Brenntag SE

XETRA:BNR

Earnings Call Transcript 2021-Q3

[Operator]

Dear ladies and gentlemen, welcome to the Q3 2021 Results Call of Brenntag SE. At our customers' request this conference will be recorded. [Operator Instructions] May I now hand you over to Thomas Altmann, Head of the Investor Relations. Please go ahead, sir.

[Thomas Altmann, Senior Vice President of Investor Relations]

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

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

Well, thank you, Thomas, and good afternoon to everybody. As usual, I will start with the highlights of the quarter, and Georg will provide further details on our financial performance later on.Brenntag achieved outstanding results in the third quarter of this year in a persisting exceptional market environment. I will talk about the current unusual and challenging circumstances we observe in our global markets in more detail later.The group generated operating gross profit of around EUR 862 million, which on a constant currency basis, is an increase of around 24% compared to the third quarter last year. Operating EBITDA also developed well and amounted to around EUR 343 million. On a constant currency basis, this is an increase of around 30% compared to the solid third quarter a year ago.Besides our organic performance, we are also very satisfied with the contribution of EUR 12 million by our newly acquired businesses in the reporting period. Free cash flow amounted to EUR 155 million. Our EPS stood at EUR 1.02 in the past quarter, which is a substantial increase of around 34%.Let me emphasize, 2021 has been a successful year for Brenntag so far. We were able to navigate all the challenges prudently and have increased our guidance for operating EBITDA for the full year 2021 twice this year.Today, we confirm our guidance of an operating EBITDA for the full year 2021 to be in a range of EUR 1,260 million to EUR 1,320 million. We also successfully continued the implementation of the different measures of Project Brenntag and are fully on-track with the transformation of our company.Before I hand over to Georg for a deep dive into our financial performance of the first quarter, allow me to talk about our 2 global divisions and the product portfolio they offer.We are very satisfied with the Q3 performance in both of our divisions. Brenntag Essentials and Brenntag Specialties contributed to these outstanding results. In line with our long-term expectations in Q3, Brenntag Specialties grew stronger than Brenntag Essentials despite the unusual market conditions, which typically would favor our industrial chemicals business.As we frequently discuss with our key shareholders, the divisional allocation of our product base, I would like to take the opportunity to briefly explain again the positioning and definition of our Specialties business and of what we deem to be the most stringent product allocation in our industry.In chemical distribution, buying decisions are often taken by different stakeholders. In order to offer tailor-made solutions and to fully meet the products and services demand of our customers, Brenntag Specialties focusing on selling baskets of ingredients and value-added services that are directly used in the production of our customers end products. As an example, on Slide 4, we have shown products and ingredients that are accounted for in the nutrition industry of Brenntag Specialties. These are, amongst others, flavors, emulsifier, sweeteners or colorants. On the other hand, Brenntag Essentials complements the specialties product and services portfolio with so-called process chemicals. Such process chemicals are needed in the broader production process of our customers and are not a part of the final product typically.Here to stay within the example for the nutrition industry, these products would be sodium hydroxide, sodium hypochlorite, sulfuric acid or hydrochloric acid. Let me emphasize that neither process chemicals sold to our 6 defined focus industry are accounted for in our Brenntag Specialties division, nor specialty ingredients being sold outside of these. Please refer to Page 5 to see a schematic representation of our stringent definition.Today, our Brenntag Specialties portfolio and offering is already the broadest and the most diversified in the specialty sector in our industry, putting Brenntag clearly in a leading position.Now let me provide some flavor on what is going on in our global markets currently, and I'm sure you hear similar statements from other corporates as well. We continue to see disruptions caused by lockdowns in connection with the COVID-19 pandemic. In Q3, particularly Southeast Asia, and especially countries such as Thailand, Vietnam and Indonesia were affected. Global supply chains and distribution channels are still under severe pressure. In addition, we see spiking energy prices, particularly in EMEA, leading to disruptions in energy-intensive value chains. The circumstances in Asia Pacific and specifically in China, are particularly difficult.In the course of the actual 5-year plan, China has imposed its dual control regulatory program. China's overall goal is to become carbon neutral by the year 2060. The so-called dual control regulatory program rolled out earlier this year seeks to support this goal by establishing specific reduction targets for both energy consumption and carbon emissions. These will be achieved during the 5-year period 2021 to 2025.The objectives are to reduce energy consumption per unit of GDP by 13.5%, which means for 2021 already a reduction by 3% and the reduction of carbon emissions per unit of GDP by 18%.In the third quarter, we have observed that the likelihood of missing the annual targets leads to a rather aggressive directive steering of energy-intensive industry and operations. As a consequence of this, China is currently experiencing a real shortage of electric power and some chemical producers have already reduced their production capacities accordingly.Taking all these aspects together, further shortages in key chemical products as well as reduced hardware activities are to be expected. Given all these events, we believe that the challenging market conditions will prevail well into 2022.And with this, I hand over to Georg, who will walk you now through the details of our financial performance in the last quarter. Georg?

