Earnings Call: Q4 2012

Mar 21, 2013

Dear ladies and gentlemen, welcome to the Bruntag AG Result Call for the Full Year 2012. At our customers' request, this conference will be recorded. Questions. May I now hand you over to Mr. Steve Holland, who will lead you through this conference. Please go ahead, sir. Thank you very much for dialing in everybody For our review of 2012 earnings, in this call, we will provide you with full details on our results. I'm on the phone together with Georg Muller, our CFO, and we'll be happy to take your questions after the presentation. We ended 2012 with an operating EBITDA of €707,000,000 However, on the Q3 call, you'll remember that we increased provisions in the European segment by €11,000,000 Adjusting for this extraordinary expense, the operating EBITDA amounts to €780,000,000 that's exceeding in the middle of our guidance range of €705,000,000 to €725,000,000 7.18 million marks another record year for our group following an EBITDA of 661 €1,000,000 in 20.11. In addition to our existing business, we were particularly pleased with the growth and contribution from our Acquisitions. In the course of 2012, we were able to strengthen our market position in the United States with the acquisition of the TER Group and significant of our share In Australia and New Zealand region, we've acquisition the ISM, SALCAT Group. We also carried out an efficiency improvement program in Europe, which helped to improve our Space, once again, the group was able to demonstrate a significant increase in free cash flow in 2012 by 13%. Following the successful year, we are delighted to submit a proposal to the General Shareholders Meeting for approval of a dividend of 2.4 euros per share, following a €2 per share a year ago. The dividend represents a payout ratio of 30 0.8 percent of the profit after tax attributable to shareholders of Brentag AG. Just coming on to Page 5. On this slide, we show you how this translates into a full set of numbers. Gross profit totaled €1,926,000,000 4.6 percent above previous year on an FX adjusted basis. Gross profit growth in Q4 was 2.9% ahead of previous year. Operating EBITDA of €707,000,000 2.2% above previous year on an FX adjusted basis. This corresponds to 3.7% growth when adjusting for the mentioned $11,000,000 In Q4, the growth of operating EBITDA above previous year was stronger and exceeded prior year by 5%. Efficiencies remained high on a 2011 adjusted level on gross profit for the year equates to 37.3%, which is in line with the record year of 37.4 percent 1 year ago. The return on net assets for 2012 totaled 32%, which Slightly below the 2011 value of 32.5 percent due to the increase in working capital. Once again, until we delivered a very strong cash flow in 2012, Free cash flow totaled €579,000,000 a new record after the €512,000,000 in 2011. On page 6, we were delighted to have several successful acquisitions in 2012. So we acquired businesses for a total enterprise value of €207,000,000 We continue price value of €207,000,000 We continue our successful acquisition path in 2012 with IFM the Salcat Group, the TER Corporation, the Delanta Group and the Octavia Corporation. Now I'll you through these acquisitions in a little more detail. With ISM, we acquired them on the 16th July 2012. We are very pleased to complete this acquisition. It is one of the leading specialty chemical distributors in Australia and New Zealand with sales of €85,000,000 in 2012. This acquisition sets out 2 of our key selection criteria, coverage. The business has exceeded our expectations in terms of performance. The purchase price for the enterprise was €82,000,000 The Altavia Corporation was acquired on the 31st December 2012. Altavia is a water treatment chemical distributor In Longview, Texas, the company realized sales of €63,000,000 in 2012. This acquisition will considerably strengthen both our regional company, And Brintag Southwest and the water treatment business, which is one of our key focus industries worldwide. The provisional purchase price is €95,000,000 We are continuing into 2013 and we were delighted to be able to announce the acquisition of assets of Lubrication Services, LSI. The company is headquartered in Oklahoma City in the state of Oklahoma and generated sales of €105,000,000 in 2012. It shows the oil and gas industry to drive a network of facility drilling in 6 states and covers many of the U. S. Shale gas plays. The acquisition is an excellent addition to our product offering. The investment amount was €33,000,000 as the acquisition is subject to contractually agreed closing conditions. I now like to hand over to Georg for discussion on the full year 2012 financials. Yes. Steve, thank you. I would start the discussion of Financials on Page 10 actually, which is the income statement for the group. Already mentioned several times, the world obviously We faced a more challenging economic environment in course of the year. Nevertheless, as you have seen, we do report strong results. The financials for 2012 to reflect and underpin the robust nature of the business. Gross profit totaled close to €2,000,000,000 actually totaled $926,000,000 4.6 percent FX adjusted increase over previous year. Equally relevant in this context, it is a pretty sound development of the group around