Brenntag SE

XETRA:BNR

Earnings Call Transcript 2020-Q1

[Operator]

Dear ladies and gentlemen, welcome to the Q1 2020 Results Call of Brenntag AG. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Christian Kohlpaintner, who will lead you to this conference. Please go ahead, sir.

[Christian Kohlpaintner, Chairman of the Management Board & CEO]

Thank you. Welcome, ladies and gentlemen, to the results call for the first quarter 2020 of Brenntag AG. I am Christian Kohlpaintner, and I'm here together with our CFO, Georg Müller. Today, we will walk you through the details of our business development in the past quarter during these extraordinary times. I will start with the highlights, and Georg will provide details on the financials for the first quarter reporting period. Afterwards, I will talk about the progress we have made in our holistic diagnosis.Now I'll provide an overview of the business development in the first quarter. Due to the COVID-19 pandemic, we are all facing very special and unique circumstances both in our private and business lives. I'm going to speak about the impact of the virus on our operational and financial performance in more detail on the next slide.Despite the challenging environment, we accomplished a solid performance, and the company demonstrated the resilient nature of its business model. The group generated an operating gross profit of EUR 745 million, an increase of 7.1% on an FX-adjusted basis.Operating EBITDA grew by 8.7% on constant currency amounting to EUR 263 million. At EUR 162 million, the free cash flow was about at the same high level we achieved a year ago. Also, we saw improvements in working capital management. Finally, our EPS amounted to EUR 0.74 in the first quarter. I would like to emphasize that on the one hand, we implemented a global crisis management and on the other hand, continued to work on the long-term position of our company both at the same time.Our General Shareholders' Meeting is planned to take place on June 10, 2020. In order to proceed with the original envisioned time line, the Supervisory Board and the Management Board have decided to go ahead with a full virtual General Shareholders' Meeting without physical presence of shareholders. We confirm our dividend proposal of EUR 1.25 per share, as communicated in March. Of course, this is subject to the approval by our shareholders. Our confidence in the resilient and cash-generating nature of our business model enables us to maintain our reliable dividend payments.It is fair to say that the spread of the coronavirus came unexpected in speed and scope for every one of us. Against this background, we managed to handle this crisis very well globally so far. As you can see from our solid results, we had only limited impact on our business activities and financial performance in Q1. Of course, our primary goal has been and remains to ensure the health and safety of all our employees and business partners. We have set up a global crisis task force and put our extended business continuity plans in place. We have no meaningful business disruptions. And as of today, basically all of our sites were fully operational. Brenntag has proven its ability to deal with challenging conditions and circumstances.Looking into the near-term future, we do see a high level of uncertainty and the situation around the world is quite dynamic. The diversification of our company strongly supports our resilience. Our global footprint and the regional spread will help us to cope with the challenges in times of crisis. We are servicing a broad and diverse range of industry segments with a customer base of around 195,000 customers in total.What we also deem important in the current situation is our strong financial profile. Firstly, we don't have immediate debt maturities. The next main maturity is due only end of 2022. And secondly, we have close to EUR 600 million cash on our balance sheet plus around EUR 600 million as committed in undrawn credit lines.Clearly, this crisis is not over yet, and the high level of uncertainty will remain in the months to come. Of course, the work of our crisis task force continues and the management team keeps monitoring the business development closely. We feel well positioned to deal with the challenging environment.With this, I would like to hand over to Georg to lead us through the numbers.

[Georg Müller, CFO & Member of Board of Management]

