Brenntag SE

XETRA:BNR

Earnings Call Analysis

Stabilizing Volumes Amid Market Volatility

In a year of market challenges, Brenntag's specialties segment saw a 36% operating gross profit, a 7% decrease from the previous year, influenced by volume and price declines in various industries. Despite cost-saving measures and even as volumes improved from Q2 to Q3, overall sales dropped 15% year-over-year, with a reported profit after tax of €178 million, down from €249 million. Facing ongoing geopolitical and economic trials, the company expects operating EBITA to hit the lower end of the year's guidance, anticipating stable Q4 conditions with a continued, though modest, volume recovery and price stabilization.

Company Overview

When analyzing the earnings call transcript for an unnamed company, we can paint a picture of its recent performance and future expectations. The company's Brenntag Specialties segment faced challenges with a 36% EBITA conversion ratio, down from the previous year's 43%, mainly due to negative volume development, falling sales prices, and increased operating expenses. Despite these challenges, the management remains cautiously optimistic that the end-of-year results could align with their full-year guidance, bolstered by signs of volume recovery and price stabilization.

Financial Health and Guidance

From a financial standpoint, the company generated a robust free cash flow, signaling good financial health. However, a more important note for investors is that the company expects its operating EBITA to be around the lower end of the guidance for the financial year 2023, with an estimation of approximately €1.6 billion on EBITDA and €1.3 billion on EBITA.

Performance and Strategy

The company is observing a low single-digit decrease in gross profit per tonne and volume compared to the previous year, implying a stable yet slightly declining operational performance. Despite current challenges, the company has improved its cost position compared to last year and is continuing to make strategic investments to enhance the safety of their sites, as well as investing in digital, data, and employee skills.

Market Outlook

Looking ahead, the company anticipates a recovery in volume growth in 2024, expressing confidence in the underlying demand of the industry and an expected better performance than in 2023. Particularly, the company is seeing strength in the Chinese market, with indicators suggesting improvements in the industrial environment. Management comments that the competitive environment is not as intense as it was in previous years, thus providing better opportunities for acquisitions and the ability to leverage their strengthened position.

Mergers and Acquisitions (M&A)

An important element of their strategy involves mergers and acquisitions, with plans to invest around €400 to €500 million annually. The company is well on its way to meeting this target for the year, with a number of potential acquisitions in the pipeline, which indicates their pursuit of growth through strategic deals.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, welcome to the Brenntag SE Q3 2023 Results Call. At our customers' request this conference will be recorded. [Operator Instructions]May I now hand you over to Thomas Altmann. Please go ahead.

[Thomas Altmann, executive]

Thank you, Sarah. Good afternoon, ladies and gentlemen. On behalf of Brenntag, I would like to welcome you to the earnings call for the third quarter of 2023. On the call with me today are our CEO, Dr. Christian Kohlpaintner; and our CFO, Dr. Kristin Neumann. They will walk you through today's presentation, which is followed by a Q&A session.Our relevant documents have been published this morning on our website and can be found at brenntag.com in the Investor Relations section. In the same area, you will also find a recording of this call later today. Before we begin, allow me to point you to our safe harbor statement, which you will find at the end of the slide deck.With that, I'll hand over to our CEO, Dr. Christian Kohlpaintner. Christian, over to you.

[Christian Kohlpaintner, executive]

