Earnings Call: Q3 2013

Nov 6, 2013

Dear ladies and gentlemen, welcome to the Brenntag AG Results Call Q3 2013. 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. I now hand you over to Steve Holland, who will lead through this conference. Please go ahead, sir. Thank you, and good afternoon and thank you for dialing in for our review of Q3 twenty thirteen earnings. I'm on the phone together with Georg Muller, our CFO and we are together with us Bill Fiddler, the Board member responsible for the Americas. As always, we'll be happy to answer your questions after the presentation. In the Q3 of 2013, growth of the global economy remained modest. While North America showed positive growth in industrial output, the recession in the Eurozone persisted. Nevertheless, gross profit of the Group grew by compared to the prior year. Gross profit grew by 5.4% on a constant FX basis. The operating EBITDA in Q3, 2013 amounts to €183,200,000 and this represents an increase of 14.6% On an FX adjusted basis, when adjusted for the €11,000,000 provision increase we took in the previous This quarter, related to the French competition law case, the growth amounts to 7.3%. To provide a fair view, we'll make this adjustment throughout presentation. Despite the still sluggish global economy, the business growth accelerated in the Q3 of 2013. This once again underlines the resilience of our business model. We were pleased to announce the signing and closing of the Zai Takacs acquisition in India, whereby we could Strengthen our nutrition and health business in the Indian region. I'll now go to Page 5, the operating highlights. Well, Shiel, this slide translates into a full set of numbers. Gross profit totaled €497,200,000 5.4 percent above previous year's Q3 an FX adjusted basis, the operating EBITDA totaled €183,200,000 also clearly growing. The EBITDA GP conversion ratio is to 36.8% compared to an adjusted 36.3% in Q3, 2012. Our free cash flow for Q3 twenty thirteen was €168,000,000 which is almost spot on last year's which was €168,200,000 €8,200,000 On page 6 in terms of acquisitions. So we were pleased that we could sign an agreement The chemical distribution division of Ziatek's Group, biotechnology, food and formulation and blending company headquartered in Mumbai, India. With this acquisition, we could significantly increase our Nutrition and Health Distribution business in India. We expect the acquired business to generate of around €7,000,000 operating gross profit of €1,800,000 and EBITDA of €1,400,000 on a run rate basis. The transaction was closed at the beginning of October 2013. And therefore, we will see the first contribution of this acquired business in the last quarter. I now hand over to Georg. Yes. Let me walk you through the details of our numbers and I We'll start the walk through the numbers on Page 8 where we show you the details of our income statement. As Steve already mentioned, the gross Profit in the quarter totaled €497,200,000 and this translates into a 5.4% increase against previous year. A positive piece of news is that all regions contributed to the growth of gross profit. So operating EBITDA for the Q3 totaled €183,200,000 and that represents an FX adjusted The increase of 14.6%. Excluding the mentioned prior year provision increase in Europe, the EBITDA CA still increased by a considerable 7.3% on a constant currency basis. EBITDA to gross 13. In the Q3 of previous year. Walking further through the income statement below EBITDA and That the figures are shown on slide number 9. The depreciation for the 3rd quarter amounted to 25 Our amortization marginally increased to €10,200,000 in the quarter. The financial result is a net expense of €23,300,000 that's slightly below last Yes. Level of €24,100,000 The financial expenses include a €700,000 charge from the effect of the revaluation of the Songeung related liability. Overall, earnings before This amounted to €124,600,000 and that is a 13.8% increase over previous year's figure. We recorded tax rate of 35% in the 3rd quarter and that is in line with the tax rate guidance of 13. €0.57 or €1.72 if excluding the amortization and if excluding the effects on the Song Jong Liability. I'm moving to the cash flow statement on page 10. In total, the reported cash flow provided by operating activities amounted to €84,900,000 Discussing a few specific items in the cash flow statement. If you look into the working capital line, given the positive business development in the quarter, we still had an inflow from working capital. In the quarter, we still had an inflow from working capital, but we had a lower inflow from working capital than we had in the Q3 of previous year. Foremost, the operating cash flow is impacted by the payment of the fine for the French competition law case. You are very well aware of that case and we paid the fine of €48,000,000 in the 3rd quarter. On page 11 with respect to the investment cash flow, spending for CapEx for the Q3 was €22,300,000 We did not have any payment for acquisition in the Q3. The payment for the Citex acquisition, which Steve mentioned, was only made in the subsequent quarter in the Q4 of this year. In the recent calls, We skip the balance sheet information for today and particularly for those participants who don't follow us that closely. I would to take the opportunity just to remind you that from the intangibles that we have on the balance sheet that A significant part of these intangibles is not related to acquisitions which we have undertaken ourselves, but is related to the acquisition Brandtag Group