Azelis Group Nv

Good day and welcome to Azalea's Q1 Trading Update call. We trust you've read the press release with the details of our Q1 performance. As usual, today we are joined by Anna Bertona, Group CEO, who will give high-level comments on our progress during the start of the year. Thijs Bakker, Group CFO, will give an overview of our financial performance. Then Anna will round out with some comments on the outlook before we open the call for Q&A. We will make a recording of this call available on the website later today. With that, I'm handing you over to Anna.

Thanks, Pam, and good morning to everyone. Thanks for tuning in today. And indeed, as Pam already said, I'll start providing a high-level overview of the trends we saw in the first quarter and our performance during the periods. Thijs will take you through the numbers. I will conclude with our view on the outlook. And we will then have Q&A. So let me start with the most important messages based on our progress in the first quarter. first sentiment has been shifting and i'm sure this applies not only to our industry but even with rapidly changing trends we maintained positive organic revenue growth momentum for the third consecutive quarter the growth trends continued to vary across regions and end markets but on average volume growth was positive and pricing remained more or less stable Second, at the end of 24, we had planned our costs based on revenue growth assumptions that are materializing much slower. As we have limited visibility on how the tariffs will impact our industry and demand in general, we believe that it is prudent to plan for alternative scenarios. We have now activated several contingency measures to save 20 million on costs to protect our profitability in light of the rising uncertainty. Thijs will share more details about this. The final point that I would like to make is this. It's easy to only mention the uncertainty, the volatility, the risk, and the ever-changing statements on trade and tariffs. But we should also remember that volatility creates opportunity for us, being a large diversified global company. We can follow trade shows close and have the agility to go after the pockets of growth that are always present. When demand or production slows in one region and trades get redirected somewhere else, we can pick it up in another region. When customers need to reformulate because certain ingredients are not longer accessible, we can help with innovative solutions. And this is where the power of a global presence and the breadth of a portfolio becomes important. And this is also why it is important to strike the right balance between making sure we control our costs, but also making sure we have the capability to respond to opportunities quickly, be it from our customers or from our principals. Now let's move to the key highlights from the first quarter on the next slide. In the first quarter, revenue increased by 4.5%. 2.5% of that was organic growth, and M&A contributed 2.2%. Gross profit grew at a more moderate rate of 1%, and therefore our gross margin contracted by 77 base points. This was due to the mixed effect from acquisitions and from higher contribution from industrial chemicals, which tend to come at lower gross margins than life sciences. Adjusted EBITDA decreased by 3.8% compared to Q1-24, which means that EBITDA margin contracted by over 90 bps. This is obviously disappointing and we are not going to sugarcoat it. We added costs anticipating faster organic growth, but the organic growth developed much more slowly and the uncertainty is also increasing. As just mentioned, we are executing cost management measures to ensure that we protect our profitability. Despite the higher costs during the period, we remained focused on generating cash. And free cash flow increased by 5% to 120 million, mostly by managing our working capital during this volatile time. Let's look now at some of the drivers of the results on the next slides. In life sciences, trends vary across end markets, but on the whole, we still see volume growth, especially in the more defensive end markets like pharma. Home care continues to deliver very good performance across the group. In food, the volume trend remains positive and on average, pricing is stable, although there are specific product categories that are under pressure. Agri in EMEA remains good, driven by volume growth and positive pricing dynamics. APEC Agri was flat with volume growth partly offset by price pressure. And in the US, the unseasonably dry weather resulted in weaker performance. In personal care, we are seeing some headwinds, especially in North America. We believe that discretionary spending is slowing as consumer inflation expectations have started to rise. Trends in industrial chemicals have been mixed in case volume growth continues to be positive in EMEA while we started to see a slowdown in the US, and this is consistent with the slowing PMI. Case in APEC continues to be pressured by a weak China. For loops and metalworking fluids, the continued positive trends in EMEA and APEC are more than offsetting the slowdown in the Americas. On a regional basis, we have seen a clear shift in sentiment. Especially in the U.S., we saw a deceleration in organic growth in the last four to six weeks of the quarter. We are seeing customers putting in smaller order sizes again, reflecting lower confidence in the short-term outlook. In EMEA, we have not yet experienced a significant change in customer behavior. We continue to see volume growth, and prices remain broadly stable in most of our end markets. And our business in APEC is supported by good performance in India and Southeast Asia. Our performance in these markets partly offsets the continued weakness in China. In terms of inorganic growth, we continue to execute on our M&A strategy. And a slower start of the year in terms of completed deals is purely a function of timing. It is logical to take time to incorporate the rising uncertainty into discussions and valuations. and sellers are not in a hurry to complete the deals with so much uncertainty being embedded into valuations. Therefore, the risk from the unprecedented volatility is also extending the time to complete transactions. However, the pipeline remains exciting, and I'm looking forward to soon presenting some projects we have been working on. Now, let me turn you over to Thijs, who will talk more about the financial results.

