Azelis Group Nv

Good day, everyone, and welcome to the Azaleas 2021 results presentation. My name is Pam, Investor Relations, and with me today are Jochen Muller, CEO, and Tez Bakker, CFO. Jochen will give us the operational highlights of the year, and Tez will talk about the numbers. Jochen will then provide the outlook for 2022, and we'll open the floor for Q&A. Please note that this presentation may include forward-looking statements that are subject to risk and uncertainties. This webcast is being recorded and will be made available on our website. With that, I'll turn you over to Jochen.

Thank you, Pam. Good morning, everybody, and welcome to this call. 2021 was a record year for Azealus on many fronts. Revenues increased by 27%. Almost 16% was organic growth. Demand was excellent in both the life science, industrial chemicals and markets. Equally important, we continue to leverage our growing scale to win new business from customers and principals. In addition, our scale allows us to efficiently manage the impact of the ongoing supply chain crisis and also manage and deal with inflation. In 2021, we closed a record of 12 acquisitions, like strengthened our lateral value chain and strategic market supplements across EMEA, the Americas, and also in Asia Pacific. Those 12 companies in total made over 530 million Euro in annual revenues. Moving on to profitability now. Adjusted EBITDA increased over 41% in 2021. Besides the top line expansion, the profitability expansion was also a result of the successful EBITDA margin expansion of 95 base points versus our annual objective we communicated earlier of 10 to 15 base points. This is another proof point of the benefits of scale. Positive mix effects and effective pricing management also contribute to this margin expansion. Now, operationally, we're running full steam with our internal programs to strengthen our network. We have launched more than 50 customer vehicles, 10 e-labs, and have now completed the pilot phase of our principal. We also remain fully committed to our sustainability agenda. And in 2021, we obtained the platinum rating from Ecovados. Financially, we leveraged significantly from 5.3 down to 2.7, and we're aiming to stay between the guidance we gave earlier, 2.5 to 2.23 net debt for EBITDA. Our operating cash flow was by and large stable, despite the temporary increase in working capital short, a remarkable and unprecedented order book at year end. Based on these strong results, we are proposing a dividend per share of $0.03. That represents 35% of our net profit. Now let's move on to the next page. The 27% revenue growth reported for the year was a combination of organic growth of almost 16%, revenue growth from acquisition of 13%, and 1% FX headwind. All three regions delivered double-digit organic growth supported by a positive economic trend. As a consequence of excellent end market demand, a significant portion of the expansion was volume. Demand, and you've seen that by the numbers earlier today, demand further accelerated in Q4 with organic growth exceeding 22%. The acceleration in Q4 was even faster in lifelines, with a gradual lifting of restrictions in many countries supporting food and health and personal care. Well, I've mentioned earlier, we acquired 12 companies. Two of those, Weigen in the US and Kindles in France, give us a strong footprint in the global flavors and fragrances market. We also added to our EMEA network, Carme, In Italy and in Austria, in Asia Pacific, we made eight acquisitions to reinforce our footprint in the region. These acquisitions in Asia Pacific are much in line with our strategy to strengthen our network and high-growth emerging market like Southeast Asia, India, and also in China. These acquisitions will not only give us scale, but certainly also strengthen our lateral aging. As already mentioned, the 12 acquisitions together generated over 530 million in annual revenues. Let us now turn to the next page and look at regional performance. In EMEA, here on the left, we saw strong demand in case and markets throughout the year. And in Q4, there was a significant acceleration across most end markets and specifically in life science. The significant uptick in business activities in food and health and personal care we have seen was a consequence of COVID restrictions so lifted in many countries, and with this, the horeca, hotel, restaurants, cafes segment, and also travel sectors, they all started to recover. Given that societies refocused on general health and wellness beyond COVID, Our pharma business also grew very nicely. All these underlying trends contributed to the reported organic growth of 13.9%. I already mentioned that a significant portion of this growth was demand-driven, although there was also some uplift from price. In addition, we made three acquisitions to strengthen our EMEA footprint. Came in Italy, came to France, and also in Austria. And total revenue from EMEA increased by over 90%. And so far, except the ongoing situation in Russia and Ukraine, and I will come back to that later, we have not seen any material change in the trends. Now let us turn to the Americas. Demand was outstanding throughout the year in both segments, life science and industrial campus, as reflected in the 16.5% organic growth in 2021. On top of the already excellent growth trajectory we were on, we experienced an additional growth uplift in life science in the second half of the year, mainly due to the inclusion of lignin, the leading distributor I mentioned earlier in North America on flavors and fragrances. Through the acquisition of Weigern, we entered the food and health market in the US and also strengthened our presence in personal care. Weigern and Kinders, the one I mentioned from France, add flavors and fragrances to our service offering and complement the actual value chains specifically in food and health, but also in personal care and markets. Now let's move on to the last part here, Asia-Pacific, sorry. Our revenue in Asia-Pacific, and you can see that here, they grew by more than 81% in 2020. Organic growth was over 19%, driven by an excellent demand across most end markets and life science and industry. Our ability to benefit from the strong market pool has improved by the growing footprint in Asia-Pacific and to continue strengthening lateral weight chain in the market segments we serve. Asia-Pacific continues to represent a strategic growth region for Azealus. And in 2021, we made significant progress through M&A, especially in this region. I mentioned in the 12 acquisitions, eight were actually in this region. We acquired MKVM and Viet Kimi in Vietnam, CW Pacific in Australia, Spectrum in India, We entered the Philippines with the acquisition of Phil Asiatic. We also made two acquisitions in Korea, Cozeal and MHMIF. And we also added two more in China, Ingredients Plus and WRC. So overall, we're really pleased with the progress we see and continue to have exciting growth opportunities in the region, both organically through the strength and capture value chain, but also certainly through M&A. In the following two slides, now we share some examples and how we add value in our labs, both for customers and for our principal partners. In this first example, we had a food customer who asked us to help them launch an innovative, healthier alternative to cow milk. In this project, we developed a product that will appeal to customers' taste, having high nutritional content, and provide a sustainable milk alternative, leveraging our lateral value chain and using several enzymes from different principles. The product was launched successfully and showed a strong market demand. Most importantly, we strengthen the relationship with this important customer by living up to our promise to be a leading innovation service provider to the industry. Moving on to the second example. So this illustrates our proactive approach to making a difference on both for our principal and customers and promoting sustainability. In this example, which is outlined on the right, it was a principal approach just to help them to improve an existing product as it would match the principal objective with a customer that could benefit from the product improvement at a lower cost. The result was an improved principal product, lower cost, long equipment shelf life for the customer, reducing waste and promoting sustainability. These are just two examples from numerous examples we have contributed to the societies we live in in 2021. Now, why does it matter to us that we contribute to a longer shelf life, introduce waste, or to find alternative, more sustainable food sources? It's driven by our commitment, our objective, to be the sustainability champions of our industry. We have published our detailed agenda actually in 2025 in our sustainability We are part of Together for Sustainability, a chemicals industry organization representing a total turnover of about 350 billion, which supports us in assessing the sustainability of our supply chains. As mentioned earlier, in 2021, we succeeded in achieving an equivocal platinum rating for our efforts, and no doubt, We will continue to push for sustainability because we are in an excellent position to contribute to a better, to a more sustainable round planet. So this concludes the section where we intended to give you really just a quick summary of our performance and some insights about what we have accomplished in the year 2021. I will now hand it over to Tejs. He will walk you through the financial results of the group.

