Brenntag SE

XETRA:BNR

Earnings Call Transcript 2021-Q1

[Operator]

Dear ladies and gentlemen, welcome to the Q1 2021 Results Call of Brenntag SE. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Brenntag's CEO, Mr. Christian Kohlpaintner. Please go ahead.

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

Yes. Thank you very much. Good afternoon, ladies and gentlemen, and welcome to our conference call on the first quarter 2021 results of Brenntag SE. My name is Christian Kohlpaintner, and I'm here together with our CFO, Georg Müller. Together, we will walk you through our business development in the first months of this year.I would like to start with the highlights, and Georg will provide further details on the financials as always. Afterwards, Georg and I are available for your questions after our presentation.Ladies and gentlemen, Brenntag started very well into 2021 and achieved very strong results in the first quarter. The group generated an operating gross profit of EUR 764.5 million, which is, on a constant currency basis, an increase of 7.4% compared to the first quarter of 2020. Operating EBITDA reached EUR 300.3 million. On a constant currency basis, this is an increase of 20.7% compared to the already strong first quarter 2020.Free cash flow was solid with EUR 75.6 million. And our earnings per share stood at EUR 0.63 in the first quarter.Regarding our nonfinancial performance, we continued to achieve the best safety performance ever, also in the first quarter of this year. We are very satisfied with these strong results and the underlying, once again, the strength of our business model as well as the important part Brenntag plays in global distribution markets, particularly in difficult macroeconomic conditions.In January this year, we went live with our operating model and our 2 new global divisions, Brenntag Essentials and Brenntag Specialties. We will walk you through the details of the financial performance of our divisions later.Also in the first quarter, we continued to consequently work on Project Brenntag and on the step-by-step implementation of the various initiatives, and we continued to make very good progress here.Finally, we confirm our operating EBITDA full year guidance for 2021 instated in March. We expect a positive earnings development in 2021, and confirm that operating EBITDA will be in a range of EUR 1.08 billion to EUR 1.18 billion.Ladies and gentlemen, in course of last quarter, we closed 3 acquisitions: Comelt in Italy, ICL Packed in the United Kingdom and Alpha Chemical in Canada with a total enterprise value of EUR 59.2 million.Regarding our M&A activity in 2021 and beyond, we stick to our proven approach. We intend to spend EUR 200 million to EUR 250 million on M&A per year, and we'll focus on specific geographies in emerging markets and, in particular, in China. Also, we look for targets operating in specific industry and targets delivering a more meaningful operating EBITDA contribution.Our acquisition of Zhongbai Xingye in Mainland China was the first important step in this direction as it meets all 3 requirements that our M&A approach is focusing on. Zhongbai Xingye distributes a variety of specialty food ingredients, including dairy products and proteins. With the first stake, we acquired 2/3 of the company for an enterprise value of EUR 90 million. The second tranche to gain 100% ownership is intended for 2024.Ladies and gentlemen, let me now provide some color on the overall market conditions in the first quarter of this year. The trends and the overall business dynamics we saw towards the end of 2020 also continued into the first months of 2021. The COVID-19 pandemic is still with us. But with our global crisis management in place, we successfully limited the impact of the pandemic and protected the health and safety of our employees and our business partners.In the first quarter, supply chains came under severe pressure all over the globe due to a number of cumulative incidents. Amongst others, the ice storm in the United States, the blockage of the Suez Canal and the ongoing container shortages heavily impacted market conditions and global supply chains in the past quarter. Moreover, a multitude of suppliers suffered from production outages leading to product shortages and allocations. In that respect, we had to deal with significant supply chain challenges, but navigated through them prudently.And with this, I hand over to Georg, who will talk in more detail about our financial performance in the past months.

