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Dear ladies and gentlemen, welcome to the Brenntag AG Q2 2018 results call. 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.
Thank you very much, and welcome, ladies and gentlemen, thank you for dialing into our review of results for the second quarter. As usual, I'm here with Georg Müller, our CFO, and as always, we're happy to answer your questions after the presentation. Let me start with the highlights of the quarter. We are pleased with the quarter results, which confirm the positive trends of the company. Our operating gross profit and operating EBITDA showed healthy growth rates of 8.4% and 10.7%, respectively. Good supporting operating gross profit of EUR 677 million and operating EBITDA of EUR 231 million. Once again, the growth is broad-based and in [ large part ] driven organically. The organic growth of operating EBITDA was almost 8% and therefore was similar to Q1. Our three largest regions contributed to these results across all main industry groups, Latin America showed stable results in a difficult environment. Through the quarter, our acquisitions continued to meet our expectations. Earnings per share amounted to $0.76 compared to $0.69 a year ago, which is up about 10%. Let's move to the operating EBITDA bridge. In Q2, again, we had a strong headwind from the U.S. dollar-euro translation of around about EUR 12 million, due to the U.S. dollar was clearly weaker than in Q2 of 2017. Acquisitions contributed EUR 6 million in the reporting period and also includes the contribution of our new acquisitions of Raj in India and Quimitécnica in Portugal, which we closed during the quarter. The European segment shows a healthy organic growth of 7%, and again we're particularly pleased with the regions of Asia Pacific and North America, which continued to show strong organic growth of 8% and 10%, respectively. Again, Latin America showed a solid performance with steady results in what is still a volatile environment.And continuing with individual segments themselves, firstly, coming to Europe. In EMEA, we have continued with the efficiency measures which we announced last year and indeed will continue to have positive effects during the course of 2018. And then we can show an operating gross profit of 6.4%, this growth was mainly driven organically and resulted in an increase of 10.6% in operating EBITDA. Coming to North America, again, I'm pleased with the results in North America. The region continued its positive trends, reported operating gross profit of 8.5% and operating EBITDA growth of 9.8%, both FX adjusted and [ almost ] double-digit operating EBITDA growth was entirely organic. Transport cost in North America continued to increase. We haven't introduced numbers so just to help compensate for these increased costs. Just coming onto Latin America. We continued in an overall challenging business environment. Against this background, Latin America achieved stable results into its operating gross profit and operating EBITDA on a constant currency basis. All the countries in this region show a mixed picture. We're committed that we're well positioned in the region to capture the future growth opportunities once the overall situation improves. Looking into Asia Pacific. Again, Asia Pacific, a better performance in Asia Pacific, the region showed a double-digit growth of operating gross profit and operating EBITDA in the reporting period in addition to very good organic performance of acquisitions that also contributed to the positive picture and our own plan. I'm coming now onto Page 9, the recent acquisitions. Most recently we signed an agreement to acquire Canada Colors and Chemicals, located in various strategically important locations in Canada. This acquisition is a significant step for our business in the country. Canada Colors generated sales of around about EUR 140 million in the year 2000. The acquisition is expected to close in the upcoming weeks. For the sake of completeness, I would like to note again that we've closed Quimitécnica in Portugal and we've also purchased 65% of Raj in India during the quarter. Over to you, Georg.
