IMCD N.V. (IMCD) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for holding, and welcome to the Full Year 2021 Results Analyst Call of IMCD. [Operator Instructions] I would like to hand over the conference to Mr. Pieter van der Slikke. Go ahead, please, sir.

Yes. Good morning, everybody, and welcome to this call. As usual, I'm here with Hans Kooijmans, 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 a record result. Our EBITA increased with 54% and our cash earnings per share with 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 predominantly volume growth. It's gratifying to see that we -- despite travel restrictions because of COVID, we're also able to continue to execute our strategy by doing acquisitions. I won't mention all acquisitions, but I want to emphasize our acquisitions in Mexico, Central America, China and Indonesia. And 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 segments. 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 showed very strong growth, 30% increase in revenue and 55% in EBITA. Order intake in this quarter remained 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've 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, Piet. Good morning, ladies and gentlemen. Earlier today, we published our full year results in the form of a short press release. And we further published our annual report and 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. 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 gross 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, like Signet in India 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. Gross profit in percentage of revenue increased with 1% point 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 gross 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 organization with an asset-light business model with outsourced logistics and a low fixed asset base. As a consequence, EBITA development shown in the next line seems more relevant for us. Operating EBITA increased 55% on a constant currency basis to EUR 374 million. This increase was a combination of 35% organic growth and 20% as a result of the first-time inclusion of acquisitions. Operating EBITA in percentage of revenue increased by 2.1% point from 8.8% to 10.9% in 2021. The conversion margin calculated as operating EBITA in percentage of gross profit, increased from 37.6% last year to 44.7% in 2021. The increase in conversion margin is the result of substantial organic EBITA growth, but by 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&L's per operating segment. Gross 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% points to 25.7%. Operating EBITA in EMEA increased 39%, but by the EBITA margin increased with 1.4% point to 11.3%. Most of this EBITA 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 EBITA, a 36% increase, and EBITA and conversion margin both increased respectively, 1% and 3% points. Then Asia Pacific had another good year, whereby the realized 61% gross profit growth. And this was a combination of 19% organic and 42% as a result of acquisitions. Gross margin increased -- gross margin percentage increased from 21.1% last year to 24.4% in 2021. Operating EBITA more than doubled to EUR 110 million, whereby EBITA margin increased to 15.4% and conversion margin further improved. The improvement of EBITA and conversion margin is the result of higher gross margins offsetting higher on cost, and in addition, the addition of the acquisition of Signet in November 2020 had a positive impact on the development of the conversion margins in this segment. In the last column, you will find in the holding companies all nonoperating companies, including the head office in Rotterdam. The absolute amount of holding cost increased from EUR 27 million to EUR 29 million and holding cost as a percentage of total revenue slightly decreased. On the next page, you will find a summary of the P&L lines from EBITA 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 2 slides. But before we go there, amortization of intangible assets and related tax credits are noncash cost items related to the amortization of supplier relations, distribution rights and other intangibles. And the increase is mainly the result of acquisitions, though. The EUR 3 million nonrecurring expenses and related EUR 1 million nonrecurring tax income in 2021 relate to cost of realized and non-realized acquisitions, net result on the sale of Nutri Granulation business in the U.S. 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 EUR 22 million, which is about EUR 4 million lower than previous year. This EUR 4 million decrease is, as you could see, a combination of EUR 3.7 million lower interest cost related to our financing structure. Further changes in deferred considerations adding EUR 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 EUR 37 million. And as a guidance for our tax cost, we indicated to expect a blended tax rate in the range of 24% to 28% of a result before tax calculated as EBITA minus finance and nonrecurring cost. 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 EUR 84 million compared to EUR 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 IFRIC agenda decision on cloud computing arrangements, a bit of an annoying change to my opinion. And perhaps just to refresh 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 the SaaS contracts under IFRS. Basically, IFRIC changed the reporting goalpost. 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, but by 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 EBITA of 2021 and 2022 -- sorry 2020 is negative EUR 10 million and only FX 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 cost 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 EUR 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 EUR 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% point 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. Then right-of-use assets is the result of the application of IFRS 16. This EUR 69 million reflects the 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 EUR 1.5 billion, covering 61% of capital employed. The increase in '21 is, as you might understand, the result of the addition of the net profit for the year of EUR 207 million. other comprehensive income, adding a positive EUR 57 million and a minus for dividend payments in cash of EUR 58 million. Two other balance sheet lines, working capital and net debt, are summarized on the next 2 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 EUR 169 million, and this increase is a combination of EUR 50 million additional working capital related to the companies that we acquired in 2021. There will be a EUR 15 million addition as a result of exchange rate differences, and further, we report an operational increase of EUR 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 Piet already indicated in his introduction, in particular, the strong sales towards the end of 2021 contributed to higher trade and other receivable days, the 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 EUR 940 million of net debt, which means an increase of a bit more than EUR 200 million compared to the end of 2020. And apart from the usual bond loan, the Schuldschein and the bank loans, net debt includes about EUR 70 million of operational lease liabilities as a result of IFRS 16. And further in the net debt, we reported about EUR 309 million of deferred considerations. And most of these deferred considerations relate to the remaining 30% of Signet and Megasetia that we will bought -- pay in 2024. On the same page, an overview of the maturity profile of our debt structure at the end of the year. And the purple bar represents the full revolver facility of EUR 500 million, which is, of course, not fully drawn. Reported leverage at the end of 2021 was 2.3x EBITDA. The leverage ratio calculated based on the definitions used in IMCD's loan documentation was only 1.5x EBITDA, which is well below the required maximum as set in the loan documentation. I would like to finish the financial summary with the cash flow overview on Page 20. And as you can see, the absolute amount of free cash flow in 2021 was EUR 279 million by the cash conversion ratio decreased to 73%. And this increase 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 [ 2022 both ]. Then on the last slide of the presentation, you will find the outlook in which we, amongst others, indicated, IMCD's interesting opportunities to increase its global footprint and to expand its product portfolio both organically and by acquisitions in 2022. So far, this is summary of our figures, and Piet and myself are happy to answer any of your questions.

