Azelis Group Nv

Hello and welcome to the Azaleas half-year 2023 earnings call. As usual, we are joined by Dr. Jochen Müller, who will present the highlights of the first half of the year, and Thijs Bakker, who will take us through the numbers. We will take questions after the presentation, but until then, everyone will be in listen-only mode. We will make a recording of this webcast available for replay on our website later today. As a reminder, this presentation may include forward-looking statements that may be subject to risk and uncertainty. With that, let's start. Over to you, Jochen.

Thank you, Pam. Good day, everyone. Thanks for tuning in and joining us for the presentation of our first half 2023 results. We appreciate, especially as we know some of you are just coming back from or about to go to or maybe even are in the middle of your summer holiday. As usual, I will start with an overview of the performance on H1. On to the next slide. In the first six months, our revenues increased by 6% to 2.1 billion, and adjusted EBITDA increased by almost 9% to 263 million. The challenges we experienced in some of our markets have put pressure on organic revenue, which declined by 5%. While the industry faces some headwinds, namely weaker demand in Americas and industrial chemicals, It's also worth reminding that H1 last year reported revenue growth of 54%, of which 28% was organic. So there's still an element of tough comes in the results for H1 2023. Nevertheless, too, we face varying degrees of challenges, some of them are markets. Overall, diversity of our portfolio allows us to mitigate the impact of the current challenges on our business. In addition, we continue to expand our footprint and invest in future growth drivers. Since the beginning of the year, we have acquired six companies across three regions. These acquisitions further strengthened our business by enforcing our lateral value chain. Worth noting that these companies have combined annual revenues of over 370 million euro in 2022. We continue to see excellent opportunities and we intend to pursue those opportunities with the same rigor and diligence as before. A proof point of the resilience of our business model is our gross profit margin remaining stable at 24.1%, despite the volatility in some of our markets. Furthermore, We adjusted EBITDA margin expanded by 29 basis points, driving 129 base point expansion and conversion margin to 50.9. Reflecting the benefits of our asset-light cash-generated business, we achieved a 92% cash conversion ratio. Operationally, we are progressing on our innovation, digital, and sustainability agendas. We just won another innovation award for personal care, have rolled out 118 portals, and had our industry-leading ESG ranking confirmed in the most recent sustainability and assessment cycle. Let's go through some of the highlights of our growth drivers in the next slide. Across the three regions where we operate, the normalization from the exceptional growth in 2022 is ongoing. Our diversified footprint and the general defensiveness of our business model allowed us to mitigate the impact of the current volatility in many of our markets. Demand is generally holding up better in life science, cushioning the impact of the weak demand in industrial chemicals. In EMEA, organic growth declined 2% in H1, driven by and large by the acceleration of demand slowdown in industrial chemicals in Q2. Organic revenues in the Americas declined by 13% as our performance remains under pressure from continuous weakness in case and in Latin America. Although we have started to see an easing in flavors and fragrances, which has impacted by the stocking since Q3 last year, the growth momentum is still feeble. In APEC, we achieved 7% organic revenue growth, despite much slower than expected recovery in China. thanks mainly to continued strong performance in Southeast Asia and India. In terms of industry consolidation, we completed six acquisitions in H1. In EMEA, Smoky Light and Sirius enhance our lateral value chain in the Benelux market. Leader gives us a strong foothold in Israel, especially in the very attractive ag market in the region. In the Americas, we acquired the well-established Brazilian Food and Nutraceuticals Distributor Vogler, a significant step in our growth expansion strategy in Latin America. And the acquisition of Gilco gives us a formidable entry platform in the US food and nutrition market. And eventually in APAC, the acquisition of ChemEplus significantly strengthens our footprint in Australia and New Zealand. Now, the following two slides will give you some idea about the type of formulations we recently developed with our customers. To stress it again, our formulation work showcases our expertise and, most importantly, the value we bring to our principals and customers as an innovation service provider. In this example on this slide, we feature work we did for a customer in the construction sector. Given the rising cost of lithium carbonate, They need help to reformulate the existing motor product to reduce lithium carbonate content. Our lab team helped this customer by creating a formulation that not only reduces the lithium carbonate content significantly and therefore reduces a cost phase, but the customer also got a product with significantly improved sustainability characteristics. Now on the next slide. The following example you see is more tangible for consumers and hence easier to relate to. Our lab colleagues developed a formulation to address the lactose sensitivity of an increasing number of consumers. By choosing specific enzymes and combining ingredients from specific principles, our colleagues formulated a dairy product that even lactose intolerant consumers can enjoy. This example and the one in the previous slide demonstrate how we create value for our principals and customers by living up to our corporate tagline, innovations through formulation. Our efforts to contribute do not stop with our principals and customers. As you know, sustainability is utterly important to us. As you can see, we continue to make strides towards our Action 2025 agenda, noteworthy We are already ahead of schedule in one of our key objectives. We already have nearly 32% of senior management positions filled by women. Obviously, we still have work left to do on our sustainability agenda, but it's encouraging to be recognized for our ongoing efforts. In the latest assessment cycle of Sustainalytics, we further improved our score and reconfirmed our top industry rating. It's a great motivator for all of us to continue on our journey of relentless improvement. With this, I will hand over to you, Thijs.

