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

Hello, and welcome to IMCD N.V. Full Year 2023 Results. My name is Alicia, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to Valerie Diele-Braun, CEO; and Hans Kooijmans, CFO, Head of Investor Relations, CFO, to begin today's conference. Thank you.

Good morning, everyone, and welcome to the first IMCD analyst call since I started as CEO of IMCD on the 1st of January. As usual from the past, I'm here with my colleague, Hans Kooijmans, the CFO of IMCD, who will lead you through the detailed financial results after my preliminary remarks, and then we are open to answer your questions. Let me start by sharing with you what pleasure it is for me to be with you today and to be part of this exciting company, which I have the honor to accompany in the past years, a Supervisory Board member before joining the Management Board in October and then become the CEO 2 months ago. Based on my 27 years of working within the specialty chemicals industry, first with the Unilever Quest International division, which eventually became Givaudan; then with DSM; and later at the Clariant carve-out of SK Capital, Archroma; and the CEO of CABB Group, I could and can strongly see the benefits that IMCD brings every day to its suppliers and customers, and I look very much forward to developing this further. But let's for the moment focus on 2023. This has been a year of solidifying the strong growth we saw in 2022 and to continue working on the foundation to be able to absorb growth also in the future. IMCD showed resilience despite difficult markets. After an exceptionally strong 2022, we recorded revenues of EUR 4.4 billion and operating EBITDA of EUR 515 million, a 3% decrease on a constant currency basis ensuring, however, stabilization of the business despite challenging market conditions and partially reduced demand. And we continue to invest strongly into our business to ensure a healthy platform for future growth. Here are some examples of our initiatives. Strong investment in new and omnichannel digital solutions to further improve the buying process and customer intimacy; continuous investment and upgrading of our global integrated ERP and CRM platforms to further optimize internal processes and reporting for our principals; acquisitions of 13 companies over the course of the year 2023; and having signed an additional 5 transactions to be closed in 2024 to accelerate the spread and breadth of IMCD geographically as well as in business areas; and last but not least, the development of tools to facilitate the collaboration of our people and to ensure continuous learning and further improvement. Based on these investments and our proven resilience throughout our history, we remain very positive about our ability to grow organically and by adding businesses. Given the macroeconomic circumstances, it is, however, prudent not to give a near-term outlook. Hans will now give you a short update on the numbers. Hans? Thank you.

