Earnings Call: Q2 2012

Aug 8, 2012

Ladies and gentlemen, welcome to the BanTech AG Results Call Q2 2020. At our customer's request, Head of Asia Pacific and Merchant Acquisitions. And we have Bill Fiddler, Head of North America and Latin America in our Reading office in the States online. We will be very happy to put your questions after the presentation. For the Q2, our group delivered continued growth in earnings in a slow growing economic environment. Gross profit growth of 4.1 percent resulted in an operating EBITDA growth of 3.8% on a constant FX basis. This growth was based on a solid business development in generally challenging economic conditions. We are pleased with executed in 2011 and had positive contribution to this development. Based on the average conversion rate in Q2 12, the strong U. S. Dollar provides us with a tailwind. Consequently, the as reported growth rates are higher than the FX adjusted growth rates. Considering this positive translation effects from the stronger U. S. Dollar, we show a 10% as reported growth of operating EBITDA. Come to the operating highlights. Gross profit totaled €487,100,000 or 4.1% above previous year on an FX adjusted basis. Operating EBITDA reached €184,400,000 or 3.8% above previous year on an similar FX adjusted basis. Free cash flow generation was once again strong in Q2 2012. We saw a moderate increase of working capital, which is the usual seasonality, starting to benefit somewhat from stabilizing prices. Free cash flow totaled €101,200,000 after compared to €67,300,000 in Q2 2011, an increase of more than 50%. The acquisition spend for this year stands currently at an enterprise value of €90 €5,800,000 including the acquisitions signed in Q3 so far. Just in terms of changes to the Board of Management, Georg Muller has been appointed the CFO of Brenntag AG. And as mentioned before, Jurgen Buchstein And has taken over responsibility of Asia Pacific in addition to its ongoing responsibility for Global's mergers and acquisitions. So I think you're very familiar with our board. Just in terms of the turn to Page 7, in terms of the increased free float. Rackham Acquisitions FCA placed the total remaining portion of their 6,900,000 shares on the market on the 6th July 2012 with institutional investors. Therefore, our fee flows increased from 86.3% to 100%. The The transaction was led by Deutsche Bank and Goldman Sachs. If I just go to Page 8 on acquisitions. ISM on 16 July 2012, we were delighted to close the acquisition of ISM Group. Company is one of the leading specialty chemicals distributors in Australia and New Zealand. Thanks to this strategic acquisition, Ventec has expanded its market share in significantly and in addition added to the New Zealand market. This acquisition satisfies 2 of the key selection criteria pleased to announce the acquisition of TER, the acquisition in Texas, Texas Based Corporation, a chemical distribution company specializing in the oil and gas sector. The company is based in one of the fastest growing shale gas regions in the United States and helps us broaden our product range and service to this important industry. Come on to the segments. I'll pass it over to you. Thank you, B. Let me walk you through the detailed income statement and you will find the details of the income statement on Page presentation, what you see in the financials for the Q2 is continued resilience of our business model also under the less beneficial market conditions, which we currently observe. Gross profit totaled €487,100,000 and that represents a 4.1 percent FX adjusted increase against previous year. All regions actually contributed to the growth of gross profit. In past, we also provided information on the growth of gross profit per working day for each month in the quarter. In the reporting quarter, we grew gross profit per working day by 5.5% year over year in April, 4.7% in May 20 2.8% in June. After the end of the quarter in July, the growth rate was 1.7%. Expenses grew at about the same rate as gross profit. In the second quarter, we did not expense any noteworthy amounts for the European efficiency enhancement program. Conversion ratio improved slightly above the levels of previous year's quarter to 37.9%. As already mentioned, operating EBITDA totaled €184,400,000 And that we present an FX adjusted increase of 3.8%. The following page gives you information On further lines of the income statement, the depreciation for the quarter was €23,700,000 Amortization amounted to €9,000,000 in the Q2 and the amortization includes customer based amortizations for acquisitions that we have undertaken in the amount of €6,800,000 The financial result totaled minus €27,400,000 We previously mentioned that our financial result is partly impacted by a rather technical effect. It is impacted by the revaluation of the liability for the outstanding 49 20. The revaluation effect on the liability for Songeung in the second quarter has in a negative €3,900,000 The strong improvement of our financial result in comparison to Q2 twenty 11 is mainly attributable to the successful refinancing that we undertook summer last year. Overall, earnings before taxes were very strong and amounted to €124,000,000 a 20% increase over previous year. For the quarter, we recorded tax rate of 34.5% and that is exactly in line with the range of 34% to 35%, which we generally indicate as our usual tax rate. Profit after tax amounted to €81,400,000 from a 20.4% increase above previous year. We show EPS information at the bottom of the slide. The earnings per share for the quarter totaled €1.57 20 2.7% increase over previous year's quarter. As you know, our earnings per share are impacted by Amortizations and they are also impacted by the revaluation of the Songdung liability. Together with many analysts, we think that These two effects are not relevant for valuation and therefore many analysts adjust EPS for these two effects. For the analysis, we also state on this page the EPS excluding amortization and excluding the effect from the Song Jong liability. And And for the Q2, the adjusted EPS amounts to €0.77 so €0.20 higher than the as reported figure. Information on operating cash flow. Overall, the reported cash flow provided by operating activities amounted to €37,300,000 And if you look through the cash flow statement line by line, you'll note that income tax payment increased considerably due to increased results. On the other hand, interest payments decreased significantly following our refinancing. Also noteworthy, in this quarter, we had a lower out Flow for current assets and liabilities than in previous year's quarter. Continue I continue with the cash flow information On page 13, the spending for CapEx in the 2nd quarter was €15,300,000 The acquisition Spend in the quarter was €2,100,000 and that's mainly related to the PetroLook acquisition earlier this year And some minor price adjustments to older transactions. The larger transactions which we closed in July ISM and TER and taxes will only be paid in the Q3 and are not part of the Q2 cash flow statement. Financing cash flow includes the €103,000,000 dividend that we paid to our shareholders in June subsequent to the general shareholder meeting. We continue to have the major part of our €500,000,000 revolving credit facility available for general corporate purposes. Briefly on the balance sheet on page 14, the page gives you as usual the balance sheet structure. As you know a significant portion of The intangibles is actually related to the acquisition of Flentech Group by BC Partners Funds in 2,006 and is not Related to acquisitions that we have undertaken ourselves. Out of the €2,000,000,000 €70,000,000 intangibles an amount of €1,200,000,000 is actually related to the BC Partners transaction. Let me walk you through balance sheet net debt and leverage on page 15. Net debt increased during Q2 by €138,000,000 to €153,000,000 and the increase is due to the dividend payout and also due to translation effects on our 20. The group's leverage for the quarter is 2.3 times, which is slightly above the leverage at the end of Q1, which was 2.2 I would skip page 16, which is a time series, a long term time series for leverage And would only briefly mention Page 17, the maturity profile of our indebtedness. There's no change to what we showed you earlier. We continue to have a very patient maturity profile with major debt maturities only coming up 20162018. On working capital, which you see on Page 18, EON, the trade working capital end of the quarter amounted to 1,120 €1,000,000 and we turned the working capital 9.2 times on the last 12 months basis. So working capital turn is quite constant since the summer of 2011. Steve already mentioned the free cash flow and you see details on PH 2019, Q2 2012 delivered a very strong free cash flow of €101,000,000 after €67,000,000 in previous year's quarter. The increase by €33,000,000 or more than 50% is driven by the EBITDA increase and also by the lower spending for working capital compared to last year. I would hand the presentation back to Steve for segment review. Thanks, Georg. Okay. Now coming on to the segments. All the regional segments contributed to our growth in the Q2 of 2012. Europe grew its gross profit by 1.3% on an FX adjusted basis and an operating EBITDA by 1.1 As highlighted previously, we had started a program to increase efficiency and reduce the European headcount by about 4%. Clearly, this is a sensitive process. And at the end of June, we had completed about 75% of the planned reductions. €1,000,000 booked are sufficient and so no additional one offs were taken in Q2. The European macroeconomic environment continues to be soft and we saw a slight weakening trend in the course of Q2. Our business is highly resilient. It continues to grow supported by the successful acquisitions carried out in 2011. We will continue to monitor the overall macroeconomic situation and remain ready to take further steps should improve if necessary. In terms of North America, we continued to be a strong performer in the quarter with an FX logistic gross profit growth of 4 point 7% and operating EBITDA growth of 3.4%. The business continues to develop well across the continent, although We noticed a slow momentum on the demand side compared to Q1. In terms of Latin America, our business in Latin America performed positively. The segment delivered a 5.2 