Yes, thank you, Thomas, and good afternoon also from my side, and thank you for joining us today. I will start with the highlights of the third quarter 2023. Kristin will walk you through the details of our financial performance later. As usual, we are both happy to answer your questions after the presentation.Brenntag showed overall a solid performance in the third quarter of 2023 due to its resilient business model. The macroeconomic environment continued to be challenging with ongoing geopolitical uncertainties and inflationary trends. However, over the past quarter, Brenntag has seen adverse market conditions continue to normalize, with volumes increasing sequentially as it has been anticipated for the second half of this year.Sales amounted to EUR 4.1 billion, which is 15% lower compared to a strong prior year period. Operating gross profits stood at around EUR 1 billion, which represents a decline of around 4%. Our operating EBITDA came in at EUR 381 million, which is a decline of 12% compared to last year's quarter, and operating EBITDA amounted to EUR 303 million, a decline of 15% respectively.Earnings per share stood at EUR 1.18 compared to EUR 1.60 in the third quarter of 2022. The combination of our solid operational performance and the continued inflow from working capital again led to a very strong cash flow for the group.The free cash flow for Q3 stood at EUR 442 million, which adds up to EUR 1.3 billion for the first 9 months of 2023. Our highest free cash flow ever recorded in the first 9 months period.A remarkable result, which again demonstrates the strong cash generation capability of our business. We have made very good progress on the execution of our share buyback program initiated in March and we are happy to announce that we have completed the first tranche of the buyback program in the amount of EUR 500 million on October 20th. With the completion of the first tranche, we also announced the cancellation of the acquired shares previously held by Brenntag. And we will continue with the planned execution of the second tranche in the amount of up to EUR 250 million starting early 2024.Now, let me say a few words on the outlook for 2023. The solid performance in the challenging market environment and the continuous sequential volume recovery observed in Q3 provide a rather stable basis for the remainder of the year, despite slightly softening pricing levels.We now expect our operating EBITA to be around the lower end of our guidance for the financial year 2023, which we had already specified during our Q2 results call. Besides our solid operational performance in the third quarter of 2023, we are making good progress on our strategic initiatives. I will talk about our progress in terms of M&A in a minute.Further details on our next strategic steps will be presented at our Capital Market Day later this year. The Capital Market Day will take place in London on December 5th and we look forward to meeting you there.Let us now take a closer look at the environment Brenntag was facing in the third quarter. As already mentioned, the macroeconomic environment remains challenging. General inflationary trends are continuing and the war in Ukraine, or most recently the escalating conflict in the Middle East region, as well as conflicts in Kosovo and Nagorno-Karabakh, are increasing the geopolitical uncertainties and might lead to additional stress on new disruptions within global supply chains. This might pose further negative economic effects, which are, however, difficult to predict.Demand in certain end markets remains up to Q3 and is still impacting companies across the chemical sector. The combination of modest demand pickup and normalized supply chains led to declines in chemical prices globally. Also, many customers are speculating on further declining raw material prices and thereby taking higher inventory risks. Even though also Brenntag has been observing and anticipated gradually normalization in prices, we are generally less affected by the cyclicality in the chemical industry. And our earnings development shows lower volatility compared to chemical producers.With our broad geographical footprint and diversity supply network, we're well positioned to manage through these uncertainties and continue to be a reliable business partner for our customers globally.Due to the continuation of sequential volume recovery seen since the beginning of the year and indications that customers reach the end of their destocking cycle, we expect rather stable business conditions for the remainder of 2020.Ladies and gentlemen, as already mentioned, we are making good progress on our strategic initiatives and I would like to highlight our strong focus on value creating M&A here. M&A remains a key strategic pillar for us and an enabler of future growth. We have successfully closed or signed 7 acquisitions this year, with a total enterprise value of more than EUR 370 million. The majority of our acquisitions was associated to our Specialties business, and in particular focusing on attractive end markets like nutrition, personal care, and pharma, catering clearly to our strategic ambition to grow in these areas.Our most recent specialty acquisitions include the closing of Colony Gums, a U.S.-based manufacturer of stabilizer blends and service provider that will expand Brenntag services and product portfolio in nutrition in North America. We also signed the acquisition of the operative business of Chemgrit Group in South Africa, an independent specialty chemicals distributor with a focus on personal care, food, and material science, thus expanding our footprint in the life and material science markets in the African region.But also our M&A activity for Brenntag Essentials is clearly aligned with our strategic targets. Here we just recently announced the acquisition of Old World Chlor Alkali at beginning of November. With this acquisition, we will expand our leading market position in the distribution of caustic soda in North America and further strengthen the distribution network in the region.With all acquisitions closed, all are ready to sign in 2023. And given our full pipeline of potential acquisition targets, we will continue our M&A execution and are well on track to reach our planned annual M&A corridor of EUR 400 to EUR 500 million in 2023.Now, I would like to hand over to Kristin, who will talk about the financial performance in the third quarter in more detail. Kristin?

