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Hello, and welcome to IMCD N.V. First Half Year 2023 Results. My name is Alicia, and I will be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions]
I will now hand you over to Pieter van der Slikke, CEO, to begin today's conference. Thank you.
Yes. Thank you very much, Alicia. Good morning, everybody. I'm here with Hans Kooijmans as usual, and we will answer your questions in a moment. In 2022, we reported an unprecedented growth of 48% of our operating EBITA under exceptional circumstances. The exceptional circumstances were the result of strong price increases and high demand, partly caused by supply issues. This year, and the first 6 months, we see the reverse, soft demands and price pressure in certain segments. This resulted in the first 6 months of 2023 in a flat revenue and a decrease of our operating EBITA of 6%, and ForEx adjusted minus 3% to EUR 280 million.
Q2 was particularly weak, which was mainly driven by lower demand in our industrial segments across all regions. Notwithstanding this, our gross margin percentage increased to 25.5% and gross profit increased ForEx adjusted with 2%. Cash flow more than doubled versus the same period as last year to EUR 241 million.
As reported by many companies in the chemical sector, global chemical production declined resulting from low customer demand and ongoing inventory reduction, many in our industry expect that a tough economic environment in the second half of the year will remain, but that demand will gradually improve as further reduction of inventory is not expected.
Despite the challenging conditions, we remain positive about our superior growth potential, both organically and by acquisitions. Our organic growth percentage over a number of years lie significantly above our target of on average 6% and we have a healthy acquisition pipeline. Until now, this year, we have closed 13 acquisitions with a combined annualized revenue of EUR 400 million.
In summary, as soon as demand picks up, we are in a great position to benefit from this with our strong portfolio of products and from the quality acquisitions that we have made this year.
And with this, I give you to Hans, who will lead you through the numbers in more detail.
Thank you, Piet, and good morning, ladies and gentlemen, and I would like to start as usual on Page 10 of the presentation, where you will find a summary of the first half year income statement. As mentioned by Piet and as you can see on this slide, ForEx adjusted revenue increased 1%, which is a combination of an organic decrease of 6% and 7% increase due to the acquisitions.
In the press release, you could read that there were differences in growth rates per region and productivity. And as an example, revenue in our Life Science activities increased 11% and our Industrial activities have a tougher start of the year with a 12% revenue decrease. Gross profit increased 2% compared to the same period of last year. This 2% increase was a combination of 5% as a result of the first-time inclusion of acquisitions a negative organic growth of 3%.
Gross profit in percentage of revenue increased 0.3% to 25.5%. ForEx adjusted operating EBITA decreased 3%, and this decrease was a combination of the positive contribution of acquisitions of 5%, combined with negative organic EBITA growth of 8%.
Operating EBITA in percentage of revenue decreased with 0.6% to 12.2%. The conversion margin, calculated as operating EBITA in percentage of gross profit, slightly decreased to 48.1%. And the decrease in conversion margin is the result of higher gross profit being more than offset by the growth of our personnel cost and other operating expenses. As mentioned in previous calls, we experienced the impact of higher than usual cost inflation in most of our companies.
Then on the next slide, Page 11, a bit more detail on the year-on-year development of gross profit, EBITA, conversion margin per operating segment. In EMEA, in the first column, we report 1% ForEx adjusted gross profit growth. We were able to increase our gross margin percentage with 0.7% to 27.3%. Operating EBITA of EUR 131 million was 4% lower than last year. Inflation driven on cost growth was the main driver of this small decrease.
In the Americas, a bit of a similar picture as a positively increased gross profit by 40 bps, however, this could not fully compensate the decrease of revenue. And as a result, we report 6% lower operating EBITA and a slightly lower conversion margin. Asia Pacific is the only reason where we reported gross margin percentage slightly lower than last year. However, when including the impact of the acquisitions done in the second half of 2022, in the first half of 2023 in this region, as are companies like Tradeimpex, Parkash, Welex. The gross margin, if you exclude for these acquisitions, the gross margin of our legacy business would have gone up with about 30 bps.
