Mar 10, 2021
Operator
Dear, ladies and gentlemen, welcome to the Full Year 2020 Results Call of Brenntag SE. At our customer's request, this conference will be recorded.
As a reminder, all participants will be in the listen-only mode. After the presentation, there will be an opportunity to ask questions via the telephone lines.
[Operator Instructions] May I now hand you over to Brenntag's CEO, Mr. Christian Kohlpaintner.
Please go ahead.
Christian Kohlpaintner
Yeah, welcome, ladies and gentlemen, to the results call for the full year 2020 of Brenntag SE. My name is Christian Kohlpaintner, and I'm here together with our CFO, Georg Müller.
Together, we will walk you through our business development in the past year. I would like to start with a review of 2020 and Georg will provide further details on the financials.
As always, Georg and I are both happy to answer any questions you might have after our presentation. 2020 was an extraordinary year for Brenntag.
Among different topics, the COVID-19 pandemic and our comprehensive transformation program Project Brenntag played an important part. At the beginning of 2020, COVID-19 started to impact our business and private lives significantly.
Brenntag very early implemented a global crisis management and the measures to counteract the impacts of the pandemic and to protect the health and safety of our employees and business partners paid off. Throughout the year, we managed to maintain our supply chains uninterrupted and deliver products to our customers.
This was greatly appreciated by the market. This crisis management is still in place and continues its work as we speak.
2020 was also an extraordinary year for me personally, as I started as the CEO of Brenntag. At the same time, we initiated a holistic analysis with a focus on the long-term positioning of our company.
In course of last year, this analysis was transferred into what we call Project Brenntag today. Project Brenntag is one of the most comprehensive global transformation programs of our company with the objective to strengthen and to expand our position as the global market leader.
With this, we have identified various efficiency measures that are expected to deliver an additional operating EBITDA of €220 million in total, in the full year 2023, ramping up year by year. We implemented two global divisions: Brenntag Essentials and Brenntag Specialties.
And the go-live of this new setup took place on January 1, 2021. The two divisions are headed by our Chief Operating Officers: Steven Terwindt for Brenntag Essentials; and Henri Nejade for Brenntag Specialties.
Also since January, the new composition of the management board has been completed. We are delighted to welcome our new Chief Transformation Officer, Ewout Van Jarwaarde, who will amongst others be responsible for the implementation of Project Brenntag and the overall transformation process, the development of our digital transformation as well as functional excellence.
Ladies and gentlemen, the financial performance for the full year 2020 has been strong, despite the very challenging macroeconomic and operational conditions caused by the pandemic. Our high diversification by countries and by industry segments helped us mitigating the risks caused by the pandemic.
Also our excellent stable and reliable supplier base as well as our longstanding customer relationships were decisive, to navigate well through 2020. Brenntag once again proved the resilience of its business model.
The group generated an operating gross profit of €2.85 billion, which is an increase of 3.3% compared to previous year on a constant currency basis. Operating EBITDA grew even more and reached €1.058 billion.
On a constant currency basis, this is an increase of 8.3% compared to 2019. The development of the free cash flow was once again particularly strong.
Free cash flow amounted to €1.055 billion compared to the already strong €837 million in 2019. Our earnings per share amounted to €3.02 for the full year 2020.
With this performance Brenntag once again proved the resilience of its business model, particularly in times of crisis. I will talk about the status of Project Brenntag in more detail later.
Finally, the management board together with the supervisory board are going to propose a dividend of €1.35 to the general shareholders meeting mid of June this year. In 2020, we have acquired 3 companies located in the United States, in Thailand and in Taiwan, with a total enterprise value of €46 million.
Here we only talk about targets that have been closed in 2020. Further targets have been signed, but closing takes place within the next couple of months.
Although the amount spent is lower than in previous years, there are no major changes in our M&A approach going forward. We continue to allocate some €200 million to €250 million for acquisitions per year.
We also continue to sharpen our focus towards emerging markets and Asia, in particular, China. We want to grow in selected industry segments and strive to identify targets, delivering a more sizeable operating EBITDA contribution.
In 2021, we already started executing this approach. Our acquisition of Zhongbai Xingye in Mainland China was the first important step in this direction.
Zhongbai Xingye distributes a variety of specialty food ingredients, including dairy products and proteins. With the first stake, we acquired 2/3rd of the company for an enterprise value of €90 million.
The second tranche to gain a 100% ownership is intended for 2024. Closing of the first tranche of this acquisition is expected in the first half of this year.
Dear, ladies and gentlemen, overall 2020 was a successful year for us. We showed excellent financial results.
We worked intensively on Project Brenntag and continued on our M&A path. With this, I will now hand over to Georg, who will lead you through our financials in more detail.
Georg Müller
Thanks, Christian, and good afternoon. I would speak about the key financial figures for the full year 2020 starting with the development of operating EBITDA from the full year 2019 into the full year 2020.
You might remember operating EBITDA amounted to €1.2 billion for 2019. The translational foreign exchange effect amounted to a negative €25 million and our acquisitions contributed €18 million to the EBITDA growth.
Europe, Middle East, Africa, Latin America and Asia Pacific showed very strong organic operating EBITDA growth rates. EMEA reported plus 17% and Latin America and Asia Pacific showed 25% and 20%, respectively.
Our region North America declined by 7% organically and that is mainly driven by the continued weak demand in the Oil & Gas and Lubricants industries. On group level, we reported operating EBITDA growth of 6% organically, which we deem a strong achievement.
The overall market has seen a volume decline in 2020 due to the COVID-19 pandemic. But we were able to offset the volume decline by higher gross profit per unit.
On the next page, let me provide some more details on the business development in each of our regions. Overall, the performance was supported by several industries, Personal Care, Cleaning, Pharma developed particularly well.
In EMEA, we saw strong results throughout the year. We benefited from strong margin management and were able to overcompensate the declines in volume by higher operating gross profit per unit.
