Azelis Group Nv

everyone, and thank you for dialing in today. We are joined by Anna Bertone, Group CEO, and Thais Bakker, Group CFO. Anna will give an overview of the developments in the first half of the year, and Thais will present the financial results. Afterwards, Anna will give some color on the outlook. As a reminder, this call may contain forward-looking statements that are subject to risk. After the presentation, we will open the line for Q&A. Until then, you will be on listen-only mode. A recording of the call will be made available on our website. I will now hand you over to Anna.

Good morning and thank you for joining us today. I would like to start with the key points regarding our results for the first half of 24. And actually, these are similar to the messages I gave during the Q1 earnings call in April. So the results of H1 reinforce what I said then. First, we continue to hold the line in terms of conversion margin while the market remains challenging. We worked hard to achieve over 47% conversion margin in 2022 and we are determined to maintain a high level while at the same time ensuring that we are well positioned for the recovery in the markets. Second point is that we are in a period of stabilization in the industry. We started seeing some green shoots earlier this year, and some of them are taking root. In general, volumes are improving, even though it is taking time to translate to top line growth, because there's still price pressure in some of our end markets. It is a slow recovery, and especially in EMEA, still wobbly. But the trends are going in the right direction. Which leads me to the final point. The slowly improving trends, as reflected in our results year to date, supports my expectation that we will return to organic growth sometime in H2. And to give more context to this, we actually saw positive organic growth in April, but volatility returned in May. Also, we had some exceptional items in Q2, like product shortage due to supply issues at one of our principles in the Americas, and delays due to the Red Sea situations. And these are circumstances that add complexity to already challenging markets. But they also give comfort that even with these added unforeseen issues, we are able to navigate and deliver improvements. Now let's go through the key updates so far this year on the next slide. In the first half of 2024, we achieved a revenue of 2.1 billion, which is a slight improvement compared to H123 on a constant currency basis. In the second quarter, our revenue increased by 4.2% on constant currency, supported by M&A contribution and stable organic revenue. Our gross profit in H1 was 526 million, which is a 3% year-on-year improvement on a constant currency basis as we benefit from our diversified portfolio. Adjusted EBITDA came in at 254 million, equivalent to an EBITDA margin of 11.8%, which is stable from Q1. As mentioned earlier, our conversion margin remains strong at 48.2%. And we also continued to execute our M&A strategy to fill the gaps in our portfolio. And in H1, we closed four acquisitions and announced two further acquisitions. And then lastly, we are proud to have won the Ringgear Innovation Award again this year for two categories in personal care. And this demonstrates our continuing commitment to our long-term growth and our three strategic pillars, innovation, sustainability and digital, even as we see temporary challenges in our industry. Now let's look at some of the drivers of these results on the next slide. On the organic side, we see several trends and some specific to a segment and a region. this plays to our diversified footprint as we are able to mitigate the impact of the ongoing volatility across different parts of the group. Home care remains strong across the three regions. In food, generally positive volumes are offset by continuous price pressure. In AES, we are starting to see signs of improvement in EMEA, which had been weak for over Personal care in the Americas and APEC is starting to turn around with volume improvements and price stabilizing. But this is not yet the case in Europe, where our personal care business is more skewed towards high-end brands, which remain soft due to lower export volumes. And in pharma, we see a bit of slowdown in momentum after a very strong performance in 2023. Also, some delays we have seen due to the Red Sea situation. And in industrial chemicals, case is stabilizing, especially in the Americas, and is also holding up in Europe. Case in APEC remains soft, primarily due to weak construction sector, mostly in China. And loops and metalworking fluids remain strong in the media, stable in the Americas, while we see price pressure in APEC impacting our loops in that region. Now, if we look into the regions in more detail, America is actually doing well. Latam is recovering. In the US, volume recovery is continuing. But in Canada, we continue to see general market weakness. In Europe, trends remain mixed across countries and segments with quite some volatility. While in Maya, growth is moderating after a strong performance in 2023. And then lastly, APEC continues to deliver good performance, except China in case, as I just mentioned, but the rate of decline is slowing. In terms of M&A, we acquired six companies in H1, closed four of these in the period. In addition to Octuate in Turkey, LocalPAC in Colombia, and XPAC in Australia, which all closed in Q1, we also completed the deal to acquire DBH, expanding our footprint in the DACH region. And we are working to complete the transaction to