[Kristin Neumann, executive]

Thank you, Christian, and also from my side, a warm welcome to everyone on this call. I will now talk about our key financial figures for the third quarter 2023, and I will start with the development of our operating EBITA levels. As a reminder, when talking about growth rates, we generally talk about FX-adjusted rates. This is particularly important this quarter as we face a significant translation of FX-headwinds.Please have a look at the bridge on the left-hand side of Slide 7. In the third quarter 2022, we reported a very strong operating EBITA of EUR 284 million. The translation of foreign exchange effect in Q3 this year had a negative impact of EUR 26 million.Our acquisitions contributed EUR 1 million to the operating EBITA growth. This represents an organic operating EBITA decline of EUR 57 million. Overall, we reported an operating EBITA of EUR 203 million for the whole group.Compared to the very strong prior year performance, this represents a decrease of 15%. Our results were overall characterized by the continuously challenging market environment.Volumes were below the prior year period and cost profit per unit decreased slightly compared to the third quarter 2022, but broadly in line with our expectation of gradual normalization in the course of this year.Compared to the second quarter 2023, we continue to see sequential volume improvements, actually counterbalancing, sequentially slightly lower cost-profit per unit value.On the right hand side, you find a more detailed view by division and all other segments. Operating EBITA growth for Brenntag Specialties was minus 20% and for Brenntag Essentials the growth rate was minus 13% year-over-year.I will talk about the divisional development of in more detail in a minute. The Group EBITA conversion ratio came in at 30%, which is 440 basis points below the very strong prior year quarter.Coming to Page 8. Brenntag Specialties reported an operating gross profit decline of 6% percent to €371 million new in the first quarter of 2023. Operating EBITA declined by 20% and reached €135 million.The EBITA conversion ratio for Brenntag Specialties was around 36% and below the prior year level of 43%. The results of Brenntag Specialties were affected by negative volume development in combination with falling sales prices and the corresponding impact on our gross profit per unit compared to last year.Even though volume sales were sequentially recovering throughout 2023, prices normalized as expected leading to results below the prior year period. Let us have a closer look at our focus industries. Pharma and Water Treatment performed very well, but as already mentioned in Q2 due to their relative size both could not compensate for lower demand in other segments where customers continued to ordered lower volumes in anticipation of currently falling prices.Nutrition & Personal Care/HI&I showed negative performance compared to the strong prior year earnings especially driven by volume and price declines of non-branded ingredients. The performance of the Material Science sector continues to be negatively impacted by muted construction activity across all regions. Operating expenses for Brenntag Specialties increased year-over-year driven by M&A, ongoing inflationary trends and additional costs in connection with our strategic initiatives.Let us take a closer look at Brenntag Essentials. Brenntag Essentials reported an operating gross profit of €623 million, which is a decline of 4% compared to the prior year. Operating EBITA stood at €199 million, which is 13% below the strong prior year figure. The EBITA conversion ratio for the division came in at around 32% compared to the high prior year level of 36%. All regions saw a decline in EBITA compared to the strong performance in the third quarter of 2022.In EMEA and North America, this was mainly due to declining volumes in combination with an anticipated normalization in gross profit per unit. In North America, this normalization was less pronounced, again underlining the robust performance in the region.In EMEA, we observed a stronger gross profit per unit normalization compared to a relatively higher prior year level. The APAC segment, an increase in volume compared to last year was achieved both organically and including acquisitions, resulting in overall gross profit growth for this segment.Operating expenses for Brenntag Essentials remained largely stable compared to the prior year period. On an organic basis, the division was able to reduce costs, which is attributable to overall lower volumes compared to the previous year and also to our cost-saving measures.Eventually, the division saw a slight continued increase in volume compared to the second quarter of 2023. Let me briefly address the developments in all other segments. In all other segments, which mainly include the holding companies, we recorded a negative operating EBITA contribution of €31 million compared to last year's results, this is an improvement of 22%.The improvement is driven by a significant year-on-year reduction in costs in the third quarter of 2023, which is next to the impact of our cost-saving measures, mainly the results of lower variable costs. In summary, the results are broadly in line with our expectation in a continuously challenging market environment.Moving to Slide 10, where we look at the income statement in more detail compared to the third quarter last year. We generated sales of around €4.1 billion, a decline of 15% compared to Q3 2023. Our operating gross profit stood at around €1 billion. This represents a decline of around 4% compared to the strong prior year quarter.Operating expenses, excluding special items, remained stable compared to the prior year period on an FX-adjusted basis. Here, I would like to add that this includes additional costs incurred through acquisitions. Excluding M&A, we are pleased with our organic operating expense development. On an organic basis, we were able to reduce our OpEx by a double-digit million amount, driven by first signs of our cost containmentmeasures, in combination with lower variable personnel expenses, as well as lower volumes compared to last year.As we are executing our Horizon 2 strategy, further costs associated with our DiDEX and IT initiatives were incurred in Q3. However, these additional costs were more than compensated by the reduction in the other cost items I just mentioned. Let me assure you that we will continue to focus on our cost development and execute our cost containment measures as indicated in our Q2 result call.Special items below operating EBITA had a negative effect of €24 million. This is mainly related to costs associated to a fire at a site in Canada in the amount of €17 million, amongst others for the loss of inventory repairs, remediation of the resulting environmental damage, and maintenance of our business activities.Depreciation and amortization together remain stable with a combined amount of €94 million. That finance cost of €25 million was significantly below the prior year period figure of €40 million. This is mainly related to one-off gains from the valuation of purchase price liabilities.Our financial performance translated into a profit after tax of €178 million and earnings per share of €1.18. This compares to the very strong prior year quarter profit after tax of €249 million and earnings per share of €1.60 last year.Coming to Page 11 and the free cash flow. In the third quarter of 2023, we generated another very strong free cash flow of €442 million. The significant increase in free cash flow generation is mainly due to the cash inflow from working capital, whereas we reported an outflow for investments in our working capital in the prior year quarter.Our working capital turnover was lower compared to the average working capital turnoff last year and stood at 7.2x. The prior year was characterized by a strong working capital turn, particularly at the beginning of 2022. Since the start of 2023 and in the currently challenging market environment, we are observing continued improvements on our working capital management, particularly driven by lower days of inventory health and higher days of purchases outstanding. We remain focused on our working capital management and we are confident to further improve our working capital in the upcoming months.Looking at our balance sheet, our net financial liabilities amounted to €2.1 billion atthe end of Q3. Our leverage ratio, which is net debt to operating EBITDA remains on low levels and stood at 1.4x. This includes the first tranche of our share buyback program in the amount of €500 million. Thereof, around €439 million were realized at the end of Q2 -- to Q3. In the meantime, however, as already announced, we have successfully completed the first tranche of the buyback program on 20th of October. With the completion of the first tranche, we also announced the cancellation of the acquired shares previously held by Brenntag.On the right-hand side of the slide, you can see our current maturity profile, which visualizes our strong financing structure.And with this, I would like to hand back to Christian to talk about the outlook for 2023.

