Dear ladies and gentlemen, welcome to the Q1 2019 results call of Brenntag AG. At our customers' 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. If any participants have difficulties hearing the conference, please press star key, followed by zero on your telephone for operator assistance. May I now hand you over to Steven Holland, who will lead you through this conference. Please go ahead, sir.
Thank you very much, and welcome, ladies and gentlemen. Thank you for dialing in. We actually speaking from a slightly different room today because we're having some feedback problems from our last call. If you have any difficulties hearing us, we'd be very grateful if you'd let our investor relations people know after the call. That would be very helpful. I'm here today with Guillaume Laurent, CFO. As always, we're happy to answer your questions after the presentation. Let me start with the highlights for the quarter. Operating gross profit rose by 4.4% to EUR 688 million. This reflects some organic growth in our business as well as a positive contribution from acquisitions. Operating EBITDA amounted to EUR 238 million, an increase of 12% on an FX-adjusted basis.
In comparison with this last year's Operating EBITDA is impacted by the first application of the new IFRS accounting standards on leases. We will, of course, provide further details on that later on. Cash flow increased by EUR 138 million and amounted to EUR 166 million this quarter. Three of our four regions delivered organic EBITDA growth in Q1 results. North America, Asia Pacific, and quite good results, and we were particularly pleased with the performance in Latin America. On the other hand, our EMEA region faced a particularly challenging environment. As expected, the weakening trend in the European business environment that we observed towards the end of 2018 continued into the new year. Europe, in particular, faced some very challenging economic conditions in Q1.
We continued to execute our M&A strategy and closed two acquisitions in North America and one in Asia Pacific. Our company Operating EBITDA bridge. In Q1, we had a positive effect from FX translation of EUR 7 million. Acquisitions contributed EUR 6 million in the reporting period. This number is net of the Operating EBITDA associated with the Biosector business, which we sold at the end of 2018. The application of the new accounting standards on leases resulting in a positive effect on the Operating EBITDA of EUR 27 million for the group. In EMEA, we reported negative organic growth of 10% against a strong Q1 last year. On the positive side, North America, Asia Pacific showed organic growth of 2%, and Latin America reported a growth of 7%. We closed, of course, with a net Operating EBITDA of almost EUR 239 million.
Into the EMEA region. As mentioned already, the weakening of the macroeconomic conditions in the region continued in the first quarter of 2019. We've indicated that before, so it did not come as a complete surprise. In this challenging environment, we managed to maintain gross profit on last year's level. We had a good start in the last year, reporting 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. This reflects cost increases, which we are currently seeing in some areas of our cost base. The new accounting standard on leases has an effect of EUR 10 million on Operating EBITDA for the EMEA region. North America reported good earnings results in the generally positive macroeconomic environment.
The operating gross profit grew by 5.5%, which was also supported by contributions from our acquisitions. We do see good demand across a broad customer base in North America. The effect of the application of the accounting standards amounted to EUR 13 million in the region. In total, Operating EBITDA grew by 18% with 2% on an organic basis, which again, is a good performance for the region. As I said, against a very high comparable in the first quarter of 2018. In Latin America. Latin America as a region remains quite challenging with the gross production in Latin America contracting by nearly 4%. Despite these headwinds, we achieved a very good result in the region and continued our positive path we started in the second half of 2018. Operating gross profit grew by almost 9%.
Operating EBITDA by more than 4%. The effect of IFRS 16 at around about EUR 2 million in the region. Although there's still quite a lot of volatility in the region, these results underline that we're well-positioned in our Latin American business. Going to Asia Pacific. Business conditions in our Asia Pacific operation remained positive, but it's more complex, particularly in China. The region reported a gross profit growth of 18%, which is mostly attributable to organic growth, and the contributions from acquired businesses. In China, we faced higher logistics costs because we're currently operating a somewhat suboptimal system in terms of infrastructure as we build new facilities. We are aware that one of the new facilities will probably be licensed within about three months' time.
The region reported growth of Operating EBITDA of around about 18%, which is also driven by initial application of the new accounting standards. The effect amounts to about EUR 2 million in the quarter. Into our recent acquisitions. We've had three transactions in the last quarter, two in North America and one in Asia Pacific. In the U.S., we finalized the acquisition of Reeder Distribution and New England Resins & Pigments Corporation. Both acquisitions help to consolidate the market and expand our products and services portfolio. Reeder is an attractive addition to our lubricants business, and New England Resins & Pigments Corporation, an addition to our construction additives industries. We also agreed on a joint venture to acquire 51% stake in Tee Hai Chem, based in Singapore. Tee Hai is a specialty chemistry distributor focused on products in the Life Sciences area, electronics, research, and diagnostics.
