Earnings Call: Q1 2016

May 9, 2016

Dear ladies and gentlemen, welcome to the Blendtec AG Results Call for the Q1 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. May I now hand you over to Mr. Holland, who will lead you through this conference. Please go ahead, sir. All right. Thank you. Well, welcome, ladies and gentlemen, and thank you very much for dialing in for our review of Q1 2016. As usual, I'm on the phone to go over to Georg Muller, our CFO, and we'll be pleased to answer your questions after the presentation. So let me begin with some words on the macroeconomic environment. Overall, the global economy has been characterized by somewhat slow 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 Q1 in 2016 is such a difficult comparables in 2015. However, it's fair to say that North America was weaker than we anticipated in this quarter. Our business in Latin America is impacted 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 €586,000,000 and grew by 6.2% on a constant FX basis. The operating EBITDA of €192,100,000 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 €27,000,000 charge, which is reflected in our financial results. In addition, we saw EBITDA of around 0 from Venezuela. The earnings per share in the Q1 amounted to $0.43 The reduction compared to last year's Q1 is barely attributable to the aforementioned effect from Venezuela. If I could just come Some acquisitions, we made further 3 further acquisitions recently. Having invested more than EUR 550,000,000 in acquisitions in 2015, We continue to invest this year. In Q1 2016, we closed 3 transactions, namely Leis and ACU in Germany and Plastic Chem in South Africa. In addition, we signed an agreement to enable to acquire the South Korean distributor, Wang Yi Corporation. Total investment math for the 4 targets is around €45,000,000 And average multiple slightly below 6x enterprise value. Now I'd like to hand over to Bjorg. Good afternoon, everybody. I'll move to Page 6, which is the upper part of our income statement. In a big macroeconomic environment, we were able to report good gross profit growth of 6.2% Operating EBITDA was roughly on par with previous year's level. I'll 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 7, 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. So at the starting point, Q1 2015, we recorded an operating EBITDA of €195,000,000 Mainly due to the weakening of the British pound, we had a negative FX translation amounting to around €2,000,000 That's not really related to the dollar. The dollar was basically unchanged against 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 WENETZO ELLA amounted to almost €3,000,000 and that's gone contributed operating EBITDA amounting to about €13,000,000 The demand in the oil and gas sector was Clearly lower than in Q1 2015. Previous year's Q1 was the strongest quarter of the year. Based on the gross profit that was lower by €15,000,000 we estimate that this resulted in an EBITDA decline for oil and Yes, of about €9,000,000 or 35% of 34%, apologies, of the oil and gas EBITDA. Overall, our business in North America outside the oil and gas sector suffered from the economic slowdown with a declining industrial production. So diversification helped to mitigate the headwind, but we do record an EBITDA decline of about €3,000,000 or about 5%. Our businesses in Europe, Asia Pacific and Latin America, excluding Benete Oella, Have seen good gross profit trends in Q1, which resulted in an EBITDA that is higher by about €2,000,000 on an organic basis or about 2%. In combination, all these factors resulted in an EBITDA of €192,000,000 for the Q1 2016. On the subsequent page, you see the lower half of the income statement. Depreciation for the Q1 amounted to €28,000,000 and amortization to €12,000,000 Financial result amounted to a net expense €49,000,000 which compares to an expense of €23,000,000 in the Q1 2015. The increase in expenses is mainly driven by the €27,000,000 asset write off in Venezuela. We recorded a tax rate of 35% in the first quarter, which is in the range of 34% to 35% we typically indicate. The earnings per share Is that €0.43 or €0.66 excluding amortization, the change of the Sonjourne liability and also excluding The write off in Venezuela. For the sake of completeness on Page 9, 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 Ennitzo Eila changed the exchange rate mechanism in February 2016, And this resulted in the devaluation of Siboliva by more than 90%, 9.0%. And 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 Hardly 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. But 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 €27,000,000,000 The current EBITDA contribution will be around €0,000,000 for the foreseeable future. This compares to an EBITDA contribution of around €12,000,000 in 2015. On the cash flow on Page And in Q1, we achieved a strong operating cash flow of €99,000,000 after €60,000,000 in previous year's quarter. Keep in mind that the €20,000,000 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 reflects the payments for the acquisitions of Leis, ACU and Plasti Chem, Which we closed in the Q1 2016. I'll Keep the balance sheet and briefly address debt and leverage. Net debt