acquire MDK, which strengthens our footprint in lucrative personal care market in Indonesia, and CPS Chemicals, which is a great addition to our case business in South Africa. We have many more opportunities in our M&A pipeline, and that will further lead to strengthening the capabilities to the benefit of our customers and principals. One of Azalea's most important strategic pillars is innovation. And that's not just a buzzword. It's part of our DNA and central to our business. Our key value proposition to customers is our ability to provide them with innovative formulations and solutions. For our principals, our expertise enables us to develop new applications to grow the market for their products. And on this slide, I have two examples of how innovation plays an important role in how we create value for our customers and principals. The formulation on the left is an example of how Azelis innovates by incorporating sustainability in formulations to respond to market trends and customer needs. Our personal care team came up with this cleansing and exfoliating bouncy cube that holds its shape even when it comes into contact with water. That in itself is innovative. But true to our commitment to sustainability, the formulation uses 100% natural upcycled exfoliant particles, and 50% of the ingredients are biodegradable. Actually, with this formulation, we won the CNT Allee Award in the US for the bath and shower category. The second example on the right is an innovative formulation that raises the nutritional value of coffee. We utilized our LVC and our technical expertise to figure out a way to add protein in coffee. Our colleagues used a specific whey protein that is natural and sustainable and still allows coffee to taste and feel like coffee. Very often, customers come to us for help with a specific problem. Providing a solution is only the first step. We actually aim to go the extra mile by giving a solution that is innovative and sustainable. Some of you have already been to one of our labs and have seen innovation at work in Azelis. We hope to see you in Istanbul in September, where you will get an even deeper dive on this, not only in terms of lab formulation, but also how innovation plays a role in how we do business. Now, before I hand over to Thijs, I wanted to briefly pause at the topic of sustainability, another key strategic pillar of Azelis. In our integrated report, you will find all the details of our sustainability agenda. But I want to highlight that our focus on this topic is not limited to our yearly reporting. It's ongoing and we continuously push ourselves to set the bar higher. And a good example is that we have just signed the SBTI commitment letter to develop greenhouse gas emission reduction targets for scope one, two and three, according to the SBTI guidelines. As one of the first in the chemical distribution industry to make this commitment, this is a testament to our ongoing efforts to minimize our environmental impact. We will share more details of our sustainability program in the next integrated report. And for now, I will hand over the floor to Thijs to talk you through the knowledge. Thank you, Anna.

Good morning, everyone. As I'm going to take you through the business update, I will guide you through the group's financial performance and those of our regions for the first half year of 2024. Let's start with a high-level overview of the P&L and the drivers of our performance for the second quarter of 2024 and the first half year on page 11. Group revenue for the first half year of 2024 is over 2.1 billion euros, representing a year-on-year growth of 1.5% at constant currency. This growth reflects the performance of our resilient life science business, which grew 3.8% offsetting the weaker performance in industrial chemicals, which declined by 2.3% year on year on a constant evics. Now let's move to the quarter, as you can see on the left side of the slide. For the second quarter, revenue came in at 1.1 billion euro, representing a year-on-year growth of above 4% on both reported and constant currency terms. Excluding the impact of acquisitions, revenue was broadly flat compared to Q2 2023, with improving trends in the Americas, offsetting the continued softness in EMEA and APEC, and generally improving trends in industrial chemicals. Cross-profit for the first half year came in at 527 million euros, representing a year-on-year growth of 1.8%, or at constant eviction rate, 3.2% growth. Cross-profit as a percentage of revenue ended at 24.5%, an uptick of 39 basis points versus prior year. This improvement of gross profit margin was supported by positive mixed effect from improved performance from recent acquisitions, as well as organic margin improvement in LATAM and Asia Pacific, as we are working on expanding our lateral value chain at the acquired companies. For the first half of 2024, adjusted EBITDA ended at 274.8 million euros and an adjusted EBITDA came in at 254 million euros, reflecting a year-on-year decline of 3.6 or 1.5 in constant currency. The decline was due to lower impact on cost control measures compared to the prior year as impact of these contingency measures commenced already in H1 2023 and to a lesser extent normalized variable accruals first prior year. Adjusted EBITDA margin therefore came in at 11.8% for the first half year representing 36 basis points contraction on a constant currency basis is translated to a 48.2% percent conversion margin. To illustrate our cost control efforts, this percentage is still well above the 47.6% and 