Thank you, Jochen. Good morning, everyone. Thank you for attending our earnings call. Let me start here on page 12 with a high level overview of the P&L and also the fourth quarter results and bridge to the 2021 results on a full year basis. As Jochen already mentioned, 2021 was an excellent year for Arzelis. Let me first provide some color on the fourth quarter performance, which is displayed in the first two columns of this slide. Growth accelerated in the fourth quarter, with group revenue growing at 48% and adjusted EBITDA with 69% at reported rates. Activity levels during this quarter remained very high. While normally the business tapers off a bit toward November and December, this year performance levels remained high for those months, As the outcome of this, our inventory positions increased in order to serve our customers for the first quarter. I'll come back to this later. Provide a bit more context. You may recall that when we presented our results for the first nine months, we reported revenue growth of 21%. In the fourth quarter, life sciences grew faster than industrial chemicals, whereas it was the reverse in the first nine months of 2021. This is also in line with what we communicated during our third quarter earnings call on expected market developments. Fourth quarter adjusted EBITDA as a percentage of revenue ended at 8.5%, implying 105 basis points expansion compared to prior year. Fourth quarter adjusted EBITDA margin is a step down from the 9.8% EBITDA margin we reported in the first nine months. partly driven by accelerated bonus accruals as the business performance accelerated, as well as the first-time inclusion of acquisitions with a lower margin profile. On a full-year basis, Zetas achieved 27% revenue growth in both life sciences and industrial chemicals businesses. Measured on a constant currency basis, this reflects 28% growth. For the full year of 2021, cross-profit as a percentage of revenue increased by 95 basis points during the year, despite challenging inflation conditions in the industry. And it also reflects our effective pass-through policy and execution capabilities around margin management. And for the full year, adjusted EBITDA ended at 268 million euros. growth of 41% or 43% on a constant currency basis, out of which 20% is due to the first time inclusion of acquisitions. Adjusted EBITDA in percentage of revenue ended at 9.5%, which translates to a 95 basis points margin expansion from 8.5% in 2020. This was achieved as the outcome of strong top-line growth, skill benefit, which mitigated the impact of the ongoing pressure on the supply chain. Our adjusted net profit for 21 increased 38% to 98 million, and I will discuss the drivers of the net profit in detail on a later slide. On the next page, page 13, we have broken down a 27% revenue growth and a 33% gross profit growth between organic growth and growth coming from the first time inclusion of acquisitions. Obviously, as Jochen already mentioned, 2021 was a very successful year for Azelis in terms of M&A. We executed throughout the year 12 acquisitions representing an annualized revenue of around 530 million. The largest one being Weigen and four acquisitions were executed in the last quarter of the year. The majority of our M&A was related, was focused on strengthening our positions in Asia. Now we remain very disciplined in the area of integration with focus on maximizing value creation by mapping cross-selling opportunities and bringing these companies onto our platform. And Asia did an excellent job in this respect. As you can see on the slide, Azadus performed very well on the key pillar of our growth strategy, whereby all of our regions delivered double digit organic growth on the back of strong demand in each of the regions. On top of that, this slide also demonstrates our ability to pass through price and that the hard work in execution of our margin management programs translated in robust organic growth And in our gross profit line during the year, we've expanded margins as the outcome. Of the 33% growth in our gross profit in 21, 19% was organic, reflecting our strategy in growing our lateral value chain and expanding geographies and segments is working. Now let's have a look at the regional composition of our growth drivers on page number 14. Let's first start with EMEA. which makes up 44% of the revenue composition of the group. Revenue for 2021 increased by 19% to 1.23 billion. The majority of this growth, 14%, was organic, and the remainder was driven by M&A and FX. In 2021, gross profit as a percentage of revenue increased with 57 basis points to 23.8%, and adjusted EBITDA in EMEA increased with 27%. or 29% on a constant currency basis. As the region continued to benefit from skill and operational efficiencies, adjusted EBITDA in percentage of revenue increased by 65 basis points to 10.2% from a level of 9.5% in 2020. The strong growth acceleration in the second half of the year resulted in higher variable compensation accruals. This was also reflected in the fourth quarter adjusted EBITDA margin in EMEA, which ended at 9% below the 10.6 margin levels reported in the first nine months of the year. However, this is still 103 basis points higher compared to the fourth quarter of 2020. And also for the full year, our conversion margin improved with 176 basis points to 42.8%. Now let's move to the middle towards the Americas. which makes up 41% of the revenue composition of our group. Revenue increased 22% to 1.16 billion. Also here, the majority of this growth, 17% was organic, and the remainder was driven by M&A, mainly the acquisition of Weigen and FIX. In 2021, gross profit as a percentage of revenue increased with 232 basis points, and adjusted EBITDA in the Americas increased with 45%, or 46% of constant EVX. Adjusted EBIT in a percentage of revenue increased with 182 basis points to 11.8% from 10% level in 2020. The strong margin expansion was on the back of efficiency gains, execution of our margin management programs, but also a positive mix effect from the inclusion of Weigen, which we acquired in June. As you can see, this is also reflected in our 305 basis points step up in conversion margins to 50.8%. Moving to the right to Asia Pacific, our fastest growing