive]

Matthew, perhaps I should take the first one on working capital. If I look at the breakdown, then -- and that is something that we did not show in the press release, but compared to year-end, stock days were more or less similar, and it's really the debtor position that [indiscernible] working capital. I mentioned the impact of acquisitions, and that played bit more role this year because we structured a couple of the transactions in Q1 as asset deals. So that means that we completely integrate the acquired working capital of the target in our own structure. And that then leads to the situation that it's very difficult to separate it out from the numbers that we report.

You can imagine that a lot of these customers that we add and a lot of stock that we add, that flows into your system, it's very complicated to say this specific one is part of that acquisition and the other one not. And therefore, there is a bit of an inflation in the days that typically should have been normalized as a result of acquisitions. Other than that, I think we typically hover around the normal run rate that we saw during last year. So nothing specific there.

Valerie, you wanted to take the one on the [indiscernible]?

[Valerie Diele-Braun, executive]

Yes. I think on the cost side, I think we can state that it is not defensive. We are really believed in our possibility of growth, as we have mentioned. And if you look at the different topics that we have mentioned, focusing on digital, first of all, because digital clearly is a big investment. We think that the market will look and the purchasing patterns of customers who very much look for digital solutions in terms of data download in terms of search of product, in terms of omnichannel possibility. So clearly, our lab infrastructure and our expertise and our people will remain there as a sales force, but we will move more and more in a world in which there will be also a digital component. And considering the economy of scale that we have, we see a real benefit there in doing this. And with that, of course, also creating efficiencies midterm. In terms of sustainability, -- we have always said we are looking at sustainable solutions in this area. We will talk also in September. In more detail, this is a focus area in terms of the customer interest because the portfolios are changing. As well as the principles in terms of their portfolio promotion. Again, an area in which lab expertise and lab capabilities are very relevant and have commercial benefit.

And then in terms of operational excellence, we continue to look at our footprint. We are looking at what -- how we -- can convert it also from a sustainability standpoint. And again, this should lead to efficiencies. So in terms of your question, Matthew, for patients, I would say we're doing our investment in a cautious thing. Unfortunately, sometimes you have to pre-invest before you get the benefit. And it -- yes, it would have helped if there was more volume in -- but we are very confident about what we are doing. Our next question comes from the line of Alex Stewart, Barclays.

[Matthew Yates, analyst]

Organ you for the interesting discussion. I don't want to labor this point, but just to come back to margins. I hear what you're saying that acquisitions were dilutive to gross margins, especially in Asia. And I hear what you're saying about cost inflation that's a problem across the market. But your operating margin in the first quarter was very similar to what it was in the fourth quarter, which is very unusual. That's not your usual seasonality where normally you have a big step up. So could you explain why there's a sequential lack of improvement when presumably the cost inflation and presumably the acquisitions were also weighing on the Q4 margin.

So I'd like to just hear the discussion for a moment quarter-to-quarter rather than year-to-year. I'm interested to know what your comment on that is?

[Hans Kooijmans, executive]

Yes. So perhaps I should take the one on the cost side. We also had 2 reasons that there's something on the commercial side and something on the cost side. If you look at the cost side, last year, we, in Q4, during the year, last year, we started realizing that in a lot of cases, we wouldn't make budget. And as a consequence, we started releasing bonus accruals and reducing additions to the bonus provisions during the year. and the biggest impact was there in Q4. For this year, we set challenging targets for commercial people. And based on where we are now and their view on the market, people see that still as realistic targets. And -- there was no reason for them to basically and also not for us to release or reduce what I would call the bonus accrual additions. So if I compare the purely Q4 cost structure on the people cost versus Q1 this year, I think there is the usual, what I would call, salary inflation addition -- and on top of that, a bit related to the difference in bonus accruals that drive a slightly higher percentage than what you would expect. If I look overall because the number of people are more or less stable, -- and when I do the math, so when I look at the difference gross profit and EBITDA and when I look at the amount in between. And that's, of course, not only wages and salaries, but also third-party costs and other operating expenses, depreciation and whatever you have there.

But if you look at the growth there, I see organic growth of 7% compared to last year. in that 7%, of course, a big part is wages and salary. And these are the 2 effects that I just mentioned because the number of people are similar compared to last year. So we didn't add additional headcount.

