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. If any participant has difficulty hearing the conference, please press the star key followed by zero on your telephone for operator assistance. I now hand you over to Steven Holland to lead you through this conference. Please go ahead, sir.
Thank you. Good afternoon, and thank you for dialing in for our review of Q3 2013 earnings. I'm on the phone together with Georg Müller, our CFO, and we have together with us William Fidler, the board member responsible for the Americas. As always, we'll be happy to answer your questions after the presentation. In the third quarter 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 Brenntag group grew compared to the prior year. Gross profit grew by 5.4% on a constant FX basis. The operating EBITDA in Q3 2013 amounts to €183.2 million, and this represents an increase of 14.6% on an FX-adjusted basis.
When adjusting for the €11 million provision increase we took in the previous year's 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 this presentation. Despite the still sluggish global economy, the business growth accelerated in the third quarter of 2013. This, once again, underlines the resilience of our business model. We were pleased to announce the signing and closing of the Zytex acquisition in India, whereby we could further strengthen our nutrition and health business in the Indian region. I now go to Page 5, the operating highlights. We'll show you how this slide translates into a full set of numbers. Gross profit total of €497.2 million, 5.4% above previous year's Q3 on an FX-adjusted basis. The operating EBITDA total is €183.2 million, also clearly growing.
The EBITDA GP conversion ratio is up to 36.8%, compared to an adjusted 36.3% in Q3 2012. Our free cash flow for Q3 2013 was €168 million, which is almost spot on last year's, which was €168.2 million. On Page 6, in terms of acquisitions. We were pleased that we could sign an agreement to acquire the chemical distribution division of Zytex Group, a 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 sales of around €7 million, operating gross profit of €1.8 million, and an EBITDA of €1.4 million 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'd now like to hand over to Georg.
Let me walk you through the details of our numbers. I would 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 EUR 497.2 million, and this translates into a 5.4% FX-adjusted increase against the previous year. A positive piece of news is that all regions contributed to the growth of gross profit. Operating EBITDA for the third quarter totaled EUR 183.2 million, and that represents an FX-adjusted increase of 14.6%. Excluding the mentioned prior year provision increase in Europe, the EBITDA still increased by a considerable 7.3% on a constant currency basis. EBITDA to gross profit conversion came in at 36.8%, up against an adjusted 36.3% that we realized in the third quarter of the previous year.
Walking further through the income statement below EBITDA, the figures are shown on slide number nine. The depreciation for the third quarter amounted to EUR 25.1 million. With respect to amortization, mainly due to an increase in the acquired customer bases, our amortization marginally increased to EUR 10.2 million in the quarter. The financial result is a net expense of EUR 23.3 million. That's slightly below last year's level of EUR 24.1 million. The financial expenses include a EUR 700,000 charge from the effect of the revaluation of the Songwon-related liability. Overall, earnings before taxes amounted to EUR 124.6 million, and that is a 13.8% increase over the previous year's figure. We recorded a tax rate of 35% in the third quarter, and that is in line with the tax rate guidance of 34%-35% that we usually indicate.
Earnings per share are at EUR 1.57 or EUR 1.72 if excluding the amortization and if excluding the effects on the Songwon liability. I'm moving to the cash flow statement on Page 10. In total, the reported cash flow provided by operating activities amounted to EUR 84.9 million. 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, we had a lower inflow from working capital than we had in the third quarter 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, we paid the fine of EUR 48 million in the third quarter.
On page 11, with respect to the investment cash flow, spending for CapEx for the third quarter was EUR 22.3 million. We did not have any payment for acquisition in the third quarter. The payment for the Zytex acquisition, which Steve mentioned, was only made in the subsequent quarter, in the fourth quarter of this year. In the recent calls, we skipped the balance sheet information for today. Particularly for those participants who don't follow us that closely, I would like 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 of Brenntag Group by funds managed by BC Partners years ago.
