Dear ladies and gentlemen, welcome to the Brenntag AG results call for the second quarter 2016. 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. If any participants have difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. I would like to ask Steve Holland now to open the call.
Thank you. Welcome, ladies and gentlemen. Thank you very much for dialing in to our review of the Q2 2016 results. As always, I'm on the phone today with Georg Mueller, our CFO, and we'll be very pleased to answer your questions after the presentation. Let me begin with some words on the macroeconomic environment. Overall, the global economy remains weak. North America continued to show negative industrial production growth year-over-year. Also, Latin American industrial production was showing negative numbers during the period we were covering. In contrast, we see moderate growth in the EMEA region, whilst Asia Pacific is clearly the region which is outperforming the rest of the regions we cover. In Q2, our business saw very strong organic growth in Europe and Asia Pacific. Additionally, the acquisitions contributed to the earnings growth at the same time.
We faced headwinds in North America due to the sustained weakness in oil and gas industry, as well as a difficult macroeconomic economy overall. As expected, the results in Latin America were heavily affected by the loss of earnings in Venezuela. Overall, we managed to increase our gross profit and operating EBITDA for the group on a constant FX basis. Gross profit grew by 6.3% and EBITDA grew by 3.3% respectively. The earnings we show in the second quarter amounted to EUR 0.66, slightly below last year's Q2. I might just now address the acquisitions. In the second quarter of 2016, we signed the Warren Chem acquisition. The company is a distributor of specialty chemicals in South Africa and perfectly complements our existing product portfolio. With this acquisition, we further expand our local presence in South Africa, where we've executed a number of transactions over recent years.
In addition, we purchased, as planned, the remaining shares of our Chinese business, Zhong Yung. We acquired the first tranche of 51% in 2011, and the company performed very well since then. Zhong Yung provides an excellent basis for strong future growth and is a perfect platform for further acquisitions in the fast-expanding Chinese chemical distribution market. The total investment amount in 2016 now stands at EUR 130 million. The average multiple for acquisitions signed in 2016 is around 6.2 times enterprise value to EBITDA. Now I pass across to Georg.
Good afternoon, everybody. I'll walk you through the income statement for the group. I will start on this slide with the upper part of our income statement. We report a gross profit for the quarter of EUR 603.6 million. This represents a growth of 6.3% on an FX adjusted basis. We acquired quite heavily last year. The growth is driven by acquisitions. Operating EBITDA amounted to EUR 215.8 million and was about on previous year's level on an as reported basis. On constant FX basis, operating EBITDA exceeded prior year by 3.3%. I will provide more details on the EBITDA development on the following slide. I'm moving to page seven. The financials in this year are impacted by a number of specific challenges. Like in Q1, I would like to provide you with an update on the different effects to allow for a more meaningful analysis.
The bridge on the page shows the development of operating EBITDA for the group from second quarter 2015 to second quarter 2016. The starting point is the second quarter 2015, where we recorded an operating EBITDA of EUR 215 million. Partly due to the weakening of the pound sterling and also the weakening of a number of other currencies, we had a negative FX translation effect amounting to around EUR 6 million. As expected, as discussed at length already, our operations in Venezuela are no longer contributing meaningful EBITDA. Second quarter last year, operating EBITDA from Venezuela amounted to EUR 3 million. The acquisitions contributed an operating EBITDA of about EUR 14 million in the second quarter this year. As expected, the demand in the oil and gas sector was lower than in the second quarter 2015.
Based on a gross profit that was lower by EUR 9 million, we estimate that this resulted in an EBITDA decline of around EUR 6 million. Our business in North America, outside the oil and gas sector, continues to be impacted by the economic slowdown with a declining industrial production. While our diversification helped to mitigate headwinds, we do record an EBITDA decline of about EUR 6 million. Our businesses in Europe and Asia Pacific have seen encouraging gross profit growth in the second quarter. In both regions, that was translated into an even higher EBITDA growth. All in all, this resulted in an EBITDA that is higher by about EUR 7 million or 7% on an organic basis. It is clearly a stronger growth than what we recorded in the first quarter.
