Earnings Call: Q1 2019

May 9, 2019

Thank you, ladies and gentlemen. Welcome to the Q1 twenty nineteen Results call are Friendship AG. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions. Listen. May I now hand it over to Steve Holland, who will lead you to this conference? Please go ahead, sir. Thank you very much, and welcome ladies and gentlemen. For dialing in. We actually, seeking to find different rooms today because we're having some feedback problems in our last call. So you have any difficulties hearing us, and we're very grateful if you'd let, our investor relations people know, after the call, that would be very helpful. So, I'm here today with the Gilmore CFO. I'd always be happy to answer your questions after the presentation. I'll just start with the highlights of the quarter. Operating gross profit rose by 4.1 percent to 1,000,000. This reflects some organic growth in our business whilst a positive contribution from acquisition. Operating EBITDA amounted to 1,000,000, an increase of 12% on an FX adjusted basis. Comparison with this last year's operating income is impacted by the first application of the new IRS Council standards on leases. Will also provide further details on that later on. And cash flow increased by 1,000,000 and amounted to 100 and 66,000,000 the quarter. We have our 4 regions of delivered organic EBITDA growth with human results, North America, Asia Pacific and political results, we were particularly pleased with the performance in Latin America. On the other hand, the army region has a particularly challenging environment. I've expected that we can turn to the European business environment, and we observe towards the end of 2018, continuing to look into the new year in Europe as particularly. If in particular, there's some very challenging economic conditions in Q1. Continue to execute our M and A strategy and close 2 acquisitions in North America and 1 in Asia Pacific by country operating EBITDA break In Q1, we had a positive FX from FX translation of 1,000,000. Acquisitions contributed 1,000,000 in the reporting period. This number is next to the operating EBITDA associated with the bio sector results, which we sold at the end of 2018. The application in your accounting standards and leases was also a positive effect of operating income of 1,000,000 for the group. In EMEA, we reported negative organic growth of 10% against a strong Q1 last year. Positive side North America, Asia Pacific showed the organic growth of 2% and Latin America reported a growth of 7%. That we closed, of course, we're not at the EBITDA of almost €239,000,000 into the EMEA region. As mentioned already, the weakening of the macroeconomic conditions in the region continued continued in the first quarter of 2019, but in the case that we call, so you're not gonna complete surprise this challenging environment, we managed to maintain gross profit on last year's level. We had a good start to win in the last year regarding high gross profits. In Q1 2018, which was difficult to beat in the current environment. Costs increased by around about 4% compared to last year, which reflects cost increases which we are currently seeing in some of the areas like some areas in our cost base. The new account is 1000000. It has an effect of 1,000,000 operating EBITDA for the EMEA region. We also reported good earnings results in a generally positive macro environment. The operation growth probably grew by 5.5% which was also supported by contributions from our acquisitions. We do see good demand across a broad customer base in in North America effect of the application with your accounting standards, amount to €13,000,000 in the region. In total, operating EBITDA grew by 18% 2% on an organic basis, which you think is a good performance for the region to, as I said, to get to a very high comparable in the first quarter of 2018. In the Latin America, Latin America, as a region remains quite challenging with the postproduction Latin America contracted nearly 4%. We decided headwinds, we achieved a very good result in the region continued our positive path for starting the second half of twenty eighteen. Operating gross profit was at almost 9% operating EBITDA by more than 40% effective IFRS 6 seeing much run about 1,000,000 in the region. Although there's still quite a volatility in the region, these results in line, but we're well positioned in our Western American business. To Asia Pacific. Business conditions on Asia Pacific, operation remain positive. It's a more complex particularly in China. Region reported a gross profit growth of the 80 percent, which is mostly attributable to organic growth, and the contributions from acquired businesses. In China, we purchased this cost because we're currently operating with some suboptimal system through the infrastructure as we build new facilities. We are aware that one of the resources will probably be licensed in about previous time. So we should report a growth of operating profit of around about 80%. Is also due to my initial application and the accounting standards we've announced about $2,000,000 in the quarter. Moving to our recent acquisitions, we've done 3 transactions in last quarter to North America and Wilmington Pacific. In the United States, we've analyzed the acquisition of re re re distributions, our new England Residence Pigments