Brenntag SE

XETRA:BNR

Earnings Call Transcript 2024-Q1

[Operator]

Hello, and welcome to the Brenntag SE Q1 2024 Results Call. Throughout the call, all participants will be in a listen-only mode, and afterwards, there will be a question-and-answer session. Please note, this call is being recorded. Today, I'm pleased to present Thomas Altmann. Please begin your meeting.

[Thomas Altmann, executive]

Thank you, Anika. Good afternoon, ladies and gentlemen. On behalf of Brenntag, I would like to welcome you to the earnings call for the first quarter of 2024. On the call with me today are our CEO, Dr. Christian Kohlpaintner; and our CFO, Dr. Kristin Neumann. They will walk you through today's presentation, which is followed by a Q&A session. Our relevant documents have been published this morning on our website and can be found at Brenntag.com in the Investor Relations section. In the same area, you will also find a recording of this call later today. Before we begin, allow me to point you to our safe harbor statement, which you will find at the end of the slide deck. With that, I will hand over to our CEO, Dr. Christian Kohlpaintner. Christian, over to you.

[Christian Kohlpaintner, executive]

Yes. Thank you, Thomas, and good afternoon, ladies and gentlemen. I will start with the summary of the first quarter 2024, and Kristin will then walk you through the details of our financial performance. As usual, we are both happy to answer your questions after the presentation. In the first quarter of 2024, we reported results which were not in line with our own ambitions. Our performance in both divisions was impacted by the challenging environment, as well as pricing pressures in various markets and industries. Although we managed to capture additional volumes in a positive demand environment, particularly in Industrial Chemicals, pricing remained challenging. Overall, higher volumes were not able to fully compensate for the lower sales prices. Sales amounted to around EUR 4 billion, which is 11% lower compared to a relatively strong prior year period. Operating gross profit stood at EUR 984 million, which represents a decline of 5%. And operating EBITA amounted to EUR 260 million, a decline of 24%, respectively. Earnings per share stood at EUR 0.97 compared to EUR 1.40 in the first quarter 2023. The combination of slower performance, higher CapEx and higher investments in working capital led to a free cash flow of EUR 175 million. This is significantly lower compared to the exceptionally high cash flow in the prior year period, but in the range of a normalized seasonal Q1 pattern. In fact, the free cash flow generated in Q1 2024 marks the second-best free cash flow Brenntag ever achieved in the first quarter. Just recently, we placed 2 Eurobonds with a total amount of EUR 1 billion. With this strategic decision, we address upcoming maturities early and secure long-term financing for Brenntag. Now let me say a few words on the outlook. In light of the performance in the first quarter and the trends we have seen continuing into the second quarter, we expect the Brenntag's Group's operating EBITA for 2024 to be now at the lower end of the guidance provided with our full year results in March. Let's now have a closer look at our strategy execution. Ladies and gentlemen, let me start with the portfolio shifts of our 2 divisions. As already announced last summer and presented in more detail at our Capital Markets Day in December, we implemented portfolio shifts and the corresponding changes in our reporting with the first quarter 2024. Since January, selected businesses have been reallocated between Brenntag Essentials and Brenntag Specialties to further strengthen the coherence of the business models of the respective divisions. On the one hand, we transferred the water treatment business and the finished lubricants business from Brenntag Specialties to Brenntag Essentials. Furthermore, we shifted semi specialty products to Brenntag Essentials due to their more commoditized nature, and we also allocated the entire operating activities from all other segments, which is now called group and regional services to our Essentials division. This includes the operations of Brenntag International Chemicals GmbH, which buys and sells chemicals in bulk on an international scale. On the other hand, we combined all pharma activities under the roof of Brenntag Specialties. These shifts increased the value creation potential by allocating all products, which are larger in bulk quantities and which require last-mile efficiency to Brenntag Essentials. All products, which are driven by value-added services, formulation and innovation capabilities are allocated to Brenntag Specialties. In addition, the changes also include a partial shift of specific functions, responsibilities, and activities from corporate level to the divisions, such as business and operations-related HR service and excellence functions. These changes are all reflected in our external reporting structure this quarter for the first time. Regarding our path towards Horizon 3, we have started the process of our legal and operational disentanglement early this year. However, as indicated at our Capital Markets Day end of last year, the disentanglement of our legal entity structure and our operations will be a longer-term exercise, which needs to be carried out diligently. As of today, we have defined and properly staffed the relevant project resources internally and have selected the required external legal and tax advisers. This is important to secure our strategy execution while maintaining focus on our day-to-day operations. We are now in a detailed design phase where we create the necessary transparency on the disentanglement and define what is required to be executed at the lowest local level. In addition, the implementation of our cost containment measures announced at our Capital Markets Day last year is on track, and we define further savings potentials as we speak. We are doing this in light of the current economic conditions and against the background of our performance in the first quarter. Lastly, let me provide a quick update on our M&A activities. Since the beginning of the year, we closed or signed 3 acquisitions, strengthening key focus industries and geographies in both of our divisions. In Brenntag Specialties, we acquired Lawrence Industries, a leading specialties distributor in the U.K. with top-tier supply partners and a high-quality portfolio within material science. In Brenntag Essentials, we acquired rental service specialty, a rental equipment supplier based in Louisiana, which focuses on providing specialty equipment for pipeline integrity and maintenance services to the oil and gas, midstream and downstream markets. And just recently, we signed the acquisition of Quimica Delta, a leading chemical distributor in Mexico. The company access to toll gates through marine terminals and last mile infrastructure complements and expands the Brenntag Essentials triple strategy, which we have outlined in detail during our Capital Market Day last December. We will continue our M&A execution and are assessing several promising targets in our pipeline in line with our divisional strategies. Now, I would like to hand over to Kristin, who will talk about the financial performance in the first quarter in more detail. Please, Kristin.