the globe. All regions actually contributed The growth of gross profit. Operating EBITDA was already mentioned totaled €707,000,000 or 7 17 on an adjusted basis and this represents a 2.2% increase on the reported basis or 3.7% On the adjusted basis respectively, maybe it's worth to mention the Q4 growth rate, which was actually somewhat stronger at 5% growth. EBITDA to GP conversion on an adjusted basis was stable on very high levels. We report 37.3 percent on an adjusted basis and this compares to the very strong actually record 30 7.4%, which we show you in previous year. In the context of conversion ratio, I would also mention that The conversion ratio for the quarter for the Q4 of the year was 38.9% and that was 100 basis points Above the Q4 2011 level of 37.9 percent, not only, but part of that increase actually came from the support I would move further through the income statement on Page 11 and talk about the items that are recorded below EBITDA. Depreciation for the year amounted to €96,200,000 and amortization amounted to €36,900,000 And as you know, most of the amortization, namely a share of €29,100,000 Actually attributable to customer based amortization for acquisitions, which we have undertaken. The financial result totaled €94,700,000 And to be frank, the €94,700,000 financial results We do include a €10,500,000 charge of provision increase for exchange rate risks in Venezuela. We took this provision resulting from the more and more unfavorable political and economic circumstances in the country, including even stricter We had a partly mitigating effect in financial results. We had a €4,300,000 beneficial effect From reevaluating the liability for the 49% outstanding for Zhengzhou. Financial results shows a strong improvement over the previous year's figure, which was 126.3 Significant part of the improvement is still attributable to our successful refinancing carried out in the middle of 2011. On an earning before tax basis, on this we report €478,000,000 14.1 percent above previous year. For the full year, the tax rate is 29.4%. And as you know, we benefited from some tax deductions, which we previously could not expect. And we do for the current year for 2013 expect the tax rate to go back up a little probably to the range of 33%. Profit after tax amounted to €338,200,000 a strong 21.1 percent up from previous year. Let's move to the cash flow on Page 12. Actually, you see details for the operating cash flow here. Overall reported cash flow provided by operating activities amounts to €433,000,000 If you look through the cash flow statement line by Line by line, you will on the one hand note that interest payments decreased significantly. If you take a look at the taxes, you will note that Payments remained roughly unchanged despite clearly stronger earnings. Regarding working capital, we had a lower outflow for liabilities in 2012 compared to 2011. Moving on to the investment cash flow on Page 13. Spending for CapEx for the full year is €86,300,000 and the spending related to acquisitions, Which you will find under purchases of consolidated subsidiaries and other business units, it's 230 €4,500,000 You will notice that earlier in the presentation, we mentioned enterprise values taken on board euros 207,000,000 The main difference between the 207 enterprise values and the 234.5 percent recorded here It's a purchase price adjustment for the 51 percent of SeongJung, which we acquired in 2011, but where we had a purchase price adjustment early 2012. The two main items in the financing cash flow are actually the dividend payment to our shareholders as well as some repayments of borrowings in course of the year. Only very briefly on the balance sheet on page 14 and fully in line with what we discussed In earlier calls, the only point I want to reiterate on the balance sheet structure is actually the intangibles. We do carry intangibles on our books of roughly €2,200,000,000 But as you will remember from the 2.2 €1,000,000,000 a major share actually €1,200,000,000 does not result from acquisitions we have undertaken, but came with the acquisition of Brentag By BC Partners back in 2006. On the indebtedness, net debt Decreased slightly year over year by €10,000,000 to €1,482,000,000 at the end The year in leverage terms, it means the leverage is down to 2.1 times, whereas it was 2.3 times a year ago. A brief word on equity. You see that we are now operating in equity position of close to €2,000,000,000 €1,991,000,000 up more than €200,000,000 against previous year, which is basically Steen, I'll also skip the maturities profile on Page 17. I will talk on the working capital slide, Page 18. Trade working capital at the end of the year slightly exceeded €1,000,000,000 actually €1,018,000,000 In terms of working capital turns, this represents a working capital turn of 9.2 times, which is virtually in line with the 9 point Sweet times we managed to achieve a year ago. I'm moving on to Page 19, which deals with capital returns. We measure returns on capital in our group based on a return on net asset concept, VONA. We define RONA as EBITA divided by property, plant, equipment and working capital. We continue to generate strong RONAs. We deliver a RONA of 32% for 2012, Which is in line or marginally lower than the figure a year