Brenntag SE

XETRA:BNR

Earnings Call Transcript 2019-Q3

[Operator]

Dear, ladies and gentlemen, welcome to the Q3 2019 results Call of Brenntag AG. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Steve Holland, who will lead you through this conference. Please go ahead.

[Steven E. Holland, Chairman of Board of Management & CEO]

Thank you, and good afternoon, everybody. Welcome to our call. As you know, I'm here; my CFO, Georg Müller, and this indeed is my last call as CEO, as I step down at Christmas. Let me start with the highlights of the quarter. Our operating gross profit rose by 3.9% to EUR 722.2 million on a constant FX basis. I'd like to note that our newly established Food & Nutrition organization contributed well in the third quarter, the gross profit growth was mid-single digit, which was clearly above the organic development of the group. We operate in quite a difficult economic environment at the moment, with soft demand, kept our operating EBITDA stable against last year's Q3, which is on a constant FX rate and on a frozen GAAP basis. For Q3, we reported operating EBITDA of EUR 262.8 million. We reported an FX-adjusted growth of 13.9%. This increase in operating EBITDA is heavily impacted by the application of the new IFRS accounting standard on leases, underlying growth is somewhat flattish. Free cash flow strongly increased by more than 60% and amounted to EUR 246 million in the reporting period. As we've always said, the cash flow in our business is particularly strong in terms of macroeconomic weakness, underscoring the resilience of our business model. We continued to execute on our M&A strategy and signed a number of deals and closed further acquisitions. In the quarter and year-to-date, we've noticed a continued slowdown in the economic situation, which has impacted demand generally. This is broad-based in many industries and regions. With the amendment to our guidance range of 0% to 4% operating EBITDA growth in mid-July, we've been taking a more cautious view regarding the overall market conditions. Situation has definitely not improved since then. We are facing a high level of economic uncertainty. We expect our operating EBITDA growth for 2019 to be around the lower end of our guidance. I will address further details on the outlook later. Coming to our EBITDA bridge. In the last quarter, we had a positive effect from FX translation of EUR 6 million. Acquisitions contributed EUR 8 million in the reporting period. This number is net of the operating EBITDA associated with our Biosector business, which we sold at the end of 2018. The positive effects from the application of the new accounting standard on leases on our operating EBITDA was EUR 30 million for the group. Both EMEA and North America were affected by the overall macro conditions. In Q3, both reported negative organic growth of 4% and 3%, respectively, which is in line with what we have seen in Q2 this year. Latin America was not able to continue the growth trajectory in this quarter, they -- which reported negative organic growth of around about 13%. The business in Asia Pacific developed well in Q3 with organic operating EBITDA growth of 2%. Just coming to the regions now, first in to EMEA. As I mentioned, we already -- we see a continuous softness in the macroeconomic developments and overall weak demand. While many countries in the region are facing the situation, Germany and France continue to be particularly affected by weak demand. Under these conditions, we achieved a stable gross profit compared to previous year. The organic decline of operating EBITDA was about 4%. The new accounting standard on leases has an effect of around EUR 10 million on the operating EBITDA in the EMEA region. Coming to North America. Since Q2 this year, we've seen a continuous weakening of demand also in North America. The current uncertainties around tariffs and trade are affecting customer behavior. The gross profit growth of 5% is resulting from a slight organic growth and from acquisitions. Organically, the operating EBITDA decreased by 3%. Despite the current slowdown, we have continued to invest in both people and resources, which are expected to pay back when market consolidation begins to occur. The effect of the application of the new accounting standards on leases amounted to around EUR 14 million in the region. Coming to Latin America. After a strong first half, we see high volatility in Latin America, and the region could not continue its growth trajectory. In total, the operating EBITDA declined by 13% in the quarter. Effect of IFRS 16 amounted to EUR 2.5 million in the region. We are able to report a positive extraordinary income below the operating EBITDA of around about EUR 9 million. This is due to a refund claim of social security charges incorrectly levered on our business. Coming to Asia Pacific. Although we see some economic uncertainty in Asia as well, China and the region -- China grew well in Q3 despite softening economic environment and continuing challenges in the logistics infrastructure. In addition, the acquisitions contributed to the quarterly results. The EBITDA grew by 2% organically. The effect of the initial application of IFRS 16 amounted to EUR 2 million in the quarter. Coming to acquisitions. We continue to execute our M&A strategy, and we acquired a number of targets in the last couple of months. As you can see, we are active in all parts of the world. And since the beginning of the year, we've entered into transactions with an enterprise value of EUR 260 million. In total, we've made 10 transactions so far. A majority of these transactions are all closed already, and we expect those to close, which we've planned so far, until the end of this year.

