Dear ladies and gentlemen, welcome to the Brenntag AG results call for the first quarter 2016. 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 * 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.
Right. Thank you. Well, welcome, ladies and gentlemen, and thank you very much for dialing in for our review of Q1 2016. I am on the phone together with Georg Müller, our CFO, and we are pleased to answer your questions after the presentation. Let me begin with some words on the macroeconomic environment. Overall, the global economy has been characterized by somewhat slowing momentum. We saw this weakest quarter in terms of global PMI since 2012. North America was sequentially weak with negative industrial production growth. In this challenging environment, we saw an overall good performance of the group with some specific challenges that impacted the quarterly results. We faced the expected headwind in North America. As you know, the first quarter in 2016 is set against difficult comparables in 2015. However, it is fair to say that North America was weaker than we anticipated in this quarter.
Our business in Latin America is impacted by the fact that we lost the earnings contribution from our operations in Venezuela from the devaluation of the local currency. On the positive side, we saw encouraging gross profit trends in Europe, Asia Pacific, and Latin America, excluding Venezuela. Also, the acquisitions contributed to growth. Total gross profit in Q1 amounted to EUR 586 million and grew by 6.2% on a constant FX basis. The operating EBITDA of EUR 192.1 million represents a slight decline of 0.7% on a constant FX basis. In February, the official exchange rate mechanism in Venezuela was disrupted, which resulted in the devaluation of the local currency by more than 90%. As indicated before, we had to carry out an asset write-off in Q1, resulting in a EUR 27 million charge, which is reflected in our financial results.
In addition, we saw EBITDA of around zero from Venezuela. The earnings per share in the first quarter amounted to EUR 0.43. The reduction compared to last year's Q1 is mainly attributable to the aforementioned effect from Venezuela. If I can just come to some acquisitions. We made three further acquisitions recently. Having invested more than EUR 550 million in acquisitions in 2015, we continue to invest this year. In Q1 2016, we closed three transactions, namely Leis and ACU in Germany and Plastichem in South Africa. In addition, we signed an agreement in April to acquire the South Korean distributor, Whanee Corporation. The total investment amount for the four targets is around EUR 45 million on an average multiple slightly below six times enterprise value. Now I would like to hand over to Georg.
Good afternoon, everybody. I'll move to page six, which is the upper part of our income statement. In a weak macroeconomic environment, we were able to report good gross profit growth of 6.2% on an FX-adjusted basis. Operating EBITDA was roughly on par with previous year's level. I provide details on the EBITDA development on the next slide. We already mentioned that we had to face a number of specific challenges and to allow for a more meaningful analysis on the bridge on page seven, we split out the different effects. The bridge on the page shows the development of operating EBITDA of the group from Q1 2015 to Q1 2016. At the starting point, Q1 2015, we recorded an operating EBITDA of EUR 195 million. Mainly due to the weakening of the British pound, we had a negative FX translation amounting to around EUR 2 million.
That's not really related to the U.S. dollar. The U.S. dollar was basically unchanged against the previous year. It's due to the British pound and some other smaller currencies. As expected, our operations in Venezuela are no longer contributing a meaningful EBITDA due to the devaluation of the local currency. In Q1 2015, operating EBITDA from Venezuela amounted to almost EUR 3 million, and that's gone in Q1 2016, where the EBITDA was around zero. Acquisitions made last year contributed operating EBITDA amounting to about EUR 13 million. The demand in the oil & gas sector was clearly lower than in Q1 2015. Previous year's Q1 was the strongest quarter of the year. Based on a gross profit that was lower by EUR 15 million, we estimate that this resulted in an EBITDA decline for oil & gas of about EUR 9 million or 34% of the oil & gas EBITDA.
Overall, our business in North America outside the oil & gas sector suffered from the economic slowdown with a decline in industrial production. The diversification helped to mitigate the headwind, but we do record an EBITDA decline of about EUR 3 million or about 5%. Our businesses in Europe, Asia Pacific, and Latin America, excluding Venezuela, have seen good gross profit trends in Q1, which resulted in an EBITDA that is higher by about EUR 2 million on an organic basis or about 2%. In combination, all these factors resulted in an EBITDA of EUR 192 million for the first quarter 2016. Page, you see the lower half of the income statement. Depreciation for the first quarter amounted to EUR 28 million and amortization to EUR 12 million.
