Azelis Group NV (AZE) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Azelis 2021 Results Presentation. My name is Pam, Investor Relations. And with me today are Joachim Müller, CEO; and Thijs Bakker, our CFO. Joachim will give us the operational highlights of the year, and Thijs will talk about the numbers. Joachim 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 risks and uncertainties. This webcast is being recorded and will be made available on our website. With that, I'll turn you over to Joachim.

Thank you, Pam. Good morning, everybody, and welcome to this call. 2021 was a record year for Azelis on many fronts. Revenues increased by 27%; almost 16% was organic growth. Demand was excellent in both the life science and 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 we're in and also manage and deal with inflation. In 2021, we closed a record of 12 acquisitions that strengthened our lateral value chain in strategic market segments across EMEA, the Americas and also in Asia Pacific. Those 12 companies, in total, made over EUR 530 million in annual revenues. Moving on to profitability now. Adjusted EBITA increased over 41% in 2021. Besides the top line expansion, the profitability expansion was also a result of the successful EBITA margin expansion of 95 basis points versus our annual objective we communicated earlier of 10 to 15 basis points. This is another proof point of the benefits of scale. Positive mix effects and effective pricing management also contributed 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 portals, 10 e-labs and have now completed the pilot phase of our principal portal. We also remain fully committed to our sustainability agenda. And in 2021, we obtained the platinum rating from EcoVadis. Financially, we deleveraged significantly from 5.3x, down to 2.7x, and we're aiming to stay between the guidance we gave earlier at 2.5x to 3x net debt over EBITA. Our operating cash flow was, by and large, stable, despite a temporary increase in working capital [ shored by ] a remarkable and unprecedented order book at year-end. Based on these strong results, we are proposing a dividend per share of EUR 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 a 1% FX headwind. All 3 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 life science with a gradual lifting of restrictions in many countries supporting food and health and personal care. I have mentioned earlier we acquired 12 companies, 2 of those, Vigon in the U.S. and Quimdis in France, give us a strong footprint in the global flavors and fragrance market. We also added to our EMEA network, CAME in Italy, and Neupert in Austria. In Asia Pacific, we made 8 acquisitions to reinforce our footprint in the region. These acquisitions in Asia Pacific are much in line with our strategy to strengthen our network in high-growth emerging markets like Southeast Asia, in India and also in China. These acquisitions will not only give us scale, but certainly also strengthen our lateral value chain. As already mentioned, the 12 acquisitions together generated over EUR 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 end 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 & Health and Personal Care we have seen was a consequence of COVID restrictions now lifted in many countries, and with this the [indiscernible], hotels, restaurants, and cafe segment and also travel sectors, they all started to recover. Given that society is 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 3 acquisitions to strengthen our EMEA footprint. CAME in Italy, Quimdis in France and also Neupert in Austria. In total, revenue from EMEA increased by over 19% 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 chemicals, 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 Vigon, the leading distributor I mentioned earlier, in North America in Flavors and Fragrances. Through the acquisition of Vigon, we entered the food and health market in the U.S. and also strengthened our presence in personal care. Vigon and Quimdis, the one I mentioned from France, adds flavors and fragrances to our service offering and complement our lateral value chains, specifically in food and health but also in personal care end markets. Now let's move on to the last one here, to Asia Pacific, sorry. Our revenue in Asia Pacific, you can see that here, they grew by more than 81% in 2021. Organic growth was over 19%, driven by an excellent demand across most end markets in the life science and industrial chemicals. Our ability to benefit from the strong market growth has improved by the growing footprint in Asia Pacific and a continued strengthening lateral value chain in the market segments we serve. Asia Pacific continues to represent a strategic growth region for Azelis. And in 2021, we made significant progress through M&A, especially industrial. I mentioned, from the 12 acquisitions, 8 were actually in this region. We acquired MKVN and Viet Chemi in Vietnam, CW Pacific in Australia, Spectrum in India. We entered the Philippines with the acquisition of Phil-Asiatic. We also made 2 acquisitions in Korea, Coseal and MH & MIF. And we also added 2 more in China, Ingredients Plus and WWRC. So overall, we are really pleased with the progress we see and continue to have exciting growth opportunities in the region, both organically through the strengthened lateral value chain, but also certainly through M&A. In the following 2 slides, now we share some examples. We -- on how we add value in our labs, both for customers and for our [ principals ]. In the 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 principals. The product was launched successfully and triggered strong market demand. Most importantly, we strengthened the relationship with this important customer. We're 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 principals and customers and promoting sustainability. In this example, which is outlined on the right, it was a principal who approached us to help them to improve an existing product. [ Azelis ] matched the principal objective with the customers that could benefit from the product improvement and a lower cost. The result was an improved principal product. Lower costs, longer equipment shelf line for the customer, reducing waste and promoting sustainability. These are just 2 examples from numerous examples we have contributed to societies we live in 2021. Now why does that matter to Azelis? We contribute to longer shelf life and to reduce waste or to find alternative more sustainable food sources. It's driven by our commitment, our objective to be sustainability champions of our industry. We have published our detailed agenda, Action 2025, in our sustainability report. We are part of Together for Sustainability, a chemicals industry organization representing a total turnover of about EUR 350 billion, which supports us in assessing the sustainability of our supply chains. As mentioned earlier, in 2021, we succeeded in achieving an EcoVadis platinum rating for our efforts. And no doubt, we will continue to push for sustainability because we are in excellent position to contribute to a better, to a more sustainably run 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 Thijs. He will walk you through the financial results of the group.

