Ladies and gentlemen, welcome to the Brenntag 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'll be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press the star key followed by zero on your telephone keypad for operator assistance. May now hand you over to Steven Holland, who will lead you through this conference. Please go ahead, sir.
Thank you very much. Welcome, ladies and gentlemen, and thank you very much for dialing in for our review of Q2 2015 results. As usual, I'm on the phone sit together with Georg Müller, 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, 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 second 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% and EBITDA by 20.7% respectively.
Both 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 on Q2 2015 amounts to EUR 215.4 million. This positive development translates into earnings per share of EUR 0.69, which represents a favorable increase of 30.2%. In light of the market environment, we are pleased with the results for the second quarter. The diversity of our business helped us to overcome a more challenging market for our oil and gas activities. At the beginning of July, Brenntag's board of management was expanded from three to five members. With this step, our global growth strategy is also reflected on the management board level. After the retirement of our long-standing colleague, William Fidler, we were delighted to welcome Karsten Beckmann, Markus Klähn, Henri Nejade as new board members.
With respect to acquisitions, we are pleased to announce the closing of Químicas Meroño. I will provide some details on this later on. Just hesitate a little bit on the management board. The board of management of Brenntag, as I said before, has been extended to five members. In addition to Georg and myself, Karsten Beckmann, Markus Klähn, and Henri Nejade have been members 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 underlines the importance of our global activities. Karsten Beckmann has been with Brenntag since 2002 and is Chief Executive Officer of Brenntag Europe, Middle East & Africa.
Markus Klähn, who has been with Brenntag since 1994, is Chief Executive Officer of Brenntag North America, and he will take over from William Fidler the responsibility for North American region. Henri Nejade is Chief Executive Officer of Brenntag Asia Pacific and joined the group in 2008. The newly formed management board, he will be responsible for the Asia Pacific region. Coming on to the acquisition of Químicas Meroño. A relatively small acquisition, we're very pleased to see the acquisition close in the middle of May 2015. Meroño is a distributor of industrial chemicals and offers logistics, blends, and storage services to its customers. Our sales were around about EUR 12.7 million annualized. Gross profit amounted to EUR 3.6 million. The normalized EBITDA, EUR 1.7 million in 2014. The investment amount was EUR 10.3 million.
This fits perfectly with our Brenntag's operation in Eastern Spain and offers additional growth opportunities in key industrial sectors. If I now just pass over to Georg.
Good afternoon. As usual, my first slide summarizes the most important financials for the second quarter. Gross profit amounted to EUR 585 million, 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 EUR 215 million, up considerably by 20.7% as reported or 6.7% FX adjusted. 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 EUR 167 million, almost 50% up from last year's Q2 number. We did leave the slide on IFRIC 21 in the presentation. The slide on IFRIC 21 is unchanged to compare it to Q1, it is included for the sake of completeness.
As mentioned on the Q1 call already, IFRIC 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, full year expense remains unchanged. The subsequent slide shows the first Statement. We talked about the most relevant figures already. I'll move directly into the next slide, into page 10, which shows the income statement below EBITDA. Depreciation for the second quarter amounted to EUR 27.2 million and amortization to EUR 9.8 million. Financial result amounted to an expense of EUR 17.8 million. Overall, earnings before taxes totaled EUR 160 million, which is 28% ahead of last year.
We record a tax rate of 32.7%, which is slightly below the range of 34%-35% that we typically indicate. The EPS is at EUR 0.69 or EUR 0.74, excluding the amortization and the change of the Zhong Yung liability. In Q2, we achieved a strong operating cash flow of EUR 106 million after EUR 48 million in the second quarter 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 EUR 20.7 million, slightly below last year's level.
The line purchases of consolidated subsidiaries reflect the payment for the acquisition of Químicas Meroño, which we closed in the second quarter 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 EUR 139 million, 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 EUR 188 million. 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 EUR 139 million, our net debt increased by only EUR 33 million during the quarter and now amounts to EUR 1.540 billion . The group's leverage stands at 1.9x . Two pages further down, you'll find the maturity profile. After repayment of the securitization program, the maturity profile only consists of the maturity of our bond in 2018 and our bank loan one year later in 2019. Trade working capital amounts to EUR 1,339,000,000. On a year-to-date basis, we turned the working capital 8.1x , which is slightly better than the level we had at the end of the first quarter 2015, though below last year's level. Q2 2015 delivered a very strong free cash flow of EUR 167 million. This is significantly up against the EUR 112 million for the second quarter 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 segment.
