Dear ladies and gentlemen, welcome to the Brenntag AG Q2 2014 Results Conference 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 participants have difficulties hearing the conference, please press the star key followed by zero on your telephone for operator assistance. I now hand you over to Mr. Steven Holland, who will lead you through this conference. Please go ahead, sir.
Thank you very much. Well, good afternoon, ladies and gentlemen. Thanks a lot for dialing in for our review of the second quarter 2014 earnings. I'm on the phone together with Georg Müller, our CFO, and as always, we'll be happy to answer your questions after the presentation. Let me begin with some words on how the macroeconomic situation looks to us. Overall, the global economy remains on course for moderate recovery. However, the picture is a mixed one. We observe ongoing recovery on a modest level in Europe. We perceive the North American economy as a lot more flattish than the general perception. Perhaps a sign of this as an example is GDP growth in Q2 of only 1.6% year-over-year. In Latin America, economic developments is now even more muted, especially in Brazil and Venezuela, which remains volatile because of the well-known problems.
In Asia-Pacific, we see clear growth of economy with the exception of Thailand, which is still under some pressure from the political unrest. In this mixed environment, Brenntag group was able to grow gross profit by 3.2% on a constant FX basis. The operating EBITDA in Q2 2014 amounts to EUR 176.7 million, this represents an increase of 8.3% on a constant FX basis. Adjusted for last year's EUR 16.8 million provision increase in France, operating EBITDA could not fully reach prior year's Q2 level. I will walk you through the reasons for this development later on in this presentation. Similar to the first quarter, the relatively strong euro led to a meaningful headwind in translating our results from non-euro countries. As one can see, the gross profit of our growth rates are negatively affected by this by around about three percentage points.
We were pleased to announce the signing and closing of the PhilChem acquisition in the U.S. This acquisition strengthens our capabilities in supply chain management, utilizing long-term relationships with key suppliers and excellent logistics expertise. Finally, after our general shareholders meeting, there was approval of the one-to-three stock split in June, and trading on the new basis started on the 1st of August. Coming on to page five, in terms of operating highlights. On this page, we are showing you how this translates into a full set of numbers. Gross profit total is EUR 502.2 million, 3.2% above previous year's Q2 on an FX adjusted basis. The operating EBITDA total EUR 176.7 million, growing by 8.3%. Adjusted for the aforementioned provision, increase was slightly below the Q2 2013 level by negative 1.8%.
The EBITDA to gross profit conversion ratio of 35.2% is somewhat below the 37% conversion rate of the second quarter 2013. We are, however, convinced that the low conversion ratio is not of a structural but of a temporary nature. To a large extent, this affected attributes to initiatives that we've started to grow future gross profit, whereas we must face the cost in service already today. This is primarily the case for North America and Asia-Pacific, where we are upgrading our internal capabilities in certain areas to increase market penetration. Operating cash flow for Q2 2014 was EUR 110.8 million, which is a good 10% up over last year's Q2. On to page six, looking back to our acquisition of PhilChem. We are very pleased that we have signed an agreement to acquire the U.S. distributor, PhilChem, based in Houston in the second quarter of 2014.
The transaction was closed in June 2014, the second quarter only had a minor contribution from PhilChem itself. In 2013, PhilChem realized sales of around about $162 million, a gross profit of $7.7 million, and EBITDA more than $6.1 million. PhilChem is a specialist in supply chain management and utilizes extremely well-developed logistics expertise. Passing over to Georg.
Thank you very much, Steve. I'll briefly talk about our stock split on page seven. We have implemented a one-to-three stock split on August 1st, consequently, our share price was arithmetically divided by three. We have done this in order to make the share more attractive to an even broader range of investors and in order to increase trading liquidity of the share. After our general shareholders meeting approved the split in June, the number of shares has now increased from 51.5 million to 154.5 million shares. The following is a more technical remark, nevertheless, an important one. Obviously, the stock split affects key figures per share, like earnings per share, dividend per share, or the analyst's target prices per share. Moving beyond the stock split to our income statement.
