Azelis Group Nv

Good morning. Welcome to Azaleas Group's nine-month 2022 trading update. I'm Pam, Investor Relations, and I'm joined this morning by Dr. Jochen Muller, CEO and Tase Backer, CFO. As usual, Jochen will start with the operational highlights of the period, followed by Tase, who will give a financial update. Jochen will then wrap up with an outlook for the remainder of the year and open the floor for Q&A. We remind everyone that this presentation may contain forward-looking statements that are subject to risk and uncertainty, and all participants will be on listen-only mode until we start the Q&A. We will make the recording of this presentation available on our website later today. With that, I'll turn you over to Jochen.

Thank you, Pam. Hello, everyone, and thank you for joining us on this update call. 2022 has been an excellent year so far. In the first nine months, Revenue has grown 53%, and 26% of that was organic. All our three regions delivered strong performance in both revenue growth and profit improvements. In terms of profitability, in the first nine months, our conversion margin expanded by 598 base points to 48.9%, despite the volatility in the supply chain and the increasing macroeconomic pressures in most markets. Pre-cash flow was 81% higher than the prior year, and even with higher investments in our working capital to support the revenue growth. Our ability to improve our profits and generate cash have helped us to continue on our leveraging path with a net debt EBITDA of 2.3 at the end of September, well within our objective to stay below three times leverage. operationally we continue full steam with our initiatives to drive future growth our labs are as busy as ever and some of you will get to see how we try to drive innovation for both our customers and principals in our labs here in paris later on today we also continue to advance our sustainability agenda and have recently achieved the top industry ranking from sustainability overall We remain focused on strengthening our lateral value chain, making sure we are the best partner for our customers and principals across any economic cycle. So let's move on to the next page. Let's look at our Q3 performance in more detail. As I said earlier, of the 53% revenue growth in the first nine months, 26% was generated organically. 21% was revenue growth contribution from acquisitions. We also had a 5.5% uplift from currency effects. Across our end markets, we saw a strong demand in life science in all three regions, especially in food and nutrition, personal care and pharma. Life science had a further boost from agri and environmental services as a drought in Europe drove reformulation requests in Q3. In industrial chemicals, we continue to see strong performance in case, especially in Europe, and the US, with price increases still supporting the growth that we have been seeing since 2021. In terms of industry consolidation, we completed eight acquisitions in the first nine months. In EMEA, we acquired Omongo in South Africa, Whitcam in the UK, and Tunckaya in Turkey. In Asia-Pacific, we acquired Catalyte in Thailand, Chemo in India, and Chemsol in Malaysia. We also acquired Ashapur in India, which completes our global network for flavors and fragrances to complement Weigern in the US and Kindes in Europe. Some acquisitions we did over the last 24 months. In the Americas, we acquired Roxa in Colombia, which serves as a strategic platform for expansion in South America. These eight businesses had combined annual revenues of 361 million. We have signed four more acquisitions with total combined annual revenues of 140 million. Well, in fact, three of those have already closed in October. Now I will hand over the floor to Tase, who will talk about our financial performance during the quarter, starting with the next slide. Tase, to you.

