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.

Thank you, Thijs. Well, in summary, I think it's fair to say that we had an excellent first half of the year, and I'm very proud of what the Azelus team has accomplished. Our teams are working relentlessly to deliver convincing results and to position Azelus as the leading innovation service provider for the years to come. Our industry is so diverse that it's hard to predict accurately with high certainty during normal times. I guess you all agree that defining the time we all live in as normal would be a stretch. Predictions became more challenging as the situation in some geographies where we are operating in is volatile. Look at the frequent lockdowns in China and the uncertainty of the direction of travel of our global economy is rising. Nevertheless, as I said, I'm proud of our performance demonstrating the resilience of our business. Our M&A pipeline remains brilliant. We continue to secure significant mandates from principals and our labs are busier than ever with customer requests. Eventually, our order book continues to be strong, indicating that the weeks and months in the immediate future will continue to be strong. Based on this, we believe that for the full year of 2022, we should achieve EBITDA of between 410 and 425 million euros. We realize that this is the second time in three months that we are providing a short-term guidance update. Please note that this is in fulfillment of our duty to you, our shareholders, to be as transparent as possible and provide updates when we know that our results will be meaningfully different from market expectations. In the future, we intend to stick, unless we think our performance differs materially from consensus expectations, to our mid-term guidance of 8% to 10% annual revenue growth and a continued 10 to 15 BIPs EBIT R margin expansion. Now that brings us to the end. We will always strive to make ourselves available to address all the questions. So let's go to Q&A now.

If you would like to ask a question, please signal by pressing star one on your telephone keypad. As a reminder, participants can also submit questions through the webcast page using the Submit a Question button.

We will pause for a moment to assemble the queue. We'll take our first question from Steen de Meester of ING.

Please go ahead.

Yes, good morning, and thanks for taking my questions. Three questions, if I may. The first one is on the guidance It seems to apply sequential softening in the second half, which I assume is driven by micro uncertainties. Can you comment on the visibility on Q3 trading and where you see or would expect first patches of weakness to arise? Second question is in terms of organic growth, Asia Pacific seems to be lagging in India and America. I assume that is predominantly driven by COVID restraints in China. Can you comment on how you predict When you would expect these elements to evolve in the second half? And the last question is on the 270 million of acquisitions that have not been closed yet. Can you roughly give an idea on the EBITDA margin on these acquisitions? These are my questions. Thank you. Thank you.

I appreciate it. I'll take the first two, and you take the third one. That's okay. on the guidance we are giving. Well, first of all, let me start that usually in our business, whatever has been usual for many years is that the second half is slightly weaker than the first half of the year. So we usually think 55% is done in the first half of the year, and then 45% with regard to revenues in the second half of the year, just reflecting what's happening in the holiday season and business winding down. Are we seeing a softening? I think as I said, we still have a really strong order book also for the weeks and months to come, which is what I said. However, also you can see that from the widened guidance, it is obvious that the uncertainty in the market has increased since we spoke last. There is this level of what will the gas situation in EMEA do for some of our partners, which is lingering. What is a recession coming? These are all things we factor in. But as one of you wrote in a report earlier today, he said, The company has always tried to under-promise and over-deliver and we try to keep on that route also going forward. Yes, we are cautious in our prediction, but again, this is reflecting uncertainty in the markets we're operating in. On APAC, very true. Yes, China had some headwinds, especially as the economic center of Eastern China, Shanghai, was in severe lockdown. Our team did a fabulous job to keep the business running, working from home, sometimes really doing things I never would have thought possible. people would be doing and just bending backwards to make sure that our customers and principal desires are met. So that's all good. However, there was a significant economic slowdown. They are now open to operate. However, as you might have picked up in the press, there are still lockdowns in China. Just two days ago, they locked down the complete island of Hainan. So 800 vacationers are stranded now in the southern part of China. That will not have an effect on our business, but gives you an indication that how fragile the business development in China is also in the months to come. When we will come to a normal here, uh hard really to say we did see some pickup of the business over the last couple of weeks and the order books is strong but how sustainable this is only the future will tell all in all we are pleased with the progress we made in APAC with regard to margin expansion and we're confident and we said that in earlier calls that eventually we will move with the increased offering on innovation capabilities, also APEC, into the realms where EMEA and Americas operate. Now, into you, Thijs.

