Earnings Call: Q3 2014

Nov 5, 2014

Dear ladies and gentlemen, welcome to the Brenntag AG Q3 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 will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Mr. Holland who will lead you through this conference. Please go ahead, sir. Thank you very much. Good afternoon, ladies and gentlemen, and thanks a lot for joining our review of the third quarter 2014 earnings. For those of you who've joined us over the phone, I'm here with Bill Fidler, our board member for Latin Americas, and Georg Müller, our CFO. We also have most of the sell-side analysts with us, and we're hosting an analyst roundtable with STAE here in London. Let me just say some words on the macroeconomic environment. Overall, the global economy remains on course of moderate recovery. However, the picture is somewhat mixed where we see a positive trend in North America and a softening economic development in some countries in Europe. The overall economic environment in Latin America remains weak, with low growth rates in industrial and production. The Asia-Pacific economies continue to grow into Q3 2014. In Thailand, a slight upward trend can be seen after a weak environment in the first half of the year. Australia shows a slowing economic development with only marginal growth in industrial production. In this mixed environment, Brenntag Group was able to grow gross profit by 4.5% on a constant FX basis. The operating EBITDA in Q3 2014 amounts to EUR 189.1 million, this represents an increase of 3.1% on a constant FX basis. Across the first half of 2014, where FX development provided some headwind, this is not the case in Q3 due to the strong US dollar recently. You will find that our FX-adjusted growth rates are very close to the corresponding as reported rates. This positive development translates into an earnings per share of 56, EUR 0.56. This represents an increase of 7.7%. We were able to announce the signing of Chimab acquisition in Italy and Pioma in India. Both could provide increased strength in our market position in the respective segments, we will provide you with more information later in this presentation. Moving on to the operating highlights. On this page, we are showing you how this translates with a full set of numbers. Gross profit totaled EUR 520.3 million, 4.5% over the previous year, as previously mentioned, on an FX-adjusted basis. Operating EBITDA, EUR 189.1 million, again, 3.1%. The EBITDA to GP conversion ratio of 36.3% is slightly below the 36.8% conversion ratio of third quarter 2013. Nevertheless, we would like to emphasize the positive conversion ratio trends. The Q3 conversion ratio is the highest this year so far. Our free cash flow for Q3 2014 was EUR 137.7 million, compared to EUR 168 million in Q3 of last year. If we come on to the acquisitions we made on 31st of October 2014, we closed the acquisition of Chimab in Italy. In 2014, we expect Chimab to generate a sales magnitude of EUR 32 million and an EBITDA of EUR 3.6 million on a standalone basis. Chimab is a dedicated supplier of food ingredients and semi-finished products with several food sub-sectors in Italy. This acquisition helps us to become market leader in several food industry segments in Italy. We were pleased to announce the acquisition of Indian-based distribution platform, Pioma. The transaction is not yet closed as it is subject to conditions precedents. For 2014, Pioma is expected to reach sales of about EUR 17 million and an EBITDA of EUR 3.8 million on a standalone basis. Pioma is a leading distributor of ingredients for pharmaceutical and personal care and food industries across India. This follows the successful acquisition of Zytex in Mumbai last year. Now I hand over to Georg. Thank you, Keith. Let me walk you through our income statement. Starting on the gross profit line, the figure was actually already mentioned. The quarter delivered a gross profit totaling EUR 520.3 million. The EUR 520.3 million of gross profit represent an FX-adjusted growth rate of 4.5%. It is relevant that all our regions, Europe, North America, Latin America, Asia-Pacific, contributed to the growth of gross profit. On an operating EBITDA level, operating EBITDA for the third quarter amounted to EUR 189.1 million. That represents an FX-adjusted increase of 3.1%. Talking about the conversion ratio, the EBITDA to gross profit for the quarter was 36.3%. That is still slightly below the 36.8% conversion ratio we realized in the third quarter 2013. If you look into the earlier quarters this year, we are on a track. We continue our track to close the conversion ratio gap against the previous year. We mentioned the main rationale in the previous quarters. To a large extent, the lower conversion ratio is attributable to the initiatives that we have started to grow gross profit. We already faced costs ahead of the actual gross profit generation, which was a drain to conversion earlier this year. You will see, as I already mentioned, that this quarter's conversion ratio actually has a much narrower gap to previous year than the earlier quarter. For the take of good order, moving through the income statement below EBITDA, depreciation for the quarter amounted to EUR 25.2 million and amortization added up to EUR 9.4 million. The financial result is a net expense of EUR 21.8 million. That is below last year's expense of EUR 23.3 million. To a large extent, the reduction in