Thank you, Jochen. Good morning, everyone. I will now provide you a brief summary of the group's financial performance for the first nine months. So let me start on slide eight, where you'll find a summary of the nine months P&L and also the third quarter performance of Azelis Group. As you can see, Azelis delivered a very strong performance in the first nine months, with a strong growth trajectory resulting in revenue for the first nine months of 3.1 billion euros. This represents a year-on-year growth of 52.5% increase in revenue. The growth comprises of a combination of strong organic growth, 25.8% and 21.3% revenue growth contribution from the first time inclusion of acquisitions. Revenue was furthermore supported by 5.5% from Eric's translation. For the third quarter, revenue came in at 1.09 billion euros, representing 49.5% growth versus 2021. with organic revenue growth remaining strong at 22.5%, despite the tougher comparables as 2021 ramped up towards the second half of that year. Growth remained very strong in both life sciences and industrial chemicals, with higher year-on-year growth in industrial chemicals, partly due to the acquisitions we have made in this segment in the last 12 months, in addition to our organic growth. The strong organic growth and addition of acquisitions resulted in elevated working capital levels to support this growth, mainly in the inventory sites. But our ratios are improving, however. I will come back to this later. The group's gross profit for the first nine months increased with 57.6% to 736 million. The majority of this growth comprises of 32.1% organic growth and 20.2% from the first time inclusion of acquisitions. Cross-profit in percentage of revenue ended at 23.7%, implying 77 basis point expansion of margins. This expansion is the outcome of mixed effects, first time inclusion of M&A at lower cross-profit margin levels and disciplined margin management to pass through price increases that were incurred from our partners. To give some insight into our M&A margins and underlying organic margin performance growth profit in percentage of revenue for the organic business improved from 22.9 to 24%, implying a step up of 108 basis points. For the first nine months of 2022, the group generated an adjusted EBITDA of 379.8 million euros and an adjusted EBITDA of 360.1 million euros. Adjusted EBITDA increased by 79.6% or measured in constant currency by 73.9%. Adjusted EBITDA as a percentage of revenue increased to 11.6%, reflecting a margin expansion improvement of 175 basis points. This improvement is a reflection of the strong organic growth and benefits of growing our skill. despite our accelerated growth investments in digital and commercial initiatives, as well as additional bonus accruals in line with result development. All of this resulted in a significant improvement in our conversion margin. Conversion margin calculated at adjusted EBITDA and percentage of gross profit improved from 42.9% to 48.9%. On the next slide, on page nine, I would like to provide a quick overview of the growth breakdown of our revenue and gross profit by region. On this page, we have broken down 52.5% reported revenue growth and a 57.6% reported gross profit growth between organic growth and growth coming from the first time inclusion of acquisitions and a VIX effect. The first time inclusion of acquisitions generated 21.3% of our revenue growth for the first nine months, as we are executing quite well on our M&A pipeline. In addition to what Jochem was saying, please note that we completed 12 transactions in the course of last year with four in the last quarter and eight acquisitions in the first nine months of this year. Out of these acquisitions, still a significant portion is not part of our organic growth calculation yet. The group performed well on one of the key pillars of our growth strategy, organic revenue growth. The group achieved an organic growth level of 25.8% for the first nine months, with all of our regions delivering high double-digit organic growth. even on a more challenging, comparable basis. In addition, this slide demonstrates clearly our ability to be able to pass through price inflation, as well as the hard work in executing our margin management initiative programs, which is reflected in the 32.1% organic growth in our cross-profit line. Let's have a look at the regional financial performance in terms of revenue, adjusted EBITDA margin, and conversion margin on page 10. Let's start with EMEA, which makes up 44% of the group's revenue. Revenue increased 53% to €1.37 billion. The majority was driven by organic revenue growth of 32.3%, driven by strong performance in the more resilient life science sector. EMEA's gross profit increased with 54.9%, out of which 38% was organic, mainly driven by mix and execution of margin management issues. The region generated an EBITDA of 170.9 million euros, translating to a 12.5% EBITDA margin. This drove 731 basis points expansion in the conversion margin to 51.7% in the first nine months versus 44.4% in the previous year. Also, the order book remains solid in EMEA. In Americas, revenue increased with 40.1% year-on-year to 1.2 billion euros. Out of this growth, 17.3% was organic. Revenue growth in the Americas contributed furthermore from EVIC's translation effects of 11.8%. The region delivered 235 basis points cross-profit margin expansion, mostly driven by the top-line growth and effective pass-through policy, but also by the first-time inclusion of M&A, where South America is contributing at a lower cross-profit margin percentage. The region generated an EBITDA of 168.5 million euros, translating to a 14.1% EBITDA margin. an excellent expansion of 229 basis points, driving up a 427 basis points step up in conversion margin to 56% versus 51.8% in the previous year. Last one, Asia. Asia-Pacific continues to be the fastest growing region for the group. The region now accounts for 17.3% of group revenue versus 14% in the first nine months of 2021. Revenue increased with 88% to 537.8 million euros. This growth was supported by strong organic growth of 31.1%. The gross margin contraction in the region was mostly due to the slower demand growth in China, which continues to be impacted by COVID measures, as well as negative mix effect from recent acquisitions, which are performing at a lower gross profit margin levels. That was upset by strong growth initiatives and activities elsewhere in the region, especially in Southeast Asia, as well as increasing skills efficiencies across the region. The region doubled EBITDA to 43 million euros and expanded its EBITDA margin with 48 basis points to 8%, resulting in 455 base point expansion of the conversion margin for the first month of the year. So let's move on to the main cash flow driver, working capital, on the next slide. The bar chart here on the left provides you the details on the underlying working capital components in absolute terms, as well as in days, and the chart on the right gives an overview of the seasonal comparisons over the years of our working capital development. Networking capital to revenue normalized for acquisitions was 15.9% at the end of September compared to 15.4% at the end of June and 15.3% at the end of December 2021. Working capital represented 58 days of revenue at the end of September compared to 56 days in June, as we have intense focus on this topic. The higher working capital investments during the period is due mostly to higher inventory to support the strong demand growth. But also please note that 134 million euros of the working capital additions for the period came from our recent acquisitions. These acquisitions are not yet at Azalea standards, but roughly double the working capital ratios as the organic business, as we are still in the process of integrating them and bringing them in line with group policies. Despite continued elevated working capital, the group generated a free cash flow of 275 million, which is an increase of 81.4% year on year. And this translates to a cash conversion of 75.7%, compared to 56.9 cash conversion in June and 67.1% at the end of December 2021. So overall, we are very pleased with the group's financial performance for the first nine months. There's still much work to do, especially in improving our working capital performance for the acquired platforms, but we are making progress and we are confident we will get there. I will now hand back the presentation to Jochen for some closing remarks.