Stein, thanks for your question. On the 270 million revenues based upon 2021, EBITDA levels are comparable to our own business between 11% and 13%.

Okay, thank you. Thank you. If I may squeeze in one question related to the sort of very helpful comments on volume versus pricing, the 60-40 equilibrium. How confident are you looking at 23 and with your history or experience in the business, how confident are you to hold on on these pricing gains?

Thanks. Also, I think we indicated earlier, through our increased offering in services, innovation service advice on how to use these formulations, we are confident that we will keep the margins and, as said, mid-term, expand by 10 to 15 bps year after year after year.

Okay, thank you.

We'll take our next question from Suhasini Varanasi of Quadman Sachs.

Please go ahead.

Hi, good morning. Thank you for taking my question. My first one is just to follow up on the previous question. Given your positive commentary on the order book, is it possible to give some color on how the sequential trends have been versus Q2? I appreciate the seasonality has probably been thrown out the window this year and last year. Would you say that given how strong the order book levels are currently, that they're up on a sequential basis due to?

Yeah, I can do that.

And you chip in. As indicated, order book is strong. Obviously, outcomes are becoming harder because the second half of 21 was also, we have experienced a very strong growth. But yes, so far we really don't see a weakening of demand. On the industrial side, as indicated there, you would expect that with housing starts also slowing down in the US. Some pockets, like on the construction side in the US, are not growing as strong. And as I think we indicated also that in here we see price being more dominant than volume growth. On an aggregate, if you look at the whole picture, we remain very confident for the weeks and months to come. Is that fair?

I think so, Shani. I think the costs are, of course, getting more tougher if you do a quarter-on-quarter comparison. But overall, the order book for Q3 looks good. We baked in, of course, some uncertainty, of course, in the market in our outlook as well.

Okay, thank you. The second one is on the lower water levels in the Rhine River in Europe. I think recently there's been a bit of press around shipments getting delayed or canceled in Europe. Is there any comment you can make on how you see that affecting your supply chain and maybe does it exacerbate the supply chain constraints in Europe?

Obviously, we're in constant dialogues with our partners manufacturing along the Rhine River and leave aside that they all have their contingency plans and what to do with their products. Most of them, they have assets elsewhere in the Americas or in Asia to manufacture these specialties. So from this point of view, obviously, if the water levels continue to fall it will become and we are currently at the historic low levels we never had that before 2019 we were at 160 and now just yesterday they announced that carpets at 110 which is kind of really insane so yes it will affect um some of the supply but reckon we are not dealing on on the commodity side we're talking specialties And with specialties, you're not talking a gazillion amount of volumes. You're talking much smaller volumes, which also can be supplied through other means and their alternative supply from other regions. So will there be an effect? Will it become easier with regard to getting supply chain going for some of these products currently sourced from manufacturing assets close to the Rhine? No, it won't.

will we see that supply comes to a grinding halt i don't expect that to happen thank you very much and the last one is on german gas shortage situation going into q4 appreciate you've given an outlook but i wanted to get some color from you on what your suppliers are telling you what your customers are telling you um generally around q4 and you know potential gas shortages

