Dear ladies and gentlemen. Welcome to the Brenntag AG results call Q1 2013. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listening-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 will now hand you over to Mr. Steven Holland, who will lead you through this conference. Please go ahead, sir.
Hello, everybody, thank you very much for dialing in for our review of the Q1 2013 earnings. In this call, we will provide you with the details on our Q1 results. I'm on the phone together with Georg Müller, our CFO, as always, we'll be happy to take your questions after the presentation. Obviously, we came in a little short in Q1 with our results relative to analyst expectations. In very general terms, we see this related to further weakness in the world economy, specifically attributable to the shortness of the quarter. Let me explain about this in more detail. After a more positive sentiment from the global economy towards the end of 2012 and early into 2013, it now feels the economy is softening again. This is specifically true for Europe, where industrial production fell by -2.9% in the first two months of 2013.
I would, of course, make an exception for Asia, where the environment is currently more positive. In addition, we have a more technical effect of the number of working days. We discussed this with you already when releasing the full year's results. Q1 was an unusually short quarter, almost three business days short of the previous year's quarter, partly driven by the Easter holidays. Generally speaking, our gross profit generation flows by working days, the shortness of the quarter impacts us mostly. We don't explicitly mention this per quarter as it's normally about a marginal of one business day swing. However, this time there's almost three business day swing, we experienced this in Q1, it's particularly unusual. Gross profit grew by 1.3%, if we adjust for the number of business days, growth was stronger at 4.9%. Operating EBITDA totaled EUR 164.7 million.
Against some pressure in the European segment, we saw a very positive quarter in Asia Pacific, as well as the positive contribution from our acquisitions, especially Altivia and ISM-Sarca Group. If I move on to page five on the operating highlights. On this slide, we show how this translates into a full set of numbers. Gross profit of EUR 477.9 million, 1.3% above previous year's Q1 on an FX-adjusted basis. This corresponds to a 4.9% increase on a per-working day basis. Whilst gross profit very much flows by business day, a fair share of the expenses just flows by month and does not benefit from the shortness of the quarter. Consequently, this impacts EBITDA negatively, together with the further cost developments. Operating EBITDA, a total of EUR 164.7 million, was 3.3% below previous year on an FX-adjusted basis. EBITDA gross profit conversion was 34.5% compared to 36.1% in Q1 2012.
Our cash flow for Q1 2013 was EUR 70.5 million after EUR 78 million in the previous year. Though the financials have suffered this quarter from the weakness of our economy and the technical effects, I see a confirmation of the robustness of our business model. In terms of acquisitions on page six, we already executed one acquisition this year. On the 12th of March, we were delighted to announce the acquisition of the assets of Lubrication Services called LSI. The company is headquartered in Oklahoma City and generates sales of EUR 105 million in 2012. It serves oil and gas industry through a network of facilities in six states that cover many of the U.S. shale gas areas. The acquisition is an excellent addition to the core product offering of our oil and gas business. The investment amount was EUR 33 million.
LSI will be consolidated into our financials starting in the second quarter. I will now hand over to Georg for a discussion on our Q1 2013 financials.
Good afternoon, Steve. Thank you. As Steve already mentioned, I'm moving to page nine. As Steve already mentioned, the gross profit total, EUR 477.9 million. In terms of growth rate, that represents a 1.3% FX-adjusted increase over previous year. All regions, with the exception of Europe, contributed to the growth of the gross profit. If I move from an absolute figure to a per working day figure. On a gross profit per working day basis, all regions, including Europe, delivered growth in the first quarter. Operating EBITDA totaled EUR 164.7 million, representing an FX-adjusted decrease by 3.3%. EBITDA to gross profit conversion ratio came in at 34.5%. As Steve already highlighted, the impact of the short quarter and specifically the stronger impact the number of business days have on gross profit than they have on the expenses, that obviously also impacted our conversion ratio for the quarter.
