Azelis Group Nv

Good day and welcome to the Azalea's full year 2023 results presentation. My name is Pam, Investor Relations, and I'm joined today by our new CEO, formerly our EMEA president, Anna Bertona, who will give an operational update and as well as a review of our industry and business fundamentals. We are also joined by our group CFO, Thais Bakker, who will walk us through the 2023 numbers. As a reminder, today's presentation may contain forward-looking statements that are subject to risk. We'll make a recording of this webcast available on our website. We will take questions after the presentation, but until then, you will be on listen-only mode. With that, I will now hand you over to Anna.

Good morning, everyone, and thank you for joining us. We understand this is the busiest day for results this earnings season, so thanks for tuning in. I'm Anna, and I'm the Group CEO since the 1st of January. For most of you, this is the first time you are seeing me, so a little introduction about myself. I've been with AZEDIS for more than 10 years, of which seven in my previous role as the regional CEO of EMEA. And that's the larger region of AZEDIS. And that prepared me well for my new role. I'm pleased to be here and look forward to meeting you in person in the coming months. I will be going through the highlights of our results, after which Thijs will take over to give you some more details. You can also find a lot of interesting facts about Azelis in our first integrated report that we just published. Now let's dive into the presentation. There are three points that are important to mention. First, I'm happy to report a strong performance in a challenging year. Second, yes, markets have been tight last year, but we believe the challenging markets are not changing the fundamentals of our industry. And based on more than 10 years of experience at Azelis, I can say the distribution market is very attractive and Azelis is well positioned to capture the opportunities. And last, we outperformed our midterm guidance, which proves that our direction of travel is the right one. Let's start with the key updates from 2023 on the next slides. In 2023, we achieved a revenue of 4.2 billion and an adjusted EBITDA of 466 million. In constant currency, they represent a year-on-year increase of 5.3% and 6.6% respectively. The growth that we delivered during the year is testament to our diversified business, allowing us to offset the ongoing challenges we face in some of our markets, which have pushed our organic revenue growth down by 5.9%. Our industry remains under pressure, but it's also worth noting that in the previous year, we delivered an organic growth over 20%. The resilience of our business is reflected in our conversion margin, remaining stable at 47.4%, and that's the record level of 2022. Thijs will discuss our financial performance in detail, but I want to point out the excellent cash generation in 2023. We achieved a 127% cash conversion ratio, and that speaks to the asset-light, cash-generative nature of our business. We also continued our M&A strategy to expand our footprint and we acquired seven companies across three regions. These companies had a combined annual revenue of 400 million in the prior year. Here are some more details about our different growth drivers. On the organic side, the impact of the pressures in the industry vary across our regions and segments. And it's exactly this diversified footprint and the general defensiveness of our business model that allows us to mitigate the impact of the current volatility. Demand is actually generally holding up better in life sciences, and we benefited from stable trends in food and nutrition, which is our largest segment in life sciences. Our pharma business also delivered a strong performance across geographies. On FNF, we saw a stabilization, and Southeast Asia and Middle East also performed well. The performance in life sciences cautioned the impact of the weak results in industrial chemicals, and especially in case. Pockets of positive trends, such as those we see in Loop's metalworking fluid, helped to mitigate the demand pressure in the industrial chemical segments. Now, in terms of industry consolidation, we completed seven acquisitions. In EMEA, we had Smoky Light and Sirius that were done in the Benelux. gives us a stronger foothold in the very attractive agricultural and environmental service markets. And BLH was an acquisition in France and a very strong complement to our global FNF platform. In the Americas, we did two acquisitions. Vogler was an important expansion in Latin America, where we are building our footprint. And Gilco gives us entry to the U.S. food and nutrition market, filling a large gap that we had in that segment in the U.S., And then finally, in APEC, we acquired ChemiePlus, and that significantly strengthened our footprint in Australia and New Zealand. We still see many excellent opportunities, and we have a strong pipeline of potential acquisitions for this year as well. Now, let's take a closer look at the developments in our industry, our performance against the debt backdrop, our strategic focus, and what it means for us in the long term. In 23, the market was challenging for all the