Operating EBITDA in EMEA increased by 19% on an FX-adjusted basis, and the growth is almost entirely related to organic business development. North America faced several headwinds in 2020 that lead to overall weak and somewhat unsatisfying results.
The main headwind in the region was related to the weakness in the Oil & Gas and Lubricants industries. Last year, we suffered a reduction of around €74 million gross profit in the Oil & Gas industry.
That is a decline of 24% compared to 2019. Within the Oil & Gas value chain, the upstream business was weakest with a decline of around 60%.
From the figures you can notice the relevance of the Oil & Gas decline on our overall North American results. Many other parts of our North American business actually develop positively.
To counteract, we applied very stringent cost management and decreased operating expenses by 5% on an FX-adjusted basis. Operating gross profit declined by 5.6%, and also operating EBITDA declined by 6.6%, both FX-adjusted, if I look at the organic level operating EBITDA in North America decreased by 7% organically.
Latin America reported strong results in 2020. We all know the continent was hit hard by the COVID-19 pandemic.
But we were clearly able to demonstrate the resiliency of our business model in the region. On a constant currency, operating gross profit grew by around 17% and operating EBITDA increased significantly by around 27%.
Organically, that represents 25%. Finally, on Asia Pacific, a very successful year, while the region was hit early by the pandemic, we saw a clear sequential recovery, particularly China recovered quickly and sustainably.
In this environment, the region reported an increase of operating gross profit of around 9%. Operating EBITDA increased by around 26% and organically the EBITDA increased represents 20%.
Across the region, and in many industries, we managed to achieve a highly positive performance. Let me summarize, 2020 was an extraordinary year, the pandemic forced us to even more focus on maintaining our supply chains and on tight cost management, and we manage that well.
In these very specific economic conditions, we were again able to grow our earnings and report very good results for 2020. I'd skip Page 9, which gives you more details on the segment reporting.
And I move to Page 10 that focuses on the fourth quarter. So the EBITDA bridge for Q4 2020 shows very similar trends as the full year 2020.
We reported a negative FX translation effect of €15 million. EMEA and Asia Pacific both grew strongly on an organic basis with 19% and 13%, respectively.
The group's operating EBITDA grew nicely by 14% organically. In our income statement on Slide 11, I particularly want to focus on the lines below operating EBITDA.
We report special items amounting to an expense of €47 million. And these items are mainly related to cost of Project Brenntag.
Depreciation amounted to €252 million, slightly higher than 2019. Financial result amounted to a net expense of around €80 million and the earnings per share stood at €3.02, that is stable compared to 2019 and that figure is after digesting the special items.
The cash flow has developed very positively in 2020. We report a free cash flow of more than €1 billion.
This is the highest free cash flow of the company has ever achieved compared to previous year this represents a very significant increase of more than €200 million. The increase in free cash flow can be attributed to several factors.
First of all, we were able to grow our operating EBITDA. CapEx spending stood at €202 million for the full year.
And finally, we saw significant cash inflows from the reductions of working capital. This is an area we have put increased focus on from the beginning of 2020.
We expect the strong cash flow also for this year, however, not at the same level as for 2020. The high cash in from working capital reductions is highly unlikely to be repeatable.
How did we make use of the free cash flow, we paid €251 million for interest and taxes? Payments for M&A amounted to €46 million.
And finally, in June last year, we paid a dividend for the fiscal year 2019 in an amount of €193 million. On Page 13, you can see our gross financial liabilities amount to €1.6 billion.
The difference to 2019 is mainly related to a repayment of a revolving credit facility of €340 million in the fourth quarter last year. Part of our strong free cash flow was used to repay this revolving credit facility.
Due to the significant decrease of net debt and the very good operating EBITDA, our leverage now stands at 1.3 times. You do know that we frequently point to a leverage target of 2 times.
We will monitor cash flow performance going forward and examine how we maintain an efficient capital structure. I'm coming to working capital.
Working capital amounted to €1.3 billion at the end of last year, compared to €1.7 billion end of 2019. So the balance sheet decrease is more than €400 million.
More importantly, we turned the working capital of 7.3 times, which is a good improvement compared to the 7 times in 2019. For the full year, we put higher focus on working capital turns, which now continuously pays off.
We deem these developments a strong success in our working capital as well as cash flow management. And in summary, we are very satisfied with the financial results 2020.
We delivered healthy earnings growth at an outstanding free cash flow and continue to have a balanced and sound financial profile. Before I hand the presentation deck, let me come to our dividend payments.
The Management Board and Supervisory Board will propose a dividend of €1.35 per share for the 2020 financial year to the General Shareholders' Meeting mid of June. Since our IPO now more than 10 years ago, we have pursued consistent dividend policy and managed to increase the dividend payments for our shareholders each and every year.
In terms of net income, the proposed dividend represents a payout ratio of 45%. In total, we will pay more than €200 million to our shareholders.
This includes - this concludes my introductory remarks on the financials, and I'll hand it over back to Christian.
Christian Kohlpaintner
Thank you, Georg. I would now like to talk in a bit more detail on the current status of Project Brenntag and the progress we have made so far.
Project Brenntag addresses the different needs of our various stakeholder groups. After providing a comprehensive information on the program that the capital markets update end of last year, Brenntag received very positive feedback from the different stakeholders, including suppliers, customers and investors.
The transformation program was implemented to form a strong basis to drive our organic earnings growth. We see a multitude of benefits for our business partners and our people.
Our new operating model will service our customers with a distinct approach even better and faster. Secondly, our initiatives within the go-to-market approach will promote a more focused client interaction.
Thirdly, our improved site network will increase customer proximity. And finally, a more performance-oriented culture will enable our leaders and employees to unfold the full potential and provide opportunities for personal development and growth.
Currently, we are consequently working on the step-by-step implementation of our Project Brenntag initiatives to achieve an additional operating EBITDA of [indiscernible] in total for the full year 2023 ramping up year-by-year. Today, we would also like to provide further details on the timeline of our transformation program.
