Dear ladies and gentlemen. Welcome to the Q2 conference call of Brenntag. At our customer's 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. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. 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, thank you very much for dialing into our review for Q2 2017 results. As usual, on the phone together with Georg, our CFO, and as always, we're pleased to answer your questions after the presentation. Just let me start with a short overview of the quarter. Overall, we saw a good gross profit development with 5.2% FX-adjusted growth. Acquisitions made a good contribution in addition to growth within our organic business. Despite the Easter holidays resulting in fewer working days in this year's Q2 versus 2016. We entered the quarter with an EBITDA of EUR 219.8 million and a 0.8% increase on an FX-adjusted basis. The picture in the regions was somewhat mixed during the quarter, I'll go through each region later in the presentation.
These results were achieved in a macroeconomic environment that follows the trends of Q1. In Europe, the growth remains moderate. In North America, we see a continuing improvement in healthy and dynamic industrial production growth. Latin America remains quite volatile and difficult in some countries. Asia Pacific, we generally see good growth rates in economies with some exceptions. Earnings per share was EUR 0.69, which is an increase of 4.5% over last year. Very briefly, on M&A, we've been active in China. Wellstar was announced recently. It's a specialty chemical distributor and a perfect addition to our existing business. The total investment amount is around EUR 25 million. Initially, we've acquired 51% in the first step. Georg.
Yeah. Good afternoon. I commence the presentation on page five, on the slide five, we are presenting the upper part of our income statement. Sales increased by around 12% on an FX-adjusted basis, that indicates higher prices for chemicals. We are passing through price increases, you will notice that gross profit is under no pressure from price increases. You will, however, notice an effect on working capital, I will discuss that later in the presentation. The gross profit showed a growth of 5.2% on an FX-adjusted basis. It's basically a continuation of the trend in Q1, with 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 219.8 million and exceeded previous year's level by 0.8% on constant FX basis.
If we take a look to the P&L lines below EBITDA on page six, there are no major changes for depreciation or amortization. Depreciation for the second quarter amounted to EUR 29.2 million and amortization to EUR 11.7 million. Financial result amounted to a net expense of EUR 23.7 million. In line with the first quarter, we recorded a tax rate of 31.5% for the quarter, and the resulting earnings per share are EUR 0.69 or an increase by 4.5%. The different elements of cash flow on page seven and page eight. I'm starting on page seven. In the second quarter, operating cash flow amounts to EUR 48.1 million, after EUR 115 million in the second quarter, 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 second quarter 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 mainly reflects the proceeds from a sale of an idle site in North America. Dividend payment to our shareholder in the amount of EUR 162 million is the main item in the financing cash flow.
On page nine, you see the information on net debt and leverage. Net debt increased slightly during the quarter and amounted to EUR 1.7 billion 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 EUR 1.5 billion 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, 8.2 times in the second quarter, slightly above the level we achieved one year before. The second quarter delivered a free cash flow of EUR 122.5 million . 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. I'm handing the presentation back to Steve.
Thank you, Georg. Now if we come to page 12 in the presentation. Before I provide you more detailed information on the segments, here is the page that shows the net operating EBITDA for the group, Q2 2016 versus Q2 2017. The second quarter, the US dollar was slightly more stronger compared to last year, which looked at a small tailwind, and this resulted in a positive EBITDA impact of around EUR 4 million. Subsequently, we have seen a weakening of the US dollar. We'd expect this will result in a headwind in the second half of the year. Acquisitions contributed an additional EUR 7 million. We are very pleased with the performance of the acquisitions which are on or ahead of plan. Let me take you through the detailed developments of the segments for the second quarter. First, we come to 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 the fact that we had less working days due to Easter. For the quarter, this translates into a reduction in working days of around about 4%. In the quarter, the business development in the region was a little weaker than expected. However, this was not across the board. In particular, the development in some business lines in the Nordic region was very weak this quarter, and that accounted for nearly EUR 4 million of the shortfall. Operating EBITDA declined by 5.9%, which is primarily a result of foreign exchange and working days. On to North America. Our North American segment reported a very strong quarter. Gross profit grew by 11.2%, which is even stronger than the first quarter.