[Kristin Neumann, executive]

Thank you, Christian. And also from my side, a warm welcome to everyone on this call. I will now talk about our key financial figures for the first quarter 2024, and I will start with the development of our operating EBITA on group level. As a reminder, when talking about growth rates, we generally talk about FX adjusted rates. Please have a look at the bridge on the left-hand side of Slide 6. In Q1 2023, we reported an operating EBITDA of EUR 345 million, which was driven by a more positive pricing environment. The translational foreign exchange effect in the first quarter of 2024 had a negative impact of EUR 3 million. Our acquisitions contributed EUR 6 million to the operating EBITA development. Here, I would like to emphasize that our largest acquisition in 2023, the acquisition of Solventis was signed last year, but is not closed yet. Therefore, the M&A contribution is not included in our Q1 results. Looking at the EBITA again, organic operating EBITA declined by EUR 88 million compared to the first quarter last year. Overall, we reported an operating EBITA of EUR 260 million for the whole group, which is 24% below the prior year's figure. The EBITA conversion ratio for the group came in at 26%. Our results were overall characterized by a continuously challenging market environment. As expected, volumes were higher compared to Q1 2023. However, higher volumes were not able to fully offset pricing normalization. Gross profit paid units was lower compared to the first quarter last year. On the right-hand side, you find a more detailed view by divisions, and group and regional services. Let us now have a look at Brenntag Specialties on Page 7. Brenntag Specialties reported an operating gross profit decline of 8% to EUR 286 million in Q1 2024. Operating EBITA declined by 23% and reached EUR 108 million. The EBITDA conversion ratio for Brenntag Specialties was 38% and below the prior year level of 45%. The result of Brenntag Specialties were affected by a negative gross profit per unit development by volumes that almost reached the prior year level. Operating expenses for Brenntag Specialties increased slightly year-over-year, mainly driven by M&A. On an organic basis, we kept our costs relatively stable with flat inflation and the internal allocation of further costs in connection with our DiDEX initiative. These are costs from prior years, which had previously remained in group and regional services, are formerly known as all other segments, and were charged on this year when various digital products went into operation. Let us have a closer look at our segments and business units. The segment Life Science reported a year-on-year EBITA decline of 19%, whereas the operating EBITA in Materials Science declined by 18%. All business units in the Life Science segment, except Beauty & Care saw a negative operating gross profit development year-over-year. In Nutrition, market prices in several regions increased at the end of Q1. However, we do not see enough evidence for a broad market trend of increasing prices yet. In Beauty & Care, the market remains challenging overall. We achieved a higher operating gross profit in most regions, mainly driven by M&A contribution. Pharma showed a solid performance. In fact, Q1 2024 was the third best quarter ever for our pharma BU, but it was still not enough to replicate the exceptionally strong prior year results. The performance in material science was below the level of Q1 2023, but in line with expectations. We saw a slight improvement in construction, particularly in EMEA, which is an encouraging development. When looking at the performance of Brenntag Specialties on a sequential basis, so compared to the fourth quarter 2023, we saw a slight increase in volumes and a slight sequential improvement in gross profit paint. Coming to the performance of Brenntag Essentials on Page 8. Brenntag Essentials reported an operating gross profit of EUR 698 million, which is 4% lower compared to the prior year result. All our segments in Brenntag Essentials achieved a positive volume development. At the same time, our profit pay unit was lower in all segments, leading to a slight decline in overall operating cost profit for the division. Only in APAC, the volume increases were able to fully offset the pressure from lower gross profit by units. Operating EBITA of Brenntag Essentials stood at EUR 186 million versus 23% below Q1 last year. All segments were negatively impacted by volume-driven increases in transport costs. In addition, costs in the connection with the DiDEX initiatives were located internally. These are costs from previous years, which had been booked in group and regional services, formerly known as all other segments, and we're only charged on this year in various digital products went into operations. These higher expenses were an additional factor for the decline in operating EBITA in EMEA, North America and Latin America. The performance in Latin America is generally driven by the economic conditions in the region in combination with higher costs. In addition, the prior year period was positively impacted by a nonrecurring other income item. Only APAC saw a positive performance in operating EBITA. The EBITA conversion ratio for the division came in at around 27% compared to 33% in the first quarter 2023. Let me also briefly comment on the performance of Brenntag Essentials on a sequential basis, so compared to the fourth quarter 2023. Here, we saw a slight increase in volumes, but at the same time, was profit pay unit decreased slightly. Moving to Slide 9, where we look at the income statement in more detail. We generated sales of EUR 4 billion, a decline of 11%. Our operating gross profit stood at EUR 984 million. This represents a decline of 5% year-over-year. Operating