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

Thanks, Christian, and good afternoon to all participants. I will speak about the key financial figures for the first quarter 2021, and let me start with the development of operating EBITDA. On Slide 7, you see the bridge of operating EBITDA from the first quarter 2020 to the first quarter 2021. We structured the bridge in a different way than the bridge you have seen on prior result releases. We went live with the 2 global divisions, Brenntag Essentials and Brenntag Specialties, and we structured the bridge now around these divisions.Operating EBITDA in the first quarter last year amounted to EUR 263 million. The translational foreign exchange effect amounted to a negative EUR 14 million. Our acquisitions contributed EUR 3 million to the EBITDA growth. Our division Brenntag Essentials reported outstanding results with an organic growth rate of 29% and a contribution of EUR 44 million to the growth of the quarter.Brenntag Specialties also performed strongly with an organic growth rate of 7%, equaling additional EUR 7 million of EBITDA. Similar to the past, all other segments comprise central functions of the group and the operations of Brenntag International Chemicals. All this adds up to EUR 300 million of operating EBITDA in the first quarter this year.On group level, we reported operating EBITDA growth of 19% organically, which represents a very strong performance. Product availability and the ability to deliver promptly and reliably were key for our success and were highly valued by our customers. We continued to benefit from good margin management and were able to overcompensate effects from supply chain challenges by higher operating gross profit per unit.Before I talk about the financial performance of the divisions, let me remind you of the setup and the characteristics of our new operating model. Since the beginning of this year, we steered the company in 2 global divisions, Brenntag Essentials and Brenntag Specialties. The new operating model with a distinct market approach enables us to better service our business partners and best meet their changing needs. Both divisions address attractive and growing markets.Brenntag Essentials is the agile, lean and efficient distribution partner for our customers and suppliers in local geographies that markets a broad portfolio of process chemicals across a wide range of industries. The division stands for local market expertise and customer proximity, and it ensures smooth and cost-efficient supply chains.Brenntag Specialties builds on our position as the largest specialty chemical distributor worldwide and focuses on 6 selected customer industries. These are nutrition, pharma, personal care, HI&I, material science, water treatment and also lubricants. The portfolio of Brenntag Specialties consists of ingredients and value-added services that are directly applied in the production of our customers and products.I'm coming to the divisional results. Brenntag Essentials achieved outstanding results this quarter. The division reached an operating gross profit of EUR 472 million and reported very strong operating EBITDA of EUR 194 million. This is an increase of almost 30% to prior year's Q1. Due to the extraordinary conditions regarding the pandemic and pressure on global supply chains, our ability to maintain customer supply clearly paid off.All geographic segments contributed to this positive performance with Brenntag Essentials in EMEA and Brenntag Essentials in North America, in particular, making a significant contribution to the division's growth. Operating gross profit per unit developed above previous year's level and supported the strong conversion ratio of 41%. In North America, the stabilization of the oil and gas industry is ongoing, but it is still on low levels.Brenntag Specialties also reported very positive results in the first quarter. This division reached an operating gross profit of EUR 284 million, and reported