Earnings Call: Q1 2014

May 7, 2014

Dear ladies and gentlemen, welcome to the Brantec AGY Q1 2014 Results Conference Call. At our customer's 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. May I now hand you over to Mr. Stephen Holland, who will lead you through this conference. Please go ahead, sir. Thank you. Good morning, ladies and gentlemen, and thank you very much for dialing in for our review of Q1 2014 earnings. I'm on the phone today with together, Bhuti Ogmo, our CFO. As always, we'll be happy to answer your questions after the presentation. 1st of all, some words on the macroeconomic. The environment in Europe shows a clear growth momentum. Also, the North American environment is a positive position. It was negatively impacted this course by extremely hard winter causing some challenging operating conditions. In contrast to the developed world, economic developments in emerging markets is weaker. In this mixed environment, Brantec Group was able to grow gross €164,000,000 and this represents an increase of 2.8% on a constant FX basis. The relative strong euro led to some headwind in translating our results from non euro countries. The difference between our EBITDA growth as the respective risks are minus 4% 0.4% compared to a growth of 2.8% at constant FX rates Indicates the importance of this effect. We were pleased to announce the signing of the Gaffer acquisition in Brazil, which adds critical mass to our presence in this country. Furthermore, we have successfully executed an amendment for our syndicated loan facility, which is by far the most important part of LifeVantage's structure. We now go to Page 5, a little look at our operating highlights. We show this slide how this translates into a full set of numbers. Again, gross profit totaled €483,600,000 4.4 percent above previous year's Q1 on an FX adjusted basis. The operating EBITDA totaled €164,000,000 growing by 2.8%. The EBITDA from GP conversion ratio of 33.9 EUR 5,700,000, which is 7% up above last year's Q1. In terms of the acquisition of GasLog Distribution, we were delighted we could sign an agreement to acquire the Brazilian distributor GasLog in the Q1 2014. The transaction was closed in April so that we will consolidate GasLog from the Q2 of 2014 onwards. In 2013, CapEx realized sales of about US70 $1,000,000 and an EBITDA of more than US7 $1,000,000 With this acquisition, we significantly expanded our position in Brazil, the most important chemical distribution market in Latin America. The acquisition clearly helps to achieve critical mass together with our existing operation in the country. As Brantec and GasLogs put loans are highly complementary Existing Industry Customer Base, this is a great fit for us. I might now hand over to Georg. Good afternoon, everybody. Some more details on our income statement on Page 8. Steve already mentioned gross profit totaled €483,000,000 and this absolute figure translates into a 4.4% FX adjusted increase over previous years. Relevant to note from our perspective that all regions contributed to the growth of gross profit. Operating EBITDA for the Q1 totaled €164,000,000 and that represents an adjusted increase of 2.8%. If you look at the conversion ratio, the EBITDA to gross profit conversion came in at 33.9% and it is slightly below the 34.5 percent conversion ratio we realized a year ago in the Q1 2013. The reduction in conversion is due to the weather impact in North America and to a degree due to the weaker business development in the emerging markets. Moving to the income statement below EBITDA. Depreciation for the quarter amounted to €24,000,000 and amortization, which is mainly customer based amortization from acquisition, amounted to €8,800,000 The financial result is a net expense of €22,200,000 and that is lower than last year's expense of €24,500,000 Overall, earnings before taxes amounted to €109,000,000 and that is 2.8% ahead of previous year. We record a tax rate of 33.9 percent and that is in line with the level of 34% 35% that we usually indicate. Earnings per share is at €1.40 or at €1.53 if you exclude the amortization and the relatively marginal effect on the Songdung liability. We will move further through the presentation and I would skip the page on operating cash flow and I think I will also skip the page on investing and financing cash flow as well as the balance sheet page. And I would start talking again on Page 13, which is the balance The net debt decreased during the quarter by €19,000,000 to €1,322,000,000 at the end of the quarter. The slight decrease in net debt is mainly driven by the cash flow generation in the Q1. The group's leverage remained at 1.9 times and that is below the 2.1 times that we achieved a year ago. Let's skip to the next page and talk about our refinancing transaction on Page 15. At the end of March, we successfully executed an amendment of our syndicated loan facility. We have further improved the maturity profile Our debt has achieved additional improvements. The syndicated loan, which we amended and extended, is by far the most important part of our It accounts for roughly 2 thirds of our gross debt and the new maturity is now 5 years out in March 