As Steve already mentioned, gross profit totaled EUR 502.2 million, This translates into a 3.2% FX-adjusted increase against previous year. All regions except for Latin America contributed to this growth. Operating EBITDA for the second quarter amounted to EUR 176.7 million, That represents an FX-adjusted increase of 8.3%. Adjusted for the provision increase in the second quarter of last year, in the second quarter of 2013, this corresponds to a slight reduction of EBITDA by minus 1.8%. The EBITDA to gross profit conversion ratio came in at 35.2%, somewhat below the 37% conversion ratio that we realized in the second quarter of 2013. With respect to the further elements of the income statement, the depreciation for the quarter amounted to EUR 24.4 million Amortization to EUR 8.7 million.
The financial result is at a net expense of EUR 20.2 million, which is improved against last year's level of EUR 23.2 million. Overall, earnings before taxes amounted to EUR 123.6 million, which is 13% ahead of last year. We record a tax rate of 34.6% in the second quarter of 2014, this is in line with the level of 34%-35% we typically indicate. The earnings per share, considering the share split, is at EUR 0.52 or EUR 0.56, excluding the amortization and the movements on June liability. I would dive into the cash flow, go directly to the investment and financing cash flow on page 12. The investment cash flow contains the payments for PhilChem and Gafor.
The finance cash flow, as usual for the second quarter, does contain our dividend payment to shareholders, which is approximately EUR 10 million above prior year's dividend payment. I would move beyond the balance sheet directly to the leverage on page 14. Net debt increased during the quarter by EUR 187 million to EUR 1.509 billion at the end of the quarter. The increase of net debt is mainly driven by the cash out for the acquisitions and the dividend payment. As a consequence, the group's leverage increased slightly to 2.1 times, which is a typical seasonal development we see each June after the dividend payment. However, the leverage is below the level of 2.3 times that we recorded a year ago. I will skip the leverage history and the maturity profile and move on to the working capital information on page 17.
Trade working capital amounted to EUR 1.176 billion at the end of the quarter. Our year-to-date working capital turnover remained about unchanged at 8.9 times, on a last 12 months basis, the turnover came slightly down to 8.7 times. This quarter delivered, once again, a strong free cash flow of EUR 110 million. Despite some headwind from translational FX effects, this is up against EUR 100 million for the second quarter of 2013. The increase in free cash flow was mainly driven by a higher EBITDA and a lower outflow for working capital compared to prior years' period. This hence the presentation. Back to Steve for a discussion of the segments.
Thank you, Georg. Let me walk you through the developments of the segments for the second quarter 2014. First, the Europe. Europe's operating gross profit increased by 4% on FX adjusted basis. We're very satisfied with the ongoing solid operating gross profit developments in Europe, as it demonstrates the business is very much on the right way for future growth. The operating EBITDA increased by 26.5%. Consider provision increase in Q2 2013, this corresponds to an increase of 1.3% on an adjusted basis. It should be noticed that the efficiency in Europe has improved sequentially from the first quarter, our GP conversion ratio of 34.1% in Q1 to 34.7% in Q2. In North America, Brenntag North America's development in the second quarter was positive in terms of continued growth in operating GP by 3.4% on an FX adjusted basis.
We do, however, incur higher costs in this quarter due to a mix of various effects. For example, we have hired additional personnel in relation to the envisaged expansion of our oil and gas business. We expect to generate additional gross profit out of that in the course of this year. Furthermore, we have faced some cost inflation for third-party transport rates, and we have implemented countermeasures by increasing our internal transport capacity. As a result of these developments, operating EBITDA in Brenntag North America was held back to a -1.6% development on an FX adjusted basis. In terms of Latin America, results in Latin America are again heavily influenced by the situation in Venezuela. While we agree with other indicators that the economy in Brazil is somewhat weakening. We are reporting a -2.7% decline on FX adjusted gross profit.
Latin America without Venezuela has grown operating gross profit by almost 3%. The operating EBITDA declined by 27.6% on a constant currency basis, which was mainly driven by Venezuela and the slow economy of Brazil. Whilst most issues within the region faced in 2013 have been resolved, the unstable situation in Venezuela and the economic developments in Brazil are challenging. In terms of Asia Pacific, it shows a +4.9% growth in operating gross profit on an FX adjusted basis. While the situation in Thailand is slowly stabilizing after the military takeover, we have seen some improvement in our performance of our Chinese business, Zhong Yung. As in the past months, we continue to invest in the upgrade of our capabilities in the region in order to increase market penetration in the Asia Pacific, which is reflecting in higher personal expenses.
