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Edited Transcript of IMCD.AS earnings conference call or presentation 16-Aug-19 8:00am GMT

Half Year 2019 IMCD NV Earnings Call

ROTTERDAM Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of IMCD NV earnings conference call or presentation Friday, August 16, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hans J. J. Kooijmans

IMCD N.V. - CFO & Member of Management Board

* Pieter C.J. van der Slikke

IMCD N.V. - CEO & Member of Management Board

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Conference Call Participants

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* Henk Veerman

Kempen & Co. N.V., Research Division - Research Analyst

* Mutlu Gundogan

ABN AMRO Bank N.V., Research Division - Analyst

* Nathalie Debruyne

Banque Degroof Petercam S.A., Research Division - Analyst

* Peter Olofsen

Kepler Cheuvreux, Research Division - Analyst

* Quirijn Mulder

ING Groep N.V., Research Division - Research Analyst

* Rajesh Kumar

HSBC, Research Division - Analyst

* Steven James Goulden

Deutsche Bank AG, Research Division - Research Analyst

* Thomas Edward Burlton

Joh. Berenberg, Gossler & Co. KG, Research Division - Head of Business Services & Senior Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for holding, and welcome to the Analyst Call First Half Year 2019 Results from IMCD. (Operator Instructions)

I would like to hand over the conference to Mr. Piet van der Slikke. Go ahead, please, sir.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [2]

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Yes. Welcome to everyone. Hans Kooijmans and I will be happy to answer your questions regarding our press release containing the half year 2019 results.

We have reported 17% EBITA growth in the first half year. After the strong first quarter, the second quarter, in particular, towards the end saw the market softening resulting in reduced growth of our results. Overall, however, the first 6 months were satisfactory with strong free cash flow and growth of cash earnings per share of 22%.

Looking at the different regions. EMEA reports a 1% growth of EBITA and 3% ForEx adjusted. Business sentiments weakened in the second quarter, which is most strongly felt in Germany. The Americas showed good growth, plus 49% operating EBITA growth, although demand in Q2 was a bit lower than expected. Asia Pacific is performing in accordance with expectation.

Summarizing. The economic environment is challenging, and given the geopolitical turbulence, visibility is low. Notwithstanding these negative factors, IMCD's business model is resilient and strong and we expect EBITA growth in 2019.

And with this, I give over to Hans for additional remarks on the numbers.

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [3]

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Thank you, Piet. Good morning, ladies and gentlemen, and I would like to give you a short summary of the results of IMCD in the first half of 2019 as reported earlier today.

I would like to start on Page 9 of the presentation where you will find a summary of the first half year income statement. As you can see, revenue increased 21% compared to the same period last year and gross profit increased 19%. Most of this gross profit growth was the result of the first-time inclusion of businesses acquired in 2018, adding 15% of the 19%. This acquisition growth is the full year impact of 3 acquisitions made in the second half of 2018, E.T. Horn in the U.S., Velox in EMEA and Aroma in India.

Gross profit in percentage of revenues slightly decreased to 22.3% year-to-date. This decrease is, as explained before, mainly the result of a, on average, lower gross profit margin percentage in the recently acquired businesses. Further, we saw usual fluctuations and differences in margin percentage between regions and quarters caused by changes in local market circumstances, product mix differences, product availability and currency fluctuations.

Operating EBITA increased 17% or EUR 18 million to EUR 123 million, and this increase was a combination of organic growth and the first-time inclusion of acquisitions. Further, the application of IFRS 16, the new lease accounting standard, had a positive impact of about EUR 1.7 million on EBITA. Operating EBITA in percentage of revenue slightly decreased to 8.8%. And the recently acquired businesses of Velox and HORN with a lower EBITA margin than IMCD average were the main drivers of this decrease. The same applies for the conversion margin, calculated as operating EBITA in percentage of gross profit, where we saw a similar small margin decrease of about 0.5%.

On the next page, Page 10, you will find a summary of the financial details per operating segment. In EMEA, we report an 11% ForEx-adjusted gross profit growth and 3% operating EBITA growth. The EBITA margin dropped 0.9% to 10.2%. The main reason of the drop in EBITA and conversion margin is the impact of the Velox business that we acquired in the second half of 2018. And to refresh memory, this business had about EUR 155 million in revenue and an EBITA margin of about 3%. Excluding the acquisition impact of Velox, the EBITA and conversion margin in EMEA were more or less in line with the first half of 2018.