Corporation. Acquisitions helped to constantly consolidate the market and expand our products such as portfolio. We did an attractive addition to our lubricants business and even letters and pigments corporation, in addition to our construction of these with industries. You also agreed on a joint venture that took a lot that required 31, 51% stating TIA can are based in Singapore. We have a special campus distributor focus from folks in the life sciences area, electronics, research and diagnostics. The other market leading the Singapore and the Southeast Asia. This joint venture allows us to expand in a very attractive industry group and since our customer has acquired relationships in the region, the company generated €22,000,000 gross profits in 2018. Is Keith. Good afternoon. As always, I would like to talk to you, through our financial disclosure for the first quarter Let's start with the upper part of our income statement on page 11. Sales amounted to 3,100 1,000,000 and sales increased by close to 4% on an FX adjusted basis. Prices for chemicals across our portfolio are flattish, compared to previous year. Operating gross profit increased by 4.4% on an adjusted basis and operating EBITDA for the group grew at 12 percent to 1,000,000. The conversion ratio for this quarter stood at 34.7% compared to 32.4% in the same period of 2018. Operating EBITDA growth rates as well as the improvement in conversion ratio were impacted the initial application of IFRS 16, and we'll provide more disclosure, due to the relevance of the item on IFRS 16 on the subsequent page 12. So obviously IFRS 16 refers to the new accounting standard for rent and leases, We have many, many rent and lease agreements in our company. In total years, we reviewed about 6,500,000 contract globally. In the first quarter, an amount of about 1,000,000 was reclassified with operating EBITDA increase by that amount. In our financial reporting package that, you can download from the internet, you will also see a split of the 27,000,000 into the different segments. It's a consequence, as a further consequence of, the IFRS 16 application, depreciation increased by 1,000,000 and interest expenses increased by 1,000,000. Earnings per share were only marginally impacted capitalization of lease contracts on the balance sheet. Balance sheet does now reflect right of use assets in an amount of 1,000,000 balance sheet does also reflect the corresponding liability for financing in an amount of 1,000,000. With that, I would move to page 13. So to the income statement below EBITDA, the only noteworthy change to this part income statement comes in the depreciation, the depreciation in the first quarter 2019 amounted to 1,000,000 and that compares to 28,000,000 a year ago, mainly due to the new accounting standard for the financial result amounted to a net expense of 1,000,000. The tax rate for the first quarter that we reported was 26.5%. Earnings per share stood at $6.8 on par with your earnings per share in the first quarter of 2018. And moving to the cash flow statement on page 14, In the first quarter, we reported an operating cash inflow of 1,000,000, a significant improvement compared to previous year's quarter as we reported a negative cash flow of 1,000,000. All attributable to a clearly lower outflow for working capital, speaking about the investment and financing cash flow, for the first quarter was on last year's level. So far this year, we spent around 1,000,000 As a consequence of IFRS 16, even the financing cash flow, the line repayments or proceeds from borrowings now also contains the respective lease payments. On Page 16, you will find the net debt and leverage information net debt amounted to 1,000,000,000. Leverage ratio continued to remain at, 2.0 times. In this context, I would like to note that the net debt as well as the leverage ratio has been calculated before buying the new accounting standard or leases. The timeline you see is therefore consistent. State working capital the quarter end amounted to 1,000,000,000. So a moderate increase over the, working capital at the end 18. Looking capital turnover, stood at 6.9 times in the first quarter. Coming through my last slide to the free cash flow, Most of these payments are not included in operating EBITDA anymore, but obviously, they remain a cash outflow. You have, therefore, adjusted the definition of free cash flow. The corresponding payments are now deducted from the free cash flow in an additional line. We totally generated a free cash flow of 1,000,000 in the first quarter, a significant increase compared to last year's first quarter that we reported a cash outflow and cash flow oncology of 1,000,000. Strong growth is primarily due to the lower increase in working capital and also reflect the generally positive business development. If you could, I'll hand it back to Steve. So let's start with current trading. About the rest of the outlook that you're going to add. Also, you're taking through the gross profit for working day numbers. So in January, the growth was 3.9%. Which is 1.3% on an organic basis. In February, the growth was 5.3 percent, 2.7 organically. In March, the growth was 4.8% 1.9% organically. April, the growth was 5.6% and 3% on an organic basis. In addition to that, we we did actually announce, in September last year, on a Capital Markets Day that we will be