Earnings Call: Q2 2015

Aug 6, 2015

Ladies and gentlemen, welcome to the Brantac AG Q2 2015 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. And after the presentation, there will be an opportunity to ask questions. I now hand you over to Steve Holland, who will lead you through this conference. Please go ahead, sir. Thank you very much. Well, welcome, ladies and gentlemen, and thank you very much for dialing in for our review Q2 of 2015 results. As usual, I'm on the phone set together with Georg Muller, our CFO, and we'll be pleased to answer your questions after the presentation. Let me begin with some words on the macroeconomic environment. Overall, the global economy is characterized by moderate growth, but we feel the momentum Has slowed. Europe continued to show positive growth, albeit on a lower level. In North America, growth of industrial production weakened in the 2nd quarter. The economy in Latin America remains modest and the economies of Asia Pacific region still grow at above average global levels. In this economic environment, we managed to increase gross profit and operating EBITDA for the group significantly. Gross profit grew by 16.5 percent and EBITDA by 20.7% respectively. Growth KPIs also grew on a constant FX basis. I'd like to highlight the growth was supported by all of our regions. The operating EBITDA in Q2 twenty amounts to €215,400,000 This positive development translates into earnings per share of €0.69 which represents a favorable In light of the market environment, we are pleased with the results for the Q2. The diversity of our business helped us to overcome a more challenging market for our oil and gas activities. At the beginning of July, Brentek's Board of Management was Expanding from 3 to 5 members, with this step our global growth strategy is also reflected on the management board level. After the retirement of our long standing colleague Bill Fiddler, We'd be delighted to welcome Karsten Begman, Marcus Klein, Andre Najjar as new Board members. With respect to acquisitions, we are pleased to announce the closing of Maronio, I will provide some details on this later on. Just heads it down a little bit on the Jean Ford, the Board of Management of Fintech, as I said before, has been extended to 5 members. In addition to Georg and myself, Carsten Bettman, Marcus Klein and Anre Najjar I've been nervous since the beginning of July. We are delighted to have them on board with us. They are long standing and highly valued colleagues who will bring their own expertise to support the long term Development of the group. Each of them will be responsible for one of our regions, which underlies the importance of our global activities. Carsten Bergman has been with Brantac since 2002 and is Chief Executive Officer of Brantac Europe, Middle East and Africa. Marcus Klein, who has been with Brenntag since 1994, is Chief Executive Officer of Brenntag North America and he will take up from Bill Fiddler the responsibility for North American Anurin Ijai, Chief Executive Officer of BrenTech Asia Pacific and joined the group in 2008. And in the newly formed management board, he will be Just coming on to the acquisition of Chromecast Maronio, A relatively small acquisition, but we're very pleased to see the acquisition close in the middle of May 2015. Moronio is a distributor of industrial and offers logistics, blends and storage services to its customers. Our sales were around about €12,700,000 annualized. Gross profit amounted €3,600,000 The normalized EBITDA of €1,700,000 in 2014. The investment amount €10,300,000 This effect fits perfectly with our Brent Thacks operation in Eastern Spain and offers additional growth opportunities in key Good afternoon. As usual, my first slide summarizes the most important financials for the 2nd quarter. Gross profit amounted to €585,000,000 which represents an as reported increase of 16.5% against previous year's quarter. On a constant FX basis, growth was 4.3%. EBITDA totals €215,000,000 up considerably by 20.7% as reported or 6.7% FX adjusted. So conversion ratio for the quarter is 36.8%, and it is up by 130 basis points against previous year's quarter. The increase of expenses could be limited so that EBITDA grew stronger than gross profit. With regards to free cash flow, We saw a significant boost to €167,000,000 almost 50% up from last year's Q2 number. We did leave the slide on IFRIC 21 in the presentation. The slide on IFRS 21 is unchanged to compare to Q1 and it is included for the sake of completeness. As mentioned on the Q1 call already, IFRS 21 is about the timing of recording of expenses for public levies. Due to the first time adoption in 2015, the previous year's figures were adjusted retroactively in order to ensure comparability. The table on the slide provides you with the details of the retroactive adjustments for 2014 by quarter and segment. As it is only about inner year timing, so