Azelis Group Nv

Good morning and welcome to Azaleas' nine-month trading update call. As usual, we have Anna Bertona, Group CEO, and Thijs Bakker, Group CFO. Anna will give us a brief update on the business and Thijs will talk about the financial results. Anna will also give a few words on the outlook before we open the call for Q&A. As a reminder, the presentation may contain forward-looking statements and they are subject to risk. We will make a recording of this call available on our website later today. After the speaker's presentation, we will open the line for Q&A. Until then, you will be in listen-only mode. Let me now hand the call over to Anne.

Thanks, Pam, and good morning, and thank you for joining us today. I will start with the key points from our results in the first nine months of 2024. And these are very similar to the messages I have given in the previous earnings calls this year. First, the green shoot we started to see in some of our markets earlier this year continued to take root. The stocking seems behind us, volumes are slowly recovering, and we are seeing tentative signs of price stabilization. The rate of deterioration has slowed progressively during the year, and we have delivered group organic revenue growth in the third quarter. Although this is partially due to these incomes, general trends are aligning in the right direction. And this is valid not only for Q3, but over the past nine months. Second, we continue our balanced approach between managing our costs and at the same time being prepared for growth as the market recovers. We aim to maintain the best in class conversion margin levels we have achieved in recent years, which is reflected in staying at 47%. And lastly, although we see signs of recovery as the business pressures are dissipating, there remains a high degree of uncertainty across the industry. As I said in Istanbul, volatility is here to stay, but we have demonstrated in these last two years of industry slowdown that Azelis can deliver good performance across business cycles. Now let's go through the key updates so far this year on the next slide. In the first nine months of 24, we achieved a revenue of 3.2 billion. Throughout the period, we saw a steady improvement in trends across our markets. And in Q3, we achieved positive organic revenue growth of 2.8% after six quarters of decline. We have achieved a gross profit of 784 million so far this year, and that means a 59 basis point expansion in our gross profit margin, which is driven by positive mixed effects due to our diversified portfolio. Adjusted EBITDA was 369 million, representing an adjusted EBITDA margin of 11.5%. And as I mentioned before, our conversion margin remained strong at 47.1%, which is broadly in line with the level we achieved in 2022. So far this year, we have announced seven deals in total, of which one is still to close. Equally important, we continue to execute on our strategy to be the reference in our industry as we presented during the investor day in Istanbul. We are executing on our strategy to be the global leading service provider in our chosen end markets. We continue to widen our lead in terms of innovation. So far this year, we have won already six industry awards for innovative formulation. And the latest one was for innovative products at FI India just two weeks ago. In sustainability, we are full steam ahead with finalizing the next phase of our sustainability agenda. And in digital, we are on the next stage of our digital strategy. After successful rollout of our 150 portals, 30 e-labs and principal portals for some of our largest strategic partners, we are executing on programs to accelerate efficiency gains and monetization of our pioneering investments in digital tools and platforms. Now let's look at some of the drivers of these results on the next slide. On the organic side, we see varying trends across regions and across end markets. Our diversified portfolio and wide footprint allows us to mitigate the impact of the ongoing volatility across different parts of the group. Within life science, we see that home care remains strong in all regions. We are seeing a recovery in the agro-market after over a year of weakness. The recovery in the food market in EMEA and Americas is supported by signs of price stabilization, while food in APEC remains relatively weak due mainly to lower volumes. In personal care, business remains weak in Europe due to lower export volumes. In the rest of the world, we are still experiencing volatility. And industrial chemicals, we are seeing meaningful recovery Americas and still weak in China, where we have exposure into building and construction and markets. Loops and metalworking fluid is broadly stable across the region. In terms of regions, Americas is doing well. The US benefits from the recovery in life sciences, particularly in flavor and fragrances and food. And we are also starting to see stabilization in Canada. Latin America, we continue to see a slow, broad-based recovery. Europe is still a mixed bag with the largest markets showing a high degree of volatility. Middle East, Africa, we are impacted by delays in shipments caused by the ongoing tensions in the region. And lastly, APEX remains broadly stable. India is doing well while China continues to be weak. Regarding our inorganic growth, we continue to execute on our M&A strategy as an active consolidator in the industry. We closed five acquisitions in the first nine months across three regions that either fill the gaps in our portfolio or reinforce existing market position. We have also just closed the acquisition of CPS Chemicals in South Africa on the 1st of October, and we expect to close Hortimex in Poland before the end of the year. The M&A pipeline remains full and we see many opportunities to execute on our strategy of building global leadership in the focus and markets that we presented in Istanbul. We are in a position of strength as we have the resources to invest and the time and patience to remain and maintain with a disciplined approach to ensure we are creating value with these investments. Now let me hand you over to Thijs for a walkthrough to our financial results.

