Earnings Call: Q1 2017

May 10, 2017

Dear ladies and gentlemen, welcome to the Brantac 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. I now hand you over to Stephen 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 overview of Q1 2017. As usual, I'm here with Guillaume Moore, our CFO. And at the end, we'll be very pleased to answer your questions after the presentation. So let me start with a short summary of the main takeaways from the Q1 of 2017. The group generated gross profit of €631,800,000 This represents an encouraging increase of 5.5% on a constant currency basis. Our regions 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 macroeconomic difficulties in Brazil and Argentina. EBITDA totaled EUR 201,600,000, growing between 0.5 percent on an FX adjusted basis. Earnings per share in the Q1, dollars 90.61 was clearly well above last year's Q1. With respect to M and A, we made 2 acquisitions in the United States in the Q1. We've already discussed these, during our 4 year results in March. So I'll probably skip that to the next page. So maybe I can add to you, Clive. Yes. Thank you, Steve. Good afternoon, everybody. I'll move you through the financials as usual, Starting on Page 6 with our income statement. In an economic environment that continues to be characterized 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 incurred in the quarter are actually driven by the stronger business growth. EBITDA for the group totals €201,600,000 and have exceeded previous year's level. On a constant FX basis, EBITDA is up by 2.5%. The reported growth rate for our gross profit and EBITDA, without the FX adjustment, so the positive growth rates were actually higher by more than 2 percentage points. And that results from the fact that the strength of the U. S. Dollar created some tailwinds in translation. The further lines of the EPSL statement on Page 7. Depreciation for the Q1 amounted to €28,900,000,000 and Amortization to €11,600,000 The financial result amounted to a net expense of €22,800,000 It's a significant improvement against last year. So financial result in Q1 'sixteen was impacted by a one €27,000,000 foreign exchange loss in connection with the business in Venezuela, and that obviously and as expected did not reoccur. We recorded tax rate of 31.5 percent for the Q1, and this results into earnings per share Of 0.61 tons an increase by more than 40%. The increase is heavily impacted by the mentioned effect in Berensela in the Q1 'sixteen. I'll move to the details of cash flow statement on Slide 8. In the Q1, the operating cash flow amounted to €75,700,000 Following €99,000,000 in the Q1 'sixteen. 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. It's a normal characteristic for our business in an environment of rising prices particularly. I'll take the opportunity on this Slide 8 and explain one particular cash flow movement. Those of you who follow us for a longer time, you will remember that Brantac France was fined by the French So we did back in 'thirteen, so 4 years ago, in an amount of €48,000,000 And the time related to a year's back case So prior to 2005, when Brandtack applied for leniency and since then fully cooperates with your sovereignties. You might also remember that we did appeal before the court against the fine. So Court of Appeal has now canceled the decision by the French opposition of Saudi due to See dual errors. The money was returned to us, and then we present the cash inflow in Q1, which is reflected in the line other of the cash flow We all need to be aware that the proceedings are ongoing and that the court has not yet decided on the merits of the case. That will be done in subsequent steps. And because the proceedings are ongoing, we did not take the amount into income. Instead, we allocated the amount to provisions. So further parts of the cash flow statement on Page 9. Let's speak about the investment and financing cash flow first. CapEx is slightly above last year's level. The cash out for acquisitions reflects the payments for the acquisitions of Peltra and Greens, which were closed in the Q1 of this year. In the financing cash flow, the line repayment of proceeds contains a repayment of $150,000,000 in connection with the refinancing of our syndicated loan in course of the quarter. I'll move a couple of pages ahead to Page 11, the trajectory on leverage. On the slide, You see the information of on net debt and leverage. Net debt decreased slightly in the quarter and amounts to 1,000,000,000 €7,000,000 at the end of the quarter in relative terms that represents a leverage of 2x Slightly below the level at the end of the last financial year. Two pages further down on Page 13, the working capital information. Great working capital amounted €4,511,000,000 at the end of the quarter, An increase of more than €150,000,000 compared to year end. The increase is predominantly Due to business volume and rising chemical prices, we turned to working capital 8.3x in the Q1, and that's an improvement against the level we achieved in 2016. Q1 20 17 delivered a free cash flow of €25,700,000 and that's obviously a pretty significant reduction against previous year, and the reduction is due to higher outflow for working capital as already touched upon. That's the general mechanic of our business. When prices and sales increase, the development of working capital returns is actually positive. I'll hand the presentation back to Steve for a segment discussion. Thanks, Johan. Moving into Page 16 on the presentation. Just going through the operating margin data bridge for Q1 2017 versus Q1 2016. We clearly the strength of the U. S. Dollar meant we had a tailwind in the Quarter, which results in a positive EBITDA effect of about EUR 5,000,000. Acquisitions have contributed an additional EUR 50,000,000 to profits. In Latin America, we faced some particular challenges, and our performance was quite negatively