This growth is broad based across industries and regions and driven by very good demand and volume. Acquisitions made 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 remains quite difficult with negative industrial production growth. Our gross profit in Latin America declined by 1.7% on a constant currency basis, which is reflecting the weaker macroeconomic picture. We recognize 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 in the country completely. We should not expect any material effects from this on the P&L or balance sheet. Just come to Asia Pacific. 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 result in divergent trends in the region. There were some countries with very strong performances like Vietnam and Thailand. In other countries, the performance was weaker. In Indonesia, we faced delays for public infrastructure projects, resulting in weak demand for some of our products. We generally deem most of these effects as temporary and expect better organic development in the near future. EBITDA declined 4% as a result of mostly weak gross profit development and normal cost inflation. Taking you 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 permit an acceleration of the current scale. Based on our continuous business review, we have therefore decided to accelerate a number of organizational and infrastructure changes in Europe. We increase our efficiency and some of our specialty chemical functions. We expect recurring annual cost savings around about EUR 8 million from this program. The full effect should be there from 2018 onwards. The implementation of this program will cost around about EUR 25 million and will be incurred in the second half of 2017. These will be classified as one-off costs. I start with the current trading and address the outlook for the year.
Let me walk you through the gross profit and working day growth on a monthly basis. I might go over slowly for those who would like to write it down. In April, gross profit per day increased by 9.5% as reported and 6.4% organically. In May, excuse me. Gross profit per day increased by 6.2% as reported, by 3.3% on an 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 indicators of gross profit and operating EBITDA to grow on a full-year basis. We now expect our EBITDA for 2017 to be in the range of EUR 820 million-EUR 850 million.
This guidance is based on latest trends and 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 US dollar is currently trading slightly weaker than the first half, which means we will face some transitional headwind for the second half. Based on the current US dollar FX rates, we expect a headwind for the full year of up to EUR 15 million. Please note the range is to be understood that it's pre-exceptional items. That's the EUR 25 million of cost efficiency program in Europe, which is not included. We have seen an increase in 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, due to increased business volumes, we expect an increase in working capital year-over-year. With respect to CapEx, we still forecast to allocate EUR 150 million in 2017. Given the strong increase in chemical prices so far and the impact of working capital, we expect a stronger book for free cash flow for the year, but we do not expect an increase on a full year basis. Now we're happy to take your questions.
Thank you. We will now begin our question and answer session. If you have a question for our speakers, please dial 01 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it's your turn to speak, you can dial 02 to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment please, for the first question. The first question is from Jaideep Pandya, Berenberg. Your line is now open. Please go ahead.
Yeah. Hi, good afternoon, everyone. My first question's 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. Also, that was on a pretty easy comp, minus 30 basis points from last year. I'm really trying to understand why conversion margins are going backwards in EMEA. Maybe start there.
Yes, you'd be quite right. Unfortunately, conversion ratio is down from prior year. Just so I say, we are taking action in terms of looking at conversion ratios in the European region, and we're accelerating initiatives within the organization to not only improve efficiency but also increase the conversion ratio. In fact, we're expecting 50 basis points from the reorganization that we're going to implement, which we announced today. I think it's fair to say that if you look at the second quarter, the lock through of the working days had a negative effect on conversion ratio, as you quite rightly point out. We also had this somewhat unhelpful EUR 4 million shortfall in the Nordic region, which essentially was around a high cost base, but a relatively low heat generation in a pharmaceutical application area.
Which we expect to be effectively covered now in Q4, so this is seen as a one quarter event. Had we not had that, agree, it obviously would have been more positive. Fundamentally, we're still driving for conversion ratio improvement in Europe, the program we announced today is part of that.
Because the Nordic's falling out, should we expect an increase in Q3 and Q4 in Europe? Presuming the macro continues and the timeline.
That's it. Certainly, we are forecasting that we'll get a growth for us. Certainly forecasting growth in the EMEA region second half. The conversion ratio should respond.
Okay, great. 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 their sales force is incentivized. How is that affecting the competition in North America? Your results in North America in Q2 look particularly strong, particularly on the conversion margin and organic gross profit growth. Any comments as to why that was particularly better than expectations? Thank you.
Well, actually, we're pretty much with our expectations. It was in line with what we thought the business was going to be doing in the second quarter. Q1 for North America was a difficult quarter for us with the higher PP&S conversion ratio, but we fully expected that to come back strongly in Q2. We were not at all surprised by the performance of North America in Q2. Obviously, I don't normally comment on competitors' activities. My understanding is that the incentive programs that have been announced by one of our competitors, strangely mirrors our incentive scheme exactly. We don't see any difference there. Nor indeed do we see any significant change in competitive intensity within the North American market compared to ourselves.
That's very helpful. Thank you.
Thank you. Next question is from Rob Plant at JPMorgan. Please go ahead.
Good afternoon, Steve and Georg. European restructuring. You've 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 to our presentation, we do talk about investing in more specialty functions as well as looking at our infrastructure. We are accelerating our capabilities in some of our life sciences businesses, which makes us a step forward. Growing this business organically is one thing, but we feel that we'd like to accelerate the success that we've seen in life sciences in particular. We're taking the opportunity to do that now. We 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.
