Azelis Group Nv

Good morning. Welcome to Azaleas' 2024 results presentation. Thank you for joining us. My name is Pam, Investor Relations. We hope you've had some time to go through the press release published earlier this morning. As usual, we have Anna Bertone, Group CEO, who will present the highlights of our results. Thijs Bakker, Group CFO, will then walk us through the financial performance of the group during the year. And Anna will provide some concluding remarks before we open the floor for Q&A. Until then, you will be on listen-only mode. Let me remind you that the presentation may contain some forward-looking statements that are subject to risk. We will make a recording of the presentation available on the website starting later today. Now let me give the floor to Anna.

Good morning, Pam. Thank you for the introduction. As Pam said, I will give an overview of the business performance in 2024. Thijs will then go through the details of our financial results, and we will conclude with some more remarks on what we are seeing so far this year. As usual, I will start with the most important messages for today on the next slide. First, many of the green shoots reflected at the beginning of 2024 were sustained throughout the year. Our results improved versus prior year, but it did not happen overnight or over one quarter. Instead, we have shown a steady improvement since the first quarter last year. Organic growth turned positive in Q3 and remained positive in Q4. My second point is that our business model proved again to be resilient. The market remained volatile overall, with the pace of improvements varying across regions and across our end markets. Throughout the year, we remained focused on protecting our profitability, and that was reflected in our EBITDA margin remaining stable at 11.2%, despite cost inflation in many of our geographies. Good thing is that we are seeing a continuation of the trend improvements, even if tempered by persistent volatility, which is mainly driven by geopolitical uncertainty. As we presented during our strategy update in September, Azelis is strongly positioned to navigate the industry challenges and to capture growth. And we have already demonstrated this in recent years. Let's move to the next slide for the summary of our results. In the final quarter of 24, our revenue increased by 4.3%, of which 1.8% was organic. This brings our total revenue for the full year 24 at 4.2 billion, an increase of 2.6% in constant currency compared to 23. The positive organic momentum in Q3 and Q4 resulted in 2.3% organic growth in H2. This reversed part of the organic revenue decline that we saw in the first half of the year. We have achieved gross profit of 1 billion for the year, and the 77 basis points increase in gross profit margin was driven by positive mixed effects due to our diversified portfolio. Adjusted EBITDA margin was stable at 11.2%, despite cost pressure we faced during the year. This included an average salary cost inflation of around 3%, as well as higher bonus accruals in markets where we saw significant performance improvements. In 24, we completed eight acquisitions across our three regions, and those eight companies had combined revenues of over 140 million in 23. I will give more details about the progress in executing our updating strategy in a later slide, but I want to highlight here the progression that we made during the year towards our objective of being the reference in the industry for innovation, sustainability and digital. Now, before we go to the strategy execution, let me share some details on our growth drivers in the next slide. Let's start on the organic side. We see the trends aligning in the right direction, although the pace varies across end markets and across regions. In general, I can say we have been observing more robust recovery in life sciences, while industrial chemicals remained mixed. If I look more in detail in the end markets, for home care, we saw a strong performance consistently across all regions throughout the year. We observed good recovery in FNF across all regions. Food, US delivered strong performance in 2024, but in EMEA, good volume growth is somewhat tempered by volatile prices and APEC was weak during the year. We recorded a recovery in personal care in H2, although mostly driven by the US. And for case, we are seeing a recovery in the US, but it remains volatile in EMEA and APEC. And for loops metalworking fluid, we see overall a constructive environment. And the rest of the end markets are broadly stable. If we look into the regions, the first green shoots were in the Americas, and the recovery was sustained throughout the year. Performance in the U.S. was driven by a strong recovery across all our focus and markets in life science, but also U.S. case has been showing improvements, but that was at a lower pace. Canada was a drag for most of the year, but we are starting to see some stabilization there as well. And Latin America, we continue to see a slow, broad-based recovery. EMEA has been different. The picture is still mixed. Western Europe remained under pressure for most of 24. Emerging markets in the region, Eastern Europe and EMEA were stable. And EMEA was supported in the second half by the strong recovery in our agri and F&F business in the region. And in Asia Pacific, results were driven by continued solid performance in Southeast Asia and a good recovery in India. And this mitigated a still weak China economy. and Australia and New Zealand. In terms of inorganic growth, we closed three M&A deals in Q4 and that brings the completed M&A to eight for the year of 24. As we presented during our investor day in September, we have identified our focus and markets and have been doing our homework in reassessing our M&A priorities accordingly. The pipeline looks good and is aligned with our strategy of building global leadership in our focus and markets. Now, let's look a bit more in the strategy and the progress that we have against the longer term objectives in the next slide. And for those who were in Istanbul in September, this slide should be somewhat familiar. In 24, we made significant progress toward an important pillar of our strategy, our objective to be the industry reference for our focus and markets and the leader in innovation, sustainability and digital. This underscores our commitment to create value for all our stakeholders, and it strengthens the mode that we are building around our business. During the year, we won five industry awards for innovative formulations across our three regions. This reflects our dedication to advancing the most innovative solutions to our customers and principals. And you can find interesting examples of these solutions in the appendix. We recently launched Impact 2030 after the successful achievement of our first set of commitments in Action 2025 around sustainability. Impact 2030 is the next phase of our ambitious sustainability agenda and shows even more ambition. And for example, it incorporates the SBTI Scope 3 targets. This reflects our firm belief that we are uniquely positioned to contribute to a sustainable future and help all our stakeholders to do the same. And in line with what we said in September, we continue to invest in our platforms to remain at the forefront of digital developments in our industry. Equally, we are focused on monetizing our ongoing investments. And this is reflected in the 60% growth in the number of active customers across our digital platforms. The next pillar of our strategy revolves around our commitment to be an active consolidator in our industry. And as I said in the previous slides, we have done our homework in aligning our pipeline for M&A to focus and markets. And the eight deals we completed during the year is consistent with that. We also have launched multiple commercial excellence programs to win market share by providing successful solutions and access to a wide portfolio of products to our customers. And furthermore, we are leveraging our global network to grow its strategic principles. By developing new applications that grow the market for their products, we strive to become their preferred distributor. And last, but definitely not least, is our third strategic pillar, building one agile Azelis. We have launched various internal projects and programs to ensure global cohesion and that we use our skill and scope to our advantage. On the other hand, we foster agility by empowering local teams to respond swiftly to opportunities in this volatile environment. As you can see, we have been busy, and while we are proud of our achievement in 24, we still have a lot to look forward to. You will find more details of our performance and the execution of our strategy in the integrated report that will be available from the 6th of March. Now let me hand over to Thijs for a run-through of our financial results.

