Brenntag SE

XETRA:BNR

Earnings Call Transcript 2021-Q2

[Operator]

Dear ladies and gentlemen, welcome to the Q2 2021 results call of Brenntag SE. At our customer's request, this conference will be recorded. [Operator Instructions]May I now hand you over to Mr. Thomas Langer, Head of Investor Relations. Please go ahead.

[Thomas Langer]

Thank you, Lisa. Good afternoon, ladies and gentlemen. On behalf of Brenntag SE, I would like to welcome you to the earnings call for the second quarter of 2021. On the call with me today are Dr. Christian Kohlpaintner, our CEO; and Georg Müller, our CFO, who will take you through today's presentation. After the presentation, we are open for your questions.All relevant documents have been published this morning on our website at brenntag.com under the section, Investor Relations. In the same area, you will find the playback of this conference call later today. In this context, I would like to highlight that with this quarter, we will be providing a quarterly Excel fact sheet with key financial figures for better reference, which you will also find in the IR section of our website.Before we begin, allow me to point you to our safe harbor statement, which you will find at the end of the slide deck. Having said this, I will now hand over to our CEO, Dr. Christian Kohlpaintner. Christian, the floor is yours.

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

Well, thank you, Thomas, and good afternoon to everybody. As usual, I would like to start with the highlights of the second quarter and Georg will provide further details on the financials later. Brenntag achieved excellent results in the second quarter of this year. We also continued our successful transformation path with Project Brenntag contributing to our strong performance. The group generated an operating gross profit of around EUR 839 million, which on a constant currency basis is an increase of around 21% compared to the second quarter of 2020.Operating EBITDA developed extremely well and amounted to EUR 355 million. On a constant currency basis, this is an increase of around 34% compared to the already strong second quarter of last year. Free cash flow came in at EUR 121.5 million and our earnings per share stood at EUR 0.87 in the second quarter. We would like to emphasize that we are still operating in an exceptional market environment and the business dynamics of the first months of 2021, continued also into the second quarter.Global supply chains remained under severe pressure, impacting production and transportation worldwide, creating an increased tension between supply and demand. In addition, the COVID-19 situation continues to create uncertainty around the globe. In this environment, Brenntag was able to perform exceptionally well. We are very satisfied with this excellent quarterly results as they underline the strength of our new operating model with our 2 divisions, Brenntag Essentials and Brenntag Specialties and are a proof point of the important part Brenntag plays in the global chemicals distribution market.We were particularly delighted about the development of Brenntag Specialties. The division achieved strong growth rates in all regions and almost all customer industries. Our focus industries, nutrition and material science performed exceptionally well. Also, we benefited from our good margin management in an environment of increased demand. Let me also emphasize here the presented excellent figures of Q2 include no substantial contribution from M&A, as our larger acquisitions, Zhongbai Xingye and JM Swank had not been closed at that time. Both have only been closed over the last weeks.For the rest of this year, Brenntag is well positioned to cope with current conditions and to continue on its successful path. In June, we have increased our operating EBITDA guidance for 2021. We expect operating EBITDA in the range of EUR 1.16 billion to EUR 1.26 billion which we confirm today.Also in June this year, we held our general shareholders meeting and paid a dividend of EUR 1.35 per share to our investors. In the second quarter, we continued our execution of Project Brenntag and are fully on track with the implementation of the various measures. I will provide further details on the status of Project Brenntag later on.In addition to our strong organic earnings growth, in the second quarter, Brenntag also pushed ahead with substantial acquisitions fostering our focus industries. In the second quarter, Brenntag signed an agreement to acquire JM Swank in North America and meanwhile closed this acquisition beginning of August. Acquisition of JM Swank is a major step for strengthening our specialties portfolio in North America. JM Swank is a renowned player in the North American market in the distribution of food ingredients.The company generated approximately USD 500 million in sales in 2020. This deal underlines Brenntag's increased strategic focus on attractive high-growth food and nutrition market. We are convinced that this market has an enormous potential globally. Acquisitions will enable Brenntag to further expand its infrastructure and strengthen its geographic presence in North America. The acquisition will enable significant growth in interesting market segments and products. JM Swank strengthens our position in the fields of meat, poultry, fish, bakery and convenience food.With this acquisition, we doubled our size in the Nutrition business in the region and become the leading food ingredients and food process chemical distributor in North America with approximately USD 1 billion in revenue. In the first quarter, we already talked about our acquisition of another food ingredient specialist, Zhongbai Xingye in Mainland China. We have now successfully closed the acquisition of the first tranche of a majority stake of 67% of the company.Also, this target perfectly fits our strategy of expanding our specialties business in Asia Pacific and finding targets, delivering a sizable operating EBITDA contribution. So far, we have spent around EUR 450 million on acquisitions this year. In general, we want to spend EUR 200 million to EUR 250 million on average on M&A per year. However, as major opportunities arise, we are willing to take decisive action as it was the case in the recent months.As mentioned at the beginning of this call, we currently do see extraordinary market conditions around the globe. The dynamics we already had to deal with in the first quarter continued into the second quarter of this year. You all know there's still a certain level of uncertainty around the further development of the COVID-19 pandemic. Many parts of the world have been successful in fighting against the pandemic, but it is still difficult to predict how the situation will develop going forward.Supply chains and global distribution channels are still under severe pressure due to the cumulative incidents we saw beginning of this year. In this difficult environment, product availability and prompt and reliable delivery were key for our success in the second quarter and were again highly valued by our customers, particularly as demand has sequentially increased in course of this year.I will now hand over to Georg, who will walk you through our financial performance in the second quarter.