Thank you, Thijs. And as you said, yes, we are confident. We have had a good year so far, as shown by our results. Although we are mindful of the increasing macroeconomic uncertainty around the world, we still see the positive momentum going into Q4, quite at a slower pace at the beginning as compared to the beginning of the year. In addition, We have a sufficiently diversified business, and we are defensively positioned in terms of our end markets. So we remain confident that we'll do well regardless of economic cycles. We've shown that in the past, and if it's becoming tougher, we will show that going forward. We have a resilient business model with many levers to protect margins. We are asset light and we have demonstrated in the past that we can generate cash through the cycle. Therefore, as I said before, we are confident that we will be able to deliver on expectations for 2022. And this is more important that we will deliver on our medium term guidance. that we will be the leading innovation service provider of the industry. Thank you. With that, let's open the floor for a Q&A.

If you would like to ask a question, please signal by pressing star 1 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 take our first question from Suhasini Varanasi from Goldman Sachs. Please proceed.

fall out of the specific verticals or specific geographic areas that are a bit slower than expected, please.

I didn't hear that, sorry. Shaini, can you repeat your question? This is very far away.

Yeah, sure. So I was saying – oh, sorry. So you mentioned that the growth has been good going into q4 albeit at a slower pace compared to q3 um so i just wanted to get some more color on maybe the growth by verticals or geography maybe are you seeing slow down in maybe specific areas by vertical or geography thank you thank you yeah um