Yes. Thank you, Steve, and good afternoon, everybody. I would like to speak about our detailed financials for the second quarter, and I start with the upper part of our income statement on Page 11. Sales increased by more than 12% on an FX adjusted basis, as in previous quarters the growth in sales was influenced by increasing chemical prices. Operating gross profit grew by 8.4% on an FX adjusted basis with a particularly strong performance in North America. Operating EBITDA for the group grew even stronger than operating gross profit. It showed double-digit growth of 10.7% to EUR 231.3 million. As in the first quarter 2018, we again managed to improve our conversion ratio. Conversion ratio stood at 34.2% compared to 33.6% in the second quarter of 2017.I'll move on to Page 12. That part of the income statement below operating EBITDA, there are no major changes for depreciation and amortization compared to previous year. Depreciation for the second quarter amounted to EUR 29 million and amortization to EUR 12 million. The financial results amounted to a net expense of EUR 23.8 million on last year's level. In the second quarter, we recorded a tax rate of 28%, this is almost 4 percentage points lower than in the second quarter of 2017. And this is mainly attributable to the changes in the U.S. tax regime. So earnings per share are at $0.76, an encouraging increase by 10% compared to previous year's quarter.The cash flow statement on Page 13. In the quarter, we reported an operating cash inflow of EUR 72 million compared to EUR 48 million a year ago. This improvement is attributable to the good business development. While working capital is still a factor, mainly due to rising chemical prices, the impact was lower than last year. The bigger improvement can also be seen in the large income tax payment, which is due to the changes in the U.S. tax regime. All other lines of the operating cash flow are basically unchanged compared to previous year.The further part of the cash flow statement on Page 14, investment and financing cash flow. In line with our expectations, CapEx is somewhat higher in the second quarter. In acquisitions, we spent EUR 69 million. That payout mainly related to Raj in India and Quimitécnica in Portugal. The dividend of EUR 170 million, which we paid out in June, is the main item in financing cash flow. I go directly to the information on net debt and leverage on Page 15. Net debt amounted to about EUR 1.9 billion, the leverage of net debt to operating EBITDA stood at 2.3x the last quarter. In June, we typically had the highest leverage of the year. Because of the dividend payment, we foresee some reductions towards year-end. Paid working capital amounted to around EUR 1.8 billion at the end of the second quarter. So working capital turnover was again at 7.5x in the second quarter. We worked on improving working capital terms in further course of the year. The free cash flow on Page 17. The second quarter of 2018 delivered a free cash flow of EUR 147 million, an encouraging increase of almost 20%. We already spoke about the different components of the free cash flow, so therefore, I hand it back to Steve for the outlook.
Thank you, Georg. So I'd like to start with the current trading and investing outlook for the year going forward. I'll talk you through the year gross profit per working day. I think we'll probably start in May, the growth was 9.3%, of which 6.9% organically; in June, the growth was 8.2%, 5.6% organically; in July, the growth was 4.8%, 2.9% on an organic basis. Coming to the outlook. After a good start of the year in Q1 2018, positive development continued into the second quarter. Overall, the global economy is expected to grow in 2018. The forecasts for our regions are positive. In this environment and assume the trends won't change materially, we expect our operating EBITDA to be between EUR 870 million to EUR 900 million for the full year. In the first half of 2018, we saw some headwinds from the U.S. dollar-euro translation. At the current rates, we might -- we expect this to be clearly less in the second half of the year. In terms of M&A, we have a number of transactions undergoing due diligence, which are expected to close during the course of this year. And we're now happy to answer any questions.
[Operator Instructions] The first question is from Rory McKenzie of UBS.
I had two on Europe. But maybe first just on those monthly trends you just called out. I see the organic slowed May to June to July, anything to kind of explain that? And just give us some comfort around the trends. And then the two questions on Europe. Firstly on growth. It does look to be quite well above market, I guess maybe reflecting some of the payback of the reinvestment you've been doing in the region. So can you talk about any notable business wins, any new outsourcing contracts you've signed, anything you'd call out that's been helping that European growth? And then secondly, on the margins in Europe. Obviously, the drop-through rates were even better in Q2 after a strong Q1 but I think you'll start to annualize some of your cost savings into H2. So do you think that, that peak of margin expansion in Europe will now start to slow?
Just as to the sequences there, I actually thought you might ask that question. So slightly drawing back to -- to give you a number in April as well, if I may. In terms of April, growth rate was 3.8% and 2.7% organic. And as you get these longer months and I don't want to get drawn into a [ rambling ] explanation, I think it confused everybody last time. But nevertheless, on longer trading months, these numbers tend to be smaller. So I think, I'd give you that again. So April was 3.8% and 2.8% organic, a [ normal ] month. In July, it was 4.8% and 2.9%. So I don't really see any significant difference in the perceived growth rates within the business on margins.
Yes, I think, Rory, [indiscernible], I think you had a question on the phasing of the European savings and impact on conversion ratio. We started implementing the efficiency improvement program in Europe towards the end of Q3, beginning of Q4 last year. So it's not immediate that these impacts will phase out in conversion ratio that would only be towards the end of the year, not now, not in Q3.
