Brenntag SE (BNR.DE), a global leader in chemical distribution, reported its second-quarter earnings for 2024, reflecting a mixed financial performance in a competitive market environment. The company achieved sales of approximately €4 billion, a slight 2% decrease from the previous year, while operating gross profits saw a modest increase of 1% to €1 billion.
However, operating EBITA experienced a more significant decline of 10% to €297 million, with earnings per share at €1.03 compared to €1.23 in the second quarter of 2023. Despite these challenges, Brenntag SE expects a sequential improvement in demand to continue into 2025 and maintains a cautious but stable outlook for the remainder of the year.
Key Takeaways
- Brenntag SE's sales hit around €4 billion in Q2 2024, a 2% decrease year-on-year.
- Operating gross profit increased by 1% to €1 billion, while operating EBITA declined by 10% to €297 million.
- Earnings per share were recorded at €1.03, down from €1.23 in Q2 2023.
- The company expects operating EBITA for the full year to be in the range of €1.1 billion to €1.2 billion.
- Brenntag executed cost reduction measures and site closures, targeting a €300 million cost takeout by 2027.
- Five acquisitions in 2024 have strengthened the company's presence in key industries and geographies.
- Brenntag received EcoVadis Platinum status and improved its ISS ESG Corporate Rating to B-.
Company Outlook
- Brenntag anticipates a challenging business climate for the rest of 2024, with sustained pressure on pricing.
- A stable gross profit per unit is expected, with a focus on margin management and cost reduction to achieve full-year guidance.
- The company projects a sequential demand improvement into 2025.
Bearish Highlights
- Operating EBITA for the life science segment declined by 14%, and material science by 8%.
- Operating EBITA for Brenntag Essentials fell by 30% to €240 million compared to the previous year.
- Free cash flow was reported at €158 million, lower than the prior year.
- Net financial liabilities stood at €2.9 billion, with a leverage ratio of 1.9 times net debt to operating EBITA.
Bullish Highlights
- Q2 EBITA improved due to strong performance in North America, with volume growth and acquisitions contributing positively.
- Margin improvements were seen from increased volume and capacity utilization.
- The company expects pricing dynamics to change favorably in 2025.
Misses
- The company experienced a sequential volume recovery but faced sustained pressure on industrial chemical selling prices.
- Financial costs increased due to higher debt positions.
- Legal costs emerged related to lawsuits against the company for past sales, with expectations of more cases to come.
Q&A Highlights
- Executives discussed the general sentiment in the chemical industry, with manufacturers expressing cautious business conditions.
- Stable gross profit per unit and encouraging volume development were noted in both Specialty and Essential divisions.
- The company aims for a slight positive earnings improvement in H2 compared to H1, despite Q1 being unusually weak.
- Digital platforms have been implemented, improving product ordering, supply chain planning, analytics, and customer engagement.
Brenntag SE remains focused on executing its strategy, which includes disentanglement and increasing divisional autonomy, despite the competitive pressures and market trends. The company's next quarter results are scheduled to be published on November 12, 2024.
Full transcript - None (BNTGF) Q2 2024:
Operator: Good day. My name is Constantine, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Brenntag SE Second Quarter 2024 Results Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Thomas Altmann, Head of Investor Relations. You may now begin your conference.
Thomas Altmann: Thank you, Constantine. Good afternoon, ladies and gentlemen. And welcome to the earnings call for the second quarter of 2024. On the call with me today are our CEOs, Dr. Christian Kohlpaintner; and our CFO, Dr. Kristin Neumann. They will walk you through today’s presentation, which is followed by a Q&A session. All relevant documents have been published this morning on our website and can be found at brenntag.com in the Investor Relations section. In the same area, you will also find the recording of this call later today. Before we begin, allow me to point you to our Safe Harbor statement, which you will find at the end of the slide deck. With that, I will hand over to our CEO, Christian, over to you.