[Operator Instructions] The first question is from Mr. Matthew Yates, Bank of America.

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 bigger scope of the overall business? And then second question is a bit of a personal one, Piet, 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 peer Azelis 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?

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. And so we're very much focused on growth and further acquisitions, strategic acquisitions. So I would say it's part of our entrepreneurial, let's say, DNA that we also need to keep cash in 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 -- the 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 that I hope relieve 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, Europe, where we strengthened 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 -- let's say, not so visible probably for everybody, but we do that. It's, let's say, for us, it's segmented under our pharmaceutical business, also sometimes on 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 in France in this field. I guess that were your questions, Matthew.

The next question is from Mr. Dominic Edridge, Deutsche Bank.

If possible, I'd like to ask 3 as well. Just -- I know in the past, you've talked about sort of fear of missing out being -- having an impact on customer sort of ordering patterns. Is that something you're still seeing? Or do you feel that, as you say, the current sort of strength in orders that you're seeing are reflective of underlying demand? And are you able to fully fulfill all of the customer orders currently given obviously all the supply chain issues? The second question was just 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, could 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. Can you just say, are there sort of very much automatic pass-throughs there? And are you seeing any -- are you still seeing a lot of logistics constraints and inflation coming through there as well?

Okay. Your first question relates to whether or not we can fulfill 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 logistics operation. And I'm really -- I 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 orders. All M&A in LatAm, maybe a very brief summary. We are -- we have a very significant traditional position in Brazil and circling around the -- let's say, the industrial segments, but also food and a very significant position in the pharma in Brazil. I think in the rest of America, the Latin America, we are building businesses like we have elsewhere in the world, which, again, circles around industrial segments like coatings and construction, 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 its hub in Miami, and serve the Central American and Caribbean region, is very much focused on the industrial segment, but we will add also life science segments to that. In Mexico, we have, I would say, broad product offering. But let's say 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 costs, Hans, do you want to go for -- I mean, basically what we do is to pass it on. And we -- I mean, if logistic cost increased, then we will pass it on 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.

And just sorry, on 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 inventories?

Sorry, yes.

Sorry, it's my fault.

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

The next question is from Mr. Chetan Udeshi, JPMorgan.

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 EUR 194 million, and now it's EUR 309 million. And I see in the annual report, the mention is that maybe about EUR 40 million of that is due to Signet changes. And then it implies there is another EUR 70 million to EUR 75 million increase somewhere else. So can you just talk about this deferred 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? The second question, and again, a bit more technical in nature, but I was just looking at the annual report in the guarantees section. And it seems it says the group has granted guarantees of EUR 80 million, I mean, versus EUR 38 million last year, and there's a big increase in guarantees for goods. 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?

