Azelis Group Nv

Hello, everyone. Welcome to Azaleas' half-year 2022 results presentation. I'm Pam Ante, Investor Relations. Joining us today are Jochen Neuler, CEO, and Thijs Bakker, CFO. Jochen will give you a high-level overview of the trends and performance in the first half, and then Thijs will talk about our financial results. Jochen will then provide the outlook for the remainder of 2022 and then open floor for Q&A. You will be on listen-only mode until then. As usual, this call is being recorded and will be made available on our website later today. With that, I'll hand you over to Jochen.

Good day, everyone. Thanks for dialing in and joining us for the presentation of our first half 2022 results. We appreciate it, especially as we know some of you are just back from vacation or about to go or maybe even, God forbid, in the middle of your summer holiday. As usual, I will start an overview of our performance in the first six months of the year on the next slide. As you might have already seen in the press release earlier this morning, we had an excellent first half. Over these six months, our revenue increased by 54%, almost 28% of that growth was organic growth. I will discuss our growth drivers in a little more detail in the following slides. Overall, momentum remains positive in most of our end markets across EMEA, the Americas and Asia Pacific. We announced quite some new mandates in recent months. All these wins are excellent proof points that we continue to strengthen and expand our relationship with new and existing principles. Azaleas remains very active in the ongoing consolidation of our industry. Year to date, we registered 10 acquisitions. Five of these 10 were closed within the first six months and had combined 2021 revenues of over €184 million. On July 1st, we completed the acquisition of OXA, marking our entry into South America. OXA had revenues of over €150 million in 2021. The remainder of the total 10 acquisitions mentioned, another four, are expected to close in the second half of 2022 and had combined 2021 revenues of over 160 million. Those acquisitions strengthened our lateral value chain and hence will foster our innovation capabilities. Financially, we can easily see the benefits of our increased scale, the investments made, and our continuous process improvements reflected in profit margin expansion. In the first half, our conversion margin expanded by 673 basis points to 49.7, despite the continued pressure on supply chains and the ongoing inflation. That is a testimony of the inherent resilience of our business model. Furthermore, our free cash flow was 74% higher than the prior year despite higher investments in our working capital to support the revenue growth. Also, that demonstrates the strengths of our asset-light cash-generated model. These strong results are reinforcing the business and our network. We continue to invest and innovate for the future. We are on track with our digital rollout schedule. As such, we have launched more customer portals and are very motivated by the take-up rate in markets where we have gone live. Our lab teams are busier than ever and are constantly coming up with innovative products and solutions. We have inaugurated our regional innovation centers for APAC and the Americas recently and increased the number of projects in our labs further. now turning on the actual growth drivers in the first half of the year. Almost 28% of the 54% revenue growth we delivered in the first six months were organic. 22 came from acquisitions, and 4% was from currency translation. Organic growth remained strong in Q2 at more than 23.3%, despite the tougher year-on-year comparables. To give you some more color on the comps, organic growth in Q1 2021 was 6.7% and increased significantly to 17.3% in Q2 2021 as recovery from the pandemic started to accelerate. As you know, growth remains strong throughout the rest of 2021. And as reflected in our organic growth of almost 28% in the first half of 2022, that strong growth momentum continues. In the life science segments, in addition to the robust demand in the segments of food and nutrition and personal care, we are seeing a bounce back in pharma, which, as you know, had been quite soft throughout the pandemic and is now just returning to the pre-COVID lab. In industrial chemicals and EMEA, case remains strong as are rubber and plastic additives and loops and metalworking fluid. In Asia-Pacific, The long-lasting lockdown in China was reflected in the relatively softer case market, although the rest of Asia-Pacific delivered strong growth. Our business in the Americas enjoyed continuing tailwinds in life science and experienced positive pricing trends in industrial chemicals. It is worth noting that for Azelus, organic growth is still predominantly driven by volumes, confirming that demand is holding up. That is particularly true for life science, where, in aggregate, volume growth still accounts for between two-thirds and three-quarters of organic growth. In industrial chemicals, the picture is slightly more mixed. Volume growth was bigger than price increases, and loops of metalwork include, whereas in case, especially in Q2, price increases have outstripped volume growths. Across our business, the volume price ratio has moved from a