full year expense remains unchanged. The subsequent slide shows the first part of the income statement. We talked about the most relevant figures already. So I'll move directly into the next slide into Page 10, which shows the income statement below EBITDA. Depreciation for the 2nd quarter amounted to €27,200,000 and amortization to €9,800,000 Financial result amounted to an expense of €17,800,000 Overall, Earnings before taxes totaled €160,000,000 which is 28% ahead of last year. We record a tax rate of 32.7 percent, which is slightly below the range of 34% to 35% that we typically indicate. The EPS is at €0.69 or €0.74 excluding the amortization and the change of In Q2, we achieved a strong operating cash flow of 100 €6,000,000 after €48,000,000 in the Q2 2014. This is mainly driven by the strong earnings development that we have discussed before. Additionally, the outflow for working capital was lower in Q2 compared to last year. You see this working capital development reflected in the line changes in current assets and liabilities. On the next page, let's briefly talk about the investment and financing cash flow. CapEx amounts to €20,700,000 slightly below last year's level. The line purchases of consolidated subsidiaries Reflects the payment for the acquisition of Kimicas Meronyo, which we closed in the Q2 of 2015. In addition, the line includes some smaller follow-up payments in relation to acquisitions, which we closed before. In June, we paid a dividend of €139,000,000 which is a higher payout than a year ago. The next line repayment and proceeds is impacted by a change in our financing structure. We have decided not to renew our securitization program and have redeemed the corresponding financial liabilities in June. The total amount we paid into the securitization was €188,000,000 I will skip the balance sheet page and Move directly to debt and leverage. On Page 14, you will see the information on net debt and leverage. Despite the dividend payment of €139,000,000 our net debt increased by only €33,000,000 during the quarter and now amounts €1,540,000,000 The group's leverage stands at 1.9 times. Two pages further down, you'll find the maturity profile. After the repayment of the securitization programs, the maturity profile only consists Of the maturity of our bond in 2018 and our bank loan 1 year later in 2019. Trade working capital amounts to €1,339,000,000 On a year to date basis, we turned to working capital 8.1 times, which is slightly better than the level we had at the end of the Q1 2015, €167,000,000 This is significantly up against the €112,000,000 for the Q2 2014. The increase was mainly driven by an increase in EBITDA as well as a lower outflow for working capital compared to prior year's quarter. CapEx spending is on last year's level. This hands the presentation back to Steve for a discussion of the segments. Thank you, Gorst. Thank you, Gorst. Right, now moving on to segments. I'll come to Europe first. Europe operating gross profit increased by 4.5%. Operating EBITDA increased by 4.8 percent, but on an FX adjusted basis. We are satisfied with the European performance in the 2nd quarter, which falls on from strong results Thank you. Europe's gross profit as well as the EBITDA clearly benefited from the efficiency measures and And the continued development of a more integrated sales and marketing platform throughout the region. The conversion ratio for the quarter reached 35.2% Underlines a positive trend. In North America Q2, our business mix was clearly affected by the weakness in the oil and gas sector. Reducing our performance in other sectors, operating gross profit grew by 2.7%. This further demonstrates the broad based nature and resilience of our business. Operating EBITDA grew by 2% and on an FX adjusted basis. Strong translation tailwinds lead to a much stronger growth on a reported basis. Coming to Latin America. Latin America reported a strong increase in earnings in Q2. Operating gross profit grew by 13% on an FX adjusted basis. The region continued to show improvements in operating efficiency and we were able to grow operating EBITDA by 61%. In Asia Pacific, we grew our operating gross profit by 2.8% on an FX adjusted basis. And here again, we saw an improvement in operating efficiency, Which resulted in operating EBITDA growth of 11.4%. We continue to see the results of investments to upgrade our resources in Asia Pacific during the last Yes. And we see the success of our new value added services being made in the region. I'd like to reiterate the group's results. Our group operating gross profit in the Q2 2015 amounted to plus 4.3 percent and Operating EBITDA grew by 6.7% on a constant currency basis. Growth rates on a reported basis were clearly higher. And when you come to the outlook, I'll start with the monthly gross profit per working day trend. Operating gross grew by 4.2 percent and 2 point organically by 