Beginning of 2020, we started Phase 1 of Project Brenntag, which was a comprehensive diagnosis of our company. The second half of 2020 was characterized by defining our targets and the deliverables as well as initiating the quick win measures.
Here, we also focused on the preparation of the go-live of our 2 global divisions Brenntag Essentials and Brenntag Specialties. Currently, we are in Phase 3 of Project Brenntag, focusing on execution planning and implementation.
We have established our new operating model and are now about to create line management responsibility for the implementation of all measures, with the maximum degree of granularity. We started tracking our performance and are executing the improvement levels.
Phase 4 will then start in the second half of this year, where our focus lies on the continuous ramp-up of the operating EBITDA uplift through Project Brenntag, by fine-tuning the target organization and especially focusing on functional excellence. The go-live of our new business divisions took place in January this year.
Internally, we have been working on the business reporting according to our new setup. We will start to report according to our new structure in the first quarter this year.
Also, we saw first positive impacts from our short-term initiatives, the so called quick-wins already. With regards to cost development for Project Brenntag, we reported around €47 million one-off costs in 2020.
This is more than 10% of the total costs of €370 million allocated to Project Brenntag. Furthermore, we have set up the customer segmentation we announced at our capital markets update in November and accordingly have relocated our sales organization.
With regards to our site network optimization, we are on track with the optimization of our route planning and also with the consolidation of some sites. In Q4 last year, we have also finalized the new composition of our leadership team below the management board.
For this new global leadership team, we have set up a new incentive scheme, both for short-term and long-term incentives, which is fully aligned with our annual operating EBITDA growth ambitions, the full 2023 impact expected from Project Brenntag and our medium-term growth targets. Coming to the results, we have achieved at Project Brenntag so far.
Our pricing and indirect procurement initiatives are well underway. We were able to improve our working capital turns from 7 to 7.3 year-over-year.
We reduced our headcount structurally by almost 200 people. We have closed 30 sites globally already.
As Phase 2 is completed with full year 2020, we can report the operating EBITDA contribution of the Project Brenntag measures to our full year results in an amount of approximately €15 million. Ladies and gentlemen, now let's come to the outlook for 2021.
You all know that COVID-19 will stay with us well into this year. Therefore, we still have to cope with the impacts of the pandemic around the globe.
And we expect the continued high level of uncertainty regarding the macroeconomic development, in particular, for the first half of this year. We manage this difficult situation well and are convinced that we are also well prepared for the challenges to come in 2021.
We are on track with the implementation of the measures and initiatives of Project Brenntag. Against the background of the changes we have implemented already and the details we continue to work on, 2021 will be a year of transformation for Brenntag.
Since January, we steer our company in the new organizational setup. In line with this, we will change our external reporting and publish our results for the group and for our new 2 divisions: Brenntag Essentials and Brenntag Specialties, starting with our first quarter 2021 reporting.
In addition, we will stick to our proven M&A approach and will now increase our focus on more sizable targets and dedicated geographies. So what do we expect with regards to our financial performance this year?
As mentioned earlier, 2021 will again be characterized by a high level of uncertainty. The virus will continue to impact macroeconomics around the globe, at least in the first half of 2021.
In addition 2021 will be a year of transformation for us. Nevertheless, for the first time, we would like to provide guidance for our operating EBITDA development provided early in the year.
For the full year 2021, Brenntag expects an operating EBITDA between €1.08 billion and €1.18 billion. This range includes organic growth expectations, benefits from Project Brenntag as well as the M&A contributions from our already closed deals.
Moreover, it assumes FX rates that remained stable on current levels. And with this, I would like to conclude the presentation.
And now, Georg and I are more than happy to answer your questions. Thank you.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions] And the first question is coming in from Rory McKenzie from UBS. Please go ahead.
Rory McKenzie
Good afternoon, everyone. It's Rory here, 3 from me, please.
Firstly, can you give more detail on the gross profits drivers by volume and gross profit per ton? Q4 constant currency gross profit was plus 7% year-on-year compared to minus 0.2% in Q3.
So what drove that change? Secondly, within your guidance, what are you assuming for gross profit per ton this year, given we're now seeing product prices are rising and last year was quite an abnormal environment?
And then, finally, could you comment on where you expect leverage to end the year excluding potential M&A? I know you had a great year in cash flow and so leverage is starting on a low-level.
But obviously, working capital will somewhat reverse and Project Brenntag should see a big increase in cash restructuring costs and CapEx spend. Those 3, please.
Christian Kohlpaintner
Well, thank you, Rory. I think all those 3 questions I will ask Georg to provide insights.
Georg Müller
Rory, hi, good afternoon. Good speaking to you.
When it comes to the volume versus gross profit dynamic in the year and in Q4, then Q4 has kind of a similarity. I would say to Q2.
Volumes have been in Q4 relatively flattish, but gross profit marginally down. But gross profit per unit has been strong, as strong as we have seen it earlier in the year, and that leads to the high growth rate in gross profit in Q4.
What do we expect for this year? Not that easy to say, because it's not typical - not typical in chemical distribution that volumes and gross profit per unit kind of squeeze against each other.
So, if we were to see a nice volume rebound then I would not be surprised if you see some mix driven, some gross profit per ton compression. But if the volumes stay on the benign levels, which they currently are on, I would fully expect us to go through the year; we see high gross profit per ton rates that we have seen before.
I know there is still the leverage question outstanding. But did I so far answer the first 2 questions?
Rory McKenzie
Yes, that's very helpful. Maybe just on that gross profit per ton outlook, because I guess, through the worst of the pandemic, through the first lockdowns, there was a huge uncertainty in the market.
Product prices fell. There was a big channel shift in some areas.
Does that not set a very abnormal level of gross profit per ton? Or are you confident that in this volume environment, you could sustain that at that high level?