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

Thank you, Steve. Good afternoon. I would like to speak about our income statement for the third quarter 2019. On Page 11, you see the upper part of the income statement. In the third quarter, we saw a slight decline in sales of 1.4% on a FX-adjusted basis. This reflects that prices for chemicals across our portfolio are declining. However, our operating gross profit rose by almost 4% on an FX-adjusted basis that demonstrates well that we are able to protect our absolute gross profit contribution in a deflationary price environment. Operating EBITDA for the group grew 13.9% to EUR 262 million on an FX-adjusted basis. The growth was clearly impacted by the initial application of IFRS 16. On a frozen GAAP basis, operating EBITDA is flattish year-over-year. On the next slide, below the operating EBITDA, you will notice positive extraordinary effect in the amount of EUR 9.2 million. This mainly relates to the case in Brazil, where we have a claim for refund relating to social security charges. The depreciation was higher than in last year's quarter. This is mainly attributable to the application of the new accounting standard on leases. Most of the lease expenses are no longer shown above operating EBITDA but are split into depreciation and interest. The financial result amounted to a net expense of EUR 23 million. Earnings per share stood at EUR 0.83 compared to EUR 0.72 in the third quarter 2018. In Q3, we reported a significant increase in operating cash flow to EUR 290 million. The significant increase is partly due to working capital development. In the third quarter, we had a significant inflow in working capital reductions. As most of the lease payments are now included in the financing cash flow, the operating cash flow benefits in the year-over-year comparison. Interest payments were clearly lower this year than last year. Last year, we still had interest payments on an expensive bond that matured last year. Let me move to the investment and financing cash flow on Page 14. CapEx in the third quarter was higher than in last year's quarter and amounted to EUR 52 million. This is in line with our plan. In addition, we spent around EUR 24 million on the closing of acquisitions. Since the application of IFRS 16, the line repayment of proceeds also includes most of the cash out in relation to operating leases. This effect is around EUR 27 million. And moving on to the free cash flow. The free cash flow is a key performance indicator for managing our business. It amounted to EUR 246 million in the third quarter, and that is more than 60% higher than in previous year. You would see in the table the relevance of working capital reductions. In connection with the first-time application of IFRS 16, we have, already earlier this year, adjusted the definition of free cash flow in order to ensure comparability with previous year's free cash flow now also includes leasing payments in a separate line. On Page 16, you see information on net debt and leverage. Net debt amounted to EUR 1.8 billion. The decrease compared to the end of the second quarter is attributable to strong cash flow generation. Leverage is at 2.0x. Net debt as well as the leverage ratio calculation exclude lease liabilities, and we did that to ensure the time line that we present to you is consistent. Trade working capital amounted to EUR 1.9 billion at the end of the quarter. Working capital turnover stood at 6.9x in the third quarter. With that, I'll hand the presentation back to Steve.

[Steven E. Holland, Chairman of Board of Management & CEO]

Thanks, Georg. I might have to start just with the current trading and then address the outlook for the remainder of the year. So I'm just trying to do this slowly. So in July, the growth -- these are gross profit per working day growth numbers. In July, the growth was 3.1%, 0.5% on an organic basis. In August, growth was 4.3%, of which 1.3% was organic. In September, it was minus 1.1%, minus 2.8% organically. And October was plus 1.4% and minus 0.5% organically. So I think we said a little bit earlier on, in mid-July, we adjusted our outlook for 2019 of operating EBITDA to be growth between 0% and 4%. We have been taking a more cautious position with regards to the economic developments for the rest of the year. I think we're very much right in doing so. We are facing a persistently difficult macroeconomic environment with certain high degree of economic uncertainty.And as I've said earlier on, against this background, we would specify our expectation that our operating EBITDA will be around the lower end of our guidance range. I think at that point, we're happy to take some questions.

[Operator]

[Operator Instructions] The first question is from Raghav Bardalai of Exane BNP Paribas.