financial expenses is attributable to our refinancing earlier this year in March. Overall, earnings before taxes amount to EUR 132.7 million, and that is 6.5% ahead of last year. We recorded a tax rate of 35% for the third quarter, in line with the 34%-35% indication we generally give. Earnings per share amount to EUR 0.56 or EUR 0.60 if we exclude amortization and any changes of the Hsong Jong liability. I'm moving to the cash flow statement. First to the operating cash flow. The operating cash flow amounts to EUR 107.1 million, and that follows EUR 84.9 million in the third quarter 2013. It's outside the door. There's a little bit of beeping noise. I hope it doesn't impact the telephone line so much. It's a car ahead of the door, which hopefully will be gone in a minute or so. I'm still on the operating cash flow slide. Keep in mind when you see the operating cash flow improvement this quarter, that last year's quarter was impacted by the payment in France relating to the French Competition Authority case. That amounted to EUR 48 million. Some of the improvement this year actually comes from the non-repetition of this one-time payout. That positive impact on the cash flow is partially offset by some cash outflow for working capital in the third quarter of this year, which we didn't have last year. Moving further down the cash flow statement. Investment cash flow is in line with the level of the third quarter of last year. There are no special items in the investment cash flow. Financing cash flow shows a cash out of about EUR 38 million, and that represents that we used a share of our cash generation to repay some of the local borrowings, which frequently occurs in the normal course of business. I would skip the balance sheet information and go to the leverage information on page 13. Net debt decreased during the quarter by EUR 43.6 million and now amounts to EUR 1.466 billion at the end of the third quarter. The decrease of net debt is mainly driven by ongoing cash generation of the business. The positive impact of the cash generation on net debt is partly offset by a strengthening of the U.S. dollar. The conversion of our U.S. dollar debt into euros at a stronger rate partially offsets the net debt reduction. The group's leverage remained constant at 2.1 times. Remaining constant means it is in line with last year's Q3. I would skip the leverage timeline and probably also the maturity profile and move to the working capital information on page 16. Trade working capital amounted to EUR 1.248 billion at the end of the quarter. In terms of working capital terms, that represents a slight decline in working capital terms to 8.7 times on a year-to-date basis. If you prefer to look into working capital terms, not on a year-to-date basis, but on a last 12 months basis, you do see very similar figures. On a last 12 months basis, working capital term amounts to 8.6 times. The free cash flow generation of the quarter amounted to EUR 137 million. It is somewhat below last year's cash flow generation. That is driven by some cash out for working capital increase in course of this quarter. I would hand it back to Steve. Thank you, Björn. Now let me walk you through the development of the segments for the third quarter. Coming to Europe first. Europe's operating gross profit increased by 3.2% on the FX-adjusted basis. This quarter is a continuation of an ongoing solid operating gross profit development in Europe, both demonstrating growth and resilience. The operating EBITDA increased by an FX-adjusted 4.4%. It should be noted the efficiency in Europe in Q3 improved with a conversion ratio of 34.3%, which compares to 33.9% in the third quarter of 2013. Coming to North America. Brenntag North America's operation GP growth accelerated in the third quarter of 2014 to 6% on an FX-adjusted basis. While we still face higher cost pressures from a number of factors like higher transport costs seen across most regions of the U.S., we've been increasingly successful in recovering these costs through effective sales price management and other efficiency measures. As a result, our EBITDA growth in North America almost fully matched the GP growth rate with a 5.2% on an FX-adjusted basis growth. Into Latin America. Results in Latin America were again influenced by the situation in Venezuela, although we now start to run against lower prior year comparables. At the same time, the macroeconomic situation in Brazil remains somewhat uncertain ahead of the recent elections. On the other hand, our business has benefited from improvements in some of these sub-regions, as well as the contribution from our recent acquisition, Gafor, based in Brazil, and we're delighted with its performance to date. It's doing well. As a result there, we are reporting a 7.5% increase in FX-adjusted gross profits. The operating EBITDA increased by 8% on a constant currency basis, the first positive growth since Q4 2012. Into Asia Pacific. Asia Pacific showed a 2.1% growth in operating profits on an FX-adjusted basis. While the situation in Thailand has improved and is stabilizing, we continue to see weak economic demand in levels in Australia. At the same time, we've seen impact from our investments in the upgrade of our capabilities in Asia Pacific, where we want to build our infrastructure to promote further growth in the region. This is reflecting in higher personal expenses. We are now approaching the end of