Brenntag SE

XETRA:BNR

Earnings Call Transcript 2020-Q2

[Operator]

Dear, ladies and gentlemen, welcome to the Q2 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, CEO, who will lead you for this conference. Please go ahead, sir.

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

Well, thank you very much. Welcome, ladies and gentlemen, to the results call for the second quarter 2020 of Brenntag AG. I am Christian Kohlpaintner, and I'm here together with our CFO, Georg Müller. Together, we will walk you through our business development in the second quarter 2020. I will start with the high level summary, and Georg will provide further details on the financials for the past 3 months. Afterwards, I will talk about the progress we have made on Project Brenntag and where we currently stand. As always, Georg and I are both happy to answer any questions you might have after our presentation. Now let me provide an overview of the business development in Q2. Even though the global macro economy has still been impacted by the effects of the COVID-19 pandemic, Brenntag managed to report very solid results in the second quarter of 2020. Despite the challenging market environment, we are overall satisfied with our Q2 performance, and the company again demonstrated the resilient nature of its business model. The group generated an operating gross profit of EUR 716 million, which is on previous year's level on an FX-adjusted basis. Operating EBITDA grew by 4% on constant currency amounting to around EUR 276 million. The free cash flow of EUR 214 million was again high and clearly above the level we achieved a year ago. Finally, our EPS amounted to EUR 0.80 in the second quarter. Furthermore, we not only kept the originally planned date of our General Shareholders Meeting on June 10, but we also kept our dividend proposal in order to let our investors participate in the positive development of our company. Therefore, the General Shareholders meeting approved the dividend of EUR 1.25 per share mid of June, and the dividend was paid out accordingly shortly after. The impacts of the COVID-19 pandemic were felt everywhere, also in the second quarter of this year. At Brenntag, we continued our global crisis management successfully also into the second quarter, and the health and the safety of our employees and business partners continue to have the highest priority for us. We managed to handle this crisis very well so far. Our global site network remains basically fully operational. The only difficulties could be felt in areas which has very strict lockdown policies in place, such as India. So far, COVID-19 still only had a limited impact on our business activities and our financial performance. Let me give you some details on the development of specific industries, regions and also costs within our group. So far in 2020, we saw particularly strong performance in our Food & Nutrition business, which reported well above the group's average growth rates both in operating gross profit and in EBITDA. Also we again saw positive results in personal care and cleaning, driven by a high demand and solid margin development for ingredients applied in disinfectants and other care products. In Asia Pacific, we acquired last year in May, Tee Hai, a strategic market leader in providing supply chain solutions for materials, chemicals and services for the life sciences, electronics and diagnostic sectors in Singapore and Southeast Asia. This acquisition has been fully consolidated by now. We see Tee Hai, which is headquartered in Singapore, as an important cornerstone to foster our future growth in the attractive Life Sciences segment in this region. China plays an increasingly important role within Asia and our Brenntag Group. It is already the country with the highest operating gross profit contribution in the region. While in the first quarter 2020 our Asia Pacific region and particularly China was hit hardest by the impacts of the COVID-19 pandemic, our business in this country recovered well and has shown a strong operating EBITDA generation over the past months. Let me also emphasize that, amongst other measures, in response to the COVID-19 pandemic, we also implemented a stringent cost management, also addressing nonvariable costs like personnel expenses, where we have reduced our headcount already noticeable. Georg will talk about this in more detail later on. However, as indicated previously, and coming back to the financial performance on group level, our top line development showed clear signs of weakening demand in most of our end markets as we went from Q1 to Q2. We need to monitor this very closely going forward, as demand and as volumes have not been recovering so far. Nevertheless, we do see the positive performance in the first half of 2020 as a solid foundation for a continuing difficult market environment during the rest of this year. Looking into the near-term future, we continue to see a high level of uncertainty and we expect the conditions to become even more challenging, particularly with regards to the soft demand going forward. Clearly, this crisis is not over yet. And we have to monitor the situation very carefully in the months to come. Nevertheless, we feel well positioned to deal with this unique environment. With this short introduction, I want to hand over to Georg now, who will lead you through our results in more detail.

