Earnings Call: Q3 2015

Nov 5, 2015

Hello, ladies and gentlemen, and welcome to today's Brenntag AG Q3 2015 Results Call. Throughout this call, all participants will be in listen only mode and afterwards, there will be a question and answer session. Just to remind you, this is being recorded. Today, I'm pleased to present Stephen Holland, Chief Executive Officer of the Brentag Group. Please begin. Well, welcome, ladies and gentlemen, and thank you very much for joining our Q3 2015. I'm on the phone today, together with Joerg Muller, our CFO, who will be happy to answer your questions after the presentation. So let me maybe give you some words on the macroeconomic environment. Over the summer, we saw the recent global economic developments characterized by a slow momentum, Especially North America, which shows a clear slowdown and more unfavorable situation in the oil and gas industry. Nevertheless, for Brentag gross profits, we grew this as well as operating EBITDA meaningfully in Q3. Gross profit increased by 9.7 percent to €570,500,000 and operating EBITDA by 7.5 percent to 204 point €4,000,000 The growth was supported by a strong tailwind from the strengthening U. S. Dollar. On a constant FX basis, gross profit grew slightly by 1.2%. The slower growth is mainly attributable to some decrease in gross profit with customers in parts of the oil and gas industry in North America. Just for this customer industry, the gross profit for the group grew by approximately 3.6% on an FX adjusted basis. The operating €204,400,000 represents a slight decrease of 2% on a constant FX basis. Earnings per share amounted to 61 euros which represents an increase of 8.9% year over year. We continue on our acquisition path and announced a number of Strategically important acquisitions over recent weeks and as early as today. If we can move on to acquisitions now. 1st of all, you'll have all received the announcement today regarding JAM and Berlin Windworks. We're delighted to announce those acquisitions. JAM is an integrated lubricants distributor headquartered in Houston, Texas that can be provided a highly diversified customer and product portfolio, Mainly servicing industrial, commercial, automotive and marine markets throughout the Gulf Coast and Texas. For Berlin Windward, in parallel, Birli Windwood is headquartered in Manchester, New Hampshire and operates 10 warehouses in the United States, the northeastern region of the United States. The company has a wide variety of premium branded lubricants delivering to over 17,000 customer locations. In terms of combined financials for these two acquisitions, which are both in the top 5 lubricant distributors in the Stays, we have closing expected for 2015. And for the financial year 2016, we The combined sales contribution of around USD 780,000,000 the contribution from gross profit and EBITDA is expected to be USD 127 US1 $1,000,000 $50,000,000 respectively. The total investment amount will be US440 million dollars I'll just skip the next slide and come back to that in the outlook. And if I move on to the slide with TAT. TAT is a very important strategic step in our Asia Pacific markets. TAT is a leading distributor of industrial chemicals with focus on value added services. It has modern and sophisticated infrastructure across Asia Pacific, and TAT is an excellent warehouse and logistics infrastructure in Singapore. In 2015, TAT's revenues were expected to be around about €145,000,000 and there's an EBITDA of €9,000,000 The investment amount will be €87,000,000 At a closing, which is the transaction expected to close in December. It's a particularly important acquisition for us as it Azyk develops our Industrial Chemicals business in Asia Pacific. 2 further acquisitions. In September, we signed an agreement to In Turkey and extend our existing personal care portfolio. In 2014, sales were approximately EUR 14,300,000 with the EBITDA of EUR 3,000,000 Investment was just under €21,000,000 and we closed this transaction in November. In addition to Pacatex, we have entered into a joint corporation with chemical distributor Trichem and up with the ownership of over 51%. Trichem is located in Dubai and is acting in the distribution of solvents, Serving the paint, ink and coating industries in the Middle East. This joint venture opens up the Middle East distribution market for us. It's a region where there is a lot of chemical production Well, a lot of our global customers are more and more looking to see are more looking to have available to them distribution services such as we provide them in other parts of the world. I'd now like to hand over to you, Jorg. Thank you, Steve. Good afternoon. I'll move on to the review Of our financials for the quarter and I would start on Page 9. On Page 9, you will see the first part, the upper part of our income statement for the quarter. The strong as reported gross profit growth supported by currency tailwinds and some more moderate but still positive FX adjusted Growth have already been addressed and that's likewise for EBITDA. You will see the conversion ratio information towards the bottom of the And so conversion ratio for the quarter is 35.8% after 36.5% a year ago. Subsequent page, you will find the income statement information below EBITDA. Depreciation for the 3rd quarter amounted to €26,800,000 and amortization to €9,400,000 As a reminder, the amortization in our income Statement mainly comes from acquisitions that we have undertaken. So financial result amounted to an expense of 27 €300,000 and that takes us to an overall earnings before taxes of €140,900,000 Which is 5.4% ahead of last year. We recorded a tax rate of 32.7% in the Q3 2015, which is Slightly more favorable than the range of 34% to 35% that we typically indicate. Earnings per share At €0.61 per share, 8.9% ahead of previous year. If you exclude amortization from the earnings Earnings per share amount to $0.65 per share. With respect to cash flow on Page 11, in Q3, we We achieved a very strong operating cash flow of €166,900,000 after €107,000,000 a year ago. The higher operating cash flow is partly driven by higher earnings. In addition