As a result, our operating EBITDA declined by 8.1% on a constant currency basis. Coming to the outlook. The first half in 2014 has been characterized by a moderate growth in GP in a mixed macroeconomic environment. Operating EBITDA remained about flat on an adjusted basis. For the full year 2014, we expect to see ongoing macroeconomic growth at a moderate pace, but with clear differentiation within major economies. We confirm our view that we expect gross profit to grow meaningfully and consequentially, EBITDA to grow. Our EBITDA guidance for 2014 is at operating EBITDA between EUR 700 million-EUR 720 million for the group. This range reflects our positive view for the second half of 2014. The midpoint of the guidance implies an organic growth of more than 5% in the second half of this first half 2014.
The guidance also takes into account that we still face significant headwind from translational effects, given that euro remains very strong compared to many currencies around the world, foremost the US dollar. Based on the results of the first half and the most recent trends, we expect the two most important regions, Europe and North America, will show growth on a full year basis. The developments of the two smaller regions, Latin America and Asia Pacific, is more difficult to predict, as they will be impacted by the various factors, by the difficult political positions in Venezuela, Thailand, and the economic development in Brazil.
The range of operating EBITDA in 2014 is based on the following assumptions: U.S. dollar-euro exchange rates stay in line with levels observed in the first half of the year, no deterioration of the world economic climate compared to the situation as we see it today, and no expected one-time effects. As 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 comparing it with the year-end 2013. As mentioned previously, we plan to see some CapEx increase this year by around about EUR 10 million to appropriately support the business and the development of the group. Let me address the current trading environment. Gross profit per working day grew by 5.5% in April, 2.5% in May, 5.2% in June, and 4.5% in July.
In closing, we remain fully convinced of the business model and the structural growth opportunities. On top, we've seen improving momentum in the macroeconomic environment, which is clearly reflected in the gross profit development. We are therefore confident that the group will grow all relevant earning 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 your questions.
Ladies and gentlemen, if you have a question, please press zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask your 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 are using speaker equipment today, please lift the handset before making your selections. One moment please, for the first question. The first question comes from Mr. Rob Plumb from J.P. Morgan. Please go ahead.
Good afternoon, Steve. Afternoon, Georg. Steve, in your letter in the results statement, you talk about growth initiatives impacting EBITDA, you've mentioned a few of these during the call. Can you just summarize them again, please? Did these growth initiatives all kick off in Q2? Will there be ongoing cost in future quarters, please?
Sure. Yeah, this is particularly relevant to North America. There's two elements which we've been particularly looking at in North America. We've invested in both people and equipment within the oil and gas arms of our business which has been principally investments were made towards the back end of the first quarter, and delivered into the second quarter. We don't expect to see the significant income to be derived from those investments until the second half of this year. This is an important opportunity for us because we see that we as a company could increase our market penetration in the area of oil and gas even further than we are today. In addition to that, some people may recall that we increased our sales of caustic soda during 2013, and this is primarily supported by third party logistics in North America.
What we've seen during the course of the last two quarters has been an increase in the scarcity of third party logistics providers, an increase in some inflationary costs as far as those services are concerned. Therefore, we've taken the decision to support the new business that we achieved in 2013 and 2014 by increasing the numbers of own drivers that we have in our own fleet and increasing some of the units that we use to service that business. This is all, I believe, perfectly correct business decisions which are there to support future growth, but they've been made towards the end of the first quarter and in the second quarter.
Thanks, Steven. There's also mention in the statement of higher personnel costs in Europe. Is that just inflation, or is that also investment in that region?
What can I say? Yeah, well, it's partly inflation. It's a few additional heads from the generally positive business development in Europe, but I would not necessarily call the staffing up in Europe, which is very moderate, an initiative.
Okay. Thanks, Georg. Thanks, Steve.
The next question comes from Mr. Andy Chu from Deutsche Bank. Please go ahead.
Good afternoon. A few questions from me. Could I just ask the organic GP per working day numbers, please, as a first question?
