Hey everyone, and welcome to the Azelis 2021 results presentation. My name is Pam, Investor Relations, and with me today are Hans-Joachim Müller, CEO, and Thijs Bakker, CFO. Hans-Joachim will give us the operational highlights of the year, and Thijs will talk about the numbers. Hans-Joachim will then provide the outlook for 2022, and we'll open the floor for Q&A. Please note that this presentation may include forward-looking statements that are subject to risk and uncertainty. This webcast is being recorded and will be made available on our website. With that, I'll turn you over to Hans-Joachim.
Thank you, Pam. Good morning, everybody, and welcome to this call. 2021 was a record year for Azelis on many fronts. Revenue increased by 27%. Almost 16% was organic growth. Demand was excellent in both the Life Sciences, Industrial Chemicals end markets. Equally important, we continue to leverage our growing scale to win new business from customers and principals. In addition, our scale allows us to efficiently manage the impact of the ongoing supply chain crisis we're in, and also manage and deal with inflation. In 2021, we closed a record of 12 acquisitions that strengthened our lateral value chain in strategic market segments across EMEA, the Americas, and also in Asia Pacific. Those 12 companies in total made over EUR 530 million in annual revenues. Moving on to profitability now. Adjusted EBITDA increased over 41% in 2021.
Besides the top line expansion, the profitability expansion was also a result of the successful EBITDA margin expansion of 95 basis points, versus our annual objective we communicated earlier of 10 to 15 basis points. This is another proof point of the benefits of scale. Positive mix effects and effective pricing management also contributed to this margin expansion. Now, operationally, we're running full steam with our internal programs to strengthen our network. We have launched more than 50 customer focus, 10 e-Labs, and have now completed the pilot phase of our principal focus. We also remain fully committed to our sustainability agenda, and in 2021 we obtained the Platinum rating from EcoVadis. Financially, we deleveraged significantly from 5.3 down to 2.7, and we're aiming to stay between the guidance we gave earlier, 2.3-2.5 to 2.2-3 net debt over EBITDA.
Our operating cash flow was by and large stable, despite the temporary increase in working capital shortage, a remarkable and unprecedented order book at year-end. Based on these strong results, we are proposing a dividend per share of EUR 0.03. That represents 35% of our net profit. Now let's move on to the next page. The 27% revenue growth reported for the year was a combination of organic growth of almost 16%, revenue growth from acquisition of 13%, and 1% FX headwind. All three regions delivered double-digit organic growth, supported by a positive economic trend. As a consequence of excellent end market demand, a significant portion of the expansion was volume. Demand, and you've seen that by the numbers earlier today, demand further accelerated in Q4, with organic growth exceeding 22%.
The acceleration in Q4 was even faster in Life Sciences, with a gradual lifting of restriction in many countries supporting Food & Health and Personal Care. While I've mentioned earlier, we acquired 12 companies. Two of those, Vigon in the US and Quimdis in France, give us a strong footprint in the global flavors and fragrances market. We also added to our EMEA network with Came in Italy and Neupert in Austria. In Asia Pacific, we made eight acquisitions to reinforce our footprint in the region. These acquisitions in Asia Pacific are much in line with our strategy to strengthen our network in high-growth emerging market like Southeast Asia and India and also in China. These acquisitions will not only give us scale, but certainly also strengthen our lateral value chain. As already mentioned, the 12 acquisitions together generated over EUR 530 million in annual revenues.
Let us now turn to the next page and look at regional performance. In EMEA, here on the left, we saw strong demand in CASE end markets throughout the year. In Q4, there was a significant acceleration across most end markets and specifically in Life Sciences. The significant uptick in business activities in Food & Health and Personal Care we have seen was a consequence of COVID restrictions that were lifted in many countries, and with this, the HORECA, so hotel, restaurants, cafe segment and also travel sectors, they all started to recover. Given that society is refocused on general health and wellness beyond COVID, our Pharma business also grew very nicely. All these underlying trends contributed to the reported organic growth of 13.9%. I already mentioned that a significant portion of this growth was demand, although there was also some uplift from price.
In addition, we made three acquisitions to strengthen our EMEA footprint. Came in Italy, Quimdis in France, and also Neupert Specialities in Austria. In total, revenue from EMEA increased by over 19%. So far, except the ongoing situation in Russia and Ukraine, and I will come back to that later, we have not seen any material change in the trends. Now let us turn to the Americas. Demand was outstanding throughout the year in both segments, Life Sciences and Industrial Chemicals, as reflected in the 16.5% organic growth in 2021. On top of the already excellent growth trajectory we were on, we experienced an additional growth uplift in Life Sciences in the H2 of the year, mainly due to the inclusion of Vigon, the leading distributor I mentioned earlier in North America on flavors and fragrances.