expenses, excluding special items, increased slightly on an FX-adjusted basis, and stood at EUR 643 million in the first quarter. I will talk about our cost development in more detail in a minute, but let us first continue with the income statement. We reported an operating EBITA of EUR 260 million in the first quarter 2024. Special items below operating EBITA had a negative effect of EUR 8 million. This includes legal provisions, additional costs incurred in connection to a fire at the Brenntag site in Canada, as well as advisory and other onetime expenses associated to the legal and operational disentanglement of our 2 divisions, Brenntag Essentials and Brenntag Specialties with a combined amount of EUR 17 million. The special items also include a positive effect of around EUR 8 million. That was booked due to a lower-than-expected tax liability in connection with excise tax risk. Depreciation and amortization amounted to EUR 94 million and remained roughly stable compared to last year. Net finance costs stood at EUR 34 million, which is also stable compared to Q1 2023. Our financial performance translated into a profit after tax of EUR 144 million and earnings per share of $0.97. This compares to the profit -- sorry, this compares to the prior year profit after tax of EUR 217 million and earnings per share of EUR 1.40 last year. To provide more clarity on the development of our operating expenses, we saw an OpEx bridge on Slide 10. The first quarter 2023, we reported operating expenses of EUR 625 million. The translational foreign exchange effect in Q1 this year had a positive impact of around EUR 5 million. Operating expenses increased by around EUR 20 million, mainly driven by additional costs from acquired companies, but also from our direct and IT investments. And looking at our underlying cost development, we kept our OpEx flat compared to Q1 2023 despite overall cost inflation, particularly in wages, and despite higher volumes. This is partly driven by lower variable personnel expenses, but also by our cost containment measures. As a result, operating expenses for the group stood at EUR 643 million at the end of Q1 2024. As already mentioned, our overall results are not in line with our own ambitions and we will continue to focus on our cost development and strict discipline. The cost measures announced at our Capital Markets Day are on track. And in addition, we will consider postponing discretionary spend and stretching IT guides investments over a longer period of time. Coming to Page 11 and the free cash flow. In Q1 2024, we generated a free cash flow of EUR 175 million. This is clearly below the record number of EUR 449 million last year, but still marks the second-best free cash flow Brenntag has ever achieved in the third quarter. The decline in free cash flow generation is partly driven by lower operating performance, but also due to the slight cash outflow for investments in our working capital, whereas we reported an inflow from working capital release last year. Our working capital turnover was higher compared to last year and stood at 7.9x. The increase reflects our initiatives to manage our working capital more effectively and is mainly related to lower days of inventory health and higher date of purchases outstanding compared to the first quarter 2023. Looking at our balance sheet. Our net financial liabilities amounted to EUR 2.2 billion at the end of the first quarter. Our leverage ratio, which is net debt to operating EBITA remains on low levels and stood at 1.5x. On the right-hand side of the slide, you can see our current maturity profile. Here, I would like to highlight our recent bond placement. We successfully issued 2-euro bonds in the amount of EUR 500 million each, one with a maturity of 4 years and a coupon of 3.75%, and one with a maturity of 8 years and a coupon of 3.875%. With the proceeds from the new bonds, we are addressing upcoming debt maturities early, improving the maturity profile of our financial liabilities and supporting the business activities of Brenntag. And with this, I would like to hand back to Christian to talk about the outlook for 2024.

[Christian Kohlpaintner, executive]

Yes. Thank you, Kristin. And ladies and gentlemen, let me close with the outlook. For 2024, we continue to expect a challenging business environment, which is characterized by ongoing geopolitical uncertainty and macroeconomic challenges. At the same time, we also expect continued improvement in overall demand, which should lead to higher volumes in the course of the year. This volume development was already visible in the first months of 2024. We are cautiously optimistic that market conditions will improve throughout 2024 with the first half of the year being more challenging than the second. We expect overall operating expenses to be higher than 2023 due to the continued inflationary trends, mainly from personnel expenses and due to slightly higher costs for DiDEX and investments. Furthermore, the expected increase in volumes will have an impact on the development of variable cost components. In light of the performance in the first quarter and the trends we have seen continuing into the second quarter, we expect the Brenntag Group's operating EBITA for 2024 to be now at the lower end of the guidance provided with our full year results in March. To reach our guidance, we will continue to focus on our cost development with strict discipline. The cost measures announced at our Capital Markets Day are on track. And in addition, we will consider postponing discretionary spend and stretching IT and DiDEX investments over a longer period of time. With this, I would like to close the presentation now, and I thank all of you for participating in today's call. We are looking forward now to your questions.