region, we continue to see strong momentum, both organically as well excellent progress in the execution of our M&A and integration, with a total revenue growth of 81%. In 2021, cross-profit as a percentage of revenue remains stable, This was driven by the lower margin profile of the first time inclusion of M&A, but also by onboarding of new mandates. Adjusted EBITDA in Asia Pacific increased with 98% or 96% at a constant currency basis. Despite our ongoing investments through acquisitions and building up our infrastructure in this growing region, adjusted EBITDA in percentage of revenue increased with 58 basis points to 6.9% from a level of 6.3% in 2020. As organic revenue growth in the fourth quarter was well above 30%, we adjusted our accruals for variable compensation accordingly. Conversion margin increased with 308 basis points to 34.4% as the region is gaining scale and momentum. These supports also are viewed that there is no reason why APEC margin levels will not reach the same levels as EMEA and Americas over time. Now from here, let me take a moment to take you through the details of the buildup of our net profit on page number 15. As you can see on this table, there are a couple of one-off items and considerations to bear in mind when looking at our net profit. They are mainly related our ipo which was executed in september this is why on the summary page we also included adjusted net profit now first of all there is 8.4 million ipo cost that is included in our operating expense which reduced operating profit these costs were not directly related to the issuance of shares otherwise they would have been deducted from equity Second, during the refinancing to restructure our balance sheet ahead of the IPO, we had to accelerate the amortization of costs related to the old finance structure, which was in place. So this resulted in a loss of 19.6 million for the majority non-cash. Obviously, these two items will not be recurring going forward. The interest expense aligned on bank loans and overdrafts amount to 46.9 million. And this is based on almost nine months of higher interest levels as the refinancing for the new structure was only completed in the second half of September. Going forward, the weighted average interest rate should be around 2.5%. This is a weighted average of our term loans in Euro and British pounds, as well as our RCF. And we expect to see an improvement here. Now, lastly, the reported increase of our tax expense is high. The effective tax rate implied by the tax expense we are recognizing in 2021 is mainly due to the items I just explained, as well as the old structure of the group due to the fact that we are in a transition phase until the IPO. On the other hand, our 2020 effective tax rate was on the low side, driven by non-cash related deferred taxes from Luxembourg. Please note that also we have increased our earnouts through the P&L with more than 7 million due to the strong performance of the acquired companies, which is not tax deductible. So having a negative effect on the effective tax rate as well. On our midterm guidance, we remain for a blended tax rate in the range of 22% operating profit minus finance and non-recurring costs. And you will find more details in our annual report. Now let's go to slide number 16, where I want to give you a little bit more update on our cash flow. As you can see, the absolute amount of our free cash flow was 182 million, and our cash conversion decreased to 67%. This was mainly driven by the swing in working capital investment due to the increase of business activities towards the end of the year and the open order book. As this is the main driver, I would like to provide some more details on page number 17. So net working capital to revenue normalized for acquisitions ended at 15.3% at the end of 2021, compared to 11.1 at the end of December 2020. As you can see from the chart to the right, where we displayed the working capital pattern over time, you will notice that the green line here shows trend breach. Normally, the working capital tapers off in Q4, but did this not happen in 2021? This increase was driven by the organic growth acceleration in Q4, but mainly by the ramp-up of inventory in preparation for the significant growth in demand expected in the first quarter of 2022. And that's also indicated by a very strong order book and new mandate gains that commenced onboarding. 2021 was also a very strong year with regard to acquisitions, but this came also with an associated working capital effect of around 144 million, which has not come down yet to Azalea standards as we are working on the integration of these acquisitions on our centralized IT platform. On a reported basis, networking capital was 16.8% of revenue. as the full working capital for companies acquired in the course of the year are reflected in the balance sheet as of 2021, but only a few months of their revenues included in the group account. So working capital is expected to gradually return to normal levels throughout the year. Now, this brings me to our final slide on our debt position before I hand it over to Jochen for the outlook. Our net debt has improved significantly for during for the largest extent following the IPO in September. At the end of 2021, our net debt was 871 million euros. So what happened in summary, we increased equity with the IPO proceeds of 880 million, and we used these proceeds to reduce our net debt. This also meant that we improved our leverage ratio significantly from over five times until 2020, to a current level of 2.7 at the end of December 2021, which is in line with the range that we provided to the markets between 2.5 and three times. Please also note when we executed the Weigen acquisition back in June, we also raised additional debt of 330 million and additional equity pre-IPO 50 million. Now, our strategy is to fund our bolt-on acquisitions via operational cashflow. And this is also what we did in 2021. We've generated a strong cashflow from operating activities of over 205 million and used a large part of this to fund our M&A and the leverage at the same time. Our liquidity at this moment is around 360 million, both in cash and unused RCF. So that was it. I'm giving it back to Jochen for the outlook.