Christian Kohlpaintner: Well, thank you, Thomas, and good afternoon, ladies and gentlemen. I will start with the highlights of the second quarter of 2024, and Kristin will then walk you through the details of our financial performance. In the second quarter of 2024, we achieved results in line with market expectations, despite a highly competitive business environment. Chemical selling prices remain under pressure in various end markets. Multiple geopolitical challenges and uncertainties keep impacting the overall economic development. However, our sequential volume recovery quarter-by-quarter materialized as predicted. Chemical manufacturers realized improving capacity utilization rates from depressed levels with less focus on selling prices. Sales for Brenntag in the second quarter amounted to around €4 billion, which is 2% below the prior year period. Operating gross profits stood at €1 billion, which represents a slight increase of around 1%. And our operating EBITA amounted to €297 million, which is a decline of around 10% year-over-year. Earnings per share stood at €1.03, compared to €1.23 in the second quarter of 2023. The combination of the year-over-year weaker performance and higher investments in working capital led to a free cash flow of €158 million. This is significantly lower compared to the exceptionally high free cash flow in the prior year period, which was characterized by a substantial release of working capital. Our sequential quarter-by-quarter performance in both divisions showed encouraging improvements compared to the first quarter of 2024. Volumes are continuing to show a sequential recovery across most regions and industries. Despite the pressure on average selling prices, we were able to keep gross profit per unit stable compared to the first quarter, thanks to various margin initiatives, which led as a result to a positive expansion of our gross profit over sales margin. This is a clear success of our commercial teams to manage margins effectively in an intense competitive environment with continuing pressure on chemical prices. As a result, the group’s operating second quarter EBITA could be improved sequentially. On a year-on-year comparison, the higher volumes could slightly overcompensate the lower gross profit per unit margins, but due to higher costs, we achieved an overall lower result. Kristin will explain the moving parts on our cost development in more detail later. We have executed further measures to achieve efficiencies, reduce our operating costs and to counteract inflation-driven cost increases. As presented at the Capital Market Day in December 2023, the measures target an overall cost takeout in the amount of €300 million by 2027. We constantly and carefully evaluate all potential levers across the group, including operations and SG&A, as well as our DiDEX and IT-related spend. In light of the performance in the first half of 2024, we will accelerate and expand our cost out efforts and initiatives. We also continue to optimize our global site network. In 2023, we successfully closed 29 sites, and in 2024, we have closed an additional 10 sites already. Further shutdown measures are in progress or in preparation phase. Now let me say a few words on the outlook. The sequential volume recovery materialized in the first half of 2024 as predicted. Also, we were able to stabilize our gross profit per unit in the second quarter compared to the first quarter due to various margin initiatives. However, the overall market trends and the chemical industry expectations observed recently, particularly in July, indicate that markets will remain highly competitive, which makes us more cautious for the remainder of the year. They indicate sustained pressure on industrial chemical selling prices. Therefore, we do not expect a positive gross profit per unit development in the second half of the year anymore, but rather anticipate a more stable development on group level. In addition, although we still expect volumes to increase sequentially in the second half of 2024, the trends suggest a slightly less supportive volume development than originally expected. Based on these assumptions, we now expect operating EBITA for the financial year 2024 to be in the range of €1.1 billion to 1.2 billion. Let me provide a quick update on our M&A activities in 2024. Since the beginning of the year, we have signed five acquisitions with a total enterprise value of around €340 million, strengthening key focus industries and geographies in both divisions. In Q1, we already highlighted the closing of two acquisitions, as well as the signing of Química Delta in Mexico. We also successfully closed the acquisition of Solventis in June this year, which had already been signed end of 2023. Furthermore, Brenntag Essentials signed the acquisition of Industrial Chemicals Corporation, a centrally located chemicals distribution facility and transportation hub in North America. And just recently, we announced the acquisition of Monarch Chemicals, one of the leading distributors of base and agricultural chemicals in the U.K., with in-house liquid and powder blending facilities. We will continue our M&A execution and are assessing several promising targets in our pipeline in line with our divisional strategies. Another key strategic pillar for Brenntag is sustainability. I would like to emphasize two recent highlights here. Firstly, Brenntag again receives the EcoVadis Platinum status, which puts Brenntag in the top 1% of companies rated across all industries. In fact, Brenntag is now the only chemical distributor with a global EcoVadis Platinum rating, which is the highest possible assessment achievable. And secondly, we have further improved our ISS ESG Corporate Rating to B-, after being awarded the prime status with a C+ rating already last year. The rating indicates a very high transparency level on ESG disclosure, as well as industry leading ESG performance. Also here, Brenntag is the only chemical distributor with this rating. These are great achievements by our teams, especially considering that we were able to even further enhance our scores in both assessments compared to last year. Now let me say a few words on our strategy execution. Despite market headwinds and the challenging environment, we stayed course on executing our strategy while prudently managing our cost base and focusing on running the business. Brenntag continues to increase divisional autonomy and independence, focusing on areas with the highest value creation and differentiating potential. We are doing this step-by-step at our own pace and without jeopardizing our operations. We continue to implement a targeted disentanglement in areas with highest differentiating effect. This means we disentangle the customer and supplier facing front end in our divisions. This means fully separated sales team, including now also separated global key accounts, and a fully dedicated divisional supplier and sourcing management, as well as separated supply chain services and capabilities. We maintain our strong joint backbone of last mile service operations and will formalize service level agreements between Brenntag Essentials and Brenntag Specialties. We continue with the optimization of our legal entity setup, but as indicated at our Capital Market Day end of last year, the disentanglement of our legal entity structure and our operations will be a longer term exercise, which needs to be carried out prudently. For our support functions, the priority is to focus on continuously optimizing the cost base and force further disentanglement. Now I would like to hand over to Kristin, who will talk about the financial performance in the second quarter in more detail.