[Operator]

[Operator Instructions]. The first question comes from the line of Suhasini Varanasi from Goldman Sachs.

[Suhasini Varanasi, analyst]

I have 3, please. Given where you delivered profits in 1Q, which was $260 million, even at the lower end of the range, new guidance, you do need a pretty big step-up in the profitability over 2Q, 3Q and 4Q to achieve it. Can you maybe talk about what gives you comfort that -- about your ability to reach that lower end of the guidance range? How have developments been in April so far? That's my first question. I can take it one by one, if that's okay.

[Christian Kohlpaintner, executive]

Yes, that's fine. If you're fine. Let me take the first question. You can also ask all 3 questions. That helps us a little bit to arrange us.

[Suhasini Varanasi, analyst]

Sure. I think the second question is around the transportation cost, which you flagged, came in higher than expected in 1Q. Is that something that you've been unable to pass on to customers? Or is there -- has there been a lag effect that has impacted profits in 1Q? And the third question is on the M&A of RSS, which marks a move into the rental industry and it's a new vertical, a new industry altogether. Can you maybe talk about the strategic rationale behind the move, given there are already several pure play rental players in the U.S.? And is this a one-off move? Do you have plans to further expand your presence in the rental market? Just some color, there would be helpful.

[Christian Kohlpaintner, executive]

Yes. So, thanks a lot. I will take the first and the third question, and ask Kristin to answer the transportation cost question. When we look at the moving parts, and as we see currently the market environment. What has been seen in the first months of this year was indeed a sequential volume recovery, which continues as we speak, also in particular in April. So, as the market has been also on the manufacturing side, quite surprised by this movement and the strong recovery we have seen now in Q1 and beginning of Q2 in the manufacturing side as well. It is incrementally, or it was incrementally difficult to basically define the pricing points. So, we see the sequential volume recovery sustained at least for the first 4 months now. We do expect, and that's the second moving part, an improvement in the way we do our pricing. I think I have earlier on indicated to you in our full year earnings call, but finding the right price points at this moment is a little bit tricky, and we have not been fully meeting the expectations here in Q1, but we do see some encouraging signs in the pricing improvements, in particular, when we talk about our warehouse business versus the vast majority of our business. And thirdly, we focus on the cost takeout measures even more, and we'll clearly also have additional contributions from cost-saving measures as we go forward. And taking those 3 moving parts together, we believe that the low end of our guidance is ambitious but still achievable. On the third topic on the rental industry topic, it is a rather opportunistic move complementing our efforts in the oil and gas industry. So, it has been a small acquisition, which made a lot of sense in that particular specific spot. So, it's not intended now to be a large strategic direction we are taking to go into this vertical offering, is a very particular case in that very, very particular locality around the rental agreements, which is supporting our strong business, which we have there. So, it's a complementary but not real strategic move here. Now about the transport cost, Kristian please.

[Kristin Neumann, executive]

Thank you, Christian. And so, the transportation cost, they have several angles here. So, first of all, there is a volume element in which is reflected in our OpEx. Generally, we are able to also pass through higher transport costs to our customers. However, on the other hand side, we also had pressure in the prices, and therefore, also in the GP per ton, which makes it a little bit more difficult. On top of that, if you overall look at our cost position, there are some elements in there which we are able to pass through. Transportation costs are push something we can pass through. However, there are also some other elements in as for instance, the higher investments in our IT landscape and our DiDEX program, where it's not that easy to pass that through. I hope that this helps to answer your question.

[Operator]

The next question comes from the line of Rory McKenzie from UBS.

[Rory Mckenzie, analyst]

It's Rory here. Two questions. First, please. Can we assume that M&A added about 2% to volumes in Q1, organic volumes on what they were also up low single digits. So, therefore, total volumes were up about 4% to 5% year-over-year. And then secondly, if that's true, then that would imply that the average gross profit per unit was down 9% to 10% year-over-year in Q1, which obviously looks quite steep. Can you just go into more detail on what's driving this? We understand that GP per unit has been elevated after the pandemic and therefore, set to normalize. But given your scale compared to your customers, normally, you would talk about being able to pass on any product price changes carefully to kind of protect and smooth your own markups? And were you unable to track the product prices and sort of mispriced contracts? What exactly has happened within that GP per unit for?

