Ladies and gentlemen, welcome to the Brenntag AG full year 2014 results call. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there'll be an opportunity to ask questions. Any participant has difficulties hearing the conference, please press * key followed by zero on your telephone keypad for operator assistance. I now hand you over to Steven Holland, who will lead you through this conference. Please go ahead, sir.
Thank you. Welcome, and thank you very much for dialing in for our review of 2014 earnings and discussion of the current trading. I'm on the phone together with Georg Müller, our CFO. We'll be pleased to take your questions after his presentation. The macroeconomic environment in 2014 was characterized by a moderate recovery, with some slightly weakening trend towards the end of the year. Our operating EBITDA amounts to EUR 726.7 million. This is a solid performance, the EBITDA is slightly above our guidance range of EUR 700-EUR 720 million, partly due to the stronger US dollar towards the end of the year. At constant FX rates, we were able to grow the business by 4.3%. The group was able to generate a strong free cash flow of EUR 521.6 million.
In line with our strategy, we were active in the M&A and signed a number of value-accretive acquisitions in 2014. The total enterprise value of all acquisitions which were signed in 2014, and which have been closed, amount to more than EUR 140 million. Following this successful year, we are delighted to submit a proposal to the general shareholders meeting for approval of a dividend of EUR 0.90 per share. This represents a year-over-year increase of 3.8% and equals a payout of 41% of the profit after tax attributable to shareholders of Brenntag AG. Just coming on to our acquisitions. As mentioned before, we've acquired a business for a total enterprise value of more than EUR 140 million. This includes the acquisition of Fred Holmberg, which we signed in 2014 and closed in March of this year.
The acquisition helps to enhance our products and services portfolio or improve our geographical coverage in existing countries. Our completed acquisitions in 2014 include Kemira's distribution business in Denmark, which means a major expansion of our industrial chemicals business in the region. Gafor in Brazil, which helps us to achieve critical mass in the most important market in Latin America. Philchem in the United States, which expands our large consignment business in the United States. Chimab in Italy, which allows us to improve our position in the important Italian food sector. SurtiQuimicos in Colombia improves our market penetration in the specialty chemical market in Latin America. You may notice the acquisition of Pioma in India is missing from the above list. We signed this transaction in September 2014. It is not yet closed and probably will not close, judging from today's perspective.
This is because the sellers were not able to meet our conditions precedent to closing. We are confident the acquisition spending will see some pickup in the year ahead. We currently operate an acquisition pipeline that contains targets in due diligence with a total enterprise value of more than EUR 250 million. Before I pass you on to Georg, I would like to spend just a few moments on the rollout of our new branding, which included ConnectingChemistry as a principal strap line to add further description to the Brenntag brand. Feedback from our suppliers and customers alike has been very positive in terms of how they see the business model and the function of Brenntag in the supply chain, creating literally hundreds of thousands of connections worldwide between manufacturers and end users.
ConnectingChemistry is sold strongly as a way of creating access to the increasingly sophisticated value-added services provided by Brenntag. I would now like to hand you over to Georg for a discussion of the full year 2014 financials.
Thank you, and good afternoon, ladies and gentlemen. I am speaking about the income statement. The world showed only moderate improvement of macroeconomic conditions in course of the year. Even in this environment, we are able to report pretty strong results. The financials for 2014 once again reflect the robust nature of the business. We record pretty strong results for gross profit and EBITDA. Gross profit totaled EUR 2.027 billion, which represents a 4.8% FX-adjusted increase against previous year. All of our regions contributed to this growth of gross profit. The operating EBITDA totaled EUR 726.7 million, representing an increase of 4.3% at constant FX. If adjusting the year 2013 for the one-off cost item relating to an old antitrust case in France, the growth rate of operating EBITDA is 1.9%. We are moving to the income statement with the P&L lines below EBITDA. Depreciation for the year amounted to EUR 99.4 million.
We recorded amortization of EUR 35.9 million. The amortization mainly consists of customer-based amortization in an amount of EUR 28.3 million. The financial results totaled a net expense of EUR 83.8 million, which compares to an expense of EUR 60.7 million in the previous year. The difference is mainly driven by an income item in 2013. That income item in 2013 is related to the revaluation of the outstanding payment obligation for the remaining 49% of our Chinese business, Zhong Yung. Our taxes remained high and amounted to EUR 507.8 million, 2.5% above previous year. For the full year, we record a tax rate of 33.1%, pretty close to the level of 34%-35% that we usually indicate. Profit after tax amounted to EUR 339.7 million, which is in line with the previous year. On the cash flow statement on this page, we show the details for operating cash flow.