by funds managed by BC Partners years ago. If I put numbers to this out of So €2,107,000,000 intangibles, a little bit more than half €1,166,000,000 It's related to the BC Partners acquisition. And moving to the Balance sheet and leverage information on page 13. Net debt decreased considerably in course of the 3rd quarter. Actually net debt decreased by €107,000,000 to a level of €1,471,000,000 at the end of the quarter. The decrease is driven by the strong cash flow generation in the quarter and it is supported by a weakening of the U. S. Dollar. Most of you will remember that we carry part of our in-depth business in that currency. In relative terms, the group's leverage is back at 2 One times, which is slightly below the level 12 months ago, slightly below the 2.2 which we reported for the Q3 profiles of our indebtedness as nothing has changed there. With respect to working capital, at the end of the quarter, the trade working capital amounted to €1,124,000,000 And talking in relative terms, the year to date Working capital turnover, we made almost unchanged at 9.0 times on a year to date basis. And if you compare on a last 12 months The working capital turnover stayed at 8.9 times. With respect To free cash flow in the definition that we frequently use, the 3rd quarter delivered a free cash flow of €168,000,000 almost exactly on the level of previous year's Q3. The higher EBITDA this year was offset By lower inflow from working capital, which I already mentioned and partly by a little higher Okay. CapEx spend. And that actually takes the presentation back to Steve for a review of the Thank you, Joerg. Okay. So now let me walk you through the development of the segments for the Q3 20 All segments demonstrated resilience in still challenging market conditions during this quarter. For Europe, Europe's operating gross profit increased 2.7% on an FX adjusted basis and adjusted operating EBITDA likewise increased by 0.9%. When taking into account the one time costs related to the provision increase in France in the Q3, 2012 EBITDA increased by 17 point 3%. We are satisfied that Europe confirmed the trend of modest organic EBITDA growth in a still recessionary environment. In terms of EBITDA, This quarter was Europe's strongest quarter so far this year. In North America, operating gross profit in Brantec North America grew by an FX Gross profit and operating EBITDA grew not only thanks to the contribution from our acquisitions carried out in 2013, but also due to 13. In Latin America, we delivered a 3.7% FX adjusted gross profit growth In a macroeconomic environment, which has clearly lost some momentum in the third quarter. As in the first half of twenty 13. This gross profit could not be turned into higher EBITDA. The stellar operating EBITDA fell back by negative 2 point 5% on an FX adjusted basis sorry on a constant FX basis. As announced in our Q2 To call, we've started under our new Chief Operating Officer for the region to implement a number of changes and are confident The appropriate corrective actions are being put in place. Now let me come to Asia Pacific. Asia Pacific shows 4.1 percent gross profit growth and the operating EBITDA increase of 8.6%. This is mainly driven by organic growth within the We continue to experience a differentiated development with the sound growth in Southeast Asia and lower growth and lower demand in the Chinese business. Let me reiterate, our group's operating gross profit growth for the Q3 of 2013 amounted to 5.6% and the operating EBITDA grew by 7.3 When adjusting for the prior year's provision increase in Europe. I'll now Come to page 2021, the outlook. After a somewhat difficult first quarter and stabilization that started in the second quarter, The Q3 confirmed this trend. We confirmed a lower boundary of our guidance range of about €710,000,000 The up end of our guidance range communicated in August amounted to €735,000,000 €735,000,000 This had assumed a faster recovery, which has not yet materialized. In addition, the U. S. Dollar, which we assume to be in line with the first half of twenty thirteen, has significantly Recently and it has impacted negatively the translation of our U. S. Denominated business into euros. We've therefore narrowed the guidance range for our expected operating EBITDA to be between €710,000,000 €725,000,000 This range is based on the following assumptions. It is adjusted for the effect of the €16,800,000 provision increase in Europe in the Q2 or any other extraordinary effects. This means that as reported figure you will find in our statements will be €18,800,000 lower. No deterioration of the world economic climate compared to this current situation as we currently see it. As working capital, this is to a large extent a function of sales and chemical pricing and we expect it will continue to grow in the course of 13. CapEx should be slightly above depreciation and will be sufficient to support the organic growth of our group. Finally, the free cash flow is expected to remain strong based on the different elements mentioned above. Now let me address the current trading environment. Gross profit per working day grew by 4.9% In July, 4.6% in August, 1.8% in September. Now we do normally try and give you COBRA as well, but we are 2 days ahead of our normal reporting. But at this stage, we're able to tell you that the growth in October was a minimum of 2.3%. In closing, we remain fully convinced of the business model and the special growth opportunities for our business. We are therefore confident that the group will grow all the relevant earning parameters in 2013 on an FX adjusted basis. Despite ongoing difficult macroeconomic conditions, Remtech remains very well positioned to capture new growth in both established and emerging markets. This is why we feel confident to provide an outlook for further growth leading to a range of €710,000,000 to €725,000,000 EBITDA. And we're now happy to answer any questions. 