Through the acquisition of Vigon, we entered the food and health markets in the US and also strengthened our presence in personal care. Vigon and Quimdis, the one I mentioned from France, add flavors and fragrances to our service offering and complement lateral value chains, specifically in food and health, but also in personal care end markets. Now let's move on to the last part here, to Asia Pacific. Our revenue in Asia Pacific, and you can see that here, grew by more than 81% in 2021. Organic growth was over 19%, driven by excellent demand across most end markets in the Life Sciences and Industrial divisions. Our ability to benefit from the strong market pull has improved by the growing footprint in Asia Pacific and a continuous strengthening lateral value chain in the market segments we serve.
Asia Pacific continues to represent a strategic growth region for Azelis, and in 2021 we made significant progress through M&A, especially in this region. I mentioned from the 12 acquisitions, eight were actually in this region. We acquired MKVN and Viet Chemi in Vietnam, CW Pacific in Australia, Spectrum Chemicals in India. We entered the Philippines with the acquisition of Phil-Asiatic. We also made two acquisitions in Korea, Coseal and MH. We also added two more in China, Ingredients Plus and WWRC. Overall, we're really pleased with the progress we see and continue to have exciting growth opportunities in the region, both organically through the strengthened lateral value chain, but also certainly through M&A. In the following two slides, we share some examples on how we add value in our labs, both for customers and for our principal partners.
In this first example, we had a food customer who asked us to help them launch an innovative, healthier alternative to cow milk. In this project, we developed a product that will appeal to customers' taste, having high nutritional content and provide a sustainable milk alternative, leveraging our lateral value chain and using several enzymes from different principals. The product was launched successfully and triggered strong market demand. Most importantly, we strengthened the relationship with this important customer by living up to our promise to be a leading innovation service provider to the industry. Moving on to the second example. This illustrates our proactive approach to making a difference on behalf of our principals and customers and promoting sustainability.
In this example, which is outlined on the right, it was a principal approach just to help them to improve an existing product as it would match the principal objective with a customer that could benefit from the product improvement at a lower cost. The result was an improved principal product, lower cost, long equipment shelf life for the customer, reducing waste and promoting sustainability. These are just two examples from numerous examples we have contributed to societies we live in in 2021. Now why does it matter to Azelis? We contribute to a longer shelf life and reduce waste or to find alternative, more sustainable food sources. It's driven by our commitment, by our objective to be the sustainability champions of our industry. We have published our detailed agenda, Action 2025, in our sustainability report.
We are part of Together for Sustainability, a chemicals industry organization representing a total turnover of about EUR 350 billion, which supports us in assessing the sustainability of our supply chains. As mentioned earlier, in 2021 we succeeded in achieving an EcoVadis platinum rating for our efforts. No doubt we will continue to push for sustainability because we are in excellent position to contribute to a better, to a more sustainable world. This concludes the section where we intended to give you really just a quick summary of our performance and some insights about what we have accomplished in the year 2021. I will now hand it over to Thijs. He will walk you through the financial results of the group.
Yeah, thank you, Jochen. Good morning, everyone. Thank you for attending our earnings call. Let me start here on page 12 with a high level overview of the P&L and also the fourth quarter results and bridge to the 2021 results on a full year basis. As Jochen already mentioned, 2021 was an excellent year for Azelis. Let me first provide some color on the fourth quarter performance, which is displayed in the first two columns of this slide. Growth accelerated in the fourth quarter, with group revenue growing at 48% and Adjusted EBITDA with 69% at reported rates. Activity levels during this quarter remained very high. While normally the business tapers off a bit towards November and December, this year, performance levels remained high for those months.
As the outcome of this, our inventory positions increased in order to serve our customers for the first quarter. I'll come back to this later. To provide a bit more context, you may recall that when we presented our results for the first nine months, we reported revenue growth of 21%. In the fourth quarter, Life Sciences grew faster than Industrial Chemicals, whereas it was the reverse in the first nine months of 2021. This is also in line with what we were communicating during our third quarter earnings call on expected market developments. Fourth quarter Adjusted EBITDA as a percentage of revenue ended at 8.5%, implying 105 basis points expansion compared to prior year.