We're at the point now where we know exactly what we want to do, and it will require some of the facilities that we have to be what I call detanking. In terms of we actually taking out some of the facilities and operate more hubs and more spokes than we've done in the past. We want to accelerate that process. We see that as being a driver of improved conversion ratios in the future as well.
Okay. Thanks, Steve.
Thank you. The next question is from Silvia Pozzi at Deutsche Bank.
Yes. Hi, morning. Two questions for you. Firstly, back on the one-off that you just discussed. Can you just split out the part which relates to growth and specifically the specialty investment from the infrastructure restructuring cost? It seems that investing in building that sales force for specialty, that doesn't seem to be a one-off investment necessarily. Why is that split up as an exceptional?
Silvia, hi, it's Georg. The EUR 25 million that we are mentioning is only one-off cost, and it's not including any investment in the specialty sales force. To the degree we do invest in a specialty sales force, it's basically part of the EUR 8 million net savings. The cost savings are higher and some re-investment into a sales force leads to a net annual one-way savings.
Would the gross number be closer to the EUR 25 million or?
I didn't continue you well.
Sorry, just moving on to the headset. Would the gross savings number be closer to the EUR 25 million or is that kind of the magnitude that we should think we are?
We do think it's fair to think about the net savings number of eight. I don't see particular use for a gross number. On top of the EUR 8 million net savings, we would expect some positive gross profit effect from the new sales force in specialties. That's an unquantified number that needs to develop over time.
Okay. I guess you'll get the payback over quite a long period on a net basis. Okay. Then, again on Europe. Can you just confirm, you said 4% was the calendar impact in Q2. Am I right in thinking that then you didn't really grow very much in Q1, if that was just the opposite of that, and then now you're growing at actually, kind of a 4% or so rate in Europe organically?
Yeah, I think it's fair to say that Europe was pretty flat. If you take the first quarter and second quarters together, we're then looking at a half year in a relatively flat position. We feel that the business is well positioned to grow in the second half, and we actually always believed that would be the probably the game plan for 2017, with a much stronger second half in Europe and indeed in North America. Certainly our guidance reflects that.
Sorry, just to go back to that. 4% working day impact negative in Q2. That implies that you were growing at about 4% or maybe a little bit more when we adjust for days. Is that fair in Europe, in EMEA, sorry?
I'm not sure I followed your calculation in detail, but it seems to me, yes, it's fair.
Okay. Your exit rate is in that range.
Yeah.
Okay. Great. Thank you. Finally, in terms of capital deployment, obviously your balance sheet is now delevered quite a long way. In terms of options for that, do you see anything beyond the acquisitions? You will be restructuring the European business, which means that maybe you're not going to be integrating businesses at that point within that business at the same time. 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. Part of our cash flow will be reinvested in acquisitions, plus some PP CapEx plus dividend. At the current leverage, 2.1 times, lower 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. In course of further delevering the business, at one point in time, we will consider cash return to shareholders.
Okay, sure. Thank you. 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, but is that more driven by any of the bigger ones, or it was one of the smaller ones?
I think it's fair to say 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 three. The first one on EMEA again, sorry. I still have difficulties to understand the organic EBITDA development. What has changed? I understand fewer working days and Scandinavia. In my understanding, Scandinavia was not the biggest region for you in EMEA. What has really changed that you even announced this restructuring program? It would mean if I take the average of the first half, that we have still seen a moderate EBITDA decline organically despite Europe being better. I think your tone always was rather bullish on EMEA. If I just see the performance from 2016, it was also doing rather nicely in the EMEA region. What is different here now? On Asia Pacific, here Q1 was already a bit softer and you mentioned this delay of infrastructure projects already.
EBITDA declined even organically. Is this just this delay or is there something more material behind? Last but not least, on the free cash flow guidance, here you revised it 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? Thank you very much.
If I come back to the EMEA region, I don't want to give the impression that [Samar], our European business, has gone expo in terms of Q2 2017. It hasn't. We had a good performance towards the back end of 2016. Q1 was a relatively positive performance. Clearly, we did have the advantage of more working days in Q1 versus Q2. Certainly management and expectation of our business in the European region is positive for 2017. 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 we'll keep you guys targeted for the rest of the year. I don't want to slice and dice into individual countries.