13. 13. 13. The first question comes from Mr. Andy Chu. Please go ahead sir. Good morning everyone. I've got a few questions. And Steve, maybe I could just start by clarifying what the organic growth rates were, please. Do we just take 2% to 2 point Half percent of the growth rates that you've given. And when you mentioned that October is a minimum of 2.3%, does that just mean Either as a draft number or you're still waiting for some country consolidation please? Thank you. Yes. I think just on the October We're about 2 days ahead of our normal schedule for this call where we would have all the numbers we've been entitled to buy now. But we already know it's a minimum of 2.3 and with the suggestion that could probably be a little bit higher. Then I'll pass it over to Georg who will give you the organic growth rates. Yes, Andy, hi. It's where we mentioned for July of 4.9 percent FX adjusted gross profit for working day growth. If I take off acquisitions that would be about 2.5%, where we mentioned 4.6% for August. If I take off acquisitions, it's probably a little bit shy of 2%. And when we mentioned 1.8 for September that's about flattish in organic terms. So and then Gal just the 2% adjustment For October, is that right, isn't it? Because you still got the 3 acquisitions in there. Okay. And then just in terms of numbers, the working Capital inflow, just remind me why that's inflow had moderated because I guess you're seeing no organic growth. So just to be clear, so you're seeing that moderating because of acquisition impact? And also what's happened to chemical pricing? I thought that actually slightly Nicole, pricing, I thought that actually slightly decreased. I would have thought that the working capital inflow Maybe slightly higher than what you reported today? Thank you. Yes. The lower in Flow in working capital compared to what we have shown in previous year is kind of sales driven relative to previous years' Sales are reasonably strong. Chemical prices sequentially in course of this year On average moderated by a relatively low degree, but actually with respect to our portfolios they picked up a little in September. Okay. Thank you. And then, Steve, just on Europe. The EBITDA performance was Flat in Europe and you had made some comment that you expected second half to be sort of flat. Is that still The expectation for Europe into Q4 please? Well, I think as I did mentioned earlier, The Q3 is actually the best quarter for Europe in terms of so far this year. I think the consensus The countries which were previously in pretty much deep recession have somewhat stabilized. And therefore, we are somewhat more optimistic about the European performance for the rest of the year. So I think To answer your question, we expect some modest organic growth in Europe for the rest of the year. And then just in terms of LatAm, just maybe a quick update on what's happening in LatAm. I think you've taken out about 19 heads Since the end of the quarter, so you're sort of down about 1% in headcount. Is there still more to do there on the headcount front. And when should we see that business stabilize and Turning points in profitability please. Well, actually we've got Bill here today. So let's just pass that one across to Bill. Yes. Hi, Andy. I think we can expect some additional measures to be taken in Latin America In the Q4 and really preparing us for a resumption of growth in 2014, but there is continued Restructuring going on with personnel and organizationally, operationally, But we think we're well positioned for 2014. All right. Thank you very much. Certainly. Thank you. The next question comes from Mr. Simon Mazzonotti from Berenberg. Please go ahead, sir. Yes. Good I've got 3 questions, if that's okay. In North America, looking at the conversion margin, it seems to me It's down slightly more than 100 basis points compared to Q3 last year. I know there is Some negative impact from acquisitions there, but I was wondering if there are other items that we should consider. Also in terms of M It has been, I would say, relatively quiet this year. And I was wondering what the pipeline It's looking at this stage. And finally on CapEx, there seems to be a slight increase As a percentage of sales, I was wondering if there is anything significant that we should keep in mind for Q4 next year perhaps? What do you want to do? Yes. I'll address the conversion ratio first. In North America, you're absolutely right. It's down 120 basis points from the Q3 of 2012. But sequentially, it is up from the 2nd quarter and the 2nd quarter was up from the 1st quarter. And I think on previous calls, it was mentioned the acquisition impact does have some But there are some additional things that we're doing in North America. We've made some investments in Infrastructure and terminals for handling our largest product in North America caustic soda That are impacting that conversion margin currently, but we should certainly we Expect a resumption to more typical conversion margins going forward in 2014. What would be the typical level that you're thinking of the 4% to 3% for the full year? Is that reasonable? Listen, I think that's a reasonable expectation. Absolutely, yes. And