an operating EBITDA of almost EUR 120 million. In Brenntag Specialties, product availability and the ability to service our customers were key in Q1. EMEA and Asia Pacific showed a particularly strong performance across all industries. Brenntag Specialties supported an EBITDA conversion of around 42%.In summary, we are very satisfied with the performance of Brenntag Essentials and Brenntag Specialties. Both divisions contributed to these very strong results and proved their strength in a challenging environment.On the following Slides, 11 and 12, we provide a full set of figures for Brenntag Essentials and Brenntag Specialties as well as figures for the regional segments in each division. This is mostly for your reference, but let me point out one thing. On Page 11, besides operating gross profit and operating EBITDA, we also show operating EBITA for the divisions for the first time. Brenntag Essentials has certain CapEx needs and, therefore, does carry some level of depreciation. So business model of Brenntag Specialties is particularly asset light. For Brenntag Specialties, operating EBITDA for the quarter totaled EUR 120 million and operating EBITA is very close to that number at EUR 112 million. This demonstrates the high cash conversion for this business.I'm moving forward 2 pages to Slide 13. I will particularly focus on the lines below operating EBITDA. We report special items amounting to an expense of EUR 71 million, so quite substantial, which are, on the one hand, related to our ongoing activities for Project Brenntag. On the other hand, special items include a provision for likely alcohol tax payments. This risk has consistently been reported in our risk report. We now received a tax assessment in the amount of EUR 64 million. The German authorities claim documentation mistakes regarding the selling of denaturated alcohol. That is alcohol that is used outside food and drinking applications.Let me be clear. There are no concerns raised about the proper use of these alcohol products. The case is about documentation. The selling of denaturated alcohol has comprehensive documentation requirements. The authorities claim mistakes in handling the documentation. We disagree with the assessment by the authorities. We are currently analyzing the final reasoning presented by them. Very, very likely, we will file an appeal.Let me get back to the other P&L lines. Depreciation amounted to EUR 61 million, slightly below the first quarter last year. Financial result amounted to a net expense of EUR 18 million. Finally, profit after tax came in at around EUR 100 million in Q1. Earnings per share at EUR 0.63, and that compares to EUR 0.74 a year ago. The reduction is driven by the special items.The cash flow has again developed solidly in the first quarter. We reported a free cash flow of EUR 75 million compared to the extremely strong free cash flow in Q1 last year. The reduction is driven by the outflow for working capital resulting from higher chemical prices. And I'll come back to that when I speak about working capital.Our net financial liabilities amount to about EUR 1.5 billion at the end of the first quarter, about stable compared to the end of 2020. Our leverage, that is net debt to operating EBITDA, also remained stable at 1.3x.Working capital amounted to EUR 1.540 billion at the end of the quarter, and that compares to EUR 1.3 billion at the end of last year. This is an increase of slightly more than EUR 200 million, and it is mainly driven by higher spend for working capital due to higher chemical prices. When we look at working capital management quality, we do note that we turned the working capital 8.7x, which is very strong compared to the 7.3x that we had in average over last year.In summary, we are very satisfied with the financial results for the first quarter. We delivered very strong earnings growth and a solid free cash flow, which provides financial flexibility for the group.I hand the presentation back to Christian.

