Dear ladies and gentlemen, welcome to the full year 2018 results call of Brenntag AG. At our customers' request, this conference will be recorded. As a reminder, our participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star followed by zero on your telephone for operator assistance. I now hand you over to Steven Holland, who will lead you through this conference. Please go ahead, sir.
Thank you very much, welcome everybody to the results call for full year 2018. As usual, I am here with my CFO, Georg Müller. We will walk you through the presentation and after that answer your questions. 2018 was a successful year for our company. Brenntag reached all-time highs for some of the most important KPIs for operating gross profits and Operating EBITDA. Gross profit amounted to EUR 2.66 billion, which means our tax adjusted growth of 7.5%. EBITDA growth continued stronger with 8.4%, we figured our margin almost EUR 876 million in 2018. Our highlight, of course, was mainly coming from our organic business development. We also did a lot of hard work and recruits people around the world. In the various programs and changes in the markets this year, the very few donations also contributed significantly.
As we highlight in this next slide, Steve brings up the environment has become more challenging, which was particularly noticeable in our EMEA region. Of course, it benefited from the business development in the amount of EUR 125 million. In 2018, we again further accelerated our M&A strategy and executed a number of very promising acquisitions around the world, on top of which those six transactions with a combined enterprise value of EUR 265 million. The earnings per share for the group increased by 27% in 2018, amounted to EUR 2.98, the highest value in the history of the company by far. We will suggest a dividend in June, a payout dividend of EUR 1.2 per share. It will represent an increase of 9.1% compared to last year's dividend. Since our IPO in 2010, this is the eighth consecutive increase of dividend, it underlines the commitment to our shareholders.
I'd like to go through a couple of initiatives which the company's currently progressing, which will be of interest to investors alike. We continually look at the development of our business model and the shaping of Brenntag for the future. There are a couple of strategic programs in place with a global focus. Most notably, the repositioning of our Food & Nutrition business, which I'll talk about in a few moments, digitization. Digitization, which we call DTB in Brenntag, as called it in our cascade. We started our journey about two years ago, we're making very good progress. DTB develops a customer interface with Brenntag called Brenntag Connect, also benefiting a lot now is we also provide transparency to internal processes where we can see a chemical pricing on a worldwide basis from our suppliers.
It's a very important initiative with our company, and we see the pace gathering with our digital program and digital offering. Coming to Food & Nutrition. Some of you may well remember our Capital Markets Day. We actually adjusted our approach to Food & Nutrition. This market transition is very associated with trends which are such as graying life expectancy, and growth of the world population. That our improving nutrition transition in the industry, a highly attractive growth for many consumers are looking for nutrients now like fat reduction and low sugar, et cetera. Our customers include beverage producers and other people support with their food requirements, and Brenntag is in an ideal position to support them. We've changed our approach as an organization within our Food & Nutrition business. We now follow a more global approach to research, strategy, marketing, procurement, and technology.
Our sales support people are now 100% dedicated to the Food & Nutrition industry. With the new organization, we have a more agile and faster decision-making process, which has been making growth and investment into the food industry. The Food & Nutrition team now has its own branding in order to better communicate our messages and value to customers. We strongly believe in the growth of this business, and we therefore also focus on acquisition in the Food & Nutrition space. Go to the next slide. It says that Brenntag is a resilient company. I think this won't work and go through this because there's a number of new investors for Brenntag. Perhaps this is a message we should emphasize a bit more. There's a particular concern about stability in the chemical sector in general.
I'm trying to emphasize that Brenntag is a chemical distributor and thus less exposed to cycles in the chemical industry. As managed to grow, and we watch me reiterate the resilient nature of our company. Our high diversification is one of the most important factors in this effect. We're actually active in over 70 countries around the world. We do not have a meaningful exposure to a single customer base. Our biggest industry accounts for 10% of our personal business. Talking about any customers and products, you will hardly find any company more diversified than ourselves. Our business is based on small orders sizes, and therefore we do not depend on single large deliveries. We are selling chemicals but passing through chemical prices, that our profitability is generally not impacted by cost price volatility you can see in the chemical industry.
In addition to this, our unique approach supports the resilient nature of Brenntag. We're focused on small and mid-size acquisitions, which are value accretive from the very beginning. If you look at the last 14 years, you will only find one year where we had a marginal decline in our Operating EBITDA. That was in 2009, and our EBITDA declined by less than 1%. That's a lot. Luckily, it has less than the countercyclical cash flow characteristic of our business. When volumes fall due to recession environments and prices, EBITDA also comes down, therefore we release working capital at Brenntag and thus resulting in cash inflow. In 2019, for example, we had an inflow of nearly EUR 240 million cash during that period. That was a business that was significantly smaller than we are today.
Much to today, and moving to the next slide, look at the Operating EBITDA bridge. In 2017, we reported an Operating EBITDA of EUR 836 million. We managed to build that to EUR 876 million in 2018. The growth can be broken down into the following components, which are shown on the bridge in this slide. The growth in Operating EBITDA was achieved against a strong headwind from foreign exchange translation, which amounted to EUR 28 million for the full year. We closed a number of value accretive acquisitions in 2017 and 2018. They still probably contributed an incremental EBITDA of EUR 4 million for the year 2018. Here's our organic business development. Our EMEA region had a good start to the year with clear organic growth. Towards the end of the year, we experienced softer and more challenging environment but we ended the year with organic growth of 3%.