All the effects combined resulted in an EBITDA of EUR 216 million for the second quarter 2016. To the second half, the lower half of the income statement, the lines below EBITDA. Depreciation for the second quarter amounted to EUR 28.4 million and amortization to EUR 12 million. Financial result amounted to a net expense of EUR 19.4 million. We recorded a tax rate of 34.5%, which is in the range of 34%-35% we typically indicate. Earnings per share is at EUR 0.66 or EUR 0.71 excluding the amortization. Moving on to the cash flow statement on page nine. In Q2, the operating cash flow amounted to EUR 115 million after EUR 106.6 million in second quarter 2015.
The respective line items do not contain any significant movements compared to last year. I would therefore like to move directly to the further parts of the cash flow statement on the next page. This is about investment and financing cash flow. Cash out for CapEx in the quarter totals EUR 25 million. Purchases of consolidated subsidiaries mainly reflect the payment for the acquisition in Warren Chem, which we signed earlier this year and which we closed and therefore paid in the second quarter of 2016. We've quite some movement in the financing cash flow. The line purchases of companies already consolidated in the financing cash flow, we present a payment for the remaining shares in Zhong Yung. In June, we also paid a dividend of EUR 154.5 million to our shareholders. That is obviously a higher dividend than the dividend we paid a year ago.
The line repayment and proceeds is lower than last year as we repaid our securitization program in the second quarter of 2015. I would skip the balance sheet page and move on to the leverage page 12. On the page, you see the information on net debt and leverage. Net debt amounted to EUR 1,767 million at the end of the second quarter. The increase compared to the end of the first quarter is mainly attributable to the payment of the dividend in the amount of EUR 154.5 million. The group's leverage stands at 2.2 times. The increase compared to Q1 is once again attributable to the dividend payment. I'll move directly to the working capital page 14. Trade working capital amounted to EUR 1,326 million at the end of the second quarter.
On a year-to-date basis, we turned the working capital 8.1 times, which is about the same level we achieved at the end of the first quarter. Q2 2016 delivered a free cash flow of EUR 164.7 million. It's about on the very strong level we achieved in the second quarter 2015. All elements of the free cash flow, EBITDA, CapEx, change in working capital, are pretty similar to the levels recorded in previous year. I'll hand it back to Steve for a discussion of the segments.
Thanks, Georg. Let me take you through the developments of the segments for the second quarter. We're very pleased with the performance in the region of Europe, Middle East, Africa. Operating gross profit increased by 8.3%. EBITDA grew strongly by 11.2%, both on an FX adjusted basis. More than three-quarters of this growth is organic growth with the rest from small acquisitions executed. We are particularly pleased to see the increased operating leverage which accompanied the gross profit growth in the region. The business in North America was again heavily impacted by ongoing weak demand in the oil and gas sector and the challenging economic environment which continues below 2015 levels. On the other hand, the acquisitions from 2015 contributed positively and helped limit the adverse effects. Gross profit in North America increased by 3.5% on an FX adjusted basis. This was clearly driven by the contribution from acquisitions.
The operating EBITDA in North America decreased by 3.1%. The reduction of the gross profit in the oil and gas sector could not fully be compensated by cost reductions. As you will know, we have taken measures to reduce capacity in the oil and gas business since the beginning of 2015 and reduced head count by more than 15% in this sector. The growth rates in North America region are to be seen in the context of a strong Q2 2015. The sequential trends do not indicate a further weakening of the environment for our business. We are monitoring the situation closely and would initiate countermeasures where appropriate. Come to Latin America. As you can see on the slide, the effect from Venezuela is significant for our business in Latin America. However, excluding Venezuela, we reported an increased gross profit of 1.4% and the operating EBITDA declined slightly by 2.6%.
Come to Asia Pacific. Asia Pacific had a very strong increase in earnings in the second quarter due to both a strong double-digit growth in the existing business and a pleasing performance from our acquisition, TAT. The region grew its gross profit by 31.2% and its operating EBITDA by 33.1%, both on an FX adjusted basis, which results in a strong quarter for Asia Pacific. I'll just come to the next chart, which gives an update on North America trends in gross profit and industrial production. You can see the oil and gas gross profit in Q2 amounted to $55 million, which is slightly above the level in Q1, but a $10 million shortfall on prior year. At the year to date, we're down in terms of GP turns by about EUR 26 million in oil and gas for our North American business so far.
