Brenntag SE

XETRA:BNR

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, welcome to the Q2 2023 Results Call of Brenntag SE. At our customer’s request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions via the telephone lines.

May I now hand you over to Thomas Altmann. Please go ahead.

[Thomas Altmann, Senior Vice President, Investor Relations]

Thank you, Luca. Good afternoon, ladies and gentlemen. On behalf of Brenntag, I would like to welcome you to the earnings call for the second quarter of 2023. On the call with me today are our CEO, Dr. Christian Kohlpaintner; and our CFO, Dr. Kristin Neumann. They will walk you through today’s presentation, which is followed by a Q&A session. All relevant documents have been published this morning on our website and can be found at brenntag.com in the Investor Relations section. In the same area, you will also find the recording of this call later today.

Before we begin, allow me to point you to our safe harbor statement, which you will find at the end of the slide deck.

With that, I’ll hand over to our CEO, Dr. Christian Kohlpaintner. Christian, over to you.

[Christian Kohlpaintner, Chief Executive Officer]

Well, thank you, Thomas, and good afternoon also from my side, and thank you for joining us today. I will start with the highlights of the second quarter 2023, and Kristin will then walk you through the details of our financial performance. As usual, we are both happy to answer your questions after this presentation.

Due to its resilient business model and despite the adverse market conditions, Brenntag showed a solid performance in the second quarter of 2023. Alongside ongoing geopolitical uncertainties and inflationary trends, Brenntag experienced, as anticipated, continued destocking trends in combination with declining chemical prices in many areas.

In this challenging environment and compared to a record high prior year period, we delivered solid results broadly in line with our expectations. Sales amounted to €4.3 billion, which is 14% lower compared to the exceptional prior year period. Operating gross profit stood at around €1 billion, a decline of around minus 9% compared to the second quarter of 2022.

Our operating EBITDA came in at €410 million, which is a decline of 21% compared to last year, while operating EBITA amounted to €332 million, a decline of 26% respectively. Earnings per share stood at €1.23 compared to €1.86 in the second quarter last year.

Our solid operational performance supported a very strong cash flow development and additionally we saw a strong cash inflow from working capital compared to the prior year period. This led to a second quarter free cash flow of €432 million, which adds up to almost €900 million for the first half of 2023, our highest free cash flow ever recorded in the first 6 months period. A remarkable result, which again demonstrates the strong cash generation capability of our business.

Besides our solid operational performance, we continued to make good progress on our strategic initiatives. We successfully carried out our M&A strategy, and announced two attractive deals for Brenntag Specialties in the second quarter.

We announced the signing of the acquisition of Saifu Chemicals, significantly expanding our Specialties chemicals and value-added service footprint in Asia-Pacific. Furthermore, we announced the signing of a strategic partnership with Royal Avebe, an international cooperative producing potato starch and potato protein, expanding and broadening our portfolio of innovative and sustainable products, especially in life sciences. This also illustrates our ambition to strengthen our collaborations with world class suppliers.

M&A remains a key strategic pillar for us and an enabler of future growth. Given our full pipeline of potential acquisition targets, we will continue our M&A track record and are confident to reach our planned annual M&A spend of around €400 million to €500 million in 2023.

In addition to M&A, we also continue to execute our Horizon 2 growth strategies. For Brenntag Specialties, for example, these include the establishment of a new regulatory team for Pharma in EMEA, the launch of a Material Science Application Center in Mumbai, or various newly signed distribution agreements with supply partners like Royal Avebe, Oterra and Kao Chemicals.

Brenntag Essentials already successfully strengthened its local presence and flexibility by opening new sites in Brazil, Argentina and North America. And for our new major site in China, the required license to start operations has been granted. In addition, business development teams have been set up for the growing battery business in EMEA and in North America.

Furthermore, we have recently updated the market on a redesign of the Board of Management and the creation of a new governance and steering structure for our two global divisions, Brenntag Specialties and Brenntag Essentials, effective January 1, 2024. The evolved divisional setup supports the creation of incrementally more independent, autonomous and market leading businesses to accelerate the implementation of our Strategy to Win. I will talk about this in more detail later.

Ladies and gentlemen, you are continuing to execute our Strategy to Win, including all investments needed. At the same time, the market environment remains challenging and we experience continued top-line pressure for both divisions. We are fully aware that we need to keep a close eye on our cost development to safeguard our results, however, without jeopardizing our stringent Horizon 2 strategy execution.

Therefore, as already indicated with our Q1 results call, we have been prudently reviewing our cost base and initiated several cost containment measures, which we will intensify in the second half of 2023. Kristin will talk about the details of our cost containment measures later.

And finally on the outlook. In March, we presented our guidance range for the full year, which has been €1.3 billion to €1.5 billion for operating EBITA, equivalent to €1.6 billion to €1.8 billion for operating EBITDA. As 2023 has further progressed, we confirm our guidance and specified at €1.3 billion to €1.4 billion of operating EBITA, thus being in the lower range of the original guidance driven by the overall highly challenging market environment and unfavorable FX effects.

Let us now take a closer look at the environment Brenntag was facing in the second quarter. As already mentioned, the macroeconomic environment continued to be challenging. We experienced ongoing geopolitical uncertainties and strong inflationary trends. Continued destocking and sluggish demand in certain end markets impacted companies across the chemical space, which is why many chemical producers have recently published substantial profit warnings.

The combination of slower demand pickup and normalized supply chains led to declines in chemical prices globally. Also, many customers are speculating on further declining raw material prices and thereby taking higher inventory risks at the moment. In addition, low domestic demand in China has led to higher export rates of Chinese products into other markets, which put further pressure on chemical prices worldwide. Of course, also, Brenntag is not immune to this challenging market environment, but our results emphasize once again the resilience of the chemicals distribution business model.

We are in general less affected by the cyclicality in the chemical industry and our earnings development shows lower volatility compared to chemical producers. Due to the sequential volume recovery seen since the beginning of the year, as well as indications that inventory control measures on our customer side are bottoming out, we are confident that the second half of 2023 will generate volumes exceeding the first half of 2023.