In terms of the bottom line is that we expect the European region to move forward in the second half and this to be a sort of temporary, if you like, slowdown in one quarter. We don't see it as a macroeconomic effect. We don't see it as a competitive issue for us. The restructure that we're talking about and that we've announced today is not something that has come about in the last few weeks. It's something we've been considering for some time. We realize that we want to move on, and we are going to move on more aggressively in Europe in terms of both increasing our efficiency and indeed increasing market penetrations into some of the product lines which are growing faster than others. I am positive about the European business insofar as we expect 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 the Asia Pacific region, which relates to products which we supply into infrastructure, particularly in the country of Indonesia. That has actually dogged the performance somewhat for the last 6 months or so. We now believe that temporary effect has now moved on, and we see the first green shoots of that product line, that product development coming back in towards August and September. We would expect to see the Asia Pacific business return to our organic growth model for the rest of this year.
I think Daniel, the cash flow related question, what has changed over the last 3 months is basically that we continue to see cash outflow for working capital also in Q2, which was basically price development in Q1.
Okay. Thank you very much.
Thank you. The next question is from Peter Olofsson 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.
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. My second question relates to procurement. That was a topic you addressed at the analyst session in November. I think you hinted at that time that it would take something like six months to get that moving. I was wondering whether you're starting to see the first results there, or is that something we might start to see more into next year?
Right. 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 a view to sharpen the organization up in terms of the general organization if 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 part of Latin America, and that effectively comes into effect from the third quarter. Those changes are in place, and those are in place to accelerate the recovery of the region. That's literally in the last few weeks. You mentioned the procurement project, which we did indeed mention at the analyst day. Indeed, we are now at the point of execution of this program.
Effectively, we expect into 2017 at this stage, we've developed a plan that suggests a EUR 20 million saving in procurement costs gross at this stage, and it's a 2018 number. The rollout effectively is starting now, and we expect to be fully operational within the context of this by the end of the year.
Okay, thank you.
Thank you. The next question is from Rory McKenzie at UBS. Please go ahead, sir.
Yeah. Afternoon. It's Rory here. Two questions, please. Firstly, you said the M&A was performing better than expected. Can you say what the organic North America profit growth was?
Also, I note that you've disposed of a facility. Did that have any benefit to the margin in Q2 in North America, please? Just trying to get to the underlying numbers.
Well, we had, [Girish]. 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 idle facility that we sold, it's a mix of effect, disposal of asset effect, net. It's an effect that is around EUR 1.5 million positive.
Okay, great. Thank you. Then just looking at the kind of broad outlook for the overall, with your guidance range and that now with the 1%-2% FX headwind for the year overall, that looks to imply an H2 constant currency EBITDA growth rate of anywhere between 4%-10%, after H1 was just 2%. I'm just interested to hear what conditions you think you'd need to get to the top end of that range. A double-digit EBITDA growth is something you haven't really delivered for a while. What lets you put the top of that range there?
Well, certainly. We need both the major parts of our organization, North America and Europe, to be firing all four cylinders to deliver top-end performance. I think it's fair to say that, we now see a positive momentum in our North American business, which you can see through the numbers. Indeed, we have confidence in our European businesses going forward. Organically, I expect North America probably will grow faster than Europe into the second half. When we get double digits in the second half is probably a bit of a stretch. Nevertheless, I think we certainly see a forward in organic growth.
We certainly do. When Rory mentioned his estimated 4%-10% for the second half, I assume he included acquisitions.
Yes, I did. Thank you very much. Just going back to Europe then, the underlying market, you said that you don't see it as a market issue, you don't see it as a competitor issue. It's more been your execution. Can you maybe update us on where you see the market volume growth in Europe at the moment and what you expect for H2?
Well, I think what's very interesting is that the chemical market in Europe particularly is showing some very strange effects in terms of there's quite a lot of product shortages in the market at the moment, and prices have been affected in that regard. You see higher prices in the marketplace, which we think will be sustained for the rest of this year. We've indicated that in terms of our cash flow analysis for the rest of this year. I think that the shortage in certain raw materials has followed through in terms of some supply chain challenges for our suppliers. It has affected us in some small ways in terms of how we're able to get to market. 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. We expect that we will overcome any of those shortages during the course of the third and fourth quarter.
All right. That's helpful. Thank you.
Thank you. The next question is from Rajesh Kumar at HSBC.
Good afternoon. Just kind of coming back to your comment 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 a percent, implying that the selling prices were growing fast, but not fast enough to pass through all the cost increases. [Alan], in an environment where there is a shortage, why is that price pass through not happening thoroughly? Just a related question on North America, we've seen a similar trend, but you did a fantastic turnaround in Q2 compared to Q1. A lot of people are getting worried if there's 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 check in second half, please?
I think I'd like to come to North America first in terms of there are no one-offs in the North American business, which is distorting performance apart from very minor amounts that we referred to in terms of.