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

Yes. Thanks, Christian, and good afternoon to all of you. So apologies ahead for the raspy voice today. I hope it doesn't impact Q&A and the answers don't have to be too short. I'll give my best.So I'll speak about our key financial figures for the third quarter 2021, and I would start with the development of operating EBITDA.On Slide 8, you see the bridge of operating EBITDA from the third quarter 2020 to the third quarter this year. In the third quarter 2020, operating EBITDA amounted to EUR 264 million. The translational foreign exchange effect in the third quarter 2021 is negligible with only around EUR 1 million. Our acquisitions contributed EUR 12 million to the operating EBITDA growth. Again, both divisions, Brenntag Essentials and Brenntag Specialties achieved excellent organic growth rates in the past quarter.Brenntag Essentials reported organic operating EBITDA growth of EUR 44 million, which is a growth rate of around 27%. Brenntag Specialties again grew even stronger. The division achieved an organic growth rate of 34% with an additional EUR 36 million of organic operating EBITDA growth. We finished the quarter with around EUR 343 million of operating EBITDA, a very strong organic growth of 25%. Overall, we continued to benefit from good margin management and were able to generate high gross profit per unit.In the third quarter of this year, both of our global divisions delivered strong results. Please keep in mind when talking about growth rates, we generally speak about FX-adjusted growth rates. Brenntag Essentials operating gross profit amounted to around EUR 520 million, an increase of about 20% year-over-year. Operating EBITDA reached EUR 210 million, around 29% above previous year.Within Brenntag Essentials, the segments, EMEA, North America and Latin America contributed to this strong performance, while Asia Pacific was impacted by further COVID-19 lockdowns. Conversion ratio for this division came in at around 41%.I'm coming to Page 9. Brenntag Specialties continued to benefit from good margin management and, again, and in accordance with our long-term expectations, grew even stronger than Brenntag Essentials. Brenntag Specialties reported operating gross profit of EUR 334 million. This is an increase of around 30% compared to the third quarter 2020. Operating EBITDA amounted to EUR 153 million, an increase of more than 42%.Almost all segments and industries contributed to the performance. Pharma and personal care, HI&I were a bit weaker the past quarter and some countries in Asia Pacific were impacted by COVID-19 lockdowns.Conversion ratio for Brenntag Specialties was around 46% in the past quarter. And in summary, we are very, very satisfied with the performance of Brenntag Essentials and particularly, Brenntag Specialties.I'll skip the details on Page 11 and 12. And I will move to our income statement on Slide 13, where I particularly focus on the lines below operating EBITDA. In Q3, we reported special items amounting to an expense of EUR 15.4 million, EUR 3.6 million related to the execution of Project Brenntag. In addition, a provision was recognized for possible breaches of export control regulations by a company we acquired a few years back. Depreciation in Q3 was about the same level as in the third quarter last year, and the financial result amounted to a net expense of around EUR 17 million.Finally, profit after tax strongly increased by about 33%, achieving EUR 161 million in Q3. Also, our earnings per share rose strongly by more than 34% to EUR 1.02 compared to EUR 0.76 in Q3 2020.Our free cash flow has developed solidly in the third quarter, we reported a free cash flow of EUR 155 million. The clear reduction against previous year is mainly impacted by the increase in working capital. However, working capital management, measured by working capital turns continued to be strong.Our net financial liabilities amounted to around EUR 2 billion at the end of the third quarter as it compares to EUR 1.3 billion at the end of last year. The increase of net financial liabilities is driven by the operating development of our business, in particular, by the working capital development as well as by payments for this year's acquisitions. Our leverage, that is net debt to operating EBITDA, amounts to 1.6x.I would like to draw your attention to our Bond 2029, in the diagram on the right-hand side of Slide 15. Beginning of October, we placed a new EUR 500 million benchmark bond on the European capital markets in a very successful transaction. It is the first one that we issued under a newly established debt issuance program. There's a maturity of 8 years and a coupon of 0.5%. The issue price of the bond was 99.711%. We will use the proceeds from the bond issuance to pay down existing financial liabilities and finance our general business development. This bond was only issued in October, it is not yet shown on our balance sheet as per end of September.I'm coming to working capital. Working capital amounted to around EUR 2 billion at the end of the third quarter. This is an increase of more than EUR 600 million in course of this year, that is mainly driven by high chemical prices and inflationary developments in the chemical industry. Despite this price and inflationary driven increase, we turned the working capital 8.4x in Q3, which is significantly above the same quarter last year.Let me summarize that we are very satisfied with these excellent financial results.And now I hand it back to Christian.