Thanks, Christian, and good afternoon. I will speak about the key financial figures for the first quarter 2020, starting with the development of operating EBITDA. The slide presents a bridge from the first quarter 2019 to the first quarter 2020.Operating EBITDA amounted to EUR 239 million in the first quarter a year ago. The translational foreign exchange effect was almost negligible at a positive EUR 3 million. Our acquisitions contributed EUR 9 million to the EBITDA growth in the quarter.In Q1, particularly EMEA and Latin America showed a positive organic earnings development, both with double-digit growth. North America declined by 6% organically, mainly driven by the weakness in the oil and gas customer in H2. Asia Pacific reported a positive organic growth of 2%. As a side note, the fair share of the M&A contribution is allocated to Asia.On the next slide, let me provide some details of the business development in the regions. Despite the difficult environment, the company stayed fully operational in all regions. In EMEA, we showed a very strong result in the first quarter. Most of our customers kept their business operations up despite the crisis. Within our portfolio, some customer industries performed particularly strong, for example, the food industry or the cleaning industry. Almost all countries in EMEA contributed to the growth.Gross profit grew by 13% on a constant currency basis. Operating EBITDA increased by 21%, whereas 19% is organic growth. So with that underline the strength and the vitality of our business. This is a good platform to build on, even if the environment should get more difficult going forward.And coming to North America. The Q1 results were clearly impacted by the weakness in the oil and gas customer industry, which in turn is mainly attributable to the significant decrease in the oil price. In particular, the demand of our customers in the upstream business was hit. Like in Europe, we saw good business development in other customer industries. However, this could not compensate the weakness in oil and gas fully.In total, gross profit in North America was on last year's level. Operating EBITDA decreased by 4.6% and by 6% organically. Latin America reported good results in a still volatile environment. In the quarter, we were able to grow operating gross profit by 16.5%. Operating EBITDA increased by 25%. Organically, this was an increase of 16%.We are also satisfied with the results we reported in Asia Pacific. In Q1, the business in China was clearly most affected by COVID-19, given that there was a comprehensive shutdown in January and February. However, production in China is now getting back to normal, which we have also seen reflected in our business. Gross profit in the region increased by 9.5% on a constant currency basis. This was also supported by acquisitions, mainly Tee Hai in Singapore. Operating EBITDA increased by 20%. Organically, this was an increase of 2%.In summary, we navigated well through a difficult operational environment. We kept the business fully operational, and we delivered an increase in earnings. The uncertainty about the next quarters remains high, and we stay very close to our market.I will skip Slide #8, which includes a full set of segmental figures for your reference. Let me address the income statement, particularly the lines below operating EBITDA on Page 9. We report a special item amounting to an expense of almost EUR 7 million. Christian already addressed, and he will speak further about the progress of our holistic diagnosis. So special item relates to expenses for this effort.Depreciation amounted to EUR 64 million, financial result amounted to a net expense of EUR 24 million. The earnings per share stood at EUR 0.74 compared to EUR 0.68 a year ago, an increase of around 9%.The free cash flow was at EUR 162 million, almost at the very high level achieved in previous year. And let me emphasize that comment. Q1 2019 was a very high free cash flow in historic context, and we almost matched that number in the first quarter this year. As you see from the cash -- free cash flow details, CapEx stood at EUR 45 million. And let me add a technical remark. Since January '19, we apply IFRS 16 for rental and leasing. In the interest of a consistent presentation, we deduct payments for rent and lease from the free cash flow.On the subsequent Page 11, you can see that our net financial liabilities amount to EUR 2 billion. This already includes capitalized lease liabilities under IFRS 16. The leverage stands at 2.0x. Please note that the leverage calculation does also include the capitalized lease liabilities. In the text box on the right-hand side, we give the indication that this calculation method increases the leverage by about 0.2x.These days, we get plenty of questions on financial covenants. Our syndicated loan is the only instrument containing a financial covenant. The government requires the leverage to stay below 3.46x. You see we have plenty of headroom.In the current situation, which is characterized by a high degree of uncertainty due to the impacts of the COVID-19 pandemic, I want to emphasize once again, Brenntag's strong funding profile. We have a very balanced and very long-term-oriented maturity profile. The first main maturity comes up only towards the end of 2022. In addition, we have more than EUR 0.5 billion of cash on our balance sheet and further EUR 600 million of undrawn and committed credit facilities.As you can see on the next slide, our working capital amounted to EUR 1.7 billion at the end of the quarter. We put increased attention on working capital management and achieved a working capital turn improvement to a level of 7.3x.In summary, we are satisfied with the financial results of the quarter. We delivered earnings growth, a high and stable cash flow as well as an improved working capital management.I'll pass the presentation back to Christian.

[Christian Kohlpaintner, Chairman of the Management Board & CEO]

