Welcome to the Brenntag AG results call Q3 2012. At our customer's request, this conference will be recorded. As a reminder, all participants on the telephone lines will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participants have difficulty hearing the conference, please press star followed by zero on your telephone for operator assistance. Down to our host, Mr. Muller, who will see you through this conference. Please go ahead, sir.
Good afternoon, everybody. Ladies and gentlemen, thank you very much for joining us here in London, and for those on the telephone to review our Q3 2012 financials. I'd like to welcome all our members present here. I'm with Jürgen Buchsteiner, member of the board and responsible for Asia Pacific and merger and acquisitions, and Bill Fidler, member of the board and of management responsible for the Americas. We'll be happy to answer your questions after the presentation. Unfortunately, Georg Müller, our CFO, cannot be with us today. He's poorly, unfortunately. He's really pleased because he's done most of the work in preparation here. For one day only, Jürgen will be reprising his role as CFO, which he's delighted, and he'll be delighted to take most of the questions later. That's why Georg's not here. Nevertheless, moving on.
In the third quarter of 2012, growth of the global economy continued to slow in all regions. Nevertheless, sales and gross profit of the Brenntag Group clearly continued to grow compared to the prior year period. Our gross profit grew by 4% on a constant FX basis, or 10.7% as reported. Before running through the details, I would like to highlight our Q3 results was impacted by a non-recurring expense of EUR 11 million in our European segment. We'll provide details of this a little later in the presentation. Adjusting for this non-recurring expense, EBITDA operating would have been on previous year's level on an FX adjusted basis, while growing by 7.3% at respective FX rates. We continue to be pleased with the acquisitions executed in 2011 and their positive contribution, and the acquisitions conducted in 2012 are also meeting our expectations.
Regardless of the current environment, we continue to report strong free cash flow driven by EBITDA as well as lower working capital. Just moving on to the operating highlights. See how this translates into full set of numbers. Gross profit totaled EUR 493.2 million, 4% above previous year on an FX adjusted basis, or 10.7% above previous year as reported. Operating EBITDA reached EUR 167.8 million, adjusted for EUR 11 million non-recurring expense. Operating EBITDA is at EUR 178.8, up 7.3% as reported or on previous year's level FX adjusted. Free cash flow continued to be strong in Q3 2012 and totaled EUR 168.1 million, driven by strong EBITDA generation and some reduction in working capital. The acquisition spend for this year currently stands at enterprise values of EUR 107.2 million, including the acquisition of Delanta, which is expected to close in Q4.
In terms of our free floats, Brachem Acquisitions S.C.A. placed the total remaining portion of their 6.9 million shares on the 6th of July 2012 with institutional investors. The free float increased from 86.3% to 100%. The transaction was led by Goldman Sachs and Deutsche Bank. If I may now come on to acquisitions. On the 16th of July, we were delighted to complete the acquisition of ISM/Salkat Group. The company is one of the leading specialty chemicals distributors in Australia and New Zealand. Thanks to this strategic acquisition, Brenntag has expanded its market share in Australia quite significantly and, in addition, provides a new entry into the New Zealand market. This acquisition satisfies two of our key selection criteria. It broadens our full line portfolio and increases our geographical coverage.
On the same day, we were delighted to be able to announce the closing of the acquisition of the Texas-based TER Corporation, a chemical distributor specialized in the oil and gas industry. The company is based in one of the fastest-growing shale gas regions, the Eagle Ford Shale in North America. It help us broaden our products and service portfolio into this important industry. As with ISM/Salkat Group, it's fair to say that TER has had an excellent start and both of these are fully in line with our expectations. On the 15th of October 2012, we were able to announce the signing of an agreement for another acquisition, this time in the southern cone of Latin America. The Delanta Group, which helps us improve our position in specialty chemicals in several countries in Latin America. Closing of this transaction is expected this month.
As with ISM, Delanta meets two of our selection criteria of acquisitions, i.e. broadens our portfolio and increases our geographic coverage. I can now pass across to Jürgen.
Thank you, Steve. Please refer to page 10 for the income statement and the detailed financials for Q3 2012 reflect the resilience of our business model, also under the currently less favorable business conditions. Gross profit totaled EUR 493.2 million, which represents a 4.0% FX-adjusted increase against previous year and a strong 10.7% as-reported growth. Once again, all regions contributed to the growth of gross profit. The non-recurring expense of EUR 11 million that was already mentioned actually relates to a change in provisions for the antitrust investigation in France, which relates to business issues before 2007. The operating EBITDA totaled EUR 167.7 million as reported or EUR 178.87 million when adjusting for this expense. This represents a 7.3% growth at respective FX rates or on previous year's level on an FX-adjusted basis.
