Brenntag SE, a global leader in chemical distribution, announced its second-quarter earnings for 2024, showcasing a mixed financial performance in a competitive market. Sales reached approximately €4 billion, a slight 2% decrease from the previous year, while operating gross profits saw a modest 1% increase 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 gradual improvement in demand to continue into 2025 and maintains a cautious yet stable outlook for the rest of the year. Key takeaways from the report include sales hitting around €4 billion, a 2% decrease year-on-year, operating gross profit increasing by 1% to €1 billion, and operating EBITA declining by 10% to €297 million. Earnings per share were recorded at €1.03, down from €1.23 in Q2 2023.
The company anticipates operating EBITA for the full year to be in the range of €1.1 billion to €1.2 billion and has implemented cost reduction measures and site closures to target a €300 million cost takeout by 2027. Additionally, Brenntag has made five acquisitions in 2024 to strengthen its presence in key industries and geographies. The company also received EcoVadis Platinum status and improved its ISS ESG Corporate Rating to B-.
Looking ahead, Brenntag expects a challenging business climate for the remainder of 2024, with sustained pressure on pricing. The company aims for a stable gross profit per unit, focusing on margin management and cost reduction to achieve full-year guidance. Brenntag projects a sequential demand improvement into 2025 despite the ongoing challenges.
Some bearish highlights from the report include declines in operating EBITA for the life science and material science segments, as well as a 30% decrease in operating EBITA for Brenntag Essentials. Free cash flow was reported at €158 million, lower than the previous year, with net financial liabilities at €2.9 billion and a leverage ratio of 1.9 times net debt to operating EBITA.
On the other hand, 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, and the company expects pricing dynamics to change favorably in 2025.
Despite facing challenges in the market, Brenntag SE remains focused on executing its strategy and increasing divisional autonomy. The company’s next quarter results are scheduled to be published on November 12, 2024. Consequently, the group’s operating second quarter EBITA showed sequential improvement. Despite higher volumes slightly offsetting lower gross profit margins per unit on a year-on-year basis, overall results were lower due to increased costs. Kristin will provide a more detailed explanation of our cost developments later on. Measures have been implemented to enhance efficiencies, reduce operating costs, and mitigate inflation-driven cost hikes, aiming for a €300 million cost reduction by 2027, as outlined during the Capital Market Day in December 2023. We are actively evaluating cost-saving opportunities across the organization, including operations, SG&A, DiDEX, and IT expenses. Following the first half of 2024, we are intensifying and expanding our cost-saving efforts and strategies, while also optimizing our global site network by closing sites. Market trends and recent observations in the chemical industry indicate a continued competitive environment with pressure on selling prices, leading us to adjust our outlook for the remainder of the year. Sequential volume recovery and stabilized gross profit per unit in the second quarter were positive developments, but we anticipate a more stable gross profit per unit in the second half of the year, along with slightly less supportive volume growth. Consequently, we now expect operating EBITA for 2024 to be in the range of €1.1 billion to 1.2 billion. M&A activities in 2024 have seen the completion of five acquisitions, totaling around €340 million, aimed at strengthening key industries and geographies. Sustainability remains a key focus for Brenntag, with recent achievements in EcoVadis Platinum status and ISS ESG Corporate Rating. Strategy execution continues despite market challenges, with a focus on increasing divisional autonomy, disentanglement of operations, and continuous cost optimization. Kristin will now provide a detailed overview of our financial performance in the second quarter of 2024. Additionally, the acquisition of Solventis only impacted our operating EBITA for one month due to the June closing. In the second quarter of 2024, the group reported an operating EBITA of €297 million, a 10% decrease from the previous year. Organically, operating EBITA declined by €42 million year-over-year. The EBITA conversion ratio for the group was 29%, down from 33% in the prior year. The challenging market environment and intense competition led to pressure on chemical prices, resulting in higher volumes but lower overall profits. Despite this, gross profit per unit remained stable compared to Q1 2024, thanks to margin initiatives implemented in Q2.