Financial result amounted to a net expense of EUR 49 million, which compares to an expense of EUR 23 million in the first quarter 2015. The increase in expenses is mainly driven by the EUR 27 million asset write-off in Venezuela. We recorded a tax rate of 35% in the first quarter, which is in the range of 34%-35% we typically indicate. Earnings per share is at EUR 0.43 or EUR 0.66, excluding amortization, the change of the Zhong Yung liability, and also excluding the write-off in Venezuela. For the sake of completeness, on page nine, we provided some more information on the situation in Venezuela. Venezuela is a country. The economy in Venezuela continues to be characterized by political and economic turmoil. The government of Venezuela changed the exchange rate mechanism in February 2016, and this resulted in the devaluation of the bolivar by more than 99.0%.
That's not news. You have seen that in the newspapers, and you have seen that in our annual report already. Historically, our business in Venezuela was quite attractive. We earned high margins and had sufficient access to hard currency to pay suppliers and to partly transfer profits out of the country. We had strong risk control in place, and over the past years, downsized our business from more than 100 people to about 30 people now. Nevertheless, as a consequence of this significant devaluation of more than 90%, we have to write off local assets through our financial results with an expense of EUR 27 million. The current EBITDA contribution will be around zero for the foreseeable future, which compares to an EBITDA contribution of around EUR 12 million in 2015.
On the cash flow on page 10, in Q1, we achieved a strong operating cash flow of EUR 99 million after EUR 60 million in previous year's quarter. Keep in mind that the EUR 20 million asset write-off is not a cash out. Let's briefly talk about investment and financing cash flow. CapEx is slightly above last year's level. Purchase of consolidated subsidiaries reflect the payments for the acquisitions of Leis, ACU, and Plastichem, which we closed in the first quarter 2016. I'll skip the balance sheet and briefly address debt and leverage. Net debt decreased during the quarter and amounts to EUR 1,630 million. The group's leverage in terms of net debt to EBITDA stands at two times, slightly below the level we achieved at the year-end 2015.
Moving to working capital on page 15, trade working capital amounted to EUR 1,283 million at the end of the quarter. In the first quarter, we turned the working capital 8.1 times, a slightly bit better than the 8.0 times we achieved in the first quarter 2015. The quarter delivered a free cash flow of EUR 131 million. This is below the cash flow we achieved in the first quarter 2015. We have indicated before that the 2015 cash flow benefited from a favorable working capital development due to price declines for chemicals during 2015. We currently do not expect to see that effect again this year, we would like to point out that the working capital cash flow is positively influenced by the slightly improved working capital turnover. Would pass the presentation back to Steven for a segment discussion.
Let me take you through the developments of segments for the first quarter. In Europe, in the first quarter, our European region grew the operating gross profit strongly by 5.9%, an increase which was largely driven by the organic business development. Operating EBITDA increased by 1.8%. The difference between gross profit and EBITDA growth is mainly driven by uneven phasing of expenses, which is expected to wash out in the course of the year. We fully expect to see a higher conversion ratio in subsequent quarters. Trends across our European markets are encouraging. Coming to North America, gross profit in North America increased by 5.9%. This was clearly driven by contributions of the acquisitions from 2015, set against a weaker-than-expected performance in oil and gas and some challenges in the industrial production.
The operating EBITDA in North America decreased by 5.3%. This is almost attributable to the fact that the reduction of the oil and gas gross profit could not be fully compensated by cost reductions. We have taken measures to replace capital to reduce capacity in the oil and gas business to reflect the lower level of demand. We reduced headcount by more than 13%, or more than 150 FTEs in this business since the beginning of 2015. In Latin America, the reported Q1 earnings in Latin America were clearly affected by the situation in Venezuela, now delivering zero EBITDA. The business developments in other countries was very positive despite a challenging macroeconomic environment. The gross profit in the region declined by 6%, but outside of Venezuela, grew by almost 4%. An even better trend can be seen from the operating EBITDA for Latin America as a whole.
We reported a 13.3% in EBITDA decline. Excluding the business in Venezuela, we saw a strong growth of almost 9%. In terms of Asia-Pacific, we showed a strong increase in earnings in the first quarter. The region grew its gross profit by 30.5%. On the operating EBITDA level, the region benefited from the operating leverage, which results in a strong growth of 39.3%. This is a pleasing performance. It's attributable to both the inclusion of the TAT Group, as well as strong double-digit growth in the existing business of the region. China particularly delivered another positive contribution. Just one second.