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

Thanks, Christian, and good afternoon to all of you. I would speak about the key financial figures for the second quarter 2021, and I would start, as usual, with development of operating EBITDA.On Slide 7, you see the bridge of operating EBITDA from the second quarter 2020 to the second quarter 2021. Operating EBITDA in the second quarter last year amounted to EUR 276 million. The translational foreign exchange effect amounted to a negative EUR 12 million and our acquisitions contributed EUR 3 million to the operating EBITDA growth in the quarter. Both divisions, Brenntag Essentials and Brenntag Specialties achieved excellent organic growth rates in the second quarter.Brenntag Essentials reported organic operating EBITDA growth of EUR 51 million, which is a growth rate of almost 30%. Brenntag Specialties perform even stronger. The division achieved an organic growth rate of 46%, adding EUR 45 million of organic operating EBITDA growth to our quarterly results. We finished the quarter with around EUR 355 million of operating EBITDA, which is a very strong organic growth of 33%.Overall, we continued to benefit from good margin management and were able to generate high gross profit per unit. In addition, we saw volumes sequentially improving throughout the quarter. In Q2, both of our global divisions, Brenntag Essentials and Brenntag Specialties delivered strong results.Let's have a look at our Brenntag Essentials division on Slide 8. When talking about growth rates, we generally talk about FX-adjusted growth rates. Brenntag Essentials operating gross profit increased by about 16% year-over-year and amounted to around EUR 523 million. Operating EBITDA reached EUR 230 million, around 29% above previous year.Let us have a look at the segments within Essentials. All segments contributed to this very positive performance, with North America in particular making a significant contribution to the division's growth. Brenntag Essentials benefited from good margin management and effects from increased tension between supply and demand. In addition, in North America, we recognized a general increase in demand and a broad-based economic recovery also with the oil and gas industry. Gross profit per unit developed above prior year's level and supported the strong conversion ratio of around 44%.I'm coming to Brenntag Specialties on Page 9. We are particularly pleased with the performance of Brenntag Specialties. The division delivered excellent results in the second quarter 2021. Brenntag Specialties reported operating gross profit of EUR 309 million. This is an increase of around 30% compared to Q2 2020. Operating EBITDA rose by almost 50% and amounted to EUR 144 million. All segments and all industries contributed to this excellent performance.Particularly, our focused industries, nutrition and material science performed strongly in Q2. Due to the very strong comparables, other industries such as pharma and HI&I decline was segmented compared to Q2 last year. We are also very satisfied with the conversion ratio of almost 47%. In summary, we are highly satisfied with the performance of Brenntag Essentials and particularly Brenntag Specialties. Both divisions contributed to the excellent group results.On the following slides, 10 and 11, we provide the full set of figures for Brenntag Essentials and Brenntag Specialties as well as the figures for the regional segments in each division. I will move to Slide 12 and in our income statement on that slide are particularly focused on the lines below operating EBITDA. In Q2, we reported special items amounting to an expense of around EUR 18 million. These expenses are related to the execution of Project Brenntag.Depreciation amounted to around EUR 65 million, it's about the same level as in the second quarter last year. I already advised you on an upcoming write-off of parts of our IT infrastructure in our call in Q1. You've noticed the impact has increased in amortization of intangible assets. In the second quarter, we reported an expense of around EUR 52 million related to this item.So financial result amounted to a net expense of around EUR 14 million. Finally, profit after tax came in at around EUR 137 million in Q2. Earnings per share rose by almost 9% to EUR 0.87 compared to EUR 0.80 in Q2 2020. Our free cash flow has developed solidly in the quarter. We reported a free cash flow of EUR 121 million compared to the extremely strong free cash flow in Q2 last year. The cash flow is now driven by the meaningful outflow of working capital resulting from higher chemical prices.Our net financial liabilities amount to around EUR 1.7 billion at the end of the second quarter compared to around EUR 1.3 billion (sic) [ EUR 2.002 billion ] at the end of last year. Our leverage, that is net debt to operating EBITDA amounts to 1.4x. After the end of the second quarter, we closed the acquisition of Zhongbai Xingye and JM Swank. Therefore, we pay the purchase price for these acquisitions only in the third quarter. You will notice the impact on net debt, leverage at the end of the third quarter.And coming to working capital. Working capital amounted to EUR 1.7 billion at the end of the second quarter compared to EUR 1.3 billion at the end of 2020. This is an increase of around EUR 360 million and it is mainly driven by higher spend for working capital due to higher chemical prices. We turned the working capital 8.6x last quarter, and we continued on the high level we hold since beginning of this year.In summary, we are very satisfied with these excellent financial results. I hand the presentation back to Christian.