[Raghav Bardalai, Analyst of Chemicals]

Just I'll start off with 2, please. On CapEx, firstly, you've indicated you started the investment program in North America. Can I please confirm that the scope of this is still around EUR 40 million? Also, any color you can share on progress made with this sort of market opportunity would be helpful. And secondly, on just free cash flow for the fourth quarter. Assuming sort of current conditions remain for the rest of the year, could you give us a sense for how different fourth quarter free cash flow could look versus the third quarter? Any sort of large movements that you could flag would be helpful.

[Steven E. Holland, Chairman of Board of Management & CEO]

In terms of the CapEx, which we've already highlighted, I think that EUR 40 million is still a consistent number, which we would go with. These are somewhat lumpy investments. And therefore, it's not entirely certain which period they'd be spend, but we try -- we think we're getting most of those done this year. And they are absolutely in line with our strategy going forward.

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

On the question, free cash flow fourth quarter. Obviously, you can deduct the EBITDA number from our guidance. I would expect -- assuming unchanged condition for chemical production prices, I would expect further inflow from working capital reductions. On the other hand, you would expect a certain degree of pickup in CapEx in the fourth quarter. So fourth quarter should well have very good cash flow, probably not exactly on the levels of Q3 due to the CapEx pickup.

[Raghav Bardalai, Analyst of Chemicals]

Okay. So can I just follow-up with the CapEx number for the full year? You guide to EUR 220 million, but now you'll have from the Chinese sales only EUR 5 million. So we should be looking at sort of EUR 215 million. Is that correct?

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

It's not for sure exactly how the timing of the things will fall. It will be anywhere between EUR 200 million and EUR 225 million.

[Operator]

The next question is from Peter Olofsen of Kepler Cheuvreux.

[Peter Olofsen, Analyst]

Two questions. First, on IFRS 16, where in the Q3 report, you still talk about the estimated impact on EBITDA of around EUR 100 million. But looking at the number year-to-date, it's already at EUR 86 million. So either this EUR 100 million for the full year is now overly conservative or in Q4, we will see a substantially lower number than what we have seen in the first 3 quarters. So maybe you could clarify this point? And then my second question is on IT costs in EMEA. I recall that in H1, you did incur some costs related to an analysis of the IT landscape. So did you incur additional costs in Q3? Has this analysis been completed now? And when will you start to spend on the actual harmonization of the IT systems? And what would that mean for OpEx and CapEx going into 2020?

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

I'll take the IFRS 16 question. Peter, I know we did repeat the EUR 100 million IFRS 16 effect on a full year basis in the report. It might be a little light. So probably EUR 110 million is a more realistic figure. So anywhere between EUR 100 million and EUR 110 million, I would say.

[Steven E. Holland, Chairman of Board of Management & CEO]

And just coming back to the IT question. We are pretty much through the initial scoping phase for the IT in Europe. That actually will be subject to a further review in December. So at this stage, I can't give you more firmer details than that. But certainly, we're at a point effectively of deciding the rollout of that program.

[Peter Olofsen, Analyst]

But when you make the decision, will we then see some shift from OpEx to CapEx?

[Steven E. Holland, Chairman of Board of Management & CEO]

I think that would be the case because I think the scoping work that's been done so far has been a mixture of the 2.

[Operator]

The next question is from Rajesh Kumar of HSBC.

[Rajesh Kumar, Analyst]

When you look at 2020, do you think your cost base is in the right shape? Are there any potential cost actions in terms of branch footprint -- in terms of warehouse footprint or logistics footprint or headcount you would need to tweak, given the current run rate of growth?

[Steven E. Holland, Chairman of Board of Management & CEO]

The straightforward answer to that is that there will -- there are actions underway at the moment in terms of looking at our operating costs, and these have been ongoing throughout this year. There is a bit of a balance to be made in some respects because we have been investing in some specialty chemicals' marketing and technical support functions within the business. And obviously, investing in certain expansions of our American -- parts of our American business. At the same time, we have reduced operating costs in North America and in parts of Europe. There is more to be done. We do actually have in real terms, a number of actions in place, such as a headcount freeze for the ongoing businesses. And we are seeking to reduce our -- continue to see if we can reduce our logistics costs and energy costs. So both of those are -- all those 3 items are in clear focus. So going into 2020, we very much see cost control and cost reductions as being part of sort of the defensive approach to our business in 2020.

