Earnings Call: Q3 2020

Nov 4, 2020

Welcome, ladies and gentlemen, and thank you for joining today's virtual event for our Q3 results, 2020. I am Christian Coelpfeitner, and I'm here together with our CFO, Georg Mueller. We decided to host this earnings call in a slightly different format because later today at 3 pm, we will start our Capital Markets update presentation on this very same platform. At our Capital Markets update, we will provide a comprehensive update and details on Project Brandtug the transformation program set up to drive our sustainable organic earnings growth in the coming years. But let us now start with our business development in the third quarter 2020. I will talk about the highlights of the quarter and GEOG will provide further details on the financials for the past 3 months. As always, geog and I are both happy to answer any questions you might have after our presentation. Now let me provide an overview of our earnings development in the third quarter. The COVID-nineteen crisis impacted the overall business conditions also in this quarter of 2020. In this continuously challenging market environment, BrenTak managed to report strong results for the 3rd quarter and we were able to once again report organic earnings growth for the 3rd consecutive quarter this year. Overall, we are very satisfied with this development, and it again demonstrates the resilient nature of our business model. On group level, we generated a gross profit of 1000000 which is on previous year's level on an FX adjusted basis, volumes are sequentially slightly better than earlier this year, but they are still below previous year's levels. While unit gross profits, on the other hand, sequentially softened, they do remain above previous year's levels. In combination, the delivered gross profit is on previous year's level. Operating EBITDA grew by 4.9% on constant currency amounting to around 1,000,000. The free cash flow of 1,000,000 was exceptionally high and clearly above the previous year's level. Finally, our earnings per shares amounted to In September, we reinstated our guidance for the full year 2020. Brandtak expects operating EBITDA for the full year to be in the range of 1,000,000,000 to 1000000. But we also continued to work on the long term positioning In September, we announced the 1st milestone of Project Brandtak, our future operating model. Starting January 2021, we operate our business with 2 global champions, Brandtag Essentials, and Brandtag specialties. We also published a change to the structure of our Management Board which will also come into effect from next year on. Last week, we announced additional measures of Project Brandtak, including our financial framework. We will talk about We know that you have a lot of questions on Project Brandtac and the financial framework in particular. Me and my colleagues and the management board will be happy to answer all of them later today. Unfortunately, COVID-nineteen is still affecting our personal lives and our business environment alike. However, at Brandtak, the impact of the COVID-nineteen pandemic on our business activities and on our financial performance was limited so far. Despite the difficult conditions in all parts of the world, the company continued to stay fully operational with only a few exceptions in countries with very strict lockdown policies We continued our global crisis managements also into Q3 and the health and the safety of our employees and of our business partners continue to have the highest priority has handled the crisis well so far, and we are confident to handle any future volatility that COVID for sure will bring. Our sound financial profile and the strong cash position put us in a solid who will lead you throughout results in more detail. We delivered a quarter with organic earnings 1,000,000 in the third quarter. I will walk you from the third quarter 2019 to 3rd quarter 2020 for operating EBITDA. The unfavorable effect of foreign exchange translation amounted to a negative million, and resided mainly from the weakening of U. S. Dollar. Our acquisitions contributed 1000000 to the EBITDA growth in the quarter. All regions grew organically with the exception of North America. EMEA, Latin America And Asia Pacific showed very positive organic earnings development. All three regions reported double digit operating EBITDA growth of 10%, 33% and 36%, respectively. North America declined by 12% organically, mainly driven by the ongoing weakness in the oil and gas industry as well as the ongoing implications of the COVID 19 pandemic on the North American economy. Let me provide some I would again like to emphasize that we managed to keep our global site network fully operational with only very few exceptions. I start with EMEA. In EMEA, our Q3 performance was again very positive. The trends we have seen the last couple of months broadly continued into Q3, and the performance was supported by customer industries like personal care, home and industrial cleaning and also pharma. We were able to grow gross profit by 4.8% on a constant currency basis. The growth in gross profit was primarily driven by higher gross profit per unit, which more than offset the softness in volumes that we have seen compared to the previous It is the 3rd strong quarter in a row. These results once again underline the strengths of our business, and our strong market We are still facing several headwinds in this region that again led to overall weak and