Imcd Group Nv U/Adr

Ladies and gentlemen, thank you for holding, and welcome to the full year 2021 Results Analyst Call of IMTD. During the presentation, all participants are in listen-only mode, and later we will conduct a question-and-answer session. I would like to hand over the conference to Mr. Piet van der Snikke. Go ahead, Pieter.

Yes, good morning, everybody, and welcome to this call. As usual, I'm here with Hans Kooijman, CFO. I will start with some opening remarks and then Hans will take over and after that, of course, we will be happy to answer your questions. As you could have seen from the press release, 2021 was an excellent year for IMCD with record results. Our EBITDA increased at 54% and our cash earnings per share at 53%. We saw very healthy business activities in all regions and our growth came from increased demand, so volume growth, increased pricing, new product lines that we started, and acquisitions. I want to emphasize that other than what some people write, it's not only price increase, it's also and predominantly volume growth. It is gratifying to see that we, despite travel restrictions because of COVID, were also able to continue to execute our strategy by doing acquisitions. I won't mention all acquisitions, but want to emphasize our acquisitions in Mexico, Central America, China and Indonesia. To give you some color, in Indonesia we are now a leader in life science, with a few hundred people working in pharma, food ingredients and personal care. At the same time, in Indonesia, we are expanding our industrial segment. In a country with 275 million people, this will give us very good growth opportunities. In Latin America and in China, we are also making great progress. Our presence in Latin America has been very much expanded due to acquisitions in Mexico, Central America and Colombia. And we announced last week another acquisition in this region. And we have therefore also very high expectations on further growth. You may have noticed that Q4 of 2021 shows very strong growth. 30% increase in revenue and 55% in EBITDA. Order intake in this quarter remains also very high. and in preparation for delivery in Q1 of this year, we had to build up our stock position which consequently explains our lower than usual cash conversion. In the end, this is positive news, as it means that demand remains high, which will lead to continued strong growth in Q1. I repeat what I said before. IMCD's future looks bright as our business model is robust and resilient, and we are therefore also quite optimistic about the outcome of 2022. And with that, I would like to hand over to Hans to lead you through a few numbers.