decreased during the quarter and amounts to 1,600,000,000 €30,000,000 The group's leverage in terms of net debt to EBITDA stands at 2x, slightly below the level we achieved At the year end 2015. Moving to working capital on Page 15. Trade working capital amounted to €1,283,000,000 at the end of the quarter. In the Q1, we turned the working capital 8.1x, a slightly bit better than the 8.0x we achieved in the Q1 2015. The quarter delivered a free cash flow of €131,000,000 This is below the cash flow we achieved in the Q1 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. I would pass the presentation back to Steve for a segment discussion. Okay. So let me take you through the developments of segments for the Q1. In Europe, in the Q1, our European region grew the operating gross profit strongly by 5.9%, The increase was largely driven by the organic business development. Operating EBITDA increased by 1.8%. 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, 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 form was 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 Gippel to reduce capacity in the oil and gas business to reflect the low level of demand. We reduced headcount by more than 13% More than 150 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet Es in this business since the beginning of 2015. In Latin America, reported 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 could be seen from the operating EBITDA. For last year, as a whole, we reported a 13.3% 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 Q1. 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 Just one second. So I just would just come back to the Slide on Industrial Production and Oil and Gas. Perhaps I think I'll probably 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. So now I'd like to come to the outlook. Let's start with 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 growth was 5.1% and flattish organically. In April, the growth was 3.8% and minus 2.2% organically. Please bear in mind that 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 expectations. As all, there was a sustained weakness in the overall economic demand in North America. Demand for the oil and gas sector shows further sequential declines. The weaker performance in Q1 in this sector is expected to be compensated in subsequent quarters by recently won business from planned and planned maintenance in the midstream sector. We might expect GPs be in the reach of $55,000,000 to $60,000,000 for subsequent quarters. You can clearly see the Q1 2016 and the most 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 to expect to grow our all relevant earnings promises for the full year in 2016. We will see solid organic growth and the EBITDA growth from our business 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 expect to remain a challenge for the rest of the year. We estimate that our EBITDA in oil and gas will be around €15,000,000 lower for the full year basis. For North America, we may expect to see a positive contribution from acquisitions. In Latin America, the 2015 EBITDA generation in Venezuela of around EUR 12,000,000 will not repeat As in the previous years, we entered your quarter guidance after the Q2. And we're now happy to take your questions. Thank you. We will now begin our question and answer session. The first question is from Wort Logan Noughen, ABN AMRO. Yes. Good afternoon, everyone. I have three questions. The first one is on EMEA. If I look at the Growth in operating gross profit, I get to 4% year on 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, but the gross profit was down sequentially if you leave out The acquisitions mainly due to the weak oil and gas market you said that, but looking at the U. S. Rig count that continues to drop also in the second quarter. So Should we expect another sequential decline on the back of that? And then thirdly is on acquisitions. I see in the waterfall chart of the EBITDA bridge That these added $13,000,000 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 JAM and Tag Group predominantly. So 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, and therefore, our customers are generally not more holding significant stocks and Order to delivery is normally a couple of days. So there isn't a restocking element. The growth in Europe is predominantly new business that we've won. New products have been sold in Europe and in the improvements in the performance of our European business. Should I take yes, your question on the On the rig count and the impact on the oil and gas business, you might know that we subsegment our oil and gas business into Midstream, downstream. And the rig count would be an indicator for our upstream business, but the upstream business has shrunk Significantly over the last year, the Upstream business by now is around only 10% of our Oil and Gas business. So 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. So 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. So we are Cautiously optimistic that the subsequent quarters will deliver a gross profit above the $54,000,000 that we delivered in Q1, But 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 €13,000,000 That's a little bit less than if you