Moving to the next page, to the income statement items below EBITDA. Depreciation for the quarter amounted to EUR 24.2 million, mainly due to an increase in the acquired customer bases. Driven by acquisitions, our amortization increased to EUR 10 million for the quarter. Financial result is an expense of EUR 24.5 million. The EUR 24.5 million financial result include an expense of EUR 1.5 million for the revaluation of the Zhong Yung-related liability. Otherwise, the financial result is about in line with previous year's financial result. Earnings before taxes amounted to EUR 106 million, about 10% below previous year's Q1. We show a tax rate of 34.2% for the quarter, that is in line with the 34%-35% that we generally indicate as an adequate tax rate. Profit after tax stands at EUR 69.8 million, about 12% below previous year's quarter.
On the following pages, on pages 10 and 11, I would like to provide some information on a few structural changes we have in our income statement in 2013 compared to what we have shown in the past. Here on the first page, 10, I show you the effect from the first-time application of IAS 19. You might have heard the same topic from other companies already. IAS 19 deals with pension and post-retirement benefits, and the IFRS board has made some changes mandatory. This led to a minor change in personal expenses and a very slight change in our financial results, just a couple of hundred thousand on a quarterly basis. To give a consistent picture between the years, we adjusted the Q1 2012 figures accordingly.
If you compare to the figures you noted last year, you will see slight changes, and these come from an adjustment of previous year's figures related to IAS 19. Similar, not exactly the same topic, but a similar topic is on page 11. Following a shift in management board responsibilities in course of last year, we reallocated a few cost items between the regions to reflect the new structure. Obviously, a reallocation between the regions is fully neutral on a group level, but you can see the impact on the regions on this page 11. You see there is a slightly positive effect for Europe, and the counter effects are borne by Asia Pacific and by all other segments, Americas not being affected at all. Same as for IAS 19, we adjusted previous year's segment figures accordingly to allow for better comparability. Moving on to our cash flow statement.
On the page, we show you the usual details for operating cash flow. Overall, reported cash flow provided by operating activities amounts to EUR 33.7 million. If you go through the lines line by line, you'll know that interest payments continue to decrease, partly because the interest rates have slightly fallen. On the other hand, this was compensated by slightly higher tax payments. Regarding working capital, we had a lower outflow for current assets and liabilities in the first quarter 2013 compared to previous year's quarter. With respect to investment cash flow on the subsequent page, spending for CapEx in the quarter was EUR 21.9 million. In the line where we show purchases of consolidated subsidiaries and other business units, so the acquisition line, you find a zero in the cash flow statement for the quarter.
It's due to the fact that Altivia was already paid in the fourth quarter last year, while the acquisition we undertook this year, Lubrication Services, LLC, has been paid only in the second quarter this year and not in the first quarter. No major news on the balance sheet picture, which is on page 14. Just as a reminder, if you look into our intangibles, keep in mind that the majority of intangibles is related to the acquisition of Brenntag Group by BC Partners. It's not related to acquisition we have undertaken. Out of the roughly EUR 2.2 billion intangibles on the balance sheet, an amount of EUR 1.2 billion is actually related to the BC Partners acquisition. Subsequent page gives you the information on net debt and leverage. Net debt increased marginally during Q1 by EUR 12.9 million to a total of EUR 1,495 million at the end of the quarter.
The slight increase is mainly translational, driven by the stronger dollar at the quarter and the translation of our US dollar-denominated debt comes home with a slightly higher euro amount. In relative terms, group leverage remains at 2.1 times. It is below the leverage we had a year ago that was 2.2 times end of first quarter 2012. I would skip the time series for leverage, and I would skip the maturity profile for our indebtedness. A few words on working capital, which is on page 18. Trade working capital end of quarter amounted to EUR 1,110 million. In terms of working capital turns, we turned the working capital 9.1 times in the quarter. It is below the 9.6 times we achieved in the first quarter of previous years.
Also here, this is partly driven by the fact that the quarter was very short in terms of number of business days because the sales figure was impacted in the way that we show lower sales for the quarter. The free cash flow calculation on page 19. As Steve already mentioned, we delivered a free cash flow of around EUR 70 million after EUR 78 million a year ago. The difference is almost entirely driven by the reduction in EBITDA. I would hand back to Steve for a discussion of the segment results.