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

Thank you, Georg, and all the best to your voice. Now I would like to provide you a brief update on our Project Brenntag execution.We continue to make very good progress with our global transformation program and are fully on-track with the implementation of our Project Brenntag measures. We have structurally reduced more than 740 jobs by now and have executed 68 of the planned 100 site closures. At the same time, we also significantly invested in our network infrastructure, for instance, in 2 new mega sites in China. By now, Project Brenntag delivered around EUR 70 million of additional operating EBITDA compared to the EUR 220 million EBITDA uplift by 2023, for which we guided you during our capital market update exactly a year ago.Measures addressing our top line contributed around EUR 12 million. The bottom line levers, mainly our go-to-market approach and the site network optimization as well as our measures with regards to indirect procurement are summing up to around EUR 59 million.On Slide 18, we show the breakdown of this figure in top line and bottom line levers. Let me emphasize that the successful execution of our transformation program requires a strong focus on our people and change management. We offer an intense portfolio of training, both for our leaders and for our employees to support them in the transformational journey and to foster the implementation of a performance-driven culture, which will guide Brenntag in the future.Let me say a few words on the development of our digital journey. On Page 19, we provide an update on the digital sales channel development. We continue to make solid progress with our initiatives, and Brenntag Connect is now active in 25 countries. We continue to observe a steady increase of onboarded customers and number of orders on our platform. Currently, we generate more than EUR 200 million sales with Brenntag connect.Currently, we are working on our digital strategy for the coming years to service our customers best. This includes our digital value creation road map and the operating model to implement our future digital business architecture. As indicated last quarter, we will provide an in-depth update on our digital transformation journey next year.Ladies and gentlemen, let's come to the outlook for the full year. 2021 is almost over, and Brenntag has had a very successful year so far. We have increased our operating EBITDA guidance twice this year and today confirmed a corridor of EUR 1.26 billion to EUR 1.32 billion for the full year. Given the magnitude of the current supply chain disruptions, we expect these unusual and difficult market conditions to persist well into the next year. We also expect continuous pressure on global supply chains and spiking energy prices going forward, and we will closely monitor the developments in China.Even in this challenging environment, Brenntag is well positioned to continue on its successful path. Our focus remains on keeping the high level of service excellence towards our partners and supporting our customers in maintaining their operations. And at the same time, we will further concentrate on the next steps of the implementation of Project Brenntag as the basis for sustainable future organic earnings growth.And with this, I would like to conclude the presentation. Georg and I are more than happy to answer your questions now. Thank you.

[Operator]

[Operator Instructions] The first question is coming from Chetan Udeshi at JPMorgan.

[Chetan Udeshi, Research Analyst]

I had couple of questions. The first one is a bit more direct question. It's great to see progress on Project Brenntag with more site consolidation, account reduction, other benefits. But I think the question here is, and I asked this last time as well, and I'll tie again this year. When I look at the constant currency OpEx growth in the third quarter, it is up 20% year-on-year. And I'm just trying to reconcile all of the improvements on Project Brenntag with that significant increase in OpEx. So can you help us tie us 2 things together? And it will be very useful if you can break out the OpEx growth into individual parts. Because I think the concern some would have that, to some extent, the rising tide today with the disruptions, pricing, it's contributing most of the earnings growth and not necessarily Project Brenntag. And so to the extent you can give us some more color on the drivers of the OpEx growth will help that debate a little bit.The second question was, is there a way for you to quantify how much pricing benefit you might have seen already in the first 3 quarters of the year? Or what do you expect for full year this year? And how should we think about the levers to offset some of that drag next year if there was to be one?

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

I think Georg will go into the details about OpEx and maybe pricing. Maybe just to reflect on one element of the OpEx besides the logistic costs and everything, which is, of course, massively increasing, which you see there. Let's just take the personnel expenses, the PACs costs. And if you see the PACs costs are actually going up, and there is a couple of reasons for that.One of it of course, we have acquired in the last quarter. So you see a big impact on the M&A side with people coming to the organization through the acquisitions, we have been undertaken. That's one topic. If you look on the compensation -- on the variable compensation, there is this fixed compensation. Fixed compensation or fixed personnel expenses went down year-to-date, EUR 22 million roughly. So this is exactly what we see also according to Project Brenntag.On the other hand, as the company is outperforming massively, variable compensation is massively up. So we have taken provisions so far of around EUR 50 million to EUR 60 million variable personnel expenses based on the outperformance of the company. So that's the variable component.So if you take all those 3 elements together, M&A coming, bringing people in, the fixed personnel expenses massively going down, variable expenses being up due to the outstanding performance of the company. I mean you get already some color of what the drivers are in that respect.And having said that, I will leave it up to Georg maybe to address some other topics in OpEx and also on the pricing side.

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

Yes, Chetan, let's see how we can split it out. When you mentioned in Q3, at least that's the way I heard you, 20% OpEx increases. That's a number that includes OpEx that comes through M&A. So pure organic OpEx increase in Q3 is around 15%, still a high number. But it's a differential of between 15% and 20%.When I try to slice the 15% OpEx increases in Q3 into the different affected cost items, then a little bit less than half, a little bit less than half of the cost increases come from personnel expenses and roughly 1/5 -- a little bit more than 1/5 comes from external transport and fuel and energy. So obviously, external transport and fuel and energy is subject to very strong inflation of rates in the market. And the personnel expenses is exactly related to what Christian mentioned a minute ago. It is not an increase in the number of heads. To the opposite, we see a decrease in headcount by now, a decrease in organic headcount, but we do have relatively meaningful increase in cost per head. And that's by far dominated through much higher variable compensation given the excellent results.So fuel and energy, external transport, PACs, explains 60% -- roughly 60% of the expense increases. And the rest is a broad mix of different items.

[Chetan Udeshi, Research Analyst]

And on pricing?

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

Sorry. Chetan, I didn't get the question on pricing, apologies.

[Chetan Udeshi, Research Analyst]

Is there any number you can provide on how much benefit you might have seen already in number, 3 quarters from pricing? I'm talking about net pricing or GP per unit? And how should we think about the levers into next year to offset any potential decline from the current favorable pricing?

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

I mean, given the supply chain restrictions and given that the product scarcity, there is limited volume increase, almost no organic volume increase in the business this year, which, by the way, we think to be quite an achievement given the product scarcity in the market. So the gross profit increase you see is predominant margin increase.

[Operator]

The next question is coming from Rory McKenzie at UBS.