Our North America region posted very strong results throughout the year and subsequently achieved an organic growth of 11%, which is a significant increase rate. I'm very pleased with this, and obviously the management team have made a great job during the course of 2018. Latin America, we achieved an organic growth of around 2%. This is despite a volatile and challenging environment, and again speaks to the resilience of our business model. In Asia, we reported rather sluggish organic development during the course of the year. The overall performance of the group led to an Operating EBITDA of EUR 830 million, which translates into organic growth of about 5% for the group as a whole. We delivered a strong growth in an environment that has become more challenging into the course of the year. On the next slide, I will explain the development of the regions in more detail.
In EMEA, we reported strong organic growth for the first half of the year. Our initiatives to strengthen business continue to pay off. In addition to numerous growth initiatives, we have a global sourcing program and an EMEA-wide efficiency improvement program. Last year, we saw a number of companies reporting weaker results and associated divisions interested in Q3 and Q4, such as chemicals and automotive. In North America, in 2018, our North American region posted very strong results throughout the year. In terms of the gross profit grew by 8.9% and EBITDA by 11.2%. This is all organic. Growth was broad based across most of the region, benefiting from the industry. On the cost side, we saw increasing inflationary pressure. This was most pronounced in transport costs, but we managed to mitigate some of those costs by applying surcharges.
In Latin America, our North American region reported an organic growth in both gross profit and EBITDA. We operate in an environment that has proved to be challenging in many respects, including declining regional production and, of course, a political landscape that can be characterized as somewhat difficult from time to time. However, I'm happy with the way we managed this result and underlined our resiliency and our ability to operate in more difficult circumstances. Latin America, both Brazil and Colombia were two contributors that had above average contribution. Brenntag is a market leader in the region, and as such, ideally positioned to take advantage of growth opportunities and indeed we've seen a strong start to the current year. Asia Pacific, we reported good growth, gross profit and EBITDA. In that segment, you begin to see a weakening trend in the course of the year.
Overall, the organic EBITDA was sluggish in 2018, which can be attributed to some items in the cost base. For example, in China, we are currently facing higher logistics costs as we are moving our warehouses and our operations. However, this will be only temporary. From a demand point of view, we have seen a mixed picture across the region. While China still shows healthy demand, albeit at a lower rate. Positive contributions came from our acquisitions, most notably from Raj India. Latin America, Asia Pacific has grown strongly over the years, organically and through acquisitions. Asia Pacific is a region with the highest long-term growth potential, and we will be making further investments in the region, recognizing this is the world's largest market.
To date, we are the only global distributor with meaningful presence in the region, and we will drive further growth through increased market share and acquisitions. Turning to now Q4. Next slide provides sales and EBITDA bridge for the fourth quarter. As I said, there's no effect from foreign exchange translation in the quarter. Our acquisitions contributed EUR 8 million of EBITDA. In EMEA, the organic growth was slightly negative in the fourth quarter, which is attributable to the formulation challenges that we faced there. North America region finished the year with another very good quarter and organic growth of around 14% for EBITDA. Latin America was on much the same level. In Asia Pacific, comparing to EBITDA comp last year, the growth rate is shown here is rather distorted. Even at that aside, we feel the performance in Asia Pacific is pretty good.
The organic EBITDA growth in Q4 for the group was 2%. Coming to acquisitions. In 2018, we achieved EBITDA almost last year for a number of interesting acquisitions. In EMEA, we closed a few acquisitions, including Portal in Belgium. We also signed an agreement to acquire the Desbro Group in East Africa. This deal will close during the course of 2019. At the end of the year, we sold our Biosector business in Denmark. This business was a non-core business for us, and we initiated a sales process in 2017. We finally sold the business to Croda Group for an enterprise value of EUR 17 million. In North America, we were active in Canada and acquired two businesses, Canada Colors, which is the large one, and it will strengthen our presence in the Canadian market significantly.
In addition to its relationships with customers and suppliers, it also comes with an attractive warehouse and logistics infrastructure. In Chile, it was a nice bolt-on acquisition in our business in Colombia. In Asia Pacific, we were delighted to close the Raj transaction, where we acquired a 65% trend in the country in India. It's a very strong segment for Brenntag in the highly attractive Indian market. With this acquisition, we have significantly delivered market access and expertise in the country. After joint ownership for the last couple of years, we will ultimately take over the entire business from the selling partner. Now back to Hans for the review.
Thank you, Steve. Good afternoon. I would like to walk you through the details of our financials to provide appropriate transparency and to provide a platform for your questions later in this call. Starting on page 15, our sales amounted to EUR 12.6 billion. Operating gross profit is always more important for us as a distributor than sales figure, totaled EUR 2.66 billion. Like sales and like operating gross profit, also the Operating EBITDA reached new all-time highs for our group, and it amounted to EUR 875.5 million. On all of our KPIs, we report a significant growth, particularly on an organically adjusted basis. I would like to emphasize that most of the growth is attributable to our organic business development. Operating EBITDA actually grew by about 5% organically. Conversion ratio for the group at the year end for the full year was 32.9%, slightly above last year's level.
The next slide, 16, shows the part of the income statement below Operating EBITDA to be transferring from special items. In 2018, we recorded special items in a total positive amount of EUR 17 million. This mainly relates to the successful sale of the Biosector business, where we generated an income of EUR 28 million. The line also includes cost items in relation to our efficiency improvement program in EMEA. In the fourth quarter, we decided to extend the program in order to address the softer results in our EMEA segment in the second half of the year. We reduced the workforce, apologies, the workforce a little stronger than initially expected, and we also made selective changes to the management. When it comes to the further lines of the P&L, there are no major changes for depreciation or amortization compared to previous years.
