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Edited Transcript of BNRGn.DE earnings conference call or presentation 7-Aug-19 12:00pm GMT

Q2 2019 Brenntag AG Earnings Call

Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Brenntag AG earnings conference call or presentation Wednesday, August 7, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Georg Müller

Brenntag AG - CFO & Member of Board of Management

* Steven E. Holland

Brenntag AG - Chairman of Board of Management & CEO

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Conference Call Participants

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* Adam Samuel Bubes

Jefferies LLC, Research Division - Equity Associate

* Isha Sharma

MainFirst Bank AG, Research Division - Analyst

* Markus Mayer

Baader-Helvea Equity Research - Lead Analyst of Chemicals

* Raghav Bardalai

Exane BNP Paribas, Research Division - Analyst of Chemicals

* Rajesh Kumar

HSBC, Research Division - Analyst

* Rory Edward McKenzie

UBS Investment Bank, Research Division - European Support Services Analyst

* Steven James Goulden

Deutsche Bank AG, Research Division - Research Analyst

* Thomas Edward Burlton

Joh. Berenberg, Gossler & Co. KG, Research Division - Head of Business Services & Senior Equity Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the Q2 2019 results call of Brenntag AG. At our customer's request, this conference will be recorded. (Operator Instructions) May I now hand you over to Steven Holland, who will lead you through this conference. Please go ahead, sir.

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Steven E. Holland, Brenntag AG - Chairman of Board of Management & CEO [2]

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Thank you very much. And welcome, ladies and gentlemen, and thank you for dialing in for our Q2 results. As usual, I'm here with our CFO, Georg Müller. We're happy to answer your questions after the presentation. Having an already pre-released EBITDA in mid-July, we'd like to provide further details in the quarter today. Our operating gross profit rose by 4.1% to EUR 722.9 million. This reflects the organic growth in the business as well as a positive contribution from acquisitions. The operating EBITDA is in line with developments in the first quarter. Our business in food and nutrition had again developed particularly positive in this quarter. We grew the gross profit by a high single-digit percentage.

The operating EBITDA increased by 12.2% in the second quarter, reaching EUR 266.3 million. We are, of course, applying the new IFRS accounting standard on leases for the first time, which has a positive effect on EBITDA. On a frozen GAAP basis, EBITDA is on previous year's level.

The free cash flow increased by 21%, amounting to EUR 179.1 million in the quarter.

Also in the second quarter, we continue to execute our M&A strategy and stand to close further acquisitions. Certainly, you may all be surprised during the quarter, we had a slowdown in economic environment, which have impacted the demand situation overall. At the same time, many companies in the manufacturing industry are slower with a number of companies often reporting weak results. This situation together with a rather weaker first half of the year does not support our ownership view. The second half of 2019 will be much stronger so we can start in July to adjust the guidance for operating EBITDA moderately downwards. Now expecting operating net EBITDA to grow between 0% and 4%. As before, this range includes FX effects -- sorry, excludes FX effects as well as a positive impact from the IFRS leasing standard. I'll come back to the revised outlook during the course of the call.

And going to the operating EBITDA bridge showing developments of Q2 today, 2018 versus Q2 2019. In Q2, we had a positive effect from the FX translations of EUR 6 million. Acquisitions contributed around EUR 9 million in the reporting period. This number is net of the operating EBITDA associated with the Biosector business, which you may recall, we sold at the end of 2018.

The application with the new accounting standard on this year's results gives a positive effect on our operating EBITDA of EUR 28 million for the group. In EMEA, the organic growth was negative 4% as compared to negative 10% in Q1. And through a more challenging environment, the organic EBITDA in North America was down to around about 3%. Latin America showed -- ended a very positive quarter, and organic EBITDA growth at 23%. Our business in Asia Pacific is facing weaker demand and some cost challenges in China, which is reflecting in the organic EBITDA down to around minus 3%. Consequently, we closed the quarter with an operating EBITDA of EUR 266 million.