percent FX adjusted gross profit growth and a 5.8% EBITDA growth. The picture you're seeing here is somewhat mixed. Our Chinese acquisitions on Yonge showed a stable contribution within the quarter, but is affected by lower demand levels due to the cooling in the Chinese economy, particularly within the construction industry. In addition, our business in Thailand is still not back to normal activities levels. We know that most of the customers initially affected by the floods in Q4 2011 are operating, while the Thai economy is now suffering from lower demand levels from Europe and China exports, China. Macroeconomic research indicates that particularly in June, industrial production dropped by almost double digits below levels seen in the previous year. In Thailand, we lost €1,400,000 of gross profit in Q2 2012 over the previous year's quarter. Clearly, the business recovery is slower as a result of these factors. We saw an improved performance in the rest of the Asia Pacific region compared to Q1. The ISM Group was not yet consolidated in Q2. We will consolidate it from July onwards. To summarize, our group's operating gross profit for Q2 amounted to plus to 3.9% and operating EBITDA grew by 3.8 Now coming to the outlook. We continue to have a positive outlook for 2012. We still expect a certain level of macroeconomic growth, but at a clearly slower pace with some differentiation around the world. In consequence, we expect the group to incur gross profits. The gross profit development will be driven by volumes and gross profit per unit, while chemical price changes are less relevant In addition to organic growth, the acquisitions undertaken in the course of 2011 will have a full year impacting 2012. Furthermore, the recently acquired ISM Group and TER will contribute to the growth in the second half of twenty twelve. Our EBITDA guidance for 2012 is an operating EBITDA of between €705,000,000 735,000,000 This range is based on the following assumptions. The U. S. Dollar euro exchange rate stays in line with levels observed in the first half of the year. No further deterioration of the world's economic climate compared to the situation that we currently see. At this stage, we don't have an updated view on the potential exposure from a French antitrust case relating to a period of over 5 years ago. Based on the currently ongoing assessment of the contents of the recently received statement or the objections from the French antitrust authority, Ferntag will review the adequacy of the current reserve. Let me also address the current trading environment. The acquisitions undertaken in the course of 2011 helped to generate gross profit growth. To some extent, currently stronger U. S. Dollar also continues to support the earnings developments. North and Latin American markets are stable versus previous years. The European gross profit continues to suffer from a soft market environment. Southern Europe remains weak. Other parts of Europe are developing more positively. In Asia, China is facing increasingly softening market environment, although Thailand is not yet back to on a growth path. Other countries in Asia Pacific developed quite positively with encouraging growth rates. A demonstration of a slow macroeconomic climate can be seen from gross Profits per working day growth trend. Despite the double dip recession seen in many countries, our resilient business model delivered growth. This is why we feel confident to provide an outlook of further growth leading to a range of $705,000,000 to $735,000,000 of EBITDA or in other words, a further call results for 2012. I think that ends our presentation. I think now we're open for questions. Our first question comes from Mr. Pad from JPMorgan. Please go ahead, sir. I think in Q1, the organic was 5.3% as a reference point. And in particular, it'd be quite nice to know how that organic has developed across the months. Thank you. It's Georg. Well, I would say the acquisition contribution the contribution of acquisitions To gross profit growth in the second quarter was somewhere between 4 5 percentage points. So if you deduct 4 or 5 percentage points from the FX adjusted as reported growth rate, you'll end up with organic. And The contribution by the acquisitions in the individual months end of the quarter was not really different. So there was no organic growth in the quarter? On gross profit organically in the quarter, FX adjusted was flattish. Yes. Okay. Thanks, Doug. Thank you. The next question comes from Mr. Wang Ling from HSBC. Please go ahead, sir. Yes. Thanks for taking my questions. Three questions actually. First of all, regarding your guidance. If I take the middle of your guidance range, this would mean that You see in the second half of the year 2.3% year on year growth in EBITDA. We have seen a 9% growth in the first half Of the year and in the second half of the year, we should see some improvement probably in Thailand, also as the comparable base is coming down. Also, we have the cost savings in Europe. So maybe could you give us your assumption about what the organic volume growth I'm sure, in your view in the second half of the year, do you expect here a significant decline in volumes because