Kristin Neumann: Thank you, Christian, and also from my side, a warm welcome to everyone on this call. I will now talk about our key financial figures for the second quarter 2024 and I will start with the development of our operating EBITA on group level. As a reminder, when talking about growth rates, we generally talk about EBITA adjusted rates. In the second quarter of 2023, we reported an operating EBITA of €332 million. The translation of foreign exchange effect in the second quarter of 2024 had a negative impact of €1 million. Our acquisitions contributed €7 million to the operating EBITA development. The acquisition of Química Delta is not yet closed and thus the M&A contribution is not included in our Q2 design. Also, the acquisition of Solventis only contributed to our operating EBITA for one month, since the closing took place at the beginning of June. In the second quarter of 2024, we reported an operating EBITA of €297 million for the whole group, which is 10% below the prior year figure. Organically, operating EBITA declined by €42 million compared to the second quarter last year. The EBITA conversion ratio for the group came in at 29% versus a conversion ratio of 33% in the prior year period. Our results were overall characterized by a continuously challenging market environment and intense competition, which put pressure on overall chemical prices. As expected, volumes were higher compared to Q2 2023. These higher volumes could slightly overcompensate the lower gross profit per unit margin. However, in combination with higher costs, this led to a lower overall result year-over-year. On a sequential basis, compared to Q1 2024, we were able to keep gross profit per unit stable, thanks to various margin initiatives, which we initiated in Q2. Let us now have a look at Brenntag Specialties. Brenntag Specialties reported an operating gross profit of €298 million, which is on the level of the second quarter last year. The results of Brenntag Specialties were affected by a lower gross profit per unit level, while volumes were above the prior year period. Operating expenses for Brenntag Specialties increased year-over-year, partly driven by M&A. On an organic basis, the increase was mainly driven by volume-related increases in transportation costs, higher personnel expenses and the internal allocation of further costs in connection with our DiDEX initiatives. These are costs from prior years, which had previously remained in group and regional services, or formerly known as all other segments, and were charged on this year when various digital products went into operation. As a result, operating EBITA declined by 13% and reached €112 million. The segment life science reported a year-on-year EBITA decline of 14%, whereas the operating EBITA in material science declined by 8%. The EBITA conversion ratio for Brenntag Specialties was 38%, and below the prior year level of 44%. Let us have a look at the gross profit performance of the segments and business units. All business units in the life science segment except pharma saw positive operating gross profit development year-over-year, driven by volume. Nutrition, we saw positive business development, especially in EMEA, but also ongoing price pressure. In beauty and care, we achieved a higher operating gross profit in most regions, partly driven by M&A contribution. Pharma showed a solid operating gross profit performance. However, the performance was not enough to replicate the strong prior year results, which were characterized by better pricing conditions in some product categories. The gross profit in material science was in line with Q2 2023. We saw positive developments in operating gross profit for case and construction, where EMEA remained strong, and North America is improving constantly. And looking at the performance of Brenntag Specialties on a sequential basis, so compared to the first quarter 2024, we managed to increase volumes, we were also able to keep gross profit per unit more or less stable and we saw a positive momentum towards the end of the quarter. Coming to the performance of Brenntag Essentials. Brenntag Essentials reported an operating gross profit of €730 million, which is slightly above the prior year results. All our regions in Brenntag Essentials achieved a positive volume development. North America, Latin America and APAC achieved double-digit volume growth compared to last year. This volume development was able to offset lower gross profit per unit in most regions, resulting in a positive operating gross profit development in all regions except EMEA. All segments were negatively impacted by volume-driven increases in transport costs. In addition, costs in connecting with the DiDEX initiatives were allocated internally. These are costs from previous years which have been booked in group and regional services, formerly known as all other segments, and were only charged on this year when various digital products went into operation. Operating EBITA of Brenntag Essentials stood at €240 million, which is 30% below Q2 last year. The EBITA conversion ratio for the division came in at around 29%, compared to 34% in Q2 2023. Let me briefly comment on the performance of Brenntag Essentials on a sequential basis compared to first quarter of 2024. We saw an increase in volumes and at the same time we were able to keep our gross profit per unit stable compared to Q1 2024. This is the achievement of our commercial teams and reflects their ability to manage margins effectively in this intense competitive environment with a lot of pressure on chemical prices. Moving to Slide 9 where we look at the income statement in more detail. We generated sales of €4.2 billion, a decline of 2%. Our operating gross profit stood at €1.03 billion and increased slightly compared to the last year. Operating expenses, excluding special items, increased moderately and stood at €642 million in the first quarter. I will talk about our cost development in more detail in a minute, but let us first continue with the income statement. We reported an operating EBITA of €297 million in the second quarter 2024. Special items below operating EBITA had a negative impact of €21 million. This mainly includes advisory and severance expenses which relate to the planning for the legal