[Georg Muller;CFO & Member of Board of Management]

Thank you, Christian, and good afternoon to everybody. I will speak about the key financial figures for the second quarter 2020, starting with the development of operating EBITDA illustrated in our bridge from the second quarter 2019 to the second quarter 2020. Operating EBITDA amounted to EUR 266 million in the second quarter 2019. The translational foreign exchange effect was negligible at minus EUR 1 million. And our acquisitions contributed EUR 4 million to the EBITDA growth in the quarter. The trends we saw in Q1 2020 mainly continued into the second quarter. Particularly EMEA and Latin America showed a very positive organic earnings development in Q2, both with strong double-digit organic operating EBITDA growth of 20% and 28%, respectively. North America declined by 10% organically, mainly driven by the ongoing weakness in the oil and gas industry, as well as increasingly negative impacts of the COVID-19 pandemic on the overall North American economy. Asia Pacific reported organic earnings of minus 11%, mainly driven by strict shutdowns in some countries of the region.And moving to the next slide to provide some more details on the business development in our regions. I would like to emphasize that also in Q2, we managed to keep our global site network fully operational, even though we faced difficulties in some countries that had particular strict lockdowns. I'm starting my comments with EMEA. Our Q2 performance was again very positive. The performance was driven by a good business development in some countries, like the DAC region, Nordic and the U.K., and many customer industries like cleaning, pharma and personal care. We were able to grow operating gross profit by 8.6% on a constant currency basis, even though we did see signs of slowing volume demand across our end markets. The growth is therefore mainly related to higher operating gross profit per unit. The operating EBITDA increased by 21.5%. This growth is almost entirely related to our organic business development. It is the second strong quarter in a row. We are very satisfied with the results in EMEA and our Q2 performance again underlines the strength of our business. But we are also well aware of the challenging market environment that is to be expected in the second half of the year. Let me come to North America. There were several headwinds in North America that led to overall weak and unsatisfying results. Gross profit declined organically in Q2 by about 10% and also EBITDA declined by about 10%. The first headwind I want to point to is a very soft demand from customers in the oil and gas industry, and that accounts for around 7 percentage points out of the 10 percentage points gross profit decline. Also, the lubricant customer industry was weak. This accounted for about 3 percentage points of operating gross profit decline. Additionally, we saw an increasing impact of the COVID-19 academic on the overall North American economy. On the other hand, we applied a very stringent cost management and decreased operating expenses in North America by more than 8%. In the region, therefore, operating EBITDA decreased by 10% organically. Latin America, again, reported very good results in a still volatile environment. With an increasing impact from the COVID-19 pandemic on the Latin American economy, we were clearly able to demonstrate the resiliency of our business model. In the quarter, we managed to grow operating gross profit by more than 8%, operating EBITDA increased significantly by 26%. Asia Pacific showed a mixed picture in Q2. While China was able to fully recover from the COVID-19 effect of the first quarter, other areas were negatively impacted by very strict lockdowns in a number of countries. In particular, our business in India was hit hardest by the pandemic due to the comprehensive lockdown measures. So the developments are still very dynamic in Asia Pacific, and therefore, future developments are particularly difficult to predict. Operating gross profit decreased by 7.1% on a constant currency basis, operating EBITDA decreased by 4.3%. And organically, this represents a decrease of 11%. Let me summarize. We were again able to report very solid results in a challenging market environment. However, we do see clear signs of weakening in demand. Due to the ongoing uncertainty in the market and the continued impact of the COVID-19 around the globe, we are expecting even more difficult conditions in the second half of the year. Nevertheless, we are prepared well for the coming quarters. As Christian mentioned, our cost management is very tight. The number of full-time equivalent employees by the end of June is about 600 FTEs below the number 1 year ago. And out of the 600 FTE reduction over the recent 12 months, more than half has been affected during 2020. I'll skip Slide 8, where we show the full set of figures for our segments for your reference. On Page 9, in our income statement, I particularly focus on the lines below operating EBITDA. We do report special items amounting to an expense of EUR 12 million, which are mainly related to Project Brenntag and smaller efficiency measures. Depreciation amounted to EUR 64 million, slightly higher than in Q2 2019. The financial result amounted to a net expense of EUR 22 million. Earnings per share stood at EUR 0.80 compared to EUR 0.81 in the second quarter 2019. The free cash flow amounted to EUR 214 million and was clearly higher compared to the same period last year. The increase in free cash flow is mainly related to higher operating EBITDA as well as a small inflow from working capital reductions. CapEx stood at EUR 44 million. Since January '19, we applied the IFRS 16 standard for rental and leasing. In the interest of consistent presentation, we do deduct payments for rent and lease payments from the free cash flow. Our net financial liabilities amount to EUR 2 billion. This includes the capitalized lease liabilities under IFRS 16. Leverage stands at 1.9x. I would once again like to highlight Brenntag's strong funding profile. We have a very balanced and 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 cash on our balance sheet and further EUR 600 million committed credit facilities, which are almost undrawn. Our syndicated loan is the only instrument containing financial covenant. The covenant requires a leverage to stay below 3.46x. As you can see, we have plenty of headroom. The dividend payment was a straightforward decision for us. I'm moving to Page 12. Working capital amounted to EUR 1.7 billion at the end of the first quarter -- apologies at the end of the second quarter. Return to working capital 6.9x in the first half of the year, a slight decrease compared to what we have demonstrated a quarter ago. Free cash flow was strong. As demonstrated 2 pages earlier, free cash flow of EUR 214 million is the highest number for any Q2 since public listing. Nevertheless, we are not satisfied with working capital turn. This is predominantly from the inventory part of working capital. On the one hand, demand dropped in course of the quarter. On the other hand, considering all the supply chain challenges, we decided not to run inventory too tight. This is an area of focus for the current quarter and beyond. [ Besides the point on ] working capital, in summary, we are very satisfied with the financial results of the quarter, especially when considering the difficult economic environment. We delivered earnings growth and a high and stable cash flow. Nevertheless, we also continue to see a high level of uncertainty and volatility for the rest of the year. So COVID-19 crisis is by no means over, and we do expect even more challenging conditions in the months to come. And let me hand the presentation back to Christian.