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

Well, thank you, Georg. Ladies and gentlemen, I will now provide more details on the progress we made with regards to Project Brenntag. In July, we successfully entered the next phase of our transformation program focusing now on the ramp-up of EBITDA uplift. In the first half of 2021, Project Brenntag generated more than EUR 40 million of operating EBITDA, which is expected to ramp up to EUR 220 million annually by the year 2023.We made very good progress in the implementation of the different measures of Project Brenntag and are fully on track regarding the overall project plan. We continue to transform our operating model with an increased focus on our customers and our suppliers' needs. We also continue to optimize our site network and already made significant progress in reducing complexity and increasing customer proximity by closing 58 sites so far.Also, we have cut around 180 jobs worldwide. Further measures have been implemented and monitoring is up and running. As Georg just mentioned, we were able to keep our working capital turn on a high level. Overall, we are delighted about the results we can report on Project Brenntag to date, which are exactly in line with our original plan. I already mentioned that we have achieved an operating EBITDA contribution of more than EUR 40 million from Project Brenntag measures.On Slide 18, we provide a split between top line levers and bottom line levers. The top line levers contributed around EUR 8 million. The bottom line levers are our go-to-market approach and the site network optimization as well as our measures with regards to indirect procurement, summing up to around EUR 33 million.Ladies and gentlemen, also for the second quarter this year, we want to provide a brief update on our digitalization activities. With Brenntag Connect, our global digital sales solutions channel, we offer over 10,000 products globally, and we see a significant increase in the number of active customers. We are continuously expanding the functionalities and reach of Brenntag Connect. We are now active in 21 countries with our platform.With Project Brenntag, we have embarked on a significant transformation journey, which also includes digital and IT. We recognized the increased speed at which the market is moving and developing. In addition, our new operating model brings changed requirements for our future digital business architecture on a global scale.We have developed multiple digital solutions and omnichannel models. We are currently working on our digital strategy for the coming years to service our customers best. This includes detailing our digital value creation road map and digital operating model to implement our future digital business architecture. We will provide an update on our digital transformation journey beginning of next year.Ladies and gentlemen, let's come now to the outlook for the full year 2021. I would like to mention once again that we are currently operating in an exceptional market environment globally. Currently, it is difficult to predict how the COVID-19 pandemic will develop further. While we saw some successes in tackling the COVID-19 pandemic, primarily as a result of the progresses in vaccination, new virus mutations are confronting us with new hurdles. Also, global supply chains continue to be under severe pressure and maintaining global trade and distribution channels remains a major challenge.In this environment, Brenntag has performed very well so far. In this context, we have raised our full year 2021 guidance in June. We expect operating EBITDA to be in the range of EUR 1.16 billion to EUR 1.26 billion. The updated guidance includes the uplift from the Project Brenntag initiatives as well as contribution to earnings from acquisitions that have already been closed at the time of publication of the guidance announcement.Furthermore, it is based on the assumption that exchange rates will remain stable at the level of the publication date of this announcement. While 2021 is the year of transformation for Brenntag, we do feel well positioned to continue on our successful path. Currently, due to the excellent capabilities of our organization, our results benefited from the exceptional market environment. We expect to continue to benefit from these circumstances and look positively into the second half.However, a sequential normalization in course of the coming quarters should be expected. Overall, we expect our business and our results to be impacted positively. We will not only be prepared to adapt to a challenging and changing market environment, but also continue to focus on the implementation of the various measures of Project Brenntag.And with this, I would like to conclude the presentation. And now Georg and I are more than happy to answer your questions.

[Operator]

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

[Simona Sarli, Research Analyst]

So a couple of questions from my side. First of all, a clarification on your guidance and what are the underlying assumptions. So you mentioned during the presentation that so far we are still seeing quite a sizable supply chain constraints and inventories remain tight; however, if we look at your guidance, and the results that you reported at H1 results, that implies quite a sizable decline in the second half of the year in terms of conversion ratio. So if you could please clarify what are your underlying assumptions for the second half of the year?And then secondly, my question is regarding Project Brenntag. So in H1, you mentioned that you have reported a contribution of roughly EUR 41 million. Should we expect a sequential acceleration in the second half of the year in terms of contribution?

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

Yes. Simona, thanks a lot. I will take the second question on Project Brenntag, and the first is going to Georg.

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

Yes. Simona, on the guidance, indeed, as you say, we do expect positive business development in the second half of the year. As we explained in the presentation, we are looking positive into the future. But we are also saying that the current supply and demand tension, that the current strong market opportunities, while they still existed towards the end of the second quarter, we cannot be sure by any means that they will continue in an unchanged manner towards the end of the year.So we would expect a gradual revert to normalization, but we cannot say -- nobody can say in current markets, how quickly this will happen and to what degree it happen. Maybe one further clarification to the guidance, even though you haven't specifically asked for it, the guidance spend of EUR 1.160 billion to EUR 1.260 billion includes the acquisitions that were closed when we issued the guidance. Meanwhile, we closed the acquisitions of Matrix, Zhongbai Xingye and JM Swank. So that would come -- their contribution would come on top of the guidance range.

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

The second question about Project Brenntag, Simona, it's exactly as we have communicated frequently. So the program is a 3-year program with a full impact, EUR 220 million EBITDA uplift in the year -- full year 2023. It is somehow front-loaded. So that means we have savings in -- earlier than later in the program. And also we have said that also in 2021, looking at that year, that this is also more end loaded. So in the second half versus the first half. So I think it's pretty much in line what we have communicated to you. So our expectation is that we see a bigger impact in the second half compared to the first half with Project Brenntag execution.

[Simona Sarli, Research Analyst]

And if I may, just a follow-up question. It's just related to prices and the gross profit per unit. Could you please comment what you have seen towards the end of Q2 and what you're seeing currently, if you're starting to see prices rolling over.