Thank you, Pete. Good morning, ladies and gentlemen. Earlier today, we published our four-year results in the form of a short press release. And we further published our annual report, a good readable and informative document about various aspects of IMCD's business model, including a lot of details about our financial performance. In this call, I will limit myself to a summary of the 2021 numbers, whereby I will start on page 10 of the presentation, where you will see Forex adjusted revenue increase of 25% and a gross profit increase of 30%. The increase in growth profit was a combination of 21% organic growth and 9% as a result of the first-time inclusion of acquisitions. The acquisition growth is the balance of the full-year impact of acquisitions done in 2020 and more recent acquisitions in India. For an overview of the 2021 acquisitions, I would like to refer to page 7 and 8 of this presentation. Cross-profit in percentage of revenue increased at 1% to 24.3% in 2021. All regions contributed to the margin growth and the improved gross margin percentage. The increase in margin percentage is the result of cross-margin improvement initiatives, the usual changes in local market circumstances, product mix fluctuations and the impact of the newly acquired businesses. Then for your convenience, we included a line with an operating EBITDA comparison, but as you know, IMCD is a people organisation with an asset-light business model with outsourced logistics and a low fixed asset base. As a consequence, EBITDA development, shown in the next line, seems more relevant for us. Operating EBITDA increased 55% on a constant currency basis to 374 million. This increase was a combination of 35% organic growth and 20% as a result of the first time inclusion of acquisitions. Operating EBITDA in percentage of revenue increased by 2.1% from 8.8% to 10.9% in 2021. The conversion margin, calculated as operating EBITDA in percentage of growth profit, increased from 37.6% last year to 44.7% in 2021. The increase in conversion margin is the result of substantial organic EBITDA growth, whereby gross profit growth more than compensated on cost growth. And this combined with a positive impact of acquisitions made. On the next slide, page 11, you will find a few key figures from the P&Ls per operating segment. Growth profit in EMEA in the first column increased 22%, which is a combination of 20% organic and 2% acquisition growth. 2021 gross margin percentage increased with 0.3% to 25.7%. Operating EBITDA in EMEA increased 39%, whereby the EBITDA margin increased with 1.4% to 11.3%. Most of this EBITDA growth is organic. Gross margin in the Americas in the next column increased 26%, which is a combination of 21% organic and 5% M&A related. Margin growth combined with disciplined cost control resulted in further growth of EBITDA, a 36% increase, and EBITDA and conversion margin both increased with respectively 1 and 3% points. Then Asia Pacific, who had another good year, whereby they realized 61% growth profit growth, and this was a combination of 19% organic and 42% as a result of acquisitions. Gross margin increased growth margin percentage increased from 21.1% last year to 24.4% in 2021. Operating EBITDA more than doubled to 110 million, whereby EBITDA margin increased to 15.4% and conversion margins further improved. The improvement of EBITDA and conversion margin is the result of higher growth margins offsetting higher own costs. In an addition, The acquisition of Cygnet in November 2020 had a positive impact on the development of the conversion margins in this segment. In the last column you will find under holding companies all non-operating companies including the head office in Rotterdam. The absolute amount of holding costs increased from 27 to 29 million and holding costs as a percentage of total revenue slightly decreased. On the next page you will find a summary of the P&L line from EBITDA to the net result for the period and some general remarks. The development of recurring net finance cost and income tax expenses are summarized on the next two slides, but before we go there, amortization of intangible assets and related tax credits are non-cash cost items related to the amortization of supplier relations, distribution rights and other intangibles. and the increase is mainly the result of acquisitions done. The 3 million non-recurring expenses and related 1 million non-recurring tax income in 2021 relate to cost of realized and non-realized acquisitions, net result on the sale of neutral granulation business in the US, and cost of one-off adjustments to the organization. And then on the next slide, slide 13, a breakdown of the 2021 net finance cost, adding up to $22 million, which is about $4 million lower than previous year. This $4 million decrease is, as you could see, a combination of $3.7 million lower interest costs related to our financing structure. Further changes in deferred considerations, adding $3.2 million to the difference, are reported on this line. and we experienced lower negative currency exchange results in 2021. On page 14, a summary of our income tax expenses. The reported increase of our regular income tax expense is 37 million. And as a guidance for our tax costs, we indicated to expect a blended tax rate in the range of 24 to 28% of results before tax, calculated as EBITDA minus finance and non-recurring costs. And as you will notice, the summary on the bottom of this page indicates that IMCD's blended regular tax rate was slightly above the 24%, which is close to the low end of the guidance that we gave to you. 2021 tax cash out was 84 million compared to 46 million in 2020, and I would like to refer to the annual report for further details on tax. You might have seen that