Yeah. It's Georg. Andy, happy to answer. Where we gave a nominal growth rate for GP per working day, it was below 5.5%. The majority of it is organic. The organic part would be 4.3%. The respective pair of figures for May is 2.5% all in and 1.3% organically. For June, 5.2%, and there was 3.9% organically. For July, 4.5%, and there, organic, 3.3%.
Okay. Thank you. If I heard correctly, just in terms of my second question was on guidance. If I heard correctly, I think you mentioned, Steve, the midpoint of your guidance, I think you said implied 5% organic growth. I was somewhat struggling to reconcile that with, A, the fact that probably in the first half of the year, ex FX, ex M&A, you were likely probably close to around about 3% growth. Obviously your EBITDA was pretty much flat. Just in terms of that 5% growth, what exactly were you alluding to in terms of, is it operating gross profit? Is it EBITDA? Could you maybe build the bridge from, I guess, your midpoint implies EUR 374 million of EBITDA for the second half versus, I think last half, second half of EUR 364 million. Thank you.
Andy, it's Georg. What we probably have to point out again here is that the 5% or higher organic growth that the midpoint of the guidance implies is actually a second half over first half growth figure. We thought it relevant to point out a second half over first half growth figure to indicate that sequentially the business is clearly improving and building higher earnings. It's not necessarily meaning that the midpoint of the guidance is an equally high growth rate second half over second half of last year, keeping in mind that the business already ramped up and was relatively strong second half of last year.
If you then exclude the impact from the weather disruption, which I believe was EUR 9 million, then clearly the growth, when you make that, it's close to flat. Is that fair?
Not second half over first half. Second half over first half would be midpoint of the guidance, 5%, 6%, 7% growth.
Okay. That's unadjusted for weather. Is that correct?
That's unadjusted for weather. The weather effect on a half year basis out of that is about two and a half to 3%.
Okay. In terms of trying to understand, I guess the cost came in obviously faster than the gross profit growth. As you started, for example, Steve, you mentioned it in the U.S., costing up ahead of growth in oil and shale gas. Should we expect for Q3 that we get a similar trend in terms of top line or gross profit growth on an FX adjusted basis of the group, but actually we see that the EBITDA is actually going in reverse. Is that something we're likely to see for Q3, please?
We wouldn't expect to see that in the Q3. It's a little frustrating in terms of, particularly North America, where we see what we consider to be a good performance in terms of new business development and what have you. They have to take the cost to invest in the business to grow. We would expect to see conversion rates returning to more normal levels during the course of this year.
Okay. Then just going back to Europe, just in terms of the cost base, I think on an underlying basis, your cost base was up 6%. Your employees that I think, Georg, you alluded to, I think were up about 1.5%. I'm just struggling a little bit to bridge the gap in terms of the total cost base going up by 6%. Obviously, wages and salaries is a big proportion of that. Is there anything else within the European cost base in terms of over and above wage inflation that can be called out?
Just to make sure, you are on Europe with respect your
Just Europe, yes.
Yeah.
Your cost base on an underlying basis per the report, I think is up 6%. As I think, Georg, you mentioned that you've added a few people, I think FTEs were up 1.5%. It feels as though the cost base up 6%, I know wages and salaries obviously a big part of your cost base, but it would imply that there is a lot more cost inflation within the group over and above what I would say, normal wage inflation or extra bonuses being paid out.
First of all, the figures you mentioned, Andy, about right. It goes across the cost structure. Salary increases. No, sorry. Personnel expense increases in Europe are about 5%. I'll explain in a minute. Transportation is about 5%. Repair and maintenance, somewhat stronger at 8% or 9%, rent at about 8%. If you think about going back to the personnel expenses in Europe, which increase about five and 1.5 or two, I would have to cross-check the exact figure is headcount, the other three or 3.5, it's wage cost inflation, which does not seem unreasonable to us. Also, keeping in mind that Europe this year is much more on track in growing its earnings than the years before. There is some more variable compensation to be paid out in Europe for this year, most likely.
Why were the other sort of cost lines are sort of maintenance and rent, why are they so much higher than inflation overall? It just seems a big jump in the cost base for warehousing spaces is there.
Well, first of all, I wouldn't necessarily say it's a big jump if you're talking about 8% or 9%. Also, we are talking volume increases.