Thank you, Thijs. Well, as you can see from also the build-up of working capital, we had an excellent start into 2022. We have not seen any significant changes in business trends, and we are on track to continue delivering on our annual objectives. Also worthwhile noting that we announced the closing of two more acquisitions at this year. End of Jan, we closed Umongo, a South African-based specialty distributor focusing on serving noobs and metalworking food solutions in sub-Saharan countries. End of February, we completed the acquisition of Catalyte, a Thai-based distribution business focusing on personal care. And our M&A pipeline stays very vibrant, so stay tuned. The current distressing situation in Eastern Europe makes it very, very difficult to predict anything with any level of certainty. We are closely monitoring the situation in Russia and Ukraine, which makes up to about one to 2% of group revenue. We have 12 colleagues in Ukraine and 31 in Russia. Especially the safety of our colleagues in Ukraine is a priority and a prime concern. We have ceased operations in Ukraine until further notice and have taken steps to support the safety of our colleagues there, and we are in daily contact. We are actively discussing concrete measures and deploy resources directly to them, and we also started an internal fundraising initiative to support our affected colleagues. On Russia, we have stopped all business activities, industrial chemicals. We are limiting business activities only to non-dual use essential materials for food and pharma. And we are constantly assessing situation in close dialogue with our principals. It's obvious that we are 100% compliant with trade sanctions, international laws, and so on, and potentially blacklisting. But obviously, what's at stake here is bigger. Well, like almost everybody else worldwide, we hope that this dreadful violence will end very soon. So wrapping it up, brimming in confidence about the outlook for the year, but with a shadow of how the situation in Russia and Ukraine may evolve. So with that, let me open the floor for Q&A.