On the chart to the right, you'll see the industrial production in North America remains weak and is clearly negative growth rates for the third consecutive quarter. If I may now come to the outlook. I'd like to start with the current trading and provide you with the outlook for full year 2016. Let me walk you through the gross profit per working day growth on a monthly basis. Please mind, just to calibrate these numbers, the weakness in oil and gas has a negative impact of around 3% of the gross profit generated by the group in the first half of 2016. In April, gross profit per day increased by 4% and decreased by 1.9% on an organic basis. In May, the growth was 2.5% as reported, and a -3.3% decrease organically.
In June, the growth was 4.9% and a slight decline of 1.3% on an organic basis. In July, the growth was 7.2% and a +0.8% on an organic basis. As for our experience last year, the third quarter is a difficult quarter to estimate. As the global economic environment is clearly more volatile, we have extended our guidance range. On a full-year basis, we expect our operating EBITDA in 2016 to be between EUR 800 million and EUR 840 million. The guidance is based on the trends that we observed in the first half of 2016. We clearly recognize this is a more cautious approach, but we fully expect to narrow the guidance after Q3. I think we're now ready to take your questions.
We will now begin our question and answer session. If you have a question for our speakers, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask the question. If you find your question is answered before it is your turn to speak, you can dial zero two to cancel your question. If you are using speaker equipment today, please press the handset before making your selection. One moment, please, for the first question. The first question is from Josh Puddle of Berenberg. Please go ahead.
Hi, good afternoon. My first question is on the U.S. business. You've seen a deterioration in the second quarter with gross profit, excluding the acquisitions and excluding oil and gas, down around 4%. That's actually slightly worse than industrial production, which you showed down 1.2%. I just wondered, why do you think you are underperforming industrial production? Presumably, it suggests you're either losing share or perhaps it's a sign that producers are insourcing. Then my second question is on the margins in the EMEA region. An encouraging performance in the second quarter, up 80 basis points. If I look on a half-year basis, you're still down, and I'm aware that there is volatility quarter on quarter. I just wondered on a full year basis, if you assume that the gross profit momentum continues, what sort of operating leverage would you be expecting? Thank you.
I just think in terms of North America, I appreciate what you're saying as far as the overall North American numbers looking a little weaker sequentially. We're not concerned at this stage at all. Clearly, the macroeconomic situation is relatively weak in North America, but we've taken steps in our business units to address that weakness. We certainly don't believe that we're losing market share, and that is probably more a reflection of the current mix that we have in North America in terms of which production you're targeting in terms of markets. For example, in terms of the car sector, we don't have a great presence in the car sector as maybe some other distributors that would affect us in some way. I think that it's a small variation, but I wouldn't say it's significant.
Josh, hi, it's Georg. On the conversion ratios for Europe. Yes, you are right. We were in conversion ratio terms down in EMEA in the first quarter relative to previous year. We are significantly up about 80 basis points up in the second quarter over previous year. We would also expect for the subsequent quarters, the Q3 and Q4, that the conversion ratio this year in Europe will exceed previous year's conversion ratio. On a full year basis, we still have the Q1 drag to cover this. On a full year basis, difficult to estimate, but maybe 50 basis points up against previous year.
Okay, thanks. Thanks very much. Just to follow up on the U.S. question. Does that mean that you're not seeing any signs of insourcing from the producers?
No, in actual fact, I would say that it would be the reverse situation because as we see a number of manufacturers who are clearly somewhat challenged in some of their own customer base, they're seeking to reduce operating costs. We see a strong pull towards outsourcing smaller customers, less strategic customers towards the distribution sector. No, I think it's more of an opportunity than a threat in that respect.
Okay. Thank you very much.
The next question is from Rob Glenn of JP Morgan. Please go ahead.
Morning, Stephen. Afternoon, Stephen Georg. Going back to the U.S., just two extra points here. First of all, with oil and gas, it looks as though it may have bottomed for you in Q2, which is what you were saying was probably going to happen in Q1. Do you feel that is a sustainable trend? Secondly, Steve, you sounded quite bearish on the non-oil and gas North American outlook for Q1. You were talking about general signs indicating recession. Do you feel a bit better about North America outside of oil and gas today?
