Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the Brenntag AG Results Call Q1 2015. 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. If any participant has difficulties hearing the conference, please press star followed by the zero on your telephone for operator assistance. May I now hand the call over to Steven Holland, CEO. Please begin your meeting, sir.
Thank you very much. Well, welcome, ladies and gentlemen, and thank you very much for dialing in for our review of the Q1 2015 results. I'm on the phone together with Georg Müller, our CFO, and we'll be happy to answer your questions after the presentation. Let me begin with some words on the macroeconomic environment. Overall, the global economy continued to grow moderately. We saw Europe on a path of positive growth. North American economy grew in terms of industrial production, but at a slower rate due to the pressure on some export-oriented business sectors and repeat of the poor weather conditions we also saw last year. In Latin America and Asia Pacific, they presented a mixed picture with different dynamics country by country. We are reporting strong FX-adjusted results for the quarter and benefited from a strong translational tailwind.
Gross profit grew by 15.2% as reported, and 4.3% on a constant FX basis. The operating EBITDAR in Q1 2015 amounts to EUR 195 million. This represents a substantial favorable increase of 22.2% as reported, and 9.7% on a constant FX basis. This positive development translates into earnings per share of EUR 0.59, which represents a favorable increase of 31.1%. Moreover, we're pleased to announce the signing of an acquisition of Lionheart Chemical Enterprises, which will strengthen our position in specialty chemicals in South Africa. Additionally, we closed the acquisition of Swedish chemical distributor Fred Holmberg, which we signed in 2014. In other news, externally, we are pleased to report that Moody's has now assigned an investment-grade credit rating to Brenntag in line with the existing Standard & Poor's investment-grade rating, which has been in place for some time.
Just moving on to Lionheart, just a very brief overview of Lionheart. We're pleased that we signed and closed the acquisition at beginning of March 2015. Lionheart is a special distributor, mainly operating in the food and beverage market in South Africa. In 2014, Lionheart realized sales of about EUR 12 million. Gross profit was EUR 3 million with a normalized EBITDAR of EUR 1.6 million. The total investment amount was EUR 12 million and is very much part of our growth strategy in the region. Now I'll hand over to Georg.
Thank you very much, Steve. My first slide shows the most important financials for the quarter. Gross profit totaled EUR 557.3 million, and that's up 15.2% as reported against previous year's quarter. Growth at constant FX rates totaled 4.3%. EBITDA amounts to EUR 195 million, up significantly by 22.2% as reported, or 9.7% FX adjusted. Conversion ratio for the quarter is 35%, up two percentage points against previous year's quarter, which is in line with our expectations. We saw a significant boost in free cash flow to EUR 161 million, more than double last year's number. You might have noticed in the quarterly report that we retroactively adjusted previous year's numbers for the change in IFRIC 21. I want to spend a few minutes of your time to explain this point. First of all, we are talking about a phasing, a shift of expenses between the quarters.
Full year expenses and therefore full year results will remain unaffected. Under the new IFRIC 21, we have higher expenses of about EUR 4.4 million for the group in Q1 and an equal amount of lower expenses spread out over the quarters two to four. IFRIC 21 is about the timing of expenses for public levies. Relevant examples of public levies are public real estate duties or annual fees to maintain a public license. Under the past practice, these levies were expensed pro rata over the year. Under the new IFRIC 21, they have to be expensed in full as soon as the levy becomes mandatory. Most levies become mandatory beginning of the year, which is why the expenses in Q1 are now higher, and from Q2 to Q4 lower.
For comparability reasons, we adjusted previous year's figures as if the new rules would have been in place in 2014 already. The table on the slide provides you with the details by quarter and by segment. Moving on to the income statement, to the details of the income statement, and the lines down to EBITDA were already discussed. I talked you through them on an earlier slide. I would move directly to the page with the P&L lines below EBITDA. Depreciation for the first quarter amounted to EUR 26.5 million and amortization to EUR 9.2 million. Financial results amounted to an expense of EUR 23.7 million. Overall, earnings before taxes totaled EUR 135.6 million. This is 29.6% stronger than last year. We recorded a tax rate of 32.7% in the first quarter 2015, which is slightly below the range of 34%-35% we usually indicate.