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

Well, thank you, Georg. As you all know, we have started a holistic analysis at the beginning of the year in order to return Brenntag to organic earnings growth. With the publication of our Q1 results in May, I talked about the progress we have made on our analysis and the start of Project Brenntag. I also mentioned the 4 different work streams, which the project is focusing on. For the time being, these remain: first, our operating model; second, our go-to-market approach; third, our site network optimization; and fourthly, people and change. In the second quarter, despite COVID-19, we have finished our holistic analysis. And currently, the work on Project Brenntag carries on unaltered in scope and speed. We are closely following our agenda, and our objectives have not changed. In recent months, we detailed out our conclusions, defined distinctive initiatives and created an overarching plan for the implementation. The project teams and work streams are fully operational and keep driving Project Brenntag. Originally, our intention was to provide a detailed update on Project Brenntag to the capital markets shortly before the summer break. However, against the background of the overall circumstances and continuing restrictions around the COVID-19 pandemic, a sound and solid alignment process has been launched. Currently, the work stream people and change management is in focus of our project work. As mentioned many times, we see our people as our most valuable asset. Chemical distribution is a people's business, and we strive to keep and have the best experts of our industry on board. We successfully finished the first phase of Project Brenntag and are now entering into the validation phase. Therefore, we currently involved a broader group of our management team into the details of Project Brenntag and the current status of our plans. We want to achieve a common understanding of the target picture and gain additional perspectives on concepts and initiatives from a broader number of members of our leadership group in order to strengthen our sound decision-making. The joint reflection and alignment will ensure an accelerated and smooth implementation process, and we will safeguard the impact of measures once finally decided and rolled out. Project Brenntag is a comprehensive journey and also includes a change in future leadership culture and values. This will also be addressed in the validation phase as we and the top leaders will be responsible for driving the change in the future. Of course, we are keen to inform you about as many details of Project Brenntag as possible, and also, we would like to get the attention of as many people as possible. We are going to hold now our capital market update together with the publication of our Q3 results in early November. Depending on the COVID-19 restrictions, the meeting will be held either as a physical meeting or as a virtual event. Now let's come to the outlook for 2020. 2020 is an extraordinary year with unique developments and circumstances. Nevertheless, our mid- to long-term goal is to bring the company back to sustainable organic earnings growth and to position Brenntag well for future growth opportunities. In June, we already got a new composition of our Supervisory Board after the General Shareholders meeting approved the elections of the members of the Supervisory Board. In addition, mid of July, we announced changes in the management Board of Brenntag AG. Steven Terwindt, who has been Chief Operating Officer in North America, joined the Board and has taken over responsibility for our regions, North America and Latin America as of August 1. We warmly welcome Steven in the management board. He has a long-standing experience in the chemical distribution industry and knows our company well. With his strong leadership, he will further expand our competitive positions in North America and Latin America. Henri Nejade, who is heading our Asia Pacific region for many years, will take additional responsibility for EMEA for an interim period. Henri knows both regions very well, and we are delighted that he is now taking care of our EMEA region as well. I would like to thank both leaving Board members, Karsten Beckmann and Markus Klähn on behalf of the management board for the strong leadership and full dedication to our business and for the successful development of our EMEA and North America regions. We wish Karsten and Markus all the best for their future endeavors. With regards to the short-term development of our company in early April, we suspended the forecast for the financial year 2020 due to the considerable uncertainty over the future effects of the COVID-19 pandemic. Until today, the further spreads of the coronavirus is impossible to predict. And while some countries have contained the pandemic quite well, other countries around the globe are reporting increasing numbers of cases day-by-day again. Even though we reported very solid results for the last 2 consecutive quarters, and thereby confirmed the resilience of our business model, the degree of uncertainty on the global economy remains high. This uncertainty is limiting our ability to make precise predictions for the rest of the year. Since our Q2 results already showed significant signs of weakening demand, we expect the second half of 2020 to be even more challenging, and depending on how the spread of the virus continues, we cannot rule out a greater impact on our business development. Of course, our top priority is still to maintain the health and the safety of our employees, while at the same time, securing supply for our customers. Additionally, we will further focus on our cost base in order to mitigate potential negative top line developments. We will publish an updated forecast for operating EBITDA once the effects of the COVID-19 pandemic can be better estimated. The same goes for our other performance indicators, which likewise, cannot be forecasted due to the current situation. 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] The first question is from Rory McKenzie of UBS.