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

Simona, it's Georg. So far, it's an unchanged dynamic in pricing. The supply and demand tension still exist. We are so far still seeing pretty healthy levels on gross profit per tonne not really lower than what we have seen a few months back.

[Operator]

Our next question comes from Isha Sharma, Stifel.

[Isha Sharma, Analyst]

I have 3, if that's okay. Could you help us with the CapEx breakdown and the phasing of Project Brenntag and ERP-related investment that you talked about at the CMD? Will there be a step up next year given your guidance of just EUR 260 million this year? The second one would be you have booked special items expense related to Project Brenntag of around EUR 75 million so far. Is your one-off cost guidance of EUR 370 million still valid? And how should we think of the phasing here as well, please? And the last one then on the free cash flow. You know that it was a bit weak in the first half due to a number of one-off effects. How should we expect this to develop in the second half?

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

Isha, thanks for the questions. I'll go ahead and then if Christian wants to add anything, I'm sure he will jump in. So our onetime cash out guidance related to Project Brenntag for EUR 360 million -- EUR 320 million, apologies, EUR 320 million through the life of the program holds. There is no change to that number, which also implies that there is no change to the expense number, mostly severance and some consultancy and there is no change to the CapEx number.Timing, really difficult, depends on the workers' council negotiation where we have made significant progress in some countries over the last quarter. So I would now expect the severance payments and severance expenses to ramp up in -- either in -- probably in the second half of this year, but maybe to a degree, first half next year. CapEx timing, I beg your pardon, it's really difficult because CapEx is mostly related to our site network optimization. We are heavily working on this. We have identified a number of new sites. We are in development and planning stage, but the exact timing will also depend on regulatory requirements and approvals, and we can only partly influence that. The important point from our perspective is the EUR 320 million onetime cash out for the life of the project holds.

[Isha Sharma, Analyst]

Right. I thought it was EUR 370 million.

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

Apologies, I misspoke. You're right.

[Isha Sharma, Analyst]

Right. And just the breakup for this year then, is it EUR 200 million growth CapEx and then the rest related to Project Brenntag or is it ERP, just for 2021, if you could put some color on that, please?

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

We -- apologies, we really don't know at this stage because it depends on the site network optimization progress. We have reduced this year's CapEx guidance from EUR 320 million to EUR 260 million, indicating those delays, but I can't really give any further split at this stage.

[Operator]

Our next question comes from Rajesh Kumar at HSBC.

[Rajesh Kumar, Analyst]

The first question is on Project Brenntag. Can you give us some nonfinancial update in this Project Brenntag if affecting in the business in terms of client engagement, portfolio optimization and positioning of the portfolio for future growth. That's the first one.Second one is, how inflation affects the business model? And how does it differ between Essentials and Specialty. I would love to hear your thoughts on that. If you could also give us some context in terms of the order of magnitude of inflation you're seeing on input price, freight, labor, while you answer that question might help us get an -- it doesn't have to be the precise numbers, but just so that we understand how -- what are the type of numbers you're dealing with, that would really help. And third, how much of the Project Brenntag cost savings are you thinking of reinvesting as we go through '22 and '23?

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

Yes. Thank you very much, Rajesh, for the questions. I will take the first and the third one concerning Project Brenntag. I'll ask Georg to talk a little bit about inflation, but also can add later on what we see in the markets right now. On the nonfinancial impact, I mean, the core and the key of our Project Brenntag topic is, of course, the new operating model and showing clearly that our focus on specialties and our focus on industrial chemicals with the differentiated steering approach is actually creating more value for our customers and for Brenntag.And I think when I'm talking to our key suppliers and key customers, which I do on a weekly basis, they really value that approach, giving that transparency, showing the clear dedication in both directions, being it either Specialties or Essentials. Also splitting the sales organization into specialized sellers for specialties or for industrial chemicals is, of course, creating a lot of more focus on, particularly on the focus industries we have created. And this is actually creating a lot of credibility with our suppliers, and once they have understood what is the model and in which direction we want to drive it towards. Also the site network optimization is reducing an immensive amount of complexity out of the organization. And indeed, we have done all those simulations. We are coming actually closer to our customers with a reduced network -- in a more efficient network, which again helps us in our agility in supplying to our customers and maintaining supply also in difficult situation. So that has all been I must say, quite well managed. Also, I would say, for our people, many, many feedback or -- multiple feedback receiving that people like that kind of specialization, in particular on the seller side, where they can really focus on -- depending on the nature, more on the specialties on the industrial chemical side, so unleashing a lot of power engagement and motivation, I have to say.On the business services, which is also another important topic. We need to modernize the company in that sense, having Global Business Services implemented, making sure that we draw on the most cost-effective business services, allowing the divisions to make a plug and play in those business services is for us of utmost criticality and we are currently in full swing to create those global organizations, being at the global finance organization, being at the global IT organization, being at the global procurement or the global HR organization.So I would say overall, a lot of upbeat in the organization towards Project Brenntag. Of course, also seeing the challenges we are having in getting the headcount reductions, getting the operating model stable and running forward. But overall, nonfinancially I must say, I'm quite pleased with the progress we are making.Cost savings, again, we're not -- the third question you had on the cost savings, how much of Project Brenntag's savings are we going to reinvest. No, I think it's absolutely clear. This is for us the bottom line impact majorly as we have outlined in the capital market update, and we want to bring back the full EBITDA uplift of EUR 220 million, which we promised to our owners and to the financial markets. So there is no change from that numbers and no change from the time horizon and no change on the magnitude and the dimension.And the second question about the inflation, I refer to Georg.

