Earnings Call: Q1 2015

May 6, 2015

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the Brantac 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. May I now hand the call over to Steve 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 Joak Muller, our CFO, and we'll be happy to answer your questions after the presentation. So let me begin with some words on the macroeconomic environment. Overall, the global economy continued to grow moderately. We saw Europe in 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 orientated 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 EBITDA in Q1 was 2015 amounts to €195,000,000 This represents substantial February increase of 22.2 percent as reported and 9.7% on a constant FX basis. This positive development translates into earnings per share of $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 Hornburg, which we signed in 2014. In other news, externally, we are pleased Moody's has now signed an investment grade credit rating to Brenntag in line with the existing Standard and 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. So we're pleased that we signed and closed the acquisition at the 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 €12,000,000 Gross profit was €3,000,000 with a normalized EBITDA of €1,600,000 And The total investment amount was €12,000,000 and is very much part of our growth strategy in the region. Now I'll hand over to Georg. Yes. Thank you very much, Steve. My first slide shows the most important financials for the quarter. Gross profit totaled €557,300,000 And that's up 15.2% as reported against previous year's quarter. Growth at constant FX rates totaled 4.3%. EBITDA amounts to €195,000,000 up significantly by 22.2% as reported Or 9.7 percent FX adjusted. So conversion ratio for the quarter is 35%, Up 2 percentage points against previous year's quarter, which is in line with our expectations. We saw a significant boost in free cash flow €261,000,000 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 IFRS 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 We'll remain unaffected. Under the new IFRIC 21, we have higher expenses Of about €4,400,000 for the group in Q1 and an equal amount of lower expenses Spread out over the quarters 2 to 4. 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. And moving on to the income statement, to the details of the income statement. As the lines down to EBITDA were already Discussed, I thought you through them on an earlier slide. So I would move directly to the page with the P and L lines below EBITDA. Depreciation for the Q1 amounted to €26,500,000 and amortization to €9,200,000 Financial results amounted to an expense of €23,700,000 Overall, earnings before taxes This is 29.6 percent stronger than last year. We recorded a tax rate of 32.7 percent in the Q1 2015, which is slightly below the range of 34% to 35% We usually indicate. The earnings per share totaled €0.59 or €0.63 Excluding the amortization and excluding the change of the Song Jong 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 Hollenberg and Lionheart, which we both closed in the Q1 2015. Debt and leverage. Net debt increased during the quarter by €96,800,000 to €1,506,000,000 The increase is driven by the continued strengthening of the U. S. 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 €4,000,000 at the end of the quarter. In terms of working capital turns, we turned to working capital 8.0 times in the first quarter, Somewhat below the 9.0 times we achieved in the Q1 of 2014. We deem the lower level of working capital turn as Temporary effect and expect that the terms 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 Q1 this year compared to Q1 previous year. And you can actually notice that when you look at the following page, that's the free cash flow page. Q1 2015 delivered a very strong free cash flow of €161,000,000 which is significantly up against the €75,000,000 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, Jorg. Okay. Now let me walk you through the developments of the segments for the Q1 All segments have shown growth in Q1. Coming to Europe, we are satisfied with the European performance in the Q1. Region grew its operating gross profit by 3.1 percent on an FX adjusted basis and operating EBITDA increased by 6.4%. We have clearly benefited from the efficiency enhancement measures in the past. The conversion rate for the quarter reached 34.4%. This is more than 1 percentage point Higher than the same quarter last year. In North America, Brentech's North American development in the Q1 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 I said last year. With the lower price of oil affecting our business in the upstream segments, the highly diversified nature of our business allowed 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, 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 Assuring 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%. So I would just like to reiterate the group's results. Our group operating gross profit growth for the Q1 2015 amounted to 4.3 percent and operating EBITDA grew by 9.7% on a constant currency basis. Growth rates reported on a reported basis were clearly much higher. Okay. So let's 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 macroeconomic environments in the rest of the year. In North America, we also expect a positive earnings developments. Due to the highly diversified end of our Oil and Gas business, we expect earnings stability. And in 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 curb 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 supply 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 high level of working capital turnover despite challenging market conditions. Finally, free cash flow Free cash flow is expected to be meaningfully higher than in 2014 based on different elements mentioned above. Okay. Now let me come to the current trading environment. So what I'm going to do here, I'm going to split between Acquisitions and organic growth for those who like to write it down. So 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 Percent and organically 2.7%. In closing, our view is positive 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 orientated companies. In Latin America and Asia Pacific, improvements of operations are going to As in previous years, we plan to give quarterly guidance on our full year results for 20 15 after the Q2 results. And now we're happy to answer any of your questions. Thank you, sir. If you wish to withdraw this request, you may do so by pressing 0 followed by the 2 to cancel. Once again, to register for a question, The