The cash flow provided by operating activities increased against the previous year and amounts to EUR 369.7 million. The increase of cash flow is based on stable profit after tax, lower payout on existing provisions, and some higher spending on working capital. With respect to the investment cash flow on the next page, spending for CapEx for the full year is EUR 103 million, and that is about 8% lower than what we forecasted on CapEx in course of the year. In the cash flow statement, we show a spend under the title Purchases of Consolidated Subsidiaries and Other Business Units of EUR 82 million. This relates to the acquisitions previously mentioned by Steve. The actual spending amount is lower than the enterprise values of EUR 140 million, as on the one hand, it does not include Fred Holmberg.
Holmberg yet, which was closed only 2015, and the spending in the cash flow statement does not include the debt that we have taken over with the acquisitions or any purchase price holdbacks. The main element of our financing cash flow is, as always, the dividend payment to our shareholders. I will skip the balance sheet information and move on to net debt and leverage. Net debt increased slightly year-over-year by EUR 68 million to a total of EUR 1.409 billion. The increase in net debt is mainly translational and caused by a much stronger US dollar at the end of 2014, considering that a share of our debt is US dollar denominated. The group's leverage remained constant at 1.9 times. I would move two pages ahead to the maturity profile.
A small piece of our indebtedness is provided by an AR securitization. The AR securitization matures in June this year. We are currently considering our options. Given the strong cash position on the board balance sheet and our mainly unused revolving credit facility of EUR 600 million, we have all the financial flexibility that our group needs. The trade working capital amounted to EUR 1.226 billion at the end of the year. In terms of working capital turns, we turned the working capital 8.6 times in 2014, a little below the 9.0 times that we achieved in 2013. 2014 again delivered a strong free cash flow of EUR 521.6 million, following EUR 543 million in 2013. The small decrease of EUR 21 million, or 4%, is mainly driven by a higher spend for working capital. I will pass back the presentation to Steve for a discussion of the segments.
Thank you, Georg. Let me take you through the developments of the segments for the full year on this page 17 and a Q4 view on the following page. Full year basis first. In Europe, it grew its operating gross profit by 4.3% on an FX-adjusted basis, a strong development for the region. Operating EBITDA grew by 6.4%. Europe clearly benefited from efficiency enhancement measures in the past and delivered a strong cost management performance. The conversion rate for the year totaled 34.6%, which is almost 100 basis points up on last year. We were pleased with European performance in 2014. Coming to North America, FX-adjusted operating gross profit in North America grew by 6% in 2014, which is a pretty healthy growth rate.
The operating EBITDA in North America was flat to last year despite the gross profit growth, which is mainly due to the high costs experienced during the bad weather in Q1, a build-up of the resources in our oil and gas business, and quite sharp inflation in transport costs during the year. I would like to come back to that in the outlook statement. In terms of Latin America, our business in Latin America delivered the FX-adjusted gross profit growth of 6.1%. Following a weaker start into the year, the development stabilized in the second half, leading to an overall 2.9% growth in operating EBITDA. Venezuela and the existing business in Brazil had difficulty in the first months of the year, but showed us a positive sequential trend during the year. Coming to Asia Pacific.
Asia Pacific shows a 1.9% operating gross profit growth, and the operating EBITDA decreased by 13.1%. This is a result of the political situation in Thailand and the economic situation in Australia. This also reflects the expenditure in connection with the expansion of our management capabilities in the region, which are now broadly completed. As we show you on the next page, the Q4 trend was significantly more positive. Let me just reiterate, our operating gross profit for the year grew by 4.3%, and adjusted operating EBITDA grew by 1.9%. Before we move to the outlook, let us have a look at the developments of the segments in Q4 on page 18. On an overall basis, our business showed some improvement, in particular, emerging markets of Latin America and Asia Pacific.
For Europe, the quarter showed a 4.6% growth of operating gross profit in line with the development earlier in the year. This performance was broad-based. North America had a strong FX-adjusted operating gross profit growth of 7.8% in Q4. You will notice that the operating EBITDA strongly increased in Europe and was lower than previous year in North America. Q4 each and every year is a quarter of various true-ups, for example, with respect to accruals, provisions, supply and customer compensations, and bonuses. On a group level, the net effect is not material. Europe saw some positives and North America saw some negatives this year. Coming to Latin America. Segment Latin America delivered a strong 25.2% FX-adjusted operating gross profit growth. This translated into a 49.5% FX-adjusted growth in operating EBITDA.
In Asia Pacific, we were pleased with the sequential improvements of our Chinese business in 2014, which is continuing. Asia Pacific grew its operating gross profit by 2.7%, and this translated into a 4.4% growth in operating EBITDA. It is probably worth mentioning that this is the first quarter for some time with a positive growth rate on the EBITDA level, which we expect to continue. On an overall scale, the group delivered a robust performance in a difficult macroeconomic environment. We saw an FX-adjusted operating gross profit growth by 7.4% and operating EBITDA grew by 3.6%. Based on the solid earnings developments of our group, we will propose a dividend of EUR 0.90 per share to the general shareholders' meeting in June. This represents an increase of 3.8% over the previous year and underlines our commitment to the dividend policy. The proposed dividend reflects the payout ratio of 41%.
