Brenntag Se

On the webinar, you may click the Q&A button on the left side of your screen and then click the raise your hand button. If you're connected by a phone, please press star followed by one on your telephone keypad. For operator assistance, please press the operator assistance button on the bottom left side of your screen or star zero on your telephone keypad. At this time, it's my pleasure to hand over to Thomas Altman, Senior Vice President, Corporate Investor Relations. Please go ahead.

Thank you, Mara. Good afternoon, ladies and gentlemen, and welcome to the earnings call for the third quarter of 2024. On the call with me today are our CEO, Dr. Christian Kohlpeintner, and our CFO, Dr. Christine Neumann. They will walk you through today's presentation, which is followed by a Q&A session. Our relevant documents have been published this morning on our website and can be found at brentak.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. Christian, over to you.

Well, thank you, Thomas, and good afternoon, ladies and gentlemen. I will start with the highlights of the third quarter 2024, followed by a strategy update, and, Christine, the details of our financial performance. In the third quarter of 2024, our results were again impacted by the highly competitive environment in which industrial chemical selling prices remained under pressure. Multiple geopolitical challenges, general uncertainties, and the lack of consumer confidence keep impacting the economic development. The chemical markets we are serving experience an extended bottoming out of the industry cycle. Despite declining chemical selling prices, sales for Brandtac in the third quarter amounted to 4.1 billion euros, which is 1% above the prior year period. Brandtac grew its operating gross profit by 3% to finish the quarter at 1.02 billion euros. and our operating EBITDA amounted to 281 million euros, which is a decline of around 5% year over year. The combination of our weaker operating performance compared to last year and the stable working capital led to a free cash flow of 247 million euros. This is below the strong free cash flow in the prior year period, which was still characterized by a substantial release of workplaces Earnings per share stood at 82 cents compared to 1 euro 18 cents in the third quarter 2023. EPS has been mainly impacted by the sale of Rajpetro specialties in India to improve our business portfolio and on which I will comment later. On group level, volumes are continuing to show the sequential recovery as predicted. However, due to the ongoing pressure on average selling prices and the highly competitive environment, a moderate decline in gross profit per unit compared to the second quarter of 2024 materialized on group level, but was quite distinct in both divisions. At the same time, our gross profit as percentage of sales continues to expand sequentially to now 25%, which indicates that we are managing our gross profit our advantage, despite the strong pressure from selling prices in the market. On a year-on-year comparison, the higher volumes could again overcompensate the lower gross profit per unit margins, but due to the higher volume-driven costs and inflationary impacts, we achieved an overall lower bottom line result. Christine will explain the moving parts in our cost development in more detail later. Let me say a few words on the outlook for 2024. In August, we updated our EBITDA guidance for the full year and indicated a range of 1.1 to 1.2 billion euros. Despite the ongoing challenges in the business environment and the extended bottoming out of the chemical industry cycle, but also based on our cost takeout measures and the encouraging start into Q4, we confirm our full year guidance. Before we have a more detailed look at the results for the third quarter 2024, I would like to provide an update on our Horizon 2 strategy achievements. Since the beginning of the year, we have been working intensively on the execution of our divisional strategies, which we presented to you at our Capital Market Day in 2023 last November. And we made good progress. We continue to execute the disentanglement of our two divisions in areas with the highest value creation and differentiation potential. At the same time, we are prudently managing our cost base and are executing our cost containment measures while focusing on running our business. We have reiterated frequently that BrandTag Specialties is focusing step-by-step on closing the performance gap to our pure play specialty competitors by a combination of short-term and long-term needs. Through short-term margin management initiatives, we were already able to optimize our pricing and purchasing structures, which is visible in a sequentially improving gross profit as percentage of sales, as well as our achieved gross profit per unit. We continue our efforts in this area through longer-term measures, like significantly upgrading our commercial excellence organization, having launched our brand tax specialties academy, As further long-term levers, we continue to optimize our business portfolio and specialties in multiple dimensions at the same time. These dimensions include, firstly, our portfolio of businesses