Dear ladies and gentlemen, welcome to the Brenntag AG Q1 2017 results call. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participants have difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. I may now hand you over to Steven E. Holland, who will lead you through this conference. Please go ahead, sir.
Thank you very much. Well, welcome, ladies and gentlemen. Thank you very much for taking the time to dial in for our review of Q1 2017. As usual, I'm here with Georg Müller, our CFO, and at the end, we'll be very pleased to answer your questions after the presentation. Let me start with a short summary of the main takeaways from the first quarter of 2017. The group generated gross profit of EUR 631.8 million, which represents an encouraging increase of 5.5% on a constant currency basis. Our region of EMEA and Asia Pacific showed another strong quarter. Also, our region in North America, which faced stronger headwinds in 2016, showed a positive gross profit development and contributed to the gross profit growth.
The gross profit development of the group was slightly held back by our business in our smallest region of Latin America, where we continue to face difficulties, in particular macroeconomic difficulties in Brazil and Argentina. EBITDA after total EUR 201.6 million, growing 2.5% on an FX adjusted basis. The earnings per share in the first quarter amounted to EUR 0.61, which was clearly well above last year's Q1. With respect to M&A, we made two acquisitions in the U.S. in the first quarter. We've already discussed these during our full year results in March, I'll probably skip that to the next page. Maybe I can hand it over to you, Georg.
Yeah, thank you, Steve. Good afternoon, everybody. I'll move you through the financials as usual, starting on page six with our income statement. In an economic environment that continues to be characterized by only moderate growth in the environment, we do report gross profit growth of 5.5% on a constant currency basis. It's, we think, healthy gross profit growth, and it was based on increasing business and mostly driven by a positive organic development. The expense increases we occurred in the quarter are actually driven by the stronger business growth. EBITDA for the group totals EUR 201.6 million, and that exceeded previous year's level. On a constant FX basis, EBITDA is up by 2.5%.
The reported growth rate for gross profit and EBITDA, without the FX adjustment, reported growth rates were actually higher by more than two percentage points, and that results from the fact that the strength of the U.S. dollar created some tailwind in translation. The further lines of the P&L statement on page seven, depreciation for the first quarter amounted to EUR 28.9 million and amortization to EUR 11.6 million. Financial result amounted to a net expense of EUR 22.8 million. It's a significant improvement against last year. Financial result in Q1 2016 was impacted by a one-time EUR 27 million foreign exchange loss in connection with the business in Venezuela. That obviously, and as expected, did not reoccur.
We record a tax rate of 31.5% for the first quarter, this results into earnings per share of EUR 0.61, an increase by more than 40%, as the increase is heavily impacted by the mentioned effect in Venezuela in the first quarter 2016. I move to the details of the cash flow statement on slide eight. In the first quarter, the operating cash flow amounted to EUR 75.7 million, following EUR 99 million in the first quarter 2016. The decline is mainly attributable to a cash outflow for working capital due to higher business volume and particularly influenced by the rise in chemical prices. This cash outflow that comes with higher sales is a normal characteristic for our business in an environment of rising prices, particularly. I'll take the opportunity on this slide eight and explain one particular cash flow movement.
Those of you who follow us for a longer time, you will remember that Brenntag France was fined by the French Competition Authority back in 2013, four years ago, in an amount of EUR 48 million. The fine related to a years-back case prior to 2005, when Brenntag applied for leniency and since then fully cooperated with the authorities. You might also remember that we did appeal before the court against the fine. The court of appeal has now canceled the decision by the French Competition Authority due to procedural errors. The money was returned to us, we present the cash inflow in Q1, which is reflected in the line other of the cash flow statement. We all need to be aware that the appeal proceedings are ongoing that the court has not yet decided on the merits of the case.
That will be done in subsequent steps, because the proceedings are ongoing, we did not take the amount into income. Instead, we allocated the amount to provisions. Further parts of the cash flow statement on page nine. Let's speak about in-financing cash flow first. CapEx is slightly above last year's level. The cash out for acquisitions reflects the payments for the acquisitions of Petra and Greene's, which were closed in the first quarter of this year. In the financing cash flow, the line repayment of proceeds contains the repayment of $150 million in connection with refinancing of our syndicated loan in course of the quarter. I move a couple of pages ahead to page 11, the trajectory on leverage. On the slide, you see the information on net debt and leverage.
Net debt decreased slightly in the quarter, amounts to EUR 1,657,000,000 at the end of the quarter. In relative terms, that represents a leverage of two times, slightly below the level at the end of the last financial year. Two pages further down on page 13, the working capital information. Trade working capital amounted to EUR 1,511,000,000 at the end of the quarter, an increase of more than EUR 150 million compared to year end. The increase is predominantly due to business volume and rise in chemical prices. We turned the working capital 8.3 times in the first quarter, that's an improvement against the level we achieved in 2016. Q1 2017 delivered a free cash flow of EUR 25.7 million, that's obviously a pretty significant reduction against previous year, the reduction is due to higher outflow for working capital as already touched upon.