to that, Working capital management and price development of chemicals permitted a reduction in working capital in Q3 and the Responding cash inflow. Briefly on the other parts of the cash flow statement, namely investment cash flow and financing cash flow. CapEx amounts to €27,000,000,000 which is slightly above last year's level. We are on track to meet our full year CapEx Guidance of €120,000,000 to €130,000,000 The line repayment of proceeds from borrowings reflects repayments of short term borrowings Leverage information on Page 14. On the page, you would see the net debt and the leverage. Thanks to the positive cash flow Apologies. Thanks to the positive cash flow development. Net debt decreased during the quarter by €168,000,000 to €1,371,000,000 The group's leverage decreased to 1.7 times, Which is below the levels seen earlier this year. If I were to pro form a in the 2 acquisitions that we announced this morning, this would take The leverage back up again very moderately to about 2.1 times. Trade working capital At the end of the quarter amounted to €1,296,000,000 On a year to date basis, we turned working capital about 8.1 times, Which is roughly the same level we reported a quarter ago. Another look at cash flow On Page 18, it's our free cash flow presentation. This quarter delivered a very strong free cash flow of €191,000,000 It's significantly up against the €138,000,000 for the Q3 2014. The increase was driven A couple of slides on oil and gas, and I would now like to focus on the oil and gas situation beginning on Page 19. It is obviously no news that the oil price is in the mid-40s and therefore less than half what it was in summer last year. However, earlier this year, in early summer this year, there was an expectation in the market of a moderate recovery when the oil price trended back towards $65 That recovery early summer this year did not last. And consequently, our customers in the oil and gas industry Slow down the activity once more. You see that, for example, when you look at the rig count, lower left hand side of the page. Obviously, the rig count is not the one and only indicator for our oil and gas business, but it has some meaning, particularly for the upstream part of our business. The oil and gas impact on the results that we report today and on our guidance is pretty relevant. The estimates that our gross profit with oil and gas customers will be about €30,000,000 lower this year than it was last To put it into perspective, that reduction of gross profit of €30,000,000 takes off 1.5% of the group's gross profit Or 3% of the North American gross profit. We certainly were able are able to This reduction through growth in other customer industries, but if you look into the total package out of oil and gas and other customer industries, you see some impact On the overall group figures, I would hand back to Steve to a continuation of the oil and gas picture. Thanks, Georg. On the left hand side of the next page, if you look at the left hand side, you'll see the gross profit developments of our oil and gas business in North America. The 1st 3 quarters of 2015 in comparison to 2014, over the 1st 9 months, we were down by 9.4%, The high shortfall was in Q3, but actually the sequential development is not too bad. Q3 2015 was about on Q2 level. The highest shortfall against previous year on results from the strong levels the business had, particularly in the second half of twenty fourteen. We have taken steps within our Oil and Gas business to reduce operating costs, which has resulted in some headcount reduction of around about 6%. On the right hand side, you can see how the rest of North America is coping. The business is offsetting some of the reductions of the oil and gas weakness. In all other customer initiatives, we have grown gross profit by 5.1% in the 1st 9 months 2015, but this has become more difficult With a loss of macroeconomic momentum in North America. If you just turn to the next page, I think we can see how that's showing the PMI Index. So the PMI index in North America is clearly backtracking since summer and the IP growth has lost momentum completely. I think when we look at the very recent PMI numbers for October, we see further weakness in the PMI index. We of course are closely monitoring these developments and plan for our own business to cope with the weakness in this respect. I'll take you into the segments now. If I could first come to Europe. Europe's operating gross profit increased by 3.5% and operating EBITDA increased by 2.1% Both on an FX adjusted basis. After strong growth rates in the first half twenty fifteen, momentum in the market slowed in the 3rd quarter. Nevertheless, operating gross profit and operating EBITDA continued to show growth. In North America, in Q3, our business in North America was clearly affected the combination of the weeks of oil and gas industry and a cooling of economic activity as a whole. In this environment, operating gross profit decreased by 3 Excluding the business with customers in oil and gas, we were able to increase gross profit by approximately 2.1%. Operating EBITDA decreased by 9% on an FX adjusted basis. Strong translational tailwinds lead to a strong growth of 7.6% On an as reported basis, coming to Latin America. Latin America continued to report strong increases in earnings in Q3 The gross profit growing by 11.3% on an FX adjusted basis. Furthermore, the region benefited from an efficiency enhancement program, which we introduced in the past, Resulting in a strong growth in operating EBITDA of 25% on an FX adjusted basis. If you take a view of the decline in industrial production in the region in Q3, we are very Fine with this result. In Asia Pacific, in Q3, Asia Pacific grew operating gross profit by 2.6% on an FX adjusted basis. In the first half of the year, an increase in operating efficiency resulting in higher conversion ratios compared to prior year, led to an operating EBITDA growth of 8.8%. Okay. We've now come to the outlook for 2015. I'll start with our monthly gross profit per working day trend. July gross profit per working day grew by 1.6% and was flat