And in terms of the -- any particular business win, I think, it's probably too detailed, and certainly, not something I probably would like to give you specific details on -- with the open call. But clearly, we are winning business in Europe and particularly, in the area of life sciences and business is doing pretty well across all the European territory.
Okay. I mean, again, not to give too much specific detail but is this kind of expansion within accounts, is it new account wins? Or how should we think about the nature of that growth?
Yes, I would just say it's expansion within new accounts in particular but also within new business and new product groups is the -- is also a key win for us. You'd be aware that we've been working pretty hard in trying to open up some of the competitive advantage we have in both sourcing and giving better information visibility within the group, and I think that's paying off.
The next question is from Mutlu Gundogan of ABN AMRO.
A few questions. The first one is on North America. That region added some EUR 10 million of organic growth to EBITDA, both in Q1 and in Q2. Is that a rate you believe you can hold onto going into the second half? The second question is on the guidance. Now if I take the midpoint of your full year guidance, you get to an increase of some 8% year-on-year for the second half. If we take out M&A currencies, which were fairly limited, I think you're guiding for some 4% organic growth. That would mean a slowdown versus the 8% that you did in H1. So just wondering why we should expect such slowdown? Is that mainly difficult comps or more difficult comps for the second half? Or is -- do you see a weakening of demand as we look further? And then thirdly, it's maybe a clarification on the guidance. So you say that the performance will be supported by all regions. Now Latin America, however, is down 11% year-to-date. So just wondering do you really believe that you will make up for that in the second half? Those are the questions.
Well onto [indiscernible] into Latin America. Latin America actually doesn't normally have a stronger performance in the second half of the year. And we have reason to believe that it will be in a good position. You'd be aware -- you may be aware that there was quite a significant devaluation in Argentina during the course of the second quarter, and you may also be aware that Brazil was on strike basically, the truck force strike in Brazil for about 2 weeks during the second quarter. So is this reason to believe that Latin America will do better in the second half? I think in terms of guidance, it's really difficult to comment actually with so much slicing and dicing. I think we have a -- I think the consensus is still around about the 8.88%, 8.89%, 8.90%, where we're basically agreeing the consensus at this stage, on the -- too detailed to start going to more detail.
Okay. And then maybe the question on North America?
North America has now an EBITDA level delivered 2 quarters this year already of double-digit growth. At this stage, we don't see a change in trend.
The next question is from Peter Olofsen of Kepler Cheuvreux.
Maybe first on volumes. With regards to North America, in the report you mentioned a slight increase in volumes. Not sure what you exactly mean with slight but considering the growth that we have seen in industrial production, I maybe would have expected a little bit more than just slight increase. So could you maybe comment on what you're seeing in terms of volumes in North America? And then in Asia Pacific, there the volume growth seems to have been particularly strong this quarter. Are there any geographical or specific end markets that you could highlight where you have seen an acceleration in volume growth? And then I have 2 follow-ups, please.
Well with North America, we're very careful about volumes because volumes are a little bit misleading. For example, you get -- you can get very high volume business in North America, where you make no money. And therefore, volumes per se, are nothing which we chase. And at the moment, there is quite a number of shortages in North America and of the high-end volume commodity style, industrial products which are -- not really that interesting in terms of the overall profitability, so that might explain why you see a deviation.
And on the Asia Pacific side?
Broad-based development basically across all countries, across all customer industries, there is not the 1 property in Asia which is growing, it's real broad-based.
Okay. Then maybe on working capital. The numbers that you show on Slide 16. We can see there has been somewhat weaker working capital turnover so far this year compared to what we saw last year. Any specific explanations for that? And what are you doing to address this?
I think Georg can probably pick a part of this. So I think [indiscernible] a couple of things which have happened, which are to some extent syntactical in so far as we have seen a number of shortages in the marketplace, which is actually correct and a rate -- [ manufacturers ] have started with carrying slightly heavier stocks in some product groups to maintain service. So we have a number of areas where probably stock is higher than we would normally expect at this time of the year. And clearly, those will unwind as the product flows improve as part of it. I think also the growth of specialty chemicals is really an effect on the business in terms that a much lower turnover in terms of overall velocity through the system. And you'll see that particularly, as I related to specific business growth.