Thank you, Anna. Good morning, everyone on the call. I will start with an overview of the group financial performance for the first quarter. Let me get going with slide nine of our headline P&L and revenue split between life sciences and industrial chemicals. In the first quarter, we recorded a revenue of 1.1 billion euro representing year-on-year growth of 4.5% or 4.7% in currency. This growth reflects the performance of a resilient life science business which grew 3.7%, and the ongoing recovery in industrial chemicals businesses in EMEA and Americas, which grew by 5.8%. This picture mainly reflects volume and mixed effects across our operating regions, less pricing. Our gross profit for the first quarter was 264 million euros, representing year-on-year growth of 1.2% on a reported basis, or 1.4% increase in constant currency. Gross profit as a percentage of revenue contracted by 77 basis points to 24%. The contraction was largely due to the mix effect, as industrial chemicals, which tend to come with lower gross margin, were slightly faster than life sciences, as you can see on this slide, but also driven by dilution from recent acquisitions. In the first quarter, we achieved an adjusted EBITDA of 120 million, resulting in an adjusted EBITDA margin of 10.9%. The 93 basis point contraction was driven by mixed effect across our businesses. Increased distribution costs, as our top line also picked up, salary cost inflation, phasing of marketing costs and events, and FTE increases in anticipation of the return to growth. That's where our budget is based upon. The slower development in adjusted EBIT growth resulted in a conversion margin of 45.4%, during the first quarter, which is a 236 basis point contraction from prior year. Let's move here to the next slide, where I provide a quick overview of the growth breakdown of our financial metrics between organic and inorganic. I will take you a little bit more to regional details in the following slide, in addition to the segment comments that Anna already gave. In the first quarter, our group revenue growth came at 4.5%. Supported by positive organic growth of 2.5%, this marks again the third consecutive quarter of positive organic revenue growth. Some color here. This organic growth was driven broadly by good performance across most end markets in EMEA. Strong performance in our newly built food platform in the US and continued recovery in industrial chemicals in both North and South America. Although this is happening at a lower pace than we expected. In Asia Pacific, we saw continued weakness in China, especially in the industrial chemical segment. The continued strong performance of flavors and fragrances in APEC offset this partially. Revenue growth contribution from M&A during the quarter was 2.2%, whilst FX remained a slight headwind of 0.3%. In the first quarter, Group cost profit grew by 1.2%, driven by a 2% growth contribution from recent acquisitions, setting a slight decline in organic cost profit. The decline in organic cost profit, especially APAC, was mainly due to geo and product mix effects, and impact also from the group portfolio optimization program, which started in the second half of last year. Now, the adjusted EBITDA for the first quarter declined by 3.8%, with a 2.5% growth contribution from recent acquisition, partly offsetting the 6.1% decline in organic EBITDA. The organic EBITDA decline, especially in EMEA and Americas, was driven by salary cost inflation and higher investments to position ourselves in anticipation of growth recovery. Note that last year, these cost effects were offset by cost mitigating actions. And there is, of course, a lapping effect of salary increments, which happened only in April. Simply put, we added cost in line with our expectation for higher organic growth, especially in EMEA and the Americas, which resulted in an adjusted EBITDA decline during the quarter. To prevent further deterioration in our EBITDA margin, we have already started a contingency plan to deliver euro 20 million in annualized cost savings. We'll continue with these cost measures for as long as the risk to our revenue and profitability remains at these elevated levels. Please note that Azelis has an excellent track record in managing this and reflecting the asset-light business nature of our business model, we can manage our cost in a semi-variable basis. These cost savings relate to accelerating our commercial and operational excellence program as presented in our capital markets event. We're just accelerating the execution and we're focusing on our M&A integration, which we bring forward, but also shared service hub migration programs and recalibration variable compensations. Now, let's have a look at our regional financial performance on the next slide. In EMEA, which makes up 45% of group revenue, of which 65% is in the resilient life science area, revenue grew by 7.8% year-on-year to €496 million in the first quarter. This was driven by a 4.5% organic revenue growth combined with a 3.9% contribution from recent acquisitions, slightly offset by an ethics advent of 0.6%. The organic revenue growth was driven by a strong recovery in the industrial chemical business, notably strong volume growth in case and loops and metalworking fluids, although at much lower margins. In Q1, the region also reported steady growth in life sciences, supported