2.6% in April. In May, growth was 6.5% and organically 4.7%. In June, growth was 1.5% and slightly positively organically. And in July, the growth was 1.9 And again, I'll be slightly positively organically. Just to calibrate these numbers, this trend is reflective of stronger comps in the course of last year and not For a weak trend within this year and it's fully considered within our guidance. On a full year basis 2015, we Our operating EBITDA to be between €830,000,000 €855,000,000 This compares to an operating EBITDA of €727,000,000 in 2014. In Europe, we are confident to grow our business which will further benefit measures we've already started, We should also be supported by moderate positive macroeconomic growth. In North America, the weakness in oil and gas is unlikely to reverse in any meaningful way for the remainder of the year. However, underlying growth in other market sectors and applications are expected to cushion this shortfall, We see the success of the measures initiated over the last 2 years and the ongoing operational improvement of the business as a whole, albeit there is some volatility on an individual country basis. Operating EBITDA is expected to grow significantly on a full year basis. In Asia Pacific, we expect to see further benefit from the expansion of our infrastructure And increased critical mass within the region, resulting in significant growth in gross profits as well as operating EBITDA for the full year 2015. As a result of our increasing business volume, we expect a rise in working capital. The turnover is slightly expected to be Below the level achieved in 2014 as a result of more challenging market conditions. As we plan to invest in maintenance of our existing infrastructure And growth projects, the CapEx is expected to increase. We indicated CapEx of circa €113,000,000 for the full year. As a consequence of the aforementioned positive outlook, the free cash flow is expected to be significantly higher than in 2014. In terms of acquisitions, we are continuously working with a healthy pipeline and remain optimistic that a number of transactions will be Please be thoughtfully before the end of this year. In closing, we are convinced that we will achieve the guidance range of EBITDA And therefore, grow all relevant earnings promises in 2015. Brantek is very well positioned to capture further growth in established and emerging markets. We're now happy to answer your questions. We have a first question From Robert Patt, JPMorgan. Afternoon, Steve. Afternoon, Georg. Two questions, please. In terms of M and A, do you think you could get Your $200,000,000 $250,000,000 target for this year? And why did the Latin American margin improve so much? Thanks. Well, just to come to M and A, I guess it's not over until the fat lady thing. I should probably say that, should I really? But In real terms, we have we do have a number of transactions which are in due diligence. And as we've said before, We are Are going to be completed this year, which would take us into the range that we've indicated previously? Yes. Latin American margins were First of all, I would point out that Latin America has delivered a pretty healthy See growth in gross profit, a 13% gross profit growth FX adjusted in the quarter. And on such strong gross profit Growth combined with a reasonable cost control, it's kind of mechanical that the margins or conversion ratio increases strongly. So from my perspective, the question primarily is why have we enjoyed a 13% gross profit growth? Mix of topics, Despite weak macro, we are from our business development, from synergies, from the combination with We are enjoying pretty strong gross profit growth in Brazil. We improved our Mexican business significantly. And I would also say Colombia is running well. Thanks very much. The next question is from Simon Mizzanotte, Berenberg. Maybe three questions if I can. Firstly, in terms of your June July performance, you said I think they were slightly up, But I didn't quite get the reason why they were only slightly up. And perhaps you can tell us if you expect trends to improve in after July. Secondly, I was wondering if you can talk about the 3% Increase in operating expenses in North America in Q2. I think they were flat in Q1. So I was wondering if this is a timing issue For a genuine increase in expenses. And maybe thirdly, if you could talk about maybe if you can talk about Oil and Gas and in particular, what's your experience of upstream versus downstream? And I didn't catch what growth would have been in North America if you excluded oil and gas. Thank you. Yes. Simon, good afternoon. Let me start maybe. On a gross profit per working day basis Compared to previous year, you're right, growth rates were weaker in June July. That's from our perspective predominantly a comp issue, a comparables issue. In course of last year, the business increased sequentially. So it will become tougher and tougher in course of the year to show the continued level of growth rates that we have delivered in Q1. However, the effect of the comps has been fully included in our guidance consideration. So the full year EBITDA guidance Of €830,000,000 to €855,000,000 take that into account. 