this process and are well positioned to expand further in the region. As a result, operating EBITDA declined by 16.8% on a constant currency basis. Now when it comes to the outlook for the full year. The first nine months of 2014 have been characterized by a moderate growth in GP in a mixed macroeconomic environment. The trend improved in the third quarter. We confirmed the full year guidance range of EBITDA of EUR 700 million-EUR 720 million. In Europe, we expect to see continued growth in a somewhat mixed macroeconomic environment. In North America, we expect to see ongoing improvements in our oil and gas business, as well as growth in our caustic soda business and expansion in our focus industries, in particular specialty chemicals. For Latin America, for the full year, we expect a moderate decline of our operating EBITDA due to the standstill in Venezuela and ongoing uncertain economic environments in Brazil. At the same time, we will keep our expenses tightly controlled as a result of measures already implemented. The position is similar in Asia Pacific, where we envisage a decline in earnings on a full year basis, but is mainly driven by the expectation of no forward economic momentum in the economies of Thailand and Australia. On to working capital. This is to a large extent, a function of sales and chemical pricing, and we expect it to be higher at the end of 2014 when we compare it with the year-end 2013. As mentioned previously, we plan to see some CapEx increase this year by about EUR 10 million to appropriately support the development of our group. Prior to free cash flow, it's expected to roughly match the high level achieved in 2013. Now I come to address current trading. Now I see we've got Andy Chu in the audience, so I'm going to answer Andy's question before he gets a chance to ask it. I'll try and give you our gross profit for working day improvements, including organic growth. I'll try and do this slowly. The gross profit for working day grew by 4.5% in July, of which 3.3% was organic. Gross profit per day grew by 6% in August, of which 4.3% was organic. Grew by 3.9% in September, of which 2.5% is organic. Our first indications for October is that our gross profit per working day has grown by just over 7%, of which 5.5% is organic. In closing, we remain fully convinced on the business model and the structural growth opportunities for Brenntag. On top, we see a modestly improving momentum in the macroeconomic environment, which is clearly reflected in the gross profit developments. We are therefore confident that the group will grow all its relevant earnings parameters in 2014 on an FX adjusted basis. Brenntag remains very well positioned to capture new growth in both established and emerging markets. Now we're happy to take any of your questions from the floor. Ladies and gentlemen, we will now begin our question and answer session. Please note that the questions from the live audience will be answered first. You can enter the queue by pressing 01 on your telephone keypad. Andy, go ahead. Good afternoon. Andy Chu from Deutsche Bank. Three questions to start, please. Could you just confirm for just the guidance range, what exchange rates you were using when you first set the guidance, please, in terms of EUR/USD at the first half results in August? Secondly, on Asia Pacific. In the outlook statement, I think, Steve, you mentioned about an improvement in Asia Pacific in terms of year-on-year operating EBITDA growth in Q4. Could you just flesh that out a little bit more? Is it because the cost base actually begins to hit easier comps in Q4? On Asia Pacific, in terms of Thailand, I think Steve, you mentioned, if I heard you correctly, that Thailand had improved in Q3, yet the outlook statement sort of called out Thailand and Australia as being particularly difficult. The final question is on Europe. Could you maybe just run through by country, by region, the sort of moving dynamic as to why the conversion ratio improved year-on-year? Thank you. Let me take the question on the FX used for the guidance range first. When we initially issued the EUR 700 to EUR 720 million guidance range in August, we basically used US dollar-euro FX rates for the first half of the year, which were around EUR 1.37. Obviously, the US dollar has strengthened somewhat since then. We would now expect a full year euro dollar somewhere between 1.33 and 1.34. That obviously has a positive impact, some tailwind on the reported results. We didn't update the guidance range for that particular effect. Asia Pacific? Can I just ask why not? Is it because it wasn't material enough, or why? I would say it's not material enough. Okay. I'll just come to your other questions, Andy. In terms of Asia Pacific, I think we do highlight Thailand, Australia. Most of you will remember that Thailand relatively recently had a coup. Prior to that, it was in turmoil. Thailand is very much our biggest market in Asia Pacific. What we see in Thailand now is the stability and effectively a return to order. I think it's fair to say that the Thai economy is flat to say the best due to some lack of confidence in companies to reinvest in Thailand for various reasons and rather obvious reasons. We are still guiding somewhat cautiously on Thailand. Australia, I think had a tough time full stop. We see no real significant upside in Australia, mainly due to, I think, maybe the impacts of weaker positions in