Thank you, Anna, and good morning, everyone. As Anna mentioned, just before getting into the numbers, we've decided to align our reporting calendar with our internal reporting. So the full integrated report with comprehensive and very interesting overviews of our sustainability indicators will be published on our website on March 6th. Now let's dive into the numbers on the next slide. In the final quarter of 2024, the group revenue increased by 4.3% year-on-year to over 1 billion, driven by a strong performance in our life science business. which grew by 7.3%, and slightly weaker industrial chemicals, which came in 0.6% behind prior year. Group revenue for the full year came in at 4.2 billion, representing a year-on-year growth of 1.5% or 2.6% measured in constant currency. This reflects a 3.4% reported growth delivered by our life science business and a 1.7% decline in industrial chemicals for the full year. Gross profit in the fourth quarter came in at 247 million euros, representing a year-on-year growth of 10.4% or 9.4% in constant currency, bringing the full-year gross profit to over 1 billion euros, a year-on-year growth of 4.8% or 5.9% in constant currencies. These results reflect a positive mix as well as improved organic growth. Now, gross profit as a percentage of revenue ended at 24.5%, 77 basis point gross margin expansion to 24.5% reflects positive mix coming from the Americas, which had a higher contribution from the life science business. And of course, as case is still in recovery mode, a margin improvement in APEC and Latin America, where we made further progress on optimizing our portfolio. In the fourth quarter, adjusted EBIT ended at 101 million euros, reflecting a year-on-year growth of 11.4% or 10% in constant currency, reversing the decline in the first nine months, bringing the full-year adjusted EBITDA to 471 million euros, an increase of 0.9% or 2.4% in constant currency. The adjusted EBITDA margin was stable compared to the prior year at 11.2%, despite salary and general cost inflation again demonstrating confidence in the resilience of our business model that we can deliver. The slower development EBIT-A growth resulted in a conversion margin of 45.7% compared to 47.4% in 2023. On the last line here on the slide, the net profit for the year was stable at €189.5 million. I will go through the details of our net profit drivers in a later slide. But let's first take a look at the breakdown of our growth. On the next slide, page 11. Here I will give you an overview of the growth breakdown of revenue, cross-profit, and adjusted EBITDA split between organic, M&A, and EVIX. On the left side of the slide, you see the quarter, and on the right side, you see the full year. I will take you to some more regional details in the following slide in addition to the segment comments that Anna provided already. In the fourth quarter, revenue came in at 4.3%, supported by positive organic revenue growth of 1.8%, versus some of the negative effects from the first half year. On a full year basis, organic revenue declined by 1.1%. Fourth quarter marks the second quarter of positive organic revenue growth and was driven by continued recovery in life sciences in the US. Second, a positive environment in the FNF flavors and fragments segment across all regions and a recovery in AgriHorti in EMEA. During the first half of 2024, organic revenue declined by 4%. This was partly offset by 2.3% organic revenue growth in the second half of the year. As we look ahead, we have confidence in our order book for the first quarter of 2025, based on a number of drivers, but not the least, improved momentum in the Americas, which is approximately 36% of our global revenue. In the fourth quarter, gross profit accelerated to 10.4%, mainly driven by organic growth. Of 7.4% for the full year, the 4.8% in gross profit was driven by organic growth 1.5% and 4.4% growth contribution from recent acquisitions, offsetting a negative 1.1% FX headwind. This picture reflects in part our work on optimizing our portfolio in LATAM and Asia-Pacific. In the fourth quarter, adjusted EBITDA grew by 11.4%, with organic EBITDA growth accelerating to 7.2% during the quarter. For the full year, EBITDA increased by 0.9%, driven by EBITDA growth contribution from recent acquisitions, offsetting a 2.2% organic EBITDA decline and 1.5% negative impact from the FX translation. For the second half of the year, organic EBITDA growth was 5.4%. This refers part of the decline in the first half, which was minus 8.1% in H1 2024. So we see positive momentum here. Organic EBIT agro for the full year includes an average salary and cost inflation of about 3%, as well as higher bonus accruals in light of improving performance in some of our markets, and as well, higher distribution costs driven by the top line. Overall, organic trends appear to be stabilizing across our markets, and we see more regular buying patterns in