[Christian Kohlpaintner, executive]

Thank you, Kristin, and ladies and gentlemen, let me close now with the outlook for 2023. The solid performance in a challenging market environment and the continued sequential volume recovery observed in Q3 provide a rather stable basis for the remainder of the year despite slightly softened pricing levels.We now expect our operating EBITA to be around the lower end of our guidance for the financial year 2023, which we had already specified during our Q2 results call.For the remainder of 2023, we continue to expect a tough operating environment characterized by geopolitical uncertainty, macroeconomic challenges, but also a continued slight sequential recovery in volumes. We also see indications that customers reached the end of their destocking cycle and observe that prices started to stabilize towards the end of Q3. Therefore, we expect rather stable business conditions for the fourth quarter.With this, I would like to close the presentation now and thank all of you for participating in today's call. We are looking forward now to your questions.

[Operator]

And our first question comes from the line of Suhasini Varanasi from Goldman Sachs.

[Suhasini Varanasi, analyst]

I have 2, please. One is on the outlook that you are now guiding for the profits to be around €1.6 billion lower end of the range on EBITDA and €1.3 billion on EBITA. This effectively implies, based on what you've delivered in the first 9 months for profits to be sequentially higher by about €10 million versus 3Q. But normal seasonal patterns would call for profits to be sequentially lower quarter-on-quarter. So can you help us understand the moving parts here, please, and the confidence levels around this guidance?Second question is around the commentary that you made that your performance in 3Q is providing a rather stable basis for the remainder of the year, despite slightly softer pricing levels. And I appreciate that you've spoken about the sequentially stronger volumes throughout the course of this year. Maybe thinking about early 2024, how should we think about the current run rate of pricing, which has now stabilized, and volumes? Does it effectively imply declines in GP if these trends continue in the early part of 2024? I appreciate it's too early to talk about 2024, but just, you know, what does it imply if these current trends continue?

