Ladies and gentlemen, welcome to the Brenntag AG Q3 2016 Results Conference Call. 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 hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Steven Holland who will lead you through this conference. Please go ahead, sir.
Hi. Good afternoon, everybody. Welcome, ladies and gentlemen. Thank you very much for dialing in for our Q3 results call. As usual, I am on the phone together with Georg Müller, our CFO, and again, as usual, we will be pleased to answer your questions after the presentation. Let me begin with some words on the macroeconomic environment. Overall, the global economy remains challenging. North America shows another quarter of water with negative industrial production growth. Latin America continues to show a clear downturn with negative industrial production growth rates as well. Industrial production in Europe is growing moderately, and the economy in Asia Pacific continues to grow at higher growth rates. In this somewhat challenging environment, we saw a similar picture on a macroeconomic basis for Brenntag. Earnings in Asia and Europe grew.
Our business in North America continued to be affected by the weak demand in oil and gas, as well as the difficult macro economy overall. As in the previous two quarters, our business in Latin America continues to suffer from the loss of earnings in Venezuela and will continue to do so for the rest of the year. Additionally, our business performance was clearly affected by the weak macroeconomic conditions, particularly in Brazil, which is currently in deep recession. It has led to an increase in GP profits, our gross profits of 5.5% and an operating EBITDA of 2%, both on a constant FX basis. Thanks for sharing. EPS for the third quarter amounted to about EUR 0.60, almost in line with last year's Q3.
We were pleased to announce a number of acquisitions since the last reporting date, and I will just give you a few details on those on the next page. We clearly consider the lubricants distribution market in the U.S. as attractive due to its ongoing consolidation. We signed a further two acquisitions in the U.S. in the lubricants business recently. First, we signed an agreement to acquire Mayes County Petroleum Products in Oklahoma. This transaction has now been closed. We also signed the acquisition of the lubricants business of NOCO with activities in the U.S. and Canada. These two acquisitions will further strengthen our business in the lubricants market, expand our local presence, and solidify our market-leading position. Last but not least, we recently signed an agreement to acquire the distribution of EPChem Group, which is based in Singapore.
This transaction will expand our footprint in specialty chemicals, particularly that of specialty waxes in the Asia Pacific region. The total amount invested in 2016 now stands at around EUR 200 million. The average multiple for acquisitions signed in 2016 is around 6.8 times enterprise value to EBITDA. I am going to hand over to Georg.
Thank you, Steve. Good afternoon, everybody. I will take over my part of the presentation on page six, which is the upper part of our income statement. In a kind of challenging macroeconomic environment in Q3, we report a gross profit growth of 5.5% on a constant currency basis. The gross profit growth was particularly driven by our acquisitions. Operating EBITDA amounted to EUR 205 million, and that is a number which is slightly above the previous year's level. On a constant FX basis, operating EBITDA exceeded previous year by 2%, and I will provide more details on the EBITDA development on the next slide. That would be slide seven. What you see is, like in previous quarters, a bridge for EBITDA from the third quarter 2015 to the third quarter 2016. The starting point is the Q3 2015, where we reported operating EBITDA of EUR 204 million.
We are dissecting the different effects to walk to the third quarter 2016. The first thing is partly due to the weakening of the pound sterling and also a number of other currencies. We had a negative FX translation effect, and that amounts were EUR -3 million. As previously expected and discussed, also in this quarter, our operations in Venezuela are no longer contributing any earnings. In the third quarter 2015, operating EBITDA from Venezuela still amounted to EUR 3 million. The acquisitions contributed an operating EBITDA of EUR 30 million in the quarter. We do see a stabilization, a sequential stabilization in the oil and gas sector. However, this still implies a reduction compared to previous year based on gross profit that was lower by EUR 7 million compared to the third quarter 2015 estimate that this resulted in an EBITDA decline of EUR 4 million.
Our business in North America outside the oil and gas sector continued to suffer from weak economic performance with a declining industrial production. While our diversification for sure helped to mitigate the headwind, we do record an EBITDA decline of about EUR 3 million. Our businesses in India and Asia Pacific continued to show organic growth. This was partly diluted by a weaker development in Brazil impacting Latin American results. All in all, this resulted in an EBITDA that is higher by EUR 1 million on an organic basis. All of the effects result in an EBITDA of EUR 205 million for the third quarter 2016. On the next page, you see the P&L lines below EBITDA. Depreciation for the quarter amounted to EUR 28.3 million, and amortization amounted to EUR 11.7 million. The financial result amounted to a net expense of EUR 23.9 million.