our customer base. Now, let's turn to our regional financial performance on slide number 12. Let's start on the left here, EMEA. In EMEA, which makes up 43% of Azaleas' revenue, revenue for the full year ended at 1.8 billion euro, broadly stable compared to the prior year, and up 1.2% in constant currency, driven by a 2.9% revenue growth contribution from recent acquisitions, offsetting the 1.8% decline in organic revenues. In the fourth quarter, organic revenue grew 0.4%, following a 3.2% organic revenue growth in Q3, reversing in part the organic decline, which is in the first half. The organic revenue growth in the second half was driven by a recovery in our RT-RT business and a favorable flavors and fragrances, or FNF as we call it, environment, and a continued strong home care performance. Gross profit in EMEA declined by 1.1%, resulting in a 28 basis points contraction in gross profit margin, due mainly to the negative mix effect from the gradual recovery in industrial chemicals, which comes at lower margin levels. In the fourth quarter, gross profit grew by 9.8%, of which 5.1% was organic. driven by the recovery in life sciences and reversing some of the negative mixed effects, as well as several lubricant orders shifting to the first quarter in 2025, where Anna also alluded. Adjusted EBITDA declined by 4%, resulting in a 52 basis points EBITDA margin contraction to 12.7%, driven mainly by salary cost inflation in the region, hireable variable comp, and investments in sales and logistics operations in MEA, and also dilution by M&A. Furthermore, EBITDA is impacted by mixed effects from the recovery in industrial chemicals and higher contribution from emerging markets in the region that come with a lower margin profile. Lower EBITDA resulted in a 145 basis step down in conversion margin to 49.3%. Please note this is still in line with 2022 levels as we took early cost mitigating actions. Let's move to the middle of the slide, turning to the Americas, which makes up 36% of group revenue and 40% of the group EBITDA. Revenue for the full year ended at 1.5 billion euros, 5.6% growth year-on-year, or 5.9% measured in constant currency, driven by a 5.4% revenue growth contribution from recent acquisitions and a modest organic revenue growth contribution of 0.5%. As communicated in Q2 and Q3, we are happy to see sustained trend improvements in the Americas, reflected in positive organic revenue growth of 0.4% in Q2, accelerating to 4.6% in Q3 and 5.6% in Q4. The positive momentum was driven by a robust recovery across all our end markets in life sciences, as well as continued stabilization in case in the U.S., where we are still in recovery mode. In the second half of the year, we also started seeing stabilization in Canada, and we see a broad-based improvement in Latin America, where our hard work building the business is paying off. Cross-profit in America has increased by 11.3%, of which a large part, 5.6%, was organic. In the fourth quarter, organic gross profit growth was 10.4%. The gross profit growth drove 127 basis points, gross margin uplift to 24.9% for the full year, driven mainly by strong recovery in life sciences in the US, as well as positive mixed effect from our portfolio optimization program in LATAM. Lastly, the adjusted EBITDA increased by 2.7%, driving adjusted EBITDA margin to 12.3%, representing a 36 basis point contraction, mainly due to a dilution effect from Latin America, where we have made investments in our infrastructure, but also from higher bonus accruals in light of improved performance. This resulted in a 417 basis point step down in conversion margin to 49.4%. Lastly, in Asia Pacific, revenue ended €885 million and declined 2.1% or flat at constant currency, driven by FX headwinds of 2.1%, an organic revenue decline of 2.5%, offsetting a 2.5% revenue growth from acquisitions. The organic revenue development reflects continued weaknesses, especially in China and ANZ, mitigated in part by strong performance in India and Southeast Asia. Cross-profit in APAC ended at 185 million euros, representing year-on-year growth of 7.7%, of which 4.7% was organic. Cross-margin expanded by 190 basis points to 20.9%, driven by improved profitability of the product portfolio of recent acquisitions, as well as positive impact of our portfolio optimization program as we are discontinuing less attractive product lines. Adjusted EBIT increased by 12.3%, driving 128 basis points EBIT margin expansion to 9.9%. as we continue to execute on our M&A integration programs and leverage our growing skill in the Asian region. This resulted in 195 base point expansion in conversion margin to 47.6%, reiterating that over time we see margins in Asia Pacific being similar as EMEA and Americas. Now let's move on to slide number 13, our net profit. Net profit after tax came in at €189.5 million, basically flat versus prior year. Net financial expenses came in at €129.8 