The earnings per share total EUR 0.59 or EUR 0.63, excluding the amortization and excluding the change of the Songjung liability. Talking about cash flow, particularly on the second page of the cash flow about the investment cash flow. CapEx is on last year's level. The line purchases of consolidated subsidiaries mainly reflect the payments for the acquisitions of Fred Holmberg and Lionheart, which we both closed in the first quarter 2015. Debt and leverage. Net debt increased during the quarter by EUR 96.8 million to EUR 1,506 million. The increase is driven, is driven by the continued strengthening of the US dollar since the end of last year. The group's leverage amounted to 2.0 times. Again, the slight increase compared to year-end 2014 is driven by the strengthening of the US dollar. The trade working capital amounted to EUR 1,344 million at the end of the quarter.
In terms of working capital turns, we turned the working capital 8.0 times in the first quarter, somewhat below the 9.0 times we achieved in the first quarter of 2014. We deem the lower level of working capital turn as temporary effect, and expect that the turns will go up again in course of the year. I would like to take the opportunity to point out that in cash flow terms, the outflow for working capital has been much lower first quarter this year compared to first quarter previous year. You can actually notice that, when you look at the following page, at the free cash flow page. Q1 2015 delivered a very strong free cash flow of €161 million, which is significantly up against the €75 million for Q1 2014.
The cash flow increase was mainly driven by a much lower outflow for working capital, as well as an increase in EBITDA compared to prior year's quarter. Back to Steve.
Thanks, Georg. Okay, now let me walk you through the developments of the segments for the first quarter this year. All segments have shown growth in Q1. Coming to Europe, we are satisfied with the European performance in the first quarter. The region grew its operating gross profit by 3.1% on an FX adjusted basis, and operating EBITDA increased by 6.4%. Europe clearly benefits from the efficiency enhancement measures in the past. The conversion rate for the quarter reached 34.4%. This is more than one percentage point higher than the same quarter last year. In North America, Brenntag's North American development in the first quarter was clearly positive. Gross profit increased by 3.9% on an FX adjusted basis. Our business with the oil and gas industry remained at a higher level as the same as last year.
With the lower price of oil affecting our business in the upstream segment, the highly diversified nature of our business allows us to maintain positive performance as a whole. As a result, EBITDA strongly grew by 10.8% on an FX adjusted basis. In Latin America, in Q1, Latin America showed a strong increase in earnings. Gross profit grew by 15% on an FX adjusted basis. This reflects mainly an improvement of the average gross profit per unit. Furthermore, the selective efficiency enhancement measures we took out last year are showing real effects, resulting in a remarkable growth of operating EBITDA of 29.4%. Coming to Asia Pacific, we increased our operating gross profit by 1.8% on an FX adjusted basis. In Asia Pacific, we see a mixed picture with continued weakness in Australia. However, we see stabilizing positions in Thailand and growth in China and Vietnam.
Increased cost efficiency resulting in a higher conversion ratio over prior year, meeting our expectations. This led to a strong growth of operating EBITDA of 11%. I would just like to reiterate the group's results. Our group operating gross profit growth for the first quarter 2015 amounted to 4.3%, and our operating EBITDA grew by 9.7% on a constant currency basis. Growth rates reported on a reported basis were clearly much higher. Let me come to the outlook. We continue to have a positive view for 2015. We expect overall moderate macroeconomic growth with some regional variations. In Europe, we are encouraged by the positive results in Q1, and we expect to further benefit from moderately positive macro, a moderately positive macroeconomic environment in the rest of the year. In North America, we also expect a positive earnings development.
Due to the highly diversified nature of our oil and gas business, we expect earnings stability, and in the long term, the potential for the business remains very strong. In Latin America, we expect gross profit to benefit from the expansion of our product portfolio, especially in the specialty sector. Together with the measures implemented to cope with still challenging environments, operating EBITDA should grow significantly on a full year basis. In Asia-Pacific, we are expanding our product range, customer base, and supplier relationships, increasing our critical mass within the region. This should result in a significant rise of operating EBITDA on a full year basis. The working capital is expected to increase as a result of the growing business volume. In addition, we expect to achieve a higher level of working capital turnover despite challenging market conditions.