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

Thank you, Georg. As mentioned already at the beginning of this call, we continued to work on implementing the various initiatives of Project Brenntag and made very good progress in the implementation also in the first quarter of this year. We already talked about the successful go-live of our 2 divisions, and you have seen our new external reporting structure. Above and beyond, we have started to roll out measures of our new more efficient and differentiated go-to-market approach, leading to an even closer alignment with our customers and suppliers' needs.We also reduced complexity and increased customer proximity by further optimizing our site network. In total, we have identified, detailed and rolled out almost 1,000 different measures in connection with Project Brenntag, and implemented a global monitoring and tracking with tools. Strong line management involvement ensures the appropriate focus on the execution of these measures.The last quarter, we were again able to increase our working capital turn. As Georg mentioned, we turned working capital 8.7x, which is a strong improvement compared to 7.3x at the end of 2020. Since the initiation of our program, we reduced around 350 jobs out of our workforce. Also, we have already closed more than 50 sites globally since the implementation started.Currently, we are in Phase 3 of the implementation of Project Brenntag. As announced during our full year 2020 results call, we will provide detailed information on the operating EBITDA contribution from Project Brenntag when entering into the next phase of the implementation after the second quarter.Ladies and gentlemen, besides operational and financial topics, we have some other important aspects playing a crucial role within Brenntag. First, I want to talk about our efforts with regards to digitalization. In 2016, Brenntag was one of the pioneers in our industry on digital across the globe, launching one of the first e-commerce platforms. Since then, we have developed multiple digital solutions and omnichannel models. Now we enter into a new phase to ensure to service our customers best.With Brenntag Connect, our global one-stop shop for our customers, we offer thousands of products now in 16 countries, and we see a significant increase in number of active customers and number of orders on the platform. We are continuously expanding the functionalities of Brenntag Connect. We recognize the increasing speed at which the market is moving and is developing. In addition, our new operating model brings changed requirements for our future digital business architecture.With Project Brenntag, we have embarked on a significant transformation journey, which also includes digital and IT. Next to them, we deem data and analytics as the third core element of our digital transformation journey. We are in the process of detailing out our digital value creation road map and our digital operating model to implement our digital business architecture.We have critically evaluated our existing assets and IT programs as well as initiatives against the future needs of our customers and suppliers as well as the requirements for our new operating model. Based on this evaluation, we made necessary amendments across our whole IT portfolio. These changes lead to a onetime write-off of intangible assets of around EUR 52 million based on current estimates in the second quarter. This is a one-off and noncash relevant impact. We will provide an update on our digital transformation journey later this year.Ladies and gentlemen, Brenntag is highly committed to continuously improve its sustainability performance and is currently developing a new strategic framework. Sustainability is part of our corporate strategy and corporate culture. Just 2 weeks ago, we published our 2020 sustainability report. It presents our performance on the field of sustainability and documents our global activities and achievements in the areas of safety, environmental protection, supply chain responsibility, employees and social involvement.In 2021, we are reevaluating our sustainability approach with the aim to develop a comprehensive strategic framework for sustainability in line with our corporate strategy. We consider sustainability aspects as drivers of our business and important contributors to our growth and the enhanced value creation. Developing new ambitious long-term goals will be part of this comprehensive framework to prioritize our resources, to drive the implementation and to monitor our performance. As for our digital journey, we will provide a further update on this important topic later this year.Now ladies and gentlemen, let's come to the outlook for 2021. Against the background of current business development, we confirm our guidance for operating EBITDA to be in the range between EUR 1.08 billion and EUR 1.18 billion for the full year 2021. This guidance includes the uplift from the Project Brenntag initiatives as well as M&A contributions. It is based on the assumption at the date of the forecast publication that exchange rates will remain stable.The COVID-19 pandemic will stay with us in the coming months. Particularly, India and Brazil face difficult conditions currently, and we do see a continued uncertainty in that respect. However, we also expect the recovery of macroeconomic conditions to gain traction in the course of the year. While we assume that supply chains maintain under stress the coming months, we feel well positioned to deal with this environment.Ladies and gentlemen, 2021 will be a year of transformation for Brenntag. We focus on the implementation of the measures of our transformation program and stick to our M&A approach with an increased focus on a more sizable targets, dedicated geographies and industries.And with this, I would like to conclude the presentation. And now Georg and I are more than happy to answer your questions. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from Simona Sarli, Bank of America.

[Simona Sarli, Research Analyst]

I have one question. You reported very solid growth in conversion ratio in North America in Essentials, while if I look at the financials for Specialties and the conversion ratio, not that positive result, actually declining year-over-year. So it seems to me that you benefited from supply chain constraints in Essentials, while in Specialties probably were impacted. Could you maybe explain the reason for the different trends in this region for Specialties and Essentials?

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

Yes. I think -- I'll start, and then maybe Georg is adding to it. I mean the first quarter has been a very special quarter when it comes to managing the supply chain. I mentioned before, we had the ice storm, particularly in the United States. We had all the other effects, I've mentioned, also the increased shortages in containers. And managing that supply chain, of course, was done extremely well by our Essentials people, and we were harvesting on our capability to deliver to our customers.In North America, the Specialties business had also some special effects in the first quarter, which are impacting the growth rate you have been seeing, in particular, also the conversion ratio, but these are onetime special effects we saw in the first quarter.