[Rajesh Kumar, Analyst]

And just in terms of the discussion you've had with your suppliers about plan for the next 6 months or next 3 months, what is the kind of sentiment you are seeing in the supply chain? Are people looking to assure the volumes you're going to buy from -- or sell for them? Or are they trying to renegotiate the prices you're getting because your volumes have come down or basically, on a relative basis, have become a more important customer for them?

[Steven E. Holland, Chairman of Board of Management & CEO]

Well, like we've always been an important customer to them. Where we are at the moment and probably a reasonable comment would be to say that prices have come down. Prices are -- in general, we do pay market prices. We don't see any one particular supplier discounting ahead of their competitors in a tactic to try and obtain more business from Brenntag. And clearly, we do have partnerships out there. So we are -- we do have a partnership approach to our supplier base in terms of working with them on a -- in terms of sales and marketing of their products. So we're not completely transactional in that respect. I think it would be fair to say that we've seen specialty chemicals under some pressure in terms of a lot of specialty chemical manufacturers are clearly searching for volume. And that's an area which is under some pressure. And this is, in particular, in the area of things like paints and coatings, and you can imagine the car industry which is very heavily involved in specialty chemicals. Those areas are somewhat -- have been very competitively priced and manufacturers looking for volume. But I think we have a pretty steady ship in terms of both the relationship with our suppliers and the pricing that we use.

[Operator]

The next question is from Steven Goulden of Deutsche Bank.

[Steven James Goulden, Research Analyst]

Firstly, apologies. I missed the monthly numbers earlier on. I've missed the first couple. If you could just repeat those, that would be incredibly helpful. Sorry about that. Just on -- I also wanted to talk about specialties and Food & Nutrition. Could you give us a bit of a feel for how specialties is going for you? I know you just talked there about tough pricing in some of the industrial specialties, but maybe any kind of organic gross profit growth you could give for both specialties and Food & Nutrition would be great. And you talked before about price weakness. Could you -- has that been beneficial for your margins? I know that at times when prices are quite volatile, chemical distributors can make decent margins as you can sort of be somewhat slow in passing those through to customers. Maybe if this -- that's been a driver, that would be quite helpful.And just thinking about your guidance, the last point, you did roughly sort of down 3.5% organic EBITDA for the first half. You've done minus 4% here. Your guidance for the year on an organic basis has you doing about minus 2.5%, minus 3% at the low end. So are you expecting a bit of an EBITDA improvement in the -- on a year-on-year basis in the next quarter in order to hit that or kind of more the same?

[Steven E. Holland, Chairman of Board of Management & CEO]

Right. Well, I'll trying to be incredibly helpful and give you the numbers again. So in July, it was 3.1% growth, 0.5% organically. August, 4.3% and 1.3% organically. September, minus 1.1% and minus 2.8% organically. And October was plus 1.4% and minus 0.5% organically. I think Food & Nutrition was around about 5% to 6% GP growth in the period, if that's something you're looking for. There is -- in terms of just trying to generally speaking about specialties, as in to the previous caller, clearly, there are pressures in specialties in terms of paints and coatings because -- and it involved the metalworking, even simple things like white goods, where they require specialty chemistry to -- for enamel finishing and what have you and clearly the car industry is a perfect example. So I would say in those industries, specialties are under some pressure because of a lower demand for products generally. In terms of pricing, clearly, there's been some volatility in pricing. But as you know, we have a relatively short lead time in terms of our stockholding. And last, we certainly get a little bit of a positive when prices move, but it's not excessive by any means, and it's more of a cushion against any losses in the up or down phase. So again, no appreciable margin accretion during this period of volatility.

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

I think Steven was also looking for a little bit of color on how do we see organic earnings growth in Q4 relative to this year so far. The difference that you were quoting, Steve, are relatively small differences. So give or take, we would expect the fourth quarter organically to be on the same growth trend that you have seen year-to-date so far.

[Operator]

The next question is from Chetan Udeshi of JPMorgan.

[Chetan Udeshi, Research Analyst]

I just had one question, and to some extent, maybe this is a clarification. I heard you guys talking about some OpEx optimization or cost optimization program. But if my math is correct and if I were to add back the IFRS 16 benefit to your OpEx, then essentially, it seems the OpEx was up close to 6% year-on-year in Q3, too, which is actually higher than your sort of FX-adjusted gross profit growth. And I'm not very clear where is the OpEx savings reflected in terms of numbers. And -- I mean, eventually, any business model probably would want to have the other way round that the OpEx growth is slower than the gross profit growth. So I think -- can you maybe help us explain when that phenomenon starts to become more visible here at Brenntag?