Georg Müller
Maybe it's an uncertain world, in that state, in that sense I can only make an uncertain statement. But we do feel that the gross profit per ton, on the business mix, we are currently having - is on reasonable levels.
I would not say that we are currently operating on abnormal level.
Rory McKenzie
Okay, thank you.
Georg Müller
When it comes to leverage or let me more answer the question in cash flow terms maybe. And you have seen the free cash flow of €1.055 billion for last year and that's supported by €300 million release of liquidity from working capital.
So those €300 million will, in all likelihood, not be repeated. In absence of any further measures, I would expect the leverage to go down a little from where we are currently, but not with the huge big steps that you have seen from 2019 to 2020.
I know I'm evading an answer to a degree. But there are so many moving parts, working capital development, Project Brenntag cost, M&A.
It's difficult to be more precise.
Rory McKenzie
Understood. That's really helpful background.
Thank you very much.
Operator
The next question is coming from Mutlu Gundogan from ABN AMRO. Please go ahead.
Mutlu Gundogan
Yes, good afternoon, everyone, and thank you for taking the questions. First on the guidance, so the midpoint of the range is €1.13 billion.
And assuming currency is a negative €30 million and M&A is a positive €10 million, that would imply organic growth some €90 million in your guidance, 8% year-on-year. Can you tell us how you see the various components of that €90 million, i.e., what have you assumed for volume growth or change in gross profit margins?
And I understand it comes back to the previous questions. But also, what's the net cost savings you have from Project Brenntag?
That will be very helpful. And then, secondly, on EMEA specific, you already alluded to also here a very strong gross profit margin, difficult to make any forecasts.
But how has it developed throughout the first quarter of this year? What are you seeing so far?
And then, thirdly, on North America, can you tell us what the headwind on for gross profit and EBITDA was in Q4 from the weak oil and gas business and lubricant markets? I'll keep it at those 3.
Thank you.
Christian Kohlpaintner
Mutlu, hi. Georg, maybe I take the questions.
I mean, on the guidance, first of all, I would point out that this is the first time in our publicly listed history that we give a specific EBITDA range this early in the year. And we think at reasonable rates of €100 million.
So we are more specific than we have been in earlier years already. How would I look at it structurally?
We ended last year at €1.058 billon. Obviously, in all likelihood FX as you pointed out will be a negative translation this year.
So if dollar/euro trade around $1.20, $1.21, which we have seen most of January and February, then I would actually say it's more negative €40 million than a negative €30 million. So that takes the year starting point down to say €1.020 billion.
And that €1.020 billion already includes as we laid out €15 million Project Brenntag benefits that we already generated last year. So if you take the €1.020 billion up to the lower-end of the guidance range, not the midpoint, the lower-end of the guidance range, with an additional €60 million, which we feel as a strong commitment in this uncertain world, and that does include mostly Project Brenntag benefits, but then we tell you and the market there is a clear upside on top of that and that upside would be underlying organic growth of the business or even higher benefits of Project Brenntag.
That's how we suggest to think about it structurally. And apologies, I haven't responded to the M&A point.
The guidance range includes the M&A that was closed at the time of publishing the report, and that would be below €10 million. If you included the Chinese acquisition already that would indeed come on top.
So that's how we would suggest to think structurally about the guidance. I beg your pardon.
I can't really be more specific with respect to lower-end, mid-point, upper-end or split into more components. When it…
Mutlu Gundogan
That makes sense. It's really helpful.
Christian Kohlpaintner
When it comes to the question, EMEA situation and how did we move from Q4 into Q1 this year, I would generally say for the group and that includes EMEA or specifically EMEA, so positive trajectory continues so far. Obviously, last year, the market changed significantly.
And in March, April and May last year, and we had extremely good results in March, April, May last year. So there is a hill to climb now.
But so far, we are seeing a very good trajectory. The last question was about oil and gas headwind in Q4.
I would have to look up the exact number, but we have not seen much of a relief in Q4. So we are still in oil and gas in North America, about roughly 25% down against previous year.
Mutlu Gundogan
That's very helpful. Thank you very much.
Christian Kohlpaintner
You're welcome, Mutlu.
Operator
The next question is coming in from Simona Sarli from Bank of America. Please go ahead.
Simona Sarli
Yes, hi. Thank you very much for taking my questions.
[indiscernible] if I may. So you already disclosed how much was the positive contribution from Project Brenntag in 2020.
Could you give a rough indication on the phasing of the remaining €205 million in 2021, 2022 and 2023? And second question, so on working capital, you said that improvement was a combination of the benefits from Project Brenntag as well as obviously the contraction in volumes.
Can you give an idea of what is sustainable as a working capital as a percentage of revenues going forward? So how much of this improvement was related to Project Brenntag?
And third question, how should we think about Q1, especially in North America, considering the bad weather impacting Texas and other southern states in February? Thank you.
Georg Müller
Simona, hi, it's Georg. We are hesitating to split out 2020 benefits from Project Brenntag exactly to the financial years.
We said in the Capital Market Update and we stand behind it. It's somewhat frontloaded ramp-up.
So we have seen some steps already, probably a little bit earlier than we expected ourselves, so some benefit already in 2020. And we'll see another meaningful amount this year.
The exact split will ultimately depend on how fast we are with the site network optimization, which is where the timing is not fully in our hands. And on the acceleration of the headcount reduction, there as you know, we seek an alignment with all the different workers' representatives in the different countries.
And we highly strive for solutions that is agreeable to everybody. So I can't give you an exact split.
But the statement that it will be a frontloaded ramp-up does stand. The working capital reduction that led to a cash-in of a little bit more than €300 million last year, I would have to go back to the exact details.
But order of magnitude, I would say, half of it is sales driven, so volume and price driven. And in that sense, that half kind of depends on future market and business development.
The other half, so the other €150 million, €160 million, a clear improvement in working capital turn in course of 2020 and we would expect that to be sustainable. And I'll give it over to Christian for the weather, North American question.