[Christian Kohlpaintner, executive]

That was the first question or was there 2 questions?

[Rory Mckenzie, analyst]

Yes, 2 parts of that, please.

[Christian Kohlpaintner, executive]

Okay. So yes, I mean, I think we had some pressure on the gross profit per ton. I think it's 9% to 10% would be on the high end from my side. And we talk about small movements here, in particular, on the gross profit per unit in absolute deals per tonne, as you can imagine, as we ship so many products. I think we have seen remarkable differences in our direct business versus our warehouse business. Our direct business, which is where we're actually handing through staff and deliver full tank truck loads directly from supplier sites to our customers. That direct business has seen higher pressure on the pricing than we saw on our warehouse business. And the warehouse business is the largest portion of our business, and we have been quite pleased with the development also as we move now into the second quarter with our price development on the direct warehouse business. M&A contributed 2% to 3% on EBITA level, not as much as volume as I think here, the number would be not the correct one if I see, but please, Kristin, correct me if I'm wrong. So, that's all the moving parts here. It is currently from a pricing standpoint, as I said, a quite opaque situation as said it over the last 2 months, also talking to our investors about this that in principle, the whole industry has been quite surprised by the change in the demand pattern, and pricing currently is search for the proper level. And we got it wrong in the Q1, but also, I think knowing our distribution model, we always can cause correctors rather quickly, and that's what we expect for the year going forward.

[Rory Mckenzie, analyst]

Okay. Then separately on the cost base. You both said that the cost containment measures you discussed at the CMD are on track. I guess we can't see that externally, and you've obviously been making growth investments as well, so that the net cost base is still rising. Can you commit to reducing absolute SG&A from here? And when are you going to come back with updated plans on things like the DiDEX programs and those investments?

[Christian Kohlpaintner, executive]

Yes, I think Kristin is also -- maybe you talk a little bit about the cost base and the development as we see it. I mean, we need to clearly distinguish, and you know that we're already between the variable cost impacts we have. And this is -- as volumes are improving. You see in our OpEx, of course, also the variable expense going up. So, that's something we should always have in mind, plus also the M&A contributions we see also on the SG&A side in our numbers. We are totally committed to reduce our SG&A costs in absolute terms going forward, except of M&A contributions and variable expenses. And I think it has been maybe not clearly enough as shown that we had indeed quite substantial inflationary cost trends in our numbers, which we could totally offset with our initial -- or our internal efforts to actually cost -- reduce those costs and have those cost increases fully digested, particularly when they come from fixed personnel costs and other influencing facts. Kristin, also feel free to add here.

[Kristin Neumann, executive]

Yes, absolutely, Christian. But you have already covered a lot here. And as also indicated in the Capital Markets Day, we will see inflationary trends over our cost positions. We will see M&A, and we will also see higher volumes, which also will lead to the fact that our absolute cost basis will increase. So, I think that is what we have already indicated back in December. If you look at our SG&A costs, that is something we are working on. It also indicated back in December that is also something which is dependent, especially on the G&A cost on our system landscape. And that is, of course, something which is not done very quickly, especially if it comes to the ERT systems. So therefore, it was also not expected that in 2024, we see some effects here. So, all in all, we were able to counterbalance all those mentioned effects during Q1, and that is also what we planned in the Capital Markets Day numbers.

[Operator]

The next question comes from the line of Chetan Udeshi from JPMorgan.

[Chetan Udeshi, analyst]

Maybe if I follow up with the first question around the guidance outlook. And I was just doing some simple math. And if I just take your Q1 and if I take your full year EBITA guidance, it seems your quarterly run rate for the remainder of the year needs to be somewhere close to 320 million to 325 million. Are you happy with that sort of run rate for us to model in second quarter? Or do you think there is much more to be done in second half to achieve the guidance so that we get the phasing correctly in terms of modeling? The other question I had was, just coming back to the shipping costs, et cetera. And I remember one of the things, Christian, you've talked about in the past was leveraging the global footprint to be able to meet the -- just the opportunities in different regions. We've seen some of the freight forwarders in chemicals talk about, number one, the shipping cost just going up quite significantly. Is that something you see in your cost base at the moment? And how does that change the opportunity for, let's say, leveraging the global scale and arbitraging between regions? In the short run, but also how you see that dynamic in the long run?