Yeah, I think it's fair to say that we are also consolidating some of our assets as well in terms of looking to bring efficiencies and investing in that area. I would see that, say, 2014, we'd expect to see conversion ratios in Europe to be improving, and well, specifically to the gross profit generation, and we're expecting a solid performance for Europe for the rest of the year. It clearly would not allow them to get their costs ahead of the game. I think you'll foresee certainly on a full-year basis that the increases that you've detected will be certainly well within expected parameters.
Right. Thanks very much.
The next question comes from Mr. Rory Mackenzie from UBS. Please go ahead, sir.
Hi. Afternoon, guys. It's Rory from UBS here. First question, I guess following up from Andy's on the cost base. Just looking at a group level, the OpEx of about EUR 337 million in Q2 was quite a big step-up on Q1. I know there's lots of kind of ups and unders in the margin and lots of things you flagged. Maybe can you just say if there's anything in going into Q3 that could make that a step down or step up or whether that EUR 337 is kind of the current run rate, firstly. Secondly, just to build on the cost inflation point in North America around third party logistics. Could you say how much of your logistics there are outsourced in North America and then compare that to your group overall? Thank you.
Rory, it's Georg. Taking the cost-based question first. I'm not sure I'm quick enough following your line of thinking about cost in Q2 and Q1. You always have the complexity around working days and what have you if you compare quarter to previous quarter. I would generally say, and give as a general answer, that the cost level we reached in Q2 is about what I would expect going forward. I would not expect a further cost ramp-up in course of the year.
Okay. Yeah.
Yeah. As far as the utilization of third-party haulage is concerned, I would say it's around about between 20% and 25% in North America particularly. That has really been a slightly larger proportion than historically due to the increase in volume that we've won new business say in 2013, early part of 2014. As you may well recall, we have grown our cost in service business quite significantly over the last six to nine months. This is an area which has probably seen the highest cost inflation. I'm not sure if you're covering transport companies in North America, but certainly, we're very much aware that with the chemical industry contracts that we have, there's quite a severe shortage of appropriately trained contractors in North America.
Yeah.
That is why we've taken the steps to invest in our own transport fleet. We already have nearly 800 drivers, which are Brenntag drivers in North America. In actual fact, although it looks as though we're increasing our cost base relative to drivers investing more in our logistics, we actually believe in not is it the right thing to do to support the existing business, but also it will actually create a competitive advantage for us as we go forward as a company.
Just to follow on that, given that there's a current scarcity of, I guess, appropriately qualified drivers in the U.S., how expensive would it be for you to add these further heads, given that that's what everyone is lacking at the moment?
We've actually done it. In terms of, I think we took on about 50 drivers during the course of the second quarter. I can't remember the exact number. It's something like 26 or 27 additional operating units. There's additions to the fleet. We've actually done this already. I don't really see that we'll do any more or need to do any more at this stage, we've effectively corrected the slight imbalance we had in our operating cost base and external haulage.
Okay. That's clear. Thank you. Just one more, if I can, on LATAM. Can you just run through what you were saying about the LATAM growth rate excluding Venezuela? How big Venezuela still is in your business, please? I missed that in the main call.
Yes. The 3%, wasn't it?
I need to look up the exact figures, I'm probably not quick enough. Just give me a sec, Rory. I'd like to make sure I am on the right figures. What we said on Latin America was that if you exclude and I'm on gross profit level.
Yep
Overall, the FX-adjusted gross profit fell in the quarter 2.7%. If you exclude Venezuela, the gross profit shows a growth of 3%.
Can you say how big Venezuela is today?
I can, if you give me another second to draw the figure up. I only have the half year's figures at hand.
Okay.
On a half year basis, and now I'm on EBITDA, Venezuela still is about EUR 2 million of EBITDA, where it was close to EUR 8 million a year ago.
Okay, that's.
On the half year.
Great. Thank you.
The next question comes from Mr. Simon Mesnart from Berenberg. Please go ahead.
Good afternoon. I just was wondering if you could quantify the two initiatives that you took in North America in terms of cost. What was their impact in terms of, I guess, EBITDA? Also, just to clarify, should we expect third quarter margins, conversion margins, to start improving already or should we expect a further deceleration compared to last year? On Asia Pacific, I think last time you said you were expecting EBITDA growth on a constant currency basis to be close to flat by the full year. I just was wondering if that's still the case. Finally, on M&A, I think you spent close to EUR 60 million in H1 against your target of between EUR 200 million and EUR 250 million, and I was just wondering how is the pipeline looking and whether you think you will hit your target by the end of this year.