creating a food nutrition division. And, this this division actually started operating, in its own right, from the first quarter. But, Hassan, I can share with you the the good topic results for the food nutrition business have grown by 6% organically during the course of the first quarter with a positive outlook for future growth in that business division. Finishing the outlook. The 1st quarter is expected to be soft soft start of the year and we saw something of the macroeconomic condition in many countries around the globe. Is particularly visible in the region, and we've already executed a number of actions to improve the outlook for the full year. Can you confirm the outlook for the full year? Operating EBITDA, we continue to expect growth between 3% 7% for the full year 2019. On an FX adjusted basis and excluding acquisitions, Also, this project was understood to be on the frozen cap. The growth in the first quarter starts with a comparable basis with a very good result in 2018 and comp problems in half of twenty nineteen are definitely quite challenging. This trend will reverse in our half through 2019. Our outlook assumes that the growth rates will benefit from that. Of course, about the, you know, further softening of the macroeconomic environment going forward. And so that M and A, we continue to pursue our strategy. And we are working on a number of interesting deals. Overall, we're satisfied with our recent acquisitions, and we're now happy to take your questions. Ladies and gentlemen, we will now begin our question and answer session. Enter the queue. If you are using specific equipment today, please list a handset before making your selection. One moment please for the first question. First question is from Rory McKenzie, UBS. Your line is now open. Please go ahead. Good afternoon. It's Rory here. Thanks for taking my questions. Firstly, just see you on Europe if I can. So on that week, post profit trend, we surprised at all about how much clients gonna put back on ordering. Can you highlight which areas or countries were the weakest you want? And then secondly, on the cost base in EMEA. Very surprised to see that it was still up 4% in Q1 despite knowing you're looking into a a tough macro environment. Are there any actions planned to mitigate that profit decline in Q2? Maybe as opposed to on your first talk, I might have heard. Sure. As far as your up is concerned, the 2 principal markets which were probably hit the hardest, from Kentucky with France and Germany. And I will probably focus more on Germany than France. This page was supposed to get to reorganization, of the interest during the course of 2018. It's currently, touching down from that. In Germany, we saw pretty significant for the way in areas which over the car is being, residents and plastics. And this is pretty much an extent, associated with the expanded supply chain in the car industry. Now that's quite a quite a big business to burn tech in Germany. That, was pretty, I'd say, pretty strongly impacted in 2000 in the first quarter 2019. And we did actually hear that some of the some of the small companies we're getting on a short time that was involved in the expanded supply chain to the car industry. Now having said that, we now do see, some recovery in the demand for products against that sector. Certainly, April appears to have a reverse direction as far as demanding that particular sector is concerned. So it's, it appears to be the worst thing, what the inverse class, the, is considered the German market. It does cost save. Clearly, there's a percent increase in cost. 1% of that cost increases is associated with transport. You may recall that, there's a several several effects on transport during the course of 2018, which related to driver shortages of all the cost increases due to certain effects in the German area, particularly the Rhine and Rhine and what have you, on the, and to be fair, the actual, PPL rates in Germany just have not come back at a rate, so you might have expected them to come back with with the slowdown in the economic environment has now changed, and we now do see that the, DPL market for, for service to be acquired. European region, as as I'm coming back to where we're negotiating contracts, lower rates. In addition to that, We have a new operations director in the European region who's joined from the UK and his focus has been principally around transport utilizations and Jupyin Germany and France. I mean, I've seen a significant little bit much fluctuate, in most three countries through the course of the Q1. Which we expect to roll through into, in Q2 and beyond. There are some other items that cost in your operation are associated with the development of the new IT systems insurance and get expensed in the 1st quarter and a little bit into the 2nd quarter, which may not then not repeat the rest of the year. And that's basically a good address of the there is a cost for the euro. Thank you for that. That's very comprehensive. If I could have my first question or in different areas, it's actually on working capital. And is there any comment on a notable slowdown in one pixel terms, in in the first quarter. I don't know how to deal with maybe that slower environment in Europe or or anything else to highlight? Certainly. What we see, working capital term is, not satisfying as it is, slightly