all previous slides include a small footnote that the 2020 numbers have been restated as a result of a change in accounting policy following the IFREC agenda decision on cloud computing arrangements. A bit of an annoying change, in my opinion, and perhaps just to rephrase your memory, in 2019, the application of IFRS 16 resulted not only in capitalizing rented offices on our balance sheet, but also to capitalize the value of our longer-term software-as-a-service contracts. In 2021, the IFRIC, which is an interpretation committee from IFRS, issued a so-called clarifying guidance about the treatment of these SaaS contracts under IFRS. Basically, IFRIC changed the reporting goalposts, and under this revised accounting policy, Costs that previously would have been capitalized are treated as operating expenditure in case you cannot demonstrate the ability to control the relevant software, which is obvious often the case with SaaS products. The change in accounting policy have been adopted retrospectively, whereby comparative figures for the 2020 years have been restated. And on slide 15, a short summary of the impact on the IMCD reported numbers. The impact of the change in accounting policy on the operating EBITDA of 2021 and 2022, sorry 2020, is negative 10 million and only affects holding, the segment holdings. The impact on the net result for both years is negligible, as higher operating expenses are practically compensated by lower amortization costs as a result of the revised accounting policy. For more details, including the impact on cash flow and balance sheet, I would like to refer to the annual report on page 127 and further. On the next page, the calculation of the cash EPS and our dividend proposal. And as you can see on this slide, we report €4.64 cash earnings per share in 2021, which is a 44% increase compared to 2020. At the AGM, in May, we will propose a dividend of €1.62 in cash per share, which means an increase of 59% compared to last year. This dividend proposal leads to a payout ratio of 35%, an increase of 1% compared to last year. Page 16, a summary of IMCD's balance sheet. Property, plant and equipment slightly increased and is, as a result of the asset-light business model, still relatively low compared to the size of our business. The right of use assets is the result of the application of IFRS 16. This 69 million reflects capitalized operational leases. Intangible assets and related deferred tax liabilities are mainly the result of acquisitions made. Then you will see a growing equity position of close to $1.5 billion, covering 61% of capital employed. The increase in 2021 is, as you might understand, the result of the addition of the net profit for the year of $207 million. other comprehensive income, adding a positive 57 million and a minus for dividend payments in case of 58 million. Through other balance sheet lines, working capital and net debt are summarized on the next two pages. Page 18 you will find a summary of the absolute amount of the various working capital components and these absolute amounts translated in days of revenue. As you can see the absolute working capital amount increased with $169 million and this increase is a combination of $50 million additional working capital related to the companies that we acquired in 2021. Then we have $15 million addition as a result of exchange rate differences and further we report an operational increase of $104 million. At the end of December 2021, net working capital in days of revenue was 63 days, an increase of 8 days compared to last year. And as Pete already indicated in his introduction, in particular the strong sales toward the end of 2021 contributed to higher trade and other receivable days, at a plus 5 days compared to the end of 2020. And in addition, the healthy order book for the beginning of 2022 had an upward effect on the inventory positions and on the trade payables. Then on page 19, a summary of our net debt position. At the end of 2021, we report 940 million of net debt, which means an increase of a bit more than 200 million compared to the end of 2020. And apart from the usual bond loans, the Schulzstein and the bank loans. Net debt includes about 70 million of operational lease liabilities as a result of IFRS 60. And further, under net debt, we report about 309 million of deferred considerations. And most of these deferred considerations relate to the remaining 30% of SICnet and Megasatria that we will buy today in 2024. On this same page an overview of the maturity profile of our depth structure at the end of the year and the purple bar represents the full revolver facility of 500 million which is of course not fully drawn. Reported leverage at the end of 2021 was 2.3 times either depth The leverage ratio calculated based on the definitions used in IMCD's loan documentation was only 1.5 times EBITDA, which is well below the required maximum as set in the loan documentation. We'd like to finish the financial summary with a cash flow overview on page 20. As you can see, the absolute amount of free cash flow in 2021 was $279 million, whereby the cash conversion ratio decreased to 73%. And this decrease in conversion ratio is a combination of substantially higher operating EBITDA as a positive, combined with lower CAPEX as a positive and a substantial working capital investment, mainly due to the increased business activities and the strong T22. Then on the last slide of the presentation you will find the outlook in which we amongst others indicated IMCDC's interesting opportunities to increase its global footprint and to expand its product portfolio both organically and by acquisitions in 2022. So far a summary of our figures and Piet and myself are happy to answer any of your questions.

