To our Shareholders
Management Report
Consolidated Financial Statements
COMBINED GRO\fP MANAGEMENT REPORT AND MANAGEMENT REPORT OF BRENNTAG\bAG 40 – 109 MANAGEMENT REPORT 40 FINANCIAL REPORT DVGXSRENNTAM AM 42 \bROUP OVERVIEW 42 Group Business Model 44 Vision, Objectives and Strategy 47 Financial Management System 51 REPORT ON ECONOMIC POSITION 51 Economic Environment 51 Business Performance 54 Results of Operations 62 Financial Position 67 Financial and Assets Position 69 ANNUAL FINANCIAL STATEMENTS OF BRENNTA\b A\b 69 Results of Operations and Financial Position of Brenntag AG 71 Appropriation of Distributable Profit of Brenntag AG 72 REMUNERATION REPORT 72 Board of Management Remuneration System 84 Remuneration of the Supervisory Board 86 EMPLOYEES 87 Developing our Employees 88 Diversity and Inclusion 88 Remuneration and Benefits 89 HEALTH, SAFETY AND ENVIRONMENTAL PROTECTION, QUALITY MANA\bEMENT 89 Brenntag’s HSE Strategy 92 REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS 92 Report on Expected Developments 94 Description of the Internal Control / Risk Management System 97 Report on Opportunities and Risks 103 Summary of the Opportunities and Risk Situation 104 INFORMATION REQUIRED PUR SUANT TO SECTION 289, PARA. 4 AND SECTION 315, PARA. 4 OF THE \bERMAN COMMERCIAL CODE (H\bB) AND EXPLANATORY REPORT 104 Composition of the Subscribed Capital 104 Restrictions on Voting Rights or Transfer of Shares 104 Direct or Indirect Interests in the Capital of the Company Exceeding 10% of the Voting Rights 105 Shares with Special Rights Conferring Powers of Control 105 System of Control of any Employee Participation Scheme Where the Control Rights are not Exercised Directly by the Employees 105 Legislation and Provisions of the Articles of Association Applicable to the Appointment and Removal of the Members of the Board of Management and Governing Amendments to the Articles of Association 106 Powers of the Board of Management to Issue or Repurchase Shares 108 Significant Agreements Which Take Effect, Alter or Terminate Upon a Change of Control of the Company Following a Takeover Bid 109 Compensation Agreements with Members of the Board of Management or Employees in the Event of a Takeover Bid 109 CORPORATE \bOVERNANCE STATEMENT MANAGEMENT REPORTCONTENTS 41 L A T L A T LATINMT ERLCT20IECRLER0R1E06 4I0IM2MRI420R05M2MRI TM9CTI 7OH\fHUO\fS D\bPFDÜ BWKY VD\bHHÜ\f8 \f8 GRO\fP OVERVIEW GRO\bP B\bSINESS MODE\f BUSINESS ACTIVITIES Brenntag’s growth opportunities along with its resilient business model are based not only on complete geographic coverage, a wide product portfolio and a comprehensive offering of valueadded services, but also on high diversity across suppliers, customers and industries and its targeted use of the potential offered by outsourcing. Connecting chemical manufacturers (our suppliers) and chemical users (our customers), Brenntag provides complete distribution solutions rather than just chemical products. Brenntag purchases large-scale quantities of industrial and specialty chemicals from various suppliers, enabling the company to achieve economies of scale and offer a full-line range of chemical products and valueadded services to around 185,000 customers. Brenntag is the strategic partner and service provider for manu facturers of industrial and specialty chemicals at the one end and chemical users at the other end of the value chain. Brenntag’s role in the value chain is also expressed in our brand identity “ConnectingChemistry”. Brenntag stores the products it purchases in its distribution facilities, packs them into quantities the customers require and delivers them, typically in less-than-truckloads. Brenntag’s customers world wide are active in diverse end-market industries such as adhesives, paints, oil & gas, food, water treatment, personal care and pharmaceuticals. In order to be able to react quickly to the market and customers’ and suppliers’ requirements, Brenntag manages its business through its geographically structured segments in EMEA (Europe, Middle East & Africa), North America, Latin America and Asia Pacific. Brenntag offers a broad range of more than 10,000 products as well as extensive value-added services (such as just-in-time delivery, product mixing, blending, repackaging, inventory management, drum return handling as well as technical and laboratory services for specialty chemicals). Brenntag is the global market leader in full-line chemical distribution. We define market leadership not just by business volume; rather, we combine our philosophy “ConnectingChemistry” with constant improvements in the safety standards at our sites. As a responsible service provider, we continually strive to achieve further improvements in the supply chain as a whole. \bROUP STRUCTURE As the ultimate parent company, Brenntag AG is responsible for the strategy of the Group. The central functions of Brenntag AG are Corporate Controlling, Corporate Finance & Investor Relations, Corporate HSE (Health, Safety and Environment), Corporate IT, Corporate Accounting, Corporate Mergers & Acquisitions, Global Human Resources, Corporate Development, Corporate Communications, Corporate Legal, Corporate Internal Audit, Compliance, Corporate Risk Management as well as Corporate Tax. MANAGEMENT REPORT GRO\bP O VERVIEw 42 FINANCIAL REPORT DVGXSRENNTAM AM l at in a meric a 2016 External sales E\bR m780.9 Operating gross profit E\bR m170.9 Operating EBITDA E\bR m45.9 Employees 1)1,482 The consolidated financial statements as at December 31, 2016 include Brenntag AG, 31 (Dec. 31, 2015: 27) domestic and 191 (Dec. 31, 2015: 194) foreign consolidated subsidiaries including structured entities. Five (Dec. 31, 2015: five) associates have been accounted for using the equity method. SEGMENTS AND LOCATIONS The Brenntag Group is managed by the geographically structured segments EMEA (Europe, Middle East & Africa), North America, Latin America and Asia Pacific. In addition, all other segments cover the central functions for the entire Group and the operations of Brenntag International Chemicals, which buys and sells chemicals in bulk on an international scale without regional boundaries. The following graphic gives an overview of the global network and the locations of the Brenntag Group: B.01 GLOBAL n ETwORK OF THE BREnnTAG GRO\bP Figures exclude all other segments, which, in addition to various holding companies, comprise the international activities of Brenntag International Chemicals. 1) The number of employees is calculated as the number of employees on the basis of full-time equivalents at the reporting date. north america 2016 External sales E\bR m3,828.8 Operating gross profit E\bR m9 9 7. 5 Operating EBITDA E\bR m3 5 7. 3 Employees 1)4,602 emea 2016 External sales E\bR m4,586.1 Operating gross profit E\bR m1,064.6 Operating EBITDA E\bR m362.3 Employees 1)6,688 asia pacific 2016 External sales E\bR m1,010.7 Operating gross profit E\bR m182.3 Operating EBITDA E\bR m6 6.7 Employees 1)1,921 MAnAGEMEnT REPORT GRO\bP O VERVIEw 43 i n STEVNHE OLSAED8VOALSOL8LBO8R GV8VHDHLVG f f furuthfhre ihnoie maclcsalg pdfiflp\f ffiTO\bRpdcc\flS lS VISION, OBJECTIVES AND STRATEGY Our philosophy “ConnectingChemistry” describes our company’s purpose, value creation and commitment to all our partners within the supply chain: | Success We support our partners in developing and growing their businesses, and enable them to expand their market reach. Equally, we are committed to creating value for our shareholders and developing our employees throughout all stages of their careers. | Expertise We provide our partners with in-depth product, application and industry expertise, and sophisticated market intelligence. We set ourselves apart, drawing on our extensive product and service portfolio as well as our comprehensive industry coverage on a global level and our ability to develop creative, tailor-made solutions. | Customer orientation and service excellence We offer powerful channels to market and provide the best customer service in the industry. Only when our partners are fully satisfied do we consider our service to be delivered. 