Earnings call: Brenntag SE faces decreased Q1 sales and EBITA

In Brenntag SE’s first quarter earnings call for 2024, CEO Dr. Christian Kohlpaintner outlined a challenging period for the company, marked by an 11% decrease in sales to €4 billion and a 24% drop in operating EBITA to €260 million. Despite the decline, the company managed to generate a free cash flow of €175 million.

Brenntag, which trades under the ticker symbol BNR, anticipates its operating EBITA for the full year to be at the lower end of its guidance, reflecting a difficult business environment. The company has made strategic moves, including portfolio adjustments and legal disentanglement, to strengthen its business model.

Brenntag Essentials, a division of the company, saw a 23% decline in operating EBITA to €186 million, primarily due to increased transport costs and higher expenses. However, positive performance in the APAC region offset some of the division’s challenges.

Key Takeaways

• Sales decreased by 11% to €4 billion, and operating EBITA fell by 24% to €260 million.
• Earnings per share were down to €0.97 from €1.40 in the same quarter the previous year.
• Free cash flow remained consistent with a normal Q1 pattern at €175 million.
• Brenntag issued two eurobonds totaling €1 billion to address debt maturities.
• The company is focusing on cost discipline and expects operating EBITA for 2024 to be at the lower end of its guidance.

Company Outlook

• Brenntag anticipates a challenging business environment in 2024 but expects a gradual improvement in demand.
• The company is committed to achieving its lower-end guidance for operating EBITA through cost development and discipline.

Bearish Highlights

• Operating gross profit declined by 5% to €984 million.
• Profit after tax decreased to €144 million from €217 million in Q1 2023.
• Brenntag Essentials’ operating EBITA dropped 23% due to increased transport costs and higher expenses.

Bullish Highlights

• Volume increases in the APAC region helped offset lower gross profit per unit for Brenntag Essentials.
• The company continues to assess promising targets for further M&A activity.

Misses

• The company faced pressure on prices and gross profit per ton, especially in direct business.
• There were challenges in passing on costs related to IT investments and transportation.

Q&A Highlights

• Kohlpaintner noted that volume development in March and April indicated a stabilization and sequential improvement in demand.
• Kristin Neumann discussed cost measures to counterbalance inflation and volume building cost increases.
• The company has good visibility for the first six weeks to two months of the year, with better volume expected in the second half of 2024.

Full transcript – Brenntag AG ADR (BNTGY) Q1 2024:

Operator: Hello and welcome to the Brenntag SE Q1 2024 Results Call. Throughout the call, all participants will be in a listen-only mode and afterwards there will be a question-and-answer session. Please note this call is being recorded. Today, I am pleased to present Thomas Altmann. Please begin your meeting.

Thomas Altmann: Thank you, Anika. Good afternoon, ladies and gentlemen. On behalf of Brenntag, I would like to welcome you to the earnings call for the first quarter of 2024. 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. All relevant documents have been published this morning on our website and can be found at brenntag.com in the Investor Relations section. In that 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, Dr. Christian Kohlpaintner. Christian, over to you.

