Azelis Group Nv

Good morning and welcome to Zalos' nine-month trading update call. As usual, we have Anna, Group CEO, and Thais, Group CFO, with us. Anna will give a high-level overview of our performance and a few words on the outlook at the end of the presentation. Thais will walk us through the numbers. We will take questions after the presentation, but until then, you will be on listen-only mode. We would like to remind you that the presentation and Q&A may contain forward-looking statements that are subject to risk. Now let me hand you over to Anna.

Thanks, Ben, and good morning, and thank you for joining us today. I will go off script a bit here and open the call by addressing our announcement regarding our Group CFO. As you have read, after 10 years of service, Thijs has decided that it's time for him to move on and get cracking with new challenges outside of Azelis. Thijs started at Azelis three years after I did, And I was then CEO of EMEA, and he decided to fill in the open EMEA CFO position at Interim, next to his group role. Originally for a short time, but he continued in this role until I moved to the group CEO position. So we have worked together very closely for 10 years. When he joined Azelis, we had an EBITDA of 90 million, leverage of almost 7 million, and a disjointed finance organization that shared only the Azelis name and not much else. He came from a Kashi APEC finance leadership role in a big international chemical company. He must have been tempted to turn around and catch the next flight back to Singapore. But for some reasons, he stayed and took on the challenge. And I'm very glad he did. One of the milestones in his finance leadership journey was obviously leading the IPO of Azelis in 2021. I'm also grateful for Thijs for helping me with my transition into the Group CEO role last year. We are in the process to appoint his successor and we have agreed that Thijs will stay until it's necessary to have an orderly handover. And in the meantime, we plan business as usual. One thing is certain, I will miss him as a colleague and as a person. Now let's turn to our results for the first nine months of 2025. And as usual, we start with the most important messages based on our progress year to date. First, the market remained difficult with the challenges in the first half of the year persisting in Q3, as the industry normalizes and adjusts with the ever-shifting geopolitical and trade dynamics. The 34% increase in our free cash flow demonstrates our strong ability to align our working capital investments to the demand environments. Second, as we have limited visibility on when the market will normalize, we are balancing our cost structure, cost reduction measures to right-size the organization, while doubling down on investments to future-proof Azelis and ensure that we emerge even stronger. I am pleased we are delivering well above the commitment we gave on our cost savings program. And my last point will be familiar to you, and it's a point that I firmly believe in. The fundamentals of the specialty chemicals and ingredient distribution industry are intact and the long-term drivers remain attractive, as was also confirmed by the latest BCG chemical distribution study. Yes, we face some temporary challenges. Yes, the normalization is taking time, but consumers will continue to consume and products will continue to be produced. Principles more than ever need a strong partner to grow their business. and the role that large distributors like Azelis play will only expand. Now let's move to the results of the first nine months on the next slide. In the first nine months, we made revenue of 3.2 billion, a 2% increase over the prior year in constant currency. Our granite growth was broadly stable despite the slowdown, specifically in EMEA in Q3. Our gross profit in the first nine months was 752 million, which is 1% behind the previous year in constant currency. Gross margin contraction was due to the negative mix effect from our newer business in emerging markets. Adjusted EBITDA for the period was 333 million and adjusted EBITDA margin was 10.5%, while conversion margin was 44.2%. The contraction in our profit margin reflects the compression in our gross profit and partial benefit from our cost savings measures, which will ramp up in Q4. We generated 293 million in free cash flow, so our cash conversion ratio expanded by 29 percentage points to 87%. This reflects our disciplined approach to managing the business and shows once again the resilient nature of our business model. Our leverage at the end of September reached 3.4. due to the slow organic EBITDA development, a peak in deferred payments earlier in the period, as well as M&A investment in select growth opportunities. We are still committed to our leverage policy and expect to manage this back to below three times while balancing investments for the future. Now let's turn to the drivers of these results on the next slide. And in this slide, I'll walk you through the key trends that we saw during the period. We saw a mixed trend in life sciences and incremental challenges in industrial chemicals, especially in the third quarter. Momentum remained strong in pharma across all three regions. Food was strong in the US, and in fact, growth accelerated in U3. In APEC, we saw some green shoot with some normalization. However, this was offset by weak performance in EMEA, especially in Middle East and Africa. Agri was broadly stable. And in personal care, the continued positive momentum in EMEA mitigated the softer trends in US and APEC. Although in these regions, the rate of decline in PC somewhat moderated in Q3. Turning to industrial chemicals, we saw incremental slowdown. In case, we saw weaker trends in EMEA with volume growth offset by price pressure, especially in Middle East Africa. In the Americas, demand remained soft. and prices are holding up. Where we saw, though, some positive signs was in APEC, with positive volume growth for the first time in seven quarters. Although I would be cautious here, it is too early to tell if this is a real inflection point. And then Loops Metalworking Fluid delivered soft performance in Q3, driven mostly by weakness in EMEA, lower volume, and price pressure. And this was somewhat mitigated by better performance in the U.S., while an APEC loop was stable. If we look at the regions, EMEA delivered weak performance in Q3 after a strong start of the year, and that's mainly driven by a slowdown in industrial chemicals and broad-based weakness in Middle East Africa. Trends in the Americas remain soft across the board, with the uncertainty over the short-term economic outlook continuing to weigh on demand. And then lastly, in APEC, the competitive pressure across Southeast Asia due to oversupply from China continues. But on a positive note, we are starting to see some green shoots in China. If we look at inorganic growth, we continue to pace our M&A, focusing only on the most strategic projects while our leverage is elevated. we will now pursue compelling growth opportunities. And this is reflected in the acquisitions that we have completed here to date. Stolken was the missing piece in our offering in Spain and gives us access to the lucrative and growing nutraceutical markets. As Emit and Distona are small bold-ons that complete our business in India and Switzerland respectively. And with Achef, we are creating the largest personal care distributor in Italy. providing skill benefits and synergies. The pipeline remains strong, and I'm confident that we will return to full M&A execution as soon as we have stabilized the balance sheet to below three times leverage. And with that, I now hand over to you, Thijs, to walk us through the numbers.