Please refer to the next page, where we provide additional information to the income statement, starting with the depreciation, which for the quarter was at EUR 24.3 million. The amortization amounted to EUR 9.9 million in Q3 2011 and includes the following issues: EUR 8 million for customer base amortization for acquisition, which we at Brenntag have undertaken, EUR 1.1 million for software and EUR 0.8 million for other issues. The increase of amortization over the previous year is mainly because of scheduled customer-based amortization for the Multisol and ISM acquisitions. The financial result totaled EUR 23.9 million. We previously mentioned our financial results was partly impacted by a technical effect related to the outstanding payment obligation for the remaining 49% of SanYoung, our Chinese joint venture. In this quarter, the effect has been minor at a negative EUR 0.8 million. Compared to previous year, our financial result improved by 16%.
Earnings before tax were strong and amounted to EUR 109.6 million, while the as-reported increase over previous year is only 2.5%. This represents a 13% increase over previous year when adjusting for the non-recurring effect in the European segment. Profit after tax amounted to EUR 79.6 million, 19.3% above previous year. We show EPS information at the bottom of the slide, and the earnings per share for the quarter total EUR 1.53, a 17.7% increase over previous year's quarter. As you know, our earnings per shares are impacted by amortization and effects from the revaluation of the SanYoung liability. Together with many analysts, we think these effects are not relevant for valuation purposes. Therefore, many analysts adjust the EPS for these effects. To support this analysis, we also state the EPS, excluding amortization and the SanYoung liability effect.
For Q3 2012, the adjusted EPS amounts to EUR 1.68 and is EUR 0.15 higher than the as-reported figure. On the next slide, some information as to our cash flow statement. Here on page 12, you find the details for the operating cash flow. The reported cash flow provided by operating activities amounted to EUR 158.1 million. Interest as well as income tax payments decreased compared to previous year. Changes in current assets and liabilities mainly relate to trade working capital. On the next page, some information as to our investment cash flow. Spending for CapEx in Q3 2012 was at EUR 20.4 million. Here in the cash flow statement, we show a spend for purchases of consolidated subsidiaries and other business units of EUR 122.7 million, which is mainly related to the acquisitions of ISM, Salkat, and the TER Group.
For your information, Delanta will be cashed out, will be paid in Q4 2012. The financing cash flow shows the repayment of local borrowings of EUR 21.7 million. Important in this context is to note that we continue to have the major part of the EUR 500 million revolver for general corporate funding purposes available. On the next chart, the structure of our balance sheet. Here, just as a footnote information, some of you have heard this already by now and several times in previous meetings, but important for analysis. A significant portion of the intangibles is related to the acquisition of the Brenntag Group by BC Partners in 2006 and does not relate to acquisitions we as Brenntag have undertaken ourselves. Out of the 2.1 billion intangibles, an amount of EUR 1.2 billion is related to the BC Partners' acquisition of Brenntag.
On page 15, some information to our balance sheet and the leverage. You can see that the net debt decreased during Q3 by EUR 57 million to EUR 1.53 billion. This in comparison to Q2 2012. More important, the Group's leverage for the quarter is at 2.2 times, which is slightly below the leverage end of Q2 2012 of 2.3 times. We are now back on or at the level of Q1 2012. Page 16, just as backup information, you see the development of our net debt to operating EBITDA leverage over time. As you can see, Q4, Q3, at the end of September, we're showing a 2.2 times multiple. Page 17, just to complete the information on our funding structure and capabilities, show the payment maturity profile of our debt. Page 18 provides information to the working capital.
I would just highlight the trade working capital amounted to EUR 1.11 billion at the end of the quarter. As in the previous quarter, our working capital turn was at 9.2 times on an LTM basis. Briefly to page 19, the cash flow. Free cash flow in Q3, we delivered a free cash flow of EUR 168.1 million, Q3 was our strongest cash flow generating quarter this year so far. With this, I would like to hand over to Steve, who will provide information on the performance at the segment level.
Great. Thank you, Jürgen. I can match the segment since business in all segments proved their resilience in even more challenging conditions throughout Q3 2012. In Europe, the gross profit grew by 3.3% on FX-adjusted basis, the operating EBITA up by 3.4% when adjusting for the non-recurring expense. As previously announced, we had started a program to increase efficiency and reduce the European headcount by about 4%. By the end of September, we had completed about 95% of the planned reductions. In Q1, we have booked a EUR 10 million expense. No additional one-time costs have been incurred in Q3 in this respect. We confirm that the expense savings amounted to roughly EUR 3 million in Q3, we expect them to slightly increase in Q4. The European macroeconomic environment continues to be quite challenging.