and operational disengagement of the two divisions and which will help to achieve the cost reduction target. Furthermore, it includes provisions for legal risk arising from the sale of TARC [ph] and similar products in North America. It also includes an income which is mainly related to further insurance reimbursement in connection with a fire at the Brenntag site in Canada. Depreciation and amortization amounted to €106 million and were higher compared to last year. Net finance cost stood at €43 million which represents a slight increase compared to the second quarter 2023. Our performance translated into a profit after tax of €151 million and earnings per share of €1.03. This compares to the prior year profit after tax of €189 million and earnings per share of €1.23 last year. To provide more clarity on the development of our operating expenses, we show an OpEx bridge on Slide 10. The second quarter 2023, we reported operating expenses of €611 million. Translational foreign exchange effect in Q2 2024 had no major impact. Operating expenses increased by around €25 million driven by additional costs from acquired companies but also from our DiDEX and IT investment. When looking at our underlying cost development, we were able to reduce our OpEx slightly despite volume related cost increases and wage inflation. This is partly driven by lower variable personnel expenses but also by our cost containment measures. As a result, operating expenses for the group stood at €642 million at the end of Q2 2024. The cost measures announced at our Capital Markets Day are on track and we will continue to focus on our cost development in strict discipline. In light of the performance in the first half of 2024, we will accelerate and expand our cost out efforts and initiatives. As announced with our Q1 results, we will also postpone discretionary spend and stretch IT and DiDEX investments in selected areas over a longer period of time. Switching to Page 11, in Q2 2024 we generated a free cash flow of €158 million. This is below the record number of €432 million last year. The decline in free cash flow generation is partly driven by lower operating performance but mainly due to additional cash outflow for investments in our working capital whereas we reported an inflow from working capital release last year. Our working capital turnover was higher compared to last year and stood at 7.8 times. The increase reflects our initiatives to manage our working capital more effectively and is mainly related to lower days of inventory outstanding and higher days of purchase outstanding compared to the prior year period. Looking at our balance sheet, our net financial liabilities amounted to €2.9 billion at the end of the second quarter. The increase compared to end of December 2023 is driven by our annual dividend payment in Q2, as well as the cash outflow for acquisitions in particular for vendors. In addition, these liabilities were higher compared to the end of last year, also partly driven by Solventis. Our leverage ratio net debt to operating EBITA stood at 1.9 times. On the right hand side of the slide you can see our current maturity profile. Compared to the first quarter 2024, the syndicated loan no longer appears by name in the maturity profile as it is currently undrawn and we therefore have no outstanding liabilities linked to the syndicated loan. And with this, I would like to hand back to Christian to talk about the outlook for 2024.
Christian Kohlpaintner: Thank you, Kristin. Ladies and gentlemen, let me close with the outlook. For the reminder of 2024, we continue to expect a challenging business environment. The ongoing tense geopolitical situation and the slowly softening inflation will continue to create uncertainty about growth expectations of the global economy. The overall market trends and the chemical industry expectations observed recently, particularly in July, indicate that markets will remain highly competitive, which makes us more cautious for the remainder of the year. They indicate sustained pressure on industrial chemical selling prices. Therefore, we do not expect a positive gross profit per unit development in the second half of the year anymore, but rather anticipate a more stable development on group level. In addition, although we still expect volumes to increase sequentially in the second half of 2024, the trends suggest a slightly less supportive volume development than originally expected. Based on these assumptions, we now expect operating EBITA for the financial year 2024 to be in the range of €1.1 billion to €1.2 billion. To reach our guidance, we will continue to focus on margin management and cost distribution. Looking beyond 2024, we expect that the currently observed sequential improvement in demand will continue in 2025 based on the general recovery of the chemical cycle combined with an improved pricing environment. With this, I would like to close the presentation now and thank all of you for participating in today’s call and we look forward now to your questions. Thank you very much.
Operator: [Operator Instructions] Your first question comes from the line of Annelies Vermeulen from Morgan Stanley. Please go ahead.
Annelies Vermeulen: Hi. Good morning, Christian and Kristin. I have three questions, please. So, firstly, you’ve talked a few times in your presentation today around markets remaining highly competitive and sustained pressure on pricing. I’m just wondering if you could elaborate on that. Is it behavior from your suppliers? Is it behavior among your competitors? Are you seeing less discipline in the industry in either of those segments? So, any additional color on that would be helpful. Then secondly, on the net expense from special cost items, should we expect a similar level for those in Q3 and Q4, as was the case in Q2? It doesn’t look like those were factored into consensus EPS expectations for Q2, so any guidance on that for the rest of the year would be helpful? And then just lastly, Christian, in your opening remarks, I think you said pausing the disentanglement, but correct me if I misheard that. Is it fair to say that that is less of a priority now as you navigate the market volatility in the near-term, but it remains a priority over the medium-term, is that fair? Thank you.
