Welcome to IMCD N.V. First Nine Months 2024 Results Conference Call. My name is Alan and I will be your coordinator for today's event. Please note this call is being recorded and for the duration your lines will be on listen-only. However, you will have the opportunity to ask questions at the end. This can be done by pressing one on your telephone keypad. If you require assistance at any time, please press 0 and you'll be connected to an operator. I'll now hand you over to your host Valerie Diele-Braun to begin today's conference. Thank you. Good morning everyone and welcome to the IMCD Q3 2024 call. As usual, I'm here with my colleague Hans Kooijmans, the CFO of IMCD, who will lead you through the financial results after my preliminary remarks and then we are open to answer your questions. In the first three quarters we recorded revenues of EUR 3.6 billion and operating EBITDA of EUR 403 million on a constant currency basis. This is a 3% EBITDA increase versus previous year same period. This increase can be mainly attributed due to an improved performance in Q2 and Q3. After a disappointing Q1 during the third quarter of this year, we were able to deliver a gross profit of EUR 303 million which is a FX adjusted growth of 13%, resulting in a 13% EBITDA growth on a constant currency basis versus the same quarter last year. This result was a combination of the performance of first time inclusions of acquisitions as well as organic growth. Additionally, we strengthened our position in all operating segments as well as regions through 12 acquisitions year to date despite continuing difficult market conditions. We are happy that we saw organic growth, gross margin and EBITDA growth in all three regions in the third quarter. Still modest organic growth in EMEA but more notable in Americas and Asia. In terms of general market development, we continue to see volatile months across all regions and business lines with little visibility beyond six weeks. Due to the desire for low inventories and just in time orders by a substantial part of our customers, we see many volumes and orders being moved to the next month and the ongoing geopolitical changes make predictions very difficult, which is why we focus on those elements which we can drive commercial excellence, digital upgrading and principals as well as customer collaboration and support. In terms of effective business development, we were able to win new principals and to expand with existing ones. Our principals continue to be excited about the volumes we have been able to gain and we work closely with them to develop additional opportunities. As far as our M&A pipeline is concerned we maintain a healthy, attractive target list and delivered year to date, as mentioned, 12 acquisitions across all three regions of business segments. Last but not least, we continued with our digital investments and sustainability programs which we will further roll out in 2025. As mentioned during the lab tour in Milan in September and the respective presentation which was published on our website, we are confident that our investments made our strong commercial teams digital and logistics infrastructure, combined with a continuous drive for operational excellence and cost control will deliver further growth and efficiencies simultaneously. We feel it to be prudent to be cautious with predictions in such a volatile environment with a changing geopolitical landscape. Hans will now give you a short update on the numbers. Thank you, thank you. Valerie. Good morning ladies and gentlemen. I will briefly summarize IMCD's first nine months' results that we published earlier today before we go to the Q& A at the end of this presentation. I would like to start on this page nine of the presentation, and as you can see, Forex adjusted revenue and gross profit both increased with respectively 7% and 8% compared to last year, and the 8% gross profit growth in the first nine months of this year is a combination of slightly positive organic growth and a 7% increase as a result of the first time inclusion of our businesses during this year. We saw a positive development of organic gross profit growth as you have seen from a -8% in Q1 via a +4% in Q2 to a +7% organic gross profit growth in the third quarter. Gross profit in percentage of revenue slightly increased to 25.4%, and this increase is the result of changes in local market conditions combined with the usual fluctuations in our product mix and various local gross margin improvement initiatives, and these effects more than compensated the negative impact from acquisitions on the gross profit percentage as these acquired businesses on average had a lower gross profit margin than group average. Forex adjusted operating EBITDA increased 3% to EUR 403 million and this 3% increase was a combination of a plus 8% as a result of acquisitions and a minus 5% organic. When looking at the trend here over the quarters we saw a similar trend as mentioned for gross profit negative organic in Q1, a small plus in Q2 and 5% organic EBITDA growth in Q3 the conversion margin was 44.3% which is 2.5% below last year. Then Forex adjusted net result earnings per share both slightly decreased the cash earnings per share so after adding back amortization net of tax is more or less similar as last year on free cash flow we report a EUR 65 million decrease compared to last year. Cash conversion margin of 73% was lower than the same period last year. Increased working capital investments were the main driver of this increase, and this