Valerie, thanks for the introduction. During Valerie's opening remarks, we clicked through a couple of slides with a few highlights of 2023, some key financials and overview of the 18 acquisitions that we either signed or closed during the last year. And further, we summarized progress made on various ESG topics. While preparing for this call, I came to realize that 2023 March, IMCD's 10th anniversary as a listed company. And over this 10 years' period on Euronext Amsterdam, we transitioned from a small-cap entity to a mid-cap and eventually secured a position among the top 25 listed companies in Amsterdam. This remarkable journey was made possible by robust financial performance throughout these 10 years. And this slide captures in a nutshell this decade by showing you the development of our EBITDA and cash earnings per share. And as shown on this slide, we reported an impressive 18%, 19% growth CAGR on both metrics over the entire listed period. Earlier today, we published our first integrated report, an informative, colorful document about IMCD's business and a lot of details about our financial and nonfinancial performance. Key financial figures from this integrated report are summarized in the press release that we issued this morning. And in this call, I will quickly take you through the financial numbers before we move to Q&A. On Page 13 of the presentation, a summary of a few key figures. And you could see that ForEx adjusted revenue more or less equal to last year and a gross profit increase of 2% compared to record year 2022. The 2% increase in gross profit was a combination of 3% organic decline and 5% growth as a result of the first time inclusion of acquisitions. For an overview of the acquisitions that we closed in 2023, I would like to refer to Page 7, 8 and 9 of this presentation. Gross profit percentage of revenue increased 0.4% to 25.3%. And the segment EMEA was the biggest contributor to the improved margin percentage. The increase in gross margin percentage is the result of internal margin improvement initiatives, the -- in general, negative impact of newly acquired businesses, the usual changes in local market circumstances, combined with product mix and currency fluctuations. Then on this page, for your convenience, we included the line with operating EBITDA comparison. However, the development of EBITDA shown in the next line seems more relevant to us. As you know, IMCD is a people organization, has an asset-light business model with outsourced logistics and a very low fixed asset base. Operating EBITDA decreased 2% on a constant currency basis to EUR 515 million, as mentioned before by Valerie. And this decrease was a combination of minus 7% organic, partly compensated by 4% growth as a result as the first time inclusion of acquisitions. Operating EBITDA in percentage of revenue slightly decreased from 12% to 11.6%. The conversion margin, calculated as operating EBITA in percentage of gross profit decreased from 48.3% last year to 45.8% in 2023, and this decrease in conversion margin is mainly the result of less gross profit and, to a lesser extent, the impact of the first time inclusion of acquisitions, acquisitions with an average lower conversion margins than the average of IMCD. Then the organic increase of own cost, a 2% cost increase, was modest, especially modest given the impact of higher-than-usual cost inflation in most of the regions IMCD operating. Then on the next slide, a few key figures from the P&L per operating segment. As you can see, we focus here on gross profit and EBITA development. On gross profit and EBITA, you will see the difference between the 2 years 2022 and 2023, and I split it in organic growth, acquisition growth and currency impact. But first, looking at the currency impact. It's fair to say that we had quite some headwind last year at a 4% negative currency impact on gross profit and EBITA and a negative impact of more than EUR 40 million on gross profit and about EUR 25 million negative on EBITA. It's fair to say that this negative currency impact more or less wiped away the positive contribution of acquisitions. And when looking at the segments, we report an organic decline in both gross profit and EBITA in the Americas. And the decline, of course, is not something to be proud about. However, I think we should keep in mind what happened in 2022 to bring this decline a bit in perspective. To refresh memory, in 2022, we reported record growth figures in the Americas, the 53% gross profit growth and 73% EBITA growth, 73% in 2022. And in the course of 2022, we saw all kinds of supply chain issues coming to an end, resulting in huge demand, customers massively overstocking. And in 2023, we saw more or less the opposite, a decrease in final customer demand, combined with massive destocking, resulting in difficult market conditions, especially in the more industrial segments. So the EUR 155 million EBITA reporting for 2023 is still way above the EUR 130 million EBITA reported in 2021. So in the Americas, in the period 2021-2023, we reported a healthy 37% EBITA growth. Same for Americas conversion margin, which is slightly below 2022, but still better than 2021. In EMEA and Asia Pacific, the other 2 columns here, performance was solid despite challenging market conditions. Organic growth was flat in EMEA. And in Asia Pacific, report -- we report mid-single-digit organic growth on both gross profit and EBITA. The EMEA conversion margin was more or less equal to 2022. And in Asia Pacific, we reported a slight decrease in EBITA margin and conversion ratio. And this decrease in Asia Pacific is mainly the result of acquisitions completed in 2022 and 2023 with lower-than-average IMCD margins. And then in the last column, you will find in the holding companies all nonoperating companies, including the head office in Rotterdam, the regional support offices in Singapore and the U.S. And as you can see, holding cost as a percentage of total revenue remained stable at 0.7% of revenue. Then on the next slide, you will find a story of the P&L lines from EBITA to the net results for the period and a few general remarks whereby, I would like to start on the bottom half of this slide with amortization of intangible assets and the related tax credits. You know, these are the noncash costs related to the amortization of supplier relations, distribution rights and other intangibles as a result of the acquisitions that we did. Then there is EUR 5 million of nonrecurring items. This EUR 5 million is a combination of costs related to realized and nonrealized acquisitions, cost of one-off adjustments to the organization, partly offset by a EUR 7 million positive result of sale of warehouse that we still have in the U.S. Then if I move to the other 2 lines, net finance and tax cost. First, a breakdown of the finance costs on Slide 16, the breakdown where you could see that the finance costs are adding up to EUR 25 million, which is about EUR 1 million lower than previous year. And this EUR 1 million decrease is, as you could see, a combination of EUR 20 million higher interest costs related to our financing structure and a positive change in deferred considerations of EUR 22 million are more or less similar negative currency results compared to last year. The higher interest cost on the financing structure is mainly the result of increase in interest rates during 2023, combined with, on average, higher net debt amount. And when looking at our debt