Dear ladies and gentlemen, welcome to the Brenntag AG Q2 2018 results call. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press * key followed by zero on your telephone for operator assistance. May I now hand you over to Steven Holland, who will lead you through this conference. Please go ahead, sir.
Well, thank you very much, and welcome, ladies and gentlemen. Thanks 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 for the quarter. We are pleased with the quarter's results, which confirms the positive trend of the company. Both operating gross profit and operating EBITDA showed healthy growth rates of 8.4% to 10.7% respectively. The group supported operating gross profit of EUR 677 million in operating EBITDA of EUR 231 million. Once again, the growth is broad-based and in large parts driven organically. The organic growth of operating EBITDA was almost 8% and therefore 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. As we share, amounted to EUR 0.76 compared to EUR 0.69 a year ago. It was up about 10%. If I can go to the operating EBITDA bridge. In Q2, again, we had a strong headwind from the US dollar/euro translation of around about EUR 12 million due to the US dollar was clearly weaker than in Q2 of 2017. Acquisitions contributed EUR 6 million in the reporting period, and also includes the contribution of my new acquisitions of Raj in India and Quimitécnica in Portugal, which we closed during the quarter. The European segment showed a healthy organic growth of 7%. Again, we're particularly pleased with the regions of Asia-Pacific and North America, which continue to show a strong organic growth of 8% and 10% respectively.
In Latin America, showed a solid performance with stable results in what is still quite a volatile environment. I come to the individual segments themselves. Firstly, coming to Europe. In EMEA, we have continued with the efficiency measures which we announced last year and these will continue to have a positive effect during the course of 2018. The region showed a growth operating gross profit of 6.4%. This growth was mainly driven organically and results in an increase of 10.6% in operating EBITDA. Coming to North America, again, pleased with the results in North America, the region continues its positive trend. We reported operating gross profit of 8.5% and operating EBITDA growth of 9.8% of FX adjusted. The almost double-digit operating EBITDA growth is entirely organic. Transport costs in North America continue to increase. We have introduced a number of surcharges to help compensate for these increased costs.
To go on to Latin America, we continue to see an overall challenging business environment. Against this background, Latin America achieved stable results in terms of operating gross profit and Operating EBITDA on a constant currency basis. Other countries in this region show a mixed picture. We are convinced that we're well positioned in the region to capture future growth opportunities once the overall situation improves. I come on to Asia-Pacific. Again, Asia-Pacific, very pleased with the 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, acquisitions have also contributed to the positive picture and are on plan. I come on now to the recent acquisitions. Most recently, we have signed agreements to acquire Canada Colors and Chemicals, located in very 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 forthcoming weeks. For the sake of completeness, I would like to note again that we closed Quimitécnica in Portugal, and we've also purchased 65% of Raj in India during the quarter. Over to you, Georg.
Thank you, Steve. Good afternoon, everybody. I would like to speak about our detailed financials for the second quarter. 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. We show a 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 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 from last year's level. In the second quarter, we recorded a tax rate of 28%. Was lower than in the second quarter of 2017, it is mainly attributable to the changes in the U.S. tax regime. Earnings per share are at EUR 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. A bigger improvement can also be seen in the [live income tax payments], 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 relates 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 2.3 times the last quarter. In June, we typically have the highest leverage of the year. Because of the dividend payment, we foresee some reduction towards year-end. Trade working capital amounted to around EUR 1.8 billion at the end of the second quarter. The working capital turnover was again at 7.5 times in the second quarter. We work on improving working capital terms in further course of the year. The free cash flow on page 17, the second quarter 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, therefore I hand it back to Steve for the update.
Thank you, Georg. I'd like to start with the current trading and then address the outlook for the year going forward. I'll talk you through the gross profit for working day. I think we 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% and 2.9% on an organic basis. Coming to the outlook. After a good start to the year in Q1 2018, positive developments continued into the second quarter. Overall, the global economy is expected to grow in 2018. The forecast for our regions are positive. In this environment, and assuming the trends won't change materially, we expect our Operating EBITDA to be between EUR 870 million and EUR 900 million for the full year. In the first half of 2018, we saw some headwind from the USD/EUR translation.
Based on current rates, we expect this to be clearly less in the second half of the year. In terms of the M&A, we have a number of transactions undergoing due diligence, and which are expected to close during the course of this year. We're now happy to answer any questions.
Ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please dial 01 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial 02 to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. The first question is from Rory McKenzie of UBS. Your line is now open. Please go ahead.