working capital investment was primarily driven by an increase of business activity. Further, we report a little increase on working capital - from 66 days last year to 68 days this year. And on the last line of this page you will notice a 7% increase in our number of full-time employees, and it's fair to say that this increase is the result of new employees as a result of acquisitions done, and when normalizing for these acquisitions we would have reported a little decrease as we were very cost conscious and careful in filling open positions given the uncertain market conditions. Then on the next slide, slide 10, you will find a summary of a few key figures split into the various regional operating segments in the first column. In EMEA we reported solid numbers given difficult market conditions in the various markets and challenging comparable figures of last year. Year to date, gross profit growth was positive and we were able to further increase the gross profit percentage to 27.8%. In EMEA, forex adjusted operating EBITDA of EUR 186 million was 1% better than last year. Modest organic growth profit growth combined with inflation driven owned cost growth was the main driver of slightly lower like for like EBITDA and reported ratios for EBITDA and conversion margins. Organic EBITDA growth was positive in both the second and the third quarter, then in the second column, the Americas positive development of organic gross profit and EBITDA growth, both with double digit organic growth number in the third quarter could not compensate the relatively weak performance in the previous two quarters. However, we've seen a promising and ongoing quarter after quarter improvement since the weak first quarter of this year, and the gross margin percentage in the region increased from 24.1% last year to 24.7% this year. Asia Pacific, the third column, is the only segment where we saw a decrease in gross profit percentage. This 1% decrease from 23.3% last year to 22.3% this year, and the reason of this decrease is mainly the result of acquisitions done. These acquisitions contributed 20% to the top line and only 14% to gross profit. Therefore, it's obvious that these acquisitions had on average a lower gross profit percentage than our legacy business. When normalizing for these acquisition impact, the average gross margin percentage slightly increased compared to last year. And similar to the Americas, we saw healthy organic gross profit and organic EBITDA growth in the third quarter. And then in the last column you will find the cost of holding companies, and this includes all non-operating companies including the head office in Rotterdam and the regional support offices in Singapore and Miami. The cost increase reflects the growth of IMCD and the corresponding need to further strengthen the support functions both in Rotterdam and in the regional head office. On page 11, a summary of the free cash flow. Free cash flow was, as I mentioned earlier, EUR 65 million lower than last year resulting in a 17% lower cash conversion ratio. The reported decrease is mainly a result of higher working capital investments as a result of higher level of business activities. Strong sales in September and additional stock to cater for the open orders in October were the main driver for the working capital increase. Capex was low in line with the asset-light business model of IMCD. Then on page 12, a short update on net debt and leverage. Compared to the end of December last year, net debt increased with about EUR 300 million. This increase was a combination of positive operating cash flows on the one hand combined with among others EUR 128 million dividend payment and EUR 277 million of considerations paid for acquired businesses. When looking at the debt position, the debt includes at the moment two 300 million bonds with a coupon of a low 2% and further it includes two 500 million bonds. As you might have seen, we successfully issued a new 500 million bond in August and this new bond matures at the end of April 2030 and has a fixed coupon of 3.725%. Then you can see that reported leverage ratio including the full year impact of acquisitions was 2.8 times EBITDA and leverage based defined on the definitions in our loan documentation was 2.7 times EBITDA and that is well below the maximum level that we can have there, the 4.25. Then last but not least on page 14 you will find our outlook for 2024. There you could read that we are positive but cautious as market conditions make future demand and developments difficult to predict. That was my short summary of our year-to-date financials, and Valerie and myself are happy to answer the questions that you have, and I would like to hand over to the operator, Alan. Thank you. If you like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. To withdraw your question, please press star two. You'll be advised when to ask your question. We will take our first question from Chetan Udeshi, J.P. Morgan, your line is open. Please go ahead. Thanks for taking my questions. Maybe the first one is for Hans. Typically in the chemical sector, I guess is also relevant for IMCD. You always see Q4 which is weaker than Q3. It's just a general seasonality. From today's perspective, Hans, do you see any reason to have a better Q4 than normal seasonality or worse? Or would you say the normal seasonality is what you expect for Q4? And just remind me of what do you think is the normal seasonality for IMCD over the years? Is it down 5, down 10? Any color there? And maybe for Valerie, within