We will continue to monitor the overall macroeconomic situation and remains ready to take further steps should it prove necessary. In terms of North America, it is now facing a rather softening environment. Nevertheless, the segment was able to increase operating gross profit on an FX-adjusted basis by just over 0.7% and maintaining its operating EBITA in line with last year's performance. The business continues to develop solidly across the continent, although we clearly note a lower momentum on the demand side compared to the first half of 2012. In Latin America, our business performed very positively, the segment delivered 7.3% FX-adjusted gross profit growth and 1.6% EBITA growth. The cost base in Latin America was affected by costs related to closed acquisitions. In Asia Pacific, it shows a 36.4% gross profit growth and 35.4% operating EBITA growth.
Our Chinese acquisitions Zhong Yung showed an improving contribution within the quarter, despite ongoing cooling in the Chinese economy, particularly within the construction industry. Our business in Thailand is still not back to normal activity levels. For the business performance in the rest of Asia Pacific, we see continued improvements. The ISM/Salkat Group has been consolidated since the mid of July 2012, and so far results are fully in line with expectations in terms of operating performance and integration costs. To summarize our group's operating gross profit for Q3 2012, amounted to a +4.1%, and the operating EBITA was in line with previous year when adjusting for the one-time effect in Europe. Coming on to the outlook. It's clear that we will not see the hopeful positive economic lift in demand of the remainder of the year.
We remain confident in our group's underlying performance and considering the challenging macroeconomic climate, the resilient nature of Brenntag's business model and the development of its results for the first nine months of 2012. We have narrowed the range of the expected operating EBITA for 2012 to be between EUR 705 million and EUR 725 million, excluding the extraordinary effect in segment Europe. This guidance range represents a strong growth over performance of prior year of EUR 661 million EBITA. The range is based on the following assumptions that basically there will be no further deterioration in the world economic climate compared to the situation we currently see. Perhaps I could address the current trading environment. Our acquisitions undertaken in the course of 2011 and 2012 continue to meet our expectations. A positive indication comes from the inner quarterly trend of GP per working day.
In the quarter, it grew by 1.7% in July, 7.4% in August, and 6% in September. Despite a double-dip recession seen in many countries, our resilient business model delivered clear growth in each month. We fully expect 2012 to be a further record year for Brenntag. I think we're now ready to take questions from those here. Perhaps we could start with those in the room to start with and then take questions on the telephone, if that's possible.
Good afternoon. It's Andy Chu from Deutsche Bank. A few questions, but maybe I could just start, please, with the gross profit per working day numbers you gave us on, I guess, they're FX adjusted, but what are those numbers, please, on an organic basis, stripping out acquisitions?
Sorry, did you have.
The question was as to the GP per working day growth.
All right.
We provided including acquisition. The question is where are we stripping acquisitions out? Well, we normally say about three or four. I think 4% is actually, if you take all the acquisitions into account, 4% is represented by the acquisitions, and the rest is organic.
Do you have a number for October, please, just in terms of the sort of trends there, please?
Well, we have a number.
Yeah.
Let me calculate it out.
I think October was all in, so including acquisitions at slightly positive. This would mean if we strip out the 4% on an organic level, we would be at a negative 4% into October. I see some people thinking, but I would like to provide some additional information first. This is just the October. This is one number. We have seen, as Steve mentioned, some improvement within Q3, starting with relatively weak July, seeing some nice improvements. There are some technical issues we have at the group level, roughly one and a half to two additional working days. You might know that some of our customers just place monthly orders, so it doesn't mean that with additional working days, we would have a higher GP generation.
In addition to this, we do not provide this information, but we can say that the October GP in absolute terms per working day was at a high level, higher than in July and higher than in August. We are quite pleased there. If you look at the average of the gross profit per working day increase in Q3, we overall see an increase of more than 5%, meaning that we would have seen a 1%-2% organic growth in Q3. If you extend these statistics including October, you would see a similar number. Taking the last three months, August, September, October, on average, we would see some slight growth on an organic basis, just to put it into perspective.
We should not forget that overall, we mentioned this, we are somewhat in a softer environment as of right now, but we still see that our business is performing on an organic basis at the level of last year, actually slightly growing. All of this, I think you please consider when we provide this one snapshot of October, where we show a somewhat slower development in our GP per working day. I hope those were not too many words, Andy.
That's good and very helpful. On your cost base, in terms of your selling costs, which were about EUR 325 million in Q3.
They were broadly around about EUR 300 million in each of Q1, Q2. I guess in Q3, you put that EUR 10 million, EUR 11 million provision. In terms of what should we expect, I guess, going forward? What is happening to the underlying cost base excluding acquisition? Is that still slightly rising or should it be flat? Maybe you could help us in terms of the outlook for selling costs, please.
Do you want to go ahead?
I think it's fair to say that there's a couple of non-recurring elements within the quarter. Therefore, I would expect underlying operating costs not to be increasing. If anything, we would see the reverse of that, excluding acquisitions, because clearly we are looking at overall improve our EBIT, our GP conversion ratio. When you look at these Q3 numbers, they look different to what you might expect. We haven't wavered from that objective, and that is still very much in our focus.