Christian Kohlpaintner: Yeah. Annelies, thank you. I will take the first and the third question. I’ll let Kristin then answer to the net expense development in special items later on. On the market environment, this pricing pressure, first of all, we observe it particularly in the industrial chemical side, so more on the Essentials than on the Specialties. Actually, on the Specialty side, the pricing has stabilized and we saw encouraging side on the pricing and Specialties as we were also moving into Q3. So that’s less of an issue. The issue is indeed more the industrial chemical pricing and that comes by its maturity from chemical manufacturers determining the pricing of large volume chemicals in the market compared to Specialties manufacturers. Reason is very, very typical for the recovery of a chemical cycle in that the recovery of a chemical cycle, first the volumes go up because manufacturers tend to benefit from reduced cost for underutilized capacity and while these volumes go up, they are very, I would say, have pricing as a second priority because their margins are expanding by the sheer high volume they are producing, and that makes it a little bit more challenging on the industrial chemical side and how the pricing is there to determine the manufacturer. 80% of what they produce they sell themselves, and here the chemical distribution serves only about 20% of that output. So here you see the pricing impact by large players impacting us. So less direct competition. Let me also emphasize that it’s really more how large suppliers determine pricing for large chemical volumes in the market to some extent at this moment of the cycle, but that will change in 2025, I’m pretty much convinced. The third topic is don’t over interpret that. The disentanglement pause of the service functions is just now a short-term measure where we are clearly looking into how can we optimize our cost structure supporting our business performance. This is not any pause for a longer period of time or that we just put this off the chart. We need to continue to prepare for autonomy and independence of both divisions step-by-step and so that’s not a deviation from our plan to reduce 2024, 2025 for the preparatory steps. So that’s how you should interpret this piece. Now I’ll give Kristin the question of -- the second question about the net expense.
Kristin Neumann: Hi, Annelies, also from my side. If you look at the special items, there’s a colorful bunch of different topics in there and the majority of that is hard to predict. What we can predict is the expenses in relation to our Project Brenntag, which is the disentanglement of the two divisions and also our cost out program, and I think that is also important that this covers both. And we guided already in Q1 that there will be a high two-digit median amount for the three years and I would like to stick to that guidance. Maybe a little bit more pronounced for the cost out measures than in the first part of the year.
Annelies Vermeulen: Perfect. Thank you.
Operator: Your next question comes from the line of Isha Sharma from Stifel. Please go ahead.
Isha Sharma: Hi. Good afternoon. I have three questions as well, please. The sequential improvement in EBITA that we have seen in Q2 versus Q1 mainly comes from Essentials North America. Could you tell us what drove that and should we expect a similar trend also going forward? On the guidance, I would also like to ask, Christian, your comments were quite cautious and you are talking about a difficult continued environment. How should we draw confidence on the guidance, because you assume sort of a current run rate for the second half as well? And third is just housekeeping. There was a bit of a step-up in D&A and financial costs in Q2. Are these now a good benchmark for the following quarters, please?
Christian Kohlpaintner: Yeah. Isha, thank you so much. Third question I give then to Kristin. On the sequential improvement, I think it was not only North America, but here it’s, of course, one of our key markets and we have been quite strongly performing on North America with substantial volume improvements, particularly on the Essential side. This is both organic but also acquisition-driven. So currently we see that sequential volume improvement continuing to some extent in North America. So overall, I think we gain market share in North America. That’s our interpretation. But we also have, as I said, done substantial acquisitions in North America, like Old World last year, which are contributing now also to that result. So North America currently is the strongest market. Here I’m a little bit more concerned about the pricing development. So I think we need to balance here more carefully our volume growth with those margin management and I think the teams are carefully working towards that in Q3. But nevertheless, essentially, it’s all the industrial chemicals. You have the direct impact of what I described in my answer to the question of Annelies, that this is currently driven. A large effect was determined for a large volume of chemicals pricing, to an extent which makes it difficult at this moment to really extend our margins here going forward. On the guidance, I think we have accomplished €566 million in the first half. We expect that we deliver a better performance in the second half. Still, we are cautious, of course, because the moving part is predominantly the pricing part. On the volumes, we are confident. Maybe not as strongly as we were maybe a couple of months ago. But the chemical cycle recovery is, in my point of view, in good development. Region-by-region differently, I think we have to clearly distinguish also Europe and North America here. But that volume recovery or the second half, better volumes than the first half is what our current plan is assuming. The unknown in the whole equation is indeed the pricing and the cost profit per unit development as we go forward and we see, indeed, also some pressure here in the key markets we are serving. But nevertheless, based on the €560 million [ph] and a better performance in the second half, makes us feel comfortable with the midpoint of our guidance, which we have given you today. Now, let’s take the third question to Kristin.