Ladies and gentlemen, let me now talk about our organizational update, which we provided about a month ago on July 6, together with a detailed slide deck which can be found on our website in the Investor Relations section.

With this announcement, we shared a new governance and steering structure for Brenntag Specialties and Brenntag Essentials. This will simplify and speed up decision making within our 2 divisions. We are creating incrementally more independent, autonomous and market leading businesses to accelerate our strategy implementation. The evolved operating model will come into effect as of January 1, 2024.

We also announced associated changes within the Management Board of Brenntag. Since August 1, 2023, the Management Board consists now of 4 members instead of 5 previously, the CEO function, the CFO function and 2 divisional CEOs. Ewout van Jarwaarde was appointed as CEO of Brenntag Essentials, succeeding Steven Terwindt, who has chosen not to extend his contract with Brenntag, which ended July 31. Michael Friede was appointed CEO of Brenntag Specialties.

The Chief Transformation Officer role, which Ewout held previously and which was established in the beginning of 2021, has been discontinued. Let me add a few words here. This Management Board role was introduced for 3 reasons: one was to ensure the stringent execution of Project Brenntag; secondly, it was intended to create the concepts and the foundations for the company’s digital and data transformation journey; and thirdly, it was intended to define and develop the Brenntag excellence initiative and to mobilize the organization accordingly. These 3 major goals were successfully achieved.

Of course, we stay fully committed to executing our DiDEX transformation. The accountability for executing the DiDEX program is firmly established in both divisions as well as the group functions. Within the Management Board, Ewout continues to be responsible for digital data and technology, and a new role of Chief Digital Data and Technology Officer has been created, reporting directly to Ewout.

I will personally be responsible for Brenntag excellence and indirect procurement to focus on delivery of cost savings and efficiency gains going forward. Ewout comments strong leadership skills and a high level of expertise, especially in the implementation of transformation programs, which he will use to consistently drive forward the expansion of our position as a global market leader in Brenntag Essentials. His expertise will be particularly valuable in driving the last mile excellence and becoming the easiest to do business with, seemingly connecting with our customers and suppliers.

The changes on the Management Board fully reflect the changes in the operating model of the two Brenntag divisions with their new governance and steering structures. As of January 1, 2024, both divisions will be steered by divisional executive committees led by their respective divisional CEO. The operating model evolution also includes a partial and gradual shift of specific functions, responsibilities and activities from corporate level to the divisions, such as business and operations, related HR service and excellence functions.

The new governance structure in Brenntag Specialties is centered around global business units externally reported in 2 new segments, Life Science and Material Science. Brenntag will create a unique Specialties positioning with a more focused portfolio and value-added services offering based on a strong global Life Science segment and a focused global Material Science business geared towards sustainable chemistry.

With this new governance structure, Brenntag Specialties is shifting from a regional to a global steering of its key businesses, while continuing to consider local differences and leveraging the local strengths in the Specialties business. The setup in global business units with a full profit and loss responsibility will support the division’s end market focus and leverages its global expertise and presence, while improving the capabilities for local execution.

The Life Science segment includes the 3 global business units; business unit Nutrition, business unit Pharma, and business unit Personal Care/HI&I. The Material Science segment is composed by CASE which is coatings, adhesives, sealants and emulsions, as well as polymers, rubbers construction as well as lubricants industries.

We will transfer our Water Treatment business within Brenntag Specialties to Brenntag Essentials. Based on product and supply chain requirements, we believe it is the best solution to bring Water Treatment under one-roof in Essentials. The product portfolio of Brenntag Specialties will be sharpened further until our Capital Markets Day.

Now, let us take a look at the setup of Brenntag Essentials. The focus of the changes in Brenntag Essentials is on delivering last mile excellence and leveraging its global reach through its regional supply chain and global sourcing capabilities to better serve its customers and suppliers. The division will continue to optimize and expand its network and product portfolio to leverage its number one market position and to realize new business opportunities.

Our 3 priorities are: building on the last-mile delivery ownership while leveraging Brenntag’s unique global reach through a connected global and regional sourcing and supply chain network; secondly, to focus on optimizing our network and product portfolio to expand our number one position and global presence and drive new business opportunities; and thirdly, to simplify the way of how we work to become the easiest to do business with for customers, suppliers and employees with a clearer accountability and responsibility within the organization.

Ladies and gentlemen, our new governance with the executive committee structure and the divisional steering of selected functions will provide the divisions with the lean and efficient processes, resources and capabilities needed to execute a more independent and autonomous steering, improve the business performance and accelerate the dedicated growth activities.

Our conclusions on strategic options and the future path for Brenntag and our divisions will be communicated at the Capital Markets Day that will take place on December 5th in London. We are already looking forward to seeing you there.

Now, I would like to hand over to Kristin, who will talk about the financial performance in the second quarter in more detail. Kristin?

[Kristin Neumann, Chief Financial Officer]

Thank you, Christian. And also from my side, a warm welcome to everyone on this call. I will now talk about our key financial figures for the second quarter 2023. And I will start with the development of our operating EBITA. As a reminder, when talking about growth rates, we generally talk about FX adjusted rates.

Please have a look at the bridge on the left hand side of Slide 7. In the second quarter 2022, we reported an exceptionally strong operating EBITA of €462 million. The translational foreign exchange effect in Q2 this year had an impact of minus €14 million. Our acquisitions contributed €4 million to the operating EBITA growth. Overall, we reported an operating EBITA of €332 million for the whole group. Compared to the exceptional prior year performance, this represents a decrease of minus 26%.

Our results were overall characterized by the continued destocking trends coupled with demand weakness in certain end markets. At the same time, gross profit per unit decreased slightly versus the second quarter 2022. But broadly in line with our expectations of gradual price normalization in the course of the year, this led to an overall lower absolute gross profit for the group compared to the prior year quarter.

On the right hand side you find a more detailed view by divisions and all other segments. Operating EBITA growth for Brenntag Specialties was minus 32% and for Brenntag Essentials the growth rate was minus 30% year-over-year. In absolute terms, Brenntag Specialties reported an operating EBITA decline of minus €79 million, whereas Brenntag Essentials reported a decline of minus €39 million compared to the second quarter 2022.