Right. Just coming to the cost, it is extremely difficult to nail this down, actually, in terms of the. There's quite a lot of moving items within that in terms of bringing drivers on and new equipment and changing out from higher expense to third-party employees. I'm not sure I can actually give you a detailed breakdown.
It's difficult to give a detailed breakdown for the quarter. The North American initiative, it's probably a low to mid-single-digit number. We would like to leave it at that.
In terms of acquisitions, clearly, we are still very much engaged in developing our acquisition pipeline. We have a number of acquisitions which are in due diligence as we speak, we're still guiding the market EUR 200 million to EUR 250 million in the year.
The one question which we haven't answered is outlook Latin America full year.
Asia Pacific, wasn't it?
Sorry, was it Asia Pacific or?
Yes, Asia Pacific.
Yeah. We would still say on a full year basis, flat-ish to slightly growing.
EBITDA?
Right.
Sorry, in terms of North America, can you say whether in terms of how should we think of the conversion margin?
Oh, right. Yeah.
Q3 year-on-year?
Yeah, we are expecting an improvement in the conversion ratio in North America.
Thank you.
The next question comes from Mr. Christian Koch from MainFirst. Please go ahead, sir.
Thank you very much. Hello, gentlemen. I hope you have a nice day. Just two small questions from my side. The first one is, can you quantify the effects you hope to see from organic growth, or let's say organic gross profit growth, going forward in North America from the investments you just did? Maybe just to get a feeling here. The second question is, there is something in the other line in the operating cash flow. Can you maybe quickly explain where the swing comes from? Thank you very much.
Let me take the cash flow question first. The swing in the other, not solely, but mainly comes from the effect that we had the provision buildup for the French antitrust last year's Q2. Because that's a non-cash item that was burdening EBITDA, in the other line, it is corrected. It led to a 16.8% improvement of the other line in the cash flow a year ago, and that's basically what's not there this year. That's the main factor.
Yeah. As far as the growth initiative is concerned, clearly, we've indicated the second half of the first half EBITDA performance improvement, and you can expect that to be principally driven by North America and by Europe. That's clearly a mix of both existing business and the initiatives. Therefore, we're expecting initiatives to contribute solidly to the second half. It's difficult to actually nail it down to an individual number for you in terms of the subtle mix.
Thank you very much. Still very helpful.
As a reminder, if you would like to ask a question, please press 01 on your telephone keypad now. The next question comes from Mr. Jaideep Pandya from Goldman Sachs. Please go ahead.
Hey, this is Jaideep Pandya from Goldman Sachs. Good afternoon. I just have a quick question. Could you talk about the specialty chemical distribution market and how that developed in the first half of the year compared to your other businesses?
Sorry, we couldn't get the first part of your question. Could you just repeat?
Yes. My question is on the specialty chemicals side of your business and how that has developed in the first half compared to your other businesses.
I know why you are asking. It's probably because of the universe you are covering. Please understand, we don't have a separate disclosure by business line.
Okay. Excellent.
Thank you. The next question comes from Mr. Andy Chu from Deutsche Bank. Please go ahead, sir.
Just a follow-up question. Just in terms of the balance sheet, I think, just looking at the numbers, I think you'll probably end up somewhere in the order, if your gross debt doesn't change, at EUR 1.7 billion at the year-end, you'll probably end up with somewhere potentially over half a billion EUR of cash. I think, obviously, that you don't need a lot of cash to run the business going forward. After, I guess, a couple of years of underspend on M&A, could I have your thoughts, please, just in terms of your willingness to give cash back to shareholders? Even on the ordinary dividend, I think you're at around about 40% payout versus a target of 35%-45%.
Just, is there any sort of willingness to hand cash back to shareholders if the M&A targets can't be found, let's say, by the end of the year? Maybe just a follow-up in terms of the M&A. As you continue to generate more cash flow, I guess when you look at the structure of the industry, there aren't actually that many large targets. I know there are a lot of third-party chemical distributors, but I think if you look at something like Multisol, it came up on one of my lists as a number 30 on the largest by revenues. To be fair, that was 2011 data.