Well, first in terms of oil and gas, the performance of oil and gas. I feel I may have shot myself in the foot about, I think maybe in the Q1 or something, saying that I think the oil and gas had stopped declining. I think the sequential numbers, as I recall now, are something like $65, $61, $50, $54, $55 into the quarters. It would suggest that certainly the mix of our customer portfolio and the services they provide would appear to be relatively stable. I'm not wishing to count my chickens before they hatch, but it would seem that we have a degree of stability in the oil and gas business. We've also had obviously a fair range of oil prices within the context of those numbers.
We do see an increase in some parts of our business, such as pipeline cleaning and what have you, as some of the units come off of production. There are other services we are providing, which I think are mitigating some of the weakness in oil and gas. As far as the North American economy overall is concerned, I think it's been a bit of a strange environment for now for nearly 12 months or so in terms of underlying industrial production. I think if you look at the graph, you can see that there is a slight uptick in terms of sequentially industrial production's down, but not quite as far down as it was in the previous quarters. Again, it may be a lot of pension solve, but the PMI index is looking a little bit more confident.
Sequentially, with a little bit of maybe some more confidence of the purchase management index, it would seem that the North American economy seems to be at bottomed out and maybe at a point where we might see some stability or a return to some modest growth. I wouldn't say more than that.
Okay. Thanks, Steve.
The next question is from Andy Tu of Citibank. Please go ahead.
Good afternoon. A few questions from me, please. Just in terms of that July organic exit rate of 0.8%, should we still adjust 3% for oil and gas? That's my first question. Secondly, on M&A, I think the guidance or some indications were for M&A to add EUR 60 million to this year. You've delivered EUR 27 million at the half year. I don't think there's a lot of change for the second half in terms of acquisition contribution from companies falling in and out. Is that still the correct expectation, please, for EUR 60 million of M&A contribution at the EBITDA level? The last question is just looking at the business for the first half and giving you the benefit of the doubt of basically stripping out oil and gas and Venezuela, the business has basically been flat in terms of EBITDA growth.
How does that square please with your two to three-year guidance of 4% to 6% organic growth at the EBITDA level? Is that achievable? If so, how is that achievable with the current run rates of growth, please? Thank you.
Andy. Hi, it's Georg. Let me start maybe with the oil and gas impact on the gross profit per working day. The oil and gas impact is 3% year to date, June. The effect will somewhat wash out in course of the year because we had a decline in the oil and gas business second half of last year. The July impact was about two percentage points, a little bit less than two percentage points on the oil and gas. M&A on a full year basis, I would still include EUR 60 million, maybe marginally less than EUR 60 million. To be fair, one of the loop acquisitions in North America is a little bit lacking behind plan. That we keep up the 60 number basically comes from the acquisitions which we have undertaken earlier this year.
Yeah. Thank you. As far as the longer term prospects concerned, I think maybe not wishing to make a summer out of one quarter, but I think the European performance quarter is a good example of where when things are going as they should, that we can deliver the 6% plus performance on a quarterly basis. I think it's also fair to say that the economic environment in Europe at the moment is, whilst it's in positive numbers, it's not exactly stellar. Once we get a little bit of a turnaround in North America coming our way, and a continued performance in both Asia Pacific and Europe, I have expectation the group can deliver the 4%-6% that we've indicated.
Could I just follow up on just on the M&A. Are there any other material acquisitions apart from the U.S. ones as a TAT? Is the outperformance coming from TAT or is it coming across the board? My final question is just in terms of CapEx. Why is that CapEx number continuing to sort of creep up, please? I think you're now forecasting EUR 150 million versus EUR 130 million, and where is that CapEx going to, please? Thank you.
Yeah. All of the acquisitions, with exception on the loop park, are at or even above plan. TAT is particularly high above plan.
Just in terms of CapEx, you're quite right, Andy. The number on CapEx has moved up a little bit. Clearly, as the business grows, we acquire more companies. They do come with some capital expenditure requirements themselves. We have perhaps a little bit in terms of out of step with norms that we have actually refurbished a number of facilities in North America over the last two or three years actually, which have been some significant upgrades, and those are pretty much coming to completion now. I think we're probably looking at 2017 without trying to trap myself too much, but certainly 2017 would look to be a similar level to 2016 in terms of capital expenditure budgeting for the group.
Brilliant. Thanks very much.
Welcome back to Deutsche Bank, by the way.
Thank you.
The next question is from William McKenzie of UBS. Please go ahead.
