Dear ladies and gentlemen, welcome to the Brenntag AG results call for the full year 2017. 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 participant has 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. Welcome, ladies and gentlemen. Thank you everybody for dialing in for our review of the full year results 2017. Today, as always, I'm here with John Murray, our CFO. We're very happy to take your questions after the presentation. Let me start with the highlights of 2017. In 2017, we showed encouraging results. Profit performance was broad-based across our main regions. For operating gross profit and operating EBITDA, we saw a return to organic growth for the group, as well as contributions from our acquisitions. Group generated an operating gross profit of EUR 2.54 billion, represents an increase of 6.5% FX adjusted, and our operating EBITDA increased by 4.5% to a new all-time high of EUR 836 million. After a more challenging first half, we saw a clear improvement in our operations through the second half.
In addition to running the operating businesses, we've implemented a number of initiatives in 2017 to improve efficiency to support future growth of our company. We are convinced that we've taken the right decisions and we expect a positive contribution in 2018 and following years. Also last year, we followed our proven acquisition strategy to acquire targets with a total enterprise value of EUR 270 million. We are very happy that in 2017, we were able to plan acquisitions in all four of our regions. The companies we acquired are small and midsize chemical distributors, which are perfect fit for our network. With regards to the dividend, we are pleased that the supervisory board and board of management will propose to the general shareholders meeting a dividend of EUR 1.1. This represents an increase of 4.8%. It is the seventh consecutive increase since our IPO.
Finally, to provide more details on the operating business in the regions, I'll actually give you an overview of the developments of the operating EBITDA for the group from 2016 to 2017. Last year, we had a headwind from US dollar-euro translation of EUR 10 million, which was mainly caused by the weakening of the US dollar in the second half of the year. Our recent acquisitions completely met our expectations and contributed an encouraging EUR 24 million in 2017, which underlines the value-accretive measure of our M&A program. Our EMEA region showed a flat performance on an organic basis, which was the result of a mixed picture in certain countries, which I'll explain later on. We are particularly pleased with the performance in North America. The region grew its operating EBITDA by EUR 23 million, representing organic growth of 7%.
In Latin America, we continue to see challenging conditions and a volatile environment. Against this background, the region reported a negative organic growth of 8%, but with a clear improvement from the second half of the year. Our Asia Pacific region showed a positive development and reported organic growth of 3% in 2017. I now come to EMEA, which I take you through the detailed developments for 2017. The operating gross profit grew by 3.7%, and operating EBITDA grew by 1.6%, both FX adjusted. Overall, we saw a mixed picture in European countries, in particular this was due to weakness in the Nordic region and France, which held back the growth in our EMEA region. You all know that we've implemented an efficiency improvement program, which will have a positive effect going forward. Coming to North America, we're particularly pleased with the results in our North American region.
The segment clearly has returned to growth. Throughout the year, we saw strong growth in operating gross profit, which was primarily driven by organic development. There's broad-based growth in all customer industries and also acquisitions, which contributed nicely to these results. Operating EBITDA followed the gross profit development and increased by 9.7%. When we returned the business to growth in the first half of 2017, we faced some cost pressures, particularly in overtime and transport, but we saw a clear improvement in conversion in the second half of 2017. In Latin America, we continue to see an overall volatile environment. Last year, we had a difficult first half, but a good performance in the second half with positive contributions from Brazil and Mexico. In this environment, Latin America reported a flat operating gross profit and a negative growth in operating EBITDA of 8%, both on a constant currency basis.
Whilst the situation remains challenging, we have a clear market lead in Latin America and we are well positioned for future growth opportunities. Coming on to Asia Pacific. We are happy with the performance of our Asia Pacific region in 2017. In an overall positive macroeconomic environment, the segment reported an encouraging growth of operating gross profit of 11% and operating EBITDA of 12.7%. These results were mainly supported by the countries of Thailand, Vietnam, and China, but also the acquisitions performed above our expectations. We continue to see this region with the highest growth potential going forward. Let's come on to the improvement programs in 2017. We continue to improve our structures and processes. In addition to numerous measures in our current strategy, we have implemented two main initiatives, and for those that follow us regularly will already have heard about these programs.
First, in the EMEA region, we introduced an efficiency program. The goal was to streamline our infrastructure, set up new processes combined with even stronger focus on the expansion of our specialty chemicals business in the EMEA region. Last year, we took the costs for this program, and now we expect savings of EUR 8 million per annum from 2018 onwards. Second, we continue with the development of our global sourcing initiative in both regions of EMEA and North America. This initiative focuses on certain parts of our purchasing volume with the goal to get more product groups centrally managed. One of the key benefits of this will be better and more optimized sourcing approach in general. The implementation of this project is complex, as one change in product sourcing can change hundreds of customers' application areas. The net effects we expect from this initiative amounts to EUR 20 million per annum.