Brenntag Specialties reported an operating gross profit of €298 million, on par with the previous year. However, operating expenses increased partly due to M&A activity. Operating EBITA declined by 13% to €112 million. The life science segment saw a 14% decline in EBITA, while material science declined by 8%. The EBITA conversion ratio for Brenntag Specialties was 38%, down from 44% in the prior year.
Brenntag Essentials reported an operating gross profit of €730 million, slightly higher than the previous year. Operating EBITA was €240 million, 30% lower than Q2 2023, with an EBITA conversion ratio of 29%. Volumes increased in all regions except EMEA, offsetting lower gross profit per unit.
Overall, sales declined by 2% to €4.2 billion, while operating gross profit increased slightly to €1.03 billion. Operating EBITA was €297 million, with special items impacting it negatively by €21 million. Depreciation and amortization were higher than the previous year, while net finance costs slightly increased. Profit after tax was €151 million, with earnings per share of €1.03. In comparison to the prior year, the profit after tax was €189 million with earnings per share of €1.23. For more clarity on the operating expenses, an OpEx bridge is shown on Slide 10. In the second quarter of 2023, operating expenses were reported at €611 million. There was no significant impact from translational foreign exchange effects in Q2 2024. Operating expenses increased by approximately €25 million due to additional costs from acquired companies, DiDEX, and IT investments. Despite volume-related cost increases and wage inflation, underlying cost development was slightly reduced through lower variable personnel expenses and cost containment measures. As a result, operating expenses for the group were €642 million at the end of Q2 2024. The announced cost measures are on track, and efforts will be made to accelerate and expand cost-saving initiatives.
In terms of free cash flow, €158 million was generated in Q2 2024, a decline from the previous year’s record of €432 million. The decrease in free cash flow was due to lower operating performance and additional cash outflow for working capital investments. The working capital turnover was 7.8 times, reflecting effective working capital management initiatives. Net financial liabilities at the end of the second quarter were €2.9 billion, driven by annual dividend payments and cash outflow for acquisitions. The leverage ratio net debt to operating EBITA stood at 1.9 times.
Looking ahead, the business environment for the remainder of 2024 is expected to remain challenging, with uncertainty in the global economy. Market trends indicate sustained pressure on industrial chemical selling prices, leading to a more stable development on a group level. Operating EBITA for the financial year 2024 is expected to be in the range of €1.1 billion to €1.2 billion, with a focus on margin management and cost distribution. Sequential improvement in demand is anticipated for 2025, based on the general recovery of the chemical cycle and an improved pricing environment. The primary issue lies in the pricing of industrial chemicals, which is determined by large manufacturers and impacts the market compared to specialty manufacturers. This is due to the recovery of the chemical cycle, where volume increases lead to lower costs and higher margins for manufacturers. The distribution of these chemicals is mainly done by the manufacturers themselves, with only a small portion handled by chemical distributors. This pricing impact by larger players affects the market dynamics. However, this is expected to change by 2025.
Regarding the guidance, while there are uncertainties in pricing and cost structures, the company is confident in achieving better performance in the second half of the year. The sequential improvement in EBITA in Q2 was driven by strong performance in North America, both organically and through acquisitions. The company is cautious about pricing developments and is working to balance volume growth with margin management.
As for the financial costs and depreciation and amortization (D&A) expenses, there was an increase in Q2, which may serve as a benchmark for future quarters. The company is continuing with its cost optimization measures and expects these expenses to be in line with current levels.
Based on the increase in debt positions due to dividend payments, acquisitions, and higher lease liabilities, I believe that the current estimate is a good one for the upcoming quarters. However, it is important to note that there are various factors that can affect the financial results, such as ethics effects and the deviation of M&A liabilities for outstanding shares. From a pure financing cost perspective, yes.
Isha Sharma: Thank you both very much.
Christian Kohlpaintner: Thank you.
Operator: Your next question is from Rikin Patel from BNP Paribas (OTC:). Please go ahead.
