Earnings Call: Q2 2019

Aug 7, 2019

Welcome to the conference playback service. Enter your conference number followed by the hash key. Please say your first name, last name, and company name followed by the hash key. The conference playback instructions are as follows. Press the hash key at any time to listen from start of conference. Enter 14 or Call of Rent AGG AD. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. On for operator assistance. May I now hand you over to Steven Holland, who will lead you for this conference. Please go ahead, sir. Thank you very much, and welcome ladies and gentlemen, and thank you for dialing in for future results. As usual, I'm here with our CFO, Georg Mueller, and we'll have to answer your questions about the presentation. Coming on already pre released EBITDA and mid July, we'll actually provide further details in the quarter today. Our operating operating gross profit rose by 4.1% to 1,000,000, reflects the organic growth of the business as well as the positive contribution from acquisitions, broadly continuously in line with the developments in the first quarter. Businesses with Nutrition And Michigan Diva particularly positive in this quarter and we grew the gross profit by a high single digit percentage. Operating EBITDA increased by 12.2% in the 2nd quarter reaching 1,000,000. We are of course applying a new IFRS accounting standard leases for the first time, which is a positive pattern EBITDA. On a frozen GAAP basis EBITDA is on previous year's level. The free cash flow increased by 21% amounting to 1,000,000 in the quarter, Also in the second quarter, we continue to execute our M and A strategy in Santa Enclosure further further acquisitions. Early, you may also during the quarter, we noticed a slowdown in economic environments, which has impacted the demand situation overall. At the same time, the Medicare result and the manufacturing industry are slower with a number of companies not reporting weak results. This situation, together, they're running weaker first half of the year, does not support our initial view second half of twenty nineteen will be much stronger for which is happening in July to adjusted guidance for operating EBITDA moderately downwards. Now expecting operating EBITDA to grow between 0% 4% as before this range includes FX effects sorry, excludes FX effects as well as the positive impact from the IFRS leasing standards. I'll come back to the revised outlook in the course of the call. And once the operating EBITDA bridge, showing developments for Q2 2018 was a Q2 2019. In Q2, we had a positive effect from the FX translation of 1,000,000, Acquisitions contributed around 1,000,000 in the reporting period. This number is net of the operating EBITDA associated with the Biocepta business, which you may recall is sold at the end of 2018. Application of the new accounting standard on leases results in a positive effect on our operating EBITDA of 1,000,000 for the group. EMEA, the organic growth was negative 4% compared to negative 10% in Q1 until more challenging by the organic EBITDA and North America was down to around about 3% turn now, I can show that another very positive quarter at the organic EBITDA growth was 92% to 23%. Our business in Asia Pacific is translating a weaker demand and something cost challenge in China, which is reflecting in the organic EBITDA guidance of around minus 3%. Consequently, we closed the quarter with an operating EBITDA 1,000,000. Moving to the segments themselves, I'll come to EMEA first. Economic environment in Europe continues to be very weak. We see the pronounced weakness, especially in those countries with countries with high exposure the automotive industry. All in all, we were able to achieve the same gross profit level as in previous year and billings conditions. As a result, as a result, the flat gross profit and the slightly in the cost base, organic EBITDA development was minus 4%. New accounting standard on leases has an effect of 1,000,000 on operating EBITDA in the EMEA region. Into North America and the North American economic environment remains solid in the 2nd quarter. Current uncertainties are affecting some custom companies, which making our other patterns more unpredictable. We attribute some of this uncertainty and market concerns around trade tariffs. Nevertheless, our gross profit in North America group organically due to contributions on acquisitions. And the opportunity for industries that stand out also in open market, the food and nutrition industry did well, and our reposition continues to bear fruit, not unintended. The operating EBITDA declined slightly in organic terms, whether this is the first time we've seen in several quarters. Effective the application of the new accounting standard on leases in to 1,000,000 in the region. Moving on to Latin America, we recorded another very good course in Latin America, and we're very pleased that we significantly increased gross profit and EBITDA in the second quarter. The