[Christian Kohlpaintner, executive]

Yes. I think the first on the outlook, Kristin will explain a little bit the moving parts. On the sequential volume development, I think, you have heard me saying throughout the year that actually we see a sequential volume recovery already since the beginning of the year, region-by-region, of course, differently, but also industry segment by industry segment different.North America has been more robust than most people have thought it is, and we see this clearly also reflected in particular in our Essentials numbers in North America. And that momentum we see at this moment continuing. We see also in Q3 the first signs of a recovery in domestic demand in China. So we have seen sequential volume increases there. And the second positive aspect to that is also that pricing in China is getting up, which is typically a good indicator that the demand situation in China is indeed improving, and that will have collateral effects also into Asia.So that's, I would say, also the important use of Q3. Last but not least, Europe, you know, still, we still see the full volume recovery yet. However, we had encouraging signs on the specialties business in Europe where we see also sequential volume increases. And for the first time since, if you ask me, 18 months, probably, we see also a recovery in demand in the Material Science pieces, which is construction, coatings, et cetera.And that all, you know, leads us to the point that from a demand standpoint of view and from a volume standpoint, development standpoint of view, we will repeat what we have said in Q2. We believe second half will have higher volumes than first half of 2023. I think we can confirm this again today. And we believe that 2024 will also be, from a demand standpoint of view, better than 2023.Again, when 2024 volume and demand, and how it will develop quarter-by-quarter at this moment, is difficult to predict. But we see that actually the large destocking cycle, one of the longest I've ever seen in my experience is actually coming, at least what we observe, coming now to the finish line. And that will lead naturally to a different volume demand scenario than what we had in 2023.On the pricing front, then I hand over to Kristin, we saw stabilizing prices now towards the end of Q3, continuing also into the Q4, which is, again, still, I would say, an encouraging sign that we do see this. So we have not seen selling prices, et cetera, as going down beyond the levels, which we had the last couple of months. And combining all of that, we believe that we will have rather stable business conditions in the absence of any geopolitical effects towards the end of the year. This is why we guide you accordingly. But Kristin has more granularity here to give you a flavor here. Kristin?

[Kristin Neumann, executive]

What we expect to see is a volume increase, a sequential volume increase. We think that this will continue, and what we also see that the GP unit values are flattening right now, which makes us cautiously optimistic that we will be able to keep our results stable for the remainder of the year.If we compare ourselves with last year's fourth quarter, we also need to say that it was a rather weak quarter due to also some special effects we have included here. For instance, also the one-off payment for our employees, so therefore, I think it's also not wise to compare that with that quarter in too much detail. And therefore all-in-all that leads us to the fact that we are able to reach our guidance towards the end of the year.

[Operator]

Our next question comes from the line of Rory McKenzie

[Rory Mckenzie, analyst]

It's Rory here, please. Firstly, can we have just a bit more detail on the volume and price impacts in Q3? Could I assume that organic volumes are maybe down 3% to 4% year-over-year, so a bit better than Q2? And equally therefore average gross profit per unit is down 1% to 2% year-over-year so a little bit worse than Q3.And then I've got just 2 questions on margins. Firstly, does your guidance reflect bigger reductions in organic operating expenses in Q4? On this call, you've referenced some cost containment measures, but organic costs were, of course, only slightly down in Q3,and in group EBIT conversion margin was down a lot year-over-year. So it's not defending profits yet. So were the plans for Q4?And then finally, just on Brenntag Specialties, could you maybe describe more about where you are with your cost investment versus cost-saving plans in specialties? The conversion margin gap between you and your peers is kind of getting up to record levels at the moment. So can you maybe talk more broadly about what your plans are for the specialties' profitability and when we would hope to see that recover?