Thanks, Georg. With the publication of our full year 2019 results, I talked about the strength of Brenntag and the solid foundation we already have. We are the global market leader, with a prudent and a strong business model. Our diversification makes us very resilient, and the company is financially sound. This is a very strong setup in a crisis like the one we have at the moment.However, in the past years, Brenntag was not able to grow earnings organically. We, as a management team, are convinced that organic earnings growth can and has to be achieved in a market like ours and with our position. In order to address this in a different and more effective manner in the future, we have started a holistic analysis at the beginning of the year. The efforts we make with this approach will lead to our overall objective and improvement of our business performance, particularly the generation of sustainable organic earnings growth.I would like to emphasize that in the challenging environment over the past quarter, we dealt well with both the short-term crisis management and the continued work on the long-term positioning of our company. We have made good progress on our holistic analysis, and the work carries on, unaltered in scope and in speed. We are following our agenda and our objectives have not changed.Based on the first findings, we are currently detailing out conclusions, defining distinctive initiatives and creating an overarching plan for implementation. For this purpose, and as we have entered into a new phase, we have now created Project Brenntag. This is a comprehensive project where we have allocated substantial dedicated internal and external resources.Let me provide some more details of what Project Brenntag is all about. Project Brenntag helps us achieving our overarching objectives. For the time being, the project is focusing on the following 4 major work streams: first, our operating model; second, our go-to-market approach; third, our site network optimization; and fourth, our people and change. I would like to clearly point out that the project is not limited to these work streams. These are the major structural changes we are targeting. In addition to that, we have also identified short-term levers, such as indirect procurement, working capital management and margin as well as pricing management. Project Brenntag will be an extensive exercise.Today, I will share our current thinking with respect to the 4 major work streams. I'll start with details on the first work stream, operating model. Brenntag is the global market leader in full-line chemical distribution. This high degree of diversification has a lot of advantages. Due to our international footprint, we are already quite close to our local customers. We can leverage scale effects within our strong network across the industry segments which we are serving.Our broad product portfolio allows us to individually service our customers with tailor-made offerings. We are not dependent on senior customers or suppliers. This diversification helps us to generate resilient results also in difficult conditions.Having said this, full-line chemical distribution will remain the core of Brenntag's business model and Brenntag continues to offer the most comprehensive portfolio of products and services. However, we have to sharpen our profile towards relevant industry segments. This will expand our service offering and strengthen our position as a solutions provider.As a part of Project Brenntag, we are evaluating how we can further develop our organizational setup in order to create a stronger focus on attractive industries, while at the same time better utilizing our scale as the global market leader. We are going to better leverage our specialist knowledge in these industries. This will lead to strong and long-term partnerships with our customers and suppliers. The future operating model includes a centralized management and steering approach. Brenntag will further develop its back-end business support processes. Based on this approach, we envision fit for purpose and cost-efficient functions and business support services. This means that we will modernize, harmonize and standardize our business support processes and build advanced shared services for Brenntag.Beginning of March, we already talked about the importance of customer management and the value delivery to our customers. This will be reflected in and focused on with our go-to-market approach, our second work stream. We are going to create a more targeted and differentiated customer approach based on an advanced and stringent customer segmentation. This segmentation provides benefits for our customers and suppliers as it will help us to better respond to the individual needs of our customers. We will leverage our strong industry segments know-how, drive our segment-specific offerings and provide the required customer focus.In order to achieve this, we will adapt our sales organization. The goal is to reduce complexity and to increase the focus within our front-end sales organization. This will come with an optimized and tailor-made deployment of our sales force. The new setup not only permits an even closer proximity to our customers but also an overall efficiency gain for our organization.The third work stream of Project Brenntag is called site network optimization. Brenntag has grown significantly the last decade also through acquisitions and so has our site network. Currently, we are operating around 640 sites globally. In light of our growth and earnings ambitions, we also see a significant potential to optimize this footprint on a global basis. Here, we see the largest opportunities in our regions, EMEA and North America.We are well advanced in our comprehensive analysis of the network and are considering carefully, amongst others, topics such as customer proximity, service levels, capacity utilization and strategic locations.Coming to our fourth work stream, people and change. Chemical distribution is a tedious business. And we can only be most successful in the team that follows the same values and leadership principles. With the transformation the company is going to go through now, we also have to take care about getting and retaining the best people onboard. The competence and leadership skills needed for the transformation will be defined and developed thoroughly and will be reflected appropriately in our organization. The initiatives which will be implemented within Project Brenntag strongly depend on the execution skills of our leadership team.Ladies and gentlemen, the transformation of our company will be a comprehensive journey. Project Brenntag is an extensive exercise with a significant scope and wide-ranging consequences. We are going to build on the solid foundation we already have and will create a strong basis to drive sustainable organic earnings growth. The Brenntag management team is committed to clear and transparent decisions. We will implement measures to drive change, and we'll focus on diligent execution to unlock the full potential of our company. We are determined to open a new chapter for Brenntag.As you can see, we have made good progress over the last couple of weeks. We are now working on the details and currently preparing the decision-making. We are going to keep you informed about the progress and the results of Project Brenntag before the summer break.Now I would like to turn the focus to the current year, 2020. Since we published our forecast in March 2020, the world has changed materially and the uncertainty around the expected effects of COVID-19 has increased considerably. Therefore, at the beginning of April, we have suspended our forecast for 2020 as outlined in the annual report. We see a high degree of uncertainty and expect continued challenging business conditions as we progress into Q2 and the second half of 2020.Depending on how the spread of the virus continues, we cannot rule out a greater impact on the demand side. Also, it has to be seen how effective the measures of the different governments are. This might also influence our financial performance over the coming months. Of course, our top priority is to maintain the health and the safety of our employees, while at the same time, securing supply for our customers. The forecast will be updated as soon as it appears that the pandemic has been contained and the effects on Brenntag's further business performance in 2020 can be reliably determined.Finally, let me walk you through our road map for this year. I'm delighted to say that we are fully on track. The Supervisory Board and the Management Board have decided to go ahead with our General Shareholders' Meeting as planned on June 10. Due to the coronavirus and measures associated with this, the event will be held as a virtual General Shareholders' Meeting. Also, we still plan to inform the capital market about the progress we make before the summer break. However, we have to decide in which form and shape we can do this once we have more clarity on how this crisis develops.With that, I would like to conclude and now Georg and I are more than happy to answer your questions. Thank you very much.