impacted by €5,000,000 And I'll talk a little bit more about in the segment It's a discussion, and I'll move to that now. If you look at our EMEA region on Page 16. Americas operating gross profit by 5.1% and EBITDA by 9.1%, both on an FX adjusted basis. This is an environment that will be growing moderately in Europe, and we believe that's a good achievement, and it's mainly attributable to strong organic growth performance. In North America, we saw further stabilization in the oil and gas sector and an overall improving macroeconomic environment. And the first quarter comes up by an encouraging 7.5% on FX adjusted. This is thanks to good organic performance broadly based on a number of industries. Yes, well, as in terms of strong volumes, not credit expenses, we our credit costs did rise during the period, particularly up over time. And transport, 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. And 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 a smaller segment in Latin America has suffered quite difficult macroeconomic conditions, Brazil and Argentina, with respect to a decline in gross profit of 9% and operating EBITDA of minus 34%, both FX adjusted. It should be noted that Q1 2016 was actually the strongest quarter in Latin America and particularly in Brazil. Asia Pacific, Q1 was another strong quarter for Asia Pacific. The region grew its gross profit by 12.1%, decreasing operating EBITDA by 11.1% as adjusted. This performance is attributable to both organic growth and the contributions of acquisitions. So welcome to the outlook on Page 18. I'll start with the current trading. I'll do numbers slowly because a lot of people want to write them down. So in January, gross profit per day decreased by 0.3% as reported and negative 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, we'll put you in reference to the second half. As usual, we intend to give constant 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 focus on more growth and this includes the numerous global regional and local initiatives, and we remain on a strategic course in all our regions. We currently see an increase in chemical prices throughout the world. Due to the faster 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, We forecast to allocate €150,000,000 CapEx and mature CapEx. We remain confident that Brantec is well positioned for further growth in 2017, We are really happy now to take The first question is from Andy Chu. Your line is now open. Good afternoon. A few questions from me. Steve, Gail, just in terms of the exit growth rates, obviously, I think we have to look back quite some time. In fact, I'm getting too much better. Shoot, it went to a period where you've delivered 6.4% Organic GP growth. So I just wondered if you can just split that out by region, give a flavor of Yes, he just lost the connection. So then the next question is from Daniel Buchter of MainFirst. Yes. Thank you very much. Actually, the question from NAQ was also one of mine. So if you would be that kind to answer it. And then I have 2 further ones. The first one is on the guidance. I think there 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 and why is the difference and what is correct? And the correct one, am I correct With this being a bit more cautious and you excluded Latin America, and I mean there has to be, yes, an explanation why this word meaningful is missing in the presentation. And then 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 16. Why and what other what can we expect you 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, and why not and what are the reasons here? Yes. Good afternoon. It's Jorg. Maybe I go ahead with the cost Per working day question and the guidance question. Of the gross profit per working day, yes, in April, the 6 4% of any 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 impacted the working day numbers and longer months had the offsetting effect. So I would actually more suggest to look at that margin April combined. March was organically plus 0.9. April was plus 6.4 percent, so the average of the tour is probably a fair number of what the trajectory of the business is. In terms of guidance, I spotted a comment in your analyst report this morning. Actually, if I may say, I think it's a little over emphasized. We didn't want to give 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 Quantitative 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 In America, for the full year at this stage, relative to what we saw when we published the full year results. Okay. And then perhaps I'll just come to North America, and I know this is a subject which a few people will be quite interested in. North America is a very interesting point of its development. If you look at I'm going to maybe put a bit more time on this. If I look at the market generally, I think we feel the benefit I just seen some of the companies in the face was thinking about North America has been flat. And that in itself is Probably true. Although we to be fair, I would say also North America is seeing a sequential improvement in industrial production, which We have seen now for 4 quarters, and we see industrial production in positive 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 Q1. So the background in North America for us is certainly a positive 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 quite It would be quite hard over the 2 year period. If I look back, we had 6 consecutive quarters where GP was negative North America is negative. And this is the Q1 after 6 negatives that this is positive. And that pulls us in several different directions in terms of all direction, the right direction from the point of view of growth. If 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 see we do see our business in oil and gas Improving, and we see reduced sequential improvement in our gross profit performance in oil and