[Rory Edward McKenzie, European Support Services Analyst]

Firstly, to clarify your comment that you see clear signs of weakening demand, we understand that Q2 on average is, of course, worse than Q1. And again, H2 on average will also likely be more challenging than Q1 average. But to be really clear, did you mean that your monthly trends weakened through the quarter, i.e., our exit rates worsening?

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

As I said, previously, we are not talking about the current trading conditions and how we are going into the Q3. I think we need to be fully alert that the demand is not recovering as quickly as we were expecting or hoping for. And this is what we need to take into our considerations while moving into the third quarter now.

[Rory Edward McKenzie, European Support Services Analyst]

Okay. I then wanted to ask about the 2 drivers of gross profit. So volumes and then gross profit per unit. Could you quantify the volume fall that you saw in Q2? And whether you think you're outperforming the wider market? And then secondly, how sustainable is the significant expansion in gross profit per unit? If conditions normalize in terms of volatility, chemical prices, supply chains, would you expect your gross profit per unit to normalize and fall back to levels you saw previously?

[Georg Muller;CFO & Member of Board of Management]

Rory, it's Georg. It is a standard element of chemical distribution that, on the one hand, price volatility is helpful to distributors, but it's also an element of chemical distribution that if volumes fall to a degree and service level becomes more important, so smaller volume deliveries, reliable to customers are better paid. And that to a degree, goes away when volumes pick up again. So it's always a scale that at the end of the day nets out reasonably. We did have in the second quarter volume reductions against previous year of high single-digit or low double-digit. I can't make a statement if -- how that relates relative to market. I have no data from other market participants. We deem that a pretty solid and strong volume performance also considering what macroeconomic data are floating around. And gross profit for the quarter is virtually stable. You can figure out what on average the gross profit per unit benefit is.

[Rory Edward McKenzie, European Support Services Analyst]

Great. That's very helpful. And just a follow-up, I appreciate that with smaller volumes, you'd make a higher profit per unit given that kind of mechanism. There hasn't been anything like more profitable products or more profitable customers, where you've seen a greater mix or anything that, obviously, given the disruption, maybe new people have come into the distribution channel?

[Georg Muller;CFO & Member of Board of Management]

In our presentation at the beginning of this call, we did point to a number of customer industries, and these are not necessarily surprising customer industries like cleaning, personal care or pharma, and the strong performance in these customer industries is partly good volume performance because these industries did have demand. But it's also that these customer industries value quality, reliability of the supply chain through the COVID-19 times by paying adequate prices for product deliveries.

[Operator]

The next question is from Laurent Favre of Exane BNP Paribas.