Depreciation for 2018 amounted to EUR 122 million and amortization amounted to EUR 50 million. With close to EUR 98 million expense, the financial result is on last year's level. In the interest line, there was a benefit from the repayment of our formerly expensive bonds in July. On the other hand, we experienced some higher interest charges from borrowing in countries with relatively high-interest rates like India, like Turkey, like Argentina. Earnings before tax amounted to EUR 674 million, 19% above the figure reported a year earlier. The profit after tax grew even by 28% and amounted to EUR 462 million. In 2018, we record a tax rate of only 26%. This is around 5 percentage points lower than in 2017, and it is mainly attributable to the changes in U.S. taxation. Earnings per share stood at EUR 2.98, strong increase of 27% compared to a year earlier.
I'll skip 17 and move directly into 18. A couple of remarks on the investment and financing cash flow. CapEx amounted to EUR 178 million, in line with the guidance we provided. In 2018, the cash out for purchase prices for acquisitions was EUR 199 million. Main acquisitions that we paid for were Canada Colors and Raj Petro Specialities in India. Investment cash flow also contains the proceed from the Biofex sale in an amount of EUR 68 million. The main item in the financing cash flow is the dividend of EUR 170 million, which we paid out to our shareholders in June. Page 19 gives you an overview of our balance sheet. The total assets of the group amounted to EUR 7.7 billion, up by about EUR 400 million from a year ago. No structural changes to the balance sheet.
The increase of the right positions of the balance sheet results from acquisitions and from organic business development. Looking into indebtedness on page 20, at the end of the year, net debt amounted to EUR 1.760 billion. Leverage ratios stood at two times less, on par with previous year, despite a quite strong acquisition activity. Equity of the group now amounts to EUR 3.3 billion. I'll skip the details on the maturity schedule. Let's take a look into working capital on page 22. Working capital amounted to EUR 1.8 billion at the end of 2018. Compared to the end of 2017, it is an increase, which is to a fair degree driven by higher prices for chemicals. Our typical turnover still is [QTB] under pressure and stands safe at 7.3 times. Free cash flow amounted to EUR 525 million. Free cash flow obviously benefits from the growth in Operating EBITDA.
Working capital helps the improvement of the cash flow in the sense that the payout for working capital was lower in 2018 than the year ago, lower than 2017. CapEx, slightly higher, but in line with our expectations. We will propose to the general shareholder meeting our annual dividend. Page 24 gives you the details based on a profit after tax of EUR 461 million and an earnings per share of EUR 2.98. We will propose to the shareholder meeting in June a dividend of EUR 1.20 per share. This results in a EUR 185 million payout. It implies a payout ratio slightly ahead of 40%. Compared to last year's dividend of EUR 1.10, the proposed dividend represents an increase of 9.1%. With this proposal, we continue our strategy of annual dividend increases. It will be the eighth consecutive dividend increase since the IPO in 2010. Page 25 is a busy chart.
It's on IFRS 16 on the changes to the lease accounting and intended to give you information and guidance on the future treatment of our leases. In 2019, so in the current, just started financial year, we will adopt the new leasing standard, IFRS 16. We have provided special leasing agreements in our international group. In total, we actually reviewed a significant number of 6,500 leasing contracts. In 2018, the total rental and lease expenses under both standards were EUR 144 million. This amount in 2018 was included in our Operating EBITDA as an expense item. With the adoption of IFRS 16, most of these contracts will have to be reclassified and presented as if we would have bought the respective assets and financed them. Based on the 2018 data, we currently expect that an amount of about EUR 100 million will drop out of the operating expense line.
Operating EBITDA will increase by a corresponding amount. The P&L effect of the reclassified contracts will in future be shown in depreciation and in interest expense. Earnings per share should only be impacted to a very minor extent following the reclassification. Due to the capitalization of lease contracts, the balance sheet will reflect the liabilities and will reflect the assets. The initial impact, which we already disclosed in our annual report that we released today, will be around EUR 350 million on the balance sheet. Please be aware this is meant as first guidance. We will provide further information and more details in the course of 2019. Our 2019 quarterly and annual financial statements will include the reconciliation information, which will allow you to better understand and track these effects.
As our main KPI Operating EBITDA from first quarter 2019 onwards will include the effects I just discussed, we would suggest that the market, that the sell side, start phasing their expectations on an EBITDA number that includes the reclassification please. Is that a relatively complicated explanation on leases? I'll hand it back to Steve for our outlook statement.
Thank you, Georg. Not a bad start of the current trading and just the outlook for the year. I'll now take you through the growth topics for working day on a monthly basis. I'll speak slowly with it, I know some of you will write this down. In October, growth was 4.9%, 1% organic. In November, the growth was 5%, 1.3% organic. December was 7.3%, 3.2% organic. In January, the growth was 2.9%, 1.3% organic. In February, growth was 5% with 2.5% organic. Coming to the outlook.
As you will know from my Q3 reporting last year, the general market in EMEA was expected to be weaker, and this has proved to be the case towards the end of last year, and it continues into the new year. We are, however, convinced that we can grow our business in 2019, despite a more difficult environment. Based on this assessment, we are taking a more cautious approach for the rest of the year 2019, and we expect growth to be more pronounced in Q3 and Q4. In Operating EBITDA, we're expecting a growth range between 3% and 7% in 2019. Excuse me. This is understood to be on constant currency basis and pre-acquisition. Furthermore, it is based on the current accounting standards. It does not take into account the impact of the current adoption of the lease standard IFRS 16, so-called frozen GAAP.