That the general mechanic of our business, when prices and sales increase, the development of working capital turns is actually positive. That's the presentation. Back to Steven for a segment discussion.
Thanks, Georg. If you look at page 15 on the presentation, just go through the operating EBITDA bridge for Q1 2017 versus Q1 2016. Clearly, the strength of the U.S. dollar meant we have a tailwind in the first quarter, which results in a positive effect of about EUR 5 million. Acquisitions have contributed an additional EUR 6 million to profits. In Latin America, we face some particular challenges, our performance was quite negatively impacted by EUR 5 million. I'll talk a little bit more about in the segment discussion. I'll move to that now. If you look at our EMEA region on page 16, EMEA grew its operating gross profit by 5.1% and EBITDA by 9.1%, both on an FX-adjusted basis. This is in an environment that is only growing moderately in Europe, we believe that's a good achievement. It's mainly attributable to strong organic growth performance.
In North America, we saw further stabilization in the Oil & Gas sector and an overall improving macroeconomic environment. In the first quarter, gross profits were up by an encouraging 7.5% on FX-adjusted, which was thanks to good organic performance broadly based on a number of industries. We saw some strong volumes and operating expenses. Our freight costs did rise during the period, particularly in overtime and transports. In addition, we paid additional transport costs, in particular in relation to fuel. Operating EBITDA increased by 1% FX-adjusted overall. We continue to see an increased demand, which is reflected in gross profit. As a result, we expect to see a meaningful benefit of that in terms of EBITDA growth during the course of the year in North America. In Latin America, now our smallest segment, Latin America has suffered quite difficult macroeconomic economic conditions, especially Brazil and Argentina.
This led to a decline in gross profit of 9% and operating EBITDA of -34%, both FX adjusted. It should be noted that Q1 2016 was actually the strongest quarter in Latin America, and in particular in Brazil. Asia Pacific Q1 was another strong quarter for Asia Pacific. The region grew its gross profit by 12.1%, increasing operating EBITDA by 11.1% FX adjusted. This performance is attributable to both organic growth and the contributions of acquisitions. Now come to the outlook on page 18. I'll start with the current trading. I'll do these numbers slowly because I think more people want to write them down. In January, gross profit per day decreased by 0.3% as reported and -2.9% on an organic basis. In February, gross profit per day grew by 5.6% as reported and 2.5% organically.
In March, the growth was 3.7% as reported and 0.9% on an organic basis. In April, growth was 9.5% as reported and 6.4% on an organic basis. It's only a couple of months since we published our annual report, and the outlook has not changed substantially. We continue to expect our key performance indicators of gross profit, operating EBITDA to grow on a full year basis, with particular reference to the second half. As usual, we intend to give quantitative guidance for full year for Q2. We do have a positive view on the business development in Europe, North America, and Asia Pacific. For Latin America, we forecast a more positive development stabilization during the course of the year after a significant decline in earnings in Q1.
Clearly, we are constantly working on improvements in all regions to improve organic business growth, and this includes numerous global, regional, and localized initiatives, but we remain on our strategic course in all our regions. We currently see an increase in chemical prices throughout the world. Due to the pass-through nature of our business model and our fast inventory turnover, it should not impact our gross profit generation as we've seen in Q1. The main effect of increasing prices will be further investment in working capital. In respect to potential price increases, we expect an increase in working capital due to the planned increase in business volume for 2017, and we forecast to allocate €150 million to CapEx. We remain confident that Brenntag is well-positioned for further growth in 2017. We are really happy now to take your questions.
If you have a question, please press 01 on your telephone keypad now. Once your name has been announced, you can ask the question. If you find your question is answered before it is your turn to speak, choose to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. The first question is from Andy Chu. The line is now open.
Good afternoon. A few questions from me. Steve and Georg, just in terms of the exit growth rates, obviously, I think we have to look back quite some time. In fact, I'm going through my spreadsheet to a period where you've delivered 6.4% organic GP growth. Just wondered if you can just split that out by region, give a flavor of
Andy, are you there, Andy? We lost him.
Yes. He just lost the connection. Sorry.
It was such an increase, you see.
The next question is from Daniel Bucher of MainFirst.
Yes. Thank you very much. Actually, the question from Andy Chu was also one of mine, if you would be that kind to answer it, and then I have two further ones. The first one is on the guidance. I think here is a mismatch between the wording in the presentation on operating EBITDA and what we have in the report. In the presentation, it is without the wording of a meaningful growth. Why is the difference, and what is correct? Am I correct with this being a bit more cautious and you excluded Latin America? There has to be an explanation why this word meaningful is missing in the presentation. The last question from my side is on the conversion ratio in North America. It is down again against Q1 last year and also Q4 2016.
Why what can we expect here for the coming quarters? It seems you had quite solid organic gross profit growth in North America, while there was no operating positive leverage effect, which should occur at this level we have seen in the gross profit organically. Why not, and what are the reasons here? Thank you very much.