Finally, free cash flow is expected to be meaningfully higher than in 2014 based on different elements mentioned above. Let me come to the current trading environment. What I'm going to do here, I'm going to split between acquisitive and organic growth for those who like to write it down. In January, gross profit per working day grew by 5.6% and grew organically by 4.1%. In February, the growth was 4.1% and organically 2.7%. In March, the growth was 4.2% and organically 1.9%. In April, the growth was 4.5% and organically 2.7%. In closing, our view is positive for Europe to continue the recovery and grow. We see a number of challenges in North America in terms of oil and gas and for export-oriented companies.
In Latin America and Asia-Pacific, improvements of operations are going to continue to contribute positively to our results during the course of 2015. As in previous years, we plan to give quantitative guidance on our full year results for 2015 after the Q2 results. Now we're happy to answer any of your questions.
Thank you, sir. Ladies and gentlemen, if you do wish to register for a question, please press zero followed by the one on your telephone keypad. If you wish to withdraw this request, you may do so by pressing zero followed by the two to cancel. Once again, to register for a question, please press zero followed by the one on your telephone keypad. There will be a brief pause whilst questions are being registered. The first question comes from Rob Plant from JPMorgan. Please go ahead. Your line is now open.
Hi, Steve. Hi, Georg. Help me, Steve, just give us the organic growth per month. Having bottomed at, say, 1.9% in March, going up to 2.7% in April, would you expect that now to strengthen the outlook statement you gave in the results statement this morning seemed reasonably positive in terms of where growth might go.
Yeah, I think I would suggest our view is a positive one in terms of growth organically. Clearly, there will be further acquisition this year as well. So I think I would see the 2.6%, 2.7% numbers as being very much sustainable.
Do you think they could improve, Steve, from the 2.7%?
Good question, actually, Rob. I think at the end of the day, when we look at Europe, all the conditions in Europe should be set then for continued growth, in Europe. I guess we all reading the background noise in the various financial papers, do wonder what exactly is going on in Europe relative to some of the other indicators. For us, we see customers that we're supplying as being more confident, and therefore, I would expect Europe to continue its improvements during the rest of the year. Yes, in real terms, organic growth should pick up in the European sector.
Would that be potentially offset by any impact in the oil and gas sector in North America?
Well, I think as we said in our announcements earlier on, our view on oil and gas in North America is still very positive.
The upstream segment for our business is about 20% of our total oil and gas business. As a result of the shift in oil prices, the midstream and downstream elements of our business have improved profitability. There's a real balance effect here. Whilst it's clear there are some pressures on the oil and gas sector, there are benefits in other parts of the business as well. I am positive about oil and gas, in terms of its stability of earnings going forward. I think probably the challenge for North America is going to be what happens to the more export oriented businesses with the strength of the U.S. dollar. I would remind you that 2014, for us, was not a stellar year in North America.
We had quite a number of cost increases, which were really troublesome from the point of transportation costs and some operating costs. We got a hold of those in the early part of this year, which I expect to see follow through for the rest of this year, too. We are actually positive about North America from a Brenntag perspective.
Great. Thanks, Steve.
The next question comes from [Andy Shu] from Deutsche Bank. Please go ahead. Your line is now open.
Good afternoon. A few questions from me, please. Steve, could I just pick up from the previous question in terms of European growth, expecting a European pick-up in growth. From Q4 into Q1, that gross profit has actually deteriorated. If I could just ask a little bit more, in terms of what you're seeing to make us feel confident on that. Secondly, in terms of working capital, clearly a big positive movement in working capital. It seems, if I'm not wrong, to be driven, I guess, by FX, but also a movement in terms of debtors. Just wondered if you're doing anything there on the collection side. Also, on free cash flow, CapEx is coming down, but I think the guidance is for CapEx to move about EUR 20 million higher to EUR 120 million on a full year basis.