gas. We see volumes across our business In North America, we see volumes up in North America across North America. We see significant price increases across the North American market. During the Q1, there was a significant move up in chemical pricing, And you can see that drawdown 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 is attributable to volume and fuel charges as it was also oil and gas and also to turn 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 pricing units. So if you add this always together, what you have is a business that's gone from being completely defensive for the last 2 years in terms of trying to hold our costs back, Hold down operating costs to basically capture as much GP as we possibly can. And to anticipate moving to Higher price market, prices are moving up strongly, which suggests fundamentally 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, paying premium rates as a result of that. We do see some operational cost increases on the straightforward fuel and distribution costs, which are also driven by volume. All of that happened pretty much in the first Quarter of 2017. So I think what we have here is an example of the business that's moving from being pretty defensive Thank you. Hold on. This cost base very strongly for quite some time. The business now is becoming with increased volumes, Significant price increases are more confident markets. And I would expect, as a result of that, the conversion ratio to improve subsequently in subsequent quarters in North America. And this is really a quick question. This is already a point in which North America turns from independents into a growth business for us and Brantec globally. That was your question? Yes. Thank you very much. Very helpful. So Andy Chu is in the queue again. Your line is open. Thank you very much. Try again. Just in terms of North America, Steve, just as carrying on, I mean, you mentioned that the business moving from defensive to growth, I think we sort of understood that you sort of held on to the sort of shape of your U. S. Business. The first sign of volume change, There should be some operating leverage in the business. And 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. So it all makes sense in terms of volumes coming back, but Clearly, that conversion ratio hasn't come back. So sort of 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 to some relentless march downwards is my first question. Thank you. Well, certainly, the conversion ratio does not It's March downwards, that's for sure. And we have the benefits of seeing the current performance of the business in terms the conversion ratios. The Q1 is seasonally quite a challenging quarter for conversion ratios, as you probably know. We do actually forward we do actually put a number of costs in the Q1, which are then spread out across the rest of the year. However, having said all of that, Yes. I'm absolutely certain that the conversion ratio for North America will exceed the EMEA conversion ratio going forward. And as far as where we can see, if you look at it's unprecedented for us such a high growth in GP And for not for that conversion EBITDA level not to be higher. And clearly, we will take this very, very closely. We do see operational costs In the areas of transport and distribution and handling. Now what we've said continually throughout the sort of defensive period in North America is that we didn't The core of the business in that area, I'm just really looking at things like specialty Geote Chemicals capacity, the management capacity, the ability of this business to actually grow organically in markets as they return, We did pull back and that's what we saw, 200, 300 people in operators, truck drivers, The people in the forklift truck drivers, all these people basically left the business because we reduced and downsized the operation to reflect We should basically call back as much as we possibly could of the operating cost of goods during the slowdown in oil and gas. Clearly, as we go back into a volume growth scenario, then all those positions come back. Those pictures do come back, but they do come back in a 12 week period. They'll come back gradually over the course of this year. And as we are at the moment, we are absolutely flat out in North America. And so we are expecting we do expect to pay Premium rates to our existing employers are working very, very hard. But that reallocation and reorientation from defense its growth is what we're going through now. And that will certainly result in North America, which recovering its conversion ratios in the future. So this is certainly not A long term trend, which I expect to be sustained. I would expect North America to go completely in the opposite direction and to start returning to its commercial ratios to more Historical numbers, it's been. And Steve will say that in Q2, will we? Are you confident that you'll be I am confident that Q2 will Certainly, it's in Q1. Okay. Sorry, in terms of the performance in Q2 Even relative to EMEA, there's also a seasonality in the business. Yes. I would be very surprised if the North American did not beat the EMEA colleagues in this, and I didn't encourage our EMEA colleagues to try Something like that to get that conversion measure up. Fine. And then in terms of oil and gas, is it possible to give us the GP number? Because I think you stopped giving the GP number for oil and gas in North America. You exited at $59 of GP in Q4, you mentioned in your statements that you're sequentially up. So how much is up, please? Andy, if you all can give the number, but 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 because 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. I 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. Yes. We took the slide from the presentation because we think from here going forward, lower LNG is not necessarily a super differentiating