Dear ladies and gentlemen, welcome to the Brenntag AG results call for the full year 2016. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties during the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Steven Holland, who will lead you through this conference. Please go ahead.
Right. Well, thank you very much for that. Welcome, ladies and gentlemen, thank you for dialing into our review of 2016 results. As is usual, I'm on the phone today with Georg Müller, our CFO. We are two months into the year 2017 already, to some extent 2016 feels quite far away. Let me quickly summarize the main takeaways for the year 2016 for Brenntag. The most important, the group reports an EBITDA above the high levels from previous year. EBITDA totals EUR 810 million, which is an increase of 1.9% on an FX adjusted basis. Clearly, Georg will provide some details on the financials later. We were delighted with the very positive business developments in our regions of EMEA and Asia Pacific.
Over the last couple of years, we've done a lot of work here to improve performance in these regions, we clearly see the efforts paying off. It should be noted that 2016 was a year which had some very meaningful headwinds in North America and Latin America. North America, we saw weak demand due to the struggling oil and gas customers negative industrial production growth overall. Latin America, our business was heavily impacted by Venezuela. The EBITDA in that country came down to zero as a consequence of massive currency devaluation early in the year. We combine these effects together, the headwinds alone represent an EBITDA reduction of around EUR 50 million or 6% of the group over 2015. Last, let me point out our 2015 and 2016 acquisitions did make a significant contribution to our 2016 results and helped mitigate these headwinds.
While we are overall happy with the performance of acquisitions, it should be noted that JM, our acquisition in the U.S., did not fully meet our expectations so far. Just coming on to acquisitions, onto page four. On this next slide, you'll see we find an overview of the acquisitions executed in 2016. In line with our M&A strategy, we signed a number of small, mid-sized acquisitions in 2016. Moreover, we purchased our remaining shares in our joint venture, Zhong Yung, in China. Total investments in 2016 amounted to around about EUR 200 million. The average multiple for acquisitions signed in 2016 is 6.8 times enterprise value to EBITDA. In 2016, we've executed acquisitions in three of our four regions, which really does underline the fact that we are continuing with our strategy on a worldwide basis.
You'll also notice on slide five that we have made a number of small acquisitions so far this year. We invested in the acquisition of Pacer Industries, where we expand our value-added services in North America. We know the company very well, and it's provided various blending and packaging service to the industry for many years, and we're delighted to add it to our capacity for mixing and blending. Moreover, we acquired the pipelining chemicals and services business of Greene's Energy, a leading provider of integrated solutions to the oil and gas industry. This, combined with our existing pipeline cleaning business, positions us very well for an expected increased demand in that area. Georg, if I could pass across to you.
Good afternoon. I move to the income statement on slide seven. On the slide, we are presenting the first part of our income statement. In an economic environment that clearly was not too helpful, we do record gross profit growth of 6% on a constant currency basis. Certainly, the gross profit growth was helped a lot by the acquisitions undertaken towards the end of 2015. EBITDA amounted to EUR 810 million, that was slightly above previous year's level. On a constant FX basis, EBITDA exceeded previous year by 1.9%. I provide more details on the EBITDA development on the next slide. Page eight holds a bridge, it's a bridge for the EBITDA from 2015 to 2016. You do see a full year bridge.
Partly due to the weakening of the GBP, also a number of other smaller currencies, we had a negative FX translation effect amounting to a negative about EUR 12 million. As mentioned in all the calls over the year, our operations in Venezuela are no longer contributing any meaningful EBITDA. In 2015, EBITDA from Venezuela amounted to EUR 11 million. The good news is that the Venezuela headwind will be gone in 2017. The acquisitions contributed an EBITDA of about EUR 52 million. This brings me to North America. Compared to the previous year, our business in the oil and gas sector in North America was hit significantly again, based on a gross profit that was lower by EUR 32 million. We estimate that this resulted in an EBITDA decline of about EUR 90 million. There's also a piece of good news.
We saw a clear stabilization in the course of the year, we are confident that this more positive, stable trend can be maintained throughout 2017. Our business in North America outside the oil and gas sector, 25% are in the oil and gas sector, roughly 75% outside the oil and gas sector, continued to be impacted by the softer macroeconomic environment, with industrial production in contraction. This resulted in an EBITDA decline of around EUR 20 million. We achieved good organic growth in EMEA and double-digit organic growth rates in Asia Pacific. This was partly offset by a weak development in the Latin American results, also outside Venezuela. All in all, this resulted in EBITDA that is higher by about EUR 13 million on an organic basis. Combined, the effects result in an EBITDA of EUR 810 million for the full year 2016.
I move to page nine and the P&L lines below EBITDA. Depreciation for the year amounted to EUR 115 million and amortization to EUR 47 million. Amortization mostly represents customer-based amortization from acquired companies. The amortization increased a little due to the higher M&A activity in late 2015. Financial result amounted to a net expense of EUR 111 million. Overall, earnings before taxes totaled EUR 535 million, slightly below last year's level. For the full year, we record a tax rate of 32.6%, slightly below the level of 34%-35%, which we typically indicate. Earnings per share is EUR 2.33 or EUR 2.72, excluding the amortization and excluding the write-off we have taken in Venezuela through financial results. Some details on the cash flow statement. In 2016, operating cash flow amounts to EUR 539 million. This is a very high level, and it underlines the good cash flow characteristics of our distribution business.