Kristin Neumann: Hi, Isha. So, if you look at the financial costs, yes, indeed, they increase. And I would say that this is a good estimate also for the upcoming quarters due to the fact that our debt positions increased as described before because of the dividend payments, the acquisitions and also higher lease liabilities. But please bear in mind that there are always similar elements to the financial result, but not only the pure interest costs, it’s also ethics effects and also the deviation of M&A liabilities for outstanding shares for our acquisitions, which are hard to predict. But from a pure financing cost perspective, yes.
Isha Sharma: Thank you both very much.
Christian Kohlpaintner: Thank you.
Operator: Your next question comes from the line of Rikin Patel from BNP Paribas (OTC:BNPQY). Please go ahead.
Rikin Patel: Questions, please. Firstly, on outlook, at the midpoints of your new guidance range, it implies that H2 EBITA will be up on H1. If I look at historical seasonality, you typically have a first half-weighted year. What makes you think that seasonality will be different this time around? And secondly, you mentioned in the prepared comments that you’ll look to expand some of the cost containment measures, possibly by lowering the pace of the DiDEX investments. Could you maybe size some of those cost outs for the second half? Thank you.
Christian Kohlpaintner: Okay, Rikin. And again, it’s based on our assumption that we see the sequential volume recovery continuing. I think we have predicted correctly about what we believe, 2023 versus 2024, that 2024 volumes overall will be better than 2023. So the first half clearly also proves that and what we see and understand from the market dynamic, we also expect that volume continues to recover, maybe not to the full extent we were hoping for, that gives us, on the volume side, confidence that we have a supporting element here for the second half. And how we have started into the third quarter, I would see also encouraging volume developments. So that is supporting that trend. Again, not to the extent we were hoping for, but nevertheless, incremental sequential volume increases there. And if you combine this with a stable gross profit per ton, which we hopefully can manage on group level, you would have indeed an upside for the second half versus the first half, which would justify that midpoint. We have also already seen also positive signs on the gross profit per unit development for Specialties. Kristin has mentioned it. We saw it at the end of Q2 and it continues well into Q3. So the pricing on Specialties is less vulnerable at this moment than it is on the industrial chemical side. Combining all of that, we are confident that even the second half will show a better performance than the first half. And don’t forget Q1 was a very bad start to the year, and why we had to adjust our guidance was also partly associated to this very weak start into 2024. Now the second question I hand over to Kristin on the cost containment.
Kristin Neumann: Hi, Rikin, indeed. So we have defined a bunch of different measures, looking at all our discretionary spend at a project and also in our DiDEX program. Please bear in mind that last year we spent already a very high amount of money for the DiDEX program and so will be in 2024. However, we cut or we just prolonged some of the DiDEX projects to later periods, which does not mean that we lower the spend compared to the prior year, but that we do not increase it, also to make it clear that we will continue with our DiDEX initiative. But it’s not only the DiDEX program, it’s also not replacing positions and really strongly also working on structural changes in our organization. So I think it’s a full bunch of different measures and we have defined measures of a mid-to-digit million amount for the second half of 2024.
Rikin Patel: Okay. Thank you very much.
Operator: Your next question comes from the line of Rory McKenzie from UBS. Please go ahead.
Rory McKenzie: Good afternoon. It’s Rory from UBS. Two topics, please. First, on the average gross profit per unit, in Q1 you said there had been some exceptional pressure due to the price volatility in the market as supply expanded. I think that particularly hit your direct business. But at the time you said you were seeing signs of dealing with it better in Q2. I understand that reducing selling prices can cause short-term pressure on markups, but it’s still not clear to me why you expect this lower level of gross profit per unit to now be permanent. Have you seen signs that manufacturers are pushing into more of your customer base or is this just a point around timing and it might just take longer for the market to normalize? And then secondly on the cost base, do you think that your actions will mean the cost base can be lower in H2 than in H1? You’ve been talking about cost-type programs for a while, but obviously total SG&A is still rising. But I wondered whether now some of those DiDEX products are live, does that mean you can start to take faster action on the legacy cost base in any areas? Thank you.
Christian Kohlpaintner: Thank you, Rory. Again, I will take the first question. Kristin will talk about the cost base. Your question around Q1, Q2, GP, EBITA and pressure in the market and how you see it. I mean, it’s my interpretation from knowing the chemical industry quite well and how chemical cycles do technically take shape. It is very typical that now you see actually manufacturers focusing very strongly on gaining volume and trying to utilize their capacities much better and then you see margins actually improving. And you saw, I think, in the Q2 results here, there are clear indications of how that has helped manufacturers and that, of course, puts pricing in a second priority. That will change as more of the recovery cycle will mature and that’s based on the comment I also made in my statement around 2025. The chemical recovery, in my point of view, is in full swing. It has its ups and downs month by month. I mean, it’s not a straightforward line upwards, so to be also clear about this. But overall, we have now the chemical cycle gaining a little bit traction, although manufacturers are still very skeptical here and there. But nevertheless, it’s clearly visible to me, and that means in 2025, once capacity utilization rates are reaching a certain level, pricing will also follow. So this is why we believe we see. And again, I’ve stated also in other discussions, I mean, don’t crucify me if I’m wrong by one or two quarters, but it will gradually move in that direction and how the cycle and how the industry actually works and acts. So it’s a long, long answer to your question. Yes, it is timing and it’s not a structural topic at this moment. And Kristin, please, on the cost base.