Right
the site a moment ago. No, fundamentally, this is just a strong performance for North America, and therefore, I don't see any, as I said earlier on, in terms of the second half of this year, we expect a contribution from Europe and North America to achieve our guidance. Just in terms of your pricing point, I'm not entirely sure I completely, were you referring to in terms of percentages as opposed to gross profit per ton? Because you may be aware that we look at the actual units margin per ton. We're not necessarily looking at percentages per se. When we look at our gross margin per ton, then we see that the price pass through has been great indeed.
Okay, your gross margin is off eight, nine basis points, isn't it? No, sorry, 151 basis points year-over-year in Europe.
As a percentage?
Yes, as a %. Clearly, your sales price have gone up, not as much as your inventory cost. How much of that is accounting for inventory, which inflated faster than you could increase the prices and is a phasing issue. How much of that is basically pricing pressure?
It's very difficult for us to comment on gross profit as a % of sales margin because it's not a KPI we steer the business after, we wouldn't want to steer the business after, because particularly in terms of falling prices, a constant % rate would not be good enough. It's not a metric 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, if prices come down, you'll have an arithmetical solution to your question. At the end of the day, we are aiming to look at the fundamental gross profit per unit, which nowadays is gross profit per ton. In terms of the amount of money that we earn in terms of the volumes that we sell, are holding up nicely. Obviously, part of the beauty of this business is actually its stability throughout the pricing cycle. As you know clearly, essentially price movements are really more of an effect on working capital as opposed to a gross margin.
Yeah. What we are seeing across a variety of distributors, not just you, even the plumbing distributors, electronics, everywhere, there seems to be gross margin pressure where you are seeing price inflation. We were just coming from that point. You're the only distributor who doesn't look at the gross margin as a KPI we cover, which is why I just wanted to understand that.
Yeah. Well, you're right. I'm not entirely sure we are the only distributor that doesn't look 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 in exactly this way, and they're making quite a feature of the way they're running the business now compared to perhaps they ran it in the past.
Univar talks about their gross margin quite a lot, if you're referring to them. Let's not harbor on the point. I'd just like to see if there's a phasing issue which might improve it or price pressure is what I'm trying to work out.
Okay.
Yeah. Thank you.
Thank you. The next question is from Todd Green at Credit Suisse. Please go ahead.
Yeah, thank you very much. I've got three questions for you. The first question is just on the EUR 8 million of net savings. I appreciate that is a net number rather than a gross number. When I look at that number in the context of your EMEA cost of goods sold cost base, which is EUR 3.5 billion. Referencing some of the comments that you made back at the Capital Markets Day last year. Have you tried to get better supply terms with some suppliers and then had some pushback there? Because even if we gross up that number as a percentage of the overall COGS cost base, it seems remarkably low. Just any color you can give around the nature of the conversations you've had with your multitude of suppliers. That's my first question. The second question is probably a little bit easier to answer.
If I'm right in thinking that Q2 2016 was when the EMEA was the low point in terms of the organic growth in North America because of the collapse in oil and gas. Therefore, a very weak comp. What was the North American performance like ex oil and gas in Q2 of this year, please? My final question, and this may sound impertinent, and it's not meant to, but just looking back over your last sort of two to three years. Last year was characterized by very unfortunate exogenous events such as huge undershoots of U.S. industrial production, Venezuela. No one could have predicted what happened there. Is it possible that you need to revisit the contingencies within your budgeting process to get out of this 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 budget targets, but we talk about this business as being a four to six percent organic growth business. Even though we clearly had a challenge with the business for a couple of years in this respect through various things which you mentioned, we still believe that is the case, and certainly we're expecting to demonstrate in 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 has not been our major supplier groups.
These are really what I would consider to be the long-tail end suppliers where although 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 be a more meaningful supplier to us and equally give those suppliers the opportunity to have a much more meaningful share of Brenntag's purchase of those products. That's the section which I refer to when I look at a EUR 20 million improvement in overall pricing efficiency. For the vast majority of the rest of the 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.
I think you left 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 Silvia Fortler at Deutsche Bank. Please go ahead, madam.
Hi. Afternoon. Just had a quick follow-up. 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 if you can split that by region. Thank you.
I have a very difficult time to answer because to draw appropriate conclusions from 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 region, is pretty much in line. There are no major deviations between volume and gross profit development.
Okay. Thank you.
Thank you. The next question is from Christian Koch at Warburg Research. Please go ahead, sir.