[Laurent Guy Favre, Research Analyst]

I've got 2 questions. So I appreciate that you don't want to talk about current trading. But I do appreciate all the comments around, I guess, granularity on the stronger end markets versus the weaker end markets. I was wondering, when you talk about clear signs of worsening, are we talking about, I guess, a reversal to the norm of those end markets that received positive impact from COVID, such as cleaning and pharma? Are you alluding to further weakness on the rest? So I guess that's the first question. And the second question, from an end market standpoint, I think for Q2, you mentioned coatings, in particular, for the EMEA strength. I mean coatings overall from a producer standpoint has been quite weak. So are you purely referring to decorative paints, I guess, is my question? And is there any reason why you didn't see that strength in the U.S. given that decorative paint in the U.S. was also very strong in Q2?

[Georg Muller;CFO & Member of Board of Management]

Yes. It's Georg. Let me take the question. When we are referring to a weakening of demand, foremost, we are referring to volume demand Q2 sequentially after a strong volume in Q1. So that's the first observation. We are commenting on Q2 volumes relative to Q1 in the dynamic the market has. And we are referencing the fact that the world is kind of expecting some volume recovery, but we don't see it yet, at least not in any material shape or form. So the comment is more relative to an expectation of recovery which is not really visible so far. And I need to check something on the coating. So if I can come back to that a little later. I think I have it already. Maybe it's just a sound problem. The strong customer industries we were referring for EMEA, I think that is what you asked were cleaning, pharma and personal care. So maybe cleaning came across as coatings. That was not what it was meant to be. It's cleaning, pharma and personal care.

[Laurent Guy Favre, Research Analyst]

Okay. And then maybe if I can follow-up on the U.S. weakness, excluding oil and gas and lubricants, it sounds like the OGP was flat year-on-year. When you look at the difference between U.S. and Europe, is it mostly a mix impact? Or do you think that the U.S. market is weaker than the European market? Or is it just the setup of your business and exposure to pharma and cleaning in Europe that is different in the U.S.?

[Georg Muller;CFO & Member of Board of Management]

Yes, as you say, oil and gas and lubricants are the most dominant negative influence sectors in North America. And if you extract those, then the rest of the business has been slightly positive in terms of gross profit. In our perception, it very much has to do with the fact that, we feel, the overall state of the economy in North America is bigger than most of Europe currently.

[Operator]

The next question is from Rajesh Kumar of HSBC.

[Rajesh Kumar, Analyst]

First, can you unpack for us how despite the revenue decline, your gross profit was so resilient? I mean the mechanism behind how the commodity price versus volume plays between those 2 numbers, that would be very helpful to understand. The second question is in terms of the outlook, do you see any meaningful differences between the specialty chemical segments and the bulk chemical segments? Obviously, oil and gas, we all appreciate, and pharma, we appreciate, but I'm talking about a lot of other segments that you have within those units. And when you're thinking about 2020, how do you see this year? Do you see this year as a temporary disruption? So not to take long-term structural decisions based on what is happening because it's locked down and focus on the medium-term story in terms of how you are doing a capital allocation and medium-term planning? Or at least this year, you need to navigate through with some resilience and then as we land into a bit of clearer, hopefully, 2021, then can think about the medium term?

[Georg Muller;CFO & Member of Board of Management]

Let me give it a try on your question about volume and cost profit dynamic. And I'm not sure if I got the core of the question, but let me give it a try or we follow-up. In the second quarter, we saw weak volume demand, and we do have volume declines relative to previous year of high single-digit or low double-digit. Gross profit was, I'm using rounded figures, virtually flat. So how did we manage to achieve the gross profit per unit increases? It's partly a mix effect. In these times and times with weakening demand, it's typical that the low-margin bulk, full truckload business goes away first. But the small quantity, less-than-truckload repeat order business remains. The latter is the, by far, higher-margin business. So there is a mix effect. But beyond the mix effect, no doubt in times of supply chain challenges as we had in late Q1 and throughout Q2, when you are a highly professional market-leading player like us, when you still have access to suppliers, still have access to transport capacity, if you manage to keep all your warehouse network operational, then you have a differentiating factor against some other players and you can deliver customers and customers are valuing that service and do pay adequate prices, particularly in these times. I pass it to Christian really on the specialty outlook question.