2020 VISION Our “2020 Vision” illustrates how we continue to position ourselves in the markets and industries we serve and is summarized by the following five commitments to our current and future development: | We are the safest chemical distributor, striving for zero accidents and incidents. | Throughout the world, we connect chemistry by providing the most effective industry channel for our customers and suppliers. | We are the global leader in all our chosen markets and industries, offering the most professional sales and marketing organization in the industry, ensuring consistently high standards every day, everywhere. | We strive to provide a working environment where the best people want to work. | We aim to generate sustainable and high returns for our shareholders and all other stakeholders. OBJECTIVES AND STRATE\bY Our goal is to be the preferred distributor for both industrial and specialty chemicals for our customers and suppliers and, at the same time, the industry leader in safety, growth and profitability. We aim to achieve this with a clear growth strategy geared to steadily expanding our leading market position while continually improving profitability. MANAGEMENT REPORT GRO\bP O VERVIEw 44 140602465 789fi73 TEXAS780036P 6P Extending our market leadership by steadily growing organically Improving profitability organic growth and acquisitions We strive to extend our market leadership by steadily growing our product and service offering organically in line with the requirements of our regional markets. In doing so, we benefit from leveraging our extensive global activities and key strengths. Our proactive sales activities focus on providing customers with tailored full-service solutions along the entire value chain rather than just products. In addition, we continue to seek acquisition opportunities that support our strategy. Our strategic focus is on expanding our presence in emerging markets in Asia Pacific in particular so as to capture the expected strong growth in demand for chemicals in these regions. In the established markets of Western Europe and North America, we continue to further develop our product and service portfolio as well as to optimize our national and international distribution networks through acquisitions. steadily improving profitability A further element of our strategy is to continually and systematically increase profitability. On the basis of our entrepreneurial culture, our operational excellence and our resilient business model, we strive to steadily increase our operating gross profit, EBITDA and cash flows and achieve an attractive return on capital. Extending the scope of our operations, both organically and through acquisitions, achieving the resulting economies of scale and placing emphasis on value-added services are major levers we use to increase profitability and returns. strategic initiatives The systematic implementation of our strategy is based on global and regional initiatives. The focus of our global safety initiative, for instance, is to establish an outstanding safety culture and to introduce globally harmonized and consistently high safety standards. In order to offer our business partners the best service in the industry, we are continuously working worldwide with particular emphasis on commercial excellence – that is to say, our effectiveness and efficiency in procurement, sales and marketing – including by leveraging the opportunities arising from digitalization. Our points of focus include systematically expanding business with regional, pan-regional and global key accounts, for which our broad product offering and extensive geographic network provide unrivalled service capabilities. In addition, we will continue to actively realize the potential that arises as a result of chemical producers outsourcing supply chain and commercial activities. Supporting the strategy through global and regional initiatives MANAGEMENT REPORT GRO\bP O VERVIEw 45 1 4 0 1 4 0 1406250 78190fi3679817838T73E X6365fi586Xfi383A5fi586 05S906 PNY\fYVN\fI R\bBCRO FGMD flR\bYYO\fff \fff As part of our regional growth strategies, we continue seeking to effectively leverage our capabilities in rapidly expanding and therefore particularly attractive industries such as water treatment, personal care, pharmaceuticals, food & beverages as well as adhesives, coatings, paints, elastomers and sealants. In oil & gas, we are counting on the industry’s long-term potential in combination with our excellent capabilities and our supplier and customer network. In order to achieve sustainable growth, we are driving the targeted expansion of our products and services in the downstream 1) segment in particular while also placing more emphasis on developing our global oil and gas expertise. Further initiatives focus on growing the customer-specific mixing and blending business by providing value-added services. In addition to our growth initiatives, we continue to improve our operational excellence, in particular by optimizing our network, adopting best practice solutions throughout the Brenntag Group and optimizing our warehouse and transport logistics on a regional and global level. In our human resources activities, we seek to best position the Brenntag brand in the employment market so as to recruit, develop and retain highly qualified employees. Our focus here is on our employees’ continuing development and, in particular, on targeted succession planning. SUSTAINABILITY Our sustainability management focuses on the aspects derived from our daily operations and service portfolio: | Safety | Environmental protection | Responsibility within the supply chain | Compliance | Employees | Social responsibility We remain committed to the principles of responsible care and responsible distribution as well as the principles of the UN Global Compact. We are also a member of “Together for Sustainability”, an industry initiative that aims to enhance sustainability across the entire chemical supply chain. Detailed information on our sustainability management can be found in our latest sustainability report and in the “Health, Safety and Environmental Protection, Quality Management” chapter of this annual report.Brenntag is the first chemical distributor to join the “Together for Sustainability” initiative 1) Downstream: the refining and processing sector of the oil and gas industry Further information in chapter “Brenntag’s HSE Strategy” MANAGEMENT REPORT GRO\bP O VERVIEw 46 140602465 789fi73 TEXAS780036P 6P FINANCIA\f MANAGEMENT SYSTEM Our goal is to remain the preferred distributor for both industrial and specialty chemicals for our customers and suppliers and, at the same time, the industry leader in safety, growth and profitability. We aim to achieve this with a clear growth strategy geared to steadily expanding our leading market positions while continually and systematically improving profitability. On the basis of our entrepreneurial culture, our operational excellence and our resilient business model, we strive to steadily increase our operating gross profit, EBITDA and cash flows and achieve an attractive return on capital, both through organic growth and acquisitions. Acquisitions help us to extend our geographic coverage, optimize our portfolio in attractive market segments and achieve economies of scale. The financial management system of the Brenntag Group enables us to measure attainment of these goals. It is based on key performance indicators such as operating gross profit, operating EBITDA and free cash flow and their growth. We also measure return on capital and set strict requirements for the performance of investment projects and acquisitions. In the following, the key performance indicators used to measure the Group’s financial performance are explained. They also include alternative performance indicators not defined under IFRSs such as operating EBITDA and free cash flow, as a result of which these terms may be defined differently by other companies. These alternative performance indicators are calculated continuously using a uniform approach, which ensures that metrics from different financial years can be compared. OPERATIN\b \bROSS PROFIT Whereas for manufacturing companies, sales play a