factor relative the rest of the business, the GP in Q1 was slightly ahead of the Q4 level, so slightly ahead of 59. Okay, great. And then in terms of Argentina, just moving to LatAm, obviously, a lot of people having problems in Brazil, so that's Sort of known and but in terms of what's happening in Argentina, maybe could you give us just a size again, a sizing of both Brazil And Argentina placed by Vidal, whatever Yes, I have to look it up, To make sure I give you the right number, I need to have a minute. Brazil is, for sure, much more relevant than Let's see if I'm quick enough here. So Argentina is on a full year base EBITDA of about $7,000,000 and Brazil Yes. On a full year basis, I have a number only, but fewer numbers here. So Brazil would be in dollar terms, I can see where the Full year number is around $18,000,000 to $20,000,000 Okay. And then my last question, just one on the balance sheet and M and A. And Obviously, sort of your cash generative and well-being obviously you've got the pricing price rises in chemicals at the But in terms of the sort of cash on balance sheet, I mean, you got €500,000,000 of cash sitting on the balance sheet. And then just remind us what the sort of The amount of cash you need actually from a working capital point of view is, obviously, you need cash available for to pay for chemicals are rising, but it still strikes me that you're running a very high level of absolute cash balance. And is there any sort of Any sort of thoughts around reducing that balance, please? Yes, Mandej. I think we are in good company with other Given that the cash has relatively low cost of carry and it gives additional flexibility for M and A or other purposes, The amount of cash we need to run the business from a working capital perspective is probably 100 to 115. Yes. And actually, could I just ask one last, 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, by Despite the major regions, so by North America and by EMEA, what does the sort of how does that organically split? Is it broadly split? I would say it's broadly even between Europe and North America. Latin America, obviously, being on a negative front. Fantastic. Thanks very much. Thank you. Thank you. The next question is from Josh Pudel. Your line is now open. Yes. Hi, good afternoon, everyone. My first question is on the conversion margin In EMEA, obviously, positive this quarter. Were you happy with that level of improvement? And you've obviously just So made up the lost ground from last year, but nothing incremental to that. And then given sort of current organic growth trends there, you think that should accelerate during the year? And then the second question is on pricing. Obviously, we've seen some chemical price inflation, But 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. And then 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. Just to the conversion of increased prices into the marketplace, I mean, it is fair to say that we have an underlying shipment of price increases in the Q1, and that has a Huge amount of activity in pricing from throughout the organization and in particularly North America. And I would say that we have a Strong price action business model. We do have some accounts that are monthly pricing, some accounts maybe quarterly, maybe some of the larger corporates, which We still tend to move on a quarterly basis, but these are less significant in the total number. But there's been a lot of movement, and I would say that Q2 would be a quarter where everything will be caught up as far as pricing is concerned, And I'm not expecting any negative drag from that. I think you had On our finance costs for the full year, I think our suggestion would be to think about cash interest So of €80,000,000 on a run rate basis, so €0,000,000 cash interest and then take an expense of another €10,000,000 Which might be a mix revaluation, discounting of provisions and what have you. So say on a full year basis, the And just on the conversion ratio in EMEA, clearly, that's the constant target. And EMEA hasn't had the Volatility that North America suffered over the last few years, and I think we can see the EMEA region being relatively stable. But There's no reason why we saw some improvements in the EMEA region. Business activity continues to be solid and continues to pick up. Certainly, we're not expecting to make any major investments in infrastructure or the people to carry on more business. So there's a natural effect there. Okay, great. And 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? Yes, it is. Okay, great. Thank you. The next question is from Mr. Mackenzie of UBS. Please go ahead. Hi, afternoon. A couple for me, please. First, just a follow-up on Josh's question on the pricing impact. Can you just clarify whether you've seen any gross profit Per tonne expansion in Q1 and whether you think that might come later in the year. And then on the growth in Europe, can you just talk about the trends Specialty versus industrial. I know that you've been investing on specialty over the past few years and that's done well, but And do you think that there's more scope to expand your sales in that specialty market, please? In terms of GP per ton, That was Dan's question actually relative to the internal company. Yes. On the GP per tonne based, mind you, you know where we the GP per tonne is influenced by a number of things, product mix, volume changes, what have you. So gross profit per tonne on the group price level is about stable against previous year's quarter, and there's ups Checked out in the regions which are probably too detailed to discuss. Specialties as well as industrials, yes, the Specialties business is growing a little stronger than the industrials business. But so here, the differentiation is not so significant. Okay. And in terms of the outlook to invest more in specialties, is that sort of focus for the developed