Thank you.
Sorry, we've just compressed this slide on industrial production and oil and gas. Perhaps I think I'll probably just skip this slide, but it's probably just worth noting the industrial production in the U.S. growth slipped to 1.7%.
Negative.
Negative. Okay. Now I'd like to come to the outlook. I'd like to start with the current trading and then provide you with an outlook for the full year 2016. Let me walk you through the gross profit per working day on a monthly basis. In January, the gross profit per day increased by 8.3%, 2.3% on an organic basis. February, the growth was 4.8% as reported and flattish organically. March, the growth was 5.1% and flattish organically. In April, the growth was 3.8% and -2.2% organically. Please bear in mind that the weakness in the oil and gas business has a negative impact of around 3% of the gross profit generated by the group. Now, looking to the macroeconomic picture. The start of the year was clearly challenging, but not significantly outside our expectations. There was a sustained weakness in the overall economic demand in North America.
Demand for the oil and gas sector showed further sequential declines. The weaker performance from Q1 in this sector is expected to be compensated in subsequent quarters by recently won business from planned and unplanned maintenance in the midstream sector. We might expect GP to be in the region of EUR 55 million-EUR 60 million for subsequent quarters. You can clearly see that the first quarter 2016, a number of specific challenges. However, we've been encouraged by the positive organic growth in Europe, Asia Pacific and Latin America, excluding Venezuela. With this in mind, we confirm to expect our all relevant earnings parameters for the full year in 2016. We will see solid organic growth and the EBITDA growth from our business in Europe, Asia Pacific and Latin America, excluding Venezuela.
In North America, the industrial production inside and outside of oil and gas is sequentially weaker and expected to remain a challenge for the rest of the year. We estimate that our EBITDA in oil and gas will be around EUR 15 million lower for the full year basis. For North America, we might expect to see a positive contribution from acquisitions. In Latin America, the 2015 EBITDA generation in Venezuela of around EUR 12 million will not repeat this year. As in the previous years, we intend to give quarterly guidance after the second quarter, and we're now 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 zero one 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 zero two 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 Uth Loganugan, ABN AMRO.
Yes. Good afternoon, everyone. I have three questions. The first one is on EMEA. If I look at the organic growth in operating gross profit, I get to 4% year-over-year, and that will be an acceleration compared to the previous quarter. Can you tell us how much of that was driven by restocking and how much of that is driven by underlying demand? The second question is on North America. You already spoke about this, the gross profit was down sequentially, if you leave out the acquisitions, mainly due to the weak oil and gas market, you said there. Looking at the U.S. rig count, that continues to drop also in the second quarter. Should we expect another sequential decline on the back of that? Thirdly is on acquisitions.
I see in the waterfall chart of the EBITDA bridge, that these added EUR 30 million to EBITDA, which is a little bit below my number that I calculated based on the guidance you gave when you announced the acquisitions of J.A.M. and TAT Group predominantly. Can you tell us what the reason is for this shortfall? Because I don't think that the lubricant business will be very seasonal unless I'm wrong.
Well, I'll take the European growth rates. No, I wouldn't say this is down to restocking. You may well know from our business model that we are a relatively short delivery company, therefore our customers are generally not holding significant stocks and order to delivery is normally a couple of days. There isn't a restocking element. The growth in Europe is predominantly new business that we've won, new products that have been sold in Europe, and an improvement in the performance of our European business.
Should I take Yeah. Your question on the rig count and the impact on the oil and gas business. You might know that we sub-segment our oil and gas business into upstream, midstream, downstream. The rig count would be an indicator for our upstream business. The upstream business has shrunken significantly over the last year. The upstream business by now is around only 10% of our oil and gas business. In that sense, I wouldn't put too much emphasis on the rig count. We don't think it's that relevant anymore.
What is relevant, particularly for our sizable midstream business, is the oil and gas production. The oil and gas production is holding up reasonably well so far. That will be an area to spot going forward, how the oil and gas production develops. We do have a number of new business wins in oil and gas from maintenance projects, from pipeline cleaning projects. We are cautiously optimistic that the subsequent quarters will deliver a gross profit above the EUR 54 million that we delivered in Q1. It remains to be seen what the underlying oil and gas production will do. On the acquisitions, yes, the waterfall bridge shows an acquisition contribution of around EUR 13 million. That's a little bit less than if you take a full year number and divide by four, a little bit less than the pro rata number.