China and what have you in terms of their exports. That's really why we highlight them both. It's also fair to say that in terms of investment in people and infrastructure for the Asia Pacific region, that we're now pretty much now approaching the end of that process which we've been involved in for well over 12 months to prepare the region to go forward with some confidence in terms of acquisitions and what have you. I now believe we really have the organization in place to support that forward strategy which we look forward to developing in 2015. I think in terms of Europe, I would probably characterize the European region as not probably too dissimilar to previous quarters insofar as Northern Europe remains very solid. U.K., Nordics, Benelux, Germany, still positive for us. France, relatively weak, and Italy and Spain under some stress. Although I would say that Spain has actually shown some positive developments, and we see Spain in a more positive light. Indeed, Eastern Europe is still a solid performer as far as European organization is concerned. I'll just clarify on Asia Pacific, the sort of comment on improvement year-over-year in Q4. I don't think you've shown improvement in Asia Pacific year-over-year for over one year. Why the confidence plays for Q4 to show growth plays in that region? It's basically a mix of somewhat easier comparables but also a positive sequential trend the business is showing. If you want to say so, trend analysis. Ramsen, go. Yeah, hi. Jörg Ramseger of Commerzbank. Three questions, if I may. I want to start to pick up Andy's question on the guidance again. In order to achieve the upper end of your guidance range, you would require 5%-6% EBITDA growth in the fourth quarter. Four percentage points of this would already be contributed by FX translation effect. Would you at least agree that if you don't see any severe or larger distortions in the global economy, that you would probably have a very high likelihood to come out at the upper end of the range? That would be my first question. The second one, could you give us an update on M&A? I still live under the impression that you have been very upbeat to complete some transactions until the end of the year, and you have seen some performance, but you want to conclude some projects there. The last question on working capital. We have seen the increase in the third quarter. Is that something that you would still attribute to the normal seasonal and business development, or would you rate the expense so high that you would say you would also love to introduce some counter measures there? Thank you. Christian? The guidance range that we published in August that we now confirmed is EUR 700-EUR 720, and we would, if you forgive us, take the liberty not to put probabilities to individual parts of the guidance range. I can confirm the calculation that it probably would take 5%, a little bit more percent of gross profit increase to actually make the upper half, if not the upper end of the guidance range. Don't overlook that expense-wise, Q4 last year was a relatively positive quarter. If we can meet that positive expense development of last year's fourth quarter in this year's fourth quarter is a question. I would, if I may, Steve, also take the working capital question. The working capital outflow in Q3, which we had this year, did not have last year, is from our perspective in the noise. If you look on a year-to-date basis, for example, through the cash flow statement, then last year-to-date September, we had an outflow of EUR 140 million, where year-to-date this year we have EUR 120 million. On a year-to-date basis, the gap seems much narrower than if you look into the individual quarter only. It's in the noise. When it comes to acquisitions it looks stubbornly low again. I can actually assure you that we actually have transactions under due diligence at the moment, which would well exceed and significantly exceed our expected spend if we were to land all these immediately. Such is the process of acquisition. It will be probably a case of some of these all arriving at the same time. I can assure you that we are very much involved in acquisitions and we expect to have them land shortly. Just a quick follow-up on this. When you talk about the budget, you talk about the difference between what you already spent this year so far, so let's say EUR 100 million or so, and then an additional amount, which will bring you into the range EUR 200 million-EUR 250 million. Is that correct? I think we've been giving guidance throughout this year, EUR 200 million-EUR 250 million acquisitions for this year. What I'm saying to you is that we have more than that value under negotiation at the moment, and it's a case of whether these can get closed in the appropriate period. We actually see an acceleration from our perspective in terms of actually the types of targets that are becoming available to us, and we would expect to be consolidating more in the future. Good afternoon. It's Rory McKenzie from UBS. Firstly, on North America. You struggled with cost inflation there through H1. That looks a bit better this quarter. Is that just because you've annualized most cost inflation impacts? Or you mentioned in your remarks that maybe passing through a bit more on the sales price? My first question. Secondly, in LatAm, the trend there again, looks a bit better. Can you talk about if you now feel more