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Dear ladies and gentlemen, welcome to the Q1 2019 Results Call of Brenntag AG. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Steve Holland, who will lead you through this conference. Please go ahead, sir.
Well, thank you very much, and welcome, ladies and gentlemen. Thank you for dialing in. We're actually speaking in a slightly different room today because we're having some feedback problems on our last call. So if you're having any difficulties hearing us, we'd be very grateful if you'd let our Investor Relations people know after the call. That would be very helpful. So I'm here today with Georg Müller, CFO. As always, we're happy to answer your questions after the presentation. Let's start with the highlights for the quarter. Operating gross profit rose by 4.4% to EUR 688 million. This reflects an organic growth in our business towards positive contribution from acquisitions. The operating EBITDA amounted to EUR 238 million, an increase of 12% on FX-adjusted basis. In comparison with this last year's operating EBITDA, it is impacted by the first application of the new IFRS accounting standards on leases. We will, of course, provide further details on that later on. Free cash flow increased by EUR 138 million and amounted to EUR 166 million for the quarter. 3 of our 4 regions delivered organic EBITDA growth to the Q1 results. North America, Asia Pacific reported good results, and we're particularly pleased with the performance in Latin America. On the other hand, our EMEA region faced particularly challenging environments. As expected, the weakening trends in the European business environment that we observed towards end of 2018 continued into the new year. And Europe was particularly -- Europe in particular had some very challenging economic conditions in Q1. We continue to execute our M&A strategy and closed 2 acquisitions in North America and 1 in Asia Pacific. I come to the operating EBITDA bridge. In Q1, we had a positive effect from FX translation of EUR 7 million. Acquisitions contributed EUR 6 million in the reporting period. This number is net of the operating EBITDA associated with the Biosector business, which we sold at the end of 2018. The application of new accounting standards on leases resulted in a positive effect on the operating EBITDA of EUR 27 million for the group. In EMEA, we reported negative organic growth of 10% against a strong Q1 last year. On the positive side, North America, Asia Pacific showed organic growth of 2%, and Latin America reported a growth of 7%. Consequently, we closed the quarter with an operating EBITDA of almost EUR 239 million. Turning to the EMEA region. As mentioned already, the weakening of the macroeconomic conditions in the region continued in the first quarter of 2019. We had indicated that before so it did not come as complete surprise. In this challenging environment, we managed to maintain gross profit on last year's level. We had a good start in the last year, reporting high gross profits in Q1 2018. This was difficult to beat in the current environment. Our costs increased by around about 4% compared to last year. This reflects cost increases which we're currently seeing in some areas of our cost base. The new accounting standard on leases has an effect of EUR 10 million on operating EBITDA in the EMEA region. North America reported good earnings results and a generally positive macroeconomic environment. The operating gross profit grew by 5.5%, which was also supported by contributions from our acquisitions. We do see good demand across a broad customer base in North America. The effects of the application of the new accounting standards amounted to EUR 13 million in the region. In total, operating EBITDA grew by 18%, 23% on an organic basis, which means a good performance for the region as set against some very high comparable with first quarter of 2018. And in Latin America, Latin America as a region remains quite challenging with the industrial production in Latin America contracting by nearly 4%. But despite these headwinds, we achieved a very good result in the region, continued our positive path we started in the second half of 2018. Operating gross profit grew by almost 9%, operating EBITDA by more than 40%. The effects of IFRS 16 ran around about EUR 2 million in the region. And though there's still quite a lot of volatility in the region, these results underline that we're well positioned in our Latin American business. Coming to Asia Pacific. The business conditions in our Asia Pacific operation remain positive but somewhat complex, particularly in China. The region reported a gross profit growth of 18%, which is mostly attributable to organic growth and the contributions of acquired businesses. In China, we pay high logistics cost because we're currently operating with suboptimal system infrastructure as we build new facilities. We are aware that one of those new facilities will probably be licensed in about 3 months' time. The region reported growth of operating EBITDA of around about 18%, which is also driven by the initial application of the new accounting standards. The effects amounts to about EUR 2 million in the quarter. Coming to our recent acquisitions. We've done 3 transactions in the last quarter: 2 in North America and 1 in Asia Pacific. In the United States, we finalized the acquisition of Reeder Distributors and New England Resins & Pigments Corporation. Both acquisitions helped to consolidate the market and expand our products and services portfolio. Reeder is an attractive addition to our lubricants business and New England Resins and Pigments Corporation, an addition to our construction and adhesive industries. We also agreed on a joint venture to acquire 31 -- 51% stake in Tee Hai Chem based in Singapore. Tee Hai is a specialty chemicals distributor focused in products in the life sciences area, electronics, research and diagnostics. They are the market leader in Singapore and Southeast Asia. This joint venture allows us to expand in a very attractive industry group and intensify our customer and supplier relationships in the region. The company generated EUR 22 million of gross profits in 2018. Now I'll hand over to Georg.