The other part, I think this is the most important answer of your question because I think on the margin side, we did not see did many fluctuations between this year and last year, if you normalize for the M&A impact.

[Matthew Yates, analyst]

Okay. If I could just add another part to that. So is it possible for you to give us some sense of what the bonus provision release was in the final quarter last year. Apologies if you gave it at the time, by the way, I may have missed it, but it would be interesting to know roughly what that was?

[Hans Kooijmans, executive]

No. We did not disclose it. What I typically say is that if you look at the bonus component in our salary structure, then I would say it's fair to assume that on average, we talk about somewhere between 1.5 and 2.5 month salary that people can make when they reach the targets. And that is for sure, related for salespeople, for management roles and also here and there for other layers in the organization.

[Operator]

Our next question comes from the line of Nicole Manion UBS.

[Nicole Manion, analyst]

First, please, just a bit more detail, if you can, on the unpredictable customer demand and what you're maybe seeing change there at the start of April? Is it kind of just orders picking up or the sizes? Any kind of sense you could give us there? Are customers coming to you and asking for you to help them find sort of cheaper solutions? And what impact is that having? Any detail on that front would be great.

And then the second question, I'm not sure we have gave this guidance anyway, but is it still your expectation to either profit growth in the year overall?

[Valerie Diele-Braun, executive]

Yes. Second part, I really don't want to answer it and I think I know the answer, but first one, I would say, in terms of customer demand. I mean the most problematic we dealt with in '23 and particularly also Q1 '24 was the thoracic behavior of volatile between [indiscernible] and then volatile in terms of order postponement and smaller orders going forward. And in terms of April, I would say confidence has returned to some of these markets.

And confidence is key for inventory to come to normal level. And the confidence means that the orders are not as much postponed and are more stable in what we'll see in terms of volumes, it is so different across the markets, the geographies, different product groups. It's very difficult to make their one statement. But I would say that confidence seems to start to come back to some markets. And as I said in my intro, personal care is an example where there's a lot of confidence. I was just in cosmetics, you can feel it there, and you can see it in the numbers. Some other markets have been too scared to already go to the same kind of levels.

Hans, the second part?

[Hans Kooijmans, executive]

Yes. Nicole, on outlook. I think you know our position there. We don't have a crystal ball that can predict demand. And therefore, we are very cautious and what we say about the future. And therefore, we ended up with the outlook that you saw in the press release. [indiscernible] quarter positive, I would call it.

[Operator]

Our next question comes from the line of Thibault Leneeuw, KBC Securities.

[Thibault Leneeuw, analyst]

I have 2 questions. One on the short term, one on the long term. With respect to the short term, I was wondering if you saw any impact from Red Sea disruptions, containers being delayed, et cetera?

[Valerie Diele-Braun, executive]

So I think I answered that one. Yes, we have seen some, but we cannot really quantify it, and therefore, we have not mentioned it.

[Thibault Leneeuw, analyst]

Yes. And then the second question is more on the long term. And I know it will be rather difficult to give a straightforward answer, but I'm more looking for of the ballpark. You are improving the product offering, you're increasing the lateral supply chain, the value chain. Now I was wondering, given all the industrial chemicals, the life science chemicals, in what kind of range do you think that currently your product offering is complete? And I'm just more looking for like a ballpark. You think that the product offering is 50, 60, 70% percent complete offering in the long run, you want to go?

[Valerie Diele-Braun, executive]

That's a really difficult question because, honestly, I cannot add that as a total, because we have 8 business groups, we have 69,000 customers or 49,000 products. I mean it is really difficult for us to answer there. Holistically, I would say as we have seen in the last 28 years or whatever, we are bit by bit expanding in geographies, expanding current principles, acquiring new principles getting new product portfolios, developing some new business areas as they come along. And we will continue to do that.

I think -- what does our flow can say unlimited opportunities. I mean in terms of the world, everybody who needs a specialty chemical is a customer of IMCD. So we are pretty much covering all areas, and there are some where we are not very strong. Yes, there are some -- ones -- there is maybe the -- in Home Care, we don't have a big portfolio as an example. But honestly, to say that across the board, it's very difficult for us.