The translational FX effect was minus €9 million for Brenntag Specialties and minus €6 million for Brenntag Essentials. Acquisitions contributed €2 million in Brenntag Specialties and also €2 million in Brenntag Essentials. The group EBITA conversion ratio came in at 33%, which is 800 basis points below the exceptional prior year quarter.

Turning to Page 8. Brenntag Specialties reported an operating gross profit decline of minus 16% to €375 million in the second quarter. Operating EBITA declined by minus 33% and reached €145 million. The EBITA conversion ratio for Brenntag Specialties was around 39% and below the record high prior year level of 48%. The results of Brenntag Specialties were affected by negative volume developments in combination with falling sales prices and a corresponding impact on our gross profit per unit. Even though volumes are sequentially recovering throughout the year, prices normalized as expected leading to results below the prior year period.

Our focus industries, Pharma and Water Treatment performed very well, which however could not compensate for substitute demand in other segments, where customers continued to destock and ordered lower volumes in anticipation of further falling prices.

Nutrition and Personal Care/HI&I showed negative operating gross profit growth compared to the record prior year earnings, particularly driven by volume and price declines of non-branded ingredients such as citric acid. The performance of the Material Science sector continues to be negatively impacted by muted construction activity.

In addition, an overall weaker performance in the APEC region impacted our specialties results in the second quarter of 2023. Although, we experienced ongoing inflationary trends and incurred additional costs in connection with our Strategy to Win, which are an investment in Brenntag’s future, operating expenses for Brenntag Specialties were stable compared to last year. This is partly driven by lower volumes. However, OpEx for Brenntag Specialties were below the level of Q1 2023, also volumes remained flat quarter-over-quarter.

Let me briefly reiterate what Christian has already said on our Q1 earnings call. Brenntag Specialties will accelerate its measures to close the relative performance gap to pure play peers. These measures include: a detailed review and optimization of the various industry product portfolios; reducing the exposure to non-branded ingredients in Nutrition and Personal Care; intensifying the cooperation with strategic suppliers, recently demonstrated by additional distribution agreements with Royal Avebe, Oterra and Kao Chemicals; opening new application and innovation centers like the recently opened Material Science Center in Mumbai and expanding the value-added services offering.

One example for value-added services in our recently announced – is our recently announced partnership with Qualifyze to enhance the pharmaceutical audit offering for our customers. This collaboration provides our Pharma customers in EMEA access to high quality third-party audits of suppliers. This is a practical solution which meets the needs of our customers facing audit challenges and regulatory requirements.

Let us take a closer look at Brenntag Essentials. Brenntag Essentials reported an operating gross profit of €638 million, which is a decline of minus 3% compared to the prior year. Operating EBITA stood at €226 million. This is 13% below the record breaking prior year figure. The EBITA conversion ratio for the division came in at around 35% compared to 39% last year. All regions showed a slower performance compared to last year, which is mainly driven by lower volumes.

Gross profit per unit remained high in EMEA and North America, but was declining in Latin America and APEC year-over-year. Compared to Q1 2023, the division saw a volume growth; however, total volumes were still below the previous year’s quarter. The EMEA as well as the North America region showed a solid performance. The APEC segment was impacted by lower demand in China. The Latin America segment continues to be impacted by low demand.

Operating expenses for Brenntag Essentials increased slightly compared to the prior year period. However, this is mainly driven by our M&A activities. Organically, we were able to reduce OpEx year-on-year, also partly driven by lower volumes. However, OpEx were also lower compared to Q1 2023, despite volume increases in our Essentials business.

Let me briefly address the development in all other segments. In all other segments, which mainly include the holding companies, we recorded a negative operating EBITA contribution of minor €38 million. This is again driven by the general inflationary environment, but also related to higher expenses in connection with our transformation program and higher IT expense. As reminder, all costs related to IT investments and our DiDEX program are reported in our operating expenses and, therefore, are fully reflected in operating EBITA. In summary, the results are broadly in line with our expectations in a continuously challenging market environment.

Moving to Slide 10, where we look at the income statement in more detail compared to the second quarter last year. It generated stable sales of around €4.3 billion. Our operating gross profit stood at around €1 billion. This represents a decline of around 9% compared to the record prior year quarter.

Operating expenses, excluding special items increased slightly compared to the previous year, which was driven by our M&A activities. Organically, OpEx for the group remained stable, partly driven by the slower demand environment compared to last year, versus Q1, OpEx could be slightly reduced, despite sequential volume improvement.

Special items below operating EBITA had a negative effect of minus €17 million. This includes provisions and various other onetime expenses. Depreciation and amortization together increased slightly with a combined amount of €94 million compared to €89 million in Q2 last year. Net finance costs remained more or less flat at €39 million. Our financial performance translated into a profit after tax of €189 million and earnings per share of €1.23. This compares to the record prior year quarter profit after tax of €294 million and earnings per share of €1.86 last year.

Turning to Page 11 and the free cash flow. In the second quarter 2023, we generated another very strong free cash flow of €432 million. The significant increase in free cash flow generation is mainly due to the cash inflow from working capital, whereas we reported a significant outflow for investments in our working capital in the prior year quarter.

On Page 12, you can see more details on our working capital development. Working capital amounted to around €2.3 billion at the end of the second quarter. This is a decline of around €130 million compared to the end of Q1 2023. Our working capital turnover was lower compared to the average working capital turn of last year and stood at 7.2 times. This is driven by a slightly weaker development of receivables and payables, whereas our inventory management has been on a positive trajectory since last year.

Looking at our balance sheet, our net financial liabilities amounted to €2.3 billion at the end of Q2. Our leverage ratio, which is net debt-to-operating EBITDA remains on low levels and stood at 1.4 times. This includes the first tranche of our share buyback program in the amount of €500 million. Thereof, around €170 million were realized at the end of Q2. On the right hand side of the slide, you can see our current maturity profile, which visualizes our strong financing structure.

Let us now talk about our cost containment measures, which Christian already mentioned at the beginning of this call. Given the challenging market environment and continuing inflationary trends, we are fully aware that we need to keep an eye on our cost development in order to safeguard our results in 2023. And at the same time ensure that we continue to execute our Horizon 2 strategy, including all investments needed.

