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Edited Transcript of IMCD.AS earnings conference call or presentation 12-Nov-19 8:30am GMT

Nine Months 2019 IMCD NV Earnings Call

ROTTERDAM Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of IMCD NV earnings conference call or presentation Tuesday, November 12, 2019 at 8:30:00am 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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* Matthew John Peter Yates

BofA Merrill Lynch, Research Division - Director in Equity Research, Head of European Chemicals Research & 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

* Steven James Goulden

Deutsche Bank AG, Research Division - Research 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 IMCD analyst call third quarter results. (Operator Instructions)

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

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

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Yes. Good morning, everyone. I'm sitting here with Hans Kooijmans, a little bit in a different setting, as usual, because we are in a van in Paris. We departed from our hotel to the office and then -- 1.5 hours ago, and we're still not at the office. So we're calling you from the van, and I hope that the reception is okay. It could be that if we reach the office that we need to step out and put you on hold for a couple of minutes. But we felt that we should just start. So I will give a short introduction and then give over to Hans, as usual, to give us a comment on the numbers. And of course, after that, we are happy to answer your questions.

So we -- so you have seen the press release, and we are positive about the results of the first 9 months, with gross profit growth of 15%, increase of EBITA of 12% and cash earnings per share plus 15%. And also during this period, we produced EUR 30 million more cash. The Americas and Asia-Pacific performed in accordance with plan. EMEA's results were affected by slowing of demand. We acquired the businesses of Matrix in Singapore and Monachem in India has signed agreements to acquire DCS Pharma in Switzerland and Whawon in South Korea. We expect to close the transactions regarding the last 2 companies later in the year -- before the end of the year, which means that the last 2 companies will possibly not contribute this year to our profits line. All these companies fit into our strategy and the Whawon transaction is in particular pleasing as it offers us a very strong pharma business in South Korea, but also a platform for growth in other market segments in this large market. We are positive about the development of the group and confident that we will continue to achieve our targets.

And with this, I will give back to Hans to take you through 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. I would like to give you a short summary of financials these first 9-month results, but I would like to start on Page 10 of the presentation.

As you can see, revenue increased 17% compared to the same period of last year, and gross profit increased by 15%. About 13% of the gross profit growth was the result of the first time inclusion of businesses acquired in 2018 and 2019. This acquisition growth is the full year impact of the 3 acquisitions made in the second half of 2018. E.T. Horn in the U.S., Velox in EMEA and Aroma in India to refresh your memory.

The impact on year-to-date gross profit and results of the 2 acquisitions closed in 2019, so Matrix in Singapore and Monachem in India was neglectable due to the timing of these acquisitions at the end of Q3. Gross profit in percentage of revenue slightly decreased to 22.2%, and this decrease, which is comparable to the first 6 months of this year, is mainly the result on average, lower gross profit margin percentages in the acquired businesses. Further, we saw the usual fluctuations and differences in margin percentage between the quarters and regions caused by changes in local market circumstances, seasonal product mix differences and currency fluctuations.

Operating EBITA increased 12% to EUR 176 million, and this increase was a combination of organic growth, first time inclusion of acquisitions. Third, the application of the new lease accounting standard IFRS 16 had a positive impact of about $3.7 million in EBITA. Operating EBITA in percentage of revenue slightly decreased to 8.5%. The full year impact of acquired businesses of Velox and Horn with a lower EBITA margin than the IMCD average, were the main drivers of the decrease. The conversion margin calculated, as you know, by (inaudible) operating EBITA. So without a D. In percentage of gross profit was 38.4% in the first 9 months of 2019. It's fair to assume that all these 3 ratios, so gross margin, EBITA margin and conversion margin, are negatively impacted by the acquisition of Velox and Horn. It's further fair to assume that excluding these acquisitions, all 3 ratios would have been slightly better than the 2018 year-to-date September ratios.

The net result before amortization and nonrecurring items increased EUR 11 million to EUR 120 million. Free cash flow and cash conversion ratio both increased substantially compared to the same period of last year. Operating EBITA growth in 2019 combined with a lower investment in working capital in the first 9 months were the main drivers of this improvement. The year-to-date cash earnings per share were EUR 2.26, an increase of 15% compared to the same period of last year. On the last line of this page, you could see a 13% increase in our number of employees and the majority of this increase is the result of the first time inclusions of the acquisitions that we did.