Yes, good afternoon. Thanks for taking my question. First, you mentioned the sourcing savings you envisaged after the rollout with EUR 20 million as of next year. Can you maybe provide some color how this sits across your regions? Secondly, the guidance you've given for 2017. For H2, the low end of your guidance comes to roughly EUR 400 million in the second half of this year, which is approximately the same as last year. You mentioned an improving performance in the APAC, EMEA, and North American region in the second half. I'm aware that you face some headwinds from FX, but you also have still some tailwind left from M&A. Actually the low end of your guidance hardly implies any organic earnings growth. Am I missing something or are you simply conservative? Lastly, just a housekeeping item.
The tax rate in the first two quarters was rather favorable, was 31.5%. Usually, you're guiding in this 34%-35% range. Is this still valid, or should we pencil in the H1 figure also for the full year and for the years to come? Thank you.
I'll just take the sourcing projects. I would say we expect to see the European business to benefit more in 2018 than the North American business, in regard to this endeavor. It's not by huge amounts, but certainly the emphasis will be in Europe.
Okay.
With respect to tax rates first, maybe from today's perspective, we would expect 31.5%, maybe 32% through out through the year. There's always a true-up at the end, we'll see what the year end really delivers. I would agree that 34%-35% we usually indicate mid-term, probably has a little bit a degree of conservatism. I don't really want to move away from that number under the current U.S. taxation regime. Tax changes to be awaited. 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 part is very high taxes. Your calculation on the guidance, it can easily be misleading from my perspective to take last year's second half and take an implied second half of this year 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%-6% for the second half of this year.
Can you repeat it please? 5%-6% midpoint of guidance organic.
The midpoint of the guidance would imply a 5%-6% organic EBITDA increase in the second half of this year.
Okay. Thank you.
Thank you. The next question is from Adrian Zegel at Commerzbank. Please go ahead, sir.
Yes. Hi, everybody. It's Adrian here from Commerzbank. A couple of questions on a little bit of sustainability, sorry to go there also again on the U.S., but I was just wondering, since Q1 saw the disconnect from gross profit and EBITDA and now Q2 looks significantly better, maybe could remind us what measures have you taken in Q2 or what was the positive impact actually and how should we think of it in terms of sustainability going forward? A question in this regarding to Asia Pacific. Should we expect, in fact, what you said on the delays in infrastructure 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? Should we think of it as a Let's say longer run delay.
A question into 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 stronger profit demands in Q1 of 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 individuals as well. That does actually disproportionately falls down the conversion ratio in Q1. Just for clarity, Q1 2018 was exactly the same scenario. Please, if people could just remember that Q1 2018 was the same scenario. However, I think it's 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.
Indeed, we were covering a lot of the extra demand with somewhat spot haulage, temporary labor, et cetera, which is not exactly the most efficient way of dealing with things. As we said in Q1 results that we would get ahead of this and get around this and get on top of this. That's what we've done in North America during the course of Q2. I think you'll find conversion ratio is actually just slightly ahead of prior year. As I would see, this has been now a sustainable environment as a conversion ratio trend for North America. Coming to your question on Asia Pacific and infrastructure. First of all, I'm not aware of any other infrastructure issues which are affecting the particular business unit.
This is something which has been in the background now for about six months, actually, in terms of the weakness in this particular product range. We do know that we actually have orders on the books now for August, which are a lower end from the previous demand, but nevertheless would 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. We would expect to see Asia kick forward in terms of organic growth during Q3 and Q4.
Okay. Just two questions on phasing actually, or timing, if you want. First of all, when do you expect the bulk of the new EUR 25 million program to kick into cost? Obviously it looks like the CapEx is pretty back-end loaded. Is there some risk that some things will roll 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 would see on an historical basis, the numbers are pretty similar in terms of they tend to be back-end loaded in terms of the actual delivery of the CapEx. The moment the contract gets effectively completed by the end of the year. I wouldn't read anything into CapEx. I'd expect to go with the guidance from Q1 of EUR 150 million has been likely for the year. Was there another question?
The timing of the EUR 25 million one-off expense depends on how quickly we get all the negotiation closed. I would expect a fair chunk of it in Q3. Maybe some in Q4.
Okay. Just a question, or two quick ones more or less. Last actually, I just wanted to make sure that I understood this correctly, what you said on the US dollar. The up to $15 million you mentioned, that was not on an annual basis, but that could be the impact expectation-wise for the second half, right?
No, we think it can be on an annualized basis, [$17 over $16]. It's probably a little bit the upper end of the effect. It would assume that the US dollar would trade $1.18, $1.19 for the rest of the year.
All right. Final question on Venezuela, actually. Things are probably a bit blurry what happens. I just wanted to get an idea or sense on where do you stand there. Could you literally start this business again overnight when things are changing? Would it take, let's say, a longer process to come back into the country with your business?