The tax rate was 33.9% within our usual, or almost within our usual 34%-35% range. Earnings per share is EUR 0.60 or EUR 0.66 if you exclude amortization. On the cash flow statement in Q3, the operating cash flow amounted to 180 million EUR, up to 166.9 million EUR in the third quarter 2015. There are no particular movements in individual line items that are worth commenting. On page 10, let's talk about investment and financing cash flow. Cash out for CapEx in the quarter totals 27 million EUR on previous year's level. You might notice that there's a line, repayment and proceeds, which has a 61 million EUR payout last year and only 3 million EUR this year. That has to do with debt repayment that we undertook. I'll skip the balance sheet page and move to leverage on slide number 12.
On the slide, you see the information on net debt and leverage. Net debt amounted to 1,604 million EUR at the end of the third quarter. The significant decrease compared to the end of the second quarter underlines the strong cash flow generation in the quarter. Group's leverage stands at 2.0 times below the level of 2.2 times achieved at the end of the second quarter 2016. I will move two pages ahead, the working capital slide, page 14. Trade working capital amounted to 1,311 million EUR at the end of the quarter. We turned the working capital 8.1 times, which is the same level achieved at the end of the second quarter. Third quarter 2016 delivered a strong free cash flow of 190 million EUR, in line with the level we achieved a year ago. That takes the presentation back to Steve for a segment discussion.
Thank you, Georg. Let me take you through the development of the segments in the third quarter 2016. In the EMEA region, in the third quarter, EMEA grew its operating gross profit by 5.3% on an FX-adjusted basis. This was mainly driven by organic growth. Additionally, some smaller acquisitions contributed positively. Operating EBITDA increased by 4.6% on an FX-adjusted basis. The depreciation of the GBP caused some headwind. FX-adjusted growth clearly exceeded the reported rates. In North America, the business in North America continued to be impacted by weak demand in the oil and gas sector and a challenging macroeconomic environment. We do see the expected sequential stabilization in our oil and gas business. Gross profit in North America increased by 6.2%, FX adjusted. Excluding the oil and gas sector and the acquisitions, the gross profit declined by about 1% on a net FX-adjusted basis.
Operating EBITDA in North America was only up by 1% on an FX-adjusted basis. This is foremost attributable to the fact that the reduction of GP in the oil and gas sector could not be fully compensated by cost reductions. Coming to Latin America. In Latin America, we were clearly affected by the loss of earnings in Venezuela, following the economic standstill. The business performance is impacted by the difficult political and economic situation in Brazil. GP in Latin America declined by 18.7%. Operating EBITDA declined by 40.1% on an FX-adjusted basis. Excluding Venezuela, operating EBITDA was down by 26.8%. Significant decrease was also attributable to the very strong comparables in Q3 2015, particularly in Brazil. Coming to Asia Pacific. Asia Pacific had another excellent quarter, clearly outgrowing the market due to a double-digit organic growth and contribution from the acquisition of TAT.
The region grew its gross profit by 36.3% and its operating EBITDA by 38%, both on an FX-adjusted basis. Growth was broad-based, with encouraging performances in both China and Vietnam. Coming to the slide on North American oil and gas and IP growth. The oil and gas profit in Q3 amounted to $57 million, which is a slight improvement compared to Q2. Clearly a shortfall against prior year's level, but sequentially stable. The group will have suffered nearly a $40 million United States dollars gross profit loss in 2016 compared to last year. The chart on the right-hand side shows the development of the industrial production in North America, which remains weak with four consecutive quarters of negative IP growth. The trend would suggest that that is improving. Coming to the outlook.
I'd like to start with the current trading and then provide you with our current outlook for the full year 2016. Let me walk you through the gross profit per working day on a monthly basis. Please bear in mind that the weakness in oil and gas sector has a negative impact of about 2% of the gross profit generated by the group the first nine months of 2016. In July, gross profit per day increased by 6.9% as reported and by 0.4% on an organic basis. In August, the growth was 5%, as reported, but a slight decline of 1.2% organically. In September, the growth was 5.2% and a decrease of 0.8% on an organic basis. In October, growth was 9% and 2.1% on an organic basis.