we have as we remember if we move back into q4 2021 the industry was picking up across the board uh and on these industrial segments there's some headwinds we're seeing for example in the americas on the industrial side not significant we're still growing but not as strong as we did in q4 2021 uh we are having uh In China, really, as Thijs mentioned, not an easy sale because the economic growth is just very sluggish. The regular shutdowns of certain parts of the country really don't help to deliver strong growth there. We're still growing, but not as to the level we like to grow. We see a very strong growth in Southeast Asia, also India. That's an area where things are good. And now moving into Europe, Western Europe, there the picture is mixed, I should say. Even on the industrial side, we have some segments which are really going strong, some other elements where we see a little bit more headlines. As was indicated on AES, so agricultural and environmental services. Well, business is flying still very hard, driven by the drought we had over the summer with regard to reformulation requests, but also with regard to actual business. So that's all good. We have a very strong performance of the business still in Africa, which for us is becoming more and more also an important region. We do not an insignificant amount of revenues there. All in all, a good picture still, but compared to the comps we had in Q4 last year, the growth is not as strong as it was last year, same time around. Is that fair? Clear?

Thank you. Yes, thank you very much. Just one more, please, if that's okay. I just wanted to get some sense on how you're thinking about pricing and margin generally for next year, given the inflation. I think at the first half of those, you were indicating that you're still comfortable targeting margin expansion in 2023. Just given that wage inflation in Europe is pretty high, and given the growth is going into Q4, I just wanted to get your thoughts on whether anything has changed on that front going into 2023. Thank you.

Well, Kees was talking about our pricing policy, that this was an instrumental piece of how we run our business. And that's true. Obviously, inflation continues to remain very high, and we're on our forefoot to make sure that price increases we are seeing in the markets, that these are given into our end customers. More importantly, the drive and expanding the lateral value channel, we spoke about that earlier, which means then embedding more products into an offering to individual customers allows us to drive prices up going forward. So we remain confident, as I said with my last sentence, that we will deliver on the margin expansion we promised to the markets to you in the years to come. On-site being alert, and on the other side, expanding our service offerings to customers.

Thank you very much.

Thank you. And the next question is coming from Luke from Beck, from Degroof. Peter, can you please proceed?

Yes, good morning. Thank you for taking my question. First of all, on the closed margin, the increase was significant. Wil Schilders, CEP, People so increasing Q3, but it was less than the previous quarters and obviously you mentioned that acquisitions with a lower margin with that should not be a huge difference versus previous course okay say. Wil Schilders, CEP, If there's a mix change or anything else that that is fighting that the difference and my second question is on the pricing trends. Wil Schilders, CEP, Can you give a breakdown in volume and price and and also. Indicate if you see any prices going down, different body macro environment. So what will be the pricing environment going forward?

Yes, you want to?

Yeah. So, Luc, thank you for your question. Our cross margins, as I mentioned before, are holding up actually quite well. So our pass-through pricing policy is very effective. We're showing growth on growth. main comment when you see margin contraction coming in is mainly mixed also a little bit seasonality and also please note if you look at growth comparables that's what i mentioned first on the gross margin in absolute terms yeah 2021 was obviously um a very strong year especially in the third and fourth quarter and as you can just alluded we expect a normal fourth quarter yeah in line with seasonality so look also at the working capital chart for instance compared to previous years, but still significant growth. On the GM1 percentages, there is, of course, quite a significant impact from the M&A that we are doing. So what we normally do, we buy these companies at the margin that sometimes is diluting our overall gross margin profile. But with the lateral value chain and the principles and our partners that we will add to their portfolios, we are very confident that in the future we will get this up. We have an excellent track record there. But yeah, it has been active and we're stepping into new territories like South America, and certain segments where the margin profile is just a little bit lower. That's why I also made the comment on the organic gross profit as a revenue percentage is much higher when you look at the organic side of things. On the volumes and pricing side, we don't want to make too many volumes due to the fact you cannot compare grams in pharma and tons in coatings. So you can get really strange effects when you try to make a variance analysis. Overall, we see in the industrial segment, and Jochen maybe can say a little bit more about that, we see obviously in the industrial segment that that segment is more prone to economic volatility versus the more resilient life science segment where there's much more formulation going on. So that's basically what we're seeing in the marketplace.

