Brenntag SE

XETRA:BNR

Earnings Call Transcript 2022-Q3

[Operator]

Dear ladies and gentlemen, welcome to the Q3 2022 Results Call of Brenntag SE. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Thomas Altmann, Head of Investor Relations.

[Thomas Altmann, executive]

Thank you, Anika. 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 2022.

On the call with me today are Dr. Christian Kohlpaintner, our CEO; and Dr. Kristin Neumann, our CFO. As usual, after the presentation, we are open for your questions.

Our relevant documents for Q3 2022 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 the 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. I would like to highlight that in today's call, we will focus only on our Q3 financial performance. All topics regarding our future strategic growth plans will be addressed at our Capital Markets Day tomorrow. Therefore, we kindly ask you to focus all questions in today's Q&A session on our Q3 results.

Having said this, I will now hand over to our CEO, Christian Kohlpaintner. Christian, the floor is yours.

[Christian Kohlpaintner, executive]

Yes. Thank you, Thomas, and good afternoon to everybody. As usual, I will present the highlights first, and Kristin will provide further details on our financial performance in this quarter later.

We are very pleased with our financial performance in the third quarter 2022. Compared to an already strong prior year quarter, we generated healthy double-digit growth rates in a macroeconomic environment that remains to be highly challenging.

Severe geopolitical uncertainties, regional COVID measures, rising energy costs and inflationary trends add to the continued pressure on global supply chains and the subdued growth we see in China and in Europe. In this environment, both of our divisions contributed to the positive performance in the third quarter. Due to our very resilient business model, our global presence and our product portfolio, we managed to maintain supply and continue to provide products and services to our customers.

Group sales stood at EUR 5.1 billion. Compared to Q3 2021, this is an increase of 26% on a constant currency basis. Brenntag's operating gross profit came in at EUR 1.1 billion, which is an increase of 18%. Operating EBITDA reached EUR 460 million. On a constant currency basis, this is an increase of 22% compared to the third quarter last year.

Due to our strong operational performance, Brenntag generated a free cash flow of EUR 348 million, which is more than double of what we have achieved in the same quarter last year.

Earnings per share stood at EUR 1.60 in the third quarter. This represents an increase of 57% compared to last year's Q3 earnings per share, which came in at EUR 1.02. This increase was mainly driven by strong earnings growth based on our excellent business performance.

We also successfully continued on our M&A track record with acquisitions in EMEA, in North America and in APAC. In August 2022, Brenntag acquired Prime Surfactants Limited, a leading player in surfactants in the U.K. personal care market. This acquisition is reflected in our Q3 results.

Earlier this year, we announced the partnership with Al-Azzaz Chemicals Company in Saudi Arabia via a joint venture. This joint venture greatly expands Brenntag's presence and footprint with one of the largest specialty chemicals distributors on the Arabian Peninsula. At the end of October, Brenntag acquired Tech Management, a leading solutions provider in the energy sector in the Permian Basin, the largest energy producing region in North America.

And just recently, beginning of November, we also announced the acquisition of the Life Science and Coatings business from Ravenswood, a specialties distributor in Australia and New Zealand, with strong expertise in blending.

These 3 acquisitions either took place in the fourth quarter or have not yet been closed, and thus, are not yet included in our Q3 results. All acquisitions clearly underline our growth ambitions and our continued successful execution against our M&A guidance.

Regarding Project Brenntag, we will meet our targets and even exceed them by the end of 2022. This is 1 year ahead of our initial plan. And I will talk about this in a minute.

Last but not least, I would like to confirm our guidance. We continue to expect an operating EBITDA of EUR 1.75 billion to EUR 1.85 billion of operating EBITDA in 2022. And based on the current business momentum, we also continue to expect to deliver results at the upper range of this guidance.

Ladies and gentlemen, let me come back to the current challenging macroeconomic environment, which we are still facing. There is a multitude of regional factors impacting global logistics and supply chains. In China, for example, the COVID-19-related lockdowns and drought conditions this summer have led to further disruptions of global supply. On top of this, concerns about the Chinese real estate market have substantially impacted domestic demand in the third quarter, which is reflected in our APAC performance, particularly in Brenntag Essentials.