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

Yes. Nothing more material to add. Maybe I should point out that the segment, Simona, you are having under scrutiny. So Specialties, Americas, it's a relatively limited segment in the overall scheme. So out of the, say, close to EUR 800 million GP that the group generates per quarter, 10% -- a little bit more than 10% is in that specific segment. The gross profit is stable -- almost stable. So many customer industries in that segment developed well.There is also some lubricants business in there that actually still, prior to pandemic, in January, February last year, had a pretty good run, which, due to the pandemic this year, didn't really repeat. And then what Christian already mentioned, when you make the move from gross profit to EBITA, there is a little bit of income netted against expenses last year that didn't reoccur and some higher expenses this year. But in a small segment, this can easily lead to some volatile growth rates.

[Simona Sarli, Research Analyst]

Okay. And can I ask you how should we think about the conversion ratio through the year for Essentials and for Specialties?

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

And you see us -- Simona, you see us hesitating a little bit. This will, to a fair degree, depend on market circumstances on the gross profit per tonne side. So Q1 conversion ratios do benefit from market circumstances. So I would need to take a prognosis for how long these market circumstances continue.On the other hand, we will have savings from Project Brenntag kicking in. So if you permit the rough answer, I would say Q1 conversion ratios are probably good conversion ratios for the full year, maybe a little bit at the higher end on what you can expect for the full year.

[Operator]

Our next question comes from Chetan Udeshi, JPMorgan.

[Chetan Udeshi, Research Analyst]

Just a couple of questions from my side. The first question was on the contribution from Project Brenntag. Are you telling us there was not material contribution in Q1? Because the way I think about it is you talked about B2C job cuts already happening, 50 sites have been closed. But then when I look at your OpEx, OpEx is still flat on a constant currency basis. It doesn't feel like we've seen any real benefit of Project Brenntag in Q1, and I'm not sure why. So maybe can you help us understand that?And second question was just coming back to the guidance. I mean I understand your point on GP per unit, probably not -- there's a bit of uncertainty on how long last at this level. Given that you also have mentioned previously that you also have the ramp-up of Project Brenntag contribution, why are you guys not a bit more confident in terms of 2021 outlook given the Q1 run rate is already EUR 300 million per year, which should in theory suggest at least the top end of the guidance should be achievable, even if one believes some moderation through rest of the year?

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

Yes. I'll take the first question and then Georg is taking the second one. I mean there has been impacts of Project Brenntag, as you clearly can see from the numbers we are showing to you. I mean we have been successfully continuing our site network optimization. So when we spoke last time, we were talking about 30 sites being closed, now it's already 50 out of this 100. So we're making excellent progress there.Also, when it comes to the structural reductions in our head count, we have now about 350 positions eliminated. And so from that perspective, we are actually exactly where we wanted to be as far as Project Brenntag contributions is concerned.OpEx, there are many moving parts in OpEx. You have logistic costs, you have many other aspects going into that. So I would be cautioned to just look at this equation. OpEx for the Brenntag, savings or reduction in OpEx. And as we said in the full year result call, we want to stay away from giving you a quarterly message about where we stand in Project Brenntag quantitatively. We want to do this as we move from face-to-face because these are, for us, the more relevant review phases than only, let's say, the quarterly impact we are looking at it.So I think overall, with Project Brenntag, we are making very good progress, actually, what we expected and within the schedule. And so from that perspective, I hope we can remove your concerns that there are no impacts of Project Brenntag in this rather strong performance we had in the first quarter.

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

Chetan, thanks for your question also on the guidance. And we issued a guidance this year despite uncertain market circumstances, pretty early in the year, already in March, deviating from past practice, we issued a quantitative guidance for operating EBITDA. Yes, Q1 was strong, no question, but there is a little bit also a level of uncertainty. You do see, I think, very few companies changing guidance only based on Q1 results. So we would more appreciate to take a steady approach to wait for developments over the next months, the next quarter, and then take a more fundamental approach. It feels too volatile to change guidance based on each quarter's results.

[Operator]

Our next question comes from Markus Mayer, Baader.