Yeah. Morning all. Rory McKenzie here, still UBS, still Rory. Two questions on Europe, please, then one on LATAM. Firstly on Europe, as you said at the end of the call, it was good there and it is clear the momentum keeps building. Can you pick out countries in particular or product areas that keep driving growth? I think before you referenced some kind of good specialty growth portfolio. Then secondly, on the margin side, following up on Josh's question on the leverage. It looks like the kind of constant currency drop-through rate has returned to 50%, and that is kind of where you are in the past. What was it about the cost base that really dragged that down in Q1, and why has it bounced back so quickly? Yeah, a bit more about how you control the cost base in Europe.
Let's just do those two first, please.
I think, well, you are very astute as you just spot the increased cost base in Q1 in Europe. In fact, Q1 was an interesting one because there was probably quite a number of one-off items in Q1, which we do not for the purpose of this call or general shareholder communication split everything out. There was a number of expenses like double cost of leasing of certain offices and.
Site closure in the U.K.
some closures, all sorts of things which occurred in the first quarter, particularly in Europe, which are not repeating in the second quarter. You can see sequentially the European cost base improving accordingly. We have no plans and nothing on the horizon that suggests that that cost base is going to be adversely affected for the rest of the year. What was the other question? What was it?
Just on the growth drivers in Europe and the areas in particular that are going better.
Well, I think what it is, in Europe it's clear to us that we actually have an organization that's flying in formation, to be honest. It's taken quite a while to do it, but Brenntag in Europe and one Brenntag Europe is a theme we've had for quite some time. We do now have a very coordinated approach across Europe. I see far more levels of convergence in terms of operating practice, operating standards, quality of operations from the cost base and the performance in terms of pricing. We are particularly pleased with the improvement in the southern parts of Europe. Italy looks stronger, Spain is stable. We've seen a great performance from even Germany, for example, which is performing ahead of where it was in previous years. I think it's actually an all-round improvement in the European performance.
When you look at that kind of one Europe, one Brenntag Europe working well, is that all about been catching up with the U.S. structure or do you think the U.S. structure needs to be improved as well, given that you're maybe underperforming a bit? I know mix aside, but there still seems to be a sense that you need to push a bit harder on the U.S. business at the moment.
Well, I'm pretty sure that I've probably got one of your colleagues listening to this phone call, so I have to be very careful about what I say here. I would say that on balance, that the Europeans are slightly ahead of North America in terms of overall coordination. In our North American business, we still have some, by terms of geography, have some very large regions. I think there's some best practice which is going to be shared or is being shared between North America and Europe. I'm sure that both sides of the Atlantic will benefit as a result.
Okay, great. Just one quick one if I can on LATAM. Obviously ex Venezuela it looks like organic growth slowed in Q2 versus Q1. What's the outlook for that region? I know it's very volatile, but what's your current thinking?
Well, I think we've just got to be a little bit careful as far as Latin America is concerned because, frankly, I only have a very clear sight on what's going to happen to Brazil. Everyone knows the problems in Brazil are clear, the issues that surround the country and the current recession in the country. I frankly have no idea what the effects will have on the Olympics over the next two, three months. It may be positive, it may not be positive. I think there is a little question mark in my own mind as to what the overall effect in Latin America that Brazil will present at the end of the third quarter. I think it's a little bit difficult to call that one.
Sure. Okay. Thank you very much.
The next question is from Milu Birnk of Goldman Sachs. Please go ahead.
Hi. Good afternoon, gentlemen. A question from us as a follow-up from an earlier asked question. On North America, you said that you'd taken steps to address the weakness. What particularly have you done? Is it on the cost side? Is it on the sales side? Then also, it wasn't entirely clear to me, do you think that most of the underperformance versus the broader macro is due to the mix effects? I'm speaking about obviously North America, ex oil and gas. Is there anything else?
Yeah, thanks. In terms of operating costs in North America, outside of oil and gas, we have taken steps to reduce our operating costs in North America. We see effectively the cost per warehouse ton delivered coming down nicely over the last two or three months. Also sequentially, we see gross profit per working day in North America improving sequentially. The cost base is coming down and the GP is starting to head in the right direction sequentially. We are in a much better position. I think in terms of the underperformance relative to the industrial production index, I think it is a mix issue. I don't believe that we have any one part of our business that is losing market share significantly to competition in any marked way.