On the industrial segment, as I said before, in the US, industrial activities had eased a bit, especially over the summer. But it's also fair to say that recent readings are a little bit more positive. So direction of travel there on the industrial side is not as negative as one might have thought about two or three months ago. And in Europe, it's really When you look into different markets, we still have some markets doing well and some others face more headwinds, particularly in Dock. We had over the summer, we had some really remarkable headwinds, but some of that also has eased recently, right? A bit. Nordic is looking really good. Yeah. It's really a mixed bag. But that, again, speaks also to the strength of the firm. We have so many market segments and countries we are serving. So you will always have some things which are looking really not so great. But as long as we drive all the segments together still up, we're in good shape. Does that answer your question?

Yes, it does. Thank you, and the next question is coming from the line of Hank Wehrman from Kemp & Co. Please proceed.

Yes, good morning, and thank you for taking my questions. I have two. The first one on acquisition activity in the market. So last week, Brandtalk actually increased its targeted acquisition spend to 400 to 500 million. uh per annum which is roughly double more than double actually what they uh spent in the past and also double what you what with yourself and imcd spent in the past so do you expect this will change the dynamics in the in the consolidation yeah let's say in the acquisition market a little bit in the upcoming years that's the first question um second question is on your uh cost base can you give us an indication uh how how much variable compensation is in your cost base this year, also to give us an idea, let's say, how much OPEX reduction we can expect if and when markets do cool down and actually slow down growth a little bit in upcoming quarters. Thank you.

Thank you. Tej, you will take number two and I'll take the first one. uh yeah obviously we have heard what brand tech has announced but we stay focused on how we explore and develop our own lateral value chain um on the specialty side of things we have a certain set of principles we're working with and these principles still have numerous hundreds of different distributors in different markets so we will approach them and as i said in in earlier uh discussions we had with you We will approach then on one-on-one discussions. We're engaged on one-on-one. Most of the processes we're driving on the M&A side are really not processes, competitive processes, but they are processes we initiate by approaching targets where we think their portfolio is fitting well to our lateral value chain offerings. So we stay focused, remain focused on what we have been doing. building relationship with existing targets, representing our principles, and then get closer to them at one point and get them into all of that increase of brand type or the focus of brand up on M&A. Will that increase competition? From what I just said, you can hear not really. There are still this 20,000 plus, according to BCG, companies out there are distributors there so i really don't expect this will change dramatically dynamic for us doing m&a going forward for the next couple of years thanks two questions yeah on the on the bonus uh um obviously we are sales driven um marketing sales organization so variable compensation is a large part of our overall

uh compensation strategy so you need if these numbers also refer to in a year-end report it's it's quite high compared to other companies if we take the effect there you can roughly say on a yearly basis that we have around 55 to 60 million in variable payroll costs Now, this year, obviously, the performance is very good, and most of the jurisdictions already maxed out on their maximum bonus potential. So the effect over prior years is that there is around 12 to 15 million euros more in variable compensation than previous year. so obviously we have to accrue in line with this performance yeah but our growth of course also in the third quarter was very good and also in the fourth quarter we do not expect a significant slowdown that's very clear thank you very much you the next question is coming from the line of florence favor from bnpp saying please

Yes, good morning. Two questions, please. The first one regarding 2023, I just wanted to clarify, when you talked about the medium-term margin target, are you specifically referring to 2023 margins being up on 2022, or is it more the multi-year statement? It wasn't clear from your comments, at least for me. And then the second question was more about the competitive landscape. We've seen over the last year, I guess, with Caldic and Barents, original players becoming a bit bigger, more global in nature. I was wondering if you started to see an impact or if you're expecting an impact in terms of consolidation of authorizations and supply chains from some key customers. Is that a threat? Thank you.

So you go for the first and I go for the second, okay?