It doesn't feel to me, and maybe I'm wrong, that there are actually that many large acquisitions that can actually move the dial for you in terms of hitting EUR 200 million-EUR 250 million of M&A spend that over time will clearly just be a larger number.
Andy, I'll just come on the M&A spend, and I'll let Georg answer a very different answer, but it's a difficult question what to do with money. On the M&A spend, clearly, it is still a highly fragmented market, and we are heavily involved in due diligence in three or four targets as we speak. We are, generally speaking, looking at the medium-sized companies and small consolidation opportunities. That's clear, and that's where we get the EUR 200 million-EUR 250 million. It's fair to say that if you look at Asia Pacific, the derived size of the chemical distribution market in Asia Pacific is circa $30 billion in terms of global market size, and you can see the size of Brenntag in that region.
Therefore, it's fair to say there are actually quite a significant number of reasonably large regional players in Asia Pacific, and we remain in a very good position to develop our strategy by further acquisition in Asia Pac. I wouldn't rule out, and this is not me saying that the deal is about to happen, I don't want to give you the wrong impression. In terms of the future development of our company, and particularly regionally, we would expect to see significant growth in Asia Pacific over the years ahead through acquisition. With respect to the balance sheet question, it's from my perspective, a question which internally we don't necessarily need to answer short term, and we do fully expect to spend the money on the acquisitions.
I don't really see the situation upcoming that end of year or throughout next year, we continue piling up cash and have a decision to take what to do with it. On the other hand, granted, we always said that our acquisition program basically is funded out of generated cash flow, that we do not see a need to drive the absolute net debt levels of the firm down further, and that statement stands. Should we ultimately come to the conclusion that we won't spend the money on acquisitions, what you mentioned, Andy, giving money back to shareholders is something we have to think about, it's from my perspective, a theoretical scenario as we do expect to spend the money on acquisitions.
Can I just add to that? Obviously you spent I think around about 60-odd million, but obviously the acquisitions announced and you have some deferred consideration. Even if you were, I guess, to spend another EUR 150 million or even EUR 200 million, that would still leave you with a cash pile at the year-end of EUR 350 million-EUR 400 million. That I would have thought seems still to be quite an inefficient balance sheet. Would that be fair or unfair?
I would say you have a point from our perspective, there's no urgency in taking that decision. We would wait how the year goes. We will see how the acquisition program develops, we'll take a decision after the year, I would say.
Thanks very much.
Question comes from Christian Faitz from Baader Bank. Please go ahead.
Yes. Hello. I have a question, despite all the positive cash flow development. When I look at the balance sheet and what you reported, June comparable to June 2013, there was an increase in inventories of approximately EUR 50 million and trade accounts and receivables of approximately EUR 250 million, despite the fact that the underlying sales was more or less flat and payables only increased by EUR 160 million. There is the increase of net working capital on a year-on-year basis, and you have some kind of a record net working capital currently. Do you see some kind of structural underlying trends that you have to carry a higher net working capital going forward because of some changes of payment terms or delivery times or whatever? This is the first question. Thank you.
No. We feel that the working capital management in the group is well under control. As briefly touched upon in the presentation, we do see very moderately declining working capital terms. If I look onto a last 12 months basis, then the working capital term this year, June, was about 8.7 times. Last year's June was about 8.9 times. Generally speaking, we feel the working capital management is well under control. We don't see any structural changes. I would nevertheless point out two elements. The two elements are working capital turns in emerging markets is somewhat lower than in mature markets, and working capital turn in specialties is somewhat lower than working capital turn in industrials. To the degree we have a mix shift towards specialties and towards emerging markets, you would see some drain, but a very moderate drain on working capital turns.
Okay, thank you. Concerning Asia Pacific, you talked about all the investments because of future growth. Will sales also in the second half of this year work against this cost or do we have to wait until the next year or even further?