We feel confident the initiative will deliver the expected results. Now coming on to acquisitions. We've been very active in acquiring companies that complement our portfolio. We signed seven acquisitions all over the world with a total enterprise value of EUR 270 million. On average, we've had an EBITDA multiple of around eight times, which we deem to be an attractive valuation. Some of these acquisitions will only close in the course of the year 2018, and therefore will contribute only partially in 2018. Now I pass you across to Georg.
Thank you, Steve. Good afternoon. I'll walk you through our financial details. I'll start with the upper part of our income statement on slide 12. Sales increased 2017 over 2016 by 13% on an FX adjusted basis. A strong share of the sales increase is reflecting higher chemical prices. The gross profit showed a healthy growth of 6.5% on an FX adjusted basis. We saw a particularly strong performance in North America and Asia. Operating EBITDA for the group amounted to EUR 836 million for 2017. This is at the midpoint of the EBITDA guidance we gave after the second quarter last year. The further income statement on page 13, the lines below EBITDA. I would like to start with the second line on the slide, which is titled Net Expenses from Holding Charges and Special Items that amounted to an expense of EUR 64 million.
In this line, the charges for the EMEA efficiency program are included. Further on, the amount also includes a charge of EUR 30 million, which the French Competition Authority has imposed last December. There are no major changes for depreciation. Amortization is slightly lower compared to last year and amounted to EUR 44 million. Financial results amounted to a net expense of EUR 94 million. Earnings per share are at EUR 2.34, slightly above the previous year. On page 14, we give details on the impact of the U.S. taxation. The U.S. legislative has made significant changes to the tax regime in the U.S. at the end of last year. The main change is obviously the reduction of the corporate tax rate from 35% to 21%. Given the high profitability and the significant size of our U.S. operations, we are a significant taxpayer in the U.S.
As a consequence of the tax reform, we will now see 2018 going forward, a reduction of our U.S. taxes. We currently expect our tax rate for the group will go down to around 30%, three zero %, from 2018 onwards. We take a look at the cash flow statement starting on slide 15. For 2017, we reported an operating cash flow of EUR 404.5 million compared to EUR 539 million a year ago. The change to last year can be explained with a higher cash outflow for working capital due to the rise in chemical prices. On the subsequent page, I would like to talk about the investment as well as the financing cash flow. CapEx amounted to EUR 151 million, in line with our guidance for the year. The cash out for acquisitions amounted to EUR 108 million.
Please be aware that some of the acquisitions that we signed late in 2017 will only be closed and will only be paid in 2018. This is why the cash out is below the acquisition enterprise value of EUR 270 million that we mentioned before. In the financing cash flow, you primarily see the dividend of EUR 162 million that was paid to our shareholders in June last year. There has not been any major changes to the balance sheet. I move directly to the page with the balance sheet and leverage. On this slide, we see the information on net debt as well as the leverage information. Net debt by the end of the year amounted to EUR 1.571 billion. The group's leverage stands at 1.9 times, roughly in line, slightly below the level of 2.1 times we had a year ago.
On page 19, you see details on the leverage development as well as on the maturity profile of our indebtedness. I will focus on the maturity profile of our indebtedness on the right-hand part of the slide. In 2017, we have extended our maturity profile with two transactions. In January 2017, we took advantage of attractive market conditions for borrowers and refinanced our syndicated loan ahead of schedule. The loan is our most important financing instrument and now has a scheduled repayment in 2023. The second transaction was the issuance of a new fixed rate bond in September last year. The new bond amounts to EUR 600 million. It matures in 2025 and pays a coupon of 1.12%. Brenntag has a maturity profile which is very long-term and which provides even more flexibility to support our overall strategy. On page 20, you will find the working capital information.
Trade working capital amounted to EUR 1.5 billion at the end of the year. The increase in course of 2017 is mainly attributable to the price increase of chemicals. What is important for us is that our working capital turnover remained on the same high level as last year. In 2017, we turned working capital 7.9 times. We do report a free cash flow of EUR 440 million. That is a reduction against a year ago. Again, the reduction compared to previous years, mainly driven by higher working capital, which in turn is driven by higher chemical prices. With respect to the dividend, we continue our track record of dividend increases and propose a dividend of EUR 1.10 per share for the approval at the general shareholder meeting in June.