industry players. We saw events like overstocking, a weak China and high inflation. Azelis dealt with these challenges in an appropriate way, doubling down on our commercial efforts and managing our costs. We had several programs in place to be close to our customers and capture the business when it would rebound. This led to a strong performance with a modest top line growth, a resilient high margin and a very strong cash generation. Having been part of shaping the strategy of Azelis, I can say the actions we took in 23 are also supportive of our long-term strategy. They reflect our agility and commitment to this strategy. And following this strategy, we are constantly investing in expanding our footprint through M&A where we have gaps, as I just explained before. And we also proceeded to make progress on our three growth drivers, innovation, digital, and sustainability. On innovation, we continue to focus on technical innovation capabilities, which both benefit our customers and principals. And our efforts were once again recognized with three industry awards in 23. In digital, we want to remain the leader we are today. Our portals and e-labs support our services and business development, increasing customer stickiness, wallets, and market share. And last but not least, we remain committed to sustainability. As mentioned, we have just published our first integrated report. And there you can also see more about our progress on sustainability. And all our efforts resulted in the top ranking in the industry on ESG amongst our peers by Sustainalytics. 2023 might have been a difficult market, but this is temporary. Structurally, nothing has changed. The fundamental drivers of the industry remain very much in place. Sustainability and tightening regulation will push the need for innovation and principals are constantly looking for growth into areas that they can't address themselves. So we are in an attractive market and Azelis is well positioned to benefit from it. Now the strength of our business is very well reflected in the results that we have delivered in the past three years. In the last three years, we achieved 23% average revenue growth, of which 10% was organic. 35% annual EBITDA growth. We delivered an annual average EBITDA margin expansion of 90 BIPs. And on average, we have converted 97% of our EBITDA to free cash flows. And these achievements include the industry downturn in 23. That means we have outperformed the midterm guidance that we set at the time of the IPO. We then committed to an 8 to 10% revenue growth, half organic, half through M&A, and a 10 to 15 bps EBITDA margin expense. We are building a strong company in an attractive industry. The results that we delivered in what many say is the most challenging period in recent history speaks to the resilience of the business. fundamentals of the industry remain positive and therefore as a bigger and stronger company we have every opportunity to accomplish more and create more value going forward now let me hand over to thijs to talk more about our financial performance over the year okay thank you anna happy um that you join us in the call today everybody we have published this morning uh our integrated report

all kinds of interesting material and information points both non-financial and financial elements and has given you a high level overview of the business development as well as a review of our business drivers now let me talk you to the financials of the group and walk you through uh through that and let's start with the growth breakdown of our headline results on the next slide Overall, we are satisfied with the performance of the group following a record year in 2022. We executed well on the elements, which are all under our control, namely margin management, benefits of controlling our cost, and our working capital improvement programs. Just as a reminder, back in 2022, we reported revenue growth of 45%, cross-profit growth of 48%, and EBITDA growth of 71%. These are, of course, tough comes to beat. And obviously, 2023 is a different year where normalization towards more historical trends took place. But overall, we're quite okay where we landed. Now, let me zoom in on the table here. Where we have broken down our reported growth and revenue, gross profit, and adjusted EBITDA into organic growth, M&A growth contribution, and a fixed impact. let me give you some voiceover on the revenue developments specifically. Following a record year in 2022, where organic revenue increased 20%, for the full year of 2023, the organic revenue decreased 5.9%, as you can see to the right of the slide. The rate of decline slowed to 6.6% in the final quarter from minus 7.5% in Q3 and minus 8.1% in Q2. The organic revenue decline during the year was driven largely by lower revenue in the Americas, where the group has a higher mixed exposure towards industrial chemicals, predominantly the case industry, which saw lower demand, but also slower than anticipated recovery in the FNF segment, and also pressure from general macroeconomic weakness in South America. The organic revenue decline of 2.7% in EMEA was largely driven by slower demand in industrial chemicals in Europe, mitigated by excellent growth in Middle East and Africa. Please