unsatisfying results. Cost profit declined by approximately 9% on a constant currency basis. The strongest headwind in North America is still related to the very weak demand from customers Oil And Gas accounted for approximately 6 percentage points out of the 9% decline. Additionally, we saw continuous impact of the COVID 19 pandemic on the North American economy. To counteract, we applied a very stringent cost management and decreased operating expenses in North America by around 8%. However, those measures could not fully compensate the decrease in gross profit. EBITDA declined about 12% on a constant currency basis. Latin America again, we reported very good results, even though the general economic environment remains volatile. So past quarter, We managed to grow gross profit by about 16%, which is related to volume recovery compared to Q2. As well as good margin management. Operating EBITDA increased significantly by around 40%. Asia Pacific saw a significant acceleration in trend. China again reported good results in India which was severely affected by the impacts of the pandemic largely recovered in the third quarter of 2020. Gross profit increased by 12% on a constant currency basis, operating EBITDA increased by 36%. In summary, we were Overall, we have handled this crisis very well, and we are prepared for the rest of this year. On Slide 8, we shows a full set of figures for our segments for your reference. In our income statement on Page 9, I particularly focus on the lines below operating EBITDA. We report special items amounting to an expense of about 1,000,000, which are mainly related to project Blendtec and smaller efficiency measures. Depreciation amounted to 1,000,000. The financial result amounted to a net expense of 1,000,000. Earnings per share stood at $0.76 compared to $0.83 in the third quarter 2019. Free cash flow has been very strong. The free cash flow amounted to 1,000,000 and was the highest free cash flow we ever reported for a single quarter. This exceptionally high free cash once again, underlines the cash generative nature and the resilience of our business. Our net financial liabilities amount to 1,000,000,000, the leverage stood at one point five times at the end of September. I would once again like to mention Brandtak's strong funding profile. We have a very balanced and long term oriented maturity profile. The first main maturities come up only at the end of 2022. Also, this financial profile provides us comfort in this unique business environment. Working capital amounted to billion the end of the third quarter. In the past quarter, annualized working capital turnover reached its 2nd highest level this year and was above the previous year's figure. Return to working capital 7.1 times. Despite supply chain challenges in course of the COVID-nineteen pandemic, some measures to improve our working capital management are yielding results. In summary, we are very satisfied with the financial results of the quarter, especially considering the difficult economic environment. We delivered earnings growth and once again, a high cash flow. Thank you very much. I hand it back to Christian. Well, thank you, Geirag. Now let's come to the outlook for 2020. In early April, we, as many other companies, suspended the forecast for the financial year 2020 due to the considerable uncertainty over the future effects Throughout Q3, we saw a development that was in line with our expectations and that gave us the confidence to reinstate our guidance for 2020. To be between 1,000,000,001,040,000,000 compared to roughly 1,000,000,000 which we had in the year 2019. The new forecast assumes that there will be no to contain the pandemic and also related negative effects Furthermore, the forecast does not envisage any special items or significant changes in current exchange rates, in the further course of the year and it also includes the contributions to earnings from acquisitions The COVID-nineteen pandemic will accompany us for the rest of this year and most probably also into 2021. Particularly against the background of rising COVID 19 cases around the globe, we expect business conditions the health and the safety of our employees and our business partners continue to have the highest priority for us. So far, we are very satisfied with our performance over the course of this year, and we also feel well positioned for the rest of 2020. Having said this we, of course, also look beyond 2020. As you know, we have been working on our long term positioning of Brandtac over the last months. We recently published our future operating model, including our 2 global divisions Brentag Essentials and Brandtak Specialties. Additionally, we are going to have a new management board structure. Stephen Turbend will take over responsibilities as the chief operating officer for the essentials business. And Ory Nyjat will take on the role as Chief Operating Officer for the specialties business. All those changes will be effective from January 1, 2021. Furthermore, we just announced additional measures and further details on Project Brandtech, In particular, the expected EBITDA uplift of EUR 220,000,000, which we aim to reach a full scope from the beginning that you are keen on getting more details on Project Brandtak and that you have a lot of questions in that respect. So please just bear with us a few more moments. Our Capital Markets update will start at 3 PM today. Therefore, let's now start with the Q and the Q and A