So ladies and gentlemen, we will now begin the Q&A session. As a reminder, you can also submit written questions via the ask a question button on the webcast. We will begin with questions from the conference line. If you wish to ask a question, please key star one on your telephone. And if you don't decide to ask a question, simply key star two. We will now pause a moment to assemble the queue. And the first question is coming from Jayesh Kumar from HSBC Bank. Please go ahead.

Thank you for taking my questions. The first one is on the outlook statement, where clearly you had a very strong Q4 performance, much better than at least what I had modeled, but from what I can tell. much better than what most people had modeled and presumably you have a reasonable idea of how trading has progressed so far in the year so when you repeat your guidance for the full year you are implying that second half growth slows down quite significantly from the current growth run rate what is driving that or is it just a dash of conservatism given we are uncertain about the world that's the first one second question is obviously uh you know on top of the momentum you obviously have inflationary pressures so can you remind to us how that affects your margins growth and cash flow please that would be super helpful And finally, on the working capital aspect, just thinking through the working capital to sales ratio, obviously, if you add acquisitions towards the year end, only the balance sheet, not the full year performance gets added. Can you either give us the pro forma full year ratios so that we can figure out how much impact was there from M&A in that ratio? Or just, you know, on an organic basis, what are the levels of receivables, payables or bad debt trends that might help the market get a bit more comfort on the working capital patterns? And I'm an analyst and my boss says I can't count very well. The fourth question is on Russia, Ukraine, clearly 1% or 1-2% of revenue exposure. That's not meaningful. any knock-on effects from, you know, supply side on the supply chain. For example, say, you know, a cafe's supply might be meaningfully disrupted. Does that affect any of your suppliers or customers? That would be very helpful. Thank you.