Thank you, Steve. Good afternoon. As always, I would like to talk you through our financial disclosure for the first quarter. And I'll start with the upper part of our income statement on Page 11. Sales amounted to EUR 3.182 billion, and sales increased by close to 4% on an FX-adjusted basis. Prices for chemicals across our portfolio are flattish compared to previous year. Operating gross profit increased by 4.4% on an FX-adjusted basis, and operating EBITDA for the group grew by 12% to EUR 238.8 million. The conversion ratio for this quarter stood at 34.7% compared to 32.4% in the same period of 2018. The operating EBITDA growth rates as well as the improvement in conversion ratio were impacted by the initial application of IFRS 16, and we'll provide more disclosure due to the relevance of the item on IFRS 16 on the subsequent Page 12. So obviously, IFRS 16 refers to the new accounting standard for rent and leases. We have many, many rent and lease agreements in our company. In total, we have reviewed about 6,500 contracts globally. In the first quarter, an amount of about EUR 27 million was reclassified, and operating EBITDA increased by that amount. In our financial reporting package that you can download from the Internet, you will also see a split of the EUR 27 million into the different segments. As a consequence -- as a further consequence of the IFRS 16 application, the depreciation increased by EUR 26 million, and interest expenses increased by EUR 3 million. Earnings per share were only marginally impacted. Due to the capitalization of lease contracts on the balance sheet, balance sheet does now reflect right-of-use assets in an amount of EUR 376 million. And the balance sheet does also reflect the corresponding liability for financing in an amount of EUR 381 million. With that, I would move to Page 13 so to the income statement below EBITDA. The only noteworthy change to this part of the income statement comes in the depreciation. The depreciation in the first quarter 2019 amounted to EUR 58 million, and that compares to EUR 28 million a year ago, mainly due to the new accounting standard for leases. The financial result amounted to a net expense of EUR 25 million. The tax rate for the first quarter that we recorded was 26.5%. Earnings per share stood at EUR 0.68, on par with the earnings per share in the first quarter 2018. I'm moving to the cash flow statement on Page 14. In the first quarter, we reported an operating cash inflow of EUR 161 million, a significant improvement compared to previous year's quarter, where we reported a negative cash flow of EUR 12 million. The improvement is above all attributable to a clearly lower outflow for working capital. Speaking about the investment and financing cash flow. CapEx for the first quarter was on last year's level. So far, this year, we spent around EUR 38 million for acquisitions. As a consequence of IFRS 16, in the financing cash flow, the line repayments of proceeds from borrowings now also contains the respective lease payments. On Page 16, you will find the net debt and leverage information. Net debt amounted to EUR 1.7 billion. Leverage ratio continued to remain at 2.0x. In this context, I would like to note that the net debt as well as the leverage ratio have been calculated before, applying the new accounting standard on leases. The timeline you see is, therefore, consistent. Trade working capital at the quarter end amounted to EUR 1.860 billion so a moderate increase over the working capital at year-end 2018. Working capital turnover stood at 6.9x in the first quarter.Coming to my last slide, to the free cash flow. Most of the lease payments are not included in operating EBITDA anymore. But obviously, they remain a cash outflow. We have, therefore, adjusted the definition of free cash flow. The corresponding payments are now deducted from the free cash flow in an additional line. In total, we generated a free cash flow of EUR 166 million in the first quarter, a significant increase compared to last year's first quarter, where we reported a cash outflow -- a cash flow, apologies, of EUR 28 million. The strong growth is primarily due to the lower increase in working capital and also reflects the generally positive business development. With this, I'll hand it back to Steve.
