Ladies and gentlemen, welcome to the DKSH Full Year Results 2022 conference call and live webcast. I am Sandra, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session.
You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Till Leisner, Head of Media Relations and Investor Relations. You will now be joined into the conference room.
Good morning, everybody. It's my pleasure to see everybody in person here again in Zurich. It's been exactly 3 years since we reconvened here at the Hotel Metropol . It's also a great pleasure to welcome everybody in our webcast. Good morning or good afternoon to everybody, wherever you're based.
My name is Till Leisner. I'm Head of Investor Media Relations at DKSH. Before we start, it's my duty just to remind you to have a look at the disclaimer of the presentation regarding the forward-looking statements that we are making therein. For those of you who do not have the presentation in front of them, please go to our website, dksh.com. You will find them under the Investor Relations section. With that very brief introduction, happy to have you, everybody here, and I'd like to hand over to Stefan. Thank you very much.
Yes. Hello. Good morning, everyone. Good afternoon. Welcome to our, you know, full year 2022 results presentation. It's really great, as Till was already saying, to see you all here again after 3 years face to face. Joining me here today is Ido Wallach, our CFO, as well as our investor relation team.
Then we have a special guest who just flew in from Singapore, Antoine. He is our Chief HR Officer. Welcome also to all of you. Today's agenda foresees a short recap of our strategic progress and the highlights of last year. I will then continue with a review of the individual business units in 2022. After that, Ido is going to follow up with a financial update. To conclude, then I will provide a brief outlook and hand over into the Q&A session. Let us now please kick off with a very brief video, giving us the essence of DKSH. Thank you.
DKSH has been at home in Asia for almost 160 years. In this time, we've expanded businesses and provided reliable access to high quality products and services with the purpose of enriching people's lives everywhere we go. After all this time, what is it that still makes us tick? To find out, we need to go all the way back to 1865, when three Swiss entrepreneurs set sail for Asia.
Hermann Siber was destined for Yokohama, Edward Anton Keller for the Philippines, and Wilhelm Heinrich Diethelm for Singapore. They didn't know each other. They had one thing in common, a shared desire to build bridges of commerce between Asia and Europe. Fueled by a true entrepreneurial spirit, the trading houses they established grew and diversified as they weathered storms along the way.
Over a century later, in 2002, Diethelm Keller and SiberHegner merged to become DKSH. The rest is history. After all this time, what is it that still makes us tick? Innovation. It's everywhere you look, not just in the products and services we offer, but the people who create them too.
As an interconnected network of pioneers and entrepreneurs, we're looking forward in modernizing the way we work by innovating DKSH as a business, as well as providing contemporary ways to collaborate, creating state-of-the-art facilities, and embracing digitalization. We've invested more in company culture to be one of trust, collaboration, and empowerment, encouraging individuals to grow into their talents and to continue to explore, expand, and innovate together.
No matter how much we've achieved in 160 years, we see every moment as an opportunity to create growth and value for our business partners and the communities we serve. Delivering growth in Asia and beyond.
As you have just seen, DKSH remained relevant over the last one and a half century. That is since we followed our purpose and helped business to deliver growth in Asia and beyond, made consistent strategic improvements over the years and always stayed entrepreneurial and never became complacent. Let me now focus on these developments and the highlights achieved in 2022.
Our clearly defined strategy for growth is firmly in place and focuses on 5 main areas. First, we drive our focused business unit strategies to generate value in the long term and accelerate our M&A strategy to expand our geographic footprint. Second, we invest in people and nurture a high-performance culture of empowerment, not to only find, but also develop and retain the best talent and create a better working environment for all.
Third, we champion digitization by continuously accelerating digital solutions, driving our eCommerce business, and leveraging data and analytics. Fourth, we drive operational excellence and are updating our operations to have modern and automated facilities, as you have just seen some of them in the video, that increase the overall agility and efficiency. Last but not least, we focus on sustainability, where we take environmental, social, and governance factors into account every business decision we make.
Based on this framework, we delivered strong 2022 results that not only confirm our successful strategy execution, but also the resilience of our business model. All these strategic advancements fueled us to deliver a higher operational performance at constant exchange rate across all four business units throughout the pandemic. We had outlined our business unit strategies during our Capital Markets Day in 2020.
As you can see, we have fulfilled what we had set out to do back then and successfully executed our strategic priorities across all four divisions. In Healthcare, our strategy of driving into higher value segments and services resulted in an EBIT increase of 20.8% from 2019 to 2022 at constant exchange rates.
In Consumer Goods business, we have successfully followed through with the transformation and continued to capitalize on our market position in Asia Pacific. This led to a double-digit improvement of over 40%. In Performance Materials, we strengthened our position as a leading pure-play specialty chemicals and ingredients distributor. From 2019 to 2022, the EBIT increased also by over 40% at constant exchange rates.