If I put numbers to this, out of the 2 billion, 107 billion EUR intangibles, a little bit more than half, EUR 1,166 million, is related to the BC Partners acquisition. Moving to the balance sheet and leverage information on page 13. Net debt decreased considerably in course of the third quarter. Actually, net debt decreased by EUR 107 million to a level of EUR 1,471 million 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 indebtedness in that currency. In relative terms, the group's leverage is back at 2.1 times, which is slightly below the level 12 months ago, slightly below the 2.2, which we reported for the third quarter of previous year.
I'm skipping the leverage timeline and I'm also skipping the maturity 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 EUR 1,124 million. Talking in relative terms, the year-to-date working capital turnover remained almost unchanged at 9.0 times on a year-to-date basis. If you compare on a last 12 months basis, the working capital turnover stayed at 8.9 times. With respect to free cash flow in the definition that we frequently use, the third quarter delivered a free cash flow of EUR 168 million, 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 CapEx spend.
That actually takes the presentation back to Steve for a review of the segments.
Thank you, Georg. Now let me walk you through the developments of the segments for the third quarter 2013. All segments demonstrated resilience in still challenging market conditions during this quarter. For Europe's operating gross profit increased by 2.7% on an FX adjusted basis, and the adjusted operating EBITDA likewise increased by 0.9%. When taking into account the one-time cost related to the provision increase in France in the third quarter 2012, EBITDA increased by 17.3%. 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 Brenntag North America grew by an FX adjusted amount of 10.4%, and operating EBITDA increased by 7.2%.
Both operating gross profit and operating EBITDA grew not only thanks to the contribution from our acquisitions carried out in 2013, but also due to organic growth of the existing business. 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 2013, this gross profit could not be turned into higher EBITDA. Instead, operating EBITDA fell back by negative 2.5% on an FX adjusted basis. I am sorry, on a constant FX basis. As announced in our Q2 call, we have started under our new chief operating officer for the region to implement a number of changes, and are confident that the appropriate corrective actions are being put in place. Now let me come to Asia Pacific.
Asia Pacific shows a 4.1% gross profit growth and the operating EBITDA increase of 8.6%. This is merely driven by organic growth within the region. We continue to experience a differentiated development with the sound growth in Southeast Asia and lower growth and low demand in the Chinese business. Let me reiterate our group's operating gross profit growth for the third quarter 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 now come to page 20 of 21, the outlook. After a somewhat difficult first quarter and the stabilization that started in the second quarter, the third quarter confirmed this trend. We confirmed a lower boundary of our guidance range of EUR 710 million. The upend of our guidance range communicated in August amounted to EUR 735 million.
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 2013, has significantly weakened recently, and it has impacted negatively the translation of our U.S.-denominated business into euros. We have therefore narrowed the guidance range for our expected operating EBITDA to be between EUR 710 million and EUR 725 million. This range is based on the following assumptions. It is adjusted for the effect of the EUR 16.8 million provision increase in Europe in the second quarter or any other extraordinary effects. This means that as the as-reported figure you will find in our statements will be EUR 16.8 million lower. No deterioration of the world economic climate compares this current situation as we currently see it.
As for working capital, this is up to a large extent a function of sales and chemical pricing, and we expect it will continue to grow in the course of 2013. 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. 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. We do normally try and give you October as well, but we are two days ahead of our normal reporting. 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 structural 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, Brenntag 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 EUR 710 million-EUR 725 million of EBITDA. We're now happy to answer any questions.
Ladies and gentlemen, if you have a question for our speakers, please dial 01 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 02 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. 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%-2.5% off the growth rates that you've given? When you mentioned that October is a minimum of 2.3%, does that just mean either it's a draft number or you're still waiting for some country consolidation, please? Thank you.
I think just on the October number, we're about two days ahead of our normal schedule for this call, where we would have all the numbers would've been tidied up by now. We already know it's a minimum of 2.3, and with the suggestion that could probably be a little bit higher. If I perhaps just pass it you across to Georg who'll give you the organic growth rates.
Andy, hi. It's where we mentioned for July a 4.9% 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, probably a little bit shy of 2%. When we mentioned 1.8 for September, that's about flattish in organic terms.
Georg, just the 2% adjustment for October, that's right, isn't it? Because you've still got the three acquisitions in there.
Yes.