comfortable on your kind of cost control side or whether it's just going to volatility quarter-to-quarter? Lastly, just wanted to ask about the fall in oil prices, how that deals with chemical prices and how that impacts your business. I understand how you're insulated through your absolute markup, but do you see any hesitancy in customer orders as they wait for maybe falling chemical prices as opposed to orders today? Thank you. Well, just coming to your cost inflation North America first. Yes, certainly the first half of the year was characterized by a pretty appalling start to our year in terms of the weather effects, as you all know, in Q1, which really hit us hard. Then particularly the increase in transportation costs, which is a Pan American issue for not just the chemical industry, but all industries. You'll be aware that we invested quite significantly in new trucks and drivers, and also we invested quite significantly in new capacity for our oil and gas segment in terms of capacity to acquire new business throughout in the later part of this year. I can say that that strategy is completely correct, and the right thing to do, and you can sort of see it start to come through in the numbers, in terms of we're on top of our expenses, but we've got the right configuration of transport fleet now compared to what was the situation earlier in this year. We also find the investment in our oil and gas capacity now starting to pay off with new orders coming in from new business. I think we're now, I'm sure we're now aware our North American business is starting to report their conversion ratios at very similar level to their normal operating conversion level, which, of course, wasn't the case in the first half of the year. I'll pass to Bill on Latin America, if I may. Yeah. Just in terms of pricing, what's very interesting at the moment in North America particularly, is a sway of the price increases from chemical manufacturers. We see this right across the market, a significant upward push from chemical manufacturers from price increases. If that's a result of lower oil prices, I'm not sure, but it does seem a little strange in some respects, but that's what we're seeing. There's a lot of volatility in pricing at the moment, which for us is actually no bad thing because we're a business which handles that very effectively, and I don't see any situation developing where we would see our margins being affected by the volatility in the oil price. I think that's absolutely correct. In terms of are we seeing customers holding off on orders, you have to remember that our business is really a day-to-day. We're satisfying demand on an immediate need, and we don't see inventory build. We don't see inventory reduction because of an expected change in pricing. Certainly, there's a lot of expectation in the marketplace that prices will come off of their highs. As Steve said, what we're seeing right now is really just the opposite. Quite a bit of inflationary price pressure across multiple segments of the chemical industry. In terms of Latin America, I think we do have our cost situation under control. We've made the necessary investments in personnel, particularly in Mexico, some additional personnel investments in Brazil, which as Steve characterized earlier, it's a troubled economy, but we do feel well-positioned to increase our market share in the largest economy that we're participating in right now. It will remain troubled. We're on the right track in terms of Latin America returning to a growth phase, and we were quite pleased with the Q3 developments. Right. One follow-up. What drove your falling working capital turns, then, if it's not delays in orders and that kind of thing and inventory building up? Reduction in working capital turns was the question, right? Yes. I would point out that the reduction in working capital turns is relatively marginal. It's 0.2 turns, maybe 0.3 turns on a level of close to nine. It's a 3% only reduction in turns. There's not the one overwhelming element which drives that marginal decline. It has to do with a vast proportional growth of specialty business, which is a slower turning business, and then some very individual movement in debtor and creditor days, which are relatively marginal. Very clear. Thank you. It's Gerhard Werner from Exane BNP Paribas. I've got a question. You said you're still positive in Germany, I guess this is despite falling industrial production over the last two years in Germany. I would like to know why you're positive and what is the reason for this? In the same context with Germany, with still falling PMIs and industrial production incrementally becoming more difficult for you, or is it more of a stable market? Well, it's fair to say that our German operations actually made some significant progress in the last two years. If I looked at our business two or three years ago, Germany was one of the lowest conversion ratio in terms of EBITDA to GP conversion ratio. They've done a heck of a lot in the last two years to streamline that. There's a lot of self-help gone into the profitability of our German business to the extent that we're a far more robust business in Germany than perhaps we were two or three years ago. It's also fair to say, when you get a reduction in economic activity, there is the natural swap out to distribution. When people start buying smaller quantities of chemicals, they tend to drop their