In our business unit technology, we fulfilled our ambition and have achieved results that exceed pre-pandemic levels again with a double-digit growth in EBIT by 37%. At the same time, our functions have developed too and supported our core businesses ambitions as well as success. We continued the momentum on the M&A side and completed our organic growth by closing 10 value-accretive acquisitions in 2022 alone. We have accelerated our M&A activity and have closed over 20 deals since 2019.
These transactions helped us to add strategic value, expand our geographical footprint, access attractive business segments, and increase our share of value-added services. M&A is more than simply buying a company, as we all know. Therefore, we strictly consider value-enhancing transactions, follow up a bottom business plan, and put emphasis on returns.
We have a strong focus on due diligence and regard the integration process as key for successful transactions. With this disciplined and strategic approach and our strong balance sheet, we are in a favorable position to profit from several M&A opportunities which the fragmented market still has to offer.
We have a solid project pipeline for 2023. We will continue to tap into new M&A opportunities to accelerate our growth with financial discipline over time. M&A is, however, not the only key area we have invested in. In recent years, we have spent considerable time to develop our people who are DKSH backbone. We are a people organization.
We embrace diversity and foster a supportive work environment for all of us. Our continued focus on the development of our talent is visible in the 75 point score we achieved in our latest employee engagement survey, which benchmarks very well with big multinational companies. Advancing diversity, equity, and inclusion in our organization with targeted initiatives will remain a strategic focus in our human resource approach.
We have made visible progress in DKSH company culture to be a modern company with a clear purpose and shared value to guide us our way. We have onboarded some great new talent this year, and I look forward to continuing building up our high-performance teams. This brings us to the topic of digitization, which is another driving factor in our continuous evolution. Our investment in online sales has paid off across all four business units.
Through an ecosystem of digital platforms, we remain operationally agile and better understand the needs of our customers. In our eCommerce business, our net sales continued to grow strongly and even increased 3 times compared to the pre-pandemic levels, excuse me, of 2019. We want to actively contribute to the promising digital economy. Leveraging data and analytics will remain one of our priorities in these digital, in this digital transformation.
Sustainability is another promising and emerging area. We made good progress on our sustainability agenda in 2022. Our commitment has been recognized with the international EcoVadis Gold Rating. DKSH now ranks among the top 5% of all companies rated by EcoVadis. Our improved sustainability ratings reflected the effectiveness of our commitment. You see this on the slide here.
Going forward, we will continue to improve our sustainability performance and keep up our commitment. DKSH has always been committed to generating sustainable and profitable growth for our shareholders. We have backed this commitment up by having consistently increased our dividend for 10 consecutive years since the IPO.
For 2022, our board of directors proposed an ordinary dividend of CHF 2.15 per share, which is equivalent to a growth of 4.9%. We will continue to hold on our progressive dividend policy in the years to come. Let me now provide you with an update on the progress in our business unit, starting with healthcare. The results in our business unit healthcare are marked by organic growth and a double-digit EBIT improvement. The EBIT margin also increased from 2.3% to 2.6%.
The business emerged stronger from the pandemic with higher profitability across key segments. Acquisitions in key growth areas, such as medical devices and own brands, supported this trend. I like to especially mention that in own brands, we signed an agreement with Eisai to purchase the two pharma brands, Myonal and Merislon, in nine markets across Asia-Pacific.
We also materialized our strong business pipeline by winning regional contracts, for example, with LEO Pharma, to advance the standard of care for people with skin conditions across Southeast Asia, or with the lifecycle management company, Pharmanovia, to bring high-quality pharmaceutical products to patients across Asia-Pacific.
Looking ahead, we will continue to expand our strong market position and drive into higher value segments and services. Let us now focus on the business unit consumer goods. Here, the successful transformation resulted in another year of EBIT growth.
Our agile pro structure, stringent rationalization of our product portfolio, and value-added services were driving factors in those results. The EBIT margin increased further from 2.2% to 2.3%, while net sales remained largely unchanged since price increases to reflect the inflation and lower market volumes basically balance each other out. In our fast-moving consumer goods business, we continued developing our business with valuable collaborations.
We partnered with Global FoodBanking Network to reduce product waste in our locations across Asia-Pacific. As announced this week, we partnered with Lipton, the world's largest tea and herbal drinks manufacturer, to establish their market presence in Vietnam. We expanded our existing collaboration with Disposable Soft Goods, DSG, in Malaysia to provide our food service offering for a range of sanitary products across all modern and general trade channels in the market. More to come next week.
We will continue to capitalize on our position in Asia-Pacific in our consumer goods business and drive growth and profitability. Moving on to Business Unit Performance Materials, where we delivered strong net sales growth of over 20% at constant exchange rate. This achievement was supported by our business development activities and improved business demand in Europe and in Asia-Pacific.