Into the segments and the sales, EMEA first. The economic environment in Europe continues to be very weak. We see a pronounced weakness, especially in those countries that expect high exposure to the automotive industry. All in all, we were able to achieve the same gross profit level as in previous year under these conditions.

As a result of flat gross profit and the slight increase in the cost base, organic EBITDA development was minus 4%. New accounting standard on leases has an effect of EUR 10 million from operating EBITDA in the EMEA region.

Within North America, in the North American economic environment, results solid in the second quarter. Current uncertainties are affecting some customer confidence, which are making our other customers more unpredictable. We attribute some of this uncertainties to market concerns around trade types. Nevertheless, our gross profit in North America grew organically and through the contribution from acquisitions. And no particular industries have stand out. But also in North America, the food and nutrition industry did well and our reposition continues to bear fruits, no pun intended.

The operating EBITDA declined slightly, again in organic terms. However, this is the first time we've seen in it several quarters. The effect of the application of the new accounting standard on leases amounted to EUR 30 million in the region.

Moving on to Latin America, where we recorded another very good quarter in Latin America. And we're very pleased with the significant increased gross profit and EBITDA in the second quarter. The IFRS 16 changes amounted to EUR 3 million for the region.

Moving to Asia Pacific. (inaudible) region. However, the general conditions do create a mixed picture. In some countries, we saw a slight growth in the second quarter. In other countries, individual industries experienced some slowdown. For example, in China, we saw products in the [build], coating to construction industry was significantly weaker during the period and throughout the market generally.

Overall, though, we're able to increase our gross profit organically and the acquisitions of recent months have made a significant contribution. On the cost side, we are facing some cost increases that are well within the typical range for emerging markets. As you know, the cost base in China continues to be a burden in terms of increased logistics costs. This is the fact that we are currently working on as we are building new sites in China, and many of you will be aware that it is the case. Information we expect on new sites in China come onstream in Q1 2020 reaching operating EBITDA of around 25%, which was also driven by initial application of the new accounting standards on leases. The effect of EUR 3 million from the quarter.

Coming to acquisitions, (inaudible) in terms of acquisitions and deals. During our last conference call, we already talked about Tee Hai acquisition in Singapore. In the meantime, we closed the transaction and acquired a 51% stake. Achieving interesting acquisitions in North America with Marlin. We're strengthening our range of value-added services and it's a company that specializes mainly in mixing liquid and powder products. And B&M again in North America was a lubricant division, which we've been continuously expanding in the region over the last year.

Neuto is establishing -- is a well-established chemical distributor in Taiwan, which will strengthen our presence within the country. In addition, we have 2 small transactions in South Africa as we acquired remaining 50% of the joint venture of Crest Chemicals, which will be in full consolidation on the closing date. Second, we acquired Chemgrit, a distributor of specialty chemicals focused on the cosmetics and cleaning sectors.

In total so far in 2019 -- June 2019, we have a total enterprise value of around EUR 200 million spent on acquisitions thus far.

And I'd like to hand it over to Georg.

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Georg Müller, Brenntag AG - CFO & Member of Board of Management [3]

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Good afternoon. I would like to talk you through our financials for the second quarter 2019. We addressed cost profit and EBITDA already. So I'll move to the P&L lines below EBITDA that you'll find on Slide #12. Depreciation in the second quarter amounted to EUR 59.8 million, and that is significantly higher than in the previous year. The increase in depreciation is mainly attributable to the first-time application of the new accounting standards on the financial result amounted to a net expense of EUR 24 million. Earnings per share amounted to EUR 0.81, and this compares to last year's earnings per share of EUR 0.76.

We spent some time on the cash flow statement, starting on Page 13. Operating cash flow in the second quarter amounted to EUR 145 million and was approximately EUR 70 million above the cash flow -- operating cash flow of previous year. So this is a quarter with a pretty strong cash flow. The significant increase is mainly due to working capital. The outflow of working capital in the second quarter 2019 was significantly lower than in the second quarter of 2018.