Thank you, Georg.
Thank you.
Right, let me move on to segments. I'll come to Europe first. Europe operating gross profit increased by 4.5%. Operating EBITDA increased by 4.8%, both on an FX adjusted basis. We are satisfied with European performance in the second quarter, which follows on from strong results in Q1. Europe's gross profit as well as the EBITDA clearly benefited from efficiency measures and the continued development of a more integrated sales and marketing platform throughout the region. The conversion ratio for the quarter reached 35.2% and underlines a positive trend. In North America, Q2, our business mix was clearly affected by the weakness in oil and gas sector. Due to an outperformance 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. Come 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. Here again, we saw an improvement in operating efficiency, which resulted in an operating EBITDA growth of 11.4%. We continue to see the results of investments to upgrade our resources in Asia-Pacific during the last few years, 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 second quarter 2015 amounted to +4.3%, and operating EBITDA grew by 6.7% on a constant currency basis. Growth rates on the reported basis were clearly higher. As you come to the outlook, I'll start with the monthly gross profit per working day trend. Operating gross profit per working day grew by 4.2% and 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. In July, the growth was 1.9% and again, obviously 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 expect our operating EBITDA to be between EUR 830 million and EUR 855 million.
This compares to an operating EBITDA of EUR 727 million in 2014. In Europe, we are confident to grow our business, which will further benefit from measures we've already started, but should also be supported by moderately 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, which will allow us to support growth in all relevant parameters for our North American business on a full year basis. In Latin America, we are pleased with the continued developments of the region. We see the success of the measures initiated over the last two 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 turn rate 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 indicate a CapEx of circa EUR 130 million 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 completed 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 parameters in 2015. Brenntag is very well positioned to capture further growth in established and emerging markets. We're now happy to answer your questions.
Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypads now. We have a first question from Robert Pann, JPMorgan.
Afternoon, Steve. Afternoon, Georg. Two questions, please. In terms of M&A, do you think you could get to your EUR 200 million-EUR 250 million target for this year? Why did the Latin American margin improve so much? Thanks.
Well, just coming to M&A, I guess it's not over until the fat lady sings. I shouldn't probably say that, should I, really? In real terms, we do have a number of transactions which are in due diligence. As we've said before, we are fastidious in the way we do this. I have every expectation that at least two or three transactions are going to be completed this year, which would take us into the range that we've indicated previously.
Yeah. Latin American margins. First of all, I would point out that Latin America has delivered a pretty healthy growth in gross profit, a 13% gross profit growth, FX adjusted in the quarter. On such strong gross profit growth combined with reasonable cost control, it's kind of mechanical that the margins or conversion ratio increases strongly. From my perspective, the question primarily is, why have you enjoyed a 13% gross profit growth? Mix of topics. Despite weak macro, from our business development, from synergies, from the combination with Gafor, we are enjoying pretty strong gross profit growth in Brazil. We improved our Mexican business significantly, I would also say Colombia is running well.
Thanks very much.
Thank you. The next question is from Simon Toennessen, Berenberg.
Hello. Good afternoon. Maybe three questions if I can. Firstly, in terms of your June and July performance, you said I think they were slightly up. 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 after July. 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, I was wondering if this is a timing issue or a genuine increase in expenses. Maybe thirdly, if you could talk about oil and gas, and in particular, what's your experience of upstream versus downstream. I didn't catch what growth would have been in North America if you excluded oil and gas. Thank you.
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 and July. That's from our perspective, predominantly a comp issue, a comparables issue. In course of last year, the business increased sequentially, 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. The full year EBITDA guidance of EUR 830 million to EUR 855 million takes 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?
Yeah. Actually, on the point of expenses, clearly, we are reducing some of our operating expenses related to oil and gas as that sector is somewhat depressed at the moment. Our view is that, clearly, where oil is at the moment, it's unlikely we're going to see any sort of expansion in drilling rigs in terms of the rig counts. Not likely to increase at all in the remainder of this year. Our business is pretty much now generating similar numbers on a month-by-month basis. 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 has already been 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. We do believe we've got a balanced portfolio in North America, which can do that. I don't think we've actually ever split out segments in terms of numbers. I'm not sure we should do that at this stage. Unless you want to do that.