[Rory Edward McKenzie, European Support Services Analyst]

It's Rory here. 3 for me, please. The first, you're kind of following-up on that last one. So with your operating gross profit up about EUR 300 million year-over-year for 9 months, 2021. As you just said, stripping out the Project Brenntag and stripping out the M&A, that's still over EUR 200 million increase, which you just said is nearly all kind of organic gross profit per ton expansion. Do you think that, that would have been possible in a normalized market environment without product shortages? And can you maybe help us understand beyond Project Brenntag, what you've been doing to maybe improve your procurement or your pricing? And so how much of that gain will be sustainable as those shortages eventually normalize? Maybe just that one first, because the next 2 are separate.

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

I'm sorry, we are not in the same room today. That makes us a little clumsy. So the -- I mean, with the strong gross profit, per unit increases have been possible in the business-as-usual environment. No, they are at least in that extreme order of magnitude, they are coming from the product scarcity, but also from our ability in -- with our supply chain strengths and the supplier relationships to fulfill by far most of customer demand and have product available.Is it a concern going forward? Not really or not necessarily because experience tells over many, many cycles, that if and when the day comes, where we see some pressure on gross profit per unit, it happens in an environment of increasing volumes. So there is all expectation that if the day comes where gross profit per ton reduces, it can be compensated by volume development.

[Rory Edward McKenzie, European Support Services Analyst]

And moving away from that pricing point, thanks for the stats on Slide 19 on Brenntag Connect. Could you just talk about what percentage of your total business, that channel now represents? And also given the big growth there, how that's feeding into your restructuring of the sales force and the locations? Is this allowing you to maybe take more actions sooner as you're shifting capacity onto this different channel?

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

I think -- so as I said in the call or in the announcement, it's about EUR 100 million annualized sales we're currently having. So the [indiscernible] of our turnover, so still small. So -- but you see the growth rates quarter-by-quarter and as they are progressing. And of course, it is -- takes a lot of effort to get the customers also on the platform. It's not sometimes natural that they just go to the Internet platform or to Brenntag Connect. So it requires a strong discussion and management by our sales force. Of course, it is necessary, as we have outlined in Project Brenntag that we go to a very clear customer segmentation, and the customer segmentation, basically determining our go-to-market approach, so where to focus, where do we have outside salespeople, where do we have inside salespeople and what is the group of customers which ideally -- which make the transactional business through Brenntag Connect.So what you see actually as the growth rates quarter-by-quarter are increasing, that's the result of that effort. This is, of course, one of the efficiency elements I've been talking about on our digital journey, which we need to leverage and continue and speed up going forward. But currently, we see that with every country, we are onboarding the number of recurring orders, the number of customers on the platform is steadily increasing. And that's exactly what we also want to accomplish in our go-to-market approach.

[Rory Edward McKenzie, European Support Services Analyst]

Great. And then just finally on the working capital. Given the product shortages and scarcity, has there been any change? Or are you being asked for any change in your trade payables and your payable terms? And equally, are you changing anything with your customer payment terms at the moment?

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

No, there is no major trend about changing payment terms currently, neither on the customer side, nor on the supplier side. And it's always a standard part of the business, a fight in the day-to-day business to optimize payment terms on both ends. But currently, there is no major trend in the market. The key in improving working capital turn or controlling working capital turn right now is more on the inventory side, given the strain in the supply chains.

[Operator]

The next question is coming from Isha Sharma at Stifel Europe.

[Isha Sharma, Analyst]

Thank you for the explanation on your portfolio. Could you help us understand how different it is, the end market and the operational model versus your pure specialty peers? Or would you say that the specialty segment that you have is 1:1 comparable to your peers? That would be the first one.Second one is on the situation in China. You mentioned that it's currently very challenging, but the region is still small for you on the group level? Or do you see more of a global impact of what's happening in China?

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

Yes. Thanks, Isha, for the question. No, it's -- again, not comparing too much with competitors. I think what we have chosen as a definition for Brenntag Specialties, I firmly believe it's the purest specialty definition you can imagine. 6 focus industries we have selected and only real specialties, which are sold into those focus industries are accounted for in the Brenntag Specialties division. And that, I would say, is unparalleled in the industry, to be very clear about this.The China topic, yes, it is, for us, domestically -- domestically, it's a market environment we are performing, I would say, according to what you could see in the market environment China is operating in. Also, our acquisitions, like Zhongbai Xingye, which is in the food industry is less impacted by the circumstances. But nevertheless, it's our domestic business.What is even more important for us is, of course, the supply of materials out of China, which gives us a very, very good reading, a very good transparency on how the product flows are going. So we currently have in any time of moment, about 1,200 containers on the ships going out of China to Europe and then to U.S. or directly to the U.S. And here, you clearly can observe that we have massive, massive disruptions there on the supply side. Many energy-intensive producers have cutting back their energies, have cutting back their production because of lack of energy or trying to adhere to the given targets by the government in China. And that has, of course, immediately an impact on all the global supply chains. Because, again, also large western manufacturers or large chemical manufacturers from the Western Hemisphere are producing in China and/or exporting material out of China.So that has immediately an impact on the supply chains. But let me again reemphasize, this is exactly where Brenntag's strength is, so we can play various global supply chains quite well. Our global presence in 77 countries make us quite resilient for these kind of things. And this is what we have demonstrated, I would say, now over the last almost 20 months since we entered into the COVID pandemic.Again, I think it is important for all of us to understand that the dual regulation program in China will have not only an impact on China and not only have an impact on the Chinese chemical manufacturers, it will impact also how stressed or how overburdened are the supply chains in the rest of the world.