your Life Sciences business, I'm keen to understand how big is your exposure to the Beauty market because we've seen warnings after warnings from large personal care companies about slowdown in the beauty spending. I just sort of remembered that you've been talking about personal care as one of the businesses which have been growing quite well for IMCD in the recent quarters. Just trying to understand how big the business might be for you? Thank you Chetan, thanks for the question. You're absolutely right about the fact that Q4 is always a bit of a lighter quarter, but also a quarter that is pretty difficult to predict, and when I say pretty difficult to predict, that has to do with the fact that we never know what customers do with respect to factory closings at year end, how quick they will basically stop the production season and if they want to replenish stock already before year end or just after year end, and that makes us cautious. What we see in today's environment, there is reluctance of customers to have stable stock positions, as I would call them. Everybody's cautious. Everybody wants just in time, these deliveries and just what they need to produce. I think it's fair to say that if you look historically, there's always a weaker December month. The good news there is that it drives your working capital position slightly down so you generate typically a higher cash generation in the last quarter. The negative is that your top line is lower, but I have no vision on where it should land this year. At the moment I think we were positive about October and let's see how November and December will develop. In terms of your question on the beauty market, we would love to have an even bigger exposure to the beauty market even if there is nearly momentarily a decline. In terms of us, we have not seen a decline in the third quarter. All our business lines except pharma grew in the third quarter. Pharma has a bigger impact and that is already in the numbers for a couple of months as I had mentioned in the other calls. Can you just remind within Life Sciences, can you maybe? I know you don't give exact split, but if you were to rank by the relative size the different parts of Life Sciences, can you do that for us? How big? Like pharma, beauty, other bits within, just on a relative basis even if you don't want to give the percentages, which is the biggest, which is the smallest? Yeah. So the guidance that we gave in the past that on the life science side food and pharma are the biggest. Like on the industrial side coating, construction and advanced materials are the two biggest. Beauty and personal care is absolutely the number three and growing nicely. Thank you. We will take our next question from Suhasini Varanasi, Goldman Sachs. Your line is open. Please go ahead. Hi, thank you for taking my question. I hear your point on Q4 still being uncertain, but it usually is the smallest quarter for you on an annual basis, and given you've returned to profit growth on a nine-month basis this year, just curious why you didn't talk about targeting operating EBITDA growth in the outlook. So just some color there please would be helpful, and how is your order book looking, I suppose, at this point in time because I think your peer mentioned it's looking decent for October and November. The second one is on SG&A. It has been outpacing organic GP growth or general GP growth. Appreciate, part of it is coming from, but what are your plans on maybe controlling the SG&A and targeting margin expansion going into 2025? Just the last one is on working capital. Is it possible to break out how the investments were generally? Was it more on the receivables front or was it a decent chunk from inventory as well? Thank you. Three questions. Shall I start taking? Started a lot on the working capital additions and stock were the main drivers there. What I mentioned, September was a strong month and then you finished the month with high inventory position and we also saw a strong order book for October and as a consequence at the end of September we had to make sure that we had the stock in the warehouse. So these were the two main drivers. Then your SG&A question. I think if you look at our cost structure and cost base that we report this year, it's fair to say that we operate on, if you look at the number of people that we have on the payroll, that we operate on a slightly lower number of people and that the cost increase that you see is mainly inflation related to the existing teams that we have. So, what I see there is that, yes, in the first quarter we had difficulties to make that cost inflation good with margin growth because we did not report margin growth. As we see an improvement quarter after quarter, we are getting back on track. There, I think we do pretty okay, though. Then, with respect to the guidance for the last quarter, yes, this short month, yes, we have visibility on an order book that delivered a pretty okay October and looked healthy for November, but at the same time what we also see every quarter is that orders quickly move into the next month or move into the next quarter as basically customers always have the freedom to postpone a delivery or to break an order in two. That means that we are, although we have that visibility, it's always difficult to predict in which month or which quarter it will finally land. That is the reason that we are a bit cautious about making a prediction for the rest of the year and then the December period. In the current environment we see here