Based on the Q3 results and the latest trends, we expect our operating EBITDA for the full year 2016 to be between EUR 800 million and EUR 820 million. Thereby, we maintain the lower end of our guidance issued at Q2 and have narrowed the range. While the main trends in our business remain unchanged, we have not seen sufficient upward momentum in North America, which would have justified to maintain the upper end of the existing range. We clearly will continue to invest in our existing infrastructure as well as growth projects for 2016. We confirm the indicated CapEx of about EUR 150 million still hold. Overall, the first nine months were clearly impacted by a continuation of challenges in particular for our North American oil and gas business in Venezuela. We are encouraged by organic growth in Europe and Asia Pacific and the sequential stabilization of GP oil and gas segment.
Now we're happy to take your questions.
Ladies and gentlemen, we will now begin our 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 a question. If you find your question was answered before it's your turn to speak, you can dial 02 to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. The first question is from Robert Plant, JPMorgan.
Good afternoon, Steve and Georg. The 2.1% growth figure you just mentioned in October, Steve, is that coming from any particular area in particular? Do you think that's a sustainable trend improvement? Thank you.
Just one second, Robert. Just give the information.
It's Robert. Okay. It's not coming from any particular area. It's basically coming around the world, a little bit of improvement, with the exception of Latin America, which is on weak levels.
Okay. Thanks, Georg.
Thank you. The next question comes from Rory McKenzie, UBS.
Hello. I guess that's Rory McKenzie, actually. Still UBS. Two questions on Europe, actually. Firstly, obviously the rate of kind of profit drop through really fell back this quarter to more like 16% drop through after 50% in Q2. I know, obviously, the cost base can be lumpy quarter-on-quarter, but it still feels like you're struggling to drive good operational leverage on the top line trends. Can you talk a bit about the cost base changes there and what we should expect for the Q4 and what kind of inflation maybe into next year as well? The other area on Europe is obviously the gross profit growth slowed from the very good performance in Q2. Can you maybe remind us what was exceptional or one-off within that Q2 gross profit growth?
Whether you think this is more of a sustainable ongoing trend within Europe?
Right. I think in terms of costs within the quarter, you're right. It has been a little bit lumpy into Q3. It's more in comparison to prior year as well, where I think cost control and cost benefits in the previous year were favorable. It's a bit of a comparable number that we should look at. The Q3 in Europe, I don't really see this as being a negative development or Europe slowing down dramatically. I think Q2 was an excellent result. We do have a number of initiatives in the European business, which we deem positive for the rest of the year. We would expect the actual pass-through from the gross profit through to EBITDA to improve in the fourth quarter accordingly.
Okay. Next year, what would you expect for your kind of OpEx growth? This year will be maybe a 5%, 6% underlying cost increase, FX adjusted. Do you think next year will be the same or lower?
No. I think the cost base is attributed in some case by the acquisitions spend. Clearly we will be looking to keep our cost increases in line within inflation or even below as we increase operational leverage in 2017. We are actually working pretty hard in Europe on a number of initiatives in terms of developing the European business' performance in particular for 2017. In terms of GP generation and sales efficiency. That spending is now occurring in this year with a view to it delivering more performance in 2017. We're particularly focusing in the area of improving our purchasing of the very long list of products that we have in the small lots around the European piece, and we expect to see GP improvements as a result of that.
Okay, thanks. On the gross profit growth trends, which slowed down a bit this quarter?
No particular reason, no particular one-off for sure in the second quarter. We do think that the gross profit growth that we demonstrate in Europe, even in the third quarter, 3%, 4%, 5% on average for the year organically are pretty much sustainable. When Q2 was a little bit stronger, I would just ask you to keep in mind that second quarter was a pretty long quarter in terms of working days.
Okay. Do you have the Europe working day adjusted growth trends or is it just something to be roughly aware of?
Well, if you don't mind, I think on a quarterly basis, a working day adjustment makes it a little bit too technical and overstates the issue. I only brought it up because you particularly asked if there was a reason for the very strong growth rate in Q2. That's part of the story.
Okay, great. Thank you.
The next question comes from Andy Chu, Deutsche Bank.