Ladies and gentlemen, we will start the question and answer session now. Until we register for questions, please press star 1 on your telephone. So that's star 1 for your questions. Go ahead, please. The first question is from Mr. Matthew Yates, Bank of America. Go ahead, please, sir.

Hey, good morning, gentlemen. A few questions, please, if I can. The first one, just around the dividend, obviously it's a substantial increase in an absolute sense, but your payout ratio hasn't necessarily changed at all. Should we read anything into this in terms of your ability to recycle capital through acquisitions being less confident, or does this really just reflect the biggest scope of the overall business? And then the second question is a bit of a personal one, Pierre, but I see you signed a contract extension last year. I wonder if you could just talk a little bit about, at a high level, things you're hoping to achieve over the next couple of years through the course of that contract in terms of keeping the company moving forward. And if I can squeeze in a third one, it's a bit niche, but... Your peers, Elias, listed last year, and one of the interesting differences in their portfolio is the emphasis on agriculture, which I don't think has ever really been a big part of the IMCD business. Do you see agriculture as an opportunity for you to move into, or does it not fit your model? Thank you.

Thank you, Matthew. On the first question, dividend and payout ratio, I think that we expressed a policy in the past that we will pay out, what was it, Hans, between 25 and 35%. And that's what we're doing. So this will be 35%. And I think what we... always aspire to is use our cash to grow the company. So we are very much focused on growth and further acquisitions, strategic acquisitions. It's part of our entrepreneurial, let's say, DNA that we also need to keep cashing the company to further grow. And I think that's in the best interest of shareholders also, as we have proven over the years. As to my own, as a question about my own ambitions, I think consistently also in the next couple of years, expand our business further, nurture talent. I think we have a lot of talent all over the world. And as in the future, as everybody sometimes will retire from the company, I hope we leave it in the best possible shape. But we have exciting opportunities to grow. I think this year or last year you saw that as well. and even the beginning of this year, also by our expansion also in Latin America, but also in China and Europe, where we strengthen our business in Southeast Europe. So a lot of opportunities. I think it's also good to again emphasize that we work with, I would say the top manufacturers in the world and that helps us of course also enormously to expand further because if we work with the best possible product portfolio that helps us and also our focus will remain on aligning with the winners in the industry. In that sense we will also further focus on our ability to help our customers formulate with greener products and that's why we also need to invest further in our technical capabilities and our digital capabilities. On agricultural we do that actually. not so visible probably for everybody but we do that let's say for us it's segmented under our pharmaceutical business also sometimes under our food business depending on the range of products so we are having a position in there and I do not rule it out that we further will expand in that As an example, maybe a nice example, is that we are very active, for example, in the Champagne region across in this field. I guess that were your questions, Matthew.

Indeed. Thank you so much for taking the time.

The next question is from Mr. Dominic Edwidge, Deutsche Bank. Go ahead, please, sir.

Hi there. If possible, I'd like to ask three as well. Justin, I know in the past you talked about the fear of missing out, having an impact on customer ordering patterns. Is that something you're still seeing or do you feel that, as you say, the current strength in orders that you're seeing are reflective of underlying demand and are you able to fully fulfil all of the customer orders currently given obviously all the supply chain issues? The second question is about M&A and Obviously, you made a lot of acquisitions in Latin America now. Can you just say what your sort of focus is now maybe or maybe more general comments on whether there's geography or product-led acquisitions or whether it's much more based around what's available out there in the M&A market? And then the last question is just on logistics costs. And apologies, can you just remind us how you think about them? Obviously, with a lot of costs going up at the moment, particularly on the fuel side, Could you say are there sort of very much automatic pass-throughs there and are you still seeing a lot of logistics constraints and inflation coming through there as well? Thank you very much.

Okay. The first question relates to whether or not we can fulfil orders. Yes, we can. sometimes with a delay but usually we are able and you can see that also in our numbers because we have had significant volume growth also so we can deliver and of course it's different per supplier, per product range, where it comes from, what the lead times are. So it's a big demand, so to say, on our customer service operation and our logistic operation. And I really want to thank these people in our company very much because they have very challenging times, but they do great. And in the end, yes, we are able to fulfill the orders. On M&A and LATAM, maybe a very brief summary. We have a very significant traditional position in Brazil, circling around the industrial segments, but also food, and a very significant position in the pharma in Brazil. I think in the Bristol for America, the Latin America We are building businesses like we have elsewhere in the world, which again circles around industrial segments like coatings and constructions, advanced materials, but also again in the life science sector. And our acquisition of IMCD Andes, or Andes Chemical as it was called before, which has a hub in Miami and serves the Central American and Caribbean region, is very much focused on the industrial segments, but we will add also life science segments to that. In Mexico, we have, I would say, a broad product offering, but the intention is to look for partners and acquisition targets that are helping us to build a complete business portfolio as we have elsewhere in the world. Last question on logistic cost. Hans, do you want to Before, I mean, basically what we do is to pass it all. And we, I mean, if logistic costs increase, then we will pass it all to the customers. So we don't, and we don't have issues with that, as you can see also, on the base of our percentage margin. So no real concerns there.

Thanks. Sorry, probably a bit of my first question got lost, I think, in all of my words. But just to follow up on, do you feel that the current level of ordering that you're seeing from your customers is reflective of their demand, or do you think they're still building their own infantry? Oh, sorry. Okay, sorry, it's my fault.

Yeah, no, that's fine. There could be some of that in, but it's very, very difficult for us to... to, let's say, monitor that for each customer. And I think the fact that it goes on for so long already is probably more evidence to the fact that they really use these products and do less on stock building.

Thank you very much.