In Europe, the development is, of course, closely tied to the ongoing war in Ukraine. Escalating energy costs and general market uncertainties resulted in supply issues and decreased production volumes in certain value chains. There are areas where we observe a dramatic shortage situation because the unfavorable energy costs force producers to cut operating rates, in extreme cases, all the way down to 0. This is creating a highly volatile availability and price environment.

An example for such a development is ammonia and related downstream products, but also products like hydrochloric acid and caustic soda, which are extremely short as they are currently not produced to the extent needed. This created substantial price escalations as there is still solid demand for these products.

In such severe situations, Brenntag is able to support its customers to keep the production processes running as we draw on intra-regional and global supply chains, demonstrating our distinct position and strength. For instance, we were supplying hydrochloric acid from Spain to Belgium or from Ireland to Germany, a product which typically doesn't travel long distances economically.

As the world market leader, we are well positioned to maneuver this challenging environment and also have the capability to balance European with global supply chains. Particularly the broad positioning of Essentials division enables the business to withstand highly volatile market conditions and keep its ability to maintain supply even at the most adverse conditions.

Ladies and gentlemen, coming back to Project Brenntag. As already mentioned, our Project Brenntag targets will be met and even exceeded by the end of 2022, 1 year ahead of our initial plan. And we also expect additional financial contributions for the next phase of our transformation process to materialize in 2023. Since its inception, Project Brenntag has already delivered EUR 230 million of additional annualized operating EBITDA as per the third quarter 2022. The additional operating EBITDA contribution coming from top line measures amounted to EUR 80 million. Savings from bottom line measures were EUR 150 million since project start.

So far, we have structurally reduced around 1,200 jobs out of the approximately 1,300 positions in total in a socially responsible manner, and the optimization of our global site network continues to make good progress. We have closed 91 sites across all regions. And in addition, we continue to invest, upgrade and develop our network despite ongoing challenges relating to construction costs and construction labor availability. Since inception, Project Brenntag-related expenses amounted to EUR 81 million. This is well below our initial assumptions.

Let me close by saying that we continue to work with strong commitment and high execution rigor on the implementation of the few remaining Project Brenntag initiatives as we move into the next phase of our transformation. Therefore, we will complete reporting on Project Brenntag with our full year results 2022.

Further contributions to incur through Project Brenntag initiatives in 2023 will be incorporated into the next phase of the transformation that will be detailed out in our Capital Market Day presentation tomorrow on November 10.

And with this, I would like to hand over now to Kristin.

[Kristin Neumann, executive]

Thank you, Christian, and good afternoon, everybody. I will talk about the financial performance of the group in the third quarter of 2022 and start with the development of our operating EBITDA. Please have a look at the bridge on the left-hand side of Slide 7. As a reminder, when talking about growth rates, we generally talk about FX adjusted rates.

In the third quarter 2021, operating EBITDA amounted to EUR 343 million. The translational foreign exchange effect had a positive impact of EUR 36 million. The contribution from acquisitions to the operating EBITDA increase amounted to EUR 7 million. Our FX adjusted EBITDA growth rate for the whole group came in at 22%, and we reported an operating EBITDA of EUR 460 million for Q3 2022. On the right-hand side, you find a more detailed view by division and all other segments.

Brenntag's 2 global divisions, Brenntag Specialties and Brenntag Essentials, have recorded a very solid third quarter in 2022. Even though the third quarter is seasonally a bit softer due to the holiday months of July and August, the underlying trends of Q1 and Q2 basically continued. Both divisions contributed to the positive performance with operating EBITDA growth of 18% for Brenntag Specialties and a growth rate of 30% for Brenntag Essentials. Our Essentials division is particularly well positioned to withstand highly volatile market conditions and keep its ability to maintain supply to our customers even at the most adverse conditions.