um because i think the concern is that obviously the industrial production slows etc but if anything that your suppliers or customers are telling you in that regard thank you thank you we're in constant dialogue obviously with our principal partners and with our customers uh how they will react to it in fact of the matter already today some of the manufacturers because the energy prices are so high they're really running not at full steam and from our customers So there is already some slowdown at their end. We don't see that yet, but it's known it's out in the market. What the effect will be on the gas shortage, leave aside now the Energy Act of the EU now enforced, Germany needs about 250, what's that, terawatt of energy from gas in a month, in a winter months. So as it looks now, if we stay at the current level of 20% supply from Russia on gas, the German economy and society will be facing shortages already at January level. If the reduction will kick in as predicted right now of about 22%, then we will be able to drag that out for the German economy and the people till about end of February, maybe middle March. And you see there's a lot of this maybe and will be out and a lot of assumptions also if Russia decides that none of the turbines is working anymore. And there will be zero gas coming up. The situation will become grimmer, especially for the society, but also for some of the manufacturers. There's multiple efforts going on with our principal partners on substituting gas, moving it either into oil and coal where possible. So I'm confident that there will be solutions going forward. allowing us to get access to the products we need to bring into the market. However, now drawing a little bit bigger picture and looking at our operations, yes, EMEA is the biggest region we're having. But as Thijs mentioned before, we have now 70% of our revenues on an IFRS basis generated in Asia, plus we have a very significant position also in the Americas by now. So it will affect some of the industrial markets business in EMEA but I don't expect it to be to a large extent also there's another element we should mention is that we do in Europe we do a lot of from the life science side and life science often is less dependent on on energy as compared to when you come on from hydrocarbon-based chemicals and they have to convert them in a steam cracker and then go to EO and then do some etoxylation and do then amination and so on and so forth. So there's a little bit of dynamic, different dynamic in it. So in all, remain confident that the situation will be manageable for us.

That's very clear. Thank you. Sorry, if I just have one last follow-up, please. Or should I leave it and I can come back later?

Go ahead.

Sorry, what percentage of your supplies come from Germany, please, and what percentage of your revenues come from Germany?

I don't think we disclose this number, but it's fair to say that it's a single-digit number on our revenues generated in Germany. So really... It's not big. And from the sourcing point of view, I think you checked out the numbers, right?

Yeah, of course. We have a significant position with BSF, but we only import from America around $15 million from Ludwigshafen, for instance. So that's also marginal. And Germany, to Shashini, if you recall, we see this as a white spot for us for growth opportunities.

Not wide, wide, but lots of room to grow. Let's put it that way. And just to say, we are also able to, obviously, as I indicated, that we're able to source for the big guys. They have assets elsewhere too, right? So we're not kind of one asset, which also will help us.

Very clear. Thank you so much. I'm sorry for taking so much of your time. Thank you.

We'll take our next question from Laurent Faber of BNPP Exane. Please go ahead.

Yes, good morning. Thank you for taking my question. Johan, the question really is about that 2023 comments you made around the confidence to grow margins by 10 to 15 basis points. I mean, the easy thing to do would be to say that this year is exceptional and therefore it might not apply to next year. It doesn't seem that you're doing that. So I'm just wondering, Can you talk about the levers that you have and I guess the areas where you are confident you can grow Margins after such an exceptional year in 2022? Thank you.

Well, all that all hinges on our efforts we're doing around developing innovative solutions in our labs. The more service you bring to customers, obviously the more to help them, the more they're ready to pay to you. And that's something we're pushing throughout the group, a big, big effort since years to improve our service levels with regard to innovation. This will enhance obviously also margin. And we have seen that year after year after year. The more we deliver to our customers, the more successful they are in the end markets they serve, the readier they are to pay us or give us a better share of margin. So I think there is no magic to it. And you're right. We're also thinking, you know what? We had such great performance. Should we stop here? No, I don't think so. This industry has quite some room to go because with the innovation levels we're at, we still can push quite a bit value for our customers on that.

You have a point you want to add? Thank you.

Thank you.

Maybe as a follow-up, thank you for all the color around Germany. I was wondering if you could provide a similar color around Italy, which I guess also has potential shortage issues on gas.