Thank you. Great questions. I'll take one, two, and four, and you three. That's okay. Good. First one was on the outlook, and you translated what we have seen in Q4 and what does it mean to the full year, also in light of what I said, that Q1 trading is really very, very strong. Well, I spoke about the uncertainty in the markets. That certainly leads to a certain conservatism we put in this equation. We have visibility for the first half of the year where I feel confident that trading, yeah. I feel confident on the outlook on this, but what happened in the second, there's too many uncertainties out there. So we stayed with our guidance. It is though correct if you would just project what we have seen in Q1 for the entire year. and obviously this conservatism would not be justified, and we would have a very different result. Second one was on the inflationary pressure, how this does affect our margins. True, we see prices of the products we source from our principal partners moving up, but as we have shown in 2021, and also actually in previous years, we are able through our service offering as we are offering more than one product to a customer through our lateral via chain. We're able to translate that into an increased price at the end customer and even increase the prices over and above what we're getting from our principal partners. So from this point of view, we've done it before and we will be able to manage also the margin pressure, the potential margin pressure going forward. Let me finish the Russia-Ukraine thing. From a sourcing point of view, we didn't source anything from Russia or Ukraine, so there will be no effect on the supply chain. It will come more obviously from the effect when you think about the bigger picture now. What does it do to energy prices? If energy prices notch up, this will obviously go from oil and gas into Refineries will go into NAFTA crackers, will go into ethylene oxide plants and will really continuously going downstream then into the specialty products we are distributing into the market. So we will see an inflationary pressure from prices rising on the energy side. And the same obviously is true when you look into food supply. Ukraine and Russia compounded, contributed to 29% of the wheat exports of the world. And well, there's pretty likely that not much will come out of Ukraine, and I'm not sure how the world, especially the Western world, will deal with exports Russia wants to do. So there will be an imbalance when it comes to these type of products, starch-based coming from wheat. There we can expect to see something, and then also it goes into fertilizer. So we will see some ripple effects. But then coming back to the second questions you raised, we will be able through the service offering we're providing to the industries we deliver into, we will be able to manage our margin position. So now to you.

Yeah, Rajesh, thank you for the question on working capital. Yeah, as I mentioned, working capital in absolute terms increased from 250 million to 474 million, out of which 144 million is related to M&A. If you take the percentage from our perspective, basically the 11 to 15, you can say about 2% is driven by organic and 2% driven by the M&A. 2% organic side is basically timing, due to the fact our input costs are going higher and basically that needs to flash through. Second element in the M&A, obviously there's a mixed effect there because the working capital in the M&A side that we acquired is much higher. It predominantly is driven by our entrance in the FNF, where we see the DIO levels are higher than our regular business. We have to work on that to get them onto our centralized platform. Obviously, the FNF segment is also impacted by the supply chain disruptions, where freight lead times are also longer. That can have a working capital effect as well, depending on the contracts that you're having. It's about 2% and 2%.

Does that answer your question?

Super helpful. Thank you very much.

The next question is coming from Luke van Beek from Dekroof Bettercam. Please proceed. Your line is open now.

Yes, good morning. Thank you for taking my questions. My first question is on the bonus accruals. Can you explain how the bonuses are determined? Is that a straight line method or is there a threshold or a ceiling in that, so you have a better feeling of how to translate future revenue growth into bonus accruals. My second question is on the supply chain, where there is obviously some scarcity, also in the logistics. So can you explain what you've done and what is it that you did to make additional costs to handle that?

Should I take the bonus one?

Yeah, take the bonus one.

Okay, thank you, Luc. On the bonus side, we are a performance-driven sales and marketing organization, and as such, have also tailored our incentive systems to that. So we are really a performance-driven organization. Now, the system has been designed mainly around gross margin growth and working capital components, and allows for accelerated incentives in case targets are well overachieved over the year. Now, obviously, we accrue this every quarter, and we make an estimate on that. but a four year end. But yeah, due to the accelerated growth in the fourth quarter, we saw these acceleration levels were reached and then we basically have to top up our accruals. So the impact is around 4 million euros versus fourth quarter and about 8 million versus prior year. Yeah. So does that answer your question, Luc, a bit?

Yeah, so it's especially an impact when you reach levels above the target. Yes, correct.

And it's maybe to add, it's capped for the executive committee going forward. It wasn't in 2021 on the previous guidance, but now it's capped. And for the others, it's not capped, but they had challenging objectives. But as I said, Q4 has seen such an acceleration, which was unprecedented. So yeah, we had to approve for it. Going to your second question, if that's okay. That was on the supply chain and whether there's disruptions reported in the supply chain, whether they had an effect on us. Well, it had an effect in a sense that obviously it became much more challenging. to manage all the deliveries OTIF on time and full. But as you can see from the expansion of the business, thanks to really a lot of good work done by the global team, we were able to handle that. What also helped us here was the economy of scales and the fact that we are not only represent a principle in one geography, but we also have representation in some other geographies. So we were able also sometimes to shift product to satisfy customer needs. So that was all well done with regard to how we managed it, how we satisfied our customers. Now, to be a question on the cost, whenever shipping costs increase, this is not with us. This is just pushed through to our end customers. So that's not anything we have. Well, we are worried in the biggest scheme of things, but not as a company because we are not affected by these costs. Does that answer your question, Luca?