session for the Q3 Results Presentation of Brandtak AG. You can follow the Q And A via the web cars in a listen only mode similar to the presentation you have just seen. And enter the PIN code 92827056 hash. Then you will receive further information. You. And the first question we received is from Tom Beltran of Berenberg. Your line is now open, sir. Please go ahead. Hi. Yes. Yeah, good afternoon, guys. Thanks for taking questions. I've got a few, if that's okay. I'll go all at once if that's easier. The the first one is just on, you you talked about the unit margin impact you've seen, in in the quarter, and the sort of sequentially lower impact from that I just wonder whether you could sort of give any more detail in terms of quantifying sort of the breakdown between volumes and sort of unit margin when we think about the sort of gross profit development in the quarter. And then a sort of another one on the quarter and sort of cadence of growth through the quarter perhaps I know you historically used to give the sort of monthly growth rates, which I know you've moved away from doing, but I just guess in terms of sort of seeing renewed lockdowns and so forth across Europe, I think people would be particularly curious to see how growth has sort of trended through the quarter and how you're exiting maybe in September. So that would be helpful. And then just specifically on North America, if I could, on the on the unit margin piece, you called out EMEA and LatAm in particular, I think, in the statement where you've seen a unit margin benefit, just curious that sort of seems even ex oil and gas, North America was down around 3% or so. Just wondering sort of why you thought you weren't seeing that unit margin benefits in North America what's going on in that market? What's going on differently there sort of relative to the EMEA and LatAm where you are getting that benefit? That would be helpful, please. Yes, Tom, thanks, thanks for joining us this afternoon. You asked for unit margin impact, relative to volume, you've seen that on a fixed adjusted basis, our gross profit in the quarter is around flattish. Volumes are down mid single digit for the group So you can imply that the per unit margin is mid single digit up for the group. When it comes, to the cadence, throughout the quarter, as you rightly say, we don't want to give monthly growth data, and any longer, we stopped that at the beginning of the year already. Our business is typically seasonally low seasonally low in in July and to a degree in in August, maybe even more in August. So business did come back after the summer holidays. It seasonally came back, as, as you would expect. It still is a good message that in, in times of a pandemic, the business does return after the summer holidays. When it comes to growth rates relative to previous years, I I really don't want to give a differentiation on a month by month basis. When it comes to margin effects, gross profit per unit effect, in EMEA and in North America, both regions benefited. So we do see a helpful, gross profit per unit benefit on both sides of the Atlantic. Indeed, the effect was somewhat stronger in Europe, but that should not diminish the success that our North American organization had in managing the gross profit per ton. What is different? I would point to the oil and gas business in North America, which is a particularly difficult business, foremost volume wise, but it's also more difficult to achieve a appropriate gross profit per unit margins in the pandemic on that end of the business. And I would point to the fact that our business in Europe typically distributes smaller orders and the North American business which also gives us better opportunities to manage margins. Great. That's very helpful. Thank you very much. And the next question received is from Roy Mackenzie of UBS. Your line is now open, sir. Please go ahead. Good afternoon. It's Rory here. Thanks for taking my questions. I like your snuffy studio. Firstly, just on the volume trends, across the economy, activity has clearly improved significantly Q3 versus Q2. Whereas I guess your share volume declines didn't improve by quite as much. Why is that is it that you saw lots of new customers come in maybe through the disruption and they haven't been that sticky, just in in Shiglin and how you see your volume trends? And then secondly, following up on on Tom's question, the GP per unit, of course, is, as you said, is now suffering sequentially. What's the safest assumption for next year? Should we assume that you can hold on to these higher levels, or would you expect all that GP per unit to revert to a pre pandemic level, say, as we eventually get out of this dis disruptive period. Yes. Huawei, thank you very much. Maybe I take the second question, First, and it is a long standing experience in our business that margin opportunities and volumes to a degree, wreath against each other. So might well be if and when volumes return, to the market, to the business, particularly in terms of higher volume orders, that this has a little bit of dampening effect on gross profit per unit, but it it in all experience that should balance out to a fair degree. When it comes to the state of the of our expectations for the state of the market into next year with respect to margins, for sure, the pandemic is not over. And even though I don't have a crystal ball, in all likelihood, it won't be over, end of December. It will be with us in a good, for