organically. In August, the growth rate was flat Organically down by 1.4%. September the growth rate was positive 0.7% and organically slightly negative to 0. In October, the growth was minus 0.5 percent and organically minus 2.1%. Just to calibrate these numbers, these trends partly are driven by stronger The course of last year and only in part reflecting a softening trend within this year. Given the status of oil and gas and the slowdown of the economic momentum, we have taken a more cautious look at the full year. On a full year basis, 2015, we are expecting our operating EBITDA to be between €790,000,000 810,000,000 This compares to an operating EBITDA of €727,000,000 in 2014. Just going to the next page. Just Very briefly, I'll just go through the strategic rationale relative to GAM and Burley Windward, the acquisitions we announced today. The lubricants distribution market is very attractive to us in terms of size, growth, profitability and resilience. The industry has been consolidating for the past several years and there are now a few major players. However, the market is still highly fragmented and consolidation is expected to go on driven by larger players. JAM and Berlin Woolwood hold market leading positions in lubricants distribution. Geographically, the 2 acquisitions are a perfect match The footprint is complementary to our own operations and we'll find we'll actually fill some white spots in for ourselves in terms of our owned network. Both of these acquisitions add further diversity and resilience to our North American customer industries and expand both products and services for the region as a whole. Just to reiterate, Gross profit generated by the 2 acquisitions is expected to be $127,000,000 with an EBITDA of $50,000,000 in full year 20 Dean, we're now happy to take your questions. Okay. I announce you simply ask that question. And if you find that question has been answered before it's return to speak, just press 0 and then 2 to cancel. And there will be a brief pause while questions are being registered. Our first question is from the line of Simon Mazzonotti of Berenberg. Please go ahead. Your line is open. Good afternoon. If I can maybe start with a couple of questions. The first one is about The implication of your guidance on Q4. So when I look at the EBITDA that you imply in Q4, I get to a year on year fall of Between 2% 12%. But obviously, you probably benefit from some effects. So I estimate a fall of between 7% 17% in Q4, Which is obviously a lot worse than the minus 2% that you saw in Q3. So you seem to be implying a significant Deterioration in Q4 again. And I was wondering where is that coming from? And then maybe in terms of the second question, When I look at cost inflation in the U. S, as you say, just 1.4%, nonetheless, it was positive against obviously AGP, Which was down 3%. I was wondering if GP continues to fall in the next quarters, is it realistic to That you can you're able to cut costs year on year or is that simply not feasible? Thank you. Simon, it's Georg. Maybe I take your first question on the implications of the guidance on Q4. We do Not to expect a further deterioration of the business on a sequential basis. We have some seasonality in Q4, which will impact Q4, But that does not impact the year over year comparison, just a sequential view That we expect higher negative growth year over year in Q4 as a comps issue. Q4 last year was a very strong quarter. Not sure I got the second question. Yes, I'll tell you. In terms of the I hope I got this correct. In terms of GP versus costs, I guess probably the challenge in sort of GP is if you look at oil and gas in 2014, It's probably in the highest quarters for the year and actually, that peaked in October of last year. So we do have a high GP generation, which connects the comparison to prior year. But I would say though in terms of costs And actually the performance of oil and gas generally, oil and gas now when we look at it trend wise, it's stabilizing. And we have taken some steps to reduce operating costs in our oil and gas business, but we are taking more steps to reduce operating costs in oil and gas. This is also the case that due to a general slowdown in economic activity in North America, We are seeking to reduce costs in other parts of the business. So we would expect the effect of the conversion ratio to be effective positively in that respect. And in terms of if I can follow-up on the conversion ratio, would it be feasible would it be realistic to Like that conversion ratio in North America to stabilize over the next quarters? Or is it not possible as gross profit would presumably continue to fall? No, no. I think we are certainly looking at stabilization of the conversion ratio. As far as we're concerned, We are able to reduce operating costs where necessary. And to be fair, Yes. If you look at oil and gas in particular, we didn't really abandon ship as it were as far as oil and gas is concerned in terms of our capabilities Despite a fall in the market because there was perhaps a bit of a full rally in the early part towards the middle of the year where we thought maybe we're going to see some appreciation in oil prices and maybe an increase in activity. But that's In oil prices, there may be an increase in activity, but that's all in a way. So we're now taking the view that in the short and medium term, we're not I think any recover rates in activities and therefore is appropriate to reduce operating costs, which in effect will increase the conversion ratio for the rest of the business. Thank you. Our next question is from the line of Silvia Fotiva of Deutsche Bank. Please go ahead. Your line is open. Hi, good afternoon. Could I please ask in the U. S, if you could give us any detail about the demand by sector? And obviously, you did say that that slowed down and we can see from your charts that kind of ex oil and gas that slowed down quite materially from kind of Q1 and Q2. I know that all your different end markets are not very material individually, but kind of if you could give us some guidance around it, that will be interesting. And then The acquisition profit