IRF 16 changes amounts to 1,000,000 for the region. Moving on to Asia Pacific, Kelly Hirsch and RWA Asia Pacific remains a growth region. However, the general conditions do create a mixed picture. Some countries we saw in slight growth in the second quarter. In other countries, individual industry experienced some slowdown, for example, in China, we saw products in the coat coatings of construction industry were significantly weaker during the period and throughout the market generally. Overall, though we're able to increase our gross profit organically and the acquisitions of recent months have made a significant contribution, on the cost side, we are facing some cost increases that are well within typical range for emerging markets. As you know, the cost base in China continues to be a burden in terms of increased logistics costs which is the fact that we are kind of working on as we are building new sites in China and many of you will be aware that is the case of information we expect a new site for China to come on on stream in Q1 2020, which in operating operating EBITDA of around 25% was also driven by initial application of the new county standards and leases, the effect amounted to $2,000,000 for the quarter. Coming to acquisitions, well, it disappeared into the acquisitions and deals. During our last conference call, we already talked about Tee High Acquisition in Singapore. The meantime, we closed the transaction and acquired a 51 percent stake and make sure interesting acquisitions in North America with Marlin, we're struggling at our range of value added services that's currently specializes, namely mixing liquid and powder products. And B and M, again, in North America, we'll start our lupine division, which we think continues to be expanding in the region of the last year. Nootau is establishing as an established chemical distributing in Thailand will strengthen our presence within the country. In addition, we have 2 small transactions in South Africa as we acquired remaining 50% of the joint venture of Quest Chemicals, the company will be fully consolidated on the closing date. 2nd, we require Cambrex and other distributors of specialty chemicals to focus on the cosmetics and cleaning sectors. In total, so far in 2019, between 2019, we've identified total enterprise value of around 1,000,000,000 spent on acquisitions thus far and now let's hand over to Gjo. Hi, good afternoon. I would like to talk you through our financials for the second quarter 2019. The address was profit and EBITDA already. So I'll move to the P and L lines below EBITDA, that you'll find on slide number 12. Depreciation in the 2nd quarter amounted to 1,000,000 and that is significantly higher than in the previous year. The increase in depreciation is mainly attributable to the first time application of the new accounting standards on lease financial results amounted to a net expense of 1,000,000. Earnings per share amounted to 1,000,000 and this compares last year's earnings per share of $0.76. We spent some time on the cash flow statement starting on page 13. Operating cash flow in the 2nd quarter amounted to 1,000,000 and was approximately 1,000,000 above the cash flow, operating cash flow of previous year. So this is a quarter with a pretty strong cash flow. The significant increase is mainly due to working capital. The outflow on working capital in the second quarter 2019 was significantly lower than in the second quarter of 2008 with respect to the investment and financing cash flow on Page 14, CapEx in the first quarter was on last year's level. And amounted to 1,000,000. In addition, we spent 1,000,000 on acquisitions in the second quarter. The most part of this relates to our acquisition PI in Singapore. In the financing cash flow, the dividend payment from June is particularly noteworthy After the general shareholder meeting, we paid a dividend of per share, which corresponds to a total cash out of 1000000. And coming to our free cash flow presentation on page 15, the free cash flow amounts EUR 179,000,000 in the 2nd quarter and that's 21% higher than in previous year. It should be noted that we have adjusted the definition of free cash flow appropriately in order to ensure comparability with previous years free cash flow now also includes leaving payments, which are reported in the income statement below EBITDA. Adjusting balance sheet and leverage, net debt amounted to 1,000,000,000, a excluding lease liabilities, the increase compared to the end of the first quarter is mainly attributable to the dividend payment of US185 million the leverage is at 2.2x. Great working capital amounted to around 1,000,000,000 at the end of the 2nd quarter the working capital turnover stood at 6.9x for the quarter. And that turns the presentation back to Steve for the outlook section. Good York. So I'll start with the trading and I'll just spend very briefly with the outlook for the year. So in terms of trading numbers, we just the slowdown at which we've talked