Yes. Thank you, Joachim. 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 Joachim already mentioned, 2021 was an excellent year for Azelis. Let me first provide some color on the fourth quarter performance, which is displayed in the first 2 columns of this slide. Growth accelerated in the fourth quarter with group revenue growing at 48% and adjusted EBITA with 69% at reported rates. Activity levels during this quarter remained very high. While normally, the business tapers off a bit towards 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. To provide a bit more context, you may recall that when we presented our results for the first 9 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 9 months 2021. This is also in line what we communicated during our third quarter earnings call on expected market developments. Fourth quarter adjusted EBITA as a percentage of revenue ended at 8.5%, implying a 105 basis point expansion compared to prior year. Fourth quarter adjusted EBITA margin is a step down from the 9.8% EBITA margin we reported in the first 9 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, Azelis 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, gross 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. Now for the full year, adjusted EBITA ended at EUR 268 million, a growth of 41% or 43% on a constant currency basis, out of which 20% is due to the first-time inclusion of acquisitions. Adjusted EBITA in percentage of revenue ended at 9.5%, which translates to a 95 basis point margin expansion from 8.5% in 2020. This was achieved as the outcome of strong top line growth, skill benefits, which mitigated the impact of the ongoing pressure on the supply chain. Our adjusted net profit for '21 increased 38% to EUR 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 the 27% revenue growth and the 33% gross profit growth between organic growth and growth coming from the first-time inclusion of acquisitions. Obviously, as Joachim 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 EUR 530 million, the largest one being Vigon, and 4 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. We 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, Azelis 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 and 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 #14. Let's first start with EMEA, which makes up 44% of the revenue composition of the group. Revenue for '21 increased by 19% to EUR 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 by 57 basis points to 23.8% and adjusted EBITA in EMEA increased with 27% or 29% on a constant currency basis. As the region continued to benefit from scale and operational efficiencies, adjusted EBITA 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 results in higher variable compensation accruals. This is also reflected in the fourth quarter adjusted EBITA margin in EMEA, which ended at 9%, below the 10.6% margin levels reported in the first 9 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 EUR 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 Vigon and FX. In 2021, gross profit as a percentage of revenue increased with 232 basis points, and adjusted EBITA in the Americas increased 45% or 46% at constant FX. Adjusted EBITA in a percentage of revenue increased 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 Vigon, 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 as excellent progress in the execution of our M&A and integration with total revenue growth of 81%. In 2021, gross profit as a percentage of revenue remained 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 EBITA 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 EBITA in percentage of revenue increased by 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 by 308 basis points to 34.4% as the region is gaining scale and momentum. This supports also our view that there is no reason why APAC margin levels will not reach the same level 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 #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 to 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 EUR 8.4 million IPO costs 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 EUR 19.6 million, for the majority, noncash. Obviously, these 2 items will not be recurring going forward. The interest expense aligned on bank loans and overdrafts amount to EUR 46.9 million, and this is based on almost 9 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 pound 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, it's 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 noncash-related deferred taxes from Luxembourg. Please note that also we have increased our earn-outs through the P&L of more than EUR 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 nonrecurring costs ], and you will find more details in our annual report. Now let's go to Slide #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 EUR 182 million, and our cash flow -- 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 #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 bridge. Normally, the working capital takes off in Q4, but this did 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 EUR 144 million, which has not come down yet to Azelis standard as we are working on the integration of these acquisitions on our centralized IT platform. On a reported basis, net working 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 the revenues included in the group accounts. 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 Joachim for the outlook. Our net debt has improved significantly for -- during 2021. For the largest extent following the IPO in September, at the end of 2021, our net debt was EUR 871 million. So what happened in summary, we increased equity with the IPO proceeds of EUR 880 million, and we used these proceeds to reduce our net debt. This also meant that we improved our leverage ratio significantly from over 5x until 2020 to a current level of 2.7x at the end of December 2021, which is in line with the range that we provided to the market between 2.5 and 3x. Please also note, when we executed the Vigon acquisition back in June, we also raised additional debt of EUR 330 million, and additional equity pre-IPO of EUR 50 million. Now our strategy is to fund our bolt-on acquisitions via operational cash flow, and this is also what we did in 2021. We have generated a strong cash flow from operating activities of over EUR 205 million and used a large part of this to fund our M&A and deleverage at the same time. Our liquidity at this moment is around EUR 360 million, both in cash and unused RCF. So that was it. I'll give it back to Joachim for the outlook.