That's not a surprise from our perspective. The major acquisitions only closed towards the end of 2015. Integration is ongoing. There are still a number of integration expenses, integration projects. We would expect a somewhat moderately higher acquisition contribution in the coming quarters.
That's very clear. Thank you.
Thank you. The next question is from Rob Plant, JPMorgan.
Hey, Steven and Georg. You've mentioned that outside of Venezuela, Latin America is holding up well. Do you see that continuing given the flux in countries like Brazil? Thank you.
Well, yeah, clearly Brazil is a very volatile situation. When we look at our business currently, Brazil is holding up in terms of the income of both GP and EBITDA. We do have a lot more bench strength, if you like, in Latin America than perhaps in previous years in terms of strong performances in Mexico, in Colombia. We see Argentina coming back in terms of improvements in the Argentinian business. Overall, Latin America is always a challenging environment. It's generally speaking, a volatile business, and has been for as long as I can remember. At this stage, we don't see anything which is making us worry about the immediate term position as far as Latin America is concerned, obviously outside of Venezuela.
Thanks, Steven. Brazil is your biggest country, I think. How much of LatAm does Brazil account for?
About 25%.
Thanks, Georg.
Thank you. The next question is from Sylvia Autter, Deutsche Bank.
Hi, good afternoon. Three questions, please. In North America, could you please tell us how much you had in the quarter in terms of restructuring costs relating to the acquisitions, especially in the U.S.? How much benefit from cost savings you saw in the North American business? If you can tell us what the run rates of that are expected to be over the course of the year. Just related to that, are you planning to take extra cost in the North American business?
Sylvia, it's Georg. The integration cost in the acquired business are fully planned for. They are not super material. They are order of magnitude, couple of EUR million, maybe. Cost savings, we have taken 150 heads out of the North American business, particularly the oil and gas business. That would be a one-rate saving of around $12 million. We started taking head out in course of last year already. The 2016 over 2015 savings are probably $7 million-$8 million.
Steve here. Just subsequent to that, I think when we look at our North American business, clearly, oil and gas is a known quantity. I think the area which is more of a concern for us is the weakness in the general economy in North America. At this stage, we don't foresee any significant change to our operating cost base in North America from that side of the business. I think it's also fair to point out that sequentially, we have a bit of a front-end loaded cost base in North America with some of the more institutional costs that are associated with the business. This will be our more challenging quarter from a conversion ratio point of view.
We will keep a close eye on North America because ultimately, it seems almost like the elephant in the room in terms of people aren't really talking about North America being in recession. It looks like industrial production numbers are weaker than they were before.
Okay, great. Thank you. Let me try to follow through. Sorry, I was on mute. Thank you very much. If I can follow up just with two more. The April run rate down 2.2% organically. Can I just confirm that still includes a 3% drag from oil and gas? When does that drag actually, obviously, we can see your run rates. They will be annualizing in this quarter to some extent. Then secondly, on volumes and gross profit per unit, could you give us some idea of where that was in the quarter? Also by region, if you could. Thank you.
First of all, yes, it's confirmed. April still has on a gross profit level a drag for oil and gas of about 3%. With respect to volumes and gross profit in the quarter. Volumes are up quarter over previous year's quarter, including acquisitions by around close to 3% against the gross profit growth of about 6%. You can see that the gross profit per unit is trending positively. I would beg your understanding that I don't have the regional figures at hand.
Could you give us any idea of that organically, if possible?
That would be an organic volume
Is a slight decline, 1% or 2% organic volume decline. That's foremost oil and gas and a part of Latin America, particularly Venezuela. Also for that business, the gross profit development is better than the volume development.
Right. Okay. Thank you very much.
Thank you. The next question is from Gerhard Orgonas , Exane BNP Paribas.
Yeah, good afternoon. Just a question on Venezuela, the EUR 27 million write-down. Will that be cash effective? I think there's some issue getting cash out of the country, is this cash that you've lost essentially?
It doesn't go through the cash flow statement because it's not cash that we paid out. Yes, you are right. The cash was sitting on the balance sheet and by way of write-off, the cash on the balance sheet is diminishing. It's out by the end of Q1 already.
Okay. It's cash you had in bolivar, not in US dollars.
That's right.
Okay.