Fourth quarter Adjusted EBITDA margin is a step down from the 9.8% EBITDA margin we reported in the first nine months, partly driven by accelerated bonus accruals as the business performance accelerated, as well as the first time inclusions of acquisitions with a lower margin profile. On a full year basis, Azelis achieved 27% revenue growth in both Life Sciences and Industrial Chemicals businesses. Measured on a constant currency basis, this reflects 28% growth. For the full year of 2021, gross profit as a percent of revenue increased by 95 basis points during the year, despite challenging inflation conditions in the industry, and it also reflects our effective pass-through policy and execution capabilities around margin management.
Now for the full year, Adjusted EBITDA ended at EUR 268 million, a growth of 41% or 43% on a constant currency basis, out of which 20% is due to the first time inclusion of acquisitions. Adjusted EBITDA as a percentage of revenue ended at 9.5%, which translates to a 95 basis point margin expansion from 8.5% in 2020. This was achieved as the outcome of strong top line growth, scale benefits which mitigated the impact of the ongoing pressure on the supply chain. Our adjusted net profit for 2021 increased 38% to EUR 98 million, and I will discuss the drivers of the net profit in detail on a later slide.
On the next page 13, we have broken down the 27% revenue growth and the 33% gross profit growth between organic growth and growth coming from the first time inclusion of acquisitions. Obviously, as Jochen already mentioned, 2021 was a very successful year for Azelis in terms of M&A. We executed throughout the year 12 acquisitions, representing an annualized revenue of around EUR 530 million, the largest one being Vigon, and four acquisitions were executed in the last quarter of the year. The majority of our M&A was related, focused on strengthening our positions in Asia. Now, we remain very disciplined in the area of integration. We focus on maximizing value creation by mapping cross-selling opportunities and bringing these companies onto our platform. Asia did an excellent job in this respect.
As you can see on the slide, Azelis performed very well on the key pillar of our growth strategy, whereby all of our regions delivered double-digit organic growth on the back of strong demand in each of the regions. On top of that, this slide also demonstrates our ability to pass through price and that the hard work in execution of our margin management programs translated in robust organic growth and in our gross profit line during the year with expanded margins as the outcome. Of the 33% growth in our gross profit in 2021, 19% was organic, reflecting our strategy in growing our lateral value chain and expanding geographies and segments is working. Now let's have a look at the regional composition of our growth drivers on page number 14.
Let's first start with EMEA, which makes up 44% of the revenue composition of the group. Revenue for 2021 increased by 19% to EUR 1.23 billion. The majority of this growth, 14%, was organic, and the remainder was driven by M&A and FX. In 2021, gross profit as a percentage of revenue increased by 57 basis points to 23.8%. Adjusted EBITDA in EMEA increased by 27% or 29% on a constant currency basis. As the region continued to benefit from scale and operational efficiencies, our Adjusted EBITDA in percentage of revenue increased by 65 basis points to 10.2% from a level of 9.5% in 2020. The strong growth acceleration in the H2 of the year resulted in higher variable compensation accruals.
This was also reflected in the fourth quarter Adjusted EBITDA margin in EMEA, which ended at 9% below the 10.6% margin levels reported in the first nine months of the year. However, this is still 103 basis points higher compared to the fourth quarter of 2020. Also for the full year, our conversion margins improved with 176 basis points to 42.8%. Now let's move to the middle towards the Americas, which makes up 41% of the revenue composition of our group. Revenue increased 22% to EUR 1.16 billion. Also here, the majority of this growth, 17%, was organic, and the remainder was driven by M&A, mainly the acquisition of Vigon and Avex.
In 2021, gross profit as a percentage of revenue increased by 232 basis points and Adjusted EBITDA in the Americas increased by 45% or 46% at constant FX. Adjusted EBITDA as a percentage of revenue increased by 182 basis points to 11.8% from 10%, the level in 2020. The strong margin expansion was on the back of efficiency gains, execution of our margin management programs, but also a positive mix effect from the inclusion of Vigon, which we acquired in June. As you can see, this is also reflected in our 305 basis points step-up in conversion margins to 50.8%.
Moving to the right to Asia-Pacific, our fastest growing region, we continue to see strong momentum, both organically as well excellent progress in the execution of our M&A and integration with a total revenue growth of 81%. In 2021, gross profit as a percentage of revenue remained stable. This was driven by the lower margin profile of the first time inclusion of M&A, but also by onboarding of new mandates. Adjusted EBITDA in Asia-Pacific increased with 98% or 96% at a constant currency basis. Despite our ongoing investments through acquisitions and building up our infrastructure in this growing region, Adjusted EBITDA as a percentage of revenue increased with 58 basis points to 6.9% from a level of 6.3% in 2020.