Thanks very much. Good afternoon. A few questions from me. Just following on from Europe, I think at the time of the Q2 call, you said that three quarters of the 8% FX-adjusted GP growth rate was organic. That would imply 6% for Q2. Taking the headline 5.3%, maybe backing out a similar amount of M&A, would lead to a slowdown in growth in EMEA in Q3 at just 2%. It does feel like quite a big slowdown from Q2 into Q3. I just wondered though, that magnitude of slowdown, sounded correct in terms of magnitude? If that's the case, there obviously must be some reasons by country at least why that growth has slowed pretty sharply. Secondly, moving to LatAm. You mentioned ex Venezuela that there was a 26.8% decline in EBITDA.
I wondered if you could let us know how much of that decline was due to Brazil. My last question for now, in terms of North America, ex oil and gas for Q4, as the IP growth comps get easier into Q4, do you think it's possible to get back into year-on-year EBITDA growth organically in North America, ex oil and gas? Thank you.
Well, just in terms of Europe, Q2 versus Q3, we're not seeing a significant sequential slowdown in our European business. I know the numbers would, if you look at them, the bare numbers, it suggests there's been a sharp downturn. In terms of the way we've seen the marketplace and looking at the opportunities that are presenting themselves, I think this is a quarter of a quarter issue. At this stage, I would not say that Q4 is expected to be a slower quarter or effectively a declining performance from the European region. I would expect the European region to put in performance in Q4. I wouldn't read into the Q3 European numbers as being, as a long-term directionally negative development.
As far as North America is concerned, improving IP performance, I think our view in North America is that we do see the green shoots, if you like, in North America. We have some evidence of quite significant price increases in the North American market in the chemical sector, which as you probably know, are always a good thing in terms of volatility with the market and for chemical distribution. Our view is that with the stabilization of the oil and gas revenues, so our oil and gas GP, effectively improving overall industrial demand in North America, we might expect a more positive outcome. Will it result in a Q4 year-over-year improvement? I can't tell you that without going through it in more detail.
On Brazil or Latin America, Andy, in absolute numbers, the EBITDA for Latin America Q3 over Q3 previous year declined by EUR 6 million. Out of the EUR 6 million, EUR 3 million are Venezuela, EUR 2 million are Brazil, and the remaining EUR 1 million is split over several countries.
Just, sorry, to go back to Europe, as I don't quite understand why the growth, you said there's no sort of slowdown, the numbers sort of suggest probably.
Andy, I think we had a little bit of a hard time to follow your explanation, what you are comparing. We would need to hear that explanation again.
Sure. Maybe if I just use the headline numbers, because there's not a lot of M&A, if I'm correct, in terms of Q2 and Q3. A few percentage points. If I'm not wrong, I think it's pretty similar to the Q2 and Q3 effect. In Q2, the FX-adjusted GP growth rate was 8.3%, and that's fallen to 5.3% in Q3. The numbers suggest a slowdown, despite commentary. Although potentially that may not be the case. Maybe looking just at Q3, is there any sort of differential development through the quarter?
First of all, you are right that the acquisition impact in Europe on a gross profit basis is around 2%. The observation you have, I would put it into a one quarter longer timeline. If you go through the three quarters, the first quarter was FX-adjusted growth 5.9%, second was 8.4%, the third was 5.2%. It's more that the second quarter was on the strong end of things. I wouldn't see this as a drop-off from Q2 to Q3.
Okay. Just in terms of Q3, was there any differential as you went through the quarter in growth rates? Clearly, it's a little bit of a weaker quarter given some of the Southern European holiday patterns. Did you see any sort of weaker July, August and a pickup in September or?
We do have the usual holiday season in Europe in July and August. In that sense, July and August are weaker months, but each and every year. It doesn't really impact the growth rate pattern.
Okay. Thank you very much.
Sure.
The next question comes from Murugundegan. Please go ahead.
Yes, thank you, and good afternoon to everyone. I have three questions. First, on M&A. Those added EUR 13 million to your EBITDA. Based on your disclosure in the various press release, I would have expected a higher number. Given the fact that I think that J.A.M. and G.H. Berlin-Windward is the biggest component of that, is that also the driver behind the shortfall of profitability? That's the first question. The second question is on LATAM. Thank you for the detail on or the split actually for Brazil. Could you also give us that number, the EBITDA decline year-over-year for the previous quarters for Q2? It seems that you're starting to see that now while Brazil has been in recession for a couple of quarters already. Just wondering why you're seeing now a bigger impact.