contribution for next year that you've given us, could you Just give us a little bit around the assumptions that you've got underlying, so kind of organic growth, any potential cost that you're taking out at those two businesses? And then how much cost could you potentially take out in the future? And then finally, if you could just update us on your Fine. Obviously, you have done 2 big acquisitions, but the net debt to EBITDA remains quite reasonable. Thank you. Ryan, just in terms of industries, I really can't give you an outstanding example of where a particular industry has fallen away, I think which is really noticeable of a general slowdown in North America because we clearly we do track individual industries and isn't one which is which you would say outside of oil and gas that is significantly affected. I think to be fair, If you want to pair it down to individual customers by customer basis, then there are some customers who are particularly hard hit in terms of And we are aware of some customers and some of our international customers who are saying that orders are not as good as they were to the strength of the dollar. So I think that is probably about the best I can give you there. In terms of the acquisitions and the recent acquisitions that we've made, We are not expecting a significant cost reduction exercise in the new acquisitions. We do see Upside in terms of synergy gains between acquisitions and our existing business. There is a number of products in cross selling which we expect to introduce. Just trying to give you a little bit of a flavor to this. We are a very large distributor of diesel exhaust fluids in North America in terms of through Brentag's North American business. And these 2 lubricant distributors We'll benefit from significantly improved purchasing and distribution capabilities by being part of Brentag. So there will be some synergy gains there. But I don't see this as a cost reduction exercise or in terms of these two acquisitions. We see very much an expansion of our share of the lubricants market. I think probably finally on pipeline. In terms of pipeline, clearly as we've always indicated, we are Looking at acquisitions on a global basis and the pipeline of acquisitions remains full. But as is always, We really can't say for sure until the deals are done. And again, as those that know as well, We are prepared to walk away from deals that don't meet our criteria. And so at this stage, I wouldn't say there's any major acquisitions Expected before the end of the year, but at this stage, I can't comment more than that. Thank you. And just to follow-up on the acquisition assumptions. So Could you give us a little bit of color around where how much they've grown by kind of historically and what growth you're assuming for 2016 days? Yes. It's hard to give a growth picture on a year by year basis for the acquisitions. They have grown historically their earnings order of magnitude high single digit. That is in principle what we would also expect going forward. We have taken a little bit of more cautious stance on a stand alone business. We have reduced in our business plan The growth is somewhat below the historic earnings profile. On top of that will come the acquisitions, sorry, the synergies that we already mentioned. But the synergies will take a little while. So most of the synergies will come in 2017 2018 only And not really in 2016 over 2015. Okay. Thank you very much. Our next question is from the line of Robert Plant of JPMorgan. Please go ahead. Your line is open. Good afternoon, Stephen and Georg. Latin America continues to hold up well. And I remember at Q2, you said that the Brazilian business had benefited Well, but conversely, because the Brazilian currency had come off and that was good for exports, so I wondered if that was still the case. But also should we be more worried about that business in the future given the macro has deteriorated in Brazil? Thank you. It's confirmed, Rob. Hi. It's the Brazilian business is still doing good and had a pretty strong Q3. The overall macroeconomic situation in Brazil is obviously not helping, but the devaluation does and our strong ties to local producers Do. We would only see this coming under pressure if the devaluation reverses, which is not really expected. Thanks, Greg. So Latin America probably continues to hold up. Would that be your view for the end of the year? Yes. Okay. Thanks. Our next question is from the line of Matthew Lloyd at HSBC. Please go ahead. Your line is open. Two questions. First a quick follow-up on Robert's question. How much of the Latin American growth is a product of the fact that the amount they're paying you in local currency has gone up Because it's a product that is effectively priced in dollars. In other words, is it an organic growth or is it in effect a currency driver on that organic growth? And the second question is to do with inventory FX costs. I'm just trying to understand if you're hedging Your currency risk in your inventory, where does that sit on the P and L? Is that inside the gross cost line? Or does it come inside financials? First of all, I don't have an exact quantification at hand how much of the gross profit growth Comes from the devaluation effect you explained. It is a smaller portion of our growth. So it's By far not the case, not the case that our growth is actually only triggered by devaluation. It's only a relatively small Contributor apologies, I don't have an exact number at hand. With respect to hedging of inventories, The hedge effect is basically in the financial result and the offsetting operating effect in gross profit. Okay. Thank you very much. Yes. And I would actually just like to add in terms of Brazil, we did make an acquisition of Gas 4 now 12 months, 18 months ago, Which is has been proved to be very successful and with a range of specialty chemical products in the market. So we to some extent, we have a degree of installation by into the performance of products that we're selling. So it's not just question of currency or speculation. We have very much improved we very much improved the quality of our business in