position, it's fair to say that our future exposure to interest rate fluctuations further reduced to 2023 -- during 2023, maybe about EUR 1.1 billion of our actual debt position. But I should phrase it slightly different. If you look at our net debt position, there is a position of about EUR 1.1 billion in there, that consists of corporate bonds versus fixed coupon. As you might have seen, we have 2 EUR 300 million bonds with an average interest rate of 2.3%. And further, we issued in September last year a new EUR 500 million bond at a rate just below 5%. So the blended interest rate on these bonds is just below 3.5%. Then a bit more complicated line, and that's the change in deferred considerations. As you might remember, part of our net debt refers to deferred purchase price considerations like, for instance, the 30% for Signet in India and Sanrise in China. The nominal values of these deferred considerations are debt items and discounted with an interest rate, triggering additional interest costs. Further on this line, we need to reflect changes of the expected value of the deferred consideration as a result of changes in expected financial performance of the companies the deferred consideration relates to. And as you know, the purchase price of these minority shares are linked to the actual performance. The IFRS treatment of differences between estimated and actual performance resulted this year in [ around ] at least for us confusing accounting treatment. First, we have the result of segment in India, which developed much better than anticipated. And this positive development resulted in a EUR 50 million increase in the fair value of the deferred consideration related to the remaining 30% of the sales of these companies. And then based on the requirements of IFRS, we had to report this increase not as cost but direct against equity. And where Signet had better results than expected end of year -- sorry, where Signet better results than expected at the end of 2022. We saw the opposite in companies like Sanrise and Megasetia, and that resulted in a decrease of the fair value of their deferred considerations. And this decrease, combined with the usual interest cost related to the discounted value of the deferred considerations, added to a benefit of EUR 29 million, a benefit that is reflected in the P&L as interest, and that is based on IFRS requirements. So when making your financial model, I could imagine to adjust for these IFRS-related adjustments. Then on the next page, our income tax expenses, where we reported a decrease of our regular income tax of EUR 12 million. As a guidance for our tax cost, we indicated to you to expect the blended tax rate in the range of 24% to 28% of result before tax, that calculated as EBITA minus finance and nonrecurring costs. And as you will notice in the summary on the bottom of this page, it indicates that IMCD's blended regular tax rate was 24.7%, which is slightly below the 2022 level and still at the low end of the guidance that we gave you. The tax cash-out that we paid in 2023 was EUR 124 million compared to EUR 130 million in 2022. And I would like to refer to the integrated report for further details on the tax calculation. Then on the next page, the calculation of cash earnings per share and our dividend proposal. As you can see on this slide, we report EUR 6.41 cash earnings per share in 2023. And at the AGM in May, we will propose a dividend of EUR 2.24 in cash per share, which means a payout ratio of 35%, which is at the top end of the range that we set ourselves as a policy that we also shared with you, and we'd like to be consistent in our messaging there. Since our listing in 2014, we increased our dividend from EUR 0.20 in 2014 to the proposed EUR 2.24 in 2023, which means a growth CAGR of 31% during the period that we are listed on the stock market. Then Page 19, a summary of the balance sheet of IMCD. Property, plant and equipment slightly increased, still relatively low compared to the size of our business, which is of course, logic as a consequence of the asset-light business model. Then we the right-of-use assets. That is the result of the application of IFRS 16. So this EUR 100 million basically reflects the capitalized operational leases and more or less some amount you will find back as a net debt item later on in the balance sheet. Then intangible assets and related deferred tax liabilities are mainly the result of the acquisitions made. You could see a growing equity position of about EUR 1.7 billion, covering 57% of capital employed. And the increase in 2023 is, amongst others, the result of the addition of the net profit for the year of EUR 292 million and a minus for the dividend payment in cash of EUR 135 million. The 2 other balance sheet lines, working capital and net debt are summarized on a separate slide. On Page 20, a summary of the absolute amount of the various working capital components, and then these absolute amounts translated in days of revenue. And as you can see, the absolute working capital amount decreased EUR 6 million. This decrease is a combination of EUR 57 million additional working capital related to the 2023 acquisitions. We report a minus EUR 19 million as a result of exchange rate differences and calculating this on a year-end basis. Further, we report a EUR 44 million operational decrease in 2023, which is mainly a result of lower activity levels that we reported. If you look at the days, we improved on year-end stock and creditor days, whereby debtor days came back to a more normal historic level. Then on the debt side, Page 21, a summary of our net debt position. At the end of 2023, we report EUR 1.3 billion of net debt. This net debt position includes the EUR 1.1 billion of corporate bonds, the bonds that I explained before. Further, that includes EUR 103 million operational lease liabilities, the result of that IFRS 16, and about EUR 345 million of deferred consideration. About 70% of this deferred consideration position relates to the remaining 30% of Signet, which we paid and acquired on the first of February this year. On the same page, an overview of the maturity profile of our debt structure as to December 2023. And with the new bond and the extended term of the revolver, we created a nice maturity profile of our debt portfolio. And the EUR 700 million revolver facility bar on this sheet reflects the maximum amount we can use as per today. The reported leverage at the end of 2023 was 2.3x EBITDA, and the leverage based on the definitions and the loan documentation was 1.7x EBITDA, which was well below the required maximum as set in the loan documentation. Then the last financial slide, cash flow is one of the most important slides. As you can see, the absolute amount of free cash flow in 2023 was EUR 554 million. But the cash conversion ratio increased from 77% to 105%. And this increase in conversion ratio is a combination of lower operating EBITDA, which is more than compensated by EUR 161 million cash coming out of lower working capital investment. And then in the -- as a last slide in this deck, you will find the outlook in which we, amongst others, indicate that IMCD sees interesting opportunities to increase its global footprint and to expand its product portfolio, both organically and by acquisitions in 2024. So far, a summary of the 2023 figures. And Valerie and myself are happy to answer any questions you might have. And I would like to give back to Alicia, the operator.