The Americas ForEx-adjusted gross profit increased 36% and operating EBITA increased 42%. This increase was a combination of healthy organic growth and the first-time inclusion of E.T. Horn acquired end of August last year. Operating EBITA margin and conversion margin both further improved compared to the same period last year despite the negative impact of these ratios as a result of the relatively low profitability of the acquired HORN business. Group growth in our North America organization, strict cost control and improved performance in Brazil more than compensated for the negative impact of E.T. Horn on ratios like conversion and EBITA margin and further resulted in a substantial organic increase of the operating results in this region.

In Asia Pac, we realized double-digit gross profit and EBITA growth on a constant-currency basis. This growth was a combination of organic growth and the first-time inclusion of Aroma, a business in India that we acquired end of last year. Operating EBITA margin and conversion margin both slightly decreased compared to the same period of last year mainly as a result of additional investments to strengthen local organizations. In the last call, you will find in the holding companies all non-operating companies including the head office in Rotterdam and regional support offices in Singapore and New Jersey in the U.S.

The cost savings that you will notice here is mainly the result of the application of IFRS 16. As mentioned earlier, this new lease accounting standard had a positive impact on EBITA of EUR 1.7 million and most of it ends up in the segment holding companies. For your convenience, I added Page 11 in which you will find a summary of the allocation of the IFRS 16 impact on operating EBITA per segment.

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 include, amongst others, interest expenses, currency exchange results and amortization of finance costs related to the setup of today's financing structure. Further, it includes part of IFRS 16 lease expenses. Income tax expenses increased in line with the increased results. Amortizations of intangible assets are mainly noncash-related to the amortization of supplier relations, distribution rights and other intangibles. Further amortization includes about EUR 2 million cash cost as a result of the implementation of IFRS 16. And last but not least, on the bottom of this page, you could see a substantial 22% increase in the cash earnings per share to EUR 1.60.

On the next page, Page 13, a summary of IMCD's balance sheet. And for your convenience, I added the restated December 2018 balance sheet including the IFRS 16 impact, adding, amongst others, our leased offices and other leased assets from our balance sheet. As you will notice, the implementation of this new lease standard resulted in EUR 64 million additional assets and debt on our year-end 2018 balance sheet. The property, plant and equipment that we own ourselves, so excluding leased assets, slightly decreased and is still relatively low because of the asset-light business model. The increase that you see is mainly due to increased lease obligations because of renewals or expansions of these contracts.

Intangible assets and related deferred tax liabilities are, as usual, relatively high as a result of M&A and our history as a private equity owned company. There's an equity position of EUR 814 million covering 54% of capital employed. As you might remember, in Q2, we paid a dividend of EUR 0.80 per share, resulting in a total dividend payment of EUR 42 million. The leverage ratio end of June, based on our loan documentation, was 2.7x EBITDA, which was well below the required maximum as set on the loan documentations. Reported leverage was slightly higher due to the additional lease-related debt as a result of IFRS 16. Working capital and net debt development are summarized on the next 2 pages.

On Page 14, you will find a summary of the absolute amount of the various working capital components and these absolute amounts translated in days of revenue. As you can see, the absolute amount of working capital increased with EUR 46 million compared to year-end 2018. Compared to last year, the overall working capital days increased with 2 days from 56 to 58. Stock days were more or less flat compared to June last year and slightly better than December 2018.

On Page 15, a summary of the movements in our net debt position in the first half of 2019. End of last year starting position was EUR 611 million, EUR 91 million cash generated from operating activities. And you see cash-out related to interest, tax and investing activities. Further, the EUR 42 million dividend payment and the new IFRS lease obligations adding up to a net debt position at the end of June of EUR 684 million.

I would like to finish this financial summary with the cash flow overview on Page 16. And as you can see, year-to-date free cash flow and cash conversion ratio substantially increased in the first half of 2019 compared to last year. Substantial operating EBITA growth and lower increase in working capital were the main drivers of this healthy cash flow.

Before we move to Q&A, I would like to take you to Page 18 where we summarize the outlook for the full year. And based on the performance in the first half of 2019 and the strong fundamentals of the business, we expect operating EBITA growth in 2019.

I would like to hand over now to the operator to open the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is from Mr. Peter Olofsen, Kepler Cheuvreux.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [2]

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My first question is on the organic gross profit growth. There was a clear slowdown in Q2 compared to what we saw in previous quarters. Is that mainly due to the more challenging macroeconomic environment or are there also other factors that may have caused some slowdown, maybe some low supply or suppliers or maybe some disruption from the floodings in the U.S. Midwest, maybe some more clarification there?