Yes. Chetan, the first one on deferred consideration. Basically, the 2 biggest positions in the EUR 300-something million that you see there are related to the 30% minority shares that we will buy from the former owners of Signet in one acquisition and Megasetia in the other one. So the increase that you refer to, the EUR 75 million is related to the 30% of Megasetia. 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 obligation 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 Signet. 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 the supplier relations and as you grow your business, automatically this amount increases. And that is -- 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.

Understood. Maybe Hans, if I follow up on your first -- I mean response to the first question. So can I also clarify this contingent consideration or deferred consideration, is that the present value? Because I'm -- 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...

Yes. 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 discounted at a rate of 1.1%. So there is -- it's very close to the nominal value that we need to pay in 2024. And what you -- then perhaps to finish the technical part here, what you then need to do if you discount it every year, you need to add a bit to the value and that flows through my P&L as interest cost. And that is what is reflected in the interest cost underlying changes in deferred considerations.

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

Yes. We have an agreement with both owners to buy the remaining 30% in 2024.

The next question is from Mr. Henk Veerman, Kempen & Co.

My first question is on your working capital inventory buildup. And you highlighted that relates to, let's say, continued very strong demand into 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 statements. And 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 is also a bit more focus on, let's say, organic expansion via new product lines, maybe perhaps a bit more focused on that in Asia, also given maybe your -- 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 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 that -- given these longer lead times that maybe clients start to source from multiple distributors again due to shorten those lead times?

Yes, Henk. 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 noted 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's the raison d'être 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 on the top of our list. So that means also that we start new business segments, so we have in -- for example, in Europe, in Advanced Materials, we have now a very strong position in the medical applications where we have a very interesting product portfolio and also very good technician. 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 lag that is organically and that's getting and convincing suppliers to work with us. On your last question, I was not totally sure if I understand it because the fact that our 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 a disruption, I would say, in logistic chains across the world in China and elsewhere and also in the United States imports 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 -- yes, let's say, core business and also helps our suppliers to reduce their cost. I hope that answers your question.

The next question is from Mr. Rajesh Kumar, HSBC.

First question is really the level of growth you're enjoying at the moment, there have to be some degree of cyclical recovery and some degree of all the improvements you talked about. So when we are thinking about the future, and I mean that you always say to us that 6% to 7% 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 maybe for another couple of quarters, should we expect a below the trend performance for a few quarters before it gets back on 6% to 7% growth because of the comps? Or would it be reasonable? I know it's in -- deep into future, but 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 many people expect later this year or even next year, you might see bulk chemical prices ease and you are not a bulk distributor, and your products are not widely quoted on ICIS. So there's a bit of lack of price transparency in the broader market. So you're not exposed to the same chemical price gyrations as bulk distributors would be. But would you think that margins -- gross margin or operational gearing, there could be a bit of impact from adverse differential inflation, especially because wage inflation is quite strong or seems to be quite strong around the world. Your thoughts on that would be very interesting.

Well, Rajesh, 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 now talking more in a general way that we see strong growth in all economies across the world. There will -- that will, of course, ease at a certain stage. When? Yes, 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 as -- 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 too and that has to do with margin and how the margin will develop over time. You rightly pointed out that's a mix of many factors, product mix, business segment mix, so to say. We have certain -- acquired certain businesses with higher-margin products. Yes, it is our focus, as you know, and I am pretty confident that we are able to -- yes, 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 we know, in Russia and Ukraine also pandemic, et cetera. So, I would be cautious. Sorry for not being more specific.

No. This is super helpful. Just on -- you touched on Russia, Ukraine, any exposure there we should be aware of?

Hans?

Yes, Rajesh, exposure is limited. And when I say limited, it 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.

[Operator Instructions] And the next question is from Mr. Quirijn Mulder, ING.

I hope you can hear me.

Yes.

Okay. 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 related to logistics and supply chain issues, et cetera. That's the correct view, I think. And also give me maybe some indication about -- is there any volume you can mention on the effect there? Where -- or is it pure pricing in that inventory?

Quirijn, if you break down the increase, if you talk about 40%, part of it relates to newly acquired companies. That is, of course, if you compare December last year, December this year, then there is a bit of -- there is a bit of currency in there. On total working capital, that was EUR 15 million, so that's also reflected in -- 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 there, 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 inventory value goes up. So it's the combination of these 4 factors. And I think out of your 40%, I think about 1/3 is M&A related, and about 10% is currency related and the remainder is more operational.

Okay. That's great to hear. Then about the U.S. So maybe Piet can elaborate on the U.S. So the organization is in order. I don't think that you have a lot still to do some integration between the units. Are you ready for the next step? And I mean, is that something which is more serious in terms of M&A?

