Brenntag SE (BNR) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome to the Brenntag SE Q2 2026 Results Call and Live Webcast. Please note that the call will be recorded. [Operator Instructions] I'd now like to turn the call over to Andre Simon, Senior Vice President, Corporate Investor Relations. Please go ahead.

Yes. Thank you, Jenny. Good afternoon, ladies and gentlemen, and a warm welcome to our second quarter 2022 call from my end as well. On the call with me today is our CEO, Jens Birgersson; and our CFO, Thomas G. As you have noticed, we have changed the procedure. We made available a prerecorded video of the management presentation this morning together with all accompanying materials in the Investor Relations section of our web page. With this, we want to give you more time for preparation and the possibility to handle potential overlaps with other earnings calls. Consequently, today's call will focus exclusively on answering your questions. A replay of today's Q&A session will be made available on our website shortly after the call. And before we begin, please note our safe harbor statement, which can be found at the end of our analyst presentation. With that, I would now like to start the Q&A session. Jenny, please open the line for questions.

[Operator Instructions] Our first question comes from Suhasini Varanasi from Goldman Sachs.

Two from me, please. Can you perhaps discuss the volume trends in Essentials and Specialties in 2Q and in July? It looks like maybe volume trends got a little bit better in Specialties. Maybe could you provide some color on customer behavior and contrast that with what you're seeing in Essentials? The second question is on your working capital. It looks like it was a heavy investment in working capital in the second quarter, but you also talked about some unwind in 3Q. Have you seen any product shortages that are causing you to maybe build up a little bit on inventory? Just some color there would be great.

Okay. Thank you. So I take the first part and then Thomas takes the net working capital section. So volume trend without going too much into detail, we basically see it holding steady. we don't see an uptick and don't, at the moment, expect any big changes. And that's part of the reason for the up guidance because we also conclude that this harmas, the Middle East crisis in one way, it has become normalized, but so has the oil price and so has the cost situation among our customers. So we haven't seen anything change so far. I can't conclude that it's a more positive environment either. It seems to continue and then we take it month by month. As you know, we have no backlog. If we compare specialty and Essential from a volume perspective, Specialty have kind of the the top performer on the material science that we mentioned in our release. And I think that is market driven. Then on the Life Science side, we are doing quite good progress in the different Bs with maybe one exception on Nutrition, where we haven't seen so much cost increase on the sourcing side. So not much price pressure yet on that side. And then we generally don't see volumes up on the same -- we are not progressing on sitting flat on that one. I haven't seen a big change. And we are still repairing a little bit in the U.S. where we have some acquisitions that have been problematic a couple of years back. So we are repairing that. But -- and if the volume -- and the volume increases on the specialty, I would also say, when I look at it, material science is clearly helped by the market, and they're doing a good job. And the sales efforts in specialty and there are a couple of things. First of all, we are less strict with -- we don't look so much at competition. We look at ourselves and we play to our strength, which means that we are a little bit less focused on gross profit per tonne, focus on gross profit. We focus on customers. And then we start to see the first results of of also making use of the essential platform, the essential salespeople on smaller customers that we are working with. So those play together to the volumes we see. And nothing much of that is market-driven outside material science. It's more self-help. Over to you, Thomas.

Thank you, Jens. Yes. So I'll now answer the question actually on working capital, cash flow a little bit. So I think what's worth noting, first of all, is that this increase in working capital is what I would call actually a temporary technical effect. And I'll explain a little bit more why I actually see it that way. So the outflow from working capital in the second quarter was EUR 353 million. However, in such a strong growth situation, -- this increase is quite normal. We've seen that in the past happening actually as well in the history of Brenntag. So we have seen total sales increasing by about 11%, a bit stronger in BES, but evenly actually quite strong in BSP. I think that's worth noting as well with a 6% increase in that space. Inventory increased very much in line with that. So at about 11.8%, even slightly below, by the way, what we would see on ASP at this point in time. So overall, then accounts receivable, accounts payable really increased overall as well, but in line with each other. So the main impact that we are seeing is here really coming from the pricing side of our inventory, and we have not seen a significant volume impact at all in our inventory. So we -- and this is actually partially answering your other part of the question as well. We haven't seen significant product shortages and have been able to continue to safely deliver to our customers, really fulfilling our purpose as a distributor. And if you look at some other KPIs, we've seen the working capital turns improving to 7.5x, which is confirming that we are managing our working capital very efficiently and effectively. And also worth to note that this temporary technical effect I was talking about actually has reached at the end of the second quarter already its peak so far and that evenly with the continuous positive start to the third quarter that we actually see on other KPIs, as we have actually indicated already in our release, we see that this peak actually is coming down into the third quarter as well. So in summary, as I said, very much a temporary technical effect of this increase in working capital driven by mainly the price effect and absolute BAU in line with our sales increase and improvement.