I think one of the other issues which I think perhaps maybe we underestimated and maybe even other companies have underestimated, is the ripple effect from oil and gas into other industries. Clearly oil and gas has been on the front edge of the curve for quite some time now. We think we see the end of that, and therefore the more positive outlook for North America is probably around the corner.
Okay, understood. Small follow-up on the July exit rate. You said that you've seen sequential improvement in North America, so that July exit rate, is that predominantly caused by North America or other regions picking up as well?
I think it's too difficult to call it in a month, to be honest.
Okay.
I think July versus the two extra day month compared to previous year, it's just too difficult to do those sums at this stage.
Understood. Thank you.
The next question is from Mutlu Gundogan of ABN AMRO. Please go ahead.
Yes, thank you for taking the questions. I have four. The first on competition. Your biggest competitor has been restructuring their European activities, and they indicate that they also might be restructuring their U.S. activities as well. My question is, in what way has that already impacted your European business? I see that your volume numbers are very strong. How does that influence your strategic thinking or your actions that you will be taking in the U.S.? Would be helpful if you would share your thoughts on that. Secondly, on oil and gas, North America. I remember that you gave this split of midstream being 60% of the business, and then upstream, downstream around 20% each. Could you update us where we stand today, especially given the declines in midstream that you talk about?
The third question is on the recent acquisition that you did in the U.S. In the press release, you talk about competitive pressure in the marine fuel business. I was wondering if you could provide some color related to that. Finally, on the dividends. I note that the net income is down year-on-year in the first half. Your guidance seems to indicate a flat earnings in the second half. Just wondering what you're thinking about the dividend, since most likely net income will be down for the year. Thank you.
Right. Okay, we'll try and pick up all of those. In terms of, I'm pretty sure I know who you're talking about in terms of Europe. I tend not to comment on other companies in terms of their strategy and development of their strategy. I think what is clear to us is that in Europe we have a very well-developed network, which we continue to optimize in terms of overall efficiency and what have you. At this stage, we don't envisage any site closures, which perhaps is something we've seen from other competitors. Therefore, we still regard this as very much a local business and therefore site closures are certainly not on our agenda as far as our European business is concerned at this stage.
As far as the marine fuel business is concerned, yes, we have one acquisition which we made last year, which does have an element of marine fuel in it. Marine fuel really is down as a result of straightforward competitive pressure within the oil and gas sector, where a number of assets have been redeployed into the marine fuel market from which were ex oil and gas. I think it's just increased the level of competition. I think this is a transitory stage, we certainly see that as being something that will recover in the medium term. As far as upstream, downstream-
The current split on upstream, midstream, downstream is around 10/75/15. 10 upstream, 75 midstream, 15 downstream. You see that the upstream part is reduced as expected on these oil prices significantly in course of the last one and a half years. With respect to dividend, very early, too early to comment on a firm dividend expectation for this year. Let's wait how the year goes and what the earnings per share at the end of the year ultimately are. I would make the very general comment that dividend reductions, dividend cuts are relatively rare in the German publicly listed equity market. It's difficult to foresee that we would go down that route.
Follow up with two questions. First, on the competition, has your market share increased in Europe? Is that something that you can confirm? The second question on the dividends. The range is clearly 30%-45% of net income. As you indicate, it's rather rare that this will happen at a dividend cut. Would you be willing to go above the 45% payout?
I'll just come on to market share. We are striving continuously to develop new products and services throughout our company. It is a continuous endeavor. I would say that an improving performance in Europe, ahead of the economic performance in the region generally, would suggest that we are being successful in increasing our market share, perhaps in products and services, which are in addition to our existing portfolio. That is very much part of our strategy and indeed the strategy of our customers and our suppliers.
Georg again. On the dividend, if I remember correctly, I would have to go back to my files, if I remember correctly, this year we dividended out 42% of net income. The stated range of 30%-45% still would leave some room to increase the payout ratio without opening up the question of an extended or broadened payout range. Again, I'm sorry that I can't be more precise at this stage. Let's wait how the year goes. Seems hard to me to envision a dividend cut.
Thank you very much for your answers.
The next question is from Joe Bunchan of Merrill Lynch. Please go ahead.