first question comes from Rob Plant from JPMorgan. Please go ahead. Your line is now open. Hi, Steve. Hi, Georg. You hopefully, Steve just gave us the organic growth per month having bottomed, 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. Yes. I think I would suggest the our view is a positive one in terms of the growth organically. Clearly, it will be further acquisition this year as well. So I think I would see the 2.6%, 2.7% numbers has been very much sustainable. Do you think they could improve Steve from the 2.7? Good question actually, Bob. I think at the end of the day, when we look at Europe, the oil conditions in Europe should be set up 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. But 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. So 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, Well, our view on Oil and Gas North America is still very positive. The upstream segment for our business is about 20% of our total oil and gas business. And 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. So whilst you're clear there are some pressures on the oil and gas sector, there are benefits in other parts of the business as well. So 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 more and more Sport orientated businesses with the strength of the dollar. But 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. So we're actually positive about North America from a Brentech perspective. Great. Thanks, Steve. The next question comes from Andy Hsu from Deutsche Bank. Please go ahead. Your line is now open. All right. Good afternoon. A few questions from me please. Steve, can I just pick up from the previous question in terms of European growth, expecting a European Pickup in growth, but from Q4 into Q1 that gross profit has actually deteriorated? So if I could just I'll 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 that I'm not wrong to be driven, I guess by FX, but also a movement in terms of debtors. So 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 higher to €120,000,000 on a full year basis. And 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. And then 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. There's a Warren King standing. I'll try and keep all of those. And just on the European growth, are you talking about sequentially between the end of the last quarter of last year In the Q1 of this year and in terms of European GP? Yes, that's correct, yes. Yes. 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 all bothered in terms of the underlying growth For Europe and 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 fault as in previous years. We believe that if we can't do it now, we never can honestly. So 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 $120,000,000 spend on CapEx. That is very much a project led Capital expenditure number, we do expect to spend the CapEx that's been suggested, but Clearly, all the projects we're involved in do have hurdle rates as well. But I wouldn't say that we're going to miss the CapEx 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. So we should really, if you like, to underline my confidence that the oil and gas business that we're in has is sufficiently diversified to cushion The downside of the upstream slowdown. So I would suggest that oil and gas is certainly not without its challenges, 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 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 about debt. I'm not sure I got that question. Sorry, I probably explained it very badly, but part of your working capital improvement I think was on the debtors side, if If I'm picking up correctly or maybe I'm incorrect. But if I am right, just wondered if you're doing anything in particular on the debtors side Please to help squeeze working capital. And then I had one question final question in terms of cost, Cost control. We do have pretty stringent collection policies in place. We're obviously Going after us after every customer who has overduced, we are pretty sensitive in extending prolonged payment terms to customers and it would be the rare exception we really do that. There's no particular initiative That explains your observation on the debt side. Okay. Andy just is that okay, Andy? Yes. Perfect. Sorry, Steve. Just on the expenses side, I think I'm not quite sure whether you were referring to general expenses. I think I would have been extremely disappointed if our expenses have been going higher in a meaningful way in this quarter. When we left, we finished 2014. We'd have really a year where expenses have been running at higher levels than we were happy with. Certainly, North America, we've seen a reduction in expenses in external haulage and equally a reduction in operating cost 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. So overall, and also we've got a very strong control in Europe in terms of keeping our hands on the The operating costs within Europe. So it is an environment where we're by no means complacent on operating Expenses and we will maintain a very strong handle on that. Thanks very much. Thank you. The next question comes from Roy Mackenzie from UBS. Please go ahead. Your line is now open. Good afternoon, guys. It's Rory from UBS here. First question just on that working capital. I guess you heard this mainly in the debtors, Can you talk about inventory turns at all or specifically given we've seen the prices by the movement of deflation and our customers are reacting to that? And then secondly, two questions on the North American margin. I think there was a very easy comp loss due to the weather impact. So what the underlying rate of improvement was in North American margin? And 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. Yes. On maybe the debt to side, Rory, chemical prices I'm not in a huge scale moving down on average over portfolio. But yes, there are some Price reductions and volatility is higher in prices to a degree. And as we typically point out, it's not very relevant for our earnings, but it does have An impact on working capital. Yes. And for sure, the lower outflow in working capital, also the improvement on the And in absolute receivables on the debt side is partly caused by an easier environment with lower chemical prices easier Okay. Thanks. Just in terms of the transportation costs and what have you, I'm not sure, shall we describe it as a tailwind. Clearly, there are probably some contractors that were previously drawn into oil and gas and their rates have 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 So we mitigated what looked like almost a permanent switch from some of the outside contracts into oil and gas. Now 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, but this will even itself out during the course of the year. And it's not just North America. It's pretty much across Across the board. Okay. And then just on the North American margin overall given that it was an easy comp in Q1 last year where you struggled? 