The fact that the operating cash flow in 2015 was even higher, with EUR 593 million, is attributable to an inflow from working capital due to decrease in chemical prices in that year in 2015, which was not repeated in 2016. Let's speak about investment and financing cash flow. CapEx amounted to EUR 138 million, slightly below our guidance of EUR 150 million. Cash out for acquisitions is below previous year's level. This was exceptionally high due to the three bigger acquisitions at the end of 2015. Relevant in the context of acquisitions is also the line purchases of companies already consolidated. This reflects the payment for the outstanding shares in our Chinese operation under the name of Zhong Yung. The dividend payment in June totaled EUR 154 million, and that is above the payout for dividend a year earlier. Let's move to balance sheet and leverage on page 13.
On the slide, you see the information on net debt. Net debt amounted to EUR 1,681 million, marginally above the level one year earlier. The group's leverage in terms of net debt to EBITDA stands at 2.1 times, and is therefore on par with previous year. On page 14, let me address the maturity schedule of our indebtedness on the right-hand side of the chart. We were active in the debt market this year already. In January 2017, we took the advantage of an attractive market condition for borrowers, and we refinanced our syndicated loan well ahead of schedule. The loan is our most important financing instrument, and it accounts for roughly half of our financial indebtedness. We pushed out the maturity from 2019 to 2022, so a new five-year loan was signed up and paid out meanwhile.
In addition to the extension of maturity, we achieved a number of improvements in the documentation. Among others, we were able to reduce interest charges slightly below the comfortable level we already had before. The extension of the maturity of our syndicated loan underlines our strong financial profile, which provides very strong flexibility to execute our strategy. With respect to working capital on page 15, the working capital at the end of the year amounted to EUR 1,354,000,000. We turned the working capital eight times in 2016 on par with the level that we achieved end of 2015. One of our key KPIs is free cash flow, and in 2016, Brenntag again delivered a very strong free cash flow in the amount of EUR 641 million. As expected, this does not fully repeat the high level we achieved in 2015.
The 2015 free cash flow benefited significantly from a reduction in working capital due to a decline in chemical prices, and that did not reoccur, nor was it expected to reoccur in 2016. I close my part of the presentation with a view on the dividend development. We continue our track record of dividend increases, and we do propose a dividend of EUR 1.05 per share for approval by the general shareholder meeting in June 2017. This represents a dividend increase of 5% compared to the dividend a year ago. The bar chart illustrates that this proposal implies more than doubling of the dividend since our IPO in 2010. Gross dividend of EUR 1.05 reflects a payout ratio of 45%, and this confirms our commitment to provide continuous cash return to our shareholders.
Going forward, we now intend to pay out a dividend between 35% and 50% of the net income. We have adjusted the payout ratio slightly upwards in order to have some more breathing room on the upside. Back to Steve for a discussion of the segments.
Thank you, Georg. I'll take you through the developments of the segments for the full year on page 18. First, looking to the EMEA region. 2016, EMEA grew its gross profit by 6.4%, and EBITDA by 5.6%, both on an FX-adjusted basis. In an environment that was only growing moderately, this is an encouraging performance, and it's mainly attributable to organic growth developments. Additionally, our smaller bolt-on acquisitions contributed positively to the earnings growth in this segment. The depreciation of the GBP caused some translation headwinds. Therefore, FX-adjusted growth rates have clearly exceeded the reported growth rates. In North America, the business was considerably impacted by the weak demand in the oil and gas sector in 2016. However, the trend in this sector, as Georg has mentioned, stabilized in the course of the year. In addition, though, the macroeconomic position in North America was somewhat weak.
On the other hand, acquisitions carried out in 2015 contributed positively and helped limit the adverse effects. As mentioned before, though, the J.A.M. acquisition is below expectations due to competitive pressures in the marine fuels business. Gross profit in North America was up by 5.9% FX-adjusted, thanks to acquisitions. Excluding the oil and gas sector, the acquisitions gross profit decreased by around about -1% on an FX-adjusted basis. Operating EBITDA only declined by 2.2% on an FX-adjusted basis. Just let me remind you that we've taken measures to reduce capacity in the oil and gas sector to reflect the lower demand, and as a result, we saw a reduction in headcount in this area of almost 20% since the end of 2014. However, clearly, the gross profit reductions in the oil and gas sector could not fully be compensated by cost reductions.
To Latin America, which accounts now for only 6% of the group, our earnings were heavily affected by the loss of earnings contribution by Venezuela. Additionally, our business performance suffered from difficult economic situations in other Latin American countries, especially Brazil. This led to a gross profit down to -13.4% and an operating reduction of 27.6% FX adjusted. Excluding Venezuela, operating EBITDA decreased by 14%. This decrease is mainly attributable to the poor performance in Brazil, but it should be noted this compares to a very strong performance in 2015. Coming to Asia Pacific, we are extremely pleased with the performance in Asia Pacific. The region grew its gross profit by 33.7% and increased its operating EBITDA by 35.8%, both FX adjusted. This is due to a strong double-digit organic growth, as well as contributions from acquisitions.
Before we move on to the outlook, let's look at the developments of the segments in Q4. Development in Q4 was broadly in line with the developments in the full year, which we've just discussed. We'd like to highlight the key points. The level of demand in the oil and gas sector in North America continued to show a sequential stabilization. Actually, this was the first quarter where the gross profit in the oil and gas sector was almost on previous year's level. After the third quarter, Brazil had another weak quarter, but please bear in mind that the country accounts for less than 2% of the group overall. More as a reminder, the fourth quarter always contains some effects that come from cleanups, which can affect the cost of our income base in the region and can make a comparison with the previous year's quarters more difficult.
There's no single effect which I'd like to highlight at this point. Let's just come on to page 20. We'll look at the oil and gas industrial production. On this page, we show you the development of our oil and gas business as we have done in previous quarters. On the left side of the chart, you can see our oil and gas gross profit has grown quarter to quarter in 2016. We're almost on the same level as last year in the fourth quarter. As you can see, 61 previous year's quarter, 59 in the most recent quarter. On the right-hand side, you can see the industrial production growth in the United States continue its trend of improvement back towards a break-even level by year end. Clearly, there's a more positive sentiment towards the United States in 2017. Can I come to the outlook?