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

I will take your question 2 and question 3. So question 2 on commodity versus specialty, I think it's not so simple. Actually, I would rather debate about industry segments because those industry segments show different momentum and show different growth profiles. Of course, new segments which were associated with, let's say, automotive industry like rubber, of course, suffered. And here, we're seeing gradual improvements as we move forward. Oil and gas and lubricants, we already talked about. So some industry segments actually showed even if you would consider them partly as specialty areas in this first half year, whereas other industry segments, by far, outpaced demand and -- outpaced the normal growth rates we typically see. And there are even some commodity products in there. So I think it is not really simple to say this is specialty and it is good and this is commodity which is not good. I think it's a very dynamic and a very fluctuating picture industry segment by industry segment what we have observed and what we currently observe. On the long-term and -- or medium-term effects, you were asking for, I believe that the debate about local supply chains and regional supply chains and strengthening them will continue. And here, I believe Brenntag is well positioned with 77 countries, which we are representing. I think the proximity Georg has mentioned to customers in this times of crisis is important and has, of course, also helped our performance. And from that perspective, I believe this local presence is something which we need to strengthen also where we are investing and where we want to put our capital behind it. Also some industry segments, of course, could change from a demand pattern, at least for a medium-term period of time, volume-wise significantly, and we talked about disinfectants. All the additional efforts which are necessary to clean all the trains, clean all the airplanes, you see all those measures which are in place could also medium-term impact, of course, such an industry segment not only temporarily, but constantly. So I think it is a very mixed bag of things. There will be medium-term impacts felt. And I'm not talking yet of digitalization and other topics, which, of course, also have been driven by this pandemic and strengthen that piece of our business.

[Rajesh Kumar, Analyst]

Appreciate that. Just on the first question, you did cover most of the points. How is the negotiation with the suppliers or discussion with the suppliers progressing when you think of course pass through, et cetera. So that is the bit I'm trying to get to the bottom now.

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

So if I understand you correctly, your question is because you're a little bit hard to understand. So I think your question is around how the negotiations with suppliers are running in these kind of times? Correct?

[Rajesh Kumar, Analyst]

Yes. Exactly.

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

Yes. Okay. Well, I think, first of all, I have to say it's a very, very trustful way of going through this crisis. I think we had excellent discussions with our large suppliers, which are basically sitting in the same boat like we are. Also, they are looking for -- can they place volumes, can they place material in the markets, can we offer them some stability in revenues and other things. And so I would say it's a multidimensional commercial discussion, which typically is done with the suppliers, but as I've said before, in a very trustful and even sometimes respectful manner. So I think it was clear to everybody that sometimes supply is more important than anything else. And maintaining also supply to customers is for our suppliers extremely important because it's continuing the flow of their products. So I would say it has been a rather constructive environment in which we have navigated with our suppliers through the crisis so far.

[Operator]

Next question is from Markus Mayer of Baader-Helvea.

[Markus Mayer, Lead Analyst of Chemicals]

Couple of questions from my side. Coming back to the gross profit and also conversion margin improvement in India, a similar question had been asked before. Was this improvement due to the smaller lots, in particular at the more commoditized product? Or was it also true for specialty and has more to do with the end market segment? That would be my first question.

[Georg Muller;CFO & Member of Board of Management]

Markus, Georg here. The -- you see it across the portfolio, but the more relevant gross profit per unit effect and therefore also conversion ratio effect is on the industrial business because these are, generally speaking, more price volatile businesses with more margin opportunities. And obviously, in terms of conversion ratio, the quarter was a quarter of achievement or also a quarter where different things fell in place at the same moment in time. So strong margins and some cost decreases, partly structural, partly through lower level of variable cost is obviously a helpful situation for the conversion ratio.

[Markus Mayer, Lead Analyst of Chemicals]

Okay. And also for my second question, in your opening remarks, you said it also that you had headcount reduction, could you elaborate more on this headcount reduction, is it mainly an all-out function in Germany or any kind of...

[Georg Muller;CFO & Member of Board of Management]

It's a broad mix throughout the globe. It's to a degree taking out headcount, which is kind of, I wouldn't call it variable cost but volume related. So out of the roughly 600 FTE decrease I mentioned over the last 12 months, I don't have the exact number at my hand, but a fair share, for example, comes from the oil and gas business, which is particularly weak. So we are basically addressing areas where we have underutilized capacity and bring out headcount out of these areas.

[Markus Mayer, Lead Analyst of Chemicals]

Okay. Understood. And then another question on the special items you had in the second quarter. Can you guide on kind of special items effects for the full year? And also could you split it up how much of the special items have been restructuring costs and other effects as well?