[Christian Kohlpaintner, executive]

I'll take the last question and would give the 2 first ones on details of volume, organic gross profit to Kristin. So the margin question, on specialties, I mean, let's be very clear, we are not satisfied with the performance of specialties at all, in particular on the conversion margin. So I think we have performed relatively well compared to, I mean, again, we don't have the peer numbers on Q3 as transparent yet because one of them only announced this morning and only for 9 months number, so we need to have a clearer look at that.But our assumption is that on a gross profit level, we are performing on par on the gross profit impact on specialties. And on the conversion margin, it is a sign, of course, of the investments we have to undertake to upgrade the company going forward. I think you heard me frequently saying that we are now fixing things we should have fixed some time ago, which is our investments into the safety of our sites. These are, of course, investments into our digital and data investments. And these are, of course, investments in the skills and capabilities this company needs to have also in specialties, while we are progressing in our separation. And making both divisions more and more independent and autonomous from each other.But that you cannot be satisfied with that, that's, I would say, obvious. And we are working very diligently and very hard to get this in the right direction. And Kristin, you want to answer the 2 other questions Rory had?

[Kristin Neumann, executive]

Yes. So first of all, in terms of volume and price, your assumptions are quite right. We see a very low single digit GP per tonne decrease compared to last year. And a bit higher decrease in volume. But also here, low single-digit amount. So you are quite right with what you assumed.In terms of organic cost development, yes, we saw an improved cost position compared to last year. And we are very well underway with our cost out measures. We have initiated in the course of this year. But you also need to have in mind that still our cost below the GP includes some variable costs, which are dependent on our volume.We have the investment into our future and we still have inflationary trends. So against that background, I think to have a reduction overall of a low single-digit number organically, is an achievement. But of course, we will also continue to focus on our cost position for Q4. So all the cost containment measures are ongoing and we are also making good progress here.

[Rory Mckenzie, analyst]

If I can just follow-up on your comments, Christian, on specialties. I appreciate the environment is more difficult today than it was before. But it sounds like something needs to change within specialty. Not just that new cost investments need to kind of ramp up and get more productive. Are there broader plans to rationalize the specialty business or will that just take time until the business is more standalone? Just trying to work out what you think has to change there next if you can't just rely on the market?

[Christian Kohlpaintner, executive]

Rory, I think this is a discussion we will have at the Capital Market Day on December 5. We will give you more granularity of how we want to tackle the medium to long-term performance gaps or the reasons for that going forward. I mean, you heard me saying also in the last earning calls that we need to address the portfolio quality of specialties. And this goes in many dimensions.It goes into the strategic supplier management. And this is a fix which doesn't happen overnight. I mean, this is, as we speak, but we had already in Q3, interesting wins of new suppliers for the specialties business that goes in the quality of the products which we are distributing. We talked lengthy around the non-branded ingredients we have in that portfolio and how their share is compared to the rest of the portfolio.And of course, in particular, also of how we are driving our focus into the Life Science versus the Material Science sector. So, all of that, I think, we will provide you more granularity in 4 weeks. So, I kindly ask you to be patient up to that point until we can talk about it in more detail.

[Rory Mckenzie, analyst]

I appreciate that. Thanks for now and I look forward to December.

[Operator]

And our next question comes from the line of Annelies Vermeulen from Morgan Stanley.

[Annelies Vermeulen, analyst]

My 3 questions as well. So, firstly, just on, I wanted to follow-up on the comments you made around your customers. So, you said that some of your customers were speculating on pricing coming down and taking more inventory risk as a result. Could you perhaps talk more broadly around the kind of conversations you're having with your customers? What are you hearing? What they're saying about their expectations for next year? I appreciate it will vary probably quite significantly by geography and end market, but any kind of high-level comments you can give based on those conversations would be interesting.And then secondly, also follow-up on China. You mentioned, you're seeing some signs of recovery. I think when you listen to some of your peer commentary and that's not just chemicals peers, but also peers with other -- in other industries with exposure to China, it sounds like China is still quite challenged. So again, is there any more granularity you can give on where you're seeing those signs of recovery? Is it specific customers or end markets and how material is that? Or is it still a case of the majority of the recovery still needs to happen and that's more of a 2024 story?And then lastly, my last question just on M&A, you've had a relatively busy year. Are you confident that that can continue at the same pace going into next year? I appreciate you give guidance on annual M&A spend, but any comments on the competitive environment for deals or multiples or anything that has changed since the start of the year with regards to potential for acquisitions. That's it.