residing in specialties, secondly, our geographical presence, thirdly, leveraging our industry segment approach, and last but not least, strategically developing our supplier base and thus our product portfolio. Let me describe some of the concrete actions that we already took in these dimensions. We have already refined our business mix with the move of water treatment, finished lubricants, and certain semi-commodities to Brandeis Ascensions. At the same time, we reviewed our geographical setup and have already carried out nine small country exits in BSP to focus on geographies, where we have enough critical mass to make a difference and have highest growth potential. We continue to scrutinize our footprint to create efficiency and positive impact on our specialty's results. We are also realizing first successes of our global industry segment setup by expanding existing supplier relationships into other regions, like, for instance, in our business unit nutrition from EMEA now to North America, Furthermore, we have upgraded our strategic supplier management and were able to score important additions to our supplier portfolio both from competitors as well as turnover businesses previously handled by suppliers in-house. In total, we have gained more than 25 new authorizations globally since the beginning of the year. As a tangible result of all these measures, we were able to improve our cross-profit in digit percentage sequentially. Also, the sales margin of BSP adjusted for seasonal effects continues to improve year over year. The year-to-date EBITDA conversion rate of BSP stands now at 38.4%. But let me at the same time also be very clear. Although we are making progress in improving the performance of BSP, we cannot be satisfied with the outcomes yet. Neither the speed of progress meets our own ambition level, nor do we start to close the performance gap to our peers. We have to accelerate and step up our efforts. Full focus on improving the performance of brand tag specialties is key. Ladies and gentlemen, in brand tag essentials, we are executing our so-called triple strategy, focusing particularly on our last mile service operations, LMSO, the performance cells to drive our business. We have designed now around 100 LMSOs globally, which will be steered under a harmonized performance framework through standard KPIs. We will increase efficiencies and reduce our network costs by consequently addressing underperforming LMSOs. We continue to optimize our global site network. In 2023, we successfully closed 29 sites. In 2024, we already closed additional 18 sites and intend to close also 29 sites in total by year end. Further shutdown measures are in progress or in the preparation phase. Also, in our essentials business, we optimize our business portfolio. In October, we sold Rajpetro Specialties in India, a non-core asset of Brandtac, to the company Shell. Raj is a manufacturer of finished lubricants and a blender of a comprehensive range of base oils, derivatives, products with two manufacturing facilities. After entering a joint venture with Raj by acquiring 65% of the company in 2018, we decided in 2023 to simplify the ownership structure through the acquisition of the remaining stake to provide the strategic flexibility for a clean and straightforward transaction structure, which we are now realizing. On a last 12 months basis, large federal specialties generated sales of around 250 million euros with an EBITDA margin below 1%. On top of it, the highly volatile earnings profile and the muted growth prospects led us to the conclusion to find a structurally better positioned owner. We decided to sell the business since we do not intend to run a highly volatile business with fluctuating margins and substantial manufacturing assets, which require a different focus compared to a distribution business. We are convinced that Raj can better scale his business by being part of a global and backward integrated manufacturer like Shell. The sale leads to an overall loss of around 63 million euros, which has already been incurred in Q3 for the most part, and which is recognized in special items below operating EBIT A and in amortization. We also made good progress in terms of M&A, on the one hand, strengthening our industry segments and specialties, and on the other hand, setting up the toll gates, which are strategic locations with deep-sea port access, in which are required to bring the triple strategy of essentials to life. In total, we have signed six acquisitions with an enterprise value of around 360 million euros year-to-date. Brentax Specialties, for example, signed in Q3 and closed on October 31st the acquisition of PIC and Pharma Special in Brazil. The transaction expands Brentax Life Science business in one of the largest global markets for personal care and pharma products. We already closed two acquisitions in Q1 and signed the purchase of Kimica Delta in Mexico, which we also recently closed on October 31st. On top, we closed also in Q3 the acquisitions of Industrial Chemicals Corporation in North America and Monarch Chemicals in the UK. Ladies and gentlemen, let me also briefly talk about our sustainability achievements. Our unique and innovative