Brenntag Specialties reported an operating EBITDA growth of EUR 41 million and Brenntag Essentials grew by EUR 93 million. The positive translational FX effect within Brenntag Specialties amounted to EUR 12 million and within Brenntag Essentials, the tailwind was EUR 24 million. Acquisitions contributed EUR 6 million in Brenntag Specialties and EUR 1 million in Brenntag Essentials.

We again managed to translate our gross profit growth into stronger operating EBITDA growth, which is reflected in the strong conversion ratio for the group of 42%. In Q3 last year, the conversion ratio stood at 40%. So this is an increase of around 200 basis points. For the full set of figures in this regard, please refer to Pages 18 and 19 in the appendix of this presentation.

On Page 8, we provide details on Brenntag Specialties. Brenntag Specialties showed another broad-based positive quarterly performance against an already strong prior year quarter. The division generated an operating gross profit of EUR 420 million, which is an increase of 17%.

Operating EBITDA amounted to EUR 193 million, an increase of 18%, were of around 80% is from organic growth. The conversion ratio for Brenntag Specialties remained stable at 46%. Operating EBITA within Brenntag Specialties grew by 17% to EUR 182 million. This growth was broad-based across all segments.

Almost all focus industries showed double-digit growth rates. Life science industries such as nutrition, pharma and personal care, HI&I continued to perform very well. Also, water treatment and lubricants showed very high year-over-year growth rate.

As expected, in current market conditions, Material Science showed a weaker performance. This is driven by an overall weaker economic environment and slower demand in construction, in particular. Overall, we experienced an inflationary cost development as well as supply shortages and increased transport costs. However, we were able to pass on higher costs through sales prices of our products and services.

Brenntag Essentials showed an exceptional performance and growth in the third quarter. The division's operating gross profit amounted to EUR 679 million, an increase of 19%. Operating EBITDA increased by 30% and reached EUR 303 million. This development was almost exclusively driven by organic growth in the EMEA, North America and Latin America regions. This resulted in a very strong operating EBITDA conversion ratio of around 45%.

Operating EBITA within Brenntag Essentials grew by 40% to EUR 241 million. Overall, the third quarter in the Essentials division was impacted by accelerated energy price development, particularly in Europe, and continued inflationary cost development, especially for transport.

The positioning of Brenntag Essentials with its unique global presence, broad supplier base and efficient network made it possible to maintain supply throughout highly volatile supply and pricing situations. The North American market is proving more robust than generally assumed, which is reflected in positive volume growth within the Essentials division.

In EMEA, escalating energy costs and general market uncertainties resulted in decreased production volumes in certain value chains, which created a highly volatile price environment. The performance in APAC was noticeably lower year-on-year due to a drop in demand in all APAC regions, particularly in China. Christian already mentioned the ongoing COVID-19 lockdowns and concerns about the Chinese real estate market that put pressure on domestic demand.

Let me also quickly address the development in our all other segments. In all other segments, which include the holding company, we recorded a significant year-on-year increase in costs. This increase is driven by the general inflationary environment, but also related to our ongoing transformation efforts and our future strategic plans. Higher consulting and implementation costs were the main driver in this context. In summary, we are very satisfied with the performance of the group in this highly challenging market environment.

Coming to our income statement on Slide 10. We generated sales of EUR 5.1 billion, an increase of 26% compared to Q3 2021. Our operating gross profit increased by 18% year-over-year and came in at EUR 1.1 billion. Around 90% of the growth was organic. Since we are not immune to the current inflationary environment, increases across all cost items are reflected in the development of our operating expenses. Operating expenses increased, therefore, by 15% in the third quarter.

Special items in the past quarter led to an income of around EUR 10 million. This positive effect is mainly related to the reversal of provisions we had to make last year. On the one hand, tax notices for payment of energy tax has now been received in relation to provisions for excise duties. These notices led to a lower-than-expected tax liability. The reversal of the relevant provision resulted in an income of EUR 13 million.

On the other hand, we had to make provisions last year for potential breaches of export control regulations. Here, a partial decision was issued by the authorities resulting in a reversal of the provision in the amount of EUR 11 million. These reversals of provisions more than compensated the expenses related to Project Brenntag and our future strategic plans in the amount of EUR 40 million.