Therefore, we have taken the prudent decision to initiate and intensify various cost control measures for the second half of 2023. First, we initiated global hiring control measures and will mainly use natural fluctuation to reduce our headcount number by 300 in the second half of 2023 in a socially responsible manner. Second, we will be reducing discretionary expenses, travel and consulting costs, and third-party contractors, as well as other indirect spend. And third, as we are continuously optimizing our site network, we have identified additional 25 sites to be closed worldwide until the end of the year. To implement the savings, we will incur some onetime restructuring costs in the course of 2023. These restructuring costs are estimated to be in the low-double-digit million euro ranges.

Let me once again emphasize that core initiatives of our strategy to win implementation will continue and are not part of the cost containment measures.

And with this, I would like to hand back to Christian to talk about the outlook for 2023.

[Christian Kohlpaintner, Chief Executive Officer]

Well, thank you, Kristin. Ladies and gentlemen, let me now briefly talk about the outlook for the remainder of 2023. In March, we presented our guidance range for the full year, which has been €1.3 billion to €1.5 billion for operating EBITA, equivalent to €1.6 billion to €1.8 billion for operating EBITDA. As 2023 has further progressed, we confirm our guidance and specify it now at €1.3 billion to €1.4 billion of operating EBITA. The specification in the lower range of the original guidance is driven by the overall highly challenging market environment and unfavorable FX effects.

For the second half of 2023, we expect a continuously tough operating environment characterized by geopolitical uncertainty, macroeconomic challenges, but also a sequentially recovering demand. Due to the sequential volume recovery seen since the beginning of the year, as well as indications that inventory control measures on our customer side are bottoming out, we are confident that the second half of 2023 will generate volumes exceeding the first half of 2023.

With this, I would like to close the presentation now, and thank all of you for participating today’s call, and now we are looking forward for your questions. Thank you.

[Operator]

Thank you. We will now begin our question-and-answer session. [Operator Instructions] The first question is coming from Suhasini Varanasi at Goldman Sachs.

[Suhasini Varanasi, Goldman Sachs]

Hi, good afternoon. Thank you for taking my questions. I have three, please, and I’ll take them one by one, if that’s all right. It’s very reassuring to hear about the sequential improvement in volumes that you expect for second half of this year compared to first half. But this is probably in contrast to what we’re hearing from the manufacturers. Is it possible to give us some color on where you have seen the most improvement compared to maybe the end of first quarter on what gives you the confidence? And why have you been able to see this improvement when the manufacturers have not? Is it to do with maybe incremental outsourcing trends? That’s my first question. Thank you.

[Christian Kohlpaintner, Chief Executive Officer]

Yes, Suhasini, thank you very much. I will take that first question from you. On the volume development, I think we have been saying this that actually since the beginning of the year, we have seen a sequential increase in the volume, not talking about now quantum leaps here. We talk about a gradual, sequential, small step improvement of volumes, which is of indeed contrary to what many chemical manufacturers have been seeing. And this has to do, of course, with our capability to service a customer base which cannot be and is not addressed by the chemical manufacturers, typically smaller and smallest customers with a high turning business, sometimes very highly innovative as well. And that has helped us to also protect our volume development.

We should not forget that still the volumes are lower than they were a year ago. I mean, this is also something where we are not totally immune against, but sequentially it’s for us important to observe where the volumes are going forward. I have would say consistently said that the American market in particular is more robust than a lot of people think. I think this has been confirmed now over the last 12, now 15 months already that we see a good decent business in North America from a demand standpoint of view.

We see now also first and gradual signs that also demand in Europe is improving. Again, not a massive change, but gradually stabilization and gradual improvement going forward. And as those are the 2 major regions we have, we are confident that this will be also reflected in our second half numbers.

Destocking in the industry has been unusually long. You have me heard saying in the past that I typically expect about 6 months of destocking and it kicked in around November last year. So now, we talk about already 7, 8, 9 months of destocking, which is an unusual period. And this is what you also have heard from chemical manufacturers that this is an unusually destocking, which we believe has now bottomed out. And also when we look at the July development, this is also an encouraging sign that we see that volumes are not declining, but they’re stabilizing and slightly going up now month-by-month, as I have said before.

So this is, I would say, the nature of our business, the nature of servicing all the different value chains. Never forget we also servicing all value chains, not only petrochemicals but also inorganics, but also food and nutrition. And we have, for instance, seen very nice developments on the volume side in Pharma. But we also have seen now first signs of recovery in the Material Science business. So, overall, we believe the signs are slightly positive that for second half we see a better volume development.

[Suhasini Varanasi, Goldman Sachs]

Thank you very much. My second question is actually on the price normalization that you expect will continue this year. Is it possible to give some color on where this price normalization is having the most impact? Is it mainly in Specialties and perhaps in the Material Science? Because I think looking at the gross margin in Essentials, it has held up really well and even improved year-over-year. Why has that been so strong? And is there a risk that it maybe comes off later? I think you mentioned in your presentation as well that you expect the pressure on margins and Essentials to continue to increase in second half? Thank you.

[Christian Kohlpaintner, Chief Executive Officer]

Yeah. No, I think when we talk about the price normalization, I mean, this is something we have been observing this minimum, I would say the last 9 months, if not even 12 months, that you see a greater normalization on pricing. On the petrochemical side, this has happened to a large extent. You still see price pressure, of course, now coming from oversupply, in particular, out of China. China domestic demand is, I would say, on the soft spot, as we also said in Q1. China continues to be a disappointment for us also in the second quarter, but we also see they are bottoming out. But we can observe that material from China is actually also exported into different markets, increasing the pricing pressure also in other regions outside of Asia.

We saw inorganics, which is a different value chain, driven by the energy costs and electricity costs, and gas costs, predominantly. So, here, we have seen also normalization now in Q1, in particular, also in Q2, and that trend continues just take caustic soda, hydrochloric acid, I’m sure that [see that] [ph] has insights here as well to share. So this is also clearly a sign that also prices are declining there.