key role, for us as a chemical distributor, operating gross profit is a more important factor for increasing our enterprise value over the long term. Operating gross profit is defined as the difference between external sales and cost of materials. Our goal is for the growth in our operating gross profit to exceed macroeconomic benchmarks. In order to ensure that measurement of performance at Group or regional level is meaningful, we adjust the growth in operating gross profit for currency translation effects. A detailed analysis of the growth in operating gross profit is given in the chapters “Business Performance of the Brenntag Group” and “Business Performance in the Segments”. OPERATIN\b EBITDA The key indicator and measure for the financial performance of the Brenntag Group is operating EBITDA. We use this indicator to manage the segments, as it reflects the performance of our business operations well and is a key component of cash flow. Our aim is to continually grow operating EBITDA throughout the business cycle. It is the operating profit as recorded in the consolidated income statement plus amortization of intangible assets as well as depreciation of property, plant and equipment and investment property, adjusted for holding charges. Holding charges are certain costs charged between holding companies and operating companies. At Group level they net to zero. MANAGEMENT REPORTGRO\bP O VERVIEw 47 1 4 0 1 4 0 1406250 78190fi3679817838T73E X6365fi586Xfi383A5fi586 05S906 PNY\fYVN\fI R\bBCRO FGMD flR\bYYO\fff \fff Information on current operating EBITDA performance in the Brenntag Group and the segments can be found in the chapters “Business Performance of the Brenntag Group” and “Business Performance in the Segments”. RETURN ON CAPITAL In the Brenntag Group, we measure return on capital using the indicator return on capital employed (ROCE). This indicator calculates return on capital taking into account the purchase price for acquisi tions. ROCE is defined as: ROCE = ebita (the average carrying amount of equity + the average carrying amount of financial liabilities – the average carrying amount of cash and cash equivalents) The average carrying amounts in the denominator are defined for a particular year as the arithmetic average of the amounts at each of the following five dates: the beginning of the year, the end of each of the first, second and third quarters, and the end of the year. We no longer use RONA (return on net assets), which was previously used to measure return on capital and was one of several indicators included when measuring variable Board of Management remuneration under the Board of Management remuneration system replaced in 2015. CASH \bENERATION Our aim is to generate increasing surplus liquidity. We measure this using free cash flow. This is defined as: ebitda – other additions to property, plant and equipment as well as other additions to intangible assets (c apex) + / – changes in working capital = free cash flow Free cash flow is an important performance indicator for us as it shows what level of cash is genera ted from operating activities and will therefore be available for growth through acquisitions as well as for lenders, shareholders and tax payments. MANAGEMENT REPORT GRO\bP O VERVIEw 48 140602465 789fi73 TEXAS780036P 6P ADDITIONAL PERFORMANCE INDICATORS In addition to the aforementioned financial performance indicators, we use several other metrics to assess the economic success of our business activities. For example, the conversion ratio is an indicator we calculate to measure the efficiency of a segment or the Group, more specifically by expressing operating EBITDA for a given period as a percentage of operating gross profit for the same period. The indicator is used primarily to assess longer-term trends and less so to analyze short-term fluctuations between quarters. To determine whether a particular investment project is expected to generate value for Brenntag, we take the modified internal rate of return (MIRR) and the payback period as measures of the risk involved in the project. An investment project is only approved if the MIRR is above the hurdle rate and the combination of return and payback seem attractive. The hurdle rate for the MIRR varies depending on the risk involved in the project and in particular on the respective country risk. In our efforts to generate increasing cash flow, we analyze working capital turnover. This is defined as: working capital turnover = sales average working capital Average working capital is defined for a particular year as the average of the values for working capital at each of the following five dates: the beginning of the year, the end of each of the first, second and third quarters, and the end of the year. In addition to these metrics, we have also set strategic objectives as well as financial hurdle rates that generally have to be considered when an acquisition is carried out. In particular, potential acquisitions must be able to satisfy our hurdle rate of return in the form of free cash flow on capital employed. The hurdle rate of return again depends above all on the country risk of the acquisition. Further performance indicators such as tax rate and earnings per share (EPS) are only used at Group level. They are not used to measure the performance of Brenntag’s segments since factors such as interest or tax are less a reflection of the operating performance of the segments, but are above all based on central decisions. MANAGEMENT REPORT GRO\bP O VERVIEw 49 L A T L A T LATINMT ERLCT20IECRLER0R1E06 4I0IM2MRI420R05M2MRI TM9CTI 7OH\fHUO\fS D\bPFDÜ BWKY VD\bHHÜ\f8 \f8 ADJUSTMENT FOR EXCHAN\bE RATE EFFECTS Brenntag is an international Group which generates its profits in a large number of Group companies in different currency areas. These Group companies are mainly located in the euro and US dollar zones, but many other currency areas are also of significance. For the purposes of Group accounting, the results of all Group companies are translated into the Group currency, the euro. The results are always translated at the average rate for the reporting period. Therefore, the results and in particular the change between reporting periods may not only be affected by changes in operating performance, but also by effects of translation from functional currencies into the Group currency, the euro (translation effects). As Brenntag considers it important to assess the operating performance of the Group companies and in particular the change in operating performance between reporting periods free of distortions from translation effects, we also report the changes adjusted for these effects. Exchange rate-adjusted financial metrics are not to be seen as substitutes or as more meaningful financial indicators, but always as additional information on sales, operating expenses, earnings or other metrics. MANAGEMENT REPORTGRO\bP O VERVIEw 50 LATITNAIM ERC2E0 16459ERTT0I7 I7 REPORT ON ECONOMIC POSITION ECONOMIC ENVIRONMENT Global economic performance in 2016 was subdued overall and only towards the end of the year were there signs of a slight recovery. This is reflected in the Global Manufacturing Purchasing Managers’ Index (PMI), which stood at 52.7 in December, a reading above the 50 neutral mark. Global industrial production only grew by about 1.5% year on year in 2016. Europe continued to record moderate economic growth overall. Industrial production expanded by approximately 1.4% year on year in 2016. Partly because of the low oil price, the USA saw a generally weak trend, with industrial production in contraction. Overall, industrial production declined by 1.0% year on year in 2016. Latin America experienced a downturn in economic conditions. Venezuela underwent fundamental economic changes and Brazil continued to face economic challenges. Overall, Latin American industrial production contracted by approximately 3.8% year on year in 2016. While the economies of Asia, particularly China, continued to see slower growth momentum, Asia nevertheless remained the fastestexpanding region globally. Industrial production across the region as a whole grew by around 4.6% year on year in 2016. B\bSINESS PERFORMANCE MAJOR EVENTS IMPACTIN\b ON BUSINESS IN 2016 In the EMEA segment, Brenntag carried out several smaller acquisitions in financial year 2016. In Germany, our existing business was complemented by the acquisition of Leis Polytechnik – polymere Werkstoffe GmbH and ACU PHARMA und CHEMIE Group. We also made two acquisitions in South Africa, namely P\fASTICHEM (PTY) \fT D and w ARREN CHEM SPECIALITIES (PTY) LTD. In North America, we expanded our lubricants business by acquiring Mayes County Petroleum Products, Inc. (MCP) and NOCO Inc. These acquisitions are a valuable addition to J.A.M. Distributing Company and G.H. Berlin-Windward, which we acquired in 2015. In the Asia Pacific segment in financial year 2016, we acquired the outstanding shares in Chinese distributor Zhong Yung. Brenntag also acquired specialty chemical distributor Whanee Corporation in South Korea and the distribution business of EPChem Group in Singapore. Successfully completed acquisitions with enterprise values totalling more than EUR 200 m MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 51 F I N F I N FINACLN REFPNOTARPEFRETEDRTV GATALOLEAGOTETXLOLEA NLSPNA MKY\fYHK\ffi B\bWQB2 8943 1B\bYY2\f5 \f5 As already outlined in the section of the 2015 Annual Report on events after the end of the reporting period, in mid-February 2016 the Venezuelan government further devalued the country’s currency, the bolivar, by more than 90%. For Brenntag, this gave rise to losses of approximately EUR 27.1 million triggered by exchange rate movements and recognized in net finance costs. In addition, Brenntag’s local Venezuelan earnings are now translated at a much weaker exchange rate, as a result of which the business in Venezuela is no longer making an appreciable contribution to operating EBITDA. STATEMENT BY THE BOARD OF MANA\bEMENT ON BUSINESS PERFORMANCE In divergent economic conditions, the Brenntag Group achieved operating EBITDA of EUR 810.0 million in financial year 2016, a slight increase on the prior-year figure of EUR 807.4 million. On a constant currency basis, earnings grew by 1.9%. Operating EBITDA was affected by political and economic factors. In North America, our business with customers in the oil & gas sector continued to be impacted by weak demand in financial year 2016. The trend stabilized in the course of the year, but at a lower level than in the previous year. We also saw a weak economic trend outside this sector in North America. The loss of earnings in Venezuela and the difficult situation in some Latin American countries put pressure on our earnings in this region. Thanks to our diversified business model, however, we were able to counter the difficulties in North America and Latin America. The existing business in the EMEA segment and in the Asia Pacific region in particular delivered an encouraging performance. The acquisitions also made a valuable contribution to the Group’s earnings, as a result of which we recorded an overall increase compared with the previous year. The EMEA segment posted firm growth in operating EBITDA on a constant currency basis due to both the positive performance from the existing business and the inclusion of several smaller acquisitions. However, the depreciation of the pound sterling reduced the earnings of our UK companies translated into the Group currency, the euro, as a result of which the reported rates of growth were lower than those on a constant currency basis. Business performance in North America was affected by the factors mentioned: while the existing business continued to be impacted by weak demand in the oil & gas sector and weak economic momentum outside this sector, the effects were offset by the contribution from the acquisitions in North America. In addition to the loss of earnings in Venezuela, earnings performance in Latin America was also adversely affected by the difficult situation in Brazil. This led to a decline in operating EBITDA overall. The Asia Pacific segment achieved very encouraging growth in financial year 2016 due to both strong double-digit rates of growth in the existing business and the valuable contribution from the acquisitions. MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 52 140602465 789fi73 TEXAS780036P 6P Despite higher sales, average working capital in financial year 2016 was up only slightly on the prior-year level. We were able to keep annualized working capital turnover on a par with the previous year. Capital expenditure on property, plant and equipment showed only a marginal yearon-year increase in financial year 2016. The inclusion of the acquisitions carried out in 2015 did not result in a meaningful increase in capital expenditure. We are continuing to follow our strategy of maintaining our existing infrastructure and expanding it appropriately through growth projects. Overall, the outlined performance in operating EBITDA, working capital and capital expenditure resulted in a free cash flow that reached a high level again but was lower than in the previous year, when working capital dropped significantly due to strong falls in chemical prices, benefiting free cash flow considerably. Business performance in financial year 2016 was mixed overall. We achieved solid organic growth in EMEA and double-digit rates of growth in the existing business in the Asia Pacific region. The acquisitions also made an important contribution. These positive effects helped to curb the impact of the difficulties in North America and Latin America, enabling the Group to increase operating EBITDA overall. MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 53 1 4 0 1 4 0 1406250 78190fi3679817838T73E X6365fi586Xfi383A5fi586 05S906 PNY\fYVN\fI R\bBCRO FGMD flR\bYYO\fff \fff RES\b\fTS OF OPERATIONS BUSINESS PERFORMANCE OF THE BRENNTA\b \bROUP 1) Change in % (fx adj.) is the percentage change on a constant currency basis. Despite several challenges, the Brenntag Group performed well overall in financial year 2016. In the following, we only comment on performance compared with the forecast published in last year’s annual report where it differs from that forecast. sales and volumes Whereas for manufacturing companies, sales play a key role, for us as a chemical distributor, opera ting gross profit is a more important factor for increasing our enterprise value over the long term. The Brenntag Group generated sales of EUR 10,498.4 million in financial year 2016, a yearon-year increase of 1.5%. This represents sales growth of 2.9% on a constant currency basis and is based on higher volumes. The acquisitions, particularly J.A.M. Distributing Company, G.H. Berlin-Windward and TAT Group, which we acquired at the end of financial year 2015, made a contribution, more than offsetting the moderate decline in sales in the existing business.E\bR 10,498.4 m sales B.02 B\bSINESS PERFORMANCE OF THE BRENNTAG GRO\bP Change in EUR m 20162015 abs.in %in % (fx adj.) 1) Sales 10,498.410,346.1 152.31.52.9 Operating gross profit 2,428.72,321.7 1 0 7. 0 4.66.1 Operating expenses – 1,618.7 – 1,514.3 – 104.4 6.98.3 Operating EBITDA 810.0807.4 2.60.\f1.9 Depreciation of property, plant and equipment – 115.5 – 10 8.7 – 6.8 6.38.1 EB I TA 694.569 8.7 – 4.2– 0.6 0.9 Amortization of intangible assets – 4 7. 2 – 36.9 – 10.3 2 7. 931.1 Net finance costs – 111.6 – 112.5 0.9– 0.8 – Profit before tax 535.75 49.3– 13.6 – 2.5 – Income tax expense – 174.7 – 181.2 6.5 – 3.6 – Profit after tax 361.0368.1 – 7. 1 – 1.9 – MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 54 140602465 789fi73 TEXAS780036P 6P operating gross profit The Brenntag Group generated operating gross profit of EUR 2,428.7 million in financial year 2016, an increase of 4.6%, or 6.1% on a constant currency basis, due mainly to higher volumes. The growth in operating gross profit is attributable to the positive performance from the existing operations in the EMEA and Asia Pacific segments and the contribution from the acquisitions, particularly J.A.M. Distributing Company, G.H. Berlin-Windward and TAT Group, which more than offset the clear reduction in operating gross profit in the oil & gas sector in North America and the decline in operating gross profit in Latin America. operating expenses The Brenntag Group’s operating expenses amounted to EUR 1,618.7 million in financial year 2016. This is a rise of 6.9% year on year, or 8.3% on a constant currency basis, and due mainly to the acquisition-driven business growth. Operating expenses for the existing business were only modera tely higher. operating ebitda The Brenntag Group achieved operating EBITDA of EUR 810.0 million overall in financial year 2016, a slight increase on the prior-year figure (0.3%). This represents earnings growth of 1.9% on a constant currency basis and therefore does not fully meet the prior-year growth forecast for 2016. However, earnings are in the middle of the forecast range of EUR 800 million to EUR 820 million published in November 2016. The growth in the existing business in the EMEA and Asia Pacific segments and the inclusion of the acquisitions more than offset the decrease in earnings in the oil & gas sector in North America and the difficult situation in some Latin American countries. depreciation, amortization and net finance costs Depreciation of property, plant and equipment and amortization of intangible assets amounted to EUR 162.7 million in financial year 2016, with depreciation of property, plant and equipment accounting for EUR 115.5 million and amortization of intangible assets for EUR 47.2 million. Compared with financial year 2015, total depreciation and amortization was up by EUR 17.1 million, a rise due mainly to higher amortization charges on customer relationships resulting from acquisitions. Net finance costs amounted to EUR 111.6 million in 2016 (2015: EUR 112.5 million). Interest expense, which is a component of net finance costs, came to EUR 81.5 million, an increase on the previous year (EUR 71.5 million) driven mainly by the bond with warrant units issued in the amount of USD 500.0 million in November 2015. In addition, net finance costs in both 2015 and 2016 reflected a relatively significant one-time effect: in 2015, the remeasurement of the purchase price obligation for the remaining shares in Zhong Yung led to an expense (EUR 23.4 million) and, in 2016, the changes made by the Venezuelan government to the official exchange rate mechanism resulted in increased expense (EUR 27.1 million). Net expense from foreign currency items showed a significant improvement. E\bR 2,428.7 m operating gross profit E\bR 810.0 m operating EBITDA MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 55 1 4 0 1 4 0 1406250 78190fi3679817838T73E X6365fi586Xfi383A5fi586 05S906 PNY\fYVN\fI R\bBCRO FGMD flR\bYYO\fff \fff profit before tax Profit before tax amounted to EUR 535.7 million in financial year 2016 (2015: EUR 549.3 million). income taxes and profit after tax Income tax expense declined by EUR 6.5 million year on year to EUR 174.7 million (2015: EUR 181.2 million) due to the lower profit before tax. Profit after tax totalled EUR 361.0 million in financial year 2016 (2015: EUR 368.1 million). return on capital employed (roce)B.03 RET\bRN ON CAPITA\f EMP\fOYED (ROCE) Change in EUR m 20162015 abs.in % EB I TA 694.569 8.7 – 4.2– 0.6 Average carry ing amount of equity 2,753.82,534.6 219.2 8.6 Average carry ing amount of financial liabilities 2,238.31,961.8 276.514.1 Average carry ing amount of cash and cash equivalents – 566.3– 460.9 – 105.4 22.9 ROCE 15.7 % 1 7. \f % –– In financial year 2016, the Brenntag Group posted ROCE of 15.7%, a decrease of 1.6 percentage points compared with the previous year due predominantly to the significant increase in capital employed. The average carrying amount of both equity and financial liabilities showed a significant yearon-year rise, which was not offset by the increase in cash and cash equivalents. In addition, EBITA declined slightly. MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 56 140602465 789fi73 TEXAS780036P 6P business performance in the segments emea (europe, middle east & africa)B.04 B\bSINESS PERFORMANCE IN THE SEGMENTS 2016 in EUR m Brenntag Group EMEANor th America Latin America Asia Pacific All other segments External sales 10,498.44,586.13,828.8 780.91,010.7 291.9 Operating gross profit 2,428.71,064.6 9 9 7. 5170.9182.3 13.4 Operating expenses – 1,618.7 – 702.3– 640.2 – 125.0 – 115.6 – 35.6 Operating EBITDA 810.0\f62.\f \f 5 7. \f 45.966.7– 22.2 B.05 B\bSINESS PERFORMANCE IN THE SEGMENTS / EMEA Change in EUR m 20162015 abs.in %in % (fx adj.) External sales 4,586.1 4,654.4 – 68.3– 1.5 0.6 Operating gross profit 1,064.61,024.2 40.43.96.4 Operating expenses – 702.3– 671.2 – 31.1 4.66.9 Operating EBITDA \f62.\f\f5\f.0 9.\f2.6 5.6 External sales and volumes The EMEA segment generated external sales of EUR 4,586.1 million in financial year 2016, a decline of 1.5% compared with the previous year. This is partly due to the depreciation of the pound sterling against the euro. On a constant currency basis, external sales were up by 0.6% on the previous year based on higher volumes. Operating gross profit The operating gross profit generated by the companies in the EMEA segment climbed by 3.9% year on year to EUR 1,064.6 million in financial year 2016. This represents growth of 6.4% on a constant currency basis and is due predominantly to the encouraging performance from the existing business. Several smaller acquisitions also made a positive contribution to the business growth. Operating expenses The EMEA segment posted operating expenses of EUR 702.3 million in financial year 2016. This represents a rise of 4.6% year on year, or 6.9% on a constant currency basis, and is due primarily to higher personnel, transport and rent costs as well as the inclusion of the smaller acquisitions. MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 57 1 4 0 1 4 0 1406250 78190fi3679817838T73E X6365fi586Xfi383A5fi586 05S906 PNY\fYVN\fI R\bBCRO FGMD flR\bYYO\fff \fff Operating EBITDA The companies in the EMEA segment achieved operating EBITDA of EUR 362.3 million in financial year 2016 and thus posted earnings growth of 2.6% and, on a constant currency basis, 5.6%. This growth is based on both the positive performance from the existing business and the contribution from the acquisitions. We are satisfied with the result, especially given the fact that economic growth was only moderate. north america Performance in the North America segment during financial year 2016 was impacted by different effects: the contribution from the newly acquired J.A.M. Distributing Company and G.H. BerlinWindward contrasted with weak demand from customers in the oil & gas sector and a generally subdued economic environment. External sales and volumes The North America segment posted external sales of EUR 3,828.8 million in financial year 2016. This rise of 6.3% compared with financial year 2015, or 6.4% on a constant currency basis, is attributable to higher volumes and due to the contribution from acquirees J.A.M. Distributing Company and G.H. Berlin-Windward. Operating gross profit The operating gross profit generated by the North American companies rose by 5.8% to EUR 997.5 million in financial year 2016. This represents growth of 5.9% on a constant currency basis and is based on higher volumes. Earnings are therefore lower than we forecast, due mainly to the fact that business with customers in the oil & gas sector performed worse this year than originally expected. The upstream sector 2) and midstream sector2) especially were impacted by weak demand, and to a lesser extent the downstream sector2) too. In addition, the acquisition of J.A.M. Distributing Company in particular underperformed our expectations, due primarily to competitive pressures in the marine fuel business. Adjusted for the oil & gas sector and the acquisitions, operating gross profit declined by around 1% year on year on a constant currency basis in financial year 2016. 2) Upstream: the sector of the oil and gas industry primarily comprising exploration and related activities; midstream: the sector of the oil and gas industry comprising treatment, transportation and storage; downstream: the refining and processing sector of the oil and gas industry. B.06 B\bSINESS PERFORMANCE IN THE SEGMENTS / NORTH AMERICA Change in EUR m 20162015 abs.in %in % (fx adj.) External sales 3,828.83,60 0.6 228.2 6.36.4 Operating gross profit 9 9 7. 5942.6 54.9 5.85.9 Operating expenses – 640.2– 5 7 7. 0 – 63.2 11.011.1 Operating EBITDA \f 5 7. \f\f65.6 – 8.\f– 2.\f – 2.2 MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 58 140602465 789fi73 TEXAS780036P 6P Operating expenses Operating expenses in the North America segment amounted to EUR 640.2 million in financial year 2016, a yearon-year increase of 11.0% (11.1% on a constant currency basis). The rise is due to the acquisition-driven business growth, which resulted in higher personnel and rent costs in particular. Operating expenses for the existing business, on the other hand, were on a par with the previous year. Since the end of 2014, we have been continually adjusting headcount in line with the changes in demand in the oil & gas sector and have since reduced the number of employees in this area of business by almost 20%. Operating EBITDA The North American companies achieved operating EBITDA of EUR 357.3 million in financial year 2016, a decrease of 2.3% compared with financial year 2015 and a decline of 2.2% on a constant currency basis. Earnings are therefore below our forecast. This is partly due to the aforementioned weakness in the oil & gas sector, which was more pronounced than originally expected. In addition, the acquisition of J.A.M. Distributing Company in particular underperformed our expectations, due primarily to continuing competitive pressures in the marine fuel business. Overall, there was a downturn in economic conditions, with industrial production in contraction. latin americaB.07 B\bSINESS PERFORMANCE IN THE SEGMENTS / \fATIN AMERICA Change in EUR m 20162015 abs.in %in % (fx adj.) External sales 780.9925.8– 14 4.9 – 1 5.7 – 14.0 Operating gross profit 170.9201.2– 30.3 – 15.1 – 13.4 Operating expenses – 125.0 – 136.5 11.5– 8.4 – 6.7 Operating EBITDA 45.96 4.7– 18.8 – 29.1 – 2 7. 6 Operating EBITDA excluding Venezuela 45.6 54.\f– 8.7 – 16.0 – 14.0 External sales and volumes The Latin America segment generated external sales of EUR 780.9 million in financial year 2016, a decline of 15.7%, or 14.0% on a constant currency basis. Volumes were down on the prior-year level. Operating gross profit The operating gross profit generated by the Latin American companies in financial year 2016 amounted to EUR 170.9 million, a decline of 15.1% year on year, or 13.4% on a constant currency basis, due primarily to the loss of earnings in Venezuela. This result is less than we forecast last year. The difficult economic situation in Brazil had an increasingly negative impact on our business during financial year 2016. MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 59 1 4 0 1 4 0 1406250 78190fi3679817838T73E X6365fi586Xfi383A5fi586 05S906 PNY\fYVN\fI R\bBCRO FGMD flR\bYYO\fff \fff Operating expenses Operating expenses in the Latin America segment amounted to EUR 125.0 million in financial year 2016, a reduction of 8.4%. This represents a decrease of 6.7% on a constant currency basis and is partly due to lower personnel and transport costs. It also reflects the lower volume of business in Venezuela. Operating EBITDA The Latin American companies posted operating EBITDA of EUR 45.9 million overall in financial year 2016 and were therefore down by 29.1% on the prior-year figure. On a constant currency basis, operating EBITDA dropped by 27.6%. Earnings were significantly impacted by the fact that local Venezuelan earnings are now translated at a weaker exchange rate, as a result of which the business in Venezuela is no longer making any appreciable contribution to operating EBITDA. In financial year 2015, operating EBITDA in Venezuela amounted to EUR 10.4 million. Adjusted for the business in Venezuela, earnings were down by 14.0% on a constant currency basis due primarily to the difficult economic situation in Brazil. Overall in Latin America, we saw a decline in industrial production in 2016. asia pacific B.08 B\bSINESS PERFORMANCE IN THE SEGMENTS / ASIA PACIFIC Change in EUR m 20162015 abs.in %in % (fx adj.) External sales 1,010.7834.1176.6 21.224.6 Operating gross profit 182.3140.0 42.330.2 33.7 Operating expenses – 115.6 – 8 9.7 – 25.9 28.932.4 Operating EBITDA 66.750.\f 16.4\f2.6 \f5.8 External sales and volumes External sales in the Asia Pacific segment increased by 21.2% year on year to EUR 1,010.7 million in financial year 2016. This represents sales growth of 24.6% on a constant currency basis and is due to higher volumes. Operating gross profit The Asia Pacific segment generated operating gross profit of EUR 182.3 million in financial year 2016, a yearon-year rise of 30.2%. On a constant currency basis, operating gross profit climbed by 33.7% due predominantly to an increase in volumes. The existing business delivered a very encouraging performance and achieved strong double-digit rates of growth. This was also supported by the contribution from the acquisitions, particularly TAT Group. MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 60 140602465 789fi73 TEXAS780036P 6P B.09 B\bSINESS PERFORMANCE IN THE SEGMENTS / A\f\f OTHER SEGMENTS Operating expenses The operating expenses of the companies in the Asia Pacific segment rose by 28.9% year on year, or 32.4% on a constant currency basis, to EUR 115.6 million in financial year 2016. The rise in costs is attributable to both the acquisitions and the growth in the existing business, which resulted, among other things, in higher personnel, rent and transport costs. Operating EBITDA The companies in the Asia Pacific segment generated operating EBITDA of EUR 66.7 million in financial year 2016 and thus posted encouraging earnings growth of 32.6% compared with the previous year. This represents a rise of 35.8% on a constant currency basis and is due to both the extremely positive performance from the existing business and the inclusion of the acquirees, particularly TAT Group. all other segments Change in EUR m 20162015 abs.in %in % (fx adj.) External sales 291.9331.2– 39.3 – 11.9 – 11.9 Operating gross profit 13.41 3.7– 0.3 – 2.2 – 2.2 Operating expenses – 35.6 – 39.9 4.3– 10.8 – 10.8 Operating EBITDA – 22.2 – 26.2 4.0– 15.\f – 15.\f In addition to various holding companies, all other segments contain the operations of Brenntag International Chemicals, which buys and sells chemicals in bulk on an international scale without regional boundaries. In financial year 2016, Brenntag International Chemicals GmbH, Mülheim an der Ruhr, matched the high operating EBITDA achieved in the previous year. The operating EBITDA posted by the holding companies in financial year 2016 showed a yearon-year improvement. Overall, the operating EBITDA of all other segments improved by EUR 4.0 million year on year to EUR – 22.2 million in financial year 2016. MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 61 1 4 0 1 4 0 1406250 78190fi3679817838T73E X6365fi586Xfi383A5fi586 05S906 PNY\fYVN\fI R\bBCRO FGMD flR\bYYO\fff \fff FINANCIA\f POSITION CAPITAL STRUCTURE The primary objective of capital structure management is to maintain the Group’s financial strength. Brenntag concentrates on a capital structure which enables the Group to cover its potential financing requirements at all times. This gives Brenntag a high degree of independence, security and flexibility. Our liquidity, interest and currency risks are largely managed on a Group-wide basis. Derivative financial instruments are only used to hedge the above-mentioned risks from underlying transactions and not for speculative purposes. A Group-wide Finance Guideline ensures the implementation of these policies and standard processes throughout the Group. The most important component in the financing structure of Brenntag AG is the Group-wide syndica ted loan agreement. Total liabilities (excluding accrued interest and before offsetting of transaction costs) under the syndicated loan running until March 2019 amounted to EUR 1,253.8 million as at December 31, 2016. The revolving credit facility of EUR 600.0 million under the syndicated loan arrangement was mostly unused at that date. In January 2017, Brenntag took advantage of the very favourable market conditions for borrowers and refinanced the syndicated loan ahead of schedule. To do so, a new syndicated loan totalling the equivalent of EUR 1.7 billion was concluded with a consortium of international banks. In refinancing the loan, an amount of USD 150.0 million was repaid from available liquidity. The new loan runs until 2022. It is based on variable interest rates with margins depending on leverage, and is divided into different tranches with different currencies. In addition to fully drawn tranches, the loan agreement also contains two revolving credit facilities totalling EUR 940.0 million, which can be drawn down in various currencies. When the loan was refinanced in January 2017, one of the two revolving credit facilities was fully drawn down in the amount of EUR 340.0 million. The second revolving credit facility in the amount of EUR 600.0 million was mostly unused at that date. While some of our subsidiaries are still direct borrowers under the loan, others obtain their financing from intra-Group loans. In April 2013, parts of the floating-rate syndicated loan were hedged against interest rate risk using appropriate financial instruments. Some of these financial instruments expired in July 2016 and were not extended. Accordingly, slightly more than 50% of the Brenntag Group’s financial liabilities are currently hedged against the risk of interest rate increases. In connection with the aforementioned refinancing of the syndicated loan, the recognized hedging relationship comprising the financial market instruments still in place to hedge against interest rate risk was reversed. The EUR 400 million bond (Bond 2018) issued by our Group company Brenntag Finance B.V., Amsterdam, Netherlands, in July 2011 matures in July 2018 and bears a coupon of 5.5% with interest paid annually. It is guaranteed by Brenntag AG. If any of the events of default defined in the conditions of issue occurs, each holder of the Bond 2018 may terminate his bond and request that it be repaid immediately. Should the issuer not be able to meet its repayment obligations, the bondholders are entitled to call on the guarantee provided by Brenntag AG as security. MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 62 140602465 789fi73 TEXAS780036P 6P Furthermore, in November 2015, Brenntag Finance B.V. issued a bond with warrant units in the amount of USD 500.0 million maturing in December 2022. The bond (Bond (with Warrants) 2022) was issued at 92.7% of par and bears a coupon of 1.875% p.a. with interest payable semi-annually. It is guaranteed by Brenntag AG. The interest expense from the Bond (with Warrants) 2022 comprises the aforementioned interest payments and the ongoing amortization of the discount. The discount (7.3% or USD 36.5 million) is the warrant premium on the warrants issued together with the Bond (with Warrants) 2022 to purchase Brenntag AG shares. The warrant premium was recognized in the Group’s additional paid-in capital in 2015. If a termination event as defined in the bond terms and conditions occurs, each holder of the Bond (with Warrants) 2022 may terminate his Bond (with Warrants) 2022 and request that it be repaid immediately. Should the issuer not be able to meet its repayment obligations, the bondholders are entitled to call on the guarantee provided by Brenntag AG as security. In addition to the three above-mentioned refinancing instruments, some of our companies make use of credit lines with local banks on a lesser scale in consultation with the Group management. According to our short and mid-term financial planning, the capital requirements for operating activities, investments in property, plant and equipment as well as dividends and acquisitions in the size of past practice are expected to be covered by the cash provided by operating activities so that no further loans are necessary for these purposes. Under the syndicated loan, we also have the aforementioned revolving credit facility available to cover short-term liquidity requirements and for general corporate purposes. B.10 MAT\bRITY PROFI\fE OF O\bR CREDIT PORTFO\fIO 1) AS AT DECEMBER 31, 2016 1) Syndicated loan, Bond 2018 and Bond (with Warrants) 2022 excluding accrued interest and transaction costs. 0 200 400 600 800 1,000 1,200 1,400 in m 20172018 2021 2019 2016 20202022 MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 63 1 4 0 1 4 0 1406250 78190fi3679817838T73E X6365fi586Xfi383A5fi586 05S906 PNY\fYVN\fI R\bBCRO FGMD flR\bYYO\fff \fff B.11 MAT\bRITY PROFI\fE OF O\bR CREDIT PORTFO\fIO1) AS AT JAN\bARY 31, 2017 0 200 400 600 800 1,000 1,200 1,400 1,600 1,8002018 2021 in m 2019 2017 20202022 1) Syndicated loan, Bond 2018 and Bond (with Warrants) 2022 excluding accrued interest and transaction costs. INVESTMENTS In financial year 2016, investments in property, plant and equipment and intangible assets (excluding additions from company acquisitions) led to a total cash outflow of EUR 138.8 million (2015: EUR 126.7 million). We regularly invest in the maintenance, replacement and extension of the infrastructure necessary to perform our services, comprising warehouses, offices, trucks and vehicles of our field service as well as IT hardware for various systems. As the market leader and a responsible chemical distributor, we attach importance to ensuring that our property, plant and equipment meet comprehensive health, safety and environmental requirements. One notable example among an array of investments is the project at the site in Houston, Texas, USA, entailing an investment volume of EUR 6.3 million in 2016. Here, three existing sites are being amalgamated into one. The project involves the construction of an additional warehouse together with tank farms and a works siding. By consolidating the sites, we hope to be able to manage our business more efficiently and have also put in place our capacities for additional growth. We expect the improvements to the logistics chain to generate significant cost savings. The project was initiated in financial year 2015. Investments are typically funded from cash flow and/or cash from the respective Group companies. With larger investment plans which cannot be covered by local funds, financing is provided by the Group and external borrowings are mostly not necessary. MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 64 140602465 789fi73 TEXAS780036P 6P LIQUIDITY cash flow Information on the “Consolidated Cash Flow Statement Disclosures” in the consolidated financial statements in EUR m 20162015 Net cash provided by operating activities 5\f9.959\f.7 Net cash used in investing activities – 269.4 – 621.6 thereof payments to acquire consolidated subsidiar ies, other business units and other financial assets – 139.8 – 500.9 thereof payments to acquire intangible assets and proper ty, plant and equipment – 138.8 – 1 26.7 thereof proceeds from divestments 9.26.0 Net cash used in / provided by financing activities – 249.1 112.0 thereof dividends paid to Brenntag shareholders – 154.5– 139.1 thereof repayments of / proceeds from borrowings – 30.8218.7 thereof other financing activ ities – 63.8 32.4 Change in cash and cash equivalents 21.484.1 B.12 CASH F\fOw The Group’s net cash inflow from operating activities amounted to EUR 539.9 million in the reporting period, a decrease of EUR 53.8 million on the prior-year figure. While tax and interest payments remained on a par with the previous year, working capital increased year on year. Of the net cash of EUR 269.4 million used in investing activities, EUR 138.8 million comprised payments to acquire intangible assets and property, plant and equipment. Payments to acquire consolidated subsidiaries, other business units and other financial assets amounted to EUR 139.8 million and included, among other items, the purchase prices for the acquisition of the lubricants business of NOCO, Inc. based in Tonawanda, New York, USA, the distribution business of EPChem Group based in Singapore and the shares in WARREN CHEM SPECIALITIES (PTY) LTD based in Cape Town, South Africa. Of the net cash of EUR 63.8 million used in other financing activities, EUR 62.2 m\Yillion related to the repayment of the liability to acquire the remaining shares in Zhong Yung (second tranche). MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 65 L A T L A T LATINMT ERLCT20IECRLER0R1E06 4I0IM2MRI420R05M2MRI TM9CTI 7OH\fHUO\fS D\bPFDÜ BWKY VD\bHHÜ\f8 \f8 free cash flowB.13 FREE CASH F\fOw The Brenntag Group’s free cash flow amounted to EUR 641.4 million in financial year 2016. We therefore recorded a decrease of 16.1% compared with the previous year (EUR 764.3 million) and were within the forecast published in the 2015 annual report. This is due mainly to the increase in working capital. Prior-year free cash flow benefitted significantly from a reduction in working capital supported by the decline in chemical prices. As expected, this reduction was not repeated. Nevertheless, we were able to limit the increase in working capital in financial year 2016 and keep working capital turnover at a high level. The planned increase in capital expenditure to expand our infrastructure also contributed to the decrease in free cash flow. Operating EBITDA was up slightly on the prior-year figure. Change in EUR m 20162015 abs.in % Operating EBITDA 810.08 0 7. 4 2.60.3 Investments in noncurrent assets (capex) – 141.1 – 130.1 – 11.0 8.5 Change in working capital – 2 7. 5 8 7. 0– 114.5 – 131.6 Free cash flow 641.4764.\f– 122.9 – 16.1 MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 66 140602465 789fi73 TEXAS780036P 6P FINANCIA\f AND ASSETS POSITION B.14 FINANCIA\f AND ASSETS POSITION 1) Of the intangible assets as at December 31, 2016, some EUR 1,308 million relates to goodwill and trademarks that were capitalized as part of the purchase price allocation performed on the acquisition of the Brenntag Group by funds advised by BC Partners Limited, Bain Capital, Ltd. and subsidiaries of Goldman Sachs International at the end of the third quarter of 2006 in addition to the relevant intangible assets already existing in the previous Group structure. As at December 31, 2016, total assets had increased by EUR 310.8 million compared with the end of the previous year to EUR 7,287.0 million (Dec. 31, 2015: EUR 6,976.2 million). Cash and cash equivalents were up on yearend 2015 to EUR 601.9 million (Dec. 31, 2015: EUR 579.1 million). This increase is attributable to the excellent cash inflow from operating activities, which more than offset the outflows for the dividend and several acquisitions. Dec. 31, 2016 Dec. 31, 2015 in EUR m abs.in % abs. in % Assets Current assets \f, 281.745.0\f,098.8 44.4 Cash and cash equivalents 601.98.3579.1 8.3 Trade receivables 1,511.220.71,426.5 20.4 Other receivables and assets 205.82.8196.1 2.8 Inventories 962.813.28 9 7. 1 12.9 Non-current assets 4,005.\f55.0\f , 8 7 7. 4 55.6 Intangible assets 1)2,873.2 39.42,7 72.1 39.7 Other fixed assets 1,03 4.714.2994.4 14.3 Receivables and other assets 9 7. 41.4110.9 1.6 Total assets 7, 2 8 7. 0100.06,976.2 100.0 Liabilities and equity Current liabilities 1,714.62\f.51,7\f8.9 24.9 Provisions 36.20.542.1 0.6 Trade payables 1,119.415.41,055.5 15.1 Financial liabilities 146.32.0160.8 2.3 Miscellaneous liabilities 41 2.75.6480.5 6.9 Equity and non-current liabilities 5,572.476.55,2\f7.\f 75.1 Equity 2,959.240.62,690.5 38.6 Noncurrent liabilities 2,613.235.92,546.8 36.5 Provisions 281.53.9272.0 3.9 Financial liabilities 2,137.529.32,094.4 30.0 Miscellaneous liabilities 194.22.7180.4 2.6 Total liabilities and equity 7, 2 8 7. 0100.06,976.2 100.0 MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 67 1 4 0 1 4 0 1406250 78190fi3679817838T73E X6365fi586Xfi383A5fi586 05S906 PNY\fYVN\fI R\bBCRO FGMD flR\bYYO\fff \fff Working capital is defined as trade receivables plus inventories less trade payables. The three components of working capital changed as follows in the reporting period: |Trade receivables increased by 5.9% in the reporting period to EUR 1,511.2 million (Dec. 31, 2015: EUR 1,426.5 million). |Inventories rose by 7.3% in the reporting period to EUR 962.8 million (Dec. 31, 2015: EUR 897.1 million). |With the opposite effect on working capital, trade payables increased by 6.1% to EUR 1,119.4 million (Dec. 31, 2015: EUR 1,055.5 million). Adjusted for exchange rate effects and acquisitions, working capital rose by a total of EUR 27.5 million compared with December 31, 2015. At 8.0 in the reporting period, annualized working capital turnover 3) was on a par with the previous year (8.0). The Brenntag Group’s intangible and other non-current assets increased by 3.8% or EUR 141.4 million year on year to EUR 3,907.9 million (Dec. 31, 2015: EUR 3,766.5 million). The increase is mainly the result of investments in non-current assets (EUR 141.1 million), acquisitions (EUR 110.1 million) and exchange rate effects (EUR 57.2 million). This was partly offset by depreciation and amortization (EUR 161.7 million). Current financial liabilities declined by EUR 14.5 million to EUR 146.3 million in total (Dec. 31, 2015: EUR 160.8 million). Current financial liabilities consist mostly of temporary local loans taken out by Brenntag companies. Non-current financial liabilities increased by 2.1% year on year to EUR 2,137.5 million (Dec. 31, 2015: EUR 2,094.4 million). This slight increase in non-current financial liabilities is due to exchange rate effects. Current and non-current provisions amounted to a total of EUR 317.7 million (Dec. 31, 2015: EUR 314.1 million). This figure included pension provisions in the amount of EUR 160.2 million (Dec. 31, 2015: EUR 150.9 million). As at December 31, 2016, the equity of the Brenntag Group totalled EUR 2,959.2 million (Dec. 31, 2015: EUR 2,690.5 million). 3) Ratio of annual sales to average working capital: average working capital is defined for a particular year as the average of working capital at the beginning of the year, the end of each of the first, second and third quarters, and the end of the year. MANAGEMENT REPORT REPORT ON E CONOMIC POSITION 68 140602465 789fi73 TEXAS780036P 6P ANN\fAL FINANCIAL STATEMENTS OF BRENNTAG\bAG RES\b\fTS OF OPERATIONS AND FINANCIA\f POSITION OF BRENNTAG AG B.15 INCOME STATEMENT OF BRENNTAG AG IN ACCORDANCE wITH THE GERMAN COMMERCIA\f CODE (HGB) Sales result largely from sales to affiliated companies. Due to the first-time application of the new definition of sales under Section 277, para. 1 of the German Commercial Code (HGB), the sales reported in financial year 2016 are not comparable with the prior-year disclosures. Other operating income mainly relates to derivatives, exchange rate gains and intercompany cost allocations. Cost of materials consists solely of the cost of purchased services, which was recognized in cost of materials for the first time in 2016 in line with the amended definition of sal\Yes. Other operating expenses primarily contain expenses from derivatives and exchange rate losses. Among other items, they also include the cost of IT and other services, expert reports, advisory services and financial statement audits. in EUR m 20162015 Sales 26.9– Other operating income 82.71 1 7. 0 Cost of mater ials – 9.9 – Personnel expenses – 24.0– 23.5 Amortization of intangible assets and depreciation of property, plant and equipment – 3.3 – 3.2 Other operating expenses – 94.5– 1 0 7. 2 Net finance income 256.9288.1 Profit from ordinary business activities 2\f4.8271.2 Taxes on income – 10.1 – 6.0 Net income for the financial year 224.7265.2 Appropriation to retained earnings – 62.5– 110.7 Distributable profit 162.2154.5 MANAGEMENT REPORT ANN\bA\f FINANCIA\f S TATEMENTS OF BRENNTAG AG 69 F I N F I N FINACLN REFPNOTARPEFRETEDRTV GATALOLEAGOTETXLOLEA NLSPNA MKY\fYHK\ffi B\bWQB2 8943 1B\bYY2\f5 \f5 As in the previous year, net finance income consists mainly of income from profits transferred by Brenntag Holding GmbH, Mülheim an der Ruhr, in the amount of EUR 241.9 million (2015: EUR 278.6 million). Net interest income in the amount of EUR 15.0 million (2015: EUR 9.5 million) was driven mainly by intra-Group financing activities. Although base interest rates remained low, interest income increased slightly, partly as a result of a higher volume of receivables, while interest expense decreased slightly. In addition, net expenses from the unwinding of discounting of provisions for pensions decline