Good afternoon. It's Georg. Maybe I go ahead with the gross profit per working day question and the guidance question. On the gross profit per working day, yes, in April, the 6.4% organic growth is relative to the recent history, quite a high number. It comes down to interpretation. Be aware or keep in mind, April was, in terms of working days, a pretty short month and impacted by Easter. Typically, a short month positively impacts the per working day numbers. A longer month had the offsetting effect. I would actually more suggest to look at March and April combined. March was organically +0.9%. April was +6.4%, the average of the two is probably a fair number of what the trajectory of the business is. In terms of guidance, I spotted the comment in your analyst report this morning.
Actually, if I may say, I think it's a little overemphasized. We certainly didn't want to give any particular message by leaving the word meaningful out of the presentation. We just wanted to be a little bit more crisp and shorter, and the adjective meaningful doesn't say so much anyhow. You correctly pointed out right now that the wording in the official report is unchanged, and the wording in the official report is what's sent. The only change that we actually see to the qualitative guidance that we are giving at this stage is, given the significant negative growth rate in Latin America, we are a little bit more cautious on Latin America for the full-year at this stage relative to what we thought when we published the full-year results.
Okay. Perhaps I just come to North America, and I know this is a subject which quite a few people will be quite interested in. North America is at a very interesting point in its development. Maybe spend a bit more time on this. If I look at the market generally, I think we do have the benefit of seeing some other companies in a similar space to us talking about North America as being flat. That in itself is probably true. Although, to be fair, I would say also North America is seeing a sequential improvement in industrial production, which we've seen now for four quarters. We see industrial production in positive of 0.6%, which we're delighted to see. Also, I would draw your attention to the PMI index, which has also been showing very confident PMI index in North America during the first quarter.
The background in North America for us is certainly more than flat, but we regard it as positive. I think it's worth pointing out that if you look at our business in North America with the effects of oil and gas which has hit us really quite hard over a two-year period. If I look back, we have had consecutive quarters where GP was negative in North America. This is the first quarter after six negatives that this is positive. That pulls in several different directions in terms of or direction, the right direction from the point of view of growth. We look at our oil and gas business.
We are now absolutely certain that our oil and gas business has been through the worst, and we do see our business in oil and gas improving, and we do see gradual improvement in our gross profit performance in oil and gas. We see volumes across our business are up in North America, and we see volumes are up in North America, across North America. We see significant price increases across the North American markets. During the first quarter, there was a significant movement in chemical pricing, and you can see that draw down in chemical pricing in terms of the effect on our working capital. We saw quite a significant lift in transport costs for the group in North America, which was attributable to volume and fuel charges as a result of oil and gas, and also attributed to diesel charges.
We also saw a big lift in overtime costs in terms of coping with additional volumes going through the business and the business operating units. If you add all this together, what you have is a business that's gone from being completely defensive for the last two years in terms of trying to hold our costs back, hold down operating costs to basically capture as much GP as we possibly can, to a business that's moved into a higher price market and prices are moving up strongly, which suggests fundamentally that the market is confident that those prices can be maintained.
We're in a position where we do see volume growth throughout our business, and we've gone from literally operating the business as tight as we possibly can to a business now having to cope with higher volumes with existing staff and paying premium rates as a result of that. We do see some operational cost increases on straightforward fuel and distribution costs, which are also driven by volume. All of that happened pretty much in the first quarter of 2017. I think what we have here is an example of a business that's moved from being pretty defensive, having to hold on to its cost base very strongly for quite some time, to a business now that is recovering with increased volumes, significant price increases, a more confident market.
I would expect as a result of that, the conversion ratio to improve subsequently in subsequent quarters in North America. This may well be the point at which North America turns from being defensive into a growth business for us and Brenntag globally. Did that answer your question?
Yes, thank you very much. Very helpful.
Thank you.
Andy Chu is in the queue again.
The cohort.
Your line is open.
Thanks very much. Try again. Just in terms of North America, Steven, just as carrying on. You mentioned that the business moving from defensive to growth, but I think we sort of understood that you sort of held on to the sort of shape of your U.S. business. At the first sign of volume change, there should be some operating leverage in the business. What is quite, I guess, surprising to see is, going back to the time of the IPO, this business or the North American conversion ratio that was meant to be the sort of benchmark of 40% is now actually in the quarter the best part of 2% below the EMEA conversion ratio. It all makes sense in terms of volumes coming back, but clearly that conversion ratio hasn't come back.
What is the sort of shape of the amount of costs that need to go back into the business in order to support the volume growth? Do you actually have the right shape in terms of costs, or do costs still need to go back in and therefore the conversion ratio continues this relentless march downwards? That's my first question. Thank you.
Well, certainly the conversion ratio does not continue its march downwards, that's for sure. We should benefit of seeing the current performance of the business in terms of conversion ratios. The first quarter is seasonally quite a challenging quarter for conversion ratios as you probably know. We do actually put a number of costs in the first quarter, which are then spread out across the rest of the year. However, having said all of that, I'm absolutely certain that the conversion ratio for North America will exceed the EMEA conversion ratio going forward. As far as we can see, if you look at that, it's unprecedented for us to have such a high growth in GP and for that conversion, EBITDA level not to be higher.