Moving to page 21, 22. Let me have a look at the outlook. We do have a positive view on 2015. On a global basis, we expect macroeconomic growth at rates slightly higher than those observed in 2014. We expect gross profit to grow and consequently also EBITDA to grow. We expect to benefit from a somewhat better macroeconomic development in Europe. In North America, we are positive and expect to return to growth in 2015. After the changes and efficiency improvements we have carried out in Latin America over the last years, we expect to see a continued improvement in the conversion ratio and therefore growth even in uncertain macroeconomic conditions in the region. Similarly, for Asia Pacific, we expect to see a continued positive development following an improved performance in Q4. We expect to give positive guidance later in the year as we have done in the past.
Many analysts and investors are interested to understand our position on oil and gas in light of the very sharp fall in oil prices we saw last year. For our business, the largest sales to the oil and gas industry are in North America, and our business is split between the upstream, midstream, and downstream parts of the oil and gas sector. Upstream is affected by the fall in prices, and some drilling rigs are now idle as a result of unfavorable economics. Midstream and downstream chemical production, however, are more favorably affected by the change in terms of costs, raw materials, and profitability. The effect of our business is broadly neutral. In addition, we see the upside of the North American and European manufacturing sector, particularly compared to a year ago, where energy and transportation costs were higher. Currency translation will have a positive impact this year.
Last year, we translated the results achieved in U.S. dollar, mostly North America and Latin America, into euros at the average rate of close to $1.33 per EUR. Current trading is around 1.1. Should this rate prevail throughout the year, we expect a translational benefit of some EUR 50 million. We do plan for some CapEx increases in the year by about EUR 20 million to support the future growth of our business. Finally, the free cash flow is expected to be meaningfully higher than in 2014 based on different elements mentioned above. We can now come to the current trading environment. We continue to see growth in the first two months of 2015. Gross profit per day for the first two months of 2015 were ahead of the same period in 2014.
We see a reasonable start in Europe in 2015, which is running against a quite strong prior year comparable in the first quarter. North America's headed off to a good start in 2015. Clearly, last year's Q1 results were heavily affected by bad weather conditions. Actually, the weather in the first few months of 2015 are already quite difficult in some areas with a number of site closures. We're very much better prepared this year compared to 2014. Therefore, the impact will not be as large. In Asia Pacific, the positive development has continued in light of the first two months of trading in 2015, following on a good 2014 last quarter. Gross profit per working day grew by 8.2% year-over-year in November, 4% in December, 5.6% in January, 4.1% in February.
In closing, we are confident that we'll grow all the relevant earnings promised in 2015 with a mixture of both acquisitive and organic growth. In line with slightly improving macroeconomic conditions, Brenntag remains very well positioned to capture new growth in both established and emerging markets. Now, we'll be very happy to answer any of your questions.
Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypads now. We have a first question from Andy Chu, Deutsche Bank.
Good after-
I'm sorry, Mr. Chu. Your line seems to be muted again. One moment, please. Sorry, Mr. Chu, your line has now been disconnected. We'll move on to the next person, who is Gerardo Gomez, Exane BNP Paribas.
Hello, this is Gerardo Gomez from Exane BNP Paribas. I guess, if Andy's around, I'll ask the question about gross profit per working day on an organic basis. Also, I didn't hear February. Was that 1%? I've got two more questions. The second one is the Q4 conversion ratios in emerging markets. Is this a new level that we can put down for next year? Were there any positive one-off effects? Thirdly, apart from Fred Holmberg & Co, do you expect any cash out for the acquisitions that you've already made in 2015?
Yeah, it's Georg. Let me respond to the question for gross profit per working day growth rate on an organic basis. I'll pick up again with the November 2014 numbers. In November 2014 number, gross profit per working day growth on an FX-adjusted basis was 8.2%. If we adjust additionally for acquisitions, we end up with an organic growth rate of 6.3%. Moving to December, we had 4% on an FX-adjusted basis. Additionally, adjusting for acquisitions, we are at 2.4%. January was FX-adjusted 5.6% and organically 4.1%. February was 4.1%, and on an organic basis, 2.6%. We don't really have a specific sort with respect to conversion ratios emerging markets in Q4. There is no material one-offs in there. We do see some improvement in the business in the emerging markets, particularly in Q4. From today's perspective, I would not expect any pressure on their conversion ratios this year.
Just remind me, please, what the third question was.
If I understand you correctly, you don't expect any further cash outs for the acquisitions-
Apologies
already made in 2015, apart from Fred Holmberg, yeah?
Yes, the cash out for Fred Holmberg will come, and there are smaller purchase price holdbacks, which we will pay on former acquisitions, but these are not material.
Okay, thanks very much.
Thank you. We have Andy Chu back on the line. Your line is now open.