As organic revenue growth in the fourth quarter was well above 30%, we adjusted our accrual for variable compensation accordingly. Conversion margin increased to 308 basis points to 34.4% as the region is gaining scale and momentum. This supports also our view that there is no reason why APAC margin levels will not reach the same levels as EMEA and Americas over time. Now from here, let me take a moment to take you through the details of the buildup of our net profit on page 15. As you can see on this table, there are a couple of one-off items and considerations to bear in mind when looking at our net profit. They are mainly related to our IPO, which was executed in September. This is why on the summary page, we also included adjusted net profit.
Now, first of all, there's EUR 8.4 million IPO costs that is included in our operating expense, which reduced operating profit. These costs were not directly related to the issuance of shares. Otherwise, they would have been deducted from equity. Second, during the refinancing to restructure our balance sheet ahead of the IPO, we had to accelerate the amortization of costs related to the old finance structure which was in place. This resulted in a loss of EUR 19.6 million for the majority non-cash. Obviously, these two items will not be recurring going forward. The interest expense aligned on bank loans and overdrafts amounted to EUR 46.9 million, and this is based on almost nine months of higher interest levels as the refinancing for the new structure was only completed in the H2 of September.
Going forward, the weighted average interest rate should be around 2.5%. This is a weighted average over term loans in euro and British pounds, as well as our RCF, and we expect to see an improvement here. Now lastly, the reported increase of our tax expense is high. The effective tax rate implied by the tax expense we are recognizing in 2021 is mainly due to the items I just explained, as well as the old structure of the group due to the fact that we are in a transition phase until the IPO. On the other hand, our 2020 effective tax rate was on the low side, driven by non-cash related deferred taxes from Luxembourg.
Please note that also we have increased our earn outs through the P&L of more than EUR 7 million due to the strong performance of the acquired companies, which is not tax-deductible, so having a negative effect on the effective tax rate as well. On our midterm guidance, we remain for a blended tax rate in the range of 22% operating profit minus finance and non-recurring costs, and you'll find more details in our annual report. Now let's go to slide number 16, where I want to give you a little bit more update on our cash flow. As you can see, the absolute amount of our free cash flow was EUR 182 million, and our cash conversion decreased to 67%.
This was mainly driven by the swing in working capital investment due to the increase of business activities towards the end of the year and the open order book. As this is the main driver, I would like to provide some more details on page 17. Net working capital to revenue normalized for acquisitions ended at 15.3% at the end of 2021 compared to 11.1% at the end of December 2020. As you can see from the chart to the right, where we displayed the working capital pattern over time, you will notice that the green line here shows a trend breach. Normally, the working capital tapers off in Q4, but this did not happen in 2021.
This increase was driven by the organic growth acceleration in Q4, but mainly by the ramp up of inventory in preparation for the significant growth in demand expected in the first quarter of 2022. That's also indicated by a very strong order book and new mandate gains that commenced onboarding. 2021 was also a very strong year with regard to acquisitions. This came also with an associated working capital effect of around EUR 144 million, which has not come down yet to Azelis standards as we are working on the integration of these acquisitions on our centralized IT platform. On a reported basis, net working capital was 16.8% of revenue.
As the full working capital of companies acquired in the course of the year are reflected in the balance sheet as of 2021, but only a few months of their revenues included in the group accounts. Working capital is expected to gradually return to normal levels throughout the year. Now, this brings me to our final slide on our debt position before I hand it over to Hans-Joachim Müller for the outlook. Our net debt has improved significantly throughout 2021. To the largest extent following the IPO in September. At the end of 2021, our net debt was EUR 871 million. What happened in summary, we increased equity with the IPO proceeds of EUR 880 million, and we used these proceeds to reduce our net debt.
This also meant that we improved our leverage ratio significantly from over 5x in 2020 to a current level of 2.7 at the end of December 2021, which is in line with the range that we provided to the markets between 2.5x and 3x. Please also note when we executed the Vigon acquisition back in June, we also raised additional debt of EUR 330 million and additional equity pre-IPO of EUR 50 million. Now, our strategy is to fund our bolt-on acquisitions via operational cash flow, and this is also what we did in 2021. We have generated a strong cash flow from operating activities of over EUR 205 million and used a large part of this to fund our M&A and deleverage at the same time.