The next question is from Mr. Chetan Udesi. JP Morgan, go ahead, please.

Yeah, hi, morning. I had a couple of more technical questions, and maybe I'll start with the first one on the deferred consideration, and I think the number has gone up quite a bit from end of 2020 to end of 2021. I think it was 194 million, and now it's 309 million. I see in the annual report the mention is that maybe about 40 million of that is due to significant changes and then it implies there is another 70 to 75 million increase somewhere else. So can you just talk about this different consideration and what it means for the cost of acquisitions in general? How should we think about maybe something similar happening in the future for other acquisitions that you may do? um the second question again a bit more technical in nature but i was looking at the annual report in the guarantees section it seems it says the group has granted guarantees of euro 80 million i mean versus 38 million uh last year and there's a big increase in guarantees for goods uh I mean, I don't know how this plays out into numbers and what these guarantees relate to. So can you maybe help us understand that topic? Thank you.

The first one will be first considerations. Basically, the two biggest positions in the $300 million that you see there are related to the 30% minority shares that we will buy from the former owners of N-Signet in one acquisition and Megafacia in the other one. And so the increase that you refer to, the $75 million, is related to the 30% of mega sales here. The adjustment on the SIGNET deferred consideration is a bit of a technical one. What you typically do is, when you make your purchase price allocation, you do first a preliminary one, Then you look at the development in the first years of trading. If it's better than expected, you need to slightly increase the obligations. Because what we said last year is that the final purchase price that we need to pay for the remaining 30%, relates to the expected profit levels in 2024, so I think it's an indication of the strong performance of Cignet. Then on the guarantee side, you mentioned a slight increase, and I think what you see there is that for certain suppliers, the guarantee the purchase price obligations from our local subsidiaries. And as you grow these supplier relations and as you grow your business, automatically this amount increases. And it's a bit the nature of the business in certain parts of the world that suppliers expect a parent company guarantee from the owners of the company. And it's nothing unusual in our type of industry.

Maybe, Hans, if I follow up on your first response to the first question. So can I also clarify this contingent consideration or deferred consideration? Is that the present value? Because what I'm trying to get to is how much cash out there will be in 2024? Will there be more than this, even if nothing changes, just because might have put the present value of that consideration, not the exact value?

Yeah, it is the present value, and there is a table somewhere in the annual accounts which shows the nominal and the present value, and basically it is the expected value that we need to pay in 2024, and then discounted at the Dutch interest rate, so we discount it at a rate of 1.1%, so it's very close to the nominal value that we need to pay in 2024. And what you then perhaps do to finish the technical part here, what you then need to do is you discount that every year you need to add a bid to the value and that flows through my P&L as interest cost. And that is what is reflected in the interest cost on the line changes in deferred considerations.

And all of this cash out will be sometime in 2024, as you said.

Yeah, we have an agreement with both owners to buy the remaining 30% in 2024.

Understood. Thank you.

The next question is from Mr. Hank Fierman, Kempinenco. Go ahead, please.

Hi, good morning. Thank you for taking my questions. My first question is on your working capital inventory build-up. And you highlighted that that relates to, let's say, continued very strong demand in Q1. Could you maybe provide some more color on which areas that you see that strong demand or in which end markets? And my second question is on your growth related to new product lines. I think you mentioned that in your opening statement. You also gave the example of growth in industrial segments in Asia, and do I understand it correctly that that is all, let's say, organic expansion into new market segments, and am I correct to assume that there's also a bit more focus on, let's say, organic expansion via new product lines, perhaps a bit more focus on that in Asia, also given maybe that it's a bit more difficult to pursue acquisitions in countries like China? And then my third question is on, let's say, the continuous shortages across your end markets, which, as you say, creates longer lead times for you to deliver to clients. And I was wondering, yeah, you talked in the past about clients aiming to simplify their supply chains, but Do you see maybe, let's say, a bit of a reversal of that, given these longer lead times, that maybe clients start to source from multiple distributors again to shorten those lead times? Thank you.