Christian Kohlpaintner: Yes, thank you, Thomas and good afternoon, ladies and gentlemen. I will start with the summary of the first quarter of 2024 and Kristin will then walk you through the details of our financial performance. As usual, we are both happy to answer your questions after the presentation. In the first quarter of 2024, we reported results, which were not in line with our own ambitions. Our performance in both divisions was impacted by the challenging environment as well as pricing pressures in various markets and industries. Although we managed to capture additional volumes in a positive demand environment, particularly industrial chemicals, pricing remained challenging. Overall, higher volumes were not able to fully compensate for the lower sales prices. Sales amounted to around €4 billion, which is 11% lower compared to a relatively strong prior year period. Operating gross profit stood at €984 million, which represents a decline of 5% and operating EBITA amounted to €260 million, a decline of 24% respectively. Earnings per share stood at €0.97 compared to €1.40 in the first quarter 2023. The combination of slower performance, higher CapEx and higher investments in working capital led to a free cash flow of €175 million. This is significantly lower compared to the exceptionally high cash flow in the prior year period, but in the range of a normalized seasonal Q1 pattern. In fact, the free cash flow generated in Q1 2024 marks the second best free cash flow Brenntag ever achieved in the first quarter. Just recently, we placed two eurobonds with a total amount of €1 billion. With this strategic decision, we address upcoming maturities early and secure long-term financing for Brenntag. Now, let me say a few words on the outlook. In light of the performance in the first quarter and the trends we have seen continuing into the second quarter, we expect Brenntag’s groups operating EBITA for 2024 to be now at the lower end of the guidance provided with our full year results in March. Let’s look at our strategy execution. Ladies and gentlemen, let me start with the portfolio shifts of our two divisions. As already announced last summer and presented in more detail at our Capital Markets Day in December, we implemented portfolio shifts and the corresponding changes in our reporting with the first quarter 2024. Since January, selected businesses have been reallocated between Brenntag Essentials and Brenntag Specialties to further strengthen the coherence of the business models of the respective divisions. On the one hand, we transferred the water treatment business and the finished lubricants business from Brenntag Specialties to Brenntag Essentials. Furthermore, we shifted semi-specialty products to Brenntag Essentials due to their more commoditized nature and we also allocated the entire operating activities from all other segments, which is now called group and regional services to our Essentials division. This includes the operations of Brenntag International Chemicals GmbH, which buys and sells chemicals in bulk on an international scale. On the other hand, we combined all pharma activities under the roof of Brenntag Specialties. These shifts increase the value creation potential by allocating all products, which are larger in bulk quantities and which require last mile efficiencies to Brenntag Essentials. All products, which are driven by value-added services, formulation and innovation capabilities are allocated to Brenntag Specialties. In addition, the changes also include a partial shift of specific functions, responsibilities and activities from corporate level to the divisions, such as business and operations related HR, service, and excellence functions. These changes are reflected in our external reporting structure this quarter for the first time. Regarding our path towards Horizon 3, we have started the process of our legal and operational disentanglement early this year. However, as indicated at our Capital Markets 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 diligently. As of today, we have defined and properly staffed the relevant project resources internally and have selected the required external legal and tax advisers. This is important to secure our strategy execution, while maintaining focus on our day-to-day operations. We are now in a detailed design phase, where we create the necessary transparency on the disentanglement and define what is required to be executed at the lowest local level. In addition to the implementation of our cost containment measures announced at our Capital Markets Day last year is on track and we define further savings potentials as we speak. We are doing this in light of the current economic conditions and against the background of our performance in the first quarter. Lastly, let me provide a quick update on our M&A activities. Since the beginning of the year, we closed or assigned three acquisitions, strengthening key focus industries and geographies in both of our divisions. In Brenntag Specialties, we acquired large industries, a leading specialties distributor in the UK with top tier supply partners, and a high-quality portfolio within material science. In Brenntag Essentials, we acquired rental service specialty, a rental equipment supplier based in Louisiana, which focuses on providing specialty equipment for pipeline integrity and maintenance services to the oil and gas, midstream and downstream markets. And just recently, we signed the acquisition of Quimica Delta, a leading chemical distributor in Mexico. The company access to targets through marine terminals and last mile infrastructure complements and expands the Brenntag Essentials triple strategy, which we have outlined in detail during our Capital Markets Day last December. We will continue our M&A execution and are assessing several promising targets in our pipeline in line with our divisional strategies. Now, I would like to hand over to Kristin, who will talk about the financial performance in the first quarter in more detail. Please, Kristin.