take a full year number and divide So a little bit less than the pro rata number. That's not a surprise from our perspective. The acquisitions the major acquisitions only closed Towards the end of 2015, integration is ongoing. There are still a number of integration expenses, integration projects. So we would expect a somewhat moderately higher acquisition contribution in the coming quarters. Thank you. The next question is from Rob Plant, JPMorgan. Hey, Stephen Georg. You've mentioned Outside of Venezuela, Latin America is holding up well. Do you see that continuing given the flux in countries like Brazil? Thank you. Well, clearly, Brazil is a very volatile situation. When we look at our business currently, Brazil is holding up in terms of the income at both GP and EBITDA. We do have a 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, so 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. But 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 Thanks, Stephen. Brazil is your biggest country. I think how much of LatAm does Brazil account for? About 25%. Thanks, Gok. Thank you. The next question is from Sylvia Ottowa, 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? And how much benefit from cost savings you saw in the North American business? And then if you can kind of tell us what the run rates of that expected to be over the course of the year? And just related to that, are you planning to take extra cost in the North American business? Xavier, Sie, it's Bjorg. The integration costs in the acquired business are fully planned for. They are not Super material. They are order of magnitude, couple of million maybe. Cost savings, we have taken 100 heads out of the North American business, particularly the oil and gas business. So that would be A one rate saving of around $12,000,000 but we started taking head out in course of last year already. So the $16,000,000 over $15,000,000 savings are probably $7,000,000 to $8,000,000 And Steve here. Just I mean just 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. And at this stage, we don't foresee any significant change to our operating cost base in North America from that On that side of the business. And 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 cost associated with the business. So this will be our more challenging quarter from a conversion ratio point of view. But we will keep a close eye on North America because ultimately, It seems almost like the elephant in the room in terms of people only talking about North America being in recession, but it looks like industrial production numbers are weaker than they were before. Thank you very much. And if I can follow-up just with 2 more. Could you tell us so the April run rate down 2.2% organically, can I just confirm that, that Still includes a 3% drag from oil and gas? And what when does that drag actually kind of I mean, obviously, we can see your run rates There will be annualizing in this quarter to some extent. And then secondly, on volumes and gross profit per unit, could you give us Some idea of where that was in the quarter. So did you and 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 from oil and gas Of about 3%. With respect to volumes and gross profit in the quarter, So volumes are up quarter over previous year's quarter, including acquisitions, by around close to 3% Against the gross profit growth of about 6%. So you can see that the gross profit per unit is trending positively. I would like your understanding that I don't have the regional figures at hand. And could you give us any idea of that organically, Francois? That would be an organic volume, which is a slight decline, 1% or 2% organic volume decline, At the foremost oil and gas and a part of Latin America, particularly Venezuela. And also for that Business, the gross profit development is better than the volume development. All right. Okay. Thank you very much. Thank you. The next question is from Gerhard O'Kornes, Exane BNP Paribas. Yes, good afternoon. Just question on Venezuela, the €27,000,000 write down, is that will it be cash effective? I think there's some issue getting cash out of the country. So is this cash that you've lost essentially? Or It doesn't go through the cash flow statement Because it's not cash that we paid out. But 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. But it's out by the end of Q1 already. Okay. So it's cash you had in Bolivar, not in U. S. Dollars? That's right. Okay. Thank you. Next question is from Bill McKenzie, UBS. Hey, good afternoon. 