With respect to the investment and financing cash flow on Page 14. CapEx in the first quarter was on last year's level and amounted to EUR 40 million. In addition, we spent EUR 55 million on acquisitions in the second quarter. So most part of this relates to our acquisition of Tee Hai in Singapore.

In the financing cash flow, the dividend payment from June is particularly noteworthy. After the General Shareholder Meeting, we paid a dividend of EUR 1.20 per share, which corresponds to a total cash out of EUR 185.4 million.

And coming to our free cash flow presentation on Page 15, the free cash flow amounts to EUR 179 million in the second quarter and that's 21% higher than in previous year. It should be noted that we have adjusted the definition of free cash flow appropriately in order to ensure comparability with previous years. Free cash flow now also includes leasing payments, which are reported in the income statement below EBITDA.

So the last thing, balance sheet and leverage. Net debt amounted to EUR 1.9 billion, excluding lease liabilities. The increase compared to the end of the first quarter is mainly attributable to the dividend payment of EUR 185 million. The leverage is at 2.2x. Trade working capital amounted to around EUR 1.9 billion at the end of the second quarter, and the working capital turnover stood at 6.9x for the quarter.

I'll turn the presentation back to Steve for the outlook section.

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Steven E. Holland, Brenntag AG - Chairman of Board of Management & CEO [4]

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Thank you, Georg. So I'll start with the current trading and then address very briefly the outlook for the year. So in terms of the trading numbers, we just showed a slowdown which we talked about. In April, growth was 5.6% and 3% organically; May was 5.4 and 2.5% organically; June was 4.7% and 1.8% organically; and July is 3.1% and 0.5% organically.

In terms of the outlook, clearly in July, we adjusted the outlook for 2019. And we expect our operating EBITDA to grow between 0% and 4% in 2019. The growth rate on an FX-adjusted basis will include acquisitions. Also, this growth is understood be on a frozen GAAP basis. The range, therefore, is an operational range of EBITDA for 2019 between EUR 995 million and EUR 1.03 billion.

And I think at that point, we can probably open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Rory McKenzie, UBS.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [2]

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It's Rory here. And 3 for me, please. Firstly, in terms of that tough backdrop that clearly got worse for you in June, July, was most of that in North America? And can you expand more about your comments on how the trade war uncertainty has spread to your business? We normally think about you guys as being quite resilient and exposed to kind of a broad range of markets. So where exactly have you seen that impact in North America?

Secondly, on the costs in EMEA. It looks like the cost inflation is going to come down a bit in Q3. And you talked about, in particular, pushing on real estate costs to reduce that there. And is there still more that you think you can work on through H2? Or is this the right run rate to think about? And then lastly, just on working capital. Are there any prospects for a 1 capital inflow through H2, given the falling chemical prices?

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Steven E. Holland, Brenntag AG - Chairman of Board of Management & CEO [3]

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Right, okay. Just in terms of the comment on the trade test. I think I was more a comment on customer confidence, where there's certain customers who are having issues with exporting to China, where their exports clear to get to China, to which of course previously they weren't. We also have some aspects or products which were previously being sourced in China and (inaudible) United States, which are more expensive than those in this location, the supply chain in that respect. I mean I wouldn't say that this is particular Brenntag affecting issuing other than there's a lack of a momentum in customer demand at this stage. And there's certainly some concern to the supply chain. But I wouldn't say it's pointed particularly as a Brenntag issue directly.

In terms of costs, in terms of EMEA, for a start, you're right, actually, in terms of the overall question of EMEA changes scrutiny, and we are now seeing a sequential reduction in transport costs in the EMEA region, which by no means the final stage of that process. And we expect to see some further improvement in the next 2 quarters in transport costs for the EMEA region. Equally in North America, some cost issues relative -- to correspond on some North American cost base, which we are looking at, particularly the reduced guidance that we've given you. Clearly, the cost, our focus for the whole group, and we are rolling out certain initiatives to attack that as a principal.