Well, thanks very much. Good afternoon, Steve, Georg. A few questions from me, please. Just starting with North America. Could you just explain why that gross profit number was very strong for Q4 at +7.8%? Also in North America, a third of your North American business is oil and gas. Could you tell us what's happening in terms of the growth rate in the upstream business, which I think is 10% of that business versus the rest? In terms of the CapEx spend, is that EUR 20 million a one-off bit of CapEx that's going in 2015? Where is that going, please, in terms of expansion? Obviously, whether that's sustainable going forward in terms of a new run rate. Thank you.
Okay. Maybe I take the upstream.
Should I take it or you take it?
Let me start with the oil and gas question, Andy, to avoid a misunderstanding. Roughly 30% of our North American business is with oil and gas customers, 10% of the group or 12% of the group, 30% of North America, but that would include upstream, midstream, and downstream. The upstream business is clearly less than a third of our oil and gas business in North America. If I look into gross profit development, oil and gas combined over all three segments, upstream, midstream, downstream, we are basically flattish since a couple of months. Yes, there is movement underneath between the three pieces, but we would rather not disclose the underlying movement. It's not that material. The CapEx question, the group has grown considerably over time. We have been, and we continue to be very selective on CapEx.
We actually expected to increase the CapEx already to some degree in 2014 and expected to spend EUR 110 million, which we did not fully do. We only spent EUR 103 million out of a budget of EUR 110. We expect to move to a level of about EUR 120 million going forward. I would not particularly call that a one-off. I would more say this is in line with the growth the group has seen over time. Behind the CapEx increase, there is not the one specific additional project. We are basically talking about smaller growth projects around the world. We haven't responded yet to your question on North American gross profit growth. I'm not sure if this was just a general question about North American gross profit growth in Q4 or if there was a specific angle to it, Andy.
Sure. Just in terms, Georg, if 30% of North America, which is oil and gas, is basically flat, it implies the other 70% is basically growing, I guess, broadly at double-digit growth rates. I just wondered where that strength is coming from, which customer segments are driving this very material growth in North America, please.
We are operating around the world, also in North America, a very broad regional and customer industry mix. The business in North America, gross profit-wise, is generally going
that it's particularly worth to be noted specifically.
I guess in terms of your business generally tracks sort of industrial production and GDP, there's quite a big disconnect, I guess even, U.S. as a region being quite strong globally, just feels like either a lot of market share gain or just trying to get an understanding of where that strength is coming from and whether therefore that is sustainable into 2015, please.
Far we are looking into pretty short time periods. It's not that long ago that the oil price has actually fallen. We think that needs to be observed for a couple of more months or a couple of more quarters.
Okay. Thanks very much.
Thank you. The next question is from Alex Magni, HSBC.
Good afternoon, everyone. Just to wrap up on some of the oil and gas related questions. I understand that the effect on the top line is roughly neutral with presumably some of the more upstream parts of the exposure under a bit of pressure being offset. If I were to think of the cost base, however, to what extent is the additional investment Brenntag made in that U.S. business, the oil and gas business last year, sort of dedicated to those components, those bits of the oil and gas exposure? Even though you can neutralize at the top line, should we expect to possibly see some gearing, some net negative because the upstream infrastructure is essentially fixed and dedicated to that business?
I'll take that one. Actually, during the course of 2014, we did invest time, effort, resources, people in the upstream area, and actually, clearly it was before the knowledge of a major shift in oil prices. We are in a position where we can take some of that cost out, because a lot of it is actually activity related. We do feel that the business is responding very positively to the shift in requirements from the customers in this area. There's a number of rigs which have been stacked and actually are not operating at the moment. We have been able and are continuing to downsize resources where they're not required in that part of our oil and gas sector.
I think also, it's worth noting that you may well recall there was a significant inflationary effect in transport last year, which was in part driven by oil and gas insofar as oil and gas was taking a lot of spare capacity out of the third party distribution fleets. We would expect to see the reverse of that as some of the drilling units are not operating in the current economics. Therefore, equally, we'd expect to see the cost of transportation, which was quite badly hit during the first half of last year, to be consequently pushed in the opposite direction, and we expect to see some savings on transport costs.
Whilst it's clear, clearly the upstream area is going to require some effect downsizing of costs where we can, and we can do that and are doing that, we also see other elements which were affecting us as a result of the expansion of the upstream coming back in our favor during the course of 2015.
Actually, you've touched on it, but as a broader comment, if I look at the conversion rates pretty much across the group, they were good. To what extent is the lowered distribution cost and the lowered diesel cost helping to drive those conversion rates? Or is it, as much as anything, just additional volume on a cost structure which is remaining more tighter?