markets? Yes, certainly, we've got a very strong position in industrial chemicals, and we see specialties and it's been a natural growth opportunity for us. We actually are growing our business in Life Sciences, particularly strongly in Europe. And indeed, As a group wide, we expect specialties to become a much larger part of our portfolio. Okay, great. And 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 to flag there? I'm sorry, just repeat the question again, please? Just on the APAC. Great. Yes. So organically, you might be down a tad year on year even. So 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. It was a very significant growth in Q1 2016. I think in terms of the development of the region, we're actually pretty pleased Across the region, I think it would be more product specific. There's 1 or 2 products which are of a seasonal nature. We do quite a lot of business into mean, the road surfacing, especially at the end of the road surfacing and some of the component parts of that. And that can be quite lumpy in terms of it's quite it's more government led As opposed to anything else. So I do know that Asia Pacific has got a lighter order book on the outgrowth servicing than it would normally have had, but The next question is from Carl Green of Credit Please go ahead. Yes. Thank you very much. Just going back to North America, I'm sorry to keep drilling the point here. But Stephen, just to clarify, when you said you were expecting it to move So the conversion ratio improvements moved back into positive territory. Are you talking there sequentially or year on year, I. E. From Q2 Through Q4, we're going to be looking at conversion ratio progress year on year or just progress versus the Q1? That's my first question. It's what you're clearly our ambition is to do that. It remains to be seen how successful we are, and we are Clearly focused on the conversion ratio because we want to take to obviously take advantage of the GDP that's being generated in the region and to get it into EBITDA As quickly as possible, we know our historical rate our historical performance rates are very impressive. We do have a bit of a change in mix in terms of some of the Positions we made more recently are not at the same historical levels as Brenntag has had in the past. But nevertheless, we want and we're still to see Sequentially improvement in our GP conversion ratio in North America. And 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 1 or 2 quarters to move through that stage. So I would say that directionally that this is a basic move that will see the business grow sequentially on GP conversion ratio during the course of the year. I don't mean to call this quarter by quarter because I think it's just too detailed at this stage. Okay. Thank you very much. And just I mean just going back to your point about paying premium rates For the staff who are coming back into business and presumably over time for the staff who were retained, I mean that Strikes me as something that's going to be a recurring feature over the balance of the year. Or 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 forward. I think it's a particular feature of this quarter. You'll be aware, North America is relatively It's a very business friendly environment in terms of recruitment and what have you. We do see Efficiency gains on 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 6 quarters or the last couple of years, we've been downsizing our capacity in terms of the warehouse volumes and Volumes that we've been doing, and as we go back into North America, that's going to be reproduced effectively. Now we are down that road. Yes. But with the call, I also want to make the point that we're not chasing volume at any price. And ultimately, we are doing interesting business making us money. So we will be giving a very close eye on volume versus margin versus EBITDA conversion, don't worry. But it is going to be a bit of a transitionary flare phase, Certainly, it's quite pronounced in the Q1 than what we've been paying in terms of operating of transportation and overtime rates and fuel costs was quite noted. Okay. And then 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? And also, 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, just what well, certainly, 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 point So a little below the 34 to 35 year guiding. That's mainly a mix effect. Obviously, tax rates are, for the time being, pretty In North America, cheaper in the emerging markets and to a degree even in Europe. So 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 usually indicate. The minority interest, it's a small number. It's basically coming from a couple of minority That exists in our business predominantly in the Middle East, but take the Q1 number and multiply it by 4 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 Improvement that 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 3rd, 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, Milena, I beg your understanding. I think with Swissy gross After the close of the quarter, we feel that it's not it's a little too much to go into regional development on that specific number. I beg your pardon. Latin America comps, yes, the first the beginning of last year was reasonably strong in Latin America, and then it weakened in course of the year. I would say the second half of the year, Q3 and Q4, we are running against materially easier comps in Latin America. Outsourcing with customers. Jack, can you repeat the question on outsourcing, please? So the question is, as customers are seeing their volumes pick up, Are the outsourcing discussions becoming easier? Or are you running into quality issues because of your need to bring on more So that slowed down the discussion? No, actually, the best environment that we can have these The discussions that is in a growth environment or a