Thirdly, on oil and gas North America, it's good that we're seeing the stabilization. Can you talk about the phasing of gross profit throughout the quarter? Has it been equally spread over the months, or are you seeing a pickup in the last few months? Thanks.
Maybe I'll take oil and gas. Oil and gas is, as you rightly point out, sequentially stronger quarter-over-quarter. I would say that particularly in the quarter, towards the end of the quarter, that we saw a larger improvement, particularly in the area of our pipeline cleaning business in N-SPEC, which is now operating at higher levels than it was earlier in the year. For those that follow this particular separate area, may remember that our pipeline cleaning business is basically, which is a strong component of our oil and gas business, has been put on hold pretty much by a lot of the operating companies who use our services whilst they were operating at full rates. Now we do find that we are doing more and more pipeline cleaning towards the back end of the year as opposed to on a more evenly spread basis.
Oil and gas is sequentially stronger going forward, and I would believe that we will do more pipeline cleaning in particular. I think for the Brazil, have you got it?
LATAM, I tried to help. For Brazil, I mentioned in the third quarter, the Brazilian EBITDA declined by EUR 2 million. I don't have the full detail with me, but I can tell you that in the first half, so over two quarters, in the first half, the earnings in Brazil declined by EUR 1 million. Q3 was a much sharper decline than the first half of the year, and it's a mix of some sequential slowdown, but even more so, Brazil had a very positive trending course of last year. Particularly in Brazil, the comps are relatively difficult in Q3 and Q4.
Yes, indeed, because Q4 is an important quarter for you. Would you expect that deterioration to worsen actually in Q4?
No, I would say not. We are where we are as far as Brazil is concerned. Clearly, Venezuela is a write-off for the year. At the end of the day, we've written that off already. I think the performance for Brazil, Q3 versus Q4 probably will be unchanged.
Just to avoid a misunderstanding, I thought maybe rightly or wrongly, the question was relative to Q4 last year, and they did have a very strong Q4 in last year.
Is that what you meant?
No, what I actually wanted to gauge is that whether the decline in profitability was picking up sequentially. When you say it was EUR 1 million in the first half and then EUR 2 million in the third quarter, that indeed indicates that it has worsened. Just wondering, going into Q4, should we use the EUR 2 million as a run rate for a, let's say, more important quarter?
The 2 is a reasonable thought process for Q4.
Okay. All right. Maybe finally on the question on acquisitions.
Yes. I think you're correct insofar as the most significant acquisitions in 2015 were Berlin-Windward and J.A.M. It's correct that J.A.M. are seeing some headwinds in terms of the GP related to the marine fuel business, which has not performed as bad quite a bit this year relative to marine fuel. That is probably a situation that probably won't improve till towards the end of this year, maybe early into next year. That acquisition is behind plan.
Okay. Thank you very much, guys.
The next question comes from Adrian Pehl, Commerzbank.
Yes. Hi, everybody. Actually, three, four questions. Sorry to bother again on the development in EMEA, just to be clear about it, since the sequential drop looks a bit steeper this time. Would you be willing to explain a little bit on the different regions in EMEA, where probably the profitability was declining more relative to Q2, thinking probably also about the U.K. A question somewhat linked to that, it's not quite clear to me how the competitive dynamics have evolved, taken from the Univar conference call. They said they want to be more aggressive, obviously, in Europe. I was wondering whether you're seeing this to some extent, or is that it's just not meaningful enough relative to a big market.
Also, having said this, what I was seeing as quite interesting here is that I heard them say the suppliers want definitely their distributors to grow, and since organic growth in these times is obviously hard to achieve, I was wondering whether you could elaborate a little bit on the support you get from the supplier level on a more broader scale. Is that actually improving, and how is the situation here? Third question, probably a bit more financial. Actually, your wording, when I got this correctly, has a little bit changed in terms of free cash flow actually improved to some extent. Obviously, and to keep your CapEx guidance, this must be attributable to your working capital development. I was just wondering, what are you seeing here right now? Is there an improvement on the receivable side, or where is that coming from?
Last but not least, maybe since we are already progressed in a year and six to seven weeks probably to go, I was wondering whether you could update us on your M&A budget. Is there still a chance that you exploit some of the usual guidance that you give, or should we expect some M&A to shift into 2017? Thank you.