2 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? Or are you taking share in Europe, do you think? And the same question again on margins in North America. You also highlighted the weak environment continuing. How should we think about the negative operational leverage in your business And outside of oil and gas, this run rate stays weak in the coming quarters. I know in Q1, you booked some provisions and that kind of thing. So What do you think is the right level of margin pressure to think about there? Let's jump into Europe first. This is organic growth, which is being driven by high levels of market penetration within Europe and parts of Asia Pacific of Middle East and Africa. We've been working extremely hard to broaden the product portfolio in Europe for a number of years. And indeed, it's fair to say that we are seeing some real traction here in terms of the competitiveness and moving products into markets, which Previously, Brenntag has not had a major position. So this is the 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. Rory, it's 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. And 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, then 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. So going forward, we would expect the conversion ratio Outside oil and gas to be stable, if not to improve, if you consider that Q1 has a little bit of uneven phasing of So for example, for public levies and so on. So long answer, it's a technically complicated topic. Conversion ratio of the most 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 Talk about Thailand within Asia, how that's trading there? Thailand, was that Thailand? Yes. As far as Thailand is concerned, I would say our cat price has been stable actually. Our business in Thailand has been at current levels now for quite Some time. There clearly are still some economic challenges in Thailand. But as you may know that Thailand was our largest region For some time, but now it's being fixed by Vietnam as being the largest country in the region. But Thailand is stable. Okay, great. Thank you. Thank you. The next question is from Carl Green, Credit Suisse. Yes, 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 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. And then a couple of very small ones. Just on the minority charge, which fell quite significantly year on year in the Q1. What's going on there? Because I thought Zhongjiang was still on balance sheet until middle of this year. So what drove the drop there? Then 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 get claim tax relief on? Thank you. Yes. Just on the European cost effects in the Q1, these have washed down in Q1. So you would we would expect to see conversion ratios improve in Europe in Q2 and subsequently. So That's basically done now. And it related to things like moving offices being closed and then we're doing site closures and changes. So things that were not necessarily, so we get some of your spread over the year and it appeared in the Q1. So as you would expect to see conversion ratios improve accordingly. Okay. Thank you. The gross profit per working day statistic, I think, if you just go inside the page, Karl, give us a second. Yes, Algo, if you like, it was 8.3% in January, 2.3% organic, 4.8% in flat In February, flattish organically, 5.1 percent in March, flattish organically and April was 3.8% minus 2.2% organically. Yes, Karl. And then you had the question why the noncontrolling interest, the minority interest benefit drops from the Q1 'fifteen to Q1 'sixteen, so the noncontrolling interest, the minority interest dropped from a positive 100,000 to a positive 100,000. So these are tiny numbers, I would point out. You are right. Sonjung minority interest are on the balance sheet until middle of the year. So the drop is not related to the Sonjung minorities. It's mainly related To the Trican minority, so you might remember, we towards the end of last year, we went into a joint cooperation with a partner in Dubai, Where we own 51%, so that also carries minority interest. And due to customer base amortization and due to integration expenses, it has this 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. Thank you. The next question is from Mailho Bank, Goldman Sachs. Hi, good afternoon. Another follow-up question on the oil and gas. So I think your comments at the full year results was for stable gross profit in this And actually, it dropped quite a bit sequentially again. So what happened there? Was it all concentrated at the end of March? Implies quite a steep decline in those couple of weeks. And was it largely in upstream or is it also in the midstream segment? And 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, so maintenance there. Could you please elaborate on that one? And then on the April growth rate, is that drop due to weaker North American outside oil and gas? And 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 Q1, But not alarmed insofar as there's a number of pipeline cleaning contracts, which we expected to be During the Q1, which didn't actually happen. And then part of that is due to certain operating units where you would expect to close down just kept going. So there wasn't the opportunity to count out the cleans that we would expect to do. And the management within that particular area of our oil and gas business fully to deliver their budget for the year, which would suggest that they're expecting a catch up in pipeline cleaning during the 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 That's converting in terms of GP growth during the course of the second quarter and certainly in subsequent quarters. And therefore, the €55,000,000 to €60,000,000, I'm perhaps I'm a little bit more cautious now, is we believe sustainable. Yes. You had a detailed question, Milo, it's Georg. On the weaker gross profit Working day growth rate in April where we had a minus 2.2 organically. This