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

Rajesh, it's Georg. Perspective on inflation. When we are talking, obviously, cost inflation, not chemical price information. Chemical price inflation, the organization is very experienced, very educated in handling it and we are handling chemical price inflation mostly through our top line through passing it on to the market. When it comes to cost inflation, you might remember from earlier conversations that roughly 60% of our cost base is personnel, roughly 40% of our cost base is other expenses. We do see per head inflation in personnel expenses, which is kind of significant, but it's actually driven by variable compensations through the excellent gross profit results.So in that sense, it's well manageable and it's a self-correcting item because it's basically the variable compensation is mostly tied to gross profit generation of the organization. The nonpersonnel expenses, so say, 40% of our cost base are a broad range of items. The most significant items being fuel and energy and external transportation. And fuel and energy and external transportation, to give a perspective, make up close to 40% of the nonpersonnel expenses. And we do see inflation there of 10%, if not more than 10% per unit. Mind you, the actual expense increases in transportation and fuel are higher because we are also turning additional volumes, but you were specifically asking for was it inflation element. How do we handle it?Professional negotiation with freight forwarders, indirect procurement initiatives, utilizing our network to the best possible extent, but also rolling it over into the market. And currently, the market permits the rollover because it's an inflation item that not only hits Brenntag, but it hits all of our competitors like us. I hope that helps with a little bit of a perspective.

[Rajesh Kumar, Analyst]

No, that's reasonably comprehensive. Just a couple of clarifications, if I may. So does it differ for specialty versus all because the specialty chemical players would say that the inflation in that space, in the product side, you can hold on in the future. Do you see that kind of effect in your business as well? Or the specialty business would move like the bulk business depending on the input price.

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

The -- I would say, but I'm also inviting Christian to comment. I would say there is generally, in terms of cost inflation and how to handle it, no major difference between Essentials and Specialties, with the additional comment that logistics costs are, to a degree, more relevant in Essentials than in Specialties. In that sense, essentially more affected by the currently -- by the current transportation and fuel energy inflationary environment.

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

And I would also say, in general, I mean, your assessment is right. So I think the industrial chemical side, so the essential side is much more exposed to volatility on the pricing side. In particular, when it comes to magnitude and frequency of the swings, which is less expressed in Specialties, that's pretty clear. So overall, I think there's a differentiation. But on the other hand, we have examples like in specialty chemicals, where also price inflationary -- or increases in costs have been substantial because lack of material was driving the prices up to some extent. So it's a mixed bag of things, not a clear-cut black and white answer.

[Rajesh Kumar, Analyst]

Understood. No, that's very clear. On your first answer, if I may, my project, it's going on and on. I just want to clarify one point you made about supplier relationships. You said that the suppliers are feeling -- they are seeing clarity of your strategy. And if you look at the specialty chemical industry, we see quite a lot of growth comes from expanding with existing supplier. Do you think you are sowing the seeds for such growth in the future now? Or has it always been there, and it has just become clearer going forward?

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

First of all, we expect it. I mean that's the reason why we are actually doing Project Brenntag and have created those 2 divisions. When I draw on my experience on the manufacturing side before I joined chemical distribution, I think it was always important for me when I worked with distributors that basically, their set up -- their strategy and their organization followed what I needed to have as a supplier so that this distributor can really replicate my strategies.I believe with Project Brenntag and with the new operating model, we built a lot of credibility for that topic. And we see numerous discussions with specialty suppliers who want to strengthen that relationship, in particular, after they have seen that also in very, very difficult situations, Brenntag was able to supply. So I think what you described as seeding that for Brenntag is correct. Has it been -- always been there? Yes, of course, it has been there, but now we are prepared to really harvest and draw on that.

[Operator]

And our next question comes from Christian Obst, Baader Bank.

[Christian Obst, Analyst]

I have 3. One is just a question concerning the others line. So you reported EUR 11 million costs in the first 2 quarters last year. This year, it's EUR 14 million, then going to EUR 20 million. Can you give us some kind of the main drivers here and your expected run rate -- average run rate going forward for the next 2 years maybe. The second one is a very speculative one in the end. Going forward, is there any possibility to separate these 2 items, Essential and Specialties as independent companies, more to say or is the interconnection within these companies when it comes to IT, financing and shared service centers, this is so much that you cannot really separate these 2 things.And the third -- the last one is a little bit about Brenntag Connect, your digital strategy. I heard that you were talking about that you would say -- or talk about more details in 2022. Nevertheless, can you give us some kind of an update what is the total sales number through the -- your IT network? Can you give us a range of conversion rates you are really achieving there? And last but not least, on this item, who develops this strategy going forward? Is this mainly internally or is it mainly with external partners?

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

I think Georg should answer the question on the other lines, and I will talk about the 2 other topics. And so maybe Georg wants to start or I can start, it doesn't really matter.

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

Yes. Christian, welcome back. I know you covered Brenntag before. Now we have you back.

[Christian Obst, Analyst]

Yes, that's right.