Good afternoon, gents. I've just got two. The first question, Georg, I think on the first quarter call, you mentioned that there was some work, I think, in North America, that had maybe been deferred out of Q1 that fell into Q2. I was just wondering whether or not you felt that had any meaningful impact on the performance of the business. Obviously, I know it's at a very low level, but was there any sort of one-off element of the performance in North America that we should be aware of as a result of that? My second question is a more general question about the North America conversion margin. If you go back, obviously a few years ago, it was comfortably above 40%.
I know there was a lot of speculation at the time of the IPO about whether or not that margin was sustainable, and obviously it's come down quite a bit from then. I guess as you look at it now, was there a reason that you were over-earning in the North American business back in 2010 through 2012, 2013? Is it still plausible that the North American margin over the medium term could get back to that sort of 40% level?
I'll take the margin question, if I may. I think you've got to bear in mind that we are acquiring businesses in North America. Every business that we buy is converting at the same levels as our core business in North America. If I were to look at our North American business today, I would see our core business outside of acquisitions has been delivering numbers of around about the 40% conversion ratio today. These are somewhat diluted by lower conversion ratios on some of the businesses that we've acquired. That doesn't mean that the businesses we acquired are performing more poorly. It's just a case of the business model in that particular business is different to the historical performance of our North American business overall. I would watch this space on this one.
It's certainly not our intention to see that the North American conversion ratio decrease on a long-term basis. Indeed, the overall distribution business is starting to push those numbers up to the 40% mark already.
Joe, Georg. On the cost base North America, not sure, we may have a misunderstanding. We try to stay away from the exercise to classify each and every type of expense as restructuring or non-recurring. You rarely hear us talking about one-offs, and if so, only for very significant items.
I didn't mean with regards to one-off costs. I just seem to remember that you made a reference to maybe some customer orders or work that maybe you'd expected to fall into Q1 that had been deferred. I may be misremembering.
Actually, I know what this is. I think this may have been the Was this oil and gas with the pipeline cleaning?
Yeah, I know.
Yeah, that's right. Yeah, I think I'm not sure whether it's Georg or myself, but we did, in terms of the oil and gas performance, there was a number of contracts which include pipeline cleaning within our oil and gas business that were fully expected to be delivered in Q1, which were delayed by virtue of the plants concerned just didn't close down. That rolled into Q2. In fact, to be fair, I would say that's been a feature of this year for our pipeline cleaning business, is that many of the customers are rolling their requirements as far forward as they possibly can, and indeed, probably reducing the amount of cleaning where they possibly can do to keep costs as low as possible. That's where I think probably the comment came. We are picking those orders up nevertheless.
Okay, it's not had a material sort of benefit?
No.
Okay. Okay. Thank you.
Thanks.
The next question is a follow-up of Andy Tu from Deutsche Bank. Please go ahead.
Sorry, just a couple more from me. Just in terms of the M&A pipeline, obviously you've exercised your option over Zhong Yung, which I guess is a big chunk of the M&A spend so far this year. You haven't really done that much in absolute terms, I think well under EUR 100 million. If you could just lay out what the pipeline looks like for M&A. Secondly, without trying to be too micro, in terms of the July number and your comment on oil and gas impact, does that basically imply the number you gave us for oil and gas? That actually just confirms that the run rate of $50 odd million of $50 million of gross profit has sort of continued into July. If you could confirm.
It's a little bit micro, Andy.
I see.
Yes. July is on the track to the $54 million, $55 million quarterly oil and gas GP.
Which part of micromanagement did I misunderstand?
In terms of acquisitions, we fully expect to deliver EUR 200 million-EUR 250 million of acquisitions, which is in addition to the Zhong Yung acquisition of the 50% of the shareholding. We have enterprises and negotiations in a way which would fulfill our normal quota plus the Zhong Yung shares.
Steve, do you think that's going to be sort of a fairly large one on the back of J.A.M. and Berlin-Windward, or do you think it's going to be comprised of smaller and medium-sized acquisitions? What does the pipe look like?
Yeah. It's not likely to be as large acquisitions as we made last year in terms of one or two. There are three or four acquisitions which could come to the table in terms of completion before the end of the year.
Great. Thanks so much.
Okay.
As a reminder, if you would like to ask a question, please press zero one.
I think that's no more further questions. Ladies and gentlemen, thank you very much, Steve, for joining our call, and we'll finish the call there. Thank you very much. Bye-bye now.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.