Okay. Just in terms of numbers, the working capital inflow, just remind me why that inflow had moderated, because I guess you're seeing no organic growth. Just to be clear, you're seeing that moderating because of acquisition impact and also what's happened to chemical pricing. I thought they'd actually slightly decrease. I would've thought that the working capital inflow would be maybe slightly higher than what you reported today. Thank you.
Yeah, the lower inflow in working capital compared to what we have shown in previous year is 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. Steve, just on Europe. The EBITDA performance was flat in Europe, and you had made some comment that you expected second half to be flat. Is that still the expectation for Europe into Q4, please?
Well, I think, as I mentioned earlier, the third quarter is actually the best quarter for Europe so far this year. I think the consensus is that the countries which were previously in pretty much deep recession are somewhat stabilized, and therefore we are somewhat more optimistic about the European performance for the rest of the year. I think to answer your question, we expect some modest organic growth in Europe for the rest of the year.
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 headcounts. Is there still more to do there on the headcount front? When should we see that business stabilize and see a turning point in profitability, please?
Well, actually, we've got Bill here today, let's just pass that one across to Bill.
Hi, Andy. I think we can expect some additional measures to be taken in Latin America in the fourth quarter and really preparing us for a resumption of growth in 2014. There is continued restructuring going on with personnel and organizationally, operationally. We think we're well-positioned for 2014.
Right. Thank you very much.
Certainly.
Thank you. The next question comes from Mr. Simon Mandinotti from Berenberg. Please go ahead, sir.
Yes, good afternoon. I've got three 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. In terms of M&A, it has been, I would say, relatively quiet this year, and I was wondering what the pipeline is looking at at this stage. 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.
Would you want to do that?
Yeah. I'll address the conversion ratio first. In North America, you're absolutely right. It's down 120 basis points from the third quarter of 2012. Sequentially, it is up from the second quarter, and the second quarter was up from the first quarter. I think on previous calls, it was mentioned the acquisition impact does have some impact. 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. 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 43% for the full year? Is that reasonable?
Listen, I think that's a reasonable expectation. Absolutely. Yes.
Thank you.
As you know, it doesn't move in a straight line.
No
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 merger and acquisitions are concerned, clearly, we have made, well, two acquisitions this year, but we are currently in the situation we have, in fact, four or five companies which we are actively looking at, and some of those are in due diligence at this stage. As you all know, Brenntag is renowned for very significant and detailed due diligence, and which is probably one of the reasons we've got a good track record in acquisitions. 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 in so far as clearly sales do go up and down relative to chemical pricing. 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 Mackenzie from UBS. Please go ahead.
Hi. Thank you. Just three from me, please. Firstly, can you talk about, I guess in LatAm, it sounds like you're talking about both initiatives at the top line as well as the margin. Can you talk about what's been done, invested there so far, and 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 kind of annualized or finished the majority of the restructuring program. What you think about the level of operating expenses going forward there? Lastly, just on the net debt levels. Clearly, it's come down a bit recently as you haven't spent as much on M&A as you might have expected. What's the goal in terms of your net debt? Thank you.
Okay. We'll get Bill just to first have the Latin American question.
Yeah. 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. We have been really making sure 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 the key unique advantages to Brenntag as a global company, and that's our key account strategy. We have over 70% of our global customers have operations in Latin America, and we're increasing our coverage to those key accounts. The third thing that I'll mention is a higher level of focus on specialty chemicals in Latin America, where we have increased authorization potential from a number of suppliers that we think will very positively impact the top line going forward in 2014.
Thanks. Can you say how much of those global customers you're currently serving in Latin America? If you think over 70% are there, how many are you serving today?
Yeah. In terms of numbers, our global key account business in Latin America is about 10% of our total. 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. 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 place within our European business. We are very pleased to take 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. We're not really considering any major additional costs in terms of restructuring costs within the European business. You might expect to see an ongoing, strong cost control regime within the European business.
Okay. Any investments required now you think growth might be improving, or are you content with the base as it is?
I think we've got a very substantial asset base and people base in place today, which is more than adequate to cover an upswing in business activity.
Great. Thanks.