The business in North America and Latin America have had a good start, and we maintain our positive view for the region. With regards to Asia Pacific, we expect that they will make a good contribution to the growth of the group's profit. Operations in Russia and China are in advance work phase as we track Mumbai over the next 12 months. The phasing of the growth of the group is expected to be more back-end loaded as a result of a modest first half due to high comps in 2018. In the CapEx in 2019, we expect to spend around about EUR 195 million CapEx in our existing business. We'd like to see a record number of 220, but we expect compensation from the Chinese authorities of around EUR 25 million for the two distribution sites in China that we are moving.
Coming to reviewing, as you are aware, the North American market, the chemical distribution is currently undergoing some major changes. We are going to accelerate this consolidation. Brenntag is well positioned in the market, and we have already seen some business by customers or buyers who are reconsidering their current arrangements as a result of potential changes to local supply chains, which is not entirely unexpected. I think with that, Christian, we can open it up for any of your questions.
Ladies and gentlemen, we will now begin our question and answer session. If you have a question for us, 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 is 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. The first question is from Mutlu Gündoğdu of ABN AMRO. Your line is now open. Please go ahead.
Yes, good afternoon, everyone. I have a few questions. First is on the guidance. Can you tell us what would make you either hit the low end or the high end of that range? Is that only macro or are there other factors as well that you should take into account? Secondly, on EMEA, I think Steve, you said something about it, but I missed it. It appears that organic growth, profit growth slowed down to flat growth year-on-year fourth quarter. Can you tell us what drove that slowdown? Then two questions on North America, if I may. First of all, it seems that the organic growth, profit growth accelerated somewhat in the fourth quarter. Can you tell us what the reason was behind that, essentially considering that we heard a lot of weak end markets, particularly typical weak end markets in the fourth quarter.
Positively surprised by that performance. Also on North America, very good cost control, how your conversion margin was up 140 basis points year-on-year. Can you tell us why that was and how sustainable it is? Thanks.
Well, I'm going to the European business. The European business, I think operating in quite a difficult market at the moment. I think anybody who's looking at across, I would say, broad industry groups, we've seen a slowdown in the EMEA region. I think that just carried across really the first quarter. If you look at comparisons, comps were pretty tough for the EMEA region in the first half with Q1, Q2 for that region being very strong. I think there will be a bounce last for the European business in terms of growing more strongly in the second half. I think answering your question, more closely between 3% and 7%. It's obviously a range there for a reason, and I think we're looking, if you look around the world, I think we can see still positive experiences in North America. Positive in Latin America.
Asia Pacific, again, we're expecting organic growth in Asia Pacific. Indeed, surprised from the cost integration we have there. The question is how the European market itself develops over the course of 2019. Certainly, been working very hard to improve our market share where appropriate and how we might increase contribution levels for our European and Middle East and Africa business. It really depends on how well Europe goes. Nevertheless, we have three regions, and we talk about resilience in the business. We have three regions that are looking positive for the group, that's why we're thinking we can do a range of 3% to 7%. I think for North America, because of the trading out of North America, we had a good fourth quarter.
When we look into, certainly, the early trading numbers that we've seen for Q1, fairly enough, Q1 is not over yet, but certainly there doesn't seem to be any slowdown or less of a slowdown on our North American business. It's very much a broad-based approach. At this stage, I can't give you an answer as to why other people may be not doing as well as we are. At this stage, the business is performing well. In terms of the conversion ratio and what we put into the conversion ratio.
I'm not sure. Did we answer your question? Anything else?
No, sorry. You got to the last question on North America. The very good cost control, how your conversion margin was up 140 basis points year-on-year. Just wondering how sustainable that is going forward.
We certainly have, through our organization, including the North American business, a good cost control, and we would expect conversion ratio improvements also in North America going forward. The high improvement you're seeing in Q4 is a little bit due to the year-end volatility, due to the Q4 volatility. You might remember that they always have the one or the other tax man each and every year. It's a positive number. Don't take the latest one trend out of that now.
That's very helpful. Thank you very much.
Maybe I can add a point actually on the European business there. I think the North American business has extremely well in terms of recovering transport costs. It's more difficult in the European region to recover those increased costs. That is more of a challenge, but the North Americans have been good throughout 2018.
Yeah. Thank you very much.
The next question is from Steve Goulden, Deutsche Bank. Your line is now open, please go ahead.
Thanks a lot. Could I just dig into the North American number? Because I think you grew organically in Q4 by about 14%. Could you just give us a bit of a feel for what the underlying drivers were there? Was it volumes? Was it a price? Was it just general macro health, some specialty, or did you maybe win some new contracts within that? Secondly, can you give us a bit more color on how the specialty division has been going recently, and within your guidance, how much of that is being driven by strength and mix improvement in specialty? Third question would just be, You touched before on some points on EMEA restructuring. I was struggling to hear that slightly. If you could give a bit more color there. Sorry, last one, just wanted to ask you on the tax.
The tax rate was lower, I think due to your tax reform. Is the current rate sustainable going forward?