Italy is an important market for us, actually more significant with regard to revenue as compared to Germany. But as a manufacturing hub, Italy is not so significant. So from a sourcing point of view, we do source some, but the effect will not be significant. So I think in Italy, we can be confident that we will deliver at the levels we're delivering. Also worth noting, we have a strong acquisition in Italy, which is not really dependent at all on these type of disruptions we're expecting on the gas side.

Thank you very much. Thank you, Laurent.

We'll take our next question from Chita Nideshi of J.P. Morgan. Please go ahead.

Yeah, thanks, Bonnie. A few questions. First, I was just trying to back out what was the volume growth in first half based on your split that you gave of 60-40, and it comes to about 17%. I mean, I haven't seen that sort of volume growth for probably any of the chemical companies, so I'm just curious. If you can give us some sense, I know you mentioned broad-based growth, but if you can give us some color from an end market perspective, where you've seen maybe stronger and less, somewhat weaker growth, I think that would be useful. The second question was, can you help us with what assumptions have you made around Total M&A contribution and effects for full year 2022 in your EBITDA guidance. Because it seems if I tried to back out the math, or at least my math suggests, maybe the implied organic growth in second half is essentially zero, but any color on what you would use for M&A and effects will be useful.

OK. Thank you, Chidan. Take the first one, and Stace, you're on with the second one. Volume growth, what drives that? Yeah. I'm not quite sure how you derived it, but it's true. The volume growth we have seen was really very convincing. However, what you have to take into consideration, I also mentioned that we were able to gain some very sizable and good mandates, which usually comes with also volume growth. coming to us. So that has helped us tremendously. This is true for life science, but that's also true also on the food and nutraceutical side, but we also gained some very nice, and this is all published, we gained some very nice mandates on the pharma side, but we're also successful in expanding on the case side. And we got a nice loops mandate. So there is a lot of this volume, not a lot, there's some volume coming from new mandate gains, which obviously makes makes it easier to report a good gross number on volume. Now, if that, Chetan would be answering a question, I would hand over to Tej.

Chetan, I'm not completely following your questions here, but okay, I think the answer lays, of course, that obviously from 2021, where obviously our comms are getting more difficult. So, Following our 91% year-on-year EBITDA growth in H1, the top end of our guidance, it calls basically 30-year-on-year growth. Let's put some context around that. H1 2021 was made up of a relatively slower Q1, still in pandemic, and a very strong Q2. So that has an effect, of course, on the numbers. Having said that, also, if you take the top end of our guidance, it still implies at least a 30% growth over a very strong second half of last year. This is 30% on top of the 52% in H2 2021, despite the rising uncertainty. Taking into account the Q3 order book is looking good, We also said that the historical cycle was last year broken with Q4 going up. We have still baked in that we expect a more regular pattern for Q4. And that's obviously conservative. And at this time, we believe it makes sense to be more prudent. But I can tell you one thing. We have sufficient organic growth in Q3 and Q4.

Understood. Thank you.

Thank you, Chetan.

We'll take our next question from Henk Fearman of Kemp & Co. Please go ahead.

Hi, good morning, all, and thank you for taking my questions. I do have some follow-ups. The first one is on the margin side, because if you allow me to ask a follow-up on that, because I'm a little bit confused. On the one hand, you're saying that You're sort of saying that the new base case is this sort of 12% EBITDA margin versus about 10% when you IPO-ed last year. On the other hand, you leave it open a little bit, saying that it also depends on the added value you will deliver in the future. So if you just allow me to isolate it, if you look at the gross profit margin, which currently stands at 24.2%, which is up 200 bps versus last year, So how much would you say of that is driven by the increased added value related to the current supply chain issues? And how much of it do you think is more structural, which relates to, let's say, the added value you provide to your customers in the labs and the technical advice?

Want to answer it?