as you know, it doesn't move in a straight line. But We continue to believe that while we're operating at a very high conversion ratio now, we still have opportunities for ongoing improvement. Okay. As far as the merchant acquisitions are concerned, clearly, we have made 2 acquisitions this year, So we are currently in the situation we have 4 or 5 companies which we are actively looking at And some of those are in due diligence at this stage. As you all know, Rentag is renowned for very Significant and detailed due diligence and which is probably the reasons we've got a good track record in acquisitions. So at this stage, it's difficult to give you an exact number for the rest of this year. But we do have a pipeline that is full and which we are actively engaged within. I think as far as the remaining question that was the CapEx related to sales Revenue, I think it's probably not an easy one for us to answer insofar as clearly sales do go up and down relative to chemical pricing. So it's not an easy ratio. We probably wouldn't normally measure our capital expenditure in relation to sales. Okay. Fair enough. Thank you. Thank you. The next question comes from Rory McKenzie from UBS. Please go ahead. Hi, thank you. Just 3 for me, please. Firstly, can you talk about, I guess, in that comment, it sounds like you're talking About both initiatives that were top line as well as the margin, can you talk about what's been done invested there so far? And then when we think you will see an impact from those? Secondly, can you talk about the outlook for operating costs within Europe? I think you've now going to annualize or finish the majority of the restructuring program. And so then what you think about the level of operating expenses going forward And then lastly, just on the net debt levels. Clearly, it's come down a bit recently as you haven't spent so much on M and A as you might have expected. So the guidance in terms of your net debt? Thank you. Okay. We'll get Bill just to first have the Latin American Yes. In terms of the top line in Latin America, some of the initiatives that have been underway now, We're always focused on execution through commercial excellence. So we have been really making that we've got the right team in front of the right customers. We are working very diligently on growing what we believe is one of Key unique advantages to Brenntag as a global company and that's our key account strategy and we Over 70% of our global customers have operations in Latin America And we're increasing our coverage to those key accounts. And the third thing that I'll mention is a higher level 13. From a number of suppliers that we think will very positively impact the top line going forward in 2014. Can you say how much of those global customers you're currently serving in Latin America? Are you thinking over 70 CEMs and all that? How many are you serving today? Yes. In terms of numbers, it represents about our global key Account business in Latin America is about 10% of our total, but I'd be hesitant to characterize The exact amount in Latin America because frankly the accounts that want to be handled on a global account basis, It changes on a quarter over quarter basis and we'd be comparing numbers that are very difficult to compare the next quarter. Okay. Thank you. Sure. Just in terms of Europe, in terms of operating costs for Europe, we've got a very strong regime of cost control in 13. Within our European business, we are very pleased to see the discipline that's been brought to bear in the region. We're talking about very low digits, single digit numbers in terms of actual increases in our operating cost base. Certainly, no higher than inflation, That's for sure. And we're not really considering any major additional costs in terms of restructuring Costs within the European business. Therefore, you might expect to see an ongoing strong cost control regime within the European business. Any investments Now you think growth might be improving or are you going to have to put the base of it is? I think we've got a very substantial asset base and people base in Today, which is more than adequate to cover an upswing in business activity. Great. Thanks. With With respect to financial debt, Rory, it's our intention to keep net financial debt about stable for the time being. And I'm Including in the year seasonality, I'm more talking year end over year end. And as the business is highly cash generative, you know That's the main spend we have to keep the net debt level stable and not to decrease it. It's partly dividends and partly acquisitions. That yes, this This year so far we haven't spent the €200,000,000 250,000,000 which we envision and which would be supported by Our cash generation, but even though there might always be some changes on the time line, I don't see any principal change in the plan to Keep net debt stable. Okay, great. Thank you very much. The next question comes from Mr. Rafael from Nomura Investment. Please go ahead, sir. Good afternoon. Please could you comment about the recent turnover of the top management of Some regions that we have seen this year? Well, I'll take that. And turnover is fairly it sounds very dramatic. More of a trickle. We have a change in our Latin American business as you know. As we've recently highlighted, we have our new operating Chief Operating Officer there and which we're delighted about And was actually needed to address some of the issues that we have in South America and Latin American markets. In North America and indeed in Europe, the two