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 first 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 FX adjusted rates. Please have a look at the bridge on the left hand side of Slide 6. In Q1 2023, we reported an operating EBITA of €345 million, which was driven by a more positive pricing environment. The translational foreign exchange effect in the first quarter of 2024 had a negative impact of €3 million. Our acquisitions contributed €6 million to the operating EBITA development. Here, I would like to emphasize that our largest acquisition in 2023, the acquisition of [indiscernible] was signed last year, but is not closed yet. Therefore, the M&A contribution is not included in our Q1 results. Looking at the EBITA bridge again, organic operating EBITA declined by €88 million compared to the first quarter last year. Overall, we reported an operating EBITA of €260 million for the whole group, which is 24% below the prior year figure. The EBITA conversion ratio for the group came in at 26%. Our results were overall characterized by continuously challenging market environment. As expected, volumes were higher compared to Q1 2023. However, higher volumes were not able to fully offset pricing normalization as profit per unit was lower compared to the first quarter last year. On the right hand side, you find a more detailed view by divisions and group and regional services. Let us now have a look at Brenntag Specialties on Page 7. Brenntag Specialties reported an operating gross profit decline of 8% to €286 million in Q1 2024. Operating EBITA declined by 23% and reached €108 million. The EBITA conversion ratio for Brenntag Specialties was 38% and below the prior year level of 45%. The results of Brenntag Specialties were affected by a negative gross profit per unit development where volumes almost reached the prior year level. Operating expenses for Brenntag Specialties increased slightly year-over-year mainly driven by M&A. On an organic basis, we kept our costs relatively stable despite inflation and internal allocation of product cost in connection with our direct initiatives. These are costs from prior years, which had previously remained in group and regional services are formally known as all other segments and were charged on this year when various digital products went into operation. Let us have a closer look at our segments and business units. The segment life science reported a year-on-year EBITA decline of 19% whereas operating EBITA and material science declined by 18%. All business units in the life science segment, except Beauty and Care, saw negative operating gross profit development year-over-year. Nutrition, market prices in several regions increase at the end of Q1. However, we do not see enough evidence for a broad market trend of increasing prices yet. In Beauty and Care, the market remains challenging overall. We achieved a higher operating gross profit in most regions, mainly driven by M&A contribution. Pharma showed solid performance. In fact, Q1 2024 was the third best quarter ever for our pharma BU, but it was still not enough to replicate the exceptionally strong pricing. The performance in material science was below the level of Q1 2023, but in line with expectations. We saw slight improvement in construction, particularly in EMEA, which is an encouraging development. When looking at the performance of Brenntag Specialties on a sequential basis compared to the fourth quarter 2023, we saw a slight increase in volumes and a slight sequential improvement in gross profit per unit. Coming to the performance of Brenntag Essentials on Page 8, Brenntag Essentials reported an operating gross profit of €698 million, which is 4% lower compared to the prior year result. All our segments in Brenntag Essentials achieved positive volume development. At the same time, gross profit per unit was lower in all segments, leading to a slight decline in overall operating gross profit for the division. Only in APAC, the volume increases were able to fully offset the pressure from lower gross profit per unit. Operating EBITA of Brenntag Essentials stood at €186 million. This is 23% below Q1 last year. All segments were negatively impacted by volume driven increases in transport costs. In addition, cost in the connection of the direct initiatives, were located internally. These are costs from previous years, which have been booked in group and regional services, formerly known as all other segments and they are only charged on this year when various digital products went into operations. These higher expenses were additional factors of a decline in operating EBITA in EMEA, North America and Latin America. The performance in Latin America is generally driven by the economic conditions in the region in combination with higher costs. In addition, the prior year period was positively impacted by a non-recurring other income item. Only APAC saw positive performance in operating EBITA. The EBITA conversion ratio for the division came in at around 27% compared to 33% in the first quarter 2023. Let me also briefly comment on the performance of Brenntag Essentials on a sequential basis compared to the fourth quarter 2023. Here we saw a slight increase in volumes, but at the same time gross profit per unit decreased slightly. Moving to Slide 9, where we look at the income statement in more detail, we generated sales of €4 billion, a decline of 11%. Our operating gross profit stood at €984 million. This represents a decline of 5% year-over-year. Operating expenses, excluding special items, increased slightly on an FX-adjusted basis and stood at €643 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 €260 million in the first quarter 2024. Special items below operating EBITA had a negative effect of €8 million. This includes legal provisions, additional costs incurred in connection to a fire at a Brenntag site in Canada as well as advisory and other one-time expenses associated to the legal and operational disentanglement of our two divisions, Brenntag Essentials and Brenntag Specialties with a combined amount of €17 million. The special items also include positive effect of around €8 million. This was booked due to lower than expected tax liability in connection with excise tax. Depreciation and amortization amounted to €94 million and remained roughly stable compared to last year. Net finance costs stood at €34 million, which is also stable compared to Q1 2023. Our financial performance translated into a profit after tax of €144 million and earnings per share of €0.97. This compares to the profit year – sorry, this compared to the prior year profit after tax of €217 million and earnings per share of €1.40 last year. To provide more clarity on the development of our operating expenses, we saw an OpEx bridge on Slide 10. For first quarter 2023, we reported operating expenses of €625 million. The translational foreign exchange effect in Q1 this year had a positive impact of around €5 million. Operating expenses increased by around €20 million mainly driven by additional cost from acquired companies, but also from our DiDEX and IT investments. And looking at our underlying cost development, we kept our OpEx flat compared to Q1 2023 despite overall cost inflation, particularly in wages and despite higher volumes. 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 €643 million at the end of Q1 2024. As already mentioned, our overall results are not in line with our own ambitions and they continue to focus on our cost development and strict discipline. The cost measures announced at our Capital Markets Day are on track and in addition, we will consider postponing discretionary spends and stretching IT and DiDEX investment over a longer period of time. Coming to Page 11 and the free cash flow, in Q1 2024, we generated a free cash flow of €175 million. This is clearly below the record number of €449 million last year but still marked the second best free cash flow Brenntag has ever achieved in the first quarter. The decline in free cash flow generation is partly driven by lower operating performance, but also due to the slight cash outflow for investments in our working capital whereas we reported an inflow from working capital last year. Our working capital turnover was higher compared to last year and stood at 7.9x. The increase reflects our initiatives to manage our working capital more effectively and is mainly related to lower days of inventory held and higher days of purchases outstanding compared to the first quarter 2023. Looking at our balance sheet, our net financial liabilities amounted to €2.2 billion at the end of the first quarter. Our leverage ratio, which is net debt to operating EBITA, remained on low levels and stood at 1.5x. On the right hand side of the slide, you can see our current maturity profile. Yes, I would like to highlight our recent bond placement. We successfully issued €2 bonds in the amount of €500 million each. One with a maturity of 4 years and a coupon of 3.75% and one with a maturity of 8 years and a coupon of 3.875%. With the proceeds from the new bonds, we are addressing upcoming debt maturities early improving the maturity profile of our financial liabilities, and supporting the business activities of Brenntag. And with this, I would like to hand back to Christian to talk about the outlook for 2024.