And then you briefly touched on this in the introduction, but could you shed some more light on what you have seen during the second quarter. Some other companies talked mainly about a rather weak June. So did you also see it more flowing towards the end of the quarter? And what are you seeing so far in the third quarter?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [3]

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Yes. Thanks very much for this. To give you a bit of color, I think where you see in the second quarter a slowdown, in particular, also towards the end of that quarter. Throughout the year, I think we have seen volatility in our monthly results. And in the second quarter, you see also strong differences. I wouldn't attach too much importance to that. I mean in terms of these quarterly results, I've always been not a great fan of these quarters, as you know, when you follow me. If you look at our, let's say, business in the first 6 months, then it has been going fine. What we see, of course, is the macro environment, in particular, let's say the middle of the year has worsened, has deteriorated and we particularly see that in Europe and then, in particular, also in Germany. We didn't lose any suppliers or customers. It's purely a matter of demand in the market. Other than that, I think our fundamentals, our business model, it hasn't changed in this quarter or in the first quarter. It's still strong.

And on your last question with respect to July, I want to be cautious about giving you signals of that, but that was a better month again versus June.

So it's -- you have to be careful not to attach too much value to these quarterly moments. That doesn't take away, of course, that as we can all read in the papers, that the macroeconomic environment has worsened, has deteriorated and that is something that we all have to see how that will play out in the next period. But basically, in the IMCD business model internally, nothing has changed. We are integrating the businesses in the U.S. and in Europe that we acquired last year in accordance with plan. We keep our margins on good levels. We have to see what the demand in the market is, and in particular, in the industrial market. As you know, we're a diversified company. We have businesses in many market segments. And where we, in particular, see slowing down is in the markets that are related to end markets like car industry, construction, et cetera. So I hope this gives you a bit of color and answers your question.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [4]

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Yes, it does. And maybe to briefly follow up a bit to check whether my math is correct. So you reported 3% organic growth for the first half and you did 8% in Q1. Then I come to something like minus 2%, minus 3% for Q3. Is that correct?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [5]

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For Q2, Peter. And then you look at margin or EBIT?

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [6]

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The organic gross profit growth. You mentioned in the press release it was 3% for the first half.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [7]

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Yes.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [8]

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It was 8% in Q1.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [9]

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Yes.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [10]

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So then doing some quick calculations, I get to a minus 2%, minus 3% for Q2. So I just wanted to check whether that is consistent with your number.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [11]

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No. The second quarter is slightly better, but it was more flattish.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [12]

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Okay. And then maybe -- one thing on the calculation of the net profit before amortization. It seems that the tax credit related to the amortization was rather low, it's only EUR 1 million on an amortization charge of EUR 21 million. Can you explain why it's that low?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [13]

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Yes. Basically, that has to do with -- where it comes from is that when you add goodwill or the intangibles to the balance sheet at the moment of the acquisition, at that moment you create the deferred tax liability and you start releasing them when you amortize. So basically, it has to do in which jurisdiction we had the goodwill amount or the intangible amount, is it tax-deductible or not and that then leads to release. But this is a bit of a more technical explanation and I'm not sure I should do that in this call.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [14]

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Okay. But given that the acquisitions took place second half last year, we should then assume something similar for H2 as what we saw in H1?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [15]

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Most likely, yes.

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Operator [16]

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

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Thomas Edward Burlton, Joh. Berenberg, Gossler & Co. KG, Research Division - Head of Business Services & Senior Equity Analyst [17]

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I've got a few, if I could. The first one is just in terms of your outlook, and I know you don't intend to give quantitative outlook. But I suppose at this stage, the outlook of expecting EBITA growth for the full year, given we've already seen 17% absolute EBITA growth in the first half, I guess becomes sort of less useful. So wondered whether you can help about maybe fleshing out the guidance for the second half.

And in particular as well as looking at the organic gross profit line in H1, we had 3% organic gross profit growth and I appreciate there's not great visibility. But looking into the second half, I think, correct me if I'm wrong, I think comps get a little bit easier in the second half. So if all things remain equal, would you expect a slight acceleration at least in the organic gross profit line in the second half?

And then the second question I had was just relating to the M&A contribution, particularly at the EBITA line. If I'm right in terms of when your acquisitions annualize, I guess the contribution in the second half would be quite a bit lower than in the first half. I have been thinking around the order of about 3% EBITA growth from M&A in the second half, is that -- I know you don't like to exact guidance on that, but are you able to help in terms of the operating profit contribution for M&A just in the second half in order to help flesh out that guidance?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [18]

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I will answer your first question. This can be very, very short and brief. As you know, since we have been listed, we are not giving specific forecasts for the year other than very generic ones like we did also for this year and we stick to that. So unfortunately, I can't give you more details like we did also in the previous 4 or 5 years with our listing.