Maybe I could just ask one more for timing. Just in terms of North America, and maybe a question for Bill. We've seen another quarter of year-over-year decline in conversion ratio. I guess even at the group level, apart from a number of moving factors, I guess the market isn't used to seeing a year-over-year decline in EBITDA to gross profit conversion ratio. I guess that the bigger question is we, I guess, have come to expect that the spread between North America over 40% EBITDA to gross profit and Europe at 33%. I guess the talk has always been sort of Europe moderate, so closing the gap versus North America. Should the market be at all concerned that actually the North American conversion ratio actually has peaked and actually is going to move down towards Europe and they'll be meeting somewhere in the middle, please?
Andy, the conversion rate, as you mentioned, is very high. While it hasn't peaked, the growth of that conversion rate will be probably slower than the rest of the Brenntag world. Actually, even though we were, I think, just a few percentage points below the conversion rate of the third quarter of 2011, that was a very high-performing quarter. What we've seen in 2012 is actually improvement in the conversion rate from the second quarter over the first quarter and the third quarter over the second quarter. It has come up during the course of the year. We expect, going forward, that while there may be periodic slight dips in that conversion rate, it will continue to improve.
One of the reasons that it fluctuates is we've had some very high growth rates in our specialties business in North America, some very high growth rates in our diesel exhaust fluid business in North America, both currently operating at conversion rates that are a little bit less than the rest of the business. It's not a straight line. Long term, it will continue to improve.
Plus, if I may add, Bill, my understanding is that the reason for the somewhat lower conversion ratio of these businesses, the DEF business as well as the specialties business, is that we are still in ramp-up phase. We have implemented and provided for an infra and cost structure, which we are now starting to more and more utilize, which gives us the comfort to say that we would expect some positive development over time from further utilization of infra and cost structure in these areas.
Absolutely. That's a good clarification. Thank you.
Good clarification.
Hi there, Toby Pearson, Bank of America. Can I ask a couple? The first is there any reason why you didn't initiate any more restructuring in the fourth quarter? I think growth interest slowing, giving a fairly conservative outlook about GDP and where that's heading. Should we expect more restructuring to come through? Are you just more confident than you give the impression of being?
We're probably relatively cautious. I guess probably it would be fair to say that what we're looking at at the moment really is our capability to deliver growth. We have a very significant capacity within the group to perform in terms of creating new growth opportunities. What I don't want to do is have a situation where we end up eating into the ability of business to grow for a short-term gain. Quite often, it takes a long time to actually train people in terms of specialty chemicals and certain elements of what we do. I'm really quite reluctant to sacrifice that capability for short-term gain. We believe that structurally, the business itself is very well positioned to take advantage and take new opportunities, even in more difficult environments.
I think if you look at the macroeconomics as it stands today, I would see that chemical distribution actually has an even greater role to play going forward than a smaller role. In many respects, we would expect to see some of the manufacturers looking to outsource even more. That's not a time when you start reducing your capabilities. We have to be a little bit patient that we don't throw the baby out with the bath water.
Just to follow up on that. If the manufacturer is looking to outsource more, are they conversations you're having or is it just sort of an internal feeling because of the low levels of growth?
Well, it's a conversation we have all the time. There's a constant dialogue with manufacturers. I think, not wishing to name any particular manufacturer, but if you look at more recent announcements, public announcements of financial results, you'll see probably a number of companies in the chemical sector, particularly, restructuring quite heavily and announcing not necessarily such positive results. This is an environment where clearly we would be looking to help them be more efficient at delivering their products into the marketplace, and therefore it becomes more of an opportunity for us to do that.
Okay, thanks. Just one on numbers. Could you quantify the acquisition-related costs that were in the Q3 numbers, please?
I think we normally don't do it.
We normally, and also in this case, will not disclose acquisition-related effects. We treat them as extraordinary effects. Yes, they come in a quarter, and in some quarters are more impacted by others. As a matter of corporate policy, we are not prepared to disclose this information.
Okay, thanks.
Hi there, Charles Wilson from Goldman. Just a couple of questions first on acquisitions. Can you talk about what you expected to spend this year relative to historic guidance you've given? Also, did that influence your decision to reduce the top end of your EBITDA guidance for this year? Also, could you comment on the bigger Brazilian opportunity, which is in the press at the moment, whether that's something you could be interested in?
It's for the CEO.