[Markus Mayer, Lead Analyst of Chemicals]

One question as well on the conversion rate. It was up some basis points in Brenntag Essentials in the first quarter year-over-year, but only up slightly in the Specialties. Please help me to understand this. Was this uplift due to the logistical issues in supply pipeline and, therefore, kind of pricing power you had? Or the effect is mainly due to the Project Brenntag? And if so, is this conversion rate to stay? Or how sustainable is this conversion rate?

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

Yes. I mean -- maybe I'll comment qualitatively and then maybe Georg can add on that one. So I think the conversion margin we saw in Essentials is a remarkable good one. Again, a little bit reflecting the special situations we are currently seeing, and that does not mean that this is only in Q1. I think this circumstances of stressed supply chains, product availability more important than pricing here and there. And our people managing that volatility extremely well. This has led to, I would say, a quite good conversion ratio.Also, of course, we are focusing, for instance, with our site network optimization and Essentials hosting the asset base that clearly also shows that there is progress noticeable here as well. So I think you wrote it also in your report, and I think one also needs to be clear about it. Q1 had special circumstances which continued to last into the second quarter. I've frequently said also in other interviews that I even anticipate that we will still see stress in supply chains into the third quarter. So I think it's now up to us to navigate this prudently and also utilize our position we have in some of the markets as the global leading chemical distributor.On the Specialties side, I'm exactly there where we wanted to be in the starting -- in the beginning. I think we gave you guidance in the capital market update in November that we anticipate this in the range to be 41% to 43%. So this is 42%, we have accomplished in this quarter. It's exactly where we see that Specialties business. And here, we are maybe a little less [ will or able to ] swings in demand or stresses in supply chains when it comes to that conversion margin.So I think this is how you should read this. But again, don't think that this is only 1 quarter very high special effect. We still have a similar situation going now into the second quarter.Georg, anything to add?

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

I think you received -- the question was answered, Markus, right?

[Markus Mayer, Lead Analyst of Chemicals]

Yes, absolutely.

[Operator]

Our next question comes from Ms. Varanasi, Goldman Sachs.

[Suhasini Varanasi, Equity Analyst]

Just a few from me, please. Can you -- you commented that in 1Q, the volumes were down, pricing per unit was up. Maybe you can comment on the monthly trends and especially the trends into April? I think you indicated that it has continued into April, but has it become better or worse? Just to get some sequential color there.Second, we understand the investment in working capital has resulted in free cash flow reduction as expected. How should we think about the full year free cash flow development, please, compared to 2019 levels?And maybe just the last one. I understand that you haven't received much benefit from Project Brenntag in 1Q. How should we think about the benefits to accrue -- that can accrue from -- for this year given the target of EUR 60 million? Is it more from 2Q or should we expect it to be more second half related?

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

Yes, I'll take maybe the first and the third question, Georg can talk about the working capital.The trends we see in the business. I think when you compare to the situation a year ago, and again, I want to remind you that we had already pretty strong quarters last year, proving again the resilience of the business model in the first quarter, but particularly also in the second quarter last year. So since then, we saw a gradual recovery in volumes. We saw a gradual recovery in business activities. And these trends continued well towards the end of 2020, but also into the first quarter. So that trends also continue in the second quarter. We see clear, again, increasing demand compared to previous year, but the baseline is extremely low. Should also recognize that the comparable in Q2, when you talk about volume, when you talk about demand, is a different one than the pre-COVID quarters.So overall, in the summary, I would say, those trends continue. Supply chains are still under pressure. Still many outages, which are hampering availability of product. Allocations is in some product groups also daily business so that you do not get all the materials you probably would need or customers would need. And you see it -- I mean you only need to read the newspaper. You see shortages in the plastics area and polymers area. You see basically everywhere. So -- and I don't believe that this stress of those supply chains will be ending with Q2. I firmly believe that we see this going well into Q3, continuing.On the Project Brenntag effect, I think we have always clearly communicated. You can expect EUR 220 million EBITDA uplift, full year run rate 2023. So that's what we are confirming. As I said, we're making very good progress with the measures of Project Brenntag. There will be a significant contribution, as we said, a front-loaded effect in this year of those EUR 220 million. We already had and have an impact out of last year. I mentioned this in the full year numbers as well. So once we are going from Phase 3 into Phase 4, we give you another transparency of where we stand and what the EBITDA contribution will be with the announcement of the Q2 results, and then you will clearly see that there's already a benefit in the first half, and the largest portion will, of course, then come in the second half.