Our next question comes from Martin Roediger with Kepler Chevreux. .

Yes. Three questions actually. The first is for JensBergerson, -- just a clarification question to your previous answer. I understand that the volumes have been flattish year-over-year in Q2; however, I understood from your first atos on the 22nd of June that you might have benefited like several other players from some prebuying by customers in Ag. Did that high demand in April softened in June so that the in months have leveled off each other.

Yes. Let me take that question. So the way we see it, it's always hard to assess this, and we try to be quite disciplined with our own inventory, as Thomas explained. And we generally see that across the industry. So in April and also to some extent, the last half of March, you saw our customers, they have been used to ever falling prices. And therefore, they were on just in time, always wait with ordering. And then we saw an uptick, say we had 4 to 6 weeks of buildup of inventory. But our take on it is that they have gone up not to a very high -- to a normalized level where I think based on the assumption is that pricing could go up, they -- many of them expect the pricing to go down a bit, but the uncertainty in the market is there, and they're not going to sit on the permanently low level. So my take on it, and it's hard to know whether you're exactly right on this, but I discussed with a lot of customers the topic. I would say it's a normalized level and no sign at the moment that they are offloading it. And I don't think we sit on an inventory bubble. That will be my summary.

And my second question the war in the Middle East has been positive for you in Q2, thanks to your defensive business model, you're leading positioning your price discipline, et cetera, et cetera. but it seems we have wars, which lasts longer than initially expected, started with Ukraine now the Middle East. If this was last couple of years from now, -- would you see that as net positive or net negative for printer?

Yes. Good question. So first of all, what the general assumption we have, it seems to be very it seems to be easier to start a war than to finish a war. So our base assumption is that they continue. I think the volatility element of them the market gets used to it. Somehow the old is getting there. So our assumption is oil will stay on [indiscernible] shipping rates will be up, and it's kind of staying there. So I would say for us, we have less impact of the volatility, but we are playing on a higher price level on the sourcing side. And we see that to keep on. Then in terms of iiwa stops, then we get into macro economics. For me, for example, I wonder I would think it's a good thing for European for the European economy if to grammar stops, right? So that one I think is a positive if they would end. And the [indiscernible] one, we would probably assume that, that lower the cost a little bit and then our margin or the gross profit we make will contract because higher overall price levels are better for us and a little bit of the volatility better for us. So it's not a clear-cut answer, but Ukraine, I clearly see as a positive if it then for European for the European economy, and we will benefit from that.

Thank you. And my final question is for Thomas Reisten. The personnel costs have rocketed in Q2 year-over-year and quarter-on-quarter. And this is despite the fact that you have reduced your workforce as part of your cost savings program. Can you explain what is the ordinary inflation effect on the personnel expenses and what was due to higher provisions for the bonus payment for beginning of next year? And as a follow-up to that, is the Q2 number for the personnel costs, a good proxy for Q3 and Q4?

So we've actually been into the second quarter, still clocking actually, to some extent, some inflationary trends that actually have been coming from salary cost increases actually over a year ago. That's one point. Nevertheless, the bulk of the increases is actually driven by higher bonus provisions. I mean, remember, towards the end of the second quarter last year, it became relatively clear that overall, we would be missing actually the guidance at that point in time. So -- as a consequence, bonus provisions at that point in time even went down. So what we are now facing is that we are taking bonus provisions not only up to the expected value. You remember, at the beginning of the year, we issued actually the initial guidance, and we've now increased this. So overall, we've been quite transparent that there's bonus provisions and other effects in the second quarter of about EUR 40 million in. The vast majority of that is actually coming down to bonus provisions, sales incentives and other topics. So that's quite a significant increase that we are digesting as a consequence. And this is very much in line, as you can imagine, with what we actually have said as guidance in terms of actually the midpoint of that guidance as well. So this is then what you could actually take as well for your model to take that as a value in order to obviously normalize for this going forward. We will continue to build bonus provisions at a higher level if the performance obviously continues to be at a positive as we are expecting this. But we doing that until the end of the year and then obviously, the new budget and new target actually will come. So this is really what you have to take into account overall salary cost inflation, is very moderate from year onwards because we've been quite, let's say, conservative with those increases and really managing inflationary costs on -- salary costs and people-related costs as well. And then the other aspect, keep in mind, we've reduced over 800 people year-on-year already, and we continue to accelerate our savings program. which comes quite a lot from Italy almost entirely from structural savings initiatives, reaching a run rate of EUR 41 million, and a lot of that is actually people-related costs at this stage. So we continue to accelerate that into this year, and you can expect that to flow through as well.