Our liquidity at this moment is around EUR 360 million, both in cash and unused RCF. That was it. I'm giving back to Jochen for the outlook.
Thank you, Thijs. Well, as you can see from also the buildup of working capital, we had an excellent start into 2022. We have not seen any significant changes in business trends, and we are on track to continue delivering on our annual objectives. Also worth noting that we announced the closing of 2 more acquisitions on this year. End of January, we closed uMongo, a South African-based specialty distributor focusing on serving lubes and metalworking fluid solutions in sub-Saharan countries. End of February, we completed the acquisition of Catalite, a Thai-based distribution business focusing on Personal Care. Our M&A pipeline stays very vibrant, so stay tuned. The current distressing situation in Eastern Europe makes it very, very difficult to predict anything with any level of certainty. We are closely monitoring the situation in Russia and Ukraine, which makes up to about 1%-2% of group revenue.
We have 12 colleagues in Ukraine and 31 in Russia. Especially the safety of our colleagues in Ukraine is a priority and a prime concern. We have ceased operations in Ukraine until further notice, and have taken steps to support the safety of our colleagues there, and we're in daily contact. We are actively discussing concrete measures and deploy resources directly to them, and we also started an internal fundraising initiative to support our affected colleagues. On Russia, we have stopped all business activities, Industrial Chemicals. We are limiting business activities only to non-dual-use essential materials for food and pharma, and we are constantly assessing situation in close dialogue with our principals. It's obvious that we're 100% compliant with trade sanctions, international laws and so on in potential blacklisting. Obviously what's at stake here is bigger.
Well, like almost everybody else worldwide, we hope that this dreadful violence will end very soon. Wrapping it up, bringing in confidence about the outlook for the year, but with the shadow of how the situation in Russia and Ukraine may evolve. With that, let me open the floor for Q&A.
Ladies and gentlemen, we will now begin the Q&A session. As a reminder, you can also submit written questions via the Ask a Question button on the webcast. We will begin with questions from the conference line. If you wish to ask a question, please key star one on your telephone, and if you then decide to withdraw your question, simply key star two. We will now pause a moment to assemble the queue. The first question is coming from Rajesh Kumar from HSBC Bank. Please go ahead.
Thank you for taking my questions. The first one is on the outlook statement. Very clearly, you had a very strong Q4 performance, much better than at least what I had modeled, but from what I can tell, much better than what most people had modeled. Presumably you have a reasonable idea of how trading has progressed so far in the year. When you repeat your guidance for the full year, you're implying that H2 growth slows down quite significantly from the current growth run rate. What is driving that? Or is it just a dash of conservatism given we are uncertain about the world? That's the first one. Second question is obviously, you know, on top of the momentum, you obviously have inflationary pressures. Can you remind us how that affects your margins, growth and cash flow please?
That would be super helpful. Finally, on the working capital aspect, just thinking through the, you know, working capital to sales ratio. Obviously if you add acquisitions towards the year-end, only the balance sheet of the full year performance gets added. Can you either give us the pro forma full year ratios so that we can figure out how much impact was there from M&A in that ratio? Just, you know, on an organic basis, what are the levels of receivables, payables or bad debt trends that might help the market get a bit more comfort on the working capital patterns? I'm an analyst and my bosses, I can't count very well. The fourth question is on Russia, Ukraine, clearly 1% or 1%-2% of revenue exposure that's not meaningful.
Any knock on effects from, you know, supply side on the supply chain, for example, say, you know, gas oil supply might be meaningfully disrupted. Does that affect any of your suppliers or customers? That would be very helpful. Thank you.
Thank you. Great questions. I'll take one, two, and four, and you three. That's okay? Good. First one was on the outlook, and it translates to what we have seen in Q4 and what it means to the full year. Also in light of what I said that Q1 trading is really very, very strong. Well, I spoke about the uncertainty in the markets. That certainly leads to a certain conservatism we put in this equation. We have visibility for the first half of the year where I feel confident that trading. I feel confident on the outlook on this, but what happened in the H2, there's too many uncertainties out there, so we stayed with our guidance.
It is though correct if you would just project what we have seen in Q1 for the entire year, and obviously this conservatism would not be justified, and we would have a very different result. Second one was on the inflationary pressure, how that affects our margins. True, we see prices of the products we source from our principal partners moving up. But as we have shown in 2021 and also actually in previous years, we are able, through our service offering, as we are offering more than one product to a customer through our lateral value chain, we're able to translate that into an increased price at the end customer and even increase the prices over and above what we're getting from our principal partners.