We've left the business in good grace, in terms of the employees, our former colleagues are now employed by a Venezuelan-based company. By no means has this been a sort of cut and run scenario where we've just left the country. If we wished to, I'm fairly certain that we could go back into the country. Frankly, I think we 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.
Hi. Just one quick follow-up on the growth rates. Can you give us some color on the difference in the growth rate between specialty and bulk segments of your business? I 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 through. We've seen it rising. Are we seeing a bit more of bulk pickup now and specialty pickup with a lag?
This is a mixed question. As you'd be aware, products which are more available in bulk tend to be somewhat more of a faster conversion in terms of from order to reality. Specialties is a much slower process in terms of growth, but it is longer term, probably more sustainable in terms of specific sales. We are, as you know from what we've said earlier, we are investing more in our specialty chemicals capabilities, that should give you some comfort that we feel that the long-term growth in our specialty businesses is very sustainable. I could hardly give you a steer on which is growing faster between the two of them at the moment. To be fair, the industrial chemicals business is a large part of our business at this stage.
Thank you. Thanks for taking the follow-up.
Thank you. The next question is from Todd Green at Credit Suisse. Your line is now open.
Thanks. Just one follow-up from me as well. Just on Indonesia. My understanding is that the Asian business is predominantly a specialty chemicals business and industrial chemicals not so well developed there. Just out of interest and my curiosity, what kind of chemicals would be going into infrastructure projects on the specialty side?
Well, actually, this is actually a product line that came with the acquisition of TAT. TAT actually is a business that's got more of an industrial mixture than the previous Brenntag specific. [TAT absorbency] has things like asphalt. It has, I say asphalt, certain types of asphalts which are solvent based. There's some infrastructure spend sales around the previous TAT acquisition, and that's where the business has come from. It's not per se a specialty product, it's more of an industrial chemical.
Okay. That's helpful. Thank you.
Thank you. The next question is from Alan Murr at Exane. Your line is now open. Please go ahead.
Oh, hi there. Can you hear me, guys?
Sure.
Great. Just three sets of questions if I could please. The first one, just regards this sort of supply chain efficiency effort in Europe, sort of the hub and spoke approach. Two questions there. The first is there potential for this model to be applied in other regions? The second is, are there any sort of capital savings around this, whether in terms of working capital efficiencies, fewer facilities, fewer trucks, so on and so forth? I'll save the other questions till you feel we're going, if I could. Thanks.
First of all, the hub and spoke approach is not a new one. So far as we've operated a particular model in various countries around the world for quite some time. I think it's fair to say that within Europe, the legacy investments within Europe are fairly significant and the European business has some fairly major assets around the region. We do see the opportunity to rationalize in terms of efficiency, those assets. What we're talking about here is actually looking at a reduction in, I won't say capability, that's the wrong phrase. We have world-class facilities, for example, in Rotterdam, when we don't need to reproduce world-class facilities 100 miles away. Whereas the previous business models, maybe of say four or five, 10 years ago, might well have done that. We won't do that.
The implication is that in the very long term, underlying further investment in infrastructure insofar as the handling infrastructure within Brenntag Europe would be long term lower by operating a hub and spoke approach as opposed to a standalone full service chemical distribution location at every site in our region. Fundamentally, directionally, certainly it does help with CapEx in the future. Also directionally, it helps with the underlying investment in working capital relative to stocks and increases the stock efficiency that we have. All of the above, not surprising that's why we're doing it.
Great. Thank you. Very helpful. A second set of questions, if I could then. Again, just coming to the sort of EUR 20 million potential savings on sourcing. It sounds very positive, but just playing devil's advocate, that EUR 20 million 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 of how is that number been arrived at, and is there sort of a range around it? Maybe just a second 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 all be in place and we should sort of see those benefits from the start of next year?
Well, first of all, I can absolutely guarantee that the preparation and planning work is in place. We've employed people to do this in terms of we have new positions within the company which are focusing what we call the non-managed product area. Those appointments have been made on a worldwide scale. This is not just a European effort, it's North America, Latin America, and Asia Pacific. The organization has been set up to capture these savings. We are deadly serious when it comes to looking at how we capture these savings insofar as we're introducing specific IT tools to track and trace the developments of those savings and also ensuring that the execution of those opportunities are taken upon by the Brenntag operations.
It's not a case of, for example, someone in Estonia or someone in Poland ignoring the fact that there's an opportunity to improve their purchasing because they happen to be a far-flung destination or in a different part of the region. We will be tracking all those types of opportunities. This is a very well put together professional project, which is why we have high expectations of delivering it in 2018.
Great. Very helpful. Thank you. Final questions, if I could. Just in regard to the acquisition pipeline, sorry if I've missed it, any update there in terms of availability of opportunities and also sort of multiple people are expecting or is it just the same as really?