historical trend of about 80-20 volume price to about 60-40 in aggregate over the last 12 months, reflecting the ongoing demand versus inflation trend. We are obviously watching the trend in our end markets very closely. But given that we see in our audit book and that we also gained new products and customers, which we onboarded in recent mandate gains, we are confident that we will keep growing volumes in the near to medium term. As mentioned earlier, we made year-to-date 10 acquisitions. Six of them have closed and the rest will close in H2. In January, we closed the transaction to acquire Umungo, which was signed and announced in Q4 last year. Umongo gives us a good platform for loops, metalwork, and fluid offerings and complements our existing industrial chemical footprints in Africa. In February, we closed the acquisition of Catalite, strengthening our personal care and home care footprint in Thailand. In March, then, we closed WITCAM, complementing our lateral wave chain and industrial chemicals in the U.K., In May, we completed the acquisition of Tunçkaya, reinforcing our life science footprint in Turkey. And in June, we closed Chemo India, adding to our lateral value chain industrial chemicals. So these five acquisitions closed between January and June and have combined revenues of €190 million in 2021. On July 1, we also completed the acquisition of Roxa. I mentioned that earlier. which marks our entry into South America. We'll also close the following four acquisitions, which were signed more recently. Chemical Partners in Africa, Ashapura in India, Arctush in Turkey, and ChemSol in Malaysia. Boxer and these four other acquisitions generated on aggregate revenues of $270 million in 2021. Our M&A pipeline remains promising, and we are confident that we will continue to play an active role in the ongoing industry consolidation. Now, let's move on to the next page. I would like to give you a little illustration of what we do to add value to our customers and principals, how we formulate and why the lateral value chain is important to us, and how we help our customers shift to safer, greener alternatives. In this first example, an agricultural customer wanted to improve his existing formulation. That formulation was already a natural, 100% plant-based formulation that had been effective for its primary use. It, however, had one unwanted feature. Some of the solvents and emulsifiers were potentially hazardous, especially to aquatic life. Our lab team succeeded in replacing the potentially harmful ingredients by developing a non-hazardous water-based microemulsion. That formulation is significantly more environmentally friendly. Eventually, just a general observation. We experienced an increasing number of lab requests for formulations and even reformulations to move to safer, more sustainable alternatives. Now, going on to the second example, a new customer needed help addressing an existing formulation. That formulation had a grid problem. Grid formation sometimes happens, especially with water-borne coatings. Our lab team analyzed the problem and determined what was causing the grid to form. They then solved that by coming up with a formulation of both hydrophilic and hydrophobic solvents and other agents for viscosity. to adapt the atrocity to specifically the needs of that process to prevent grid from forming. That is an example of how our teams provide customers with solutions to address problems with existing formulations. But this type of challenge, deep knowledge of the latter way chain and intimacy with the products of all our principles are crucial in solving our customer challenges. So moving on to the next page, our commitment to sustainability. On this slide, you will see our progress against our main commitments. As illustrated by the case studies, we are playing an increasingly active role by supporting the trend towards more sustainable formulations. We remain focused on reducing our carbon footprint. By now, we have very robust methodologies to measure and disclose the progress of our sustainability efforts. We've just had our sustainability metrics and methodologies audited by PwC, and you will find all the details in our latest sustainability report published less than two months ago. We actively promote gender and cultural diversity across the group and in senior management. Finally, we aspire to have best-in-class corporate governance and continuously build robust systems and processes. On the topic of governance, you might have seen that Tom Hallam was just appointed to join our board and chair our audit committee. He succeeded in Jürgen Buchsteiner. Jürgen has provided us, over the last four years, instrumental support throughout many milestones And we are grateful for its service and wish him all the best in his new endeavors. We're excited to have Tom as part of the board and we look forward to his support and challenge. He needs to make sure that we stay on our toes and continue to step up our game. That all follows our corporate mantra that everything can be improved everywhere at all times. I do not doubt that he will contribute to many healthy debates in our board meetings. All that to ensure that we work for the good of all stakeholders. Now, I hand it over to you, Thijs, to talk about our numbers.