[Operator Instructions] We'll take now the first question from Annelies Vermeulen from Morgan Stanley.

I have two questions, please. So the 9 months report, you talked about expecting Q4 to be better on a sequential basis, particularly in terms of volumes. It sounds like that has been the case. I'm just wondering about the moving parts within that. Were there any differences in the geographies that you expected to be better or not? It sounds like the U.S. has still remained more challenging, but any comments you have on that? And on a related note, now that we're 2 months into the first quarter, could you perhaps comment on the performance of the business and the outlook for your order book so far in 2024? And should we expect a further sequential improvement in Q1 relative to Q4, notwithstanding the usual seasonality effect? That's the first question. And then secondly, just on your conversion margin. You've clearly seen a reset in 2023 from the exceptionally high levels of '21 and '22. How should we think about the conversion margin going forward? Do you think this is now the new normal level? Do you think there is a further reset needed still in 2024? Or equally, do you think that you can continue to grow the conversion margin from the 45-ish percent you've reported today?

Thank you for your question. I would say I take the first two on Q4 and Q1, and Hans takes then the last one in terms of conversion margin. So Q4, I mean, we continue to see that the Americas have not come back at the same degree. And that also, of course, due to the fact that in our industrials are strong in the Americas. In terms of the other two, it was basically on par with our expectations. And in terms of Q1, we have not seen two trends. So I think it's a bit too early to talk about it. We see that customers are still concerned about inventories, not in terms of having them, but in terms of not building new ones. And therefore, we see smaller order size, more frequent orders. And I think it would be too early to talk about Q1 at this point of time. Do you want to take...

Yes. So the question about is the current conversion margin, the new normal going forward. That is, of course, difficult to predict in a business like ours. But if I look at the components, you know we never give guidance on future developments with respect to results. But what we definitely will see this year is that the relatively high cost increase that we saw last year as a result of the higher inflation environment which we operate in, which we had to manage and we could manage pretty well by. on the one hand being very careful on adding new people to the structure, saving a bit on the bonus component because we did not make our targets there. So there, we will see a bit of stabilization. And on the margin side, yes, that is the bigger known. And that is in the end of the day, the biggest factor that will drive the conversion ratio. So if we grow, then we could improve, and let's see how that develops. But I don't want to pinpoint on what is the new number going forward.

We'll take now the next question from Matthew Yates from Bank of America.

Firstly, Valerie, welcome. Now having spent time on the Board, I won't ask you for your first impressions of the company. But now that you're in the CEO seat, what are your top 1 or 2 priorities for the coming year, where you think your experience and skill set can have a positive impact on the group's strategy and execution? And then maybe a second question to Hans, not really around the interest in the IFRS accounting. But just given how important M&A is to your strategy, I did want to come back and ask about the earn-out release. I think you said it was Megasetia and Sanrise. Is there a negative surprise here since taking over the businesses that they are, frankly, not as good as you thought they were going to be? You've had some unforeseen integration issues since owning them. Or do we need to look at it more in the context of how aggressive or optimistic the business case was for structuring the earn-out to begin with? I'm pleased to give my cynicism, but just on Signet, which you said was doing much better than expected, is there any risk here that sales have been inflated and pulled forward ahead of that minority buyout? Or has the business continued to perform very well since the turn of the year?

So I'll start and then hand over to Hans. I mean in terms of strategy and what the plans are for the company, being on the Board I really fell in love with, [ or Hans if he has ] to say, because it has an acquisition machine and it has such a strong business model. Where I think that I can add something substantial is really on the digital and sustainability journey because coming from the principal side, I think I do know what principals are looking for. And having -- for being even the customer of IMCD, I do know what I want as a customer. And there, I think, is where we see, of course, at the moment, in general, in the market, a huge development and a fast one and where we have to make sure. And I think we have the toolbox on which we can build on to continue on a journey to go with the transition of the market. So sustainability in digital is where I will add and where we have the focus. But in the end, we also have people, organization. And of course, on the people side, training, development, changing demographics of the market. That's another one that we have to be careful with and have a focus on developing further. Hans?