Hans, on number two?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [19]

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Yes. Tom, on the M&A side, when you look at the full year impact of -- we had 3 acquisitions last year, E.T. Horn, Aroma and Velox. E.T. Horn was acquired end of August, so what you could expect is another 2 months of M&A impact and then that should sit in our comps of last year. To remember the numbers there, when we acquired E.T. Horn, we announced that they made an EBITDA of about $12 million. So that means an EBITA of around somewhere between EUR 10 million and EUR 11 million on a full year basis. So there will be a few of millions of M&A impact in the P&L.

Velox with an EBIT margin of 3% acquired last year, was it September? So another 3 months, so that would be another EUR 1 million of M&A impact.

Yes. And then Aroma was pretty small. We acquired it end of November with, was it EUR 25 million, EUR 26 million of revenue. And then I think we indicated then around 8% EBIT margin. So then you can do the math, I think, yourself.

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Thomas Edward Burlton, Joh. Berenberg, Gossler & Co. KG, Research Division - Head of Business Services & Senior Equity Analyst [20]

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Okay. That's really helpful on the M&A contribution.

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Operator [21]

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

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Mutlu Gundogan, ABN AMRO Bank N.V., Research Division - Analyst [22]

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Let me try to also have a swing at the organic gross profit growth because I understand -- I mean I know from history that you don't -- how you always say that there's a lot of -- there can be volatility from one quarter to the next, but the decline from Q1 to Q2 is significant and we all know that the macro picture, indeed, has deteriorated. But nevertheless, such a decline seems to indicate that there was more going on. So was there any potential benefits of client wins, filling the channels in Q1, which can explain the decline to Q2?

And then maybe adding to that, is H1 then the base we should look at, is that what you're saying when you say don't look at quarter? So is H1 a good base to base our forecast on for the remainder of the year and maybe 2020 as well? So that is a big first question.

And then secondly, on Americas. The conversion margin has shown quite some volatility here in the last few quarters and Q1 very strong and now Q2 a little bit weaker. Can you tell us why that is and what we should expect going forward?

And then finally, third question, on acquisitions. There seems to be a EUR 3 million cash inflow and that seems to indicate that you saw something. Is that correct? If so, can you explain that? And perhaps to add to that, so far this year has been relatively quiet in terms of M&A. Can you update us on the pipeline, how things are evolving?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [23]

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Yes. I'll try to answer all your questions. First, on your questions with respect to Q1 and Q2, whether or not it was inflow of suppliers in Q1 and not in 2, the answer is no, no difference. I mean, we have a consistent business that is not, let's say, so dependent per quarter, of course. I mean we have long-term relationships with our suppliers and so that's not a difference. That's not an explanation. I would also like to point out, by the way, that the second quarter last year was extremely strong, and I think if I'm not incorrect, the strongest quarter that we had. So I think you should also take that into account if you look at the numbers now.

I think you should not over interpret, again, the quarterly results either on the positive side but also not on the negative side.

Again, on your question on forecast, whether or not we should take the first half as an indication of the second half, I'm not going to say more than I said and we said in our press release on what we expect on the development of our EBITA.

I think the second question, Hans will answer. But just the third question is on the capital inflow. Yes, we have sold a small business and it's also in the press release on Page 4, last paragraph, where we indicated we sold a small business that we have in Australia in flavor formulating, which is really noncore for us.

On the pipeline, also here, I mean I don't want to be boring, but it is what it is in terms of what comes out and what goes in. And sometimes, we always, throughout our 25 years almost of existence, we are busy on M&A. Also this year, I can't predict what will come out, but we expect something will come out this year. So there's no -- I mean our business doesn't change over quarters. I hope that you understand. I mean our business stays resilient, strong. We grow our customer base. We try to grow our supplier base. But of course, like anybody else, we are also dependent on demand from the markets and it's clear that we see here and there, in certain regions, demand slowing. Will that continue? We don't know. We will see.

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [24]

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And that makes it also difficult, of course, to make a forecast.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [25]

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Okay. Did you leave one on the table, one more question?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [26]

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I think you answered them all.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [27]

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Okay. Mutlu, is that okay for you?

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Mutlu Gundogan, ABN AMRO Bank N.V., Research Division - Analyst [28]

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Yes. I mean that's fine.