about in April growth was 5.6% and 3% organically. May was 5.4 2.5 percent organically. June was 4.7% and 1.8% organically and July is 3.10.5 percent organically. In terms of the outlook, clearly, in July, we adjusted the outlook for 2019, and we expect our operation to be down to grow between 0% 4% in 2019. Growth rates are on an FX adjusted basis and include acquisitions. Also, this growth is understood to be on a frozen GAAP basis. The range, therefore, an operation manager of EBITDA for 2019 between 1,000,000 $195,000,000 and 103,000,000 billing And I think at that point, we can open up for questions. You. If you find a question the first question is from Rory McKenzie, UBS. Your line is now open. Please go ahead. Afternoon guys. It's Rory here. 3 for me, please. Firstly, in terms of that tough backdrop, it clearly got worse. For you in June, July. Was most of that in North America? And can you expand more about your comments on how the trade war uncertainty has spread through to your business? We normally think about you guys as being quite resilient and exposed to kind of a broader range of markets. So where exactly have you seen that impact in North America? Secondly, on the costs in EMEA, it looks like the cost inflation is going to come down a bit in Q2. You talked about in particular pushing on logistics costs to reduce that there. Is this the more that you think you can work on through H2, or is this the right run rate to think about? And then lastly, just on working capital, are there any prospects for a 1 capital inflow your H2 given the fall in chemical prices? Thank you. Right. Okay. Just in terms of, with the comment on the trade test, I think was not more comment on customer confidence where there are certainly some customers who are, having issues with exports into China. Where they're exports clear on some bits of tax, which, most people say weren't. We also have some aspects of products which were previously source in China coming to say, for example, United States, which are more expensive than there's a bit of slight dislocation of supply chain in that respect. I mean, I wouldn't say that this is particularly a Brent tank, Brent tank effecting, assuming other than there's a lack of a like a momentum in customer demand at this stage, and there is certainly some concern in the supply chain. But I wouldn't, I'd say, point it particularly as a Brentank issue directly. In terms of costs, in terms of EMEA for start, you're right, especially in terms of the overall invested in India, I'll exchange as scrutiny. And we are now seeing a sequential reduction in transport costs in the EMEA region, which by no means, at the final stage of that process. And we expect to see some further improvements in the next two quarters and transport costs for the EMEA region, equally in North America, some cost issues related to transplant other owners of North American cost base, which we are looking at, particularly in view of the reduced guidance that we've given you clearly what costs are a focus for the whole group and we are rolling out certain initiatives to attack that as a principle. Think Huawei, you also had a question about the regional split of the gross profit per working day trajectory. You are was relatively slow earlier this year and continued slow into May, June, July. North America had clearly more healthier levels early this year, but it's slow down in June July. Great. Thank you. And just on the working capital, any comments on account with prices kind of keep on the treadmill they're on. Would you guys expect to see an inflow in working capital through H2 or just kind of, again, a low outflow It depends on to a fair degree, it will depend on chemical quest development, which makes the prediction difficult. Its chemical prices are stable to marginally falling and considering that the H2 seasonality typically is an inflow it's a good likelihood of some inflow in H2, but again, the question of chemical prices will be the decisive question for this. Think there's also some questions regarding price of oil in the final analysis just because clearly there's some concern of the security situation in the Middle East and things like things on the fires of Exxon Refinery in North America don't help much. So I think that's anything that's oil based is a little bit more volatile at the moment in terms of the variable base stocks being somewhat relevant as they're priced. That's great. Thank you guys very much. The next question is from Stephen Golden, Deutsche Bank. Can I just, again, on the cost side again? So it looks like you had roughly 4% cost inflation in EMEA and North America. Can you give us a bit of a steer as to where that's coming from? Obviously, wage inflation has been a problem for many of your competitors, but my understanding is that sort of tracking at around 2.5%, 3% and that's about 60% of your cost base. So if you could give us a bit more color on where that's coming from, if there's been projects, front loading of