Yes, thank you. So the first question is on where the growth is coming from. And I can only say that it's coming from all regions and all business segments. So there is... To be honest, there's no weakness to be noticed anywhere. And I would say it's also, in my experience, quite unprecedented. So it's quite remarkable. On the new business lines, first of all, I think I have to emphasize that one of the key focuses since the last 26 years of us is, of course, to expand our business organically and because that is the result of our business model to be able to offer suppliers and customers a channel, regional channel, multi-country channel, a channel that simplifies their business. And of course, that means that we pitch for new business and new business lines and products. That is something that is a constant in our, let's say, focus. And of course, also something that is at the top of our list. So that means also that we start new business segments. We have, for example, in Europe, in advanced materials, we have now a very strong position in medical applications where we have a very interesting product portfolio and also very good technicians. So you always think about us as a group that is investing in business segments and specializations that help our suppliers and our customers to formulate the products. So I mentioned that specifically because otherwise we always talk only about acquisitions. But there's also a big lack that is organically and that's getting and convincing suppliers to work with us. On your last question, I'm not totally sure if I understand it because the fact that there are longer lead times has not nothing to do I would say with the need to simplify businesses for our suppliers. I think it more has to do with the disruption I would say in logistic change across the world in China and elsewhere and also in the United States in ports and whereby sometimes it takes longer to get the products from Asia to Europe and the other way around so it's more let's say capacity that is let's say applicable to everybody and not so much to us our focus is to help our suppliers to optimize the logistic chain from them to us and then to the customer and that is something of course that is part of our core business and also helps our suppliers to reduce their costs. I hope that answers your question.

Yeah, okay, thank you.

The next question is from Mr. Rajesh Kumar, HSBC. Go ahead, please.

Hi, good morning. The first question is really the level of growth you're enjoying at the moment has to be some degree of a click of the company and some degree of all the improvements you talked about. So when you're thinking about the future and the I mean, you all just say to us that, you know, 50-70% type of growth is your end market exposure. So, that's across many years. So, if we have had a very fast year recently, and, you know, maybe for another couple of quarters, should we expect a below-the-trend performance for a few quarters before it gets back on 60-70% growth because of the comps? Or, you know, would it be reasonable? I know it But, you know, just how you think about it would be very helpful to understand. The second question is, obviously, there is a big step up in margins because of acquisition mix and operational gearing. As, you know, many people expect later this year or even next year, you might see bulk chemical prices ease and you are not about just to be there. and your products are not widely quoted on ISIS. So, there's a bit of, you know, lack of price transparency in the broader market. So, you're not exposed to the same chemical price duration as bulk distributors would be. But, would you think that margins, gross margins, or operational hearings, there could be a bigger impact from adverse potential inflation, especially because rate inflation is quite strong or seems to be quite strong around the world. Your thoughts on that would be very interesting.

Yes, you hit me on my weak spot and that is how the future looks, I think, in both questions. I guess it's clear, but I'm not talking more in a general way, that we see a strong growth in all economies across the world. That will, of course, ease at a certain stage. When? That is difficult to say. I think central banks also told us that inflation would be very short-lived and we already have that for a longer time. That is of course also an effect for the future. So these growth numbers will not stay forever, but that is a bit of a general statement that is more philosophical. So it will come down, I don't know when. But I think that what we have demonstrated in the past that we're pretty good at holding our, let's say, positions and then grow from there further. So, although, yes, in the future growth will be less abundant than it is now, then we still have a lot of opportunities in our business. The second question is more or less a little bit similar to, and that has to do with margin and how the margin will develop over time. You rightly pointed out that the mix of many factors, product mix, business segment mix, so to say, we have certain, acquire certain businesses with higher margin products. It is our focus, as you know, and I am pretty confident that we are able to keep a large part of that increase in the future as well. But I'm a bit cautious here to answer, I hope you don't mind, but I find this longer look in the future always difficult and I think that goes for everybody because we see how the economic environment changes and is influenced by political events as you know in Russia and Ukraine also pandemic etc. So I would be positive. Sorry for not being more specific.

No, this is super nice. Thank you very much. Just on Russia and Ukraine Any exposure there we should be aware of?

Yeah, that's it. Exposure is limited. And when I say limited, that means it's less than 1% of our revenue and less than 1% of our asset base and also far below 1% of our EBITDA.

Thank you.

Thank you very much.

Ladies and gentlemen, for questions, you may still press star 1. And the next question is from Mr. Kirijn Mulder, ING. Go ahead, please.