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Georg Müller, Brenntag AG - CFO & Member of Board of Management [4]

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I think, Rory, you also had a question about the regional split of the gross profit per working day trajectory. Europe was relatively slow earlier this year and continued slow into May, June, July. North America had clearly more healthier levels early this year, but did slow down in June and July.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [5]

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Great. And just on the working capital. Any comments on this kind of prices going to keep on the pace that they're on? Would you guys expect to see an inflow in working capital through H2? Or just kind of, again, a low outflow?

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Georg Müller, Brenntag AG - CFO & Member of Board of Management [6]

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It depends on -- to a fair degree, it will depend on chemical price developments, which makes the prediction difficult. If chemical prices are stable to marginally falling and considering that the H2 seasonality typically is an inflow, there is a good likelihood of some inflow in H2. But again, the question of chemical prices will be the decisive question for this.

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Steven E. Holland, Brenntag AG - Chairman of Board of Management & CEO [7]

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I think there's also some questions regarding price of oil in the analysis. Because clearly, there's some concern out there of the security situation in the Middle East. And like on the fires of Exxon refinery in North America don't help much. So I think anything that's oil based is a little bit more volatile at the moment in terms of the base stock's being variable at that price.

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Operator [8]

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The next question is from Steven Goulden, Deutsche Bank.

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Steven James Goulden, Deutsche Bank AG, Research Division - Research Analyst [9]

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Can I just again on the cost side, again. So it looks like you had roughly 4% cost inflation in EMEA and North America. Can you give us a bit of a steer as to where that's coming from? Obviously, wage inflation has been a problem for many of your competitors, but my understanding is that sort of tracking at around 2.5%, 3%, and that's about 60% of your cost base. So if you could give us a bit more color on where that's coming from? If there's been projects front-loading of IT spend, that sort of thing? And whether or not you expect that to materially ease in the second half? And sorry, on that point as well, I just missed your response to the North American cost. I think you said that you are focusing on that, but I missed the actual detail around the response.

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Steven E. Holland, Brenntag AG - Chairman of Board of Management & CEO [10]

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Yes. Just in terms of cost generally, we've reduced our guidance for the rest of the year. And the costs are absolutely in focus. So in fact, not just North America, but on the group as a whole because we want to make sure that we -- our guidance, as far as we guided here. There is -- there are some -- couple of things, which actually (inaudible) in terms of costs, which are perhaps outside of day-to-day. And so far as in North America, we do have a number of new distribution deals which require us to employ new staff and new technicians, lease and expertise to support the new deals, but they are somewhat front loaded in terms of combining resources before the easy flow of GP into the business. That's going ahead and so now we're pretty happy to see that for future development.

And certainly, we are providing, to some extent, some more investment in infrastructure logistics to access certain parts of the market, which we believe are more tangible now than perhaps they were this time last year. As far as Europe is concerned, I think we touched on that already in terms of being transport and distribution costs. However, there was a point about IT, but maybe, Georg, you could answer that one?

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Georg Müller, Brenntag AG - CFO & Member of Board of Management [11]

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Yes. I mean the European cost inflation, as Steve says, goes through different P&L line, particularly through transport and to decrease our IT. We are ramping up staff more and more in our growth to harmonize European ERP systems, and there is some resource, and therefore, cost element in there.

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Steven James Goulden, Deutsche Bank AG, Research Division - Research Analyst [12]

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Great. Sorry, just a quick follow-up on that. I mean on the -- in terms of organic EBITDA development, you did around minus 3.5 in the first half. So to hit the midpoint, you probably need, for the full year, you probably need to be up 2 or so. And I do realize comp fees and then particularly is on the EBITDA side. But is it fair to say that we're probably looking at the lower end of the range as a realistic target than the mid-end of the range, just given what you have to deal with and the fact that there's still some cost inflation there?

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Georg Müller, Brenntag AG - CFO & Member of Board of Management [13]

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I wouldn't really comment from a company's perspective now on lower and mid of the range, upper end of range. We put out the range and that's what we feel to be comfortable to end up in. If you want to make up your mind on where you see us within the range, don't forget that last year, second half was relatively a soft half year.