This is around 5% higher than last year, and it is the seventh consecutive year with an increased dividend payment. The proposed dividend reflects the payout ratio of 47% and confirms our commitment to provide a continuous and strong cash return to our shareholders. I will close my part of the presentation, for the sake of reference and completeness, with an EBITDA bridge for the fourth quarter. We looked on page 23 at the EBITDA development, fourth quarter 2016 to fourth quarter 2017. We had a pretty strong revaluation of the US dollar in the second half of the year. On Q4 alone, we had a negative FX translation effect of EUR 10 million. If you think about 2018, on the levels that the dollar/euro is trading right now, you would have to assume that negative FX translation will also stay with us through 2018.
For the full year, you would have to expect 2018 over 2017 and about EUR 14 million negative FX translation. Going back to the fourth quarter bridge here, the positive contribution from our acquisitions in the quarter amounted to EUR 5 million. Regarding organic growth of our segments, we reported 10% for North America, 8% for Latin America and 14% for Asia-Pacific. In EMEA, we saw a flattish EBITDA performance. I'll hand back to Steve for the outlook.
Thank you. I will start with the current trading and address the outlook for 2018. Let me walk you through the gross profit per working day numbers on a monthly basis. In October, gross profit per day increased by 8.7%, as reported, and by 5.5% on an organic basis. In November, the growth was 7.7%, as reported, and 5.6% organic. In December, the growth was 9.9% and an increase of 8.7% on an organic basis. In January, the growth was 8.6% and 7% on an organic basis. In February, the growth was 7.3% and 6.4% organically. The gross profit growth in January and February is a very good start for the year in 2018. We don't see a change in these trends and expect Q1 to continue with a positive performance.
Please be aware that Easter will partially fall into March this year, when looking at your various models, it will have an effect in terms of reducing the number of days trading compared to last year. Coming to the outlook, we fully expect Q1 2018 conversion ratio to exceed Q1 2017. The global economy is expected to show further signs of recovery in 2018. In this environment, we expect our key performance indicators, operating gross profit and operating EBITDA to grow in line with past years, and we will give quarterly guidance for the full year back in Q2. Now we're happy to take your questions.
Thank you. 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 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. We've received the first question from Daniel Buchner, Bank First. Your line is now open.
Yes, thank you very much, guys, for taking my three questions, actually. First of all, on EMEA in Q4, I mean, you hear the organic EBITDA growth was basically flat, despite if we calculate the organic gross profit number being probably the best one for the whole year. Can you explain what holds you back to see a significant stronger performance? How can we expect the EMEA restructuring program to help you here in this context in 2018 so that the performance hopefully gets significantly better compared to Q4? The second one on North America, here, obviously a very good performance in my view, also sequential pickup again. Can you say any particular industries or businesses that have supported you here? The last one, quickly on the restructuring measures.
In here, am I right if I assume basically to be implemented from January 1st on the Sourcing Initiative the same? We can expect the full benefits on that in 2018. Thank you very much.
Also, I'll just deal with the restructuring first.
Daniel, hi. With respect to the phasing of the impact of our initiatives, the EUR 8 million we expect from the EMEA restructuring as well as the EUR 20 million we expect from the Global Sourcing Initiative. We are basically fully implemented on the EMEA restructuring. We are almost fully implemented on the Global Sourcing. It should be pretty pro rata throughout the year, maybe a little less in Q1, but there's no strong phasing on our part of these two initiatives effects throughout the year. North American, strong development comes across all regions, comes across all customer industries. You know we had a little bit of a challenge or a strong challenge, I should actually say, in oil and gas in 2016 and 2017. Oil and gas is back to a good growth in 2017.
It's growing somewhat stronger than the average of the North American business, but not so materially stronger that I would particularly point to that customer industry. EMEA Q4, yes, the organic gross profit growth rate was the best of the year, but actually the quarters have not been too different, so it's a little bit less than 4% organic GP growth in EMEA in Q4. There's nothing which particularly holds us back. It's usual Q4 volatility, year-end effects. We would suggest not to think too much about that specific situation going forward. We do fully expect conversion ratio increases on a year-over-year basis.
Okay. Thank you very much. That's helpful.
The next question is from Josh Puddle from Berenberg. Your line is now open.
Oh, yeah. Hi there. First question, I wonder if we can just come back to EMEA. Whether we look at the Q4 conversion margin or the full-year conversion margin, they're both down, which does look surprising given good organic gross profit in the region. If you could just maybe explain in a bit more detail what exactly is happening, and if we stick to Q4, that would be helpful. Maybe split out by, I know, cost inflation and then any one-offs, if there are one-offs. My second question, I just wondered in your slide four and slide 23, you've got quite a significant headwind from your rest of world segment. I just wonder if you can detail exactly what's driving that, and then what we should expect from that segment into 2018. I'll leave it there. Thank you.