Clearly, as we've looked at this very closely, we do see operational costs in the areas of transport and distribution and handling. Now, what we've said continually throughout the defensive period in North America is that we didn't cut into the core of the business. In that area, I was really looking at things like our specialty chemicals capacity or the management capacity, the ability of this business to actually grow organically in markets as they return. What we did pull back, and that's why last week you saw 200 or 300 people in operators, truck drivers, the fork truck drivers, all these people basically left the business because we reduced and downsized the operation to reflect, to basically pull back as much as we possibly could of the operating costs of the business during the slowdown in Oil & Gas.
Clearly, as we go back into a volume growth scenario, all those positions come back. Those positions do come back, but they don't come back in a 12-week period. They'll come back actually over the course of this year. As we are at the moment, we are absolutely flat out in North America. We are expecting that we do expect to be paying premium rates to our existing employers, who are working very, very hard. That reallocation and reorientation from defensive to growth is what we're going through now. That will certainly result in North America, which recovering its conversion ratios in the future. This is certainly not a long-term trend, which I expect to be the same.
I would expect North America to go completely opposite direction, which is to start returning to its conversion ratios to more historical numbers it's in.
Steve, we'll see that in Q2 or are we? You're confident that you'll be-
I am confident that Q2 will certainly exceed Q1.
Okay. Sorry, in terms of the performance in Q2, even relative to EMEA-
Yes
There's obviously a seasonality in the business.
Yeah. I will be very surprised if the North Americans did not beat their EMEA colleagues in this. That isn't encouraging our EMEA colleagues to try any less hard to get their conversion ratio up.
Fine. In terms of oil and gas, is it possible to give us the GP number? I think you've stopped giving the GP number for oil and gas in North America. You exited at EUR 59 of GP in Q4, and you mentioned in your statement that you're sequentially up. How much is up, please?
Well, Andy, I'm happy to give the number. I'm probably going to be a little bit reluctant to give this number going forward because we have a competitive situation in North America, and this is a bit of a give. We gave this number very clearly to help investors understand where we're going on GP and what have you in oil and gas. I think we've got to the point now where as a company, we can say to you that our oil and gas business is stable and growing. We will give you the number, but I do see it as being a commercially sensitive number, which I don't particularly want to be broadcasting every quarter.
Yeah. We took the slide from the presentation because we think from here going forward, the oil and gas is not necessarily a super differentiating factor relative to the rest of the business. The GP in Q1 was slightly ahead of the Q4 level, slightly ahead of 59.
Okay, great. Then in terms of Argentina, just moving to LatAm, obviously a lot of people are having problems in Brazil, so that's sort of known. In terms of what's happening in Argentina, and maybe could you give us just a size again, a sizing of both Brazil and Argentina, please, by the dollar, whatever measure?
Yeah. I have to look it up, Andy, to make sure I give you the right number. I need half a minute. Brazil is for sure much more relevant than Argentina is. Let's see if I'm quick enough here. Argentina is on a full year base, an EBITDA of about EUR 7 million. Brazil is on a full year base, and I have an FY number only, but you have numbers here, Alex.
Yeah.
Brazil would be in USD terms, I can see by the full year number, is around $18 million-$20 million.
Okay, brilliant. My last question, just one on balance sheet and M&A, you're cash generative, and will be. You've got the price rises in chemicals at the moment. In terms of the sort of cash on balance sheet, I mean you've got half a billion EUR of cash sitting on the balance sheet. Just remind us what the amount of cash you need actually from a working capital point of view is. You need cash available to pay for the chemicals fee rising, but it still strikes me that you're running a very high level of absolute cash balance, are there any sort of thoughts around reducing that balance, please?
Yeah, Andy, I think we are in good company with other companies, given that the cash has a relatively low cost of carry, and it gives additional flexibility for M&A or other purposes. The amount of cash we need to run the business from a working capital perspective, probably EUR 100 million-EUR 150 million.
Yeah. Could I just ask one last one? In terms of the current run rate of about 3%-3.5% or whatever that is in terms of GP growth rate, how does that split, please, just by the major regions, so by North America and by EMEA, how does that organically split? Is it broadly split? Is it three-ish in both regions?
I maybe don't really want to go on that level in a region by region discussion. I would say it's broadly even between Europe and North America. Latin America, obviously been on a negative run.
Fantastic. Thanks very much. Thank you.
Thank you.
The next question is from Josh Pade. Your line is now open.
Yeah. Hi, good afternoon, everyone. My first question's on the conversion margin in EMEA. Obviously positive this quarter. Were you happy with that level of improvement? You obviously just sort of made up the lost ground from last year, but nothing incremental to that. Given sort of current organic growth trends there, do you think that should accelerate during the year? The second question's on pricing. Obviously we've seen some chemical price inflation. What is the environment like for you to be able to push price increases through for your services. Presumably the lack of group conversion margin improvement suggests that this isn't happening yet. Final question for now on finance costs.