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Operator [29]

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

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Steven James Goulden, Deutsche Bank AG, Research Division - Research Analyst [30]

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I've got a few as well. Just on the organic gross profit, could you give us a bit of a feel for how the life sciences business did versus industrial because, obviously, if you're saying organic GP was flattish and we're seeing ballpark 4% organic growth from the likes of Givaudan, that suggests that industrial may have been particularly weak, and obviously you said before that Germany surprised negatively toward the end of the quarter. Just do you see this as potentially driven by a short-term destocking across your customer base? Or would you say that it's more -- and therefore, could it potentially correct itself in 1 to 2 quarters given that you deal with smaller customers with less working capital, which they outsource to you? Or is it just too difficult to say and can you not really give much commentary there?

Over the medium term, do you still think that the sort of 6% to 7% organic GP target that you've got is reasonable or does this change anything?

And lastly, sorry, just on the margins. Thinking about operational leverage, it looks like Velox probably in Europe took off maybe 70 to 80 basis points of margin. And I think you did slightly worse than 100 basis point is in EMEA. So are you seeing some negative operational leverage there? And in general, given cost inflation, what do you need to grow at in a region to maintain margins on a like-for-like basis?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [31]

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Yes. Okay. First question on industrial versus life science, it's clear that our life science business consisting of food, pharma and personal care is more resilient and growth -- has a higher growth rate than our industrial business. And of course, the volatility of our industrial business is a bit larger -- higher than the other ones.

On destocking, very difficult question. It's very difficult to have visibility on that. We have, of course, been asked about stocking in the U.K., waiting for Brexit. Probably some effect, I'm not sure if they have now destocked or are stocking up or have been fully stocked. It's difficult to say. I don't have an answer today.

Our guidance with respect to our organic growth, remains the same, doesn't change, that over the, let's say, on average, a 6% organic growth in the medium term is something that we stick to.

And then on Velox, Hans, if you have maybe...

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [32]

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Yes. What I tried to say, Steven, in the quarter that if you normalize the EMEA numbers for the impact of Velox, then the EBITA margin that we generated in the other companies is flat compared to last year. So it hovers then around that 11.1% that we also showed last year. If you add a business with a 3% EBIT margin, then that takes a bit of time to bring that up toward a decent level. So if you take that out then it's flat compared to last year.

Your other question is more complicated. That had to do with cost inflation and how much margin we need to keep ratios the same, and I think that is more a mathematical exercise. If you grow your cost base with 3%, then you should also grow your margin business.

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Operator [33]

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

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Rajesh Kumar, HSBC, Research Division - Analyst [34]

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First, can you give us some idea of the exposure you have to segments where you have seen some slowdown? So for example, you earlier called out auto, you called parts of industrial segments in Germany. So which particular industries are seeing greater degree of slowdown than the more resilient food flavoring, that sort of thing? So that would be quite helpful.

Second, when you look at the slowdown you've seen in Q2, obviously quarterly data can be quite volatile, so making long-term decisions just based on quarterly data would not be prudent. But what do you need to start any cost action in terms of how many quarters or what trend do you need to see before you say, okay, we need to now start cutting a bit of cost?

And the third point is just on the inventory inflow. It seems like there have been some destocking. It could be an impact of how M&A looks like when added to your balance sheet. So can we get some flavor on what sort of -- or the nature of the discussions you're having with your suppliers and customers about maintaining inventory levels or planning for the future?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [35]

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Okay. On the first quarter, Rajesh, exposure to end markets. Yes, I answered it more or less already. It's, of course, very much aimed at these industrial end markets like the car industry. And of course, we are not delivering directly to the car industry, but just to people who deliver to the car industry. So the coatings market, painting, coatings and that goes, of course, for this painting, coatings market, also for advanced materials like plastics or composites that have a function in these industries. I think that's the most important 2 markets that are affected.

Cost action, we are a business that depends on the quality of our organization and the quality of our people. So it's very important that we maintain under all circumstances, of course, a strong organization and we are not in the business of reorganizations, et cetera, other than when we integrate businesses. On the cost side, so we have the possibility, of course, to not fulfill vacancies or to look at the variable parts of our compensation schemes. But there is also, to be quite frank, no reason at all for us to differ from the path that we are on, which is to continue to build strong organizations, specialty chemical distribution and food ingredient distribution, and we will continue to do so. I mean I find it a bit -- I mean I think we all tend in many respects to overreact on the positive side but also on the negative side. I mean come on. I mean we have an organization that has been growing for the last -- for a couple of decades. And of course, and I've said that also earlier when we did so well in the quarter, we never always grow. We never always grow. But the underlying trend of our business model and of IMCD has been continuous growth over the years. And that's how you have to look at our business.