We'll start with current trading and address the outlook for 2017. I'll walk you through the gross profit per working day on a monthly basis. For October, gross profit per working day increased by 9% as reported and 2.2% on an organic basis. In November, growth was 8.2% as reported and 1.2% organically. In December, the growth was 4.8% and a decrease of 0.6% organically. January was a decline of 0.4% and -3% on an organic basis. In February, growth was 5.5% and 2.4% organically. The global economy is expected to show some signs of recovery in 2017. In this environment, we expect our KPIs of GP, gross profit, and operating EBITDA to grow. As in line with last year, we would expect to give qualitative guidance for the full year in Q2.
We do have a positive view of the business developments in the European region, we expect to see a progressive improvement in the North American environment. The oil and gas business is on a stable trend and should not present a headwind in 2017. For Asia Pacific, we are optimistic and expect to see continued positive development of our business, whilst clearly in Latin America, there remains some challenges. As you would expect, we are constantly working on improvements in all regions in order to drive organic business growth. This includes numerous global, regional, and local initiatives, we maintain our strategic course in all regions. Price inflation is currently a widely discussed topic in the chemical industry, we at Brenntag are also seeing an upward trend across our full line product portfolio.
Due to the pass-through nature of our business model, our faster inventory turnover, this should only be marginal, if at all, impacting our gross profit generation. The more important effect of increasing prices will be further investment in working capital. Irrespective of potential price increases, we expect an increase in working capital due to the planned increase in business volume. For 2017, we forecast to allocate a little more than EUR 150 million to capital expenditure. With the aforementioned outlook on operating EBITDA, working capital, CapEx, we would expect to see a free cash flow that will be significantly above the previous year. Coming to M&A, it is and remains a very important part of our business development and will also be the case in 2017.
We've already closed two smaller deals in the U.S., the pipeline contains many attractive targets from around the world, with a special focus on Asia Pacific and North America. Brenntag is and expects to continue to be a consolidator in the industry. Overall, we remain confident that Brenntag is well positioned for further growth in 2017, we're happy to take questions.
Ladies and gentlemen, we will now begin the question and answer session. If you have a question for our speakers, please dial 01 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask your question. If you find your question is answered before it is your turn to speak, you can dial 02 to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. The first question comes from Rob Bland, JPMorgan. Your line is now open. Please go ahead.
Good afternoon, Steve and Georg. In North America, the gross profit growth accelerated in Q4. The improvement in EBITDA went to decline in Q4. Was there any particular reason for that, please?
No, Rob. In each and every region, we do all the true-up for a number of provision center cohorts towards the year-end. A variety of environmental provision, pension provision, personnel related provision. This year in North America, it worked out to a degree that we had a couple of EUR millions, a handful of EUR millions, to expense from provision increases. Not one specific item that needs to be pointed to.
Thanks, Georg. We shouldn't take that as a structural trend or a trend that.
I completely agree. For sure, not a structural trend.
Okay, thanks.
Thank you. The next question comes from Steve Sprongeon, Bank of America Merrill Lynch. Your line is now open. Please go ahead.
Hi. Good afternoon, everyone. Just a couple from me. I was wondering if I can start just following on in terms of the EMEA development and obviously good GP developments, but it didn't really drop through to EBITDA. As you look into 2017, how do you feel about growth and particularly EBITDA growth in the EMEA division? Do you think that there is still the possibility that margins can rise? That's my first question. Second question, sort of similar, but with regards to North America, ex oil and gas. Obviously, you showed the chart there with the improvement or industrial production getting progressively better. Are you seeing any signs of life in terms of your non-oil and gas activity that gives you any degree of confidence? Finally, just a straightforward one on the tax rate. You mentioned obviously it was slightly lower than you initially guided to.
What's your feeling for 2017, Georg?
Well, I can take on the EMEA first. Yes, we're pretty pleased with the development in the overall GP for the EMEA region. Many of you will know we've been working pretty hard in terms of looking at efficiency gains and improving that conversion ratio. For 2017, we are expecting to see the fruits of that labor in so far as with the European business developing its conversion ratio progressively in 2017 and seeing that conversion of GP into EBITDA more pointedly than we managed to achieve in 2016. I think coming to North America, yes, you're quite clear. You can see the graph, we do see in the marketplace some degree of return of confidence from customers.
We are a little bit cautious to some extent because we believe that sentiment is running very high in the markets and expectations are very high with the new government in North America. We do believe that North America this year is going to see a step forward in profitability for our group, clearly without the headwinds that we've had in 2016 and indeed in 2015. We'd expect to see North America step forward. I think I would probably want to call it in the second quarter as opposed to the first quarter. I'm just being a little cautious and those that know me, I'm generally speaking quite an optimistic person. I'm trying my best not to overplay this one. Clearly, I would like to say it's going to go gangbusters from day one. Let's just see how the first half works out.
I am convinced that 2017 is a year for North America to step forward in terms of performance.
Still Georg here, Joel, hi. I still owe you an answer on the tax rate. For the year, we record 32.6%. I think the year before we had 33%. We do pay at least status quo. Basically, the highest tax rate within the group in North America. We might well return to the 30%, 34%, 35% band under the assumption that the North American business will see earnings improvement. At the same point in time, we all know there is a discussion outstanding if the U.S. might lower tax rates going forward, that decision hasn't been taken yet, therefore we didn't figure it into our guidance.