Thanks very much. Thank you for delegating. Thank you very much. I think in terms of that, we've generally been guided between EUR 200 million-EUR 250 million in terms of the acquisition spend for this year. At this stage, we believe that will actually occur. The fact too, as we are in November, you can imagine this is going to be relatively late in the day, but we're quite confident that we can get this done. It's not had an effect on the year-end guidance. Our view about the year-end guidance is much more of a macroeconomic view. We were perhaps a little bit more optimistic there might be an upturn, but what we see, particularly, for example, in the European segment, there's a much flatter situation than we hoped for as far as demand is concerned.
As far as the Brazilian opportunity, which you refer to in the press, we really don't make a policy to talk about that sort of acquisition opportunity, particularly if we were involved in that discussion.
Okay. Finally, maybe one for Jürgen. I guess that the original or some of the acquisition in China might not have been quite what you thought at the beginning or didn't quite go as well as maybe some people might have thought. Maybe you can give an update as to what you've been doing in China and how you see that bit of the business progressing.
Just to clarify. In 2011, the joint venture which we have there in China, SanYoung, really outperformed clearly our expectations. We saw a drop in performance in Q1, partly related to a drop in demand in the construction industry. As you might know, our joint venture provides solvents as a distributor, is focused on the coatings industry, which serves to a high degree the construction industry, and we saw a significant slowdown there, ultimately a slowdown in our demand and pressure on our GP per ton. We have recovered. First, we can say we do not really see a significant increase improvement in demand. We went through some internal adjustments.
We focused the company on higher sales efficiency, a certain higher level of aggressiveness in the market, and a proper price management, meaning effective pass-through of price increases, which we have to face on the supplier side, that we guarantee and ensure that we fully and more or less immediately pass these increases through. This has shown significant improvement. As of right now, for the last three to four months, we see a significant improvement, and currently, including October, the joint venture is exceeding significantly our expectations again. We are, as of now, still very happy with the acquisition.
Final question, do you see acquisition opportunities in China, or are you still in bedding down mode with what you've got?
Of course, we are looking at acquisition opportunities, but I think it's fair to say that when it comes to China as well as to the whole region of Asia, probably we need to digest the most recent acquisitions. We just talked about the acquisition in Australia and New Zealand. We are preparing the organization for further growth organically, but also for external growth. I would see 2013 more as a consolidation phase. I would not surprised if we see some smaller two or three bolt-on acquisitions, but I would be surprised if we see a significant larger move in China.
Thank you very much.
Yes, Ma Wie Geen from HSBC. I have two questions. First of all, regarding the growth in Latin America, is there a particular reason that the growth of EBITDA was so much lower than the growth in gross profit?
I think we're very pleased with the gross profit growth in Latin America in the third quarter. I think what you're seeing in the absence of growth in the FTEs is really taking advantage of the growth that we put in place over the past couple of years. It's in spite of a very weak Brazilian economy and a very weak Mexican economy. We're really keeping our cost positions under control even though we're able to increase those gross profits. I think our position in Latin America remains very positive in spite of the two largest economies weakening considerably.
Did you plan actually for bigger growth in Latin America and therefore increase the cost base stronger than you would in this current growth environment?
Well, I think the cost base that you saw go up was really what Jürgen referred to, really acquisition-related costs. Our overall cost base in Latin America is very much under control.
Okay. The second question, you gave us the organic growth of the gross profit per working day. Could you also give us, it's a bit easier to compare for the full quarter, for the third quarter, also the organic gross profit growth year-on-year? It was 4% including external growth. Organically, was it slightly down? No?
Thomas, are we providing this information?
Yeah. Sorry. It's up to me to say that we also do not disclose these numbers. I think we are giving you sufficient information in our investor relations news so that you have at least a good understanding of what the operating organic gross profit development would be. I would therefore refer to this information.
Okay. I try last thing.
Different question.
The gross profit developments per ton. Did this change in Q3 year-on-year?
To be fair, gross profit per ton doesn't really matter that much in our context because volumes vary significantly, and we take the view. It's actually return, actual gross margin matters to us. We're not a volume-driven organization.
Especially on a quarter-on-quarter basis. You can have fluctuations. We have large volumes of indent business where we trade a lot of and deal with a lot of volumes and with low GP contributions. Looking on a quarter by non-quarter basis doesn't really give you too much of a good feeling as to the indication or as to the underlying business.
As an analyst, it would drive you crazy trying to work out what's happening now in volume GP per ton, honestly.
Look at us.
Look at us, yeah.
Gerhard Roggens from Exane BNP Paribas. I'd just like to come back to the restructuring in Europe. I think previously you said that if organically you were down 3%-4%, you would look into more restructuring. My question is, for you, is October at the moment a noise? When do you expect an organic recovery, also in 2013? Is it that you're not announcing more restructuring at the moment? Is it more related to a possible outsourcing partnership in anticipation of an outsourcing contract by a chemicals customer.