IT spend, that sort of thing? And whether or not you expect that to materially ease in the second half? And Sorry, on that point as well, I just missed your response to, to the North American cost. I think you said that you were focusing on that, but I missed the actual detail around the response. Yes, just in terms of cost generally, we've reduced our guidance for the rest of the year and the costs are absolutely in focus. So in fact, not just not American euro but the group as a whole, Nickus wants to make sure that we have our guidance as well as we've guided you. There is some a couple of things which actually happening in terms of costs, which are perhaps outside of day to day insofar as in North America, we do have a number of new distribution deals, which require us to employ new staff, new technicians, new some expertise to support new deals. So there's some front loaded in terms of, combining resources before the you see a flow of GP into the business. That's going ahead. And we're pretty happy to see that. That's for future development. And certainly we are providing, to some extent, some more investment in infrastructure logistics to access certain parts of the market, which we believe are more attainable now we absolutely were this time last year. As far as Europe is concerned, I think we've touched on that already in terms of things like transport and distribution costs. Whether there was a point about IT, but maybe you're looking to answer that one. Yeah, I mean, the European cost inflation, Steve says, goes through different P and L lines, particularly through transport and to a degree through IT, we are ramping up staff more and more, in our work to harmonize European ERP systems and there is an some with Stewart and therefore cost element in there. Great, thanks. And sorry, just a quick follow-up on that. I mean, on the in terms of organic EBITDA development, you did around minus 3.5 in the first half. So to hit the midpoint, you'd probably need for the full year, you'd probably need to be up 2 or so. And I do realize compsies and they particularly use on the EBITDA side, but, is it fair to say that we're probably looking at the lower end of the range as a realistic target than the mid end of the range, just given what you have to deal with and the fact that there's still some cost inflation there? I wouldn't really comment from a company's perspective now on lower and mid of the range, upper end of the range, we put out a range and that's what we feel to be comfortable to end up in If you want to make up your mind on where you see us within the range, don't forget that last year's second half was relatively soft half year. The next question is from Raghavalli, Exane BNP Paribas. Your line is now open. Please go ahead. Hi there. I have 2, please. Just on that U. S. CapEx plan, I think you're still considering a 1,000,000 investment program mean could you give us a sense for what the latest is there and whether the maybe recent drop in sort of macro momentum has affected your approach at all And then secondly on the M and A pipeline, can you maybe just talk through the sort of outlook for the second half? Obviously, you've been very active in the first half and should we be expecting spend over 1,000,000 of farm acquisitions given the sort of pace you've been at? With M and A, we do have a number of transactions and projects, which in due diligence says, but as usual, it's very difficult to nail it down when these will arrive. But regarding the guidance that we gave, let's say, between $200,000,000 $250,000,000 or up to $300,000,000 is about right. But certainly, I would expect to have at least some more acquisitions during the course of this year. The as I've got your question around CapEx Rights and it's great then you'll refer to the about 1,000,000 CapEx program, we have to address changes in market circumstances in North America. So to respond to market opportunities that come from mergers of some competitors. And there is kind of the answer. This is driven by market opportunities that are not depending on macro. So from today's perspective, you fully expect to go through with that program. And can you just remind us what is the anticipated timing for that? Is it on a 2, 3 year deal? The 40,000,000 is a 2 year program. We have We are working on realizing a couple of projects. I would not be surprised if the majority of this comes late this year, but if it is early year, it wouldn't be very relevant for us. The next question is from Isha Sharma, MainFirst Bank. Your line is now open. Please go ahead. Hi, thanks for taking my questions. I just have to please. In terms of your new guidance, if you could please give us some color as your assumptions of the guidance? Or do you see the market expect the market deteriorating from today? Or is it based more on a mark to market basis? And the other question would be on a CapEx, you have we have a guidance of $220,000,000 for the year. And there's an expected compensation back