[Christian Kohlpaintner, executive]

Yes. Chetan, thanks for the questions. On the phasing, I think we said it in our call here that we see first half and second half different here. So, I think one needs to now see out how that plays out. Currently, volume development, I would say, was as encouraging as we entered into the second quarter. It will be the pricing topic. And again, I think it's currently a very fluent market development, very fluent markets overall in the chemical industry. I'm sure you hear this also from other players in the industry. So, when you model, I would rather take what we have said in our call, second half better than first half. On the shipping costs, I think it's a good topic to talk about, because we see indeed that logistic costs do go up substantially, particularly out of the Asian sphere of space into Europe and into North America. So, we have seen already a substantial cost take-up, which also when you take the rate concern with us, it's not a disruptive move at this time. It is more as we interpret our nuance or how we feel it, is more nuisance to us. For us, it's more important on playing that regional game, not so much on the logistic costs and the advantages or disadvantages you might have there, but it's really playing the arbitrage game, which exists in the various markets. And what we currently see is that the arbitrage opportunities at this moment are lower, or not as expressed as they used to be. But again, that does not mean that it is not possible going forward, but there is, again, arbitrage opportunities for shipping products across the regions. We believe and are convinced that this is the right strategy for our Essentials business to draw all those opportunities. And we are, as we speak, are building up the capability more and more, and also steering our business very clearly, if you want to call it a source to rec, to really to optimize our business also in that sense from, as I said, source to rec, and rec to source. This is our direct business from our warehouse store customers. You, of course, manage also very clear and very, very tight. So that's how we see shipping cost is a pain. We can push most of the pricing forward to our customers and passing on, but always that's possible, but it's also not a threatening a situation as we speak at this moment.

[Chetan Udeshi, analyst]

Can I ask one follow-up, otherwise, I think I'll probably go into the queue and come back, so others can ask questions first.

[Christian Kohlpaintner, executive]

Go ahead. Go ahead.

[Chetan Udeshi, analyst]

Yes, just using your point about arbitrage, and I was just thinking out loud here, let's say, just for the sake of argument, if I'm sure you work with BASF. And if you try to undercut BASF in Europe by buying something from China and selling it at a lower price, would that not impact your relationship with BASF on the specialties? Have you seen that instances where maybe what is good for essentials might not be necessarily good for specialties in terms of supplier relationship? Or is that something you don't see in your day-to-day business?

[Christian Kohlpaintner, executive]

Chetan, that's what we actually don't see. And this is also one of the reasons why we are clearly pushing towards those differentiated business models. The decision, and I take now your example of BASF, the decision about the business cooperation between a distributor and a supplier like the BASF is taken at the third or fourth level of that company, which is a business unit. And the business unit, Food Ingredients in BASF, which is working in specialties has nothing to do with, let's say, the business unit Petra Chemicals of BASF, where the industrial chemicals are basically distributed. And so, I think we have to always make that clear distinction that the relationship is defined almost business unit by business unit even in those large conglomerates, and also the character of that relationship is different. Wherever it might be in the specialties field and exclusive relationship. In industrial chemicals, sometimes it's not even exclusive relationships. So, we always have to have that in mind. So, the collateral damage, which you tried to describe is actually not something which we experienced in our day-to-day business.

[Operator]

The next question comes from the line of Christian Obst from Baader Bank.

[Christian Obst, analyst]

First, I have a question concerning your announcement to merge stretch investments into IT and DiDEX. I'm not really sure what does that mean? And how does it come to the conclusion that you might spread these investments because you don't have a free cash flow problem. Now on the other hand, it doesn't it make sense to make it as quick as possible to reap any fruits afterwards. So, this is the first question.

[Christian Kohlpaintner, executive]

Yes, Christian, very valid point. I think a couple of things I need to be mindful of. First of all, when we talk about stretching investments into DiDEX /IT, unfortunately, due to the changes in the accounting standards, investments you take in to IT and IT infrastructure, and those programs need now to be OpEx in the past is the CapEx. So indeed, if you will talk about CapEx, it would not make -- that's a different thing. But we need to carefully watch our OpEx development and our impact it has on our operating EBITA, which is our key performance indicator. So absolutely, so that's one on. Absolutely, we're looking into how do we spend or how do we actually take these, let's say, costs into our scheme as we invest into that infrastructure, and carefully balancing it out is between what we believe is absolutely not necessary to do. And what maybe is -- I would not call it discretionary, but it's something where you think about of stretching this further out and not having this high spend in 2024. 2024 is a critical year in our DiDEX and IT investments because it's the year of the highest spending is '24 and '25. So we have to have that in mind. But we also need to manage now the situation. As I've said, with the results we have shown to you, we cannot be satisfied and we need to address that.

[Christian Obst, analyst]

Okay. And in the end, there's some kind of flexibility to come up towards the low end of your guidance in the end, to move some of these kind of OpEx into the new year at 25%?

[Christian Kohlpaintner, executive]

As I said, there's many moving parts, right? One is clear cost containment and addressing our SG&A costs and making sure that we reduce our spend here. The other one is, of course, managing our margins. Price management is a core topic. And I think Q1 was a bad example of how we should do it or should not do it. And then it's, of course, also projects and programs, initiatives we have planned for a certain year, but then you need to recognize that this -- in order to safeguard our results sent where you just need to reprioritize and that's what's happening as we speak.