[Georg Muller;CFO & Member of Board of Management]

Yes. Out of the EUR 11 million or EUR 12 million special items, roughly EUR 6 million project costs related to Project Brenntag and EUR 5 million or EUR 5.5 million are restructuring costs. Difficult to guide to a full year number. I -- if you are a little patient with us, and I would say together with the Q3 results, we will have a much better view on project costs and related items.

[Markus Mayer, Lead Analyst of Chemicals]

Okay. Great. And then my last question would have been on what you talked about before on your ability to serve customers in difficult time. I guess several of your smaller competitors might have had problems in this situation. Do you think that you are gaining market share? And if so, what kind of markets or particular regions, you think you outperformed the peers?

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

I think it's hard to distinguish and hard to split it out. Security of supply was, I must say, decisive topic clearly, in particular, when the pandemic hit in March and April, very strongly and then later, it became a little bit more normalized as the demands overall were much lower. So it was in the beginning of it. There could have been effects maybe in Europe, there could have been effects here and there in Latin America. But I would not say now that we have went or did go for a large market share gain. What is important is the long-term perception about suppliers and customers working with the globally leading #1 in the distribution space together. I think this is much more worth than a short-term gain, which we have here and there. I think people understand what a global network and our global representation in 77 countries can offer to them when it comes to critical situations like we have experienced it over the last 4, 5 months.

[Operator]

The next question is from Steven Goulden of Deutsche Bank.

[Steven James Goulden, Research Analyst]

So just firstly, on the FTE reduction. Sorry, could you just tell me what was the base of FTEs? I'm just trying to get a feel for the magnitude of that as a proportion of the overall company employees. And I guess sort of following on from that and the other questions you had on most structural cost removal, is this kind of in line with what you've done already on Project Brenntag? Have you got any sense for I guess what the potential is to sort of reset the cost base down on a more structural level? And within that, where the kind of low-hanging fruit is on cost, and if there really is that much? And I appreciate that it's still a kind of work in progress, and you probably want to keep the major announcements for Q3, but any kind of indications you could give us on that would be really helpful.

[Georg Muller;CFO & Member of Board of Management]

Yes. Let me grab the easy one, Steven, here before me to answer the complicated one. The 600 FTE reduction is on the organic business development between June '19 and June '20 and the starting point of that calculation is 16,700.On the restructuring cost opportunity?

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

You're absolutely right, Steven. We would like to keep that debate open until we can show the clear plan forward for Project Brenntag. We are intensively working on it. As I said, we are in the validation phase right now and piecing out with us. And once we are ready to tell you in detail about what structural cost reduction structure changes, we can foresee medium to long term.

[Operator]

The next question is from Isha Sharma of MainFirst Bank.

[Isha Sharma, Analyst]

The first one would be related to cost. In terms of cost, you have called out your efforts in North America. Could you also give us some flavor on the group level in other regions? Should we expect some more to come in the second half? Secondly, more strategic question. You have mentioned the changes in management board. Is that a step in project management? And what are your expectations from these changes?

[Georg Muller;CFO & Member of Board of Management]

Maybe I'll take the cost management question, Isha. Not surprisingly, we manage costs most tightly, and we have the ability to manage costs most tightly. We have a business that is softest. Currently, the business is softest in North America. So I'm not surprised, you have the most significant cost reduction there. But also in the other regions, we do have expense decreases. In each and every region in Q2, we had expense decreases. So we will keep the belt as tight as possible in these times of uncertainty. And on top of that, through our project work, we will revisit the structural cost reduction opportunities, but we can report on those only later this year.

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

And on the management board, you have seen the announcement, I think, 3 weeks ago. And again, we're building a complementary board with complementary skill levels and competences, which we need to have in place to drive the change and move Project Brenntag forward. So this is just a consequent step of creating a board which will be in a position to execute what we are defining in Project Brenntag to the best possible extent.

[Isha Sharma, Analyst]

Perfect. Just maybe I can squeeze one more. When you say H2 might be more challenging, is that versus H1 or year-over-year? So is it fair to assume that it simply means normalizing gross profit per unit and not potentially further declining volumes? I understand that you earlier have mentioned that you don't see a recovery and you are -- and there's a lot of uncertainty. But is it a fair way to look at it based on what you've mentioned before?

[Georg Muller;CFO & Member of Board of Management]

No. It's a real challenge to normalize out H1 because nobody really knows what the normal is or will be going forward. When we speak about more challenging -- my -- the way I would phrase it is it's predominantly against H1. H1 was really strong first half of the year. I'm not sure if it will also be weaker than second half of last year. But the comment predominantly refers to the strong H1.