I see here, just coming to the EMEA region. Obviously in 2017 we did carry out a restructuring exercise, which is there to drive increased efficiency. That had an effect in terms of actually quite a number of people left the organization. You can imagine that was quite a focus of management during the course of the year. Nevertheless, we expect fully to see those benefits coming through in 2018. I would remind you that we did have a bit of an unhelpful development in our Nordic region, which affected us by nearly EUR 6 million EBITDA during the course of the year. That has been corrected. We're not expecting that to reoccur relative to the European business in 2018. EUR 6 million on the EBITDA is actually quite an effect in terms of the overall performance of our European business.
Can I just clarify on that EUR 6 million. Should you get that EUR 6 million back in 2018?
Well, what I would say is that the EUR 6 million was a drag in 2017, and that drag has been eliminated. How much there will be left behind in 2018 remains to be seen, but I'm utterly convinced that we will not have the drag that we had in 2017.
Okay.
Josh, it's Pierre. Hi. On the rest of the world, EBITDA development, rest of the world, it's mostly headquarter expenses and headquarter bears a lot of our project costs, and these can be volatile depending on the number of projects we undertake and on the nature of the projects we undertake. What you see Q4 2017 over 2016, so a EUR 5 million expense increase is mainly driven by a number of projects, and to name a few, we had M&A activity towards the end of the year. M&A project costs are in there for the major acquisitions. We had professionalization of our HR IT systems, and we have a little bit of costs for the global sourcing initiative in there. None of them major, but they add up to the amount you see. 2018 over 2017 depends on what projects we ultimately undertake.
I think it's a reasonable assumption to assume the same rest of world EBITDA in 2018 that we have seen in 2017.
Okay. Thank you.
The next question is from Rory McKenzie of UBS. Your line is now open. Go ahead.
Afternoon. It's Rory from UBS here. Three from me, please. Two on growth. Firstly, can you just call out any particular countries that really drove the strength in emerging markets? Obviously, both LatAm and APAC looking good into year-end. I know you had said that China had been a bit more challenging. Any countries that really stood out for you on the positive side? Secondly, in terms of the broader picture of outsourcing of chemical distribution, Steve, I think you've talked about hoping to see some kind of larger scale announcements or shifts in the market as you got into this year. Anything you'd say about the landscape outsourcing or new contracts you'd highlight? Lastly, any comment on timing or any delays in passing on any product price increases or whether that's all working as expected?
Just going to the emerging markets, we saw a recovery in our Brazilian business during the course of 2017, which drives the shift between quite a negative performance in the first half of the year for Latin America into positive. The business in Mexico was particularly positive for the region overall. Coming to Asia Pacific, the businesses which are the stars, if you like, are Vietnam and Thailand and indeed China. My only caveat with China is a very sort of temporary scenario in so far as our Chinese business is going to gross margin very nicely. We do have quite high operating costs in China because those that follow us will realize that we will be building 2 new sites in China in the next 2 years. During the interim phase, the distribution costs were reasonably high.
The underlying performance of China is actually much better on a longer term basis than would first seem at first sight. In terms of outsourcing and new distribution agreements, I think to be fair, the momentum continues from all our major suppliers in terms of outsourcing, including more with Brenntag. I don't think I can really give you particular suppliers. I perhaps don't want to give you particular suppliers from a competitive point of view. I can say that we are expecting to see growth from a number of areas in terms of new distribution agreements, particularly in the area of life sciences during the course of 2018.
Passing on price increases is the strength of the organization. It works nicely.
I think what is maybe an interesting point, I was charting the price movers as we see them, interestingly, we do still see some upward pressure on price increase. It continues in the marketplace. There's quite a number of price increases which we've seen scheduled for April. As Georg said, that's initially what we want to.
Is that allowing you to offset your own cost inflation with expansion in gross profit per ton? Is the market kind of tight enough you start doing that now?
Yeah, I think that's a fair observation. Where, particularly in very flat market conditions, it's sometimes more difficult. In the current scenario, we do have an opportunity to recover operating costs. Clearly, there's been some issues regarding transport costs going forward, and we are seeking to recover those incremental costs through improved margins. I think you can see our margins are moving up quite well in this context.
Great. Thank you.
The next question is from Laurence Alexander of Jefferies. Your line is open. Please go ahead.
Hi, this is Dan Lazzaro for Laurence. I was just wondering if you could provide color on sales force productivity. Are they performing to plan? Are things going as expected or better or worse, or just anything you can provide?
That's a very good question because in our EMEA region, part of the restructuring element was actually to look at sales force management within the region. To be fair, we have made some decisions there to let go a number of salespeople and replace them with different assets. That's particularly the EMEA region, and that's pretty much settled down now. I think generally speaking, the sales force, as we see it today, is very well positioned. We don't see any other major changes for our business going forward.