Afternoon, guys. Thanks for taking my question. I have two on Europe. Maybe first actually just on those monthly trends you just called out. Obviously, the organics slowed May to June to July. Anything to kind of explain that and just give us some comfort around the trends? Then the two questions on Europe. Firstly, on growth, it does look as if we quite well above market, I guess maybe reflecting some of the payback of the reinvestment you've been doing in the region. 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? Then secondly, on the margins in Europe, obviously the drop through rates were even better in Q2 after a strong Q1. I think you'll start to annualize some of your cost savings into H2.
Do you think that that pace of margin expansion in Europe will now start to slow? Thank you.
Just on the sequences, I actually thought you might ask that question. I'm slightly drawn back to giving you the number in April as well, if I may. In terms of the April growth rate was 3.8% and 2.7% organic. As you get these longer months, and I don't want to get drawn into another explanation because I think I confused everybody last time. Nevertheless, on longer trading months, these numbers tend to be smaller. If I could give you that again, April was 3.8% and 2.8% organic on a longer month. In July, it was 4.8% and 2.9%. I don't really see any significant difference in the perceived growth rates within the business on margins.
Okay, thanks.
Yeah, I think, Rory, it's Georg. 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. 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.
Yeah. I think in terms of the particular bits between that, I think it's probably too detailed and certainly not something I probably would like to give specific details on with the open call. Clearly we are winning business in Europe and particularly in the applied sciences and businesses is doing pretty well across all the European territory.
Okay. Again, not to give too much competitive detail, is this expansion within accounts? Is it new account wins? How should we think about the nature of that growth?
Yeah, I would just say it's expansion within new accounts in particular, but also winning new business, in new product groups is also a key win for us. You'd be aware that we've been working pretty hard and trying to open up some of the competitive advantage we have in both sourcing and giving better information and visibility within the group. I think that's paying off.
Okay, great. Thank you.
The next question is from Mutlu Gundogan of ABN AMRO. Your line is now open. Please go ahead.
Yes. Good afternoon, everyone. 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 on to 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 will be very limited, I think you're guiding for some 4% organic growth. That would mean a slowdown versus the 8% that you did in H1. Just wondering why we should expect such a slowdown. Is that mainly difficult comps or more difficult comps for the second half? Or do you see a weakening of demand as we look further?
Thirdly is maybe a clarification on the guidance. You say that the performance will be supported by all regions. Now, Latin America, however, is down 11% year to date. Just wondering, do you really believe that you will make up for that in the second half? Those are the questions.
Well, I'll just very quickly come to Latin America. Latin America actually does normally have a stronger performance in the second half of the year. We've reason to believe that they're in a good position. You may be aware that there was quite a significant devaluation in Argentina during the course of the second quarter. You may also be aware that Brazil was on strike, basically. Transport strike in Brazil for about two weeks during the second quarter. There's reason to believe that Latin America will do better in the second half. I think in terms of the guidance, it's really difficult to comment actually, because it's sort of slicing and dicing. I think the consensus is still around about the eight, EUR 80, EUR 90. We're basically agreeing with consensus at this stage. I think it's a little too detailed to start going through more detail.
Okay. Maybe the question on North America.
North America has now, on EBITDA level, delivered two quarters this year already of double digit growth. At this stage, we don't see a change in trend.
Okay. That's very helpful. Thank you.
The next question is from Pieter Olofsen of Kepler Cheuvreux. Your line is now open. Please go ahead.
Thank you. 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. Could you maybe comment on what you're seeing in terms of volumes in North America? 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? I have two follow-ups, please.
Well, first of North America, we have to be very careful about volumes, because volumes are a little bit misleading. For example, you can get very high volume business North America where you make no money, and therefore volumes per se are not something which we chase. At the moment there's quite a number of shortages in North America of the higher volume commodity style industrial products, which are not really that interesting in terms of overall profitability. That might explain why you're seeing a deviation.
On the Asia Pacific side?
A broad-based development basically across all countries, across all customer industries. There is not one pocket in Asia which is growing. It is real broad-based.
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?
Georg will probably take a part of this, I think what I would say there is a couple of things which have happened which are to some extent tactical insofar as we have seen a number of shortages in the marketplace, which has actually created a rate. Manufacturing itself is carrying slightly heavier stocks in certain product groups areas where probably stock is higher than we would normally expect at this time of the year. 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 of they are much slower turnover in terms of overall velocity through the system, and you will see that particularly as our Asia Pacific business grows.