Kristin Neumann: Hi, Rory. So, first of all, I think it’s important to keep in mind that our consumption is also affected by a lot of activity, so on organic changes and also driven by volume development. So that is always something which lies into our OpEx cost. So with higher volumes, we will also see that the OpEx line will increase. However, if I look at our cost position for H2, we assess that this will go, compared to H1, will go slightly down. With all the volume assumptions we have now, right, in our forecast and also with the M&A assumptions. So if there is a bigger M&A acquisition, which is not included in our forecast now, is coming, then of course it changes. The picture can also change.
Rory McKenzie: Thank you both. And just on the cost base, it was quite notable that I think the life sciences costs went up a lot this quarter, maybe up 14%, 15% year-over-year. Can you describe what kind of new products you’ve pushed into that division now and how that fits into the overall IT roadmap?
Kristin Neumann: I think it’s a mixture of different items we see here. So what we can see is that we have higher transport costs as well because of a strong increase in volumes. And the second point is that you also increase our personnel capabilities, especially in the pharma division and that also gave us an increase which is a bit higher compared to the other business units as a business and specialty.
Rory McKenzie: That was great. Thank you.
Operator: Your next question comes from the line of Himanshu Agarwal from Bank of America. Please go ahead.
Himanshu Agarwal: Hi. Thank you for taking my questions. I have a couple. First one on the inventories, I see inventories have substantially increased to around €1.55 billion in Q2. We understand some normalization from low levels, but it seems quite a sharp increase, given you expect softer demand and want to maintain price discipline. So could you help us understand that? And second, on the guidance, it seems like you are assuming a stable gross profit per unit in second half and given your commentary around the increased pricing pressure, especially in Essentials from July onwards, it sounds like the market has deteriorated. So what gives you confidence to maintain a stable gross profit per unit in Essentials? And then thirdly, I just wanted to ask about the legal cost, which stepped up quite substantially in Q2. Can you share a bit more details with regards to where you are in this legal process and what’s the scope, and if there are more provisions to come in second half? Thank you.
Kristin Neumann: Thank you, Himanshu, for your question. So first of all, if I look at the inventory, that is indeed true that we have a steep increase in the inventory numbers. That is, first of all, driven by the higher volume we process and that is also something we see to continue, because we expect that we have substantial volume uptake also for the following months. That is one driver. You can also see that reflected in our revenues going up, which is normal cost of the business. The second driver is that we have included some acquisitions here, which did not affect the cash flow per se. But if you look at the balance sheet and look at the pure capital accounts, then you can see that we have a higher inventory because of this acquisition and that is, again, preventive because it was a sizable acquisition and that is visible in the balance sheet as well. If it comes to the GP per ton development, yes, we expect that this GP per ton development is stable compared to what we saw in Q2. Of course, we have guided last May and you need to compare it to this status. We have guided that we expect the prices and the GP per ton levels to increase and to uptake in the second half of the year. And therefore, we mentioned that also at the beginning of the second half of the year in July, we saw not a major change in the trend and also in the last couple of months, we could not observe that on the group level. So therefore, we need to interpret this comment in this way. If you look at the special item of the type cases, those are lawsuits which are filed against us. And these lawsuits or these cases stem from type sales we did mostly more than 20 years back. And the claims are being made against Brenntag by persons who came into contact with those type products. And we are now providing for those potential future cases, and of course, we also need to take into account the dynamics behind there, and if there is a change, we need to provide for those type cases. Of course, we are defending ourselves against those cases with all means and we also make or try to indemnify third parties for those to the extent that we believe they are responsible for those type cases. But it’s a pending topic in our P&L [ph] and balance sheet. But that is what we currently know.
Himanshu Agarwal: Thank you. And any indication on the P&L you could give?
Kristin Neumann: So, we expect that there will be further cases coming. It’s very hard to predict how many and what the number will be. So therefore, we need to see what the latest movements are going forward.
Himanshu Agarwal: Thank you.
Operator: Your next question comes from the line of Christian Obst from Baader Bank. Please go ahead.
Christian Obst: Yes. Thank you and good afternoon. First, a short question on the transport cost. Can you remind us how many do you pay for transport approximately and how do you transfer the transport cost to customers? Is it possible to do it more or less than you have done it before? This is the first question.