Well, I think it's fair to say that we would see the current investment in Asia Pacific as being probably sufficient for this year in terms of providing enough capability to grow. I would not expect to see our cost base in Asia Pacific accelerating away from where we are today. Obviously, year-over-year, there will be a change, but nevertheless, I don't see further expansion from where we are today to increase our market penetration. We have sufficient capability now to grow from where we are. We also have sufficient capability now to make acquisitions in the region in a competent and efficient way. I'm sure hopefully that answers your question.
Okay, thank you. Maybe you have answered the question concerning Europe and the cost development in Europe. The new management, as far as I understand, is working on the integration of the European network and reducing net working capital there and reducing costs going forward. After two or three years, I think most of the easy things are done. Can we expect really to a lower cost base going forward on a structural basis because of that kind of integration, or do you have really to work on other parts of the structure of the European network? Thank you.
The European network is by no means an end of the road in terms of increased levels of efficiency. We still have a significant number of sites which we believe could be more efficiently integrated from a supply chain perspective. That is an unrelenting focus for our business. Therefore, I think we talk about quite often a convergence of the conversion ratio in Europe towards that of North America.
Yeah.
Certainly our resolve in that respect has not diminished. We are seeking, again, further efficiency gains for our European business. I think there is a positive development in Europe insofar as the European business now is very much managed as a European business, not as individual countries. Certainly, our position as a sales and marketing organization has strengthened considerably in the last 12 months, which I think will be demonstrated to some extent in the years ahead as Brenntag is a preferred platform for many manufacturers. By no means are we finished as far as that efficiency gain is concerned.
Okay, the last one. You talk about building up at least a part of your own fleet in North America. Do you have some intention to do that also in other regions?
I think in North America, there's a particular need because I would say actually a need, I think we've addressed the need, but I think there's particular pressure due to the oil and gas businesses effectively soaked up quite a lot of capacity when the external haulage provider community, and also sucked it up in a pretty much inflationary way. I think quite a lot of that external haul is managed to get better returns by working in the oil and gas sector as opposed to general chemicals or general chemical distribution. We think we've done what we need to do to address that issue. I think, as I said earlier on, I actually really believe that the size of our current logistics capability as Brenntag itself will provide a competitive advantage to our company in the future.
I don't see the same pressure in other parts of the world, and particularly in Europe. I think we're pretty much balanced where we are, and there isn't the same drive in terms of inflationary increases in third-party providers.
Okay. Very good. Thank you very much.
We have a further question from Mr. Rory Mackenzie from UBS. Please go ahead.
Hi, guys. Yes, one more from me, please, if that's all right. Just looking back to LATAM again, can you talk a bit about Brazil and how you've seen what sounds like quite a worsening of the macro conditions, and whether that's manifesting itself in any form of pricing pressure? Thank you.
Well, I think as far as Brazil is concerned, I think we've all been looking at Brazil for the last couple of quarters now and saying, "Well, what is the underlying strength of the economy?" I think with the combination of exchange rates and business confidence, Brazil is proving a bit of a challenge. I think we do see that the Brazilian government has taken some steps to ease import controls in certain areas and improve the access to certain markets for chemicals in particular. We are keeping a close eye on Brazil. We see it as being very flat at the moment or slightly negative development in a number of business areas, and I think that's also articulated by other industry groups and other segments saying that Brazil has shown a weaker performance. At this stage, it's by no means a catastrophic situation. It's nothing like Venezuela.
I don't want to give the impression that we have a big issue here, but we are keeping an eye because we really regard Brazil as being a long-term growth opportunity.
Any comments on pricing pressure or gross profit per ton trends, that kind of thing?
I think there's pricing pressure on the domestic producer of chemicals in Brazil, for sure.
Okay. Thank you.
The next question comes from Simon Verraute from Berenberg. Please go ahead.
Yes. If I can go back to Europe. You've obviously flagged a 60 basis points improvement in the conversion margin quarter-on-quarter, but obviously last year, the margin was quite volatile. What would you expect for the second half? Should we still expect quarter-on-quarter improvements, do you think? Is it realistic?
I think it's realistic. I think we have an expectation that the European business should end this year at a higher conversion ratio compared to 2013. I think you get a little bit of volatility within quarter to quarter, to be fair, but I would say we will be disappointed as a management group if we had a lower conversion ratio at the end of this year compared to 2013.
Thank you.
Thank you. There are no further questions.
Okay. Thank you very much indeed, everybody, for joining our call.