Yes. And Matt, you've done a very valid kind of question on deferred consideration. Perhaps first, more in general, when we do acquisition and when we talk with owners, there is always a debate about what is the sustainable profit level in the company and how should we value future growth. And what we often see then, owners sell their business to us, then they claim that there will be a record growth in the coming years. And then we typically structure deals in a way that we say, "Okay, we pay you 70% upfront on the basis of the value that we see at that moment in time." And then we make the accrual for the deferred consideration on the basis of the -- what we would call the growth model that the owners present to us. And that in some cases, it's a bit of a hockey stick in case people are very optimistic, but we take a prudent approach there. We follow their guidance. And on that basis, we create a different consideration. If I don't look at the different cases that we now talk about, if I look at the Signet's case, if you look at our annual report, I understand your cynical feeling that there was a big uptick in the last year. You go to think about pre-stocking or front-loading your customers. What happened with Signet is that we bought a pharma business in India, where we expected quite some commercial synergies between the existing structure of Signet and the pharma platform that we have globally. And if you look back in our last 3 annual accounts, in every annual account, you see an increase of the expected deferred consideration of segment, basically meaning that year after year, they overperformed and that we had to increase the expected deferred consideration because of overperformance on its own business model. And a big part of that was also the result of synergies that we could bring to the table. If I look at the other 2 cases that you just referred, Megasetia and Sanrise, there we saw a situation by Sanrise, a personal care company in China, a market going down in China, a very strong supplier base. And basically here, the way we structured the transaction pays off. So if we then see that the results go down, also the purchase price that we need to pay for the remaining 30% goes down. And that leads then to a blended purchase price that is still pretty okay compared to the profit levels that they made there. And a similar situation in Megasetia. So for me, this is more a proof that the model that we use, so sharing the risk but also sharing the upside of former owners, it works. Only the accounting treatment is rather weird because basically, you get a bonus in your P&L if they underperform on the management case, and you get a hit either in your P&L or through agency, depending on the timing of the payment, if they overperform. And that is why I think it is a strange way of accounting, but I need to follow the rules here of IFRS. It's a bit of a long answer to your question, but I hope it helps.

We'll take the next question from Suhasini Varanasi from Goldman Sachs.

I have to take them one by one. Can you maybe discuss the demand environment in APAC, please, in 4Q, China versus the other countries? It looks like APAC saw some improvement in 4Q. So anything that you can highlight across the countries? That will be helpful. And secondly, if I think about the Red Sea disruptions, is there any increase in, let's say, supply chain constraints resulting from that disruption?

I think I would take the Red Sea disruption and I would refer to the countries to Hans. In terms of the Red Sea disruption, clearly, we see a delay in a viable of product, which also means that there is a shift between months now. We see also an increase in costs which, however, is in general, transferred to the customers because we are not the only ones that are hit by this. And otherwise, I would say, at this point in time, we don't see any other changes to this.

Yes. And then talking about Asia Pacific, perhaps to remind you of the structure that we have there. In Asia Pacific, we have different regions with different developments. We briefly spoke about India. That's by far the biggest region right now in Asia Pacific. And we have Australia as a solid and mature market with complete different dynamics than Southeast Asia, China. So if I look at Q4, I think it's fair to say I just explained a bit around Signet, but also the other businesses in the [indiscernible] performance. China, I would say, now look at salary, but salary, if I would say the market is still not really optimistic there than I put it mildly, perhaps. And that also has an impact on surrounding countries. But what we see is that we -- by adding a couple of acquisitions, we also strengthened our base there. We created commercial synergies. And that, of course, helps us to grow them despite difficult market conditions in those regions. So all in all, I think pretty happy with the performance in the last quarter there.

If I may ask one more question, please. Peers in specialty chemical distribution have mentioned that the mix of industrial versus life sciences in 2023 was generally in favor of life sciences with very weak demand in industrial, and that actually helped the gross margin profile in 2023. So if that picks up in '24, industrial demand, then the gross margin mix could actually be a little bit dilutive. Just wanted to get your sense on how trends have been in '23.

I think it's too early to talk about it because, of course, the mix is very much depending also with -- in life sciences, there are any movements. So I would say what we don't hear from the commercial team is that there is a strong noise about any price decreases in the market. In terms of our mix, yes, there is depending on the market, a little bit of a movement. But across the base, there should not be anything substantial that really [indiscernible] so to say, I don't know, terminology. We will [indiscernible].

No. And I think your question is coming from the fact that you have the feeling that on average, gross margins on life science are higher than on the industrial side. Is that the background question?

Yes. Yes, exactly.

I think that differs per region, per market segment. For sure, if we have seen a bit of a swing this year, that most of the difficulties and especially the Americas related to the more industrial applications. But I can assure you that we make quite reasonable margins in that market segment. [ There could also be an impact ]. But for me, this is more the usual swings between the different business groups and lines of production. So many dynamics play a role there that it's very difficult to talk in general.

We'll take now the next question from Chetan Udeshi from JPMorgan.