Also wanted to check in on North America, that comments that you made were in terms of oil and gas, was that the growth was flat at the gross profit level. Just in terms of in the statement, just sort of drawing out some comments on cost control, cost reduction. Wondered if you could expand on that in more detail, please. Thanks very much.
That's a war and peace, Andy. Christ. All right, I'll try and cover all of those. Just on the European growth, are you talking about sequentially between the end of the last quarter of last year and the first quarter of this year in terms of European GP?
Yeah, that's correct. Yeah.
I think you have to be a little bit careful, Andy, when you look at the year-end Q1 versus Q4. There's some roundings up in there, and there's a seasonality in there. I'm not at all bothered in terms of the underlying growth for Europe. I would suggest that we see a consistent performance in Europe going forward. We do expect this time for the European market to actually continue to grow as opposed to falter as in previous years. We believe that if we can't do it now, we never can, honestly. We are positive about Europe, and I don't see it as being a weakening at all. In terms of the CapEx, I think we've indicated EUR 120 million spend on CapEx. That is very much a project-led capital expenditure number. We do expect to spend the CapEx that's been suggested.
Clearly, all the projects we're involved in do have hurdle rates as well. I wouldn't say that we're going to miss the CapEx target this year. I would expect us to spend that over the course of the year. When it comes to oil and gas, actually our oil and gas GP in Q1 actually overall increased slightly compared to the prior year as a result of the mix. Which really, if you like, to underline my confidence that the oil and gas business that we're in is sufficiently diversified to cushion the downside of the upstream slowdown. I would suggest that oil and gas is certainly not without its challenges, but in terms of the way we're managing it and the diversification that we have, I think we're in a very good position relative to certain other players in that market.
In terms of debtors maybe.
I'm not sure I got the question, Andy. I'm sorry. There was a question on bad debt. I'm not sure I got that question.
Sorry. I probably explained it very badly. Part of your working capital improvement, I think, was on the debtors side, if I'm picking that up correctly, or maybe I'm incorrect. If I am right, just wondered if you're doing anything in particular on the debtors side, please, to help squeeze working capital. I had one final question in terms of cost control.
We do have pretty stringent collection policies in place. We are obviously going after every customer who has overdues. We are pretty sensitive in extending prolonged payment terms to customers. It would be the rare exception we really do that. There's no particular initiative that explains your observation on the debtor side.
Okay. Is that okay, Andy?
Yeah, perfect. Sorry, Steve.
Just on the expenses side, I think I'm not quite sure whether you were referring to general expenses. I would have been extremely disappointed if our expenses have been going higher in a meaningful way in this quarter. When we finished 2014, we'd had really a year where expenses had been running at higher levels than we were happy with. Certainly in North America, we've seen a reduction in expenses in external haulage and equally a reduction in operating costs for haulage in Europe. We have actually reduced headcount in North America, particularly to reflect a reduction in the upstream activity within oil and gas. We've got a very strong control in Europe in terms of keeping our hands on the operating costs within Europe.
It is an environment where we're by no means complacent on the operating expenses, and we will maintain a very strong handle on that.
Thanks very much.
Thank you. The next question comes from Rory McKenzie from UBS. Please go ahead. Your line is now open.
Yeah, good afternoon, guys. It's Rory from UBS here. First question just on that working capital. I guess you hinted it's mainly in the debtors, but can you talk about inventory terms at all, or specifically given we've seen the prices start to move into deflation and our customers are reacting to that? Then secondly, it's two questions on the North American margin. I think there was a very easy comp last due to the weather impact. What the underlying rate of improvement was at North American margin. Then relating to that, I know that obviously in the past you found cost inflation pressures with truck drivers, given the expansion in the oil and gas industry bidding up wages.
Do you think that could be actually a tailwind as obviously that market gets a bit less popular at the moment and I guess more truck drivers might be a bit more underemployed in that market? Thank you.
Should I do it? Yeah. On maybe the debtor side, Rory, chemical prices are not in a huge scale moving down on average over portfolio. Yes, there are some price reductions and volatility is higher in prices to a degree. As you typically point out, it's not very relevant for our earnings, but it does have an impact on working capital.
Yeah.