It's not in anticipation of any one particular contract. That wouldn't be the case, it wouldn't work in our business model. We operate obviously country by country to a large extent, not many contracts would cover the whole of Europe. As far as we are genuinely looking at the capacity of our organization to grow organically in the light of the macroeconomics that present themselves. What we need to do as a company is present the best channel to market to our customers, I see our customers as our suppliers and the end users. Just at the moment, we are actually really well-positioned to give a very good service. I'm really reluctant to say to reduce the ability of Brenntag to take advantage of the macroeconomic opportunities that are generated by a major slowdown or recessionary elements.
This is part of the resilient story that you hear about Brenntag. We're a business that operates well in really quite challenging conditions as well. I say I wouldn't want to compromise that at this stage. What we might do is take out volume-related costs. For example, we may well look at our logistics, and for some of us that know us a little bit better, we have probably 10%-20% of our truck fleet, which can be almost like a flywheel and be turned down, and we can take costs out in that respect. I would prefer to look at operational costs rather than particularly sales and marketing costs at the moment.
Would you say that you would be happy even if conversion margins in Europe would be flat next year?
No, I would not be happy. No. In fact, Andy asked a question earlier on, which I was desperate to answer as well, because I think it was the idea that the North American conversion ratio and the European conversion ratio could come together from different directions was probably my worst nightmare. No, I see the Europeans chasing the Americans, not coming together.
Thank you.
Yes. Andy Chu from Deutsche Bank. Three numbers questions, if I may. Firstly, on provisioning and the French antitrust provision, can you just confirm that's booked within miscellaneous provisions? I think they've gone up by about EUR 7 million in the quarter to about EUR 70 million. Maybe just give us a flavor of what's actually within that miscellaneous provisions. Secondly, maybe you could give us a flavor of what you expect the benefits of cost-cutting to be in Q4. My last question is on guidance. Are you still assuming a flat currency assumption for second half versus first half, i.e., at 130 in terms of the euro-U.S. dollar exchange rate, please? Does that feel realistic given that half year so far is at 126, which would imply, I guess, 140 for the remainder of the year on average? Thank you.
Okay. Starting with the second question as to the Q4 2012 benefits of the cost reduction program in Europe, in the verbiage we said it's around EUR 3 million of benefits in Q4.
Yes.
We had, I think a little less than EUR 3 million in Q3, would expect some increase to slightly over EUR 3 million in Q4. The other question was as to the provisions. I have to admit, I couldn't take a note, but I think the answer is yes. This is in the miscellaneous provision. As far I'm looking here at our support team. I think in addition, we have their environmental reserves. Are they in the miscellaneous category? Yeah. Which is a larger portion. We have, I don't know, personnel related, or why don't you provide the information? I think the question was what type of accruals do we have in this position? It's environmental, which I recall is the larger portion.
Sorry, in the field?
Yeah. Not the field, but what type do we have?
Okay. Types are the environmental provisions, the provisions for custom expenses.
Miscellaneous
remaining miscellaneous.
Yeah. The larger portion is environmental.
Yeah.
The largest portion by far.
Yeah. The one in miscellaneous.
I think the question is where the French antitrust provision is in.
In the miscellaneous provision. That's correct.
What else is in there apart from, I guess the key drivers, but what other things?
As far as I recall, we talked about 40, 50 different provisions, and there are smaller amounts in there. This provision would be probably a larger one.
U.S. dollar rate?
U.S. dollar rate. I didn't really understand the question. I think we assumed that this is a base for our guidance, that the current U.S. dollar rate would continue. In what is the range, 128 to 130.
Sorry, your guidance is based on what? At the half year, you said it was sort of based on 130. Is that?
Yeah, I think that's what it is. What do we have? We assume that the average FX rate for the first nine months would hold for Q4. Now I have to guess where it is, but I think it's 128, 129.
Does it answer your question? You look.
for 1:30, I guess.
Yeah.
Thank you.
Okay.
Simon Mizenoth from Berenberg Bank. Can I ask the role that chemical prices played in Q3? The working capital inflow, this quarter compared to the last one, is significantly lower. I am guessing prices were quite stable.
Yeah, I think there's a slightly confusing numbers, which will affect our cash flow because in terms of chemical pricing, reduction in people's inventory levels, people becoming more cautious about taking stock. We actually see an unwinding of sales. We see an unwinding of certain chemical pricing, reduced stock levels and what have you. It actually is a very typical recessionary effect, to be fair. Now, it's also fair to say we've seen some chemical prices going up recently. In terms of the reverse, it's quite an unusual market at the moment. Although having said that, looking at some of the announcements of recent chemical manufacturers, I suspect we won't see long-term high prices. I guess you might well see some more unwinding of working capital in that respect.