we will Probably also see some positive impact from the U. S. Dollar development. Maybe you could give us some more details here what your assumptions are in terms Of Thailand improvement in cost savings in the second half of the year. And then second question, could you give us some idea how the gross Profit per unit developed, did you increase the value added services you are selling to your clients? And then a third question regarding the developments and the growth rates of EBITDA compared to the gross profit, especially in North America, the EBITDA growth was lower than the gross profit growth. Maybe you could give us some reasoning for this development especially in North America. Yes. Yes, good. It's Georg. With respect to the guidance, obviously, we provide a range of $705,000,000 to $735,000,000 The range is a little bit broader than the range we used last year. And the fact that we indicate a broader range than last year obviously Also reflects that there was a little bit more uncertainty in the market than Martin, the uncertainty we have seen Previous year. A recovery in Thailand is while it is very relevant for Thailand, while it has relevance for the segment Asia Specific is on a group level of relatively minor relevance given that Thailand is relative to the global group relatively Small piece of our business. The U. S. Dollar euro rate, which we have figured Into our guidance range is around €129,000,000 So yes, we do observe that currently the U. S. Dollar is trading a little bit stronger Then the 129, but we didn't want in providing the guidance, we didn't want to take a bet on currency developments. We effectively used the average rate that we observed in the first half of the year being fully aware that the current trading is stronger In the U. S. Dollar. I would move on to the gross profit per unit question. In the second quarter, I would say the volume development was pretty close to the gross profit development, basically indicating that in the second quarter we Have not seen any significant change in the gross profit per unit. The third part is the The observation that in North America gross profit in the quarter grew a little bit stronger than EBITDA or in other terms That the conversion ratio marginally declined. Yes, agreed. We would still say from our end given that the conversion in North America is Very, very high. It's a small changes within the noise. And if you look not on the quarter, but on the first half year, you would See that we have no change in North American conversion. So the change in the conversion rates is then something related to product mix or I would say, when I say it's in the noise and I basically mean it's that small that it is difficult to identify any specific Driver in the complex business model we run on these tiny changes. Okay. And then one follow-up question regarding also the guidance. The cost savings in Europe, are you still targeting something like €12,000,000 cost savings on an annual basis? Yes, absolutely. Just to clarify, The €12,000,000 would not be calendar year 2012, but run rate basis, most of it kicking in Q2 This year all of it Q3 this year. So in the second half of the year, you see the full positive impact from the cost savings? Happy Reeks from Merrill Lynch. Please go ahead sir. Good morning or afternoon guys. Toby Reitz from Orange. Can I ask a couple? The first one is when in your old statement you sort of you talk about Asia Pacific where you're taking repositioning assets and resources in response to slow economic growth? Can you explain what you actually mean by that? I think it's fair to say that we have a very significant sales and marketing organization in Asia Pacific. And therefore, it's important that we address markets which are showing growth as opposed to chasing markets that aren't particularly positive. So we're making sure the organization is appropriately configured and it's pointing in the right direction. So this is more a case of making sure tactically that we are in the right At the right time and addressing markets which give us growth. So maybe it's a broad way of really looking at the positioning of our business to make sure we're in the right Places in Asia for those markets that will develop most quickly in the next months years ahead. And is that a sort of shuffle of headcount rather than a reduction? Well, I think there's I think in general, there's been a small reduction in headcount, but this is more a case of us Really getting hold of Asia Pacific over the recent years. We've actually invested in Asia Pacific quite extensively in terms of The quality of people and the positions that exist there. And I wouldn't actually rule out, I I don't want to be more cautious, fortunately, because I wouldn't rule out increasing headcounting in Asia Pacific to prepare Asia Pacific to grow more strongly in the future. So this is a relatively small region for us. And therefore having the right people in the right place is important. And I would actually probably more likely We invest in personnel costs in Asia Pacific from the point of view of giving the platform to grow in the future. Okay. Thanks very And then one on M and A. Could you give us