And on the next page, Slide 11, you will find gross profits, EBITA and conversion margin per operating segment. EMEA in the first column reports a 9% ForEx adjusted gross profit growth and a little minus percentage on operating EBITA growth. The EBITA margin decreased 1.1% to 9.7%. The main reason of the drop in EBITA margin and conversion margin is the impact of the Velox business that we acquired in Q3 2018. To refresh your memory, this business had about EUR 150 million 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 comparable with the first 9 months of 2018. Velox has been fully integrated in the IMCD organization by the end of Q3.

In the second column, the results of Americas, where ForEx adjusted gross profit increased 24% and operating EBITA increased 29%. This increase was a combination of organic growth and the first time inclusion of E.T. Horn acquired end of August last year. Operating EBITA margin and conversion margin both improved compared to the same period last year, despite the negative impact on these ratios as a result of the relatively low profitability of the acquired Horn business. Growth in our Americas organization, strict cost control and improved performance more than compensated for the negative impact of E.T. Horn on ratios like conversion and EBITA margin.

Asia-Pacific, in the third column, reported 13% gross profit growth and 10% operating EBITA growth. This growth was a combination of organic growth and the first time inclusion of acquisitions. Operating EBITA margin and conversion margin both slightly decreased compared to the same period of last year as a result of slightly lower gross margins in the regions and additional investments to strengthen local organizations. And in the last column, you will find the cost of holding companies. All nonoperating companies, including the head office in Rotterdam and regional support offices in Singapore and New Jersey in the U.S. The cost saving in holdings is mainly the result of the application of IFRS 16. The new lease accounting standard had a positive impact on EBITA of EUR 3.7 million, and most of it ends up in the segment holding companies.

On Page 12, you will find a summary of the allocation of the IFRS 16 impact on operating EBITA per segment.

On 13 -- we have a lot of noise in the back unfortunately. A summary of IMCD's free cash flow. Free cash flow and cash conversion ratio were both better than the same period of last year. Excluding the impact of IFRS 16, the reported cash conversion ratio of 73%, would have been 5.5% higher. So the real like-for-like improvement on this cash conversion ratio compared to the same period of last year is about 10%. The main drivers of this improvement are increased EBITA, combined with a lower working capital investment. CapEx of EUR 3.5 million was mainly IT and application (inaudible) related.

Then on Page 14, short update on the net debt and leverage. Compared to the end of September last year, net debt increased of about EUR 52 million to EUR 672 million. The net debt position increased with EUR 71 million as a result of the adoption of IFRS 16 with the new lease accounting rules. Further, we saw healthy operating cash flows, reducing net debt and a cash outflows as a result of acquisitions made and dividend payments. Reported leverage ratio, defined as net debt divided by operating EBITA, including the full year impact of acquisitions made, was 2.8x EBITDA at the end of September 2019 and 2.6x based on the definition used in our bank loan documentation. And last but not least, on Page 15, you will find our outlook for 2019. And based on the performance in the first 9 months of 2019, and the strong fundamentals of the business, IMCD expects operating EBITA growth in 2019.

Now we would like to hand over 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) First question is for Mr. Mutlu Gundogan, ABN AMRO.

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Mutlu Gundogan, ABN AMRO Bank N.V., Research Division - Analyst [2]

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I have a few questions. I would like to ask them one by one, if that's okay? The first one is on the organic gross profit growth, that slowed down from minus 3% in Q2 to minus 4% in the current quarter. Can you tell us what drove such a slowdown?

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

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Well, basically, Mutlu, this speech, basically we speak in particular about EMEA. And so we see in a few countries, in EMEA, we see really a slowing down of demand. I think that if you look at the general economic information that comes to us, that manufacturing indexes are down. We see that in Germany, in particular. We see also a little bit of Brexit effect, bit up and down. Still very strong, but nevertheless, influenced by dates of Brexit. So I would say, not something that is company-specific, but is really something that is driven by the market.

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Mutlu Gundogan, ABN AMRO Bank N.V., Research Division - Analyst [4]

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Right. Okay. And just to confirm, I mean, in the past, you spoke about Germany, France [and indeed], Great Britain. Those are the -- is it isolated to those countries or are the other countries weak as well?

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

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No. I think generally, I would say, it's weaker. But these countries stand out a little bit more than the others. Generally overall, you see a softer demand.