I just wondered if you could give us some sort of guidance on absolute levels of finance costs and how those should phase through the rest of the year following the refinancing. Thank you.
Just in terms of conversion of increased prices into the marketplace. It is fair to say that we had an avalanche of price increases in the first quarter. That has deserved a huge amount of activity in pricing throughout the organization and particularly in North America. I would say that we have a strong price passage business model. We do have some accounts that are monthly pricing, some accounts may be quarterly. Some of those may have been the larger corporates, which do tend to move on a quarterly basis, but these are less significant in the total number. There's been a lot of movement and I would say that certainly Q2 would be a quarter where everything will be caught up as far as pricing is concerned. I'm not expecting any negative drag from that.
Okay. I think you had a question on our finance costs for the full year. I think our suggestion would be to think about a cash interest of EUR 80 on a run rate basis, so 8-0 cash interest, then take an expense of another EUR 10, which might be a big revaluation, discounting of provisions and what have you. Say on a full year basis, the expectation of a financial result would be around an immaterial set of EUR 90.
Okay. That's helpful. Thank you.
Just on conversion ratio in EMEA. Clearly, that's a constant target and EMEA hasn't had the volatility that North America suffered the last two years. I think we can see the EMEA region being relatively stable. There's no reason why you shouldn't see improvements in the EMEA region if business activity continues to be solid and continues to pick up. We're not expecting to make any major investments in infrastructure or people to carry on more business. There's a natural effect there.
Okay, great. Just to clarify that, is the sort of level of organic growth I think around 3 or 4% in Europe at the moment, is that enough to drive operational leverage if that continues through the rest?
Yes, it is.
Okay, great. Thank you.
The next question is from Mr. Mackenzie of UBS. Please go ahead.
Yeah, afternoon, everyone. A couple from me, please. First just to follow up on Joshua's question on that pricing impact. Can you just clarify whether you've seen any gross profit per ton expansion in Q1 and whether you think that might come later in the year? On the growth in Europe, can we just talk about the trends in specialty versus industrial? I know that you've been investing a lot in specialty over the past few years, and that's done well, do you think that there's more scope to expand your services in that specialty market?
In terms of GP per ton, that's a question actually related to the total company.
Yeah. On the GP per ton basis, mind you, the GP per ton is influenced by a number of things, product mix, volume changes, what have you. Gross profit per ton on a group-wide level is about stable against previous year's quarter. There's ups and downs in the regions which are probably too detailed to discuss.
Okay.
Specialties versus industrials, yes, the specialties business is growing a little stronger than the industrials business. Also here, the differentiation is not so significant.
Okay, thanks. In terms of the outlook to invest more in specialties, is that still a focus for the developed markets?
Well, yes, certainly, we've got a very strong position on industrial chemicals, and we see specialties as being a natural growth opportunity for us. We actually are growing our business in life sciences, particularly strongly in Europe. Indeed, as a group-wide, we expect specialties to become a much larger part of our total portfolio.
Okay, great. Just one more, sorry, on APAC. Obviously some slowdown in the growth there. I think organically maybe slipped back a bit. I guess that's just very tough comps. Would you call out any country or region? I know it can be volatile, but anything just to flag there.
I'm sorry. Could you repeat the question again, please?
Just on the APAC growth rate.
APAC.
Yeah. Organically you might be down a tad year on year even. Anything to call out there in terms of regions, or is it just the tough comps from the prior year?
I think in terms of APAC, there was a tough comp in terms of prior year with a very significant growth in first quarter 2016. I think in terms of the development of the region, we are pretty pleased across the region. I think it would be more product specific. There's one or two products which are of a seasonal nature. We do quite a lot of business into road surfacing, specialty chemicals for road surfacing and some of the component parts of that. That can be quite lumpy in terms of it is more government led as opposed to anything else. I do know that Asia Pacific has got a lighter order book in the area of road surfacing than it would normally have had. I expect to see that recover over the course of the year.
Okay, that is helpful. Thank you.
The next question is from Carl Raynsford of Credit Suisse. Please go ahead.
Yeah. Thank you very much. Just going back to North America, I am sorry to keep drilling the point here, but Steven, just to clarify, when you said you were expecting the conversion ratio improvements to move back into positive territory, are you talking there sequentially or year-on-year, i.e., from Q2 through to Q4? Are we going to be looking at conversion ratio progress year-on-year or just progress versus the first quarter? That is my first question.
Well, clearly, our ambition is to do that. It remains to be seen how successful we are. We are clearly focused on the conversion ratio because we want to obviously take advantage of the GP that's being generated in the region and to get it into EBITDA as quickly as possible. We know our historical performance rates are very impressive. We do have a bit of a change in mix in some of the acquisitions we made more recently are not at the same historical levels as Brenntag has had in the past. Nevertheless, we want our ambition is to see sequential improvement in our EBITDA GP conversion ratio in North America. As I said earlier on, we're taking this business from being quite defensive into a growth mode, and that's a sequence that doesn't happen in a few weeks.