Okay, thank you. Can I just a quick follow-up in terms of the minus three organic for January? Is there anything specific that you would call out to explain that? I know it's hard to read too much into one specific month, but I just wondering if there is anything that you would call out around that.
Well, actually, January for us is quite a long month in terms of clearly the number is divisible by the number of days. If you look at, obviously, the quality of earnings per day in January is one of the weaker months because of clearly there's a rollover from New Year and what have you, and startup of business and what have you. The quality of GP per day in January is somewhat weak, and it was a longer month, and arithmetically it presents itself as a weaker performance.
Okay. Thank you.
Thank you. The next question comes from Geoff Kendrick, UBS. Your line is now open. Please go ahead.
Yeah. Geoff. Two from me first just on price inflation. Firstly, can you just talk about the rate at which you've seen your end prices to customers increasing over the past few months? That's in terms of total cost to customers rather than just your Gross Profit. The second question is on your markup. With that improving run rate of organic growth in Gross Profit, is that all volume improvement, or have you managed to see any Gross Profit per ton expansion or any change in that trend over the past few months?
Well, that's a pretty complicated question actually, because you can imagine across our ranges we have different dynamics by products and by region and by volume. I think indicative is we had seen a significant increase in oil related products such as solvents and what have you. You see that feeding through into the markets. All manufacturers and solvent manufacturers are effectively reflecting increased cost of feedstocks, et cetera. We coped with those increases, but they are still going through, and we still see those increases coming through. We also see increases in the other side of the supply chain, which is more to do with a non-oil related products. Right across the range, we are facing price increases. This is generally as a result of improving demand for the chemical manufacturers because obviously they see that they can be confident in going for price increases.
There's also some effects from outages of certain refineries and what have you, which may well ease towards summer. I think at the moment we do see a manufacturing sector who are fairly robust in terms of price increases. We're passing those through. I honestly think it's a little bit early to try and give you a definitive Gross Profit per ton number or an indication on volume because clearly it is quite a challenging time in terms of moving all these price increases through literally in the first two months of the year.
Okay, great. In general, obviously, again, there's such a huge range of products mainly lost in mix, but, do you think that in a price inflation environment you find it easier to expand Gross Profit per ton? Or is that not something you pick out?
First of all, the overall market's not growing dramatically. We are obviously clear as a market leader, we seek to improve our market share progressively over time. We will see some increased volumes. As a result of price increases, we do clearly take the opportunity to increase our level of GP where we can to contribute to increased overheads, increased operating costs, and what have you. You would expect naturally an improvement in our gross profit per ton as a result of price increases. This is a fairly benign environment for us because clearly in the case of price decreases, we don't see the big swings around that say a manufacturer would. Indicatively in a price increase or even a price decrease scenario, we will seek to increase our GP per ton. Certainly price volatility is not something we're afraid of.
Okay, great. Thanks. Just on the cost side. Firstly, the all other segments line was down EUR 4 million year-on-year, all of which basically came in in Q4. Can you just remind me what runs through that line and why it was so different and anything that's changed in that all other EBITDA line? Secondly, just again, to follow up with the comment on Europe. The incremental constant currency conversion margin was 30% for the year overall, but weaker in Q4. Is that because you've essentially kind of front-loading some costs, so building up the specialty business? Are you happy where the cost base will be sequentially in Europe? Please.
I'll take the cost base question. Where we are at the moment in terms of our European business is we are, I would say, absolutely fully staffed in terms of this business. All incremental volumes that come through the business will be converting at higher rates. We have a number of initiatives underway which we expect to enhance our GP performance and our cost performance, which is clearly one of our primary objectives for this year.
The ROE on the all other segments line, that's mainly headquarter costs and one small operating business which is not allocated to any of the regions, but mainly headquarter costs. The improvement you see Q4 2016 over Q4 2015 is mostly 2015 acquisition costs. We have undertaken the bigger acquisitions towards the end of 2015, and obviously there were costs associated with these acquisitions which did not reoccur in 2016.
Okay, great. That's all very helpful. Thank you very much.
Thank you. The next question comes from Milou Ben, Goldman Sachs. Your line is now open. Please go ahead.
Hi. Good afternoon, gentlemen. Two questions from me on North America. You alluded to that you've reduced your headcount in North America. Can you remind us, in terms of the costs that you've taken out, what is the run rate of cost savings into 2017? A little bit more of a medium-term question. I think in the past you've alluded to that there's no structural reason for the North American margin not to go back to the 42%-43% type of levels. What do we need to see for that to happen? Do we need to see a couple of years of good growth and volumes to be back at previous highs, or how do you think about this in terms of timeline and measures to be taken?
I'll just take the conversion ratio improvements for North America. We run a pretty lean machine in North America. The ability of the business to start producing higher rates of conversion is really on a pivot almost, because we don't need that much to create the pickup in margins for North America. We can see progressively the improvement in industrial production, and clearly we're overcoming the oil and gas business. We are in a good position that any improvements in North American demand is going to have a, I would say disproportionate, because it sounds excessive, but we'll have a significant increase in our operating margin in North America. We're not at the stage yet by any means of looking to hire new people or increase the size of our oil and gas business, et cetera.
All the incremental income that we have is going to be converting at much higher rates.
The run rate on cost savings, if I got your question right, Milou, you were basically asking the headcount reductions in North America, what the additional savings in 2017 over 2016.
Correct.
Our headcount reduction program in North America was mostly a 2015 ending course of 2016 program, which basically means half of the savings are there in 2016 already. What you basically have as additional savings in 2017 over 2016 is half a year of savings on average, and I would guess that to be $2.5 million-$3 million.
Okay. Understood.
Okay.
Thank you.