We've got a pretty professional, experienced approach to M&A. We are working through a number of targets. From today's perspective, we would really expect to spend EUR 200-250 this year. You can only be sure if and when the deals are really done, everything is looking okay so far.
Just in terms of acquisition multiple, any movement there or really the same as history?
I'm sure you will remember that we evaluate acquisition opportunities on an IRR basis, and the 14% hurdle rate that we on a pretax basis apply is achievable in the market.
Perfect. Thank you very much.
Thank you. The next question is from Tom Sykes, Deutsche Bank. Please go ahead, sir.
Afternoon, everybody. It's just a quick follow-up on the U.S. conversion rates. Just the extra costs that you put in on temporary labor and freight. Could you just remind us, were they still there in Q2? I mean, are you expecting those to come into the permanent cost base now, or 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? Could you maybe just walk us through that a bit?
I think this is where we have to be a little bit careful. We do quarter reporting here in a 12-week cycle. We're talking about people handling hazardous chemicals, and they're highly trained and what have you. It's not a quick transition process. We certainly have effectively recontracted a number of suppliers and haulage companies which were previously spot hired to support our volume growth in the region. Those effectively are sustainable and ongoing. I would say that this is the second quarter of good underlying demand for North America. We go forward, clearly, we'd like to increase our efficiency further. At this stage, my primary drive is making sure we give the service that is required by our customers, and we will worry about the fine-tuning, I suppose, Tom, in a more settled environment. At this stage, we're still continuing to grow.
Okay. Just in terms of improvement in conversion, obviously the conversion ratio is sort of flattish year-over-year in the U.S., but you're growing organically at mid-single digit. Improvement in that conversion, we probably have to wait until the latter part of this year, given what you just said on the software integration.
I think that's a good one. Also, it would be fair to say that as part of the improvement is the oil and gas business. That business was operating at suboptimal levels in terms of the low conversion ratios the past two, three years. As that business improves, clearly their conversion ratio improves and the overall mix. I would look towards the end of the year for an overall improvement.
Okay, thank you. Just in addition to that, I suppose the conversion ratio on oil and gas is, even if it's improving, probably slightly lower than the conversion ratio of North America overall. 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 Olofsson at Kepler Cheuvreux. Please go ahead, sir.
Thank you. Yes, I wanted to come back on the procurement topic, the EUR 20 million that you mentioned. Just wondering how that will show in the P&L. Will it simply mean lower costs and that shown directly 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&L? My second question relates to Indonesia. 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 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 us in that way in Indonesia. We've not mentioned that, but it clearly was a bit of a challenge there. Just coming to the procurement exercise, clearly the way this effectively works is that as we essentially approve and appoint suppliers to have a greater share of our small chemistry. Those new suppliers and their products and specifications will be subject to approval of our own customers. You have effectively a leading period where essentially you have the better purchasing arrangement, but you also then have to execute that through the supply chain. There is a process which that will be undertaken. Q1 and Q2 2018 will effectively be that rollout period. I would expect to see the improvement in GP 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 terms of some of those 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. I think it's an evolutionary process, but certainly you're looking at a build-up during 2018. We're fairly certain that the numbers we've talked about are achievable.
Thank you.
Thank you. Currently, there are no further questions. As a reminder, if you would like to ask a question, please press 01 on your telephone keypad now. We received a follow-up question from Christian Koch at Warburg Research. Please go ahead, sir.
Yes, thanks for taking my follow-up question. It is again related to the procurement issue. You mentioned the EUR 20 million savings you envisaged for next year. Now you have more than EUR 9 billion cost of goods sold, so huge procurement. Is this EUR 20 million just a start? Can you think of now with having the right people, having the IT in place, that there is more savings potential to be generated in the years to come?
You're tempting me now, aren't you?
That's the reason.
Look, we have been deliberately careful about this because, first of all, our suppliers are very important to us. We're not the sort of organization for shopping around and effectively short-term relationships. This is very important to us, that we have long-term relationships with our suppliers. We're certainly not going to become an organization that's just purely driven by price. This is about opportunity to consolidate what is effectively a fragmented part of our purchasing activities. The area we're concentrating at the moment is a relatively small part of our total purchases. I think what we'd like to see is the execution of this particular project underway. Once that execution has been completed, then I'm sure that in the years ahead that we will find opportunities for further gains.
Okay. That's clear. Thank you.
Thank you. There are no further questions. I hand back to the speakers.
Okay. Well, in that case, thank you very much, everybody, for joining us on our quarterly call. I think we will close the call at this point. Thank you very much, everybody.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.