It probably takes you one or two quarters to move through that stage. I would say that directionally that this is a basic move that we'll see the business grow sequentially on GP conversion ratio during the course of the year. I don't want to get drawn into quarter by quarter because I think it's just too detailed at this stage.
Okay. Thank you very much. Just going back to your point about paying premium rates for the staff who are coming back into the business and presumably overtime for the staff who were retained. That strikes me as something that's going to be a recurring feature over the balance of the year. Are you able to do some efficiencies around labor scheduling to try and reduce the level of effectively these premium labor rates that you're paying? Again, I just see that as being a drag on the conversion ratio as we go forwards.
I think it is a particular feature of this quarter. You'd be aware North America is a very business-friendly environment in terms of recruitment and what have you. We do see efficiency gains in our own fleet and also bringing back in outside operators to supplement our existing fleet in terms of transportation. You've got to bear in mind that over the last six quarters or the last couple of years, we've been downsizing our capacity in terms of the warehouse volumes and direct volumes that we've been doing. As we grow back into North America, we produced effectively. Now we are down that road. I also want to make the point that we're not chasing volume at any price. Ultimately, we are only interested in business making us money.
We will be keeping a very close eye on our volume versus margin versus EBITDA conversion. Don't worry. It is going to be a bit of a transitionary phase, but certainly it's quite pronounced in the first quarter that what we've been paying in terms of operating of transportation and overtime rates and fuel costs was quite noticed.
Okay. Just a couple of final questions for Georg, if I can. Just looking at the effective tax rate in the quarter, that looks like it came out about 31.5%. What are you guiding for the full year? It's a very small number, but I noticed that there's a minority charge, a very small one that's crept back in. Again, firstly, what's that in respect of, and what's it going to look like for the full year?
On the tax rate first. Yes, the tax rate is 31.5, so a little below the 34%-35% we are guiding. That's mainly a mix effect. Obviously, tax rates are, for the time being, pretty high in North America, cheaper in the emerging markets and to a degree even in Europe. With the strengthening of the results in North America, at one point in time, I would expect the tax rate to be more to 34% than that we usually indicate. The minority interest. It's a small number. It's basically coming from a couple of minority participations that exist in our business, predominantly in the Middle East. Take the Q1 number and multiply it by four for a full year idea.
Okay. Thank you very much.
The next question is from Laurence Alexander of Jefferies. Please go ahead.
Hello. I guess three quick ones. First, on the U.S. trends in April, or maybe more broadly, can you speak to whether the acceleration that you saw in April is volume related, or is that pricing catching up to the raw material costs? Secondly, in Latin America, do you expect to generate positive comps by the end of this year? And third, with your discussions with customers about potentially picking up more market share, can you discuss how your quality levels have been doing and whether the customers are more open to those discussions now that they're seeing their volumes improve?
Laurence, maybe as I go ahead, I beg your understanding, I think with the gross profit per working day on a monthly basis, we feel quite a level of disclosure already. April is the month after the close of the quarter. We feel it's a little too much to go into regional development on that specific number. I beg your pardon. Latin America comps. Yes, the beginning of last year was reasonably strong in Latin America, then it weakened in course of the year. I would say the second of the year, Q3 and Q4, we are running against materially easier comps in Latin America.
Outsourcing with customers?
Can you repeat the question on outsourcing, please?
The question is, as customers are seeing their volumes pick up, are the outsourcing discussions becoming easier? Are you running into quality issues because of your need to bring on more staff, and so that slows down the discussion?
No, actually, the best environment that you can have these types of discussions in is in a growth environment or a recessionary environment, because that tends to push people into making a decision to change. Certainly, it would be fair to say that where we look at customers on as a global account, which we have a significant number of global accounts these days, the tendency for them to try and push more down the route of consolidation using Brenntag increases as their volumes go up because they're looking to effectively concentrate more on their core activities and seek to outsource more to distributors like Brenntag.
Thank you.
The next question is from Ratresh Mah. Your line is now open.
Hi, good afternoon, gents. Sorry to ask again about the conversion rate. Seems quite topical. If you look at the inventory turn for the business, how long does it take for you to basically get the cost price increases moved to the customer? I know the inventory turn has slowed because of chemical prices, but as the prices increase, sooner or later you'll pass on to customers. Should we expect some tailwind from that in Q2, in the coming quarters, if not Q2, later on? If there are any hedging effects that might change that, it would be useful to understand. That's my first question.
Well, in terms of pricing, I mean, it's pretty straightforward. We have a strong price pass-through model in the group as a whole. When we receive price increases or notification price increases, we do go to the market pretty much instantaneously. The time lag, such that there is, should be negligible. I think probably where you do get pushback, I think it's probably fair to say, is when you have very significant price increases. Clearly, they're subject to more negotiation and there's a more intense interaction with customers over those types of increases compared to relatively modest or inflationary-type increases that we've seen in other parts of the product portfolio.