[Isha Sharma, Analyst]

That's very clear. Just a follow-up on this one. So is there scope for increasing or having an even higher pricing power going into '22? Because you already have such a strong year so far. So can we imagine year-over-year, even further upside scope to earnings? Or is it that this kind of situation, you will be able to continue the performance that we have seen, so kind of a flattish development year-over-year?

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

No. I think one needs to be very careful, because the situation right now is hard to reach. Our prediction is that the disruptions and the stress in the supply chains will be visible and feelable into the -- well into the first half of 2022. And they will not normalize very quickly. Shortages of containers, shortages of container ships, the reduced harbor activities, the long, long lines of ships waiting on the West Coast of U.S. to be unloaded. This doesn't disappear from over Christmas, so to speak. It will continue further down. So that means that product availability still will be a key challenge going forward. And if Brenntag being well positioned there, our target and our goal is to keep our customers operating. Even if you cannot supply them all the volumes they probably would need, still we try to maintain the minimum operation rates they need to not shut down their operations. And that is a role Brenntag is playing very well. And that means product availability is a key topic and a key question at least into the first half.Then I think once a little bit normalizing of those effects starts to kick in, we believe the prices quickly will actually adjust. And then it comes to volume and how much volume is available and how much volume can you actually deliver to the market? So what Georg has said before that our anticipation is that there will be a volume recovery seen in 2022, there's also a key part of our scenario. When it actually will happen is really, really hard to predict right now. When you asked me last time about this, how long did this prevail? It already took longer than I ever thought. And now we need to see how that constrained supply chains will continue. But it will be a pricing and volume balance, a fine-tune -- a fine line to walk into the first half and then, of course, into the second half of 2022.

[Isha Sharma, Analyst]

Right. And just the last one, if I may. This time, when you have -- when a certain normalization happens and we talk about volumes, would you say that Brenntag is better positioned than it was in the past in terms of volume leverage because of the effects of Project Brenntag? Because as you talked about the fixed costs going down, we have seen in the past that the EBITDA was actually growing slower than the gross profit. Would you say that you are more confident that, that should change going forward?

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

Yes, absolutely. This is exactly why we are doing this. I have always said that Project Brenntag is actually the response and the answer to the question why would the company not grow organically for 5 years? And I've been giving Project Brenntag as an answer, the EUR 220 million uplift, of course, brings us in a different position than we were before. That's the whole exercise. And with executing and -- allow me to say that, I mean, Project Brenntag is running like a clockwork. So it really is delivering month-by-month by month, what we do expect. And so I'm very confident that this EBITDA uplift and the reduced cost base will make us more cost competitive.Also addressing maybe the question of Rory before, so what do you do about it if normalized markets are there? So we have the impacts of Project Brenntag. We will have a highly efficient and with the lowest cost to serve in the industry, Essentials business created and ready to deliver as it does already now, you see it already in the numbers. And then, of course, we have the focused Specialties division in the Specialties business with the new market approach and a strong focus on value-added services and a strong focus on application know-how will play also out of this strength. And that portfolio, as I described it and as it is defined, is much, much less exposed to any volatility than you would expect.And so from that perspective, I'm highly confident that even if normalization starts to kick in and the exuberance of the market is somehow normalizing, that Brenntag actually will be positioned much, much stronger than in the past to harvest on the volume recovery, which we predict now for 2022.

[Operator]

The next question is come from Andy Grobler at Crédit Suisse.

[Andrew Charles Grobler, Analyst]

Just 3 from me -- 2 of them are quite linked -- if I may. Firstly, kind of going back to pricing, you said that the gross profit growth this year is almost all priced. How much of that is kind of market pricing? And how much of it is Brenntag specific pricing? Because you talked previously about wanting to increase some prices before we got to this kind of supply chain disruption. That's the first one.Secondly, and kind of related, to what extent do you think you are winning or losing market share in your end markets through this kind of slightly turbulent series of end markets?And then thirdly, just in Asia Pacific, you've got about a couple of issues in China and then the COVID-related lockdowns. Can you give us any idea of how much those 2 factors have impacted your growth? Is it mainly China? Or is it mainly the COVID lockdowns that have caused the slower performance in that region?