[Operator]

[Operator Instructions] And the first question is from Daniel Hobden, Crédit Suisse.

[Daniel James Hobden, Research Analyst]

Just 3, if I may. I understand sort of the challenge you're looking at and the visibility that we have. And I understand from the full year results, I think you're looking to step away from monthly sales trends or monthly performance. I was just wondering, given the challenges that you've seen if there was an indication maybe about how March and then into April, what sort of performance you've seen and maybe how that had changed?Second question is around the sort of EUR 7 million special charges or exceptional charges. I was wondering if you had any visibility or ideas about how we think about them going forward for the next couple of quarters. And then I think I was looking through the results release and in fact sort of the dividend clearly remains in play and as does M&A going forward. I was just wondering if you could sort of provide any more flavor on M&A and if you're seeing any opportunities in the market at the moment.

[Christian Kohlpaintner, Chairman of the Management Board & CEO]

Let me start with the more simple question. That's what Georg probably could take. This is the EUR 7 million charges. I mean Georg, maybe you can talk about this, and then I'll take the other 2 topics.

[Georg Müller, CFO & Member of Board of Management]

Yes, Dan, the EUR 7 million charges we are addressing for Q1 almost completely referred to consultancy fees in the context of the project. And I would expect the consultancy fees on a similar level to roll to Q2. The more relevant part is, whatever initiatives and measures we decide in the context of Project Brenntag will have clear benefits, but they may also have additional cash out. And we will provide clarity on those cash out in our next capital market update.

[Christian Kohlpaintner, Chairman of the Management Board & CEO]

Again, we refrain from giving you monthly indications of how our business is doing. I think overall, when we look at the first quarter, there was, I would say, solid demand in most business areas, in most industry segments we are serving. Particularly also in March, we saw a good uptick in demand. But again, across all segments, there are a few exceptions, I must say, of course, the ones we have indicated before, which are impacted by that. And so from that perspective, not specific about the quarter. We do, of course, expect for the second quarter that there could be impact on the demand; how strong it will be, we need to see for the whole quarter. But again, we look industry segment by industry segment, and things can be quite different here and there.On M&A situation, I believe it is clear to everyone. I mean currently, the M&A markets are a little bit slow. We are not deviating from our typical guidance we have around M&A to spend EUR 200 million to EUR 250 million every year for this activity. However, we need to see now which kind of opportunities could develop. We stay alert and open and monitoring very closely what opportunities could develop. We have certain projects in our pipeline, which we continue to explore and continue to develop. So I think there's no fundamental change in our strategy and our guidance to how we deal with M&A.

[Operator]

And the next question is from Rory McKenzie, UBS.

[Rory Edward McKenzie, European Support Services Analyst]

It's Rory here. My first question, again, about kind of the current business trends. So obviously, in Q1, gross profit was really stronger than expected, and you called out cleaning and Food & Nutrition as 2 strong areas. Do you think the business benefited from volume seeing any pre-stocking in those areas? And have you also seen, in maybe disruptive markets, more new customers getting pushed into the, I guess, distribution channel? Obviously, you hold those inventory, you've got good availability. Do you think that helps your -- I guess, maybe some more of your pricing metrics going to help to boost Q1?

[Christian Kohlpaintner, Chairman of the Management Board & CEO]

I think we cannot exclude that there could be here and there pre-stocking. I mean this is, I think, a very normal behavior, which you would see in such a situation. Again, it is -- we saw the demand across the industry segments, besides the ones who are weak, relatively good. So from that perspective, we cannot exclude this but I would also not put too strong an emphasis on that. On the new customers, that's, I would say, difficult to say because also suppliers at this point of time, of course, are more interested in a stable relationship with distribution partners. And so handing all the business in these kind of situations cannot be expected and should not be expected. So we saw here and there maybe some opportunities for Brenntag because of availability, because of our global presence here and there, but it's not a broad movement. I must say that we can really say we have gained a lot of new customers clearly during this time of crisis.

[Rory Edward McKenzie, European Support Services Analyst]

Okay. And then maybe turning to another metric within your top line, to kind of the gross profit per ton that it sounds like a source of like good expansion, maybe through the first quarter. Is that mix? Or do you think that given the price volatility that you've seen that the business actually managed to perform quite well and being quite commercial with its maybe approach to pricing in some products?

[Georg Müller, CFO & Member of Board of Management]

Rory, it's Georg. It's all of the above. That gross profit per ton developed favorably. There is a certain mix effect in there, particularly to more smaller quantity warehouse orders and a little bit away from the direct orders, which does help gross cost profit per ton. Obviously, there is also an underlying favorable development within a number of product groups.