Okay. And then my final question relates to transport costs. So you mentioned that you have been implementing some surcharges in North America. Were these sufficient to fully cover for the increase in transport cost in Q2? And to what extent are you planning additional surcharges later this year?
Well, I think it's a fact that we do have surcharges in place in North America. Unfortunately, we can't apply them to every single customer we want, they will not accept them. So we have certain mitigation in transport cost, but not fully.
The next question is from Rajesh Kumar of HSBC.
Three, if I may. First is, could you give us some color on the difference between various categories, bulk versus specialty, organic versus inorganic, where are you seeing growth momentum? Do you think specialty will pickup with a lag? That sort of color on where the demand is? Second on the demand side, if you can give us by end customers' industry, where you are seeing a pickup in momentum or a slowdown in momentum, any specific ones to call out? And finally, you referred to a point about advantage of being Brenntag as a skilled player in terms of the cost price. Can you explain to us how that cost advantage translates into your ability to pass through cost increases or put surcharges to customers when you can?
Well just on size, I think, there's typical moments, which obviously, we benefit from in terms of we are leveraging our knowledge across the complete supply chain relative to procurement costs. And this is something which the group is improving its own performance and us in particular over the last year or so. And where we are able to effectively acquire products at improved purchase prices and which may not necessarily be available to other parties. So I think that's a scale on for us. Obviously, cost is -- cost mitigation is leverage related to volume in so far as with our current infrastructure, our current logistics setup, if -- the more volume that goes through the logistics, the lower the cost per unit in terms of volume cost, the cost per unit. And therefore, we feel that, that's been the conversion of that GP through to EBITDA, it could occur at a higher rate due to lower cost of service. So that's really the sort of scale on which should help Brenntag compared to smaller players.
Understood, thank you. And on the bulk versus specialty split?
You meant, the management of the company, the segmentation of the company is regional. So we have some most detail available by region not by other [ axis ]. But to give you a sense, we typically say that mid-term to long-term our experience is that specialties grow 1%, 1.5% stronger than industrial. And there is no deviation from that general observation. When it comes to customer industries, almost all customer industries are currently growing. There's not one [ product ] which is extremely poor or super, super relevant for the group. It's pretty broad based.
So it would be unfair to assume that oil and gas resources are growing faster than others?
I didn't say that. I said that there's not the one and all customer industry which is dominating the gross for the group and that also holds true for oil and gas. Oil and gas is at about average growth currently.
Principally, North America.
We have a follow-up question from Mutlu Gundogan of ABN AMRO.
Steven, I want to get back to what you said on the working capital question, and you mentioned shortages. Just wondering how does that affect your business? I mean because there's shortage and you have this -- you have inventory on a product that is in high demand because of the shortage. Does it also mean that you make higher margins on it? So that's the first question. And maybe you -- can you mention a few products that -- where you had that benefit and whether that's continuing into the second half? And then secondly, getting back to the effective tax rate that's 28% in the last 2 quarters. Is that a sustainable level? Because to be honest, I was thinking more about 30% going forward? And then finally is on trade wars. I think you probably had this question several times but how is that and how could that affect your business, if it would worsen?
Okay, just on specialty chemicals, the bottom line is simply this, is that if a product is in short supply, the manufacturers put the prices up. So they don't sit there gathering extra margins, per se, ourselves. We are just carrying higher safety stock, if you like, you can call in that, in terms of being able to maintain service and then perhaps we would too on a completely normalized situation. But I don't want to exaggerate this aspect. It is an element. It is a dynamic in the marketplace but it's not a dominant feature of our business. But we are, say, carrying a little bit more stock than we normally do. And I guess, we expect that to unwind. I wouldn't assume a major margin advantage for us at this stage.
Can I maybe follow-up on that? Because you're global, would you have a better insight of when to expect a, let's say, either a planned or unplanned maintenance shutdown? And therefore, could it be that you win market share in a certain product?