2019. Not only have we extended some maturity, we have also managed to reduce interest margin significantly subscription and we were able to increase the mainly unused revolving credit facility by €100,000,000 to now €600,000,000 The transaction was strongly supported by 22 banks from our existing banking group, and the transaction does clearly reflect our On the next page, working capital. Trade working capital amounted to EUR 1,112,000,000 at the end of the quarter and the year to date working capital turnover remained almost unchanged at 9.0 times. Cash flow generation on Page 17. Free cash flow generation. The Q1 of 2014 delivered a free cash flow of 75 €1,000,000 and that is clearly up against the €70,000,000 we achieved in the Q1 2013. The increase in free cash flow was mainly driven by a lower outflow for working capital in this quarter compared to prior year's quarter. And that ends the presentation already. Back to Steve for a discussion of the segment. Thank you, Goran. I want to walk you through the development of the segments in the Q1 2014, which shows a somewhat mixed picture. Europe's operating gross profit increased by 5.4% on an FX Thanks to the improved macroeconomic environment, but also results of efficiency measures successively introduced to the challenging macroeconomic environment in previous years. In North America, Brantec's North American development in the Q1 was clearly positive. However, the region was adversely affected by extremely hard winter in January February The Q1 compares to an average rate for the full year of 42.7 percent, resulting in EBITDA impact from around about €9,000,000 in Q1. As a result of operating gross profit in North America, it grew by on an FX adjusted basis of 6.7% operating EBITDA increased by 1.6%. Mass America results in Mass America were heavily influenced by the situation in Venezuela. We are reporting a negative 4.6 percent decline in FX adjusted gross profits. Latin America without Venezuela has grown operating gross profit by about 3%. The EBITDA impact was even higher. The operating EBITDA declined by minus 8.5 However, without Venezuela, the rest of the region was able to grow operating EBITDA by about 14% against prior year's Q1. These numbers demonstrate that the underlying Latin American business without Venezuela is trending positively. In In terms of Asia Pacific, here a weaker performance with a 2.1% decline in operating gross profit. This unsatisfying development was partly due to a cooling China and the continuing difficulty difficult political situation in Thailand, which is paralyzing demand. The weak gross profit development resulted in operating EBITDA, which decreased by 30%. However, this is not only attributable to the GP developments, but also to reflect higher cost base As we have intentionally operated our infrastructure and management capabilities in the region to be able to generate and digest future growth. You reached Rietta. Our group's operating gross profit growth for the Q1 2014 amounted to 4.5% and for operating EBITDA, it grew by 2.8%. Let me come up to the outlook for the full year. We continue to have a positive view for 2014. We expect ongoing macroeconomic growth at a moderate pace and certainly good differentiation between the major economies. Since we confirmed by the positive developments in Q1, we expect to continue to benefit from better macroeconomic environments in Europe. In North America, we also expect to benefit from an ongoing economic recovery, especially as the adverse winter conditions were a temporary distortion not affecting the underlying economic fundamentals. At Latin America, we expect that we will continue to see a divided picture over the rest of the year with an ongoing stance in Venezuela, but clearly growth for the rest of the region. As for Asia Pacific, we expect to see growth on a full year basis Due to the combination of a weak Q1, but more significant growth for the rest of the year. For Thailand, we do not expect short term improvement of the overall economic environment. Moving on, as mentioned previously, we see we plan to see some capital expenditure increases this year by around about EUR 10,000,000. This is appropriate to support the growth of our group. Finally, the free cash flow is expected to be meaningfully higher than 2013 based on the different elements mentioned above. Now let me address the current trading environment. Our gross profit per working day grew by 3.8% in January, 2.5% in February, 4.4% in March and 5.3% in April. In closing, we remain fully convinced of the business model and the structural growth opportunities. On top, we see momentum in the macro Economic Environment. We are therefore confident that the group will grow all its relevant earning parameters in 2014 on an FX adjusted basis. Brantec remains very well positioned to capture new growth in both established and emerging markets. As in previous years, we plan to give quantitative guidance on our full year 2014 for the Q2 results. And now we're happy to answer any questions. Okay, thank you very much. We will now begin our question and answer session. Once your name has been announced, you can ask your question. And