From this point of view, we've done it before and we will be able to manage also the margin pressure, the potential margin pressure going forward. Thijs Bakker, or let me finish the Russia, Ukraine thing.
Yeah, let's do Russia.
From a sourcing point of view, we didn't source anything from Russia or Ukraine, so there will be no effect on the supply chain side. It will come more obviously from the effect when you think about the bigger picture now, what does it do to energy prices? If energy prices nudge up, this will obviously go from oil and gas into refineries, will go into naphtha crackers, will go into ethylene oxide plants, and will really continuously going downstream then into the specialty products we are distributing into the market. So we will see an inflationary pressure from prices rising on the energy side. The same obviously is true when you look into food supply. Ukraine and Russia compounded contribute to 29% of the wheat exports of the world.
There's pretty high likelihood that not much will come out of Ukraine, and I'm not sure how the world, especially western world, will deal with exports Russia wants to do. There will be an imbalance when it comes to these type of products, starch-based coming from wheat. There we can expect to see something and then also it goes into fertilizer. We will see some ripple effects. Coming back to the second question you raised, we will be able through the service offering we are providing to the industries we deliver into, we will be able to manage our margin position. Now to you.
Yeah, Rajesh Kumar, thank you for the question on working capital. As I mentioned, net working capital increased from EUR 250 million to EUR 474 million, out of which EUR 144 million is related to M&A. If you take the percentage, from our perspective, basically the 11-15, you can say about, 2% is driven by organic and 2% driven by the M&A. 2% organic side is basically timing. Due to the fact our input costs are going higher and basically that needs to flush through. Second element in the M&A, obviously, there's a mix effect there, because net working capital in the M&A side that we acquired is much higher.
Predominantly it's driven by our entrance in the F&F, where we see the DIO levels are higher than our regular business. We have to work on that to get them onto our centralized platform. The F&F segment is also impacted by the supply chain disruptions, where freight lead times are also longer. Net can have a working capital effect as well, depending on the contracts that you're having. It's about 2% and 2%.
Does that answer your question, Rajesh?
Super helpful. Thank you very much.
The next question is coming from Luuk van Beek from Degroof Petercam. Please proceed. Your line is open now.
Yes. Good morning. Thank you for taking my questions. My first question is on the bonus accruals. Can you explain how the bonuses are determined? Is that, say, a straight line method, or is there a threshold or a ceiling in that? To have a better feeling of how to translate future revenue growth into bonus accruals. My second question is on the supply chain, where there was obviously some scarcity also in the logistics. Can you explain what you've done and what are some of the additional costs to handle that?
Should I take the bonus one?
Yeah. Take the bonus one.
Okay. Thank you, Luuk. On the bonus side, we are a performance-driven sales and marketing organization, and as such have also tailored our incentive systems to that. We are really a performance-driven organization. Now, the system has been designed mainly around gross margin growth and working capital components and allows for accelerated incentives in case targets are well overachieved over the year. Now, we obviously accrue this every quarter and we make an estimate on that for year-end. Yeah, due to the accelerated growth in the fourth quarter, we saw these acceleration levels were reached, and then we basically have to top up our accruals. The impact is around EUR 4 million versus fourth quarter and about EUR 8 million versus prior year. Yeah. Does that answer your question, Luuk, a bit?
Yes. It's especially an impact when you reach levels above the targets.
Yes. Correct.
It's maybe to add, it's capped for the Executive Committee going forward. It wasn't in 2021, under previous guidance, but now it's capped. For the others, it's not capped, but they have challenging objectives. As said, Q4 has seen such an acceleration which was unprecedented, so yeah, we had to approve for it. Going to your second question, if that's okay. That was on the supply chain and whether the disruptions reported in the supply chain had an effect on us. Well, it had an effect in the sense that obviously it became much more challenging to manage all the deliveries on time and in full.
As you can see from the expansion of the business, thanks to our already a lot of good work done by the global team, we were able to handle that. What also helped us here was the economy of scales and the fact that we are not only represented principally in one geography, but we also have representation in some other geographies. We were able also sometimes to ship product to satisfy customer needs. That was all well done with regard to how we managed it, how we satisfied our customers. Now to your question on the costs, whenever shipping costs increase, this is not with us, this is just pushed through to our end customer.