Rikin Patel: Thank you. Firstly, regarding the outlook, the midpoints of the new guidance range suggest that H2 EBITA will be higher than H1. This is based on our expectation of a continued volume recovery and stable gross profit per ton. Additionally, positive signs in gross profit per unit for Specialties are also contributing to this outlook. As for cost containment measures, we have identified several areas, including reducing discretionary spending and slowing down the pace of DiDEX investments. These measures are expected to result in cost savings of a mid-to-digit million amount for the second half of 2024.
Rikin Patel: Thank you very much.
Operator: Your next question is from Rory McKenzie from UBS. Please go ahead.
Rory McKenzie: Good afternoon. In regards to average gross profit per unit, while there was initial pressure in Q1 due to market dynamics, we have seen improvements in Q2. However, the lower level of gross profit per unit may not be permanent and could be a result of manufacturers focusing on volume over pricing. As the market cycle matures, we expect margins to improve. Regarding the cost base, despite ongoing cost-cutting programs, SG&A expenses have been increasing. With the DiDEX projects now live, we anticipate being able to address legacy cost base more efficiently in the second half of the year.
Christian Kohlpaintner: Thank you, Rory. Kristin will address the cost base question.
Kristin Neumann: We have implemented various cost containment measures, including cutting discretionary spending, slowing down DiDEX investments, and addressing structural changes within the organization. These measures are expected to result in cost savings for the second half of 2024.
Rory McKenzie: Thank you.
In my opinion, the chemical recovery is currently in progress, with fluctuations month by month. It’s not a straightforward upward trend, but overall, the chemical cycle is gaining traction. Manufacturers are still skeptical in some areas, but it’s clear to me that in 2025, as capacity utilization rates increase, pricing will also follow suit. It may not happen exactly as predicted, but the industry will gradually move in that direction. Regarding costs, our OpEx is influenced by volume development and organic changes, with higher volumes leading to an increase in expenses. In the life sciences division, costs have gone up due to higher transport costs and increased personnel capabilities in the pharma sector. The increase in inventories is driven by higher volumes and acquisitions, which are preventative measures. As for gross profit per unit, we anticipate stability in the second half of the year, despite pricing pressure in Essentials. Legal costs have increased due to lawsuits stemming from past sales, and we are making provisions for potential future cases. We are actively defending ourselves against these cases and seeking indemnification from third parties when appropriate. However, the financial impact of these cases is still a pending issue on our P&L and balance sheet. As for the transport costs, we typically pass on increases to our customers, which can affect our cost base. The transport costs account for roughly 30% of our total OpEx in Q2. Regarding the disentanglement process, we initially estimated costs between €450 million to €650 million, with a significant portion related to taxes. We have since worked to lower the tax impact, so the overall cost may be lower than initially projected. As for the recent digital platforms, we have gained new capabilities and are leveraging them in our day-to-day business operations. In terms of July performance, while there have been challenges in the chemical industry, we have seen encouraging volume developments in both our Specialty and Essentials businesses. Overall, we expect a slightly positive improvement in earnings compared to H1, with the cycle in the chemical industry following a typical profile. Currently, we are in a phase where volumes are gradually improving, and pricing is not yet the determining factor for change, at least in my assumption for 2025 and beyond. Now, moving on to Kristin for another topic.
Kristin Neumann: Hi, Chetan. We implemented some products like the customer growth engine, salesforce, and supply chain planning and analytics tools to enhance our operations. These tools helped us make better decisions on product orders, optimize our working capital, and plan our cost of goods sold more efficiently. The customer growth engine also enabled our salesforce to be more customer-centric by providing automated suggestions for ordering, resulting in improved cost of goods sold. These initiatives highlighted the importance of allocating costs where the benefits are realized.
Chetan Udeshi: Thank you.
Operator: There are no further questions at this time. I will now hand the call over to Thomas Altmann for closing remarks.
Thomas Altmann: Thank you, Constantine. This marks the end of our conference call. If you have any more questions, please reach out to the IR team. Our Q3 results will be released on November 12, 2024. Thank you for joining us today, and have a great day.
Operator: This concludes today’s conference. Thank you for participating. You may now disconnect.
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