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

Maybe let me clarify the numbers, and then I'm sure Steve wants to give some color. I can't follow the 6% OpEx increase in Q3 you mentioned. I assume -- I'm not sure, but I assume this is not an FX adjusted number. The OpEx increase in Q3, including M&A, has been 4.9% and on an organic basis, has been 3%. And the 3% reflects a general cost inflation in the market. And keep in mind, we are holding up, if not growing our volumes.

[Steven E. Holland, Chairman of Board of Management & CEO]

Yes, I think that's probably -- that's a fair comment from Georg. And I would think it's also the case that in the current environment, we have held our volumes in the market. So our operating costs are not unreasonable in some respect. However, we do recognize that and as you quite rightly point out, in an environment where margins are under pressure, we have to get our costs down. And hence, we have the hiring freezes. We have a number of initiatives on logistics and other things like travel bans and all sorts of things going on, as you would expect any responsible company to do so. So we are trying very hard to get those costs down. And we have a mixed -- a bit of a mixed priority here in some respects. And in terms of actually running our business, we clearly see an opportunity to grow our business in Food & Nutrition. And therefore, we're not to have -- we don't have a hiring freeze in terms of developing our Food & Nutrition business. And clearly, we see an opportunity to take a view versus market consolidation in North America, which in itself is something which will be a payback for the future, not necessarily today. So that balance is one we have to achieve. But certainly, we're very conscious that our OpEx has to be in line with our ability to generate GP.

[Chetan Udeshi, Research Analyst]

Understood. Maybe if I can follow-up on Food & Nutrition. I mean, there seems to be some slowdown hitting the food and nutrition market as well. I mean, has that had any impact on maybe the competitive landscape between, say, Brenntag and your competitors in terms of bidding for the business or in any shape or form, that would be useful?

[Steven E. Holland, Chairman of Board of Management & CEO]

Look, as far as we're concerned, we are very happy with the developments in our Food & Nutrition business. And it's one of these things where we are effectively leveraging our size and market penetration in food and nutrition in a way which we haven't done in previous years. It's proving very effective. We are attracting more and more suppliers to Brenntag as their preferred channel-to-market partner, and we're attracting more and more customers. So I'm quite sure the market is not bouncing along and why would it. But certainly, from our perspective, we see a positive development. And we have size and market position to take advantage of our current strategy.

[Operator]

The next question is from Mutlu Gundogan of ABN AMRO.

[Mutlu Gundogan, Analyst]

Just one very simple short question. It's on M&A. This has averaged around EUR 8 million in the last 3 quarters. And I know Q4 was a bit weaker quarter. So should we expect a number slightly below that number going into Q4 because I have to say the historical numbers have been a bit higher than what I forecasted.

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

Mutlu, it's Georg. Relatively small difference, maybe EUR 6 million for the fourth quarter. You are wondering EBITDA contribution on the quarter, right?

[Mutlu Gundogan, Analyst]

Exactly, exactly. Yes. Okay. And maybe just sneak one more -- one question more. It's on the IFRS 16. Just wondering, how is it possible that the number is so much higher, and I'm mainly focusing on Q3, but also for the full year, that it's higher than your guidance. I would have assumed that you know your contracts upfront. So why is the absolute impact higher than what you guided?

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

Partly M&A activity, partly FX translation. So dollar relatively strong this year. And it is 3,600 contracts. So while in principle, we know all the contracts beforehand, until you really work through the 3,600 contracts, takes a little bit of a time.

[Operator]

The next question is from Markus Mayer of Baader-Helvea.

[Markus Mayer, Lead Analyst of Chemicals]

Three questions from my side as well. Firstly, on your oil and gas business, maybe I missed it, in North America, can you give us a kind of update there. We see continuously declining rig count numbers. Has this any effect on your business? Secondly, in your outlook statement, you say that you do not expect macroeconomic conditions to show any improvement. So the question is, do you see any end markets improving or any regions improving? And lastly, the question is, the time is getting tougher for chemicals overall, do you again see the distribution outsourcing trend accelerate in this environment?