Thank you, Georg. Now let me take you through the developments of the segments for the first quarter of 2013. Business in all segments demonstrated resilience in challenging market conditions on a short first quarter. Europe's operating gross profit decreased by -2.3% on an FX-adjusted basis, and the operating EBITDA came down by -5.8%. However, the fact that Europe's gross profit per working day was 1% ahead of previous year's quarter is clearly emphasized the impact of a lower number of working days. In North America, operates at a relatively stable trend line against a strong Q1 2012. The operating gross profit grew by a moderate 1.2%, and operating EBITDA could not reach prior year's level with -5.5%. Expenses grew mainly in transportation expenses and rent. We continue to expand our infrastructure in North America.
In Latin America, delivered 7.9% FX-adjusted gross profit growth. At the same time, operating expenses increased, partly driven by higher personnel costs and increased headcounts. This resulted in negative EBITDA operating development of -3.1% on a constant FX basis. In Asia Pacific, it shows a 27.9% gross profit growth, and the EBITDA operating increased by 30.4%. This was driven by a mix of strong organic growth and the contribution of our successful acquisition of ISM-Sarca Group in the region. Let me reiterate, our group operating gross profit growth for the first quarter 2013 amounted to 1.3%, and the operating EBITDA in a shorter quarter could not fully reach previous year's level with -3.3%. Coming to page 22 and 23, let me address the outlook. Despite the somewhat difficult first quarter, we remain fully convinced of the business model and the structural growth opportunities.
The macroeconomic, which looks quite promising at the year-end, has softened. This is a stronger challenge than we expected at the beginning of the year. Having said that, we continue to believe that the group will show growth in all relevant parameters on a full year basis. We see the biggest macroeconomic headwind in Europe, where the full year EBITDA is currently expected on or slightly above previous year's level. How are we addressing this situation? We will continue to capture any growth opportunities from outsourcing and our market position. At the same time, we are accelerating the alignment of processes in Europe, which will help us to redirect existing personal resources to increase product profitability and growth. We will not overreact on the cost side, given that trends are stable. However, we will clearly reinforce tighter cost control.
After working capital, this is to a large extent a function of sales and chemical pricing, and we will expect it to 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, free cash flow is expected to grow based on different elements mentioned above. The acquisition pipeline is progressing as always. We are working on a number of transactions, and I am confident that we will see further deals later this year. Now let me address the current trading environment. Not surprisingly, the higher number of business days in April generates gross profit and EBITDA growth. Gross profit growth over the previous year was in the range of 7%-8%. Gross profit per working day grew by 5% in January, 6.9% in February, 2.5% in March, and 0.7% in April.
In closing, we continue to be confident the group will grow all relevant earning parameters in 2013 on a full year basis. Despite the ongoing difficult macroeconomic conditions, Brenntag remains very well positioned to capture new growth in both established and emerging markets. We're now happy to answer any of your 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 a 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 today before making your selections. One moment please for the first question. The first question comes from Mr. Andy Chu from Deutsche Bank. Please go ahead, sir.
Good afternoon, Steve. Good afternoon, Georg. A few questions, if I may. Could you just clarify what the organic number is, please, for April? Obviously, just to be absolutely clear, that +0.7%, I guess, is your reported number, but without FX, what is the number, please?
Yeah, I can take that. The 0.7% gross profit per working day growth for April is FX adjusted, but it does include acquisition effects. If I strip out the acquisition effect, I'm at about -2%. Just to show the full picture, I would add what we also had in the presentation, that April had roughly two working days more than April previous year. On an actual number basis, gross profit in April was 7%-8% above the previous year's April.
Okay. No, that's clear. Thank you very much. Just in terms of the outlook. The outlook statement says that the group's operating EBITDA is expected to grow on a full year basis, potentially at a lower rate than on average over recent years. Could you just clarify as to, you're looking at 2013 and a 2014 trend in the right-hand column on Page slide 22.