and there customers already announcing that they close their production factories a bit earlier to basically I think save a bit of the cost structure. For us that is difficult to predict, difficult to judge. Let's see how the month plays out and the quarter plays out and we will tell you what is it end of February, early March next year? Sounds good. Thank you very much. We will take our next question. From Matthias Maenha, Kepler Cheuvreux, your line is open. Please go ahead. Yeah, hi, good morning. Thank you for taking my questions. I actually wanted to come back on the SG&A and the OPEX group. You've been trending this year up organically, I think roughly from 5%-7%. Is this the kind of run rate in terms of OPEX growth we need to bank on for next year and what would be like the core drivers of that? That would be my first question. If you look at our cost structure, then if you go through the P and L, cost of goods of course follow the revenue, and they have seen our development in gross margin percentage, so that means that we are we were pretty consistent in keeping the margin at the level where it was last year. Then we have third-party cost as a big cost driver. There we see the usual discussions about changing rates and additional transportation cost at year end. And of course we try to push back to our third-party service providers if they come up with cost increases. These are the negotiations that go on at the moment. And then the biggest cost component that we can influence is our basically people-related cost. And as people are the main asset of our company and we need to be careful that we keep paying people in line with market conditions. Valerie, I don't think. No. And I think what I would like to add here, and we have made that point also in other calls, we clearly see ourselves as a growth company and in considering that our most important assets are the people, we are not in a mode to say, okay, we're going to decrease, not a number or we are going to not give the required salary increases. And additionally, we have a lot of investment in digital, which we feel are very important to be competitive in the future. And also at this side, we'll continue to have people working on all the various programs that we have talked about. So we feel it is prudent actually to continue with these investments and to then save on those elements where one can put some negotiation on or one can should be a little bit frugal. But on the people side, we will continue to invest, and in order to be fit for the future. Okay, thank you. If I may do a small follow up, I think last year there was a little bit of a tailwind on the back of bonus provision accruals that have been reversed. Is this something we should expect to reverse in Q4 this year? I assume that it won't be of the same magnitude. I hope not, to be honest, because if I need to reverse, it means that people don't make the targets what they expect to make right now. So there is a bit of a plus and a minus here. If we don't make the target, there will be a bit of a release. And if not, I think everybody happy. All right, thank you. That were my questions. We will take our next question from Quirijn Mulder, ING. Your line is open. Please go ahead. Yeah, good morning everyone. A couple of questions. Let me say zooming in on EMEA. I see. Let me say that organic growth 9 months of -3%. That was already the case in the second quarter of second half, first half, I must say. So it looks to me that the organic growth on EBITDA level was again negative against the second quarter being a positive. So maybe you can elaborate on what's happened in Europe and maybe you can zoom in on, let me say your what is the development there with regard to coatings construction and maybe on the automotive sector where you have also a position with Velox. That's my first extended question. Let me do the number part. We saw organic EBITDA growth both in Q2 and in Q3, but by your conclusion that in Q2 the organic growth level in EMEA was higher than Q3 is the right one. But they were both positive. I think that is a bit in the round. Yeah. And in terms of the automotive sector, I mean, I think the beauty of the business model of IMCD is that it has so many business groups. It has so many different sub businesses within each segment. That is extremely resilient. Yes, we have an impact from the automotive sector, and that is at the moment clearly not looking too good. But overall, that is compensated by other trends in the same. Even in the same business groups and in others that are doing very well. So I think automotive. We have nothing that is so outstandingly important that really overshadows here. Does that answer you? Yeah, mostly there was a strong momentum in the second quarter with regard to coatings and chemicals for construction. So that is still the case, as I understand. Yes. Okay. And then my question, my second question. And on the Americas, it looks to me that the margins on M& A are higher than in the, let me say, on the company, on Americas itself. Is that correct? And can you maybe elaborate on that somewhat? I'm looking at the numbers now, and my feeling is that also in the Americas, but I'm trying to do that now off the top of my head. But in the Americas, the margin is, I think, more or less slightly higher than the average in that region. Slightly, but not a lot. And I see the opposite in APAC. And that is, of course, the area where it has the biggest impact because there we have most of the acquisition growth, and that the