I'll just take a few of these. First of all, in terms of the Univar question, I actually didn't hear the Univar call, so I will have to take your word for it. I would suspect as far as Univar's concerned, they are clearly significantly smaller than Brenntag in the European arena, and my understanding, rightly or wrongly, is that they are looking to improve their margin performance in their business overall. If that's their strategy, that's fine by me. I would not anticipate any significant competitive threat to Brenntag's position in Europe in overall terms. Clearly, we're well positioned to deal with that. In terms of the comment about suppliers wanting to see their distribution businesses grow, I would concur that is the case.
Indeed, when we talk to all the majors such as Shell or Dow or BP and what have you, they continue to stress their desire and their policy to increase the use of the distribution channel as a channel to market partners and to seek to reduce the number of distributors they're working with. In particular, we can look at all of those names, particularly in Asia Pacific, where I would say now we're dealing with Dow, Exxon, Shell, BP, and other major companies in the Asia Pacific region from an outsourcing point of view in an increasingly accelerated way. As far as M&A is concerned, I think we've indicated EUR 200 million.
We stick to the EUR 200 million-EUR 250 million budget, and we actually did spend around EUR 200 million this year already.
Yeah. The pipeline is active, as is always, but I would say probably about EUR 200 million-EUR 250 million holds, as Georg just said. I'm not sure we've got the country analysis for-
Yeah. Europe, again, we would see Europe nicely growing also in Q3. There's no noteworthy differentiation between the countries that we would like to point out. You asked for U.K. post-Brexit vote. The U.K. business is holding up well, there's no development, particularly no development related to Brexit, which gives us any earnings concern. You also referred to the report of expected development in the third quarter report, you spotted that we uplifted the forecast for free cash flow a little bit. That's actually due to working capital development, the working capital development is benefiting to a degree from the fact that chemical prices have continued to decline until now in course of this year. Even now, it seems price declines have come to a halt. Basically, because prices for chemicals are lower than we initially expected, we need to tie less money into working capital.
All right. Just quick one, you were saying in your presentation that your usual tax bracket is around 34%-35%.
Yes.
That's a figure we should expect for the whole of 2016, probably no change in maybe four or anything?
Yeah, it's a good figure.
All right. Okay, thank you.
The next question comes from Daniel Buchta, MainFirst.
Yes, good afternoon, everyone. Just two questions on my side. The first on CapEx, you guided for EUR 150 million this year, so far you have spent around about EUR 70 million, so EUR 80 million is left. Is the EUR 150 million still valid and can we expect the rest really to come in Q4? Then, obviously, we're in North America and in the U.S., we had a quite important event today. Do your customers kind of give you a feeling on what they expect from this, and can we expect an improvement here still on the back of this event? What we also are seeing in October, the oil price came back again to below EUR 50. Does this somehow impact your trends in the oil and gas business there, or can we expect the slightly positive trend to continue based on this? Thank you very much.
Yeah. Well, as far as oil and gas is concerned, I think I'm actually somewhat encouraged by the fact that throughout 2016, we've actually had the oil price all over the place, below EUR 40, above EUR 50. If you look at our GP generation from our oil and gas business, it's looking pretty stable. I think we managed to find ourselves an optimum level of being able to operate within the scope of the current oil price, which I think is a positive development for us, particularly going forward into 2017. As far as CapEx is concerned, I fully appreciate what you're saying about the capital expand. We do tend to authorize projects which are kicking off in the first quarter, the nature of the investment process can be quite lengthy because of the sort of things that we're doing.
Quite often, the actual capital expenditure doesn't really get booked until towards the end of the year when there's a sign-off of the completed project. That's more a feature of the project planning and project execution. We do fully expect to be around about the 150 mark. What was the request?
Oil 50, still stable?
No.
Okay.
Yeah. Was that it?
The election.
The election.
Oh, yes, the election. All right. What happened again? We're like everybody else and on this call, and we're all sort of scratching our heads, what does it mean? I suppose at the end of the day, and it's purely a personal view that the president elect professes to be somewhat more business-friendly than maybe perhaps the other candidate. If that's the case, then clearly that's good for everybody in business.
Your customers don't give you any feedback or are much more negative, you would say, based on?
I think most of them are still a little bit in shock, I think, in terms of the results. I've had no negative or positive feedback I can share with you.
Okay. Thank you very much.
The next question comes from Kyle Green, Credit Suisse.