ago, which was 32.5. The very slight reduction is basically due to working capital increase, which slightly exceeded increase in EBITA. Yes. Pretty proud on the strong free cash flow development, which you can see on Page 20. You will remember That free cash flow is one of the most important KPIs we steer our operating management by. For 2012, the group delivered Strong free cash flow of €578,000,000 following €511,000,000 in 20 11. The strong increase of €67,000,000 or 13% is strongly driven by the EBITDA increase and supported And I would hand back to Steve for a discussion of our segment results. Thanks, Jorg. Now let me take you through the developments of the segments for the full year on page 21 and a key for on the following page. Our business in all segments demonstrated resilience in challenging market conditions throughout 2012. In Europe, its operating gross profit We've turned by 2.4% on an FX adjusted basis and operating EBITDA by 2.9% when adjusting the previously mentioned extraordinary effect in Q3. As Hayley has highlighted previously, we had started a program to increase efficiency and reduced the European headcount by about 4%. At the end of December, the program has been fully implemented. In Q1, we have booked €10,000,000 in expenses. No additional material one time costs for this program have been booked since. We confirm that the full year expense savings amounted to roughly €10,000,000 in 2012 and we expect them to increase in 2013 where we will be able to benefit from the full year's savings effects. The European macroeconomic environment has been challenging throughout the year. However, we have seen recently a trend of stabilization in Southern European countries. In North America, North America continued to be a solid performer in the year with a good FX adjusted gross profit growth of 4% And operating EBITDA growth of 5.5%. The business developed well across the continent. In Latin America, our business demonstrated further organic growth in 2012. The segment delivered a 7.3% FX adjusted gross profit growth and 5.6 percent EBITDA operating growth. Our cost base in Latin America was affected by costs associated with acquisitions in the region. In Asia Pacific, we show a 26.7% gross profit growth and EBITDA operating increased by 25 4% paid by the contribution of our successful acquisitions in the region. Organic growth was significantly affected in the early part of the year by ongoing weakness Thailand and the slowdown in China, we are pleased to report a strong return to organic growth in the second half of twenty twelve. Now let me move to Page 22 in terms of the Q4 segments. In Europe, the 1st of the quarter, Europe continues to demonstrate significant resilience with a 0.3% growth of gross profit and a 1.2% of EBITDA growth. Regionally Northern Europe still continued to perform better than Southern Europe. At this stage, we are not planning further significant reductions to our structure or cost base. However, we remain vigilant and will react to any deterioration in the overall macroeconomic situation. North America had a satisfactory Q4 on FX adjusted gross profit growth of 1.4% and an EBITDA growth of 7.8%. Overall business confidence was somewhat affected by the unclear outcome of fiscal cliff discussions. Please note the acquisition of Altiva has not been included in our 2012 figures and is only included from 2013 onwards. As far as Latin America is concerned, the segment of Latin America delivered a 7.6% FX adjusted gross profit growth and a 5.2% EBITDA growth. Please note that Delantra has not been included in our 2012 figures and is only consolidated from January 2013 onwards. In Asia Pacific, it shows a 30.1% gross profit growth and an EBITDA growth by 40%, Which reflects a strong return to organic growth in the latter part of 2012 driven by Thailand and China. Overall, we were pleased with the operating performance in Q4 2012 where we saw operating gross profit grow by 2.7% and operating EBITDA grow 5%. If I now go on to page 23, the dividend proposal. Based on strong earnings development, we are able to manage the existing payout ratio and we propose a dividend of €2.4 which represents a 20% increase over previous year. Now I'd like to come to the outlook. We do have a positive outlook for 2013. We expect a macroeconomic growth at a moderate pace and certainly with some differentiation within the major economies. In addition, we are seeing a continuing outsourcing trend to distribution and expect to benefit from Brentag's strong competitive position, Increasing global reach and expanding products and services to the benefits of the whole group in the year. The efficiency improvements measures The efficiency improvement measures implemented in 2012 particularly in Europe will have a positive effect in 2013. We will continue to work on further improvements as a result our EBITDA GP conversion ratio will improve. In addition to the organic growth, the acquisitions undertaken in 2012 like ISM and Altavia will have a full year impact in 2013. Now profit before tax should develop broadly in line with the growth of operating EBITDA. We expect to give functional sales and chemical pricing, 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 the group. Valens' free cash flow is expected to grow