Christian Kohlpaintner
Yeah, Simona, thanks for bringing this topic up, because it is indeed interesting and quite challenging topic, because out of various reasons. 2 major points.
First of all, our direct impact, that means that our locations being shut down due to the severe weather conditions that actually happened in February are not insignificant. So we had regional operating companies who couldn't deliver products for 4 or 5 days roughly, because we just simply couldn't get the material on the road and delivered to our customers.
Secondly, more severe is, of course, the strains this event has put on the already tight supply chains in the United States. I think I'm quoting chemical weak numbers here.
When you look at the U.S. ethylene supply, 78% was shut down.
When you look on the [C3] [ph] value chain, which is probably the most critical one, 60% to 65% of U.S. propylene capacity was shut down.
So, it tells you that also the whole value chain, even into vinyl chloride, into chlorine, into caustic soda, all are currently severely under stress. And we have more than 30 force majeures globally announced by large chemical manufacturers.
So currently supply and maintaining supply to our customers is the biggest challenge we are facing right now.
Simona Sarli
Okay, thank you. If I may, sorry, just one last one.
You mentioned at the beginning of your presentation, that consistently with implementation of Project Brenntag, you are now introducing a new incentive scheme also for mid-level management. Could you maybe provide a little bit more color on how that has changed?
Thank you.
Christian Kohlpaintner
Yeah, again, we talked about the global leadership team. This is level one, level two, below the board of Brenntag.
So basically the top 100 leaders of this company roughly. And the changes we have made are in both areas in the short-term incentive and in the long-term incentive.
It's now - this whole group has a uniform incentive scheme independent whether they are in a business or whether they are in a business service function. They are heavily centered around financial KPIs, about 70% of the short-term incentive is leaning towards financial performance targets.
This is number one, the organic EBITDA growth, which is almost half of that financial performance indicators, which we are incentivizing, then working capital turns as the second lever. And we have basically made sure that actually those measures are also tightly knitted to the Project Brenntag deliverables.
So there are also clearly expectations on the individual Project Brenntag measures and how they are implemented. So the line responsibility of that individual is also reflected in that KPIs, which we are using here on the short-term incentive.
More importantly, on the long-term incentive, we have created a long-term incentive, which is clearly directed towards the €220 million EBITDA upside. And here we are very digital, if the €220 million are reached, there will be a target achievement of 100% in the long-term incentive plan.
If it falls €1 below, the payout is zero. So this is a clear, clear incentivization for delivering the €220 million which we have promised to the market.
Simona Sarli
Thank you. That's very helpful.
Operator
Next questions are coming from Rajesh Kumar from HSBC. Please go ahead.
Rajesh Kumar
Hi, good afternoon. Thanks for taking the questions.
Could you give us some color on how much expense have you budgeted - cash expense have you budgeted for Project Brenntag in the current year? Just that would give us some handle on the cash flow modeling aspect of it?
Then second question, obviously, your medium-term objective is to reduce the working capital. We had a big unwind last year.
No one expects that to repeat, especially if you get back in the growth mode. But over the next 2 or 3 years, what are the various levers you could pull on the working capital side?
That would be very helpful to understand. And finally, as you're going in the release, you mentioned that you had a positive comment from customers and suppliers.
Could you give us some flavor of what sort of discussions you've had with the suppliers and customers? And can you identify new opportunities out of it?
Or are they just supportive of the transition? So what do you mean by [indiscernible] could you qualify that a bit better, please?
Christian Kohlpaintner
I will hand over the first 2 questions to Georg, and then I will take it up on the customer discussion.
Georg Müller
Rajesh, hi, good afternoon. Cash out for Project Brenntag.
So as a reminder for the group maybe the €370 million total one-off cash out that we caught out in November last year is roughly one-third CapEx. So say €120 million CapEx and €250 million expenses, where the €250 million expenses will be reported below operating EBITDA.
Out of the budget, if you want to call it that of €250 million expenses, we had €47 million already last year. So a fair degree is already digested.
How much we will spend this year kind of depends on the speed of the negotiation with the workers' representatives on FTE reduction and on the speed of our site network optimization. Our best guess for this year is that it will be a number that comes close to €100 million, maybe a little less than €100 million.
But it's - the timing is a little difficult to predict either way, we are only talking about shifts between periods. The CapEx part of it is mostly related to major projects in the site network optimization and that will be more backend loaded.
So I wouldn't expect much of an additional CapEx this year actually. When it comes to the question on future working capital management, I don't want to beat the same bush over again, but I think we have a strong trajectory in course of last year already.
And the first step we have to ensure this year is ensuring that the levels are sustainable that we reached by now through increased focus and management attention and what have you. There are further steps to come midterm down the road, but these need more analytical tools, I would say, in the area of - for example, in the area of inventory management so far, we mostly rely today on the experience of inventory managers, but we will for sure implement more analytical tools going forward.
And I would also expect more benefits from the much-improved customer segmentation where we can and will take much more analytical decisions on payment terms given to customers based on potential profitability, credit risk, what have you. So that would be my 2, and I'll pass it over to Christian.
Christian Kohlpaintner
Yeah. I spent significant time with our large suppliers and large customers.
Sometimes, they're the same, because being the role Brenntag plays in the chemical industry, most of our larger suppliers also of course large customers of ours for different products. But overall, when you talk to our key suppliers, the reoccurring theme which comes up is actually that they show a very high interest of whether we are really able to replicate the strategies to make them successful in their markets.
And here, clearly, the creation of the 2 divisions Essentials and Specialties is really, really intriguing to those key suppliers in particular in the Specialties field, because they see that actually, we're not only talking about being the largest specialty chemicals distributor in the world. We are also acting and putting our organization in line with that role in which we have in that position that we have.
And here, there are - I would say, from a character and from a quality of discussion, there are now totally different discussions possible, because we have added this credibility of that we not only talk, but we actually put the organization in place to do it. There are out of that movement, interesting opportunities coming up, typically people understand much more and much better, also in the Specialties field, what we can do for them.