[Christian Kohlpaintner, executive]

Okay, Annelies. I will take those 3 questions together. So, on the customer side, again, let us remind us the average order size of our customers is EUR 4,000 per order. So, very frequent interactions with our customers, they order very small parcels, typically, a pellet or even less, less than that EUR 4,000 per order. That's the customer base we are serving.And of course, what we clearly can see is that in this day-to-day discussions with those customers, the customers see, well, product is available, supply chains have normalized. I don't see as a customer, I don't see any necessity why not to build a safety buffer at this moment, because I know if I need a material, I can call Brenntag and then they will deliver within 4 hours if I need it. So, that's, at the end of the day, what we currently see, totally different to what it was 12 months, 18 months ago.Our customers' first question was always availability, and then, in particular, also building safety buffers, as you can see across all industries that we have been working off this -- safety buffers out of the COVID times and the de-stocking cycle being unusually long and intensive.As I've said, in my 30 years in the industry, I've not seen it so prolonged. So, that means that expectations for next year is that despite, or in the absence of any geopolitical shocks, this buying behavior of our customers will be relying on secure supply chains. So, that means we will see the, in my point of view, very clearly Q1 and Q2, the underlying demand this industry has, and that is, at least my prediction, is different from what we see in the second half of this year. So, this is why I believe volume recovery in 2024 and volume scenarios in 2024 will be better than in 2023.On China, I'm talking here specifically around the topic of domestic demand, which we're also serving here. For me, it is clearly visible since about, I would say, 4 or 5 months that we see the volume recovery predominantly in the solvents business, which we are very strong in China. Our Essential business, actually, which has a good position in China, where we see indeed improvements here, which is a good sign because that is an early indicator of how the industrial environment is looking there. But the most encouraging sign for me is the pricing scenario, because that's a strong, strong indicator that demand and supply in China comes a little bit more into balance.Still, Annelies, I would support that view that maybe the big turnaround story is more in 2024 than in the fourth quarter this year. But I think at least to where we are coming from, from a relatively muted and challenged situation in China, we see some optimistic signs or positive signs, if you want to call it that way, in China. And that will have collateral impacts also for the rest of APAC.On the M&A side, yes, it has been a busy year. I mean, we have guided you that last year in our Capital Market Day that we are intent to invest around EUR 400 to EUR 500 million now every year on M&A. I think we are on an extremely good track to deliver on that guidance for the rest of the year, because we have still one or the other target in the pipeline. The pipeline is very healthy and well-filled. Competitive environment is not fierce at this moment, I would say. I think we can acquire assets still, I would say, decent multiples. I think it is not as fierce as it used to be maybe 2 years ago or 1.5 years ago. And one also needs to be clear that now, gradually, sellers' expectations are facing a little bit more reality than they did maybe 12 months ago.Where, we are coming in particular to the specialties field from irrationally high valuations to now a little bit more normalized view. And that, I think, is offering again for Brenntag good opportunities as we have also exploiting and harvesting this year.

[Operator]

And our next question does come from the line of Dominic Edridge from Deutsche Bank. Please go ahead

[Dominic Edridge, analyst]

Just 2 for myself. Just both on essentials, the focus. In terms of the normalization of margins at a higher level that you referenced in the report, can you just explain why that's particularly the case for essentials in North America? Is that due to better demand or the market structure? And maybe say, do you feel this is sustainable given the way the prices do seem to be stabilizing as well? And could you also discuss the situation in Europe and maybe how it differs in North America in essentials?And then the second question was also, obviously, OWI was a major acquisition that you've made in Essentials in North America. Can you maybe discuss the benefits to your network and the potential synergies and just sort of say how the framework we should be thinking about you maybe doing more deals on the essential side of things?

[Christian Kohlpaintner, executive]