That's not anything we have. Well, we are worried in the bigger scheme of things, but not as a company, because we are not affected by these costs. Does that answer your question, Luuk?
Yes. Thank you. That is clear.
Thank you.
The next question is coming from Suhasini Varanasi from GS. Please go ahead. Your line is open.
Hi. Good morning. Thank you for taking my call. Just a few quick ones from me, please. If you wouldn't mind talking about how you expect gross margins for this year. You've probably built up inventory in Q4 that reflects the higher prices of the products. There should be, actually, maybe a moderation in the gross margin in Q1, Q2, as you sell the higher-priced inventory. Then if you think about the profitability of your Russia-Ukraine exposure, is it on the same order of magnitude as the revenue exposure? I think the last one is on the M&A pipeline. Can you comment on how the M&A pipeline looks? Given the geopolitical situ...
Do you think you would doing M&A or would you prefer to wait, and hit pause on that and maybe focus on de-
Okay. Thank you, Suhasini. On the gross margin expansion we are expecting. Well, when you're dealing with commodities, obviously you might be caught in the loop of prices of materials are dropping and you're sitting then on high valued inventory. Previously in my life with a previous employer, I've seen that. That's not pleasant. What I've seen also since many, many years now is when you're on the specialty side of things, you can hold on quite nicely to the margins you have because as I indicated in an earlier questions, this price increase and decrease from the raw material, there are in between ten acts steps until you end up. Chemical conversions until you end up to the specialty chemicals. There is really a huge time delay and it's really not transparent.
A lot of actually the costs are built on the assets you have in between, not necessarily on raw material costs. I think we have not only a good chance, we're very, very high likely that we can stick with the margins we're having and just continue going on. It's easier obviously to expand our margin profile in times when everybody talks about inflation, but I'm not afraid that we will be sitting on high-value inventory, which we can't say when we sell on the specialty side.
DIO tells me.
Sorry?
DIO tells me.
That's yeah. That.
Our DIO levels are not that we have the three-month stock or those kind of things.
That's the term.
That also justifies that.
Turns much quicker. The question on Ukraine and Russia, and I didn't get the second part. If you could repeat that, please.
Profitability.
Sorry, profitability.
Russia.
Yeah. That's about the same or between 1% and 2%. Right. Not major. The third one you had was with M&A and whether we-
M&A.
We would like M&A, yeah. Whether we would like to take our position or to wait now. No, certainly not. As said, the M&A pipeline is very vibrant and there will be some announcements coming out within the next couple of days and weeks and certainly also months. Many of these acquisitions we're pursuing, it's not like, and we indicated that also in the roadshow discussion we had, it's not something you start and you stop. It's something which goes on for months, for years, for many years. You're building a relationship with the seller and then you come to a point where he wants to sell. Obviously, if we would have started anything in Russia, we would have stopped. Obviously, if there would have been the case in Ukraine, we would have stopped, but that was not the case.
For all the other projects we're pursuing, we just continue doing what we have been doing, working diligently through our analysis whether this business fits to us. Once we conclude, we will sign a deal and integrate them into our network. Is that clear, Suhasini?
Very clear. Thank you so much.
Last question is coming from Chetan Sherlapalli from JPMorgan. Please go ahead.
Hi, thanks for taking my questions. Can you hear me?
Yes.
Yes.
Loud and clear.
Hi. Thanks. Apologies if I missed this before, but could you give us some color around the contribution of acquisitions to Adjusted EBITDA, both in full year and fourth quarter? My second question is on gross profit to EBITDA conversion. It seems that conversion margin is down sequentially in the fourth quarter in all the regions. Could you help us understand the drivers for this? Thanks.
Okay. Yeah.
The second question, what was it? Okay. Let me first take the M&A question from you, and then maybe you can repeat afterwards your second question. As I indicated, the M&A side of the business has contributed around twenty... I don't have the exact number. As I mentioned, it's also in my speaker notes on EBITDA perspective, 20% was related to M&A. I also will refer you to section seven out of our year-end report, where we also have included also those details in there on a pro forma overview. Yeah.
Sorry.
To repeat my question. Yeah, it was on the conversion margin. It seems that conversion margin is down sequentially in fourth quarter. I was hoping you could help us understand the drivers for this.