3% expense increase in the North American environment, I would not say it's a timing issue. It's About an ordinary level of expense increases, which we see that we were better in Q1 primarily has to do with the effect That we had pretty severe weather conditions in Q1 2014, which caused additional expenses that did not reoccur this year. Oil and gas? Yes. Actually on the point of expenses, clearly, we will be we are reducing Viropricing expenses related to oil and gas as that sector is somewhat depressed at the moment. Yes. Our view is that clearly where oil is at the moment, it's unlikely we're going to see any sort of expansion And the drilling rigs in terms of the rig counts, so not likely to increase at all in the remainder of this year. And our business is Pretty much now generating sort of similar numbers on a month by month basis. So we think we're pretty much stable where we are. The mix between upstream, midstream and downstream, if I was going to probably try and characterize it, I would say that the pain As already being felt in upstream, midstream, downstream is probably a little flatter now as a result of the overall oil and gas market. We've pretty much factored all these things in when we look at our guidance for the full year. Clearly, for North America, it has to overcome Any shortfall in oil and gas by growing faster in other sectors that it currently operates in. But we do believe we've got a portfolio in North America, which can do that. I don't think we've actually ever split out segments by in terms of numbers. I'm not sure we should do that at this stage. I think last time in Q1, you gave Can we do that? We basically see a gross profit growth in North America, Including oil and gas in the second quarter of around 6%, a little bit north of that. Thank you very much. Thank you. One question on the working capital guidance. You've mentioned that there's more demanding market conditions. Could you perhaps explain what these And secondly, on the tax rate, it's a little bit below your earlier guidance of the 34% to 35%. What tax rate should we assume for the full year? And perhaps lastly, just a little bit on the M and A. What makes you more confident that you can close the deals in the second half of The year compared to last year, has anything changed in the process in terms of the types of deals that you focus on? Thank you. Hi, it's Georg. Starting on the working capital. First of all, I would point out that actually the working capital cash flow is pretty positive. It's much more positive than previous year. To be fair, it is helped by the fact that the overall chemical prices are a little bit below last year's level. So Where we usually point to the fact that chemical pricing levels don't mean much for our profitability, They do mean something for working capital. So lower capital crisis help our working capital cash flow. On the other hand, we do have to face the situation that the working capital turns, the relative quality of working capital management It's a little bit weaker than what we had a year or 2 years ago. Where is it coming from? It's very granular. It's partly coming from mix effect. Specialty is growing a little bit stronger than industrials. Emerging markets growing somewhat stronger than mature markets. But it's also coming from the fact that customers are more demanding. Customers are more demanding in payment terms and with respect to product availability. We deem it to be very, very important always to have good service level to have product on stock For the customers to deliver on short notice, it's a differentiating factor. But it costs us something in terms of amount of money we have to deploy in working capital. But it's a constant effort internally always to find the right balance. Moving on to your tax rate Probably we will get to the lower end of our 34%, 30%, 35% guidance in the range, but that we recorded 32.7 percent is not significant deviation enough that we would actually change that guidance. M and A? Yes. In terms of M and A, there's been no change to our approach to M and A. I think probably for us, It's a little frustrating in some respects because we'd like to have these transactions delivered a bit earlier in the year. We are actually looking at Larger more larger transactions from our point of view in terms of the €100,000,000 plus transactions as opposed to the So 10,000,000,000, 10,000,000, 15,000,000, 20,000,000 transactions, which we do quite often. And naturally, there's a complexity to those as a result. But we feel that we are at the sort of stage in those particular transactions where So