And then you have, I would say, quite unusual in our field on the Nutrition side also some price declines here, which we currently are managing quite well, because the relevant topic is really what is the gross profit per unit which we can create. And that’s not overall determined by the price level itself, but how well we manage the volatility going up and down.

So on Essentials to complete that picture, we have, of course, had support from various shortages in the markets over the last, I would say 3, 4 quarters, which now fading and have been already faded. So, I think, supply chains have largely normalized. So in that respect, you would expect that also due to the normalized conditions, prices will come to some extent under pressure, and we see that. But, nevertheless, we believe that the volume recovery we expect for the second half will also compensate for that and also including our cost containment measures on top of it. So this is why we are confident for the second half and this is why we have confirmed our guidance as specified.

[Suhasini Varanasi, Goldman Sachs]

Thank you. Maybe just to clarify that bit on the second half, it’s clear that you are reaffirming your guidance. But, I think, going into Q3, and Q3, obviously, is very important for getting to the full year profits. Under normal seasonal patterns, you would probably end up seeing Q3 profits similar to 2Q. And I appreciate you, you don’t give a lot of color by quarter, but just that it’s pretty important this year. So I’m just trying my luck over here. When we think about the moving parts, sequential volume recovery, price normalization, and then you have restructuring program, what do you think is the key risk to profits in Q3 that can prevent you from getting to your guidance at the lower end of the range and can restructuring basically help to offset that? Thank you.

[Christian Kohlpaintner, Chief Executive Officer]

Well, I would not narrow it down to a Q3 performance. I think you need to look at the second half overall and compare it also how we fared last year. We had a particular bad fourth quarter last year, if you might remember. As I said, we see first signs also in our Specialties business that we have seen here bottoming out and also gradually volumes, even in Europe start to increase. Again, now we talk about single-low-digit numbers here, but nevertheless you clearly can see this and that gives us confidence for the second half. And again, Q3, Q4, we do not discuss separately, but for the second half we overall are confident that we can confirm the guidance as we did today, as the markets and also our self help program in that respect are supporting us to accomplish that guidance.

So I don’t see the major risk here besides any exogenic events like further escalation of the Ukraine-Russian war or any things around Taiwan and other topics. But in the absence of these kind of exogenous shocks, we believe that second half from a demand standpoint, if we will be better than the first half.

[Suhasini Varanasi, Goldman Sachs]

That’s very clear. Thank you very much.

[Christian Kohlpaintner, Chief Executive Officer]

You’re welcome.

[Operator]

The next question is coming from Markus Mayer at Baader Helvea.

[Markus Mayer, Baader Helvea AG]

Yeah. Good afternoon, Christian, Kristin and Thomas. I have two questions, please. Firstly, on your cost containment measures this potential savings, can you quantify the savings? What do you expect which might come on top to the already guided savings? And also this 25 site closures, are there more affecting specialties or should we expect there a stronger effect is Essentials, or might be the effect equally split for the 2 decisions – into the 2 decisions?

And then the second question is on the financial costs. If you could give us guidance there, net fund capital came down, leverage came down, financial costs went up, not massively, but nevertheless, maybe a guidance there would help? Thank you.

[Christian Kohlpaintner, Chief Executive Officer]

Okay, Markus, I hand over to Kristin for those 2 questions.

[Kristin Neumann, Chief Financial Officer]

Thank you, Christian. And, hi, Markus, also from my side. So first of all, in terms of cost containment, the numbers are included in our guidance, so it does not come on top. We see for 2023 mid-sized double-digit million amount, helping us support our guidance. And, I think, it’s important to say that, of course, we are also with that fighting inflation and balancing out other headwinds we have. In terms of the number of closures, so we do not distinguish between Essentials and Specialties locations. In most of the cases, they are somehow also service both divisions and, therefore, there’s not a division which is more affected by the closures. It’s also worth mentioning that the major part of those 25 sites we identified are third-party sites.

In terms of financial costs, they are more or less stable compared to what we saw in 2022. Next to the interest costs, of course, we have also other elements in our financial results. And the major driver here is also next to the interest costs is FX developments, and also the hyperinflation in Turkey, which had a major impact on the financial costs in Q2 2023.

If you look at our leverage, you might have seen that or also heard from me that this already includes our share buyback program until the end of this year with the €500 million we will purchase back. And, therefore, that includes already the lower liquidity or lower cash position out of that buyback program. I hope that this answered the questions.

[Markus Mayer, Baader Helvea AG]

Yeah, absolutely. Thank you.

[Operator]

The next question is coming from Dominic Edridge at Deutsche Bank.

[Dominic Edridge, Deutsche Bank]

Hi, there. Thanks for taking the questions. Just two from myself. Firstly, can you just discuss maybe the volume developments in the different industry areas and just is it too simplistic to say that the more cyclical in the end market, the more volumes are down currently. And just allied to that, just on Water Treatment, the only distributor to say Water Treatment has been strong. Is there sort of a rationale you feel behind that in terms of secular growth?

And then the second question was just on cost containment. I think, doing the numbers and apologies if I’ve got anything wrong, you have about 173 net increase in headcount organically since January. So in that context sort of 300 doesn’t feel aggressive. Is it fair to say that you’re trying to avoid doing anything too drastic currently on the assumption we will see a recovery perhaps in 2024? Thanks so much.

[Christian Kohlpaintner, Chief Executive Officer]

Yeah, Dominic, thanks for your questions. On the volume development, yes, Water Treatment, we see the same thing. I think we have seen a positive development in Water Treatment, in Pharma, as I’ve said, but now also first signs in Material Science that this is improving. We also have seen substantial volume increases also in our energy business, our Pharma, oil and gas activities. So you clearly can see that both divisions are actually faring quite well when it comes to volume at least to our expectations, July has been encouraging in that trend.

And, again, this is also, in my point of view, a clear sign of that. You have different industries which follow a different, let me call it, destocking cycle, but also follow different logic, how quickly they come out of the woods again. And, here, I’m positive that what we see now in various areas is also extending now to other industry segments, which have been difficult, for instance, like the nutrition business, which has shown also a decline in volumes actually going forward.