Yes, good afternoon. Hello to everyone. A couple of questions from me, just operationally, first of all. Just in terms of the U.K. and the impact of the Sterling devaluation, can you indicate what proportion of chemicals you're distributing into the U.K. are actually imported? I'm just trying to get a sense of potential transactional impact on the margin, particularly into the fourth quarter and early next year, whether that's something we need to be thinking about in terms of the conversion ratio going forwards. The second question just goes back to that pipeline cleaning comment that you made. Just to put that in context, can you indicate roughly what the revenues were in the last full fiscal year and what you're budgeting for the current year, acknowledging that the fourth quarter is likely to see a pickup?
I've got a couple of small follow-ups, if I can.
Yeah. I can't really give you a full detailed breakdown on the oil and gas business between pipeline development, the pipeline cleaning services, and all the other services. We don't really want to get into that level of detail. Just really give some indication as to why we think the oil and gas business is stabilized going forward and has some growth potential for us. I can't really give you that much detail.
Kyle, on the U.K., roughly 70% of what we sell is sourced locally and roughly 30%, 25%-30% is imported into the U.K. Mind you, most of the product that we import are not produced in the U.K. Each and every distributor to the market has to import the product.
Yes.
We are not in a competitive disadvantage to others. So far, we haven't seen any negative transactional impact.
Just to follow on that point, it still is the case that the U.K. has increased its prices to cover any exchange rate-related increases in prices for products delivered into the U.K. Most of the effect would be of a translational nature as opposed to operating nature.
Okay, great. That's very helpful. Then a couple of smaller follow-ups. Just on the cash flow statement, Georg, there's a fairly big inflow from a line item called other non-cash items and reclassifications of EUR 45 million in the nine months to September. Can you just run me through what is in there and how that's likely to look for the full year? Linked to that, just in terms of net debt movements based on current spot rates, acknowledging your significant USD borrowings, roughly what sort of full-year FX impact you're expected to see on net debt, please?
Okay, not so easy because it's a mixed bag of items. In the EUR 45.2 you are referring to on the cash flow statement.
Yeah
Other non-cash items and reclassification, there's basically also the P&L entries that are non-cash effective. The most relevant item is actually the Venezuela write-off. We have written off EUR 27 million of Venezuela in Q1, non-cash. It reduced earnings, so it reduced the starting point of the cash flow statement. Within the EUR 45, EUR 27 is actually offsetting it to show an appropriate cash development. I don't have the exact split of the remaining 17 or 18. It's a very broad mix of items.
Okay. That's clear, because that EUR 27, that went through the finance-
Yeah
expense line, didn't it? Further up in the P&L. Yeah. Okay, great. Then the net debt's FX impact, if possible.
Net debt FX, I would have to go through the details. If you think about FX effect on net debt, end of 2016 over end of 2015, it actually won't be much because most of the foreign exchange effect on debt is in U.S. dollar, and the U.S. dollar hasn't changed much. There's a little bit of impact on the British pound, but not much. I'm guessing a number. It's an about EUR 10 million-EUR 15 million decline in net debt from FX items.
Okay. Thank you very much.
The next question comes from Rojesh Kamara. Please go ahead.
Hi. Good afternoon, gents. Just following up on the non-financial, basically the financial expense item, which are non-cash. Could you give us some idea on how much of that relates to currency swaps? The second one is on LatAm, Brazil. I'm sure you will be irritated by the B word after this call. I think we've discussed this in the past, that your selling prices tend to be in U.S. dollars in Brazil. Obviously, the costs are local. When we get a sequential currency improvement in Brazil, one would expect pressure on the conversion margin. Have you tried to look at how much of the margin pressure there stems from transactional FX impact? And then how much of similar effect can we expect in the U.K. next year if the pound stabilizes?
Finally, your inventory turn now looks like it sort of stabilized at nine times in the last two, three quarters. You had highlighted that a move towards specialty chemicals and a bit lower volumes in oil and gas were contributing to that. Do we see that going down further, or do we assume that to be the level you would target, i.e. you would keep adjusting the inventory if it starts going below that?