some sort of comments on the size and sort of shape of the pipeline? Obviously, not going to give us The deals you're planning to do, but if it just gives an idea of what's out there and what's close to being done potentially? Well, to be fair, We do have a quite an active pipeline on M and A and we've guided the markets between €200,000,000 250,000,000 as being An average spend for us. We certainly have a number of projects in hand at the moment, which we are hoping to close In this quarter and maybe the last quarter. So at this stage, I wouldn't alter the numbers that we've been indicating. Okay. Thank you very much. And then the final question is, the numbers you gave were gross profit per working day, either 5 0.5% in April, 4.7% in May and 2.8% in June. Following on from the question I'll start it, is it just the M and A contribution for each of those months was very similar, yes? Yes, confirmed. It's about 4% to 5% for the future of these months. Next question comes from Mr. Ram Pfann from Commerzbank. Please go ahead, sir. Hello. Thanks for taking my question. I just want to come back on the topic you raised in France, So the antitrust authorities claims there. Could you just shed some more light within the limitations you may have Regarding the account provisioning you have done and I understand that you did something and let's say a potential impact on On earnings, if you would have to digest a fine or somewhat higher than assumed payment here? Thank you. I'll take that. This is a case that sort of goes back over 5 years. And to be Frank, we've only very recently received the statement of objections, which is quite a lengthy Document if you like for our internal legal teams to absorb and to review. We have actually tested The relevance of the provision that has been taken against this potential, which was even backing our prospectus when we initially quoted Before we floated the company. And at this stage, there's no suggestion that that isn't sufficient to cover. But frankly, It is an early stage. We need to review it. And if there is a change that's necessary, then we would come back and inform the market It's going to be. Okay. Thank you. The next question comes from Mr. Sykes from Deutsche Bank. Please go ahead sir. Yes. Good morning, everybody. Danilo, really. Just on the comments of gross profit per unit, are you already able to sort of say Whether that might start increasing in the second half of the year perhaps whether in a softer macro You may be getting some better input prices from your suppliers and maybe able to widen the Spreads between that and your customers at all, please. I'll tell you. It's Steve here. I think we're at a very interesting stage in terms of economic development here because I think the way we read the market is that Yes. This has been a bit of a slowdown, which has been happening now for quite some time. And I think you guys are pretty much aware probably in a wider sense than even ourselves In terms of the into how industry has been affected, what you would expect to see or which we would believe we would see is probably the large Consignments and softer demand period to start reducing and that has actually a natural effect. It's almost an arithmetical effect. If you look at it in terms of lower volumes, we generally end up with a higher average margin per unit. So there will be some arithmetic effects in there, but also you would expect some customer behavior changes maybe in the future months as people look at To reduce the amount of products they buy in terms of the stock levels they maintain and look after their cash flow and what have you. So this is a very typical Scenario developing in quite difficult economic conditions. And quite often, I think we've talked about this in terms of our resilience In quite difficult economic conditions. And these are the sort of things we're starting to see now. Right. Okay. Thank you. And in terms of Further cost cuts and how bad things might have to get before you start looking again. I mean, I presume it's ongoing planning, but before you may actually take the Going planning, but before you may actually take the opportunity or move towards cost cutting or making some further one off reductions, questions, what is your thinking about? At what point do you start looking at those again? Well, we've we're not actively planning organization. We don't we've been looking at this for quite some time. And clearly, We could have probably taken more costs out in the Q1. But what we've done is Effectively configured the business in a way which we think is appropriate for the likely macroeconomic situation that's facing us. If for any reason we see a major deterioration in economics, which are a surprise to us, then we can take further action. Opportunities Will be presented to us as a result of more demanding economic conditions. Quite often, this is The exact point at which people start to outsource more of their purchases and a lot of our supplier To start looking at their supply chain and looking towards distribution as a way of being more effective at what they do. So it's not The ideal situation the ideal time for us to reduce our capability. If we were in a tough