Yeah.
Is this on a total basis? Is it on an organic basis? I'm struggling a little bit to decipher that. I guess the broader question is since results a month or so ago, I guess what's changed in terms of so dramatically, given that a lot of industrial companies are probably talking about things getting a little bit better, sort of flat into Q2 and a sort of second half recovery. I know you don't have any visibility, but what's changed in the last few weeks? Is it the April run rate that's made you a little bit more cautious?
I'll try to address the questions, Andy, and just jump in if I'm not on the point. When we say we expect growth on a full year basis, that obviously would include acquisitions. If you see the trend more as a two-year trend, because we really don't plan, as most of the analysts don't plan for acquisitions in the model, next year's growth would probably be an assumed organic growth. When we make the statement that we expect growth at a little bit lower rates, it probably means that where we generally indicate an organic EBITDA growth in any given year of, say, 6%-9%, then obviously even the lower end of the range this year is a pretty challenging figure.
Okay.
What has changed, I would not only attribute it to the April run rate. I would attribute it to the March and April run rate, so it's more than just one month. Actually, I see it kind of confirmed in what other companies reported over the last couple of days. That basically made us a little bit more cautious. I also noted that a few companies made a statement that they expect a recovery in the second half of the year. I'm not sure if we would join their view of a recovery, but I would say that comparables get a little bit easier in the second half of the year. That helps in terms of growth rates. Of course, towards the second half of the year, you have a little bit more lead time to deal with cost control or other growth projects.
Okay, perfect.
Andy, I think Steve wants to add something.
Andy, I think it's also quite interesting in terms of looking at our numbers. I think probably for the first time, we've actually seen one of the characteristics that we saw in 2008 from within the European segment. In 2008, what we saw was generally a flattish to slightly negative position on customers who were taking small lots. We saw an inflow of business from customers who were pretty much previously almost buying from manufacturers directly. These are the higher volume, lower margin accounts. I think in the last two, three months, we've actually seen this type of change, which is more reminiscent of 2008, which really makes us feel that the recession in Europe probably is starting to bite a little bit in terms of various end of the customers.
We see that the buying behavior of perhaps some larger customers has become rather more short-term. I think, for those that know the sort of rationale to the way we operated in 2008 is part of the resilience elements of Brenntag that during a recession, that we do actually acquire more business from parts of the market, which were previously maybe exclusive to manufacturers. There is that little change which makes us feeling a little bit more cautious about Europe because of the change in buying behavior from some of these customer groups.
Okay. Brilliant. Maybe just one more for me at the time. Tell me, what do you think the conversion ratio, if you were to adjust that, the working days would be? Would you be sort of flat or slightly down or up from the 36.1% last year?
Yeah. If I may say that, Andy, it becomes a little bit artificial to do working day adjustments on the cost base. Our estimate is that conversion ratio, if you were to do these adjustments, would be about flattish.
Okay.
It's also, again, Andy, just to perhaps just emphasize the point on that in terms of costs. We were pretty unhappy with Latin America actually, in terms of you look at the developments of gross margin. You can see that that, from my recollection, is around about a 7.9% increase in gross margin, and that translated into a negative number on the EBITDA. We didn't really expect to see that, and therefore, as far as cost control for Latin American region, that's been addressed.
Okay, great. Thank you very much.
Thank you. The next question comes from Mr. Rob Flank from JPMorgan. Please go ahead, sir.
Hello, Steven. It's a point of clarification. Could you give the figures again, please, for the months January, February, March, April, in terms of what you think the best indicator is? Perhaps it's organic changing gross profit because it was all done quite quickly, and maybe how that compared to Q4. Thank you.
Okay. Rob, I'm not sure I fully got the question. I'll call out the figures and you just ask if I didn't fully answer the question.
Okay.
If I talk about gross profit per working day growth rates.
Yes
FX adjusted, including acquisitions, January, +5%, February, +6.9%, March, +2.5%, April, +0.7%. If I do an acquisition adjustment, call out the organic growth figures for the same period.
Can you just do it more slowly please, Georg?