Brazil, and we're benefiting from that. Okay. Thank you. The next question is over the line of Roy Mackenzie at UBS. Please do go ahead. Your line is open. Good afternoon, guys. A few for me. Just a couple of divisional trends I want to go through. So just to drift back to the table on Page 22. Firstly, the conversion margin in North America with EBITDA down 9%. Are you still to get the average margin in oil and gas? We can understand the mix impacts within that margin decline versus any natural negative leverage? And then secondly on Europe, it looks like growth It's now too low to offset cost inflation. So what's your outlook for margins here given growth isn't going to change for the rest of the year? Just those 2 first, please. Can you do the European? Yes. I'll do the European first. I mean, yes, clearly, growth in Europe is You're saying around about the 2% mark. Inflation could be off of the 3% in terms of underlying inflation. We do have the To turn down our variable costs in the electric transport over time, handling costs and what have you. But also we are constantly and I know it sounds to some people that know as well, we it's an old story but never said a continuing story of driving efficiency in our European business. And we are constantly seeing ways of improving efficiency throughout the region. And that has not stopped. And therefore, our plan very much is to neutralize the effects of inflation within the European Operation to create organic growth. On the Conversion ratio oil and gas North America, it's pretty much in line with the overall North American conversion ratio. In fact, It's marginally lower. So from a decline in oil and gas business, you don't really have a mix The conversion ratio, not a meaningful one. Okay. So that's just negative operational gearing then. Okay. And then just one other question, if I can. Have you carried out any goodwill impairment test given all the acquisitions you've done in oil and gas over the last few years? I guess the outlook there must be structurally low. So Any comments on that? We do goodwill impairment tests annually And or if there was an additional triggering event in between, but we don't see a triggering event right now. We do test goodwill on segment basis. So for the segments, Europe, North America, Latin America, Asia Pacific, there's no requirement to do an individual oil and gas Impairment test because oil and gas in our the way we structured our business is not an own cash generating unit. We do operate very significant cushions under our goodwill impairment test. From today's basis, The situation in oil and gas is not at all expected to trigger a goodwill impairment. Okay. I guess just given some acquisitions were purely focused on the area of things like FILCHEM, I just wonder if that would be a triggering event, but I guess not yet. First of all, FILCHEM is not particularly in oil and gas. But even if it were, as soon as we buy and integrate, the goodwill in the group's balance sheet is not Tested on the level of the individual acquisition, but on the level of the segment only. Okay. That's clear. Thanks. And so just to add, We just on oil and gas, the acquisition we did make in oil and gas was the LSI, which is actually a lubricants distribution business within oil and gas, Which is very much a part of our development plans for the region. Okay, great. And so lubricants are more upstream. If I may, it's well ahead of plan. Which is well ahead of plan. Okay. Don't impair it. Okay. And lubricants are more upstream, is that right? Yes, downstream effectively, yes. So to the end application, yes. Okay. I've got almost up there. We are now over to Peter Olofsen of Kepler Cheuvreux. Please go ahead. Your line is now open. Good afternoon. Three questions, if I may. First on the CapEx, the guidance for the full year assumes quite Of an increase in Q4, will that normalize again in Q1? Or could it stay at a higher level also going into next year? And then coming back on the oil and gas business. In the press release on the 2 acquisitions, There was a reference to a structural change in oil and gas earnings. Could you elaborate on what you mean by that? And then my final question is on the organic Growth in gross profit per working day. I think in June, July, it was up slightly. What has been the numbers for the recent months? Hi. I'll take the structural change. Yes, what we actually meant by that, what I meant by that is if you look at oil and gas In the context of Brentag, clearly a reasonably strong part of the oil and gas business that we operate We're servicing the rigs, actually drilling rigs in North America that were operational in shale gas. And the structural change is clearly that the number of rigs that were previously operating has reduced significantly. And that structural change has come as a result of the dramatic fall in oil prices. And at this stage, We can't see that changing in the short or medium term. So that is a structural change and effect and clearly we're dealing with that. And just to a large extent, as you can see, the acquisitions that we've announced today, which are very much downstream, if you like, Lubricant sold not into oil and gas, lubricant sold into automotive and marine and industrial sectors are Our way of effectively increasing diversity and resilience of our North American business. So it's reaction to something which we can't change But we effectively have improved our business by going in a different direction with the 2 acquisitions. Yes, Peter, it's Georg. On CapEx, We started into the year with a full year CapEx guidance of around €120,000,000 for the full year. CapEx is like our earnings, a little bit subject to translational FX. So the strengthening of the dollar will work the CapEx number up a little bit Towards a number between $120,000,000 $130,000,000 CapEx is seasonal in our business. So a lot of CapEx you will find in Q4. That would not imply that the Q4 run rate runs into next year. I would fully expect next year's Q1 to be lower again. We haven't given yet a CapEx guidance for full year next year, but it will be some organic for Casting development