First of all, welcome to this group. You just took over coverage at Deutsche, if I remember correctly. Maybe I don't get your questions in the exact right order, Steven. I'll start off, and then you just jump in with whatever we didn't answer. On EMEA restructuring. We brought it up in explaining the special items below Operating EBITDA, and the special items below Operating EBITDA in Q4 include an expense of cost savings of EUR 11 million. EUR 11 million expense in Q4 for European efficiency measures, which is basically personnel change and personnel reduction measure. Tax rate, 26% for the full year. People are paid one percentage point sustainable going forward. No reason from today's perspective to expect a major change, obviously for the group tax rate in 2019 or beyond.
Good development in the business in North America in Q4 is from our perspective, the continuation of the positive trend that we have seen throughout the North American business for a while now in various customer industries. There's not an outstanding chemo factor. It is a strong achievement by the team, and it's happening in a positive environment in North America. So I think we've answered a number of your questions, but maybe not all of them.
Good development in the business in North America in Q4 is from our perspective, the continuation of the positive trend that we have seen throughout the North American business for a while now in various customer industries. There's not an outstanding chemical factor. It is a strong achievement by the team, and it's happening in a positive environment in North America. I think we've answered a number of your questions, but maybe not all of them.
I'll take this one. Obviously I would touch on the human nutrition business, and that is really targeted at growing the Specialty element of our human nutrition offering. I would say that the overall Specialty business has grown by 2%-3% more than the industrial chemicals business across the patch. How much more of that can be brought in in terms of growth is to be seen. Certainly the reason we've reorganized ourselves is to actually be more attractive to specialty chemical consumers and the specialty chemical manufacturers, which we continue to target, as you might imagine. It's a growing element pathway of the Industrial chemical, and we would, of course, continue to concentrate on that.
At this stage it's probably 2%-3%, but the drive of the business is more fundamental in terms of our broad approach, for example, like North America, across all industry.
Great. Thank you very much.
The next question is from Chetan Udeshi of JPMorgan. Your line is now open, Keith. Go ahead.
Yeah, hi. I was just wondering if you can give us some color around your comment on any sort of effects in North America to participate or benefit from wins or gains in the market share. What sort of benefit are you trying to gain share possibly from the disruption from two of your closest competitors merging there? Second question was, what extent do you see in the oil and gas business in the U.S.? Some of the chemical companies are starting or have started to see a slowdown from oil and gas business in Q4 already. I would be truly helpful if you can give some comment there. The last question is on M&A activity. Firstly, can you give us some color of how much of M&A contribution have you included in your EBITDA constant currency growth guidance?
Secondly, given bigger deals have been sort of announced in the last 6 months, have you seen some more private distributors wanting to talk, are they more approachable in terms of discussing a potential transaction? Thank you.
Well, first one is CapEx North America. There's been consolidation going on in North America. Within our North American business, there are some white spots which would be normally filled in by a combination of capital expenditure and/or acquisition. Where it makes sense, we are minded to do either or in terms of actually capturing opportunities as they present themselves. We're planning additional investment where we feel there's an opportunity to take an increased market share in certain geographical areas where we've not been as present. Equally, we're still focused on M&A as well. I wouldn't say that it's either or, it's more a combination of both. In terms of M&A generally, I think M&A in the current market is very interesting as far as obviously there's some markets are slowing down and the U.K., the U.K. market is an example.
I don't believe that some of the valuations in the private sector are probably caught up with the public sector as of yet. I think we don't see at this stage a tsunami of people coming to the market. It's still relatively muted in that respect. Having said that, we do have a very strong pipeline on M&A. As you know, it was fair to say that things have been strong to achieve this commercial target. We certainly feel confident that we will meet our M&A target for the course of this year.
You also asked the question, you rightly pointed out that the 3%-7% constant currency EBITDA guidance we are giving does include M&A. If you consider the M&A that we already have undertaken, but we also have to consider the disposal of the Biosector business, where we lose a little bit of EBITDA. The net of these effects or the net of M&A and disposal of Biosector is 1.5-2 percentage points. Oil and gas trends, I'm sure you will remember that about 25% of our business in North America, so it's more of the North American business, which is customers in the oil and gas industry. We measure the contribution of this business as you would expect in our business on a gross profit level.
We still see growth in that business, still see double-digit growth in that business, there's no denying that the growth was stronger at the beginning of the year than towards the end of the year.
Thank you.
The next question is from Rory McKenzie of UBS. Your line is now open, please go ahead.
Good afternoon, it's Rory here. Firstly, I wanted to ask about the lower gross profit growth you've seen in Europe. Has that been just customers delaying orders, or was there any price pressure? Do you think that organic decline will carry over into Q1 2019? secondly, I wanted to ask about. You reminded us how you were resilient as a distributor, but of course, where some of the prices do have an impact is on your working capital. Given the kind of price drops there, should we expect to lose cash growth in the year ahead? Thank you.
If I was going to answer pricing. To be fair, I think when we looked at the general activity in the market, we wondered whether a general feeling that prices would come down would somehow bring some sort of dampener on demand and people were taking a de-stocking approach. We've made the talks about the fact that Brenntag isn't really affected by de-stocking because of the relatively small companies that we supply. Particularly maybe in the area of specialty, that might be the consideration. I think the reality is there was just a broad-based slowdown in the European region. I don't think it was de-stocking or prices going down. I think it's more a case of demand was not there.
You're right, Rory. Obviously, chemical prices have an impact on our working capital and therefore on our cash flow. In that sense, we do see some easing of the working capital pressure already. However, we do see selective and relatively moderate price decreases so far. If and when we see further price decreases, we will have a boost in cash flow from working capital reduction.
Okay, thank you. If I may, I wanted to ask about your other announcement today and see that you decided to step down as Brenntag CEO after this financial year. You have that year, that's certainly going to be a big change for the company. Is there any more you can tell us about either the decision or maybe the process the board will take over the next year as they look through options?