I just wonder how much emphasize one -- just to add 1 thing to sum it up, that there are a couple of things happening to the personnel expense, the base of the -- the 1 is that we are reducing quite a lot of management layers. So that means the average -- that helps the average. And then due to looking at the previous years, we had been I would say, a couple of years above market, and this year on the salary increases for 2025 and up until spring, we have been extremely tight to kind of set it more in line so that it's right over a few years. So the salary increase for the last 12 months or 9 months has been very conservative.

Our next question comes from Annelies Vermeulen with Morgan Stanley.

I have 2 questions, please. So firstly, just to follow up -- come back on the working capital point. Could you confirm, did you book any inventory gains in the quarter, i.e., where you sold inventory at higher pricing than where you purchased it? And if so, could we see a reverse of that in Q3 if prices come down and you're left with higher cost inventory? And then my second question was on the special cost items in the quarter, which were up quite a bit year-on-year. I think, as you said, that's mainly head count restructuring, but how do you those to trend in Q3 and Q4?

Okay. I think that's for me. If I'm not mistaken, those questions. So on the inventory buildup, I think -- I mean you are targeting on your question here, and let me briefly confirm that is actually asking whether we have been selling lower cost inventory at the beginning of the quarter. And then obviously, replenishment of this inventory came in at higher prices actually towards the end of the quarter. So as a consequence, having actually a higher gross profit margin initially, and then that actually to moderate down, I would say, later in the quarter. That is true, obviously, because we've had actually this lower cost inventory. Nevertheless, even now with this being -- with the replenishment costs coming through, we are seeing actually positive trends still emerging into the new quarter and towards the end of the second quarter, actually as well. So overall, you will see -- and this is even 1 other aspect that you with regards to the working capital, that on the accounts receivables side, you actually have initially higher effect than you actually have on the accounts payable side. I know over time that actually catches up after a few weeks where you actually then have a bit of a balance, actually, that is coming out of that. But which is one of the reasons why we see an improvement into the beginning of the third quarter actually as well giving you another layer of detail on working capital movements. And gross profit, we still continue to see into the third quarter despite the replenishment costs going up, a positive impact and we've seen that as well towards the end of the second quarter. In terms of Q3 and Q4, if we look at the guidance, I mean, you will have recognized that -- maybe the second half is not actually assuming as much overperformance versus the previous year. That's very true. So the underlying assumptions that we have put in there for the midpoint are that over the third quarter, we actually expect gross profit to somewhat actually moderate step-by-step actually down. And then the fourth quarter, maybe conservatively is actually at a relatively similar level to the previous year. So there's opportunities and risks that are attached to that, that Jens did talk about already. which is related to, on the 1 hand, if actually this conflict lasts longer and inventories or respective availability of product actually will continue to be scarce and oil prices will actually remain higher, that might actually pose an opportunity for us next to the underlying initiatives continuing to actually gain that. And then on the risk side and in our previous increased guidance, we were emphasizing on that a bit more than we do today. If we actually see demand destruction happening, which I really underpin. We haven't seen a sign of at this point in time. Instead, actually, volumes are flattish even with a good improvement on the -- with the sequential improvement in both areas. And and [indiscernible]. And year-on-year, you see actually BSP very positive and only maybe slight decreases on the best as Jens actualy has said. Only FCC demand destruction happening, we might actually move down on that towards the low end. I hope that gives you a little bit of guidance on that.

Our next question comes from Tristan Lamotte with Deutsche Bank.

The first one is just a bit of a follow-up from what you just said. I just wanted to check as a kind of -- to me, it seems like a kind of conservatism in the guidance given that 1.45 implies 68 in H2, having done 7.17 in H1. You just on 4.63 in Q2. So you could get to the top end with a big drop down in Q3 to 3.80 and then a 300 in Q4. So I just want to understand, -- is that kind of conservatism? Or are you really seeing that level of quite extreme drop quarter-on-quarter? Maybe leave it there for the first question and come back in the next.

The level of clarity in terms of the market environment is obviously not really improving at this point in time, right? So we -- what we can say is that we haven't seen signs of demand destruction happening at this stage. And what we can say as well is that we have benefited from the higher pricing environment. that benefit, as I've discussed on 1 of the previous questions is obviously higher initially in the second quarter than it will be in the future, definitely. So that is actually coming down in the third quarter. question is, is it actually going to continue to be there, given actually oil price development, given actually opening or closing of the [indiscernible] and in fact, as well, is product availability, feedstock availability going to improve that rapidly and the production is going to improve that rapidly when some of the manufacturing sites are still affected by this. So I mean, it's hard to predict what we are actually expecting at this point in time is really what I've said is a decrease of the benefits sequentially month by month into the third quarter and then this to level out at similar levels compared to the previous year in the fourth quarter. If that happens, is obviously a question of what I've just been saying in terms of the market environment.