million, with increased financial income partly offsetting the higher financial expense. In September, we conducted a refinancing of our debt, lowering our interest rate going forward and extending maturities till 2029. The financial expense also includes €26 million of non-cash financial costs from the impact of hyperinflation accounting for Turkey and a one-off non-cash P&L charge of €4 million related to transaction costs from previous refinancing activities. Tax expense in 2024 was 66.6 million euros, implying an effective tax rate of 26% versus 23.4% in 2023, and includes the tax impact of non-cash costs associated with hyperinflation accounting and fair value adjustment of acquisition-related liabilities, which are not tax deductible. Now, let's jump to the next slide and talk about the cash performance of the group. In 2024, we generated a free cash flow of 342 million euros, down versus prior year, mainly driven by significant prior period working capital release from the stock. This was driven by higher investments in working capital in light of improving demand in our end markets. Let me provide a little bit more detail on this, as the lower free cash flow conversions mainly due to the higher working capital investments. In 2024, the cash outflow from working capital was €118 million, which is mainly driven by the inventory of €98 million. This is also reflected in our higher DIO at 57 days versus the average for the last three years of roughly 52 days. So why is this inventory higher? Now, Our inventory was at the low side end of 2023 due to prior period destocking. Now we experience the opposite as we get out of the downturn cycle and we see improved momentum. There's also a mixed effect. The growth drivers behind our inventory this year are flavors and fragrances and our Latam business. Those businesses typically have a higher working capital level than the group level. Lastly, there's also inventory buildup for the positive outlook of the first quarter 2025. Now, the swing of inventory of above represents roughly 10% of free cash flow conversion. We're not worried about our free cash flow conversion and are confident in the order book for the first quarter. That's also about an impact of about 0.2 on our net debt leverage. Furthermore, of course, the 180 million euro is also an increase driven by an increase in accounts receivable in line with the revenue trend that we presented here and investments in fresh inventory in markets where we see growth in demand picking up. F&F, LATAM and Turkey in particular. With new inventory buildup in Q4, broadly corresponding to the order book of Q1 2025, we expect a normalization in working capital trends in line with historical seasonality later in the year. The higher net working capital investment resulted in a 55 percentage point contraction in free cash flow conversion to 72.1% in 2024. Let's zoom a little bit more into that working capital on the next slide. Networking capital to revenue normalized for acquisitions was 15.9% at the end of the year versus 15.4% in June and 13.4% at 2023. So looking to the right side of the chart, you see the evolution of our networking capital was tracking historical seasonal patterns until Q2, accelerating in Q3 as demand in our markets are ramping up. In 2023, we represent the yellow trend line. The trend was exceptionally low due to the weak business environment in the chemical industry and in our top line. The higher working capital in the second half of 24 points to continued volume recovery following a prolonged period of demand weakness across all of our end markets. We remain committed, of course, to our working capital projects to protect our cash flows and debt levels. And we expect this trend to come back, as I said earlier, in the second half of 2025 in line with the short seasonality. Obviously, we remain committed to strict control on our working capital to protect our cash flows, but We have some work to do here. That brings me to the final slide, our debt levels, on page 16. The change in debt during 2024 reflects the weaker operating cash flow, 369 million versus 618 million in 2023, mainly driven by the change of working capital, higher interest payment, 108 million versus 89 million in 2023, M&A investments and dividend payments. We ended the year with a leverage of 2.9, well within our confidence of 4.5. At the end of December, we have a liquidity position of 804 million euros, both in cash and unused credit facilities, giving us ample runway to continue to execute our strategy and convert our strong M&A pipeline. In summary, we continue to make progress on our strategic and financial objectives in 2024. Recovery is underway in many of our end markets, and we have demonstrated that we are well positioned, delivering strong performance for principals, customers, and shareholders. Based upon this, let me give it back to Anna for some closing remarks on the outlook.