Depreciation increased by 8% to EUR 76 million. Amortization remained roughly stable at EUR 70 million. Net finance costs increased to EUR 40 million compared to EUR 17 million in Q3 2021. This increase is mainly related to the generally higher interest rate environment and FX effects.

Also, the issuance of our promissory note in August increased our net finance costs slightly. Both profit after tax and earnings per share were particularly strong in the reporting period. This is mainly due to our strong business performance. Profit after tax amounted to EUR 249 million, and EPS came in at EUR 1.60.

Coming to Page 11 and the free cash flow. Compared to last year, we more than doubled our free cash flow, which stood at EUR 348 million in Q3 2022. The strong increase is related to our strong operational performance and lower cash outflow for working capital.

On Page 12, you can see more details on our working capital development. Working capital amounted to EUR 2.9 billion at the end of the last quarter. This is an increase of around EUR 1 billion compared to Q3 2022, and it is mainly driven by the higher chemical prices, but also related to investments in working capital that we had to make mainly in the beginning of this year. Our working capital churn was lower compared to last year and stood at 7.5x.

Our net financial liabilities amounted to EUR 2.3 billion at the end of the third quarter. The increase compared to the end of last year is, among other things, mainly driven by FX effects. Our leverage of 1.3x decreased compared to the end of last year.

And with this, I would like to hand back to Christian.

[Christian Kohlpaintner, executive]

Yes. Thank you, Kristin. Ladies and gentlemen, let's talk about the outlook for the full year 2022 now. We confirm our guidance for the full year and continue to expect an operating EBITDA in the range of EUR 1.75 billion to EUR 1.85 billion. In light of the current business momentum, we also continue to expect results to be at the upper range of this guidance. After very strong results in the first 9 months of 2022 and in light of current feedback from customers and suppliers, we are confident to maintain solid earnings throughout the fourth quarter of 2022.

This does not mean that the remainder of the year will be easy. We expect the overall geopolitical, macroeconomic and operational conditions to remain highly challenging. For the remainder of 2022, we also expect inflationary pressure to persist. Its impact on the macroeconomic development, global, regional and local supply and demand is difficult to predict. Supply chains will continue to be under pressure, impacting production and supply.

On the other hand, we navigated the different challenges of the past prudently, and we feel well positioned to manage particularly difficult conditions proactively and with foresight. Our high diversification and the resilience of our business model as well as our excellent relationships with our suppliers and customers and our product know-how will support the positive performance of our company.

We have continuously talked about a slowing momentum in the second half of 2022. So some level of normalization in pricing and slowing demand patterns in certain end markets have been expected and were communicated accordingly. All of this is already reflected in our confirmed guidance range.

And with this, I would like to finish the presentation on Q3 and open the Q&A session.

[Operator]

[Operator Instructions] The first question comes from the line of Simona Sarli from Bank of America.

[Simona Sarli, analyst]

So if you could please provide more color on the operating gross profit, organic growth, in particular, the split between prices and volumes? And how does it compare versus Q2? And also, second question, your guidance implies that in Q4, the operating EBITDA will decline quarter-over-quarter by 14%. But then if I look at your inventory, so it seems to be stable. So how should we read it?

[Christian Kohlpaintner, executive]

Okay, Simona, thank you so much. I think I will refer the first question to Kristin, and then talk a little bit about the guidance Q4.

[Kristin Neumann, executive]

Okay. So in terms of gross profit, the organic gross profit, the major part or the major driver of the gross profit development was price driven very clearly. And if I compare that with the second quarter, even a bit stronger compared to what we saw in Q2. So therefore, the slightly volume decline was even stronger in Q3. You will take the guidance question, yes?

[Christian Kohlpaintner, executive]

Yes, Kristin, please go ahead.

[Kristin Neumann, executive]

And on Q4, yes, this is true, we will see a decline. We can see that -- maybe also a bit of an outlook. The gross profit per ton is still very stable. Also during the first insight on Q4. However, we see a decline in volume. And therefore, we see a weaker Q4 compared to Q3. However, that is also a little bit of a seasonal topic, because also last year that was quite similar. We saw a weaker Q4 compared to Q3. I hope that answers your question.