Thank you, Rory, for bringing that up. That's a very sensitive issue. I mean, Rory, at the end of the day, I hate to say it, but I'm nearly 62 years old, so whilst I might look and feel like a young whippersnapper, at the end of the day, Time waits for no man. I think the reason I took this decision was simply that we have such a lot going on in the company in terms of digitization, specialty chemicals, the way we operate companies, modeling Europe, a whole host of things which need to be delivered. I think that the CEO needs to be here for the long term to execute the projects which are fundamental to our business success.
I felt it was probably the right timing to actually announce that so as to get plenty of time to go through a very smooth transition.
Okay, thank you. I didn't want to call it out in the room, but I just wanted to get it out there. Thanks for your honesty.
No worry. I'm happy you did, don't worry.
Okay. Got it.
The next question is from Laurence Alexander. Jefferies, your line is now open. Please go ahead.
Yes. Hi, this is Nick Theron for Laurence. A few questions, if I may. In regards to working capital, how much do you aim to improve working capital terms over the next two or three years? What are some of the levers you can pull in order to do so?
Levers?
Yeah. We are looking at each other. Who is best suited to answer the question? Let me go ahead, and I'm sure Steve can add value or insight. Obviously, working capital is a fair share of the capital we tie into the company, and we have increased working capital over the years significantly, partly through acquisitions, partly through a strong increase in chemical prices. These two elements are kind of natural in our business, which we have to and do expect. To be fair, we also have seen an increase in working capital to a degree through deterioration of working capital terms.
The length of the time it took and the degree of deterioration in working capital terms we are seeing, we just initiated a significant group-wide project also together with the providers to review deposits, to review working capital governance, to review working capital decision structure, also to review working capital tools. I can't give you an exact steering today about the levers we will use. It's obvious that we look at inventory terms, particularly at inventory terms, because they are directly under our control. We also look into Days Sales Outstanding and Days Payable Outstanding. It's a full-fledged review, and in course of the year, we will be able to give you better insight which levers we think we can pull.
I'd like to add to that. I think not so much on the amount of terms, but the actual amount of working capital in our business. Obviously, price is an issue and has influenced working capital development quite significantly. Also I would say that in general terms, that payment terms to customers and both our payment terms to suppliers and payment terms to customers probably need to reduce to an extent. I mean, we've seen a trend where manufacturers are looking for even tighter payment terms at the same time. It was both happening, and that's something we can't continue. I think certainly manufacturers recognize that there's some work required to make sure that that gap doesn't develop. We are looking and working with our supply partners on how we might address that issue.
Perfect. Just one more. How should we think about the tailwind in 2019 from share gains in the U.S. with the industry realigned?
Well, we should think positively about it. Yes. Actually, on the last question, how should we think about it? Seriously, think positively about it. There is a change in the market, and we are super concentrated, super focused on dealing with customers and suppliers, and we have very limited, if no internal distraction.
Thank you very much.
The next question is from Christian Kohl of Warburg Research. The line is now open. Please go ahead.
Yes, good afternoon. Thanks for taking my questions. First, maybe with regards to your internal efficiency programs. First, you booked EUR 11 million special item in the fourth quarter for the EMEA region. Can you maybe elaborate what is the corresponding positive benefit or impact from the future P&L from that efficiency measures? Secondly, you have some EMEA Restructuring in the years before. You have initiations like Global Sourcing Initiatives, for which you, I think, invested EUR 20 million, and for the EMEA Restructuring, EUR 8 million benefit, so a total of EUR 28 million. How much of this impact has materialized already in the 2018 P&L? Are there any spillover effects in 2019, and could you quantify them? Secondly, with regarding your interest expenses, you repaid a high coupon bond in the mid of 2018.
If I remember correctly, at the capital markets day, you were suggesting interest expense coming down to roughly EUR 75 million on a per annum basis. Looking at your implicit H2 financial expense, I think it is more in the region of EUR 80 million. Is this EUR 75 million and the relief on the interest side still valid, or is this simply absorbed by M&A and by the before-mentioned loans you have taken in high interest terms? Lastly, we currently face volatility on the FX side again. Could you remind us a rule of thumb about how changes in the U.S. dollar-Euro exchange rate translate into EBITDA, assuming a certain debt regime?
Let me go ahead, and Truffert can jump in. The extension of the European efficiency program, which I mentioned that we expensed in the fourth quarter, EUR 11 million, it should deliver 2019 and going forward a savings of mid-single digits. Mid-single digit EUR positive impact on EBITDA. You were asking for the status of the prior efficiency improvement program in Europe that we indicated actually in savings. These savings are there, and you can actually track the headcount changes in the various pockets. So they are part of our European results in 2018. The Global Sourcing Initiative that we indicated EUR 20 million benefit on a run rate basis. It's a little bit more difficult to isolate for our financials because it obviously ultimately shows in the profit per ton. The amount is there, maybe not to the fullest, given the market circumstances, particularly in EMEA.
The high majority of this target is actually achieved. I would point to the fact that we have grown the EBITDA in 2018 more than 8%, including acquisitions, and on organic sales is 5.5% as a group. You can see that we have organic EBITDA increases, and at least it gives you a degree of comfort that the measures we took contributed to our managed development. The question you asked on interest expenses, if I may say, the difference between 75 and 80 is relatively small, and given that part of the debt is floating rate and shifts between countries and currencies, it's not so easy to predict interest expense down to an accuracy of EUR 5 million per year.