Yeah, good morning, everyone. I hope you can hear me. Yes. Okay, thank you.

Good morning.

On inventory, the inventory was increasing by, I think, over 40%. So, can you give me some indication what is that more, let me say, that's the impact, the related to logistics and supply chain issues, etc. That's the correct view, I think. And also give me maybe some indication about is there any volume you can mention on that effect there? Or is it pure pricing in that inventory?

If you break down the increase, if you talk about 40%, part of it relates to newly acquired companies. Yeah, that is of course, if you compare December last year, December this year, then there is a bit of currency in there. Total working capital was 50 million, so that's also reflected on the inventory line. And then there is quite some additional volume due to the very healthy order book for the start of this year. And then for sure there is also a little bit of a pricing impact there, that if you have a bit inflated prices compared to the same period of last year, then also if the prices go up, then also your inventory value goes up. So it's the combination of these four factors. And I think out of your 40%, I think about a third is M&A related, and about 10% is currency related, and the remainder is more operational.

That's great to hear. Then about the US. So maybe Pete can elaborate on the US. So your organization is in order. I do think that you have a lot still to do, some integration between the units. Are you ready for the next step? And I mean with that something which is more serious in terms of M&A.

we always we are always ready for the next step you're right that we have integrated that we have implemented IT infrastructure and we are now also organically adding business in the US and let's say our ability now to also offer coast to coast service to our suppliers and customers is enormously helpful. And if the opportunity arises, yes, we will make next steps also in the US.

Okay, but there are in general, there are some candidates, you think? Yes. Different from the Far East, of course. There are candidates, yes. And then my final question is about, let me say, moving more and more into Indonesia, Latin America. You know that these countries are not always, let me say, the ethics we try to push forward. So is there anything you can say about measures you take to prevent issues which are related to that sort of problems or issues?

Yeah, well... I think you always have to be cautious about, let's say, judging other countries. I would say, of course, like I would say any internationally operating company, that we have very strict compliance rules, compliance officers, and so we, there's no let's say no tolerance for deviating from these compliance rules and so we will do everything to keep that and we give trainings to people and monitors of course very closely. I think this is not different from any multinational so I can only say that we try to hold up the highest standards here. Okay.

Thank you.

The next question is from Mr. Andy Grobler. Go ahead, please.

Hi. Good morning, everybody. Just two from me, if I may. Firstly, on M&A, we hear from lots of the competitors about their intention to increase the level of spending into the market. What is that doing to the pricing environment for those dealers, particularly the kind of mid to larger size ones? And then secondly, just thinking about organic gross profit growth through the year, can you split up how much of that is volume versus pricing or your pricing? and how that moved through the course of the year would be great. Thank you very much.

Yes, your second question I think helps you rotate maybe. The first question on pricing of potential targets. I mean, let's say, first and foremost, we want and will stay disciplined about paying value for companies. But I think if you look over time, then maybe slightly multiples have come up, but I think over time it's still within the bandwidth that we use. And so we're not too concerned about that. You know, individual companies are, of course, not comparable in terms of value because it depends very much on the size, on the portfolio of products, suppliers, etc. But we have competition. We had competition in the past. But I think that we're still disciplined in how we execute that.

Andy, your question is around volume and pricing split in the organic margin growth. I can imagine if you talk about our business model and compare that with the more commodity-oriented players. So the commodity people always talk about margin per ton and what is the volume impact and what is the pricing impact. If you compare that with our business model, for certain suppliers we talk in prices per kilogram, others we do prices per ton, others we do even talk in grams, then volume is not so much something that we really track and trace as one of the KPIs. But if I look at individual suppliers, and that is of course what we do on a regular basis, I think it's fair to say that with most suppliers, the volume increase had a much bigger impact than the pricing increase. So I think if I would look at the total ICD portfolio, the organic growth is mainly driven by volume growth and supported by a bit of pricing increases. But you should put ARCI on a fixed percentage.

I wonder on that DKSH in that performance materials business talked about, around 80-20 split volume versus their pricing. Is that something you would recognize in your business around that level?

Again, I don't have a fixed number there, but for sure it's more than half as volume related, and it could be close to that range. To be brutally honest, I just don't know.

Okay, fair enough. Thank you very much.

The next question is from Mr. Chetan Udesi, JP Morgan. Go ahead, please.