[Simona Sarli, analyst]

And how should I put that in the context of inventory? So that instead it seems to be stable? If I look at them and I compare them like in Q2 and Q3.

[Kristin Neumann, executive]

The inventory is, of course, driven by 2 factors. It's price driven and also volume driven. And of course, if markets fall, then we need to sell our inventories. And we are in the course of doing that, of course. But I think it's not a preannouncement for the last 2 months we have right now because Q3 -- we had already the October, and then we will also follow up in the last 2 months of the year with the inventories.

[Operator]

The next question comes from the line of Isha Sharma from Stifel.

[Isha Sharma, analyst]

The EBITDA, given the -- given that you have still continued strategic investments, should we assume this as a run rate going forward because it was quite a significant impact quarter-over-quarter? And the second question would be on the implied Q4 guidance as well, just a follow-up. Could you help us a little bit and tell us which end markets are still doing well? Where do you expect things to normalize a little bit? And if the entire decline quarter-over-quarter is driven by volumes? Or do you also expect a bit of normalization in the gross profit per unit?

[Christian Kohlpaintner, executive]

Let me take the second question first, and then Kristin will try to elaborate a little bit on the run rate. As we have said, there are quite some differences depending on which industry segment and which region you're talking of. What we have clearly seen as we went from the second quarter into the third quarter that everything which is closely related to, let's say, construction like material science, also automotive -- I think this is what we also had in the past -- we saw quite some reductions in volume. And that has continued also into Q4.

Regionally, you also have a different picture. You have -- for instance, in Europe, we see quite substantial volume declines, which is not a surprise, right? I mean we see -- we know what's going on. This is not only demand driven, but also in many cases as well as supply-driven. Whereas, in North America -- and I keep on reemphasizing this -- whereas, in North America, we believe that the market is more robust than currently a lot of people think it is. And we see this actually with a very encouraging volume development month by month. And that momentum also continues.

So it really depends a little bit on where you look geographically. It depends on where you look on the industry segments. And then, again, it's a big -- the question is: how do we see 2023 developing? So I think there's still -- so overall trend is similar to what we have seen from Q3 into Q4, most likely prolonging into Q1. But for me, it's a little bit too early to give you a more clear guidance on what we see. What is running quite well also from a volume standpoint of view, of course, is the classical life science segments like personal care, like pharma, but also food and nutrition, developing quite well.

And last but not least, we should not forget that China and the China markets are currently, and particularly on the domestic demand, not on where we have seen them in the last years, particularly due to the concerns we have around -- which are around the real estate market and also the construction markets in China.

So I would say a very, very mixed bag depending on where you are. What is important is that based on all those scenarios, we will be able to manage our supply chains. And we'll address those topics accordingly. So that means that we can balance out those risks we have in various areas of the business quite well.

And then I will ask Kristin to answer the first question you had.

[Kristin Neumann, executive]

You're right, we had an increase in our cost position for the Brenntag business services. And that is driven by the fact that we, in the future, want to professionalize the group with better business, IT infrastructure and also to professionalize it in terms of how we cope with -- how to -- with processes and the further development of the group. And therefore, this increase in cost is something which will also occur in the future. We will elaborate a little bit more on that because we have already started with some of our programs in our company. We will elaborate a little bit more on that on the Capital Markets Day tomorrow.

But all in all, yes, it's a fair assumption that we will have -- we'll see higher costs going forward in the BBS section due to the professionalization of our business.

[Operator]

The next question comes from the line of Chetan Udeshi from JPMorgan.

[Chetan Udeshi, analyst]

Maybe first question, I was just looking at the sequential -- so Q3 versus Q2 development on gross profit and OpEx. And if I look at the gross profit, Q3 gross profit versus Q2 is down probably 3%. But then the OpEx actually is up Q3 versus Q2 by 5%. And I guess going back to the whole discussion around Project Brenntag, the whole point -- at least the key point was to make sure the OpEx growth is lower than gross profit growth. And I think we didn't see that at least on a sequential basis in Q3.