Christian Kohlpaintner: Yes, thank you, Kristin. And ladies and gentlemen, let me close with the outlook. For 2024 we continue to expect a challenging business environment, which is characterized by ongoing geopolitical uncertainty and macroeconomic challenges. At the same time, we also expect for continued improvement in overall demand, which should lead to higher volumes in the course of the year. This volume development was already visible in the first month of 2024. We are cautiously optimistic that market conditions will improve throughout 2024 with the first half of the year being more challenging than the second. We expect overall operating expenses to be higher than 2023 due to the continued inflationary trends, mainly from personal expenses and due to slightly higher costs for DiDEX and IT investments. Furthermore, the expected increase in volumes will have an impact on the development of variable cost components. In light of the performance in the first quarter and the trends we have seen continuing into the second quarter, we expect Brenntag Group’s operating EBITA for 2024 to be now at the lower end of the guidance provided with our full year results in March. To reach our guidance, we will continue to focus on our cost development with strict discipline. The cost measures announced at our capital markets day are on track in addition, we will consider postponing discretionary spend and stretching IT and DiDEX investments over a longer period of time. 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: Thank you. [Operator Instructions] The first question comes from the line of Suhasini Varanasi from Goldman Sachs. Please go ahead.

Suhasini Varanasi: Hi, good afternoon. Thank you for taking my questions. And I have three please. Given where you delivered profits in 1Q which was €260 million even at lower end of the range new guidance, you do need a pretty big step up in the profitability over 2Q, 3Q and 4Q to achieve it. Can you maybe talk about what gives you comfort? That about your ability to reach that lower end of the guidance range? How have developments been in April so far? That’s my first question. I can take it one by one if that’s okay.

Christian Kohlpaintner: That’s fine. If you are fine, let me take the first question or you can ask all three questions that helps us a little bit to arrange us.

Suhasini Varanasi: Sure. I think the second question is around the transportation costs which you flagged came in higher than expected in 1Q? Is that something that you’ve been unable to pass on to customers or is that – has there been a lag effect that has impacted profits in 1Q? And the third question is on the M&A of RSS which marks a move into the rental industry. And it’s a new vertical, a new industry altogether. Can you maybe talk about the strategic rationale behind the move? Given there are already several pure play rental players in the U.S. and it’s just a one off move? Do you have plans to further expand your presence in the rental market? If there is some color that will be helpful? Thank you.

Christian Kohlpaintner: Yes, thanks a lot. I will take the first and the third question and ask Kristin to answer the transportation cost question. When we look at the moving parts, and as we see currently the market environment, what has been seen in the first months of this year was indeed a sequential volume recovery which continues as we speak, also in particular in April. So, as the market has been also the manufacturing side quite surprised by this movement and the strong recovery we have seen now in Q1 and beginning of Q2 in the manufacturing side as well. It is incrementally or it was incrementally difficult to basically define the pricing points, though we see the sequential volume recovery sustained, at least for the first 4 months now, we do expect and that’s the second moving parts and improvement in the way we do our pricing. I think I have early on indicated to you, our full year earnings call that finding the right price points at this moment is a little bit tricky. And we have not been fully meeting the expectations here in Q1. But we do see some encouraging signs in the pricing improvements. In particular, we will talk about our warehouse visibility, the vast majority of our business. And thirdly, we focus on the cost takeout measures even more, and will clearly also have additional contributions from cost saving measures as we go forward. And taking those three moving parts together, we believe that the low end of our guidance is ambitious, but still achievable. On the third topic, on the rental industry topic, it is a rather opportunistic move, complementing our efforts in the oil and gas industry. So it has been a small acquisition, which made a lot of sense in specific spot, but it’s not intended not to be a large strategic direction or taking to go into this vertical offering a very particular case in that very, very particular locality around the rental agreements, which is supporting our strong business which we have such a complimentary, but not real strategic [indiscernible]. Now about transport cost to, Kristin, please.

Kristin Neumann: Thank you, Christian, and hi Suhasini for the transportation cost, first of all, there is volume element in which is reflected in our OpEx. Generally, we are able to also pass through higher transport costs to our customers. However, on the other insight, we also had pressure in the prices in these and therefore also in the GP per ton, which makes it a little bit more ore difficult. On top of that, if you overall look at our cost position, there are some elements in there which we are able to pass through transportation costs are approaching something you can pass through. However, there are also some other elements on the higher investment in our IT landscape and our DiDEX program, where it’s not that easy to pass it through. I hope that this helped to answer the question.

Suhasini Varanasi: Yes, it does. Thank you so much.

Operator: The next question comes from the line of Rory McKenzie from UBS. Please go ahead.

Rory McKenzie: Good afternoon. It’s Rory here. Two questions, first, please. Can we assume that M&A added about 2% of volumes in Q1, organic volumes down while they were also up low single digits? So therefore, total volumes were up about 4% to 5% year-over-year? And then secondly, if that’s true, then that would imply that the average gross profit per unit was down 9% to 10% year-over-year in Q1, which obviously looks quite steep. Can you just go into more detail on what’s driving this? We understand that GP per unit has been elevated after the pandemic and therefore set to normalize. But given your scale compared to your customers, normally you would talk about being able to pass on any product price changes carefully to kind of protect and smooth your own markups and where you are able to track the product prices and so in this price contracts, what exactly what happened within GP per unit [indiscernible]?