Yeah, thank you. That is clear.

Thank you. The next question is coming from Tuhasini Varanasi from GS. Please go ahead. Your line is open.

Hi, good morning. Thank you for taking my call. A few quick ones from me, please. If you wouldn't mind talking about how you expect growth margins for this year. you've probably built up inventory in Q4 that reflects the higher prices of the product. So should we expect maybe a moderation in the gross margin in one Q2Q as you sell the higher priced inventory? And then if you think about the profitability of your Russia-Ukraine exposure, is it on the same order of magnitude as the revenue? And I think the last one is on the M&A pipeline. Can you comment on how the M&A pipeline looks? And given the geopolitical situation. Do you think you would be doing M&A or would you prefer to wait and hit pause on that and maybe focus on dealer?

Okay. Thank you. On the gross margin expansion, what are we expecting? Well, When you're dealing with commodities, obviously you might be caught in the loop of prices of materials are dropping and you're sitting then on high valued inventory. So previously in my life as a previous employer, I've seen that. That's not pleasant. What I've seen also since many, many years now is when you're on the specialty side of things, you can hold on quite nicely to the margins you have, because as I indicated in earlier questions, the price increase and decrease from the raw material, they're in between the 10 steps until you end up, so chemical conversions until you end up to the specialty chemicals. So there is really a huge time delay and it's really not transparent. A lot of actually the costs are built on the assets you have in between, not necessarily on raw material costs. I think we have not only a good chance, but a very, very high likelihood that we can stick with the margins we're having and just continue going on. It's easier, obviously, to expand our margin profile in times when everybody talks about inflation, but I'm not afraid that we will be sitting on high-value inventory, which we can't sell on the specialty side. Sorry?

So our DIO levels are not that we have the three months stock or those kind of things. So that also justifies that.

Turns much quicker. Then the question on Ukraine and Russia, and I didn't get the second part. If you could repeat that, please. Profitability. Yeah, that's about the same between 1% and 2%, right? So not major. And the third one you had was with M&A and whether we would like to take a position to wait now. No, certainly not. As I said, the M&A pipeline is very vibrant and there will be some announcements coming out within the next couple of days and weeks and certainly also months. Many of these acquisitions we're pursuing, it's not like, and we indicated that also in the roadshow discussion we had, it's not something you start and you stop. It's something which goes on for months, for years, for many years. So you're building a relationship with a seller, and then you come to a point where he wants to sell. Obviously, if we would have started anything in Russia, we would have stopped. Obviously, if that would have been the case in Ukraine, we would have stopped, but that was not the case. And for all the other projects we're pursuing, we'll just continue doing what we have been doing, working diligently through our analysis, whether this business fits to us. And then once we conclude, then we will sign a deal and integrate them into our network. Thank you.

Thank you so much.

Last question is coming from from JP Morgan. Please go ahead.

Hi. Thanks for taking my question. Can you hear me? Yes. All clear. Hi. Thanks. I apologize if I missed this before, but could you give us some color around the contribution of acquisitions to adjusted EBITDA, both in full year and fourth quarter? And my second question is on gross profit to EBITDA conversions. It seems that conversion margin is down sequentially in the fourth quarter in all the regions. Could you help us understand the drivers for this?

Thanks.

The second question, what was it? Okay, let me first take the M&A question from you and then maybe you can repeat afterwards your second question. As I indicated, the M&A side of the business has contributed around 20, I don't know the exact number, as I mentioned it also in my speaker notes, on EBITDA perspective, 20% was related to M&A. I also will refer you to section seven out of our year-end report, where we also have included also those details in there on a performer overview, yeah.

Second question, maybe you can repeat. Yeah, it was on the conversion margin. It seems that conversion margin is down sequentially in fourth quarter. So I was hoping you could help us understand the diverse for this.