Okay. Just with the M&A pipeline, has it improved? Is it getting too high in terms of expected valuations? Also net debt to EBITDA, it's come down considerably, obviously in the last few years. I was just wondering what your comfort level is with bringing that back up or what your target is for that metric.
In answer the M&A, maybe I'll let Georg because we just met there. On M&A, for those that again follow us, you have seen we made a number of announcements really towards the back end of the year. In fact, I think it's probably quite a unique event, 5 acquisitions in one week. I think that probably should indicate to people on the firm that there's actually multiple negotiations underway at any one time because you can't celebrate 5 acquisitions in one week. We do have a very active pipeline in acquisitions. We are still indicating a range of about EUR 250 million as being our normal spend. We fully expect to spend that in 2018, and we're busily on with closing those acquisitions, which we signed in 2017.
On the leverage, we are running the company since several years now at a 2x net debt to EBITDA. We feel comfortable with that number. It's a very comfortable number that leaves us headroom for larger acquisitions should an opportunity arise. It's not necessarily that we expect such opportunity, but we feel it's valuable to have that
Flexibility in case an opportunity comes around. We consistently said over time, if and when leverage falls substantially, sustainably below 2x, we will have a very serious look at increased cash return to shareholders.
Thank you very much.
The next question is from Rajesh Kumar from HSBC. Your line is now open. Please go ahead.
Hi. Good afternoon, gents. It's Rajesh Kumar from HSBC. Could you tell us what has been the impact of sales force changes in EMEA on the profit growth, if any? Did you get a step down because you've changed the number of people there? The second one is, I know you referred back to price increases, and if we look at the numbers this year, it's the inverse pyramid. You've got a better sales growth and slower growth profit growth and a slower EBITDA growth. Should we start to expect an inversion in that pattern in 2018 as you get this price increase through? Finally, the third one, rather boring. IFRS 15 and 16, what would be the impact on KPIs such as organic EBITDA growth? When you are calculating that for the remuneration committee, will you adjust for these changes?
Let me look at the pay last year.
I have to admit, I appear to have challenged you to hear the question well. Brendan, you want to start or shall I?
Sure. I'll just cover the first point, then maybe repeat the question on IFRS.
Okay.
I'll just come to the sales force in Europe. I don't want to give anyone a misleading view here. Basically, the European business has been through some restructuring during the course of 2017. We did that to drive up sales efficiency, to increase market penetration, to sell more products to more customers. That was the reason we did it. That in itself is quite a tough thing to do during the course of the year. That's done now, we're pretty confident that those decisions were not only right, but they're also timely in relation to growth in the market. We can expect both sales force efficiency and sales force profitability to improve during 2018. With that, we can expect to see an appropriate improvement in the EBITDA.
Clearly, we expect to see an improvement in conversion ratios within the European business during the course of 2018 compared to 2017 as we deliver more EBITDA from the GP that's been generated. I think probably the IFRS question I got lost in, to be honest.
Yeah.
Yeah.
If you want, I can repeat the question.
Yeah, that would be kind.
Yeah. Effectively, I know that the way operating leases are being treated, some of the revenue recognition on the margins, they all are being reconsidered under IFRS 15 and 16. There's a combination of many changes. When you are looking at EBITDA next year, and your KPIs such as organic EBITDA growth, could we get an order of modeling help on how much benefit or headwind do we get from the change in methodology? I'm assuming remuneration committee will do a like for like calculation. I know you're not restating historic, which is why I'm asking.
When we talk about IFRS 15, the sales or turnover recognition, which comes into force this year, you will see some statement in our annual accounts that we expect the IFRS 15 impact to be super marginal. Impacting sales by less than 0.1%. I think the opening balance of the equity will change by EUR 6 million, EUR 6 million on EUR 3 billion, nothing. If we go beyond IFRS 16 to the new standards for treatment of operating leases, we will apply those only next year, we have not yet any reliable quantitative framework and not any reliable figures which we could communicate about what the effects will be next year. The remuneration committee hasn't dealt with the question yet, I cannot say what the outcome of that discussion will be.
No, I appreciate that. When I'm looking at the operating leases, you are going to capitalize them, that should help EBITDA as such.
Well, it's a restatement at the end of the day. In terms of a change of accounting principles, from the method of the business, we're not changing. Also on the point of remuneration. Remuneration is based on performance and not changing accounting rules.
You are right. Most of the operating leases will be capitalized. We are still evaluating which of the operating leases will be capitalized, particularly under the complexity of the rules where short-term leases still might go without capitalization.
Appreciate that. Thank you very much for the color.
Absolutely. Did we answer all your questions or have we missed one?
I think we got them.
Okay.
The next question is from Tom Sykes of Deutsche Bank. Your line is now open. Please go ahead.