Yeah. Sure. Okay, if we look a little bit, this is also driven by seasonality. There are three elements with seasonality and mix, the M&A, and also timing. In our medium-term outlook, I communicated that it's normal that the margin, and as such, the conversion margins in the last quarter are generally lower. From, let's say take Q3 to the fourth quarter, it's normally around 20 basis points in GM1, and then accelerated in EBITDA terms is about 1.5%-2%. In 2021, this effect was about 50 basis points on the GM1, and 1.5% versus the third quarter. They were all well above the 2024, 2020 levels. Now, what are the key drivers around that? First, seasonality and mix.
Margins in the F&F also taper off due to the fact it's a more seasonal business. In Vigon, that effect was about 1%-1.5% on the GM1 side. We have onboarded a lot of new mandates. There's also the relationship to our working capital comment. When you onboard a mandate, yeah, okay, they come in at a lower margin, then you do the analysis, you complement them in the lateral value chain, you add components to the customer, and then you can bring margins up over time. This was mainly in EMEA and in APAC. Also M&A, the second element. We did M&A in Asia at lower GM1 levels. That was also communicated to the market, mainly WWRC and Coseal.
They are at a lower margin level than the average. Lastly, timing. As I mentioned, I refer back to the bonus comment and the accrual comment that we made before in the call. If you take those three things into account, I think that gives you a little bit of some color on the conversion margin development.
Understood. Thank you.
Thank you.
We have received one more question, and this is coming from James Rollo from Barclays. Please go ahead. Your line is open.
Hi there. Good morning. Just one from me. The H2 market backdrop is obviously difficult to predict. For those who are looking at more bearish scenarios or potentially recessionary conditions in Europe, could you remind us of how the business has performed during past recessions and past oil price spikes? Try and give us a sense of how defensive your various end markets could be within that European business. Thank you.
Thank you, James. When you go back through the crises business has seen, go back to 2008, 2009, 2010, what we all had to live through, we saw contraction there, but it was not a significant one, and we expanded immediately afterwards. Now, going really closer to where we are right now, going to 2020, I mean, you have seen what the COVID crisis has done to many industries. The beauty of the industry we're in is that even during the COVID crisis, we managed to keep our top line on a like-to-like basis stable and continue to expand margins by adding elements to our lateral value chain, which allowed us higher pricing power in the market. I guess in a nutshell, this is a very sturdy business. Obviously, when the market is growing, we outgrow the market.
When the market is contracting, we manage to really stay solid through a crisis. Again, there are many underlying factors of that, which is a continued outsourcing trend amongst our principals. There's this trend of obviously they don't wanna work with zillions of smaller players. They also entrust us more mandates. Then obviously what we do, our lab work, that's a key element to it, bringing this innovation formulation into innovative formulations into our customers. These are all elements which allow us to expand profitability over the years to come as we have did over the last couple of years. Is that clear, James?
Yeah. Thank you very much.
Thank you.
Quick reminder for everyone, if you wish to ask a question, please key star one on your telephone. Thank you. Yep. The next question is coming from Rajesh Kumar from HSBC Bank. Please go ahead.
Hi. Sorry. Just a quick follow-up on the conversion margin. Clearly, there's a seasonality in Q4, and I'm assuming last year Q4 must have been a bit stronger than normal. What do you think, clearly your margin performance has been reasonably strong considering that fact. Do you think inflation has supported this and we could see a reversal by Q4 next, the Q4 2022, again, see strong? Or is that what you're factoring in your guidance?
I'm not sure what you're asking, Rajesh. Are you asking is Q4 2022, will you see basically a decline or an increase? Maybe you can-
No decline. I think what I understood is
Decline versus 21.
We don't expect the market decline or a decline towards 2021. No, we don't. We have won numerous mandates which will strengthen the position, so I'm confident that we keep it. It's also what I tried to explain earlier. The more we offer to our lateral value chain, the better will be our pricing power to end customers. I'm confident that we will keep what we have right now.
No, I appreciate that. I just wanted to be clear on the call because it's clearly, you know, you're a new company to the market and, you know, people are trying to still understand how that works. So it's very helpful to hear from you. Thank you.
Thank you.
There are no more questions. Ladies and gentlemen, that concludes today's Q&A session. I will now hand over to the management team for closing remarks.
Well, thank you for your interest in Azelis and our story. As you, Rajesh, just said, this journey just begun as a public company. This journey started with some of the founding companies more than 120 years ago. The focus has changed significantly. We have moved from being a distributor to being an innovation service provider. With what we have built on a global basis, with the spirit of working as a team, delivering sustainable solutions to end markets, I'm confident that we will continue to deliver to promise over years to come. Thanks again for your interest. Stay safe, and talk to you for our Q2 results call. Thank you.