And maybe second question kind of linked. I'm wondering a little bit about mid-cycle EBITDA, which gets more difficult to think about when we have these kind of quarters of overearning. But I just wanted to understand like in terms of thinking about mid-cycle EBITDA, is the kind of Q1 '26 plus EUR 20 million of retained cost savings after this year, I think if you do your EUR 150 million in routine half -- is that kind of a fair way of thinking about a mid-cycle EBITDA? Or how would you think about that from here? Like is the 2025 level of about EUR 1.3 billion? Is that like a fair starting point?

Obviously, we do have quite a few initiatives that are starting to actually have results that are affecting our overall earnings as well. So we do have improvement in commercial execution. We have improved customer penetration, penetration pricing discipline. The cost reduction program is actually giving us results as well. And I think what we've shown there is that the reason why you don't see this coming in as net savings at this point in time, I mean, to some extent, the previous question on the overall bonus provisions that we are taking, which is an effect of this over performance that we do have. And on the other hand, then as well, the temporary effect of energy and transport costs, given the Middle East effect is there. So what I'm saying is there's underlying effects that are helping us already from our strategic initiatives. And then on the other hand, there are over earnings, but the cost reduction program actually will be showing net savings into the future for sure. Because when you have actually the GP decreasing, you should assume as well that the over costs are actually disappearing and as well on the -- on the energy and transport costs, fuel costs actually as well. As a reminder on those costs, we are having the ability and we use it to pass this through gross product as well. So the technical effect is you see that higher in OpEx, but we actually get these benefits in the gross profit. So in summary, initiatives starting to produce positive effects. And then on top of that, it's not all market volatility.

Makes sense. And then maybe just last one. Are you concerned about the water level for Orion. And is that something that presents opportunities? Or is it more of a kind of risk.

We don't see it as a main factor. A few years back, there was a situation where it was really tight. I think the industry has learned to deal with it. You have more contingency plan, and we don't see it impact. We took an extra round with the businesses to check on that. And at the moment, no 1 worries a lot about that.

[Operator Instructions] Our next question comes from Nicole Manion with UBS.

I think you just touched on this in the previous question actually, but I just wanted to come back to it. If I look at your outlook commentary today compared to the TOT release in June, at least in the quality sense, it does seem like there's a bit more constructiveness there, as you said, not just about the environment, but also on the commercial side. Can you talk a bit more about the specifics of what you mean there and what gives you sort of confidence that you can split that out from the environment? And related to that, obviously, the cost out program is 1 element of this. looks like it was sort of fairly strong. I think you've talked about this as a program out to 2027. But I just wondered if there's any more details at this point on kind of the phasing of it through the rest of this year in terms of how you think about sort of splitting that total amount of '26 and '27?

So let me answer that, and then Thomas can add. So on the commercial side, I think we need to get used to that to get growth in many segments. If you don't have industrial, the link between GDP growth and market growth in chemicals, it's not a hardwire link. I think it's quite disconnected. So level of industrial production drives a lot of the demand -- and I think we, as a distributor, we have to get used to getting growth with market share increase, growing with customers that see the value maybe shifting some of the noncore sales over to us in the mid and low end selling get better than that. So a lot of volume growth will have to come with on the specialty side, innovation, customer proximity. And in our case, also the fact that we are full line that we can leverage all the sales people we have. And what I see is that is starting to happen to kind of build a commercial machine and get the people out in the street. What we see now on volumes in the market environment is in my mined, a lot of that improvement is because people are selling more. We are working better together. We worry less about the split. We are starting to correct motivate people better, it's still a big job to work our sales incentive. And if you look, for example, at the pharma business, we have had quite a lot of success in having the domain experts focus on the big accounts and then leverage essential salespeople to help opening doors to come maybe where we were not so active. So I think there is a big self-help element and that has to continue. And I think the underlying approach to growth in, for example, Europe will be that we need to really, really be good at selling at cross-selling, upselling data about the sales, seeing the trends. And also the pricing. We have started in the quarter. And I don't want to AI wash anything. But for example, we have started now to us some. It's actually been quite some good work on AI and pricing. And we start to apply these things. We also start to apply now customer information, analyzing our customer interactions with AI. And there's so much left to do on that front. With our scale, if we can find this balance. I think that's the main growth element in our business. What was your other aspect of that question?

It was around cost actually and expectation, what is in the second half?

Okay. Over to you...