is everything is a little bit softer, But it's mainly North America outside of oil and yes, 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. But I particularly in North America, that's not an effect I would really point to. Okay. Maybe one follow-up question on the 2 U. S. Lubricant acquisitions. So we understood that the EBITDA contribution should be more weighted towards The last quarters of the year, is that from 2Q onwards? Or is that from 3Q onwards? Have you done all your integration costs here? And 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? Yes. I think it would be fair to say that we're looking towards the second half of the year for the lubricants businesses to Delivering on synergies and cross customer selling opportunities that we have. So that's very much in the plan going forward. So what was the second question? It was on cost, was it? What was your second question? I'm sorry, on how are they developing? As planned and what's the impact of the softer U. S. Industrial production environment for these two businesses? Yes, I would yes, I think in terms of the I'm going to get into quite a But in terms of the 2 principal acquisitions, one we have absolutely on plan, one which is slightly behind plan, But that's more to do with some fuel sales into the Marine business, which is weaker than expected. But at 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. Yes. Good afternoon, everybody. Just firstly, just a point of clarification. Would you be able to clarify the organic gross profit growth for So EMEA and U. S. Or just without exactly the whichever way the M and A contribution. And then just on your U. S. Conversion. I mean, notwithstanding the decline you've seen in the oil and gas You obviously are at your lowest sort of 4 quarter conversion since basically since 2,009. So are you seeing any weakness in pricing outside of oil and gas or any mix shifts So they're affecting your conversion, possibly any new capacity coming in? Or 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 It's concerned, we 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. And I think I said earlier maybe on the call is that the big question is, is the North American economy in a decline? And are we now starting to look at a recession rate The 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 the situation in 2,008, 2,009, we did take costs out of North America quite aggressively To reflect the situation which arose at that point. So in terms of straightforward conversion ratios, If we have a situation where this persisted, then we will take action to change that position. You're seeing it as just volume related Rather than that there is any weakness in pricing outside of oil and gas? It's not a price issue. It's more weakness in demand in the market generally. As I said, we're keeping a very close eye on this. And if we actually catch you, we will do. Okay. Thank you. So the organic gross profit growth rates in the quarter by segment, it's who is taking disclosure to a level beyond what we typically give. But if you disclosure to a level beyond what we typically give. But if you take a look at the EBITDA bridge, I can probably help you there. If you look into North America, where we have the €9,000,000 decline in oil and gas EBITDA and €3,000,000 EBITDA decline outside oil and gas, That would correspond to a gross profit development of minus 23% for oil and gas Plus 2% for the other businesses outside oil and gas. And the gross profit development in the other organic business, EMEA, Asia Pacific, Latin America, ex Venezuela, It's plus 4%, and that's very similar to the European numbers. Okay, perfect. Thanks very much, Gael. Thank you. The next question is from Julian Torrey, Descartes Training. Sorry, this is Deskcar Trading, not Diskcar Trading. So I'm not trading anyone here. Well, 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 are lagging and how volume versus price reacts? So that's First question. Second question that I have is, could you please explain a bit more in detail the known oil and gas Factors that you operate in North America and how they reacted differently to the slowdown in industrial production with a bit more granularity? And 3rd, 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 market, I believe that inflation is running almost 10%. Thank you. It's Jorg. I'll try to answer your questions, and you just jump in if I misunderstood the 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. And whenever they increase or decrease their output, it will have some impact on their purchasing with their chemical distributor of choice. So 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. So the sales prices we have, the purchasing prices we have, they do swing This general chemical price levels, but our take in between, the gross profit per tonne, the gross profit per delivery, It's not really impacted by the chemical price. So the gross profit per unit is a very stable America and only North America is with oil and gas customers. The other 75% broad mix, So very broad and diverse mix of customer industries, industrial producers in the ASES area, but also food, Feed, personal care, pharma customers, water treatment, a very broad range. And