Thank you. The next question comes from Andy Shaw. Your line is now open. Please go ahead.
Thank you. Good afternoon. A few questions from me, please. Can I just start with the exit rates? I guess if you take January and February together, it looks like you're flat as a sort of start to the year. Given that Europe has been growing and growing in Q4 and the macro data is pretty supportive, you're actually still organically declining in North America. Again, for sort of flattish GP that you're indicating for the first two months of the year, are you basically then still showing negative operational leverage? Secondly, I wondered if you could make some comments over JAM and the performance of that business. If I look at Q4, I think the incremental acquisition contribution has come down slightly from Q3, but I guess if you could confirm, is that due to the TAT acquisition falling out?
Some commentary around JAM would be helpful. Then, in terms of wage inflation, what are your expectations, please, for wage inflation, particularly in the U.S., and what are you seeing currently? Thank you.
Okay. Maybe, Andy, I start at Georg Müller on a number of the questions, Steve will chip in. Let me take the acquisition contribution question first. It is more technical. We closed JAM and Berlin-Windward in course of December 2015. TAT, if I remember correctly, only at the end of December, so that you see a slightly lower acquisition contribution in Q4 than the other quarters basically relates to the fact that for a couple of weeks of the 2015 Q4, the data were already in. It is not a full quarterly contribution. JAM performance, you do know that the JAM performance relative to plan was not what we expected across the year. It has not deteriorated further. It is a pretty stable contribution across the year up to and including Q4 and early this year.
I think the wage inflation, we are probably talking between 2.2%-2.5%.
Yeah.
The gross profit per working day beginning of this year, it is difficult for us to comment. I think at this point in time, we do not really want to give a too detailed, a too quantified commentary on regional development. I would like to leave with you that North America is not shrinking. The GP in North America is not shrinking in January and February. Latin America is pretty weak, which is part of the explanation for being overall flat-ish. While Europe is growing, it is probably currently not at the exactly same levels that we have seen towards the end of last year, but it is two months only.
Can I just ask you a little bit about LatAm? Because even in Q4, if you add back the EUR 3 million hit from Venezuela, the business was actually declining quite materially in terms of EBITDA. Clearly, it is a small business, but your comments there, just in terms of LatAm being weak, can you comment on Brazil? I think Steve, you mentioned it is only 2% of the business, but clearly that is weighing quite heavily at the EBITDA level and it is even subsequently set up at group level.
Yeah, Latin America is a pretty difficult place at the moment. It essentially splits into two areas, really. If you look at the northern parts of Latin America, which is Mexico, Colombia, Ecuador, et cetera, those are positive and relatively stable and what have you. The more difficult areas are really Brazil, Chile, Peru, and Argentina, which has been really just a recession in terms of the changing macro policy there by the government. We have quite a lot of volatility in the southern part of Latin America, which was really increasing during the course of 2016. I think Latin America this year is going to have a few challenges because the Brazilian situation has not improved as yet. Although we are certainly maintaining our market share and what have you, but certainly the market itself is very difficult, ultra-competitive as people trying to maintain positions.
I think it's one of those things where it's a steady-hand time for Latin America. We are working with it and working on the team down there to stabilize the position which continues today. And as I said, it's a smaller part of the business, but nevertheless, we're not ignoring it. We are looking at it and trying to get it to settle down of what was a very difficult 2016.
Can I just add just two small ones, just in terms of the southern countries there. Is there any reason why you'd pull out of any of those countries, as with Venezuela? Then in terms of oil and gas, my final question, in oil and gas, in terms of gross profit for January, February, are you actually into growth territory GP wise for January and February for oil and gas?
As your question on in terms of pulling out of the markets, no, we wouldn't pull out of the markets. There's no market which is in the Venezuelan scenario. It is just a little bit volatile at the moment. I think for oil and gas across the patch in North America is certainly solidifying in terms of the returns and the expectations and sentiment within the oil and gas sector itself, customer confidence, et cetera. We, and I think I said it was early in the call, I'm trying not to overplay this because I think let's look at the first half. I think we are very well positioned in North America to take advantage of an upturn in oil and gas. I think at this stage, what I can see is effectively a far more solid customer base with a pipeline of orders which suggests improvement.
Let's just see the numbers delivered in the first and second quarter.
Thanks very much.
Thank you. The next question comes from Josh Powell. Your line is now open. Please go ahead.
Yeah. Hi, good afternoon. My first question was on the organic growth in EMEA. It looks like it accelerated in the final quarter. I wondered what the driver of that was. Then also maybe looking kind of Q4 and the beginning of this year, if you've seen any notable trends between your specialty business there and your commodity business. Then the next question, and sorry to harp on, but on the EMEA conversion margin and perhaps ignoring the quarterly volatility, but if we look at the year as a whole, it looks like you've done decent organic growth, yet still conversion margins are down. I wondered if you could just say at the end of the year what you thought the main driver of that was.
In terms of the split between specialties and industrial chemicals, I would say that we are increasingly successful in our specialty chemicals business, which is about 30% of our total portfolio. I would suggest that we are gaining market share in a number of important areas of specialty chemicals. Certainly, it is a small part of our portfolio. Overall it would have grown slightly quicker than the industrial chemicals part of our portfolio overall. I would see that as more of an improvement for Brenntag rather than saying that the whole specialty chemical market is growing faster than industrial chemicals. Coming back to Europe, clearly we have a very clear expectation for Europe's conversion ratio to improve during the course of 2017. There is no fundamental reasons why that shouldn't happen.