Thank you, Anna, and good morning, everyone. As Anna mentioned, our resilient model and disciplined execution continue to support us through a volatile environment. I will now walk you through the group's financial performance and regional developments for the first nine months of 2025 with a focus on the third quarter. Now let's start on the next slide with a high-level overview of the P&L and the drivers of our performance in the third quarter and the first nine months of 2025. Our group revenue for the first nine months of 2025 reached 3.2 billion euros, representing a year-on-year growth of 2.1%, measured at constant currency. This reflects a 2.4% growth delivered by our life science business and 1.7% growth of industrial chemicals, both measured at constant rate. In the third quarter, revenue came in at around 1 billion euros. This indicates a 3.8% year-on-year decline, giving a 3.5% EVIX headwind and a 4.1% organic decline, offsetting 3.9% revenue growth contribution from acquisitions. Cross-profit for the first nine months came in at 752 million euros, representing a 1.3% year-on-year decline at constant currency. Cross-profit as a percentage of revenue contracted by 80 basis points to 23.7%, mainly due to mixed effects from emerging markets and competitive pressure in Asia and Latin America. The adjusted EBITDA came in at €333 million, reflecting a year-on-year decline of 7.1% at constant currency, resulting in an adjusted EBITDA margin of 10.5%. This performance reflects our lower gross profit from especially emerging markets and only the partial benefit from our cost savings, which are on track and are expected to ramp up in Q4. The slower development in EBITDA growth resulted in a conversion margin of 44.2% compared to 47.1% in 2024, but this indicator remains robust in my view. Now let's look at the breakdown of our performance drivers on the next slide. On this slide, we provide a high-level breakdown of revenue, gross profit, and adjusted EBITDA into organic, M&A, and FX. The breakdown by business provides insight into our regional diversification as well. On the revenue line, growth contribution through acquisitions offset the decline in organic revenue, as well as the negative effects of FX translation. Organic revenue was broadly stable in the first nine months of the year with growth in EMEA offsetting softness in the Americas and Asia-Pacific. In the third quarter, organic revenue declined 4.1%, maybe in industrial chemicals, while life science remained resilient with a pickup towards the end of the quarter. Gross profit in the first nine months declined by 4.1%, driven by an organic decline 4% and a 2.8% of X headwind, partially offset by a 2.7% growth contribution from recent acquisitions. In the third quarter, organic gross profit declined by 8.6%, driven by mixed effects, price pressure, and regional dilution. Adjusted EBITDA for the first nine months was supported by contributions from the acquisitions, partly mitigating the 10.2% decline in organic EBITDA and 2.8% heft. The organic EBITDA decline was driven by lower gross profit margin and higher operating costs in EMEA and Americas as the benefits from our cost-saving initiatives are only partly reflected in the result. Maybe zoom in a little bit on that. Please note that our operating cost in the quarter is coming down significantly and is lower than prior year, despite payroll inflation and acquisition impact. The operating cost is down 2% year-on-year, despite roughly 3% to 4% salary inflation and acquisition impact, resulting in being well ahead with the communicated cost savings, and we will see more ramp up in the fourth quarter. Now, let's have a look at the regional financial performance on the next slide. Let's start with EMEA. This makes up 45% of our group revenue. Revenue for the first nine months came in at 1.4 billion euros. representing a year-on-year growth of 5.9% or 7.2% in constant currency. This was driven by organic revenue growth of 1.4% and revenue growth contribution from acquisitions of 5.8%, partially offset by 1.3% FX headwind. In the third quarter, revenue increased by 4.2% year-on-year as the organic decline of 5.6% was offset by 0.8% EVIC tailwind and 9% revenue growth contribution from acquisitions that we did. During the quarter, the life science business was broadly stable, with growth in agri and personal care offset by weakness in food, particularly Middle East Africa. Industrial chemicals delivered weaker performance during the quarter, especially in case and loops and metalworking fluids, as demand in terms of volume slowed in the largest markets and our business in less mature markets saw only modest volume growth. Gross profit in EMEA grew by 3.6% year-on-year or 4.7% constant currency to €365 million, translating to a 56 basis points contraction in gross profit margin to 25.4%. This is mainly driven by a mixed effect across the businesses in terms of volume. During the quarter, margins were stable compared to previous year at 25.4%. The adjusted EBITDA margin decreased by 3% to 175 million euros, resulting in 112 basis points, adjusted EBITDA margin contraction to 12.2%. This is driven mainly by the aforementioned mixed effects and higher operating costs compared to prior year, benefits of the cost savings actions in the region partially reflected in this result. I'm not concerned there because this region is well on track to deliver their