47.4% achieved for the full year 2022 and 2023, respectively. We're well in control of our cost. Net profit for the first half year was 100 million euros, and I will discuss the drivers of the net profit in details in a later slide. Let's move to slide 12, where I would like to provide you a high-level growth breakdown of revenue, gross profit, and adjusted EBITDA. I will take you through more regional details in the following slide, in line with the comments of Anna on the segments. In this table, we have broken down the revenue, gross profit, and adjusted EBITDA between organic growth, growth coming from the first-time inclusion of acquisitions, and lastly, EVICS. On the revenue line, growth contribution from acquisitions offset the decline in organic revenue, as well as the negative impact of EVIX. More specifically, our organic revenue declined by 4.4% in the first half of 2024, with improved and stable organic performance in the second quarter, mitigating a large organic decline in the first quarter. Basically, our comps are getting better. The performance in the second quarter was supported by easing trends, notably in the industrial chemicals and the Americas, which showed organic revenue growth in the second quarter. Some are color on this. In the first quarter of this year, our organic growth came in at a decline of 8%. So this translates into a sequential improvement quarter on quarter in line with Anna's comments. The gross profit during the first half year was driven by strong performance from recent acquisitions, although it's worth noting pointing to the organic gross profit development, a decline of 3.5% versus a revenue decline of 4.4%. So our margin management and pricing discipline and improving our product mix can be witnessed in these numbers, especially in Asia Pacific. Adjusted EBITDA for the first half was supported by contribution from recent acquisitions, partially migrating the 8% decline in organic EBITDA, as well as the negative impact of FX translations. Organic EBITDA decline, especially in EMEA and the Americas, was driven by lower benefit from cost control measures compared to the prior period year, and to a lesser extent, normalized variable compensation. As a reminder on these contingency actions, we're not done yet. In the U.S., they started already at Q4 2022 and in Q1 2023 in EMEA. Therefore, the magnitude of the impact of those measures were contained also in the first half of 2023, and you will see a lesser extent in 2024. Let's have a look at the regional financial performance. So turn to slide 13. Start with EMEA here on the left, which makes up 43% of our group revenue. Sales declined by 2.9%, or 0.8% measured at constant eviction rates to 970 million euros. On an organic basis, revenue declined by 5% combined with an FX headwind of 2.1%. These were partially mitigated by positive contribution from recent acquisitions. Weak organic revenue was driven by continued volatility in prices and a weak Agri Horti environment and limited benefit of the volume recovery across our major end markets. And I mentioned, we do begin to see recovery in these segments in the Q3-Q4 in our order book of Agri-Hortiferenx example. The immediate gross profit in the region declined by 4.7% year-on-year to 241 million euros, translating to a 51 basis points contraction in gross profit margin to 26.2%, driven by the makeshift towards industrial chemicals during the period. It's overall a solid performance considering that last year's gross profit margin ended at 26.7%, and in the second quarter, it was even 27.7%. Very high. Adjusted EBIT decreased by 8.6% to 128 million euros, resulting in a strong conversion margin of 53.2%. At this point in time, we choose to monitor additional cost-mitigating measures as we prepare for market recovery. Now let's turn to the Americas, which makes up 37% of group revenue, where sales increased by 7.1% year-on-year, driven by an almost 10% revenue growth contribution from recent acquisitions, namely Jilco in the US and Vogler in Brazil, offsetting the organic revenue decline in the first half. As communicated earlier, we are seeing sustained improvement trends in the Americas, reflected in narrower declines compared to prior years. In the first half year of 2023, our organic growth was minus 13%. This confirms on a statement on improvement in the Americas, further evidenced by organic revenue growth, which was slightly positive in the Americas in the second quarter, driven by volume improvements in Gase, which is our largest single-end market in the U.S., In addition, we also see wider volume improvements in Latin America, partially offset by lower price levels driven predominantly by product mix. Gross profit in the region increased by 9.9% to 194 million euros, with gross profit margin expanding 63 basis points to 24.6%. This uptick was driven largely by improved margin performance across our businesses in Latin America, offsetting lower margins in the U.S. industrial chemical segment, driven by price pressure in the case segment. Adjusted EBITDA declined by 1.5% to 98.5 million euros, mainly due to lower benefit of cost control measurements compared to H1 2023. As I mentioned before, we started already in Q4 2022. resulted in an adjusted EBITDA margin of 12.5%. The lower adjusted EBITDA resulted in a conversion margin of 50.9% in the first half of 2024. Lastly, let's move to Asia-Pacific on the right. Revenue declined by 4.4% to €441.8 million, driven by an organic decline of 3.6% and a fixed headwind of 3.5%. The organic revenue