we have the first question from Andy Chu. Your question please. Good afternoon, Steve, Georg. A few questions for me. Steve, could you give us those growth rates, gross profit per working day, FX adjusted on an organic basis. I think you said April was 5.3 percent, which I guess will be an organic number. But for March. It would be helpful if we could have an organic number for March. Yes, let's Guillaume get the numbers on it. Yes. Andy, at what point in time You bring us into a position where we actually volunteer the information upfront. But for now, the January, as reported, gross profit per working day, EPIX adjusted is 3.8. As we mentioned, the organic is 2.7. The February reported is 2.5 and the organic 1.3. So March is 4.4% and organic 3.3%. April was 5.3%. It's not fully organic due to the Brazilian acquisition. It's 4.1 on an organic basis. Okay. Thank you. And then On Asia Pacific, you're sort of down 30% in Q1. You're talking about Thailand not recovering. I think that's probably about 12.5%, 15% of Asia Pacific. So what gives you the confidence Steve, at this point that you can actually beat the on a full year basis last year's EBITDA number please. Yes. If you took the region as a whole, clearly, it's one of our smaller regions. And both Latin America and Asia Pacific struggle with the They are quite small regions and multi country base. So if you have 1 or 2 countries which are not doing too well, it The group quite widely in terms of that particular region. I think where we're more positive is that although Thailand Looks to be politically not likely to change too much in the immediate future. We believe that ultimately the Chinese business is going to showed some growth in 2014 above last year. And certainly, we expect our Australian business to be more positive during the balance of the year as well. So if you take the mix of the various countries, even for example, Vietnam, Malaysia, all these Countries are positively contributing to the region as a whole. And as a result, our estimation is that we will see overall growth for the year. And Andy, one more point. I'm not sure if I heard your estimate correctly that using Thailand to be 10% or 15% of Asia, Actually, it's bigger. It's 20% to 25% of Asia. And in addition to all the operational items that Steve mentioned, Don't forget that towards the end of the year, later in the year, we get the base effect because Thailand basically didn't get weak Q1. This year, it got weak over the second half of last year already. Okay. That's helpful. And then in terms of Europe, which Clearly continuing to accelerate and clearly doing very well. What I understand is sort of pretty broad based recovery, but Are you able to just give us a bit of flavor around some of the geographies, please, in terms of where the strengths are, including sort of countries such as France, which have been problematic sort of historically. Thank you. Yes, sure. Well, it is a broad based Good performance in Europe. And indeed, I'm happy to report that France is contributing to that performance. I mean, we had really a couple of years have been in the doldrums. And so we were pleased with the overall performance of our French operation in the Q1. It's also fair to say that the weak Europe the sort of European economies, which are being weak generally, are also contributing positively to the European region as a whole. So we are we see a far more balanced approach actually in terms of right Across the region, both the Northern Europeans, the UK and Germany are in good positions and growing. And what we don't have is what we've The last 2 or 3 years where there's been a general dragging down by Southern Europe and France, this is now no longer the case. And we see A lot of that positively being delivered in the results that you see today. And then finally on Venezuela, the numbers you talk about in LatAm, Steve, ex Venezuela look pretty good. So I guess the natural thing to ask is, Are you going to stay in Venezuela? Can you easily exit Venezuela? What's the position on Venezuela, please? Well, it is clearly it is a very volatile situation in Venezuela, and we are actually reviewing our options for the country. It clearly It would be inappropriate to say what we're doing at the moment because it has not been decided, albeit it is a contribution as in the past And provided some good results. I think we have to be careful and contrast operating EBITDA versus financial result Well, as you've seen the various risks on currency and Wahhabi conversion, it does question whether the further investment in that country is merited, We are looking at it. We've not decided to do anything significant as far as Venezuela is concerned at this stage. We are I'm monitoring the situation closely. Great. Thanks very much. Okay. And the next question comes from Roy Mackenzie from UBS. Your question please. Hi, good afternoon everyone. It's Roy Mackenzie from UBS. Just following up on Ani's question on emerging markets and the volatility. Can you comment on the exact nature of the disruption to your businesses, particularly in the 2 hardest countries, Venezuela and Thailand. You mentioned that the instability in