I think it's all of the above, actually. I don't think you can actually separate them out as one being distinctly more beneficial than the other. We do have a very tight control of costs. In North America in particular, we have taken action to make sure that costs are in line with requirements in terms of capacity and what have you. We do expect to see something like an 8% reduction in our transport costs through fuel savings. It clear there are also some other issues in terms of availability of trucks. Nevertheless, we will see a reduction in operating costs in transport, and that obviously has a positive effect on conversion ratios in the course of the year.
Okay. Just last one on this whole theme, at least from my side. If I look at your inventory holding at the end of the year, it's about 14% up on last year, and I understand that there's going to be a lot of Forex effect on translating that inventory. In view of sort of an oil and gas headline price that fell nearly sort of 50% or 40% between the middle of the year and the end of the year, I suppose what I'm asking is, to what extent has that oil price fall been fully reflected in the price of things coming out of chemical manufacturers? Is there a forward selling issue that when this rolls off, we'll start to see the prices of at least the bulk side of the chemical inventory continuing to drip down?
Yeah. I think we haven't seen a really significant drop-off in chemical pricing as of yet.
Yeah.
We do expect, with the basic economics of oil being where it is, that we should see some falls in chemical pricing in oil related feedstock streams. We say we expect to see that feeding through into our business during the course of the first quarter, probably into the second quarter, which will have Freeing up working capital as a result of that. We also expect, if we're being absolutely honest with ourselves, a better performance in inventory turn whilst we are on top of inventory. We as a company were not satisfied with the performance at the year-end, and therefore, we were taking some internal actions to improve inventory turn in any case.
Right.
I don't expect any significant shifts in pricing in a dramatic way.
Okay, great. Thanks. I won't have the phone. I might come back later. Thanks.
Thank you. The next question is from Jos Fittagama. Your line is open.
Hi. Thanks for taking my question. I have three, if I may. The first one is basically just a confirmation. Did I understand correctly that in your outlook for 2015, you're looking for a US dollar exchange rate of 1.10, then giving you a tailwind of EUR 50 million? The second question is on the conversion ratio, which was always stated to be the most important efficiency ratio for Brenntag. However, if I look at the current presentation on your homepage, the chart is no more included. Also, this figure dropped in 2014 below 36% after levels above 37% in 2011 and 2012. I was wondering, is that ratio not in focus anymore? Where do you see this figure going forward? The third question relates to the growth rates of gross profit and EBITDA.
Basically, if I look at the CAGR from 2005 to 2014 and the more recent one, 2010 to 2014, there has been quite a slowdown. I was wondering, what's the reason for this? Is there anything structural? Is it just a natural development due to the growth or the size that Brenntag has already achieved? Thanks.
Yeah, Georg. Conversion ratio is in the focus as it has been. If it is at this moment not in the general company presentation on the homepage, it's due to update and layout reasons. It will be back on in a couple of days after we finish that layout work. With respect to US dollar translation, I'm not sure what the actual question was. We obviously have a US dollar trading currently much stronger than over the average of last year. We do generate roughly half of our business in companies that are US dollar functional, and that will give us a tailwind we discussed. You need to help me what the exact question was.
I was wondering if you have stated the assumption for the US dollar in your outlook. Do you have a certain ratio in terms of like 1.10, 1.05, 1.06?
What we generally indicate to the market is a rule of thumb, and the rule of thumb is if the US dollar-euro rate moves by EUR 0.05, so say from 1.15 to 1.10, this will impact the EBITDA by about EUR 12 million. We don't have a specific US dollar-euro expectation for this year. In the outlook statement, we mentioned the 1.10 because 1.10 is about what we currently have, and we deem it important to disclose that the translation effect on that basis will be pretty material.
Okay, understood.
Can I just do a double check on your third question, please, just so I can get that right. Can you just repeat your third question?
Yeah. I was looking at the growth rates of gross profit and EBITDA historically. Comparing a CAGR of 2005 to 2014, as it is stated in your current presentation. There's the gross profit CAGR of 8% and EBITDA CAGR of 12%. However, if I look at the more recent timeline, comparing 2010 CAGR 2014, the growth actually slowed down to gross profit 6% and EBITDA growth of 5%. I was wondering where this slowdown in growth comes from.
Historically, it's difficult to nail it in terms of the timescales. We have had a number of recessions in Europe during this period. Nevertheless, I think directionally, our GP is increasing and has increased well in the regions during the course of 2014. Our expectation is that the ratio of the GP conversion into EBITDA should be a higher conversion in terms of percentage EBITDA improvement. I would not see a 6% increase in GP as being a 5% increase in EBITDA. We should see higher levels of EBITDA under normal circumstances. That's probably where I could probably leave it at that.
Understood. Thanks.
Thank you. The next question is from Simon Mezzanotte, Berenberg.
Hello. Good afternoon. I just had a question about your North American costs, operating costs increasing by something like 21%. I think you talked about some changes in provisioning which affected the number. I was wondering if you could give us more details on that. Conversely, in Europe, I think you said you had a maybe better-than-expected margin improvement, and I was wondering if you could give us a sense of what, let's say, an underlying improvement would have been without these one-offs.