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

Other line, it's mostly headquarter and partly digitalization costs. Why is the increase there? The increase is mostly there, some variable compensation effects from the currently excellent result, some consultancy projects, outside project, Brenntag, some digitalization costs and also staffing of some departments where Brenntag was kind of underdeveloped before. Like for example, a much more professional HR function than we had it before. So that's the mix of explanations for the increase in the others line. Run rate, maybe Q2 this year is a little high because of the consultancy. But I would think about a number not too far, not much lower than this year's Q2.

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

Coming to the question 2 and 3. So again, talking about Essentials and Specialties. We have just implemented the new operating model beginning of this year. So we have now created the transparency. We're actually steering the businesses in a differentiated way. And basically, we have a very positive feedback from our suppliers and customers in the market.Nevertheless, it is very clear that there's a lot of shared services, if you want to call it that way, used by both divisions. One is, for instance, the customer service desk, which is uniform because this is where the customer is actually interacting with, and we want to keep it as simple as possible for the customers and receiving one invoice and receiving one order confirmation and these kind of things.We also have the global business services, which are serving both divisions highly efficient, at least according to our plans once we have established them and brought them in. And also, we want to draw on the broader talent pool we have in Project Brenntag across the 2 divisions. So it is for us the right moment to have that operating model established and showing those 2 divisions and also steering them in a differentiated way. And we believe in keeping them together is an advantage for Brenntag.As far as Brenntag Connect is concerned, still the sales levels are on a low number. So I think we should -- you see the trajectory, we're still talking of numbers which are in the 3-digit million size, but not in a huge number, which is quite normal, I must say, because you see the ramp-up quarter-by-quarter as this is developing in our investor calls, I always explain to them, it always takes 2 to tango. So you also need to have customers who are willing to enter onto the platform and doing business there. And the chemical industry overall is a very traditional industry where sometimes not moving as quickly, and you know that pretty well, is not moving as quickly as possibly -- as one wants, once in a while, but at least we have the platforms there.We are developing now the digital strategy going forward. We brought the competence into the Board with Ewout Van Jarwaarde, our Chief Transformation Officer, who brings an in-depth knowledge about how to develop digital sales platforms. And here, of course, we will develop strongly with internal resources we had, and have the Brenntag DigiB organization focusing on our digital side. And based on some input we receive, of course, also from outside views, we will drive and develop that strategy over the next 6 months. And once it is clear, as I said, beginning of 2022, we will come back to you and give you a granular view of how we intend to tackle that animal.

[Operator]

Our next question comes from Dominic Edridge at Deutsche Bank.

[Dominic Edridge, Research Analyst]

Just 4, and hopefully that will be fairly quick. And the first one is just on your fill rates at the moment. Are you basically around about 100% in terms of fulfilling customer orders? And could you just sort of maybe talk about how that's moved over the last few quarters, if you could.The second one was on your gross margin. I think it's up about 2.4% since the first half of 2019. I think about -- so about 3% if you adjust for the Project Brenntag savings that you've disclosed today. Can you just say would you regard all of that is due to the current market conditions, and can, therefore, reverse if market conditions sort of maybe go back more towards normal again? Or are there any other structural changes that you would highlight that's happened over the last couple of years?The third one was a comment I saw in the quarterly report on Project Brenntag, where you talk about needing to upgrade some of your technology infrastructure. Could you just maybe discuss what needs to be upgraded for you to go on to the next steps?And then the last question was just on staff. I'm just wondering if you see much change in terms of staff turnover. I know you've had some redundancies, but maybe on the voluntary side. And also, I did notice in the report, there's been quite a big shift of employee numbers from Essentials to Specialty. Is that just a presentational change or is that sort of a functional change?

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

Dominic, thanks a lot for the question. The first one I didn't get fully, maybe you can ask it at the end again. I need to fully understand what the question was exactly. Now on the gross margin, I think also Georg is well positioned to say a few words about this one. But nevertheless, the -- what is the normalization, and we debate this internally also quite heavily and say, okay, what does normalization mean?And that comes back to me to the question, first of all, with which speed and how quickly that will happen, and then what is the level of, let's say, a new normal or a never normal. So this is currently, I must say very, very difficult to predict. As long as the supply/demand side is so far out of balance as it is right now, I do not expect that, that normalization will kick in very, very quickly. But again, nobody knows how the world will look like in 2, 3, 4 months down the road. Typically also in the industrial chemical side, volatility can be quite dramatic in a short period of time, and one needs to recognize that this normalization will take place. But to which degree of our gross margin expansion, this will normalize, it's hard or almost impossible to read clearly -- clearly predict. On the technology and infrastructure, this is more referring to what we have said in the past. We are willing to invest also in our IT architecture and our IT infrastructure. Again, we are running now the company in global divisions that requires, of course, a very concise setup when it comes to your IT systems, going away from a more regional view on the IT systems to a more global view and running this global company. So this is more or less related to that infrastructure when it comes to technology. Also on the data side, and putting data at the center of our considerations will be part of our digital strategy going forward.On the staff turnover and on the redundancies, Brenntag should not be underestimated. Typically, we have about 17,000 employees globally. We have an annual turnover of employees of around 2,000. So 2,000 people come and go within 12 months in Brenntag. This is a very normal number, which we have seen since years. This is not changing at all substantially from that numbers we have seen also in previous years.So that shows you of how big fluctuations there are anyhow. When it comes to key people, which we monitor very, very closely, I must say the people we have lost on key decisions making level is actually less than 2%. So it's a very small number of people which are changing places and work for somewhere else. So this is the questions I had here. I think you had 2 more, Dominic, could you repeat them again. And then I will...