Thank you, Thijs. Well, as you can see from also the buildup 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 objective. Also worthwhile noting that we announced the closing of 2 more acquisitions in this year. End of January, we closed Umongo, a South African-based specialty distributor focusing on serving lubes and metalworking fluid solutions in Sub-Saharan countries. End of February, we completed the acquisition of Catalite, 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 1% 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 in industrial chemicals. We are limiting business activities only to non-dual-use essential materials for food and [ farmer ] and we are constantly assessing the situation in close dialogue with our principals. And it's obvious that we are 100% compliant with trade sanctions, international laws and so on and potential 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, bringing in confidence about the outlook for the year, that was a shadow of how the situation in Russia and Ukraine may evolve. So with that, let me open the floor for Q&A.

[Operator Instructions] And the first question is coming from Rajesh Kumar from HSBC Bank.

The first one is on the outlook statement. 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're 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, on top of the momentum, you obviously have inflationary pressures. So can you remind to us how that affects your margin, 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 on an organic basis, what are the levels of receivables, payable or bad debt trends that might help the market get a bit more comfort on the working capital patterns? And then I'm an analyst and my boss says I can't count right. The fourth question is on Russia, Ukraine, clearly, 1% of -- or 1%, 2% of revenue exposure, that's not meaningful. Any knock-on effects from a supply side on the supply chain? For example, the inert gases supply might be meaningfully disrupted. Does that affect any of your suppliers or customers? That would be very helpful.

Thank you. Great questions. I'll take 1, 2 and 4; and you, 3, if that's okay. Good. First one was on the outlook and you translated to 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 -- yes, 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. 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 value 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, now we've done it before, and we will be able to manage also the margin pressure, the potential margin pressure going forward. Thijs, you want to do the working capital, let me finish the Russia, Ukraine thing.

Yes. You can do 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 side. It will come more obviously from the effect when you think about bigger picture now what does it do to energy prices -- energy prices [ notch up ]. This will obviously go from oil and gas into refineries, will go into naphtha cracks as well 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 driving 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 there's pretty likely that not much will come out of Ukraine, and I'm not sure how the world, especially 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 base 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 question you raised, we will be able to through the service offering we are providing to the industries we deliver into, we will be able to manage our margin position. So now to you.

Yes, Rajesh, thank you for the question on working capital. Yes, as I mentioned, working capital in absolute terms increased from EUR 250 million to EUR 474 million, out of which is EUR 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 in the [indiscernible]. Second element, in M&A, obviously, there's a mix effect there, because working capital in the M&A side that we acquired is much higher. And predominantly is driven by our entrance into F&F, where we see the DIO levels are higher than our regular business. So yes, we have to work on that to get them on to our centralized platform. And obviously, the F&F segment is also impacted by the supply chain disruptions, where freight lead times are also longer. So that can have a working capital effect as well depending on the contracts that you're having. So it's about 2% and 2%.

Does that answer your question, Rajesh?

Super helpful, thank you very much.

The next question is coming from Luuk van Beek from Degroof Petercam.

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 we have a better feeling of how to translate future revenue growth into bonus accruals? My second question is on the supply chain, where there was a possibility of some scarcity in the logistics. So can you explain what you've done and what is it you did to make additional costs to handle that?

You want to take the bonus one?

Yes. I'll take the bonus one. Okay. Thank you, Luuk Okay. On the bonus side, we are a performance-driven sales and marketing organization. And as such, I've 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 for year-end. But yes, 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 EUR 4 million versus fourth quarter and about EUR 8 million versus prior year. Yes. So does that answer your question, Luuk, a bit?

Yes. So it's especially an impact when you reach levels above the target and you [indiscernible] accruals.

Right. 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 it's -- they have challenging objectives. But as I said, Q4 was -- has seen such an acceleration, which was unprecedented. So yes, we had to [ cover for it ] . Going to your second question, if that's okay. That was on the supply chain and whether the disruption 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 [ over to on time and growth ]. But as you can see from the expansion of the business, thanks to our already 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 scale and the fact that we are not only represent principal in one geography, but we also have representation in some other geographies. So we were able also sometimes to ship 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 your question on the cost, where -- 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 -- we are worried in the bigger scheme of things, but not as a company because we are not affected by these costs. Does that answer your question, Luuk?

Yes, it does. It's clear. Thanks.

The next question is coming from Suhasini Varanasi from GS.