The EBIT was CHF 112.2 million. The underlying result reached CHF 130 million Swiss franc when we considered three factors. M&A related costs of CHF 3.6 million, which were quite high last year, translational currency effects of CHF 6.5 million, as well as realized FX and hedging gains of CHF 7.8 million. Let me briefly explain the hedging gains. In the Business Unit Performance Materials, we typically buy ingredients in one currency and sell them in another currency.
The currency in which we buy the ingredients from our suppliers increases whereas the currency we sell it to the customers, this typically reduces our gross margin or EBIT. These exchange rates effects are typically hedged to secure our margin, the realized FX hedging gains are reported in the net finance result below EBIT as required by IFRS.
Showing the results of our business unit, including these hedging gains, is required to better understand the underlying performance or profitability. Like for like, the result is also up 13%. We also continued our targeted M&A approach in Performance Materials. In total, we closed six acquisitions across three continents, which all helped to solidify our position as a leading specialty chemicals and ingredients distributor.
We closed one acquisition in Asia with Right Base Chemicals in China, four in Europe with Victa Food, Refarmed, Georg Breuer , and JW Foods. We expanded our global footprint with Terra Firma in North America. At the same time, we increased our global network to 53 innovation centers in total, where we are helping our clients to develop cutting-edge ingredients and formulations.
Backed by our scalable business model, sorry, solid business development pipeline and industry consolidation potential, we will continue to strengthen our leading position in the specialty chemicals and ingredients distribution industry and expect solid EBIT growth in 2023. Ending our business unit review with technology. I'm pleased to report that we achieved very strong results in 2022, which in line with our ambition, exceeded the pre-pandemic levels. We recorded a double-digit increase for net sales as well as EBIT.
We benefited from investments going into Southeast Asia and also the realization of some backlog projects across the region. We also achieved higher results in our consumables and service business, too, as pandemic-related movement restriction eased obviously after COVID. With the acquisition of the DNIV Group in Singapore, a major player in the distribution of semiconductors and electronics in Asia, we strengthened our position in a very dynamic growth segment.
We have entered promising and future-oriented partnerships with Rion Klein in the life science industry last year and have a very strong pipeline for 2023 as well. Overall, the business unit is on track with its strategy of building further resilience and focus on higher margin segments and services. With that, I would like to hand over to our CFO, Ido, who will guide you through our financial results in more detail. Thank you very much.
Thank you, Stefan. Welcome also from my side. It's great to see some familiar faces for again and great to see new faces for the first time. We know that in this great city of multinationals and great financial institutions, you have choice. Thank you for choosing to spend this morning, chilly morning with us today.
I'm delighted to provide you with further details of our 2022 results. We are pleased with the achievements made last year, which are reflected in our key financials. Net sales grew by 1.9%. EBIT increased by 12.2%. EBIT margin increased by more than 25 basis points. This marks the third consecutive year in which we increased our EBIT margin.
Profit after tax, when excluding non-recurring items in 2021, stood 7.3% higher than 2021 and 10% at constant exchange rates. We generated CHF 209.5 million of free cash flow, representing cash conversion rate of 106%. Again, a third year in a row of surpassing the long-term target of 90% conversion rate.
Let me now cover our net sales development in more detail. We grew organically by 3.0%. As many of you know, in our Business Unit Consumer Goods, we have been pursuing portfolio optimization. This strategy has increased the EBIT margin of the Business Unit from 1.7% in 2019 to 2.3% in 2022. On the flip side, the impact of this optimization on our organic growth in 2022 was 1%.
We can therefore confirm our GDP plus long-term growth aspiration. It describes our ambition to grow faster than economic growth in the markets where we operate. We do this by winning market share for our existing suppliers, as well as winning new clients. M&A has been a highlight once again, with a growth contribution of 1.5%, an acceleration from last year, and from half 1, mainly from the consolidation of deals closed in the second half of 2022.
Combining organic and M&A, our net sales growth at constant exchange rates was 4.5%, ahead of the pace recorded in the first half of 2022. This 4.5% growth rate has been affected by a 2.6% FX impact following the strengthening of the Swiss franc. Moving now to the development of our EBIT.
We are very pleased with our continued EBIT growth. Organically, it grew double digits by 10.5%. Net sales growth, combined with continued strong focus on gross margin and cost structure optimization, deliver an overall EBIT margin improvement of more than 25%. M&A added 6.1% to EBIT growth, ahead of its incremental 1.5% contribution to net sales growth as we continue to focus on margin-accretive acquisitions.
Similar to net sales, currency changes had a negative impact on our EBIT, measuring -4.4%. All in all, EBIT reached CHF 319.2 million. EBIT margin reached 2.8% of sales. Let us now move on to our balance sheet. It remains very solid. I would like to highlight three things. Our very strong liquidity position is maintained.
We continue our strong focus on timely collection and timely payments. Trade receivables and trade payables as a percentage of net sales are on a continued sequential improvement this year and lower since pre-pandemic 2019.