[Operator]

The next question is from Chetan Udeshi of JPMorgan.

[Chetan Udeshi, Research Analyst]

Just following on the previous question, actually, just to confirm, when you say, okay, volumes are not improving, at the same time, are you seeing any deterioration so far in the third quarter versus second quarter sequentially, especially in terms of businesses or segments where you saw strength in the second quarter? That would be the first question. And just a follow-up to that. Have you already actually seen a normalization in gross profit per unit so far in the third quarter? Is that something that you think is possible, but maybe you haven't seen it yet necessarily?

[Georg Muller;CFO & Member of Board of Management]

Chetan, thanks for the question. We don't really want to go too much into the -- in nitty-gritty kind of trading, but trying to be helpful. Nevertheless, I referenced a little bit earlier that a very typical mechanically chemical distribution is that gross profit per unit and volumes lead against each other. So when one is particularly weak, the other is particularly strong. In that sense, going forward, I would always expect the scale to balance out between the 2 items to a degree, I believe. I cannot say that we have seen a super material change in dynamic in course of the quarter or after. So every movement we have seen is still in the noise -- or in the ballpark, of obviously high level of uncertainty that the world currently has.

[Operator]

The next question is from Daniel Hobden of Credit Suisse.

[Daniel James Hobden, Research Analyst]

Just one left from me, please. It's around the M&A. Are we to expect sort of a continued hiatus until post Project Brenntag is finished and all of that communicated? Or is M&A sort of still firmly on the agenda? And how does that pipeline look for the rest of this year and possibly into next year?

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

Thanks for the question. As I have said also in previous communications, currently the market is a little bit quiet. And so I must say, not very active for the time being. We will not deviate from our original thinking of what we have been doing in the past and are reserving about EUR 200 million to EUR 250 million on M&A. We have done this historically, but the opportunities need to be there and they need to be sent -- need to make sense. The pipeline is, I must say, still well filled and also with attractive targets, one must say. But again, currently, it's not something which is easy to do also from a seller's perspective as well. It always takes two to tango. So unchanged basically on what we typically have been doing. We are seeking for the opportunities. And once interesting things come up, we will certainly take action.

[Daniel James Hobden, Research Analyst]

Okay. Maybe one more, if I could. Just looking at the EBITDA line and trying to understand. Are there any tailwinds coming through -- from Project Brenntag sort of straight away in terms of sort of conversion margin benefits that have been felt? Is any of that sort of this structural gains that otherwise you would have quantified as a Project Brenntag win or one of those initiatives and benefits waiting to come through in the future?

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

I think impact is very limited at this point of time. Again, we are working on initiatives. We are working on detailing everything out. Do we take here and there some creepings yes, of course. But again, don't overestimate, it might be a couple of millions here and there, but not really substantial yet.

[Operator]

[Operator Instructions] So the next question is a follow-up from Chetan Udeshi?

[Chetan Udeshi, Research Analyst]

Just a follow-up question on working capital. I think, Georg, you mentioned previously that sort of you guys who were trying to manage inventory during first half to secure enough stock, and that is where focus will be on second half in terms of reduction. I mean can you maybe give us any more clarity in terms of how to think about the working capital evolution overall through second half? Is it going to be similar to what we saw in the second half of last year? Or could it be materially different from second half of last year in terms of evolution?

[Georg Muller;CFO & Member of Board of Management]

Thanks for the question. Not an easy topic. Obviously, cash flow this year so far and cash flow in Q2 was a pretty strong cash flow, so evidencing that working capital is under control. But yes, given the amount of sales reductions, we would expect an even stronger benefit from working capital management. The levels we are to expect this -- for the second half of this year will to a degree depend on the sales activity. So I can make a statement, but it has a clear level of uncertainty. In a steady-state business, as we have currently, I would clearly see working capital falling from here forward. So the second half of the year should clearly be below June 2020.

[Operator]

As there are no further questions, I hand back to the speakers for the conclusion.

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

Well, thanks again for dialing in and having the dialogue. We are very much looking forward to engage further with you in the third quarter and also for our capital market update early November. Whether this will be virtual or physical, nobody knows yet. Let's hope the best. But it would be great to see you at least -- or hear you then on the line on virtual one, if we cannot do it physically. So thanks a lot, and I wish you all the best.

[Operator]

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