purchase from manufacturers and start buying from distributors, and therefore, there's a cushioning effect in a more difficult market. That certainly will be the case seen in our German operation as well. Certainly, as far as our Brenntag in Germany is concerned, we are market leader, and we remain strong as a company there. While macroeconomically, clearly, I recognize that Germany has got some challenges, but within the context of our business in terms of how it's diversified and the resilience actually of the business model, we're happy with the current performance. Afternoon. It's Alex Magni from HSBC. Can I pick you up on the conversion rates in LatAm and in Asia? If I were to strip out sort of the political effects of Venezuela or Thailand, could you give us a flavor of what the conversion rates might look like? Where over time do we see those normalizing or getting back up to? To what extent is the recovery in conversion rates a product of just more volume on the cost base or having to take cost out? Right. I think it's fair to say. Do you want to comment or? I'd be more than happy to. In terms of what? You do Latin America. Okay. You do Latin America. In Latin America, it's difficult to say exactly what we would expect other than continued improvement. Latin America, it's a lot of geography with some built-in inefficiency that we and every other distribution company encounter. We do see continued opportunities for incremental improvement over the midterm. I wouldn't want to put up an absolute number as this is what we're shooting for. Continued improvement is certainly very possible. Just to follow from what Bill was saying, it's fair to say, if you look at the historical performance of Latin America, it was around about 33%-34% conversion ratio when things were relatively stable. It's not unthinkable that that should be a reasonable expectation for Latin America going forward in the short and midterm. I think much beyond that is really pushing it, really. As Bill says, it's a very large area, and you don't get sufficient route density that will allow you to get the efficiency gains out. I think as far as Asia Pacific is concerned, and this is a classic example in goods as you look at the nature of our Asia Pacific business, it is generally speaking, a specialty chemicals business and not industrial chemicals business, or not the mix that Brenntag is on a group-wide basis. Under normal circumstances, without all the issues we've had with Thailand and particularly an Australia slowdown, you would expect high 30s conversion ratios in Asia Pacific. What you should think about, though, in terms of going forward in Asia Pacific, it's very much the case that we would want to continue to develop the business in Asia Pacific, which is not just specialties, but a full line chemical distribution offering, which will mean bringing in industrial chemicals into that mix. If you look at the Asia Pacific position in years ahead, I wouldn't be taken hostage on the conversion ratio because the nature of that business has become more mixed in terms of we'll have more industrial chemicals in there, as well as specialty chemicals, and therefore you'll have a merger, if you like, in terms of the conversion ratios. We're looking at EBITDA growth there as opposed to trying to hit a special magic number on GP conversion. If I could possibly ask the question in a slightly different way. If a lot of your Asia Pac business is specialty, would it be fair to assume that there is still an issue in passing through some of the FX-related issues of Q1? Your inventory will have been purchased in EUR or USD. Local Asian currencies fell out of bed in Q1, and the effect of price increases being still being digested. Actually, it's not necessarily the way we think about the business. The business is so granular and doesn't really have a high price sensitivity on each individual order. That typically the effects, that's how I understand you mention them. Indirect FX effects on local price levels in Asia, it's nothing which we typically analyze or steer the business for. Sorry, last one from me. Just as a point of clarity, is the Venezuelan business running at essentially zero EBITDA or close to? Has that been wound down? It's actually on a positive EBITDA, but lower than a million. Right. Okay. Thank you. Thank you very much. Christian Kort from MainFirst. I have two questions. The first one relates to Latin America again. I think you mentioned in your Q3 report that going forward you expect a little weak performance in Brazil, if I remember correctly. I assume that the performance in Q3 must have been quite all right. Would be interesting to see your thoughts on that, where that's coming from, if that's market share gains, if it's more outsourcing towards distributors and especially to you or where that comes from. The second question relates to the, let's say, hire personnel that you have hired in Asia. Maybe you could shed some light on where that happened, not only on a country base but also, I think you mentioned you invested into the organization. Is that more back office functions? Is it overheads or is it also that you ramped up the sales force and people working within your distribution centers? Thank you very much. In terms of Brazil, the Brazilian economy overall has been weak, and the third quarter was certainly less than what we had planned for. We do see some improving trends