The gross margin in these acquired businesses was on average substantially lower than the average 24% that we reported last year. And holding cost remained stable at 0.7% of revenue.
Then on Page 12, a summary of the P&L lines between operating EBITA and net results for the period. A few general remarks. Net finance costs increased from EUR 8 million last year to EUR 26 million in the first 6 months of '23.
On Page 23 of our press release, there is a breakdown of the different cost components, whereby the EUR 18 million increase could be split in 2 categories. First, an increase of about EUR 7 million on bank interest, we reported EUR 9 million bank interest last year versus EUR 16 million this year. And this increase in bank interest is a combination of higher base rates in our revolving bank facilities combined with on average a higher debt amount.
And the second reason for the increase on this line is currency exchange results and changes in deferred considerations. They moved from a positive EUR 3 million last year into a negative EUR 7 million of this year. So the EUR 18 million increase in finance cost is a combination of EUR 7 million real bank interest costs and about EUR 10 million noncash movements reported on this line.
Then income tax expenses more or less decreased in line with EBITA and the tax cash out in the first 6 months of this year was about EUR 56 million. Amortization of intangible assets are mainly noncash costs related to the amortization of supplier relations, distribution rights and other intangibles. Then nonrecurring items, these are costs related to acquisitions that we did and also the acquisitions that we did not do, and a bit of cost related to one-off adjustments to the organization.
And then when looking at 2022, that year, the cost also included the estimated financial impact of the winding down of our operations in Russia. And then last but not least, on the bottom of this page, you could see net results for the period of EUR 153 million and the ForEx adjusted 9% decrease in cash earnings per share to a healthy EUR 3.28.
Page 13, a summary of IMCD's balance sheet. Property, plant and equipment of EUR 31 million still relatively low as a result of the asset-light business model. Then we have thanks to IFRS 16, EUR 86 million right-of-use assets. So these are capitalized operational leases. Then there is the combination of intangible assets and the related deferred tax liabilities of about EUR 2 million in total.
As you can imagine, these are the result of acquisitions done since July 2014 and a bit that we carried over on the base of the history as a private equity-owned company. And then on the financing side of the balance sheet, there is EUR 1.3 billion of debt. I will come back on that in a minute, EUR 1.7 billion of equity and this substantial equity position covers about 57% of our capital employed.
Then working capital summarized on this page, where you will find a summary of the absolute amount of the various working capital components, and these absolute amounts translated in days of revenue and -- as you can see, the absolute amount of working capital end of June 2023 is more or less similar to the amount end of June last year. And compared to last year, June, the overall working capital days were stable at 65 days. And when looking at the individual components, so if inventories, debtors, trade and other payables, we see small differences when comparing June to June, however, no major changes there.
On the debt side, a summary of our net debt position on this slide, leverage ratios and maturity profile. Net debt increased with about EUR 200 million to EUR 1.3 billion, and this increase is, amongst others, influenced by a dividend payment of EUR 135 million that we did in May and considerations paid for acquired businesses of EUR 167 million.
The EUR 1.3 billion of debt includes EUR 600 million of bonds at a [indiscernible] fixed interest rate, then in that EUR 1.3 billion, there is about EUR 330 million of considerations related to acquisitions, those are deferred considerations. And then the remainder, about EUR 350 million is the balance of cash and bank facilities.
The leverage ratio end of June, based on our loan documentation, was 1.6x EBITDA, which is well below the maximum set in our loan documentation, and their reported leverage, so based on IFRS, it was 2.1x EBITDA. And then on the right side of this slide, you can see the maturity profile of our debt position.
Then I would like to finish this short summary with a cash flow overview. As you can see, free cash flow increased with EUR 123 million to EUR 241 million. The main driver of this increase was lower level of business activities, which resulted in a substantially lower working capital investment and a further CapEx of about EUR 5 million was more or less similar to last year and mainly relates to IT investments, office improvements and some lab-related equipment that we bought.