They are the market leader in Singapore and Southeast Asia. This joint venture allows us to expand in a very attractive industry group and enhance our customer and supplier relationships in the region. The company generated EUR 22 million gross profits in 2018. Over to Guillaume.
Thank you, Steve. Good afternoon. As always, I would like to talk 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 EUR 3,182,000,000. 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 FX adjusted basis. Operating EBITDA for the group grew by 12% to EUR 238.8 million. 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 by the initial application of IFRS 16. We'll provide more disclosure, due to the relevance of the item on IFRS 16, on the subsequent page 12.
Obviously IFRS 16 refers to the new accounting standard for rent and leases. We have many rent and lease agreements in our company. In total here, we reviewed about 6,500 contracts globally. Through the first quarter, an amount of about EUR 27 million was reclassified. Operating EBITDA increased by that amount. In our financial reporting package that you can download from the internet, you will also see a split of the EUR 27 million into the different segments. As a further consequence of the IFRS 16 application, the depreciation increased by EUR 26 million. Interest expenses increased by EUR 3 million. Earnings per share were only marginally impacted.
Due to the capitalization of lease contracts on the balance sheet, balance sheet does now reflect right-of-use assets in an amount of EUR 376 million. The balance sheet does also reflect the corresponding liability for financing in an amount of EUR 381 million. With that, I would move to page 13, so to the income statement below EBITDA. The only noteworthy change to this part of the income statement comes in the depreciation. The depreciation in the first quarter 2019 amounted to EUR 58 million and that compares to EUR 28 million a year ago, mainly due to the new accounting standard for leases. The financial result amounted to a net expense of EUR 25 million. The tax rate for the first quarter that we reported was 26.5%. Earnings per share stood at EUR 0.68 on par with the earnings per share in the first quarter 2018.
Moving to the cash flow statement on page 14. In the first quarter, we reported an operating cash inflow of EUR 161 million. A significant improvement compared to previous year's quarter, having reported a negative cash flow of EUR 12 million. The improvement is above all attributable to a clearly lower outflow for working capital. Speaking about the investment and financing cash flow, CapEx for the first quarter was on last year's level. Far this year we spent around EUR 38 million for acquisitions. As a consequence of IFRS 16, in the financing cash flow, the line repayments of 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 EUR 1.7 billion. 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 applying the new accounting standard on leases. The timeline you see is therefore consistent. Trade working capital at the quarter end amounted to EUR 1.86 billion. A moderate increase over the working capital at year-end 2018. Working capital turnover stood at 6.9 times in the first quarter. Coming to my last slide, to the free cash flow. Most of the lease payments are not included in Operating EBITDA anymore, obviously they remain a cash outflow. We have therefore adjusted the definition of free cash flow. The corresponding payments are now deducted from the free cash flow in an additional line.
In total, we generated a free cash flow of EUR 166 million in the first quarter, a significant increase compared to last year's first quarter, where we reported a cash flow, apologies, of EUR 28 million. Strong growth is primarily due to the lower increase in working capital and also reflects the generally positive business development. With this, I will hand it back to Steve.
Thank you, Guillaume. I'd like to start with current trading and then address the outlook for the year going ahead. I'll take you through the gross profit for working day numbers. In January, the growth was 3.9%, which is 1.3% on an organic basis. In February, the growth was 5.3%, 2.7% organically. In March, the growth was 4.8%, 1.9% organically. In April, the growth was 5.6% and 3% on an organic basis. In addition to that, we did actually announce in September last year on our capital markets day, that we would be creating a Food & Nutrition division. This division actually started operating in its own right from the first quarter.
I can share with you the gross profits 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. Turning to the outlook, the first quarter was expected to be a soft start for the year. We saw something of a macroeconomic condition in many countries around the globe, which was particularly visible in the Oil & Gas, and we've already executed a number of actions to improve the outlook for the full year. We confirm the outlook for the full year. For Operating EBITDA, we continue to expect growth between 3% and 7% for the full year 2019 on an FX-adjusted basis and including acquisitions. Most of this growth is understood to be on Frozen GAAP.
The growth in the first quarter is based on a comparable basis, with a very good first half in 2018 and comparables in the half in 2019 are therefore really quite challenging. This trend will reverse in the half 2 2019. Our outlook assumes that the growth rates will benefit from that. Of course, provided there was no further softening of the macroeconomic environment going forward. In terms of M&A, we continue to pursue our strategy. Currently, we are working on a number of interesting deals. Overall, we're satisfied with our recent acquisitions. We're now happy to take your questions.
Ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question has answered before it is your turn to speak, you can dial zero two to cancel your question. If you are using speaker equipment today, please lift the 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 to you on Europe, if I can. On that weak gross profit trend, were you surprised at all by how much clients kind of cut back on ordering? Can you highlight which areas or countries were the weakest in Q1? Secondly, on the cost base in EMEA. Very surprised to see that it was still up 4% in Q1, despite knowing you were heading into a tough macro environment. Are there any actions planned to mitigate that profit decline in Q2? Maybe if I pose to you on Europe first, I'll come back with a third.
Sure. As far as Europe is concerned, the two principal markets which were probably hit hardest, from a Brenntag perspective, were France and Germany. I would probably focus more on Germany than France at this stage for us. France was subject to a reorganization of the business during the course of 2018, which currently I'm touching down from that. In Germany, we saw a pretty significant fall away in areas which I would regard as being resins and plastics. This is pretty much to the extent associated with the extended supply chain in the car industry. That's quite a big business for Brenntag in Germany. That was pretty strongly affected in the first quarter 2019. We did actually hear that some of the small companies were going on short time. Those involved in the extended supply chain to the car industry.
Having said that, we now do see some recovery in the demand for products into that sector, certainly April appears to have a reverse direction as far as demand in that particular sector is concerned. It appears to be the worst may well be over as far as the practice concerned in the German market. In terms of cost base, yes, clearly there's a problem with increasing cost. 1% of that cost increases is associated with transport. You may well recall that there's several effects on transport during the course of 2018, which related to driver shortages, overall cost increases due to certain effects in the German area, particularly the Rhine and what have you.
To be fair, the actual PPL rates in Germany just have not come back at a rate that you might have expected them to come back with the slowdown in the macroeconomic environment. That has now changed, we now do see that the PPL market for products and service we acquire in the European region has actually come back to where we're negotiating contracts at lower rates. In addition to that, we have a new operations director in the European region, which joined from the U.K., his focus has been principally around transport utilizations in Germany and France. We have seen a significant lift in utilization rates in those two countries through the course of the Q1, which we expect to roll through into Q2 and beyond.
There are some other items of cost in Europe which are associated with the development of new IT systems, which are a bit expensive in the first quarter and a little bit into the second quarter, which may not then not repeat in the rest of the year. That basically addresses the areas of cost in Europe.
Thank you. That's very comprehensive. If I can have my third question in a different area. It's actually on working capital. Just any comment on the notable slowdown in working capital terms in the first quarter? I don't know if that's to do with maybe that slowing environment in Europe or anything else you can highlight.
Certainly, Rory, the working capital term is not satisfying as it is slightly down from the end of last year. We have to put more energy into improving working capital term going forward. I couldn't point out any particular development which explains the slight decrease from the year-end number.
Do you think that's being driven by customers or suppliers? Anything to help understand why it's changed, because it's fallen by 0.5 terms year-over-year, which is quite the drop.
If I could just interject here. I think it's fair to say that if you look around the world, there's generally been more pressure on payment terms with customers. In terms of manufacturing base and suppliers to Brenntag, we've not seen a level of flexibility in payment terms. I think this is certainly an area which we are looking at very closely in terms of making sure that if there is any move out in terms of payment terms to customers, that these are reflected by the similar terms available to Brenntag on the purchasing side. There's some work being done there, and we expect that to be neutral at the very best, or at the very least neutral to Brenntag going forward.
Understood. Again, thank you very much
The next question is from Tom Dawson. Go ahead. Your line is now open. Please go ahead.
Hi. Morning, guys. Yeah, Tom Dawson from Berenberg here. I just had another follow-up question slightly in relation to working capital just on chemical prices. I know they're not really relevant from a sort of top-line gross profit perspective. In terms of the revenue trajectory and 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 slightly surprised by that. I wasn't expecting such a strong performance. I'm just wondering why that hasn't fed through, I suppose, into working capital when I'm looking at the working capital performance in the cash flow statement. Why didn't those higher sales prices hit the working capital in Q1?
Tom, hi, it's Georg. Yes, indeed, we make the comment about the pricing element of the sales increase in Europe. I think the calibration from my perspective is overall, Europe has seen a very limited price increase. With the challenges, as discussed a little earlier, in France and particularly in the German industry, it more speaks to a little bit of volume weakness.
Yeah. Perhaps I could try and clarify for you a little bit further on this one. Certainly, when you have an economic downturn, as we saw in the European region, what you tend to find is that the higher volume, lower value products are the ones that start to decrease first. The average selling price over the rest of the mix tends to be higher.