in that we are going through a gradual transformation of our business where we are less dependent on uncompetitive domestic producers in Brazil and beginning to import more product from our global sourcing organization out of China, which is enabling us to compete in a broader cross-section of the industrial market. Even in a no-growth environment, we feel like we're gradually improving our position to compete. The second point is what Steve mentioned, the Gafor acquisition, which has really performed to plan because it also is in a different segment of the market. It's a specialty solvents distributor, and we've been able to continue with the growth path that the Gafor business was on when we acquired it. Going forward, we think we're making the necessary adjustments to our profile in Brazil to continue to incrementally grow our market share in essentially a no-growth environment. Just coming to Asia Pacific. The increase in cost base in terms of personal expenses have been very much directed at really the higher end of the organization. By this, I mean we've effectively developed a motion acquisition team. We have corporate development planning. We've introduced group-wide personnel management. We've introduced a team to expand industrial chemicals and plan the expansion of industrial chemicals. Essentially, this is really quite a relatively expensive and high-powered group of individuals that have been brought in to launch Brenntag's future growth in the region. All this cost effectively lands on top of the existing business. I think that is the principal driver, of course. We do see quite a headcount in the Asia Pacific region, but to be fair, the average cost per person in Asia Pacific generally is relatively low. The principal driver of cost increase is from those resources that have been brought in to grow that region in the future. I think I referred to in my notes that we're now at the endpoint as far as that is concerned. Now the region's in a position to move forward. Armin Medunjanin from Berenberg. I just wanted to maybe have an update on your investment in shale oil in Q2. Is that business already contributing gross profit? Do you see a risk from the lower oil price in terms of the desirability of shale oil in the U.S.? Yeah. Unfortunately, I think Marcus is going to do a big presentation on oil and gas after this call, I'm happy to take this question. As far as the investment we made earlier this year in terms of additional people and trucks and equipment to grow our business on oil and gas has come to fruition in terms of we are now winning new business. In fact, I think, not wishing to steal Marcus's thunder, but we've actually now achieved some contracts which are offshore as well as onshore in terms of our oil and gas business and capabilities. As far as the market in general is concerned, we are a very broad-based service provider to the North American shale gas market. You'll be aware there's different types of gas. There's wet gas, dry gas. There's those that are based on, which are natural gas drivers and those that are oil drivers in terms of the economics, we have a broad base there. Frankly, as 1 type of operation tends to become less interesting, the other one picks up. I think we have a relatively insulated position there, we don't see any issue about the volatility of oil prices on a global basis for us. Mattia Gargolet from Goldman Sachs. I have two questions. The first one was going back to, say, your M&A pipeline, you talked about Asia. Asia still seems to be subscale compared to the other regions where you operate. Could you perhaps tell us if, say, your M&A is more skewed towards one region or others? If the answer is no, would you consider also some larger acquisitions for Asia to potentially scale up that business? The second question, just on personnel costs. You talked about Asia, that's clear. Can you also give us a bit of, say, more color on Europe? How have personnel costs been going up, which has been the wage inflation more recently? Thank you. Right. In terms of Asia Pacific and M&A, somebody is going to answer the question by why have we increased our operating costs in Asia Pacific? We have done a full analysis of the Asia Pacific market and market opportunities on M&A. We have identified quite a number of targets, which we think will be very appropriate as part of our future strategy if we were able to acquire them. This is actually a range of what I would regard as medium-sized distributors as opposed to very large distributors. We are looking at those markets where we have a relatively high confidence in terms of corporate governance and compliance, the larger transactions. I think we have a good opportunity, certainly going forward in 2015, to make acquisitions of that type. Trying careful not to be a hostage to fortune here, but some acquisitions are driving some of you mad and certainly driving me mad in terms of actually getting the conversion of some of these targets on and actually closing them. Certainly, as far as Asia Pac is concerned, we are now at the point in our development where we, A, are capable of making acquisitions, and B, we know where they are. Your second question, I think, was on operating expenses in Europe. I think to be fair- I think the question was on personnel expense development in Europe. Actually, on a nine-month basis, the personnel expenses in Europe exceeded the previous year