Thank you. The next question is from Will McKinsey, UBS.
Hey, good afternoon. Two from me, please. Firstly, on Europe, you talked about the growth being mainly driven by new business wins. Is that outsourcing gains or are you winning suppliers from competitors, so are you taking a share in Europe, do you think? The same question again on margins in North America. You obviously highlight the weak environment continuing. How should we think about the negative operational leverage in your business outside of oil and gas if this run rate stays weak in the coming quarters? I know in Q1 you booked some provisions and that kind of thing. What do you think is the right level of margin pressure to think about there?
Just to come to Europe first. This is organic growth, which has been driven by high levels of market penetration within Europe, and parts of the Middle East and Africa. We've been working extremely hard to broaden the product portfolio in Europe for a number of years. Indeed, it's fair to say that we are seeing some real traction here in terms of competitiveness and moving products into markets which previously Brenntag has not had a major position. This is a case of market share growth within Brenntag, and really using the leverage that we have as a larger company to source internationally and place products in the European sector.
The worry is, Georg, on the conversion ratio North America, let me provide a little bit more color. The drop in conversion ratio in North America is foremost coming out of the oil and gas situation. It's coming out of the situation that we are losing gross profit in oil and gas. While we do have some cost decreases, cost savings from headcount reductions, these cost savings cannot, and are not really expected to compensate the gross profit loss dollar for dollar. If you think about our business outside oil and gas, yes, Q1 had a little bit of conversion ratio reduction. We had outside oil and gas, about 2% gross profit increase, but 5% EBITDA decrease. The underlying cost base is actually not growing much.
Going forward, we would expect the conversion ratio in North America outside oil and gas to be stable, if not to improve, if you consider that Q1 has a little bit of uneven phasing of expenses, for example, for public levies and so on. Long answer, it's a technically complicated topic. Conversion ratio drop, foremost oil and gas. Outside oil and gas, some improvement going forward.
Okay, great. That's helpful. Just one more if I can. Can you just talk about Thailand within Asia, how that's trading now?
Thailand. Was that Thailand?
Yeah.
As far as Thailand is concerned, I would say I would characterize it as being stable, actually. Our business in Thailand has been at current levels now for quite some time. Clearly, there's still some economic challenges in Thailand, but as you may know, Thailand was our largest region for some time, but now it's been eclipsed by Vietnam as being the largest country in the region. Thailand is stable.
Okay, great. Thank you.
Thank you. The next question is from Carl Raynsford, Credit Suisse.
Thank you very much. I've just got a few questions. Firstly, just in terms of the comments about the European conversion ratio, I think you did mention there as well that there was an issue too with just the timing of costs. Could you just elaborate on that and indicate when those cost phasings will unwind? The second one is very simple. Could you just repeat the organic and constant currency GP per working day stats? I didn't quite jot all of them down. A couple of very small ones. Just on the minority charge, which fell quite significantly year-on-year in the first quarter. What's going on there? Because I thought Zhong Yung was still on balance sheet until middle of this year, what drove the drop there?
The very last question, which is very straightforward, is just the tax deductibility of the cash write-off in Venezuela. Is that something you'll be able to claim tax relief on? Thank you.
Just on the European cost effects into Q1. These are washed out in Q1. We would expect to see conversion ratios improve in Europe in Q2 and subsequently. That's basically done now. Closed in Upemba, we're two site closures and changes. Things that were not necessarily, something you spread over a year, and it appeared in the first quarter. As you would expect, the conversion ratios improved accordingly.
Okay. Thank you.
Georg?
Oh, see, is the gross profit per working day statistic.
Do that again.
If you could just type the page Carl, give us a second.
Yeah, I'll do it if you like. It was 8.3% in January, 2.3% organic. 4.8% in February, it was flattish organically. 5.1% in March, flattish organically, and April was 3.8%, -2.2% organically.
Carl, you had the question why the non-controlling interest to minority interest benefit drops from Q1 2015 to Q1 2016. The non-controlling interest to minority interest dropped from a positive EUR 600,000 to a positive EUR 100,000. These are tiny numbers, I would point out. You are right. Zhong Yung minority interests are on the balance sheet until middle of the year. The drop is not related to the Zhong Yung minorities. It is mainly related to the Trychem minorities. You might remember towards the end of last year, we went into a joint cooperation with a partner in Dubai, where we own 51%, that also carries minority interest. Due to customer base amortization and due to integration expenses, it had a negative contribution, an expected negative contribution, in Q1.