cost savings commitments ahead of communication, and we expect improvement of the run rate of these savings in the fourth quarter and, of course, next year. Both resulted in 329 basis points stepped down and conversion margin to 48%. And let's turn to the Americas. This makes roughly 35% of our group revenue. The revenue for the first nine months ended at 1.1 billion euros, reflecting a year-on-year decline of 5% or 0.9% in constant currency. Organic revenue and M&A revenue contribution were broadly stable. while FX translation presented the negative impact of 4.1% as the euro strengthened versus the dollar, and that obviously impacts our performance. In the third quarter, the revenue declined 8.1%, with minus 6% FX effect, quite material, and 2.1% organic decline. The organic revenue decline was driven by a mixed performance in life sciences, where we see accelerated strong growth in food and pharma, offset by demand softness, in other end markets in the segment. Our industrial chemical business in the Americas remains weak. With return, although slower than expected volume growth in case, largely supported by better growth in loops and metal working fluids, but that's coming at lower margins. Gross profit in the region declined by 9.2% to 266 million euro, with 109 basis points contraction in gross profit margin, 23.7%. The margin contraction was mainly driven by mixed effects across the business in the region, with higher contribution from industrial chemicals and Latin America, as well as margin pressures in that region, LATAM, where margins were diluted by low margin products in Colombia. Adjusted EBITDA declined by 15% to 127 million euros, driving adjusted EBITDA margin to 11.3%. The 133 basis point contraction was mainly due to the softer top line in gross profit and dilution from a less mature Latin America business. Also here, the results only reflect partial impact from the cost savings programs, which we expect to ramp up in the fourth quarter. The lower adjusted EBITDA results in a conversion margin of almost 48% for the first nine months of 2025. Now let's move to the last region, Asia Pacific, There, the revenue declined by 7.2% to 670 million euros, driven by an organic decline of 4%, a VIX headwind of 4.4%, partially offset by revenue growth contribution from acquisitions of about 1.1%. The third quarter was tough. In the third quarter, revenue declined 11.7%, with 7.6% VIX and 4.6% organic. This organic revenue decline was driven by continued pressure in Southeast Asia, as in our view, tariff-related uncertainties continues to weigh on demand for pricing due to excess supply. Also weakness in Australia and New Zealand and residual impact of our portfolio optimization program in the region as we close the plan. On a positive note, as Anna also already alluded to, China delivered broadly stable performance during the quarter and we're seeing green shoots within case and AMA. and a return to organic growth in the life science business as well. Gross profit in Asia-Pacific declined by 12.8% to 121 million euros, representing gross profit margin of 19.6%. The 126 basis point gross profit margin contraction reflects negative mix effects as well as the competitive pressure in Southeast Asia, which we also flagged in H1. The adjusted EBITDA for the first nine months declined by 10.4% or 6.2% in constant currency to 59 million euros. It's resulting in a 35 basis points margin stepped down to 9.6%. In here, the conversion margin actually expanded by 129 basis points to 49%, demonstrating disciplined cost control to mitigate ongoing demand pressure. The region is performing here very well. Now let's turn to the main driver of our cash flow generation, working capital. On the next slide. Networking capital as a percentage of sales came in at 15.3% at the end of September 2025, compared to 15.9% at the end of December 2024, and 16% at the end of September. of September 2024. As communicated before, we are very confident and we indicated that also in H1 to bring this back in line and are delivering on these commitments. Compared to December, we've made continuous progress, reducing our working capital levels. We've made significant progress in improving our DIO and we are expecting our working capital will continue to trend down in Q4 in line with some historical seasonality and our commitment to managing our working capital while the demand environment remains uncertain. As always, and I've been building that over the years with the teams, our systems, processes and team efforts, as well as our predictive engines, allowing us to optimize working capital to protect our cash flow and manage our debt levels. That leads to, in the first nine months, our free cash flow increased by 34.3% year-on-year to 293 million euros, representing 29% point uplift in free cash flow conversion to 87.1% for the period, compared to 59% in 2024. This is a true reflection of our asset-light business model, and please note, we generate cash. Now, in summary, Q3 reflects margin pressure, regional volatility, and FX headwinds. But our cost actions are delivering, and we remain on track for Q4 recovery. A resilient asset-like business model, strong liquidity, and disciplined execution position as well to navigate the remainder of 2025, and we're well positioned to pick up volume as and when the market returns. Now, with that, I'll hand back to Anna for some closing remarks.