We have invested quite heavily in a number of programs in Europe during the course of 2016, including such things as procurement improvements, a number of consultancies in terms of the harmonization of the European operation, integration of IT structures, harmonization of product coding, a whole host of things which are incremental in terms of the cost, but are not seen in terms of the efficiency of the organization as of yet. Those are the essential things that we need to put into place to go to the next stage of integration in our European business, which will be a more and more harmonized supply chain across Europe.
Just to follow up, is it fair to assume that most of those, of the bigger investment programs have now come to an end? I'm just thinking, November, I know you talked a lot about procurement, and it sounded like that investment program would be ongoing through this year. I'm just wondering if we should expect more investments in that in 2017 or if it's largely done.
Yes, insofar as the investment in the initiatives is pretty much done, the output of those initiatives is for 2017.
Right. Okay.
We expect to get the benefits in 2017.
Okay, great. Thank you.
Thank you. The next question comes from Mutlu Gundogan again. Your line is now open. Please go ahead.
Yes. Good afternoon, everyone. A couple of questions. First, on the acquisitions you did in North America, especially J.A.M. You talk about competitive pressure for that business. Can you be a bit more specific? What kind of competitive pressure are you seeing? Is it lower prices that you're being confronted with? What actions are you taking? Secondly, also on the North American business, on oil and gas. In your outlook, you talk about a more positive environment for your customers in this business. How should we think about your cost base and potential operating leverage in 2017? Are you keeping the amount of employees fixed, or are you investing in the business or willing to invest in the business? Thirdly, maybe a very foolish question, but obviously profitability of oil and gas has come down in the recent years.
Just wondering what kind of oil price do you need to return to a EUR 300 million gross profit in that business? Finally on LATAM, I understand that it's a very small business, but you do talk about you expect operating EBITDA to grow in 2017. To what extent is that driven by positive effects? Thank you.
If I take the oil and gas business in J.A.M., you're lucky in America. Well, just going to oil and gas. As far as oil and gas is concerned, I think as I mentioned before, we reduced our operation to a size which actually did not reflect the amount of GP that we lost because we maintained the core of our business. The business is in good position to grow significantly once the oil and gas GP returns. The question of whether or not we can actually achieve the levels of GP that were in the market previously and at what oil price that might be, I think the more difficult and challenging question is really what is the shape of GP earnings that can be expected from an oil and gas industry that's had to live with very low oil prices.
What we've seen during the course of the last two to three years is the oil industry go through an amazing transformation in terms of improving their break-even point. You've seen the break-even points come down significantly in the oil and gas industry, where, for example, if you look at the oil price today, the oil price where it is today would have been an inconceivable break-even scenario for a large number of drilling rigs and shale gas sources two or three years ago. The chemistry that's been required to operate in these lower oil price environments is different. The services are different.
We are a very agile company, and we are doing all sorts of things, and you will have seen the small acquisition we made on pipeline cleaning to actually add additional services to the oil and gas industry to capture new types of income as the business develops. It's certainly not the same, but we have the expertise and the agility to capture more GP once that business picks up. As far as J.A.M. is concerned, it's very straightforward, regrettably very straightforward, is that the J.A.M. business had a significant marine fuels business, which when we talk about marine fuel, we have four or five barges and a couple of tugs in the Houston area, which fed the marine fuel market there.
What happened very simply was, as a result of the oil and gas industry going into a significant decline, there was actually a reasonably large number of barges and tugs and various ancillary equipment which became suddenly redundant almost overnight with the decline in oil. Essentially the owners of these equipment were seeking to gain any sort of revenue that they could find, and they decided marine fuel would be a great place to go. Clearly, that hit us unexpectedly and made the market very difficult. It is as a consequence of an improvement in the oil and gas business and as a consequence of leases expiring on some of those competitive equipments, we expect to see an improvement in our position on marine fuel during the course of this year.
This is not a case of the acquisition has gone wrong, it's gone wrong forever. It's more a case of we had a pretty big bump in the road as far as that particular acquisition was concerned. However, that market is not dead, and we certainly see the situation improving during the course of 2017.
When it comes to Latin America, we do have a pretty strong, very experienced organization in Latin America. We are around for many, many years. We do have a positive business development in a number of Latin American countries, including a strong base in Colombia, including a strong base in Mexico. There's a number of countries within Latin America where we expect a positive development this year. Obviously Brazil, which is roughly a quarter of our Latin American business, has had a difficult finish in 2016 and also didn't necessarily have a good start into 2017. To what degree on a net basis Latin America will grow in course of this year will, to a degree, be dependent on how Brazil is developing going forward, but it's just March, so it's much too early to write all of CA off for Brazil.
There are other countries within Latin America where we are more positive.
That's very clear. Thank you very much.
Thank you. The next question comes from Adrian Pehl, Commerzbank. Your line is now open. Please go ahead.
Yes. Hi, gentlemen. Good afternoon. Actually, two, three questions left from my side. A bit more clarification ones, actually. Just wondered, I had the impression that your free cash flow statement you gave after Q3 was a bit more upbeat. Now you came up with -16% versus previously moderate development. I think this has something to do with the working capital. I was wondering whether there were some effects in Q4 that caused the deviation here. Maybe you could, again, elaborate a little bit on this. Overall, I just wonder simply whether you could give us a figure for the organic growth you had in 2016. That would be, in fact, helpful, and then I might have some follow-ups.
Adrian, hi, it's Georg. On the free cash flow, yes, good catch. We started the year with a statement that we would expect a double-digit decrease in free cash flow. We moderated the statement to a degree after Q3, and now we are at a double-digit decrease. It's basically related to chemical pricing. We spoke about chemical pricing already in a different context on this call. In course of Q4, we saw chemical prices rise to a meaningful degree, and that led to a more significant outflow into working capital than what we expected after Q2 or Q3. We feel it's kind of in line with our general explanation that chemical prices don't mean much for our gross profit and our EBITDA, but they can cause some working capital and therefore cash flow volatility.