Thanks, Thijs. And my comments on the outlook will be very brief. Our order book is developing positively, and that suggests that the trend improvements in the last two quarters in 24 have continued so far in 25 as well. We see the positive momentum in the Americas and especially in the US persisting, at least in the near term or until the next tweet. There is still much uncertainty around the world. And as mentioned before, volatility is here to stay. But let me conclude with the following. As I've been saying, since I assumed the role of Azelis Group CEO, the fundamentals of our industry remain very much intact. And with our updated strategy, we are well positioned to capture the opportunities that are out there. And with that, we are ready to take questions. So operator, please open the lines.

If you would like to ask a question, please signal by pressing star one. We'll pause for a moment to assemble the queue. And the first question comes from the line of Sushani Varanasi from Goldman Sachs. Your line is open.

Hi, good morning. Thank you for taking my questions. Just a couple from me, please. You've signaled that the order book has seen a positive build-up into this first quarter, and I appreciate the quarter hasn't really ended, but if these trends were to continue into the rest of the quarter, should we expect a further improvement in the organic GP growth versus 4Q levels? That's the first question. Second one, how do you see gross margins evolving in 2025 if industrials were to come back? Should we expect some compression in the gross margins? Thank you.

Thanks for your question. Maybe starting with the first about our order book. Indeed, Q1 is not yet finished, but we have, I think, quite good visibility on the rest of the quarter and that looks positive. And of course, compared to Q4, that will be an improvement as there is always a seasonality in Q4 where their growth is normally a bit lower with the strange December month trend. That's always a bit smaller than other months. So yes, Q1 looks actually promising. And yeah, of course, we hope that that will continue for the rest of the year, but that's a bit more difficult to say. As I said before, there is still quite some volatility. On gross margins, as you know, we have a very diversified portfolio and depending on which segment is improving, and which one will maybe be lagging a little bit more, that will have an effect on our gross margin. In general, the industrial ones are lower than the life sciences ones' gross margin.

Thank you very much.

Your next question comes from the line of Chetan Udashi from JP Morgan. Your line is open.

Hi, thanks and morning all. Maybe first question I wanted to ask is, can you remind us how does the, you know, let's say if there were import tariffs from US president or imports from Europe or any other place in the world, how will that impact Azelus in terms of sourcing? How much of your sourcing might be, let's say, coming from Europe or Asia that goes into US, that would be the first question. The second question is, you know, you sound a bit positive on Q1 trends in terms of order books. So is it fair to assume that you are expecting at least some sort of organic growth in your Q1 gross profit and earnings on a year-on-year basis? And last question I had was, can you remind us how big is your personal care and beauty business? And the reason for asking this is There have been multiple warnings in the beauty market from large MNC companies. I'm just curious, how do you see the trend in that part of the market as well? Thank you.

Well, thanks for your questions. Starting first with the import tariffs, of course, there's still quite some uncertainty how it's going to pan out. And some things have been announced and then retracted. But what I can say in general is that we have a local for local business. So most of the products that we sell are actually produced in the region where we are. So that has less of a direct impact for us. We have not seen a lot of concern and panic with our customers up till now. We are monitoring, of course, and it's also true that prices, if they increase, they will be passed on. So on the direct effect, there's less. There might also, of course, be a longer term indirect effect, but that's difficult to predict. On your second question, indeed, Q1, I sound positive. I think that the order book looks good for the remainder of the quarter and what lies behind us is also good. So, yes, if nothing changes, then we can expect that organic growth would continue.

And associated with profit growth.

So yeah, I forgot that element of the question. Amazing for the personal care business. We have also been reading some concerns of the larger multinationals active in personal care. But we are actually active in serving smaller customers. And there's quite some trends that's not very recent, but already I would say the last year where you can see upcoming smaller brands, the so-called TikTok brands, the indie brands. And we are serving these. And they are actually taking market share, we expect, from the larger ones as customers are moving more towards these local for local brands.

We see personal care is roughly 15% of our global portfolio shut down.

And just coming, thank you for these responses. I'm just curious, just following up on first question. So is it fair to assume that you don't have much sourcing from outside US that gets sold in the US? Is that a fair statement?

That's correct. It's limited. Very limited.

But Anna was saying, we obviously don't know what our principles are sourcing indirectly when we buy it from the US. That's very difficult to assess, but normally I think the tariffs, in our view, they will lead to inflation and will pass the price on to the customer. Can we have a good track record with that, as you know?

Yeah, thank you. Your next question comes from Nick Armanian from UBS. Your line is open.