thank you and good morning everyone let me guide you through the group's financial performance and those of our regions for the first nine months of 2024. now let's first start with a high level overview of the p l and the drivers of our performance in the third quarter our first nine months 2024 on the next page we have a revenue split between life sciences and industrial chemical revenue for the first nine months of 2024 was 3.2 billion representing a year-on-year growth of 2.3% at constant currency, as you can see here on the right side of this table. This growth reflects the performance of our resilient life science business, which grew by 4% and a slightly weaker performance in industrial chemicals, which declined by 0.4%, but is improving quarter on quarter, both at constant effects. In the third quarter, which you can see on the left side of this table, revenue came in at around 1.1 billion. representing a year-on-year growth of 1.5% or 4% in constant currency. I will take you through the growth breakdown a bit later, but as you will see that without the impact of acquisitions, Azaleas returned to organic growth in line with earlier communication. Cross-profit for the first nine months came in at 784 million, representing a year-on-year growth of 3.1% or 4.8% in constant currency. Cross-profit as a percentage of revenue ended at 24.5%, now a tick of 60 basis points versus the prior year on constant currency basis. Cross-profit margin expansion was driven by organic margin improvements in Asia Pacific, as we made good progress on our portfolio development and also the Americas. Over there, we have experienced positive mixed effects from the recovery in life sciences, as well as margin improvements in Latin America. So all positive. In addition, we see a positive margin impact from improved performance of recent acquisitions due to the execution of our integration efforts. For the first nine months of the year, adjusted EBITDA was 400 million, around the same level as previous year, and adjusted EBITDA came in at just over 369 million, reflecting a year-on-year decline of 1.6%, but up on a constant currency basis. This lower absolute EBITDA development during the period was driven by phasing as the impact from cost control measures versus prior year are lapping and the recovery of the top line and associated GP is coming back quarter by quarter as you can see in the positive organic EBITDA growth in the third quarter. Adjusted EBITDA margin therefore came in at 11.5% for the first nine months of 2024 representing 19 basis points contraction on a constant currency basis despite this conversion margins remain strong at 47.1 percent roughly in line with levels achieved in 22 and 23. so overall we're quite positive on the performance in the third quarter where we witnessed return to organic growth let's have a look at the breakdown on our growth numbers on page number 10. On this page, I would like to provide a high-level growth breakdown of revenue, cross-profit and adjusted EBITDA between organic, M&A and FX. I will take you through more regional details in the following slide in addition to segment comments made by Anna. On the revenue line, growth contributions from acquisitions offset the decline in organic revenue as well as the negative impact of FX translation, especially in this quarter. Organic revenue declined by 2% in the first nine months of the year with positive organic growth of 2.8% in the third quarter, reversing some of the organic decline in Q1 and Q2. The organic revenue growth in Q3 follows signals of organic revenue recovery in the second quarter already. So basically, we're coming out of the bathtub. The positive organic momentum in the third quarter was driven by the recovery in several market segments, notably life science in North America, industrial chemicals in EMEA, and F&F in Americas and Asia. Cross-profit for the first nine months was driven by strong performance from recent acquisitions, which contributed 5.1% of cross-profit growth during the period, offsetting weaker organic cross-profit growth and negative impact from EVX translation. In the third quarter, organic cross-profit came in at 6.6%, following a 0.5% organic growth in Q2 and a 7.3% organic decline in Q1. The improvements in gross profit growth was mostly supported by positive mixed effects in the Americas, as well as improvement in organic gross profit margins in Asia-Pacific. Now, our adjusted EBITDA for the first nine months declined by 1.6%, supported by contribution from recent acquisition, partly mitigating the 4.5% organic decline and a negative impact of FX translation. As you can see on this table, the organic EBITDA decline was driven by lower benefit from cost control measures in America and EMEA compared to the prior year, as well as some margin dilution from higher contribution from our businesses in Middle East Africa and Latin America. As a reminder, we started our contingency actions in the US at the end of Q4 2022 and commenced in Q1 2023 in EMEA. As we are seeing an increase in our organic growth in the third quarter, adjusted EBITDA grew by 3.1%, driven by a 3.9% organic growth, reversing some of the declines in Q1 and Q2. Overall, in summary here, organic trends appear to be stabilizing across our end markets. Now, let's now turn to the regional financial performance on page 11. Let's first start on the left here. Let's start with EMEA, which makes up 42% of the group revenue. Revenue for the first nine months ended at 1.4 billion. That represents a year-on-year decline of 1.7% or an increase of 0.8% in constant currency. For