Yeah, so our medium-term guidance is 8% to 10% revenue growth, half M&A, half organic, and 10 to 15 basis points margin expansion. This is driven by scale, mixed effects, but also take, for instance, the M&A that we have included in here. You see a lot of opportunity and a lot of runaway for margin expansion there. So see this as an opportunity. So this is on top of our 2022 figure.

Okay. And on your second question, competitive landscapes. Yep. Quite some activities at that end. Combination of Kaldik and Cornell. And you were asking whether there's a threat to us or the industry possibly. I do see that as actually a good thing. because this will continue to professionalize our industry. We will move over the years more away from being seen as a distributor, but again, as innovation service providers, because we are the only ones who are able to combine the different chemistries, the different offerings from principles in a formulation. And that's something where, well, there needs to be a good understanding of the industry, that this has to be the role of the industry. So for us, no, it's not a threat. I see that as a good thing on the avenue to professionalize the industry further.

Thank you, Johan. And then, Tej, sorry to insist, but I guess consensus right now is assuming that margins are down in 2023. Is your message today that we are all a bit too conservative?

Yeah, I think you're correct. Now, in Q3, I already, and maybe a little bit to react also to Shashini's comment, if we set in Q3 that we do not want to give every time an outlook or an update on the outlook. The consensus is currently at 436 million EBITDA, um we have to give basically a correction on the outlook if we go for a threshold of 10 percent but um we stay within that range but it will be on the upper hand and yes your comment that the consensus is a little bit too conservative is correct thank you thank you next question is coming from giant chalapali please proceed from jp morgan

Hi, can you hear me?

Yep.

Yeah. So could you remind us on how fourth quarter usually performs from a seasonality perspective versus the third quarter? To dip in earnings.

Yeah. Thank you for that question. Normally the fourth quarter at the end of November and December, it tapers down. I refer also in the presentation, you can see a couple of years back, basically the working capital development that gives you a little bit of a pattern on seasonality. Now what happened in 2021, as Jochen already said, Q4, It's exceptionally high. It was an exception. You can also see that in the line that all of a sudden popped up. We do not predict a similar shape of the curve in the fourth quarter. But obviously, our order book is still very positive. We expect to have a good quarter, but we do not expect an exceptional fourth quarter like in 2021. it um and i mean third quarter was very strong could you help us understand why the guidance for this year was not was not changed or updated yeah i think i just answered that in the previous question i think the guidance uh um if you look on a revenue level and on an ebit uh ebit level is a little bit on the low end but we do not expect that our ebit i will go over 10 over the consensus of 436

And just my last one, could you help us with the incremental contribution from acquisitions on fourth quarters earnings and next year's earnings? Just to give us a sense of how much you expect them to contribute.

Can you repeat your question again? Sorry.

I was hoping you could help us with the incremental contribution year on year from acquisitions on EBIT A in fourth quarter and next year. Any sense that you could give us?

No, we don't make statements on that. We put in the report, we put a page there where you can split out by region the organic and the M&A contribution. And then also on the first part of the presentation, Johan indicated how much M&A we acquired. So I think that's where you can do the math with. Again, we're very positive on the runway of our M&A pipeline, but also on the future synergies that we will get out of there.

Thank you so much.

Thank you. Everyone, if you wish to ask question, please press star one in your telephone keypad, or you can submit your written question. There are no further audio questions and no written questions. So we have come to the end of this call. I will now hand over to Chief Executive Officer Dr. Jochen Müller for his closing remarks.

Well, thank you. Thank you, everybody, for listening in. The world is in an interesting state. We have numerous challenges around the globe. I hope pace and i and with that the entire azaleas team and remember it's a team delivering this result has shown you that we are on a good track we will deliver to what we have promised and we will live up to what i always say under promise and over deliver we have had good months till now and whatever laser had we will manage it well. Thank you for the trust, your interest, and looking forward to talking to you next year on our full year's result. Thank you.