[Christian Obst, analyst]

Okay. Understood. And the second one is on your separation efforts. So, you started more or less at the beginning of the year with everything. So, what have you implemented? Or what have you done so far? And what was the main surprise you recognize in these first steps?

[Christian Kohlpaintner, executive]

I mean, we are -- and I think Kristin can add to that. Maybe I'll start with the surprises. Surprises are, of course, that this are not surprises, I must say. But when you go to the detail of the disentanglement and how you basically go into the separation and what kind of perimeters you need to define, and how -- what does it mean on the local level is quite complex task, talking about, for instance, with the 600 sites we are operating worldwide and making sure that we can disentangle those operations as we go forward. So, we discovered that the devil is in the detail as we say in German, in many cases, but we need to sort that out. I mean, for me, that's not a surprise, but sometimes it is surprising of how many topics actually are identified. As we have said in our call, on the teams have been staffed, we have a dedicated project organization working on that with clear dedication, but also separating this as much as we can from the operational business because the legal disentanglement, the tax disentanglement, and should not be an excuse for our people to not raise a shop in focusing on execution of our business and our operations. So that's where we stand at this moment. And you have also seen that we have already some spend in our extraordinary items associated to that help. But we push for it because we are firmly believing that we need to be faster here to make a decent tenure that happen. And Kristin, again, maybe your views on that one as well.

[Kristin Neumann, executive]

Yes, absolutely. And you also asked what we are currently doing. We exactly make a detailed plan how to do it. And as I mentioned already, the 600 different sites. We plan which side goes into which division. You also look at the legal entity structure and also the site here, where do we meet which entity and how to do that most effectively. So that is exactly what we are doing right now. So, we are in the detailed planning model.

[Christian Obst, analyst]

Okay. And one last additional question related to that. You have these other special items and your net expenses coming from special items, which was EUR 80 million, and that in some cases, related to legal and qualitative separation of the 2 business units, and it's a onetime expense. So, what can we expect that these kinds of expenses will go on and on, quarter-by-quarter going forward?

[Kristin Neumann, executive]

So, we have guided at the Capital Markets Day that all in all, the cost together with the cost to achieve the cost-out program. It's very important to mention that. And also including the tax legal will be EUR 450 million to EUR 650 million. So, also again, that also includes the tax leakage. We have guided for this year to a low 3-digit million amount. If I look at it right now, I would rather say that this is a high 2-digit million amount towards a low 3-digit million amount.

[Operator]

The next question comes from the line of Rikin Patel from BNP Exane.

[Rikin Patel, analyst]

I've got 2. Firstly, a follow-up on pricing. The question, you mentioned that you are in the process of correcting pricing. Does that mean that we should expect sequential improvements in GPP units into Q2? Or is that something which will be more weighted towards the second half? And secondly, last week, you announced the acquisition of Quimica Delta in Mexico. I think the business was reported to sales in the high $300 million range in 2023, which would make it one of the larger acquisitions you've done in recent times. Could you maybe give us a sense of the margin profile around that business?

[Christian Kohlpaintner, executive]

Yes, Rikin, thank you very much. Again, on the pricing, as I've said, we see moving parts in our pricing, our direct business versus our warehouse business. So, that's, in particular, also in the Essentials business, stabilizing and slightly going up. So, we probably see some effects here. On the specialty side, there's still some pressure on the pricing side, which we'll cause correcting now. As we speak, the good thing about our business model is that typically, we can correct those pricing topics rather quickly, because we're not locked in with a bi-quarterly or even a quarterly pricing scheme. So, I think the organization is fully alert about how -- and the importance of pricing, and that we do not lose the margins we have established so far, and also using our strong position we have in that value chain. On Quimica Delta, yes, you're right. It's one of the larger acquisitions, which we have been doing in the past. We firmly believe that Mexico is an important space to be as we go forward for the next 5 to 10 years. We see a strong chemical price as tech chemical market in Mexico are rising. And also, about -- when we talk about the Americas in principle. And here, I'm talking about Canada, North America, and Mexico in that sense. So, we are convinced that we need to play that strong position in Mexico, which Quimica Delta gives us, and we will be then the largest distributor in Mexico. I think strategically a very good move. On the margin profile. I mean, you will see it as we go forward once we have closed to the acquisition. That is something which follows our strict rules of how we assess the target and what internal rate of returns, we do expect from an acquisition, otherwise, we would not do it. So as always, you can expect us to stay totally disciplined on the valuation parameters and how we assess a certain target. But it has been more a good and important move for us in Mexico.

[Operator]

[Operator Instructions]. The next question comes from the line of Himanshu Agarwal from Bank of America.