recessionary environment because that tends to push people into making a decision to change. And certainly, it would be fair to say that where we look at customer delivery among us 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 Brantec increases as their volumes go up because they're looking to effectively concentrate more on their core activities And seek to outsource more to chemicals like Brantac. Okay. Thank you. The next question is from Rakesh Mahar. Your line is now open. Hi, good afternoon, gents. Just Looking through sorry to ask again about the conversion rate, seems quite topical. If we look at the inventory turn for the business, how long does it take for you to basically Get the cost price increases move 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, is there 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. I mean, we have a Strong price patterning model in the group as a whole. And when we receive price increases or notification price increases, We do go to the market pretty much instantaneously. So the time lag sets up there is, it should be negligible. But I think probably what the when you do get pushback, at least probably fair to say, We have very significant price increases. Clearly, there's a bit more negotiation and there's more intense interaction with customers Those customer increases compared to relatively modest or inflation increases that we've seen in other parts of the product portfolio. So I would say that certainly in the Q1, there was a heck of a lot of activity in price, price negotiations, interaction with customers and what have you, Particularly North America as a result of the very strong upward pressure there. But I under normal circumstances, this business wouldn't expect See any delta between price increases from the suppliers as putting prices up to customers? No. Totally appreciate that. Normally, you would pass through the price increases. And given your inventory turn, you should have had a benefit of 1.5 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. So hence, the second part of the question, So I just tend to say I think it's more difficult to pass it through. I just said that the price has a lot of activity on pricing, A lot of interaction, a lot of customer meetings and what have you. So there's a difference between actually being able to pass the pricing going through and actually doing it. I think the answer is that we're I mean, you can see from our sales numbers, we've been our GP moving up, 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. But 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? It 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. See, 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's coupled with the first half of last year being relatively strong. I think what's quite interesting in Latin America is that the and we're certainly not Shouting out loud about it, but we do see that there's probably has been a certain point in Brazil and Argentina. We see this The negative outlook to be it's a little more subdued and more neutral as the year progresses. So I would be The next question is a follow-up of Andy Du. Your line is now open. Thanks very much. Another Question for me, Steve. Just I think you just mentioned that in terms of Q2 that you would expect North America conversion margins To be above EMEA. So just putting some numbers around that, the conversion margin in EMEA was at 36% Last year and North America was at 37.8%. So you're confident The North American margin, I guess, as a floor should be at least 36%, although one would probably expect, given the trend in GP and conversion ratio improvement that actually EMEA itself from that 36% should be up year on year. Is that a fair Summary of what your thoughts are, please, for Q2 and North American conversion ratio. Yes. Well, I think, Les, first of all, in EMEA, clearly, we have ambitions to remain stable by the conversion ratio, but I think your point is on North America aside. Right. Thanks very much. The next question is from Christian Kors. Your line is now open. Yes. Good afternoon. Thanks for taking my question. Two housekeeping items. First, your interest expense in the P and L, but also in terms of cash Payments in the cash flow statement. So it's gone up year over year, but also sequentially, through this Q4, why net debt has hardly changed. I wonder what this is about. And do you face any material deterioration in your refinancing costs? For sure, I would We're very surprised about. Secondly, you're guiding for 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. So that is it then fair to assume that Your free cash flow guidance implies a very pronounced EBITDA improvement, and the free cash flow improvement is, yes, solely based Solidly driven by EBITDA? Yes. On the interest expense or on the interest payment in the cash flow statement, They don't draw conclusions from that. That's basically related to our refinancing in Q1 this year, Which moved interest payments into slightly different quarters than they occurred last year. So on a full year basis, you shouldn't see too much of The other question I just said a little earlier, I pointed to an €80,000,000 cash interest And for the full year, and that's net net net, what you will also find is 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 that's the volatility factor that's hardly to predict. The shortfall we have seen in Q1 relative to previous year and 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 Ours will depend on the continuation of chemical price developments from here. It assumes flat chemical prices from here going forward. Okay. Okay. That's clear. Thank you. The next Question is from Milu 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 in your Conversion margins, particularly probably in EMEA. And then the second question, just a sort of a reiteration, but Can you say anything on