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Mutlu Gundogan, ABN AMRO Bank N.V., Research Division - Analyst [6]

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Yes. And the second question relates to the first question. So looking at Q4, do you think we should be penciling in another quarter of negative organic gross profit growth?

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

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Well, let's -- I mean, that is something that, if I would know, I would tell you or not. But you know, it's very difficult to predict. And we see strong months changed by weaker months. So it's very difficult to say and to predict. And so I'd rather look overall full year than to quarter per quarter.

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Mutlu Gundogan, ABN AMRO Bank N.V., Research Division - Analyst [8]

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Yes, I understand. I mean the reason I was asking is that you roughly have 1.5 months of trading now in your books, with potential orders and December usually being a slower month. I thought you would be able to give an indication about Q4.

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

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Yes. But we are -- I mean, we are not pessimistic, but I don't want to say more about it. Let's see what happens. (inaudible).

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Mutlu Gundogan, ABN AMRO Bank N.V., Research Division - Analyst [10]

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Okay, fair enough. And just a few more questions on -- a bit more details on the regions. So first on EMEA, your conversion margin in the third quarter came down significantly. I mean, it's something like 570 basis points. Are you looking to take out costs to offset this?

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

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Yes. I mean this has been a year, of course, a bit of a special year, particularly in EMEA because of the integration of Velox. We have taken out costs already, but we will take out more cost. And so we will see the effect early next year. But I give over to Hans now.

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [12]

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And Mutlu, the reason for handing over is that if you exclude -- if you would take out the Velox acquisition, we have an EBIT margin of a bit more than 3% out of the EMEA numbers. Then the conversion margin would be around roughly 42%. So one of the big drivers of the drop in conversion margin is basically because of doing an acquisition with a pretty low EBIT margin. What we said before, we went into the process to fully integrate these activities in the IMCD organization, that is done by the end of September, and that also allows us to optimize the structure of the group in EMEA.

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Mutlu Gundogan, ABN AMRO Bank N.V., Research Division - Analyst [13]

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Okay. And then final question, and then I'll give the floor to someone else. On Americas. Here, the conversion margin did very well. I mean it was up 110 basis points year-on-year despite, I would say, weaker top line. Can you tell us how you were able to achieve this? Is it synergies? Is it cost synergies solely? What is it?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [14]

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Yes. It is a combination of a couple of these things. And also there, we are in the process of integrating all the American organizations into 1. We announced -- there was a press release announcing that at the 1st of November, that process was more or less done. And that means that we are in the process to optimize the setup and the structure on the cost side. And then we also see commercial synergies in the organization, helping us to grow the margin. And these 2 things help us to improve the overall financial performance in the region.

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Operator [15]

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Next question is from Mr. Peter Olofsen, Kepler Cheuvreux.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [16]

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I want to be follow up on Mutlu's question on the conversion margin in EMEA. I do understand that the integration of Velox has an impact for the 9 months. But still, if I look at Q3 and I compare the conversion margin with the first half, still Q3 looks much weaker. So is it fair to say that in Q3, also in your existing business, there was some pressure on the conversion margin because of the lower demand? Or was it just entirely Velox, which caused a somewhat weaker Q3.

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [17]

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[I think it, Peter], I think it's a combination of both whereby the lower demand in Q3 certainly plays an important role.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [18]

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And if you look at the integration of Velox, did you incur some one-off or incidental costs in Q3 that are included in the operating EBITA? Or is the operating EBITA really a clean figure?

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

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There were some costs related to the integration in the operating results. So you could call that one-off. But basically, before you integrate, you have a period whereby you just have double structures. And we are going through the books [as well as rationalizing the setup] and that should lead to cost savings in the coming months.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [20]

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Yes, okay. These double cost structures, you also had already in the first half, so that didn't really change in Q3. I was more referring to maybe some costs to layoff some overhead -- people and overhead [ventures] or something. But that is not really that material.

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [21]

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[Won't have an] important impact on the Q3 results.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [22]

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Okay. And then also on a follow up on Mutlu's question on the organic growth based on your own calculations, what do you think the organic growth was in Q3? Mutlu mentioned minus 4%, I come to minus 3%. What do you think of those?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [23]

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You look at margin or EBIT?