Okay, great. Thank you. Just I just had one follow-up question just on the regional divisional run through. You alluded to tougher comp effects in Q1 a few times. Just looking forward into Q2, and I know the April pickup in organic GP per working day looks promising, but I guess April looks like it was probably a slightly softer comp and then comps get slightly more challenging by the looks of it in May, June. How are we thinking about organic GP growth at a group level going into Q2, just in light of the comps you're facing?
Well, I'm not sure I agree with you on the April number being a lighter comp. I think it was pretty strong performance in April last year. I think I would characterize April as being a good month for the business in terms of we see a substantial improvement in the organic growth, and we saw that substantial improvement in Europe.
Okay, great. Thank you.
The next question is from Chetan Udeshi, J.P. Morgan. Your line is now open. Please go ahead.
Yeah. Hi. Thanks. Just first one is just on clarification. Do you see any year-on-year impact from any working number of business days delta in Q1 or Q2 this year versus last year? That's number one question. Number two is more of a structural question. If I were to strip out your IFRS 16 benefit in Q1, your conversion ratio has dropped by 150 basis points. This has been a sort of a steady grind down over the last five years. You can also see that when you compare your gross profit per day, organic growth, you mentioned about 2% on average for Q1, but then your EBITDA is down almost 4% organically. 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 a pricing pressure?
Is it a cost management issue? What are you doing to address that? Thank you.
Well, conversion ratios are obviously a focus of the business have been for many years. We've been through this on more than one occasion with investors and analysts. The conversion ratio, I think certainly Q1 is under some pressure, particularly from a European perspective. We saw clearly a business that was operating at a lower rate. You can all see that there's been a 4% increase in operating costs for the European base, which has been equally a negative effect on conversion ratios. We have taken action to correct the actually increasing operating costs in the European region, and we should see that flow through into the second quarter and certainly for the rest of the year.
There is a balance if you're going to exactly back over five years, please remember that we do actually acquire businesses in Brenntag which don't necessarily have the same conversion ratio as a group as a whole. I would look at things like the lubricants business and other parts of the business where conversion ratios are in the 30s, not in the 40s as they are in North America. There has to be a balance to be made there. Directionally, Europe has pulled it back in the quarter, and clearly, we don't accept that as a set position going forward, and we are taking steps to correct that.
On working days?
No relevant working day difference between this year and previous year, neither in Q1 nor in Q2.
Thank you.
The next question is from Lawrence Alexander.
Hi, guys. This is Lawrence Alexander. How are you?
Hi, Lawrence.
Could you tell us what % of sales are conducted via online portals, and is there any difference in margins by that method?
It obviously is pretty tiny at the moment. We are rolling out the online business ourselves, along with our competitors. Everybody in the market has an online offering and it's usually ones and twos and threes %. Very, very low take-up. I think this is something we could look at maybe towards the end of this year to see what adoption rates are going to be. Ourselves and our competitors are offering the ability for customers to go online. The conversion hasn't been overwhelming at this stage.
Okay. What % of volume or sales
If any, negative working capital.
Very negative working capital. There are a few smaller sections of business where we have a payment term differential in our favor, but that's a relatively tiny piece. It's not a relevant number.
Okay.
That's something I need to find. There's only a tiny more business in that area, not really.
Well, it's de minimis. That's okay. Thank you.
It doesn't matter.
Thank you very much.
The next question is from Steven Golden, Deutsche Bank. Your line is now open. Please go ahead.
Hello there. Thanks for taking my question. I just wanted to touch on 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 versus industrial, that'd be a very helpful thing.
Well, I think I just gave you the number on Food & Nutrition, which it's the first quarter we've measured it as a separate business division. Its GP growth was 6% organic. Versus industrial's pretty flat in terms of organic growth overall. I think we are certainly seeing higher levels of growth in the specialty business. At this stage, Food & Nutrition is one I could actually separate for you in a meaningful way, and I don't want to be drawn into making estimates and guesses. We will give you that number now going forward. I know lots of people were a little unhappy we didn't provide Food & Nutrition reporting at our investor day. We're going to give you it. I'd say, I think this is an area which we will expect to see grow faster in the future.
Thanks a lot.
The next question is from Knut-Ivar , Pareto. Your line is now open. Please go ahead.
Good afternoon. Thank you for taking my question. Two, actually. There are two questions. First on acquisitions. With [Marlin], you did the third acquisition in the U.S. My question would be whether it is 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? Second question is, in the confidential statement, you said that you would spend EUR 38 million on acquisition. Just for clarification, does it also include your acquisition in Singapore? Thanks.