Good morning, everyone. Just a follow-up question first on the order book, please. I think you've previously indicated that order book visibility is quite limited anyway, maybe six to eight weeks out or similar. But you do sound quite positive on what you're seeing. So I wonder, is there any other change you can anchor that in in terms of customer ordering behavior maybe that makes you more constructive or not? And then, just secondly, could you give an indication of how much further to run you have on some of these portfolio optimization initiatives by region, if possible?

Thanks. Yeah, let me answer you that. It's a good question. Our order book, indeed, is we have a three-month rolling forecast. We have visibility of around eight to ten weeks. Obviously, the further out, it becomes less visible. What we do see, and I mentioned that in my notes as well, that we see a more traditional buying pattern. But what we actually see right now is the order frequency is basically stable, while last year the order frequency was on the higher end. And we see actually the order quantity going up a little bit. So that gives us also confidence that we're returning to more normalized trading patterns from our smaller customers. And that's basically also anchors our view upon Q1 as well. On the portfolio optimization side, what you indicated, this is obviously always a moving target. And when we, especially you'll see this portfolio optimization market, optimization is happening in emerging markets or areas where we did M&A and there are some product lines where we, for instance, in the past for ESG purposes, we say, hey, we do not take them on board. So obviously, as you build your lateral value chain or your portfolio of time, you basically take more portfolio in, new principles, new products, but you also phase certain areas out. This year, the estimated on the revenue side is roughly 20 to 30 million, but that is normally every year what we have seen in the past. This is mainly in Asia and in Latam, where we obviously are building our portfolio. So maybe that gives you some color on your question.

Yeah, that's very helpful. Thank you.

Your next question comes from from BMP. Your line is open.

Yes, good morning all. Two questions, please. The first one is on the comments on APAC margins. And I was just wondering if you could remind us that over time you aim to achieve a similar conversion ratio or an actual EBITDA margin. And if it is on the EBITDA margin, what do you think you need to get there? Is it more acquisitions of higher margin businesses? That's the first question. The second question is on the M&A side. You mentioned $295 million of M&A spent in 2024 for minority buyouts, acquisition of new businesses and deferred payments. Can you give us a sense of the amount that went into deferred payments, i.e. not contributing incrementally to the P&L? Thank you.

Good morning, Laurent. Maybe for the first question, indeed, we always said that there are no reasons why longer-term APEC could not grow into a similar margin profile as the other two regions. But that's definitely not only due to M&A. It's by, first of all, having skill. And skill helps us, of course, to reduce our margin. As you can see, APEC is growing and starting to have growth. not as big, of course, as the other two regions, but it helps. And then, yeah, we constantly look at improvement programs. And as we have, I would say, a more mature situation and a more mature portfolio, we are also able to manage our gross margin better due to better pricing.

Now, on your M&A question, Laurent, Good morning to you. For 2024, our M&A spend was roughly 295 million. 135 million is related to acquisitions from this year, and roughly 165 is deferred payment, earn-out, put options for acquisition before 2024. In 2024, there was a higher amount, of course, of earn-outs and deferred payments. And then in 2025, we will have approximately 100 million of put options, and mainly burnouts and a much smaller amount of deferred payments. So it's phasing out all in basically Q1 and Q2.

Okay. And on the 165 deferred payments, so there was about 50, I think, for minority buyouts. So we will see the impact on the P&L in 2025. And everything else is just based on deferred payments that is not incremental to the P&L either at EBITDA level or net income level? Yes, correct. Okay, thank you.

As a reminder, if you wish to ask a question, please press star followed by one on your telephone and wait for your name to be announced. And your next question comes from Matthew Yates of Bank of America. Your line is open.

Hey, come on in. Just a couple, please. Just in terms of the order pattern that you've seen, just to be clear on this, do you believe that there's any pre-buying around tariffs, particularly in the US, that maybe is flattering that order book? Or do you think it's more reflective of sort of underlying economic activity and confidence? And then I'd really like to focus a bit on the balance sheet. Leverage is getting close to three times. You said on the call you still have a very healthy or active deal pipeline. Should we therefore think that you're going to be constrained over the next year to just recycling the sort of 200 to 300 million of cash flow you organically generate? Or are you thinking about issuing equity in the way you did in 2023 to support the strategic acquisition pipeline? Thank you.

Let me address your order pattern question and Thijs can further discuss our financial room for doing acquisitions. We haven't seen up to now so much pre-buying for the tariffs. The only place where it was a little bit more was in Canada. But for the rest, I have to say that its customers are more wait and see. As Thijs said before, the positive thing is that we see that our order pattern is coming back to a bit more normalized size per order and frequency. That gives us the impression that even with these tariffs maybe looming over the market, they are more confident about what's happening in the market and not anymore the hand-to-mouth approach that we saw in the last years.