Kristin Neumann: Yes. So normally, we can pass on increases in transport costs to our customers. But these are now linked to higher volumes. And of course, the customers will also pay for those. But if you then isolate and look at our OpEx line, that will affect an increase in our cost base. If we look at the exact number for Q2, it’s roughly 30% of our total OpEx number.
Christian Obst: Okay. But in the end you can transfer more or less 100% to customers.
Kristin Neumann: More or less, yes. Of course, there are always exceptions. But yes, more or less, yes.
Christian Obst: Okay. So then from the start on the entire disentanglement, which is a very complex process, of course, until the year 2027, something like that. So, and you stated in the Capital Markets Day or you indicated in the Capital Markets Day the large amount is about taxes. Do you have any further or any more detailed idea how taxes will occur when it comes to the entire disentanglement? And as a result, will the entire cost base more on the line of €450 million or more on the end of €650 million after all?
Kristin Neumann: Well, in the Capital Market Day 2023, we indeed guided that we have overall costs for the achievement of the cost out program and also for the real operations disentanglement of €450 million to €650 million. And indeed, we also guided you that there is a major part which is linked to tax leakage. In the meantime, we also worked on the tax leakage to lower the number. So I would assume that this number will go down and we will see more or less cost for the cost out program and also for the operational disentanglement and consulting fees. However, not that much of tax impact anymore. We are not ready to update the guidance right now. But you can expect that there is a lower number to come.
Christian Obst: Okay. Very helpful, of course. These are very good questions. Thank you very much.
Operator: [Operator Instructions] Your next question comes from the line of Chetan Udeshi from JPMorgan. Please go ahead.
Chetan Udeshi: Yeah. Hi. Thank you and hi all. I had a few questions. I’ll start one by one. Maybe the first one, I’m just trying to understand the comments on July a bit better. So I heard, Christian, you mentioned the GP per unit is improving in the Specialty business. But what about the Essentials business? Is July or was July worse in GP per unit terms for Essentials and then Q2 average? The second question, you talked about chemical cycle and volumes continuing, sorry, to get better in current quarter? Does that mean at least sequentially your earnings should be up versus Q2, given also you have some seasonal decline in Q4? And the last question, I heard Kristin talk about some digital platforms going live recently. Can you talk about what capabilities have you gathered from these platforms? What is the customer reception? How are you leveraging it in your business on a day-to-day basis? Any color there will be useful.
Christian Kohlpaintner: Okay, Chetan. Thank you so much. I will take the first two questions and then Kristin the other one. I mean, the comment on July was referring more to the general sentiment in the chemical industry. I think you have seen, after some encouraging news, more down-tuned comments from chemical manufacturers of how they see the current business conditions, in particular around July. I mean, you have seen the publications and that tells us combined to what we observe that the pressure in the markets are actually there. And when we look at the gross profit per unit, I mean, we see, as I said, on a group level, a stable development. We see encouraging signs on the Specialty side. We see a little bit losses on the Essential side. But overall, we are able to maintain that also in July, more or less, I must say. The volume development in July has been encouraging -- in both divisions very encouraging, I have to say. So, again, we need to now carefully manage our margins according to that volume picture, which particularly exists in North America, coming back to the question we had earlier in that call from Isha. The volume and pricing better, earnings up. I mean, yes, I mean, we have said that, when you look at H1 and H2 comparison, and this is reflected in our midpoint guidance, will show a slightly positive improvement compared to H1. And never forget that the first quarter in H1 was an unusually weak quarter for Brenntag. I think they have been expressing our disappointment with a very weak start into the year, which again makes it difficult to catch up fully towards the end. And the cycle you mentioned, again, it is equally good as I know it. The cycle follows a certain profile in the chemical industry. And currently we are now in the phase where volumes are gradually, sequentially, slightly improving and pricing is not yet the determining factor that will change. That’s at least my assumption in 2025 and going forward. Now Kristin on the other topic.
Kristin Neumann: Yeah. Hi, Chetan. So, we had some products, for example, the customer growth engine, but also salesforce and also some supply chain planning and analytics tools which went into operations. Those helped us to improve our performance in terms of how much products do we order, for instance, how do we also improve our housing capital and also how do we plan our cost of goods sold in an efficient way, for instance. But also the customer growth engine helped us to, or helped our salesforce to be closer to our customer to make automated suggestions when and what to order and that also helped our cost of goods sold, for instance. So there are those two examples which then led to the fact that the costs also need to be allocated where the benefits are.
Chetan Udeshi: Thank you.
Operator: There are no further questions at this time. So I’d like to turn the call over to Thomas Altmann for closing remarks.
Thomas Altmann: Thank you, Constantine. This brings us to the end of the conference call. In case of further questions, please do not hesitate to reach out to the IR team. Our Q3 results will be published on November 12, 2024. Ladies and gentlemen, thank you very much for joining us today. Have a good day and good-bye.
Operator: Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect.
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