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Operator [14]

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The next question is from Raghav Bardalai, Exane BNP Paribas.

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Raghav Bardalai, Exane BNP Paribas, Research Division - Analyst of Chemicals [15]

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I have 2, please. Just on that U.S. CapEx plan. I think you're still considering a EUR 40 million investment program. I mean could you give us a sense for what the latest is there? And whether the maybe recent drop in sort of macro momentum has affected your approach at all? And then secondly, on the M&A pipeline. Can you maybe just talk through the sort of outlook for the second half? Obviously, you've been reactive in the first half and should we be expecting spend over EUR 250 million of foreign acquisitions given the sort of pace you've been at?

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Steven E. Holland, Brenntag AG - Chairman of Board of Management & CEO [16]

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With M&A, we do have a number of transactions and projects which are in due diligence phase. But as usual, it's very difficult to nail it down when these will arrive. So I think the guidance that we gave that said we're between EUR 200 million, EUR 250 million, up to EUR 300 million is about right. But certainly, I would expect at least some more acquisitions during the course of this year.

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Georg Müller, Brenntag AG - CFO & Member of Board of Management [17]

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I got your question around CapEx plan and right then, you referred to about EUR 40 million CapEx program. We have to address changes in market circumstances in North America. So to respond to market opportunities that come from mergers of some competitors, and there is kind of the answer. This is driven by market opportunities that are not depending on macro. So from today's perspective, we fully expect to go through with that program.

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Raghav Bardalai, Exane BNP Paribas, Research Division - Analyst of Chemicals [18]

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And can you just remind us what is the anticipated timing for that? Is it just on a 2-, 3-year view?

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Steven E. Holland, Brenntag AG - Chairman of Board of Management & CEO [19]

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The EUR 40 million is a 2-year program. We have -- are working on realizing a couple of projects. I would not be surprised if the majority of this comes late this year. But if it is early next year, it wouldn't be very relevant for us.

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Operator [20]

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The next question is from Isha Sharma, MainFirst Bank.

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Isha Sharma, MainFirst Bank AG, Research Division - Analyst [21]

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I just have 2, please. In terms of your new guidance, if you could please give us some color as to your assumptions of the guidance? So do you see the market -- expect the market deteriorating from today? Or is it based more on a mark-to-market basis? And the other question would be on the CapEx. You have -- we have a guidance of EUR 220 million for the year. And there's an expected compensation back from -- in China of around EUR 15 million. Should we expect the CapEx to be EUR 220 million and the compensation to come in the next year? Or should we already net it as an assumption for this year?

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Georg Müller, Brenntag AG - CFO & Member of Board of Management [22]

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If I take the second question first. You should see -- you should expect the compensation to arrive basically the same point in time where we undergo the CapEx. We related our cost to you because it will happen in different lines of the cash flow statement. So you would see the CapEx growth and 25 compensation will basically be an inflow from sale of assets. That's why we have shown it separately, but it will happen at the same moment in time, give or take a little.

The 0% to 4% guidance range that we have is under current market circumstances. We don't have a particular assumption for weakening nor a strengthening market in that range.

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Operator [23]

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The next question is from Rajesh Kumar, HSBC.

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Rajesh Kumar, HSBC, Research Division - Analyst [24]

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Couple if I may. You gave some color on what sort of cost commitments you might have with suppliers when you find a new deal. Can you give us some color on what sort of contract negotiations you're having with the suppliers as the volumes get weaker around minimum service levels, minimum inventory or vendor rebate, that sort of discussion? Are you -- basically, are you preparing for a slower growth environment with the suppliers?

And the second one is, if I've understood it correctly, at the current run rate, your inflations in Europe and the U.S. gets easier in the second half. Is that an accurate summary of what you said on costs so far?