we don't see other than oil and gas, we don't see any development in any customer industry outstanding currently. Okay. That's very helpful. Thank you And finally on Asia America, considering rates of inflation in the in several countries in the region, are you running above inflation? Or can you say that organic growth is strong? When we talk about organic growth, we generally talk about volumes or gross profit. Yes, we do some see some inflation in labor cost, but that's not so materially moving our EBITDA line. Okay. So on a real basis in local currency, you're growing those currencies, right? Yes. Okay. Thanks very much. Thank you. The next question is from Retko Kutikov, Westry Capital. Hi, gentlemen. A few questions for me. First, you mentioned that you expect growth in all relevant earning metrics. Are organic gross profit growth and conversion ratio relevant metrics for you? That's question 1. Question 2 is on EMEA. You said that conversion ratio you expected to improve in subsequent quarters. But if we take a full year view, do you expect overall 2016 to be a better year than 2015 for conversion ratio in Europe. And the last question is, You on your outlook page, you changed the wording slightly and you kind of almost imperceptibly shifted The shape of the arrow is down a little bit. Now versus the outlook that was issued only in March. So 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 improvements in conversion ratios through the course of this year since if that's to answer your question. The growth in all relevant earnings parameters is foremost I'm not saying solely, but it's Foremost, addressing gross profit and EBITDA, the statement deliberately was not What has changed? We are probably a tiny little bit more cautious on the outlooks than we were on the full year. And what has changed is what Milu from Goldman basically already addressed that the gross profit in oil and gas is coming in a little bit weaker than what we saw a couple of months And the environment in North America, the industrial production growth environment was minus 1.7% It's somewhat weaker than what we saw at a short term a short while back. Thank you. The next question is from Lesley of HSBC. It's Matthew Lloyd, not Matthew Lord, but anybody who wants to know 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 to margin contraction? And 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 sort of 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 the is there any more questions? No, just 2. I'm an analyst who can count 2. That's very encouraging. I'll say the 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, that is an economic cross border, cross state, Cost of industry cost application development. So it's slowing down generally in North America, Notwithstanding, clearly, there's a fact from oil and gas, but I would say this is more broadly based. Yes. 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. So 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 U. S. 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 work With the 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. But your costs are in local The costs below purchasing costs, so the costs for distribution, warehousing, personnel, transport is local currency costs mainly. And Brazilians almost universally priced 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. We have one more question. The next question is from Christian Kors, Warburg Research. Yes. Good afternoon. Thanks for taking my question. Actually, there are 3. So first of all, If I remember correctly, you have had, I think, roughly €40,000,000 contribution on gross profit from M and A, so stripping out then the FX effect, this takes me to a 1% decline actually in organic gross profit growth. Looking on the monthly figures you've provided there over flattish or in positive territory. So am I missing something or where is the Yes. Where is the missing link? Secondly, looking in the P and L, your selling expense has gone up 9% year on year. Do you have any selling or marketing initiatives in the pipeline? And lastly, the obligatory question regarding M and A. You have done many transactions in the past months 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. So the acquisition contribution on gross profit is a little bit below the €40,000,000 you mentioned. That gives an organic gross profit growth for the quarter, which is marginally positive, and then it basically fits to the numbers we quoted on a per working day basis. Okay. Thank you. Just on M and A, obviously, we've announced $45,000,000 enterprise value already at around about 6x Enterprise value. We fully expect to acquire businesses between €200,000,000 to €300,000,000 value during the course of this year. Okay. So there's more to come. More to come. Okay. Thank you. And the selling expense, sorry? I think maybe the selling expense is more directly related to the acquisition. Yes. 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. 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. I'll bet you, Norman, for the questions, we'll close the call there. Thank you very much. Ladies and gentlemen, thank you for your attendance. This call is being concluded. You may now disconnect.