Okay, you would not say this is something structural in terms of.
No, absolutely not.
you broadening your portfolio, it's a bit harder to manage working capital. That's not the case, right?
For sure not.
No.
Yeah. We are struggling a little with the question for Q1 2016 organic growth. If you permit, the only organic numbers that we publish is basically the per working day numbers.
Okay. Understood. One question also related to the non-oil and gas business. In fact, it looked like that, looking at the bridges you provided for the quarters, that non-oil and gas was a bit worse in Q4, despite obviously the industrial production showing a bit more positive momentum. I was wondering whether in a certain area you were more affected in your portfolio than in other businesses. That is my final question.
Yeah, I think it's, again, a good spot, but at the end of the day, it is really in the noise. It's a whole range of products and regions and a plus in the Mid-South and a negative in the Pacific and a positive in the Northeast. I think I wouldn't read anything into that. I think clearly it looks like on a quarter basis, not something's happened, but we don't have a structural shift in North America in terms of the oil and gas. We'd expect to see a pretty normal-looking quarter for the first quarter of this year.
Okay. Very final question on M&A. We have obviously not spoken too much about this year, so I am trying to sense. I saw a couple of headlines over Bloomberg that you said you plan to spend the usual budget in 2017. Nevertheless, I am trying to sense whether there is more activity you see in the short to medium term with respect to M&A. Are we going to see most of your 2017 M&A in Asia this time?
Well, in terms of geographically, we are heavily involved in M&A in Asia Pacific. We're also involved in M&A in North America. We see both North America and Asia Pacific as being prime opportunities for us in the course of 2017. I think sometimes it's a little bit difficult to project how active we are in M&A, but we looked at over 25 transactions last year in terms of actually completing a possible acquisition, some which we walked away from on value basis and walked away from on environmental basis, et cetera. Many deals which just couldn't be done for various reasons. We are very actively involved in M&A, and I would expect that was why we indicate that we expect to spend that $200 million to $250 million during the course of 2017. If the appropriate target is converted, it could be even higher than that.
M&A is absolutely in our minds and on the forefront of our strategy.
All right. Thank you.
Thank you. The next question comes from Daniel Buchta, MainFirst Bank. Your line is now open. Please go ahead.
Yes, good afternoon. Thank you very much for taking my questions. Two questions on the guidance. On the one hand side for EBITDA, you are guiding for meaningful growth. Could you kind of try to quantify what this means? If I assume mid-single digit, is this correct? The second point on the guidance for the free cash flow, you guide for a significant increase despite or assuming stable chemical prices, and you highlighted already that this is not the case. Chemical prices for certain commodities are massively up compared to the 2016 average, and many chemical companies guide free cash flow to be down in 2017. How does this fit together with your guidance? Thank you very much.
Well, just on chemical pricing, certainly where we are today is certainly roughly increasing prices in the whole host of product ranges. I do caution you a little bit in so far as that's for now, and it's quite volatile at the moment. If I look forward four or five months, I can see new production coming online in the Middle East. I can see new production coming online elsewhere in the world and a number of units which are currently out of service for maintenance or unplanned maintenance coming back online, which will change the supply balance in the chemical sector. I think you have to be a little bit careful about chemical pricing. It does move around, but they are strongly up at the moment.
In terms of the guidance as you refer to, I think we did say we would give a quarter of guidance in Q2. Certainly when our analysts say, we do say to people that this business has a model of between 4%-6% organic growth business, and we certainly stand by that as being our business model.
The guidance contains everything, M&A, FX and organic growth. Not only this meaningful growth is not coming from meaningful chemical
It includes organic and M&A. It excludes FX.
Oh, okay. Thank you.
Thank you. The next question comes from Laurence Alexander, Jefferies. Your line is now open. Please go ahead.
Hi, good afternoon. This is Jeffrey Schnell in for Laurence. In Asia Pacific, how are you thinking about margins? Can you exceed, and can you exceed mid-teens growth in 2017? As an add-on, can you double or triple share in Asia without significant M&A? How do you view the opportunity in that market?
Well, as far as margins are concerned, are you talking about conversion ratios or are you talking about gross margins here? I guess you're talking about conversion ratios, I guess.
Yes, please.
Well, with conversion ratios, I think you have to be, again, a little bit careful. I don't want to be teaching people that already know how this works, but in terms of conversion ratios, we operate effectively a specialty chemicals business in Asia Pacific at the moment, then industrial chemicals, particularly in China. Southeast Asia is specialty and industrial chemicals in China. We will do more industrial chemicals in Asia Pacific generally because to the demands of our suppliers and our customers. If you add industrial chemical capacity to the range, you get potentially a lower conversion ratio, but higher EBITDA. I don't want to become a hostage to the conversion ratio in Asia Pacific being what it is today forever and not grow the business. That is worth considering.
In terms of doubling the size of the business, obviously I'd love to be able to do that without acquisition. I think the reality is that whilst we're certainly gaining significant critical mass in Asia Pacific, we're not there yet where there's sufficient critical mass for us to grow organically without further M&A. Obviously we will grow organically, but I think to double it would require more M&A. If you look at this in, say, three to four years' time, it may be a different story, and I can give you a different answer. In terms of the overall growth, we're expecting similar performance in 2017 as we saw in 2016.
Thank you.
Thank you. The next question comes from Rajesh Kumar, HSBC. Your line is now open. Please go ahead.
Hi, good afternoon. Could I just confirm that the January organic decline of 3% you mentioned, that was gross profit or revenues? Before I ask the question, please.
It's FX adjusted gross profit per working day.