So we are not in the business of immediately cost cutting. So we rely on our people, and we will continue to improve the strength of the organization. Now on inventory, Hans, do you have a remark on that?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [36]

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No. I think, Rajesh, what we show at year-end 2018, we had relatively high stock positions. You see the stock days coming down slightly. As indicated before, we are not in the business to take speculative positions on stocks. And we try to buy based on expectations of what our customers need. And we monitor carefully business line per business line what we have and what we need. Could always be lower, that's also the internal push that we have in the organization. We could always optimize and do better on that [looking forward] to always the levels where we are at the moment.

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Rajesh Kumar, HSBC, Research Division - Analyst [37]

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Understood. It gives us some feel. Just on the first question, the proportion of your overall revenue, the gross profit, how much you've -- the exposure to the autos and industrial segments, which have been weak, just a ballpark figure, 10%, 20%, something?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [38]

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Yes, on the automotive you mean?

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Rajesh Kumar, HSBC, Research Division - Analyst [39]

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Yes.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [40]

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That I don't know exactly. But I think if you look at our industrial business, we do about -- versus our life science, it's about 55% versus 45%. But that's a general indication.

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Operator [41]

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The next question is from Ms. Nathalie Debruyne, Degroof Petercam.

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Nathalie Debruyne, Banque Degroof Petercam S.A., Research Division - Analyst [42]

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A few, if I may. Starting, again, I'm very sorry about that, with organic growth. Because you mentioned 3% organic growth in the first part of the year, so it was much more pronounced in H1 obviously. But if I do the calculations, I would assume it was in negative territory in the EMEA, still somewhat positive in North America and also positive in Asia Pac in Q2. If you could confirm that, that would be helpful.

And secondly, I'd like to go to the EBITA margin in the Americas. Again, sorry, about that, looking into quarters but trying to understand. Because what I see is that you had, yes, an important margin compression in the second half -- well, second quarter, sorry, of the year so I'm curious to hear about why that is. Is there any specific reason for that? Is the general slowdown the reason for it? Because in the first quarter, I mean, the EBITA margin was quite solid despite the fact that you were busy integrating the latest acquisition, so E.T. Horn, but then it came down in Q2. So I'm just curious to hear about your thoughts about that.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [43]

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The organic growth figures that you mentioned on the different segments, I think I can confirm that this is right. Your second question is a bit more complicated because I don't really follow you there. But that is -- could you repeat the question? It's about the EBITA margin in the Americas.

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Nathalie Debruyne, Banque Degroof Petercam S.A., Research Division - Analyst [44]

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Yes. Exactly. It's about EBITA margin in the Americas because if I do the calculations, I see in Q1 EBITA margin was 8.7%, which was positive, just surprising given the fact that E.T. Horn obviously is a low-margin business. But you also had a solid quarter on the organic side of things in Q1. And then Q2, I see EBITA margin is now at 7.8%, so down versus the first quarter. So just curious to hear about why that is.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [45]

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Yes. Basically, nothing specific. I think also in the quarter, we had a slightly lower gross margin percentage compared to the first quarter that basically has to do with mix effects in what we sold in that quarter. And that is why we try to avoid talking about quarters because before you started to talk about seasonality in certain business lines, higher- and lower-margin products and so on and so forth. There is nothing specific in there as far as I [remember].

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Nathalie Debruyne, Banque Degroof Petercam S.A., Research Division - Analyst [46]

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Okay. So for the year, what should we think of because it was -- Yes. I mean I guess it was also mix driven in Q1 and then you had negative mix effect probably in Q2. But what does that mean for the remainder of the year?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [47]

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If you could predict what the demand in the market, I could help you. We don't know. We will see. We're not in the business of forecasting.

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Nathalie Debruyne, Banque Degroof Petercam S.A., Research Division - Analyst [48]

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Got that. Appreciate it. But just was wondering, as compared to last year, what should we see given that you're progressing with the integration of E.T. Horn and I'm actually surprised to see that mix effect has such big impact on margins in that region because it doesn't seems to be that big in the other regions.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [49]

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No. no.

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Nathalie Debruyne, Banque Degroof Petercam S.A., Research Division - Analyst [50]

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So that's purely mix?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [51]

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Yes.

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Operator [52]

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The next question is from Mr. Quirijn Mulder, ING.

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Quirijn Mulder, ING Groep N.V., Research Division - Research Analyst [53]

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On Far East, you say it was in line with expectations but that's also somewhat headwind visible there from the macro environment.