This is the result of relentless collaborative efforts of all our business units, all our business, of whom we are very proud. M&A and the earlier phasing of Chinese New Lunar Year in January 2023 drive the majority of the inventory increase in 2022. In addition, we have also seen in 2022 a normalization of inventory levels from the supplies and shortages experienced during the height of the pandemic in previous years. 2022 was an historical year for DKSH also when it comes to capital deployment.
On top of the progressive dividend payment of CHF 133.2 million, which we returned to shareholders, we have invested CHF 472.9 million in the acquisition of businesses and trademarks. Subsequently, despite these large investments, our net debt position remains marginal at CHF 42.3 million, corresponding to as little as 0.1 times net debt to EBITDA.
Combined with a strong equity ratio of 31.1%, we have ample room to further grow our platform for industry consolidation. We continue to carefully assess deals and only acquire if we find them value accretive, scalable, and available for reasonable price. Let me also provide you with some financial indications. In terms of M&A, we estimate that our recent acquisitions will contribute around 2.5% to 3% to net sales in 2023.
On the FX side, assuming that current rates prevail for the remainder of the year, we expect a full-year FX impact of around -2.5%. Tax rate. We estimate that it will remain within midterm range of 27%-29%. CapEx is expected to remain at 0.5% of net sales for the full year.
Before handing back to Stefan to elaborate on our prospects, I would like to wrap up my section with highlighting to you the resilience of our business as evidenced during the pandemic and the achievements made throughout. On the back of movements restrictions, supply chain interruptions, inflationary headwinds, and geopolitical tensions, to name just a few of the challenges we had to endure in the past few years, we increased EBIT margin each year, and in some by more than 50 basis points.
We consistently achieve cash conversion rates above 100% of profit after tax. We progressively increase our ordinary dividend payments, in total distributed almost CHF 400 million to shareholders. We deployed more than CHF 600 million of capital in M&A, especially in late 2022, which position us for further growth in the future.
We expanded in new geographies such as ANZ, North America, as well as new business lines, we strengthened our position in Europe. We further strengthened our asset-light business model, where we typically lease contribution center, distribution centers, IT equipment, and outsource transportation.
This track record during the pandemic is testimonial to our successful transformation journey, the resilience of our business model, our unique value proposition, and above all, our passionate teams. With that, I would like to thank you for the attention and hand over back to Stefan.
Thank you very much, Ido, for your presentation. Let's conclude now, but before we go to the outlook, have a very brief look at Asia. Overall, the economic recovery in Asia is expected to continue at a slightly slower pace due to the weakening of the global demand. Thanks to a robust consumption and border openings, the GDP growth forecasted for Southeast Asia is still the highest in the world.
The region is expected to experience a temporary relief from rising consumer prices as inflation is still settling at lower levels compared to most markets in the Western world. Given China has curbed the long-lasting zero COVID policy and open borders, Southeast Asia will likely benefit from easing travel restrictions, especially tourism-oriented markets such as Thailand.
Thanks to the resilience and the diversification of our business model, we hold on to our aspiration of delivering GDP plus growth and expect a higher EBIT in 2023 than in 2022. We base this expectation, as we usually do, on the following general factors being realized: economic growth in Asia-Pacific, stable exchange rates, and excluding unforeseen events. Looking ahead, we remain very optimistic about the prospects for Asia-Pacific.
Our disciplined strategy execution, asset light, resilient, and cash generative business model, as well as our pan-regional approach, empower us to capitalize on the unique opportunities this dynamic growth region has to offer. On top, we will continue to develop Performance Materials into a real global player. With that, I thank you all for your intention and invite you now to address your questions in our Q&A session. Thank you very much.
Thank you very much. We start with the first question in the room. Just give us 10 seconds until the microphone is here. Maybe we start ladies first with Stephanie in the, in the back.
Yes. Hello, good morning. Thanks for taking my question. I would like to start with consumer goods. I mean, before Christmas, you released a press release that Terry Kyriakou left the company or is going to leave the company.
When he started, I think three or four years ago, he was announced as like the big messiah almost. Can we assume that now with the 2.8% margin where we are right now, that that's the limit because the turnaround is done? What can we expect in terms of this? Maybe can you share with us a bit...
Yes.
... more details why he left than just the PR answer.
Okay. I mean, first of all, I think if you look back till, you know, 2017 and then 2018, you know, we achieved a major transformation in consumer goods. The results advanced very well, as they also did this year.
A major progress was achieved, but we will remain hungry. In terms of the margin, it's always our objective to further enhance the margin as well as coming back to a stronger top-line growth, and that is our objective, you know, for the years to come. Terry is going to leave us in July or end of June, after 4 years.
He has done a, you know, great job and was, you know, very successful with the transformation here. He did build also a very strong team underneath of himself. We are very confident that we will replace him with another, you know, strong leader. Together with the wider management team, they will continue to execute our successful strategy in consumer goods.
Maybe still with consumer goods, Maurice Lacroix, how much did it contribute to the current EBIT? Did it contribute in a positive way? If you take this out, how much would it be without?