On Page 18, the summer -- the outlook for this year, why we felt it's prudent not to give a near-term trading outlook, given the macroeconomic uncertainties.
I would like to hand over to the operator open the lines for Q&A. So Alicia, I leave the floor to you.
[Operator Instructions] We'll take now our first question from Suhasini Varanasi from GS.
I have a few, please. You mentioned that given the macro uncertainty, it's prudent not to give a near-term trading outlook, which is fair. Does this mean that you're effectively worried about EBITA decline on a reported basis this year? If so, can you maybe talk about what you can do on the cost side to help mitigate the margin impact? That's my first question. And I'll take it one by one, if that's okay.
Yes. Thank you very much for your question. Yes, we are always, as you know, throughout our history, very, very prudent about giving outlooks. And in today's environment, I think it's even more prudent to be careful on that. And that also means that I do not, let's say, give predictions about our future EBIT development because otherwise, I would give an outlook. So I don't want to do that.
On the cost side, what we -- first of all, I think it's important to emphasize again that our people, of course, our biggest, biggest asset if not our only asset together with our IT systems and they're highly motivated and highly capable of doing their business. So on the cost side, what we do is, of course, we are very prudent in hiring new people. So we won't do that.
On the other -- on the other hand, on the cost side, we will be very careful in not expanding on other operating expenses like travel, et cetera. And also, there will be a component of bonuses that will, of course, be affected if we don't make our results. And that's, that's the usual levers that we have.
Again, our staff is productive and ready to also to gear up again. And I think, I think it's important to emphasize also that this is a blip in a long history of growth that the company is totally ready to when demand picks up to grow again, so we need to be ready for that. I hope that answers your question.
Yes, it does. My second question is on pricing, please. Specialty normally doesn't have a lot of pricing volatility unlike commodity chemicals. But I think one of your peer yesterday mentioned that they had seen some pricing unwind in Americas in 2Q. Is this something that you have seen either in Americas or in other geographies, please? And is that a risk?
Well, I think it's not so much region dependent. I think that the, generally, our prices have been holding up quite well. So we are happy with that. There always in this broad portfolio, there are product ranges that are a little bit more price sensitive. And there, of course, we see some pressures. For example, also because China opened up again and caused an additional competition. But I would say, by and large, because we are so specialty focused, our prices have held up quite remarkably well.
So given your commentary around APAC, would you say that maybe pricing was a component and the gross margin decline year-over-year that we saw in 2Q?
No. I think that's, that's very often a mix, and it's very difficult to say exactly pinpoint exactly where that comes from.
And perhaps to add to that, but I also -- the message that I'll try to pass on is that we did 3 acquisitions in that region, so Parkash, Welex, and Tradeimpex. The average gross margin in their business was substantially lower than the average margin in what I would call our legacy business in that segment. And so if you would exclude for these 3 acquisitions, we would have reported an increase in gross margin percentage in Asia Pacific.
That's very clear. And the last one for me is just on the -- some of the countercyclical elements in distribution. Sometimes, we find that there is a little more mandate wins that happen, which can add to volumes during this period. Is this something that you have seen and maybe that can help some of your volume trends in the second half in any region?
Yes, certainly. And I think it's a very important question. And of course, 1 of the, let's say, focuses of our business is always to increase our mandates and we have been successful in that, and it certainly will also contribute to -- in the near future. So we are very positive about that. And I think, again, it's important to emphasize that we didn't lose any businesses so much. It's really a demand question. And we are expanding our portfolio as well. So in that sense, I'm optimistic.
We'll take now our next question from Annelies Vermeulen from Morgan Stanley.
I just have 2, please. So firstly, could you talk a little bit in more detail about some of your end markets and geographies, the performance in the second quarter relative to the first quarter. I recall that the Q1 as like U.S. industrials were a little bit weaker, and we talked about destocking in flavors and fragrances, et cetera. So I'm just wondering if anything has sequentially deteriorated or improved in the second quarter. I think you mentioned in your opening comments -- speech that destocking seems to be bottoming out, if I've understood that correctly. And then just on Asia, whether you're seeing any improvement in China as of yet? Or is that again that a similar story to the Q1?