Yeah. It's Georg. Simon, I'm not even sure I would call this a one-off. Each and every year-end quarter is a quarter for usual cleanups in all types of provision in customer bonuses, in supplier bonuses, in supplier payments of each and every type. I would reiterate that on a group level. The Q4 2014 over Q4 2013 does not see any material movements between '13 and '14. Yes, obviously, the European segment this quarter benefited from the cleanups. The North American quarter suffered a little bit. We don't think it adds material value now to dissect the segment movements for any particular quarter.
Thanks, Georg. When I look at the group in Q4, the group was still down 100 basis points versus last year.
In conversion, you mean?
Yes.
Yeah. I agree. That's been a theme that was with us through big parts of the year. It's basically from the growth challenges we had in Q1 and Q2. The gap was much narrower in Q3 and Q4.
Am I not right to think that Q4 conversion margin was also down year-on-year in Q4 specifically?
Q4 conversion margin was a little bit down against previous year.
Okay. Looking at Q1, should we expect that conversion margin, specifically in North America and Europe, to continue to improve, do you think?
The only reason I'm hesitating is to make a quarterly statement. We for sure expect further efficiency improvements in the group, and we for sure would expect on a group level, on an annual basis, to see a conversion ratio improvement of 40, 50 basis points. I would not have a particular reason to believe this does not materialize in Q1, but conversion ratios on a quarterly level, so on a short time frame, are a difficult thing.
I guess also maybe my interest in here, directionally, you might expect to see North America improve. At the end of the day, 2014 was not the very best year we've seen for North America, and that was a surrounding cost base. Very strong gross profit growth, cost base getting ahead of itself in terms of that supporting that growth rate. Clearly, we've taken action to address that issue. Therefore, I would expect to see 2015 as a much more balanced year for the North American business. As a result, you'd expect conversion ratios to improve in North America and the group as a whole.
Thank you.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press 01 on your telephone keypads. We have a further question from Andy Chu, Deutsche Bank.
Just three more follow-ups, please. Just in terms of Asia Pacific, what was the incremental cost in EUR millions, please, from putting more senior people into the region? Secondly, could you just run through, please, Steve, what's happened in Europe? The growth rate was pretty decent in Q4. On a countrywide basis, how does Europe look, please, by country? In terms of the M&A that you made and the impact of M&A, when I look at the revenue contribution of EUR 131 million and a disclosed profit after tax number of EUR 2.8 million, that implies a 2.1% profit after tax margin, which seems a pretty low margin. Certainly, if you look at the M&A contribution over the last three years, that is a very low margin compared to the last three years. Could you just explain why that is the case?
Has there been any issues with M&A that you've made over the last 12 months? Thank you.
Well, I'll just take the European margin. To be fair, I think I mentioned, it's a very broad-based performance in Europe. We don't have any particular outliers in terms of the businesses that are underperforming. We are pretty pleased with some of the, what I would consider been previously weaker members of the group, such as Italy particularly, which has shown sequential gains and improvements there. Again, the normal spread, if you like, exists throughout Europe as you might expect. In terms of the northern countries such as U.K., Nordic, Benelux, Germany are strong and solid. France remains a relatively weak-ish environment, and we continue to work hard on our French business. Spain, Italy heading in the right direction. Eastern Europe, positive. We haven't had any effects from the Russian-Ukrainian situation in our Eastern European business. It's really quite small contribution to our business currently.
Again, Europe, pleased with the broad-based performance in 2014. Looking at so far, we appear to be heading the same sort of direction as trading starts this year.
On Asia Pacific, the additional costs taken in the regional headquarter in Asia Pacific are close to EUR 3 million on a full year basis. I'm not sure I got the question on M&A. If I could ask you to repeat the question.
Sure. Actually in your annual report and accounts with the disclosure on M&A, which is actually page 158, on the note basically discloses revenues of EUR 131 million. On a profit basis, doesn't give EBITDA, but gives a profit after tax number of EUR 2.8 million, which basically implies a profit after tax margin of 2.1%. I appreciate that's the only profit number that I can see. If I were to look at that margin versus M&A over the last three years, that's a pretty weak margin. It's basically half the lowest margin of M&A over the last three years. Just wondered why that margin looked quite so weak. I was just wondering whether there was any issues in terms of what you'd acquired or was there a significant, any more start-up cost, but it just seems a low amount of profit after tax contribution.
It's mainly a purchase price allocation issue. What do I mean by that? The profit after tax number that is disclosed in the annual accounts following the IFRS rules, is a profit after tax number for acquisitions after customer base amortization. It can be a number that varies widely between different acquisitions, depending how much of the assets purchased is actually customer base and how much is goodwill and how much is tangible assets. It's, from our perspective, not really a meaningful number.