For sure, the lower outflow in working capital, also the improvement in absolute receivables on the debtor side is partly caused by an easier environment with lower chemical prices, easier for working capital.
Okay, thanks.
In terms of the transportation costs and what have you, I'm not sure Charles would describe as a tailwind. Clearly there are probably some contractors that were previously drawn into oil and gas and their rates have gone up significantly, which causes a lot of pain actually towards the middle of last year. You may well recall our action to ease that pain was to increase the size of our own fleet and take on more drivers, which are Brenntag dedicated drivers. We've mitigated what looked like almost a permanent switch from some of the outside contractors into oil and gas. Obviously, none of us were in the position to know what was going to happen to oil prices at that time.
I think I would suggest that we should, and we will, and we are doing, seeing benefits in terms of reduced operating costs from external haulage providers, and indeed our own transport fleet as a result of reduced fuel costs. This will even itself out during the course of the year. It's not just North America, it is pretty much across the board.
Okay, thanks. Just on the North American margin overall, given that it was an easy comp in Q1 last year where you struggled.
Yeah. I'm not sure whether you're going to believe me or not on this one, but believe me, this is actually true. We actually had more closures in Q1 this year than we had in Q1 last year as a result of weather.
Okay.
I almost didn't want to mention it. I can tell you that we were very much more prepared this year than we were last year for the type of effects of weather we're going to have. We've actually done, I believe, a pretty damn good job in North America to overcome a lot of the difficulties that we frankly slumped at last year.
I guess that still means that the comp was easy last year, and you just dealt better with it this time around. That rate of improvement, extrapolate it, or is that, again, an easy comp just in Q1?
We do expect a continued improvement in conversion ratio also in North America, but probably the rate of increase in conversion ratio in North America won't be as high for the course of the year as it was in Q1.
That's great. Thanks, guys.
Once again, ladies and gentlemen, to register for a question, please press zero followed by the one on your telephone keypad now. The next question comes from Matthew Lloyd from HSBC. Please go ahead. Your line is now open.
Good morning, gentlemen. I just wondered if you could give me a feel for your cost of goods sold line. How much of that movement is volume, and how much of that movement is the prices, the value?
Yeah. Just hang on two seconds. I think we've got that actually for you. One second. No pressure.
Yeah. No pressure, I know. The first quarter over previous year's quarter, the volumes are up about 2.5%. As sales are down 2.7% or 2.8%, you could assume that the average selling price, but it's average over many, many products, is down about 5%.
How does that compare to your input costs? Are they down slightly more? I'm trying to work out if there's a phasing lag.
Oh, it's going to be marginal. Very, very marginal. As you know, we have a pass-through price model here. In volatile pricing environments, you're going to get a little bit of a take-up on increasing prices and equally, we don't suffer too much on the way down either. I would suggest it's very marginal. I wouldn't read too much into that.
Okay. Thank you very much.
Thank you. The next question comes from Christian Obst from Baader Bank. Please go ahead. Your line is now open.
Hello, and thanks for taking the question. Just a short one. We have seen the scope of the upcoming IPO of Univar in the U.S. Do you have seen any changes of the behavior of that company, which is a main competitor in that market? Has it any influence on the behavior of Univar, and do you see some changes there? Do you gain market share or you're losing market share? Is there more competition or less? Do you think there's almost no impact from that? Thank you.
Actually, we don't spend a heck of a lot of time looking at Univar, do we?
Okay.
I think, to be fair, I think for Univar, clearly we're not in a position to really comment too strongly on this, but we're not aware of any significant change in their competitive activity in terms of the way they compete with Brenntag. We're not aware of anything significant. I think maybe probably what is more relevant to Univar, and frankly, this is not from a position of lots of knowledge, but perhaps I would suggest that Univar's exposure to oil and gas is far more meaningful to them than it is to us in real terms in North America. Obviously, you take that with a pinch of salt because we don't have detailed numbers on their business.
Okay. Thank you very much.
Once again, ladies and gentlemen, to register for a question, please press zero followed by the one on your telephone keypad. The next question comes from Christian Cohrs from Warburg Research. Please go ahead. Your line is now open.