Yeah.
Yeah.
January, plus 1.2.
Yeah.
February, plus 3.2. March, minus 0.5. April, about minus two.
Therefore, what Steve is saying is that March, April downturn is indicative of what you're seeing in terms of a slower economy.
I would agree, yeah.
Yeah.
Yeah.
Okay. Thanks, chaps.
The next question comes from Mr. Gerhard Orzessego from Exane BNP Paribas. Please go ahead, sir.
Good afternoon. Georg, I also have a question of clarification, please. Did you talk about the EBITDA growth rate when you said that the lower end of the 6%-9% would be probably difficult to achieve this year? That would be my first question.
Yeah.
The second question would be on further cost reduction and measures. I can see that you've further reduced the head count in Europe since the end of the year. Is that something that's a legacy of the last program, or is this something that is a part of a new program, or do you plan anything else in Europe given that the economy is now weaker?
Yeah. For the clarification, I was referring to an organic EBITDA growth rate, which we generally indicate structurally in our business with 6%-9%. The statement was that will be difficult to reach this year.
Okay.
Yeah, with respect to the cost base, Steve has some insight.
Well, as far as the cost are concerned, in particular, headcount, what we're doing in Europe particularly, is looking at the structure of Europe in terms of how we're organized. We're looking to harmonize the structure so that we have a me too position in every country that we operate. Therefore, people will recognize Brenntag in a more uniform way. Inevitably, that means that there will be some reallocation of duties and some people will move jobs around. Our view is that the structural opportunities to grow in this business are still very significant, we expect to capture new services and grow market share and grow new products. Therefore, we would prefer to allocate those trained resources into doing exactly that.
If at the end of the day there is any efficiency gains, which are available to us, as a result of this realignment, we will certainly look at taking those, clearly we also are expected to be relatively defensive in our cost base. We're in a low growth market.
Okay. Can I just ask a follow-up question? Do you see any market share gains in Europe at the moment from your increase? I think you've also increased your salespeople and so on, especially in specialized chemicals.
Well, I think for the market, it's quite difficult to measure that because a lot of our competitors don't necessarily publish results which are easy for us to monitor so closely. Our view is that we have increased our market share.
Okay. Thank you.
Thank you. The next question comes from Mr. Rory McKenzie from UBS. Please go ahead, sir.
Good afternoon. It's actually Rory McKenzie from UBS. Just a couple from me. First of all, it was really useful to hear the working day impact on the conversion margin. Can you maybe talk about what the underlying drivers of the change in OpEx there were? You mentioned cost inflation for transport and rent, so it might be useful to kind of expand on that and maybe give the outlook there. Then, I've got a couple of follow-ups as well, actually.
Yeah. Actually, I would say with the cost development in the major regions, with the cost development in North America and in Europe, we are pretty satisfied. On a net basis, we basically have a flat organic cost development in Europe and North America, Q1 over Q1. Yes, where we see a little bit of inflation in transportation expenses, where we see some additional rental expenses, because specifically in North America, we are increasing our infrastructure. On the other hand, the personnel reduction measures undertaken last year do show their full savings effects. Steve already mentioned that with the Latin American cost development, we are not too happy, and that will be addressed, but it's in the overall group context of lower relevance. Asia does have some organic cost increases, which is not too surprising that the business is also growing organically.
Okay, thanks. That's clear. Let me just ask. Do you still expect to see, I guess, an expansion in the conversion margin over the course of 2013 as this kind of the main working day impact reverses over the next three quarters?
First of all, I would confirm that the working day impact reverses, but it will not reverse fully in Q2.
Yeah.
It will reverse only piece by piece over the three quarters. I would say we are not nervous at all about the conversion ratio.
Okay.
If we can achieve an increase, will probably depend on some gross profit growth.
Okay. Thank you. On that gross profit growth, you talked about the group overall and the exit rate. Could you maybe speak about North America specifically? That does look to have slower and underlying base premise, maybe even an organic decline in Q1.
I would say it's more a comparable topic than a trend topic.