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Steven E. Holland, Brenntag AG - Chairman of Board of Management & CEO [25]

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Just in terms of the supplier question. Generally speaking, we don't have a scenario where we are actually engaged in contracting and tonnages. We -- normally, our contracts are -- our framework contracts were -- essentially, these are the terms which we do business together. But don't normally -- won't give commitment in terms of tonnages. Therefore, any change in the business environment means we're able to automatically change our inventory -- relative inventory even in stock or reduce the number of times that we replace the products. And clearly, we are focused on making sure that our stock turnover is maintained at a current level. So we can adapt our stockholding to whatever is appropriate for the market conditions that prevail with -- and there's not a contraption that would stop us from doing that.

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Georg Müller, Brenntag AG - CFO & Member of Board of Management [26]

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When we indicated that the comparables for the second half of this year are a little easier because second half of last year was weak, this was more addressing the gross profit level than a specific cost situation.

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Rajesh Kumar, HSBC, Research Division - Analyst [27]

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Yes, I was asking about the cost pressure in terms of freight cost, labor cost, transportation, that at the current run rate, would you see a bit of easing of cost inflation?

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Steven E. Holland, Brenntag AG - Chairman of Board of Management & CEO [28]

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Yes. I think the -- well, firstly, we are making progress in terms of the European region relative to logistics. We talked about that the last couple of quarters. And we have actually invested more in our own transport, our own personnel to actually reduce the dependence on external service providers. So we should expect to see a benefit from -- during the course of the third and fourth quarter. And besides that, we are clearly looking at our overall cost of operations because in the current market conditions, which are not at a good point, we are certainly looking at all our costs relative to the operations. And as a result, we should see some shaving of cost in that regard.

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Operator [29]

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The next question is from Tom Burlton, Berenberg.

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Thomas Edward Burlton, Joh. Berenberg, Gossler & Co. KG, Research Division - Head of Business Services & Senior Equity Analyst [30]

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I just wanted to come back and sort of dwell on the cost point because I guess it's important, basically your guidance. On the comment around IT deployment cost. Remember, in Q1, there was a comment that they would still be flowing through your IT deployment costs in Q2 but were expected to drop down in Q3. Can you confirm that they were in the P&L in Q2, and they will, in fact, drop out in Q3 as was initially guided?

And then again, just thinking about the sequential cost developments, speaking with EMEA. Is your guidance premised on an assumption that we will get quarter-on-quarter cost improvement, i.e., Q3 better versus Q2 and Q4 better versus Q3? And then just lastly on free cash flow. Any more color in terms of quantifying that guidance? You've talked about a significant increase year-on-year. I mean you're basically run rating it double the free cash flow of last year. Is that a sensible sort of run rate for the full year out then? Or how should we be thinking about that, please?

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Steven E. Holland, Brenntag AG - Chairman of Board of Management & CEO [31]

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Just sticking to the cost base. I think I've said it a few times now. Clearly, costs are a focus for us. So I think whether or not -- we can just call it sequential or not, but certainly the second half of the year, we're certain about cost being a focus for both maturations to the North America and Europe. We will see -- we expect to see some improvement in logistic costs in the European region, which have actually been quite a burden for the European business in the course of 2019. So in that regard, where I'd expect to see a reduction. But it's a focus for the whole group, not just the 2 iterations.

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Georg Müller, Brenntag AG - CFO & Member of Board of Management [32]

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It probably can't be too helpful in narrowing free cash flow guidance. Free cash flow through working capital movement and in terms through chemical prices can be a volatile element. And it could really be a little artificial if we work from narrow guidance on that end.

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Operator [33]

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Sorry, excuse us. Was the question answered?

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Thomas Edward Burlton, Joh. Berenberg, Gossler & Co. KG, Research Division - Head of Business Services & Senior Equity Analyst [34]

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Yes.

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Operator [35]

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Then the next question is from Markus Mayer, Baader-Helvea.

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Markus Mayer, Baader-Helvea Equity Research - Lead Analyst of Chemicals [36]

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Two questions. Firstly, again, coming to the trade form effect. Given the large petrochem capacity versions in North America, not only petrochem sort of other chemical additions and then the negative feedback on the trade uplift. Do you see a very high outcome for trade for your volume from North America to Europe? And if so, if there any kind of positive feedback in particular for Europe? They're the largest chemical distribution company in Europe.