out of the $120,000,000 to $130,000,000 that we have for this year. No structural change at all expected. On gross profit per working day gross rent, I'm not sure I got your question. I think we gave some number in the presentation. I'm happy to repeat the numbers. So Gross profit per working day growth on an FX adjusted basis was 1.6% in July, flat organically. It was flat in August, Marginally down organically. In September, it was plus 0.7%, organically slightly negative and October was minus 0.5% and organically minus 2.1%. Be aware, it does not indicate A negative sequential trend. What it really indicates is that the second half of last year was pretty strong. Yes. Okay. That's clear. Thank you. Next question is from the line of Gertr Gounas of Exane BNP Paribas. Please go ahead. Your line is open. Yes. Good afternoon. On the oil sorry, on the oil and gas Did I understand you correctly at the beginning of the presentation that for Q3 only, the gross profit growth would have been 3.6% if we take out oil and gas. Is that right? And then if I look at Slide number 20, my understanding was that your U. S. Oil and gas business is Preevolence split between upstream, midstream and downstream. And now in Q3, we've got about a 20% decline In gross profit year on year, which would suggest that the upstream is pretty much gone. Is this a run rate that we can mix the €4,000,000 gross profit that we can see going forward? Or do you see any risk spillover into the midstream as well? So Probably another €20,000,000 to €30,000,000 gross profit at risk here. Gerd, hi, it's Georg. First of all, to confirm, yes, the Gross profit growth in Q3 only for our group's business excluding oil and gas was 3.6%. Actually, with respect to sub segmentation, the business is not evenly split between upstream, midstream, downstream. Midstream is currently the biggest part. Midstream is roughly 60% of the business. Upstream a little bit less than Downstream a little bit more than 20%. With respect to run rate, on Page 2020, you can see that our oil and gas gross profit was $65,000,000 in Q2, dollars 64,000,000 in Q3. So some level of stability, and we would expect that level of stability to continue going forward. Okay. So you don't see any wells that are producing oil being turned off in the near Well, I think it's very difficult for us to make an estimation. I think the I think we are where we are. I think we have now 2, 3, 4 months of relative stability in probably the most difficult period that we can ever remember as far as this particular Industry is concerned. So we don't anticipate any significant change to the current status Okay. Thank you. And maybe a question on your acquisitions in the U. S. Can we model them in basically for the full year of 2016 and assume that they probably Closed by the end of this year? Yes. We expect them to close in December. Okay. Do you own any of the other top 5 lubricant distributors in the U. No, we don't. So this new business for you? It is. And then maybe just on the multiples, it looks Slightly on the high side, if I compare it to historics, can you confirm that it still hits your 14% IRR targets Even with the lower growth forecast that you have than what they achieved historically? Yes. Gerd, it's Georg. First of all, I'm not sure I heard you correctly. We do have a lubricants business already in Europe and also in North America, but it is kind of part of our general regional organization. So we don't own any of the other top 5 lubricants distributors, but we do have some business into our existing organization. So we do have A knowledge level and experience, some infrastructure. Okay. With respect to the IRR of the acquisition, they are pretty close to the 14%. Okay. Thank you. Our next question is from the line of Rajesh Kumar at HSBC, please go ahead. Your line is open. Good afternoon, gents. Before I ask any question, can I Clarify a particular definition, because if I've got that wrong, then all the questions are known times ago? When you Calculate constant currency growth. Am I right in assuming it's being calculated On last year's exchange rate and the weighted average is calculated on last year's sales numbers, gross profit numbers It's on this year's exchange rate. So we basically compare this year's result at this Year's exchange rate with last year's results at this year's exchange rate. That's very useful to understand. Good. So when you restate last year's numbers in this year's exchange rate, do you restate it versus dollar or versus your Accounting currency, euro because Accounting currency. Okay. Because I'm a chemist and I've never seen Chemical prices quoted in any other currency than dollar, which is why I was a bit careful in clarifying that because I understand. We would probably comment that while we distribute chemicals, we are not a chemical company. So the product prices themselves And the volatility of the product prices does not really impact our gross profit. Yes. And to be fair, when you're looking at dollar denominated currency for chemicals, you're really looking at chemical trading, which isn't our business. Okay. So when you distribute chemicals, You don't take it on your balance sheet in terms of the inventory. You do take it on your balance sheet? We do. Yes, definitely. We do take it on to our balance sheet. And generally speaking, we are actually functional both the sale and the purchase is in the currency We're operating, so we buy in dollars, we sell in dollars, we buy in euros, we sell in euros. I totally understand that. But suppose if I I'm selling in Brazil and I sell BRL 100 BRL last year and I sell BRL 100 BRL this year. I've actually contracted in real terms because the nominal price is in dollars and That means volume or pricing decline, isn't it? So it does flow through your accounts in that fashion? I'm not sure I got your point. Okay. In a very simple terms, if suppose I Tell you something, I mean, a customer comes and buys something for $100 last year. But So suppose the trade is happening in Brazil, you obviously will quote the price in Brazil in real, but most chemists, most chemical engineers Going to