We're 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 U.S. 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 U.S.

Okay? But there are -- in general, there are some candidates you think? It is different from the Far East, of course, but...

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, in the ethics, we try to push forward. So is there anything you can say about measures you take to prevent issues which are -- yes, which are related to that sort of problems or issues?

Yes. Well, I think we always have to be cautious about, let's say, judging other countries. But 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 monitor, of course, very closely. Yes, I think this is not different from any multinational. So I can only say that we try to hold up the highest standards here.

The next question is from Mr. Andy Grobler, Credit Suisse.

Just 2 for 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 deals, particularly the kind of mid- to larger-sized ones? And then secondly, just thinking about organic gross profit growth through the year. Can you split out how much of that is volume versus pricing or your pricing and how that moved through the course of the year would be great.

Yes. Your first -- I mean, second question, I think, Hans will take maybe. The first question on pricing of potential targets. I mean, let's say, first and foremost, we want and will stay disciplined about, let's say, paying value for companies. But I think if you look over time, then I would -- yes, maybe slightly multiples have gone up. But I think over time, it's still within the bandwidth that we use. And so we're not too concerned about that. But 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, et cetera. But we have competition, we had competition in the past. But I think that we're still disciplined in how we execute. Hans, you want to...

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 pricing per ton, others we do -- we even talk in grams. The volume is not so 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 IMCD portfolio, the organic growth is mainly driven by volume growth and supported by a bit of pricing increases. But you should ask me on a fixed percentage.

I wonder on that DKSH in 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 is volume related, and it could be close to that range. But to be brutally honest, I just don't know.

The next question is from Mr. Chetan Udeshi, JPMorgan.

Actually, my question was same as the previous question, which was the split of gross profit between volumes and price. So I think it's [ answered ] right now.

I hope you are happy with the answer then.

The next question is from Mr. Quirijn Mulder, ING.

And a follow-up question on the -- let me say, the EUR 110 million for let me say, increase in deferral considerations. Is there anything -- let me say, you have made your first estimate probably at the end of 2020. Is it possible that we get another -- let me say, another EUR 100 million in addition to that at the end of 2022, or is that -- or is the estimates much more, yes, cautious and, let me say, better than it was in origin?

Quirijn, I would be very happy if we could add another EUR 100 million because the 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 earnout 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 as interest cost. And therefore, we were with the exception that if you change your guess in the first year after the acquisition, you can just adjust your deferred consideration by the balance sheet. But your question, could it change? Yes, and it will change on the basis of changes in expected payout amount, and that is related to the profitability of the company.

The next question is from Ms. Suhasini Varanasi, GS.

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 -- you're planning to -- or going 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 inflation that you're seeing over there? And I know you don't give guidance, but how should we think about EBIT margins this year in the context of wage inflation and maybe growth slowing a bit compared to the tough comps last year. Flattish margins is a good starting point? Or should we be thinking slightly lower? Any color there would be helpful.

Yes. On inflation, or let's say, on price increases for products, maybe generally, I think it's good to realize again that we work very much in the global business in terms -- in the sense that we work with suppliers that have global positions very often, not always, but very often. And so I don't think that we see a big difference in the sense that the U.S. 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 we do not give guidance on that. So I'm sorry that I can't do that.

Actually, sorry, not price increases, sorry, I was referring to not chemical price increases, but wage inflation for your...

Wage inflation. Okay. Sorry. Sorry that I misunderstood. Yes, I think there you see some differences, of course. Significant wage inflation in the U.S., I would say, in certain individual countries, may have mentioned Turkey here. This, of course, has an unprecedented inflation. And then 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. Apologies if I may just have a follow-up. Just -- sorry if I'm pushing it, but would you say it's basically the same level of inflation of maybe, say, high single digits in the U.S. as well as Europe or maybe Europe is a bit less? Just to get some color.

On wage inflation you mean?

Yes, on wage inflation.

No, I would say U.S. is a bit higher than Europe.

The next question is from Mr. Rikin Patel, BNP Paribas Exane.

I noticed the conversion margins in the Americas were down sequentially in Q4, but up in Europe and Asia. Just curious if you could provide some context around that.

Yes. 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 a lower quarter if we 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 we have to do because of the very strong outcome of 2021. But what you usually receive 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 [ at the ] company, it's the same trend every year.

[Operator Instructions] 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 lines. Have a nice day.