Sorry to be a bit of a numbers junkie here, but I'll try anyway. Maybe this is for Hans. If I look at your Q4 numbers, and I know you don't give us the organic components and M&A components by quarter. But if I just back out from what you told us for the first 9 months and full year, it seems like the gross profit and -- I mean, gross profit and EBITA both have grown organically year-on-year in Q4. But at the same time, the M&A contribution, especially on EBITA went to a very, very small number despite all the acquisitions. So can you first confirm those numbers? Because I know you do the rounding, and that can swing the numbers, especially on a quarterly basis. So just to understand if you have the numbers to hand, what would be the organic contribution for gross profit and EBITA and also M&A component? And second, I understand you don't want to guide for Q1 or full year and you never do. But do you feel confident that you can at least grow organically both in Q1 and full year 2024? Just given the comps will get easier through the year, but I guess there's still a bit of difficult comps in Q1. But just curious if you think organically, at least you feel confident enough to grow both in Q1 and full year 2024.

Let me start with good news. The fact that this from 2024 onwards, we will share with you organic growth figures per quarter on the different segments so that we don't need to do the guessing anymore. I think that will help us with the conversations. If I look at M&A contribution Q3, Q4, I think the M&A contribution was more or less similar, close to each other. I think there was perhaps a gap of less than EUR 1 million between the 2 quarters. So I don't see a decrease there. Then on the prediction for next year, just far too early to give guidance. If I look back at last year when we had to call Q1, I still remember my colleague, Piet van der Slikke. At that moment in time, he was very, very optimistic about 2023. And we started the year with what turned out to be the best quarter of last year. So at the moment, as we had that full year call, we were confident that, that was the normal at that moment in time. We all know what happened since. And so for us, this year, the first quarter is the most difficult one to beat. And then it's because I've almost call it easier, but at least more in line with the market conditions that we perceived in the second half of last year. So I'm cautious there to make any predictions because I learned or we learned our lesson last year, being very positive in this call this time of the year and then experiencing a completely different year than expected.

And can you confirm Q4 organically was up?

Yes.

We'll take now our next question from Rikin Patel from BNP Exane.

I had one on gross profit units. Q3, you mentioned that you've seen some stabilization. I'm just curious how that has developed quarter-to-date. If you could give any insights on that. And then secondly, Valerie, given your experience on the principal side, I'm curious if you have any thoughts around some of the consolidation on the producer side that we've seen in the past year and how that could impact formulation and specialty distribution.

I'm sorry, the acoustic, it's been -- any changes in -- on the principal side in?

From the consolidation that we've seen in the industry over the past year, yes.

You want to start?

Yes. The gross margin question, we reported around about 25% in the last 2 quarters of last year. So that feels like a stabilization. And let's see what we report in April on Q1, if that continues. Too difficult, too early to predict. And the reason that I say that is that what we see is that average order size is still small. We see a lot of customers that Valerie already indicated, nobody wants to build stock in the current environment. So people order just in time, small quantities. They all have the flexibility to move their orders into the next month or so. So it is -- the visibility is always low in our type of business, but we typically have, what is it, 4 or 5, 6 weeks of order book that we see. But at the moment, it's even more foggy, I would say. So it's difficult to predict.

And on the consolidation, I mean, clearly, this is a trend that has gone on for the last, what, 20, 30 years, including myself was bought once or twice. So I don't think this has -- it will change anything for IMCD. What I think what is important also to note, the relationships that we have with our principals are across many countries and for a long time in the majority of cases. And I have visited them all in the last few months, and the relationship is really excellent in terms of what the collaboration and activity. So I don't see at this point in time any notion of a change due to consolidation.

We'll take now the next question from Dominic Edridge from Deutsche Bank.

It was just actually a nonfinancial question. It's actually about employees. I noticed that your employee turnover is now at 18%. I think it was 15% in '22. And I think going back precrisis, it was around 14%, 15%. And I think you also made comments in the report about watching turnover quite carefully. Could you maybe discuss what you're finding about why employees are moving? And secondly, your thoughts on -- I'd imagine you want to keep employee turnover relatively low. Can you just say what -- any plans you might have internally to maybe to work on that?

Yes. So good question and one that we have, of course, also looked into. I mean there is one effect, which is when we close warehouses days, a number of people that all of a sudden move from our numbers into the numbers of our 3PL logistic provider. And therefore, these numbers would be something that we actually -- that we expect. There's also a certain element of synergies when we acquire companies or people moving out because they want to stay in a small environment and people double functions. So that is the second one. And we also believe, and this is a bit of a more soft factor of a post-COVID effect. I mean in some countries, it really only in '23 started to normalize. And people have, as we all know, moved more after COVID because during the COVID times, they didn't want to disrupt their lives, transfer into other countries was not possible. But at the same time, we are watching these numbers. And clearly, this is a very important one for us to review, and we would hope to ensure that we will get to a lower numbers in terms of attrition. Demographics to a certain degree also play a role. I mean we do have still also in some countries the people who are retiring and yes. Anything you want to add, Hans, here?