Christian Kohlpaintner: That was the first question or was the two question…

Rory McKenzie: Yes, two parts of that piece.

Christian Kohlpaintner: Okay. So yes, I mean, I think we had to crush on the gross profit per ton, I think it’s 9% to 10% will be on the high end from my side. And we talk about in a small movements here in particular on the gross profit per unit in absolute euros per ton. As you can imagine, as we ship so many products. I think we have seen remarkable differences in our direct business versus our warehouse business. Our direct business which is where we actually handle through stuff and deliver food tank truck loads directly from a supplier sites to our customers – direct business has seen higher pressure on the pricing than we saw on our warehouse business. And the warehouse business is the largest portion of our business. And they have been quite pleased with the development. Also, as we move now into the second quarter with our price development on the direct warehouse business. M&A contributed 2% to 3% of EBITA level, not as much as volume as the number would be not the correct. I see. But please, Kristin, correct me if I’m wrong. So that’s all the moving parts here. It is currently, from a pricing standpoint as I said the situation. As I said, it’s over the last 2 months or so talking to our investors about this, that in principle, the whole industry has been quite surprised by the change in the demand picked and pricing currently is searching for the proper level. And we got it wrong in the Q1. But also, I think, knowing our distribution model, we always can course correct us rather quickly. And that’s what we expect for the year going forward.

Rory McKenzie: Okay, thank you, then I’m separately on the cost base. And you both said that the cost containment measures you discussed at the CMD are on track. I guess we can’t see that externally. And you’ve obviously been making closing that investments as well, so that the net and cost bases are rising. Can you commit to reducing absolute SG&A from here? And when you’re going to come back with updated plans on things like the DiDEX programs and those investments?

Christian Kohlpaintner: I think Kristin is also – maybe you could talk a little bit about the cost base and the development as we see it, I mean, we need to clearly distinguish and you know that, we are between the variable cost impacts we have and this is as volumes are improving this OpEx, of course, also the variable expense going up. So that’s something you should always have [indiscernible] DMA contributions we see also on the SG&A side in our numbers. We are totally committed to reduce our SG&A costs in absolute terms going forward except of M&A contributions and variable expenses. And I think investment maybe not clearly not just shown, that we had indeed, quite substantial inflationary cost trends in our numbers, which we could totally offset with our initial internal efforts to actually constantly take – reduce those costs and have those cost increases fully digested particularly when they come from fixed personnel costs and other interesting facts. Kristin, also feel free to add.

Kristin Neumann: Yes. Absolutely Christina, that you have already covered a lot here. And so, as also indicated in the capital markets state, we will see inflation returns over all cost positions, we will see M&A, and we will also see higher volumes, which also will lead to the fact that our absolute cost basis increased. So, I think that is what we have already indicated like in December. If you look at our SG&A a cost that is something we are working on,as also indicated back in December, that is also something which is dependent especially on the SG&A cost on our system landscape. And that is of course something which is not done very quickly, especially if it comes to the IT systems. So therefore it was also not expected that implement [indiscernible] would see some effects. So all in all, we are able to counterbalance all those mentioned effects during Q1, and that is also what we planned in the capital markets day number.

Rory McKenzie: Okay, thank you both.

Operator: The next question comes from the line of Chetan Udeshi from JPMorgan. Please go ahead.

Chetan Udeshi: Yes. Hi, thanks. Maybe if I follow-up with, the first question around the guidance outlook, and that was just doing some simple math. And if I just take your Q1 and if I take your full year, EBITA guidance, it seems your quarterly run rate for the remainder of the year needs to be somewhere close to€320 million to €325 million. Are you happy with that sort of run rate for us to model in second quarter? Or do you think there is much more to be done in second half to achieve the guidance so that we get the phasing correctly in terms of modeling. The other question I had was, just coming back to the shipping costs, etcetera. And I remember, one of the things Christian you’ve talked about in the past was leveraging the global footprint to be able to meet the – just the opportunities in different regions. We’ve seen some of the freight forwarders and chemicals talk about number one, the shipping cost, just going up quite significantly. Is that something you see in your cost base at the moment? And how does that change the opportunity for let’s say, leveraging the global scale and arbitrage in between regions in the short run, but also how we will see that dynamic in the long run? Thank you.