margin on the acquired businesses is, for various reasons, on average much lower than what we typically do. Okay. Okay, thank you. We will take our next question from Nicole Manion, UBS. Your line is open. Please go ahead. Hi, good morning. Thank you for taking my question. Just given events this week, just wanted to ask how much of your U.S. product is imported compared to being produced domestically and if some of it is imported, how much of that comes from China? Nicole, we don't know by heart, but I think it's fair to say that. I think if I look at the suppliers that we represent in that market, if we import, we mainly import from EMEA and I think very limited out of Asia and as far as I know, not a lot from China. Yeah, absolutely. For obvious reason. Also in terms of our supplier base and. Yeah, yeah, just wanted to double check. That's very clear. Thank you. Thank you. Once again, if you like to ask a question, please press Star one on your telephone keypad. Now we will take our next question from Dominic Edridge, Deutsche Bank. Your line is open. Please go ahead. Hi there. Thanks for taking the question. Just one on just to follow up on Nicole's question, just more general question about supply chains. Obviously we've got a strike going on in the Canadian ports. There's potentially going to be the East Coast. U.S. is still uncertain and, as I say, the tariff situation is unclear. Are you feeling anything from either your principals or from your customers about the need to build up more inventories at the moment or what are your thoughts on the current situation on the supply chain? Thank you very much. I have not received any requests for building up of inventory due to that and also we don't see at the moment any impact in terms of our performance. Thank you very much. We will take our next question from Eric Wilmer. Your line is open. Please go ahead. Hi, good morning. Thanks for taking my question. I got one left. I believe Q3 was the first quarter in quite a while that the number of FTE went down slightly. In Q1, I think that you also highlighted that you are continuing to invest in staff in Rotterdam and in your global corporate offices. So I was wondering is this slight FTE decline, although it's indeed slight, but is this perhaps driven by any businesses or so in Q3? What am I missing? Thank you, Eric. It is mainly the result of the fact that we were careful filling vacancies. So if people leave the company then we really discuss, is there a need to backfill or can we fill it in a different way? And I think also the contribution of new employees as a result of acquisitions in that period was relatively low. You can imagine that you will see a pickup in the last quarter because the Bluemore acquisition will add what is it, about 160 new people. And for sure a couple of the vacancies that we had during Q3 will be filled in the last quarter. But we are really cautious. There should be a business rationale behind adding new people. And if we backfill open vacancies, also due to the more digital environment that we are creating, we also see a slight change in roles. So we need to be careful that we don't automatically backfill if people leave. And that is why you see every now and then a bit of a change in the number of employees. Understood. Thanks a lot. We will take our next question from Matthias Kepler Cheuvreux. Your line is open. Please go ahead. Hello, thanks. Thanks for taking this question. I just had a question on the organic gross profit margin evolution in Q3. I have the impression it's flat to slightly down. Would you be able to confirm and how should we think about the organic gross profit margin expansion going forward given the fact we see better organic growth, which I assume is driven by better volumes? So any color on that, that would be much appreciated. Sorry. First, to make sure that I understand if you talk about the gross margin? Organic gross profit margin expansion, so effectively how your gross margin has evolved excluding the acquisition. In Q3, we increased our gross margin with 7%, so we had 7% organic gross margin growth. And the percentage gross margin that we realized in the third quarter was slightly higher than the same period of last year. In that quarter we were, if you do the math, I think 25.2 versus 25 last year. On both numbers we increased in the third quarter compared to the same quarter of last year, and that is also a bit of trend that I tried to describe in the opening remarks that we had a negative organic gross profit growth in the first quarter, that it increased to 4% organic growth in the second quarter. And we report now 4% in the second quarter and 7% in the third quarter. Now we see a trend line that we are improving quarter over quarter here and that is both on margin percentage and both on the absolute amount. Great, thank you, Hans. We will take our next question from Thibault Leneeuw, KBC Securities. Your line is open. Please go ahead. Good morning. I just had a quick follow up on the cost base. We talked quite a lot on the FTEs, but if I look at the other cost it basically looks like in the consensus numbers. The cost for the second half will go down quite a lot and I'm not sure what would drive meaningful decrease in the other operating expenses in the second half. Some clarity on that would help. Sorry, the line was at a certain moment bad. Did you refer to the comparison with what happened last year or in actual numbers or in consensus? Because I missed a bit. No, Michael, I'm not sure. So when I look at