Actually, my question was the same as the previous question, which was the split of gross profit between volume and price. So I think it's fair enough. Thank you.

I hope you were happy with the answer there.

The next question is from Mr. Kiran Lohler, ING. Go ahead, please.

I have a follow-up question on the 110 million for increase in deferral considerations. You have made your first estimate probably at the end of 2020. Is it possible that we get another 100 million in addition to that at the end of 2022? Or is the estimate much more cautious and better than it was in origin?

I would be very happy if we could add another 100 million, because performance is really going through the roof, and even better than what we expect now. And that is a bit my concern always with these earn-out obligations, that you need to make a guess for the final payout by the end of each and every year, and the difference in the guess flows through your P&L at interest cost. And therefore, with the exception that if you change your guess in the first year after the acquisition, you can just adjust your deferred consideration via the balance sheet. But your question, could it change? Yes, and it will change on the basis of changes in expected payout amounts. And that is related to the profitability of the company. Yes. Thank you.

The next question is from Ms. Sini Varanasi, GS. Go ahead, please.

Hi, good morning. Thank you for taking my question. I had just one, please. A lot of talk around wage inflation this year and even a bit last year. I think you commented that you have your plan to increase the pricing in line with the wage increases. But can you give some color on geographic trends, U.S. versus Europe in particular, any differences on wage increases that you're seeing over there? And I know you don't give guidance, but how should you think about EBIT margins this year in the context of wage increases and maybe growth slowing a bit compared to the tough forms last year? Flatish margins is a good starting point, or should we be thinking slightly lower? Any color that would be helpful. Thank you.

yes or inflation or let's say price increases for products maybe generally I think it's It's good to realize again that we work very much in the global business in the sense that we work with suppliers that have global positions very often, not always, but very often. So I don't think that we see a big difference in the sense that the US or Asia is very different from Europe and vice versa. So I would say that generally we see the same patterns over in the regions. On the EBIT margin, I think you do not get guidance on all that. So, I'm sorry, but I can't do that.

Sorry, I was referring to wage inflation actually, sorry, not price increases, sorry. I was referring to not chemical price increases, but wage inflation. Oh, wage inflation.

Oh, okay, sorry, sorry, that I misunderstood. Yeah, I think there you see some differences, of course. Significant wage inflation in the US, I would say. In certain individual countries, I may have mentioned Turkey here, which of course has unprecedented inflation. And even in Europe some differences per country, although it grows together more and more. But I would say generally significant wage inflation. And of course we compete for high performers and highly educated people. So that is of course always a factor in our business, because we want to retain people and also recruit people. that can help us grow our business. So that is an issue, and that's why we have to work hard to do even better, so to say.

Got it, thank you. Apologies, if I may just have a follow-up, just correct me if I'm pushing this, but would you say it's basically the same level of inflation of maybe, say, high single digits in the US as well as Europe, or maybe Europe is a bit less, just to get some color, thank you.

On wage inflation, you mean?

Yes, on data basis.

So I would say US is a bit higher than Europe.

Thank you very much. The next question is from Mr. Ricky Patel, BNP Galba, Exxon.

Go ahead, please. Hi, thanks for taking my question. I noticed the conversion margins in the Americas were down significantly. sequentially in Q4, but up in Europe and Asia. I was just curious if you could provide some comments around that.

Thanks. If you look at the development of conversion margins through the quarters, I think it's fair to say that normally the last quarter is a bit of an lower quarter if you talk about sales and revenue. This year the quarter was pretty strong and as a consequence I think we added also a bit of additional cost to our structure in the last quarter to basically prepare for the additional bonus payments that they have to do because of the very strong outcome of 2021. But what you usually see during the year is that the last quarter is always the quarter with the lowest conversion ratio. And so that's not abnormal. If you look at the history of the company, it's the same trend every year.

Okay, great, thanks. Okay.

Ladies and gentlemen, if there are any additional questions, please press star 1. There are no further questions at this moment.

Okay, then I want to thank everybody for listening to us and asking questions and having interest in IMCD and hopefully talk to you next quarter. Thank you very much. Have a good day.

Ladies and gentlemen, this concludes the analyst call. Thank you for attending. You may now disconnect your line. Have a nice day.