your M and A pipeline? You've done a couple of deals, but they're relatively on the smaller side. Anything worth flagging there? Certainly, yes, there is some operational leverage that I think is, which will be attributable to the European business In the Q1 due to Easter, and obviously, the equivalent effect on the in the same quarter in the reverse. I don't think these are so pronounced. And then over previous years, they've been pretty flat, net, net, net. So you're completely correct. There will be a beneficial operational leverage in Q1 and then reverse that in Q2, but Ultimately, it's not a huge number. And because of acquisitions, we do have A number of acquisitions which are in the final strategic diligence and surrounding North America and indeed Asia Pacific, And we expect to deliver this sort of EUR 200,000,000 to EUR 300,000,000 this year. It's still our ambition. Okay. Thank you very much. The next question is from Uchut van de Ghan. Your line is now open. Yes. Thank you for taking the questions. I've got 3. First on LatAm. Steve, you spoke about the comps getting easier In the second half. So my question is, I mean, obviously, the result is down significantly. It's down 34% year on year. So are you saying that you're not you're leaving the business as it is so that it can recover towards EMEA? Or are you taking certain measures, taking out some cost there? So that will be the first question. The second question is a bit on the chemical industry. I mean, 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? And then thirdly, it's coming back to the working capital. There was an Flow this quarter of €156,000,000 mainly on the back of higher trade receivables. I mean, it seems that you expect this to normalize. Can you tell me by when? I mean is it on a quarterly basis, especially considering that the oil price is flattish to down a little bit? Yes. First of all, just regarding outages, the answer is yes, actually, Insofar as our Asia Pacific operation has had to cope with product availability issues, And that's been really a bit of a drag on our organic number. And that's been in the petrochemical side, which Which I mentioned earlier on in terms of working back road servicing and what have you. So that we are hoping and expecting that change During the course of the Q2, so that is a well spotted pressure on the business in Asia Pacific. So I'd like to note the concern. 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 This organization to cope with was effectively a smaller part of the market at the moment than we would normally that we've experienced previously. So we are certainly actually looking at that one. On the working capital, a seasonal reduction Working capital would be in Q4 of this year. To what degree The 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 don't overvalue it. That way, I wouldn't make too much of a judgment Yes. A bit of a theoretical question, but if you look at the starting base of most chemical products, so naphtha, If we would track that, usually what is your delay? Because obviously, you have a mix of commodities and specialties. So 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. Brian? Yes. I'd be very cautious about trying to track NAFTA and chemical pricing. So chemical distribution pricing is The fragmentation is too great. You actually do find yourself in a confused position. Okay. Let's not do that then. Thank you. Yes. The next question is from Christian Ochs of Baader Bank. Please go ahead. Yes. Just one question and sorry to come back to conversion ratios, but 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%. And Maybe the entire business model or maybe you agree or give some explanation is in adapting or changing the mix From specialty to more and more standard chemicals adjusting capacities, the 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, and you have to accept that fact going forward? Or 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, You can increase the overall conversion rate of the group again towards 35%. Thank you. Well, obviously, that's a challenge for the management, and I think it's a management that is a challenge we very readily accept. It's fair to say that the chemical distribution, as I say, along with many other industries, has had to effectively Starting to cope with what is actually a very, very low macroeconomic environment. We've all gone from growing with very initial production at 3%, 4%, 5% In the past, and that's been an environment which has supported a very significant growth. But I think we all recognize that we're going to be living in a low macroeconomic environment, And we have to effectively reorientate it and realign our business to grow successfully in a low growth market. Now from our 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. And therefore, existing in a lower growth macroeconomic environment is obviously not necessarily a comfortable place to be, We do have a very much a target rich environment for growth in the distribution sector, and it's a question of making sure that the company, Brenntech particularly, It's well positioned and we sourced accordingly to capture that growth. So I'm by no means changing The outlook of this business in terms of its fundamental growth characteristics, I think they're as solid as ever. But this means gross Profit growth, I accept that. And even if you achieve a 30% conversion rate, it's not that bad than going into EBITDA. It's just slower against the average of the past. So could it be that we can come To some kind of a new normal, which is more around 30% than 35% or would you disagree? I would disagree with that number. Okay. Thank you very much. There are no further questions. I hand back to the speakers. Okay. Well, thank you very much indeed, everybody for joining this afternoon, and thank you for all your Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.