Yeah. Good afternoon, everybody. Just first of all, would you be able to give some view as to the difference in growth in your more specialist business lines versus the more commodity chemical business lines, please? Would you pick out any specialisms in any particular regions? Just on EMEA, you do pick out in the annual report, Middle East and Africa growing quite quickly within EMEA. I was just wondering actually how big that is now for you and whether that has an effect on the conversion ratio at all. Also just on EMEA, you have mentioned the sort of end-of-year provisions and balance sheet true-ups. I was just wondering what would be the line items which would be the biggest variability over the year or the quarter in that respect, please?
Well, just coming to the industry, I think it would be fair to say that our specialty chemical range is growing a little faster than the industrial chemicals range. However, I think we need to be a little bit careful because, particularly in the current environment, where there's again, a significant demand and quite a number of shortages, particularly in the area of industrial chemicals, that the growth and profitability between the two categories What will probably change during the course of the year where industrial chemicals profitability may well (LCA) and move forward relative to specialties. It's not going to be a consistent picture with the current market dynamics that we're seeing.
However, it would also, to be fair, would be that we, as a long-term option, will be increasing our specialty chemicals market penetration in the area of food ingredients, life sciences, personal care, et cetera. As we see those areas as being subject to a fairly steady and progressive growth going forward.
Middle East and Africa, Tom. Middle East and Africa is by now about 7%-8% of our European EBITDA. 7%-8% of our European EBITDA. The biggest blocks in Middle East and Africa for us are Turkey and South Africa. These are the two pieces which are really in there. Conversion ratio, yes, the conversion ratio in Middle East, Africa, is a little bit below the European average, but there's no material impact on Europe overall.
Okay. Thank you. Just on the sort of, I mean, I just feel like it's a bit of kind of provisions, balance sheet movements or whatever you've been pointing out on the end-of-year conversion.
It's mostly in selling expenses and what is behind it is basically a true-up of environmental provision, true-up of outstanding packaging material that is with customers, true-up of credit notes and all these types of things.
Okay. Thank you very much. Just on the targets to move more into the sort of some of the specialist areas that you highlighted, how skewed is the acquisition pipeline or acquisition activity towards those at the moment, please, versus sort of a picture of the group as a whole?
I think it's fair to say that in our more developed regions of Europe and North America, it's unlikely we will need much in the way of industrial chemical distribution assets. We already have an extremely well effective and dense network of operations and therefore those particular areas, specialty chemical acquisitions are preferred. It's somewhat different in Asia Pacific insofar as they will be looking to increase the level of industrial chemical distribution that they do in the region as they're currently predominant in specialty chemical distribution throughout the region. You may have seen our acquisition of Raj Petro announced, which will hopefully close in March. That's particularly aimed towards expansion of our industrial chemicals and oils business in India.
Okay, thank you. I know you get asked about it all the time, but just how aggressive is private equity for specialist chemicals businesses in developed markets at the moment?
No, I think it's a moot question in some respects because there's relatively few large private equity groups pursuing chemical distribution. I can only think of one or two where you might say they've got a relevant strategy. When it comes to valuations and what have you, we don't have an issue here because ultimately the vast majority of times that we're involved in acquisitions, we're doing it on an exclusive basis.
Okay. Thank you very much indeed.
Tom, one correction on the Middle East, Africa statement. I said that the conversion ratio is a little bit below European average. Actually, I've looked up the number. It's a little bit above European average. It needs my attention that the business in Turkey and partly South Africa is particularly a specialty business. The statement that it doesn't have a major impact on Europe overall does hold.
Okay, great. All right. Thank you very much. Thank you.
The next question is from Christian Koch of Warburg Research. Your line is open. Go ahead.
Yes, good afternoon. Christian Koch. Thanks for taking my questions. First on the financial results. Looking back on the fourth quarter, I was actually surprised it was down heavily versus Q4 2016. Could you provide some color what actually was in the cards? Looking into the future for the financial result, you mentioned that you are going to refinance a bond. I think the bond was at quite unfavorable terms. Can you remind us of the benefits from all the refinancing measures you have taken that are going to materialize in 2018 and 2019? The second question relates to the assets held for sale. I think it was a figure of roughly EUR 50 million. What exactly are you selling? Is it just nitty-gritty, or are you envisaging also a major disposal?
I remember that you think about selling the pharmaceutical application business in the Nordic region. Is that right? A question regarding the global sourcing initiative. On page nine, you said there could be more regions to be defined. Is there anything in the cards? Lastly, on CapEx, can you maybe provide us with an idea about your envisaged CapEx spending in 2018?
Shall I take that one? You did a hard one.
I do hard ones later. Okay.