[Rory Edward McKenzie, European Support Services Analyst]

Okay. Understood. And then just last one for me. Can you talk about how you prepared your cost base as you head into Q2? For example, how many of your staff do you have on short-time working schemes or other furloughing schemes?

[Georg Müller, CFO & Member of Board of Management]

See -- well, you see that the business development in Q1 was actually pretty good. So we run on relatively high levels of capacity utilization in challenging circumstances. So we need all hands on deck. And the gross profit development actually warrants that. No question, there is a high degree of uncertainty going forward. And we are very, very tight with respect to hiring. I could almost say we don't hire, and we drive down temps wherever possible.

[Rory Edward McKenzie, European Support Services Analyst]

Okay. But -- so there's no real comment on the use of furloughing schemes or similar at the moment?

[Georg Müller, CFO & Member of Board of Management]

There is. Furloughs, for example, in North America, but to a very small degree, again, because the volume development, the business development is still a healthy development. But the concept exist that we can extend if necessary.

[Operator]

The next question is from Tom Burlton, Berenberg.

[Thomas Edward Burlton]

I've got a few, if I can. Firstly, just on EMEA on that very strong performance. I wondered if you can give any more detail, you called out a couple of the sort of end-market segments, which performed particularly well, Food & Nutrition, for example. Can you remind us how big that is within EMEA and actually the group level actually and perhaps how that trended specifically through the quarter? The other question, divisionally, in terms of North America, oil and gas, if I'm not mistaken, is about 20%, 25% or so of that business. In the past, sort of coming back to 2015, '16, when we had an oil and gas crisis, you for a period of time called out what that segment was doing. Can you say where oil and gas was sort of run rating towards the end of Q1 or in March? Or any sort of color on the development of that end market would be helpful.And then one final question, just following up on Rory's comment on the furlough schemes and use of those furlough schemes. Obviously, you've committed to paying the dividend. Does that limit the -- your ability to access any of the furlough schemes in any of your geographies, for example? I know in some countries, there's issues where if you're accessing those schemes and paying dividends, I think that can be a problem. Do you see any issues there?

[Georg Müller, CFO & Member of Board of Management]

Okay. I think I'll start, and then Christian, of course, can jump in. And the reference we made to a particularly healthy development in Food & Nutrition and to a degree also in cleaning was more meant as examples for strong industries. Actually, the vast majority of our customer industries is developing positively. So maybe we should more have pointed out the negatives, but instead of giving these 2 positive examples and the negative spots are obviously oil and gas, North America and to a degree, the lubricants industry. Actually, most other customer industries are in varying degrees developing pretty, pretty nicely. On your particular point, food -- in EMEA, Food & Nutrition in EMEA is good double-digit growth. So certainly at 12%, 13% on a gross profit level. And it accounts for roughly 13% of the business in EMEA on that particular one. As you point out, and I'm changing to the next question. We confirmed our intention to pay the dividend on the 2019 earnings of EUR 1.25 per share subject to approval of the General Shareholders' Meeting on June 10. It's important to us because we have a resilient cash-generative business model. We are a reliable dividend payer. And through acting this way, we want to reconfirm and reassure the market of this. We do not expect to make extensive use of furlough schemes in the Bavarian countries. As of today, I'm not aware of any furlough scheme that actually prohibit us of paying a dividend. Does that answer the question, Tom?

[Thomas Edward Burlton]

Yes. I mean just any outstanding points on the oil and gas and how that trended sort of in a specific period, if you could?

[Georg Müller, CFO & Member of Board of Management]

As you say, oil and gas is a good 20% of our business in North America, and it's very, very tiny in the other regions of the world. In Q1, the gross profit of the oil and gas business was about 9% down against previous year, but the trend is pretty negative. So I would expect the declines to be stronger in Q2 and potentially Q3.

[Operator]

The next question is from Markus Mayer, Baader-Helvea.

[Markus Mayer, Lead Analyst of Chemicals]

Coming back to oil and gas, you have also recently acquired some oil and gas distribution assets. In this current environment, are there some impairment risks? And maybe you also can shed some light how you do and what kind of basically assumptions your impairment testing is based on? The second one is on Asia. What would have been the underlying earnings growth in Q1, excluding the Tee Hai Chem acquisition? And then the last one is most likely on Christian. Has the COVID crisis have discussed an impact on the potential changes you have in mind for Brenntag? Are there any changes that will happen faster or fewer? That would be most helpful.

[Christian Kohlpaintner, Chairman of the Management Board & CEO]

Yes, I'll take the last one. As I said, we have managed to run both. So it was, of course, a short-term crisis management necessary. And I think we have overall managed this relatively well. But at the same time, we did not let go on our focus, on our agenda to prepare a solid foundation for the future. So we stay the course. We are exploring the opportunities and developing Project Brenntag unchanged. And so we are currently not decelerating the effort, which is running at high pace. So that's managing basically the short-term and the long-term necessities and requirements of the company in the same time.I think on the impairment topic, I will hand it to Georg and also maybe Asia, the impact of Tee Hai, I think he can also answer. But if you...