And then on Velox, you acquired the firm with revenues of EUR 155 million in September last year. If you would look at the revenues today, can you give an indication and can you also give an indication about the progression on the integration and the cost savings of that business given this environment?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [54]

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If you look at where we are with the integration of Velox, what we said earlier is that we are in the process -- Velox is a combination of all kinds of local European companies headed by a German head office in Hamburg. We are in the process of integrating these local entities in the IMCD organizations. We expect that we will finish that process, more or less in this quarter. And that means that we have the existing cost structure in the first 6, 7 months of this year and that we should see the cost savings as a result of the integrations in the last quarter of this year.

I think on the commercial side, they operate in the area that Piet just referred to with difficult market circumstances, but what was we see there is that we hold up nicely. We did not lose any suppliers or critical people, so everything on track. We struggled a bit with demand but so far, so good.

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Quirijn Mulder, ING Groep N.V., Research Division - Research Analyst [55]

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Okay. And then on the Far East, the situation there and also on the extra cost you made in the Far East?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [56]

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Asia Pacific is, as I said, performing in accordance with plan. It's a smaller region, and of course, that's also a bit more volatile if something happens. We see good growth in the region. I think Australia, New Zealand, in particular, Australia, also a bit, let's say, flat and depressed, but the rest of Asia is doing quite well. So we don't see there a very specific reason to comment on yet. On the cost side, Hans?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [57]

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Yes. We saw a little bit of reduction of conversion margin and that is basically driven by adding a bit of additional cost in the region just to strengthen the sales forces and local organizations. And then what Piet said, Quirijn, that if you do that in a small -- in a smaller region, you immediately see it back in the ratios.

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Quirijn Mulder, ING Groep N.V., Research Division - Research Analyst [58]

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No. No. But the question here is, of course, on the background, that you had some extra cost for setting up the organization in Vietnam and in Japan, for example, and that was not the case anymore from interest. Where is that -- why did you, of course, then start up in the higher cost now if that isn't the reason? But it's a detailed question, I know.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [59]

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Yes. It's adding fewer people here and there.

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Operator [60]

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

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Thomas Edward Burlton, Joh. Berenberg, Gossler & Co. KG, Research Division - Head of Business Services & Senior Equity Analyst [61]

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I just had a couple of follow-up questions, one of them has already been answered around Velox. But the other question I had was regarding a comment of one of your peers who's also active in specialty chemical distribution made, that historically specialty tended to upgrade commodity distribution by around 1.5% in their view yet, but it currently was trending at about 3% ahead of commodity distribution. I'm just trying to reconcile that with the sort of flat performance in Q2 and just whether or not you can corroborate that's what you see in kind of the specialty market overall underlying and then maybe whether Q2 was really, as you mentioned earlier, a function perhaps of the extraordinary tough comparator you had at the company level in Q2 or whether or not there's something going on with market share kind of more broadly in specialty chemicals?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [62]

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Yes. I mean I'm really not occupying myself to try to compare ourselves with commodity business, let alone that I have to then know what the definition exactly is. So I have difficulty to answer this question quite frankly. So does it help us also if we know this? I'm not totally sure what the objective of the question is.

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Thomas Edward Burlton, Joh. Berenberg, Gossler & Co. KG, Research Division - Head of Business Services & Senior Equity Analyst [63]

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I guess it was just -- it was around -- more around what was going on underlying in the overall specialty market relative to your growth and whether or not there were any movements in market share gains amongst distributors in specialty chemicals.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [64]

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No. But listen, the specialty chemical market is, of course, huge. That makes it also sometimes difficult for us, of course, to quantify it. I mean we are working with more than 40,000 product lines in all kinds of different applications. Wide, different applications of these products from very small, very expensive products in the personal care industry to more volume products in paints and coatings, et cetera, and in all kinds of applications. It's impossible for us to have a vision and a view of each and every different application of these products and of the end markets of these products. Don't forget, of course, that we deliver also to customers that exports themselves to, for example, Asia or to China or wherever and that they are also -- could also be affected and that has in the chain and also, again, an influence on us.

So it's a complicated, let's say, structure and it's not so easy just to talk about market shares in our business because we have so many different markets. So we have also many, many different market shares. I think what you, underlying, should look at is do we keep up our margins, is it a demand question, do we lose business ourselves because of loss of suppliers? The answer to that is no. It's purely an effect of demand in the market whether or not we -- and that's of course, then a bit more dependent in a bit more volatile industrial markets and a bit less in the large-sized markets. But I stay away from, let's say, the market share discussion.