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [24]

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The organic gross profit decline. So the growth [plus] 1% for the 9 months. It must have been slightly negative then in Q3?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [25]

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Yes. I think [it maybe] I'll call it flattish.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [26]

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Like it was in Q2?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [27]

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Yes, yes.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [28]

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And the flattish was there in slightly positive in the Americas, and Asia-Pacific, and also in Asia-Pacific and then negative in EMEA?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [29]

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Yes. I -- if you look at the negative in EMEA, it was close to 0.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [30]

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Okay. And then my last question is on Asia-Pacific. You indicated you were satisfied with the overall performance there. Could you break out the performance in Australia versus the rest of Asia? Do you see a clear difference there?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [31]

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Peter, I think we've lost the line.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [32]

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Can you hear me?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [33]

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Hello?

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [34]

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Hans?

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Unidentified Participant, [35]

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Chairperson?

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Operator [36]

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This is the operator.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [37]

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Operator?

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Operator [38]

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Yes. Can you hear me?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [39]

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Yes.

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Operator [40]

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

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Matthew John Peter Yates, BofA Merrill Lynch, Research Division - Director in Equity Research, Head of European Chemicals Research & Research Analyst [41]

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Sorry, just for the clarification, you kindly gave the EMEA organic number. Can you just clarify for me exactly what the Americas organic number for the quarter was, please?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [42]

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For gross profit. In EMEA, we reported a low single-digit organic growth number on the gross profit line. You asked the Americas?

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Matthew John Peter Yates, BofA Merrill Lynch, Research Division - Director in Equity Research, Head of European Chemicals Research & Research Analyst [43]

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Americas, yes. Americas is a low single digit, yes?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [44]

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[Yes].

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Matthew John Peter Yates, BofA Merrill Lynch, Research Division - Director in Equity Research, Head of European Chemicals Research & Research Analyst [45]

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Okay. Just as a follow-up, can you talk about the couple of deals you've announced recently in Switzerland and Malaysia? Just in terms of taking the business increasingly in the direction of Life Sciences, you've spoken earlier on the call about the impact something like a Velox has had on margins being dilutive. Can you just talk about broadly as you make these more recent deals? Are they also margin dilutive? Are they -- what sort of growth profile do you expect from these segments and geographies?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [46]

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No. I think -- I mean we have individual strategies for all our market segments, so both in coatings and construction, advanced materials but also in life science, in food, pharma and personal care. These particular two acquisitions that we announced predominantly focused on the pharma industry. Our pharma business is pretty much starting to become a more global franchise, more global operation. This will help us also, in particular, the Swiss one to strengthen our position in active pharmaceutical ingredients, and the one in South Korea is very much similar to the businesses that we have elsewhere. So it's a strengthening of our pharma business, and it is not dilutive as to margins. I would say, no, on the contrary, but it's very much geared to executing our strategy also in pharma, and so we are very positive about these latest additions.

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Matthew John Peter Yates, BofA Merrill Lynch, Research Division - Director in Equity Research, Head of European Chemicals Research & Research Analyst [47]

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And just a technical point on the Malaysia one, is it -- it's slightly unusual structure in terms of the ownership that's been retained. Do you intend to fully consolidate that business? Or you just book your net share?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [48]

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You mean the Korean one, the South Korean. We will fully consolidate them in our numbers.

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Operator [49]

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Next question is from Mr. Steve Goulden, Deutsche Bank.

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Steven James Goulden, Deutsche Bank AG, Research Division - Research Analyst [50]

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Just on the growth point, sorry to labor the point. So just on the numbers I've got for the first half of 3% organic GP. And I think the 9 months was 1%. So I just wanted to confirm that those are the right numbers from the press release, which, again, gets me to sort of down 2% to 3% organic for this quarter. We were talking earlier on about minus 4%. You were saying sort of flattish. I know that, that's generally a sort of relatively rough read, but at the group level, is that sort of right? Or could you just give us a little bit more color there in sort of in terms of working out how we get there. And within that, is there anything you could say about volumes potentially versus any kind of price benefit that you might have had from any chemical pricing weakness over the last quarter. And also, any kind of (inaudible) you could give us maybe on how life sciences fared versus the industrial products?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [51]

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So number-wise, Steve. I keep on repeating what I said. The flattish is around nil, slightly plus or slightly minus, depending on the regions and -- but then I start repeating on the previous remarks. On the volumes and price question, it's obvious that when demand is lowering that we have some pressure on volumes. I would say, in price, we keep that -- the price where it was and hopefully also to further improve. Life sciences, it's -- that's always, of course, more stable, but also here, you will also see some regional effects. Predominantly, I would say, still holding up pretty well. Okay. Again, if you look at the margin percentage that we show, the drop of 0.5%. If you would take out Velox and Horn there, the margin before these 2 acquisitions would have been at least as high as last year. (inaudible) prices in the market.