On the cost containment, actually in the FTE headcount, we are using the June 30 baseline which you have, which has an M&A impact. We try to walk really a fine line here between what do we need to do to safeguard our results this year versus really doing the necessary investments into executing our Strategy to Win. So it’s not a digital decision. We go to the left and then to the right, it is really a fine and balanced assessment of where do we see cost takeout possible without jeopardizing our successful execution of our Strategy to Win. So it’s one of those, I would say, management tasks and management responsibilities to do this in a prudent manner and not in a very digital manner.

[Dominic Edridge, Deutsche Bank]

Okay. That’s very clear. Thank you very much.

[Christian Kohlpaintner, Chief Executive Officer]

You’re welcome.

[Operator]

The next question is coming from Rory McKenzie at UBS.

[Rory McKenzie, UBS Group AG]

Good afternoon. It’s Rory here. Three questions, please. Firstly, can we have more detail about volume trends? Can we assume that group organic volume declines are about minus 7% year-over-year in Q2, so the average gross profit per unit is maybe minus 2% year-over-year? And could you say whether those year-over-year volume declines were worse in Essentials or Specialties?

Second question, how much further should we expect the losses in the other segments line to increase in H2? Or is this now a higher but stable level after that increased? And then, finally, a question on the new structure. Just to be clear, does each division now have a full top to bottom separate P&L and balance sheet cash flow? And have you created separate entities in each jurisdiction that would allow that full separation? Or is that something you’re still working on? Thank you.

[Christian Kohlpaintner, Chief Executive Officer]

Yeah, I think I will let maybe the volume development and the other segment discussion to Kristin, when it comes on the last question around separate P&Ls, this is exactly what we are trying to accomplish as we move now forward. We want to create more autonomous and independent divisions going forward. And that, of course, is one of the key elements, is that you have full line P&L responsibilities first in both divisions, but also in particular now in Specialties in the global business units which we are creating. It’s a fundamental shift. It’s not so maybe noticed by you. We will move from regional reporting in Specialties into a second reporting in Life Science and Material Science, where there are three global business units, let’s say, in the Life Science business as just one example.

And that’s a fundamental shift in the operating model. But it is required that you also give the full P&L responsibility into those business units. And that, of course, requires that you are thinking about the legal entity structures in each and every country, in particular, in the big ones, we are not talking about, we are present in 72 or 75 countries worldwide. I mean, splitting legal entities in a small country like Nigeria or another small market we are acting in doesn’t make a lot of sense.

But, of course, you need to have that if you are looking into the Americas, if you look into the big European countries. But this is now the task which we are undertaking and giving that, as I said, a more autonomous status and a more independent decision making into those divisions that’s now work for the next weeks and months to come to ensure a successful startup in January 1. So that’s around the P&L and the balance sheet, and separation and the two other questions around the volume development, and the losses in other segments, I hand over to Kristin.

[Kristin Neumann, Chief Financial Officer]

Thank you, Christian. Maybe one additional comment on the separation we will not have starting from July 5, really a separated cash flow statement and also a separated balance sheet due to the fact that these are bound to illegal entities which are still intermingled and that is something we need to decide how to work on that in the future.

Coming to the volume question, you know that we do not give exact numbers in terms of volume in GP per ton development. However, what we see is that we have a higher one digit number of reduction in terms of volume organically and we see a quite stable GP per ton number. If you look at the divisions, the lack of volume is more pronounced in BSP compared to BAS.

And the second question was on the further development of all other segments, as far as if I got it correctly, and how the development here is, we will see higher costs also for the second half of the year. But also here we have taken actions in order to make that less pronounced compared to what we saw in the first half of the year. I hope that this answered the question.

[Rory McKenzie, UBS Group AG]

Yes. So just to clarify, were you saying that we should expect this high level in the all other segments losses to continue or to increase further in H2? Sorry.

[Kristin Neumann, Chief Financial Officer]

I said that there is still higher cost compared to or worse results compared to last year, however, less pronounced to what we saw in the first half of the year. So if you look half year over half year, then it should be less.

[Rory McKenzie, UBS Group AG]

Got it. That makes sense. Thank you for your clarification.

[Operator]

The next question is coming from Isha Sharma at Stifel.

[Isha Sharma, Stifel Financial Corp.]

Hi, good afternoon. I have just two left, please. Appreciate that you would give us more color at the CMD, but could you give us some broad topics that explain your underperformance at specialties versus your peers that are listed? And in that regard you mentioned further sharpening of the Specialties portfolio, is the rationale reducing the commodity products that you still include there that go into consumer end markets or how should we think about it?

And the second question is on OpEx. You mentioned that both segments sequentially saw a decline but the sequential gross margin improvement of 100 bps, we did not see it drop down to the conversion ratio. Could you explain why that is?

[Christian Kohlpaintner, Chief Executive Officer]

Hey, Isha, thanks for the questions. The second question I will give to Kristin. On the capital market, I mean, I think we have been on a performance relative to the peers in Specialties. I think we have been quite explicit in the first quarter about this topic that we fully recognize that there is a performance gap between our Specialties business and our pure play players. You again saw that in the second quarter, confirmed. And this is what we said is not a short-term fix, because it has also to do besides a stringent performance management. Don’t get me wrong, I mean this is something which we work on diligently every day. But it also has to do with the portfolio structure and, I would say, the trajectory you see with us extracting a Specialties business out of a full line distributor model.

And by this extraction of that portfolio, you actually have a reflection of what the portfolio of the full line distributor once was. And this has to do with the products you are also marketing and selling through Specialties. But it has also to do, of course, with our supplier relationships. And in the past we had a less strategic build up of supplier relationships and the products which come with it then maybe pure play peers who have been designed from day one to be a specialty distributor.

And that’s, I would say, this moment in time where you basically see a difference in that performance quality, which is explaining a part of that relative performance gap. And, again, it’s more than just the portfolio. We recognize that it has also to do with performance. And this is why we also have done the necessary changes not only in the top management, but also in the divisional structure going forward. But you will get more granularity around this in our Capital Markets Day, which is now on December 5.

With that, I would give the OpEx question to Kristin.