down from the end of last here. So, we have to put more energy into improving working capital turn going forward. I couldn't point out any particular development, which, explained the slight decrease from the year end number. Do do you think that's being driven by, you know, customers or suppliers, you know, anything called to have a lot of sense of why it's changed? Because it's all in my null point 5 turns year over year, which is quarter drop? My focus is to suggest here. I think I think it's fair to say that if you look around the world, there's just there's generally been a, a more on payment terms, with with customers. And I in the in terms of manufacturing and manufacturing base and supplies to Brenton, we're not seeing and level of flexibility in payment terms. I think this is certainly an area which, which we are looking at very closely in terms of making sure that if there is any move out in terms of payment customers, but these are inflected by the the similar terms of Delta branch on a purchasing site. So we do some work being done there and, and we expect that to be, neutral at the very bad. Also, the the least neutral, depends on going forward. Understood. Again, thank you very much. Next question is from Tom Bouthan, Berenberg. Your line is now open. Please go ahead. Hi. Good morning, guys. Yeah. Tom Berenberg from Berenberg. Yeah. I'd say that another follow-up question, certainly in relation to working capital, just on chemical crisis. And I know they're not really relevant from a top line gross profit perspective. In terms of the revenue trajectory in working capital, you make the comments in the statement in the EMEA section that the sales growth was predominantly driven by higher average sales prices per unit. I'm certainly surprised by that. I I wasn't expecting such a strong performance, but I'm just wondering why that hasn't said through, I suppose, into working capital when I'm looking at the the working capital performance and the cash flow statement, why didn't those higher sales prices working capital in Q1. Tom, hi. Yes. Indeed, we made some comments about the the pricing element of of obviously, offset rate increase in Europe. I think the collaboration from my perspective is overall, you are seeing a very limited price increase. And with the challenges at this customer earlier in France and particularly in the German industry, it more speaks to a little bit of volume weakness. Yeah. Perhaps I just tried by for you a little bit further on this one. Certainly, I think we have an economic downturn as we saw in the region, what we tend to find is that the, the higher, higher volume, lower value products are the ones that that start to increase first. And so are we average selling price of the rest of the tradition is to be higher. Okay, great. Thank you. And just, just one follow-up question, just on the the regional divisional run through, you you alluded to tougher comp effects in Q1, a few times. Just looking forward into Q2, and I know the April pickup in organic cheap people working day looks promising, but I guess April looks like it was prompting a slightly softer comp and then comps get slightly more challenging, but it looks in May, June. So how are we thinking about organic GP growth at a group level going into Q2 just in light of the the comps you're facing? Well, I'm not sure I agree with you on the, hyphen the modem as a lighter comp, but it's I think it's pretty pretty strong performance in April last year. I think, I would I would characterize April's been a good month, with the business in terms of we we see a sequential improvement in the, in organic growth, and, we saw that sequential improvement in Europe. Okay, great. Thank you. Our next question is from chetan Udeshi, JP Morgan. Your line is now open. Please go ahead. Yeah, hi. Thanks. This first one, is this on clarification? Do you see any year on year impact from any working number of business days Gelstein Q1 or Q of this year versus last year? That's number one question. Number 2 is more of a structural question and you know, if I were to strip out your, IFRS 16 benefit in Q1, you know, your conversion ratio has dropped by 150 basis points. And this this has been, like, sort of a steady grind down over the over the last 5 years. So you know, you can also see that when if, like, your gross profit per day, organic growth, you mentioned about 2% on average for for Q1, but then your EBITDA is down almost 4%. Organically. So can you address what is underlying problem with the conversion ratio that, the company has been facing, not only in Q1, but in recent years, is there pricing pressure is a cost management issue, and what what what are you doing to address that? Thank you. Our conversion ratio is obviously So this has not been for many years. We went through this, a modern modification with, with investors and analysts. The commercial ratio, I think, certainly, Q1, I think there was some pressure, particularly from a European perspective, we saw clearly a business that was operating at a, a lower rate and, and we all, you could all see that there's been a 4% increase in operating costs for the European base, which is basically other and and negative facts and conversion ratios, we have taken action to correct the, actually increasing operating costs in European region that we you know, flowing