Thank you, Georg. So let me start with current trading and then address the outlook for the year going ahead. So I'll see you -- take you through the gross profit and working day numbers. So in January, the growth was 3.9%, which is 1.3% on an organic basis. In February, the growth was 5.3%, 2.7% organically. In March, the growth was 4.8%, 1.9% organically. In April, the growth was 5.6% and 3% on an organic basis. In addition to that, we did actually announce in September last year at our Capital Markets Day that we will be creating a food and nutrition division. And this division actually started operating in its own right from the first quarter. And so I can share with you the gross profit results for the food and nutrition business have grown by 6% organically during the course of the first quarter with a positive outlook for future growth in that business division. Coming to the outlook. The first quarter is expected to be soft start to the year. And we saw softening of the macroeconomic condition in many countries around the globe. This was particularly visible in the EMEA region, and we've already executed a number of actions to improve the outlook for the full year. We confirm the outlook for the full year. For operating EBITDA, we continue to expect growth between 3% and 7% for the full year 2019 on an FX-adjusted basis and including acquisitions. Obviously, this growth is understood to be on frozen GAAP. The growth in the first quarter is flat on a comparable basis. We had a very good first half in 2018, and comparables in half in 2019 are -- therefore [ will be ] quite challenging. This trend will reverse in half 2 2019, and our outlook assumes that the growth rates will benefit from that. And of course, provided there will be no further softening of the macroeconomic environment going forward. In terms of M&A, we continue to pursue our strategy, and we're working on a number of interesting deals. Overall, we're satisfied with our recent acquisitions. And we're now happy to take your questions.
[Operator Instructions] The first question is from Rory McKenzie, UBS.
It's Rory here. Firstly, just 2 on Europe if I can. So on that weak gross profit trend, are we surprised at all by how much clients kind of pulled back on ordering? And can you highlight which areas or countries were the weakest for Q1? And then secondly, on the cost base in EMEA, I'm very surprised to see that it was still up 4% for Q1, despite knowing you're heading into a tough macro environment. Are there any actions planned to mitigate that profit decline in Q2? Maybe [ just let those 2 ] on you first, and I'll come back with a third.
Sure. As far as Europe is concerned, the 2 principal markets which were probably hit hardest from a Brenntag perspective were France and Germany, and I would probably focus more on Germany than France at this stage because France was subject to reorganization of the business during the course of 2018, and it's currently settling down from that. In Germany, we saw quite a significant fall away in areas which are regarded as being resins and plastics. And this is pretty much to the extent associated with the extended supply chain in the car industry. Now that's quite a big business for Brenntag in Germany. That was pretty, I'd say, pretty strongly affected in the first quarter of 2019. We did actually hear about some of the smaller companies were going on short time, those involved in the extended supply chain to the car industry. Having said that, we now do see some recovery in the demand for products back into that sector. And certainly, April appears to have reversed direction as far as demand in that particular sector is concerned. So it would appear to be the worst may well be over as far as the -- concerning the German markets. In terms of cost base, yes, clearly, there's a 4% increase in cost. 1% of our cost increases is associated with transport. You may well recall that there's several effects on transport during the course of 2018, which related to driver shortages, overall cost increases due to certain effects in the German area, particularly the Rhine and what have you. And the -- and to be fair, the actual [ TPL ] rates in Germany just not come back, rates that you might have expected to come back with the slowdown in the macroeconomic environment. That has now changed, and we now do see that the [ TPL ] market, for instance, the service we require [ in ] the European region [ essentially ] coming back to where we're negotiating contracts at lower rates. In addition to that, we have a new Operations Director in the European region, which joined from the U.K. And his focus has been principally around transport utilizations in Germany and France. And we have seen a significant lift in utilization rates in those 2 countries during the course of Q1, which we expect to roll through into Q2 and beyond. There are some other items across in Europe, which are associated with the development of new IT systems, which are being expensed in the first quarter and a lot of it into the second quarter, which may not then not repeat in rest of the year. And that basically addresses the areas of cost in Europe.