the consensus numbers, it basically looks that the total other operating expenses show a decrease in 2H24. In Q3 we basically see that overhead cost basically remains flat. So that would imply that in Q4 costs would meaningfully decrease in Q4 overhead costs. Yeah, and you refer to what people predict in the consensus, and that is of course difficult. Yes, exactly. No, yeah, but it's just what I see in the consensus. So that's why I wanted to see if I missed anything, if there would. If there is reason for lower cost in Q4? No, I think the only thing I could imagine is that what we saw last year is that during the year we saw that we would miss budget targets and that resulted last year in a situation that on the one hand we were again cautious on filling vacancies, but also reduced the bonus provisions that we had. So last year there was quarter over quarter, a bit of a decrease there basically in my own cost structure because of that. Not something that would really move the needle. I have to add to that as well and perhaps that is part of the consensus. But now I'm a bit guessing what you and your colleagues put in your model. Thank you. That's all for me. We will take our next question from Quirijn Mulder. Your line is open. Please go ahead. Yeah, from Quirijn, two follow-up questions. One is only working capital and what you said about the, let me see, the behavior of your customers. If the working capital is growing so fast, in fact compared to, let me say, more than EUR 60 million higher than last year, does it indicate that the clients are starting to behave somewhat different from what it was at the trough in the way that they are now looking for orders for somewhat longer time or, let me say, or maybe somewhat higher quality quantities? That's my first question. And the second question is maybe it's a technical question. Normally there is a big difference between your net debt over EBITDA ratios between what you report and what the documentation is. Is that related to earn outs or is there a difference there because it is normal, let me say 0.6 and now it's 0.1? Perhaps. First, to reflect on the working capital days, there are two things there. You can look at the absolute amounts and you can relate it to business activity, and perhaps I should start on the second one, so we reported this time 68 days for working capital compared to 66 last year and 67 the year before at the end of September, and so it is all around that same ballpark, and the line that has the biggest impact on my working capital days is basically my debtor position. Because if you look back historically, then my debtor days are always higher than my stock days and my creditor days, so if I have strong sales or strong top line growth in a certain period, that drives my debtor days up and that has the impact on basically the number that I just mentioned. So I don't see anything abnormal. I only saw a bit of a positive sign at the end of September because I had a high inventory and more stocks because of a strong order book of October. So for me this is more a positive than a negative. The fact that I had to invest then on the net debt, the difference in definitions, you're absolutely right. There is a different accounting treatment in IFRS versus loan documentation. How to deal with earn-out obligations and minority shares that are still with previous owners. And what we see in the loan documentation is that I don't need to include the earn-out obligation that I have to pay, but I also cannot include the profit related to the minority share. So for instance, in the Signet case, I did not have the debt related Signet in my loan documentation debt and I did not have the 30% profit that related to that same debt position. First of all, the big one is out. So that already made the difference smaller. And the other thing is that as the open positions are getting smaller, the gap is also getting narrower and that drives now the small difference between the loan documentation, the IFRS calculation. A bit of a technical answer. Technical question. Thanks. We will take our next question from Luuk van Beek, Degroof Petercam. Your line is open. Please go ahead. Yes, I have one remaining question on. Your acquisition spending run rate. And are you still comfortable with keeping? That run rate despite the higher leverage. That you're currently seeing? Yeah, I think as you know, we have always maintained an active and disciplined M&A strategy as a complement to our strong organic growth. And what you see there is that acquisitions are always difficult to plan. First of all, you need to have. We talk about a healthy M&A pipeline at the moment. We talk about a leverage profile. But I know that during the year my highest point in the cycle are always the end of June and the end of September. So we will deleverage towards year end if we don't do additional material. But we will carefully monitor our balance sheet and our leverage development there. And I don't feel uncomfortable there. Okay, thank you. As a final reminder, if you like to ask a question, please press Star one on your telephone keypad. Now we'll pause for just a quick moment to allow everyone an opportunity to signal for questions. There are no further questions on the line. So I will now hand you back to your host for closing remarks. It was a pleasure to be with you on the call and as Hans mentioned, speak to you in the next year. Yeah, thank you. Wish you all a good finish of the year. Yes. Thank you for joining today's call. You may now disconnect.