by volume growth in food and agri, and the beginning of recovery in our pharma business. Cost-profit in EMEA grew by 4.2%, resulting in an 88 basis points contraction in cost-profit margin. This was mainly due to a mixed effect from the strong recovery in industrial chemicals. It is coming back. and higher contribution from emerging markets in the regions, both of which come with lower margin levels, so it's a pure mix effect. Adjusted EBITDA declined by 5.6%, resulting in a 177 basis points EBITDA margin contraction to 12.5%. This is mainly due to salary cost inflation in the region, dilution from recent acquisitions, and also FTE increases on the front side as we geared up for growth. The lower EBITDA resulted in a 508 basis points step down in conversion margin to 49.2%. Now let's turn to the Americas, which makes up 35% of group revenue. Revenue for the first quarter was to 384 million euros, representing 3.3% growth year on year. driven by a 2.8% organic revenue growth and a modest growth contribution from recent acquisitions. Impact from EVIX was broadly neutral. The organic revenue growth was driven by a recovery in the industrial chemicals business and a mixed performance in life sciences. The recovery in case is there. We have a large portion of our industrial chemicals business in the U.S. in case it's there, but it's not in line with our expectations yet. In the U.S., we continue to see strong performance in the food and home care business lines, offset by weaker performance from agri due to unseasonably dry weather, and lastly, deceleration in personal care, partly due to shifting consumer sentiment over short-term economic outlooks. On a positive note, during the first quarter, Canada was stable and Latin America continued to benefit from positive volume momentum, and we see an uptick in our F&F volumes. Gross profit in the Americas was stable at 92 million euros, with an 81 basis point contraction in gross profit to 24%. The margin contraction was mainly driven by mixed effect across the businesses in the region with higher contribution from industrial chemicals in Latin America. Adjusted EBITDA declined by 4.6% in the first quarter, driving adjusted EBITDA margin to 11.2%. The 93 basis points contraction was mainly due to higher personnel costs due to salary cost inflation and increased FTE, higher distribution costs and dilution effect in Latin America. Overall, this resulted in a 223 basis points step down in conversion market to 46.8%. Now, lastly, Asia Pacific. During the first quarter, revenue decreased slightly to 280 million euros. Organic revenue declined by 2.1%, partly offset by a 1.6 revenue growth contribution from recent acquisitions. Please note the results during the quarter include the impact from the group's portfolio optimization program, which started in the second half of last year, the shift towards more pure specialties. This had a negative revenue impact of 2.3% in the region during the first quarter. The life science business in the region actually performed really well, driven by good performance in F&F and pharma, offset by weaknesses in China, especially in the industrial chemical sector. Cross-profit in APEC declined by 3.9% to 45 million euros, resulting in a 70 basis points cross-profit margin contraction to 20.8%, mainly due to a mixed effect from higher contribution from India, which comes at generally lower margin, and lower contribution from Australia and New Zealand that comes typically with a higher margin. So it's purely a geographical mix shift. Despite the declining gross profit, adjusted EBIT increased by 7.6%, driving an 84 basis point adjusted EBIT margin expansion to 10.9%. This was mainly due to mixed effect from recent high margin acquisitions, therefore margin accredited, and there is less dilution from previous acquisitions as we continue to execute on our M&A integration programs. We're also starting to reap the benefits of our growing scale in the region as well. This resulted in a 563 basis points expansion and conversion margin to 52.6%. We're integrating again and again that over time we see margins for Asia Pacific being similar to EMEA and Americas. Now let's move on to our working capital slide. Now, let's look at the main driver of our cash flow, working capital. Net working capital sales was 14.7% at the end of March 2025, compared to 15.9% at the end of December, and 13.9% at the end of March 2024. Compared to December, we've made good progress in reducing our working capital levels as indicated in the Q4 call. while the higher working capital compared to Q1 last year was driven by higher inventory due to improved demand. Bob, there's still some work to be done there, and as you can see, we're very good at managing this. We generated as the outcome of that free cash flow of 120.3 million euros, representing a cash flow conversion of 99.7% for the period. Status has a very high cash flow conversion compared to the cash conversion of 91% in Q1 last year. This is mainly driven by the cash release from lower working capital investment compared to the end of December. Once again, a demonstration of our asset-light, highly cash-generative business. Overall, we will continue to optimize our working capital and focus on cash generation regardless of business cycle. With that, I'm handing the floor back to Anna for some closing remarks and the output.