That was very comprehensive. And if I can, I'd like to ask a third question on a different area. It was actually on working capital. And any comment on notable slowdown in working capital terms in the first quarter? I don't know if it had to do with maybe that slower environment in Europe or anything else you'd want to highlight.
Certainly, what we see, working capital turn, it's not satisfying as it is slightly down from the end of last year. So we have to put more energy into improving working capital turn going forward. I couldn't point out any particular development which explains the slight decrease from the year-end number.
Do you think that's being driven by customers or suppliers? I mean, anything at all that will understand why it's changed because it's fallen by 0.5x year-over-year, which is quite a drop.
If I might just interject here. I think it's fair to say that if you look around the world, there's just generally been a -- more pressure on the payment terms with customers. And in the -- in terms of the manufacturing base, the suppliers just weren't -- we have not seen same level of flexibility in payment terms. I think this is certainly an area which we are looking at very closely in terms of making sure that if there is any move out in terms of payment terms with customers, these are reflected by the similar terms available to Brenntag on the purchasing side. So there's some work being done there, and we expect that to be neutral at the very best -- or so that they're at least neutral to Brenntag going forward.
The next question is from Tom Burlton, Berenberg.
Yes, Tom Burlton from Berenberg here. I just had another follow-up question slightly in relation to working capital, just on chemical prices. And I know they're not really relevant from a sort of top line gross profit perspective in terms of the revenue trajectory in working capital. You made the comments in a statement in the EMEA section that the sales growth was predominantly driven by higher average sales prices per unit. I was certainly surprised by that. I wasn't expecting such a strong performance, but I'm just wondering why that hasn't fed through, I suppose, into working capital when I'm looking at the working capital performance in the cash flow statement. Why didn't those higher sales prices hit the working capital in Q1?
Tom, it's Georg. Yes, indeed, we make the comment about the pricing element of the sales increase in Europe. I think the calibration from my perspective is, overall, Europe has seen a very limited sales increase. And with the challenges, as discussed a little earlier, in France and particularly in the German industry, it more speaks to a little bit of volume weakness.
Yes. Perhaps I just clarify for you a little bit further on this one. Certainly, when you have an economic downturn, as we saw in the European region, what you tend to find is that the higher-volume, lower-value products are the ones that start to decrease first. And so the average selling price of the rest of [ it ] tends to be higher.
Okay. Great. And then just -- I just had one follow-up question just in the regional or divisional run-through. You alluded to a tougher comp effect in Q1 a few times. Just looking forward into Q2, and I know the April pickup in organic GP per working day looks promising. But I guess April looks like it was probably a slightly softer comp, and then comps get slightly more challenging by the looks of it in May, June. So how are we thinking about organic GP growth at the group level going into Q2, just in light of the comps you're facing?
I'm not sure I agree with you on the April and a lighter comp. I think it's pretty strong performance in April last year. I think I would characterize April as being a good month for the business in terms of we see a sort of sequential improvement in the organic growth. And we saw that sequential improvement in Europe.
The next question is from Chetan Udeshi, JPMorgan.
Yes. Just first one is just some clarification. Do you see any year-on-year impact from any working, like, number of business days, delta in Q1 or 2Q this year versus last year? That's number one question. Number two is more of a structural question. And if I were to strip out your IFRS 16 benefit in Q1, your conversion ratio has dropped by 160 basis points. And this has been a sort of a steady grind down over the last 5 years. So you can also see that. If I look at your gross profit per day, organic growth, you mentioned about 2% on average for Q1. But then your EBITDA is down almost 4% organically. So can you address what is underlying problem with the conversion ratio that the company has been facing, not only in Q1 but in recent years? Is there a pricing pressure? Is it a cost management issue? And what are you doing to address that?