based on the different elements mentioned and above. I'd now like to address the current trading environment. We have continued to see growth in the 1st 2 months of 2013. Gross profit and EBITDA for the 1st 2 months of 2013 were ahead of the same period in 2012. Gross profit per working day grew by 3.4% year over year in November, 2.3% in December, 5% in January and 6.9% in February. Just as a reminder for those looking at comparisons, For comparison purposes, Q3 Q1 2012 versus Q1 2013, Easter will be in this quarter, which has the effect of about 3 working days less. In closing, we are confident that we will grow all the relevant earnings parameters in 2013 With a mixture of both acquisitive and organic growth. Despite ongoing difficult macroeconomic conditions, Brentag remains very well positioned to capture new growth in both established and emerging markets. Now happy to answer your questions. Thank you. We will now begin our question and answer session. 12. Please lift the handset before making your selection. One moment please for the first question. And our first question comes from Raul Plante from JPMorgan. Please go ahead. Morning, Steve. Good afternoon, Georg. In terms of organic revenue growth, you helpfully provided that on a monthly basis Just now, I was just wondering if we look at the quarter just reported, Brentag gives the figure for Q4 of 2.7% Growth in gross profit, how was that split between organic and acquisition? I think from Q3 3 where there was 4.1% growth, all of that was acquisitions. So I'd like to get a sense and it seems like on a monthly basis things are improving whether things are improving. Thanks. Yes, hi, it's Georg. Not sure I could in the street follow all the detailed Growth for price of P and L license, which we don't deliver so far, I couldn't give you an Exact organic growth figure for any certain quarter on GP level. Generally speaking, I would confirm that In terms of organic growth rates, the picture somewhat improved towards the end of the year. Okay. Helpful. Thank you. And in terms of the exit, has it improved even more since the end of the year? It would seem so given Steve's Comments about the monthly rollout? I would agree to that, but I would also reiterate Steve's point that if you don't look on a working day basis, but you will see quarter over quarter, March will have the Easter effect meaning that Easter is in March this year, but was in April last year. Yes. Thank you. Our next question comes from Andy Shaw from Deutsche Bank. Please go ahead. Good afternoon, everyone. I just had I have 4 if I could sneak them in please. Sorry, just to confirm, I think Steve you gave The gross profit per working day on an FX adjusted basis. Could you give us the sort of the acquisition impact Please across the 4 months that you gave. That's question 1. Question 2, just interested Then comments around the North American conversion ratio. As far as I can see, that's a record quarter, but it may have been higher Some time in the past pre IPO at 45.7 percent Q2, Q3 that wasn't down a little bit year on year, but you're up 2 50 basis points quarter on quarter in Q4 to hit that 45.7%. On Asia Pacific, You mentioned that the growth was growing clearly on an FX adjusted basis. You're up 40%. So I just wondered what the organic growth was please in Q4 year on year? And Maybe some more granular details please as to what's happening in Thailand and China to I've seen a good turnaround and rebound in growth. And then just a small one in terms of environmental provisions. Seems as though there was a $12,700,000 reversal in environmental provisions year on year please. Thank you. Okay. It's Georg. Maybe I if that's okay with you Steve, I'll go ahead with some of the questions and then we jump in. First of all, yes, to confirm, the figures Steve mentioned were FX adjusted gross profit per working day growth rates. And they were and I'm focusing on 2013 now. They were 5% for January and 6.9% for February. That does include acquisitions. We don't provide clean organic growth rates. But if you take our IR press releases do the math Then it's fair to assume that roughly 3 percentage points and that would be January as well as February roughly 3 percentage points comes from acquisitions And the remainder is organic. Unfortunately, it's a little bit the same answer, Andy, on your second Question about organic growth rates for Q4 and I assume that was referring to organic EBITDA growth. We don't disclose clean organic rates for all the reasons mentioned earlier about integration and it's kind of Arbitrary to split things out once they are integrated. If I've seen your release correctly this morning, And I think you estimate that roughly 2% organic EBITDA growth for the quarter might be marginally on the high But it's a figure that does not make me nervous at all. Environmental provision, I have to go back to the files. We always have a little bit in and out out of environmental provisions, but what is included in the release of €12,000,000 that you mentioned is the €7,000,000 Galicia, which we discussed as early as Q1. You might remember that we had an environmental provision on the books Related to an older environmental case in Spain, which was finally settled beginning of And where we released the provision of €7,000,000 that was not any longer needed that was over provided. I think we discussed that in Q1 and that would be the one and only major item within the 12. I think Thailand and China is the only remaining question. China, I would say, pretty strong towards the end of the year, basically on the back Of strengthening macroeconomic environment in China. Thailand now above previous year's level, But granted previous year still is a little bit low because previous year's level was immediately after the flood. So being back on previous year's level is a success, but it also means there is more potential to come in Thailand. And just maybe on North America. So I've asked quite a few questions just on that conversion ratio looked a bit of a whopper That's 45.7 percent. I would say it's I know it sounds like a little bit more Significant gaps and I'm placing it, but I would say it's in the noise. North America is on pretty strong conversion ratios. The figure which we have is pretty strong figure. I wouldn't have any very specific reason why we are a little bit down versus And Andy, I think just when it comes to sort of Thailand and China as well, I think we are very pleased to see the in Asia Pacific in this particular respect. But you know, I think 2012 was a year a little frustrating year for us. And it It seems to take quite a long while to get the business rocking and rolling in the right direction. So the recovery towards I think it was stable Q3 growing in Q4. We're seeing a positive momentum at the start of the year. So it's what we have expected for a little while. So we're delighted See it, but we would have been expecting that. See, I would Andy, sorry, I don't want really to jump back to an earlier question, but maybe to make the group aware, The thought just crosses my mind. And with respect to conversion ratio in North America, which you point out is a little bit reduced over the years, I would also say that the North American business has grown strongly in terms of gross profit as well as in terms of EBITDA. So even if the conversion ratio might be down a little bit, the absolute success of the business in terms of gross profit growth and even CTA growth was a tremendous success. Okay. Thanks very much. And our next question comes from Rory McKenzie from UBS. Please go ahead. Good afternoon. It's Rory McKenzie from UBS. Just two questions if I can. First question, given that this course included some restructuring benefits, can you talk about the movement in the underlying European conversion margin and some of the drivers behind that? And then secondly on the U. S. Kind of strong growth, what areas in particular have you seen growing, growing well? I mean maybe for example oil and gas Yes. Okay. In North America, we saw quite a good performance performance quite Across the region actually, it wasn't just shale gas, but we saw strong performance in our specialty chemicals, business and water treatment etcetera, etcetera. So the shale gas and the oil gas business is important in North America, but we have a far more broad based Property improvement for North America. So it is not just sort of based on one particular segment. I think the question was on conversion ratio in Europe. Yes. Our view is that the underlying conversion ratio in Europe, so meaning if I strip out the nonrecurring effects improved by 20 basis points 2012 over 2011. It's 20 basis points full year over full year against a weak macroeconomic environment. From our perspective, it proves it underpins that the variability of the cost structure, our ability to manage the costs hold. It is fair to say as well that we've been sort of saying to investors for quite some time now that we expect to see an improvement in the European conversion ratio. Certainly during the course of 2012, we have been taking actions and rolling out programs which will enhance that during the course of this Yes. And in fact years after. So we are making we feel we're making good progress in the conversion ratio in Europe and we'll expect to see some good results there. Okay. That's great. Thanks. Just one follow-up, actually just a quick one. What is your all in exposure to oil and gas in the U. S. Now after these acquisitions? I would have to go back to the files for the details. I would say roughly 30% of the sales in North America are oil and gas related. We have no further questions at this time. Okay. In that case, well, thank you very much everybody for joining the call. We feel we've had A strong performance in 2012. This has demonstrated underlying good growth in profitability and a high degree of resilience Really quite difficult macroeconomic conditions and I think Pardon the interruption. We do have a question that just popped up from Andy Shaw. Please go ahead. Okay. Go on. So, actually, I'll take it later on. Sorry, Steve, I'll take that later on. I'll let you carry on with you. Yes. I see my very polished ending there. You interrupted me. What can I say? Sorry about that space. I'll just say it now. Everybody is laughing on the phone at me now. Okay. Frank, well, thanks very much everybody for coming on the call. I think we've answered all the questions And we'll close the call from there. Thank you very much. Bye bye now. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You