I think where you need to be a bit careful, being global is one thing. But most of the industrial chemicals are sold on a regional basis. So most industrial chemicals generally are lower-priced items. And therefore, they don't travel so far, so you want them in that local market. We may well offer a global approach to the region, where, for example, every country in Europe would know what price a product costs across Europe. And I think it's relevant to compare and contrast it to say Asia Pacific as well as a few products that would actually travel the world to give you a competitive advantage. But what we do have though is clearly a benchmark reference point across major regions, which we can -- so we can make sure that we're not out of step in any one particular region. So in terms of the trade war thing, I mean, I'm always reluctant to talk about trade wars because it sounds like it's somewhat -- I'm not sure one has broken out yet. And I think as far as products' movement, at this stage, if there's a significant movement in tariffs, which increases prices, our experience so far has been that tariff increases and perhaps supply to overseas manufacturers, results in the domestic producers increasing their prices. So that's been the experience that we've seen so far. So it really -- it's not such a feature for us. And as you know, we have a solid price pass-through model for our business. And therefore whilst it may be some turbulence, at this stage I don't see it affecting our business in a significant way.
So but there was, I think, another question on tax rate that indicated 30% or a little bit below 30% before, we are now at 28%. This may be mix effect obviously, currently North America has a below-global-average tax rate and with the particular strengths of our business in North America that lower-than-average tax rate in North America has an even more important role. So short to midterm, the 28% is probably a good number using forward and other regions like Europe has to growth [indiscernible] that we might revert back to certain.
The next question is from Tom Sykes of Deutsche Bank.
Sorry if this was asked before. You mentioned it before, just whether you can make any comments on your SME mix versus some of the larger accounts. Obviously, you've referenced being able to pass on prices or surcharges a little bit more to some customers but would it be fair to say that you've probably been pushing smaller customers a little bit more in that respect it sounds like. And therefore, if look at sort of customers, thinking particularly in the U.S., of a similar size, is the conversion rates that you're seeing in SMEs now comparable to where you were in sort of in [ 7, 8 ]? And is there a benefit to come through that those customers may be going up as a proportion of the mix of the business at the moment?
No, I think is going to be the answer. We -- there isn't a differentiation between SMEs and larger customers with regard to the surcharge and transport. In fact, if anything, the larger customers are even more aware of the compression in transport costs. So there is, if you like, a competent, knowledgeable understanding in what's happening on logistics with larger customers, which may not necessarily always be available to smaller customers. So I wouldn't differentiate between SMEs and our larger accounts in any case as far as transport is concerned. And I don't see a change in the ratio between ourselves and -- between our larger customers and our smaller customers. It would be fair to say that on the longer term, and our experience in the last 2 to 3 years is that we see more global accounts developing for Brenntag where there are more and more accounts buying from us on a multi-continent basis. So in that respect, we are selling more to the larger accounts.
Okay. And just in terms of the U.S. growth outside of oil and gas. Are there any particular industries that you'd say -- you'd sort of pick out where you can see there's a proper reinstallation of the client base, a lot more investment going in, jobs coming back that you feel more comfortable about that breadth or some of the industries in the U.S. industrial at all?
I don't think I can really give you a very direct stare in this because we have a very broad-based sort of offering here and a broad-based customer base. So I wouldn't say there is any one particular industry that I would highlight as being remarkably strong compared to any other. I think we have across-the-board improvement in business.
The next question is from Christian Cohrs of Warburg Research.
Maybe first on your interest expense. You're right, it is approximately on the previous year's level, however, looking sequentially quarter-on-quarter, interest expense has gone up, and I wonder why, maybe you can shed some color on it? And maybe could you confirm that you have repaid your high-coupon bond and that we should pencil in lower interest expense as of Q3 onwards? Secondly, with regard to your restructuring in the EMEA region, you guided for EUR 8 million savings on an annualized basis in Q -- after Q1, you said the contribution was rather lumpy. Where do you stand now after Q2? And can you maybe also shed some light on the global sourcing initiative, what are the benefits, which benefits have you realized in the first and second quarter? And maybe you can also provide a split among the North American and the European region? And lastly, cash flow, nice operating cash flow performance in Q2, partially making up for the poor performance in Q1. Do you expect -- especially since you've mentioned a higher focus on working capital in H2. Can we expect that you will be able to make up for the shortfall in Q1 that you can make up further in Q3 and Q4 so that full year operating cash flow will approach the 2017 level?