So can you maybe talk about if there were any one-off costs that you had? You mentioned something on the corporate line. But I'm just curious whether this is something which can be addressed now that clearly the environment is more difficult and that may mean the gross profit growth might become more difficult to achieve. And so if OpEx is not managed, maybe that's something we have to talk about.

The second question is more a clarification. Christian, I think you mentioned at the beginning as well that you did not see any gross profit per unit change in Q3. Is that something you also see on a group level in Q4? Or are you now starting to see any signs of some worsening in that metric too?

[Christian Kohlpaintner, executive]

Chetan, thanks. I will clarify the second point, and then Kristin will talk about the first point. Indeed, the message actually was -- Kristin mentioning this -- is that we see the gross profit per unit -- or gross profit per ton is a simple measure, actually maintaining at a decent level and actually continuing well into the start of the fourth quarter. So the gross profit per unit is actually holding up because, again, suppliability or reliability in supply is still key for our customers. And that helps us to stabilize that part on the pricing side quite well. And again, repeated it -- we see this also continuing into the fourth quarter for the time being. And then, Kristin, answer the next one, please.

[Kristin Neumann, executive]

So first of all, I think we need to distinguish between the different cost drivers. Project Brenntag was a structural reduction of our cost base. And of course, Brenntag is also not immune against any inflation we see right now. I think you're all pretty much aware of the fact that our energy costs, but also our personnel expenses are inflated. That is true for Q2 and also for Q3. On top of that, we have higher costs because of M&A activities. So that is all different kinds of buckets compared to what we did with project Brenntag.

If it comes to our goals and also the gross profit comparing Q2 and Q3, I think it's fair to say that in Q2 and also in Q3, we had exceptional pricing environments with the prices for chemical products increasing much more compared to the inflation we saw on the OpEx side. And that was a little bit of a catch-up effect in Q3. But therefore, I would not say that we do not reflect the results of Project Brenntag. I would turn it around. If we would not have Project Brenntag, then, of course, our cost development would have been much higher.

[Operator]

The next question comes from the line of Rikin Patel from Exane BNP Paribas.

[Rikin Patel, analyst]

I had one on the availability of products, which I think you spoke about a bit earlier on. I suppose now that gas has started to decline in Europe. Have you started to see some signs of improved availability in certain chemicals? Or are supply chains still causing a material restriction?

[Christian Kohlpaintner, executive]

I mean, Q3 has been in certain areas quite challenging, in particular in Europe. We saw due to the high energy prices a lot of production and a lot of capacities not being on stream. I think I quoted last time that from, I think, 33 units -- ammonia units in Europe, I think 18 were shut down. So this is -- still continuing, not to the extreme extent we saw in Q3.

We had -- I mentioned hydrochloric acid as just one example, which is a byproduct of precursors for polyurethane. You also have seen hydrochloric acid extreme shortages and massive, massive price escalations, which was driving actually the good profit development we saw in Europe despite declining volumes.

So I think there has been continuing shortage in Q3, which we see to some extent a little improving, but not that I can say this is far from over. But still, all the measures that the government has put into place to put some ceilings on energy prices need to come through and they need to be really materializing. We saw gas prices already substantially coming down. I mean you have seen it yourself as well.

And so I think gradually, I think, that some of the production will then resume. I'm more concerned about the medium to long-term impacts that we'll have as we believe that the long-term competitiveness of the European chemical industry will be somehow suffering. And then we need to be clear about where do we get competitive sourcing and where we can supply to our customers materials, which we're still offering the lowest cost to serve you can get in the market. So mixed picture. Slightly improving from Q3 into Q4, but not a massive turnaround point at this moment of time, to put it short.

[Operator]

The next question comes from the line of Dominic Edridge from Deutsche Bank.

[Dominic Edridge, analyst]

Just a couple for myself. Can you just say in terms of product prices, in your view, have they peaked now? And obviously, what does this mean for maybe for working capital requirements going forward?