Yeah, I mean, as you know, Stephanie, we don't give, you know, specific EBIT numbers by sub-business line. You can be rest assured that also in 2022, we did grow that business faster than the market. We gained market share in the segment in which Maurice Lacroix is active, and the results of 2022 were stronger than the results of 2021. It's a single CHF million EBIT contribution we are generating through Maurice Lacroix.
Maybe one last question, and I go back, on inflation. How much of organic growth in consumer goods, but also maybe in Performance Materials was driven by inflation, and how much was volume driven?
Yeah. Maybe I can help with this one, Stephanie. Overall, we have seen organic growth in CG of, yeah, of 3%. As I mentioned, overall, it's a game of more or less the BU that did no growth. The various effects have been offsetting each other.
We have seen a growth of 3%, but at the same time of the pricing effect. At the same time, we've seen a volume effect because consumers have been spending and buying less in volume. Together, the two offset each other.
Zero volume.
Minus 0% on the volume or plus 3% on the price.
Next question. Olivier, if you could just for the webcast mention the company please also.
Yeah.
that you work for. Thanks.
Sure. Can you hear us or yeah?
Yeah.
Good morning. Yeah, Olivier Calvet from Credit Suisse. I have 2 general questions on PM and 1 more specific one. First of all, maybe I take them 1 by 1. Could you provide us some color on the order behavior that you've seen from your customers in Performance Materials? Probably, yeah, the first one. Do you want the 3?
You mean general behavior?
Yeah.
in Performance Materials. I mean, as you, as you can see, I mean, we you know, did grow the top line at constant exchange rate, you know, by 20%. In our, you know, sectors, there was the healthy demand of ingredients and services we are, you know, providing for them. We are very confident that, you know, this will continue into the year 2023.
Okay. Thank you. Second question will be just on the organic growth in PM, so the 12.2%. Could you actually break that down perhaps in price and volume? Yeah, if you could kind of give us an indication on how it worked in H1 and H2, that will also be quite helpful.
Yeah, look, in general, it depends, of course, on the various business lines and of course, different demand levels in different countries. The average of the growth is about 70% of volume and 30% of the price. That helps the comment on overall that we continue to see strong demand. Certainly the first half was stronger. We still saw the, we're still seeing the catch-up effect from, of course, COVID. The growth has slowed down somehow in the second half, but it's still there.
Just to confirm, 70 and 30, in PM volume price, right?
Correct. Yeah.
That is correct.
There was a slightly, I mean, higher cool down on the industrial side than on the Life Science side. Overall, you know, Life Science is the major part of the business.
Okay. Then just on the Terra Firma deal, you know, it's in the notes to the financial statement, it says, if you had consolidated the business for the entire year, you would have reported about 150 million Swiss francs of net sales. I had about 240 million in mind. I just, you know, wanna obviously there are probably some scope effects. Could you perhaps explain this, give a bit more color and, yeah, just, you know, help us understand the pro forma number that you were maybe referring to with this 240 million, yeah.
You can keep the 240. It's just, it's completely technical because we annualize the 2 months which we own Terra Firma, which includes December. December, especially in North America, we have the Canadian business there, is very soft every year. Just an annualization of a seasonally low month, that's it. There are also has been some exchange rate effect. The US dollar was stronger when we bought Terra Firma. It is a bit weaker now versus the Swiss franc, overall the performance remains on our target.
Not the scope effect from, you know, acquisition within Terra Firma.
No, no. We are making some, you know, very good progress with the post-merger integration of that business. We are right now, almost completely, rolled our existing relatively small North American business already into there. Yeah, and we will continue to deliver the strategy of building a serious North American business on the back of the platform we acquired.
Thank you. Next question will be from Gian marco.
Thank you. Gian Marco Werro from ZKB. Three questions from my side, please. First one, is on the cash conversion for the CFO. There, I think also a positive surprise, over 100%, compared to originally indirectly guided around 90%. At the same time, your inventory has also increased.
Maybe you can give us a bit of guidance about where the cash conversion could be for 2023. Then, from a M&A perspective, also impressive pace there for 2022. Can you maybe also elaborate a bit, you already mentioned your targets, that you want to continue acquire companies.
Maybe, you also can mention for us a number of companies or a total enterprise value that could be in your mind, especially now with the new situation in the US, where you also want to expand. That would be interesting. The third question is the healthcare margin. That was for me a positive surprise, strong improvements there.
Maybe can you elaborate a bit, also about your expectations for 2023 now? Can you keep this margin? Maybe, also if the recovery phase that we might see in healthcare with the tourism in Thailand coming back, will this maybe dilute the margin or even enhance the margin? That will be interesting. Thank you.
Okay. Let's start with the cash related. Yeah, we're very pleased with 100%. It's not that far from the 90%. Okay, there will be occasion which will be slightly below. Please credit us for the slightly up as well. Yeah, we've done a tremendously good job, not myself, the teams that on accounts receivables.