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

I think on the pricing side, let me complement really our teams. It's a remarkable capability. The Brenntag organization has to deal with volatility in the market, in particular, also when it comes to pricing, but also toward volume volatility. But on the pricing side, the organization has done extremely well to navigate this prudently.As I said, our availability in the circumstances is much more important than the price at this point of time. That does not mean that you can do whatever you want. Of course, you have to be in line with market. You have to be in line with what the market movements are telling you. And again, we are not totally out of what the markets typically would see. And this is what you also see with other announcements from companies in the chemical space. So we are just quite fast and quite agile to draw on those opportunities. And there is very little delay, let's say, until we can roll over raw material price increase we are faced with to our end markets. And again, we are also depending on what the chemical manufacturer has as a price idea and at which price we can source that material from him. And also, this manufacturer needs to make choices to give this material to a distributor, to give it directly to my salesforce.And then allocation is key at this point of time in the market. It is the good relationships we have with our suppliers, the strong presence and the strong -- really Brenntag Place is the global #1, which helps us to do that.So that leads me to answer your second question. I think we are winning in this situation. We're gaining market share because many, many smaller competitors, which do not have those independent supply chains and which do not have the strong relationship to our key suppliers are indeed suffering here. So I believe we are actually able to outgrow here the smaller competitors quite well. And again, it's a product by product, a different situation. Sometimes, the solvents market is ticking differently than, for instance, the asset and liabs markets are. So I think you need to always differentiate there. But I believe overall, Brenntag is in a good position to maintain or even gain market share in these volatile situations and hold on to it. As I said before, because Project Brenntag will give us the benefits of being more cost competitive going forward.Last but not least, on APAC, on your question, I would say the impact -- Georg has shown the numbers, and you can see it on APAC and overall. So China, of course, has been hampered, has had an impact. But what is hurting us a little bit more is currently, for instance, the shutdowns we have experienced in Vietnam and in Thailand. These are the 2 largest countries we have actually in Asia. Vietnam, one of our key markets. And here, we clearly have seen that the business activity is substantially reduced with the extremely tight lock down since now more than 2 months. So we have seen that evolving.Long term, to be honest, I believe the question about the dual regulation and how it will impact the export capacity of China and the production capacities in China for me is the more concerning topic.

[Andrew Charles Grobler, Analyst]

And just going back to pricing, because just on a kind of gross profit per tonne, I wasn't quite clear whether you felt that your gross profit per tonne are gone up more quickly than the market as a whole.

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

I would not say. As I said, the market is extremely volatile. And you see prices in the C2, C3 value chain and even further down, you see this volatility, and we see the escalation, escalating raw materials. So I'm saying we are developing quite well in line with those movements. What is decisive in this situation is how fast you're able to roll over? And how fast you can do this? And with our EUR 3,000 average order size of our customers, we are fortunately in a situation to do this quite quickly and quite rapidly. This is contrary to many, many manufacturers, which have sometimes quarterly pricing contracts, or even half year contracts, which makes it difficult for them to roll over a new pricing on the raw material side, and that is causing sometimes a margin squeeze, whereas we can play that, obviously, with our sales force, with our sales organization quite, quite well.

[Operator]

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

[Dominic Edridge, Research Analyst]

Just a few for me. Just obviously, can maybe ask again about the point about normalization on pricing. Are you -- would you expect to see markets like, say, the U.S., which typically is much more self-sufficient for chemicals, sort of normalized first out of your major markets? And if so, are you seeing any signs of that at the moment?The second question was the benefits from obviously having your own transport network versus peers. Do you think that is working well at the moment, maybe versus the ones you have to outsource to third party logistics? And are you sort of seeing some benefits of that coming through in results?And then the third question was just on digital. Could you just say in terms of the customers, is it basically just onboarding your existing customers? Or are you winning any new customers who may be are happy to deal with you in a slightly different fashion? And in terms of the benefit for you for converting customers to digital, can you give sort of any idea from what's happened already, what kind of benefit you get from having, say, a digital relationship to a customer versus the traditional relationship?

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

Yes. Dominic, thanks a lot. Yes, I think your hypothesis is correct. So my anticipation is that normalization in the U.S. could happen the first and the fastest. Now let's wait. Hurricane season is over, that's true. But let's wait whether we are hit with another eye storm or we are hitting with any inefficiencies, the infrastructure in the U.S. obviously has also. But your hypothesis is correct. But currently, we don't see any normalization there, even on the contrary I would say. So I think there's great, great opportunity still in North America and how we drive our earnings growth there forward.Now in transport. And also, let me be very, very clear and very specific about it. We have, by far, the largest transport capacity internally as Brenntag, even in the U.S. And this is -- we have, I think, 1,200 trucks. We have about 2,000 trailers. We have a massive amount of truck drivers, which are dedicated Brenntag [ D&A ] branded drivers. So they have a higher identification with the company. They're very proud to be a Brenntag driver, truck driver.And so this has played out a lot to our benefits because about 60%, 70% of what we are doing is covered by our own drivers. And that is not only from a safety standpoint of view, but also from a brand standpoint of view, and from a reputation standpoint, and invaluable asset which we have. Again, this is what we balance out. Of course, sourcing the remainder, 20%, 30% externally, but we have been blessed, if I may say so, with the highly loyal and strong truck driver community. We have globally, not only in U.S., in Europe it's the same, Asia exactly the same. And I think this is a real, real benefit. And also in our acquisitions, we just recently when we take JM Swank, we have received a substantial amount of trucks again with this one. So I think it is actually a benefit for us.On the digital onboarding, I mean it's easy said and difficult to be done. I mean, difficult to be done because many times, customers are saying, I don't want to go to the digital platform because I want to have a contact. I'm a specialty customer. I want to have somebody I can talk to when I need applications advice. When I have an issue with applying one of the products of the large manufacturers, they would never get airtime at them because they're so small. So they come to us. They talk to us, and then some people say, "Okay, it's a nice feature, what we have on the digital platform, but this is not for me, I want to still send you an e-mail and you put it into your system yourself. So let's talk reality now."And -- but there is, of course, an increasing number of customers who are saying, "If I can have a one-click reordering process for my drum of acetone I get frequently from you, that's what I would like to do." And this is where we're, of course, offering that platform and we need to design it and have hopefully designed it that way that is the easiest way to do business with us is with the platform.Why we do this? To answer maybe that question is also cost. It's an efficiency gain as well. If this is all automized, there's nobody involved to put an order, which comes by e-mail into the system, it flows automatically there. And again, it's also a part of our go-to-market approach to push for these digital channels, in particular, in customer segments, which we consider as important for Brenntag, but overall, on being in a segment of customers where the most efficient way to deal with them is actually through a digital channel.

