INTERVIEW: Brenntag braces for tough Q2, sharpens M&A strategy
Author: Will Beacham
BARCELONA (ICIS)–Brenntag, the world’s largest chemical distributor, is prepared for a tough second quarter, with lower industrial production leading to slower demand compared with the first.
The Germany-headquartered group has adopted measures such as restricting overtime and paying strict attention to cash levels to safeguard its business as the impact of coronavirus-related shutdowns hits economies around the world.
Christian Kohlpainter, who became CEO in January 2020, led the company through a relatively benign first quarter as the coronavirus impact was restricted to China and other parts of Asia. Into the second quarter, however, and he is having to navigate Brenntag through steep declines in GDP and industrial indicators around the world.
Kohlpainter said, “For Q2 we expect a different business dynamic. Patterns of industrial output have changed in Q2 with forecasts of industrial production falling by 14-17% – we are carefully navigating this situation of slower demand.”
Brenntag has yet to reduce its headcount or furloughed many staff, but is looking at other ways of saving money such as using third-party logistics or cutting overtime.
Careful inventory management is also a high priority, especially at a time when crashing chemical prices can expose companies to losses on expensively priced stock.
The CEO said, “We have a high turnover of inventories and carefully manage levels. There is a balance between securing supply and managing working capital – our exposure to inventories is low with an average order size of €3,000.”
Kohlpainter said Brenntag has a solid balance sheet amid the crisis. It holds €600m in cash and a similar amount in credit lines which it has not needed. “We are present in 77 countries with 195,000 customers. We are watching payment behaviour carefully and have not seen any major impact from the crisis so far,” he added.
Following the oil price collapse and a shrinkage of that sector in North America, Brenntag’s oil and gas business has been badly affected, and its lubricants and some rubber businesses are also suffering.
“Basically anything connected to automotive has taken a noticeable hit. On the plus side food and nutrition, cleaning, personal care and water treatment have all performed well: it’s not as simple as saying that industrial has been badly hit and specialties less so. It’s determined more by the end use markets.”
Kohlpainter said Brenntag’s logistics operations have remained relatively unscathed since the lockdowns kicked in.
In China – where Brenntag sources €300m/year of supplies – its supply chain had been well stocked in preparation for the Chinese New Year shutdown. Supply from China has been maintained since then “with a few exceptions.”
In Europe, there have been no real hiccups on the supply side. There was a shortage of hydrochloric acid because it is a by-product of methylene diphenyl diisocyanate (MDI) and toluene di-isocyanate (TDI) production which have been affected by the automotive shutdown.
However, there have been shortages on the demand side – for products used in disinfectants and hand santisers such as isopropanol (IPA) and ethanol.
A SATISFACTORY FIRST QUARTER
According to Kohlpainter, “The virus impact on our business was limited in Q1 and we were happy overall with our result. Out of more than 17,000 employees we only had around 30 infections – that’s an impressive result with regard to health and safety. We have had very few problems with staff working from home – globally 49% of our staff worked remotely.”
The CEO said all of Brenntag’s warehouses had remained open, allowing it to continue serving customers globally.
NO 2020 FORECAST
Brenntag has joined many other companies in withdrawing its earnings guidance for full year 2020 – a lack of visibility has made forecasting all but impossible.
“It is not realistic to give a forecast for 2020 and we have pulled our guidance. As soon as we have better visibility, we will update the market,” the CEO said.
M&A STRATEGY SHIFT
Kohlpainter signalled a greater concentration in Brenntag’s mergers and acquisitions (M&A) strategy towards Asia and the more resilient end-use markets.
He said, “I have sharpened the focus of our acquisition pipeline – I want to be more selective in M&A because I believe it’s very important to focus on investing countries with higher GDP growth rates, especially in Asia. I also want to invest in segments with more attractive growth rates such as food & nutrition, personal care and pharma.”
However, Kohlpainter does not exclude investing in North America, Europe or industrial segments if there is a strong reason to do so.
ACCELERATE ORGANIC GROWTH
Kohlpainter has been disappointed by Brenntag’s organic growth over the last five years and when he became CEO implemented a plan to improve performance in this area. He pointed out that organic gross profit growth has only averaged 1-2%/year over that period.
“This is not what we should be able to deliver – organic earnings growth has been disappointing. Growth has largely been an M&A story. We need to strengthen our organic earnings growth and have started a holistic analysis we call Project Brenntag,” he said.
Because of the pandemic, the M&A market is quiet with players cautious about transactions.
“But we still have a full M&A pipeline and intend to explore and develop projects. We will wait and see what the world looks like in 2-3 months,” said the CEO.
ANALYSTS RAISE EARNINGS ESTIMATES
Earlier today, analysts at Credit Suisse upgraded its earnings estimate for Brenntag’s full-year results by 7.5-9%, “following strong Q1 results and our growing belief that management will be able to drive future organic growth and margin expansion with tailwinds from increased outsourcing penetration.”