[Steven E. Holland, Chairman of Board of Management & CEO]

In terms of our oil and gas business, clearly, we do have an effect in terms of the softness in the market in oil and gas. A lot of the major service providers who we support have difficulty with a reduction in rig counts and what have you. So that has a knock-on effect in our North American business. And -- but I think it would be fair to say that our North American business is somewhat more broader-based now than it was, say, this time, say, 3 or 4 years ago when we took quite a knock on that. So while certainly it's not helping, it's not as crucial as it would have been in the past. In terms of end markets, I think geographically, we would expect to see an improvement in our Asia Pacific business in 2020, particularly in the area of, for example, in China, and you know what we spoke there and hear me say that because we are finally getting to the point where the new sites are coming online and therefore our logistics cost will improve. We have made some good acquisitions in our Asia Pacific region, which we feel will generate additional growth in 2020 and, particularly, our business in India is expected to have a much better performance in 2020 as well. So it's not particularly end-market, but more regions. Rest of the market, generally, I think it's more a case of, will we see a recovery in industrial production in 2020 is a good question. The rest of the market relatively is flat. And in terms of outsourcing, we do see more outsourcing. What we're seeing is consolidation within major manufacturers in terms of they're looking at their channel-to-market partners, and we have a number of partners who we are doing literally more and more and more with as they start to deselect a number of regional players. So the outsourcing, to some extent, is by virtue of consolidation within the distributor sector as well as consolidation within manufacturing sector.

[Operator]

The next question is from Isha Sharma of MainFirst Bank.

[Isha Sharma, Analyst]

Just going back to the trends that you see, it would be great if you could shed some lights going into 2020? So specifically, I wanted to ask about North America, which has started to deteriorate in Q2, you were actually the first ones to call it out. Do you see any risk there that it gets worse next year? And do you expect Europe to then stay soft? Now that you talked about Asia getting better, is it specific to Brenntag because of your investments in the past? Or do you see this as your end markets in Asia in terms of demand getting better? My second question would be again on free cash flow, please. Last year, in Q4, we have seen a very strong inflow from net working capital. Is this a typical seasonal phenomenon? And what would be a fair assumption for that? In terms of falling chemical prices and the low-growth environment that we have right now, is it fair to assume that net working capital needs might also be very limited in 2020.

[Steven E. Holland, Chairman of Board of Management & CEO]

Just coming to the United States, I would say, if you look at the oil projections in terms of things like the Purchasing Managers' Index and other indices, it does have a look of weakness -- continuing weakness towards the end of this year. I think it's pretty certain that we're going to take a view in terms of our operating costs in the United States. I think the thing about the United States is, it is pretty flexible in terms of addressing operating costs where they need to be changed. And our management team will be looking at that, obviously, actively to react if the market doesn't improve in early 2020. At this stage, I don't see any significant upturn in demand in North America, unless there is a particular change on a global level relative to perhaps the position versus China. In Asia, I think there's a bit of Brenntag story in Asia. We are -- we have made very good progress in Asia. I think sometimes it's easy to forget that we started on 0, now we're approaching a $2 billion business, if you like, in the Asia Pacific region. And therefore, I would expect us to continue to grow. Irrespective of the rest of the world, growing at 2% or 3% or 4% in Asia Pacific represents an opportunity for us, and I would expect Asia Pacific to take that opportunity.

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

Isha, on the free cash flow, indeed, the free cash flow pattern benefits in Q4 from seasonal inflow from working capital reductions. Our working capital forecasting and, therefore, cash flow forecasting is always a little difficult because it heavily depends on pricing. But if memory serves correct, then last year, we had done in Q4 an inflow from working capital well ahead of EUR 50 million. And that's not an unreasonable assumption to go into this year. Just keep in mind that on the other hand, the Q4 cash flow will see some higher CapEx.

[Operator]

The next question is from Christian Cohrs of Warburg Research.

[Christian Cohrs, Analyst]

First on M&A, actually. And given the current macroeconomic downturn and the chemical prices coming down, does this have any impact on your M&A strategy and also on M&A pricing. I wonder -- so you have a nice working capital inflow. Your potential M&A targets, are they more willing to sell their business due to the deterioration of the macroeconomic environment? Or is the opposite the case due to the fact that they most probably also experience a more convenient cash flow position at the moment that there is a lower ability or a lower willingness to sell the business. So what are the implications on the M&A side? And another question on working capital. Do you still strive for an improvement in the working capital turn? And do you have any measures in place. And lastly, some years ago, you launched a global purchasing initiative. And I wonder, especially now with chemical prices under pressure and some suppliers are under pressure, is this not a good point to pursue this strategy and are there any ideas in place?