carbon emissions calculation tool called CO2 Explorer has reached the next important commercial step. We recently announced the launch of an online version for our customers in Europe. While the CO2 Explorer already has been used at Brandeis internally to provide customers with comprehensive product carbon footprint data, the now introduced CO2 Explorer on demand to be used directly by customers themselves. It allows companies to assess and manage their carbon footprint more effectively and calculate CO2 emissions across the entire supply chain, including transportation, warehouse, and packaging. The CO2 Explorer was recently awarded the prestigious ISIS Best Digital Innovation Award 2024. In addition, we recently announced the pioneering step in our ambition to make our product portfolio more sustainable. We now offer 100% sustainably produced caustic soda in the Netherlands and Belgium as the first distributor in the region. These two countries in EMEA are the first ones with more regions likely to follow. Both achievements clearly demonstrate our leadership in sustainability in our industry. We also made good progress with our digital data and excellence program called Dydex, and Christine will elaborate on our achievements and our investments in these areas later. After this update on the ongoing execution of our Horizon 2 strategy, let us now look at the future strategic path of Granter. We have communicated our strategic way forward to move to Horizon 3 at our last capital market day in November. including our ambition for a step-wise disentanglement of certain parts of our company to create the full and future optionality beyond 2026. While executing our strategy and further performing various design phases, we concluded that it serves the interest of our shareholders best to focus fully on our Horizon 2 strategy and on our performance improvement path. We will be leveraging our existing setup as one BrandTag with two differentiated divisions, serving the distinct needs of our customers and suppliers, supported by a lean joint services backbone. Our decision is based on the following rationale. Firstly, BrandTag Specialties is not likely to close the performance gap to our PUPIP years before 2027. Its supply partner and product portfolio stems from Brandtac's full-line distributor legacy and has been less strategically developed towards the higher value end of the portfolio in our life science and material science segments. Although we are consequently addressing this in our Horizon 2 strategy execution as described, it is currently significantly inferior to the portfolio of our pure-play peers, which is visible in terms of gross profit growth, conversion ratios, and EBITDA margins. A valuation re-rating is not going to materialize short-term. Secondly, a full legal and operational disentanglement will lead to a very high one-off cost on which we guided you already during our CMD last year. Thirdly, running dis-synergies identified would add approximately an additional 90 to 120 million euros of costs to our cost base. And lastly, we need to focus on performance improvement in both of our divisions, in light of the currently challenging market environment, driving our operating gross profit growth, lowering our underlying cost base, and thus improving conversion ratios and EBITDA margins. As a consequence, we are convinced that a premature split into two companies and a potential separation of Brand X specialties does not provide the desired value creation to our shareholders before our extensive homework is not done. Based on these priorities, we amend our disentanglement part as presented at the CMT last year and pursue a targeted disentanglement while minimizing dis-synergies and one-off costs. This means we continue to disentangle the customer and supplier facing front end in our divisions, creating fully separated sales teams, including now also separated global key accounts and a fully dedicated divisional supplier and sourcing management, as well as separated supply chain capabilities, including service level agreements between both divisions at arm's length. We will also continue to optimize the legal entity structure in areas where a disentanglement can be easily achieved, creates more transparency, allows for better steering, and does not create further or only minimal dis-synergies. As an example, we intend to continue with the legal entity simplification and harmonization in the United States, in China, and potentially in Germany. we continue to execute our small country exits where we lack critical mass. At the same time, we maintain our strong joint backbone of last mile service operations and back-end support functions to harvest the maximum amount of synergies. Consequently, our initial one-off cost assumptions for the disentanglement and the achievement of our cost-out measures will be significantly lower moving from 450 to 650 million euros to around 300 million euros. With more than two-thirds assigned to accomplish our ambitious cost-out target, which Christine will allude to now in the following section. She will provide insights into our strategic cost-out initiatives before a review of our financial performance in the third.