[Kristin Neumann, Chief Financial Officer]

Isha, I hope I got it, right. What we can see is that sequentially, if I look at Q1 and Q2 in terms of conversion ratio, the conversion ratio is more or less stable. So there’s not a big movement. What we can see is that the gross profit in absolute terms went slightly backwards organically and on the other hand side also OpEx went down. And, therefore, as an end result, the conversion ratio remained stable. So that is how I see it. But maybe I missed something. The margin went up, that is true. But that also means – but in absolute terms the GP organically went down.

[Isha Sharma, Stifel Financial Corp.]

Yeah, I just wanted to confirm, because the gross profit margin went up quarter-over-quarter from [a23.4%.] [ph] However, we did not see that convert to the EBITDA margin. So just was wondering because for the personnel costs went up, but you said that OpEx actually came down, so it was a bit confusing?

[Kristin Neumann, Chief Financial Officer]

Sure. Exactly. So percentage wise, the margin went up, that’s true. But the ASPs also went down and, therefore, in absolute terms, gross profit organically went down slightly, and that is fairly expecting.

[Isha Sharma, Stifel Financial Corp.]

Thank you. That’s very helpful.

[Kristin Neumann, Chief Financial Officer]

Okay. Thanks.

[Operator]

The next question is coming from Alex Stewart at Barclays.

[Alex Stewart, Barclays Corporate and Investment Bank]

Hello, good afternoon. Thank you for taking my question. I wanted to probe a little bit more on this cost savings or cost efficiencies that you’ve talked about. I think you said that it was a double-digit benefit to the P&L in fiscal 2023. Can I just confirm that? And does that mean that it’s a sort of triple-digit benefit annualized on the basis that you’ve started it roughly halfway through the year? And then as an extension to that, are these cost savings to try and offset higher cost inflation than you were expecting elsewhere? So if I were to look at what the level of operating cost you expected on the January 1, do you expect that to be broadly what you achieve throughout the year? In other words, does one offset the other? Or is this lowering your OpEx beyond what you had expected? Because this is the first we’ve heard of these cost cutting, these cost initiatives. So very useful to get more detail, if possible.

[Kristin Neumann, Chief Financial Officer]

So you got it right. It’s a mid-double-digit million amount within 2023. There are several elements in there. Part of that is onetime effects and also holding the breath, as Christian always says, also postponing things, so it will not be all sustainable. Of course, there are other measures where we have rate only kicking in next year. So I would not go to a three double-digit million amount. I think that is balancing off in the end with two elements. That will, of course, we hope to compensate for inflationary trends we saw. And, therefore, we do not want to say that our cost base in absolute terms really goes down, because that is also depending on our volumes we will see going forward. As you know, we also have in our indirect spend in our OpEx some volume related costs, and therefore that is also an element we would see. All in all for this…

[Alex Stewart, Barclays Corporate and Investment Bank]

Just to be clear on that last point, I wasn’t asking about whether OpEx would be up or down compared to any other period. I was asking compared to your budget. When you budgeted at the start of the year, do you think that OpEx will be lower than you budgeted, because of the benefit of the cost savings or will it just serve to negate some of the unexpected costs that you’ve experienced in the quarter [ph]?

[Kristin Neumann, Chief Financial Officer]

It will be definitely compared to our budget. It will be definitely down, which is already now the case. Of course, we always try to steer against it and to balance out the head trends we see compared to our budget, to our expectation in the beginning of the year is definitely down. I confirmed that.

[Alex Stewart, Barclays Corporate and Investment Bank]

Thank you very much.

[Operator]

The next questions come from Chetan Udeshi at J.P. Morgan.

[Chetan Udeshi, J.P. Morgan Cazenove]

Hi, thanks. I wanted to talk a little bit about your new organizational setup and – apologies, but it seems to me a bit counterintuitive to have a global setup for a specialty business and a regional setup for essential business, given that essentials can source same molecule from different parts of the world. So can you maybe explain the rationale having this sort of setup, which at least to me seems a bit counterintuitive at this point?

The related question is, Christian, when you started, we already had management changes and now there is another set of management change. I think just from a continuity point of view, how should we think about possible disruptions from an execution point of view, because to have such frequent management change sometimes can also lead to disruptions?

And just last point was – our last question was more on your second half guidance, which at the midpoint is roughly flat. If I look at the EBITA versus first half, and I appreciate you, you are expecting volumes to be higher in second half versus first half. But what we saw in second quarter also is quite interesting in the sense like your volumes were up, as you said, but yet your earnings were down. So why should we not expect the same trend in second half? Maybe the volumes are up, but the earnings are down, because the GP per unit is still sort of sequentially moderating as we speak. But those are the questions. Thank you.

[Christian Kohlpaintner, Chief Executive Officer]

Hey, Chetan, thanks for the questions. I will take the first two, and then ask Kristin to think about the second one. Now, on the organizational setup, I would say when you look at the fundamentals of those two businesses. The Essentials business is the industrial chemicals, bulk chemicals business, where you typically would source of course locally and the last mile delivery excellence is key in that business, because you move large volumes and you need to do this most cost effectively. So it makes a lot of sense to have that as a regional setup unchanged to what we had before.

The major difference you have in the Essentials business going forward is that we also combine it now with a global sourcing capability, because we want to play the arbitrage optionalities, which are coming from the different regions and Brenntag having that unique setup, which allows us to bring products from every region in the world into a region where the demand is taking place mean you heard me talking in the past that we, for instance, bring caustic soda from North America to Europe at a given time. And that has helped us greatly also in the performance of our Essentials business. So Essentials, clearly, local and regional but we combine it now with a global sourcing capability. But still we believe the organizational setup needs to be a regional one.

On the Specialty side, totally different. Specialties, we are going towards an industry focused setup where we are looking on what is a business unit, what is a Nutrition business doing globally, what is a Pharma business doing globally, and how we can actually safeguard that we have the exchange of knowledge and know-how, and application know how across the globe to really drive the growth in both – in those business units. And that’s a fundamental shift, because in the past, there was very little regional exchange about what are the food trends in North America and how we can basically use those knowledge for also European trends and vice versa, or what is personal care in South Korea doing, which is no more or less determining the trends also North America.