recent appointments there which sell promotions to Chief Executive Officers of Magnus and Magnus Klein has really been a promotion from their Chief Operating Officers positions. We work very 13. To manage succession management within this business and we felt it was very appropriate that both Jaws operated as Chief Operating Officer for some time before they were promoted to CEOs, which is what we've done due to Successful track record. I think the only other change would be change at the AG Board which is Jurgen Brooksteiner. And we actually released a press release a couple of days ago just to basically confirm that Jurgen will be leaving At the end of this year, when his contract finishes with the company, which is purely personal reasons, he's relocated to North America with his I'm Lee and we are absolutely delighted for him in terms of his future life in North America. And it goes with us absolutely our full blessings. We have a very strong management team here. Succession is something which we plan on a continuous basis. And I have Absolutely no concerns about the future management of the business. Okay. Thank you very much. We have a further question from Mr. Andy Chu. Please go ahead sir. Steve, hi there. Just on Asia Pacific. The performance in Asia Pacific is actually Pretty good. Almost double digit growth in EBITDA. Could you just break down as to firstly what's happening by each of the sort of segments within Asia Pacific, I guess mainly China and Thailand or Southeast Asia. And then related To the better performance in Asia Pacific, do you have any sort of different views in terms of acquisition spend in I guess it's been more than a couple of years since or a couple of years since Zhongjiang. And I think you had made the sort of comments Previously that you needed to bed in Zhongjiang EAC. Do you think that we might see something in Asia Pacific now? Has 13. Right. Okay. Well, as far as Regional regions, I'm not sure we want to go into that level of detail. I think it would be fair to say that just in terms of the way the region has That Southeast Asia has done well and continues to grow positively. It would be fair to say that Chinese business, joint venture partner, business, Zhongjiang, has been pretty tough this year in terms of trading With the Chinese market, you'd be clearly aware that China has had a relatively slow growth period in recent months. So that is a more challenging environment and the business in China is a little bit more of a transactional business as opposed to the outsourced and business services elements which we use in all Other regions. So in terms of color, I would say that China remains a challenging market for us. However, we are Really pleased nevertheless to be where we are with our joint venture partner. Extremely good resources and we are fundamentally Completely convinced that where we are in China is still the right strategy for us. The rest of the region again positive developments. One of the things that I asked to do as part of his role in looking after Asia Pacific in this It was to strengthen the management team in Asia Pacific and we've actually done that. We have 3 or 4 13. The At the region in terms of acquisitions, yes, we find ourselves in a position where the management team, the management capacity to do that Has now been put into place, so we might expect some progress in 2014. And I guess does that change the order in terms of M and A spend? Because I think you had said sort of over the last 6 months that some of the valuations look pretty attractive in North America. So I guess we assume that North America probably might be more of Priority, is the M and A sort of conversion likely to be more balanced across the globe? I I think it's fair to say you are correct that certain evaluations and the attractiveness of the targets in North America remained a very positive feature for us. We do see some extremely attractive opportunities in North America to add to Already existing extensive portfolio businesses across there. So yes, we are still focused on that and we do hope that we will be able to convert more opportunities And later this year or early next. As far as acquisitions in the other parts of the world, I wouldn't rule out at all further growth in Latin America or Asia Pacific. For Europe, not quite a a top priority because we already have such a great facility coverage in the European region. Although I wouldn't rule out small bolt on acquisitions in that region. All right. Thanks so much, Dave. Thank you. We have a further question from Mr. Rory McKenzie from UBS. Please go ahead, sir. So just one more. Can you just clarify the one day impact within Q2 sort of within Q3 and any impact like Q4? Thank you. It's Georg. We had one working day more in Q3 This year over Q3 last year, I don't have the Q4 figure on the top of my head. But if I remember correctly, And we'll also have one day more this year than we had last year in Q4, even though I'm not 100% sure here. Yes. That's what I'll remember. Thank you. Thank you. There are no further questions. Well, it's okay. Well, ladies and gentlemen, thank you very much, Niv, for joining our call today. For some of you, hopefully, you'll know that we're having an investor meeting 13. Tomorrow in Rotterdam. And so hopefully we'll see some of you in person. I look forward to meeting you there. And so thank you for your time and joining our call today. And we'll close the call at that point. Ladies and gentlemen, thank you for your attendance. This call is being concluded. You may now disconnect.