Christian Kohlpaintner: Yes. Actually, no thanks. So for the questions on the facing. I think we said it in, in our call here, that we’ve seen the first half and second half different here. So I think one needs to now see how that plays out. Currently, volume development, which was of is encouraging, has entered into the second quarter, even with the pricing topic. And again, I think it’s currently a very fluid market development, very fluid market overall, in the chemical industry, I’m sure you hear this also from other players in the industry. So when you model I would rather take what we have said in our call, second half better than first half. On the shipping costs. I think it’s a good topic to talk about, because we see indeed that logistic costs to go up. So essentially, in particular, out of the Asian sphere or space into Europe and into North America. So we have seen already a substantial cost take ups, which also really take the Red Sea concern with us, it’s not a disruptive move at this time, it is more as we interpret a nuisance or how we feel it is more nuisance to us. For us, it’s more important on playing that regional game, not so much on the logistic costs, and the advantages or disadvantages we might have there. But it’s really playing the arbitrage game, which exists in the various – in the various markets. And what we currently see is that the arbitrage opportunities at this moment are lower, or not as expressed as they used to be. But again, that doesn’t mean that it does, it’s not possible going forward, that there is again, arbitrage opportunities, especially being products across the regions, we believe and are convinced that this is the right strategy for our Essentials business to draw on those opportunities. And we are, as we speak, are building up the capability more and more and also steering our business very clearly if you want to call it source to rec, so really to optimize our business also in that sense from as I said source to rec. And rec to source, this is our direct business from our warehouses to our customers. We of course managed also very clearly, very, very tight. So, that’s our sea shipping cost is a pain. We can push most of the pricing forward to our customers and passing on, but always that’s possible. But it’s also not threatening situation as we speak at this moment.

Chetan Udeshi: Can I ask one follow-up, otherwise, I think I will probably go into the queue and come back so others can ask questions first?

Christian Kohlpaintner: No, go ahead. Go ahead.

Chetan Udeshi: Yes. I just using your point about arbitrage and I was just thinking out loud here. Let’s say, just for the sake of argument, if I am – I am sure you work with BSF and if you try to undercut BSF in Europe by buying something from China and selling it at a lower price? Would that not impact your relationship with BSF on the specialties? Have you seen that instances where maybe, what is good for essentials might not be necessarily good for specialties in terms of supplier relationship, or is that something you don’t see in your day-to-day business?

Christian Kohlpaintner: Chetan, that’s what we actually don’t see. And this is also one of the reasons why we are clearly pushing towards those differentiated business models. The decision that – and the take now your example of BSF, the decision about the business corporation between the distributor and a supplier like BSF is taking at the third or fourth level of that company, which is a business unit. And the business unit food ingredients in BSF, which is working on specialties, has nothing to do with, let’s say, the business really petro chemicals of BSF where the industrial chemicals are basically distributed. And so I think we have to always make that clear distinction that the relationship is defined almost business unit by business unit even in those large conglomerates. And also the character of that relationship is different, wherever it might be in the specialties field and exclusive relationship in industrial chemicals, sometimes it’s not even exclusive relationship. So, you also always have to have that in mind. So, the collateral damage, which we try to describe is actually not something which we experience in our day-to-day business.

Chetan Udeshi: That’s great. Thank you.

Christian Kohlpaintner: You’re welcome.

Operator: The next question comes from the line of Christian Obst from Baader Bank. Please go ahead.

Christian Obst: Yes. Thank you and good afternoon. First, I have a question concerning your announcement yet to my scratch investments into IT and directs. I am not really sure what does that mean and how does it come to the conclusion that you might stretch these investments, because you don’t have a free cash flow problem? Now the other hand, it doesn’t make sense to make it as quick as possible to reap any fruits afterwards? So this is first question.

Christian Kohlpaintner: Yes. Kristin, the point, I think couple of things we need to be mindful of. First of all when we talk about stretching investments into directs IT unfortunately due to the changes in the accounting standards, investments you take into IT infrastructure and those programs need now to be off extent in the past this the CapEx. So, indeed, if you will talk about CapEx, it would not make that’s a different thing. But we need to carefully watch our OpEx development and our impact it has on our operating EBITA, which is our key performance indicator. So, absolutely, so that’s number one. Absolutely, we are looking into how do we expand or how do we actually take these, let’s say, costs into our scheme as we invest into that infrastructure. And carefully see, carefully balancing it out, switching between, what we believe is absolutely not necessary to do. And what maybe is, I would not call it discretionary, but it’s something where think about of stretching this further out and not having this high spend in 2024. 2024 is a critical year in our directs and IT investments because it’s the years – the year of the highest spending ‘24 and ‘25. So, we have to have that in mind, but we also need to manage now the situation, as I have said with the results we have shown to you, we cannot be satisfied and we need to address that.

Christian Obst: Okay. And in the end, there is some kind of flexibility to come up towards the low end of your guidance in the end to move some of these kind of OpEx into the New Year ‘25?

Christian Kohlpaintner: As I have said, there is many moving parts, right. It’s one is pure cost containment and addressing our SG&A cost and making sure that we reduce our spend here. The other one is, of course managing our margins. Price management is a core topic and I think Q1 was a bad example of how we should do it, we should not do it. And then it’s of course also of projects and programs initiatives you have planned for a certain year. But then you need to recognize that this, in order to safeguard our results essentially where you just need to reprioritize and that’s what’s happening as we speak.