The last question, will we get the tax benefit from the cash write-off in Venezuela? As much as I would like to have the state of Venezuela pay for some of our write-off, the sad reality of the thing is we will not get a tax benefit.
Great. That is really helpful. Thank you very much.
Thank you. The next question is from Milou Bent of Goldman Sachs.
Hi, good afternoon. Another follow-up question on the oil and gas. I think your comments at the full year results was for stable gross profit in this section. Actually, it dropped quite a bit sequentially again. What happened there? Was it all concentrated at the end of March? That implies quite a steep decline in those couple of weeks. Was this largely in upstream or was it also in the midstream segment? I think you mentioned that you are a little bit more comfortable with your around EUR 55 gross profit going forward. That was due to midstream coming back from maintenance lag. Could you please elaborate on that one? On the April growth rate, is that drop due to weaker North American outside oil and gas? Is there any impact of Easter? Thank you very much.
Okay. On oil and gas, we were a little disappointed with the oil and gas number in the first quarter, but not alarmed insofar as there's a number of pipeline cleaning contracts which we expected to be executed during the first quarter, which didn't actually happen. Part of that is due to certain operating units you would expect to close down just kept going. There wasn't the opportunity to carry out the cleans that we would expect to do. The management within that particular area of our oil and gas business fully expect to deliver their budget for the year, which would suggest that they're expecting a catch-up in pipeline cleaning during the subsequent course of the year.
It's also fair to say that we have actually won some new business in oil and gas, which we expect to be start converting in terms of GP growth, during the course of the second quarter, and certainly subsequent quarters. The EUR 55 million-EUR 60 million, perhaps I'm a little bit more cautious now, is we believe, sustainable.
Yeah. You had a detailed question, Milou, it's Georg, on the weaker gross profit per working day growth rate in April, where we had a -2.2% organically. Everything is a little bit softer. It's mainly North America outside oil and gas that was softer than in the earlier months. Easter plays a little bit of a role because it was in April this year and in March last year, and all the trading days around Easter are a little bit softer. Particularly in North America, that's not an effect I would really point to.
Okay. Thank you. Maybe one follow-up question on the two U.S. lubricant acquisitions. We understood that the EBITDA contribution should be more weighted towards the latter quarters of the year. Is that from 2Q onwards or is that from 3Q onwards? I.e., have you done all your integration costs there? Maybe, sorry, one additional one. Are they sort of developing as planned? What is the impact from the softer industrial production environment for these businesses?
Yeah, I think it would be fair to say that we're looking towards the second half of the year for the lubricants businesses to start delivering on synergies and cross-customer selling opportunities that we have. That's very much in the plan going forward. What was the second question? It was on cost, was it? Sorry, what was your second question?
Sorry, on how are they developing? Are they developing as planned, what's the impact of the softer U.S. industrial production environment for these two businesses?
Yeah. I think, I mean, we get into quite a lot of detail here, but in terms of the two principal acquisitions, one we have absolutely on plan, one which is slightly behind. That's more to do with some fuel sales into the marine business, which is weaker than expected. At this stage, we're not by any means alarmed by this, and we expect the businesses to contribute fully for the full year.
Thank you so much.
Thank you. The next question is from Tom Sykes, Deutsche Bank.
Yeah. Afternoon, everybody. Firstly, just a point of clarification. Would you be able to clarify the organic gross profit growth for the quarter in EMEA and in U.S., or just without exactly the, whichever way, the M&A contribution? Then just on your U.S. conversion, notwithstanding the decline you've seen in the oil and gas business, you obviously are at your lowest sort of four-quarter conversion since basically since 2009. Are you seeing any weakness in pricing outside of oil and gas or any mix shifts that are affecting your conversion, possibly any new capacity coming in? Do you think that your conversion rate outside of oil and gas can continue to hold where it is in the medium term, please?
Well, as far as the conversion ratio in North America is concerned, we certainly don't expect it to be where it is in this quarter. We expect it to be higher in subsequent quarters. We clearly have a weakness in industrial demand in North America, which is sequential. I think I said earlier maybe on the call, is that the big question is the North American economy in decline? Are we now starting to look at a recessionary situation in North America as opposed to an expansion in North America? We haven't taken any hard decisions in terms of operating costs within North America, within the traditional chemical distribution business.