Okay, let me first put some context to that. It's obviously a very difficult question to answer. We are running a very diversified portfolio across over 60 countries, different topics, 12 end segments. 55 000 customers and 2500 principles so uh to dissect this 24.2 percent um in what is supply chain shortage what's price what's volume i i don't think uh that is uh such an easy task to do i think it's not too it's not do with a lot of analysis uh in my view but I think we try to accommodate that with the comment that Jochem made, especially on the volume and the price effect in the industrial chemical side. And it's fair to say that obviously our margin management and our enterprise levels that we expect is to maintain to a large level these specialty chemicals that we're active in.

And Henk, just to also frame it a bit, maybe there was a misunderstanding. The 12%, we're confident to stick to this 12% going forward and to add the expansion we promised you at time of IPO of 10 to 15 BIPs also in the years to come. And how much of that is by increased lateral value chain offering? How much of it is coming through innovation done in our labs? And how much of it is us focusing even more on our bio-naturals and sustainable solutions is really, I think it's not possible to dissect this. How many transactions are we doing in a month, in a year? Sales lines, I think? Yeah. So it's, I think it's a, It's a humongous task, but let's go back to the basic and the fundamentals. With us increasing our service offerings, the more service you get from somebody trying to service you, the more you're ready to pay, right? This has worked since aeons, since many, many, many decades. So it will work for us. And this is what we continue to push. And I just want to convey the confidence we're having to sustain the current margin level we have reached and expand that on average by 10 to 15 bps for the years to come.

There's also, Henk, an M&A component in that. We communicated 190 million and 270 million based on 2021. obviously not stopping there. We're bringing our partners in and we're increasing these margins. So therefore we feel quite confident on the 10 to 15 basis points margin uplift from the current base.

Yeah, I fully appreciate the complexity and thank you for the color. The follow-up is on the acquisitions that you did in the year today. So you did 10 deals, which obviously is still at a very high level. Do you see a similar, let's say, willingness in the market to sell businesses to you now also that the whole sector is going through a period of strong profitability and strong sort of organic growth, or do you see sort of targets for getting more demanding valuations and perhaps some timing?

Well, first of all, thank you. It's a good question. What I should highlight is something I really did highlight also last year quite a bit, is that the processes we're pursuing, by and large, are not processes which are set up by a seller where he invites a couple of people bidding for his business. These companies, the 10, we have for this year signed up. They were, I think, 90% or even 100% were on exclusive negotiations. We have started not in January or in March this year, But some go back, which were started four years ago. So there is a good pipeline of these things. It is true if there would be a competitive process. Obviously, you have more people looking into a target. And there, if we could put our nose in, we would stay disciplined. The thing is... What we do, we have analyzed our lateral value chain and we know exactly what type of products from which principles are in a specific geography missing. So which guides us towards people we approach and see whether we can buy their business. So there is a good element of being proactive in the way we're conducting and fulfilling our M&A strategy. It's not like the opportunistic approach. Somebody sits there and decides, I want to sell my business. You have to win the trust of the owner of the business over a couple of meetings. And once you have won the trust that what he has built in his career will be in safe hands, then you embark on a process. And in general, we have not seen for the targets we have achieved. signed and closed this year marked uplift on the multiples, and I think when you do your simulation later on, looking at the full year results, you will be able to extract exactly that.

OK, yeah, that's that's that's interesting.

I want to follow up also on the on the acquisition. The role upfront is. it seems like in in if you just take a step back and it seems like when you look at all the chemical distribution companies there seems like there's a slight sort of more focus on consolidating the asia pacific region you also signed multiple acquisitions in asia pacific this year and a significant amount last year would you agree that let's say the focus of of the company to become a leading player in Asia Pacific and accelerate consolidation in that region? Is it a bit of a, let's say, higher focus or more focus for you than it was, let's say, one, two, three years ago?