position, we have Very clear views as to what we would do and when we would do it. Okay. Thank you. And just finally in terms of the North And demand, could you maybe just give a little bit more detail as to the perhaps slowdown in North American demand and whether it's Particularly regional and difference or by industry or maybe a bit more detail there please? Steve, may I take that? Yes, sure, Bill. Yes. Good afternoon. This is Bill Fiddler. Hi, there. What we're seeing in North America is clearly a slowing macro Environment, economic environment and it affects certain industries more than others. And it's an Certain environment, but we remain very optimistic about our competitive position about our industry mix. Steve talked earlier about the resilience of the business and we're very confident in the balance of the year in spite of Clearly weakening economic environment and it's different industry by industry. And And I'll leave it at that at the moment, but hopefully that answers your question. Yes. Okay. Thanks very much. Certainly. Thank you. Our next question comes from Mr. Yu from UBS. Please go ahead. Hi there. Two questions from me, if I may. To begin with, if I understand correctly, your FY 2012 EBITDA guidance is based on average year to date FX rates. Could you just help us understand what this guidance would look like if you extrapolated spot FX rates? Yes. Sank, it's Georg. Hi there. We would rather if you may not lay out a sensitivity analysis what the guidance would look at different FX rates. But it's perfectly fair to say, you will remember our general guidance that on a full year basis, on a full year basis, a Change of $0.05 in the U. S. Dollar, euro rate would account for roughly €12,000,000 of EBITDA. Right. Okay. That's And then just in terms of top line trends, if I take out the 4% to 5% M and A contribution from that one 0.7% constant currency July exit rate. That gets me to kind of minus 2%, minus 3% organic gross profit per working day in July. Could you just help us understand what kind of FY 2012 organic gross profit growth your guidance makes in? We Chang, the guidance we gave is a range. We admit a rather broad range on an EBITDA level. We do not have a practice to provide gross profit guidance. Sure. Understood. And then just in terms of all other The loss in all other segments, which I understand comprises your corporate cost and also your trading segment of minus 4.9 that seems to be smaller than last year despite a higher gross profit contribution from all other segments. Could you help us understand what's driven potentially lower costs in this segment in this quarter? I'm not sure I follow the observation fully. You are right that the all other segments is dominated by the central costs. And the central costs are partly offset by a positive contribution of centralized distribution unit. The central costs do have some volatility. I would not say and you will find this volatility quarter over quarter. I would not say There was a very specific movement in the Q2. Right. So no structural reduction in your corporate cost then? No, I wouldn't say that. Okay. Right. And sorry, just one last One for me, 2 or 3, just so maybe I should clarify or underline why there is always some volatility in some headquarter costs. Headquarter costs Also include, for example, costs for the due diligence efforts we undertake for various acquisitions and that can be there in some quarters and not in others. So that That can easily give you a meaningful volatility. All right. Okay. That's helpful. Thank you. Just one last question. Sorry if I missed this, but could help us with the volume growth rate for this quarter versus from memory it was 1% in Q1? The volume development in this quarter That's 1% in Q1. So volumes were relatively strong in the Q2 compared to the Q1. But we would also we emphasize that while we fully Understand that volume development is of some interest. So gross profit development is a more relevant information. Right. And this plus 3 and plus 1 both includes M and A? Yes. Yes. Good afternoon. On your gross profit per day figure of 1.7% or down 2.5%, 3%, Can you give us some flavor of how that looks across the 3 the 4 divisions? And In terms of your free cash flow generation, are there any one off reasons in Q2 that explain the jump? Yes. And the gross profit per working day growth rate in July, We provide that since a couple of quarters as a kind of a fixed data point and objective measure to give you some information how The current business is doing. It's typically not split it out by region, but it's generally speaking fair to Say that the development in Europe is obviously though it is more stable than others, but it's weaker than what you see it in other regions. Questions? The free cash flow, no one offs in the free cash flow. Okay. Thank you. There are no further questions. Okay. Well, thanks very much, everybody. Thank you very much for those who have joined the call and thank you very much for your questions. And I think we could probably finish the call at this point. Thank you very much. Thank you, everybody. Thanks. Ladies and gentlemen, thank you for your attendance. This call is being concluded.