Yeah. Okay. If we look a little bit, this is also driven by seasonality. So there are three elements with seasonality and mix, the M&A, and also timing. So in our medium-term outlook, I communicated that it's normal that the margin and such the conversion margins in the last quarter are generally lower. So from, let's say, take Q3 to the fourth quarter, it's normally around 20 basis points in GM1 and then accelerated EBITDA terms is about 1.5 to 2%. In 2021, this effect was about 50 basis points on GM1. and 1.5% versus the third quarter. But they were all well above the 2004-2020 levels. Now, what are the key drivers around that? First, seasonality and mix. Margins in the FNF also taper off due to the fact it's a more seasonal business. So in Weigand, the effect was about 1% to 1.5% on the GMO side. But also we have onboarded a lot of new mandates. There's also the relationship to our working capital comment. And when you onboard a mandate, yeah, okay, they come in at a lower margin, then you do the analysis, you compliment them in the lateral value chain, you add components to the customer, and then you can bring margins up over time. But this was mainly in EMEA and in APAC. And also M&A, the second element. We did M&A in Asia at lower GM1 levels. that was also communicated to the market, mainly WWRC and CoSeal. They are at a lower margin level than the average. And then lastly, timing. As I mentioned, I refer back to the bonus comment and the accrual comment that we made before in the call. So if you take those three things into account, I think that gives you a little bit of some color on the conversion margin development.

Understood. Thank you. Thank you.

And we have received one more question, and this is coming from James Rose from Barclays. Please go ahead. Your line is open.

Hi there. Good morning. Just one from me. The second half market backdrop is obviously difficult to predict. But for those who are looking at more bearish scenarios or potentially recessionary conditions in Europe, Could you remind us of how the business has performed during past recessions and past oil price spikes and try and give us a sense of how defensive your various end markets could be within that European business? Thank you.

Thank you, James. Well, when you go back through the crisis business I've seen, so go back as 2008, 9, 10, what we all had to live through. We saw contraction there, but it was not a significant one. And we expanded immediately afterwards. Now going really closer to where we are right now, going to 2020. I mean, you've seen what the COVID crisis has done to many industries. The beauty of the industry we're in is that even during the COVID crisis, we managed to keep our top line on a like-for-like basis stable. and continue to expand margins by adding elements to our lateral value chain, which allowed us higher pricing power in the market. So I guess in a nutshell, this is a very sturdy business. Obviously, when the market is growing, we outgrow the market, and when the market is contracting, we manage to really save solid through a crisis. Again, there are many underlying factors. of that, which is a continued outsourcing trend amongst our principals. So there's this trend of obviously they don't want to work with gazillions of smaller players. They also entrust us more mandates. And then obviously what we do, our lab work, that's a key element to it, bringing this innovation formulation into innovative formulations, into our customers. These are all elements which allow us to to expand profitability over the years to come, as we have did over the last couple of years.

Is that clear, James? Yeah, thank you very much.

Good deal. Quick reminder for everyone, if you wish to ask a question, please key-style one on your telephone. Thank you. So the next question is coming from Rajesh Kumar from HSBC Bank. Please go ahead.

Hi, sorry, just a quick follow-up on the conversion margin. Usually there's a seasonality in Q4, and I'm assuming last year Q4 must have been a bit stronger than normal. What do you think, you know... your margin performance has been reasonably strong considering that fact. Do you think inflation has supported this and we could see a reversal by Q4 next, the Q4 2022 against these funds? Or is that what you're factoring in your guidance?

I'm not sure what you're asking, Rajesh. Are you asking, is Q4 2022, will you see basically a decline or an increase?

I think what I understood is decline versus 21. We don't expect a market decline or a decline towards 2021. No, we don't. We have won numerous mandates which would strengthen the position So I'm confident that we keep it. And it's also what I tried to explain earlier. The more we offer to our lateral agent, the better will be our pricing power to end customers. So I'm confident that we will keep what we have right now.

I appreciate that. I just wanted to be clear on the call. It's clearly, you know, you're a new company to the market and, you know, people are trying to still understand how that works. So it's very helpful to hear from you. Thank you.

Thank you.

There are no more questions. So ladies and gentlemen, that concludes today's Q&A session. I will now hand over to the management team for closing remarks.

Thank you for your interest in our story. And as you said, this journey just begun as a public company. This journey started with some of the founding companies more than 120 years ago. The focus has changed significantly. We have moved from being a distributor to be an innovation service provider and with what we have built on a global basis, with the spirit of working as a team, delivering sustainable solutions to end markets, I'm confident that we will continue to deliver to promise over years to come. So thanks again for your interest. Stay safe and talk to you for our Q2 results call. Thank you.