Yeah. Maybe I start in the order of sequence you asked. You are right that in principle, the currency swaps go through that same line, other non-cash items and category classifications in the cash flow statement. Apologies, I don't have an exact figure at hand. It's in this year, not a meaningful figure. It could become a meaningful figure, this year it's pretty minuscule. Apologies, I don't have the number at hand. With respect to transactional FX effect from the indirect dollar impact you referred to in Brazil, then you're asking the question for the U.K. Again, I have to apologize, we had the discussion, I think, over the recent quarters, we disagree with your analysis of the principle effect. I'm happy to take it again offline and discuss it again, I can't give you the number because we don't follow the logic.
Oh, the logic is chemical prices in Brazil tend to be in dollars.
We disagree. Can I beg your pardon and take that discussion offline? I think it's difficult in a very broad call.
Yes. Thank you very much.
Maybe I could take your question on stock turn. I think you're quite right in terms you point out that our stock turn is relatively stable. Clearly, we seek to increase our share of specialty chemicals on a continuous basis around the world. We see the benefits of that in, for example, in Asia Pacific. I would also say that the group is working very hard to effectively bundle more products together as a group, and we are pushing hard to both extend the availability of products to our customers and increase stock turnover as a group and improve our working capital turn, which is all about efficiency throughout the world. These are some of the larger initiatives that we have running on a global basis.
I would say that I would not anticipate a reduction in the stock turn level for our business in the immediate future.
No, that's very useful to understand. I mean, your gross margin clearly has gone up this quarter, and to some extent, that would be a mix towards specialty chemicals, and to some extent, that's just the fact that you're one of the biggest distributors in the world. You got very effective product procurement. Can you sort of give us some flavor on how much you think is impact of specialty in the mix versus how much of that is you procuring at a lower price than most other competitors?
No, I think the easier thing to probably do is done more of a one-to-one call, if that's all right, because it's a long and somewhat convoluted answer to your question. It's suffice it to say, if you take the group as a whole, there's not been a significant switch towards specialties or industrial chemicals. Broadly, the mix is broadly the same. You will see some regional variations, and margins are equally moving around both on specialties and industrial chemicals in a relatively consistent way. I don't really see it as being a step change in either direction in terms of margin development and/or a mix change within the company. It would be a null effect. Again, there's some points that you've raised, probably better off on a one-to-one discussion on the call.
Thank you very much.
The next question comes from Andy Chu, Deutsche Bank.
Hi there. Just some follow-ups from me, please. Just in terms of the M&A contribution, which is a significant part of the bridge and contribution, I think that you've been running at EUR 13 million, EUR 14 million of EBITDA contribution for the nine months. Can I just confirm that that should be the right run rate of growth into Q4? Should we think of anything else that might make that number materially away from EUR 13 million-EUR 14 million?
No, I think you can take that number as being a reasonable assumption.
Okay. On LatAm, just to clarify the decline of EUR 6 million, I think you mentioned Venezuela EUR 3 million, Brazil EUR 2 million, that kind of indicates that the rest of LatAm is kind of net going backwards, doesn't it? I just wondered if you can.
No, it's not actually. We see some countries clearly are growing. You've got, for example, economies like Chile and Peru, which are relatively small in the context of-- Bear in mind, Latin America is small in real terms, the smallest part of our company. Within Latin America, Brazil is clearly an important part of Latin American business. The smaller countries like Chile and Peru, which are heavily affected by the commodity prices, such as copper, ore, and what have you, are clearly struggling with mining and what have you. I think that's certainly a bit of a drag, but we do see positive contributions from Mexico and Colombia and what have you overall.
Okay. My last question is just to sort of double check in terms of the exit rate for October, the +2.1%. I guess the comp's a little bit easier or significantly easier because that's when the oil and gas impact first began to bite last year. Is it fair to say that actually nothing's really changed in terms of the underlying trading from a group perspective? It's just a comp effect that's driving you into positive growth, or do you actually see anything that makes you sort of think that October is actually slightly stronger?
I think this is a between quarters discussion, really, to some extent. Just as Q2 was strong and Q3 looks weaker versus Q2, Q4 would be probably stronger versus Q3. I think we're in the mix, Andy. We don't see a material change to the business. The business is solid.
Great. Okay. Thanks very much.
Okay.
Thank you. This concludes our Q&A session for the moment.
Okay, ladies and gentlemen. Well, thank you very much, Steve, for taking the time on this historic day. I know you've all probably been distracted looking at our screens today with what's going on in North America, we do appreciate you taking the time to join us on our call. At that point, we'll close the call. Thank you very much.
Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.