subject to some more due diligence and procedural elements. We should get those done So during the course of this year, which we obviously, we expect to see the benefit of those transactions in 2016 particularly. Perfect. Thank you very much. Thank you. The next question is from Salve Mazel Westrac. Hi, there. Apologies, I may have missed this earlier, but can you just did you give the organic gross profit growth per working day by month During the quarter July, did I miss that? We did that. Well, actually, we have to set that both June July, well, just slight growth actually. Yes, I'm happy to repeat the numbers. I just have to pick them out. So I'm starting in May, gross profit per working day On an FX adjusted basis, in May grew 6.5 percent excluding acquisitions. In June, we had 1.4% including acquisitions, slightly positive Excluding acquisitions and similar in July, 1.9% including acquisitions, slightly positive excluding acquisitions. Okay, great. Thank you very much. Thank you. We have a further question from Simon Mizanati. Yes. Good afternoon. I've got a follow-up on the North American costs. Obviously, conversion I just think Q2 was slightly down year on year. And although, Georg, I think you said 3% increase in operating expenses is Probably in line with what we should expect. I seem to remember last year you suffered from certain one off Related to distribution. So I thought the comparable would have been Easy this quarter and I'm surprised the conversion margin is down. Yes. I'll give it a try and maybe Steve has to The one or the other thought. First of all, I would point out that we are volume up Q2 over last year in North America. So there is not only an inflationary effect in the cost increase, but also a little bit a volume Other than that, yes, we incurred additional costs in North America in last year. I would not call them one off. We basically increased our capabilities across certain industries, including oil and gas. Yes, you are right. There was one inflationary factor in there, which is easier this year, which is around transport costs and energy. But the predominant cost factor in our business is personnel expenses. But I'm sure Steve wants to add something. Yes. I think there's a bit of a mix here as well in terms of the cost of operation for Some of the new business we took on, funnily enough, actually in oil and gas, is business that was at a lower conversion ratio than the traditional oil and gas So I think it's a little bit in the noise. If you look at the overall operating costs relative to GP [SPEAKER SEBASTIEN DE MONTESSUS:] We are carrying some extra costs to manage some of the more specialized oil and gas work, which we do today. We did actually win business towards the end of 2014, which we're pleased to see because obviously a lot of business Fallen away from the upstream. The business we've achieved in oil and gas is actually more expensive to service in terms of the Compared to the previous business mix. So there's a little bit of that in there. But other than that, I don't really think there's anything which is stand out. Thank you. That's very clear. And perhaps a last one for me. The growth in Latin America has been Can you maybe talk about the various countries and in particular in Brazil what you're seeing in Brazil now? Well, yes, the growth across Latin America for us is a little bit of sort of a Brenntag version, if you like, opposed to the macroeconomic, because in Latin America, we actually had quite we did quite a lot of work over the last 18 months. And for us, we've seen significant improvements in our business in Colombia, in Mexico Colombia and Mexico particularly. And we also have had you may recall we made an acquisition of Gaffore in Brazil last year, Which has proved to be a very successful acquisition. And this acquisition is primarily pointed at Specialty Chemicals and therefore That's held its value pretty well in more turbulent environment in Brazil. I think for Brazil, when we look at the performance year to date, we're pretty pleased with Brazil. They've done a good job. And we've actually repositioned parts of the business to be more Resilient in more challenging conditions in the Brazilian market itself. I think to be fair, we're not expecting High single digit growth from Brazil in the course of 2015 because macroeconomically, it's not in a great place at the moment. And to some extent, it's probably not going to improve over the next 6 to 12 months in our opinion. But nevertheless, Yes. On balance, if you take Brent Tank's total coverage in Latin America, we're very pleased with the overall performance and we've got the right mix of improvements across The region. Thank you very much. Thank you. We currently have no further questions. Right. In that case, well, thank you very much Deepa. Everyone has joined us on the phone call for our Q2 results. And I think we can finish the call there.