And so, I think, we believe that in the Specialties business, it is of utmost importance to be organized according to industry segments and also steering them in a global manner, not losing the local touch. I mean, don’t get me wrong. This is not what we want to give up, but clearly, clearly coming from that industry logic and driving a Nutrition business, driving a Pharma business, driving a Personal Care business with the fundamental differences they do have.

On the continuation point of view, yes, there have been changes in the Management Board and, again, for various reasons. But the setup we have now, I think is a very good one with the 4 board member setup and clear distinct responsibilities with the operational responsibilities in those 2 divisions. Kristin, myself taking the overall responsibility for the group but, again, also as a first step to create those autonomous and independent divisions, I think this also needs to be reflected in our board and, again, personal decisions by one or the other board member not to continue the contracts. This is a personal decision, but definitely has not been a corporate decision and forced upon them.

But, overall, I would say we have now reached the perfect setup for what we intend to do going forward. And from that perspective, I feel very comfortable with that. And, again, don’t forget, Ewout has been in the organization now since almost 3 years. So he’s very well known in the organization and very well respected due to this transformation track record he brought with him.

And the last question around the second half guidance, I give to Kristin.

[Kristin Neumann, Chief Financial Officer]

Hi, Chetan, also from my side, so our guidance compared to the first half of the year is as follows. We saw in the first half of the year that we had lower volumes compared to previous year with more or less stable GP per ton values. And, therefore, what we foresee now that volumes are gradually improving and increasing as we saw it also already during the course of the first half of the year and that this counterbalances any shortfalls in prices. And that is, of course, our assumption behind and we need to see how that will turn out. But that is the assumption that H2 is more or less comparable to what we have in H1. I hope that this answered the question.

[Chetan Udeshi, J.P. Morgan Cazenove]

That’s clear. Thank you very much.

[Operator]

The next question is coming from Rikin Patel at Exane BNP Paribas.

[Rikin Patel, Exane BNP Paribas]

Hi, thanks for taking my questions. I have two left. Firstly, on free cash flows. If I look at your inventories, they’re now roughly back to where they were at the end of 2021. Given you’re expecting an improvement in demand and volumes in H2, can you maybe just give us some guidance on working capital for the period? And then, secondly, on M&A, Christian, I think you mentioned that you still aim to spend the €400 million to €500 million this year. Could you maybe just remind us what M&A contribution you’re factoring in your new guidance? Thank you.

[Christian Kohlpaintner, Chief Executive Officer]

Yeah, I will take the M&A question, and then Kristin will take the free cash flow and working capital question. On the M&A side, I think we have disclosed or diverged to you that our pipeline is healthily filled and that we are planning to execute in the new horizon the €400 million to €500 million per year on the M&A side. And in this guidance there are not M&A effects included, only the ones which will be closed but not the ones which we will most likely announce in the second half. So, I think, this is always the guidance is excluding that M&A, which is not really closed yet. So I think to be also very specific about this.

And so, we always have said that M&A needs to contribute about 1% to 2% on our earnings growth and this is something, which we continue to execute. There are enough targets in the pipeline and also attractive ones for both divisions, by the way, and this is where we are confident. But also on the M&A side, we will successfully execute our strategic plan, which we gave to you last November.

And then, Kristin, do you want to talk about cash flow and working capital?

[Kristin Neumann, Chief Financial Officer]

Yes. Hi, Rikin. So on the free cash flow that is, of course, heavily dependent on the working capital, as you know, compared to our operational EBITA. If you look at the working capital, that is driven, of course, by the top-line, first of all, and we probably see a stable working capital maybe a little bit up in the second half of the year. At the same time, we will also work on the efficiency in terms of our stock and also the DSO and DPOs, of course, but the major driver will be the top-line and with the normalizing prices. We would say that this is around stable for the second half of the year.

[Rikin Patel, Exane BNP Paribas]

Okay. Thank you very much.

[Operator]

[Operator Instructions] The next question comes from Thomas Swoboda at Société Générale.

[Thomas Swoboda, Société Générale]

Yeah. Good afternoon, everyone. I have one question left on pricing, if I may. If I had to correctly question you, probably previously didn’t mention pricing as a risk for the second half of the year. I was a little bit surprised. Could you share your thoughts on what you think, how the stage of the pricing normalization in chemicals is in your view? And how happy or how unhappy you have been how your organization handled price decreases so far? Thank you.

[Christian Kohlpaintner, Chief Executive Officer]

Thomas, thanks for the question. I mean, I have been exceptionally pleased with how our commercial organization has dealt with the declining prices in the industry. I mean, they talk about declining chemical prices when you look at the various value chains over the last 9 to 12 months already. And I would say they have been remarkably capable to hold on to the margins, even in sometimes drastically declining prices. So this is why what I mentioned before, the absolute pricing level is not really determining for us. I mean, it has an impact, don’t get me wrong, but it’s not the determining factor. This is a determining factor how quickly you are adjusting your pricing according to what you can source from the market.

And if in falling prices scenarios, where you source raw materials at a price level X [ph], if you have a commercial organization, who is able to hold onto a different pricing level, which is not one on one reflecting that decline, you actually have a good margin development. And that is what we have been observing going forward. And, again, I want to not negate that pricing, of course, has an impact on us going forward, but the volatility of earnings relative to absolute pricing levels is much less pronounced than you do have it in the manufacturing side.

And this, I would say, is confirmed by the performance we have showed in the second quarter compared to the manufacturers around us who have been severely impacted by that lack of demand and pricing declines.

[Thomas Swoboda, Société Générale]

This is very clear. Thank you.

[Christian Kohlpaintner, Chief Executive Officer]

You’re welcome, Thomas.

[Operator]

There are no further questions at the moment. For closing remarks, I’ll give back to the speakers.

[Thomas Altmann, Senior Vice President, Investor Relations]

Thank you, Luca. This brings us to the end of the conference call. Thank you very much for your interest in Brenntag and joining us today. If you have any further questions, please don’t hesitate to contact the IR team. Our Q3 results will be published on November 9. And, of course, we would be delighted to see you at our Capital Markets Day on December 5 in London.

Ladies and gentlemen, that’s it for today. I wish you all a good day and a great week. Goodbye.

[Operator]

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