From today's perspective, given that I see a little bit higher interest expenses in the U.S. dollar, but particularly financing needs in the relatively expensive emerging market countries, probably I would more pick the EUR 80 million as a guidance than the EUR 75 million I used before. On translational FX volatility, what the further topic you raised, the reminder is if USD/EUR moves EUR 0.05, so USD/EUR EUR 0.05, it impacts our EBITDA by EUR 20 million roughly.
Okay. That's helpful. Thank you very much.
Sure, Christian. Thanks.
The next question is from Isha Sharma of MainFirst Bank . Your line is now open. Please go ahead.
Hi, gentlemen. Two questions from me, please. Number one, could you just give us some guidance for free cash flow in 2019 because of the moving parts like net working capital getting better, but at the same time, a little bit of higher CapEx? Just maybe a little bit idea on a range would be great. The second question is around acquisitions. Recently you have announced acquisition of New England Resins & Pigments company also in the U.S. Could you give us a little bit of more detail on that one? How should we look at the strategy in 2019? Would it be more around specialty ingredients and would stay in the U.S. or do you also look at other geographies? Thanks a lot.
I'll shy away from the free cash flow guidance. We'll have a positive impact obviously from the expected improvement in EBITDA, partly offset by the CapEx, which we laid out. Why am I shying away from the guidance? Big volatility in cash flow comes through chemical prices, we are probably not best equipped to predict chemical prices for the first quarter of the year. The underlying cash flow development should be positive, but there is an overlay with chemical price volatility, which is very difficult for us to predict.
Since the recent acquisition, the virtually U.S.-based acquisition, it's a relatively small acquisition in real terms. However, it's certainly a sector which we expect to grow more into the food ingredient specialties. You would expect the acquisitions on a global basis, which would support growth of that particular area of our business.
Thank you. The next question is from David King of Goldman Sachs. The line is now open. Please go ahead.
Yes. Hello. Good afternoon. It's actually Mattia Gerli from Goldman Sachs. My first two questions are on the conversion margins on Latin America and Asia Pacific. You talked a lot about EMEA and North America. First of all, Latin America, small division, it's your lowest conversion margin. What do you think it would take to have that margin going up from the mid-20s to the, say, thirty or low 30s? Is it really just macro? Is there anything specific that now you could do to get the margin to a structurally higher level? Second question is on Asia Pacific. Just to understand a little bit better what you are assuming for next year. Conversion margin is probably around 35%, but you would be expecting some further, say, one-off cost in China. Is that my understanding?
We should expect a bit of a margin pressure as we go into 2019 and then gradually recover from 2020 onwards. If you can just elaborate a bit on that, please. The third question is just double-checking something which you said. I think you mentioned that in North America, one quarter of the business is linked to the oil and gas industry. Is that right? Is the number that high? I was under the impression that it was a smaller number. If you could just confirm, please. Thank you.
Okay. Thanks very much. Oil and gas is around about 25% of the business in terms of it. It's a very broad church in terms of upstream, midstream, and downstream. It's diversified within the oil and gas sector, but principally the midstream area. It was indeed about 30% I think in years gone by, and I think it's reduced as a proportion of the business in more recent years. In terms of the Latin American conversion ratios, it's all right. If you look at the conversion ratios in Latin America, they were in the low 30s, but I think that's when we had quite a few bits of business in Venezuela, which probably influenced that. There isn't a huge amount you can do in terms of conversion ratios in Latin America other than the critical mass within each individual country. It's such a large area.
This is around about business concentration in terms of improving the conversion ratio. That certainly can be done by growing locally. I would say that the way we are viewing things at the moment, upper 20s, low 30s is not inconceivable, but it is actually a relatively small business region. It doesn't move the needle a heck of a long way. Nevertheless, these are targets which are not too far out. When it comes to Asia Pacific, again, there's a disproportionate factor in terms of the region is relatively small in terms of the group. Therefore, when you do get a major cost increase in things like transport logistics in China, it can have a negative round conversion ratio. However, we do expect the transport logistics problem to be solved over the course of 2020, 2021.
To be fair, this has taken a little longer than we would have expected, and this is all down to the licensing of new plants in China. On the one side, the fact that it's very difficult to change licenses may be more frustrating. On the other side, it's also an amazing differentiator when you are full of licenses in China as we are. When these plants come online, that will clearly affect the efficiency and improve conversion ratios in that part of the region.
Okay. Very clear. Thank you very much.
We have a follow-up question from Mutlu Gundogan of ABN AMRO. Your line is now open. Please go ahead.
Yes. Thank you. Just a few follow-ups. Also on LATAM, your organic profit growth, that reversed from a positive 4% in Q3 to a negative 4% in Q4. Can you tell us why that was? Is that just the macro or is there anything else going on? That's the first question. The second question is on Asia Pacific there on the decline in conversion margins that you mentioned in China. Can you just disclose what the more like one-off cost is that you had in Q3 and now in Q4 and what we should expect full quarter going forward across 2020, sorry, 2020-2021? Quite a long period for these cores. Finally, it's not a question, but more a request.
I know you've been doing this for a very long time, would it be possible when you publish Q4 results to get a Q4 report as well? That way we can directly see what has happened in the quarter instead of having it to derive it from the end result.
Michel, I'm sorry, I'm jumping on your last question.
We think it is in the annual report. At least in the annual report there is a great page on segment reporting for the quarterly numbers, if that is what you mean. We don't issue, it's unusual to issue a commentary on Q4, the numbers are there in the annual report.