[Georg Müller, CFO & Member of Board of Management]

Let me take the impairment question first. We do test our intangibles for impairments, obviously, on a cash-generating unit basis, which equals the segment in the case of Brenntag. So we test on Asia, on North America, on Latin America, on EMEA and on the group. We had the last fully comprehensive impairment test based on the results of 2019. And you see a full elaboration of the impairment test in the annual report with very significant cushions. Now after Q1 and given the corona crisis, we did not go through full impairment test because we do not see a triggering event. We obviously cross-checked our assumptions against the sensitivities we laid out in the full year. And for the time being, we do not see any impairment risk.The oil and gas business in North America is not a separate cash-generating unit. So there will not be an impairment specifically on that overall small part of the business. Earnings in Asia in Q1, obviously, we do show an EBITDA increase for Asia of 20%, which is predominantly or to a very high degree Tee Hai acquisition-related. The organic earnings growth in Asia in Q1 is 2%. Still a positive number. And if you consider that China is part of the organic development and China was in a very comprehensive shutdown in January and February, we do think the 2% positive organic growth to be a pretty positive number for Asia.

[Operator]

The next question is from Chetan Udeshi, JPMorgan.

[Chetan Udeshi, Research Analyst]

I just had one question. I think to some extent, similar to the previous question on, can you help us understand the trajectory of demand you saw through Q1? And the point I'm trying to get is, again, similar, how to think about the divergence between, say, the end market growth versus what you guys did, especially in EMEA in Q1? And in other words, have you seen any slowdown from the trends you saw until the end of March and what you saw till the end of April?

[Christian Kohlpaintner, Chairman of the Management Board & CEO]

Again, we know. I think we try to refrain from monthly judgments. We can talk about business dynamics. Business dynamics is certainly clear that while we are going from Q1 into Q2, the business dynamics become softer. And we do expect impact on the demand side as we go further into Q2 compared to Q1. I think this is obvious that this will be the case, and we cannot overcome this totally.

[Chetan Udeshi, Research Analyst]

Understood. And can you help us understand -- maybe this is for Georg. What is the approximate split would you say in your cost base between variable and fixed costs? So I mean just for our center would be analysis, if you want to stress some models and say, okay, the volumes are down 10%, 15%, how much can the cost come down in that environment?

[Georg Müller, CFO & Member of Board of Management]

Yes. I tried to answer but would caution you -- or caution the broader audience a little bit because, obviously, the question of cost variability relative to volumes, it's also a question of time access. In the long run, everything is variable, obviously. On the very short run, so what is equal the automatic cost reduction together with the volumes, I would say the immediate effect is probably around 30%, maybe 40%. So $1 of gross profit generated less through volume decrease would lead to a cost savings of $0.30 to $0.40. But really take it with a grain of salt. If you think somewhat longer term, 6 months, a year, I would give you clearly a higher number.

[Operator]

The next question is from Peter Olofsen, Kepler Cheuvreux.

[Peter Olofsen, Analyst]

Two questions left for me. The first question is on what you call Project Brenntag, where you state that you will sharpen your profile. Does that mean that you plan to de-emphasize activities in certain industries or regional markets? Or what do you exactly mean by sharpening your profile? And then a question for Georg. What do you anticipate in terms of full year CapEx?

[Christian Kohlpaintner, Chairman of the Management Board & CEO]

Just -- yes, just to make sure I listened well to the question. The question in the context of Project Brenntag was particularly if we want to de-emphasize certain regions or customer industries, right?

[Peter Olofsen, Analyst]

Yes, because also in the interim report, you write that you want to sharpen your profile. And trying to understand what does that mean, sharpening your profile.

[Christian Kohlpaintner, Chairman of the Management Board & CEO]

Okay. Yes, let me take the Project Brenntag question and then Georg will answer the question around the CapEx. Sharpening a profile, I think I have spoken to the last couple of months since we had interactions, that I believe that Brenntag needs to have a much different approach towards certain industry segments. And even before I joined, there was the exercise and the pilot that we call it that way, to create a Food & Nutrition business to give this a sharper profile towards that specific industry segment. And I believe there are more industry segments where we should explore and develop our thinking of how can we tackle those markets better than we currently do in our current setup. That does not mean that we are giving up areas or we are de-emphasizing any areas because even, let's say, in a nonspecialty area, you can sharpen a profile by being very clear on what customers expect and that's delivering a ton of caustic soda at the lowest cost you can. So I think this is what we mean with sharpening. Clearly understanding what is driving an industry segment, what is driving the customer behavior and the buying pattern of those customers and then sharpening our profile there, which is also very clearly in line what our suppliers expect us who want to sell their products in certain industry segments more successfully. And this is what it means by sharpening the profile.