[Himanshu Agarwal, analyst]

The first question is on the guidance. Sorry to come back to that. I just wanted to ask how much visibility you have into second half at this stage as that would be critical to achieving the full year guidance? And also, if you could quantify the contribution of cost containment measures and which I presume to be back half weighted. So, that's the first one. And then secondly, if you can talk about the volume development. I know you've mentioned that such volume development has been sustained into March, April. But during the full year '23 call, you mentioned that we still -- we need a few more months of data to confirm if it's just transitory or an actual cyclical recovery. So, if you could give us an update on that, please?

[Christian Kohlpaintner, executive]

Yes. I will let Kristin answer the guidance topic. On the volume development, I think I've said in the full year call at that point of time, it was hard to distinguish between, is it the restocking peak we are seeing, or is it really marking the turning of the cycle after now 4 months through the year and also talking to the large manufacturers. I would not book it under the short-term restocking peak. I would say this is on a lower level, stabilizing sequentially, improving volume demand. You saw it in the results of many factors that their results improved substantially sometimes because of better utilization rates of their capacity, and that has helped them to improve their margins, which, again, is not the case in our business. But nevertheless, you clearly see that the volume development is encouraging for all of them. Now let's see how long that will hold. And principally, we see encouraging signs in channel from the various industries we are active in that. Destocking, of course, has been completed for quite some time ago. And now what we see is this real underlying demand. And therefore, we believe that as we progress further and using the momentum and the sequential improvement, we have observed now over the last 4 months that we believe that, in particular, towards the second half of 2024, we will continue to see a gradual improvement in the volume demand. Key is, and remains the pricing topic also for many factors, by the way, is very right price point in this market dynamic, very currently very dynamic, a very volatile environment we're operating in. And this is why we are a little bit cautious in our conversation here. But nevertheless, we see that the clear demand pattern is changing in this turn compared to the years '23, and also, to some extent, 2022. And Kristin, do you want to talk about the guidance topic again?

[Kristin Neumann, executive]

Absolutely, Christian. So, on the cost topic, so what we see is that we will implement measures in the mid- to high digit million amount. But again, it's important to mention here that it helps us to counter balance inflation and also helps us to cost abated volume-driven cost increases. That does not mean in absolute terms that our costs will be lower compared to the year 2023. I think it's important to mention that again.

[Himanshu Agarwal, analyst]

And just briefly, on the second half with confidence into second half recovery?

[Kristin Neumann, executive]

And do you mean the visibility you've heard the first -- Okay. So, normally, we have a good visibility, 46 weeks to 2 months into the year. So, yes, the visibility into the second half of the year is quite limited. But of course, we are also looking into market data, which is available but not directly visible from our side.

[Christian Kohlpaintner, executive]

And if I may add, I mean, we are talking to our key suppliers every day. And so, they also -- when they look in their business, we also take their assessments into our consideration. So, when we come to a statement like this. And I think this has been encouraging, what you hear from many factors, all have been surprised by what we have indicated earlier already, that the markets are more robust than a lot of people think. They have been also surprised about the first quarter development, and also how April has continued into the second quarter. Now again, taking all those comments, taking all those assessments across the industries. And here, we talk from Petra Chemicals to food and nutrition, from pharma to personal care. We believe the condensed statement we can give here by having all those insights into all those value chains, the condensed comment is that we believe second half from a volume standpoint, a view better than the first half of 2024. And I've said it also last year already, if you remember, I said that the second half 2023 will be better than the first half of 2023. That materialized. And I also said that 2024 will be better volume than 2023. And I still stick to that statement. And we now add to it that we believe second half 2024 will be also from a volume standpoint, a few better than first half of 2024.

[Himanshu Agarwal, analyst]

And just if I may ask a quick follow-up, please. Yes, I just wanted to ask because you gave guidance just 2 months ago. So, what has changed since then because at that time, you must have known about the pricing development in Q1, et cetera. So, what has really changed in the last 2 months?

[Christian Kohlpaintner, executive]

I think it is indeed the pricing topic, which is currently, I would say, the most challenging topic to find the right price points and making sure that our gross profit per unit are stabilizing, increasing again, and not just the rolling away. This is what we have been fighting now over the last weeks and months. And that, I would say, is a difference from what we came to a conclusion when we formulated the guidance, which typically happens mid-February and February before we go out with the full year results. So, that was in early year, we were a little bit more positive on the price environment. And now as we have Q1 behind us and ran into Q2, we see that pricing still is probably the most -- is the most important moving part. On the volume side, again, we are actually fully in line with what we have anticipated.

[Operator]

There are currently no further questions registered. I hand the conference back to you, Thomas.

[Thomas Altmann, executive]

Thank you, Anika. This brings us to the end of the conference call. In case of further questions, please don't hesitate to reach out to the IR team. In our Q2 results, our Q2 results will be published on August 13, 2024. Ladies and gentlemen, thank you very much for joining us today. Have a great rest of the week, and goodbye.