And then secondly, I just wanted to clarify. I think you made the comment about, it feels that you're over-earning, as it were, from inventory moves has sort of -- has come down significantly in Q3 versus Q1 and Q2, I think, in line with what your peer has said. Can you just say if you got any idea of what you can tell us about what sort of level of over-earning you felt you had in Q3? And whether you think it's sort of entirely gone now?

And then just finally, in terms of just thinking about the level of improvement that you've had, that EUR 230 million that you got from Project Brenntag. Obviously, if you feed that through into the quarterly numbers, there's still a significant amount that's sort from -- versus 2019, that's unorganic, as it were, or not structural. Can you just discuss how much of that you feel could come out in regard if you see volumes and pricing reverse next year?

[Christian Kohlpaintner, executive]

I will try to work it down the line. Product prices have they peaked or have they not peaked? I mean, again, quite different from where you are. I continue to remind all of us that Brenntag is across all the value chains. So we talk about inorganic chemicals. We talk about petrochemicals. We talk about food and food downstream products. So it means it is quite different from where you look on what the product prices are currently doing. We have areas in the inorganic chemicals where prices still massively go up because of shortages. I mentioned, hydrochloric acid and glue, whatever you have in mind, which is on the energy-intensive side that prices have substantially come down -- come up. Petrochemical prices, Europe is still very high, but nevertheless, in Asia, they are coming down already. And so it's a different scenario here as well.

And when you look on the food and food ingredients, the drivers are totally different, because here we talk about starch, dextrose and downstream products, which follow, again, a different logic. So I think it's not easy to say that this is -- we have seen the peaks of the product pricing and will come -- is that now coming back from working capital.

What we do see, that, if we do really the average across our whole portfolio, we see a leveling off since we have been seeing it, I think, coming from Q2 into Q3. So this is what we currently see, and we keep it stable. And so that our expectation for working capital -- and this is addressing your question -- that we still need to invest heavily into working capital. This phase will come to a slowdown or to a stop, and then working capital will reverse. And you see already, I would say, a pretty good development of our cash flow, which we have shown to you in Q3.

On the over-earnings, the question -- that's a $100,000 question. We are always debating what is over-earning and how it will -- about this. I think currently we are still in a phase where we have quite positive gross profit per unit numbers. So we believe that we are able to continue on that trajectory. We see even in Q4, gross profit per unit stable. And that is now more or less a question how does volume develop and what impact does it have on our earnings, how the volume game is developing. And here, we have a little bit more dark clouds in Europe and in China, but we have, as I said, very encouraging signs in North America that the market is actually much more stable than it is.

The improvements of Project Brenntag are structural improvements. That means we have structurally reduced 1,200 headcounts. We have, of course, added through M&A a lot of people because we have done significant acquisitions. You should always have that in mind. Also, when it comes -- when you look on the OpEx development, it's a quite dynamic picture due to all the M&A.

And then you also have, of course, top line impacts out of Project Brenntag, which are driving our margins and our margin development going forward. And I believe -- and I talked about this 2 years ago -- we will also tackle pricing levers and eliminate sub margin -- subpar margin business or negative margin business as much as we can. And all those commercial levers will be in place going forward. So we are not expecting that those benefits are just disappearing, but we are steering and developing and running our commercial organizations in a different way than we did 2 years ago with a clear focus on specialties and Essentials. So that's in a nutshell of how I would try to answer your questions.

[Operator]

[Operator Instructions] The next question comes from the line of Alex Stewart from Barclays.

[Alex Stewart, analyst]

I wanted to loop back on this issue of gross profit per ton, which is clearly integral to the case. You say there's been no dilution and you sound hopeful for continued high levels in the future. But if I look back over time, you had a very consistent level of gross profit per employee up to about 2020, '21. And then varies significantly. And it's now something like 60% above the historic level. Can I just confirm that, that is what you believe will happen, is the current level of gross profit per ton, the current level of order intake per ton will stay at this high level? Because that's quite a big statement in the context of where you're coming from.