from in China of around CHF 15,000,000 should we expect the CapEx to be 2.20 and the compensation to come in the next year or should we already net it as an assumption for this year? Excellent. This is the second question first. You should see you should expect the compensation to rise basically the same point in time where we undergo with the CapEx, we, laid it out cost to you because it will happen in different lines of the cash statement. So you would see the CapEx growth and the 25 compensation will basically be an inflow from sale of assets. That's why we have shown it separately, but it will happen the same moment in time before take a little. The 0% to 4% guidance range that we have is under current market health circumstances. We don't have a particular assumption for weakening nor a strengthening market in that range. Perfect. Thanks a lot. The next question is from Rajesh Kumar, HSBC. Your line is now open. Please go ahead. Hi, good afternoon. A couple if I may. You gave some color on what sort of cost commitments you might have with suppliers when you sign a new deal. Can you give us some color on what sort of contract negotiations you're having with the suppliers as the volumes get weaker around minimum service levels, minimum inventory or vendor rebate, that sort of discussion. Basically, are you preparing for slower growth environment with the suppliers. And the second one is, if I've understood it correctly, at the current run rate, your inflation in Europe and the U. S. Gets easier in the second half. Is that an accurate summary of what you said on costs so far? And generally speaking, we don't have, a scenario where we are effectively engaged in contracting and turning gears. We normally our contracts are our framework contracts where essentially these are the terms in which we do business together but don't normally welcome them to support it. Kind of use, therefore, any change in the business environment means we automatically change our inventory relative either inventory even in stock or reduce the number of times that we replace the products. And, clearly, we are focused on making sure that our our stock turnover is maintained at current levels. So we can adapt our stockholding to whatever is appropriate to the market conditions that prevailed and there's nothing contractual that would stop us doing that. Understood. When we indicated that the comparables for the second half of this year are a little easier because second half of last year was weak. This was more addressing the gross profit level than a specific part situation. Yes. I was asking about the cost pressure in terms of freight costs, labor costs, transportation. That's at the current run rate, would you see a bit of easing of cost inflation? Yes, I think the well, firstly, we are making progress in terms of the European region relative to logistics. So we talked about that over the last couple of quarters. And we have actually invested more in our own transport, our own personnel to effectively reduce the dependence on external service providers. We should expect to see a benefit from that during the course of of operations because in the current market conditions, which are not at a good point, we are certainly looking at all our costs relative to the operations. And as a result, we should see some shaving costs in that regard. The next question is from Tom Barden, Berenberg. Your line is now open. Please go ahead. Hi, guys. Thanks for taking the questions. I just wanted to come back and sort of dwell on the cost point, I guess, is important vis a vis your guidance. On the comment around IT deployment costs, I remember in Q1 there was a comment that they would still be flowing through IT deployment costs in Q2, but would we expect to drop out in Q3. Can you confirm that they were in in the P and L in Q2 and they will in fact drop out in Q3 as was initially guided. And then again, just thinking about the sequential cost developments, sticking with EMEA, is your guidance premised on an assumption that we will get quarter on quarter cost improvement, I. E. Q3 better versus Q2 and Q4 better versus Q3. And then just lastly on free cash flow, any more color in terms of quantifying that guidance? You've talked about a significant increase year on year. Mean, you're basically run rating at double the free cash flow of last year. Is that a sensible sort of run rate for the full year out there or how should we be thinking about that, please? Just came to the cost base now. I think I've said a few times now. It clearly costs our focus for us. So whether or not we can just call it sequential or not, but it's certainly the the second half of the year, we have we set up our costing focus for both both major regions in North America and Europe. We will see we expect to see some improving in logistic costs in the European region, which have actually been quite a burden for the European business the course of 2019. So in that regard, I'd expect to see a reduction, but it's a