[Dominic Edridge, Research Analyst]

Can I just ask one follow-up on that last point? Not now, obviously, but in a much more normal supply demand market, could you imagine maybe incentivizing some customers to move online, i.e., by saying, look, we know there's a benefit to us from this, maybe the -- on the pricing side, there could be something you could give to sort of encourage people to move a bit more online within certain categories of customer?

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

I think we are playing here the whole toolbox of convincing customers to go on the digital platform. And to be honest, what I observe in many cases, also customers are quite happy to do that because they said, I don't want to be bothered with a salesperson every 2 weeks you send to me. That's stealing my time. And so I think we need to be honest here and clear and see what reality is. So I think this trend will be strongly emphasized going forward. I mean you clearly will see it. But it is a mixed bag. It's not a single answer, ABC will happen. It is -- you need to really differentiate look at that. But I believe that opportunity is something a must for Brenntag. It's an additional sales channel we need to play, and we need to play diligently and with the right measures.

[Operator]

Next question is coming from Rajesh Kumar with HSBC.

[Rajesh Kumar, Analyst]

You mentioned then of average order value per customer earlier. So could you give us some color on how that differs by bulk versus specialty? And if you've seen any differences in the dynamics in terms of how prices are moving in those 2 segments? I'm sure you've answered the question differently, but just the average order value statistic was reasonably interesting, so trying to get to that.The second question is a follow-up on what Andy was trying to understand earlier. Earlier this year, late last year, you mentioned that you had certain clients where the pricing was not appropriate so that even a small, very small portion of the business was making a gross loss than gross profit. So are you in a position where those not making contracts have been exited? Or is that something you still need to do through '22?And then the final question is on when analysts like us are trying to cast our numbers for '22 and '23, should we be looking at the quarters where you've had price inflation tailwind? Should we reverse some of the margin gains we've had in last couple of quarters and first 2 quarters of '22 because of the pricing tailwind. And by margin, I mean, conversion margin, not the gross margin. I appreciate your gross margin fluctuates.

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

Yes. Maybe I have not fully understand the first question fully, but let me ask -- answer what I understood. So the average order size is indeed the EUR 3,000. And that's, of course, the average. We have, I think, about 3 million transactions every year, 3 million roughly. And that tells you that we have everything from actually a tank truck of caustic soda, which is typically, I don't know, 32 tonnes or something, down to really a full ingredient which is sold, let's say, in a 25 kg bag or in a 50 kg bag and even down to, let's say, in the biopharma business, where we are in Asia after our acquisitions on Tee Hai, where you actually sell boxes of, I don't know, 300 milliliters. So it's actually very, very differentiated wherever you are. And of course, in all those segments, the pricing mechanisms are different.What we want to make sure with our new operating model is that we have with a differentiated steering approach towards the industrial chemicals versus the Specialties field that we have specialized sellers now in the market who only, for instance, sell those 25 kg bags or a food ingredient or a blend for an application and is not trying to sell a tank truck of caustic soda in the afternoon. That doesn't work. This is what always was clearly convinced that we need to separate the sales forces because the pricing mechanism, the value-add in both divisions is totally different. And I think we are making very good progress in that. And that, I believe, will help us to keep the pricing momentum going forward.In time -- answering your second question. In times of this extreme shortages or allocation gains, we have taken delivery choices not to serve customers who are not giving us the value which we deserve. And that, I think, has worked out rather well. It's easier, of course, if you have to take a decision and you say, I only get 30% of my demand of silicon's, because the market is extremely tight and extremely short. We take delivery choices, whom we are going to supply and at which price level we are going to supply. And that, I think, has also made clear that we corrected some of those topics I mentioned a year ago that we have a business which is actually diluting our margins and is actually not giving us the returns for the services we are providing.Now the conversion margin, I'm actually quite positive that the conversion margins, as we continue to execute and work on Project Brenntag is on a level which we are able to maintain. This is clearly our ambition to make sure that this is not leaving us back to where we have been a couple of years ago. I believe that in 2022, with the expected volume recovery, a normalization of the pricing level, the consistent and stringent execution of Project Brenntag will be a combination, which will help us to preserve the conversion margins you see today.

[Operator]

[Operator Instructions] We have a question coming in from Simona Sarli at Bank of America.

[Simona Sarli, Research Analyst]

Yes. So just one clarification. If I look at Project Brenntag in Q3, contributed roughly EUR 29 million. And at the beginning of your presentation, you made some remarks saying that, typically, you would have expected in tight market conditions, Essentials to grow actually faster than Specialty. So what is the reason why you see rather like a faster growth in Specialty? It's because this EUR 29 million contribution is mostly related to Specialty, or it's because you are getting market shares in Specialty?