I would say that certainly in the first quarter, there was a heck of a lot of activity in price negotiations, interaction with customers and what have you, particularly in North America as a result of the very strong upward pressure there. Under normal circumstances, this business wouldn't expect to see any delta between price increases from the suppliers as putting prices up to customers.
No, I totally appreciate that. Normally, you would pass through the price increases. Given your inventory turn, you should have had a benefit of one and a half months of price increases in your gross margin. We have not seen that, which is why I asked the question. I think what you're telling us is because it's a spike, it has been more difficult to pass through. Hence the second part of the question, do we-
Okay. I just hesitate. I didn't say it's more difficult to pass it through. As you said, there's a lot of activity on pricing, a lot of interaction, a lot of customer meetings and what have you. There's a difference between actually being able to pass the price increase through and actually doing it. I think the answer is that you can see from our sales numbers moving and our GP moving up that we have been successful in generating more GP.
Okay. On the Latin American business, if you look at statistics coming out of LatAm countries on chemical volumes, they all seem to be okay. You seem to be struggling a bit. You're not alone there. Most other chemical distributors are. Is that something to do with the fact that the dollar pricing and real is improving sequentially, means that the price component in the growth or sales growth is not working as you would expect, and that should eventually normalize as the real recovery stabilizes?
The negative growth rate in Latin America that the chemical distribution industry is currently experiencing, it's basically based on weak market demand in terms of volumes, and that coupled with the first half of last year being relatively strong.
I think what's quite interesting in Latin America is that we're certainly not shouting out aloud about it, but we do see that there probably has been a turning point in Brazil and Argentina. We see this negative outlook to be somewhat more subdued and more neutral as the year progresses. I would be a little bit more optimistic about Latin America towards the end of the year.
Thank you.
The next question is a follow-up of Andy Chu. Your line is now open.
Thanks very much. Another question from me, Steve. I think you just mentioned that in terms of Q2, that you would expect North America conversion margins to be above EMEA. Just putting some numbers around that. The conversion margin in EMEA was at 36% last year and North America was at 37.8%. You're confident that the North American margin, I guess, as a floor should be at least 36%, although one would probably expect, given the trends in GP and conversion ratio improvement, that actually EMEA itself on that 36% should be up year-over-year. Is that a fair summary of what your thoughts are, please, for Q2 with North American conversion ratio?
Yeah, well, I think first of all on EMEA, clearly we have ambitions around the further conversion ratio, but your point about North America is valid.
Right. Thanks very much.
The next question is from Christian Kohlpaintner. Your line is now open.
Yes. Good afternoon. Thanks for taking my question. Two housekeeping items. First, your interest expense in the P&L, but also in terms of cash payments in the cash flow statement, has gone up year-over-year, but also sequentially versus Q4, while net debt has hardly changed. I wonder what this is about, and do you face any material deterioration in your refinancing costs, which I would be very surprised about. Secondly, you're guiding for a significant improvement in free cash flow for the full year. In Q1, you faced a shortfall. You're guiding for higher working capital, moderate increase in CapEx spending. Is it then fair to assume that your free cash flow guidance implies a very pronounced EBITDA improvement and that the free cash flow improvement is solidly driven by EBITDA?
Yeah. On the interest expense or on the interest payment in the cash flow statement, don't draw conclusions from that. That's basically related to our refinancing in Q1 this year, which moved interest payments into a slightly different quarter than where they occurred last year. On a full year basis, you shouldn't see too much of a difference. On a question I just said a little earlier, I pointed to an EUR 80 million cash interest expense for the full year and net net net what you would also find in the cash flow statement over the full year. On free cash flow, obviously free cash flow is to a meaningful degree impacted by working capital swings and then the volatility factor that's hardly to predict.
The shortfall we have seen in Q1 relative to previous year in course of the year, we would expect to recover partly by higher EBITDA, but also by strong positive seasonal effects towards the end of the year. If that guidance of stronger cash flow at the end of the day holds will depend on a continuation of chemical price developments from here. It assumes flat chemical prices from here going forward.
Okay. That's clear. Thank you.
The next question is from Milo Bank of Goldman Sachs. Please go ahead.
Hi, good afternoon, gentlemen. Two questions from my side. First of all, have you seen an impact from Easter into your numbers? Is there anything that we should take into account, both on the top line and then assuming a higher drop through also on your conversion margins, particularly probably in EMEA? The second question, just as sort of a reiteration, but can you say anything on your M&A pipeline? You've done a couple of deals, but they're relatively on the smaller side. Anything worth flagging there?