contraction follows a strong performance in the comparable period last year, when the region delivered 36, I repeat, 36% revenue growth, of which 7% was organic. Business trends are broadly stable in APEC, even compared to the strong performance in the prior year. China conditions remain challenging, where the business is focused on expanding and improving margin levels from prior acquisitions. And we're doing a good job at that. Profit in APEC grew 4.4% to 92 million euros, representing gross profit margin of 20.9%. The 176 basis points expansion in gross profit margin was driven by improving profitability of the product portfolio of recent acquisitions, and we are on track with our ambitions. Adjusted EBIT increased by 8.6% to 44.8 million euros, reflecting continuous margin and skill improvement initiatives. The improvement in both gross profit and adjusted EBITDA margin resulted in 186 basis points expansion in conversion margin to 48.6 in the first half of the year. Solid performance. So let's please turn to slide number 14, which shows the net profit of the group. Net financial expenses remained relatively stable with an increase of 1.7% compared to prior year. Financial income increased mainly due to the higher interest income and mitigated the higher financial expenses, which include increased interest expenses, due to the full-year impact of higher gross debt with higher interest rates. Our results in the period also include a non-cash charge of €12.2 million from the impact of hyperinflation accounting in Turkey. Tax expenses for the period ended at 42.2 million euros, implying a tax rate, an effective tax rate of 29.6% versus 29% in the prior year. The tax line was impacted roughly by 2% driven by withholding taxes due to upstreaming of dividends from trapped cash countries and another 1% by hyperinflation. The lower operating profit as well as higher financial expenses resulted in an 8.3% decrease in net profit. which came at 100 million euros for the first half of 2024. From here, let's move to the slide 15 for the cash flow performance of the group. During the first six months of the year, Zelix generated a free cash flow of 136.5 million euros, a decrease of 44.3% compared to prior years. This was driven by the lower EBITDA, but mainly by higher investments in working capital as volumes begin to recover across our end markets. Please note that working capital levels in absolute and relative terms are broadly stable. However, going back in time, in 2023, we witnessed a higher release of working capital compared to 2022, impacting the comparable in this table. I'll come back to that a bit later. This resulted in a 39 percentage point contraction in free cash flow to 53.3% for the period. And let's come back to the working capital as this is a key driver in our cash flow. So let's look at the components of our working capital in the next slide. Networking capital revenue normalized for acquisitions remained flat at 15.4%. Even with the higher investments in working capital as our business is in recovery mode. So you should read this positively. I would like to draw your attention to the right chart with the lines. Our working capital increase is in general driven by seasonality pattern we witness every year with a ramp up towards summer. You see this in the dotted lines in the chart for the historical periods. Last year, this effect was exceptionally low to the soft business performance at this time. As we see the momentum of improvement, for example, US case, India, so does their share in working capital requirements, LATAM as well. Similarly, when comparing versus full year 2023, networking capital to revenue was low in the fourth quarter of 2023 due to tight control and soft business. Currently, we see now a normalization towards historical trends levels as the increase in first half of 2024 had a similar seasonal trend as in previous year. You can see in the chart that actually 2023 was an outlier. Those working capital investment in the first half of 2024 reflect our ongoing focus on managing the business as volumes begin to recover across end markets. And we don't see a deterioration in relative KPIs with main impact coming from business mix changes, for example, US case, Latin, Southeast Asia, and India. Obviously, we remain fully committed to strict control of our working capital to protect our cash flows and manage our debt levels and drive our working capital down via our programs and systems at acquired families. Let's move to the next slide. It shows our net debt. The change in net debt during the first half year reflects the weaker operating cash flow of 153 million euros, higher interest payments, and lastly, our M&A investments. We ended the first half of 2024 with a leverage of 2.7 times, well within our stated limit of 2.5 to 3 times leverage. At the end of June 2024, we have a strong liquidity position of 734 million, both in cash and unused credit facilities, and the strength of our balance sheet, both in terms of leverage and liquidity, provides us with sufficient runway to continue to execute our strategy. In summary, we continue to make solid progress on our strategic and financial projectives in the first half year of 2024. Please note that we're still in a difficult operating environment and at the beginning of the recovery out of the bathtub. But we believe Azelis is ready to perform for our principals, customers and shareholders through the rest of 2024 and beyond. Now let me give it back to Anna to give some closing remarks and some comments on the outlook.