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Thomas Edward Burlton, Joh. Berenberg, Gossler & Co. KG, Research Division - Head of Business Services & Senior Equity Analyst [65]

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Okay. That's helpful. I appreciate it's a complicated market.

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Operator [66]

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

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Steven James Goulden, Deutsche Bank AG, Research Division - Research Analyst [67]

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Sorry, I've just got a quick follow-up, if you don't mind. We touched before on the cost inflation and operational leverage point. But just off the back of my estimates, it looks like you did about minus 2% organic GP in EMEA from my calculations and you're saying before that underlying margins were basically flat year-on-year, which is obviously pretty good when you look at what your main European competitor did with obviously a much more fixed cost base, but they have cost inflation of 3%, 4% in EMEA. So I just wondered if you could give us a bit more color what -- on how you manage that and what that kind of says about the flexibility of your cost base, whether or not you maybe took some cost out? Just any kind of feel you should give us there in terms of cost flexibility and operational leverage as we go forward would be really helpful.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [68]

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Yes. And so what I said before is the cost flexibility is mainly in whether or not we add people. It's also, to a certain extent, of course, trying to prevent our logistic cost to increase, although that's a smaller part of our total cost structure. We also have, of course, variable compensation parts, which we look at during the year. So these are the levers that we can touch. Yes. And so far we have been successful. I think we had questions in the past about our flexibility of our logistic costs and I think that that helps us versus those who have fixed infrastructures.

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Operator [69]

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

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [70]

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Some remaining -- 2 remaining from my side. Firstly, on the U.S, much has been said on the organic growth, has been still somewhat positive in the first half of the year and maybe also in Q2. How much of that could you -- is it, let's say, is it fair to say that a meaningful contribution still came from the -- let's say the cross-selling and the self-help potential of all the more or less recently acquired businesses over the last 2 years -- 2, 3 years?

And then second question, stepping back from the growth into, let's say, the role of strategy into the upcoming years. I guess one benefit of, let's say, the market slowdown as we see it today is that some targets and some targets may become a bit more -- a bit cheaper and may also be more inclined to sell. Is it something you're looking at and in which regions? Obviously, last years were more or less focused on the U.S. amongst others. Is it fair to say that the role of strategy is switching towards other regions globally or more emphasis on the regions globally? More color on that would be appreciated.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [71]

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Okay. On let's say, cross-selling in the U.S., that's the situation in the U.S., a few words. We're very busy, as you know, to integrate our businesses there. That means, of course, that we shift here and there also our supplier portfolio, on the positive side, and sometimes also we have to say goodbye to certain suppliers. Overall, the development is very positive. We hope we can -- towards the end of the year integrate the businesses in the U.S. And we see very good traction in terms of gaining new businesses on a national scale. I think that the U.S. market, in particular, in specialties is changing in the sense that consolidation, of course, continues and that there are bigger players in specialties like us that hope to benefit from that. So I'm positive about that region.

On the question of targets and the impact of, let's say, a decreasing economy, I think you can write books on that in terms of what that means for how owners will decide on whether or not to sell in a downturn market or what the prices will be. I find that difficult to predict. I don't think that, that will have an immediate effect on prices or availability of targets. So I think that's the answer to that. And as to where and which regions, we stay focused on fulfilling our strategy in each region in -- where we're working. So there's no particular preference for any region.

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Operator [72]

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

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Mutlu Gundogan, ABN AMRO Bank N.V., Research Division - Analyst [73]

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Yes. Just one follow-up question. On the lower demand in Q2, can you break that down? Is that because the frequency of the orders has come down? Or is it the order size that is actually smaller?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [74]

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I would say the frequency, the number more or less.

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Operator [75]

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The next question is from Mr. Quirijn Mulder, ING.

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Quirijn Mulder, ING Groep N.V., Research Division - Research Analyst [76]

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Yes. One striking here from my side is that you said we hope to integrate the business in the U.S. end of year. What do you mean by that? Is there no plan or is there something going on? What's the causes of delay or something? Is that...

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [77]

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No. I mean I think we shouldn't catch each other's own words. I mean we're rolling out our IT platforms and we expect that we integrate these businesses end of the year.

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Operator [78]

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(Operator Instructions) There are no further questions at the moment, sir.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [79]

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Okay. Then thank you very much. I wish everybody good day.

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Operator [80]

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Ladies and gentlemen, this concludes the event call. Thank you for attending. You may now disconnect your line. Have a nice day.