Christian Obst: Okay. Understood. Thank you. And the second one is on your separation efforts. So, you started more or less at the beginning of the year with everything. So, what have you implemented or what have you done so far and what was the main surprise you recognized in these first steps?

Christian Kohlpaintner: I mean you are. No and I think Kristin can add to that. Maybe I will start with the surprises. Surprises are of course, that this are not surprising. But when you go to the detail of the disentanglement and how you basically go into the separation and what kind of parameters you need to define and what does it mean on the local level is quite complex tasks talking about for instance, with the 600 sites we are operating worldwide and making sure that we can disentangle those operations as we go forward. So, we discovered that, the devil is in the detail. As we say, that’s shown is many cases, that means you need to sort that out. I mean for me that’s not a surprise, but sometimes it is surprising of how many topics actually are identified. As we have said in our call, the teams have been staffed. We have a dedicated project organization working on that with KIA, dedication and but also separating this as much as we can from the operational business. And that’s the legal disentanglement detects disentanglement and should not be an excuse for our people to not raise it sharply, focusing on execution of our business and our operations. So, that’s where we stand at this moment. And we have also seen that we have already some spending our extraordinary items associated to that have helped. But we push for it because we are firmly believing that, we need to be faster here to make a decent thing that happen. And Kristin, again, maybe your views on that one as well.

Kristin Neumann: Yes. Absolutely enjoyed off what you are currently doing. We exactly make a detailed plan how to do it. And as I mentioned already, the 600 different sites, we plan which site goes into which division, the little entity structure and also decide here. Where do we need which entity and how to do that most effectively, that is exactly what we are doing right now, so we are in the detailed planning model.

Christian Obst: Okay. Thank you. And one last additional question related to that. You had these other special items in your net expenses coming from special items, which was €8 million and used that it’s – in some cases, it’s related to legal and qualitative separation of the two business units and it’s one-time expenses. So, what can we expect that these kind of expenses will go on and on quarter-by-quarter going forward?

Kristin Neumann: So, we have guidance at the Capital Markets Day with all-in-all, because together with the cost to achieve the cost out program, it’s very important to mention that. And also including the tax leakage will be €450 million to €650 million to offer again here that also includes the tax leakage. We have guided for this year to a low three digit million amount. If I look at it right now, I would rather say that this is a high two digit million amount towards lower three digit million amount.

Christian Obst: Okay. Thank you very much.

Operator: The next question comes from the line of Rikin Patel from BNP Exane. Please go ahead.

Rikin Patel: Hi. Thanks for taking my questions. I have got two, firstly, a follow-up on pricing. Christian, you mentioned that you are in the process of correcting pricing. Does that mean that we should expect sequential improvements in GPT units since Q2, or is that something which will be more weighted towards the second half? And secondly, last week, you announced the acquisition of Quimica Delta in Mexico. I think the business was reported to have sales in the high-three hundreds million dollar range in 2023, which would make it one of the larger acquisitions you are done in recent times, could you maybe give us a sense of the margin profile around that business? Thank you very much.

Christian Kohlpaintner: Rikin, thank you very much. Again, on the pricing, as I have said, we see moving parts in our pricing, our direct business versus our warehouse business. So, that’s in particular also in the Essentials business stabilizing, slightly going up. So, we probably see some effects here. On the Specialties side, there is still some pressure on the pricing side, which we are of course correcting now, as we speak. The good thing about our business model is that typically, we can correct those pricing topics, rather quickly, because we are not locked in with bi-quarterly or even a quarterly pricing scheme. So, I think the organization is fully alert about the importance of pricing and that we do not lose the margins we have established so far and to also using our strong position we have in that value chain. On Quimica Delta, yes, you are right, it’s one of the larger acquisitions which we have been doing in the past. We firmly believe that Mexico is an important space to be as we go forward for the next 5 years to 10 years. We see a strong chemical price as to chemical market in Mexico are rising and also about when you talk about the Americas in principle, and here I am talking about Canada and North America and Mexico in that sense. We are convinced that we need to play that strong position in Mexico which Quimica Delta gives us, we will be then the largest distributor in Mexico, I think strategically a very good move. On the margin profiles, I mean you will see it as we go forward, once we have close to the acquisition, that is something which follows our strict rules of the assessor target and what internal rate of returns you do expect from an acquisition, otherwise, we would not do it. So, as always, you can expect us to stay totally disciplined on that on the evaluation parameters and how we assess a certain target. But it has been now a good and important move for us in Mexico.

Rikin Patel: Okay. Thank you.

Operator: [Operator Instructions] The next question comes from line of Himanshu Agarwal from Bank of America. Please go ahead.