No, no. Perhaps to add on the warehouse remark that Valerie just made, we are an asset-light company. So in principle, the outsourced logistics every now and then when we do acquisitions, we buy businesses by the former owners at a different setup and also operated their warehouses themselves. And what you then will see over time is that every now and then we sell assets, we basically move then the warehouse people in a logistic service provider organization. And that is what Valerie rightly mentioned included then also in these turnover ratios. As a positive also every now and then, they have a bit of a profit when we sell these properties off, like the EUR 7 million that we gained this year as an extraordinary income in the Americas.

Okay. Clear. So in other words, sort of voluntary turnover may be less. What has been less volatile, you feel then?

Yes. Yes, yes. I think it's -- it would normalize for all these type of items. I think they'll be slightly higher than longer-term average. And I think it's fair to say that post COVID plays a bit of a role there.

We'll take now the next question from Quirijn Mulder from ING.

Yes. Valerie, welcome.

Thank you.

I have a couple of questions here. First of all, thank you for the breakdown between organic and the nonorganic, that's fine. It saves a lot of time and estimates, but that's fine. My question is, first of all, can you maybe give some more feeling about the difference between Latin and North America? Because in my view, Latin America was quite weak for most of the year. And it looks like that the Americas is not recovering anyway. So maybe you can give some feeling there. And I think the second question, I will ask later on if allowed.

I think for us, Quirijn, you make a split between Latin and North America. I think that is a way to look at the market. You could also look at industrial versus life science and the developments there. And then it's fair to say that in first, North America, based on the history of the companies that we acquired there that they are a bit more active in the industrial side than on the life science side. So there's work to be done to get a decent position in life science there. So that plays a role in where you see an impact. I think there is different developments in different countries in the region. Just as an example, Canada and Brazil have different dynamics, and that leads to a different outcome and a different impact. And I think for us, in general, [indiscernible] than what I would call the country differences.

Okay. Fine. My second question is about -- can you hear me?

Yes, perfect.

Yes, loud and clear.

Okay, perfect. No, no, no, it's simple. So the second question is about the acquisitions in Asia Pacific. If I look at the gross margin of the acquisition, that's 16%, 1-6, based on the new breakdowns. How long will you take to bring that to the average level in Asia Pacific, given the 23% you have there? That's one. And then given the experience, let me say, with Sanrise and the Megasetia in Indonesia and China, has it any consequence for your M&A, let me say, M&A efforts in these countries?

First of all, Quirijn, I think that we could release this different concentration, indicate the way we acquire work, that we protect ourselves for fluctuations or profitability of the targets that we acquire. If they overperform, we pay more. If they underperform their own business model, then we pay less. And we basically pay people on the basis of the profitability that we buy. So it will not have an impact on number or appetite to do acquisitions there, but it indicates that the way we structure the deals makes sense, I would say. Then your conclusion about the gross margin of these M&A targets in Asia Pacific is right. That's also why we see the -- a little bit negative impact on overall ratios in the regions, that we have a very, very high conversion margin and a very high gross margin compared to a lot of our peers in that region. What we then see is that if you buy, you typically buy companies at a lower ratios. And that is -- there is an upside for us to improve that. But it's difficult to predict how quickly we can bring them to the levels that we are used to. And that very much depends on market conditions, that very much depends on the type of activities and the quality of the supplier base and with whom we compete.

And I would also add to that, I mean, we are seeing Asia as a growth market. I mean global for everybody in specialty chemicals. And therefore, it is really also the geographic footprint, first of all, that pushes us into the direction of acquiring these companies. And then we will see if the best benefit is increasing the margins or if it is adding business to this or principals or expanding further. So we see lots of opportunities how we actually can utilize these acquisitions. Yes, I think I would also add that.

We'll take now the next question from Nicole Manion from UBS.

First of all, maybe could you comment about how your conversations with suppliers around pricing have been evolving in recent months? I know it's obviously difficult to generalize on this front, but any directional comment would still be useful. And secondly, just a comment on M&A pipeline. I think some of your peers have commented that maybe seller expectations have become a bit more realistic as some profit normalization has come through in the market. Again, I understand this will differ case by case. But is this something you also recognize in your own conversations around M&A or not really?

I mean I think taking maybe your second question first because I would not totally agree with, that the expectations have come down. We see that some people actually -- some companies are saying, "Well, we had a fantastic '22. We had a not so good '23. So why should we sell now based on '23 numbers?" So will the multiples come down or would these expectations come down? I'm not 100% sure. I don't know, Hans, if you have any different view to having done it more in '23.