Thank you, Johan. Good morning, everyone. I will now provide you a brief summary of the group's financial performance in the first half of the year. Let me start with the P&L overview on slide 11. you will find a summary of our half-year P&L and a quarterly split. As you can see on the slide, we're very happy to report a strong growth trajectory, resulting in revenue for the first half year of 2.019 billion euro, representing a year-on-year growth of 54%. Measured in constant currency, growing came at 49.9%. A strong performance was on the back for record organic growth, 27.6% across all of our three regions. Revenue growth contribution from acquisitions was 22.3% and a 4.2% tailwind effect in the first half from FX translation. If we take a look at our operating segments in the second quarter, growth remained very strong in both life science and industrial chemicals. Higher year-on-year growth in industrial chemicals partly due to the acquisitions we have made in that segment in the last 12 months, in addition to our organic growth. Quarter-on-quarter revenue growth achieved a level of almost 50% in the second quarter, following a very strong first quarter with almost 60% revenue growth. The strong growth trajectory, the continuation of positive development of our order book, and lastly, regular business seasonality led to elevated stock levels. Therefore, our working capital levels increased. Back to this later. Our cross-profit increased 65% to 489 million euros. Out of this growth, the majority, or 38%, was organic. Cross-profit as a percentage of revenue ended at 24.2%. The 157 basis point year-on-year expansion was the outcome of mixed effects, and despite the well-documented inflation in the industry, reflecting also our effective pass-through policy and active approach towards pricing management, by selling more products and principles towards our customer base by our technical sales approach. We call this the lateral value chain. In the first six months of 2022, Azadis generated an adjusted EBITDA of €255 million and a corresponding EBITDA of €243 million. Adjusted EBITDA increased by 91% or measured in constant EVX, 86.7%. adjusted EBITDA as a percentage of revenue increased to 12% for the first six months of 2022. The 230 basis point margin expansion is a reflection of the strong top-line growth, pass-through pricing efforts and benefits of our growing scale. This result also reflects elevated bonus accruals to cater for this performance. As such, the conversion margin calculated at adjusted EBITDA in percentage of gross profit improved strongly from 42.9% to 49.7% in the first half of 2022. Reduced financial cost and lower effective tax rate, and I will discuss this a little bit later in the call, have further driven profits for the period, allowing the group to generate net profit of 141.7 million euros, which is almost three times what we delivered in the prior year. Okay, let's move on to the next slide on page 12, where we have broken down the 54% reported revenue growth and the 65% reported gross profit growth between organic and growth coming from the first time inclusion of acquisitions and FX effects. Strong performance for the first half year was furthermore supported by the disciplined execution of our M&A pipeline. As Jochen mentioned, over the course of the first half year, we have closed five transactions. Although the IFRS effect is much smaller, these five have a combined annual revenue of around 190 million euros and a gross margin of 32 million euros based on 2021 numbers. And for a more detailed split, I refer to the business combination section in our half-year financial report. In July, we also closed Roxa, which marks our entrance to the South American market. And also note that a significant portion of the acquisitions is still not part of our organic growth calculation, with 22% of the revenue growth in H1 coming from the first-time inclusion of acquisitions. As you can see on this page, the majority of our growth came from the key pillar of our growth strategy, namely our organic growth, driven by gain principle positions and expanding the lateral value chain. All of our regions delivered high double digit organic growth of between 23 and 33%. Even more important, you see the robust organic growth in our gross profit during the year. Out of the 65% growth in our gross profit in the first half of the year, 38% was organic, clearly reflecting the benefits of our growing scale and the effectiveness of our pricing policies. The next slide on page 13, you'll find a bit more detail on the year on year regional financial performance. So have a look at that and we'll provide you some more color on this. In EMEA, revenue increased with 53% to 960 million euro. This growth was driven by strong organic growth, 32.3%. and growth from the first-time inclusion of acquisitions was 22%, where in 2022, it closed to Mungo in South Africa, Whitcam in the UK, and lastly, Tuncaya in Turkey in May. The profit margin in EMEA expanded despite inflation pressure driven by mix. Strong geographical performance across the board, but in particular, life science in the Middle East and Africa did really well. In EMEA, adjusted EBITDA increased 79% to 120 million euros, and the region achieved a 13.1% EBITDA margin. This drove an excellent 697 basis point expansion in conversion margin, from 46.5 to 53.4 in the first half of the year. The order book remains strong with accelerated demand levels in life science, and in particular, agricultural and environmental services, where Johan alluded to, the formulation side of the business is very strong. And let's move over to the Americas. Revenue increased in the Americas with 44% to 763 million euros. This growth was driven by strong organic growth of 23% on the back of strong end market demand in life science. The Americas delivered a 414 basis points gross profit expansion, partly driven by mix from top line, Topline growth, in particular Weigen, and effective pass-through policy for the team did a fantastic job. Adjusted EBITDA