That's beyond our usual expectation for them. But everywhere we look in the company, there are teams that are just focusing on getting the cash back on time, sometimes it's transaction. Let's not forget that's one of our core activities. Customer, clients come to us because we operate those invoicing and collection for them.
That's also a sign that the team is, has been doing what clients are expecting us to do. Inventory increase is not concerning. If you look at the, as a % of our costs, if you do the calculation, we're looking at 7 weeks of inventory. The best companies in the world in inventory management, the Walmarts and Targets of the world, they hold 8, 9 weeks.
We don't get credit for 7 weeks. That could be at the best, but maybe we should. There was an effect last year that we were at 6 weeks. That's I'm not sure we will always be able to run at that level. I see it as a normalization.
As I said, with Chinese New Year coming in mid-January this year, we need to keep some inventory late into December. That effect is a one-off. There was also a bit of coming from the M&A. A third of the increase is from M&A. As a % of net sales, we maintain, we will probably maintain this level. In absolute, it will grow as the business grows. Yeah.
Okay. Coming to your second question, Gian marco Werro, regarding M&A. Yes, 2022 was a very successful year in terms of mergers and acquisitions. We closed 10 transactions. We spent almost CHF 500 million in 2022, and we will continue to progress our aggressive M&A strategy, right?
That's I have to be specific here, also in 2023. A lot has come together, right, to really make all those transactions available for DKSH Discover. It's really hard to forecast or promise anything. If you look at the current M&A environment, it's slightly favorable for us because many PM players who are normally competing with us in the market are cooling their engines slightly.
On the other hand, multiples are starting to come down, sometimes it can make sense to slow things slightly down to then secure, you know, better deals, a little bit further, you know, down the road. If you look at our balance sheet, we still have, you know, a lot of firepower, and we will continue to use this across all four business units. The pipeline right now looks healthy going into, you know, 2023, let's see what we can deliver, you know, during this year.
In terms of healthcare, yes, I mean, we said before we are pursuing a strategy to go into more high value-adding segments where we can achieve higher margins, and we made some very good progress in 2022, and we will continue to try to improve the margin, right, going into 2023 and even beyond that.
It was quite a significant jump we have done in 2022. The opening of the tourism market is going to help us because, as we stated in the past, the margin on over-the-counter products is slightly higher than in than in big pharma. That should give us, you know, small tailwinds. The big increase in tourism, especially in Thailand, we expect in the second half of the of the year.
Last year, there were around, you know, 10 million tourists going into Thailand. This year, they expect around close to 30. I think the official number is 27.5. And pre-pandemic levels, we had like 45 million of tourists. We will continue to go after our high-value strategy and try to enhance the margin also in healthcare.
Thank you.
Thank you. Next question, Pascal.
Yep. Thank you. Pascal Boll from Stifel. A couple of questions. First, overall, outlook-wise, you gave us, as usual, the outlook of a higher EBIT in 2023. Now, after two years of pandemic where you were quite cautious but then performed quite solid and well, is it now the time where you could become more optimistic as we see that markets are reopened, less restrictions?
Now we have a reopening of China, which should help tourism, as you just outlined. Further on, I just listened to the Unilever call. They were quite bullish on APAC with Vietnam and Thailand and Philippines in particular to mention. What's your view here? Should we now really expect an acceleration in 2023, or is it too early to get excited?
I mean, first of all, thank you very much for, you know, recognizing our, you know, good progress and very solid results in, you know, 2023. I think we achieved what we achieved by more or less giving you the same, you know, outlook like the year before. As we were stating before, I mean, we clearly expect higher EBIT, you know, in 2023 than in 2022.
I mean, you are right. If you look at the macroeconomic environment and all the driving factors, 2023 on the one hand looks better than 2022 with the opening of China. You know, the tourism coming back, you're quoting exactly, you know, one country. You know, the Philippines is doing very well in the region.
On the other hand, I mean, you still have this dark cloud of a, of a global potential recession, still out there. It's really hard to predict exactly, you know, where the economy is going to land. The forecast for Asia Pacific in terms of GDP growth, weighted according to our footprint, is currently 4.2%. As always, we expect that we deliver, you know, GDP plus, if that gives you know, a little bit more of, you know, of guidance here for 2023.
All right. Touching on Performance Materials on the margin. I mean, I appreciate your details on this one-off or extraordinary effect, but I think it's also fair to assume that FX is not really a one-off. M&A might be slightly higher than in 2022.
So these effects probably we shouldn't exclude, and so the margin would still be around probably 8% something, which is below what we have seen in the last two years. So what are the effects here? Is it a less favorable pricing environment? Is it negative mix effects? And what should we expect going forward? Should we expect the margin going back to 8.5% or even higher?