No. First of all, the pipeline is really healthy. And that has barely driven the fact that what I would call difficult question issues that owners have, that they want to sell because there is nobody that can take over, and partly the result of changing dynamics in the market. What these owners also see is that suppliers more and more want to work with fewer distributors in a bigger part of the market. And if you're a small business, you cannot deliver that expectation. But the same thing is that supply is more and more expect you to have a technical infrastructure, that you have a digital infrastructure and so on and so forth. And that is also a reason for owners to basically look for alternatives, how they can support suppliers in these areas. And one of the alternatives is to sell themselves to people like us. If we talk about valuation with owners, then for a lot of these owners, 2022 was a record year. 2023 was longer. And then I come back on my previous point. So if we agree on pricing, we basically price on the basis of 2023, and we get these owners an upside if they bring their profit levels back to 2022 levels. And that then leads to a deferred consideration with all the technical remarks that I mentioned earlier in the call about what it does in the P&L. But that is the way how we, on the one hand, pay for today's profit. And at the same time, there's the opportunity to benefit from the fact if they really deliver on growth in the years thereafter. But the multiples, if they really come down, I doubt. It's more just question about what is the sustainable profit level going forward.

And then your first question being about the pricing of our principals. Okay, again, sorry to say that it depends on the market, it depends on the segment. We don't see any dramatic movements in either direction. We have continuous discussions, of course, we've done to ensure that we stay competitive and stay competitive. And -- but there is nothing really different to report from the past, particularly if you look across the whole portfolio.

We'll take now the next question from Eric Wilmer from Van Lanschot Kempen.

I think one of your Dutch key competitors saw its credit rating outlook being lower today. I was wondering, I think basically based on pretty aggressive acquisitions or acquisition policies over the past, I was wondering to what extent you could see this actually as an opportunity in terms of M&A going forward.

Yes. Thank you, Eric, for the question. I know the company you refer to. I know that interest rates for them went up heavily. And I know that, that will have an impact on their credit rating. And that theoretically also means that if the private equity owner behind it will not put in additional capital, that it will be more complicated for them to do further M&A in the current market. At the same time, if you look at our credit rating, it's stable. And I think that's also one of the reasons that if you look at our profile is that we are pretty prudent on the dividend that we pay. On the one hand, we say we stay at the high level of our -- the guidance that we gave to the market. And when we went to the stock market 10 years ago between total market, we will pay out somewhere between 25% and 35% of our net result normalized for amortization. And we are at the high end of that spectrum already for a couple of years, 35%. Of course, we were tempted to say, "Okay, the profit goes down a couple of percentage. Let's keep the dividend at a similar level as last year." But we want to be there, I think transparent in saying now we have a policy that says between 25% and 35%. We are at the high end of that policy. We stick to that policy. And we want to be predictive with all these type of things. And that also helps in keeping a good credit rating that's signed to these rating agencies. And in the end of the day, we have an interest to keep those rating agencies also happy because part of the interest that we pay is linked to the ratings that we get from these rating agencies. So we always need to make a bit of a trade-off there. Who do we want to please most? The rating agencies, the credit, the stability. I think consistency here and predictability here is important for us.

We've got one more question from Stefano Toffano from ABN AMRO.

Most of my questions have been answered. I have two left. Last year, obviously, you remained cautious on the hiring, and it seems like nothing has changed on that front. So maybe if you can confirm that. And then I had a question also related to what my colleague, Quirijn, was referring about. In terms of continued growth also via M&A in APAC, do you see any changes? Do you see the market there still as attractive as you have seen over the past few quarters? And I'm asking because, obviously, the conversion margins there are much higher. And the operating EBITDA you generate from that segment is now, well, I think, almost as large as the Americas. So it starts to become bigger and bigger, and it will obviously impact the group conversion margin picture going forward if you continue to grow at a higher pace there.

I think I would not with that say the conversion margin saving because that would be a little bit forward-looking. But I would say that Asia could definitely continue to be very attractive for us. It is, as I said before, a market in which more and more chemicals are being produced and more and more products are developed. So clearly, we want to participate in that, and we'll continue to look at targets there and the pipeline also is looking healthy. In terms of hiring, we continue to be cautious. The market has not really turned. So I don't think we plan to start a hiring spree in '24. We will, of course, as always, invest in where it is necessary and where it is beneficial for us in terms of supporting our principals and hunting for business. So yes. Great. Alicia, that was the last question? Or any more?

Yes. We currently have no more questions. So I hand over to you now, Valerie.

Thank you so much. It was a pleasure to be with you, and I'm looking forward to the next quarterly call, which we have in a couple of months. And yes, in the meantime, thank you for today.