increased with 88% to 108 million euros, and in the first half ended at 41%. Adjusted EBITDA margin, an expansion of 326 basis points, driving up a 457 basis points step-up in conversion margin, 50.2% to 54.8%. The excellent margin expansion was on the back of efficiency gains, effective pricing management, and positive mixed effects from the inclusion of Weigand. Asia-Pacific continues to be the fastest growing region for the group. I'm on the right side of the slide now. Revenue increased with 86% revenue growth to €339.7 million. The region now accounts for 17% of the group revenue versus 13.9% in H1 2021. We are executing well on our strategy to grow in this particular region. Revenue growth was driven by strong organic growth of 26% and the remainder driven by M&A. Cross-profit as a percentage of revenue ended at 19.7% compared to 20.6% in 2021. This is solely driven to a negative mixed effect from recent acquisitions. Organically, our margin levels increased well, both 21%. As we are making progress with executing our strategy and expanding Asia Pacific via M&A as a growth pillar, we expect this to be a solid platform for future margin expansion by expanding our lateral value chain. Despite our ongoing investments in this region, adjusted EBITDA increased in Asia with 106% to 29 million euros, and adjusted EBITDA margin ended at 8.4%. A strong adjusted EBITDA improvement of 79 basis point, resulting in a 567 basis point expansion in conversion margin, 37% to 42.7% during the period. So from here, let me take a moment now to talk you through the details of the net profits of drivers on the next slide or page 14 of this deck. We're quite happy to report, in addition to the strong revenue development and margin expansion, that our operating profit doubled to €212 million. There are a couple of considerations which I will take you through. Zavis net financial expense in the first half of 2022 was reduced with 29.4% to 21.1 million euros due to the lower debt load and also more favorable interest rates on our loans. Tax expenses in absolute terms ended at 49 million, driven by the higher profit before tax. And our effective tax rate reduced to 25.7% versus 37% in the prior year. As we communicated previously, we have ongoing programs in place to simplify our structure so that our taxes more closely reflect the geographies where we generate profits. Driven by the additional uplift from the lower financial costs and tax rate, net profit had an almost threefold increase to 141.7 million euros. Let's move on from here to the cash flows side of the business. This slide, I present to you a high level overview of our cash flow. The absolute amount of free cash flow ended at 139 million euros, a substantial increase compared to prior year. Despite that, our cash conversion decreased to 57%. This is mainly driven by working capital to accommodate increased business activity levels, facilitating also the order book with our buildup for our regular seasonal pattern, but also additional working capital investment as a result of the M&A activities that we do. Working capital is the main driver behind the cash flow movement. I would like to provide some more details on the next slide on page 16. Net working capital as a percentage of revenue normalized for acquisitions ended at 15.4% at the end of June, compared to 15.3% at the end of December and 12.5% at the end of June 2021. The bar chart on the left here provides you the details on the underlying working capital components in absolute terms, as well as in days. And the chart to the right gives you an overview of the seasonal comparisons over the years of a working capital development. In absolute amounts, working capital remains at elevated levels compared to previous years, and trends lagging with elevated demand growth levels in our business. Working capital has been trending higher since Q3 last year, driven by ramp-up in inventory to support the ongoing strength of our order book, as well as the onboarding of recent mandate gains. To provide you a bit more background on the inventory build-up, as we have been very active on the M&A front, about €180 million in working capital increase is driven by M&A, which around €135 million relates to inventory reacquired. We are making progress on the inventory levels, but this will take time to get them to a Zeta standard. Organically, networking capital as a percent of revenue would have ended at 13.4%. Also, there's a second effect in here. In our numbers, there's a goods-in-transit effect from our suppliers, as we still experience supply delays. This increased around 30 million year-on-year. To be clear, we do not expect this to be structural. On a reported basis, net working capital ended at 15.7% of revenue. And of course, we're working continuously to gradually bring our business to normalized levels by our systems and our processes. So this brings me to the final slide of the deck, a summary of our debt position and leverage ratio on page 17. Our net debt at the end of June increased with about 120 million versus the end of December to Euro 991 million. Given the significant EBITDA expansion during the period, our leverage ratio has improved materially to 2.3 times compared to 2.7 times in December. The absolute increase in the net debt was driven by 151 million in cash flow being used largely to fund acquisitions, income tax, interest expense, and to a lesser extent, dividends and share purchase for our LTIP program. Also, you might recall that in April, we topped up our syndicate loans by 350 million euros to increase the flexibility in our funding position by effectively widening our RCF flexibility. Despite this and the busy M&A pipeline and activities that we performed, we reduced our leverage in line with our historical track record and in line with our objective of deleveraging and staying below three times net debt on EBITDA. At the end of June, we had liquidity of around 660 million in both cash and unused RCF. So with this, I will hand over back to Jochem for some closing remarks.