through into the 2nd quarter and certainly for the rest of the year. And there is a balance. If you're gonna tackle, it's not been much of a 5 years, please please remember that we do actually acquire businesses in the in in Brent Engrift. We don't necessarily have the same conversion ratio as a group as a whole. I mean, I'm I would look at exactly the lubricants business, under the parts of the business where conversion ratios are in the thirties, not in the forties as they are in North America. So there's a that has to be a balance we made, but directionally, Europe has has pulled it back in the in the quarter. And clearly, we don't except that has been a a sustainable position going forward, and we are taking steps through to correct that. Unworking again? No relevant working day before and between this year and previous year, neither in Q1 or in Q2. Thank you. The next question is from Lawrence Alexander. So just Hi, guys. This is Ben. How are you? Could you tell us what percent of sales are con conducted via online portals? Is there any difference in margins by that method? It's obviously pretty tiny at the moment. We, we are rolling out the online business ourselves along with our competitors at Innovay and everybody in the market has an online offering. And, it's during months and 2 to 3%. And that's a very, very low echo. So I think this is something we should be looking at maybe towards the end of this year. A few adoption rates are going to be, that's how our competitors are offering, the ability for customers to go online, but the the conversion hasn't been, overwhelming at this stage. Okay. And then what percent of volume or sales if any negative working capital. Oh, very negative. There are a few smaller sections of business there. We have a payment term differential in our favor, but that's a relatively tiny piece. It's not a relevant number. Okay. Yeah. So what I need to find is the only time for my business in Ireland. You're not really. Oh, if it's minimal. That's okay. You very much. The next question is from Stephen Golden, Deutsche Bank. Your line is now open. Please go ahead. Hello there. Thanks for taking my question. I just wanted to touch specialty. If you could just give us a bit more color in terms of how that business is going, particularly within that, how food nutrition was going for industrial, that would be, that would be very helpful. Thanks. Well, I think I just gave you the number on, food and nutrition it's the 1st quarter measured it, the separate distribution is cheapy, growth was 6% organic. I, you know, invested in this was pretty flat, into the organic growth, overall. So I think we are certainly seeing, we are seeing a high level of growth in this, in the specialty business. At this stage, food and nutrition, you know, and when I could actually separate for you in a meaningful way, and I I don't know what's drawn into into making estimates and guesses. And, but we'll do that number now going forward. I know lots of people are unhappy we didn't provide food nutrition reporting at our Investor Day, but we're good to give the US. And I'd say I think this is an area which we will expect to grow faster in the future. Thanks a lot. The next question is from Kanujangal Pareto. Your line is now open. Please go ahead. Good afternoon. Thank you for taking my question. 2, actually, this question, first one, positions, with Marlin, you did, the 3rd position in the west. So my question would be, whether it's just, incidental or, if the U S is a particular focus right now, and we should expect more from that, in the remainder of the year. And second question is, on the cash flow statement, said that you spent 38,000,000 on acquisition. Just for clarification, this year, does it also include euro position in Singapore. Thanks. I'm just gonna ask you a question on North America. We are, it's certainly the case that we're, we're taxi make acquisitions in North America, we have, we have a strong market position, but nevertheless, though, so areas in North America where we could be stronger in terms of market share. And therefore, we're always looking at opportunities to increase our market penetration in North America. From a National Clinical's point of view and from a specialist point of view, also fair to say that we are actively seeking to grow our market position in North America. To market consolidation going forward into 2019 2020. So the the Singapore acquisition of, Kihei closed end of April, you will see the cash out for that in the Q2 statement. It's not part of the Servier. The next question is from isha Sharma from MainFirst. Your line is now open. Please go ahead. The first one is that they've seen a significant improvement in the free cash flow. However, when we look at the net debt, This client only has 30,000,000. So is there it was that a strategic decision and what drove that? My second question is around, LatAm. So we saw an EBITDA with an organic growth of around 12 percent. What drove this, and is this, run rate that we should see for the next quarters? And the very last one, I listed on your competition space in the US. So, the biggest complaint that you have to have also reported strong set of numbers, and then we see, another competitor in the specialty business, talking about having a bit of footprint in the US. So how do you see the competition