[Dominic Edridge, Research Analyst]

Apologies for not being very clear. It was just a question about your fill rate in terms of filling your client orders, your customer orders. What sort of level is that running at? Are you able to do everything at the moment? Or are you suffering from some product shortages? In other words, if I ordered some products from you, would there be any products in certain locations, which you're unable to fulfill at the moment? And how's that sort of moved through the course of the quarter and maybe since the start of the year?

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

Let me take that question. I mean in chemical distribution, from your preferred chemical distributor, you would, in principle, expect every order to be filled. So the norm in our industry and our business is we fill all the orders. We are not too far away from that. There are supply and demand tension temporarily in certain products, and sometimes we cannot fill orders completely. But for existing customers, it's very rare, almost unheard of that we completely turn a customer down. Occasionally, if you are as a distributor on allocation yourself, you put customers on allocation, so you part fill orders. So that's not unusual. The dynamic of the thing hasn't changed much. So there is still supply and demand tension, and it will take a while in our expectation until this is sorted out.I think you had a further question on if I got it correctly on gross profit margin. You observed an increase in gross profit margin over time. And I assume by that you mean gross profit divided by sales. It's, frankly, a KPI, we don't focus much on because it commingles 2 things: the underlying chemical price inflation and our pricing power.Actually, I would say, if you observe an increased gross profit margin currently, keep in mind, it's a higher percentage on a higher base. So the actual gross profit per unit develops even stronger than what you see in the gross profit margin. You were asking why is that. And it's a mix of items that delivers a very strong gross profit per unit. It's general market supply-demand tension. So if you have product available, if you have a strong supplier network, if you have transportation capabilities, the market gives the opportunity currently to price up.It's cost inflation world over, that the market permits, but it's also a constant improvement of business mix, and it is group Project Brenntag initiatives to optimize pricing, particularly to weed out pricing inefficiencies we had in the past. I hope that gives some flavor.

[Operator]

Our next question comes from Chetan Udeshi with JPMorgan.

[Chetan Udeshi, Research Analyst]

So first question is, it's great to see some further progress on Project Brenntag. But what I'm struggling with is to see the benefit on actual P&L. Where do I see the benefit? Because on one hand, you guys are talking about 450 job cuts, but on the other hand, when I look at your P&L and personnel expenses in 2Q, they are up almost 9% year-on-year.I mean of course, there is some FX benefit there. So maybe on a constant currency basis, it's even higher. So can you explain why the personnel expenses don't reflect the job reductions that you guys are talking about? That's one.And second is, I'm curious, why is the organic growth in Specialty Chemicals higher or Specialty or whatever -- Specialties business higher than Essentials because I would have thought the GP per unit uplift in theory should be higher at commodity part of your business than specialty. So can you maybe comment a bit on why the growth in Specialties is so much higher in second quarter than commodity part?

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

Yes. Chetan, it's Georg. With respect to the P&L question. So indeed, as one can follow from the FTE numbers, we do have the reduction in FTEs. We do see it to a degree in the P&L already, but it's compensated, if not overcompensated, to a strong variable compensation. So the per head cost currently goes up. But that's, as explained in a different context earlier, we don't see that as an issue because it's directly linked to gross profit, and gross profit is very, very strong currently. And the second part of the answer is it's a timing issue. It will be clearly more visible in the second half of the year.

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

When it comes to the organic growth in Specialties is higher than in Essentials, I think it has been, as I said before, the operating model and our focus on the specialty side is, of course, indeed fostering and stimulating a lot of interest from key suppliers and key customers. So I think we have made good progress there.Overall, the growth as we have seen it in Q1 and in Q2 also, when you look overall on the market and other players in that field, it has been higher also in specialties. So there is a sequential increase in growth rates from Q1 into Q2. Also, sometimes in Specialties, you see also a sort of a lag, a time lag until pricing, gross profit, margin management is fully kicking in.So I think you have always that kind of different out-of-sync behavior between Essentials and Specialties. And overall, I mean, this is what we have said from an underlying standpoint of view, we expect medium to long term anyhow Specialties growing faster than Essentials. So I think for us, it's -- I must say, this quarter is not really a surprise that we see is maybe the magnitude as Specialties has outgrown Essentials is a little bit unusual, but nothing where we are overly concerned.

[Chetan Udeshi, Research Analyst]

And maybe if I follow up on the recent acquisition of JM Swank. Can you give us some -- because it's a bit sizable than what -- in terms of the size of the acquisition bigger than what you guys normally do. Can you give us some color on what margins are they making? Is there a scope for synergies for you guys in terms of cost or top line? Because it seems from the EV that maybe the multiple is higher than what you guys normally pay. So I'm just wondering if you can give us some color on how should we think about the earnings and -- earnings potential.

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

No, I think I have frequently talked about how I see the M&A pipeline and our focus on the M&A pipeline being skewed more towards 3 dimensions. One is choosing the right focus industry and that was, of course, Food & Nutrition, a perfect match. Then talking about geography. I mean North America is, of course, not Asia Pacific or an emerging market, but nevertheless, North America a key market for us.And thirdly, about looking for targets which are adding -- are sizable, let's say, so that they have a meaningful EBITDA contribution compared to, I would say, the many, many small and more or less acquisitions Brenntag has done in the past. The JM Swank and also Zhongbai Xingye, they basically fulfill this criteria very well.And again, for us, strategically, creating basically one of the largest or if not the largest distributor in that field in North America is a key strategic movement. And based on what we have paid for that asset, I must say it has been an excellent acquisition and quite interesting also from a multiple standpoint of view, even if this is slightly higher than we typically would have done in the past.