Well, I think it's fair to say that the prices which we are seeing right now are still significantly above last year. That we, on a quarter-on-quarter basis, I think in Q2, you need to help me here, Thomas. If you compare Q2 ASP of our portfolio to Q2 last year, we have seen an increase of roughly 7%. In Q4, it was a 4% increase. We are still, at least with regard to our portfolio, we are seeing price increases.
There's also a slight nuance on this is as we do more specialty chemicals, you will see a difference in the basic balance of our selling prices.
Thank you.
We will probably take some questions from the telephone.
Dear ladies and gentlemen on the telephone lines, if you have a question for our speakers, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask your question. If your question is answered before it's your turn to speak, you can dial zero two to cancel your question. If you are using speaker equipment today, please lift the handset before making your selections. Once again, if you wish to ask a question, please press zero one on your telephone keypad now. One moment please for the first question. The first question comes from Mr. Rob Plant from J.P. Morgan. Please go ahead, sir.
Afternoon, everyone. Two questions, please. The first one on the provision charge, was that cash or non-cash? Secondly, you mentioned that you don't like to split out the acquisition-related costs. In this quarter, they seem to be quite a factor. You've mentioned them in Latin America, and also in the other segments, there was a EUR 6 million swing down in the EBITDA, which was, I think, the most interesting move in the EBITDA today. There's a comment in the text that talks about acquisition-related costs. How much of that EUR 6 million relates to acquisitions? Thanks.
On the EUR 6 million, about two-thirds relates to acquisition costs.
No, personnel.
Personnel-related costs.
One time.
Right. Okay. Sorry, thank you. Yes, that's right. It's just acquisition cost?
No, not there. You're talking about the roughly EUR 6 million cost increase Q3 2012 over 2011 in the other segment.
Yes.
How we call it rest of world. What we are saying out of the EUR 6 million increase, roughly two-thirds are related to non-recurring personnel-related expenses.
In the other regions, it sounds like Latin America also had an acquisition-related cost.
We have some acquisition-related costs. As we said, we don't provide the exact information there, but it's in the low single-digit amount in absolute terms for Q3, and also a significant increase compared to Q3 2011.
Thank you.
On the cash.
Provision. Could you repeat your question? We had some difficulties with the line.
The provision of EUR 11 million in Europe, was that non-cash or cash?
It's a provision. I would say it's non-cash related. I don't know whether this answers your question.
Yeah.
There was no corresponding cash outflow for this. It's just provisioning.
Thank you.
Okay.
We have a further question from Mr. Charles Evans . Please go ahead, sir.
Hi, it's Charles Evans. Can you hear me?
Yeah.
Sorry, just to understand what you said about acquisition-related costs. You said there was a low single digit EUR million in Q3. I don't want actually the exact number. Was that with reference to Latin America? Because you also said there was a significant increase compare year-over-year. If we're just talking a couple of EUR million, it's not a big issue.
Yeah. It not only relates to Latin America. I think what we are talking about in terms of Latin America is a startup of our acquisition there. We have a certain cost element, and we do not see the GP necessarily in Latin America, and partly also outside the country, I guess. This explains why we see a relatively high increase in the cost base in Latin America, in addition to certain acquisition-related costs. Your observation is absolutely right. The acquisition-related costs do not fully explain the different development in Latin America when it comes to GP growth versus EBITDA growth.
Sorry. When you said that there was a low single-digit absolute EUR million cost, that was a reference to Latin America, not the Group?
No, it was a reference to the Group.
Okay, fine.
The group.
There can't have been much of an increase year-over-year at the group level if it's just a few EUR million.
That's the increase compared to Q3. In absolute terms, the acquisition-related cost for integration diligence were higher in Q3. I'm just talking about the two EUR million, the change in quarter-over-quarter last year, the absolute amount-
Okay
of acquisition-related cost, like integration, like diligence, is of course higher because we also had some significant cost in Q3 of last year. I hope this answers your question.
That's very clear. The number is significant, but the year-on-year is two.
Yes.
Okay. Going on to your guidance. If we just strip out the implied Q4 using the midpoint of your operating EBITDA guidance, it does imply a kind of acceleration compared to the Q3 trends in local currency. Can you just run through what, if anything, might be driving that?
The question is, what's driving the Q4 performance in terms of our expectation?
If you look at your implied Q4, it implies a 10% or 11% growth year-on-year if you use the midpoint. There's less of a currency tailwind. Can you maybe comment on that? Because obviously in local currency, Q3, you were flat.
To Latin America?
I think I'll start, unless Bill, you want to go ahead?
I can talk a little bit about North America and Latin America. If you look at 2012, the second quarter and the third quarter were very challenging economically. We had a lot of headwinds from a lot of different industries. What we're seeing today is a slight change in the environment, and we're quite optimistic about the fourth quarter and going forward. We believe that we have positioned ourselves very competitively, to take advantage of any type of an upswing in the economy, which we are expecting. In spite of the election results yesterday, I intend to take out my frustration on the competition, not on my employees. Seriously, we're quite bullish on the long term and actually the immediate future in North America, partly because of our energy situation. We're a low-cost energy country again. We see some return of manufacturing to North America.