note that in the fourth quarter, our performance in EMEA includes also a negative impact of over 8 million euros from portfolio optimization programs, which we mentioned earlier in Q3. If you put this aside and back out this effect, the organic revenue decline will be around 2%. In Asia Pacific, organic revenue was broadly stable as growth in Southeast Asia offset the continued softness in China. The 11.2% revenue growth contribution from the first time inclusion of acquisition offset the weaker organic revenue development, as well as the 4.2% negative impact from AVIX translation. A strong performance together with the execution of our cost initiatives means that we are able to mitigate the impact on our adjusted EBITDA and report a modest growth of 2%. This demonstrates the resilience of our business and also our ability to leverage scale and cost initiatives across all environments we operate in while continuing to invest for the future where Anna alluded to. Now let's zoom in on our regional performance on the next page. Let's start with EMEA here on the left, which makes up 43% of the group's revenue. Revenue was stable at 1.8 million euros. On a reported basis, this is a 1% decline. But on constant currency, this represents a 3.9% year-on-year growth. On an organic basis, revenue was 2.7% lower, as softer industrial chemicals demand outweighed the good performance in pharma and growth in the Middle East and Africa. As mentioned in the previous slides, EMEA's results include the negative impact from our portfolio optimization program, which was for EMEA a net effect of 30 million euros, which roughly 8 million euros was in Q4. Bit more on that in a second. EMEA's gross profit increased by 8.1%, out of which 4.5% was organic. Due mainly to the shift towards life sciences and execution of commercial excellence programs. The region executed very well in operational efficiencies and cost control actions, which commenced in April and May, which led to 101 basis points expansion in conversion margin from 49.8 to 50.8%. So some context here, this achievement is on top of a 700 basis points conversion margin expansion in EMEA in the prior year. So this is an excellent performance. bit more color on the Q4 development as the combined impact of our portfolio optimization program. To be clear, this is related to gas-related end product lines and hyperinflation accounting in Turkey impacted Q4. In the fourth quarter alone, These two effects had a negative 230 basis points impact in the region's conversion margin. If we back out these two elements, EMEA's conversion margin in Q4 would have been 44.3% or 35 basis points expansion versus the prior year on a like-for-like basis, explaining the drop in Q4 specifically. Let's turn to Americas, which makes up 35% of the group revenue. Revenue decreased by 6.2% to 1.5 billion euros, with organic revenue declining by 12.4%. Although we see trends gradually improving, the fourth quarter showed modest sequential improvement, although demand, especially in industrial chemicals, remained softer compared to the previous year. Throughout 2023, our business in the Americas was impacted by its higher mix of industrial chemicals, as well as slower than anticipated F&F performance and macro weakness in South America, in particular Mexico and Colombia. The adjusted EBITDA margin for the year came in at 12.7%, a decrease of 98 pips, driving conversion margin down with 139 basis points to 53.6%. Now let's move on to Asia-Pacific, which makes up 22% of the group's revenues. versus 18% in 2022, as it remains one of the key areas for growing our footprint. Overall, it was a solid year, where a lot of activities took place to integrate the acquisitions from 2022. Revenue increased by almost 21% to €904 million, with organic revenue holding up, as sustained growth in Southeast Asia offset the continued weakness in China, particularly driven by the construction and markets. The growth during the year was entirely from M&A revenue, though, and the growth from M&A diluted by FX headwinds 5.9%. Faster growth in adjusted EBITDA resulted in a 90 pips adjusted EBITDA margin uplift, translating into a 490 basis point improvement in conversion margin to 45.7%. Again, reiterating the point that we see no reason why Asia will be able to catch up to similar margin levels as EMEA and Americas over time. Now, let's wrap this all up into our full P&L by business segment on the next slide. Group revenue for the year was around 4.2 billion euros, representing a year-on-year growth 1%, or a constant FX rate 5.3%. This growth reflects the performance of our resilient life science business, which grew 3.7% or at a constant of 7.7%, offsetting the weaker trends in our industrial chemicals business, which contracted by 2.9% year on year. At constant currency, industrial chemicals actually grew by 1.6%. In the fourth quarter of the year, revenue ended at €972 million, representing a 2.9% year-on-year decrease, with organic revenue declining by 6.6% as demand was soft compared to Q4 2022. Notably, in EMEA and Asia-Pacific, organic growth was still in double-digit levels. Please note that. His performance is not only in the context of a more challenging environment, but also against