And secondly, coming back to the cash flow. The working capital reduction. Do you think that most of the reduction was not done in the first half from the (inaudible) from the working capital side free cash flow in the second half?

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Steven E. Holland, Brenntag AG - Chairman of Board of Management & CEO [37]

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I think in terms of trade flows of petrochemicals, there's not really a significant -- I don't think we have a significant (inaudible) with us. As you would be aware, we've got a very straightforward price production model and therefore, fluctuations in pricing, whether it be by virtue, source of the product by manufacturing in Europe or manufacturing in the United States, doesn't really affect us. So it may be more pertinent to very large users in refineries, but in chemical distribution is just not an issue.

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Georg Müller, Brenntag AG - CFO & Member of Board of Management [38]

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We'll try to be helpful on working capital forecast. It's not easy as working capital very much depends on chemical prices. We have an expectation that we see further reductions of working capital in the second half, partly also seasonal, but chemical prices can easily move the needle one or the other direction.

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Markus Mayer, Baader-Helvea Equity Research - Lead Analyst of Chemicals [39]

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Okay. So to add-on question for the first one. The question was less related to the price, it was more related to the volume, basically that you see more petrochemical volumes from North America to Europe?

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Steven E. Holland, Brenntag AG - Chairman of Board of Management & CEO [40]

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Oh. Sorry, I missed the (inaudible) inside the question. I wouldn't say that we are tracking particularly larger volumes from North America into Europe. You've got to bear in mind that it's -- from our perspective even though we are a large distributor of solvents in the European region, there are also very significant protection facilities in the European space in any case. So I think it's more a case of if there's a refinery outside, we figure it. For example in Exxon, you may find the reverse flows of the product coming into Europe. So it's not really an item for us.

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Operator [41]

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The next question is from Laurence Alexander, Jefferies.

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Adam Samuel Bubes, Jefferies LLC, Research Division - Equity Associate [42]

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This is Adam Bubes on for Laurence Alexander today. I was wondering as we look out into 2020, if you could kind of just touch on different levers that could maybe be pulled next year to provide any tailwind?

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Steven E. Holland, Brenntag AG - Chairman of Board of Management & CEO [43]

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I think clearly, we would hope that we give a fair sum and analysis about a more stable position relative to the macroeconomic development. I think it's fair to say that we're pretty pleased with the development of our food and nutrition business in terms of the way that's moving on. And in addition to that, I would expect to see some upside from my investment in the specialty chemicals in North America and some of the logistics investments that we're putting through the business to take advantage of demand from the customer base in North America. So I think there's a couple of industry initiatives and market initiatives that should help Brenntag beyond the market in general.

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Adam Samuel Bubes, Jefferies LLC, Research Division - Equity Associate [44]

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Okay, great. And then my last question. Should we expect the current pace of M&A if you continue? Or how should we think about M&A going forward?

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Steven E. Holland, Brenntag AG - Chairman of Board of Management & CEO [45]

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There's actually no reason why M&A shouldn't continue at the current pace. Clearly, the market remains difficult for everybody. I think one of the great characteristics of this business is cash flow. And you'll be aware that cash flow into small chemical distributors in the second half is equally as good. And so many business we'll be seeing maybe lower EBITDA and strong cash flow. So actually it does tend to make people hang on to that businesses a little bit longer, clearly valuations tend to be driven by EBITDA. So having said all that, we are -- we have a very active pipeline. And therefore, I don't think we have any expectation that we spend less in 2020 compared to 2019.

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Operator [46]

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There are currently no further questions. (Operator Instructions) We haven't received any further questions.

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Steven E. Holland, Brenntag AG - Chairman of Board of Management & CEO [47]

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Okay. In that case, thank you very much, everybody, who've joined us, and we'll close the call at once. Thank you very much.

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Operator [48]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.