In spite of some challenging circumstances in the coatings industry, the adhesives industry, housing is starting to return. Automobile production is going up, we're quite bullish on the rest of the year. In terms of Latin America, I think, again, we are so well positioned to take advantage of some of the long-term trends that Steve talked about, the outsourcing. We've taken an approach, an Americas approach to our specialties business. What we see are far greater opportunities for product line authorizations, some turnover business, and we're very bullish, again, in spite of the two largest economies being very flat in Brazil and actually very soft in Mexico.
Yeah, I think I can only add that it doesn't really move the needle too much. We are quite optimistic as to the development in Asia Pacific. I mentioned earlier that we feel quite comfortable there with what we are seeing, some improvement during the course of the year, and indications are that this improvement will hold and perhaps even slightly show further improvement.
I think it's also fair to say, as far as Europe is concerned, we see the cost savings coming through in the final quarter. We are, as I mentioned previously, we've not cut into this business in terms of reducing its capacity to grow. We are equally optimistic about getting the business moving in the last quarter.
Okay. Well, that was a very comprehensive answer. Thank you very much.
We have further questions. One moment, please. The next question comes from Mr. Marcus Meyer from Kepler Capital Markets. Please go ahead, sir.
Thanks for taking my question. Three, if I may. First of all, only the small one, you mentioned the last conference call that your Thai business had only a slow recovery from the flood. Just a question here, what is the current situation there? Secondly, have you seen effects from Hurricane Sandy, and which will these effects kick in the fourth quarter? Lastly, in this low growth environment for Asian companies, do you already see a higher outsourcing momentum there as well?
I'm sorry. I don't think I've got any of that.
Sorry. We have really a bad line. I don't know how we handle this. Perhaps one question at a time.
Sorry. Could you say it again? A little slower.
Sure. I will try. First of all, can you give us an update on your Thai business, which had only a slow recovery after the flood? Secondly, can you give us indication what kind of effects you have or will have in the fourth quarter from the Hurricane Sandy? Lastly, do you already see the higher outsourcing momentum-
Yeah
for the Asian market?
For the Asian market. Well, that's quite right. Okay, I've got one. As far as Asia Pacific is concerned, yes, the outsourcing is not as well-developed in Asia Pacific as, say, in North America or indeed Europe or Latin America, as it's a market still developing as far as chemical distribution is concerned. What we are seeing, and we're delighted to see, is that a number of major manufacturers who use Brenntag globally are now appointing Brenntag as their preferred channel to market in China and their preferred channel to market in other parts of Asia Pacific. We are really gearing up our capabilities and our organization to take advantage of those opportunities. I think that's really part of our global proposition, which we're very positive about.
Okay.
It seems that one of the question was related to the effects of the flood in Thailand.
Yeah.
I think we see some weakness in performance in Thailand. We talked about this. It's partly related to the weak macroeconomic condition in Thailand. Thailand has not, at least based on our information, found its way back to production and levels which we have seen and enjoyed before the flood. We see some structural changes. Actually, some of the industries, if you think in terms, for example, hard drive businesses, are leaving the country for whatever reasons. Thailand is also hit very hard by weakness in export to China, but also Europe. In addition to this, we see some negative effects also for our business from an increased supply of excess chemicals coming from China, which are being, I don't want to say dumped into the market, but flooding the market in this sense. There is a flooding effect.
As to the original 2011 flood, the aftermath, I think they've been taken care of. We still have to face a very weak Thai economy. Probably too many words here. The third question, we didn't understand. Could you-
If you have effects from the Hurricane Sandy in the U.S.
Hurricane effect.
Oh, yeah.
Sandy.
Sandy.
Sandy delivered a crushing blow really to our Northeast business and a portion of our specialties business. We lost several shipping days in the Northeast. Long-term, I think the effects are probably, except for the human suffering, of course, economically, the effects are probably positive as a lot of rebuilding, and it'll stimulate certain industries. Currently, it is causing some product line disruptions and availability because of the impact of terminals along the northeast coast. Because of our scope and breadth of operations, we're really in very, very good shape to make sure that our customers are taken care of. There is a short-term negative impact today.
It's also fair to say we weren't affected in an adverse way.
Right
In terms of our principal locations.
Right.
No damage.
Our facilities are fine.
Perfect. Thanks.
Okay.
Have your questions been answered?
Yes.
Yes.
Thank you. There are no further questions.
Well, in that case, ladies and gentlemen, thank you very much for those who've attended in person. Thank you very much for those on the line, and we'll bring the call to a close. Thank you.
Thank you.
Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.