Just in terms of the assets for disposal, you're correct. In terms of it is actually the business in the Nordic region, the pharmaceutical business, which we are looking at as a position non-core for our business going forward.
Sorry to interrupt. We shouldn't expect any impairments because it was obviously, you mentioned that you faced a EUR 6 million drag on EBITDA last year. Do you think that you can sell the business at least at book value?
It's a small business. You see the asset held for sale in the balance sheet. We have had to undergo an impairment test end of this year. The impairment test came back clean.
Okay.
In terms of the global sourcing initiative, it is principally focused on the EMEA and North American markets just at the moment. That's just simply while we get this thing rolling and momentum behind it. It's taking some time to move this forward. I know a few people are a little frustrated on how long it's taking, but it is complex, but it is moving. What we see already is that globally our sourcing has become far more focused in certain areas, particularly in area of life sciences, where we are significantly seeing benefits from a global approach as opposed to a local approach. As and when it makes sense that we will extend that into Asia Pacific and Latin America in a more meaningful way. There's a lot to go at just within Europe and North America at this stage.
Okay.
Okay. On the time you started your questioning, I think with the financial results. The run-rate savings, and I hope I don't confuse people here. The run-rate savings from the cheaper bond, versus the more expensive bond, the older, more expensive bond that matures in the middle of this year, is on a run-rate basis, EUR 20 million, but the savings kick in middle of this year. It's EUR 10 this year and EUR 20 next year, if you want to say so.
Okay.
Financial results Q4 2017 over Q4 2016, I would have to go back to the details. What I could find out in scrolling through my papers here quickly, it's a number of smaller topics around FX and a few interest items. There's nothing structural in there. If you need more detail, I suggest Thomas gives you a ring after this call to follow up on the details.
If you mention smaller topics, before you had a run rate roughly of EUR 22 million quarterly. That run rate is actually still valid?
I would agree. I would agree with it.
Okay, that's fine.
I think we have the CapEx question open, right?
Yes.
We do point in the annual report to a CapEx order of magnitude, EUR 190 million.
EUR 190? Okay.
Yeah. Careful. EUR 190, yes. Careful. We do move two of our sites in China, and we get heavy state support for moving the sites. The best estimate at this point in time is we will get combined, timing not fully certain yet, but we will get combined EUR 30 million from the Chinese state. If you offset that, it would be at a net of EUR 160, maybe EUR 165.
Okay. That's clear. Okay, thank you. If I may, just one follow-up. It's more a philosophic question. Everybody, especially in the forwarding industry, is talking about digitalization, blockchain technology, and they cite immense scope for efficiency improvement. Also in the forwarding industry, we see asset-light digital players popping up. I wonder, you have some similarities with the forwarding industry. I wonder whether this technology is also something where you have an eye on, and whether it can be disruptive to your business in a positive or negative sense. Maybe you can share your thoughts with us on this issue.
Well, it's a pretty big subject to talk about on the phone. Nevertheless, clearly, digitization is with us, and we have invested, and we continue to invest in the development of our digital presence and our digital networks and markets. As far as freight is concerned, we would expect to be a beneficiary of digitization within that particular environment. What I would remind you that we are operating, generally speaking, with products which are hazardous products which are regulated, and therefore the market itself is quite narrow due to the expertise which is required to carry these products. Also, remember that we actually do carry quite a significant asset base in terms of our own transport and our own drivers and what have you. On one hand, yes, we recognize it is happening, it's very forwarding, but we're not a transport company per se.
We don't actually sell transportation services. It's actually part of our service to customers selling chemical products.
Okay. Thank you.
The next question is from Lawrence Fader of ISI. Please go ahead, your line is open.
Good afternoon, gentlemen. Two questions on my side, please. The first one is on North America. I think organic EBITDA growth was about 6.5% for 2017. I was wondering if you could give us color on the key end markets such as oil and gas. Oil and gas chemical producers have talked about strong double-digit growth for the year. I was wondering if this was in force or if you participated as well. The second question, partly related to North America, for Georg, is on the tax rate. If we use a 40% split from the U.S. to your group number, I think it's very easy to get the group tax rate closer to 27% or 28%. Obviously, you get it to 30%. I was wondering if you could talk about the offset, or whether you're just being conservative. Thank you.
I'll take the oil and gas one. I'm sure wish I would have been conservative on that. Well, certainly not the market. Yes, we do see a recovery in the oil and gas business. Again, people need to be a little bit careful about oil and gas insofar as the price barrel of oil has stabilized and price has been increasing gently over the course of 2017. We're just bringing into play more exploration, more volume, more drilling rigs and what have you. There is a supply and demand scenario. Let's be careful that we could quite easily move into a situation which we had previously where we had almost too many wells being drilled and too much supply, which will affect the overall economics of the market.