Yeah. So, Matthew, on your question, on the deferred payments, no deferred payments will come out in the first half, and we will see a more natural attrition of the leverage coming down. Please note that I also mentioned that our working capital, which is about 42 points, is coming out of the leverage because we have some work to do over there. And for the rest, basically, we see a more natural trend of the leveraging, which we have been done across the line. What I don't see right now on the cards is basically equity raise like we did in the past. It's not on the cards right now. We focus on organic revenue recovery, taking more gearing on our leverage by basically executing on our operational excellence programs, working on our working capital, and leverage will go down when deferred payments will go. So when they will all happen in basically Q1. So I hope to give you some more background on that.

Okay, thank you.

Your next question comes from Eric Warmer from Kempen. Your line is open.

Thanks. Good morning, Juan. Just one question remaining. It's a question on your payables. You reported cash inflows from payables of around 81 million in H1, which then reduced to 23 million at year end. and quite a strong outflows in H2. Is this correlated to the market recovery or do you observe any change in payment terms and how do you see this develop into 2025? Thanks.

No change in payment terms. There's obviously a timing difference there, Eric. And also, please note that normally our seasonality builds down at the end of the year. Especially December is one of our lower months where you then have this effect as well. And lastly, please also note we pay our principals on time or even ahead of time because that is very important for our relationship with our partners. So I see no change. I think what happened here, what I tried to explain in the working capital on that side, that is quite stable from a traditional, from a pattern point of view. Yeah, but we did do, we did have some more stock and that's why I explained that in the call.

Understood. Thank you.

Your next question comes from Stefano Tofano from ABN Amaro Addo. Your line is open.

Good morning, everybody. A few short questions from me left. The first one is on you mentioning labor cost inflation in EMEA. I was wondering what kind of trends you're seeing there, how big that impact is. You also mentioned the beginning of the call, higher distribution costs. If you maybe can elaborate a little bit on that one as well. And then the last one, I missed the answer of the impact of the portfolio optimization measures in Asia Pacific. Compared to, let's say, normal portfolio optimization efforts, how big was the impact this time in the quarter?

Thank you. Let me first take you on the labor cost inflation, because I do think that you also need to get basically credits for this. If you take our labor cost increase roughly in the P&L, which you can see is roughly 11 million. But that's despite the increase from M&A this year. So that was roughly 12 million. So we reduced our labor costs with basically 1 million. But there's one element is missing in there, which is basically salary cost inflation of 3% on top of that number. So actually, we did a lot of optimization in the back office and basically executing our contingency plans that we started in 2023 and 2024. So we get the benefits of that. Also, our conversion margin remained high. We executed all those programs. and now in the phase that we're basically seeing the top line recovery. So our sales force need to be out there and basically getting into the feet on the street. So the cost element, what I mentioned for labor cost in MIA is not a generic singled out comment. It's more a generic comment across all of our three regions. We also indicated in the call that our inflation cost basically on the labor side is roughly 3%, like any other company. And we, of course, we implement measures to offset that inflation, which we did quite well this year. So that's that one. On the second one, can you remind me again? High distribution costs. Oh, the high distribution costs. Okay. Good point. The distribution cost is, to a large part, is linked to our top line. So when our top line goes up, that's roughly 50% variable. We rent pellet spaces. We rent 3PLs. So there is a direct connection with the top line there. So it's very variable natures. But on the other hand, we don't have the large depreciation cost and a large infrastructure cost. where we are dependent of. So that gives us agility. Now, what we are doing right now, there's a little bit of double cost in our distribution cost due to the fact we have warehouse optimization programs, which always come when we do M&A. And there we have, especially in the Americas, where we're taking basically multiple warehouses to a single stock point for specific segments, where we have a little bit of double cost. On the other hand, We don't see an upward trend in our distribution cost. A bit in the lubricant side. There's also a little bit of mix that have a higher distribution cost. And we had a good lubricant here. So those are the two trends, what you see there. So it's a little bit of time lag for cost savings that are still coming into our P&L in 2025. Your last question that I had, maybe I can take it on, is an optimization program in Asia. You should see these optimization programs more. We do M&A. We build up a business. So you start in a country with a very small portfolio. And over time, you entice your principals to get onto the Azaleas platform. And we have a very attractive value proposition for them. That takes time. So you start with basically only a couple of products in your portfolio. The more products you basically sell into the portfolio, the more margin you can command. If you do M&A, you also take out, for instance, products in there. So in the past, for instance, we made a clear ESG statement to step out of vaping ingredients. So, or tobacco products, that is also still with us, that is in our charter. We do not want to be part of that business, but sometimes we buy businesses and we know that there is basically part of that in. So it's roughly 20 to 30 million. I'm not going to go into a quarter thing because you cannot just say from day one to day two, if we buy a company, boom, you stop it. We do that in consultation, of course, with the customers, but you can take an annual run rate of roughly 30 million euros in your assumptions. Okay.

All right, very helpful. Thank you.