[Thibault Leneeuw, analyst]

And then maybe as a follow-up, in certain regions, I assume that the lateral value chain more or less is complete. And in such a case, what kind of margins -- EBITDA margins are you able to achieve?

[Hans Kooijmans, executive]

That -- look -- if you look at the way we are structured, then we talk about -- we have market segments of food, pharma, personal care, et cetera, that drive the commercial strategy per market segment. What these people do, they look at per country, what is the ideal and even per group for the whole group? What is the ideal product portfolio that we want to have? What is the suppliers that we want to work with? And how do we get these products and suppliers on board? And then they create maps with white spots and there are enormous amount of white spots already in the existing segments.

And then on top of that, we have a lot of what we call subsegments, things like nutrition, things like electronics, like water treatment, like Agra, like [indiscernible] so on and so forth, or segments where we hardly have a presence at the moment. And what we then don't do because your question then is around EBITDA. And we judge these business groups on margin and margin development. But we don't want to allocate the uniform back office, for instance, for regulatory, for IT, for finance also to these business groups, so we never calculate an EBITDA per segment per commercial segment.

But -- and it is at the same time, the beauty of the model. I suppose we would enter a new market. I suppose we come to the conclusion that electronics would be a fantastic market for us. And we don't need to build a complete new back office. We can use the infrastructure, the uniform IT set that we have across the group. We can produce all these type of facilities and services and structures that we have also to start building something in a complementary market or in an adjacent market.

And we don't want to end up in the bureaucratic process of allocating all these costs to the individual cost drivers and then say the EBITDA of the business group is that amount. For sure, we register cost directly related to it. But we don't go to an EBITDA level, if you don't mind.

[indiscernible] start to help you a bit to explain the rationale behind what we do. But I think the most important message here is that we operate in a very -- in a market so many opportunities that every now and then we need to focus on certain market segments to avoid that we spread in. But at the same time, it opens so much opportunity for future growth that I'm not worried about what we can do in that part of the world. The market is huge. If you look at all kind of consultancy reports the total multiple hundreds of billions, and we only do on an annual basis, 5. So still a lot of win and we're open to do so.

[Operator]

Our next question comes from the line of Chetan Udeshi, JPMorgan.

[Chetan Udeshi, analyst]

I was just following up on the comments on pricing pressure. I just wanted to understand in practical terms, how does it actually work? Because we've seen numbers from some of the -- or at least a couple of F&F companies, and they've been reasonably good. I mean no pricing pressure. So how does it work? So if you see pricing pressure in the industry, do you see that first in your books and then you go to your strategic principles to push them to cut their pricing to you? Or how does it work? Because clearly, at the moment from FNF companies, we are not seeing them talk about any pricing pressure. So just curious when you talked about food and nutrition pricing pressure.

And second, just on this bonus accruals point, is it fair to say then that if things don't improve from where we are in Q1, that is the flexibility that you guys have in terms of maybe releasing some of these bonus provisions that you've taken in Q1? Or is that not really material in grand scheme of things, to protect the numbers or earnings?

[Valerie Diele-Braun, executive]

I think I'll leave the second one to Hans and I really hope [indiscernible] to happen. But your question on FNF, I mean you assume that our nutrition -- food and nutrition business is only F&F and clearly, it's not. I mean we have more than 3,000 principles. And also in that segment, we have more differentiated ones like F&F and we have less differentiated ones, where there is more pricing pressure. And that has an impact in certain regions for certain markets because there is maybe a big principle that is experienced at this moment. So I would not think that you can read from the results of FNF, what we are doing in Food & Nutrition.

If you want to take the other, Hans?

[Hans Kooijmans, executive]

Yes. So your question, Chetan, about bonus accruals, yes, that is, of course, that creates flexibility. But what I mentioned earlier is that the bonuses are linked to targets that we set with people. These targets are typically growth-oriented and people still feel that they can make their targets for this year. They ask people every time to make forecast for the full year, and that gives them [indiscernible] basically the comfort that for now we should not do too much on what I would call the bonus provisioning during the year. And that is a bit similar to what we saw last year in Q1.