Okay, great. That makes sense. Thank you very much.
Thank you. We have a further question from Alex Magni, HSBC.
Yeah, thanks. A couple of follow-ons. Just related to the provisions and the accruals that sort of come out of the wash in Q4. I am trying to understand, if you could just flesh out some of the more important sort of accruals and provisions and what makes them so difficult to accrue for properly through the year. If I look at Europe, for example, the volume growth, the gross profit growth has been relatively stable. Admittedly, a bit more of a jump in the U.S. What is it that makes this a bit lumpy in Q4? Why is it difficult to accrue for more accurately on a quarterly basis?
I do not think we accrue poorly on a quarterly basis. Again, on a group basis, there is no material impact on Q4. Why is the movement between the segments a little bit difficult? The type of things we are talking about is a true-up on environmental provision, it is a true-up on supplier bonuses. It is a true-up on customer bonuses, and these are typically accrued by a leading region, by one region within the group, and you only do the distribution exercise, distributing it throughout the group on the segment on a full year basis because it is quite a lot of workload.
Accrued in one region, and there is essentially an interregional transfer that a part of it is-
Yeah
that is what we are seeing. Is that what affected-- if I look at Q4 last year, the conversion rate in the U.S. was very strong, and actually that is what, to my mind, is creating the comp on this year, making this year's conversion in the U.S. look weak when actually it probably is not, as it was that last year was something like 47%. Was that the reason the Q4 conversion comp was so challenging for the U.S.? Was it these sort of accruals being washed?
Yeah. When I said a little bit earlier, the effect is not material for the group on Q4 this year, but Europe saw some positive and North America saw some negative.
Yeah.
It's actually exactly what you mentioned. It's not really negative North America Q4 2014, it's more positives Q4 2013, which did not repeat.
Okay. Yeah, understood. Then, second one, in terms of, I suppose just coming back to the M&A contribution. If I looked at the total contribution from M&A, so you've called the EUR 131 from the acquisitions done in 2014. If I rolled the 2013s over as well, would I get something like EUR 160, EUR 165 of total M&A contribution? Rough number.
On a sales basis, you mean?
Yes, on a sales basis.
Honestly, I wouldn't know that number. We rarely think in terms of sales.
Okay.
You are asking 2015 over 2014, or which period are you asking?
If I look at the contribution to your revenue growth from acquisitions made in 2014 is EUR 131 million. If I look at the rollover of the acquisitions made in 2013, so Lubrication Services and Blue Sky Environment, I get something like another EUR 30 million-EUR 35 million. I was just wanting a rough estimate on that.
The acquisition impact 2014 over 2013, it's on gross profit around EUR 30 million, EUR 30 million-EUR 35 million.
Yeah.
Around EUR 10 million on EBITDA. I have to admit, I don't know a sales number.
Okay.
The number you are mentioning does seem reasonable.
Okay. Just a last one on that. As I understood, Philchem, it wasn't a distributor. It was more a procurement business. The margins there would have been sort of really low. If I were to look at the P&L of Philchem, would it look very different to your P&L in terms of where the margin falls?
That's true, but in the relative to the size of the group, Philchem is not that big.
Okay. If I looked at Philchem in relation to the total M&A contribution we're talking about at the top-
You are right
It might have been about half of, or all of the M&A.
Yeah, I agree.
Okay, perfect. Thank you.
Thank you. We have a question from Chris Gallagher.
Hello. Just a quick question on M&A. You talked about things that are in due diligence. Could you give us any view on regional areas you're focusing on?
Yeah, I could take that. We still have a very positive view of North America. You probably won't be surprised to hear that we are looking at Asia Pacific. We've carried out quite an extensive review of our Asia Pacific, a number of targets in that area. As you know, we've spent quite a lot of time and effort providing resources into that region to allow them to grow by acquisition. Our ambitions would be to grow our business in Asia Pacific this year by acquisition. Equally, we believe we have a number of very sustainable and value-accretive opportunities in North America. We expect to see some add-on bolt-ons in Latin America, Europe small additions, but nothing substantial is expected in terms of a major add-on to the European infrastructure this year.
Okay, thank you.
Thank you. We have a further question from Andy Chu, Deutsche Bank.
Just on a question on Asia Pacific. Could you remind me of the weighting, please, of China, Thailand, and the rest of Asia Pacific, please, in terms of the split? Just within those three buckets, what's happened, particularly in Q4, in terms of the growth rates, which I guess are all organic. How does the 2.7% FX-adjusted GP growth rate look like split across those three buckets, please?
Yeah. In terms of EBITDA, Thailand is roughly one-quarter of our Chinese business.
Asia business.
Sorry. Apologies. Of our Asian Pacific business. The other pieces you were asking for is, help me again, Andy, it's China.