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Steven James Goulden, Deutsche Bank AG, Research Division - Research Analyst [52]

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Sorry, what was the last thing you said?

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [53]

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So it's more a volume than a pricing thing.

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Steven James Goulden, Deutsche Bank AG, Research Division - Research Analyst [54]

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Right. Okay. And in terms of your ability to add new suppliers and customers. I mean is it fair to say that there hasn't been really much share gain over the last couple of quarters, particularly in North America? And would you expect that to improve over the next few quarters? Any kind of color, if you -- any kind of color you could give us there? And the last one for me, sorry. Just on the Velox margins. So you said that, that had been fully integrated, would it be fair to assume that, that business is now running at kind of ballpark group EBITDA or conversion margins, whatever you want to call it.

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Hans J. J. Kooijmans, IMCD N.V. - CFO & Member of Management Board [55]

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No. On the last question, I can say definitely not yet. We need to work all the structure a little bit more. I mean the integration has been completed, but the optimal structure is not there yet. And so in the next couple of months, we will further optimize that and hopefully get the benefit next year of that. On your first question, share gain Americas. I think we work very, very hard in the U.S. market to integrate these 2 companies that meant also this year that we had to put the whole United States on the same IT platform. Which was successful. And of course, that creates a lot of work and focus in the organization. We changed also now, let's say, with the integration of Horn, of course, it became an IMCD company. And also in the supplier dynamics in the United States because of this integration, but also because of the acquisition that -- of Horn, and you see some dynamics, some positive, some negative. In the end, of course, the purpose of the whole exercise is to accelerate growth and to offer our model to suppliers who work with us on a more national basis. And that time -- we need some time to convince suppliers to get [on board] we are optimistic that we have now an organization that is strong, integrated with a good IT backbone with all the people in the right place. So we are optimistic about possibilities that we'll offer to our customers and suppliers.

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Operator [56]

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Next question is from Ms. Nathalie Debruyne, Degroof Petercam.

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Nathalie Debruyne, Banque Degroof Petercam S.A., Research Division - Analyst [57]

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Actually, all my questions have been answered. I have no follow-up. But maybe -- you already discussed the organic growth in EMEA and in North America. Can you maybe just go to Asia-Pacific and elaborate a bit more on this? And what are the dynamics that you are seeing there? Was it different than it was in EMEA and in Americas?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [58]

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Yes. I think -- I mean, Asia-Pacific is, of course, a very large area, but so if I take it in a couple of parts, and Australia and New Zealand, you see a little bit of the same, let's say, picture as elsewhere. So not abundant growth of course, a country affected by various influences from the outside, the moving away of industry but also all kinds of -- the drought has played a role as well. So -- but all in all, okay, but not spectacular. If you look at Southeast Asia, we're very positive about the developments in countries like Indonesia, where we grow very fast, but also in the Philippines. In smaller countries, Thailand, we're also doing well. So on the whole in South -- Southeast Asia, we're positive, also positive about, let's say, supplier dynamics, we see good possibilities for growth.

In North Asia, where we have a business in China, there we see a little bit of effect of the trade war because we import stuff from the United States into China, that has some tariffs on it. Now we are not very big in China. So it has a limited effect, but we see it a bit. We see very good and positive dynamics in Japan. And then last but not least, India. I would say it's a success story. It's doing very well. We have, of course, now acquired a company called Monachem, which is in Gujarat -- place in Gujarat that we will integrate in our business. And let's say, our strategy in India is to also be able to serve the markets throughout the whole country. And we are more and more capable of doing that and also more and more capable of serving the market in the segments that are the usual segments of IMCD. So overall, I think, good traction in Asia-Pacific and to not -- it's not the same picture as we saw now in particularly in Europe.

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Nathalie Debruyne, Banque Degroof Petercam S.A., Research Division - Analyst [59]

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All right. Good. And would you say that when you talk about positive dynamics, is that mostly on the volume or pricing side? For the other geographies, you mentioned that it's mostly a lower demand story. What about Asia-Pacific, do you see price differences? As compared to the other regions?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [60]

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Yes, I think in Asia-Pacific, and particularly in Asia, we have very much focused on gaining product lines. So I would say that, that's increasing our offering to customers. And with that, of course, also volume and keeping our pricing at this higher level. I would say it's more focused on getting more volume in the market.