Thailand was straining demand, for example. That's a bit more color and that would be useful. Thank you. Yes. I think as far as the talent is concerned, you'll all be most people will be aware that there's been significant protests in Thailand The way we look at it, we look at the some of the multinationals in Thailand at the moment. I'm not reinvesting. And indeed, 1 or 2 multinationals are exiting Thailand as being a base for manufacturing. And so some of the fundamental, if you like, foundations for the Thai economy are being eroded by the current political instability. And this is as Georg said, it's actually quite an important region for us into the 20%, 25% of EBITDA contribution. So again, we are balancing that off by better performance in other parts of the region. But Thailand for us in the last 2, 3 years has been quite a difficult market because of its importance and the political situation that's developed there. As far as Venezuela is concerned, again, that's politics to a large And you will although all you all investors involved in Venezuela will realize there's some pretty big challenges in terms of and the currency devaluations and the ability to convert The national currency into dollars, etcetera, etcetera. So there's a whole raft of issues surrounding that, although Strangely, we actually see some positive movement in Venezuela very recently in terms of, say, converting cash from national currency into dollars. So at this stage, we'd say we're looking at that closely, but there's nothing being decided as yet. Within Venezuela, are you facing any supply chain issues? Or is it just, I guess, customer behavior and customer demand that's being impacted by the instability? Yes, it's Pierre Agori. It's more it's to a degree our deliberate decision. By far most of what we sell in Venezuela to local It's imported from the U. S. And other countries into Venezuela and then sold locally. And it obviously gives us a challenge that we have to transfer the money that customers pay in Venezuela outside the country to pay the outside the country supplier as well as to repatriate profits. Both through the repatriation of profits as well as transferring money outside Venezuela to pay suppliers has become more and more difficult due to political restrictions due to transfer restrictions over time. And we just basically decided that under these circumstances, We should significantly reduce our sales in Venezuela. Okay. That makes sense. Thank you. And then just turning to North America. Can you go into more detail on million impact. Are they just, I guess, lumber occurring distribution costs that you had to invest to support growth within the harsh winter? So will they just drop back in Q2? Or how else should we think about that moment impact for Q1? Yes. It's just just want to quantify insofar as there's multiple it's multilayered when it comes to the effects of weather. I think probably the biggest cost element is really in the physical distribution of products, where essentially we had, I think between 60 70 days of where we actually had some of our sites closed, I. E. Trucks not even leaving the sites. And obviously, we saw all the cost base associated with that and quite a number of deliveries being made to customers where the customers were not even able to open. So it is extremely difficult to nail down in terms of the individual cost line development. But obviously, transport and distribution Is the primary driver in terms of the inefficiency of that number. Okay. So therefore, weather improves that should drop out for the next quarter? Yes, you should certainly see an improvement as far as the we will see an improvement as far as the utilization transport in that case for sure. Okay, great. That makes sense. Thank you. And the next question is coming in from Markus Mayer. Your question please. Yes. Good afternoon, gentlemen. Three questions as well. First of all, I can't again come back to the winter effect in there. This EUR 9,000,000 EBITDA impact, are they it's only coming from the high logistics costs or are there was impacting there as well. And do you expect that this there's also that there was also a delay of business into Q2 to the winter or this is basically then an effect which is was an on one off in Q1 has No effect on Q2 as well. Secondly, then I can come back to Asia. Besides Thailand, How do you see the growth in China and the rest of Asia? Because we hear from several chemical companies that So you see quite a good growth in these kind of markets. Do you see this growth as well? And then lastly, this is volume growth you'll see in Europe, which is quite healthy and should hopefully go on. Do you ever think that this is tricking than price increases for chemicals? And would then this also help you to increase your conversion ratio. Well, there's a few questions there. I'll take the last one first. In terms of chemical Pricing. I mean, clearly, any increase in demand is going to put the chemical manufacturing sector under a little bit more strain in terms of clearly meeting that demand. I think we have to be very careful and measured about this because those that are old like me will remember back to the 