With respect to financial debt Rory, it's our intention to keep net financial debt about stable for the time being, and I'm excluding in a year seasonality. I'm more talking year-end-over-year-end. As the business is highly cash generative, you know that the main spend we have to keep seeing that debt level stable and not to decrease it is partly dividends and partly acquisitions. This year so far, we haven't spent the EUR 200 million, EUR 250 million, which we envision and which would be supported by our cash generation. Even though there might always be some changes on the timeline, I don't see any principal change in the plan to keep net debt stable.
Okay, great. Thank you much.
The next question comes from Mr. Raphael from OMMA 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. Turnover sounds very dramatic. It's more of a trickle. We have a change in our Latin American business, as you know, as we've recently highlighted, we have a new Chief Operating Officer there, 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 are promotions to Chief Executive Officers of Karsten Beckmann and Markus Klähn, has really been a promotion from their Chief Operating Officers positions. We work very carefully to manage succession management within this business, and we felt it was very appropriate that both those individuals operated as Chief Operating Officers for some time before they were promoted to CEOs, which is what we've done, due to their successful track record.
I think the only other change would be a change at the AG board, which is Jürgen Buchsteiner. We actually released a press release a couple of days ago, just basically confirmed that Jürgen will be leaving at the end of this year when his contract finishes with the company, which is for purely personal reasons. He's relocated to North America with his family, and we are absolutely delighted for him in terms of his future life in North America, and he goes with 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 the 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? Related to the better performance in Asia-Pacific, do you have any sort of different views in terms of acquisition spend in Asia? I guess it's been more than a couple of years since Zhong Yung, and I think you had made the sort of comments previously that you needed to bed in Zhong Yung EAC. Do you think that we might see something in Asia Pacific now? Has everything been bedded down, ready for further M&A? Thank you.
Right. Okay. As far as splitting it by individual 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 performed, that Southeast Asia has done well and continues to grow positively. It would be fair to say that our Chinese business joint venture partner, Zhong Yung, has been pretty tough this year in terms of trading conditions with the Chinese market. You'd be clearly aware that China has had a relatively slow growth period in recent months. That is a more challenging environment, and the business in China is a little bit more of a transactional business as opposed to the outsource and business services elements, which we use in all the other regions.
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 Jürgen to do as part of his role in looking after Asia Pacific in this year was to strengthen the management team in Asia Pacific, and we've actually done that. We have three or four senior management appointments in the region during the course of the last three or four months. These high-caliber individuals are there for one purpose only, and that's to provide a significant growth base and capacity for the business and the region as a whole.
To answer your question, yes, we expect further growth in Asia Pacific, and yes, we are also looking at the region in terms of acquisitions, and yes, we find ourselves in a position where the management team, the management capacity to do that has now been put into place, we might expect some progress in 2014.
I guess, has that changed the order in terms of M&A spend? Because I think you had said sort of over the last six months that some of the valuations look pretty attractive in North America. I guess we assume that North America probably might be more of a priority. Is the M&A sort of conversion likely to be more balanced across the globe?
I think it's fair to say you are correct that certain valuations and the attractiveness of the targets in North America remain a very positive feature for us. We do see some extremely attractive opportunities in North America to add to our already existing extensive portfolio businesses across there. We are still focused on that, and we do hope that we will be able to convert more opportunities in either 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 as such 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 very much, Steve.
Thank you. We have a further question from Mr. Rory Mackenzie from UBS. Please go ahead, sir.
Hi. Sorry, just one more. Can you just clarify the working day impact within Q3 and any impacts 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, then we'll also have one day more this year than we had last year in Q4. Even though I'm not 100% sure here.
Yeah, I think that's what I remember. Thank you.
Thank you. As a reminder, if you would like to ask a question, please press 01 on your telephone keypad now. There are no further questions.
Well, that's okay. Well, ladies and gentlemen, thank you very much indeed for joining our call today. For some of you, hopefully, you'll know that we're having an investor meeting tomorrow in Rotterdam, and so hopefully we'll see some of you in person. I look forward to meeting you there. Thank you for your time in joining our call today, and we'll close the call at that point.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.