Perhaps to give you a little bit of a guide, when we had this situation in 2008, 2009, we did take costs out of North America quite aggressively to reflect the situation which arose at that point. In terms of straightforward conversion ratios, if we have a situation where this persisted, we would take action to change that position.
You're seeing it as just volume related rather than that there is any weakness in pricing-
Yeah
Outside of oil and gas.
It's not a price issue, it's a more weakness in demand in the market generally. As I said, we're keeping a very close eye on this, and if we have to take action, we will do.
Okay. Thank you.
The organic gross profit growth rates in the quarter by segment, it's taking disclosure to a level beyond what we typically give. If you take a look at the EBITDA bridge, I can probably help you there. If you look into North America, where we have some EUR 9 million decline in oil and gas EBITDA and EUR 3 million EBITDA decline outside oil and gas, it would correspond to a gross profit development of -23% for oil and gas and +2% for the other businesses outside oil and gas. The gross profit development in the other organic business, EMEA, Asia-Pacific, Latin America, ex-Venezuela, is +4%, and that's very similar to the European numbers.
Okay. Perfect. Thanks very much .
Thank you. The next question is from Julian Torresi, Descartes Trading.
Oh, sorry. This is Descart Trading, not Descart Training. I'm not training anyone here. The first question is, could you please explain how your business is reacting to the economic environment? Should you think of this as a leading indicator versus the rest of the U.S. industrial production or lagging, and how volume versus price reacts? That's the first question. Second question that I have is, could you please explain a bit more in detail the non-oil and gas sectors that you operate in North America and how they react differently to this slowdown in industrial production with a bit more granularity? Third, on Latin America, you say that organic growth remains strong. I was just wondering if by that you mean organic growth above inflation or below inflation, because a number of countries, especially your largest markets, I believe that inflation is running almost 10%.
Thank you.
I'll try to answer your questions, and you just jump in if I misunderstood a question. I would say with respect to timing, we are very much in sync with industrial production. I would not see us as a leading indicator, nor would I see us as a trailing indicator. A lot of our customers, most of our customers are industrial producers of any form or shape, whenever they increase or decrease their output, it will have some impact on their purchasing with their chemical distributor of choice. We are time-wise very much in sync, I would say. Volume and price question. Chemical distribution is a business-to-business service. It's a value-added service. The sales prices we have, the purchasing prices we have, they do swing with general chemical price levels.
Our take in between, the gross profit per ton, the gross profit per delivery, is not really impacted by the chemical price. The gross profit per unit is a very stable thing, irrespective of chemical pricing swings. Roughly a quarter of our business in North America and only in North America is with oil and gas customers. The other 75% are a broad mix, a very broad and diverse mix of customer industries, industrial producers in the ACES area, also food, feed, personal care, pharma customers, water treatment, a very broad range. Other than oil and gas, we don't see any development in any customer industry outstanding currently.
Okay. That's very helpful. Thank you very much. Finally, on North America, considering rates of inflation in several countries in the region, as you run your core inflation when you say that organic growth is strong.
When we talk about organic growth, we generally talk about volumes or gross profit. Yes, we do see some inflation in labor cost, but that's not so materially moving our EBITDA line.
Okay. On a real basis in local currency, you're growing those countries, right?
Yeah.
Okay. Thank you very much.
Thank you. The next question is from Chetan Parkhi of Westry Capital.
Hi, gentlemen. A few questions from me. First, you mentioned that you expect growth in all relevant earnings metrics. Are organic gross profit growth and conversion ratio relevant metrics for you? That's question one. Question two is on EMEA. You said that conversion ratio, you expect it to improve in subsequent quarters. If we take a full-year view, do you expect overall 2016 to be a better year than 2015 for conversion ratio in Europe? The last question is, on your outlook page, you changed the wording slightly, and you kind of almost imperceptibly shifted the shape of the arrows down a little bit. Now, versus the outlook that was issued only in March. What has really turned out to be worse than expected? Is it only the non-oil and gas in the U.S., or is there anything else?
If I can come to the EMEA element first. Yes, in terms of the conversion ratios for Europe and Middle East and Africa, yes, we would expect subsequent improvement in conversion ratios through the course of this year. If that answers your question.