2,009 2008, 2,000 line position where there's quite a lot of capacity that was taken out of the system due to certain drop in overall volumes worldwide. It remains to be seen whether or not we have An upturn in the European and North American markets, which are going to push capacities to the point where there will be significant price increases. I don't think we're there yet. It remains to be seen and we'll look towards the back end of this year as to whether that is putting some pressure on pricing. I don't really see that pricing has been particularly an issue for us as we have a very strong pass through model on pricing. I mean for us as far as Europe is concerned, Operational leverage is really what we're looking for here. We worked very, very hard to increase efficiency during the very difficult Trading conditions, you know, we've had for the last 2 years. And we don't expect to see a significant lift in operating cost curve with the increased demand that we're experiencing. So that should improve the conversion factors. Okay. Yes. Sven, it's We had a you had the additional question on the sub regional picture in Asia, and we pointed out Thailand because Thailand has The most significant reduction in earnings within the region, and it is a significant piece of our business in Asia even though limited in relevance on a group wide level. Where we see growth in Asia, It's more from the other Southeast Asian countries. So countries like Vietnam and countries surrounding Singapore Generally growing currently in our business, China is not. With respect to the U. S. Winter effect. The winter effect is mainly a logistic cost effect, And it's just a pretty basic effect. You have to pay for overtime because people have to do slow snow cleaning exercises before the site actually becomes operational. You have truck trips that take longer than they usually take, which makes you pay overtime. Occasionally, you go to a customer site, but the Customer site is closed, you can't drop the product, so you have to go again tomorrow, which causes additional costs. Do you lose business? To a degree, you also might lose a few orders. But from our perspective, that's more a shift From one day to another or one week to another, I would not point to a significant shift from Q1 to Q2. Whatever shift there has been was probably from January February to March. So the catch up was there already. Okay. Perfect. Thanks. The next question comes from Jaskom Majerweglin from HSBC. Your line is open now. Yes. Thanks for taking my questions. I have two questions. Firstly, on Venezuela, again, The impact of Venezuela is something like EUR 3,000,000 in EBITDA, which you gave us. Does this mean that you're not Recording any process EBITDA for Venezuela in Q1 anymore and therefore this is the bottom or can the impact in Venezuela get the next few quarters also a bit bigger. And then second question on the impact from the changes in the foreign currencies FX impact. Is there also an impact on the margin because you have some time lag maybe before you can pass on price changes, which are based on different currency development. Is this also affecting the margin? Or would you say there's an impact from the summer margin. Yes, I'll take these, Jesco. The Venezuela impact Venezuela was EBITDA breakeven Q1 of this year, so around 0. Last year's EBITDA in Q1 was Not fully the figure you had in mind. It was €2,500,000 So a reduction from a positive €2,500,000 to 0. I would say this is the bottom. Of course, in COE, you can have a business with negative EBITDA, but it rarely, rarely happens in our business. So it's nothing which I would envision going forward. I would more see that as a lot of important Venezuela. But you're still making sales? Sorry, you're still making sales in Venezuela? We do have as mentioned for on an earlier question, Most of the product in Venezuela is imported and we don't import any longer. There is a small fraction of product which is locally sourced and sold And that continues for the time being. But that's just sufficient to pay for our costs in Venezuela basically. On the FX effect, yes, the translational impact is there from the strengthening of The euro or mainly the beginning of the dollar. Margin effects, there are no meaningful margin effects in our business. By far, most of the product It's sourced and sold in the same currency environment. And even where we interchange currencies from dollar to euro or the other way around Emerging Market Currencies. The cycle is so quickly that you really don't have any meaningful impact. Okay, great. Thanks. And there is a next question from Suhasini Varanasi from Goldman Sachs. Your question please. Hi. It's Charles Wilson from Goldman Sachs. Two questions, please. 