a good part of next year. The point I want to make is the market situation that we currently face also with respect to gross profit per unit, we would generally expect to continue this for a while. We would not expect a sharp change. When it comes to your first question, I'm not sure if I got the exact point of the question. If it implies something like you see in other industries volumes coming back more strongly, I can't really comment on that. Our volume trajectory has been pretty stable to us throughout this year. And we are actually pretty positive that after the summer holidays, the usual seasonal return indeed occurred. Okay. Thank you. That's helpful. And just one last one just on the finance costs, obviously quite a big step down there. Should we assume this run rate continues from now? Obviously, you did hear the bit. Is is that the main impacts? Yeah. There's, when it comes, what you see in the quarter, there is an underlying, interest expense, and that's a good good run rate. What you see there, there can always be a little bit of volatility quarter by quarter from FX effects, this quarter didn't have any. So to cut a long story short, use this quarter's figure as a run rate or maybe put in a little bit of caution couple of millions. The next question we received is from Laurent Salle of Exane BNP Paribas. Your line is now open, sir. Please go ahead. Yes, thank you. Good afternoon. And two questions, please. The first one on the Q4 on the implied Q4 EBITDA guidance. I think it's implying a drop compared to Q3 sequentially of 10% to 25%, and much more, I guess pronounced compared to the past 5 years. I was wondering, are you and I guess it's pretty understandable to be extremely cautiously, but I'm wondering, are you just seeing, cautious or are you already seeing either in terms of, you know, a lot of activity or in terms of further normalization of gross profit per unit, something it seems something that it would just decide this level of drop sequentially? And then the second question, on free cash flow, as you said, exceptional cash flow in Q3, some of that being working capital. And should we assume that working capital improvement is an area of focus for you also on Project Burnside. So are you there seeing some exceptional effect in Q3? In other words, if you want to assess on Q4 P and L, should we assume the normal seasonal boost in free cash flow in Q4? Thank you. Taking your first question. And when it comes to the guidance, our guidance for operating EBITDA for the full year stands at 1000000000 to 1000000000 And I think it would probably not be too helpful to guide you to what the one or the other end and off the range. There is still a quarter to go or almost a quarter to go in a world, which is currently a little bit of volatile, unpredictable world? You were particularly referencing that the guidance implies a somewhat lower absolute EBITDA for Q4 than Q 3. That's absolutely right. And that is what you would expect from our business. Our business typically seasonally in Q4 it's a little lighter than the rest of the year, then it has to do with the fact that in many, many countries we operate in Christmas and Christmas holidays play a significant role. So in many countries, there is basically December only a 3 week, sometimes even only a 2 week month. So there is nothing no message included, on the implications at Q4 is forecast a little bit lower than the other quarters. A free cash flow, let's speak a little later in the capital market update about our specific initiatives also to focus and refocus working capital management, which indeed positively impacts free cash flow. I mean, you have heard us say on on the Q1 call and the Q2 call that we were not fully satisfied with working capital management. And we did put a lot of focus on emphasis on the topic already. So from my perspective, we had a good catch up in Q3, which honestly, we should have had in Q1 and Q2 all already. We nevertheless expect also a good free cash flow Q4 and going forward. And the next question is from chetan Udeshi of JPMorgan. Your line is now open. Please go ahead. Yes, hi. Thanks. Apologies if I missed this, a point previously, but did you talk about how much impact do you see in North America from oil and gas decline? So in other words, what was the magnitude of oil and gas related gross profit decline and Exact in North America. And second question was, No. Just around, I mean, have we seen any benefit from project rent that already in terms of how you are managing the business this year, in terms of cost management, etcetera? Or is that something that It'll only kick start, once this is formally announced today, etcetera, etcetera. Yes. So, thank you very much, Chaton, for the question. I will take the second one, you know, about the benefits of project Brentac already already in this year, and then GEA will so a few words about the oil and gas, impacts in in North America. Yes, indeed. I mean, I think we have talked previously about the so called early wins or the quick wins we see out of project Brentac. And, the most visible one is indeed the working capital improvements and and a very strong, cash flow created, then we have, of course, other measures we will talk later in the in the Capital Market date about it, like, indirect procurement. We see already also some some savings materializing, this year. And, so you can imagine that there are already some some impacts, of project Brentac. But again, I