So let me, Christian, let me start with the interest expense question. It's always a little challenging to comment sequentially but the 2 effects that predominantly play a role when thinking interest expenses sequentially Q1 and then Q2 is, on the one hand, U.S. dollar -- a good -- a fair share of our interest expense is U.S. dollar. Sequentially, the U.S. dollar strengthened, so there is a little bit translation effect, which increases interest expense. And also, the U.S. dollar base rate increases to some extent. And the second effect is we closed our acquisition in India. We closed Raj beginning of May. And also we financed Indian working capital in India on the ground, and India is a high interest rate environment. So these are the explanations on the interest expenses. We did, indeed, in July repay the 5.5% bond that was due, so the interest savings from repaying that bond do kick in starting Q3, which about -- looking at terms to be sure, EUR 5 million a quarter.
I think in terms of the savings during the course of the year, we are -- we completed the whole process for Europe in Q2. And we're a little delayed in so far as there was quite a bit more reorganization within France, which is just take a bit more time. So I would say that we're still on target for an EUR 8 million savings during the course of the -- full course of the year. I would guess as of this stage, we're round about EUR 3 million achieved in Q1, Q2. And -- but we're still committed to that EUR 8 million for the total year. And to the global sourcing initiative and we had to [ run ] about EUR 20 million identified within global sourcing. That's on plan. And it's -- obviously, it's spread between the main regions of North America and Europe. I would say these facts say that North America is slightly ahead of the game in terms of their winning of that particular income. But I would say that the software and the big gauge analysis that was done and bridge support, all this is now across the whole of North America and Europe. And therefore, I'd expect -- we fully expect to get the target, the EUR 20 million into the full year numbers.
Steven, thanks for commenting on the cash flow improvement. We would expect a good cash flow development also in the further course of the year. Although it's a little bit difficult to forecast the cash flow because it's heavily impacted by working capital and that in turn is heavily impacted by chemical prices. It seems that on average, the chemical price increases are slowing down to some extent. And that should have a positive impact on cash flow on a full year basis, we do expect the free cash flow that is better than last year's cash flow from today's perspective.
Okay. Maybe just one follow-up for clarification with regard to the global sourcing and the EMEA restructuring. So you confirm the EUR 8 million and EUR 20 million targets. So there will be no spillover effects running into 2019?
That's not the plan. We're expecting to deliver that in 2018.
And these are also fully anticipated in the full year guidance, the full amount of EUR 8 million plus EUR 20 million?
It is.
The next question is from Matthew Lloyd of HSBC.
I just wonder if you could give us some color on what happened to inventory turn rather than just the working capital, just how inventory turn is developing? And whether it's different in any particular regions?
Yes, let me -- I need a second, Matthew, to look at detail up here. In the inventory turn this year over last year, it's a little bit lower, not materially so, maybe a quarter of a turn lower or a little more than a quarter of a turn lower. And it's predominantly through the effects that you mentioned about product scarcity, partly in specialties and our desire for high service level and therefore in additional stock warehouses to ensure strong service levels to our customers. Regionally and this is more about levels, not about trend, North America does have the highest inventory turns. It's the most spend-concentrated business. North Europe has good inventory turns. Latin America and Asia are somewhat slower in inventory turns, that's not unusual in emerging markets, partly, particularly for Latin America because we take the products on in the mature economies and actually ship the product there under your own ownership.
And then just one -- just one sort of quick follow-up. I'm just trying to relate 2 things. If you have to have slightly better inventory to maintain service levels when there is sort of patches of scarcity, which strikes me as entirely commercial. If you get dislocations because of a sort of trade war or tariffs added here and taken off there. And you get dislocations because of a trade war. Is there a potential that you'd have to carry slightly higher inventory in order to maintain service levels and client relationships. If this turns into something more than a bit of sort of saber rattling and tit-for-tat?
I mean that's a very speculative sort of question, really.
I'm a stock broker.