And we show much stronger and much clearer and transparently our technological capabilities, our application know-how, our labs we have globally. So this is quite convincing.
And we have now, I must say, quite intensive talks of how can we leverage, let's say, what we do for a certain customer for a certain supplier in a certain country or a region, how can we actually leverage this globally? And secondly, also we have discussions, because we have now capabilities as one example in sensitive areas like in pharma that we can offer now also global quality agreements, which allows to our suppliers and our customers, that we can replicate their needs everywhere in the world.
And that's, I think, getting more transparent and more clear to those customers and suppliers, and this is why the feedback overall is very positive.
Rajesh Kumar
Understood. That's really helpful color.
Just one dimension, perhaps if you could clarify, I mean, I know for certain, a lot of people were surprised to see how large your specialty chemical unit was when you disclosed it, right? So did you find that level of the price from your customers as well?
Or were they aware of your scale?
Christian Kohlpaintner
I think on the surface, probably yes. And even we - remember, we were talking about our Specialties business being a certain percentage of being roughly one-third of our business.
And now we have the transparency. And now we show really what it is.
The same I must say is true also for customers and suppliers. They know that we are big.
They know that we have a strong position. But they have not really felt yet what are really our capabilities.
And with this kind of more focused sales approach we are taking and focusing only on our capabilities we have in the specialties, it comes from many of them as a surprise, as I just mentioned, being able to have global quality agreements in place. That's actually a competitive advantage Brenntag has, and we'll work on and develop further of being the largest player and being represented in 77 countries in the world.
So I believe, we shorten that approach, we make it more clear, we make it more visible. And thus we are positive that this will also show a positive impact going forward.
Rajesh Kumar
Understood. Thank you very much.
Operator
The next question is coming from Peter Olofsen from Kepler Cheuvreux. Please go ahead, sir.
Peter Olofsen
Yes, good afternoon. First of all, a follow-up question on the guidance.
In the annual report, you indicate that you expect the Essentials business to outgrow the - sorry, the Specialties business to outgrow the Essentials business. Is that purely a reflection of the specialties markets are growing faster?
Or is it also because you need a bit more time for your performance and execution in the Essentials business to improve? And my second question is on the Oil & Gas business in North America, where you gave an indication of the declines that you have seen there.
Is it fair to say now that this business has stabilized? And if so, what do you think is the recovery potential for this business?
Georg Müller
Yeah, I'll take those maybe Christian wants to add. Peter, good afternoon.
So the difference in growth rates that we expect for Essentials and Specialties is mostly if not completely underlying market. So we fully trust in the capabilities and the potential of our Essentials business.
But as we all know the underlying market is growing somewhat slower than the specialty market that that drives our statement. Oil & Gas, sequentially the business has stabilized since several months already.
But if you look into the trajectory of comparables, then I would have to go back to my data, but basically the business came down if I remember correctly, mostly March and April last year. So that is why you still see in Q4 and probably also beginning of this year, negative year-over-year growth rates, but sequentially the business has stabilized.
And I would not expect the negative growth rate year-over-year to continue for much longer. I'll ask Christian for help on the recovery potential.
Christian Kohlpaintner
Yeah, I see it's a quite similar. So I would say, the Oil & Gas downturn in my point of view will bottom out now.
We see oil price is stabilizing, you see no huge constraint on supply chains, which typically supports pricing, OPEC is very disciplined to our supplies. So that the oil price actually is going up quite nicely since, I would say, 3, 4 months.
And now, of course, everything depends on is drilling activity and other activities in U.S. coming back.
Certainly the harsh winter shock in February didn't help in that respect. So one needs to be seen - one needs to see.
But I believe the Oil & Gas business is on a trajectory of being stabilized and then gradually recovering. How quick and how fast, nobody knows at this time.
Peter Olofsen
Okay. Thank you.
Operator
The next question is coming from Markus Mayer from Baader. Please go ahead, sir.
Markus Mayer
Good afternoon, gentlemen. 2 questions as well.
First question - just 2 questions on more circling around the competitive environment, coming back to the supply chain disruptions, as you are the largest chemical distribution company on the U.S., I guess, you should have better supply security than small competitors. Therefore, my question is, do you think that you can further gain market share, not only in the U.S., but also assess disruptions also in Europe and even also in Asia, that you basically can gain market share globally.
That would be my first question. My second question would be more on the overall effect of [indiscernible] also potential consolidation out of that?
Do you think that the dynamic effect and also the stricter REACH regulations or all kind of stricter regulation, but also digitalization, together with pandemic that will accelerate consolidation? That's my second question.
And the last question will be on COVID vaccine and potentially the delivery by Brenntag of this COVID-vaccine could be extra business for Brenntag? Or is it kind of extra business that you're serving farmer customers with the [strengthen that you're - during this next one] [ph].
Thank you.
Christian Kohlpaintner
Marcus, thank you very much for those 3 questions. Yeah, I mean, on the supply chain side, we see this constraints and our many, many customers knocking on our door for product to be very clear.
And so, I think, we try now to navigate carefully through this tight situation and making sure that we are supplying the markets responsibly and in appropriate manner. So I think you see the constraint on a day-to-day business, of course, whether this leads at the end to market share gains, I think, for me, it's too early to tell.
Currently, we're just trying to navigate through this tight situation, I must say, particularly in North America. On REACH regulation and digitization or the regulatory aspects of it, yes, I believe, Brenntag is in a strong position to utilize those kinds of development.
So we clearly need to play our role here as the world market leader, and clearly also defining what that means for us and whether consolidation is accelerating out of those 2 aspects. I'm not 100% sure.
At least, what it will do is that the competitive pressure goes up for those who are fast movers. And for those who are actually playing the digital platforms.