1, your very strong performance in Europe this quarter. Are there any sort of one off benefits such as the comp effect? Because I think remember, was Q1 Tougher last year due to less working days. So if there's anything that you want to highlight? And secondly, the weather in North America, I can see how it impacts your costs. Do you think it impacted your gross profit during the quarter? Well, just in terms of Commerzbuyer, there's never a significant sort of nonrecurring events in the quarter, which would we've got to support the performance. So it is very much broad based improvement across the region. I'm not sure if it may be a day extra, working day extra, but I'm not Entirely sure that's the case, but I know there's nothing significant. It's a genuinely good result. I think as far as North America I think the chart is Kirk. I would think the weather impact is predominantly an efficiency and therefore cost impact. I wouldn't see any meaningful gross profit impact. It's mainly shifting business between weeks or months. Yes, there might be the occasional order loss that the customer just didn't place due to weather conditions. It's very hard to quantify. The principle exists, But it is tiny from our perspective. Okay. Perfect. Thanks very much. And for the moment, there is a last question coming in from Robert Plant from JPMorgan. Your line is open now. Thank you. Hi, Steve. Hi, Georg. You've completed the Gafford acquisition. I remember at the time of the Q4 conference call, You said that the relatively low acquisition spending last year was more a matter of timing, quite a few deals could slip into 2014. We've had one of them. Are you still confident that you could probably spend above average rates on acquisitions this year? Thank you. Yes. We're still guiding the EUR 200,000,000 to EUR 250,000,000 as been our spend for the year. And we certainly expect to deliver that. And indeed, as you may have gathered, there are A number of transactions which are under due diligence at the moment. But I don't see any very significant overspend of Our current guidance on acquisitions. Thanks, Steve. And there is another last question coming in from Simon Mittamaste from Berenberg. Your question please. Yes, good afternoon. I've got 2 quick First of all, can you give us an update on your specialty business in Europe and the impact that it might have had in Q1? And also as a final point just to check, did you say that you are expecting to grow your EBITDA in Asia Pacific this year on a constant currency basis, please. Yes. Last question, yes, we do expect to grow EBITDA in Asia on a constant currency basis this year. As far as Specialty Chemicals are concerned, actually very interesting you should highlight that because what we do we have seen is, I mean, certainly The Q1 is a probably an increased contribution from Specialty Chemicals across the European segment. We do focus on very specific industries, and they previously have been broadly in line with the Industrial Chemicals range of products. But we saw a pickup in Specialty Chemicals in the Q1 and the interest that we focus upon. Are you able to quantify that impact on Q1? Because as I understand, you also put more emphasis on this business in Q1. Yes. I wouldn't say we put more emphasis on that. I think generally as a strategy, the certain Brandtec is developing a Specialty Chemicals range of products, and we are investing in resources to provide customers and manufacturers with those services. I think the ratio of Specialty Chemicals sales to Industrial Chemicals sales are still broadly the same, but we do see increased sales So I don't want to give you an idea there's been some seismic shift towards specialties that clearly hasn't been, We see the signs or green lights in the direction of expanding our share of that particular type of range. Thank you. And there is another question from Andy Chu. Your question please. Thank you. Just a couple of quick follow ups. In terms of your 2 largest geographies, Europe and North America, Obviously, North America has some acquisition impact and some weather disruption. But out of the two regions, which region is actually growing at fastest run rate of growth at the gross profit level, please. And then secondly, on the cash flow, There's some improvement in cash flow in Georgi. You alluded to that in your presentation as to working capital being the driver of that cash flow improvement. It just seems to me to be a little bit counterintuitive that the business is growing and the cash flow delta is shrinking. So I wondered if you could just help me on that point, please. Thank you. Andy, just on your gross margin growth question. And we see Europe has been the lead in the 2 big regions. This is the working capital. 1st of all, working capital management and cash flow management is one of the strong focuses we set within the group. We do have an outflow of liquidity. We do see growth in working capital. In that sense, Andy, We don't feel it to be counterintuitive. So business is growing and the working capital is growing. But yes, the working capital is growing to a lower degree than previous years. We would say it's reflective for our management focus and it also reflective to the fact that overall The price development in Chemicals is a relatively modest price development. As you know, which is not relevant for our earnings, but it has relevance for working capital. Okay. Thank you very much. Okay. There are no further questions. There are no further questions. Okay. Well, thank you very much, Jeanette. Thank you all for Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.