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

The remark was specifically showing or should address the topic that when we look on the market circumstances we're operating in, typically, you will see the industrial chemicals business being favored because of the shortages, the volumes you're turning and of course, the short-term pricing opportunities you have. And pricing is indeed even faster and more agile in Essentials than in Specialties. Still, Specialties could grow faster than Essentials according to our medium- to long-term expectations, so exactly what we were expecting when we have created this new operating model.It should -- and this is underlying our position in the Specialties field and is showing what we are able to accomplish with our differentiated approach now. And as I said with the dedicated sales force. It has nothing to do actually with Project Brenntag allocations because we typically don't allocate them one on one into the divisions. Of course, we have some impact on the sales forces here. But still, we have a lot of shared elements in the organization like, for instance, the customer service desk, which is one Brenntag because here you don't need a differentiation, because it's more transactional and has nothing to do with the customer interface at the end of the day. So it's not driven by a Project Brenntag allocation. It is really showing that the potential of the stringent definition of our product baskets to the industry segments we are serving in Specialties is giving us an advantage, even in a situation where Essentials theoretically would be favored.

[Simona Sarli, Research Analyst]

Okay. And one last question, if I may. If you could please comment on today's news that Georg has decided not to renew his mandate next year? And yes, if there is already also plan for a successor?

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

Yes. We'll probably let Georg answer the question, if he'd like.

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

It's probably for me, Simona. Thanks for the question. And see, I'm very rooted in Brenntag. I'm doing management functions at Brenntag now for almost 20 years, and has been CFO 10 years, and it has been a hell of a positive ride, and the company has taken a magnificent development since then, and it's very well positioned today.So for all of us at one moment in time, you have to decide when to pass on the baton to the next. And I feel it is for personal reasons. It is a very good moment in time for me to pass on the baton. So I decided earlier, I decided for personal reasons. Under German Corporate governance, succession is in the hands of the supervisory board, and they are dealing with succession question in a very careful and diligent manner. And we'll let you know if and when there is news about succession.

[Operator]

Next question is coming from Christian Obst at Baader Bank.

[Christian Obst, Analyst]

I have one last question concerning a little bit about the market structure. So do you see any -- among your thousands of customers, do you see any change -- structural change in buying patterns, meaning that they try to diversify the supply chain? And are they asking you for help or support to get maybe another supplier for each and every product they are buying? So is there some kind of a structural change underway because of the current disruption we have seen and still seeing?

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

Christian, yes, I see that. It, again, has been already when the pandemic started, but it continues right now. Product availability is really, really important. And of course, we have numerous customers who are not our customers, potential customers knocking on our doors and asking whether we can help them? And even really, really strong, strong brand names, you all know, where we could on short term help because the supply out of China was significantly reduced or cut off and very desperately we're asking for support for a simple product like citric acid. And we could help them on short notice with our European supply chain. And that, of course, is opening up doors. It's opening up commercial discussions, which would never happened before. And people recognize the strength Brenntag has by being able to play those different value chains. And it's also, of course, raising the question on many of the customers with whom they want to team up and with whom they want to back together.Also, in particular, our global footprint is extremely strong and important for, let's say, large customers who are saying, can you supply our chemical demand on our 50 plants we have globally? And today, it's almost clear. It's obvious that we are the very few player or if not the only one who can cut, for instance, a global quality assurance agreement. Because those chemicals need to be supplied with certain quality standards to those facilities worldwide. And that is also a shifting pattern. So the people recognize more and more that being the global #1 and having that strong global position is actually a good reason why to consider Brenntag as a potential supply partner and supplier in the future.

[Christian Obst, Analyst]

So this means that this structural development is some kind of an additional source of growth above market average, right, at least in the midterm?

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

Yes. I think that's true. And if you combine this with Project Brenntag, and that was always the intention. This is why we have actually created a new operating model to have that differentiated approach with the lowest cost to serve in Essentials. But with the value-added service focus with a very clear product definition of what is in the specialties will give us advantages in both divisions going forward. I'm really convinced about this.

[Operator]

Next question is coming from Isha Sharma at Stifel Europe.

[Isha Sharma, Analyst]

Just a follow-up on the conversion ratio. Is your comment on keeping the ratio at the current level in reference to what you have seen in Q3? And is the profitability at both segments, a good benchmark to look at going forward?

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

Again, I think we discussed around the conversion margin and the good picture we have seen the full year. So I would not take now 1 quarter and take that and saying, this is it, and we will be able to maintain that at that level. Again, I believe on the gross profit side, we have seen a very favorable situation on the pricing side. On the conversion margin, it's, to a large extent, our homework. It is how we deal with our cost base and how we manage that. And you will see the impact of Project Brenntag materializing as we have predicted 1 year ago. We had our capital market update for the first time, where we showed the EUR 220 million. We have EUR 70 million there. So it's roughly 1/3 of what we have promised to you. So I think you can count on that we are executing project Brenntag according to our plan. And that will, of course, support our conversion margin development quite well and quite nicely. So from that perspective, I think we do all the right stuff to maintain that as much as possible.

[Operator]

Ladies and gentlemen, we have no more questions waiting in the queue. I would like to hand over to Thomas Altmann to conclude this conference call.

[Thomas Altmann, Senior Vice President of Investor Relations]

Thank you, Luca. This brings us to the end of the conference call. Thank you very much for joining us today and your interest in Brenntag. If you have any further questions, please don't hesitate to contact us. And we will publish our full year 2021 results on March 9, 2022. Until then, we are looking forward to further discussions with you.So this is for today. I wish you all a good day and a great week. Thank you, and goodbye.

[Operator]

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