Okay. My final question relates to transport cost. 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? To what extent are you planning additional surcharges later this year?
I think it's fair to say we do have surcharges in place in North America. Unfortunately, we can't apply it to every single customer will not accept them. We have some mitigation of transport costs, but not fully.
Okay, thank you.
The next question is from Rajesh Kumar of HSBC. Your line is now open. Please go ahead.
Hi, good afternoon, gents. 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 pick up 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're seeing a pickup in momentum or a slowdown in momentum, any specific ones to call out. Finally, you referred to a point about advantage of being Brenntag as a scale player in terms of the cost price. Can you explain to us how that cost advantage translate into your ability to pass through cost increases of what surcharges to customers when you can?
Well, just on size, I think there's several elements which obviously we benefit from in terms of we are leveraging our knowledge across the complete supply chain relative to procurement costs. This is something which the group is improving its own performance and has done particularly over the last year or so, where we are able to effectively acquire products at improved purchase prices and which may not necessarily be available to other parties. I think that's a scale element for us. Obviously, cost mitigation is, I suppose, related to volume insofar as with our current infrastructure and our current logistics set up is the more volume that goes through the logistics, the lower the cost per unit in terms of volume cost, the cost per unit.
Therefore, we feel that the conversion of that GP through to EBITDA, it could occur at a higher rate due to lower cost of service. That's really the sort of scale items we help Brenntag and compare to smaller players.
Understood. Thank you. On the bulk versus specialty split.
Yeah. The management of the company, the segmentation of the company is regional, we have the most detail available by region, not by other axes. To give you a sense, we typically say that midterm to long-term, our experience is that specialties grow 1%, 1.5% stronger than industrials, and there's no deviation from that general observation. When it comes to customer industries, almost all customer industries are currently growing. There's not the one focus which is extremely poor or super relevant for the group. It's pretty broad-based.
It would be unfair to assume that oil and gas or resources are growing faster than others.
I didn't say that. I said there's not one at all customer industry which is dominating the growth for the group, that also holds true for oil and gas. Oil and gas is an above average grower currently.
Yeah. Principally North America.
Agree.
Thank you very much.
Sure.
We have a follow-up question from Mutlu Gundogan of ABN AMRO. Your line is now open. Please go ahead.
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 inventory on a product that is in high demand because of the shortage, does it also mean that you make higher margins on it? That's the first question. Maybe can you mention a few products where you had that benefit and whether that's continuing into the second half? Secondly, getting back to the effective tax rate, that's 28% in the last two quarters. Is that a sustainable level? To be honest, I was thinking more about 30% going forward. 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 simple, Rajesh. If a product is in short supply, the manufacturers put the price up. We don't sit down gathering extra margins per se ourselves. We are just carrying higher safety stock, if you like, you can call it that, in terms of being able to maintain service than perhaps we would do on a completely normalized situation. I don't want to exaggerate this aspect at the moment. It is an element that is a dynamic of the marketplace, but it's not a dominant feature of our business. We are having to take care of a little bit more stock than we normally do. I expect that to unwind. I wouldn't say there's any 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, let's say, either a planned or an unplanned maintenance shutdown? Therefore, could it be that you win market share in a certain product?
I think where you got to be a bit careful is, being global is one thing, most of the industrial chemicals are sold on a regional basis. Most industrial chemicals generally are of a lower price items and therefore they don't travel so far. You are talking about local markets. We may well have a global approach to the region where, for example, every country in Europe would know what price a product costs across Europe. I don't think it's relevant to compare and contrast it to, say, Asia-Pacific. There's relatively few products that would actually travel the world to give you a competitive advantage. What we do have, though, is clearly a benchmark reference point across the major regions so we can make sure that we're not out of step in any one particular region.
Yeah.
In terms of the trade war thing, I'm always reluctant to talk about trade wars because I'm not sure one's broken out yet. I think as far as products movements, at this stage if there's a significant movement in tariffs, which increases prices, our experience so far has been that tariff supply to overseas manufacturers results in the domestic producer increasing their prices. That's been the experience that we've seen so far. It really is not such a feature for us. As you know, we have a solid price pass-on model for our business. Therefore, whilst it may be some turbulence, at this stage I don't see it affecting our business in a significant way.
Yeah.