As far as Brenntag in North America is concerned, we clearly took a very significant hit in 2015 and 2016. It would be fair to say that the business is stable and now growing. I would exaggerate and say it's growing at double digits at this stage, certainly during the course of 2017, we would expect to see a more significant recovery in oil and gas business if the oil industry and the oil price maintains its current trajectory.
On the group tax rate, I think in our presentation we said the group tax rate will come down to around 30%, where those we indicated 34%-35% before. Four to five percentage points reduction. When we say around 30, don't hold me against the question at this stage if it is 29.5 or 30. I don't think there is a huge degree of conservatism in there. The U.S. corporate tax rate drops by 14 percentage points, there are also some offsetting measures. None of them will hit us very hard, there's a little bit of offsetting in state taxes, I understand, we won't see the absolute full degree of reduction. Around 30 going forward, hopefully a little bit below.
Okay. Thank you very much. Very clear.
There are currently no further questions via the telephone lines. As a reminder, if you would like to ask a question, please press zero one on your telephone keypad now. We've received another question from Mr. Green of Credit Suisse. Please go ahead. You're now open.
Yeah. Thank you very much. I've got three questions if I can. Firstly, just on your comments around France being a drag within EMEA. Just looking at the disclosures, the French external sales were up 5% year-on-year, let's assume that that's driven mainly by chemical pricing and therefore gross profit might be closer to flat. Are you suggesting therefore that France is a drag mainly from a cost management perspective? Is that a fair assumption? How big a drag was it? You quantified Nordics at EUR 6 million. Was France perhaps maybe half to a third of that sort of magnitude? That's my first question.
The second question, Steven, just going back to your comments at the Q2 stage last year back in August, you did caution that Q1 of this year was likely to see a repeat of the profit pressures that you'd seen in Q1 of 2017 in terms of phasing and timing of cost increases around rent, et cetera.
Is that still going to be the case, particularly given we're seeing that tightness around labor, rent reviews, et cetera, that you'll see a big pickup in costs in the first quarter? My final question, just around M&A, just in terms of you've given us the average multiple, can you give an indication as to the range of multiples you paid for the various assets you acquired and, bluntly, how much more expensive were they, the bigger deals compared to the smaller sized deals, please?
Just taking the cost base into the Q1 versus 2017 versus 2018. To be fair, I think we are at a pretty constant level now in terms of the changes which we saw in terms of bringing forward costs which are expense in the first quarter, but then spread across the rest of the year. I don't see any major changes. I think my comments and guidance is that for everybody is to assume that the cost base in Q1 is artificially higher as a result of these charges compared to other quarters.
I would reiterate my comment in the outlook that we expect Q1 2018 conversion ratio to exceed Q1 2017. I think in terms of the overall M&A range, it does vary significantly between the type of asset that we're buying in terms of whether it be a specialty chemical distributor, whether it be a SHU in terms of a sort of a distributor that we're adding onto the existing network. I think valuations are not that helpful to you because you have unique circumstances around each particular deal. 6 to 9, probably a reasonable range, but I wouldn't be too scientific about that.
France. You obviously had a very thorough review of the annual report already, this particular figure. External sales in France are up 6%, in chemical distribution, sales don't mean anything because they don't mean much, because they are heavily influenced by chemical prices. Also for the group, we show a 13% sales increase and a 6.5% gross profit increase. You are right to assume that the French gross profit is more flattish, actually slightly down, and then through cost inflation, France becomes a little bit of drag to the European EBITDA profitability. The French EBITDA is down two and a half million euros, EUR 3 million, you can see here.
Okay, that's very helpful. Just going back to North America. Just to clarify there, are you suggesting that over the last 6-9 months you haven't seen any material increase in the rate of, say, driver or logistics inflation?
No, that wouldn't be the case. There's definitely been an increase in operation costs within North America, obviously everyone could see that we improved our margins in general cost 2017, some of the margins were consumed by additional overhead costs. Throughout North America, it would be fair to say not just the chemical distribution business, but certainly across borders, across industry groups, freight and forward is a really difficult area for most people. Indeed, we're working with a lot of our manufacturing suppliers to see whether we can get the Brenntag fleet to batch load product into ourselves as opposed to depending on other service providers. There is cost pressure within that area. I'm not sure how much more cost pressure there will be in 2018, I think we've taken a lot of that pain already.
I think you can see it in conversion ratios and what have you, there is an underlying cost increase in transportation. I think we're now moving to a different stage in 2018.
Okay. Thank you very much.
There are currently no further questions. I hand back to the speakers.
Right. Ladies and gentlemen, thank you very much for joining this afternoon on our call. If there are no further questions, 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 concluded. You may disconnect.