focus for the whole group, not just the 2 big regions. We probably can't be too helpful in narrowing free cash flow guidance. Free cash flow through working capital movement and in terms of chemical prices can be a volatile element and I, it would really be a little official, if we were to narrow guidance on that end. I'm sorry. Thank you. This was the question answered. Yes, thank you very much. Okay. Then the next question is from Markus Mayer. Your line is now open. Please go ahead. Good afternoon. I have two questions. Firstly, again, coming to the potential trade war impact. During the last particular capacity additions in Boston American, not only petricans of other commercial additions and the debit from the trade conflict. Do you see already higher kind of trade flow volumes from North America to you? And if so, is there any kind of positive impact particular for Livo, the largest, in kind of the distribution company in Europe. And secondly, with that coming back to the cash flow, the vessel reductions, do you think that most of the reduction was now done in the first half or do you speak about from the working capital side for your cash flow in the second half? Thank you. In terms of trade flows, of petrochemicals, there's not really a significant, we have a significant petabyte business as you be aware, we've got a very straightforward price pass through model and therefore fluctuations in pricing, whether it be by virtue or source of the product by a manufacturing in Europe or manufacturing in United States, doesn't really affect us. So it may be more pertinent to very large users in refineries, but mechanical distribution is not just not an issue. The time to be helpful on working capital forecast. It's not easy as working capital very much depends on chemical prices. We have an expectation that we see further reductions of working capital in the second half, partly also seasonal, but chemical prices can easily move the needle 1 or the other direction. Okay. So to add on question for the cell phone, The question was less related to the price. It was more related to the volume that you see more petrochemical volumes from North America to Europe? Sorry, I missed the Naveen to answer your question. I wouldn't say that we are tracking particularly larger volumes from North America into Europe. You've got to bear in mind that from our even though we are a large distributor of solvents in the European region, there are also very significant production facilities in the European space in any case So I think it's more a case of, if there's a refinery out like we've seen with, for example, with Exxon, you may find reverse flows of the Versicon product coming into Europe. So, it's not really an item for us. The next question is from Laurence Alexander, Jefferies. Your line is now open. Please go ahead. Hi. This is Adam Divis on for Laurence Alexander today. I was wondering as we look out into 2020, if you could kind of just touch on different levers that could maybe be pulled next year, to provide any tailwind? I think, clearly, the we would hope that we'll give it to ourselves and I want more stable position relative to the macroeconomic macrochemical development. I think it's fair to say that we're pretty pleased with the development of our food and nutrition business in terms of the way that's moving on. And in addition to that, I would expect to see some upside from my investment in new specialty chemicals in North America. And some of the logistics investments that we're putting through the business to take advantage of demand from the customer base in North America. I think there's a couple of industry initiatives and market initiatives that should help brands ag with and beyond the market in general. Okay, great. Thank you. And then my last question, should we expect the current pace of M and A to continue or how should we think about M and A going forward? There's actually no reason why emanation continue at a current pace. Clearly, the market remains difficult for everybody. I think one of the great characteristics of this business is cash flow and you'll be aware that cash flow into small chemical distributors in the 2nd half is equally as good. And so many businesses may well be seeing maybe low EBITDA and strong cash flow. So it does tend to make people hang on to their businesses a little bit longer. It's clearly valuations tend to be driven by EBITDA. So that being said all that, we are we have a very active pipeline and therefore, I don't think it will be any expectation that we spend less in 2020 compared to 2019. There are currently no further questions. We haven't received any further questions. Okay, in that case, thank you. Thank you very much for your debited. And we'll close the call at that point. Thank you very much. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect. You have reached the end of the playback. Press 1 to go to playback or any other key to end. Thank you for using the conference playback service.