And I've said it with many calls previously, the COVID pandemic has changed the interface to customers significantly. And this is something where we need to much, much more move also smaller customers and those who want actually to also digital platforms.
And we see a nice directory in our digital sales month by month now, as we move forward, I will talk about this more in the coming quarters give you more transparency here. On the COVID vaccines, no, this is not in our business where we are particularly strong and distributing this extremely small quantities, extremely small lots that's not in our core business.
And that's not where we are really strong. We do have efforts in Asia and particularly in Singapore, because there we have GMP warehouses, which allow us to store pharmaceuticals and store intermediate.
So here, we have no requests, but that's a very local and regional aspect, and cannot be generalized globally.
Markus Mayer
Okay. Thank you very much.
Operator
The next question is coming from Isha Sharma from Stifel. Please go ahead.
Isha Sharma
Good afternoon, gentlemen. Thank you for taking my questions.
The first one would be on whether you could tell us what you see at your customers in terms of order patterns given that most chemical companies seem to have seen a very strong volume trend in Q4 and Q1? And how do you compare to them since you talk about volumes remaining rather lucid?
The second one would be for Asia, your strategy in the past has been on increasing market share, which meant volatile conversion ratio and rather low level. But now that you focus more on the EBITDA contribution within the region as well, does that mean that the above 40% conversion ratio is sustainable?
Christian Kohlpaintner
Okay, those 2 questions - Isha, hello. Yeah, the customer - with our order book being rather thin and rather short noticed, and the average order size is €3,000 and very fast changing business.
So it's really not totally predictable of how the customer order pattern is going forward, and how far we can see. We've seen greatly from Q2, Q3, Q4, a directory of recovering demand globally.
Again, different by industry segment to industry segment, also different region by region, but nevertheless, we saw the trajectory and we believe from what we see in current trading that this trajectory continues also well into Q1. But, again, we need to face also in some uncertainties, and also the constraint supply chains, which is not only U.S., but it's also out of China, which you certainly have also may be heard from other players in the chemical industry is a severe topic right now.
So one needs to see how that volume trends really, really are developing in Q1. And also what Georg already said, we had last year in March, pretty good volume development.
So, I think, we need to see how the Q1 volume-wise we play out. On Asia, I believe you can grow in Asia also with decent conversion margins.
So growing in Asia is for me not a question of margin versus volume to some extent is always is. But on the other hand, I believe the opportunities we have in Asia are so plentiful and so broad that I see for us great opportunity, strengthening our presence there also creating decent returns while doing that.
And I only always repeat, we are considered as one of the largest players already in China. But the chemical industry in China, we have less than 1% of market share.
So that shows you what kind of opportunities we also have in that particular market. Overall, I'm very positive on Asia and we will continue to push and drive growth in Asia.
And you saw already I would say in the 2020 numbers that this recipe has worked quite well.
Isha Sharma
Thank you. Maybe I can squeeze just 1 more in.
On the pricing, you've always mentioned that as a distributor, you benefit from volatility. Is that something that is also helping you with the gross profit per ton in terms of going into Q1 as well?
Or is that something which is on a constantly increasing basis? [indiscernible].
Christian Kohlpaintner
I think, I've mentioned it several times. Volatility is actually a strength Brenntag has.
Its commercial force is very agile, very quick in adapting to different pricing scenarios in the market. And this is also what I learned coming from manufacturers to distribution due to this fast-turning business we have.
We are more flexible and more agile in price management and adaptations. So volatility is actually in our case, our friend.
Isha Sharma
Right. Thank you.
Thanks a lot.
Operator
The next question is coming from Daniel Hobden from Credit Suisse. Please go ahead.
Daniel Hobden
Hey, guys, just 1 left for me, if I may. It's around the leverage, which is clearly below the 2 times you've spoken about the M&A.
I was wondering, what is the capital allocation policy, if leverage stays below 2 for quite some time. And I suppose we'll building on that question.
How do you see the M&A marketplace at the moment? And I think you've pulled out bigger transactions, you've pulled out Asia Pacific.
How is the competitive bidding process over there? I think, there's a few players that are looking to grow in that region as well.
And just some thoughts around that dynamic group would be interesting, please?
Georg Müller
Dan, Hi. Georg.
How to respond to the leverage question? We are currently reviewing all the alternatives and options, and we are reviewing and reviewing again, our cash flow plans for this year, and the business perspectives, M&A, working capital considerations.
I think the only thing I can say at this stage with respect to leverage is there is no idea to run the business permanently on 1.3 times or even lower leverage. I apologies, I can't say more than that currently.
I think that was the second part of the question about - help me again about the M&A landscape in Asia.
Daniel Hobden
Yeah, just around the competitive bidding around the [Suez] [ph] transactions and how you're seeing the pipeline in that region, if that's okay?
Christian Kohlpaintner
Yeah, I think - Hi, Dan. The M&A pipeline is healthy, there are good opportunities out there.
Competitive processes are, of course, also out there, and sometimes quite strong competition, I must say, for an interesting target. We stay disciplined, we stay very clear and what we want to do and what we do not want to do.
And from retrospective, I would say, the pipeline is filled well. There are good opportunities for us fulfilling those 3 dimensions, I meant earlier with the increased focus.
And so I think it's just for us at the end of the day to make one or the other target really successful. But the competitiveness is quite high right now for good assets.
Daniel Hobden
Perfect. Thanks.
Bye.
Operator
The next question is coming from Chetan Udeshi from JPMorgan. Please go ahead.
Chetan Udeshi
Yeah. Hi.
Just a couple of questions. First one was - and I mean, there is - this concern in the market today that Brenntag has over earned in 2020, especially during second quarter, and the things were tighter to source and prices put up by Brenntag and other distributors.
But it feels like - you already mentioned Q4, the gross profit per ton was still relatively strong. Is that a function of pricing going up?
Is that a function of mix? Or is it both?
I mean, the crux of the question is, do we think that is something which is one of the natures which will normalize and create a headwind in 2021. That's the first part.