Yes. Thanks for taking my question. First, maybe on Latin America, the IMF cut its forecast for Brazil, I think, a couple of weeks ago. Do you see any deterioration in your Brazil business? I think it accounts for 25% of your Latin America division. Secondly, during the full year results call, you were very optimistic regarding the M&A pipeline. Is this still valid? Lastly, a technical issue regarding the tax rate. You are below 33%, below the usual corridor. Is this something we can put forward in our model, or do you think for the full year and for the years to come, we should stick to the usual 34%-35% corridor?
Okay. If I chat to M&A and Brazil? Yeah. Okay. Well, first of all, M&A. Yes, I still remain confident on M&A. We've indicated a EUR 200 million-EUR 250 million spend. From what we know today, we expect that to be delivered during the course of this year. In terms of Brazil, quite interestingly in Brazil, for us, it's actually not that bad an environment for us in Brazil. The reason it's not too bad an environment for us is that we are sourcing product from locally manufactured materials. Local manufacturers are providing a lot of the products which we are selling into the marketplace. More recently, the change in the currency and the relative competitiveness of some, in terms of people buying product from overseas, has changed to the favor of local produced product.
In actual fact, we find ourselves in a fairly good position in Brazil, compared to where we were only a year or two ago. In actual fact, despite a difficult macroeconomic background, our business is actually doing rather well.
On the tax rate, we would for now stay with the corridor of 34% to 35%. That we are a little bit below that in Q1 is within the noise. It's probably fair to take a look towards the lower end of the corridor of 34%-35%, and not to the upper end of the corridor. We don't have any belief at this stage that we could actually lower the corridor.
All right. Thank you.
Thank you. We have a follow-up question from Andy Shu from Deutsche Bank. Please go ahead. Your line is now open.
Thank you. Just a couple more. Steve, any sort of comments? Obviously you're cutting headcount in upstream oil and gas, obviously the oil price has bounced back somewhat. Any sort of comment there, please? Yeah, there's just that one there, please. Thank you.
Yeah. Okay. The way it works, Andy, is that the upstream elements of our business is very much related to the drilling rig activity. In other words, the oil price has to get to the point where the exploration companies are prepared to engage the drilling rigs on exploration. There's a big difference in North America in terms of how competitive drilling rigs are, in terms of which locations they are operating and how difficult is it to get there. I think it's a little bit of a broad brush to say that if the oil price moves up by a few dollars, that there's going to be a shift in demand. What we haven't done is cut heads in a dramatic way in our oil and gas business. We absolutely firmly believe this is still a great business to be in.
To a large extent, we probably got a little bit ahead of ourselves in 2014, and we've probably got ourselves now in a situation where we probably are of a more measured position in terms of our service offering. I think we're in a good place. We also bought equipment and resources last year, which will be definitely usable in 2015. I'm really relaxed that we, A, were the right shape, and we probably won't take any more headcount out of our oil and gas business as we see it today.
Okay. I almost forgot the second one. Just remembered it. M&A. In terms of the outlook for M&A, in terms of what's in the pipeline, I think last time, full-year numbers, Steve, you mentioned, I think that the pipeline was pretty similar to the EUR 200, EUR 250. Has that number changed at all in terms of what the pipeline looks at as we head into May?
Yeah. I think the nature of our business in terms of M&A, there's always targets coming in. The pipeline is being replenished literally day by day. I think in terms of the number of transactions that we might expect to execute during 2014, I'd still stick with the EUR 200 million-EUR 250 million. We are confident that those are going to be delivered this year. If we can convert some of the opportunities that have come in more recently during 2014, I see no reason why we wouldn't do it. As you know, we are pretty prudent when it comes to doing acquisitions. As I say, I would guide you to the EUR 200, EUR 250 as being reasonable for this year.
Thanks very much.
Thank you. There appear to be no further questions. I'll return the conference back to you.
Right. Well, thank you very much, ladies and gentlemen. Thank you for taking the time to join us for the call today, and I think we can call the close there. Thank you very much. Bye now.
Thank you, ladies and gentlemen. This does conclude today's conference call. Thank you very much for participating. You may now disconnect.