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

When it comes to free cash flow this year, and we do have a strong basis for free cash flow generation also this year, anchored in our strong EBITDA generation and the trajectory we have demonstrated in the EBITDA. The one part of free cash flow which is subject to material external influences is working capital or working capital change. We do control and will control working capital management in terms of working capital turnover. And we fully expect the working capital turnover to remain above 8x this year, which is a substantial improvement from last year.So that's a positive trajectory we achieved second half of last year, and we now expect to at least maintain and slightly improve these levels further. But chemical prices play a significant role when it comes to absolute working capital cash flow, and it's very difficult to forecast. From today's perspective, you would have to expect, by this influence factor by factor of chemical prices, so free cash flow this year to be a couple of hundred million lower than last year's number.

[Operator]

Our next question comes from Isha Sharma, Stifel.

[Isha Sharma, Analyst]

Thank you for the transparency on the segment level as well. Maybe based on the discussion so far, probably just a little bit color on what a normalized level would look like at Brenntag? I think the question is we have a special situation now, as you pointed out, and it continues in Q2 and Q3. But then what is the conversion ratio which you would say you are confident to deliver when this is over?

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

I think it is indeed a very specific year this year, and we don't know about even next year. I think we have most economies on a path of recovery once they go out of the lockdowns. I mean you can read this and follow this personally day by day. So that means we are trying to navigate all of those volatilities we have, shortages we have, the stress in the supply chains as much as we can. And I believe we, as the global market leader, are in an excellent position to draw on those special effects to the maximum.So normalized conditions. This is also a question, what is the new normal? Is it -- or is it a never normal? We have to expect after the pandemic, there will be fundamental changes. So it's hard to predict what the new normal will look like. Nevertheless, currently, we feel very comfortable with the guidance we have been giving to you in our capital market update on the long-term conversion ratios we see. I think we have disclosed this to you with Specialties, as I said before, 41% to 43%; in Essentials, now I forgot the number. It's slightly lower than that. And then you will have, over the cycle, over this kind of special event movements in one way or the other. But I think we are on a very good trajectory.And what you can see, I think, in this number, in the special circumstances, that what I have said also in the past, we have, I would say, a very, very strong Essentials business, which is currently underestimated in its capability. And we also have Specialties business which is very solid, and we are managing it and developing it in a proper way because we have now the full transparency and the focus on this as well.So overall, in a nutshell, hard to predict what the new normal will look like. It's almost unpredictable. But we believe that those situations we have right now will not go away from 1 month to the other.Georg, do you want to add something to that?

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

No.

[Operator]

Our next question comes from Mr. [ Noha ], Exane BNP.

[Unknown Analyst]

I have 2 questions, please. The first one is going back to the comments you made around sustainability and strategy. I was wondering were you referring to works you need to do on your own impact in terms of emissions of trucks, et cetera? Or are you more speaking along the lines of realigning the product portfolio to better cater into an industry where, clearly, there's more and more trends around sustainability, more and more focus? And if it's the latter, how much work do you think is required? So that's the first question.And then the second question, I'm sorry, going back to the guidance, going back about 10 years. I think Q1 has never been less than 1/4 of the full year. So I'm just wondering, there's, of course, a lot of pluses and minuses. But is the message that based on the trends of so far this quarter if no big catastrophe happens later this year, this year should be again a year when Q1 is 1/4 of the full year?