would not over emphasize them as we are you know, and they're still in preparation for for the full scope, of that, of the program. But indeed, there are some benefits already visible in Q3 and how we are actually managing the company. So maybe Guy argue, then answer the oil and gas question. Yes, Chetan. Thank you for the oil and gas question. The perspective I gave in when I gave my little speech was that North America in the 3rd quarter had a gross profit decline of about 9% and 6 percentage points actually relate to the oil and gas business. So two thirds of the decline in gross profit in North America relate to oil and gas. I can add an additional perspective. The Oil And Gas business in North America accounts for order of magnitude, 25% of our business in North America, now actually a little less given the trajectory oil and gas currently has. So first quarter was still almost stable, but in the second and also in the third quarter, we see a decline profit of the Oil And Gas Business North America of about 1 third, so about 30%. Understood. And is that now stabilizing at those low levels when you say sequentially you've got it from Q2 to Q3 or Q3 to Q4? Or is it still trending down even sequentially, at the moment. Yes. Happy happy to answer that. It's stabilizing, but not improving. Understood. Okay. Thank you. A reminder, if you would like to ask a question, please connect to the telephone conference using the numbers provided in the subtitle and press 1 after entering the call. And the next question we received is from Rashid Kumar of HSBC. Your line is now open. Please go ahead. Hi, good afternoon. This is Audrey Kumar from HSBC. Thanks for taking the question. 2 if I may. 1st is 9 months into 2020. The most bizarre end of office would have been? What is the nature of discussions you've had with your suppliers? Are are they opting for more on different kind of outcome from, a key marketing partner, such as BrandTech. And, second one is related to the pliers. Again, on the supplier, the date side, if I understand correctly, most of the visas accrue supplier base based on certain volume and value targets, and it varies to a great degree. Can you just run up to how have you accrued the supplier rebates in your business and is there a potential that if you see a pickup in volume or a decline in volume you might have to change those assumptions. Yes. Thank you for the question. I will answer those, both in one one topic. You know, when you look on, on, you know, our suppliers and, of course, we have and continue to have intensive discussions with the suppliers navigating through this, through this challenge jointly. I think what you can feel is that, of course, suppliers looking for a reliable partner in such a difficult times. And, and Brenda, giving its size, giving its leading market position, and giving its global presence has been. A very reliable and a very strong partner, during those, those crisis times and continuing, right now. Of course, I mean, you have seen, that the chemical industry is adjusting. It's adjusting to the decline in the volumes, you know, the suppressed market conditions and the demand pattern they see. And there is, of course, a lot of discussions going on what does this mean in in a supplier and distributor relationship, as we as we move forward? So we talk about safety, security of supply. We talk about many, many in previous calls, I when I was asked about the outsourcing trend, I always emphasized that the outsourcing trend is not just a unidirectional trend. So there are give and takes as typically we move forward in developing certain businesses, but there are also certain cyclicality where in times when, chemical manufacturers are rethinking about the cost base or rethinking about adjusting their complexity, there are, increasing talks about, you know, can distributors help them to reduce their complexity and also follow their volume and their and value strategies. And I think this is one of the unique strengths Pentec has. We will talk about this in specifically, in the capital market update in more detail, how we are addressing these, these needs. And I would say the trend is in general there. But it's even a little bit more pronounced than in normal times, I would say. And I hope that answers that question to some extent. Appreciate the answer. And it just under debate side. Okay. Thanks, sir. So what was the Can you give me, Imran? The rebates, supplier rebate, how have you approved it so far in the year? Given that the volumes have been unpredictable. So I'm not sure if I understood the question now where we can can you maybe, go a little bit closer to the microphone or something? Because it's Okay. I'll just apply as a apply as a date. How have the supplier rebates progressed so far in the year? And, if you see a volume pickup or volume decline, would you have to readjust your accruals of such rebates? Yes. Thank you. Ma'am, first of all, let me make the point. You should not overestimate the relevance of supplier rebates in our business. In chemical distribution, most of the pricing between supplier and distributor actually runs on a net basis. To the degree rebates exist and to the degree rebates, are subject to the certain volume triggers. The accrue in course of the year based on the expected volumes that we make throughout the year. But obviously, the softness in volumes, is with us all year already and whatever estimate we have taken take that into account