And also then we had different -- at least then we had the best quarter of the year. And during the year, we started releasing bonus accrual. You can imagine that at the moment that you get closer to year-end that people can calculate more precise and release basically more precise to what should be the final outcome of the year, but there is certainly always flexibility there.

[Chetan Udeshi, analyst]

I understand. So is it fair to say that what you are accruing today is with the view that the business should grow organically, at least that's the target of the team?

[Hans Kooijmans, executive]

Yes. That is basically the thinking at the moment. I wanted to say and then let's see how it will materialize. That is -- and that is -- then I come back on my crystal ball and demand prediction. And there, again, I'm too long in this industry that I know that it's difficult to predict. The growing optimism in the market, a healthy pipelines drive a bit of positives on our side.

[Operator]

Our next question comes from the line of Quirijn Mulder, ING.

[Quirijn Mulder, analyst]

A couple of questions from my side. The first one is about the outlook. So you see somewhat green lease in the first quarter. Can you give me somewhat more details with regard to in the geographical sense? And can you combine that with, let me say, what a company like [indiscernible] has said on the first quarter development there, where they're growing by, let's say, I think, over 10%, 12% on that range.

And my second question is about M&A. So despite the fact that the interest is higher since more than a year, and that it mostly complicates the M&A deals I saw a lot of -- yes, a serious amount of acquisitions already in 2024, I think 6 or 7. So can you maybe elaborate on that how that develops at this moment? And can we expect just a run rate to continue?

[Valerie Diele-Braun, executive]

I think I leave the second one -- to the part of -- to Hans to review.

The first one in terms of outlook of some of our principles. I would say that I gave some light in what I discussed in the beginning. And we have to also remember that we don't represent the same principles in all regions. So it will have an impact in one region, but not in another, and we have never disclosed really that much who we represent and where because it also is changing sometimes. And clearly, we want to expand even further.

In terms of business segments, we can definitely say Personal Care has performed very nicely and continues, as I said, in terms of sentiment to be very positive. And sentiment is important in this market because as I said, people are not building inventories this day, I don't have a positive sentiment about the future. Where we see a lot of benefit is on the industrial side, where both on the pricing as well as in terms of the volumes in a lot of areas, it looks like, what did you call it, like release also coming and it's stabilizing and the sentiment is improving. And also that you start to see in some of the principles.

I think a 12% increase of [indiscernible], I think they even said it was more on the fragrance side and on the flavor side, that is a wonderful number but we don't represent [indiscernible] globally.

Second part?

[Hans Kooijmans, executive]

Quirijn, when we look at the pipeline healthy, we have a lot of people we talk to it's what we see is that in the discussion with owners, it takes a bit longer than what it did in the past, and that is partly related to coming to the right valuation together. So evaluation with acceptable for both sides. You're right, we closed 6 transactions in Q1. We signed 3 new ones. If you look at the transactions that we closed sometimes it were projects that really moved fast. Sometimes it was the outcome of something that already started years ago. And even sometimes, there is quite a gap between signing and closing.

[indiscernible] is a nice example of the transaction that we did in Malaysia. And we announced it already in May last year, but it took us I would say, close to 10 months to close the transaction due to all kind of what I would call balance sheet normalizations, local approval, permits and so on and so forth.

So -- but if I look in general, the pipeline looks healthy. And if I look at the reason for that, it is -- it's more -- something more fundamental in the industry. What you see is that suppliers on the one hand want to work with fewer distributors in the bigger part of the market. And that means that if you represent top suppliers only have one country, there is a bit of the fear factor for the smaller players that they might lose suppliers.

At the same time, Valerie spoke a lot about, investing in digital and investing in technical capabilities to do these type of things, you need to have scale. And a lot of the family-owned businesses lack the scale to make these type of investments, but it becomes more and more something that you should have in your toolkit. So apart from what I would call the typical reason to sell for [indiscernible] the succession issue, at the moment, we see more and more owners reconsidering their future options just because of fundamental changes in the industry, and these fundamental changes will drive further consolidation.

And for sure, we want to be accomodater in this industry. And therefore, we are always on the lookout for opportunities to further expand our position and to basically capture the nice family-owned businesses with the suppliers that we would like to have in the portfolio. And we keep doing it. And I hope more to come there.