the first nine months, organic revenue declined by 2.4%. In the third quarter, organic revenue increased by 3.2%. reversing some of the declines earlier in the year. Positive effect. Improvement in organic revenue in Q3 was driven by a recovery in our agri and food businesses, as well as a broad-based recovery in industrial chemicals. First nine months, gross profit in EMEA declined by 4%, resulting in a 66 basis point contraction in gross profit margin, mainly due to a mix towards industrial chemicals and food, Sequentially, in the third quarter, organic cross-profit followed that makeshift. For the first nine months, adjusted EBITDA declined by 7.5%, resulting in an 84 basis points adjusted EBITDA margin contraction to 13.3%, driven mainly by the product mix effect I mentioned earlier, but also the impact of higher contribution of emerging countries in the region that come with a lower margin profile, and lastly, lower impact from cost control measures compared to prior year, as I mentioned before. Conversion margin ended at 51.3% compared to 53.2% in the prior year, so still well above 50%. Turning to the Americas, which makes up 37% of group revenue. Revenue for the first nine months ended at 1.2 billion, a year-on-year increase of 5.7% year-on-year to 1.2 billion. driven by a 6.8% revenue growth contribution from recent acquisitions, offsetting the organic revenue decline in the first nine months. We are pleased to see sustained improvement in trends in the Americas, reflected in positive organic revenue growth of 0.4% due to further strengthening to 4.6% in the third quarter. The positive momentum was driven by the recovery in life science, particularly in flavors and fragments, as Anna already mentioned, personal care, home care, and continued stabilization in case, our largest segment in the US. In Latin America, we continue to see positive momentum across ad markets as we're integrating our M&A. For the first nine months, gross profit in the Americas increased by 11.6%, driving 131 basis points gross profit margin expansion to 24.8%, driven by the positive makeshift towards life sciences in the US, as well as gross profit margin improvements in Latin America, as we are improving our portfolio positioning, As such, in the third quarter, gross profit margin ended at 25.2%, an increase of 262 basis points versus prior year. Adjusted EBIT increased by 1.9%, driving adjusted EBIT margin to 12.7%, representing a 48 basis points contraction over the prior year, driven mainly due to the dilution from Latin America, where our margins are improving, but still lower than the US and Canada. This affects growth conversion margin in the region down to 51% during the period, but also still well above 50%. Let's move to the last one, to the right, moving to Asia-Pacific. Over there, revenue declined by 3%, to €665 million in the first nine months. Driven by an organic decline of 2.9%, and FIX had been 2.7%. The trends in Asia Pacific remain broadly stable in the region over there, except in China, where we see limited signals of recovery. To put these results into context, however, the 3% decline in the first nine months of this year compares to 27.4% revenue growth in the region in the same period last year, out of which 2.4% was organic. For the first nine months, gross profit in Asia-Pacific grew by 6.4% to 138.9 million, representing gross profit margin of 20.9%. The 183 basis points expansion in gross profit margin was driven by improving profitability of the product portfolio of recent acquisitions, as we are executing well on the integration of them. Adjusted EBITDA increased by 10.4% to 66 million, reflecting continuous margin and scale improvement initiatives. The improvement in both cross-profit and adjusted EBITDA margin resulted in 172 basis points expansion in conversion margin to 47.5% during the period. Again, reiterating that on the long run, we see no reason why Asia-Pacific can reach similar levels like EMEA or Americas. Now let's turn to the main driver of our cash flow generation, working capital, on the next page. Networking capital to sales was 16% at the end of September 2024 versus 15.3% in the prior year. The increase in the group working capital improvement was driven mainly by higher inventory levels, which should be perceived positive and in line with demand recovering across our markets and our open order book. This uptick also, of course, reflects the impact of acquisitions. On the picture on the right, we are expecting our working capital trend to trend down in Q4 in line with historical seasonality as shown on the chart on the right. Based upon our current view on the order book, you can assume historical patterns. Our working capital investments year-to-date reflect our ongoing focus on managing the business as volumes recover across our end markets. As always, we are committed to strict control of working capital to protect our cash flows and manage our debt levels, and we have a good track record with this. In the first nine months, we generated free cash flow of 218.4 million, representing a cash flow conversion of 58% for the period, driven by higher investments in working capital during the period, as in 2023 we had a cash inflow of working capital due to organic revenue decline. Overall, we will continue to optimize our working capital and focus on cash generation, regardless of the business cycle. As a reminder, the working capital of M&A companies is around 25 to 30%. It takes about 12 to 24 months to get this in line. With that, I'm handing the floor back to Anna for some closing remarks and the outlook.