already. So at this stage, I do not see, a particular risk in having over accrued supplier rebates. And the next question is from Liza Sharma of MainFirst Bank. Your line is now open, madam. Please go ahead. Hi, good afternoon, gentlemen. Thank you for taking my questions. Could you talk a bit about your performance in Asia where we saw such a strong organic EBITDA growth and a jump in the conversion ratio. Also how we should think about this going forward, please. The second one would be, is it fair to assume that the majority of your networking capital inflow in Q3 might be attributable to low inventory levels and anticipation of weak demand. If that is the case, should we expect this to reverse somewhat in q4 as volumes hopefully pick up and in the course of 2021? What would that mean then for the free cash flow? And the last one, please, the leveraging show is now at historically low level that we have seen at BrenTac. What is the leverage that you are comfortable with in the midterm and what are your priorities in terms of use of cash Thank you. Let me answer the question on free cash flow and then probably, Christian is best suited to give more color on our Asian development. And the working capital management, which influences free cash flow, we internally typically measure in terms of working capital turns. So we not necessarily hold our, general management teams responsible for an absolute level of working capital, but more for a turn. So the amount of working capital deployed in the business relative to sales. And indeed volumes are down this year. And at one moment in time, we expect volumes and therefore sales to pick up. And then we will have to give a little back. But that's notwithstanding that we primarily focus now on stronger working capital turns. And we do expect the positive turn trajectory to continue. So in that sense, I would not expect the full amount that we released from working capital in Q3 to go back into the business over time. If you permit me to park the question on on on leverage and our leverage target because we we have prepared a statement on that for the capital market update. Yeah, Alicia. Hello, Alicia. You know, answering the question about performance in Asia, strong performance, recovery in Asia, I must say, besides Latin America, the strongest we have seen this year particular China, going back to very good and decent levels, I have to say. We also excellent performance in Vietnam, also India, coming back, after, you know, the complete lockdown, which we have faced earlier this year, So overall, a very solid and stable recovery in Asia where predominantly with the exception of China, we talk about our specialties business. So from that perspective, very pleased with the with the, with the volume development with, with the growth overall. And, and I would say the conversion margins and conversion ratios, you have seen, they are, they are, you know, satisfactory and and going in the right direction. I don't believe that they are really a one time effect, but it shows again, our presence and our position in Asia being quite strong. Thank you both very much. And the last question for today is from Ben Hoekim of Credit Suisse. Your line is now open. Oh, cool. Thank you. Just two from me, if I may. One, I was wondering if you could talk about the competitive dynamics. Given your size and scan and scope, if you had been taking market share, given the strength of your supply chain relative to maybe some of your smaller peers, across these these troubled times. And then my second question, EMEA, when you speak about the areas there that performed particularly well, it feels very specialties driven. I was wondering if you could maybe give us a feel as to how specialties grew through the period, maybe relative to what we're now calling essentials. Thank you. Well, Ben, thank you. Thank you very much for the question. Competitive dynamics, I must say overall relatively stable. I think, you know, there was currently, supply security, stability of supply, making sure that our customers are getting the products even euro and borders were closed and other things that actually effects, which are start to happen again, is is currently, the most critical one I believe we have fared quite well, in that, in that arena and performed, to according to our expectation, what we believe is the underlying, market growth. We have seen, of course, different by industry industry segment, and that leads me to your question about about specialties industry by industry segment, you use with different, growth patterns. You see more of the industrial space, showing a lower growth rate when we talked about Automotive in the past that Tepan has now recovered. We talked about construction chemicals and other things. That one has stabilized, but still, you know, good business when we talk about pharma, when we talk about nutrition, when we talk about, when we talk about, personal care, as I have mentioned. So I would say overall, a good trajectory also for our specialties business, we will talk later on the capital market update, give you a little bit more flavor on our, on our, specialties business. So please hang out there. And, and as we move forward, you certainly will get more transparency on the performance of those two segments relative to each other. So please bear for us for a couple of minutes and then we talk about this. Ladies and gentlemen, thank you for your attendance. We came to the end of the Q