I think last time in Q1, you gave us a feel for what growth would have been like excluding oil and gas.
Can we do that?
We basically see a gross profit growth in North America, excluding oil and gas, in the second quarter of around 6%. A little bit north of that.
Thank you very much.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press 01 on your telephone keypads now. We do have a further question from Milo Bank from Goldman Sachs.
Hello, good afternoon. Thank you for taking the question. One question on the working capital guidance. You've mentioned that there's more demanding market conditions. Could you perhaps explain what these are? Secondly, on the tax rates, it's a little bit below your earlier guidance of the 34%-35%. What tax rate should we assume for the full year? Perhaps lastly, just a little bit on the M&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.
Milo. 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. 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. Lower chemical prices 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 is a little bit weaker than what we had a year or two 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. It 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 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. It's a constant effort internally always to find the right balance. Moving on to your tax- Probably we will get to the lower end of our 34%-35% guidance in the tax range, but that we recorded 32.7% is not significant a deviation enough that we would actually change that guidance.
M&A?
Yeah. In terms of M&A, there's been no change to our approach to M&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 more larger transactions from our point of view in terms of the EUR 100 million plus transactions as opposed to the sort of EUR 10 million, EUR 15 million, EUR 20 million transactions, which we do quite often. Naturally, there's complexities of those as a result. We feel that we are at the stage in those particular transactions where they're subject to some more due diligence and procedural elements. We should get those done certainly during the course of this year, which we obviously then we expect to see the benefit of those transactions in 2016, particularly.
Perfect. Thank you very much.
Thank you. The next question is from Salma Mazi, WestLB.
Hi there. Apologies, I may have missed this earlier, but did you give the organic gross profit growth per working day by month during the quarter and July? Did I miss that?
We did that. Well, actually, we have just said that both June and July. Well, there's slight growth, actually.
I'm happy to repeat the numbers. I just have to pick them out.
Okay.
I'm starting in May. Gross profit per working day on an FX-adjusted basis in May grew 6.5% including acquisitions and 4.7% 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.
Great. Thank you very much.
Thank you. As a final reminder, if you wish to ask a question, please press zero one on your telephone keypad. We have a further question from Simon Toennessen.
Yes, good afternoon. I've got a follow-up on the North American costs. Obviously, conversion margins in Q2 are 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 investments in Q2 in North America, and you also faced higher costs related to distribution. 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 Steven has to add the one or the other sort. First of all, I would point out that we are volume up Q2 over last year in North America. There is not only an inflationary effect in the cost increase, but also a little bit a volume effect. Other than that, yes, we incurred additional cost 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 is one inflationary factor in there, which is easier this year, which is around transport costs and energy. The predominant cost factor in our business is personnel expenses . I'm sure Steven has to add something.
Yes. Actually, 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. It's a business that was at a low conversion ratio than the traditional oil and gas business. I think it's a little bit in the noise. If you look at the overall operating costs relative to GP, that 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 businesses have fallen away from the upstream. The business which we've achieved into oil and gas is actually more expensive to service compared to the previous business mix.
There's a little bit of that in there. Other than that, I don't really think there's anything which is stand out.
Thank you. That's very clear. Perhaps a last one from me. Growth in Latin America has been very strong. Can you maybe talk about the various countries and in particular in Brazil, what you're seeing in Brazil now?
Well, yeah, the growth across Latin America for us is a little bit of a Brenntag version, if you like, as opposed to the macroeconomic. In Latin America, we did quite a lot of work over the last 18 months. For us, we've seen significant improvements in our business in Colombia, Mexico particularly. You may recall we made an acquisition of Gafor in Brazil last year, which has proved to be a very successful acquisition. This acquisition is primarily pointed at specialty chemicals and therefore has held its value pretty well in the more turbulent environments in Brazil. I think for Brazil, when we look at the performance here today, we're pretty pleased with Brazil. They've done a good job. We've actually repositioned parts of the business to be more resilient in more challenging conditions in the Brazilian market.
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. To some extent, it's probably not going to improve over the next six to 12 months in our opinion. Nevertheless, on balance, if you take Brenntag'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 for everyone who's joined us on the phone call for our Q2 results. I think we can finish the call there. Thank you very much.
Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded.