Earnings Call: Q2 2017

Aug 9, 2017

Dear ladies and gentlemen, welcome to the Q2 Conference Call of Pentax. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions. May I now hand you over to Mr. Holland, who will lead you through this conference. Please go ahead, sir. Okay. Thank you very much, and welcome, everybody, and thank you very much for dialing into our review So let me start with a short overview of the quarter. Overall, we saw a good gross profit development with 5.2% in This year's Q2 versus 2016. We ended the quarter with an EBITDA of €219,800,000 and a 0.8% increase on an FX And I'll go through each of the regions later in the presentation. We still foreseeing the macroeconomic environment of the positive trends in Q1. In Europe, the growth remains moderate. In North America, we see a continuing improvement in Latin America remains quite volatile and difficult in some trend risks. Asia Pacific, we generally see good growth rates in the economies with Some exceptions. Earnings per share was $0.69 which is an increase of 4.5% over last year. Very briefly on M and A, we've been active in China. Wellstar was announced recently as a speciality chemical distributor and a perfect addition to our existing business. The total investment amounted around €25,000,000 Initial required 51% in the first step. Georg? Yes, good afternoon. I commenced the presentation on Page 5. And on the Slide 5, Presenting the upper part of our income statement. Sales increased around 12% on an FX adjusted basis, And that indicates higher prices for chemicals. We are passing through price increases, and you will notice that gross profit is under no pressure from price increases. You will, however, notice an effect on working capital, and I will discuss it later in the presentation. The gross profit showed a growth of 10.2% on an FX adjusted basis. It's basically a continuation of the trends in Q1. It's a particularly strong performance in North America. The expense increase we incurred is driven by volume growth Also general cost inflation. EBITDA for the group amounted to EUR 219,800,000 and exceeded previous year's level 0.8% on constant FX basis. If you take a look to the P and A Airlines Show EBITDA on Page 6. There are no major changes for depreciation or amortization. Depreciation for the 2nd quarter amounted €29,200,000 and amortization to €11,700,000 Financial result amounted to a net expense of €23,100,000,000 In line with the Q1, we recorded a tax rate of 31.5 percent for the quarter, The resulting earnings per share are €0.69 or an increase by 4.5%. The different elements of cash flow on Page 7 and Page 8, I'm starting on Page 7. In the Q2, operating cash flow amounts to €48,100,000 after €115,000,000 in the Q2 2016. This is basically a continuation of the structure we have seen earlier this year. The decline is mainly attributable to a cash outflow for working capital due to rise in chemical prices. This cash outflow for working capital is to be expected consequence in an environment of rising prices. In the cash flow statement, you can find the effect in the line changes in current assets and liabilities. In addition, the tax payments in the Q2 were higher than previous year. This is just due to timing differences, and we do not expect A major difference on a full year basis. All other lines are basically unchanged compared to previous year. Speaking about investment and financing cash flow on the next page. CapEx is slightly above last year's level. The other line in the investment cash flow may reflect the proceeds from a sale of an either side in North America. Dividend payment to our shareholder in the amount of EUR 162,000,000 is the main item in the financial cash flow. On Page 9, you see the information on net debt and leverage. Net debt increased slightly during the quarter and amounted €1,700,000,000 at the end of the second quarter. Main driver of the slight increase is the dividend payment I mentioned before. The group's leverage stands at 2.1 times. Trade working capital amounted to a little above 1.5 €18,000,000 at the end of the second quarter, this is a slight increase compared to the end of the first quarter. The more noticeable increase compared to the year end 2016 is attributable to the already mentioned price increases. In terms of working capital, 8.2x in the second quarter, slightly above the level we achieved 1 year ago. Page 11, the 2nd quarter delivered a free cash flow of €122,500,000,000 The reduction against previous year's cash flow is due to higher outflow from working capital. The development of the working capital turns is positive. And I'm handing the presentation back to Steve. Thank you, Georg. Now if I can see Page 12 of the presentation. And before I provide you more detailed information on the segments, the HES approach that shows the operating EBITDA for the group, Q2 2016 versus Q2 2017. In the Q2, the U. S. Dollar was slightly stronger compared to last year, which looked at a small tailwind. This resulted in a positive EBITDA impact of around €4,000,000 Subsequently, we have seen a weakening of the U. S. Dollar, and This will result in a headwind in the second half of the year. Acquisitions contributed an additional €7,000,000 We're very pleased with the performance of the acquisitions, Let me take you through the detailed developments of the segments for the Q2. First, we can see Europe. Our European segment operates in a relatively unchanged macroeconomic environment with stable growth. Gross profit grew by 1.2% in Q2. This is clearly held back by looking at the fact that we had less working days due to Easter. The quarter is translating to a reduction in working days of around about 4%. In the quarter, this term to the region was a little weaker than And as expected, however, this was not across the board. In particular, the development system business lines in the Nordic region was very weak quarter and accounted for nearly €4,000,000 of short form. Operating EBITDA declined by 5.9%, which is primarily a result of formation of pressure Welcome to North America. Our North America segment reported a very strong quarter. Gross profit grew by 11.2%, which stronger than the Q1. This growth is broad based across industries and regions, both as we should know, and very good demand and volume. Acquisitions have been a good contribution to this development. EBITDA grew by 11.6%. Moving on to Latin America. Our business in Latin America continues to operate in a macroeconomic environment, which has remained quite difficult with negative industrial production growth. Gross profit in Latin America declined by 1.7% on a constant currency basis, which is reflecting the weaker macroeconomic picture. We're asking that the growth rate implies an improvement compared to Q1, which is attributable in part to the stabilization of our Brazilian business. I would like to inform you that we have sold our business in Venezuela at the end of June. As you know, our operations in Venezuela were downsized significantly at the time, We do not expect any meaningful contribution in the future. We have now sold the business and assisted the country completely. We should not expect any material effects from this on the Just coming to Asia Pacific. The gross profit in Asia Pacific grew by 6% in the second quarter. This is mainly attributable to the contribution from acquisitions. The flash developments in existing businesses resulted in divergent trends in the region. There were some countries with very strong performance like Vietnam and Thailand. In other countries, the performance was weaker. In Indonesia, we faced delays for our public infrastructure projects resulting in weak demand for some of our products. We generally deem most of these acts as temporary and expect better organic developments in the near future. EBITDA was down at kind of 4% as a result of relatively weak gross profit elements from normal cost inflation. Backing on to Page 18. In terms of the efficiency program in the European region, We strongly believe that we have the right strategy for long term growth in the European region and continue to make progress. However, the macroeconomic environment is not strong enough To commit an acceleration under economies of scale. This is our continuous business review. We've been, therefore, decided to accelerate a number of organizational and infrastructure changes in Europe. So we'll increase our efficiency in this Panzanolo's Specialty Chemicals functions. We expect to reoccurring annual cost savings around about €8,000,000 from this program. The full effect should be there from 2018 onwards. The implementation of this program will cost around about €25,000,000 and We'll be encouraged in the second half of twenty seventeen. We shall be classified as one off costs. Let's start with the current trading and adjusted outlook for the year. So let me walk you through the gross profit for working day growth on a monthly basis. I'm going to slowly, but this doesn't seem to like to rise down. In April, gross profit per day increased by 9.5% as reported and 6.4% organically. In May, gross profit per day increased by 6.2% as reported by 3.3% on a organic basis. In June, gross profit per day increased by 7.7% as reported, or 4.6% organically. In July, the growth was 8.6% and 5.6% on an organic basis. With respect to the outlook, we continue to expect our key performance in the case of gross profit and operating EBITDA to grow on a full year basis. Now expect our EBITDA for 2017 to be in the range of €820,000,000 to €850,000,000 This guidance is based on latest trends It implies a clear improvement of organic growth in the second half. July numbers are fully in line with our expectation. The guidance range reflects the fact that the U. S. Dollar is clearly showing clearly weaker than the first half, which means we will face some transactional headwind for the second half. So the current U. S. Dollar FX rates, we expect a headwind for the full year of up to EUR 15,000,000. Please note the range is to be understood that is pretty exceptional item is about €25,000,000 of cost efficiency program in Europe, which is not included. We have seen increasing chemical prices in the course of this year so far, and we expect prices will remain on a higher level than last year. Due to that and due to increased business volumes, we expect an increase in working capital year over year. We expect CapEx will be With respect to CapEx, we still forecast in Jariket €150,000,000 in 2017. Given the strong increase in chemical prices so far On the impact of working capital, we expect a strong number of free cash flow for the year, but we do expect to increase on a full year basis. And now we're happy to take your questions. Thank you. We will now begin our question and answer The first question is from Josh Puddle, Berenberg. Your line is now open. Please go ahead. Yes. Hi. Good afternoon, everyone. My first question is on the EMEA conversion margin. Clearly, there was an Easter effect between Q1 and Q2. If we look at your conversion margin performance for the first half, it declined 60 basis points despite you achieving organic gross profit growth. And also that was on a pretty easy comp, minus 30 basis points from last year. So I'm really Doctor. Rupert, the WhittelGate has my next effect on professional issues as you might rightly point out. We also have this somewhat Unhelpful 4,000,000 shortfall in the Nordic region, which essentially was at a high cost Thanks for the low generation and a pharmaceutical application in an area which we expect to be effectively covered now In Q4, so this is a 1 quarter event. We've not had that, but obviously, it would have been more positive. Fundamentally, we're still driving for conversion, I should improve in Europe and And then should we because the Nordics falling out, should we expect an increase in Q3 and Q4 in Europe, presuming the macro Yes, that's it. Yes, certainly, we are forecasting the volatility growth for us. I'm certainly forecasting growth in the EMEA Okay, great. And then my second question is on North America. Your main competitor there is talking a lot about refocusing efforts in that region and has made a number of changes, Including how the sales force is incentivized, how is that affecting the competition in North America? And also, your results in North America in Q2 look particularly strong, particularly on the conversion margin And organic gross profit growth. So any comments as to why that's particularly better than expectations? Thank you. Well, actually, it was pretty much with our expectations. We I mean, obviously, I'd love to comment on competitors' activities. My understanding is that The incentive programs have been announced by one of our competitors as strangely mirrors our incentive scheme exactly. Thank you. The next question is from Rob Plant, JPMorgan. Please go ahead. Good afternoon, Stephen, Gayorgum. European Restructuring, you had a lot of restructuring over the years in Europe. What's new here? And why are some of these initiatives coming now? Why haven't they been done before? Thank you. Well, I think what's new, if you read into our release and into our presentation, we do talk about Putting investing in more specialty functions as well as reopening our infrastructure. And so we are accelerating our capabilities In some of our life sciences businesses, which is a niggas to step forward and growing this business organically one thing that we feel that we'd like to accelerate the success that we've seen in Life Sciences in particular, and we're taking the opportunity to do that now. I believe the market is right, and we believe that we have the right strategy to develop that market. When it comes to infrastructure, We've been looking long and hard at hub and spoke operations for some time in Europe. And we've Now taking the point, we've got the comment now where we know exactly what we want to do and it will require some of the facilities that we have to be Good call, detanking, in terms of we're actually taking out some of the facilities and operate more hubs, more spouts than we've done in the past. And we want to accelerate that process. And so we see that as being a driver for improved conversion ratios in the future as well. Okay. I'll speak. Thank you. The next question is from Sylvia Fotua, Deutsche Bank. Yes, hi, morning. Two questions here. So firstly, back on the one offs that you just discussed. So How is can you just split out the part which relates to growth and specifically the specialty investment From the infrastructure restructuring call, it just seems that investing in, because you can beat out sales force for specialty, that doesn't seem to be a one off investment. That's right. Is that Why is that pickup as an exceptional? Yes, I'm Sylvia. Hi, Georg. The €25,000,000 that we are mentioning is only one off cost, and it's not including any investment in the specialty Salesforce, to the degree we do invest in specialty sales force. It's basically part of the €8,000,000 net savings. So the cost savings are higher and some reinvestment into a sales force leads to a net annual run rate of So would the gross number be closer to the 25? I didn't get confuse you well. Sorry, I just will go on to the headset. So will the gross savings number be closer to the 25% or is that kind of the magnitude that we should think about? I think it's we do think it's fair to think about the net savings number of 8, and I don't The particular use for our gross number, on top of the €8,000,000 net savings, we would expect some positive gross profit effect From an to form the new sales force in specialties, but that's an unqualified number that needs to develop over time. Okay. Okay. So I guess you'll get the payback over quite a long period on a net basis, which is Okay. And then on again, on Europe. So can you just confirm, so you said 4% was the calendar impact in Q2. So am I right to think that then you can really grow very much in Q1 if that was just the opposite of that? And then now you're growing at actually Have a 4% or so rate in Europe organically? Yes. I think it's fair to say that Europe was pretty flat. The first quarter and second quarter together, we've been in the other half year in a relatively flat position. But We feel that we are the business is well positioned to grow in the second half. And we actually always believe that, that would be the probably the game plan for 2017, with a much stronger second half in Europe and indeed in North America. And certainly, our guidance reflects that. Sorry, just to go back to that. So 4% working day impact negative in Q2. That I'm not sure I followed your speculation detail, but it seems to me, yes, it's fair. Okay. Your exit rate is in that range. Yes. Okay. Great. Thank you. And then finally, in terms of kind of capital deployment, so obviously, your balance sheet is now delever quite a long way. Do you in terms of options for that, do you see anything beyond the acquisitions? I guess you are investing in You will be restructuring the European business, which means that maybe you're not kind of going to be integrating businesses at that point within that business at the same time. So If you don't see as many opportunities, would you consider buying stock back? Or are there any other options for deployment which you are considering at the moment? First of all, I would reiterate that we expect acquisitions to occur. So our cash flow will be reinvested At the current leverage, 2.1x, our end of investment grade credit rating, We would not consider increasing cash return to shareholders. However, we also said consistently over the time that there is no particular need To delever the business further, so in course of further delevering the business at one point in time, we will consider cash return to shareholders. Okay. Sure. Thank you. And then finally, just to check on the acceleration into July, was that driven by any particular reason? I know that you don't like to specify necessarily, Is that more driven by any of the bigger ones? Or was it one of the smaller ones? I think we expect that we saw an acceleration in both Europe and North America. Right. Okay. Thanks. Thank you. The next question is from Daniel Buchta at MainFirst Bank. Please go ahead, sir. Yes. Thank you very much for taking my questions. Actually, I have 3. The first one only me again, sorry. But I still have difficulties to understand Organic EBITDA development. I mean, what has changed? I mean, I understand your working days and Scandinavia, but in my understanding, Scandinavia was not Biggest region for you in EMEA. So what has really changed that you even announced this restructuring program? Because it would mean if I take the average For the first half, we have still seen a moderate EBITDA decline organically despite Europe being better. And I think your tone always was rather The EMEA region. So what is different here now? Then on Asia Pacific, here, Q1 was already a bit softer, and you mentioned this Delay of infrastructure projects already. Now EBITDA declined even organically. And is this just delay or is there something more material behind? And then last but not least, on the free cash flow guidance, I'm here you revised a bit. What has changed here, given raw material cost inflation was observable already at the beginning of the year with several products Jumping massively. And why do you change your guidance here? Thanks very much. Yes. I think So the EMEA region, I want to leave an impression that Samara, our Eurofib business has postponed export in terms of 2017, it hasn't. We look at performance towards the back end of 2016. Q1 was a largely positive performance. Clearly, we did have advanced more working pace in Q1 versus Q2. But The certainly management and expectation of our business in the European region is positive for 2017. And we expect and you can see from our guidance that we expect organic growth in the European region And North America in particular, which will drive the businesses' EBITDA target for the rest of the year. So I don't want to sort of slice and dice into individual countries. I find the bottom line is that we expect the European region to move forward in the second half. And just to be a sort of temporary, if you had slowdown in 1 quarter, we don't see it as a macroeconomic effect. We don't see it as a That's an issue for us. The restructuring that we're talking about and that we've announced today is not something that's been in terms of increasing our efficiency and indeed increasing market penetrations in some of the product lines, which are growing faster than others. So I am positive about the European business insofar as we expect to see organic growth for the rest of this year. If I come to Asia Pacific, There are very specific reasons for the slowdown in the terms of organic growth in Asia region, which relates to products which we supply into infrastructure, particularly in the country of Indonesia. And that has actually dogged the performance somewhat in the last 6 months or so. We now believe that That has that temporary effect has now moved on. And we see the first shoot screen shoots of that product line, that product development Coming back towards August September. So we would expect to see the Asia Pacific business return to our organic growth For the rest of the year. Sinca and Daniel, the cash flow related question, what has changed over the last 3 months Basically that we continue to see cash outflow for working capital also in Q2, which was basically in price development in Q2. Okay. Thank you very much. Thank you. The next question is from Peter Olofsen at Kepler Cheuvreux. Good afternoon, gentlemen. Two questions from my side. Maybe first on Latin America. In the Q1 call, you indicated you were looking at the shape of these operations or the organization over there. So I was wondering whether you've drawn a conclusion and to what extent you are happy with the organization and the shape in that region. And then my second question relates to procurement. It was a topic you addressed at the Analyst session in November. And I think you hinted at that time that it would take something like 6 months to get that moving. So I was wondering whether you're starting to see the results there? Or is that something we might start to see more into next year? Well, thank you. I'll take both those questions. As far as Latin America is concerned, yes, we've been looking very closely at Latin America, particularly with you to Shartan, the organization in terms of the general organization you can imagine, particularly in the southern area where we've seen challenges in Chile and Peru. We've clearly addressed management changes in Brazil, which has been positive. We've actually introduced a new management team into the southern parts of Latin America, and that effectively comes into effect from the 3rd quarter. So there's a change in place and there's a put in place to accelerate the recovery of the region. And that's literally the last few weeks. You mentioned the procurement project, which we did indeed mention at the Analyst And indeed, we are now at the point of execution of this program. These and effectively, we expect Into 2017, at this stage, we've developed a plan, so just a €20,000,000 saving In procurement costs, gross at this stage, at least a 2018 number. But the rollout actually is starting now, and we expect to be fully operational within the context of this value of the year. Okay. Thank you. Thank you. The next question is from Roy McKenzie at UBS. Please go ahead, sir. Yes, afternoon. It's Rory here. I have two questions, please. Firstly, you said the M and A was performing better than expected. Can you say what the organic North America profit growth was? And also, I know that you've disposed of the facility. Does that have any benefit to the margin in Q2 in North America, please? Just trying to get to the underlying numbers. Huawei, hi, it's Georg. When it comes to gross profit development in North America, Q2 on an organic basis, You are a little bit shy of 6%, close to 6%. With respect to the facility, The higher facilities that we sold, it's a mix of effect, pension effect, disposal of asset effect, net net net, It's an effect that is around $1,500,000 possibly. Okay, great. Thank you. And then just looking at the kind of broad outlook for the year overall. With your guidance range and now with a 1% to 2% FX headwind The year overall, that looks to imply an H2 constant currency EBITDA growth rate of anywhere between 4% to 10%, After H1 was just 2%. I'm just interested to hear what conditions do you think you'd need to get to the top end of that range and double digit Deepak, something you haven't really delivered for a while. So what lets you put at the top of that range there? Well, I mean, certainly, We both in the major parts of our organization, A North America, Europe to be final for 7% to 50% top performance. I think it's fair to say that we now see a positive momentum in our North American business, which we shared with you through the numbers. I know indeed we have confidence in our European businesses, including foreign organically. I expect North America probably will grow faster than Europe If you come to the second half, but when we get double digit in the second half, it's probably a bit of a stretch. But nevertheless, I think we certainly see a step forward in organic growth. We certainly do. When Rory mentioned his estimated 4% to 10 And for the second half, I assume he included acquisitions. Yes, I did. Thank you very much. And then just going back to Europe and the The underlying market, you said that you don't see it's a market issue, you don't see it's a competitor issue. It's more than your expectation. Can you maybe update us on where you see The market volume growth in Europe at the moment and what you expect for HD. I think what's interesting is that The chemical market in Europe particularly is showing some very strange That's in terms of quite a lot of product shortages in the market at the moment and prices have been immense and prices have been offensive in that regard. So you see higher prices in the marketplace, which we think will be sustained for the rest of this year, and we've indicated factors of our cash flow analysis for the rest of this year. And I think that the shortage in certain raw materials has fallen through in terms of some supply chain challenges for our suppliers. But it has affected us in some small ways in terms of how we were able to put an argument. So I think that's likely to continue. Nevertheless, we are happy and optimistic to see the underlying growth in our European business for the rest of the year. And we expect that we will overcome any of those shortages during the course of Q3. Great. That's helpful. Thank you. Thank you. The next question is from Rajas Kamal at HSBC. Hi, good afternoon. Just transferring back to your comments about European shortages and chemical prices being strong. You can see that the revenue growth of 8% translated into a constant currency gross profit growth of 1%, Employing that the selling prices were growing Fast but not fast enough to pull past all the cost increases. Alan, in an environment where there is a shortage, Why is that price possible not happening probably? And just a related question on North America. You've seen a similar trend, but you did a fantastic turnaround in Q2 compared to Q1. A lot of People are getting worried. You've got something fundamentally wrong in North America. The margins have improved. Are there any one offs we need to be aware in that improvement which may not affect in second half, please? I just I'd like to control the market first in terms of the no one offs in the North American business, which is distorting before, Apart from very large amounts, we can refer to the total fee right to the site a moment ago. But no, fundamentally, this is just a strong performance for America. And therefore, I don't see any as I said earlier on, in terms of the second half of this year, we expect the contribution from Europe and North America And just in terms of your pricing points, I'm not entirely sure I'm going to be completely asking you, but were you referring to Percentages as opposed to gross profit per tonne, you may be aware that we have to look at the actual unit margin per tonne, we're not necessarily looking at percentages per se. When we look at our gross margin per tonne, And we see that the price pressure is being present indeed. Okay. But your gross margin is off 8.9 bps, isn't it Year on no, sorry, EUR 151,000,000 that's year on year in Europe. So As a percentage? Yes, as a percent. So clearly, your sales price have gone up, but not much as your inventory cost. So how much of that is Accounting for inventory which inflated faster than you could increase the prices, if a phasing issue, how much of that is Basically pricing pressure? It's very difficult for us to comment on gross profit as percentage of sales margin because it's not the KPI we steer the business after and we wouldn't want to steer the business after because particularly In terms of falling prices, a constant percentage rate would not be good enough. So it's not a metrics we're using. No, I appreciate that you've run the business in a particular way. But will the margins come back at some point? Obviously, prices come down, then you'll have an arithmetical solution to your question. But At the end of the day, we are aiming to look at the fundamental gross profit per unit, which now in terms of gross profit per tonne. And in terms of the amount of money that we earn in terms of the volumes that we sell are holding up nicely. And obviously, part of the pieces of this business is actually is its stability in throughout the pricing cycle. And as you know clearly, Associate price movements are really more of an effect on working capital as opposed to gross margin? Yes. And then what we are seeing across a variety of distributors, not just you, even the plumbing distributors, electronic, There seems to be gross margin pressure that you are seeing price inflation. So we are just coming from that point. You're the only distributor who And to look at the gross margin and the KPI we cover, which is why just wanted to understand that. Yes. Well, you're right. I'm not entirely sure we are the only distributors that looks at it in this way. In fact, I'm fairly certain across the Atlantic that I have another competitor who is now looking at it exactly this way, and they're making quite I mean, the Univar talks about the gross margin quite a lot, if you're referring to them. But let's not harbor on the point, but just like to see if Thank you. The next question is from Thor Green at Credit Suisse. Please go ahead. Yes. Thank you very much. I've got three questions for you. The first question is just on the €8,000,000 of net savings. I appreciate that is a net number rather than a gross When I look at that number in the context of your in the cost of goods sold cost base, which is 3,500,000,000 I'm referencing some of the comments that you made back at the Capital Markets Day last year. Have you tried to get better supply terms to some suppliers and then have Because even if we gross up that number as a percentage of the overall COGS cost It seems remarkably low. So just any color you can give around the nature of the conversations you've With your multi unit suppliers, that's the first question. But the second question is probably a little bit easier to answer. If I'm right, I'm thinking that Q2 'sixteen With the Nordea, there was low points in terms of the organic growth in North America because of the collapse in oil and gas. So definitely a very weak comp. What was the North American form of Oil and Gas in Q2 of this year, please. My final question, and this may sound impertinent and it's not made to, but Just looking back over your last sort of 2 to 3 years, last year, it was characterized by very unfortunate exogenous events such as Huge on the shoots of U. S. Industrial production in Venezuela. No one could have predicted what happened there. But is it possible that you need to revisit contingencies within your purchasing process to get out of the cycle of coming into each year with a budget, which then proves to be very difficult to reach. That's my final question. Thank you. Yes. I'm not quite sure what contingency you might have in mind in terms of the budget targets we'll have you. Now we talk about this business as it has been a 4% to 6% organic growth business, and we even though we clearly I had a challenge with the business for a couple of years in this respect to various things which you mentioned. We still believe that is the case and certainly we're The second half of this year that the model will deliver that. As far as the suppliers are concerned, the target group, Which we talked about in terms of the supply rationalization in our major supply groups is really the what I would consider to be the long tail end suppliers where Well, we've got literally thousands and thousands of suppliers. We are supplying those quite small quantities, and we are able to consolidate those suppliers to There's a more meaningful supply to us and equally give the suppliers the opportunity to have a much more meaningful share of Pentax Purchase of First Products. And that's the section which I refer to when I look at a £20,000,000 improvement In overall pricing efficiency, for the vast majority of the recipe, this supplier Network, we are working with our major relationships, and that's a much more market led Pricing environment, which we are comfortable that we are already optimized. Okay. Thank you. Okay. The question open on North American performance Q2 ex oil and gas. Actually, oil and gas is developing Nicely. A little bit better than the average of the business, but not dramatically so. Or vice versa, the performance of the business Ex oil and gas is not materially different from what you see including oil and gas. Okay. Thank you. Thank you. The next question is from Sylvia Fotua at Deutsche Bank. Please go ahead, Hayden. Good afternoon. Just had a quick follow-up. So you're talking about gross profit per ton. Can you just tell us by region where you're seeing, I don't know, I guess volumes grow faster or slower than gross profit and what and so you can split that by region. Thank you. Yuri, I have a very difficult time to answer because to draw appropriate conclusions On the answer, you would have to go down to product groups and different business lines. A lot of the shifts are actually mix. I think it's absolutely fair to say that the volume development and the gross profit development for the group, but also for the regions, It's pretty much in line. There are no major deviations between volume and cost profit development. Okay. Thank you. Thank you. The next question is from Christian Kors at Warburg Research. Please go ahead, sir. Yes. Good afternoon. Thanks for taking my questions. First, you mentioned the sourcing savings you envisage after The rollout was €20,000,000 as of next year. Can you maybe provide some color how this fits across your regions? Secondly, the guidance you've given for 2017. Actually, for H2, the low end of your guidance comes to roughly €400,000,000 in the second half of this year, which is approximately the same as last year. Now you mentioned improving performance in the APAC, EMEA and North American region in the second I'm aware that you face some headwinds from FX, but you also have some still some tailwind left from M and A. So actually, the low end of your guidance hardly implies any organic earnings growth. Am I missing something? Or And then lastly, just a housekeeping item, the tax rate in the 1st two quarters was Rental favorable was 31.5%. Usually, you're guiding in this 34% to 35% range. Is this still valid? Or should we present an RTH one figure also for the full year and for the years to come? Thank you. I'll just say the sourcing projects. I would say we expect to see European business to benefit more in 2018 than the North American business in regard to this endeavor. So the interest rates are not by huge amounts, but certainly, this will be in Europe. Okay. Yes. With respect to tax rates, 1st, maybe from today's perspective, we would expect 31.5%, maybe 32% growth for the year. There's always a true up at the end, so we'll see what the year end really delivers. I would agree that 34% to 35% we usually in the mid term probably has a little bit of conservatism. I don't really want to move away from that number under the current U. S. Taxation regime. So the Changes to be rated under the current U. S. Taxation scheme, the group's tax rate will be impacted if and when our North American earnings recover because that Your calculation on the guidance, It can easily be misleading from my perspective to take last year's second half and see take an implied second half of this Yes, because the FX effects can be quite material. I would maybe go back to something we discussed with Rory earlier. At the midpoint of the guidance, we would expect an organic EBITDA growth of, say, 5% to 6 Can you repeat it, please? 5% 6% in midpoint of guidance. Midpoint of the guidance would imply a 5% to 6% organic EBITDA increase in the second half of this year. Okay. Thank you. Thank you. The next question is from Adrian Trego at Commerge It's Edrico from Connors Bank. Actually, couple of questions on little bit sustainability, sorry to bother also again on the U. S. I was just wondering since Q1 saw this disconnect from gross And our EBITDA in our Q2 looks significantly better. Maybe you could remind us what measures have you taken In Q2, what was the positive impact? Actually, how should we think of it in terms of sustainability going forward? And also a question in this regarding to Asia Pacific. Should we expect, in fact, what you said on the delays in infrastructure, this portion that you missed obviously in Q2 to come back In the second half and then Asia should just simply grow double digit as we thought before? Or do you should we think of it as a, let's say, longer run delay? And a question linked to that is, obviously, there's Some dependency on those kinds of infrastructure projects. I was just wondering whether there are more similar Projects that could face a delay, be it either in Asia Pacific or elsewhere? And then I might have some follow ups. Okay. Well, just coming to North America in terms of sustainability. We did have a strong gross profit development in Q1 This year, a relatively poor conversion, and that was a result of a number of costs which are actually phased into Q1 numbers. These are things like leases and rents and for warehouses and the vessels where else. And that's actually Fortunately, we reported on the conversion ratio in Q1. And just for clarity, Q1 twenty However, Peter is also fair to say in Q1, we had a ramp up in the business in Q1 in North America, which was Stronger than we planned. And indeed, we were covering a lot of the extra demand with Somewhat spot haulage, temporary labor, etcetera, etcetera, which is not an exact and most efficient way of dealing with things. And as we said in Q1 results that we would get ahead of this and get around this and get on top of this. And that's what we've done in North America And of course, I think Q2. And I think you'll find conversion ratio is actually broader, just slightly ahead of prior year. As I would see, this has been now a sustainable environment as a compression ratio trend for North America. To your question on Asia Pacific and infrastructure, first of all, I'm not aware of actually the other infrastructure issues which are affecting the particular business unit. This is something which is putting in the background for about 6 months actually in terms of the weakness in this particular product range. We do know that we have we actually have our orders on the books now For August, which are a lower end from the previous demands, but nevertheless, we suggest that we're starting to recover that position. Clearly, we do have businesses in Asia Pacific that are performing extremely well, and This has been a bit of a drag on their performance. So we would expect to see Asia forward in terms of organic growth in Q3 and Q4. Okay. And just two questions on phasing actually or timing, If you want to, first of all, when do you expect the part of the new €25,000,000 program to kick into cost? And Obviously, it looks like that your CapEx is pretty back end loaded. So is there some risk that some things will go over into 2018? Or when do we see The bulk of the remainder of the CapEx that you have projected? Well, on CapEx, if you look at our numbers, you On a historical basis, the numbers are pretty similar in terms of they tend to be back end loaded in terms of the actual facility of the CapEx and all the contracts effectively completed by the end of the year, so I wouldn't really read into CapEx. I'd expect to go with the guidance for Q1 150,000,000 It's been largely for the what was the question? The timing of the €25,000,000 one off It depends on how quickly we get all the negotiation closed. I would expect a fair chunk of it in Q3 and maybe some in Q4. Okay. And then just a question, a little too quick on the smallest last actually. I just wanted to make sure that I understood correctly what you said on the U. S. Dollar. So the up to 15,000,000 you mentioned, that was not on an annual basis, but that could be the impact, Question wise for the second half, right? So So we think it can be on an annualized This is 17 over 16. It's probably a little bit the upper end of the effect, and it would assume that the dollar We'll trade 1.18, 1.19 for the rest of the year. All right. And then final question on Venezuela, actually. I mean, Things are probably a bit blurry. What happens is just wanted to get some idea on sense on where do you stand there? I mean, could you Literally start this business again overnight when things are changing? Or would it take, let's say, a longer Process to come back into the country with your business. Well, look, we've left the business in good grace In terms of the employees, our former colleagues are now employed by a Australian based company. And so we by no means there's been a sort of cut and run scenario where we've just left the country. So we would if we wished to, I'm very certain that we could go back into the country. But frankly, I think we've got more opportunities elsewhere in the world to capture first. Right. Understood. Thank you. Thank you. The next question is from Rajesh Kumar at HSBC. Just one quick follow-up on the growth rates. So can you give us some color on the Difference in the growth rate between specialty and bulk segments of your business. Remember, in one of the previous Conference calls, you implied that inventory turn was coming down because there was more specialty in the mix coming. So We've seen it rising. Are we seeing a bit more of bulk pickup now and expect a specialty pickup with the lag? This is a mixed question. And both as you'll be aware, Products which are more available in bulk tend to be somewhat more of a faster conversion in terms of formula from order to reality. Specialties is a much slower In terms of growth, it's longer term, probably more sustainable as in terms of product specific sales. We are as you know, from what we've said earlier, we are investing more in our specialty chemicals capabilities, and that should give you some confident that we feel that there's long term growth in our specialty businesses is very sustainable. But I wouldn't I could hardly give you a Steer, always the which is growing faster between the 2 at the moment. And to be fair, the industrial chemicals business is the largest possible business at this stage. Thank you. Thanks for taking the follow-up. Thank you. The next question is from Todd Green of Credit Suisse. Your line is now open. Yes. Thanks. Just one follow-up for me as well. Just on Indonesia, I mean, my understanding is that the Asian business is predominantly specialty chemicals business, Sharp Chemicals not so well developed there. Just out of interest and my curiosity, what kind of chemicals will be going into infrastructure projects on the specialty side? Just Well, actually, this is actually a product line that came with our acquisition of TAC. And TAT Actually, as a business has got more of an industrial mixture than the previous But tank gauge specific to TAT solvents, it has things like asphalt. It has ashphalt and titanium ashphalt, which are solvent based. So there's some infrastructure spend around the fixed TAT acquisition and that's where this Thank you. The next question is from Alan Moore at Aegon. Your line is now open. Please go ahead. Can you hear me, guys? Sure. Great. First, three sets of questions, if I could, please. The first one, just regards to the supply chain efficiency In Europe, some of the hub and spoke approach. Two questions there. The first is, is there potential for this model to be applied in other regions? And the second is, are there any sort of capital savings around this, whether in terms of working capital efficiencies, Fewer facilities, fuel trucks, so on and so forth. And I'll take the questions to you still with data factory. Thanks. Yes. Well, first of all, the hub and spoke Approach is not a new one. And so far as we've operated a specific model in various countries around the world for quite some time. But I think it's fair to say that within Europe, the legacy investments within Europe are fairly significant. And European business has some fairly major assets around the region. And we do see the opportunity to rationalize The interest of efficiency of those assets. And what we're talking about here is actually looking at a reduction in If you I will say, Kevin, really, that's the wrong phrase. We have world class facilities, for example, in Rotterdam, We don't need to reproduce world class facilities 100 miles away. And whereas in the previous business models, maybe you have said 4 or 5, 10 years ago, Mike will have done that. We won't do that. So the implication is in the very long term underlying further investment in infrastructure Insofar as the handling infrastructure within Brenntag Europe would be long term lower than operating a hub and approach as opposed to a standalone full service chemical distribution location at every site in our region. So fundamentally, directionally, certainly, it does help with CapEx in the future. And also, Directionally, it helps with the underlying investment in working capital relative to stocks and increases the stock efficiency that we have. So All of the above. And so I'm not surprising that's why we're doing it. Great. Thank you. Very helpful. A second set of questions, if I Again, just coming to the sort of €20,000,000 potential savings on sourcing, it sounds very positive. But just That 20,000,000 must be a very hard number to calculate, a lot of moving parts, 1,000 plus suppliers being dealt with. Could you give us a sense in there, how is that number going to arrive there? And is there a range around it? And if I may just add sort of a follow on from that is Given the number of moving parts, the number of suppliers involved and so on, how confident are we that come the end of this year, The pieces will be in place, and we should sort of see those benefits from the start of next year. Well, first of all, I'm actually guaranteeing that the preparation and planning work In place and the effectively we've employed and people to do this in terms of we have new positions within the company, Which I'll focus on what we call the non managed criteria. So there's and there's appointments to be made on a worldwide scale. So this is not just a European effort. North America, Latin America and Asia Pacific. So the organization has been set up to capture these savings. And we are deadly serious when it comes to looking at how we capture these savings insofar as we're introducing specific IT tools Track and trace effectively the development of those savings and also ensuring that the execution All those opportunities are taken upon by the Brantec operations. So it's not a case of, for example, someone in Estonia or someone in Poland Ignoring the fact there's an opportunity to improve their purchasing because they have to be a far flung destination or a different part of the region, we will be tracking all those types of opportunities. So This is a very well put together professional project, and which is why we have high expectations of delivering it in 2018. Great. Very helpful. Thank you. And final questions, if I could. Just with regards to the acquisition pipeline, sorry if I missed it, but any update there in terms of availability of And we have a pretty professional approach to M and A, we are working through a number of targets. On today's perspective, We would expect to spend the SEK 200,000,000, SEK 250,000,000 this year. You can only be sure if and when the deals are really done, but everything is Okay, so far. And just in terms of acquisition, multiple, any movement there or really same as history? We you know you are sure you will remember that we do evaluate acquisition opportunities on an IRR basis. And so 14% further rate that we on a pretax basis apply is achievable in the market. Perfect. Thanks very much. Thank you. And the next question is from Tom Sides, Deutsche Bank. Please go ahead, sir. Yes. Afternoon, everybody. It's just a quick follow-up on the U. S. Conversion rates. So just the extra costs You put in on temporary labor and freight. Could you just remind us, so would they still there in Q2? I mean, are you expecting those to come into the permanent cost base now? Or do they do you find a way to facilitate that business through your existing infrastructure and then start bringing back or reducing some of those perceived as temporary costs. Can you maybe just walk us through that a bit? Yes. I think it's I think this is where we have to be looking careful. So we're doing quarter reporting here. And in the 12 week cycle, we're talking about how people handling Hazards Chemicals and how you train and what have you. So it is a sort of a quick transition process. We certainly have, technically, recontracted a number of suppliers and And all these companies which were previously spot hired to support our volume growth in the region. So there's a flexible and ongoing. I would say that we are still This is the Q2 of good underlying demand for North America. As we go forward, Clearly, we'd like to increase our efficiency further. But at this stage, my primary driver is making sure we get the service that is required by our customers. And we will worry about the fine tuning in the business once we're in a more settled environment, but at this stage, we're still continuing to grow. Okay. So just in terms of sort of improvement in conversion, obviously, the conversion ratio is sort of flattish year on year in the And you're growing organically at sort of mid single digit. But it's improvement in that conversion. We probably have to wait until the latter part of this Yes. What you just said, I think that's roughly something that's important. I think that's part of the improvement is the oil and gas business. And that Business, yes, it was operating at some more levels in terms of the low conversion ratios in the last 2, 3 years. So As that business improves, clearly, that conversion ratio improves in the overall mix. So I would like to look towards the end of the year for Okay. Thank you. And just in addition to that, I suppose the conversion ratio on oil and gas Even if it's improving, probably slightly lower than the conversion ratio of North America or if that's growing more quickly, that's dampening The weighted average conversion ratio a little? Correct. Okay. All right. Thanks very much. Thank you. Thank you. We received a follow-up from Peter Olofsen at Kepler Cheuvreux. Please go ahead, sir. Thank you. Yes, I wanted to come back on the procurement topic, the €20,000,000 that you mentioned. Just wondering how that will show in the P and L. Would that simply mean lower costs and that's shown directly in a lower in a better bottom line? Or will you reinvest those savings into better pricing and thereby driving volumes So it will take a bit more time to show in the P and L. And then my second question relates to Indonesia. So You touched on these infrastructure projects that have been delayed. To what extent was there also an effect from working days? I think Some companies have talked about that, that in Indonesia, there was an effect from holidays, which would largely reverse in Q3. Is that also something that did affect your business in that particular country? Yes, it did affect it in that way in Indonesia. So we've not mentioned that, but it clearly was a bit of a challenge there. But if you're speaking to the Procurement exercise, clearly, the way this effective works is that as we essentially approve the point Suppliers to have a greater share of our smaller chemistry, those with your suppliers and their products and specifications We'll be subject to approval of our own customers. So you have effectively a leading you have a leading period where Essentially, you have the better purchasing arrangement, but you also have not then have to execute that through the supply chain. So there is a process which that will just be undertaken. So Q1 and Q2 2018 will effectively will be that rollout period. And so and I would expect to see the improvements in our NGP in those particular application areas and those particular customers. I think the exciting thing for us is effectively what does this do to our overall competitiveness in the future in product lines and can we grow and increase market share as a result of that. I'm looking towards the end of 2018 before we get into that type of discussion. And so I think it's an evolutionary process. But certainly, you're looking at a buildup during 2018. We're probably certain that the numbers we talked about are achievable. Thank you. Thank you. Currently, there are no further questions. We received a follow-up question from Christian Kors at LabCorp Research. Christian, it is again related to the procurement issue. You mentioned the €20,000,000 savings you envisage for next Now you have more than €9,000,000,000 cost of goods sold, so huge procurement. Is this €20,000,000 just So can you think of having the IT in place, is there a small savings potential to be generated in the years to come? Now you're tempting me now. That's the reason. Look, We are being deliberately careful about this because first of all, we are our sulfurs are very important to us. And we're not the sort of organization that's shopping around and effectively short term relationships. So This is very important to us, but we have long term relationships with our suppliers. So we're certainly not going to become an organization that's just driven by price. This is about opportunity to consolidate what is effectively a fragmented part of our purchasing activities. The The area we're concentrating at the moment is a relatively small part of our total purchases. And so I think what we'd like to see is the execution of this contingent project Underway, all of that execution has been completed. And I'm sure that in the years ahead that we will find opportunities to further gain. Okay. That's clear. Thank you. Thank you. There are no further questions. I hand back to the speakers. Okay. In that case, well, thank you very much for joining us on our quarterly call. And I think we will close the call offline. Thank you very much, everybody. Ladies and gentlemen, thank you for your attendance. This call is being concluded. You may disconnect.