Just coming to your question on North America. It is certainly the case that we are very actioning acquisitions in North America. We have a strong market position, but nevertheless, there are still areas of North America where we could be stronger in terms of market share. Therefore, we are always looking at opportunities to increase our market penetration in North America, both from an industrial chemicals point of view and from a specialty point of view. Fair to say that we are actively seeking to grow our market position in North America as a market consultant going forward into 2019 and 2020.
The Singapore acquisition of Tee Hai Chem closed end of April. You will see the cash out for that in the Q2 statement. It is not part of the EUR 38.
Okay, thanks.
The next question is from Isha Sharma from MainFirst. Your line is now open. Please go ahead.
Hi, good afternoon. Thanks for taking my question. The first one is that we have seen a significant improvement in the free cash flow. However, when we look at the net debt, it has declined only by EUR 30 million. Was that a strategic decision, and what drove that? My second question is around LATAM. We saw in Operating EBITDA, with an organic growth of around 12%. What drove this, and is this run rate that we should see for the next quarters? Very last one, a little bit on your competition space in the U.S. The biggest competitor that you have, they have also reported strong set of numbers, and then we see another competitor in the specialty ingredients business talking about having a bigger footprint in the U.S. How do you see the competition space developing? Thanks a lot.
Well, I'm not quite sure which competitor you're referring to with a strong set of numbers, to be honest. Maybe that's an earlier analysis I should do later.
Maybe I take the one on the net debt. Typically, you see a seasonal cash outflow in Q1, and we had a very limited seasonal outflow this year. In that sense, indeed, the cash flow is much better this year than it was previous year, but you wouldn't necessarily draw the conclusion from that not to see a net debt increase in Q1. On top of that, there is also a little bit of a translation through part of the debt being US dollar, and there is the acquisition payment. Struggling a little with the answer, obviously, but it's a little counterintuitive. It's not necessarily that we would have expected different from what we report.
Right. Thanks.
The next question is from Peter Olofsen, 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 & Gas vertical. Should we read it as stable year-over-year? Or did you see continued growth in that part of the North American business? Then a follow-up on EMEA. Your U.S. peer that reported today mentioned a positive impact from Brexit as 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. Obviously, we can speak 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 exit effect though.
I think just on Brexit, I think if you look at the current situation where it's certainly unclear what's going to happen and you take the length of our supply chain in terms of customers ordering patterns, it'd be very unusual for me to say that there's been an obvious improvement or otherwise. In terms of Oil & Gas, it would be fair to say that Oil & Gas business is in line with our expectations, not moving forward at a significant rate, but nevertheless, a stable business.
Okay, thank you.
The next question is from Marcus Meyer of Hauck & Aufhäuser. The line is now open. Please go ahead.
Yeah, good afternoon, gentlemen. Only one question. We heard from chemical companies that they all see ongoing destocking. I know destocking is not a risk for you, but it might indicate that the underlying demand might weaker also in the second quarter. My question is, has so far your business and also now going into April, which looks pretty good, has developed differently than you were expecting at the beginning of the year? Were there any kind of regions or end markets which have been better or worse than expected? Thank you.
I would say that generally speaking, we're not normally affected by destocking due to the relatively small quantity that we supply customers. However, what I would say is that certainly in the European space, there's clearly been a more cautious approach to purchasing. What I believe we see now is actually an increase in demand in industrial chemicals particularly, which would suggest to me that period is now coming to an end. I wouldn't say that we have a destocking scenario that I would recognize.
Okay, thank you.
There are currently no more questions. As a reminder, if you would like to ask a question, please press zero one on your telephone keypad now.
Okay, ladies and gentlemen, it would appear we've no more questions. We'd like to thank you very much for the time you spent with us today. Oh, sorry, maybe we've got one more.
Yes, we do have a follow-up question from Isha Sharma, MainFirst. 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 EBITDA in LATAM, and how do you see your competitive space developing in the U.S. currently?
Right. Okay. Well, 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 business, which was relatively flat in the quarter, is also showing signs of improvement going forward. I think in strict comparison terms that we're pretty much in a good position in the major markets of Colombia and Brazil, particularly with good recovery in Mexico. The rest of the region are relatively in line with expectations. On our competitive position in North America, I'm sometimes hesitant 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, actually, no.
Clearly, there is a competitive situation in North America, and everyone is aware of the consolidation that's going on in North America, which provides a challenging environment for everybody concerned. I don't think I can really comment more than that.
Okay, thanks very much.
Okay. I think we've actually come to the end of the questions that have been asked. Thank you so much for spending your time with us this afternoon. I think we can 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.