Yes. Thank you for your question. I think end markets, I mean we -- if you compare our Industrial sector, which is consisting of as the main ones, coating and construction chemicals, advanced materials and also lubricants then. First is the life science markets, food, personal care and pharma then it's obvious that we see the decline, in particular, in the Industrial side.
And we see positive developments in the Life Science, very strong performance of our pharma business, also a beautiful -- beauty and personal care, and food very stable and doing well. And then on the Industrial side, we see a significant decline in that the industrial markets. And I would say North America more than in other markets. We see also a slight glimmer of light there. So I hope that glimmer will become more bright.
On your question on China, it is true that in China, there is really stagnation and it's for me difficult to say if that will improve in the next 6 months. So I don't see signs of it yet. And I also rely a bit on what the big chemical industry says about that, and they are also not seeing a clear, let's say, a clear change in what's going on there. So I think that summarizes it. I hope I answered your question with this.
We'll take our next question from Rikin Patel BNPP Exane.
Firstly, just a follow-up on your comments just now. You mentioned you're seeing some glimmers of light in North America, I think. Could you maybe give some indication on whether you've seen destocking trough in Europe and maybe what the order book looks like across the business?
And secondly, just going back to the sort of price volume dynamic, could you maybe sort of give us some detail on what this looks like there for the sort of 10% organic decline on gross profit in Q2, specifically?
Yes. I think on destocking, I think it's, again, I mean, it's very difficult, of course, to totally be sure about this. But I think a common opinion on this is that inventory reduction has come to a stage where it won't go further and that we probably have bottomed out there.
Yes, in the United States, you asked also about the glimmer of light that we see there. It's just about -- it's just, let's say, the feeling that orders will also in the Industrial sector will pick up somewhat. But let's see if that happens actually and all the gross profit decline.
Yes, Hans, there anything to say about that? Other than, yes, it is what it is. I mean, I can't change that.
So we'll take our next question from Chetan Udeshi from JPMorgan.
Maybe the first question I had was on working capital? And particularly, if I look at your receivables, I mean your receivables have gone up by EUR 125 million, give or take, between end of last year and first half this year. And I'm just curious, why is that the case? Because demand, as you talk about is weakening.
So I'm just curious, is this more a reflection of maybe the end of Q2 might have been very strong or stronger. And hence, you ended up with these receivables at the end of Q2? Or is the receivable cycle in terms of collection sort of lengthening and that's being reflected in this number. I'm just curious why this number did not went up so much when inventories actually has stabilized at the levels at the end of last year. That's the first question. The second...
Perhaps should I answer this one first before we move to the next one. Because -- the answer is in the end, pretty simple. It's a combination of 2 things. It is -- one reason for the increase is the impact of the acquisitions that we did. For sure, every company that we acquire also brings additional debt to our balance sheet, and that is part of the increase, but perhaps more important is that typically December is always a very slow month.
A lot of companies stopped buying somewhere what is it the second or the third week of December. So December is typically a very low month with respect to sales. By June is just an ordinary month and lower sales automatically results in lower debt positions.
So if you look at the trend line during the year, the working capital cycle, typically, the year-end position is in most years, the lowest point in the cycle, and then around the summer period, we typically talk about the highest part of the cycle. Does that make sense to you?
No, I understand the seasonality. I just thought given what we've seen in terms of demand, which, frankly, hasn't -- it doesn't seem like things have necessarily stepped up a lot versus Q4. And hence, I thought maybe it was quite high. But anyway, I understand the seasonal point. That's clear.
The second question was just going back to the comment Hans you made about the deferred consideration and stuff like that. And I think if I'm not mistaken, the deferred consideration on the buyout of Signet is due to be repaid or to be paid rather in 2024. And I think this is just a broader question. Your balance sheet is good, but my question is, are you seeing the incremental funding cost even to raise the debt today stepping up significantly for even IMCD. And I'm just curious, let's say, if you had to raise EUR 400 million EUR 500 million, EUR 600 million today in the market? Like what sort of interest rates we should be considering in terms of future debt increases that you might have to do both to fund future acquisitions, but also to pay this deferred consideration maybe in the future?