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Operator [61]

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(Operator Instructions) Our next question is from Mr. Mutlu Gundogan, ABN AMRO.

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Mutlu Gundogan, ABN AMRO Bank N.V., Research Division - Analyst [62]

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I had a few follow-up questions. First, on M&A, you mentioned that the last 2 acquisitions of pharma that they would probably be closed towards the end of the year, so limited benefit. I mean we have seen the M&A contribution to gross profit come down, I think it was EUR 20 million in Q2, now down to EUR 12 million. So my question is, could you give us some guidance on the impact on Q4? That's the first one.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [63]

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If I look at the recent acquisitions that we announced, Switzerland and South Korea, where we did the signing, I think closing there is expected end of this year. So that will hardly have any impact on the numbers of this year other than the changes in the balance sheet that you might expect as a result of that. The other 2 are small ones. And if I then think about the timing of the acquisitions last year that could have an impact then. Horn was included in the figures from August last year onwards, Velox from October and a Aroma in India from November. So there will be a little bit of full year M&A impact of the 2018 acquisitions. But not as massive as what we saw in the first 9 months.

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Mutlu Gundogan, ABN AMRO Bank N.V., Research Division - Analyst [64]

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Okay. Okay, that's clear. Then yes, apologies for the bit of a [nerdy] -- nitty-gritty question. But on IFRS 16. I think your -- the impact on EBITA was something like EUR 2 million in the third quarter, increasing from EUR 0.5 million in Q2. Can you tell us how this number jumped so much?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [65]

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Yes. I think basically, it has to do with signing on new contracts. The guidance that we gave at the start of the year is that we would expect an impact of somewhere between EUR 4 million and EUR 5 million on EBITA level and that guidance is still in place.

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Operator [66]

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Our next question is from Quirijn Mulder, ING.

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Quirijn Mulder, ING Groep N.V., Research Division - Research Analyst [67]

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My question is on Velox. Can you give me an idea about the developments of Velox, especially given it depends on the automotive industry in Germany?

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

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Yes. It's not only dependent on the automotive industry, fortunately, but it's also dependent on, for example, medical. We have a department that is focused on the medical -- medical applications, cable industry. So it's a wider, let's say, application fields than only automotive, but it's clear that, of course, automotive has a big impact on -- in Germany on also this business. We also have composites, that is more related to other type of industries. So it's a broad area, but definitely, we see, of course, the impact from automotive also on the Velox business.

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Quirijn Mulder, ING Groep N.V., Research Division - Research Analyst [69]

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But do you see, let me say, compared to the -- when you did the acquisition at 3% EBITA margin, did you see any improvement overall at Velox or was there still, let me say, it was probably a combination of, let me say, integration against pressure on revenues in my view.

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [70]

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Yes, that's exactly right. You see some pressure on revenue, and you see some positive effects on costs and what we have to work all very hard also is now to further increase the margins. So we are absolutely not at all pessimistic about, let's say, our targets with respect to Velox. We still have too much cost in the organization, so we will work hard to decrease let's say, our cost -- [our all] cost further and bring it to, let's say, the productivity levels that we have. But we are positive that we will get there, despite some pressure on the revenue side.

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Quirijn Mulder, ING Groep N.V., Research Division - Research Analyst [71]

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Any idea about the timing when you can [reach at] Velox, the margins of the group? Or let me say, of EMEA?

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Pieter C.J. van der Slikke, IMCD N.V. - CEO & Member of Management Board [72]

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It will depend a little bit on German labor law, cause that is, of course, a factor that, let's say, it slows us down. But I hope that we, let's say, in the course of Q1 we see positive effects with that.

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Operator [73]

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(Operator Instructions) There are no more questions. Please continue.

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

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Okay. No more questions. So yes, then I want to close and also apologize for the -- a bit of an unorthodox call because of the traffic, which is still very bad, if I look out of the window. But I wish you all a very good day. Thank you very, very much for your attention and your interest in our company. So have a good day.

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Operator [75]

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Ladies and gentlemen, this concludes the IMCD analyst third quarter results call. You may now disconnect your lines. Thank you, and have a nice day.