Well, congratulations. Obviously, focused on the business, I think, for many years. We've been through this on more than one occasion with investors and analysts. The conversion ratio, I think, certainly in Q1, has been under some pressure, particularly from the European perspective, where we saw clearly a business that was operating at a lower rate, and you could all see there's been a 4% increase in operating costs for the European base, which is equally a negative effect of conversion ratios. We have taken action to correct the [ effects of the ] increasing operating cost in the European region, and we should see that flow through into the second quarter and certainly for the rest of the year. Now there is a balance, if you get that, where it's not going to be a macro for 5 years. Now please remember that we do actually acquire businesses in Brenntag which don't necessarily have the same conversion ratios with the group as a whole. I mean -- and I would look, in fact, to lubricants business and the other parts of the business where conversion ratios are in the 30s, not in the 40s as they are in North America. So there has to be a balance to be made there. But directionally, Europe has pulled it back in the quarter. And clearly, we don't expect that as being a sustainable position going forward, and we are taking steps to correct that.
And on working days?
No relevant working days [ for -- ] between this year and previous year, neither in Q1 or in Q2.
The next question is from Laurence Alexander [ from Jefferies ].
This is Dan Rizzo on for Laurence. Could you tell us what percent of sales have been conducted via online portals? And is there any difference in margins via method?
It's obviously -- it's pretty tiny at the moment. We are rolling out the online business ourselves along with our competitor. [ There -- ] everybody in the market has an online offering, and it's [ doing ] 1s and 2% and 3% at the moment, very, very low take up. So I think this is something which we will need to look at maybe towards the end of this year to see what adoption rates are going to be. But ourselves and kind of competitor are offering, certainly, ability for customers to go online, but the sort of conversion hasn't been overwhelming at this stage.
Okay. And then what percent of volume or sales, if any, has negative working capital?
[indiscernible]
The negative working capital, there are a few smaller sections of business where we have a payment term differential in our favor, but that's a relatively tiny piece. It's not a relevant number.
It's somewhere I need to find. I need to find some more business in that area. Not really.
Well, if it's de minimis, that's okay.
I'd say it's de minimis.
The next question is from Steven Goulden, Deutsche Bank.
I just wanted to touch on specialty. If you could just give us a bit more color in terms of how that business is going, particularly within that -- how food and nutrition was going versus industrial, that'd be very helpful.
Well, I think I'll just give you -- I just gave you the number on food and nutrition, which -- it's the first quarter, we've measured it, a separate division. Its GP growth was 6% organic versus industrial. Industrial's pretty flat in terms of organic growth overall, and so I think we are certainly seeing -- we are seeing higher levels of growth in the specialty business. At this stage, food and nutrition, [ I mean ], we're not going to actually separate for you in a meaningful way. I don't want to get drawn into making estimates and guesses. And -- but we will give you that number now going forward, and there will -- also people that were a little unhappy we didn't provide food and nutrition reporting at our Investor Day. But we're going to give you it. And I'd say, I think this is an area which we will expect to see grow faster in the future.
The next question is from Knud Hinkel, Pareto.
Two, actually, there are 2 questions. First one, acquisitions. With Marlin, you did the third acquisition in the U.S. My question would be whether it's just incidental or if the U.S. is a particular focus right now? And we should expect more from that in the remainder of the year. And second question is according to your cash flow statement, you said that you spent EUR 38 million on acquisitions. Just for clarification issue, is it -- does it also include your acquisition in Singapore?
Just coming to your question on North America, we are -- it's certainly the case that we're very happy to make acquisitions in North America. We have a strong market position but nevertheless, there's still areas of North America where we could be stronger in terms of market share. Therefore, we're always looking at opportunities to increase our market penetration in North America, both from an industrial chemicals point of view and from a specialties point of view. Also fair to say that we are actively seeking to grow our market position in North America as the market consolidates going forward into 2019 and 2020.
So the Singapore acquisition of Tee Hai closed end of April. You will see the cash out for that in the Q2 statement. It's not part of the EUR 38 million.
The next question is from Isha Sharma from MainFirst.
The first one is you have seen a significant improvement in the free cash flow. However, when we look at the net debt, it has declined only by EUR 30 million. So is there -- was that a strategic decision? And what drove that? My second question is around LatAm. So we saw an EBITDA with an organic growth of around 12%. What drove this? And is this run rate that we should see for the next quarters? And the very last one, a little bit on your competition space in the U.S. So the biggest competitor that you have there also reported strong set of numbers, and now we see another competitor in the specialty ingredients business talking about having a bigger footprint in the U.S. So how do you see the competition space developing?