There was, I think, another question on tax rate that we indicated 30% or a little bit below 30% before. We are now at 28%. It is maybe mixed effects. Obviously, currently North America has some below global average tax rate. 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. Short to mid-term, the 28% is probably a good number using forward. When other regions like Europe start to grow stronger, we might revert back to 30%.
Understood. Okay. Thank you for your answers.
Sure.
The next question is from Tom Sykes of Deutsche Bank. Your line is now open, please go ahead.
Thanks. Afternoon, everybody. Sorry if this was asked before, you mentioned it before, just whether you could make any comments on your SME mix versus some of the larger accounts. Obviously, you reference being able to pass on prices or surcharges a little bit more to some customers. Would it be fair to say that you have probably been pushing smaller customers a little bit more in that respect, it sounds like? Therefore, if you look at sort of customers thinking, particularly in the U.S. of a similar size, is the conversion rates that you are seeing in SMEs now comparable to where you were in sort of 2007, 2008? 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 at all?
No, no, I think is probably the answer. 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 on transport costs. There is, if you like, a big competent and knowledgeable understanding of what's happening on logistics with larger customers, which may not necessarily always be available to smaller customers. I wouldn't differentiate between SMEs and our larger accounts in any case as far as transport is concerned. I don't see a change in the ratio between our larger customers and our smaller customers.
It would be fair to say that on the longer term, and our experience of the last two or three 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. In that respect, we are selling more to the larger accounts.
Okay. Thank you. 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 U.S. industrial at all?
No, I don't think I can really give you a very direct steer in this because we have a very broad base.
Yeah
developing here and a broad base customer base. I wouldn't say there's any one particular industry that I would highlight as being remarkably strong compared to any other. I think we have an across-the-board improvement in business.
Okay, fine. Thank you very much.
The next question is from Christian Cohrs of Warburg Research. Your line is now open. Please go ahead.
Yes, good afternoon. Thanks for taking my questions. Maybe first on your interest expense. You are 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 regards to your restructuring in the EMEA region, you guided for EUR 8 million savings on an annualized basis. After Q1, you said the contribution was rather lumpy. Where do you stand now after Q2? Can you maybe also shed some light on the global sourcing initiative? 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.
Lastly, cash flow. A nice operating cash flow performance in Q2, partially making up for the poor performance in Q1. Especially since you 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? Thank you very much.
Let me, Christian, maybe start with the interest expense question. It's always a little challenging to comment sequentially, but the two effects that predominantly play a role when thinking interest expenses sequentially Q1 and then Q2 is on the one hand, a fair share of our interest expense is US dollar. Sequentially, the US dollar strengthened, there is a little bit translation effect which increases interest expense. Also the US dollar base rate increases to some extent. The second effect is we closed our acquisition in India. We closed Raj beginning of May, we financed Indian working capital in India on the ground, and India is a high interest rate environment.
Okay.
These are the explanation on the interest expenses. We did indeed in July repay the 5.5% bond that was due. The interest savings from repaying that bond do kick in starting Q3 with about, looking at Thomas to be sure, EUR 5 million a quarter.
I think in terms of the savings during the course of the year, we completed the whole process for Europe in Q2. We're a little delayed insofar as there was quite a lot of reorganization within France, which did take a bit more time. I would say that we're still on target for EUR 8 million savings during the full course of the year. I would guess at this stage it's around about EUR 3 million achieved in Q1 and Q2. We're still committed to that EUR 8 million for the total year. To the global sourcing initiative, I think we had around about EUR 20 million identified within global sourcing. That's on plan. Obviously, it's spread between the main regions of North America and Europe.
I would say it would be fair to say that North America is slightly ahead of the game in terms of their winning of that particular income. I would say that the software and the big data analysis that was done in support of this is now across the whole of North America and Europe. Therefore, we fully expect to get a target of the EUR 20 million into the full year numbers.
Yeah. Thanks for commenting on the cash flow improvement. We would expect a good cash flow development also in the further course of the year. Always 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. Thank you very much. Maybe just one follow-up for clarification with regards to the global sourcing and the EMEA restructuring. You confirm the EUR 8 million and EUR 20 million target, so there will be no spillover effects running into 2019?
That's not the plan. We're expecting to deliver that in 2018.
These are also fully anticipated in the full year guidance, the full amount of eight plus 20.
It is.
Okay. That's clear. Thank you very much.
Thank you.
The next question is from Matthew Lloyd of HSBC. Your line is now open. Please go ahead.