Himanshu Agarwal: Hi. Thanks for taking my questions. Good afternoon. The first question is on the guidance. Sorry, to come back to that. I just wanted to ask how much visibility you have into second half at this stage that would be critical to achieving the full year guidance. And also if you could quantify the contribution of cost containment measures, and which I presume to be back off weighted, so that’s the first one. And then secondly, if you can talk about the volume development, I know you have mentioned that such volume development has been sustained into March, April. But during the full year ‘23 call, you mentioned that we – still we need a few more months of data to confirm if it’s just transitory or an actual cyclical recovery. So, if you could give us an update on that, please.

Christian Kohlpaintner: Yes. I will let Kristin answer the guidance topic. On the volume development, I think I have said in the full year call, at that point of time, it was hard to distinguish between is it the restocking peak we are seeing or is it really marking the turning of the cycle often our four months into the year and also talking to how to the large manufacturers I would not put it under the short-term restocking peak. I would say this is on the lower level stabilizing sequentially improving volume demand, you saw it in the results of manufacturers that their results improved substantially sometimes because of better utilization rates of their capacity. And that has helped them to improve their margins, which again is not the case in our business. But nevertheless, you clearly see that the volume development is encouraging for all of them. Now, let’s see how long that will hold. In principle, we see encouraging signs and channel from the various industries we are active in that destocking, of course, has been completed for quite some time ago. And now what you see is really underlying demand. And therefore, we believe that as we progress further and using the momentum and the sequential improvement, we have observed over the last four months, that we believe that particular towards the second half of 2024, we will continue to see a gradual improvement in the volume demand. Key is and remains the pricing topic also for manufacturers, by the way. It is verse right price point in this market dynamic to very contrary, very dynamic, and very volatile environment we are operating in. And this is why we are all a little bit cautious in our connotation here. But nevertheless, we see that the clear demand pattern is changing in this turning compared to the years ‘23 and also to some extent 2022. Kristin, do you want to talk about the guidance topic again.

Kristin Neumann: Absolutely. So, on the cost topic, so what we see is that we will implement measures in the mid to high, to determine [ph] amount. But again, it’s important to mention here that it says it helps us to counterbalance inflation and also helps us to counterbalance volume building cost increases. That mean, in absolute terms that our costs will be lower compared to the year 2023. I think it’s important to mention that again.

Himanshu Agarwal: Thank you and just briefly on the second half with confidence into second half recovery?

Kristin Neumann: And do mean the visibility you felt reversed, first that you have…

Himanshu Agarwal: Yes.

Kristin Neumann: Okay. So, normally we have good visibility for six weeks to two months into the year. Yes, the visibility into the second half of the year is quite limited. But of course, we are also looking into main market data, which is available, but not directly visible from our side.

Christian Kohlpaintner: And if I may add, I mean we are talking to our key suppliers every day. And so they also –they look in their business. We also take their assessments into our consideration so we can share and we come to a statement like this. And I think this has been encouraging what you hear from manufacturers. All has been surprised by what we have indicated earlier already that the markets are more robust than a lot of people think. They have been also surprised about the first quarter development and also how April has continued into the second quarter. Now, again, and we are taking all those comments, taking all those assessments across industries, and talk from petrochemicals, to food and nutrition from farmer to personal care, we believe the condensed statement we can give here by having all those insights into all those value chains. The condensed comment is that we believe second half from a volume standpoint view better than the first half of 2024. And I have said it also last year already, if you remember, I said that the second half 2023 will be better than the first half of 2023 that materialized and also said that 2024 will be better volume than 2023. And I still stick to that statement, and now add to it that we believe second half 2024 will be also from a volume standpoint better than first half of 2024.

Himanshu Agarwal: Thank you. Just, if I may ask a quick follow-up please.

Christian Kohlpaintner: Yes. Please, go ahead.

Himanshu Agarwal: Yes. I just wanted to ask because you gave guidance just two months ago. So, what has changed since then, because at that time, you must have known about the pricing development in Q1 etcetera. So, what has really changed in the last two months?

Christian Kohlpaintner: I think it is indeed the pricing topic, which is currently I would say the most challenging topic to find the right price points and making sure that our gross profit per units are stabilizing and increasing again, and not just eroding away. This is what we have been fighting over the last weeks and months. And that I would say is a different difference from what we came to a conclusion when we formulated the guidance, which typically happens mid-February and February before we go out with the full year results. So, that was an early year, we were a little bit more positive on the price environment. And now as we have Q1 behind us enter into Q2, we see that pricing still is probably the most – is the most important moving part. On the volume side, again, we are actually fully in line with what we have anticipated.

Himanshu Agarwal: Thank you.

Christian Kohlpaintner: You’re welcome

Operator: There are currently no further questions, I will hand the conference back to you, Thomas.

Thomas Altmann: Thank you, Annika. This brings us to the end of the conference call. If you have further questions, please don’t hesitate to reach out to the IR team. In our Q2 results – our Q2 results will be published on August 13, 2024. Ladies and gentlemen, thank you very much for joining us today. Have a great rest of the week and good bye.

Operator: Thank you.

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