by 4.5%. Out of that, roughly 2.5% is inflation, and roughly 2% is headcount increase. A little share, and I do not have the exact number, but a little share of the headcount increase is acquisitive. Most is organic, actually. That was Chris Gallagher from JPMorgan. As you see the chemicals industry, you get North America becoming an exporter and importer of chemicals. How do you position that over the kind of coming years? Well, we're pretty well positioned. In fact, we already see the initial stages perhaps of that type of transformation. We are already in a position where we take product into our facilities in Rotterdam from North America and redistribute those throughout Europe from obviously the manufacturers in North America. I think it's probably a little early to shout down the demise of the European chemical industry, but I think we'll be able to access it. Nevertheless, if it becomes the case that there's more distribution required, then really we're in a pretty sweet spot relative to our service. We find major manufacturers seeking us out in terms of being able to be their channel-to-market partner and deliver products into the European segment for one-stop shop, if you like, as opposed to transmitting multiple channels. To a large extent, this plays very much into our favor in terms of future developments. It's Christian Lux from Baader Bank. Just two short questions. One is on debt. How much of your debt is currently in U.S. dollar? The gross debt. You mentioned that you are starting to get some material from China to Brazil. Does that make currently sense when the real is declining further and further? Does it really improve your situation there? Thank you. You answer that one. I'll take the easy answer on the gross debt. Roughly 40% of the gross debt is in US dollars. In terms of movement of product from China to Brazil, it's not necessarily a currency evaluation. What it is there are a lot of products that aren't manufactured in Brazil that we didn't participate in. We are now expanding our product portfolio with imported products from not just China, but elsewhere in Asia and to some extent, from North America. The currency valuation has little to do with that movement. It's really putting us into products that we weren't currently involved in. Some of the domestic manufacturers in Brazil are not competitively well-positioned, even with the currency situation that they're facing right now. Quick follow-up. It's Andy Chu from Deutsche Bank. One of the challenges you've had over the last couple of years, obviously, from an organic standpoint, is that the weak macro and your gross profit growth has been low single-digit. The 5.5%, albeit one data point, I think is the highest gross profit growth rate organically since March 2012. I think historically, you've said that once you're over the mid-single-digits tipping point in gross profit, that's the point where you start to see maybe a one to two drop through in operating leverage or certainly conversion ratio begins to kick in. Could you confirm that has been the case, please, in October? All of the set is true. It's a pretty strong gross profit development in October, much stronger than for a longer period in time, it's one month only, to be confirmed in the subsequent months. Given that this is November five only, I don't really have the full P&L information below gross profit. The question to what degree the gross profit dropped through EBITDA is unanswered for the time being. Just a follow on from you as well. Very dull operating question, within the organization, who carries responsibility for controlling working cap inventory in particular? Whose P&L does that hurt if that gets out of kilter? All the senior management team are actually incentivized to make sure working capital is used as effectively as possible, and that obviously includes inventory, debtors, even CapEx. There's a very strong emphasis as to working capital turn and working capital management at the very top of the company. In terms of whose P&L does it hurt? It hurts people's pay packets, actually. Right across the company is incentivized to make sure working capital turns and the efficient use of that cash is very much on people's minds. No one gets any prizes for growing the EBITDA at a cost of a significant reduction in working capital performance. Yes. Thank you. Okay, can I hand back now to the telephone operator, please? Thank you. Ladies and gentlemen, if you would like to ask a question, please dial zero one on your telephone keypad now. Once your name has been announced, you can ask a question. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. As a reminder, if you would like to ask a question, please press zero one on your telephone keypad now. I can arrange for my brothers to ring in. Be careful they don't disclose anything private. Don't want to be disclosed. There are no questions at the moment. All right. Okay. Well, looks like the analysts have done a good job. I can actually confirm those people on the telephone, the analysts, are better looking in real life than we thought. Which is encouraging. Okay. Well, in that case, if there are no questions online, thank you very much to everybody who joined the call. Thank you everybody in the room for their questions, and we'll close the call at that point. Ladies and gentlemen, thank you for your attendance. 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