Okay.
If you look into trend lines for North American GP, into trend lines over the last 12, 15 months for gross profit per working day, the challenge is that North America is running against a pretty strong Q1 and an even stronger Q2 2012.
Yeah.
Actually, the trend development is pretty okay.
Okay.
I think it's also fair to say, if I may add, that certainly in the first part of the year, we saw relatively weaker performance within our oil and gas business. Since the year has gone on, that has now returned to more normal levels.
Okay. That's very useful. Thank you, guys.
As a reminder, if you would like to ask a question, please press zero one on your telephone keypad now. One moment, please, for the next question. We have a further question from Mr. Andy Chu from Deutsche Bank. Please go ahead, sir.
Hi there. Steve, I wondered if you could just maybe elaborate on what happened in LatAm on the cost front. Maybe just quick comments on volume and pricing trends, too. Also, any sort of update on France. Thank you.
Andy, with respect to Latin American cost development, nothing that really sticks out. I would say probably the region overestimated the growth perspectives. They built up headcount, partly in countries like Ecuador, and that increased the cost base. Ultimately, the business did not come in to the full expected degree. We'll deal with it. It's pretty relevant for the region. It's not relevant for the group overall due to the limited size of the region. We have made the experience in the past that you can adjust the cost base in Latin America reasonably quickly. Volume and pricing, where we said that in the quarter, the gross profit increase was +1.3%. Actually, volumes grew a little bit stronger. Volumes grew by about 2.5%.
What you see here, that volumes are growing a little bit stronger than gross profit, is exactly what Steve mentioned, that you see the recession effect that we also saw in Europe 2008. That you get a lot of cut-over volumes that are bulk or semi-bulk that were distributed by producers before and now fall into the distribution space. They give us an interesting margin, but a lower than average margin. That's why you see a little bit of margin dilution. It's more a mixed topic than an actual pressure.
As far as France is concerning me, France is probably one of the most challenging markets we have in Europe. Clearly, Spain and Italy have been challenging for quite some time now. I would say France, as the largest economy, is really not in great shape. We are taking steps within our French operation to increase efficiency throughout that operation because it has to really cope with a relatively weak industrial demand throughout France. We think that the French business is really a primary focus for us in terms of business recovery, because we don't really see any increase in demand in the French economy in the near future.
You're on mute.
Has your question been answered?
Yes. Could I just ask one last question, please, on the cost base and looking for the rest of the year, how we should think about Q1 as a starting point? I think you were at EUR 330 million of expenses for Q1. That, if I've got the right number, was EUR 295 in Q4, which seems rather low versus a run rate in Q3 of around EUR 315, so sort of Q1 levels. Is it right to annualize Q1 as a sort of run rate, or any reason why that's not a sort of sensible starting point? Thank you.
Andy, I couldn't fully follow the figures you called out for the different quarters. Irrespective of that, I would say yes, Q1 does not include any specific one-off items. In that sense, Q1 is a good proxy for the cost development going forward. Mind you, in a few countries, you get wage increases starting Q2, you will have a little bit of wage cost inflation. Everything will depend on volumes, obviously.
Okay. Just maybe finally, just on the cost reduction front. Clearly, no need at this stage as you see it to do anything further on cost, what are the sort of trigger points for further cost reduction? Is it the sort of gross profit per working day falls to minus five, minus three? Is that the sort of trigger point for further cost reduction? I know you're very proactive as well, so maybe a sort of something behind the sort of thinking of when you might do something on the cost side.
Well, Andy, not surprisingly, we are a planning organization and we do have various plans and contingency plans set aside for any deterioration in the business environment, which is beyond where we might expect it to be today. We are actually more interested in increased levels of productivity and growth. Despite the somewhat doom and gloom sort of feeling around the markets generally at the moment, we still believe there's structural growth opportunities for us and market growth opportunities as well. Rather than take out capacity to grow, we would prefer to get that conversion of the effort into results. At the end of the day, we have to cut our cloth to suit. If there is a volume reduction in the marketplace, we would react and take down capacity where it was required.