[ On the ] question, which competitor are you referring to with the strong set of numbers, to be honest? But maybe that's [ a more later -- ] analysis I should do later. So Georg?
Yes, maybe I take the one on the net debt. And let -- typically, you see a seasonal cash outflow in Q1. And we had a very limited seasonal outflow this year. So in that sense, indeed, the cash flow is much better this year than it was previous year. But you wouldn't necessarily draw the conclusion from that not to see a net debt increase in Q1. On top of that, there is also a little bit of translation through part of the debt being U.S. dollar. And there was the acquisition payment. So struggling a little bit, the answer, obviously, but it's a little counterintuitive. It's not necessarily what -- that we would have expected different from what we report.
The next question is from Peter Olofsen, Kepler Cheuvreux.
Yes. Two questions. First on North America. In the interim report, you mentioned the solid performance in the oil and gas vertical. Should we read it as stable year-on-year? Or did you see continued growth in that part of the North American business? And then a follow-up on EMEA. Your U.S. peer that reported today mentioned a positive impact from Brexit as customers ordered and carried higher-than-normal levels of inventory. Just to confirm that you did not see something similar.
Maybe I take the last one first. I mean, obviously, we can speak about our business but not really about reporting of our competitors. Our U.K. business is doing good. I wouldn't attribute it to a specific Brexit effect. So...
Yes. I think it would -- just a little on Brexit. I think if you look at the -- on the current situation where it's certainly unclear what's going to happen, and you take the length of our supply chain in terms of customers' ordering patterns, it really would be very [ mutable ] for me to say that there's been an obvious improvement or otherwise. In terms of oil and gas, [ I think, essentially ], the oil and gas business is in line with our expectations, not moving forward at a significant rate but nevertheless, a stable business.
The next question is from Markus Mayer, Baader-Helvea.
Only one question. We heard from the other chemical companies that they all see ongoing destocking. I know destocking is not a risk for you but might indicate that the underlying demand might make off in the second quarter. So my question is, has the 5 business [indiscernible] now going into April, which looks pretty good, has developed differently than as you have expected at the beginning of the year? Were there any kind of regions or end markets which have been better or worse than expected?
I would say that, generally speaking, we're not normally affected by destocking due to the relatively small quantities that we supply customers. However, what I would say is that there's been -- certainly in the European space, there's clearly been more cautious approach to purchasing. And what I believe we see now is actually a increasing demand in industrial chemicals particularly, which would suggest to me that, that period is now coming to an end. I wouldn't say that we have a destocking scenario that I would recognize.
There are currently no further questions. [Operator Instructions]
Okay, ladies and gentlemen, it would appear we've no more questions. So we'd like to thank you very much for the time you spent with us today. Oh, so maybe we've got one more?
Yes, we do have a follow-up question from Isha Sharma, MainFirst.
I'm sorry. I guess you missed my question on LatAm. I just wanted to ask you what drove the organic growth in EBITDA in LatAm. And how do you see your competitive space developing in the U.S. currently?
Right. Okay. Well, I say -- I do apologize. In terms of Latin America, we saw a very good performance in Colombia and Brazil during the quarter. It's also fair to say that our Mexico -- Mexican business, which is relatively flat in the quarter, is also showing signs of improvement going forward. Therefore, I think, in particular, comparison terms, that we're pretty much in a good position, I say, in the major markets of Colombia and Brazil in particular, with good recovery in Mexico. The rest of the region, they're relatively in line with expectations. On our competitive position in North America, I'm sometimes hesitant to go through some details. We often have people from our competitors on the call actually. So if you're out there listening, I'm making note. We -- clearly, with the competitive situation in North America, everyone's aware of the consolidation that's going on in North America, which is -- provides a challenging environment for everybody concerned. So I don't think I can make comment more than that.Okay. I think we've actually come to the end of the questions that are being asked. So thank you so much for your time -- for spending your time with us this afternoon. And I think we can close the call at that point. Thank you very much.
Ladies and gentlemen, thank you for your attendance. This call has been concluded, you may disconnect.