look up the price in dollar and then convert it in real. That is how the industry works, if I understand it. So if last year, I looked up $100 worth of sodium hydroxide, and this year, I do $100 worth of sodium hydroxide. Local currency wise, I would have got 35% growth. And that brings me to my first question, because if LatAm currencies on an average Have de rated versus dollar by 15% to 20%. Your constant currency 1.5% decline Tells me volumes must have been off double digit. Am I completely getting it wrong or not? First 1st of all, I would point out for the benefit of the larger group, the example you are addressing, the Brazilian example, It's a relatively specific example that does play a role in our group, but it's by far not so relevant in our group because we the 80 Percent of the business actually in Europe and North America. Nevertheless, taking on that example, you are right that Probably all other things being equal, the selling prices and our gross profit in Brazil this year in real It's higher than it was last year for exactly the effects you mentioned. But then again, the revaluated against the euro. And if I If I state constant currency growth rate, I lose that advantage again back again. So there is no meaningful Technical effect in our group accounts, which impacts growth in that respect. Now how do you lose that at 200? I mean, you reported 1.5% LatAm decline. Can I suggest we take that offline to IR? I think it's a long explanation that goes beyond this call. Okay. So if I can just clarify the second question. If I look at the inventory turn in U. S. Dollars, which perhaps is the natural currency to calculate that, that has been coming down. And you have guided towards that because obviously you're getting more business out of Specialty Chemicals. Could you Give us some color on how much of that is mix between bulk versus specialty and how much of that is dollar weakness? None of it is dollar weakness. A little bit of it is Mix shift, not too much. And so we may do of it as being challenging market conditions. Great. And finally, just the last one. I promise this is the last If your accounting for inventory is done at the average cost, Alan, if I look at any American chemical distributor, they would tell you what the FIFO reserve was because obviously In a falling price environment, the impact on gross margin with a fee for accounting would be greater. So just trying to get a sense of what the underlying gross margin decline would happen, give the accounting with FIFA? It's Absolutely marginal. We are turning inventory very, very quickly. We are turning inventory on average every 5, 6 weeks. It's a very price volatile product. We very often turn within days. So the average pricing impact on inventory is very, very marginal. Thank you. We're now over to the line of Karl Green at Credit Suisse. Please go ahead, Karl. Your line is open. Thank you very much. I've got 2 or 3 questions. I'm sorry to go back to this FX question, which I'll try and ask in a very, Very different way just on Latin America. Could you just explain to me in simple terms why there's only a 4 percentage point FX impact In Latin America, we're invoicing in the dollar, which has strengthened versus the euro or local currencies, which have always sorry, Which have weakened against the euro. Is it just a mix of those two items? What else is going on there? I'm just not clear as to what's being invoiced and what's being how much of that is local currency. That's my first question. Can you shoot the second question? I think Yes, yes, absolutely. The second question is more about European growth profit growth. If you strip out Fred Holmberg and Keymap, then it looks like organic Gross profit growth in the 3rd quarter was only about 0.7%, which is lower than industrial production. And I just wondered, is there Something specific going on there given that you have got exposure in the Spanish market, which is recovering quite nicely. Are there any countries where you've seen a material Deterioration in the Q3. There is any greater competitor activity going on in Europe. And my final question, which might somehow be linked to FX, but I'm not sure, is the other financial results within your interest line. That's Been very volatile over the last three quarters. It was plus 0.3 in the second quarter and it was minus 10 in the Q3. Can you just talk me through exactly what's in there and why is it moving so elastically? Maybe just something on Europe. I don't There's not one particular industry or country that's showing major variations at the moment. And you know that 1% 1.5% sort of growth rates in Europe at the moment seem to be what we're able to achieve. So it's yes, we're not totally satisfied with the performance, but there isn't one particular element that you could point And say that's pulling down the results. On the relatively modest difference in Latin America between as reported growth So the fixed adjusted growth rates, my best estimate at this stage is that by far most of the devaluation took place relatively early this Yes. So that on Q3 this year over Q3 last year, the devaluation impact is actually not that big. But I have to reconfirm this with the data and we have to come back to you With this reconfirmation. Okay. Thank you. The other FX result is part of financial result. It's basically FX gains and losses from hedging. And it goes back to what was asked on this call a little bit earlier That's an operating effect on devaluation. You basically have in gross profit, but the offsetting hedging effect in financial results. And just to be clear, does most of that hedging apply to Latin America? Or is it equally applying to Asia Pac as well. The higher share applies to Latin America, but the fair share also applies to Asia. So it's kind of best to look at the emerging market performances in light of that result rather than in isolation. Okay. Thank you very much. I agree. We're now over to the line of Christian Kopf at MainFirst. Please go ahead, Christian. Your line is now open. Thank you very much. I just have 3 small questions. First of all, I would like to ask if there are any implications on 2016 from your guidance On the Q4 for this year, I guess that the negative effect on your earnings development within oil and gas business will persist as long as the situation in oil and gas is unchanged. Or on the other hand, do you think that you might overcome any shortfall in the first half of twenty sixteen already thanks to the headcount reduction you mentioned and any efficiency gains? 