is developing? Thanks a lot. You know, I'm not quite sure which which competitor you're referring to with a strong set of numbers, to be honest, so that's, maybe that's fine. Earlier analysis I should do later. You know, should I take, takes 1 on, on the net debt. Mathematically, you see a seasonal cash outflow in Q1. And we had a very limited seasonal outflow this year. So that, and indeed, the cash flow is much better this year than it was released year, but you wouldn't necessarily draw the conclusion from that, not to see an excess increase in Q1. On top of that, there is also a little bit of translation to, to part of the debt being U. S. Dollar and there we see acquisition payments. So struggling a little bit the answer of VSP, but, but it's a little counterintuitive. It's not necessarily what we would have different from what we report. Right. Thanks. The next question is from Peter Oliver from Kepler Cheuvreux. Your line is now open. Please go ahead. Yes, sir. Good afternoon. Two questions. First on North America. In the interim report, you mentioned the solid performance in the oil and gas vertical? Should we read it as a stable year on year or did you see continued growth in that part of the North American business? And then a follow-up on EMEA, your U. S. Peer that you reported today, mentioned a positive impact from Brexit as the customers ordered, and carried higher than normal levels of inventory. Just to confirm that you did not see something similar. Thank you. Maybe I take the last one first. And obviously, we could just think about our business, but not really about reporting, of our competitors. Our U. K. Business is doing good. I wouldn't attribute it, to a specific act, so Yeah. I can't guess. Yeah. I think you would, I'm just gonna unbox it. I think if you look at my, in the current situation where it's just sort of unclear what's going to happen, and you take the the lens of our our supply chain, in terms of customer ordering patterns, it's it's really would be very unusual for me to say that there's been an obvious improvement for otherwise. In terms of oil and gas, it would be affected that oil and gas business is in line with our expectations. I'm not moving forward to getting it right, but nevertheless stable business. Okay. Thank you. The next question is from Mark Maja Bader Helvea. Your line is now open. Please go ahead. Yeah. Good afternoon, gentlemen. Only one question we heard from the companies that they all see ongoing destocking. I know this is not at risk for you, but, it might indicate that the underlying demand might make post in the second quarter. So my question is, as to fire your business and also now going into April, which looks pretty good. Has developed differently than you have expected at the beginning of the year. Well, is there any kind of regions or end market to check with that. Thank you. I would say that, generally speaking, we're not normally we're not normally affected by destocking the relatively small quantities at least by customers. However, what I would say is that certainly in the European space, the data being more cautious approach to purchasing, and what I what I believe we see now is actually in play increasing demand in industrial chemicals, particularly which would suggest to me that, that period is now 22nd. I I wouldn't say that we have a destocking scenario, that I would recognize. Okay. Thank you. A question. Okay, ladies and gentlemen, it would appear for no more questions. So we'd like to thank you very much for the time you spent with us today. Oh, sorry. Maybe for one more. Yes. I do have a couple of questions from isha Sharma. Mine's first. Your line is now open. Please go ahead. Thank you. I'm sorry. I guess you missed my question on LatAm. I just wanted to ask you what drove the organic growth in Vitya in LatAm, and how do you your competitive space developing in the US currently. Right. Okay. Well, so, yeah, I I do apologize. In terms of, Latin America, we saw, a very good performance in Colombia, and Brazil during the quarter. It's also fair to say that our Mexican Mexican business, which is flat in the quarter is also showing signs of, an improvement, going forward. Therefore, I think, yeah, in structural comparison terms that we we're pretty much, in a good position, say, in the major markets of Colombia and Brazil, in particular, with the good return in Mexico, the rest of the, the region relatively in line with expectations. And our competitive position in North America and I'm I'm surprised what evidence to to to go through some details. We often have people, from our competitors on the call, actually. I'm not sure if you're out there listening. I'm with the, excuse me, no. We, clearly, over there is a competitive situation in North America, then everyone is aware of the consolidation that's currently North America, which is, provides, and charging them a fair bit of concern. So, I don't think, I'm not going to comment more than that. Okay. Thank you very much. Okay. I think, Patrick, it comes to the end of the the questions that have been asked. So, thank you so much for your time, for spending your time with us this afternoon. And I think we can close the call of our points. Thank you very much. Ladies and gentlemen, thank you for your attendance. This call has been concluded since you may disconnect.