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. So and I almost didn't want to mention it. But we were I can tell you that we were very much more prepared this year than we were last year for the type of Thanks for the weather we're going to have. And so we've actually done, I believe, a pretty damn good job in North America to overcome a lot of the difficulties that we've frankly Long term last year. But I guess that still means that the comp was easy last year and you just dealt better with it this time around. So that rate of improvement To extrapolate it or is that again an easy comp just in Q1? We do expect the continued improvement in conversion ratio also in North America, probably the rate of increase in conversion ratio in North America won't be as I for the course of the year as it was in Q1. Okay. That's great. Thanks, guys. 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 That movement is volume and how much of that movement is the sort of the prices, the value? Just hang on 2 seconds. I think we've got that actually for you in a second. No pressure? Yes. No pressure I know. So The Q1 over previous year's quarter, the volumes are up about 2.5%. So as sales are down 2.7% or 2.8%, you could assume that the average selling price, But it's averaged over many, many products. It's down about 5%. Okay. And 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. It's going to be very, very marginal. Yes. As you know, we have a pass through price model here. And 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 the way down either. But 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 Hobbs from Baader Bank. Please go ahead. Your line is now open. Yes, hello and thanks for taking the question. Just a short one. Do you we have seen the scale For the upcoming IPO of Univar in the U. S, do you have seen any changes of the behavior of that company, Which is the 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? Or do you think there's almost no impact from that? Thank you. Actually, we don't do 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, I mean clearly it's not hard. So we're not in a position to really comment strongly on this. But we don't we're not aware Of any significant change in their competitive activity in terms of the way they Completely Brent's Hag, there's no we're not aware of anything significant. I think what you 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 And then it's towards in real terms in North America. But obviously, you take that with a pinch of salt because we're not we don't have detailed numbers on that business. Okay. Thank you very much. The next question comes from Christian Kors 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 and A pipeline. Is this still valid? And 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% to 35% corridor. Okay. I'll just check M and A in Brazil. Yes. Okay. Well, first of all M and A, yes, I still remain confident on M and A. We've indicated the €200,000,000 to €250,000,000 spend. And from what we know today, we expect that to be delivered during the course of this year. And in terms of Brazil, I mean, quite interestingly, in Brazil, for us, it's actually not that Bad environment for us in Brazil. And the reason it's not too bad an environment for us is that we are sourcing products from locally manufactured materials. So local manufacturers are providing a lot of the products which we are selling into the marketplace. And 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 products. In actual fact, we find ourselves in a fairly good position in Brazil compared to where we were only a year or 2 ago. So actually 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. So it's probably fair To take a look towards the lower end of the corridor of 34% to 35%, but not to the upper end of the corridor, But 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 Hsu from Deutsche Bank. Please go ahead. Your line is now open. Thank you. Just a couple more. Steve, any sort of comments? So obviously, you're cutting headcounts In upstream oil and gas, but obviously the oil price has bounced back somewhat, so penny sort of comment there please. And then yes, there's just that one there please. Thank you. Yes. Okay. The way it works, Andy, is that the upstream elements of our business is very much related to The drilling rig activity. So in other words, the oil price has to get to a point where the Exploration companies are prepared to engage the drilling rigs on exploration. And for those And 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. So 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 Phil, 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 probably have got ourselves now in a situation where we probably are in a more measured position in terms of our service offering. So I think we're in a good place. We also bought equipment and resources last year, which will be definitely usable in 2014. So I'm really Relaxed that we A, we're in the right shape and we probably won't take any more headcount out of our Oil and Gas business as we see it today. And I almost forgot the second one. Just remember that M and A. In terms of the outlook for M and 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 sort of similar to the 200, 250. Has that Sort of number sort of changed at all in terms of what the sort of pipeline sort of looks at as we Head in some light. Yes. The nature of our business in terms of M and A, there's actually there's always targets coming in. So 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, And still stick with the €200,000,000 to €250,000,000 and we are confident that those are going to be delivered this year. If we can To convert some of the opportunities that have come in more recently during 2014, I see the reason why we wouldn't do it. As you know, we are pretty prudent when it comes to acquisitions. But as I said, I will guide you to the EUR 200,000,000 EUR 250,000,000 that's been reasonable for this year. Thanks very much. Thank you. There appear to be no further questions. I'll return the conference back to you. Well, thank you very much ladies and gentlemen. Thank you for taking the time to join us on the call today. And I think we can call the close-up. 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