A few quick ones for me, please. If you wouldn't mind talking about how you expect gross margins for this year. You probably built up inventory in Q4 that reflects the higher prices of the products. So should we expect maybe a moderation in the gross margin in 1Q, 2Q as you sell the higher-priced inventory, so to speak? And then if you think about the profitability of your Russia, Ukraine exposure, is it on the same order of magnitude as the revenue exposure? And I think the last one is on the line. 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 [indiscernible]?

Okay. Thank you, Suhasini. On the gross margin expansion we are 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 had because, as I indicated in an earlier question, that price increase and decrease from the raw material, there's, in between, there are 10 steps until you end up -- so chemical conversions until the end up with the specialty chemicals. So there is really a huge time delay, and it's really not transformed. A lot of actually the costs are built on the assets you have in between, not necessarily on raw material costs. So I think we have not only a good chance but 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 say we sell on the specialty side.

So our DIO levels are not that we have the 3-month stock or those kind of things. So that also just points at...

Turns much quicker. Then the question on Ukraine and Russia, and I didn't get the second part. If you could repeat that, please? Sorry, profitability in Russia. Yes, 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 M&A, whether we would like to take our position of -- to wait now. No. Certainly not. As 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 out some months. Many of these acquisitions we're pursuing, it's not like -- 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 it 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 just continue doing what we have been doing, working diligently through our analysis, whether it's [ business factors ] and then once we conclude then, we will sign a deal and integrate them into our network.

Last question is coming from Jayanth Challapalli from JPMorgan.

Apologize if I missed this before, but could you give us some color around the contribution of acquisitions to adjusted EBITA? Both in full year and fourth quarter. And my second question is on gross profit to EBITA conversion. 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?

The second question, what was that?

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 have here the exact number. As I mentioned it also in my speaker notes, on EBITA, effective 20% was related to M&A. I also will refer you to Section 7 out of our year-end report, where we also have included also those details in there on a pro forma overview. Second question, can you repeat?

Yes. To repeat my question -- yes, 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 drivers for this.

Okay. If we look a little bit, this is also driven by seasonality. So there are 3 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 as such, the conversion margin 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 in EBITA terms, it's about 1.5% to 2%. In 2021, this effect was about 50 basis points over GM1. And 1.5% versus the third quarter, but they were all well above the Q4 2020 levels. Now what are the key drivers around that? First, seasonality and mix, the margins in the F&F also tapered off due to the fact it's a more seasonal business. So in Vigon, that effect was about 1% to 1.5% on the GM1 side. But also, we have onboarded a lot of new mandates. There's also a relationship to our working capital comment. And when you onboard a mandate, yes, okay, they come in at a lower margin, then you do the analysis, you complement them with 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 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 3 things into account, I think that gives you a little bit of some color on the conversion margin development.

Understood. Thank you.

And we have received one more question, and this is coming from James Rose (sic) [ James Rosenthal ] from Barclays.

Just one from me. The second half market backdrop is obviously difficult to predict. But for those who are looking at more bear 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.

Thanks. Well, when you go back through the crises the business have seen, so go back to 2008, '09, '10, what we all had to live through, we saw a contraction there, but it was not a significant one. And we expanded immediately afterwards. And now going really closer to where we are right now, going to 2020. I mean, you have seen what the COVID crisis has done to many industries. The beauty of the industry we are in is, as I said, even during the COVID crisis, we managed to keep our top line on a like-for-like basis stable and continued to expand margins by adding elements to our lateral value chain which allowed us higher pricing following 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 stay solid through a crisis. Again, there are many underlying factors that, which is a continued outsourcing trend [ in 1 shop ] principle. So there is this trend of -- obviously, they don't want to work with [indiscernible] smaller players. They also entrust a 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 expand profitability over the years to come as we have said over the last couple of -- does that do it, James?

Yes. Thank you very much.

[Operator Instructions] So the next question is coming from Rajesh Kumar from HSBC Bank.

Sorry, just a quick follow-up on the conversion margin. Clearly, there's a seasonality in Q4. And I'm assuming last year Q4 must have been a bit stronger than normal. Would you think -- clearly, 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 -- Q4 2022 against these [ things ] 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? Maybe you can...

I think what I understood is...

Yes. Decline versus '21.

We don't expect the market decline or a decline towards 2021. We have -- no, we don't. We have won numerous mandates which will strengthen the position. So I'm confident that we keep it. And also what I tried to explain earlier. The more we offer through our [ indiscernible] the better will be our pricing power to end customers. So I'm confident that we will keep what we have right now.

Appreciate that. I guess I just wanted to be clear on the call because clearly you're a new company to the market, and 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.

Well, thank you for your interest in Azelis, in our story. And as you, Rajesh, have said, this journey has 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 the years to come. So thanks again for your interest. Stay safe and talk to you for our Q2 results call. Thank you.