The growth in all relevant earnings parameters is foremost, I'm not saying solely, but is foremost addressing gross profit and EBITDA. The statement deliberately was not made with respect to organic growth, but with reported growth over previous years' figures. What has changed? We are probably a tiny little bit more cautious on the outlooks than we were on the full year. What has changed is what Milou from Goldman basically already addressed, that the gross profit in oil and gas is coming in a little bit weaker than what we saw it a couple of months ago. The environment in North America, the industrial production growth environment with -1.7%, is somewhat weaker than what we saw a short while back.
Okay, thank you.
Thank you. The next question is from Matthew at HSBC.
It's Matthew Lloyd, not Matthew Lloyd, Anybody who wants to ennoble me is more than welcome to try. Two quick questions. One on Brazil, given the appreciation of the real versus the U.S. dollar, do you see a risk of half two margin contraction? The second question, you've used the R word for North America a couple of times, yet a lot of the data centers suggest that numbers are weak in shale states and not so weak outside of the shale states. Do you see a geographical sort of split? I'm wondering whether oil and gas supply chains, which sort of filter into other kinds of businesses are being affected, or whether you're just seeing everywhere in the States, everything you do is a bit weaker.
Well, if I can answer. Is there any more questions or was that just two?
No, just two. I'm an analyst who can count to two.
Well, that's very encouraging. I'll say in terms of the general industries that we address across North America, what we can say is that the overall trading performance across our North American business is relatively even in terms of the performance, which suggests that is an economic cross-border, cross-state, cross-industry, cross-application development. It's slowing down generally in North America, notwithstanding clear there's effect from oil and gas, but I would say this is more broadly based.
Yeah. With respect to Brazil, maybe for the broader group to calibrate Brazil. Brazil is around 25% of our business in Latin America, which is 8% of the business of the group. What we are talking about is 2% of the business of the group. Having put that into perspective, so far, we are not seeing any challenges, earnings impact on our business in Brazil, from the recent currency changes. It's fair to say that if the Brazilian currency should appreciate against the US dollar, then foreign producers that bring product into Brazil become a little bit more attractive to the market, and that might be a little bit of a challenge to us because we foremost were portfolio of local producers, but we also do have access to imported products. To cut a long story short, so far, no challenges. We are observing the market tightly.
We will be able to react with appropriate product streams if necessary.
Okay. Your costs are in local.
The costs below purchasing costs, so the costs for distribution, warehousing, personnel, transport, is local currency costs mainly.
Brazilians almost universally price chemicals in dollars.
I'm not sure I would agree to that statement in its generality.
Okay. Well, thank you anyway.
Thank you. Currently, there are no further questions. As a reminder, if you would like to ask a question, please press zero one on your telephone keypad now.
Okay. One more.
We have one more question. The next question is from Christian Koch, Warburg Research.
Yes, good afternoon. Thanks for taking my question. Actually, there are three. First of all, if I remember correctly, you have had, I think, roughly EUR 40 million contribution on gross profit from M&A. Stripping out the FX effect, this takes me to a 1% decline actually in organic gross profit growth. Looking on the monthly figures you've provided, they're over flattish or in positive territory. Am I missing something or where is the missing link? Secondly, looking in the P&L, your selling expense has gone up 9% year-on-year. Do you have any selling or marketing initiatives in the pipeline? Lastly, the obligatory question regarding M&A. You have done many transactions in the past months and weeks. Is there more in the pipeline, or are you going to take a break now and focus on integration first?
Sorry, Georg. On your question for the organic numbers, it's all about rounding. The acquisition contribution on gross profit is a little bit below the EUR 40 million you mentioned. That gives an organic gross profit growth for the quarter, which is marginally positive, and it basically fits to the numbers we quoted on a per working day basis.
Okay, thank you.
Just on M&A, obviously, we've announced EUR 45 million enterprise value already at around about six times the enterprise value. We fully expect to acquire businesses between EUR 200 million to EUR 300 million value during the course of this year.
Okay, there's more to come.
More to come.
Okay. Thank you.
Okay.
The selling expense, sorry.
I think maybe the selling expense is more directly related to the acquisition.
Yeah. It's in a structure we don't use that frequently. The selling expense increase is mainly related to the acquisitions. It's not initiative related.
Okay, that's clear. Thank you.
Thanks.
Thank you. There are no further questions. I hand back to the speakers.
Okay. Well, thank you very much, ladies and gentlemen, for joining us this afternoon. Obvious no more further questions, we'll close the call there. Thank you very much.
Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.