2nd theme is around the guidance for 2015. You say that the oil and gas does leave around 30,000,000 Euro leak in 2015 or shortfall, which would roughly translate into €12,000,000 on EBITDA if we take into account 40 Conversion ratio, but taking into account that you cut your 2015 EBITDA guidance by around 5% or €45,000,000 at midpoint, I just would like to ask where the difference is coming from then. And I think it would be very helpful if you could please break that down a bit from this side. And lastly, on the working capital effects for the remainder of the year, do you expect the current trends to continue and also the cash inflow to continue? Just on in terms of 2016 relative to gross profit development and general revenue business, Yes. We will go into 2016. So the Q1 will be quite a strong comp versus 2015, which we're expecting. We do see clearly there's still structural growth in our business. We still see outsourcing. We still see all the elements That we might expect to enjoy as a large distributor. And therefore, we will be seeking to regain effectively momentum in terms of growth by Capitalizing on those elements of our business. We think we will be through oil and gas in terms of the oil and gas It's likely to be stable and therefore we have a solid platform there which will not be will not have the effect that it's had this year. So I'm expecting the business start moving forward again in 2016 with our normal business plan. And on if I understood your Stood your question correctly, a little bit of detail and color, where the guidance reduction is to be allocated to. I would first of all say, if you take the €30,000,000 gross profit reduction in oil and gas and translate it Into an EBITDA shortfall, we don't have an exact number, but you would have to use a higher conversion ratios than 40 Percent because there was some operating leverage which works somewhat towards the negative in this end. So you probably More end up with €20,000,000 if not a little bit higher EBITDA impact from that. The other effects which we basically saw over the last Quarter, I would like to point you again to Page 21 of the presentation, which on the right hand side has quarterly industrial production growth figures North America. So kind of a proxy of the development in all our other customer industries. And the industrial production growth came down sharply. It was 3.3% in Q1, 1.2 1.8% in Q2 And 0.9% in Q3, and that is basically what impacted the remainder of our North American business. We have a similar but by far not that strong effect in Europe where also industrial production growth came in at pretty low levels. I mean just to add to what Georg said on oil and gas, I think I referred to earlier We did not automatically reduce our cost base severely in our oil and gas business to reflect The lower operating conditions, but we now realize and well, it's not realized, but we now recognize So we're not looking at a short and medium term development here. And therefore, we will seek to reduce that in the course of the next 2, 3 months. And it was completely correct in terms of the conversion ratio that you should use, give you nearer €20,000,000 as opposed to the €12,000,000 I think which you mentioned. That's already very helpful. Just to come back on the working capital effects that we might see. And secondly, one follow-up. What time frame would you think is needed to, let's say, work a little bit on the efficiency just to get some kind of feel? Thank you very much. The working capital, we generally point out that price levels of chemicals Not relevant, not very relevant for our profitability, for gross profit and EBITDA. Price levels of chemicals are relevant for working capital and can cause a little bit Volatility, from today's perspective, we do not see an upward trend in chemical crisis. We see stability To some further declines, in that scenario, we do expect continued very strong cash flow from working capital towards the end of the year. A timeframe on efficiency gains, the easy wins, 3 to 6 months. That's great. Thank you very much. Thank you. Okay. It looks like we've got a final question in the queue and That is going back to the line of Karl Greene at Credit Suisse. So Karl, back to you. Thank you very much. It is just one small follow-up on the working capital. I mean, we heard from Univar earlier this week about them pushing up inventories to improve their service levels To customers, are you seeing similar demands from your customers just in terms of thinking about those pressures on working capital terms over the next 12 to 18 months? And in addition to that, is there any kind of pressure on payment terms you're seeing from any particular customer segments? Thank you. Well, firstly, I'm not quite sure why Univar is changing their policy and stocking, but we our business is already configured in the shape you might expect it to be to Meet customer service, so I will be changing our policy on that. But so that's one what was it that part of the question? So I'm so incensed by this. Payment terms, customer suppliers? Yes. Look, I think there's pressure in just about every direction to underpayments Both suppliers and customers are all searching for payment terms, and we're pushing back as hard as we can. And I think the important thing is that we are on top of that. But we I don't see any I don't see us being in a position where we should be significantly affected by this. And I think the working capital turn It's a number which we look at very closely. Thank you. Okay, gentlemen. As that was the final question for think we can probably end the call there. Okay. Well, this now concludes Today's call, thank you all very much for attending. You may now disconnect.