I think the broader question is, clearly, the funding cost is going up, is the acquisition multiple also coming down at the same time? Are you just taking the funding cost increase under your belt and maybe taking some dilution, if you will, on the returns from these acquisitions in the future?
Yes. So if I look at funding cost, you might remember that we issued a bond, what is it, March last year at an interest rate of 2 and a bit percent, so a low 2% rate. I think if I would go to the market today, I will experience an increase of, I think, close to 3%. So the interest levels for new bonds would be around about 5%, if I need to go to the market to refinance.
Will we have an impact on valuations? That, yes, typically, that should have an impact on valuations. In the end, that should translate in lower multiples that we pay for the targets that we talked to. And because also to these people, we explained that if we acquire their businesses, yes, making your valuation calculations, interest plays a role there.
But are you seeing that? Are the multiples coming down already in the discussions that you have in terms of future acquisitions? Because that's not what I hear, but maybe it's happening now based on what you think.
It is happening. It is happening. It is also explainable to owners. In the end of the day, if you are in a competitive process, then you always need to compete with somebody else and then you need to find an agreement on price anyhow. But in the one-on-one discussions, it's certainly, and a subject that we bring to the table, is a reason to offer lower multiples than what we did apart.
We'll take now our next question from Nicole Manion from UBS.
I just wanted to ask one on conversion margins. It obviously came down in the half overall, but also it clearly notably in Q2. Could you maybe help us understand that move a little bit better in terms of sort of how much is driven by volume and operating leverage, how much is sort of the like-for-like pricing impacts working through and so on. Just help us understand those margin dynamics and how that might evolve a little bit better?
Yes. I think if you would do a pure mathematical exercise, then what you see is that we did not grow our gross margin enough to fully compensate the inflation driven on cost growth. That is, let's call it, the technical answer to your question. And what we saw, as Piet already indicated on the cost side, we used the usual lever.
So we were prudent in filling vacancies, we were careful with our travel and exhibition costs and things like that. But at the moment, the demand in certain segments dropped a bit, but you get lower gross margins. It's difficult to quickly reduce fixed cost base if you want to do it anyhow because you need to keep your sales structure in place as we see this as a temporary -- a temporary drop in demand.
[Operator Instructions] We'll take now our next question from Quirijn Mulder from ING.
Three questions from my side. First of all, with regard to the gross profit margin, which was even up. And I would like to know -- I've seen the reason that portfolio changes, et cetera, but there was some negative impact at the group level, so not only in the far east but also at group level probably. So can you elaborate on that effect there?
And then my second -- my third question about the cost levels. On the cost, we have seen -- I see that you are somewhat reluctant to take measures to adapt to the gross profit decline. And is that the reason that you see this whole story as a temporary dip effect that it only takes maybe 9 to 12 months further, and that's it. And you don't want to intrude on your cost, IT cost, personnel, because you're afraid for that you can't hire people when you're going to -- when the markets are going to recovering of just reduce the situation.
And then with regard to your assumption on bonuses, is that in terms of -- is that conservative? Is that -- is there some uptick there in terms of lower cost, thanks to the bonus, lower bonuses at the end of the year, because, yes, you have a conservative view on that. Is that possible to give some more idea about it?
Yes, the first question, I leave to Hans, but maybe he can think about it.
I was just struggling to understand what the question there is because what we report is year-to-date, on average, a higher gross margin percentage. We saw a bit of a negative impact in Asia Pacific as a result of acquisitions that we did companies that we acquired with [indiscernible] and then during the year, what I would call the usual fluctuations in margin percentage, depending on the product developments and so on and so forth.
Okay. But there were also acquisitions in Europe. So that had not a negative impact on the gross profit margin?
Yes, also a bit but less significant than what we saw in Asia Pacific. And in Asia Pacific, it is especially the fact that the size of the region is, of course, much smaller and then the acquisition impact is much bigger.