Obviously, you are. Looking out, I think the difficult question would be if there is a dominant local indigenous producer who effectively becomes overloaded by virtue of tariffs being applied on overseas manufacturers and is not able to service local demand, and that's the scenario which obviously no one wants to see and obviously when tariffs start getting really out of control, which is why we would certainly not be supportive of tariffs in any respect. So I think what we have to make sure that we do is keep a cool head in this. And in so far as we are supplying small customers, not the very large customers here and I would think the real focus for that type of problem would be for someone who is consuming very large quantities as opposed to us buying a wide range of products and supplying small lots to multiple customers. So whilst it is something which we watch, the more -- the greater threat or the greater risk is to the large consumers, mainly manufacturers rather than distributors.
The next question is from Karl Green, Crédit Suisse.
I've just got 2 questions, please. Firstly, in terms of the strong performance in Middle East and Africa and I think you also referenced Eastern Europe as well. Can you indicate what's going on there? Is that you taking market share? Is it the demand environment? Is it the benefits of your initiatives that you've mentioned? Just a bit more color there. And also for context, how big Middle East and Africa and Eastern Europe are as a percentage of regional gross profits. And my second question is really just to get an update, if possible, on DigiB in terms of the supplier usage and reception to how that's going, please?
Sure. I mean, the European piece is across-the-board improvement. I think we've been working pretty hard in Europe in terms of the -- both systems and consolidation of best working practice, we have been for quite some time, I'm sure you'll appreciate. So I don't think there's any one particular highlight, [ of course, you know, ] in which we can say it, as there's the reason for a good performance. It's right across the board and also in different product groups and customer industries. I think as far as the regional split in turns, maybe we can...
Middle East and Africa, just to remind you, we had a series of acquisitions in Middle East, Africa over the years and South Africa, Dubai, also in Turkey, which is Middle East and Africa for us. And our network in these countries now comes together in a very professional way and permits us to deliver strong organic growth in this region. Size-wise, Middle East and Africa in gross profit is about 5% of Europe for us. And Central and Eastern Europe is about 10% of Europe for us.
And just on your question on digital. Brenntag Connect, which is now [ picked up,] our digital channel is currently being trialed actually in the cosmetic sector in one of our countries in terms of proving and is going very well. Our digital Big Data services across both North America and Europe are performing well and are virtually all ready in terms of our approach and visibility. And we would expect the digital to roll out into North America, particularly in the -- certainly during the course of this year. The reality is that no one is particularly ahead in the digital marketplace. The traction for customers outside of China is relatively slow. A lot of people are asking questions, a lot of -- we are bombarded by requests from manufacturers to [ commit ] ourselves to [ build ] additional warehouse in Europe to understand how it all goes. And so at this stage, it's still very much in the evolution stage although it's clearly accelerating.
Okay, great. And just a follow-up question, if I can. There's reports that one of your biggest competitors in Asia, Connell Brothers, is going down the vertical integration routes. Is there anything you'd observe there in terms of the rationale for that. Any sort of change in the market dynamics which you think might be forcing that decision?
I'm not terribly clear when you're saying going down vertical. Can you explain what you mean exactly by that.
As in [indiscernible]
Manufacturing?
Yes.
Well, to be honest, that's pretty much news to me. I have not heard -- that's not been a feature in Asia Pacific that I know of. I think it's -- you have to make sure that you keep it in context. Connell Brothers is a privately owned company actually headquartered in United States. It's a family business. They are a strong player in Asia Pacific but by no means would I expect them to be regarded as a manufacturer.
The next question is a follow-up from Peter Olofsen, Kepler Cheuvreux.
It's about CapEx. I think in the recent past, you've been guiding for annual CapEx of EUR 150 million. Now it seems that for this year, the figure will be closer to EUR 190 million. Is that a kind of temporary increase? Or is this a number that we should also look for, for the coming years?
Yes, I think you may well recall that we have a couple of major plant expansions in China, which are scheduled to be -- the investments are on their way now into the design installation and what have you. It is a complicated scenario as far as these investments are capitalized but in reality, there will we quid pro quo in terms of we are being supported by the authorities in China and as an [ obviously ] entry into the cash end. So going forward, I think we probably may be EUR 160 million, it will be more, it will vary that we've indicated as being likely capital expenditure requirement in the future. So the EUR 190 million is a bit of a one-off.
There are currently no further questions. [Operator Instructions]
Okay, well, having seen no more further questions, I thank you very much to you if you called in and we can close the call there. Thank you very much, indeed.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.