At this stage, we don't have any significant plans to do that.
Okay. Thanks very much.
The next question comes from Mr. Simon Mesnard from Berenberg. Please go ahead, sir.
Yes, good afternoon. I just wanted to clarify an aspect. In 2012, I think you had some one-off expenses in Q3, but also in Q1, and I think the total was something like EUR 14 million. You made a comment that you think you'll be able to grow EBITDA in 2013, and I was wondering if that's against the underlying EBITDA of 2012, i.e., excluding these one-off costs. Also the same applies to the conversion ratio. If you exclude this one-off cost last year, would you still be comfortable that you would be at least in line with last year?
Yeah. Simon, it's Georg. The answer is, how to put it's not that easy. If you read the forecast report from the quarterly report, the forecast report just says that we expect growth of all relevant KPIs. That would be on top of the reported number, not necessarily on top of the adjusted number. Still, having said that, I think we would be disappointed on our end if we couldn't grow the adjusted figure.
Would that also apply to the conversion ratio, or would that be more challenging to keep the conversion ratio in line with last year, again, excluding those one-off costs?
As I said to a slightly different question, I would say we are not nervous about development on conversion ratio at all. I wouldn't see anything falling from the cliff. An improvement over previous year on an adjusted basis will depend on some gross profit growth.
Also, if I might add, you have to be aware that as we grow our business in North America, we have to invest in infrastructure, and we will seek to grow our business further. When I say we have to invest in infrastructure, we are looking at developing new markets and new products. So the conversion ratio in North America will be affected by higher rents and some storage costs and what have you. Notwithstanding that, we expect to see an increase in EBITDA as a result of those investments.
Thank you. That's clear.
The next question comes from Mr. Markus Mayer from Kepler Cheuvreux. Please go ahead, sir.
Yeah, two questions remaining. First of all, you mentioned that the buying behavior of your large customers is now more short-term. Does this also mean that there's a certain effect then on going into the downtrading means that your customers are looking more on cheaper products? The second question is again on the one-off costs. You said Q1 was not affected by one-off costs. Does it also mean that there have been no one-off integration costs?
Well, I'll just take the first part of your question. This isn't about cheaper prices per se. What we're saying is that there are a group of customers that would, say, normally be buying directly from manufacturers. They are, if you like, the customers that are a little bit on the customer, does it make sense to buy, say, 20 tons from a manufacturer or buy five tons from a distributor? As those customers have less forward visibility in terms of their own order book and their tendency is to come towards the distributor sector and acquire smaller quantities as opposed to buying a larger quantity and having that product in stock as a result, tying up their working capital.
That just means that as an average order size tends to be on a larger order than we would normally have, because most of our business is in very small lots, therefore the average price and margin is somewhat lower. Not just the price, but say the margin is normally lower. I don't see it as being lower prices per se. I think it's more like a new group of customers that generally come into the distributor sector when forward visibility is reduced.
Maybe a follow-on question on this. Does it also mean that this general behavior of your customers, meaning ordering lower volumes but then more regular in general, is still valid and means that in general, your gross margin is higher than for normal years?
Yeah. What would normally happen, and so we're starting to see evidence of this, is that we get the larger customers come in like the ones I've just described, but also in our smaller customers also sometimes reduce their order quantities and order those more frequently. Therefore, we do apply volume discounts. Therefore, someone buying a smaller quantity should expect to pay a higher price for that volume. Over the period of time, that generally translates into a mix which suggests higher gross margins for the small lot accounts.
Okay.
It's Georg. Markus, the question on the one-offs and the integration costs in Q1. There probably were a few integration costs in Q1, but they don't stand out by any of the order of magnitude. Given that we typically do four or five acquisition transactions each year, you will each and every quarter see some integration costs. There is nothing which we would suggest to adjust.
Okay. Very clear. Cool. Thanks.
Thank you. There are no further questions.
Okay. Well, ladies and gentlemen, thank you very much indeed for attending our call today, and I think we'll call the call finished at that point. Thank you very much.
Thank you.
Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.