Sorry. I touched on China
which is also roughly a quarter of our Asian Pacific business. Australia is much smaller. Australia is a little bit north of 10%, maybe 15% of our Asian Pacific business.
In terms of growth rates.
China grew in Q4. Thailand and Australia were somewhat down against previous year.
The issue in Thailand, I guess in Q4, there's been sort of less disruption, I guess. Thai floods were a long time ago. The military coup is probably over. It's obviously political instability, why is that Thai business actually down? Or did I misunderstand that was on a full year basis?
I mean, Andy, I think as far as Thailand is concerned, Thailand used to be the largest part of the Asia Pacific EBITDA contribution. I would've said in the last four to five months, Vietnam has actually become a larger contributor on a monthly basis than Thailand. This is because Thailand itself is suffering economically in terms of people literally moving production out of the country. They've not been able to compete effectively against new markets or new producers such as the Vietnamese. If I was going to give you a bit of a color for Asia Pacific in 2015, I would say that we will probably end up the year with Vietnam being a much more significant part of the Asia Pacific business. China continuing to grow sequentially as it has been throughout the whole of 2014.
Thailand, we would expect to be probably flat until there's some serious sorting out of the country's direction. Australia is flat, going nowhere due to the somewhat poor economics. I think that's probably the best color we can give you in terms of where we see Asia Pacific.
Right. Thanks very much.
Thank you. The final question is from Simon Mezzanotte, Berenberg.
Yes. I'm sorry. I've got another question on the conversion margin in Q4. If you say that accruals and provisions wash off at group levels, can you explain why the margin in Q4 is down almost 100 basis points? I'm asking this because you talk about the investments in oil and gas and the higher transportation costs that obviously had an impact in Q2 and Q3. Given that presumably those have had not an impact in Q4, I would expect the conversion margin in Q4 to be slightly stronger at group level.
Well, I don't think your assumption of the oil and gas effect went away in Q4. Clearly, we're taking action to reduce our operating costs. Transport costs, I think there was no relief on transport costs in Q4 for North America. We do see relief on transport costs coming through now. It would be fair to say that when we got to the end of 2014, we ended up with an oil and gas business, which was geared up for growth. We're talking about the upstream element Geared up for growth, which has actually been the opposite direction. We've obviously taken action to reduce those costs, and therefore you will expect to see during the course of 2015, those conversion ratios to go in the right direction. I think, honestly, you can't nail it to just a quarter. It's just too short a period.
Thank you.
Thank you. We have one last question from Karl Green, Credit Suisse.
Yeah, thank you very much. I've got a couple of questions. The first one just around M&A. You mentioned that one of the deals fell over because the sellers couldn't meet conditions precedents close to closing. Can you just elaborate on that as to exactly what happened and perhaps how big that deal was? Also, I suppose the sort of second part of that M&A question is, are there any medium or sort of reasonably large size deals in your pipeline as it stands at the moment? Question two, just back to this issue about chemicals pricing. When you made that comment about pricing holding up reasonably well, were you talking there about your purchase pricing or your selling prices there?
Just linking that to the sort of working capital movement that we might see as we go through into Q1 and Q2, are you expecting to see them? I think you've hinted that there might be a reasonable working capital movement positively in your favor. Can you sort of quantify that potentially?
I think just on purchase prices and selling prices, I think it would be fair to say that most chemical manufacturers are trying to hold their prices as long as they can, even though they are benefiting quite considerably through reduction in raw material costs. The selling prices into the outside market are being held aggressively. How long that will continue is a good question. My view would be that we would see, in terms of straightforward revenue per unit, a drop in overall chemical prices as the year goes ahead. Clearly, selling prices for ourselves will come down at the same time as a pass-through model during the course of that pricing cycle, and therefore you would see some unwinding of working capital in that respect. As far as acquisition is concerned, the acquisition concerned was Pioma in India, and I think the value we-
The enterprise value was a little bit more, sort of EUR 20 million.
Yeah. I'm not sure I can really give you much detail as to why that transaction didn't go ahead because it is subject to agreements with the seller. Suffice to say, and maybe this is perhaps a reasonable thing for people to take away, that we as a company don't get deal fever. At the end of the day, if the transaction is not right, we don't proceed. To some extent, I wonder if we get a little bit of criticism that we are ultra thorough on M&A, and we do walk away from a number of transactions which others may have taken. In fact, we know of one quite recently which went to private equity for values which we would never have considered.
In the case of the Indian one, it was just simply the deal would not have been correct had we signed it.
I think there was a third question. Medium-sized deal in terms of pipeline.
Yeah.
Yeah. I think, to be fair, I would say the largest transaction, which is currently in effectively post or actual due diligence, would be over EUR 100 million.
Okay. Thank you very much.
Thank you. We currently have no further questions.
Right. Okay. In that case, I'd just like to thank everybody who's joined the call. Thank you very much indeed for your questions, and we'll finish the call there. Thank you very much.
Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.