Thank you, Jochem. And good morning, everyone. As Jochem has taken you through the business update, I would like to focus on the group's financial performance and those of our regions for the first half of 2023. Let's start with a high-level overview of the P&L and the drivers of our performance for the second quarter of 2023 on page 11. Group revenue for the first half year of 2023 was over 2.1 billion euros, representing a year-on-year growth of 6.1%, or at constant EVX rate, 8%. This growth reflects the performance of our resilient life science business, which grew 9%, or at constant EVX, 10.8%, and our industrial chemicals business, which grew 1.7% year-on-year, or at Constantinvix, 3.7%. For the second quarter, revenue came in at 1 billion euros, representing a flat year-on-year performance. Without the impact of the acquisitions, sales decreased with 8.1% versus an organic growth of 23.3% in the same quarter last year. Therefore, this performance is not only in the context of a more challenging environment, but also against a very tough comparable. The revenue trends reflect ongoing softness in the Americas, as well as efforts in balancing mix and gross profit margins levels at similar levels like last year. We have been successful in executing our M&A strategy. On a pro forma basis, accounting for the full six months revenue of closed M&A in 2023, half your revenue would have been 2.22 billion euros. Cross-profit for the first half year came in at 517 million euros, representing a year-on-year growth of 5.8% or at constant VIX rate 7.6%. Cross-profit as a percentage of revenue ended at 24.1%, which is basically stable versus prior year. This stability reflects the outcome of excellent margin management and a favorable mix shift towards life sciences. In the same period last year, we expanded gross margin by 157 basis points, so we are pleased to hold ground despite the less favorable market environment, as Jochem alluded. Furthermore, we have kept our gross profit margin stable despite the first-time inclusion of some M&A in emerging markets, which is performing at lower gross profit levels. To illustrate this, gross profit as a percentage of revenue for the organic business improved from 24.2 to 24.7%, implying a step up of 49 basis points, predominantly mixed driven. For the first half year of 2020 through, the group generated an adjusted EBIT DA of 279.2 million euros and an adjusted EBIT A of 263.4 million euros. The adjusted EBITDA margin remains strong at 12.3%, translating to a 29 basis points margin expansion resulted in an excellent 129 basis points expansion in conversion margin. This improvement is a reflection of all the items that we can control. We are executing on the M&A pipeline, We're executing balanced margin management, and we are controlling our cost base by executing on integration and operational excellence. So controlling our costs. In the second quarter, EBITDA margin ended at 12.3%, which is a 22 basis point step up from the previous year period. Our net profit for the first half year was 109.2 million euros. I will discuss the drivers of net profit in detail in a later slide. On the slide on page number 12, I would like to provide a breakdown of growth by region for revenue, cross-profit, and EBITDA. In this table, we have broken down the 6.1% reported revenue growth and the 5.8% reported cross-profit growth between organic growth and growth coming from the first-time inclusion of acquisitions and VIX effects. Following record performance in 2022, organic revenue levels in the first half of 2023 decreased with 4.8%. This was largely driven by lower revenue levels in the Americas, where the group has a higher mix towards industrial chemicals, which saw lower demand, slower recovery in the F&F segment, as well as softer performance in South America. The strong organic gross margin performance I mentioned earlier, together with the execution of cost initiatives, means that despite lower organic revenue, there is no change in organic EBITDA relative to the first half of 2022. This clearly shows the resilience of our business and our ability to leverage scale and cost initiatives in all environments, while continuing to invest for the future. First-time inclusion of acquisitions generated 12.8% of our revenue growth for the first six months, as we are executing well on our M&A pipeline with six acquisitions closed, out of which two are platform acquisitions. Please note, we completed 12 transactions in the course of last year with seven in the second half of the year, which are not part of the organic definition yet. Now, the impact from exchange rate was a negative effect of 1.9% on revenue growth, When comparing the EVX rate in the first half of 2023 versus the same period in 2022, the euro has continued to strengthen against most of the major currencies in which the group operates. Let's have a look at the regional financial performance, so please turn to slide number 13. Starting on the left with EMEA, which makes up 44% of group revenue. Revenue increased by 33.1% or with 6.1% at constant FX rate to 944 million euros. On an organic basis, revenue was 2.2% lower, predominantly driven by softer industrial chemicals demand, outweighing good performance in the Middle Eastern Africa and our food and nutrition and pharma segments. But