[Steven E. Holland, Chairman of Board of Management & CEO]

Coming to M&A. It's quite interesting. We've a few contradictions in terms of M&A because, clearly, the slowdown in economic activity, you may well think that might prompt some people think, well, it may be time to sell. Certainly, in chemical distribution, as you can see, the business model has been cash generative. And therefore, a number of targets may well believe that their -- that even though their EBITDA is dropping, their cash position is strong. And therefore, the need to sell at the bottom of the market probably wouldn't be their first choice. We also have this dilemma in terms of there's so much liquidity left in the market in terms of cash availability to -- in terms of borrowing cash that the valuations have not really come down too much in recent months. And so it's a dilemma in terms of reducing EBITDA and valuation is not really moving in the right direction point of view as a purchaser. Having said all of that, there are still quite a number of targets out there for us to acquire. And we are more limited by capacity to acquire, i.e., the actual function of acquiring businesses, it does limit our ability to only to do only so many deals. And at this stage, we certainly are not without the opportunity to buy businesses at appropriate prices for our -- in terms of valuation purposes. So it's an interesting market, but a market that's still open for us. One of the questions, I think, was on purchasing. Yes, you're quite right that there was an initiative a few years ago relative to reducing our average pricing or looking to the best possible product pricing. We have moved on quite some way actually in that regard. And we have a in-house digital marketplace developed since the pricing initiative a few years ago and the sort of visibility of pricing is actually now across all of Brenntag in a digital sense. And therefore, you can imagine that we are now in a position that we can take advantage of the best possible deals that the group has to offer and work with our suppliers in a much more global way. So we are already operating and increasing more optimized purchasing activity.

[Christian Cohrs, Analyst]

And one question was left regarding working capital turns. So I mean this year, if I'm not mistaken, this was mostly driven by lower chemical prices, Steve, the strong year-to-date improvement. But do you have also any intention to get the working capital turn up again?

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

Yes. The -- as you rightly point out, Christian, this year's cash flow is pretty strong. And this cash flow -- this year's cash flow is strong from working capital reduction, but it is very much helped by chemical price declines. We are also working on improvements of working capital turn globally that gets, in terms of measures, pretty granular pretty quickly, but to call out some themes, we work on improved usage of inventory cross-border. So inventory that sits in one country but can be used in other countries is made accessible to other countries. We are talking about payment terms harmonization where their customer is also a supplier. We are talking about reduction of payment terms, particularly, for smaller customers, and we are, for example, also talking about improvement of standing processes.

[Operator]

The next question is a follow-up of Mutlu Gundogan of ABN AMRO.

[Mutlu Gundogan, Analyst]

Steve, I just want to get back to one remark you made on the North American oil and gas business. Can you update us on the share of the oil and gas business of the overall North America business?

[Steven E. Holland, Chairman of Board of Management & CEO]

I would -- it's a bit of a, I wouldn't say guess, but pretty much around about 22% or 23% of the North American business will be a fair guide.

[Mutlu Gundogan, Analyst]

All right, 22%. And has the -- I mean, the fact that the share has come down, is that because the earnings have come down or that the other business has grown or maybe both drivers?

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

It's particularly that the other businesses have grown.

[Mutlu Gundogan, Analyst]

Right. Okay. So -- because you've done several acquisitions within this business, just wondering, is there any risk of any impairments towards the end of the year?

[Steven E. Holland, Chairman of Board of Management & CEO]

No. I'm not quite sure what you're talking about acquisitions in oil and gas, but nothing that we're -- we have at the moment is anywhere near an impairment. I'm not sure whether you're confusing oil and gas with lubricants. Maybe -- we have made a lot of lubricants acquisitions, which are not in the oil and gas bucket. It maybe is a bit confusing. But lubricants business is basically distribution. Oil and gas is actually oil and gas processing.

[Operator]

[Operator Instructions]

[Steven E. Holland, Chairman of Board of Management & CEO]

Okay. Ladies and gentlemen, I think we've run to the end of our questions. I'd just like to say on a personal note, this is my last quarterly call. So I'd just like to thank you all for your professional interest and courtesy during this call, sometimes tough, but always fair. So thank you so much for that. I wish you all the very best for the future. Thank you.

[Operator]

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