[Operator]

Our next question comes from Suhasini Varanasi of Goldman Sachs.

[Suhasini Varanasi, Equity Analyst]

Just a couple please, on the M&A side of things. It's very helpful to see that you've mentioned the guidance on EBITDA does not include the M&A that was announced after you did the guidance raise in June. But can you help us understand, maybe give us some color on what the annualized EBITDA contribution would be from the 3 deals that you did after the guidance raise in June, what would that contribute on an annualized basis?And secondly, just on the M&A pipeline. How should we be thinking about future M&A? Is the M&A pipeline looking solid still? Should we expect quarter M&A in second half of year or given the activity levels, which have been elevated so far this year, maybe it's -- we should now look at it only from 2022 onwards?

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

Thanks a lot for the question. And I think Georg will answer the question on the M&A annualized EBITDA impact, and I will talk about the pipeline afterwards.

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

Yes. Suhasini, it's Georg. The contribution, the EBITDA contribution from these 3 acquisitions this year, so from the closing end of July, beginning of August until end of this year, should be around EUR 20 million, give or take a view depending on how fast we are in integrating and generating synergies. If you think about next year's full year number, you can basically annualize those EUR 20 million and at -- an expectation on non-synergies and gross.

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

Yes. And on the pipeline and the future M&A, I think our pipeline is still quite nicely filled. I think I've said it also previously we are actively working on always having a constant and interesting pipeline because some things materialize, some don't. So I think it will not go down to 0 in the second half. This is not my expectation. Will it have the same magnitude as in the first half? I probably would doubt it. But I think we're constantly looking for good targets and if they are good and affordable and they make sense with our disciplined approach, we certainly will look into them.

[Operator]

And our next question comes from Matteo Cataldi, Exane BNP.

[Matteo Cataldi, Research Analyst]

Congratulations on the nice quarter. Most of my questions have already been answered. I have just one left on the guidance. I was wondering to what extent a recovery in oil and gas is factored in. I think you were assuming no recovering in your previous guidance, but you flagged out good development in Q2 in your presentation.

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

Matteo, it's Georg. Yes, I'm not sure I really got the core of the question. We do not expect a further recovery or strengthening of the market circumstances in the guidance. We do expect some gradual return to normalization. But maybe I misunderstood the question.

[Matteo Cataldi, Research Analyst]

Okay. No, that was the question on oil and gas.

[Operator]

Our next question comes from Isha Sharma, Stifel.

[Isha Sharma, Analyst]

I just wanted to ask you on the Specialties. The 50 bps improvement quarter-over-quarter, is it purely driven by the increase in gross profit or are there other underlying factors? And how should we think about it going forward? Secondly, if the market conditions do not ease into the second half as you expect, how should we think of the seasonality? Would you -- would -- should we still assume certain -- so the H2 to be a little bit lower than H1? Or is it possible that the seasonality goes out of the window just because the supply chains remain as tight through the year.

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

Yes. I think, again, I'll take maybe the second question, Isha. And thanks for asking that. No, it could well be that those favorable market conditions, as I said before, can be maintained or stay longer with us than we thought. And that, of course, is something which Brenntag can play quite well and obviously would be positive for us. Talking to some of our key suppliers, and maybe answering your question about seasonality, we have, for instance, one big supply in the material science business, where they are clearly saying we are still not out of our force majeure topics we had in the beginning of the year in North America.I'm still not able to supply fully to the market. This will last well into Q4 for me and again, speaking about the key supplier. And then my seasonality starts because typically I'm in a business which is picking up in Q1. So the lack of capability of building inventories is huge. And so from that perspective, there could be pockets, there could be industry segments, there could be product groups.Well, let's say that out of balance supply and demand scenario will maintain longer. And there could be places where this is normalizing much faster. So I think, again, no black and white answer here. Again, we are navigating carefully through that. And it's hard to predict really how quickly and how far that will normalize. Georg, maybe you talk about...

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

Your question on H1, H2 seasonality. So if there were no change in market circumstances, if there were no underlying business trends, if I try to isolate the pure seasonality of the business, then you would typically expect the second half of the year to be marginally weaker 1, 2 percentage points weaker than the first half of the year. And that's mostly summer holidays and Christmas. There is no inherent seasonality in the business really.

[Isha Sharma, Analyst]

Right. And the question on specialties improvement in conversion ratio?

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

What you see in the numbers currently is mostly gross profit driven in Specialties, which is, in turn volume-driven, business mix driven, gross profit per tonne driven. But Specialties does benefit already and will benefit even further from the efficiency measures in Project Brenntag. So to a degree you will see improvement in the Specialties results also on the cost side.

[Operator]

And we have not received further questions. I will hand back to the speakers.

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

Well, I think with that, I close the Q2 call. Thanks for your attention and for the interesting questions you asked. And looking forward to further interactions when we report on Q3 and where we stand with our transformation program and overall in our performance. So thank you very much, and all the best to you. Bye-bye.

[Operator]

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