Dominic, thanks for the questions around Essentials, which I try to answer. And again, you heard me talking in the past about the underappreciated business we have here. And thanks for bringing that up. I would say North America fundamentally, I've been saying 12 months, 18 months ago that the US market is more robust than many people think it is. And I think this has materialized in the development, particularly in the Essentials business strongly. We also believe that at this moment we do gain market share in North America. I think we have enough evidence to clearly state that against not only one single competitor, but numerous competitors there. And that is, of course, supporting the performance in Essentials in North America quite strongly. And again, as demand supply in North America is not totally out of balance, the pricing in North America holds up very well.I would have expected a stronger reaction over the last, I would say, 4, 5, 6 months. But this is where we see that the pricing levels have indeed stabilized. And this is where we can indeed now play out to our strength of losing basically this last mile delivery ownership that Brenntag indeed has in that North American market.Europe is a little bit different because the European market from a volume and demand standpoint is not in the same spot as North America. I think we still see a softening on the demand side. We still see, of course, impact on high energy prices. We still see impact, of course, on competitiveness of our customer base here in Europe based on the pricing levels we are having.So, here I would say, we have a different scenario. But nevertheless, Essentials is navigating quite well. Also, last year one has to have in mind that last year in Q4, for instance, in Essentials in Europe, we had a very strong business due to the energy shortages and discussions which have basically offered enormous arbitrage opportunities for us. This has also now normalized. So we will not expect a special effect in Europe on Essentials as we had it last year.On the acquisition of Old World, I mean, this was for us a fantastic acquisition, I must say, because it's helping us to close significant bright spots we had in our network when it comes to alkaline chain, particularly here to caustic soda and potassium hydroxide. And again, it serves our strategy, what we have said, that we need to own the last mile delivery into our key markets. And that is North America. And as one example, a prime example, and caustic soda and potassium hydroxide is definitely one of those areas where we want to be stronger. And so we were quite happy that we could acquire that company, I would say, and signing close even on the same day. So we'll have a contribution from that acquisition already still into this year.

[Operator]

And our next question comes from the line of Isha Sharma from Stiefel.

[Isha Sharma, analyst]

I just have 2 left, please. Is the reduction in the CapEx guidance by EUR 50 million, is it simply phasing? Or are there cancellations of some investments? And the second question would be on the cost savings. At half year, you mentioned mid-double-digit millions in the second half. Could you tell us how much of this were already realized in Q3? And should we expect any incremental savings coming in '24?

[Christian Kohlpaintner, executive]

Isha, I think I'll leave both questions to Kristin here.

[Kristin Neumann, executive]

In terms of reduction, CapEx, first of all, the major part is really phasing. A little bit is also driven by the fact that we cannot capitalize as much as we thought in earlier times for our IT investments. So that is also a minor part here. But the major part is, as I said, phasing.On the cost savings, I indicated in the Q2 announcement that we have a 2-digit million amount of savings. As I already said, we are on a good track here to realize those. And that will also continue, of course, in Q4. In 2024 and also the upcoming years, I think that is something we'll discuss in a bit more detail in the Capital Markets Day, where we also announce a lot about the optionalities for both businesses and the overall group. And I think in that context, it makes maybe a bit more sense to discuss the overall picture. Isha, if you may be a little bit patient until 5th of December.

[Isha Sharma, analyst]

Of course. Look forward to it.

[Operator]

And our next question comes from the line of Thomas Swoboda from Societe Generale.

[Thomas Swoboda, analyst]

I have one question left, please. And it's more general. Some of a couple of chemical companies here in Europe have been commenting that there have been significantly more imports from China this year. My question to you is, did you see that reflected in your books? Are those imports going through your infrastructure? And if not, is this possibly a partial explanation why essentials in Europe lack in the recovery process?

[Christian Kohlpaintner, executive]

Yes, Thomas. I think the exports out of China into the European but also North American market have been put pressure on the price in particular in Europe and has led to, I would say, non-competitive positions in many domestic producers. We do participate partially in that effect. You might know that we have a global sourcing organization in China, which brings material out of China into Europe and into North America, certain product groups, which we are entertaining here. And here we have seen in particular the last month the highest volume shift ever out of China into those target destinations.So we do participate in that trend, but it's a give and take because on the other hand, the pricing levels in the European market in particular are impacted by that. The good news is that as domestic demand appears to pick up now in China, that the export out of China at any cost probably is getting a little bit less strong than we have seen in the last 4 or 5 months. But again, this is too early to really say that this will be the trend, but it's exactly what you described and you have seen from others that the export volume out of China is quite substantial at this moment.

[Operator]

[Operator Instructions] And as we do have no more questions registered, I hand back to our speakers.

[Thomas Altmann, executive]

Thank you, Sarah. This brings us to the end of the conference call. Thank you very much for your interest in Brenntag and joining us today. We would be delighted to see you at our Capital Market Day on December 5th in London.If you have not registered yet, we encourage you to do so, but please be aware that we only have a few seats open. Please reach out to our IR team in order to register. As a reminder, our full year results will be published on March 7th, 2024. Ladies and gentlemen, that's it for today. I wish you all a good day and a great week. Goodbye.

[Operator]

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