Certainly, there is some operational leverage benefits, which will be attributable to the European business in the first quarter due to Easter, and obviously the equivalent of that in the second quarter in reverse. I don't think these are so pronounced, over previous years, they've been pretty flat net net net. Whilst you're completely correct, there will be a beneficial operational leverage in Q1 and then it reverses out in Q2. Ultimately, it's not a huge number. In terms of acquisitions, we do have a number of acquisitions which are in the final stages of due diligence and surrounding North America and indeed Asia Pacific. We expect to deliver the sort of EUR 2 million-EUR 300 million spend this year. It's still our ambition.
Okay. Thank you very much.
Okay.
The next question is from Vutu Gandegan. Your line is now open.
Yes. Thank you for taking the questions. I've got three. First on LatAm. Steve, you spoke about the comps getting easier in the second half. My question is, obviously the result is down significantly. It's down 34% year-on-year. Are you saying that you're leaving the business as it is so that it can recover towards the end of the year or are you taking certain measures, taking out some costs there? That would be the first question. The second question is a bit on the chemical industry. We've seen several outages in various parts of the industry. Was there any impact on your business, be it positive or negative from that? Thirdly, it's coming back to the working capital. There was an outflow this quarter of EUR 156 million, mainly on the back of higher trade receivables.
It seems that you expect this to normalize. Can you tell me by when? Is it on a quarterly basis, especially considering that the oil price is flattish to down a little bit?
First of all, just regarding outages, the answer is yes, actually, in so far as our Asia Pacific operation has had to cope with product availability issues. That's been really a bit of a drag on our organic number. That's been in the petrochemical side, which I think I mentioned earlier on in terms of impact road servicing and what have you. We are hoping and expecting that to change during the course of the second quarter. That is a well-spotted pressure on the business in Asia Pacific.
As far as Latin America concerned, I think it's fair to say that we are looking at the current shape of the organization, and we are actually considering what we should do in terms of reflecting appropriate structures and business organization to cope with what is effectively a smaller part of the market at the moment than we would normally, than we've experienced previously. We are certainly actively looking at that one.
On the working capital, a seasonal reduction in working capital would be in Q4 of this year. To what degree chemical price changes influence working capital from here obviously depends on chemical prices, which probably other people are cleverer than us to predict chemical prices. Oil price is one influence factor, but I would overvalue it. I wouldn't make too much of a judgment from oil price development.
Yeah. A bit of a theoretical question, but if you look at the starting base of most chemical products on naphtha, if we would track that usually, what is your delay? Because obviously you have a mix of commodities and specialties. What is usually the delay you see in your price in terms of months or quarters?
We tried an analysis a couple of years ago. It didn't show a super clear correlation.
Right.
Yeah. I'd be very cautious about trying to track Naphtha and chemical pricing, in terms of chemical distribution pricing. The fragmentation is too great. I think you'd find yourself in a confused position.
Okay. Let's not do that then. Thank you.
Yeah.
The next question is from Christian Obst of Baader Bank. Please go ahead.
Yes, hello. Just one question, sorry to come back to conversion ratios, nevertheless, you explained in detail the development 2016 to 2017. Having a little bit of a longer view, coming from 2011 quarterly basis conversion rates, always almost went down from above 35% to below to approximately 30%. Maybe the entire business model, and maybe you agree or give some explanation, is in adapting or changing the mix from specialty to more standard chemicals, adjusting capacities to volatility of the underlying economics, and that the entire structure of the business model, in the end, is driving conversion rates a little bit down going forward. You have to accept that fact going forward.
Do you really think that even with this broad range of activities you have on these movements in the mix and in these economic changes, that you can increase the overall conversion rate of the group again towards 35%? Thank you.
Obviously that is the challenge for the management and as the management, that is a challenge we very readily accept. It's fair to say that the chemical distribution business, along with many other industries, has had to effectively start to cope with what is essentially a very low growth macroeconomic environment. We've all gone from growing with the industry production at three, four, 5% in the past, and that's been an environment which has supported a very significant growth. I think we all recognize that we're going to be living in a low macroeconomic environment and we have to effectively reorientate and realign our business to grow successfully in a low growth market. From our perspective, we are in a good position as far as I'm concerned because ultimately the chemical distribution business is extremely fragmented.
Market penetration by products, by industry, by product, by customer groups across the world is still relatively shallow in many respects. Therefore, existing in a lower growth macroeconomic environment is obviously not necessarily a comfortable place to be, but we do have a very much a target-rich environment for growth in the distribution sector. It's a question of making sure that the company, Brenntag particularly, is well-positioned and resourced accordingly to capture that growth. I'm by no means changing the outlook of this business in terms of its fundamental growth characteristics because I think they're as solid as ever.
This means gross profit growth, I accept that. Even if you achieve a 30% conversion rate, it's not that bad then going into EBITDA. It's just lower against the average of the past. Could it be that we can come into some kind of a new normal, which is more around 30% than 35%, or would you disagree?
I would disagree with that.
Okay. Thank you very much.
As a reminder, if you would like to ask a question, please press 01. There are no further questions. I hand back to the speakers.
Okay. Well, thank you very much indeed, everybody, for joining this afternoon. Thank you for all your questions and for making the public listed call.
Thank you very much.
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