Yes.
Yes. Quirijn, on the other 2 questions, cost measures, we are reluctant to take them. I think, first of all, yes, we see this as a temporary, let's say, small decline. I want to reminds everybody also that this company has grown on average in the last 5 years with 29% EBITA last year with 48%. And we tripled -- more than tripled our cash earnings per share in this period.
So it has been a very, very successful growth story. And this year is a bit of -- this first 6 months is a bit of a small dip. And so -- and therefore, there is no reason to panic or to suddenly take drastic measures. We have a very, very efficient sales structure. We have a fantastic IT infrastructure. We work very hard on further digitalize our operations and we see fantastic opportunities there.
So if you look at the potential of this company, then it is very, very strong, and we don't let, let's say, our strategic growth story be influenced by a quarter that is not as satisfactory as we hoped for. So yes, I think that's the answer to your question.
On bonuses, we all have in our company, we all have targets. And if you make the targets, you get your bonus, you don't make it, then there will be some consequences. We are not going to disclose what we talk about. We will see at the end of the year what the results will be. And hopefully, for everybody, they will be better than, let's say, in such a way that we can pay bonuses. So let's see what happens in the next 6 months.
Okay. And my final question is then how long do you think you will take to raise the gross profit margins in the far east of this recently acquired firms?
Yes. I think there are a couple of things there. If I look, for instance, in a country like India, on the Industrial side there on the average gross margins in that part of the market are lower than group average, but also the cost structure is much lower so that the EBIT margin. So there, I don't expect a huge substantial increase in margin percentages in areas like China, for instance, there is quite an upside, will take a bit of time, but we will get there.
Yes, I think maybe to add to what Hans was saying. We have, of course, invested quite significantly in India. These companies will be integrated, that will take time. But I think we will improve their operational qualities and let's see if that and also translates in better margins. I think on China, we made some fantastic acquisitions, also in the beauty and personal care space. So we expect a lot of that going forward. So again, I think we're very well positioned for growth. And in that sense, I'm totally optimistic.
We'll take now our next question from Stefano Toffano from ABN AMRO.
Yes. Last question from my part. Talking with your competitor yesterday, they mentioned, obviously also Industrial is very weak, but particularly a very strong acceleration of this weakness in June compared to the first 2 months of the quarter and then continuing into Q3. Did you see a similar dynamic? Or was it more spread out over the quarter talking about the weakness in Industrials.
Well, I don't want to comment month per month, to be honest. I think you see, of course, some changes from month to month, but you don't see a pattern in that in particular. So I don't want to further speculate about what will happen then in the next quarter or in the next 6 months as I've said before. From months to months, it changes, but it is not one, let's say, a very recognizable pattern, some months are better, some months are a bit worse.
And if I may add one last question regarding the impact of the higher debt pricing and the influence it has on acquisition multiples. So you're saying that you're still -- that you are indeed seeing or can explain to potential targets about what is happening, and you're seeing lower acquisition multiples. Do you see some delays maybe in a potential new acquisition or in your pipeline? Or is there no difference compared to, say, a quarter or 2 quarters ago?
This -- it's a good question, but it is -- of course, these processes take time. So it's not -- I mean, before you start conversations and finish, it can take a long time. As you have seen, we have done a lot of acquisitions in this first 6 months. And the pipeline is still good. So we expect to do more. And so far, we don't see a slowing down. But it's maybe too early to tell. I think it's always a bit countercyclical how much targets come on the market. But to be honest, we see a healthy, healthy pipeline still.
We can really have no questions coming through. [Operator Instructions] There are no follow-up questions.
So I will hand you back to Piet to conclude today's conference. Thank you.
Yes, I want to thank everybody very much for your attendance. That's very good to talk to you. And actually, to close, to tell you that here in Rotterdam, the Sun is actually shining, which is in the Netherlands the last couple of weeks an exception. But I wish you a good day, and have a nice day. Bye.
Thank you for joining today's call. You may now disconnect.