please put this performance also in context of growth, organic growth over 30% in the first half of 2022. EMEA's gross profit increased with 12.4%, out of which 5.7% was organic, mainly driven by a shift towards life science and execution and balancing of our commercial excellence program to optimize our lateral value chain at the customer base. EMEA successfully executed on operational improvement programs and cost control actions, such in H1, which led to an improvement in conversion margin from 53.4% to 55.5%. Turning to the Americas, which makes up 34% of the group revenue. Revenue decreased by 3.7% to 735 million euros, out of which 13% was organic. Trends in Q2 were broadly similar to Q1 in the Americas, where the region's sales development was impacted by its higher mix in favor of industrial chemicals, slower than anticipated FNF performance, as well as softer performance in South America. Adjusted EBITDA margin for the half year ended at 13.6%, a decrease of 53 basis points. Despite the challenges in the Americas, put in cost control, and mitigating actions translated to 195 basis step up in conversion margin to 56.7%. An excellent performance. Let's move to Asia Pacific. This region makes up 22% of group revenue versus 17% in 2022, as we are executing on our strategy. Revenue increased by 36% to 462 million euros, including solid organic growth of 7%. Organic growth was seen across the board, but particularly in Southeast Asia, which more than offset continued weakness in the Chinese market. Asia-Pacific nearly doubled EBITDA to 41 million euros and expanded its adjusted EBITDA margin with 50 basis points to 8.9%, translating into a 399 basis points improvement in conversion margin to 46.7%. Continued execution of our M&A strategy, both in terms of new acquisitions and excellent progress on M&A integration, will continue to drive margin improvement in subsequent periods. Let's please turn to slide number 14, which shows the net profit of the group. Net profit after tax came in at 109.2 million euros, a decrease of 23%. This is driven predominantly by the higher interest costs increasing due to higher debt levels and higher interest rates. Secondly, the group incurred a negative impact from two non-cash-related drivers, first being hyperinflation accounting in Turkey, where both balance sheet items and P&L are adjusted for inflation, and there was a negative impact from FX volatility, mainly on intercompany loans. This all led to a higher-than-desired effective tax rate, despite good progress in completing our structure post-IPO. Please move to slide number 15 for the cash flow performance of the group. During the first six months of 2023, Azedas delivered excellent free cash flow, with free cash flow of €245.2 million versus €139.2 million in 2022, an increase of 76%. our cash conversion came in at 92.2% in line with historical trends and in line with our target range of 85 to 95%. Given that working capital is one of our key drivers of our cash flow, let me take you through our working capital development in the next slide, number 60. Networking capital to revenue normalized for acquisitions remained flat at 15.4%. But in my view, this does not give credit to the underlying improved performance. Since Q2 2022, the businesses we have acquired have added 170 million euros of working capital. Over the same period, the group's net working capital increased by 53 million euros. So on an organic basis, it has decreased significantly. This demonstrates the working capital improvement we have delivered in the organic business and the opportunity we have to optimize the working capital for the acquired companies. This improvement has been broad-based. with both DSO and DPO normalizing closer to historical trends. We still see that whilst DIO has improved slightly compared to last year, it's still in the higher end in my view, and reflects more work required here to unlock the full opportunity. Now, overall, we're pleased with the progress we are making, and our programs are working, as our cash flows also help us to manage our net debt levels. So please turn to slide 17 to look at the debt profile of Azelis. Change in net debt during the first half year reflects strong operating cash flow of 250 million euros. The 200 million euro capital increased completely in May and M&A spent approximately 558 million euros, which includes deferred payment to acquisition from previous years of approximately 50 million euros. We ended the first half of 2023 with a leverage of 2.6 at the lower end of our stated leverage policy between 2.5 and three times. Now at the end of June, 2023, we have a strong liquidity position of 766 million euros, both in cash and unused credit facilities. And the strength of our balance sheet, both in terms of leverage and liquidity, provides us an excellent runway to continue to execute our strategy. So in summary, we continue to make great progress on our strategic and financial objectives in the first half of 2023. This is a more difficult operating environment than we have seen in recent years. But we believe AZEDIS is stronger than ever and is ready to perform for our principal customers and shareholders through the rest of 2023 and beyond. And let me give it back to Jochen for some closing remarks and the outlook. Thank you, Dees. Well said.