And second part was comment on M&A focusing on sort of bigger size or bigger EBITDA contribution targets. I mean, is this some sort of change in strategy to now focus on sort of bigger consolidation opportunities, rather than just going after smaller targets?
Or am I reading too much into that statement?
Georg Müller
Yeah. Chetan, hi.
Georg. I don't think we over-earn.
Actually, I think we under-earn. Customers and suppliers should value our services even better.
No, just joking. I mean, obviously, 2020 was an extraordinary year in many, many aspects.
Pricing volatility, supply chain challenges, pandemic challenges. And it's very difficult to sort out analytically all the tiny bits and pieces, and how they added up to our results.
I would not say that we over-earned. Yes, we had specific circumstances that were difficult on the one end; lack of demand in certain customer industries, lack of demand generally.
And we had other circumstances that helped our business. Our strong ability to manage supply chains and to have product availability, to be a very reliable high-quality source to our customers, but also pricing volatility in the market that gave us some margin opportunities.
So it's more difficult than in earlier years to build a plan for 2021 based on 2020 results, because of the extraordinary situation. But we are pretty confident about the earnings range that we laid out in our guidance for this year.
Christian Kohlpaintner
And, Chetan, on the M&A, I think Brenntag has acquired since 2007 more than 100 companies, and many, many of them being rather small, and creating an enormous amount of complexity, while integrating them and while adding sites and these kinds of things. So when I'm saying we are sharpening our focus towards more meaningful or sizable targets, it just means that we are really looking into targets specifically, which are to some extent moving the needle on the EBITDA for Brenntag a bit.
And that's naturally targets which are in the 3 digit million range when we acquire them as an EV. So from that perspective, this is how you should interpret that that does not exclude, of course, that there's - if there's a really interesting topic of a smaller company, where certain technology comes, for instance, with it or where we are able to close a certain white-spot in our product portfolio is one example.
But we don't do it, because dogmatically we have said we don't do it. But I think the focus is shifting towards what I have described.
Chetan Udeshi
Got it. Thank you.
Christian Kohlpaintner
You are welcome.
Operator
Next question, again, is coming in from Mutlu Gundogan. Please go ahead.
Mutlu Gundogan
Yes, thanks. I had a few follow-ups.
So, first, on the Project Brenntag, the €15 million contribution in Q4, would you be able to split that over the segments? That is the first.
And secondly, on your operating gross profit margin, yes, we've seen an uplift in Q2 and now again in Q4. Would you be able to split that over Essentials and Specialties?
Is one of those 2 driving that increase? And then, finally, to come back to M&A, I hear you saying that you're looking for EVs of triple digits.
But you also said more dedicated regions. Could you explain the latter?
Are those certain countries you're looking for? And also, would the large acquisition go against Project Brenntag as it would make your site footprint more complex while at the same time you try to simplify it?
Thanks.
Georg Müller
See, help me with your first question, Mutlu. That was looking for split of, say, €15 million into what?
Mutlu Gundogan
Yes, over the regions, i.e., segments. So how much in EMEA, how much in North America?
That will be very helpful.
Georg Müller
Oh, that's difficult and it becomes very, very granular. So we tried to help with the €15 million to give you an idea of the order of magnitude achieved through this Project Brenntag already.
We think it becomes too granular if we go to the regions. Apologies for that.
The second one, the split in Essentials and Specialties, kind of likewise, we start reporting on Specialties and Essentials Q1 this year. And you'll get full transparency on the 2 divisions for this year.
But that we don't have figures to disclose on Specialties and Essentials for last year. The M&A point is for Christian probably.
Christian Kohlpaintner
And on M&A, on regions, I'm always saying we are sharpening the focus in 3 dimensions. One is actually the size we already talked about.
The other one is the regions and the third is the industry segments we want to grow. With the regions, I mean that we have large growing chemical markets like in China, where Brenntag is currently underrepresented, given its global position.
I think for me it's absolutely clear that not only by M&A, but also by our organic efforts, we need to foster and we need to basically harvest the growth opportunities, which are out there. The chemical industry market or the chemicals market in China is twice the size of the European market and twice the size of the American market.
So we need - and it is growing, still 5%, 6% and higher even. So we need to be present in that growth pocket.
And this is why I'm saying we need to strengthen and focus our approach towards emerging markets. Look on our performance in Latin America; it was a stellar performance in 2020 when it comes to growth there, also interesting opportunities for us as well.
That does not and I specifically say that exclude that we are not acquiring any more in North America and Europe. I think it still is depending on what industry segment we are talking or what deal size we are talking.
And if that's the right one, we certainly would also continue to acquire in Europe and in North America to act as a consolidator in the market. The site topic is an important topic, of course.
We try now to reduce the complexity by going from 700 sites to 600 sites. Every acquisition, of course, typically adds sites.
But we are, I must say, also in our negotiations with certain targets, very firm now, on what kind of sites we take on and others, which we consolidate before we even acquire the company. So I think this is not running against Project Brenntag.
But it's on a much more scrutiny what kind of complexity do we bring with certainty into Project Brenntag or into Brenntag overall, not only in the project, but overall in Brenntag.
Mutlu Gundogan
Thank you very much.
Operator
[Operator Instructions] There seem to be no further questions. For closing remarks, I get back to the speakers.
Christian Kohlpaintner
Thanks a lot for dialing in. And following our earnings call for full year.
As I've said, I believe we have shown a strong performance in 2020. We have continued to work with high speed on our Project Brenntag implementation and also our M&A efforts still is following our guidance which we have given in the markets quite for some time now.
So I think we are on the good trajectory and are now in full swing to deliver what we have promised to you and to the market. So, looking forward to further interact with you going forward.
Thank you very much.
Operator
Ladies and gentlemen, thank you for your attendance. This conference has been concluded.
You can now disconnect.
Christian Kohlpaintner
Thank you.
Georg Müller
Thanks.