I wouldn't say one or two years ago. I would say maybe six or seven years ago. As indicated, usually what we have, what we bring to our pipeline starts early. 36 months, 48 months before we eventually announce a deal. So the deals were discussed, we have announced now also in Asia. They were not initiated. Recently, they were initiated in 2017, 2018. It's clear we have the strategy since I think the first time we put it on paper was in 2016, where we said, you know what, this is where the market is. This is where the population is younger than elsewhere in the world. This is where we need to grow stronger. We had a good presence with the CODA acquisition in 2015 in the Americas, which we, since then, there we enhanced our platform. But Asia clearly was a focus area and will continue to be a focus area going forward. We shouldn't kid ourselves with regard to size of markets. The specialty chemical needs and food ingredient needs in China today is bigger than what you have in North America or in the entire EU, or Europe for that matter. So this is a humongous market opportunity. China and India is coming up strongly too, was driven by Growing middle class, changes in demand of going from street vendors into ready-made food and so on and so forth. So we see a lot of very individual growth drivers, which kind of point us being active in these two countries, but also in Indonesia and others. Vietnam, Thailand, these are all population, very sizable, rather young populations. with a lot of change in demographics and desires of what people buy. So, yes, clearly a focus area.

And then we move to... Sorry, because in the past, other players also mentioned in Asia Pacific, the market was not ready to a large extent to outsource a lot of capacity to third-party distributors. And as well, what I've heard in the past is that it was difficult to find, let's say, high quality acquisition targets. Do you see these two things now also rapidly improving?

Let's put it that way. There are targets we look at and we don't touch, or we look at a little bit closer and we walk. And then there are other targets where we feel they live up to the standards we're having with regard to, first of all, governance. and then also their technical savviness and how they serve the markets. And once we feel that governance absolutely and technical savviness is met, plus they represent similar principles or identical principles after the principles we work with, then we go after them. And there are opportunities, as you have rightly pointed out. We did quite a few acquisitions in Asia last year. We did quite a few this year.

So, and this will continue. One other thing on the M&A side.

Thank you. I need to chip that in still. That we do see M&A as a major growth opportunity is also reflected in the fact that we appointed Lorna Tuff, who was a regional CEO of Asia Pacific, to spearhead our M&A effort to foster, groom, grow the pipeline we're having on that side, and also to ensure that these targets then are seamlessly integrated

into our platform okay perfect thank you we are take our next question from thibault lenny of kbc securities please go ahead good afternoon could you give us a range or an indication of when you expect the lateral value chain to be in a rather mature stadium thank you

Wow.

That is a very complex question. The lateral value chain obviously is defined per market segment per market. So let's zoom in, for example, on food and nutrition. There you would say, okay, how is our lateral value chain in the dark region in bakery, right? There you have a certain level of completion. Let's say we have a 60% completion in bakery, but maybe on dairy, we're only at 40%. So you really have to go down to individual market segments and actually in there into sub-market segments, whether you talk decorative painting or whether you talk industrial painting or whether you talk skincare formulation or haircare formulation to really capture what is the percentage of the larger value chain you're covering. So I'm afraid this is not an answer I'm able to give. And it's also something where it will take years and years and years and years. And then also reckon there is this move going on with regard to the offerings for the different industry reserve to be more sustainable. So you get also new products coming into lateral value chains to complement or substitute existing portfolio. So it's a pretty moving target. One point, though, is important. We always strive to get more level of completion in a given market segment, in a given lateral, in a given country, because we clearly have seen in the past and numerous analysis that the more complete you are in the lateral value chain, the higher the margin, is you get out of that business so this will be a driver for years and years and years to come to complement our lateral variation is that clear sorry that i couldn't give you a clear number but no i didn't expect a clear number that's very clear thank you there are no further questions we have come to the end of this call

I will now hand over to Chief Executive Officer Jochen Müller for his closing remarks.

Well, thank you. And thank you all for listening in and spending the time with us this morning. We appreciate your interest in the firm. And as I said, I'm very confident about the weeks and months ahead. And also when I look into all the levers we are playing within the firm, where we are improving our processes, our efforts around sustainability, digital and innovation, I'm very, very confident that for many years to come, Azelis will be a company growing strongly and delivering to all stakeholders involved in the business. Thank you all. Stay safe and talk to you for the next update call of our