[Christian Kohlpaintner, executive]

I think what I was saying is that we currently have no indication that gross profit per ton is now coming down as many have predicted, by the way. So we always have said, "Okay, let's see how the pricing momentum really plays out." I'm currently less concerned on the gross profit per ton unit. I'm more concerned about the volume developments we will see going forward, because that, of course, has a clear impact.

But I think we have shown also in times of quite substantial decline in volumes -- and you just take the years 2008, 2009 and the financial crisis, but also 2020, if you take the second quarter, where we had 14%, 15% volume decline in that quarter, that we were able to hold up through the relevant pricing and the ability to supply our gross profit level.

And so from that perspective, I don't see at this moment of time that gross profit per ton is really turning south or is not decreasing substantially. And our concern currently is on volume and is on product availability and secure that so that we can maintain supply to our customers. That's our primary focus at this moment.

[Operator]

The next question comes from the line of Suhasini Varanasi from Goldman Sachs.

[Suhasini Varanasi, analyst]

Just a few for me, please. Please, can you help -- remind us what is your exposure to construction in the specialties vertical? It looks like the weakness was mainly in Europe. Or was it also in the U.S.?

Secondly, the concern generally is on wage costs in Europe going into 2023. Any views on that, please? That would be helpful. It looks like inflation is relatively high in Europe and probably wages go up mid- to high single digits. So I just want to get some perspective there.

And last, I think on trends in September and October. Was there a material softening in the trends that you saw, especially on volumes? Because I think there was an article in October that mentioned that maybe the order sizes were getting a lot smaller.

[Christian Kohlpaintner, executive]

Yes. Our exposure to construction chemicals is in certain parts of what we supply to construction materials like coatings, like adhesives, like those things. So this is the so-called case segment we have in specialties. Here, we clearly see 2 areas which are impacted negatively. We see, in particular, Europe, of course, where we in channel have a slower volume development. But we also see, of course, impacts in Asia and in particular in China. So Asia overall is not developing. And you see it in our numbers that actually the Asian development, strongly driven by China, is not on a level which we have seen over the last years. So that's -- primarily, the exposure is Europe and is China, and it's particularly in coatings and adhesives and those parts.

On the wage costs, yes, indeed -- I mean, we have to face substantial inflationary effects on the salaries going forward. I mean you see it and you can read it everywhere. We have even countries where there's an automatic inflation adjustment like in Belgium, like in Netherlands.

Now also in other countries in Europe, you have automatic wage inflation adjustment, and that can be substantially in the high single digit or even double digit -- low double-digit number. So this is clearly what we will be faced and what we have seen.

I would say the chemical industry -- and we are somehow looking at what they have been doing. We, in Germany, particularly found a pretty good agreement over the next 3 years, I would say. But still, when you combine all of that, we talk about double-digit increases and particularly for the lower wage and the lower income people. And that is something which we just have to accept and address and, of course, steer against with all kind of other saving measures to compensate for that.

And September, October, indeed, it has been in certain areas, particularly in Europe, but also in Asia an increasing trend of where we see softening on the volume side. Positively on the other side is we see this encouraging sign in North America, and it could well be that actually like it was -- and I'm 30 years now in this industry -- that maybe the U.S. market is pulling or is the locomotive to pull out of this recessionary scenarios rather sooner than later. So that's the mixed and diverse picture we currently observe, and that's the granularity we can give you at this moment.

[Kristin Neumann, executive]

Maybe let me add one point on the wages for next year, the outlook. So we expect overall for the company mid-single digit to high mid-single-digit increase. And of course, there are different areas where it's higher and some of them are lower. But all in all, you should assume that for your calculation.

[Operator]

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

[Thomas Altmann, executive]

Thank you. This brings us to the end of the conference call. Thank you very much for joining us today and for your interest in Brenntag. If you have any further questions, please don't hesitate to contact us. I look forward to seeing many of you in person tomorrow at our Capital Markets Day. If you cannot join us in person tomorrow, you will find the presentation material on our website tomorrow morning, and we will also provide a video recording on our website after the event. Our full year 2022 results will be published on March 8, 2023. Thank you very much, and goodbye.

[Operator]

Ladies and gentlemen, thank you for your attendance. The conference has been concluded.