[Georg Müller, CFO & Member of Board of Management]

Yes. On the CapEx number, it's kind of a related answer. In the context of Project Brenntag, particularly the work stream of site network optimization, we are also thinking and rethinking CapEx and I really can't give you a good number for 2020 at this stage. It will become part of the update that we plan to give the capital market before summer.

[Operator]

The next question is from Isha Sharma, MainFirst Bank.

[Isha Sharma, Analyst]

The first one would be around the conversion ratio at EMEA to improve meaningfully. Could you tell us how sustainable this is? And is there some temporary mix effect there? My second question would be, correct me if I'm wrong, but I assume that you have a relatively high exposure to smaller business players, due to the potentially higher financial impact in the current crisis. On these counterparties, do you see any credit risk for Brenntag? Those would be my questions.

[Georg Müller, CFO & Member of Board of Management]

Let me start with the credit risk question. But indeed, in distribution, you service -- a good part of your customer base and distribution is SME. So you have to deal with SME credit risk. But we are very experienced in judging on credit risk and in collecting. Don't forget that we also typically deliver customers with repetitive orders, so we always have the tool in our hands that the customer will make sure as long as he can to pay our invoices because otherwise, we would cut him from a subsequent product stream. I would also point out that particularly in EMEA, not necessarily globally, but particularly in EMEA, we have a good share of our customer base credit insured. So through our processes, through our tools, through the credit insurance, credit risk is actually a pretty limited risk for us, as you can see that over many, many years of history. In the current situation, we do continue to see very sound customer behavior, very sound customer payment behavior, with very few exceptions, almost no increase in overdues. We are observing and cautious nevertheless. And if you go through the details of the quarterly report, you can spot that we actually provisioned about EUR 3 million for bad debt. They usually, we -- in Q1, we would provision maybe EUR 1 million. So we are taking some balance sheet precaution already. But in the context of seeing this as a very low risk.

[Christian Kohlpaintner, Chairman of the Management Board & CEO]

Conversion ratio?

[Georg Müller, CFO & Member of Board of Management]

Yes. Conversion ratio, EMEA, I would rather refrain from answering. Obviously, Q1 was a very, very strong quarter for EMEA, and that shows in very different KPIs. It shows in gross profit. It shows in EBITDA. It also shows in conversion ratio. I have all expectations that the conversion ratio in EMEA will develop positively. But can I say Q1 is easy to repeat? No, I can't.

[Isha Sharma, Analyst]

Understood, but I just wanted to understand if it is more because of cost alignment? Or is it because of the mix effect? That would be super helpful if we just get the flavor.

[Georg Müller, CFO & Member of Board of Management]

A fair degree of conversion ratio development in EMEA in Q1 is attributable to the very strong gross profit.

[Operator]

The next question is from Mutlu Gundogan, ABN AMRO.

[Mutlu Gundogan, Analyst]

A few questions from my side. So the first, on your gross margin. Obviously, this increased quite a bit year-on-year to 23.2% and also driven by 3 out of 4 operating segments. So it is almost, say, a company-wide development, except North America. Can you tell us whether this uplift is sustainable?

[Georg Müller, CFO & Member of Board of Management]

Yes. We are hesitating to answer, Mutlu, because gross profit relative to sales. So what you call a gross profit margin, nothing which is a major KPI for us. It is not a percentage of sales business. It is a volume and gross profit per unit business. The improvement you mentioned is to a degree attributable to year-over-year somewhat lower chemical prices without harming our absolute gross profit, and that's exactly what you would expect from our business. The percentage you quote is sustainable, if you assume a stable level of chemical prices, so this being more a technical explanation. The more relevant point for me is gross profit in our business is very, very resilient. And I would not expect any gross profit shocks going forward.

[Mutlu Gundogan, Analyst]

All right. And then a second question, you already indicated that some industries did better. And we know that from mid-March, there was some hoarding at consumers and probably also maybe industrial clients. So what is the risk of an unwinding of that? I would assume that certain sectors are probably slow to unwind, but it could be, for example, I've heard stories of certain customers buying a year's worth of volume in the first quarter, just to be certain that there would not be any logistical issues. Is this something that you've seen?

[Georg Müller, CFO & Member of Board of Management]

Well, this is a distribution business. So we delivered less -- mostly less-than-truckload, small quantities to our customers. And while we have seen a positive development in Q1, we have not seen any buying pattern that indicates material prebuying in the order of magnitude you mentioned. As we said, we cannot rule out there is an element of prebuying, but that should be limited in the context to the degree we can tell. The more relevant question is, from our perspective, will -- the industry, will we experience further reductions in demand just because the production processes at our customers are not fully running? Hopefully not, but that's the uncertainty we have to deal with.