a very tough comparable. Cross-profit for the year came in at 984 million euros, representing a year-on-year growth of 2.4%, or at constant eviction rate 6.5%. Gross profit as a percentage of revenue was 23.7%, representing a 32 basis points margin expansion. But this is mainly supported by a favorable mix shift towards life sciences, which has a higher gross profit margin driven by more formulation requirements for the customer. In 2022, we expanded the gross profit margin by 39 bps. So we're quite happy to hold ground despite less favorable market conditions and dilution from new acquisitions, which typically come at lower gross profit percentage levels. To illustrate this, gross profit margin for organic business improved from 23.4% in 2022 to 23.9% in 2023. implying a step-up of 51 basis points, again, all predominantly mix-driven. For 2023, conversion margins held up well, remaining broadly stable at 47.4%, supported by these positive mix effects, excellent cost management, which, by the way, also included a shift from CapEx to OPEX, as our IT investments in digital came more to an execution point, This excellent performance and our sustained margin reflects our ability to manage all the elements in our business that are under our control and a testament to the resilience of our asset light business model. Net profit for the year ended up at 189.3 million, for which the drivers are on the next slide. Net profit after tax, as I said, came in at 189.3 million, a decrease of 13.5% on a reported basis, or 10.9% in constant graphics. This is driven predominantly by a significant increase in interest expense, which was roughly 2.7 times the amount of the previous year. This is due to higher gross debt levels and the full impact of higher interest rates. In 2023, our weighted average interest rate rose from 2.7% in 2022 to 5.6%, despite the base rate on a large part of our capital kept at 3%. Secondly, the group incurred a negative non-cash impact from hyperinflation accounting in Turkey, where both balance sheet items and P&L are adjusted for inflation, as well as some negative impacts from the fair value adjustment on our interest rate and our VIX hatching instruments. Details can be found about that in our year end report. Now let's look at the cashflow performance of the group during the year on the next slide, page 50. For the year, Azaleas delivered an excellent free cashflow of 601.2 million euros, an increase of 37% compared to 2022. We achieved a record cash conversion ratio of 127% as we focus on cash preservation and cash generation while we face some uncertainty in the industry as Anna already alluded to. As you can see in the bridge, working capital was obviously one of the key levers for cash generation. So let's take a look at our working capital performance on the next slide. Networking capital to revenue, normalized for acquisitions, ended at 13.4% at the end of 2023 versus 15.4% at the end of June and 13.8% at the end of 2022. On an organic basis, working capital was reduced to 12.5% by improvement mainly around operational efficiency of our working capital programs via our state-of-the-art ERP and planning systems. The overall reduction in working capital intensity was wider, obviously, in the M&A scope. This is where the main improvement is coming from, as communicated early. I'm gone from 34% in the prior year to 23% in 2023. And this demonstrates the working capital improvements we have delivered, and it demonstrates our integration capability as the improvement is mainly driven in the area of the acquired holdings. As DAOs stayed mainly flat, improved slightly to the last year, it's still on the higher end compared to historical trends, which you can see on this chart. And we took on board more inventory towards the end of the fourth quarter to support 2024 ramp-up. But it also reflects more work required here to unlock the full opportunity, of course. In summary, this is an excellent performance during uncertain top-line developments. as our cash flow also helps us to manage our net debt levels, which we show in the next slide. The change in net debt during 2023 reflects a strong operating cash flow of 618 million euros. The 200 million capital increase completed in May and an M&A spent approximately 585 million euros, which includes deferred payments to acquisitions from prior years for approximately 54 million euros. We ended the year with a leverage of 2.5 at the lower end of the stated average policy between 2.5 and 3 times. At the end of 2023, we have a strong liquidity position of 835 million euros, both in cash and unused credit facilities. Our balance sheet, both in terms of leverage and liquidity, provides an excellent runway to continue to execute our strategy. So in summary, We continue to make good progress on our strategic and financial objectives in 2023 with all the elements that are under our control. This is obviously a more difficult operating environment than we have seen in recent years, but we believe Azadis is stronger than ever and is ready to perform for our principals, our customers and shareholders through the rest of 2024 and beyond. Now, let me give it back to Anna here for some closing remarks and outlook before we go into Q&A.