Yes. Not for the commentary.
Okay.
I don't want to be very evasive on Asia-Pacific in terms of the conversion ratio and operating profit, what have you. I think one of the things which you should bear in mind is that Asia-Pacific is an area which we are investing in as a company, and have been for quite some years. I think this is one of the things that perhaps maybe is not necessarily appreciated because of the pressure on short-term results. We are actually investing heavily in terms of infrastructure, people management, training, and what have you. This region tends to have a cost issue, if you like, on a longer basis as we build up the critical mass in the Asia-Pacific region and put the business in a position where it can make more acquisitions.
It's a bit of a chicken and egg scenario where we do actually have to invest in the region. It is also quite a difficult region relative to cost. I mean, on average, we look at salaries and what have you moving anywhere between 10%-15%, depending on which region you happen to be in in terms of the region. That's quite a challenging balance in terms of cost. Conversion ratio, if you like, in Asia-Pacific is a topic which could lead you in all sorts of different directions. What was the second question?
I think the last question was trajectory Latin America, I'm not sure I got the details of the question. If I go through the quarters in Latin America on a gross profit level, We were slightly better than flat-ish in Q1, 2% growth in Q2, close to 4% in Q3, and 1% in Q4. I would more deem that volatility of a small and a little bit more difficult region. I wouldn't deem that a trend change in Q4 over Q3.
Okay, that's very helpful. Thank you.
We have another follow-up question from Chetan Udeshi with JPMorgan. Your line is now open. Please go ahead.
Hi. Can you remind us if there was any material impact you saw in your numbers in Q4 or Q3 from the lower Rhine water level? That's number 1. Number 2 is just checking, because if I look at your Q4 gross margins, which are the gross profit to sales, I would have thought with chemical prices sort of coming down or at least flattening out, that number should have been flat to up. Whereas except for U.S., it's down in all the other regions in Q4 2018 versus Q4 2017. Can you help us understand the dynamics on gross profit or gross margin rather, given the chemical prices are now starting to sort of at least edge down from their highs? Thank you.
If you want it first?
Yes. Well, clearly, those that are now followers of the water level in the Rhine will know it's now operating. We certainly had some impact in Q3 from increased operating costs relative to transport and availability of tankers and what have you. Now that has eased. It's quite interesting, actually, and this is a challenge for the European businesses, is that transport logistics costs in Europe have not come down and we're reducing them, actually not in North America, but availability of transport drivers particularly in Europe, is still an issue. The cost inflation in transport is quite high. Whilst I certainly would have expected to see something of a rough science of relief from transportation costs in the European region, particularly Germany, with the Rhine now being open normally, I don't think we've seen that much of a change.
It's not really been, I think it's been one way traffic in terms of up and not really relieved.
On your question for gross profit percentage of sales, I get your problem. It's not a KPI that we track. It's not a KPI that we manage the group by. I would discuss or argue a point that is not a management tool in this business. We can certainly have a conversation, probably better an offline conversation why that is and what our thought process is behind it. I can't comment gross profit as percentage of sales.
Thank you.
Sure.
The next question is from Rajesh Kumar, HSBC. Your line is now open. Please go ahead.
Hi. Good afternoon. Just checking on the freight cost in Germany earlier. Can you give us some color on how the freight cost inflation is shaping up in the geography and how the pass through of that is working, where can you pass it on to the customer and pricing and where not? Second question would be, you've done quite a few acquisitions in the last three or four years. What sort of supplier synergies do you expect due to all the new acquisitions you've done in the coming year margins? Finally, a very simple one. When you invoice your customers, do you invoice them for the value of the product that is sealed, which includes your markup, or do you invoice them for cost of product plus a separate markup for your services?
Well, I'll take the last one first. We have a cost plus individual service charge. Pricing is market pricing. Clearly we have to understand the markets very closely we sell. We add our margin to the base price that we are charged by the supplier. That margin will vary depending on hardwork we put into the product. For example, if you're buying products for X, then adding mixing, blending or repackaging or formulation work, then it would be X plus, plus our various services. Pricing, you've got a not too easy example to give you, but it's not just cost plus a fixed margin for sure. In terms of transport, overall transport, I'm hesitant to give a total number in terms of the total cost, but it is well over EUR 10 million in North America and Europe.
I think it would be fair to say that the North American market is more receptive to surcharges, and they are more effectively delivered as a result. It's not quite the same in Europe, and therefore, I think I mentioned a little bit earlier on in relation to the Rhine, We just took the cost. We didn't really get a surcharge in the marketplace for that difficulty. It may well be in the future that changes, but at this stage, recovering overhead transport costs in Europe is more difficult than it is in North America.
Thank you. Again, did I understand your answer correctly, that when you go to the customers, the customers only see your sales number, they don't see your gross profit number in majority of the cases?
Absolutely. They generally see one price. If you're buying sodium bicarbonate, you see a price for the sodium bicarbonate. You don't see a breakdown of the component parts of the price there.
Gross margin is a tool you use internally but never reveal to the customer.
No, we don't. We don't reveal the gross margins on an individual transaction basis actually to customers. No, we don't.
Thank you.
Currently no further questions. As a reminder, if you would like to ask a question, please press zero one on your telephone keypad now. We haven't received any further questions. I hand back to the speaker.
Okay. Well, ladies and gentlemen, thank you so much for joining us for updating full year results, and take this time to celebrate. Thank you. Goodbye.
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