Good morning. I just wondered if you could give us some color on what's happened to inventory turn rather than working capital, just how inventory turn is developing and whether it's different in any particular regions.
Yeah. I need a second, Matthew, to look a detail up here.
Okay.
In the inventory turn this year over last year is 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. It's predominantly through the effect that Steve mentioned about product scarcity, partly in specialties and our desire for high service level, and therefore bringing additional stock into our warehouses to ensure strong service levels to our customers.
Okay.
Regionally, this is more about levels, not about trends.
Okay
North America does have the highest inventory turns. It's the most dense, 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 you take the product on in the mature economies and actually ship the product there under your own ownership.
Thank you for that, by the way. Just one sort of quick follow-up. I'm just trying to relate two things. If you have to have slightly better inventory, to maintain service levels when there's 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.
That's a very speculative sort of question, really.
I'm a stockbroker.
Oh, look, I think the difficult question would be if there's 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. That's the scenario which no one wants to see, and that's when the tariffs start getting really out of control. Which is why we would certainly not be supportive of tariffs in any respect. I think what we have to make sure that we do is we keep a cool head in this insofar as we are supplying small customers, not the very large customers here. I would think the real focus for that type of problem would be for someone that's consuming very large quantities as opposed to us buying a wide range of products and supplying small lots to multiple customers.
Whilst it is something which we watch, the greater threat or the greater risk is to the large consumers, mainly manufacturers rather than distributors.
Okay. Thank you very much.
The next question is from Karl Green, Credit Suisse. Your line is now open. Please go ahead.
Yeah, thank you very much. I've just got two questions, please. Firstly, in terms of the strong performance in Middle East and Africa, 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. Also for context, how big Middle East and Africa and Eastern Europe are as a % of regional gross profits? 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. The European piece is across the board improvements. I think we've been working pretty hard in Europe in terms of both systems and consolidation of best working practices and what have you for quite some time. I'm sure you appreciate. I don't think there's any one particular highlight across Europe which we'd say there's the reason for a good performance. It's right across the board in all sorts of different product groups and customer industries. I think as far as the regional split concerns,
Middle East and Africa, just to remind you, we had a series of acquisitions in Middle East, Africa over the years, in South Africa, in Dubai, also in Turkey, which is Middle East and Africa for us. 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, Central and Eastern Europe is about 10% of Europe for us.
Okay, great. Thank you very much.
Just your question on digital. Brenntag Connect, which is effectively our digital channel, is currently being trialed actually in the cosmetics sector, in one of our countries, in terms of approving and it is going very well. Our digital big data services across both North America and Europe are performing well, and I have referred to it already in terms of our purchasing visibility. We would expect digital to roll out into North America, particularly during the course of this year. The reality is that no one is particularly ahead in the digital marketplace. The traction for customer relatively slow. A lot of people asking questions. We are bombarded by requests from manufacturers to come visit our digital warehouse in Europe to understand how it all goes. At this stage, it is still very much in the early evolutionary stage, although it is clearly accelerating.
Okay, great. Just a follow-up question, if I can. There are reports that one of your biggest competitors in Asia, Connell Brothers, is going down the vertical integration route. Is there anything you had observed there in terms of their rationale for that? Any sort of changes in the market dynamics, which you think might be forcing that decision?
No, I am not totally clear when you say going down vertical. Can you just explain what you mean exactly by that?
As in they're going to start opening plants.
Like manufacturing?
Yes.
Well, to be honest, that's pretty much news to me. That's not been a feature in Asia Pacific that I know of. I think you have to make sure that you keep it in context. Connell Brothers is a privately owned company, actually headquartered in the 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.
Okay, thanks.
The next question is a follow-up from Pieter Olofsen, Kepler Cheuvreux. Your line is now open. Please go ahead.
Yes, thanks for the follow-up. It's about CapEx. I think in the recent past you have 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?
Yeah, 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 sort of on their way now in terms of the sites are selected and what have you. It is a complicated scenario in so far as these investments are capitalized, but in reality, there will be a quid pro quo in terms of we're being supported by the authorities in China as an opportunity entry in terms of cash in. Going forward, I think we probably, maybe EUR 160 is probably more the sort of area that we've indicated as being the likely capital expenditure requirement for the business in the future. The EUR 190 is a bit of a one-off.
Okay, thank you.
There are currently no further questions. As a reminder, if you would like to ask a question, please press zero one on your telephone keypad now.
Okay, well, having seen no more further questions, thank you very much indeed for calling 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.