Okay. Yeah. Thank you. Thank you very much for the question. First of all, yes, I mean, you, you should, you know, take the hedging results into, you know, into consideration. M&A costs are really hard to predict, as I was saying before, right? We don't know exactly what is going to happen in terms of M&A in 2023. We have a, you know, very healthy pipeline. Looking historically, you know, 2022, the M&A cost was slightly higher than normal.
In terms of the margin development, you know, 2022 was a very challenging year, and it was also different, you know, for the different players in the different regions because there were, you know, US developed slightly different than Europe, as well as, you know, Asia Pacific.
Overall, we are very optimistic that we can enhance or continue to enhance the margin despite the slight setback we have seen. You're right. If you put those effects into consideration, the margin is 8%, and, you know, we will continue to strive for, you know, closing to get to, you know, to market, to market performance.
Maybe one last question coming back to consumer goods. If I did the calcs right, we are at something above 2.3% margin-wise. In the past, you set out a target of 2.5%. When should we expect that?
When we set the targets, we were at 1.7. Today we're at 2.3. I think the debate that we also have with ourselves is the pace, right? That we will get there. We don't know if it will be this quarter, next quarter or in the following year. We certainly have track records that we are climbing to the 2.5 and then we'll be there at some point.
Do you see a volume deterioration in consumer goods?
I mentioned before, we do see in some countries, I can definitely relate to what the Unilever CEO says about Vietnam. We see their incredible growth in volume. In some countries, we have seen consumption effect of higher prices and some decline. We manage this business in the long term, and the occasional movements of consumptions will happen.
Over time, population growth, GDP growth in the markets that we operate with our CG operations are gonna grow disproportionately ahead of the rest of the world. You can have an occasional hiccup, but not over the long term.
Please, please don't forget, I mean, in 2022, looking at the inflation, the war, right, the headlines about the global recession, there was a huge amount of uncertainty in the market. And that, I mean, did change slightly, buying patterns by consumers, but I don't think there is a long-term effect here.
Next question, Mr. Tulov, yeah.
Yeah. Hannes Bähler , Sandton Invest. I have a question on the market structure. Did the difficulties you're seeing on the supply chains or in pandemic change something in your industry? More precisely, are more companies relying on services you and your competitors offer? Is that the growth driver? If yes, how much is that coming on top of it? The other thing is, do you grow more with existing clients or new clients?
Okay. With pleasure. In terms of, you know, market changes, there are a few. I mean, first of all, the tensions with China and the behavior of China during the, you know, pandemic and the complete closure of the market, those two factors having one effect, and that is that people invest more in Southeast Asia.
In the past, it was almost the mantra, everything, you know, you have to go into China, China and China only. I think today there's much more diversification that people really go into Southeast Asia with more CapEx. As Ido was saying, if you right now, if you travel to Vietnam, it's just amazing how the economy is booming there.
I mean, when you, when you put your foot on the ground, you almost feel that the earth is shaking. It's really very, very dynamic. I also just did mention, you know, the Philippines, which is doing nicely, and there are also some large CapEx projects going into Thailand.
Since we are in general present in China with Performance Materials and technology, but with healthcare not at all and with consumer goods in a limited way, and Southeast Asia is really our backbone, yes, we do expect that we will benefit from this shift from investments from China going into Southeast Asia. The other driver is that, you know, obviously for our, you know, clients, you know, the business environment also is more and more challenging.
Those companies and organizations, they look, you know, how can they variabilize fixed costs they have by running their own sales and marketing organizations across Southeast Asia and across those, you know, small countries. There is clearly a trend towards outsourcing on the one hand, which we benefit from.
Not only that they are trying to outsource more of sales and marketing activities along their value chain, they also try to work with less distributors in the region. We, as the largest distributor, especially in consumer goods across the region, are also going to benefit from that. 'Cause as you can imagine, for them it's much easier to work with one distributor across seven, eight countries instead of having seven, eight distributors, you know, country by country.
Which growth, maybe new clients or existing clients?
Yes. I mean, obviously, we are always, you know, trying to deliver strong organic growth, according to with our existing clients and to penetrate them further to get a, you know, bigger share of wallet, and we do that by taking existing, you know, contracts into more and more countries, but also by trying to bring in, you know, more of their SKUs into our country. We also have a very, you know, aggressive BD strategy, as you have just seen the announcement over, you know, the last few days here. As I said, you know, more to come next week, so that we try to grow with new customers as well. It's more or less, it's a balance, I suppose.
As a rule of thumb, the growth ahead of GDP is what we call organic growth, is increasing market share with new clients. Mitch?
Mm-hmm. Thank you.
Thank you. Is there any more question in the room? Stephanie at the back, yeah.
Thank you. Stephanie Scholte, Mirabaud Group, by the way. I have another question on on the Performance Materials organic growth. I mean, in second half, growth slowed down to 8%. Was this 8% mainly driven by pricing or by volume? Do you expect that this slowdown will continue going into next year? Where do you see this organic growth in Performance Material heading to?