[Quirijn Mulder, analyst]

Okay. And does that mean that, let me say, several of these acquisition candidates with where 5 or 10 years ago already, but to fix into family hands are now coming somewhat in [indiscernible], let me say, in a position where they are reconsidering. Is that something that you -- that is now like [indiscernible] that they...

[Hans Kooijmans, executive]

Yes. No, it's [indiscernible], but we have certainly more discussions than 15, 10 years ago. It has also to do with our -- the fact that we are active in more countries. And so contact and more contacts in the various markets. But certainly, the changes in this industry drive further consolidation one way or the other. And one of the ways to drive consolidation in M&A. The cheapest way still, is that suppliers decide themselves to move to us.

And also there, we see a couple of successes that we generated this year. And that is, of course, the cheapest way to grow organically, and that is also where the focus should be. We do organic growth and on top of that, we do acquisitions. I hope this answered your question.

[Operator]

Our next question comes from the line of Carl Reisfort, Berenberg.

[Unknown Analyst]

Just 2 left from me. So on the comments around weaker demand in pharma that you're seeing, the other view on where we are on that cycle at the moment? Are we sort of at or near the bottom in terms of sort of trough levels of demand. If you have any comments on momentum that will be useful.

And the second question, again, just relating to pharma and specifically APAC. How much of the pharma side of Signet is impacting the lower conversion margin APAC at the moment? Is it fair to think of that material. Going forward, should we see this as kind of a baseline based on the cycle or there should be room for improvement there?

[Valerie Diele-Braun, executive]

Yes. Second I leave to Hans. In terms of weaker demand in pharma, yes, this is something that we have seen now in Q1. We believe it's a temporary effect. We have to also say in Q1 2023, we had a very strong pharma month. So we see it as temporary. I mean pharma products, as you know, in a lot of cases are done the regulatory confinements. We see -- we have always seen this as a very positive market. Inventories are, at the moment, being run down. And our general view on pharma is very positive, and it's an important part of our portfolio.

[Hans Kooijmans, executive]

Then perhaps your question on Signet, earlier in this call, somebody raised the question about Red Sea and impact business. And if I would look at one of the companies that was a little bit impacted than it was signed that they had a bit of delay in deliveries, resulting in a bit of delay in also the deliveries to their customers. But other than that, Signet performing in line with plan and expectations and is still on a very, very high level.

[Unknown Analyst]

Just a quick follow-up then on that delay. Should we see sort of a bit of a bounce in Q2? That sort of a buildup of demand? Or is it just sort of the phasing issue where just everything has moved a bit later?

[Hans Kooijmans, executive]

That is exactly the reason that we didn't want to mention the Red Sea issue ourselves as something, but what you certainly see is that when it happens, it took a bit longer to get stuff from Europe into a country like India. And as a consequence, there was a bit of a delay. And that will, of course, be solved in this quarter. it is already solved.

[Operator]

Our next question comes from the line of Eric Wilmer, Van Lanschot Kempen.

[Eric Wilmer, analyst]

Just one follow-up question, if I may. You mentioned that valuation discussions are taking somewhat longer with targets. To what extent is this driven by different views regarding the market recovery between you and targets and enhance profitability expectations going forward for these targets?

[Hans Kooijmans, executive]

Eric, that is exactly the -- often the issue that likely challenge us on what is your normal profit level going forward. We do the same with owners. Owners always refer to 2022 as the new normal. You can imagine that 2023 was typically lower than 2022, looking at the results of potential targets in most markets, in most segments. And that is one of the reasons that we structure more and more transactions on the basis of what we see, of course, in the most recent years. So the 2023 valuation is then the basis.

And then we topped that up with earn-out arrangements or we do a 70/30 transaction, by -- we allow owners that if they rebounce back to the 2022 levels that they get compensated for that. But to convince owners that these are the right mechanics takes always a bit longer. So it's not about multiples. It's more about what is the underlying baseline.

[Operator]

There are no further questions on the line, so I will now hand you back to your host for closing remarks.

[Valerie Diele-Braun, executive]

Thank you so much for the call, and we are looking forward to see some of you here, some of you over the next couple of weeks and [indiscernible] to hear you again all in for the Q2 call. Thanks so much.

[Operator]

Thank you for joining today's call. You may now disconnect.