[Mutlu Gundogan, Analyst]

Right. I understand. And if I can squeeze in one final question. I understand that you want to move away from monthly trading updates. I think that's very logical. But obviously, this is a massive crisis where what is expectedly a significant drop in demand in Q2. So a lot of cyclical companies have given monthly numbers in terms of what volume development is. Is that something that you would be willing to give March, April and perhaps an order book indication for May?

[Georg Müller, CFO & Member of Board of Management]

I think you said cyclical companies are giving that to you. And I don't think we are a cyclical company. No, joking aside, I can't give you a monthly number. If it provides some comfort, April does not give any material negative indication that we should convey to you, it doesn't. But it is May and June outstanding for the quarter. It is an uncertain ground.

[Operator]

And we have a follow-up question from Tom Burlton, Berenberg.

[Thomas Edward Burlton]

Sorry, just one follow-up from me. Just trying to reconcile some of the comments. I know you won't give us kind of April run rates. But just thinking about kind of -- historically, Brenntag's been a sort of something of an industrial production-type proxy. And I think kind of consensus views amongst economists is IP drop of sort of minus 14%, 15% in Q2. And I'm just trying to square that back with the comment on the fixed or variability of the cost base. If you're only able to take out sort of 30 cents on the dollar of the gross profit decline, how to think about that? And also, if you're not using any furlough schemes as of kind of the end of April. Maybe specifically, what the question is as well is on the personnel expenses, that sort of 60% of sort of OpEx. What's the sort of split within that of fixed versus variable remuneration? Is there a lot you can do in terms of bonuses? Is there a lot of sort of slack there where you can move the needle on cost to offset some of that perhaps volume decline that those industrial production sort of estimates would imply?

[Georg Müller, CFO & Member of Board of Management]

And we have the same desire that you have to predict the future and to work with the model. It is not easy in these times because you have to put in 3, 4, 5, 10 key assumptions. And every of these key assumptions is highly unlikely. I hear what you say about economists' forecast on industrial production, but how certain is that? So nobody knows. And I don't want to make those numbers my own numbers. In terms of your specific questions on personnel expenses, you are right, roughly 60% of our expense base is personnel expenses. The majority of those expenses are of fixed salary nature. So that will -- if a super material gross profit hit were to occur, and I wouldn't necessarily expect that with or long term, but if it were to occur, it becomes a question of headcount.

[Operator]

[Operator Instructions] And the next question is from Christian Cohrs, Warburg Research.

[Christian Cohrs, Analyst]

Just 2 left for me. First of all, you improved your working capital turn in the first quarter. Is there -- are there any measures you have taken? Or is this just more coincident? You elaborated a bit on the 4 work groups for the Project Brenntag so that actually means that, that you're more focused on efficiency and growth, but not on cash flow and working capital, in particular?And second question, oil and gas is weakening and most likely to weaken towards the end of second quarter. Have you elaborated any rightsizing measures with regards to your ASP? Because I assume it will -- yes, volumes will come down quite heavily in the months to come.

[Christian Kohlpaintner, Chairman of the Management Board & CEO]

Yes, I'll talk first about the work streams. Again, it's -- as I said, these are the 4 major work streams to address structural changes we have in mind for the company. But at the same time, we have also other work streams, which are addressing the more short-term levers. And this is -- working capital management is just one example. And so from there, we have certain initiatives to improve our working capital management and to a smaller extent, you can see this already reflected Q2, but also other impacts have led to that improved working capital turnover which we can report on the first quarter. So the work streams, as I said, are not only related to cost and growth, we're also looking on cash flow. We're also looking at working capital improvements. On the oil and gas business, I think Georg has elaborated already this. There is, of course, a lot of uncertainty around the oil and gas business also around the sectors in the oil and gas business, which we need to do, of course, very closely monitor an important part of our North American business in particular. And there, also coming back to a question before, of course, seeing what the second quarter is predicted from an industrial production standpoint of view and other things. This is something which we are fully aware of and that we are clearly tightening our belts while we're going from the first quarter into the second quarter, in fact, as early as possible to the movements we can see. And this is particularly true for the oil and gas business. So here, it's very clear that we stay alert, that we stay alert about customer behavior, that we stay alert about our cost position, that we stay alert about our inventories and everything we have in that business. But this is normal management, I must say, in such a situation, so nothing really special around this.

[Operator]

[Operator Instructions] And there are no further questions at this point. So I hand back to the speakers for closing remarks.

[Christian Kohlpaintner, Chairman of the Management Board & CEO]

Well, thank you very much, again, for participating in the call. We're very happy to be able to show solid results to you and to the investors on the financial markets. I think it is another proof point of a resilient business model Brenntag has with strong foundation we can build upon. And I'm very much looking forward to give you an update before summer and how we have developed Project Brenntag and what the outcome of it is and what you can expect. So looking forward for further interaction in a couple of weeks with you. Thank you very much.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.