As a reminder, if you wish to ask a question, please press star one. Your next question comes to the line of Laurent Farr from BNP. Your line is open.

Yes, hi. I'd like to go back to Matthew's question around leverage. When you did the capital increase in 2023, the $200 million, at the time you argued that that was to, I guess, pre-fund some of the acquisitions pipeline that you had in mind, and you closed H123 at a leverage of 2.6 times after the capital increase. So I'm just wondering again, on Matthew's question, the 2.9 times, should we assume that the M&A pipeline is not that big in terms of actual spending? Or are you just more comfortable with a higher level of gearing at this stage?

Okay, listen, based upon our cash conversion, we can always be in comparison to a manufacturing basis. We are comfortable with a little bit higher leverage. But, of course, the game is to bring this down. And Azaleas has a natural ability to deliver quarter on quarter. I think you also need to look at the nature of the M&A, Laurent. So when we did that, there were larger M&As. For instance, the Brazilian one, the entrance of the food market in the U.S., Jilco. And basically, these M&As had a different nature than our normal traditional M&A. Right now, we have basically a pipeline where we focus on our small to medium-sized M&As, so tuck-ins as we call them. And then once in a while, there is a bigger one in there, but these are not that big, and they all came at the same time. So that was the driver behind the ABB. So if you take, for instance, right now, when I take my working capital increment, 120 million out, that's already 0.2 of leverage. Then we have, of course, the earlier question that you referred to on the deferred. There's also an impact of that. If you take that into account, it's actually quite acceptable. So our M&A pipeline is promising, it's full, but they are tuck-ins.

Okay, great. Thanks for the clarification.

Your next question comes from Matthew Yates of Bank of America. Your line is open.

Hey, sorry, we're going to go back to the same thing. I want to make sure I understand this. The 100 million that's going out for the deferred payments or the earn out, how does that bring down leverage? Doesn't it make the leverage even higher? Sorry if I'm being a bit silly, but can you just help me understand that?

Yes, it will initially go up, but then they're all done. So there are no other ones anymore coming in. That's what we're trying to say. And obviously, with the pickup in our top line and our improved Q1 performance, what we see, we will see that there, that we see then over the rest of the remainder of the year, you will see us deleveraging again.

Okay, but the flip side of an economic recovery and pickup is that the business has to build receivables and inventory. And when I look at your slide showing the seasonal evolution, I would imagine that you will continue to build working capital through the first half. So should we not think that leverage metrics will go above three times in the short term?

Yeah, I don't. I think in the working capital side and deferred payments in Q1, we're building up the working capital. But right now, our working capital is at elevated levels, as I tried to communicate to you. And you will see this coming down. We saw this already from December to January. And then in February, we get already to a more normalized level. And that's why I also mentioned, Matthew, in all fairness here, that I said, hey, we got some work to do on our working capital side. Yeah. So I'm not so worried about it. We have a very good track record of bringing our working capital down. We also should realize that right now, mature Europe and mature America, for instance, at the case side, is basically still very muted. And that comes in at a much lower working capital absorption than, for instance, the emerging markets.

Okay. And when you say you have work to do, I mean, the working capital build is a function of a stronger order book. Where is the work there for? Is there things around overdue receivables that you can proactively work on?

I think our overdue, definitely. I think we have a very good track record on our overdues, but there's always work on working capital, Matthew. This is a business with such a broad portfolio, about 63 countries. There's always work to do, and I will never say that it is perfect. So I do think on the inventory side, I think we saw basically a phasing there in December where I saw a pickup in the working capital, especially on the inventory side. As I mentioned, those are the three factors, mix, Maybe a bit of pre-buying in Canada ahead of the tariffs of about 4 or 5 million, but that's not moving the needle. And on the other hand, we just need to make sure that especially in our emerging markets, I see our DIO went up a little bit too much. That's where I have some work to do. So it's mainly Latam, Maya, and in certain geographies in Asia. Now then also note, we buy companies on average working capital 30 to 35%. So we did again two acquisitions in December. I got some work to do. I got the full working capital in there. So that is also part of the work that I need to do and where I need to focus on.

But also on the M&As we did in 23, they're still not completely in line. With our own standards, that takes some time. We put them on our own IT systems. That helps them also to have better processes. But that takes time, of course, before that is completely fully operational.

You can assume historical trends. That's what I also indicated, Matthew. Thank you for that.

Thank you both for taking the follow-ups.

As a reminder, if you wish to ask a question, please press star followed by one. And there are no further questions on the conference line. We have come to the end of this call. I want to hand over to Chief Executive Officer Anna Bertona for closing remarks.

Thank you. And thanks again to everyone for dialing in. I encourage you to read more about our progress in the annual report that, as I said before, will be released on the 6th of March. Have a nice day.