Yeah. Yeah, as we mentioned before, the by and large, the volume value component of the growth is 70/30, that was maintained in the second half. We have to take. Understanding our second half, we have to understand what happened in the world in 2020, 2021, which was just panic buying effectively due to supply shortages, et cetera. I think that the growth the year before was somehow disproportional. And therefore it's an 8% on a very on a fairly high base.
Overall, we expect these business units to grow disproportionately to the rest of the company because international trade of specialty materials, sophistications of material is going to grow ahead and will probably stay the high single digits for quite some time. Again, one semester it can go down. You, we read the same news as you on what's happening in the world. Consistently over the long term, we think it will be a solid single digits high.
Now you entered the U.S. market, with Terra Firma, with the acquisition you did. What's your experience so far, is it completely different from what you have seen in Europe? What's your experience so far?
I mean, no. I mean, it's, you know, this is a global market, right? Where clients, they would like to work with you on a global scale, because more or less you see the same behavior in the different regions. There is no material difference overall. What is different for us that normally in Asia and in Europe, we have a higher share of life science. As we disclosed when we acquired, you know, Terra Firma, Terra Firma today is 95% industrial and only 5%, you know, life science.
There was also in Q4, as Ido mentioned, there was, you know, some softening, some, you know, price decreases, but we are very optimistic, medium term if you look into the American, U.S. market, because especially on the industrial side of things, it's the market with the lowest energy costs.
You can expect that a lot of the business from Europe is going to move to the U.S., medium term, and Terra Firma will definitely benefit from that. Strategically, obviously, our focus for 2023 is now also to building the life science leg in that market organically as well as looking for M&A targets.
Thank you.
The exchange rate is much simpler in the U.S.
Yeah.
It's only US dollar.
We will have translation to the Swiss franc, but the whole hedging is simpler.
Good. Any more questions in the room? That's not the case, then let us please move to the telephone line and webcast.
For questions over the phone, please press star and one. The first question comes from Andy Grobler from BNP Paribas. Please go ahead.
Hi, good morning. Three questions from me, if I may. The first one just on consumer and the Levi's contract, which you've, you have held for many years. That have moved back in-house. Can you just talk through the dynamics there, and also, I guess, comment on whether that's a trend you see across or potentially see across some of your larger contracts. Secondly, well it might be too early for this, but with the return of Chinese tourists, are you seeing any early signs of a change in activity from your clients? To what extent is that having a positive impact on the kind of the underlying countries and the great things like Thai consumer confidence going up?
Lastly, just in terms of interest, a few moving parts last year. What is the guidance at this stage for 2023? Thank you very much.
Okay, hi Andy. Thank you very much for your questions. Maybe I take number 1 and 2, and then Ido can close with the, you know, 3rd question. There was a, you know, strategic decision by the board of Levi's, I think 2 and a half, 3 years ago, to completely go direct and cancel, you know, all contracts with distributors globally.
They executed that strategy over the last 2 and a half years. I think we reflect also that the contract with DKSH was, you know, running out 2 years ago. There is no longer any Levi's business in our numbers being reflected in 2022, and only a very small part, if I recall that correctly, in 2021.
We, as you remember from the past, it was a unique contract we had there because we also do own the factory or owned the factory since 45 years and were manufacturing locally. We signed a contract with, you know, Lee Cooper, a brand out of the UK, and are right now in the process of, you know, building up that business in a first step, across Thailand only, and then with the idea to expand into other countries.
The dynamics here is that the, you know, Levi's business completely disappeared, and right now we are in a phase of, you know, building this with this new brand, which from a numbers perspective at this point of time is an investment.
In terms of the Chinese tourists, yes, we see some very first soft effects here, especially in healthcare for over-the-counter products. As I was outlining before, I think the majority of Chinese consumer is being expected in the second half of the year because please don't forget, right now they're still finishing up on a major Covid wave going through the country after they did change the policy more or less overnight.
You are right. This opening of China has a material effect on the consumer confidence and the economic outlook in Thailand and was being reflected and discussed, I think in different articles and analysts' outlook for the Thai economy. We are, you know, quite optimistically, you know, looking into the development of our largest market in 2023. I hand over to Ido.
Yep.
Please.
To clarify, the question was about the interest rates?
The interest charge. What do you expect the net interest of this one? Interest rates as well.
The interest charge.
Go where I think.
Yeah. Okay. Look, We cannot of course... I mean, we can forecast the our interest rates, but that's we'll see what central banks will do. Overall we have a clear policy of fixing at least 50% of the interest that we're paying. More than 50% of our interest charges are fixed, and regardless of any interest rate movements, we will have the same charge.
At this point, what would you expect for the total cost for 2023?
It will probably increase by close to CHF 10 million.
Okay. Brilliant. Thank you very much.
Operator, do we have any more questions in the, on the phone?
Gentlemen, so far there are no more questions over the phone.
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Yeah. Thank you very much for your time and attention. Thank you.
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