Adjusted gross profit per working day on an organic basis was down 3% in January.
Yeah.
It was flat for the first two months of the year.
It was down 3% in January. It was up 2.4% in February, which on average is about flattish, yeah.
Okay. Cool. When we look at the chemical prices in Q1, the bulk chemicals, and I appreciate that specialty chemical prices will move with a lag. The product price inflation hasn't changed much. Would it be a fair assumption to make that the volume growth, basically it started off slow in January, but is still running at a lower growth rate than it was in Q4 overall? The second question is on the inventory turn, which seems to be coming down again, and we would like to know if that's a product of move towards specialty chemicals or is it a product of rising chemical prices?
Well, first of all, in terms of the chemical prices, chemical prices are going up.
I'm not quite sure. I'm not quite sure whether you said they weren't going up. There are prices going up in a whole host of ranges, particularly in solvents and the chlor-alkali, particularly. We are seeing volatility in pricing. Any increases in terms of our sales revenue, we're happy as a result of a combination of both pricing and volume. I'm planning don't drawn into volume and we don't really comment about volumes generally, because that's not something which drives our business, in terms of, it's not a key focus for us. Chemical prices are definitely moving up.
I think we still have the inventory turn question open. I'm not sure what way you calculated inventory turn. I would suggest, if you calculate inventory turn, we compare sales to inventory. It's difficult to take only end of period inventory-
Sales for the full period because basically, the danger is you compare different price levels in the calculation.
Yeah.
If you use an average of working capital for the year, then the inventory turn is slightly up in 2016 over 2015. You are right in the long-term timeline, that inventory turn comes down a little.
Partly due to growth in emerging markets, partly due to more specialties in the business. It's not necessarily a 2016 over 2015 effect.
Okay. Yeah, because if you use the end of balance sheet number, or balance sheet number that's flattered by a rising chemical price.
Exactly.
If you compare with an average over the period, what you're getting is inventory turn is actually increasing.
I agree.
Okay, perfect. Thank you.
Operator.
Thank you. The next question comes from Carl Green, Credit Suisse. Your line is now open, please go ahead.
Yeah, thank you very much. I've just got two remaining questions, please. Georg, just back to your point about the true ups in North America. I think you mentioned there were a handful of EUR millions of various charges for environmental provisions, pensions, personnel, et cetera. Can you quantify what those charges amounted to? Just be a bit more specific and also what the delta was versus Q4 2015, just to get a sense as to how that's impacted the conversion ratio year-on-year? My second question is just around the procurement benefits. You've mentioned that in the context of the improvement or the expected improvements in the European conversion ratio as we go through this year. Are you in a position yet to indicate the scale of the group-wide procurement benefits that you would expect to see in FY 2017, please?
Carl, hi, it's Georg. Yeah, I know it's probably not the answer you are looking for, but I really cannot quantify the various true ups. They are not material in a group context, even not in Q4. They are not material in North America in a full year context. I think it would be we artificially overplaying that to name a couple of EUR million here and a couple of EUR million there.
Okay.
I'm not sure I want to give guidance in terms of the outcome from the procurement process at this stage. We've been very careful about this because clearly suppliers are very important to us and we want to do this in a very responsible way. It's quite a big subject area, but we really will be delivering what we hope in terms of savings on this particular program from April onwards. Basically, the work is done and you would see it more likely in the GP improvements on industrial chemicals in the first instance.
Okay, great. Just one follow-up question unrelated, if I can. Again, just on the maturity extension on the syndicated loan. Did you say, Georg, that the rates had also come down, the coupon had come down on that, or is it broadly similar? Has it just extended or have you also got better terms on that facility?
The rates have come down a little, so probably say EUR 3 million a year. The real benefit in this thing is pushing out the maturity three years and another set of documentation improvement.
Okay, great. Thank you.
Thank you. The next question comes from Christian Kohlpaintner, Warburg Research. Your line is now open. Please go ahead.
Yes, thanks. Good afternoon. Three questions left from my side. Maybe first, I think I've got your point regarding the conversion rate in North America, that you expect an improvement this year. Looking into the divisional history, actually, you had conversion rates of 40% plus. Do you think that you can regain this territory, or you think that the market has structurally changed meanwhile? Secondly, the M&A impact on EBITDA last year was roughly EUR 52 million. Can you maybe remind us what is the approximate contribution from M&A on the 2017 EBITDA based on the transactions you have executed so far? Lastly, a technical question.
Can you maybe, due to the fact that also due to acquisitions and different divisional performance, the divisional picture has changed a bit, can you maybe give us an update regarding the sensitivity for a change in the US dollar/euro exchange rate on group EBITDA?
I'll take the conversion ratio in North America, it's relatively simple. Yes, we fully expect North America in the plus 40% conversion ratio, that's certainly our aim to get there for 2017.
The transactions that we already have closed in course of 2016 or very early 2017 should deliver an incremental EBITDA 2017 over 2016 of about EUR 17 million, give or take a little. Translational U.S. dollar sensitivity, a strengthening of the U.S. dollar by $0.05, say from 110 to 105, average of the year over average of the year should increase our EBITDA by close to EUR 20 million.
Close to EUR 20. That's more than I think you've guided in the past, right?
That's true. We acquired the lubricants business in North America and a number of other entities in North America over time.
Okay. Excellent.
If I may give a technical addition. $0.05 on, say, 130-125 is different than from 110-105.
Okay. Understood.
Thank you. There are currently no further questions. As a final reminder, if you would like to ask a question, please dial 01.
Okay, well, there's no further questions. Thank you very much everybody for your questions, and thanks for joining this afternoon on our year-end numbers. I'm going to close the call there. Thank you.
Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may now disconnect.