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

Yes. Let me take the sustainability question first and then Georg. As I mentioned, we will take this year to develop our strategic framework around sustainability. And here, it is absolutely clear that we need to look on the various dimensions with the ESG thinking and driving our sustainability efforts forward. I'm a firm believer that sustainability needs to become a driver of our strategy. So emissions is one aspect. And here, we talk about Scope 1 and Scope 2 emissions. But for us, as a member of this value chain -- chemical value chain, the Scope 3 emissions also in line with our key suppliers and our key customers will also be focused because I believe we need to look at sustainability across the value chain.This also comes to responsible sourcing of material. So here, it actually already starts. And [ Noha ], can you guarantee that you source material accordingly to sustainability standards? And then, of course, it continues thinking about what is the proper product portfolio for Brenntag going forward? Are we focusing more on products which are giving higher growth rates and also higher profitability because they are also highly sustainable? All of that framework will be developed in the course of the year. And as we discussed for digital, we will give you insights later this year of where we stand in our considerations.On the guidance, I refer to Georg.

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

Yes. Thanks for the confidence you're having in us delivering strong numbers this year. As I said earlier, it's just too early to readdress the guidance question. We need to see how the market develops, we need to see how earnings develop. On your observation that Q1 typically was never more than 1/4 of the year. And don't forget, Q4 is typically seasonally a little bit weaker and partly end of Q2, beginning of Q3, is seasonally a little weaker.So it's not that straightforward and simple. And then you have the question of how FX develops in course of the year, and the question how the market develops? Be a little patient with us and then we will either over time reaffirm guidance or make an adjustment if we deem it necessary.

[Operator]

[Operator Instructions] We have received one more question. The next question comes from Chetan Udeshi, JPMorgan.

[Chetan Udeshi, Research Analyst]

Just a follow-up on the previous question, if you can, which is, again, coming back to not necessarily full year guidance. But just looking at Q2 trends and, again, going back to the history, typically, Q2 tends to be better than Q1 in terms of earnings, at least. Is that something you see today? Or do you believe there's a reason to see that differently in Q2 this year versus what we've seen in the past?

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

Yes. As I said, we see the trends in Q2 continuing in the overall market. That means the efforts of increasing demand, which is hampered by constraints in product availability and also logistic constraints. So that trend, we believe, will continue for a period of time. That means, at the end of the day, that even be in the world cleaner in chemical distribution, you cannot maybe do all the business you could do because you're just not receiving the material you need to have. That's what I meant with also product allocations we currently see in some product groups. So it's hard to predict how that is going away or how long it will stick or will it get even worse. So that's not so easy to say.So we see a good volume recovery as far as this is possible. We are harvesting the volatility we see. Massive, massive price volatility in both directions, actually now up and some were down. And hoping to manage that very carefully. And then you, of course, see regional differences where India, for instance, currently, for us, is really challenging and some other regions like China are running quite well. So you see an overall very, very mixed picture. And please don't forget also in the last -- second quarter last year, we also had some special effects contributing to our profitability then, namely isopropanol sales we had for disinfectants at that point of time, which are also not repeating one-on-one in the coming quarter.So I think it's a mixed bag. Seeing the trajectory out of Q1 and Q2, I think we are on a good track for delivering also a solid performance in the second quarter. How strong it will be, let's see, once we have more than just 4, 5 weeks in this quarter under our belt.

[Operator]

We haven't received further questions at this point. [Operator Instructions] And we haven't received further questions. I will hand back to the speakers.

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

Well, thank you very much for dialing in and taking the time. Appreciate the discussion, insightful questions and looking forward for the further interaction. We are very satisfied with this quarter, the best quarter Brenntag has ever shown. Good progress in safety. Good progress in executing Project Brenntag. So overall, also our team, and I want to thank our team here for delivering in this very volatile and uncertain market conditions such a respectful result. So thank you very much, again, and talk to you soon. Bye-bye.

[Operator]

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