Azelis Group NV (AZE) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Azelis Group's Q1 2022 Trading Update. With us this morning are Dr. Joachim Müller, CEO; and Thijs Bakker, CFO. Joachim will start with the operational highlights of the period, followed by Thijs, who will give a financial update. Joachim will then wrap up with an outlook for the remainder of the year, and we'll open the floor for Q&A. We remind everyone that this presentation may contain forward-looking statements that are subject to risk and uncertainty. [Operator Instructions] We will make the recording of this presentation available on our website later today. With that, I'll hand you over to Joachim.

Hello, everyone, and thank you for joining us on this update call. So let me kickstart with a short presentation now. As you might have seen in our press release this morning, we had an excellent start to the year. The group delivered record organic growth of almost 33% with strong performances from all the regions. Demand in both the life sciences and industrial chemicals end markets remain very strong, as we indicated already in March when we presented our full year 2021 results. In Q1, we also completed 3 acquisitions that further strengthened our Lateral Value Chain. Umongo in South Africa, Catalite in Thailand and Whitchem in the U.K. These 3 companies have combined annual revenues of over EUR 160 million. The strong top line growth as well as the benefits from our growing scale, efficient margin management drove a 95% increase in our adjusted EBITA, and an EBITA margin expansion of 215 basis points compared to the prior year. Noteworthy that our pass-through and value-based pricing policy allowed this expansion despite the continued cost increase we are seeing for the materials we are sourcing from our partners. We continue to generate cash, although our working capital was impacted both by the strong demand as well as the ongoing supply chain pressures. Once again, we reduced our leverage ratio to 2.6x at the end of March this year compared to 5x at the end of March 2021. Operationally, we'll continue full steam with our initiatives that will drive and support our future growth. We're still focused on rolling out our digital platforms and building a strong network of laboratories that will keep us at the forefront of innovation. Innovation is a key driver of all we do. We continue to deliver award-winning innovative formulations and solutions for both our principles and customers. So let's move on to the next slide. Let's have a look at our Q1 performance in more detail. At group level, organic growth was a record at 32.6%. The strong growth reflects continued strong demand in both the life sciences and industrial chemicals end markets as well as some positive impacts on higher prices. It should be noted that the impact from volume growth was still greater than the price impact during Q1. In industrial chemicals, we continue to see strong demand in CASE across all regions, supported by positive trends in the building and construction sectors. In life sciences, growth in food and health accelerated following the lifting of COVID restriction in most countries. Additionally, the recovery in pharma and the continued positive plans on personal care have further reinforced demand in life sciences. In the first 3 months, we closed 3 acquisitions, 2 in EMEA and 1 in Asia Pacific. Umongo, which was announced already last year, but only closed in Jan, significantly strengthened our industrial companies footprint in Africa, especially in the local chems and metal working fluids. Catalite, which we built in February, reinforces our portfolio in the personal care and home care markets in Thailand. And in March then, we completed the acquisition of Whitchem, which complements our lateral value chain very nicely and the industrial chemical markets will be okay. These 3 acquisitions represented, as mentioned earlier, revenue of more than EUR 160 million. Now I will hand the floor over to Thijs, who will talk about our financial performance during the quarter starting with the next slide.

Thank you, Joachim, and good morning, everyone. Thank you for attending earnings call. I will provide you a brief summary of the group's financial performance in the first 3 months. As we noted in November last year during our first trading update as a listed company, quarterly updates will provide a high-level financial review and also refer to our press release where there are some more details on this. We, of course, will publish a more detailed financial figures for the half year and full year results. Now let me start with the P&L overview that you can see here on this slide. As we already indicated in March, and as from Joachim's introduction, we're very happy to report the strong growth trajectory from the fourth quarter in 2021 carried on to the start of 2022 resulting in revenue for the quarter to EUR 975.3 million. That represents a year-on-year growth of 59%. In constant currency, growth was 57%, a significant acceleration quarter-on-quarter. The strong performance was on the back of a record organic growth of 32.6%, which was achieved across all of our regions. Revenue growth contribution from acquisitions was 24.1%, and we also had 2.7% tailwind effect in the first quarter from FX translation. Organic growth in the more resilient Life Science segment was strong on the back of customer gains and new mandate gains, which started to materialize and where we expect to ramp up in the coming quarters. As the outcome of this strong revenue performance and the positive development of our order book, also, our working capital levels increased. I'll come back to this later on in the presentation. Our gross profit increased 71% to EUR 235.9 million, which implies a gross margin of 24.2%. The 167 basis points expansion in our gross margin was the outcome of positive mix effect as well as disciplined margin management, pass-through price increases that we incurred from our partners to our customers. But as feels to putting strength from our innovation to formulation work that's happening in our labs. Please note that this is already our seventh consecutive quarter where we booked double-digit gross profit growth. In the first quarter, adjusted EBITA increased by 95% or at a constant mix at 92.3% to EUR 116 million. This translated to a strong margin expansion of 250 basis points versus prior year. Strong top line growth as well as the benefit of our growing scale allowed us to deliver a strong margin uplift despite continued growth investments in digital as well as commercial initiatives. This result also reflects full bonus accruals to cater for the over performance versus our budget. Now all of this resulted in a significant improvement in our conversion margin from 43.3% to 49.2%. So let's move on the next slide to a quick overview of the growth breakdown of our revenue and our gross profit. So here on Page 9, we have broken down the 59% revenue growth and a 71% reported profit growth between organic growth and growth coming from the first time inclusion of acquisitions. The strong performance for the first quarter was supported by M&A. We completed 12 transactions over the course of 2021 and 3 acquisitions were closed for the first time included in the first quarter of 2022 with a combined revenue effect of around EUR 160 million as Joachim already mentioned. Please note that a significant portion of these acquisitions is still not part of our organic growth calculation. 24% of the revenue growth in Q1 coming from the first-time inclusion of these acquisitions. But even more important, as you can see on this slide, the majority of our growth came from the key pillars of our growth strategy, that is organic growth. All of our regions delivering high double-digit organic growth on the back of strong demand in the majority of the end markets in each region. And group level organic growth came in at 32.6%. In addition, this slide also demonstrates our focused ability to execute pass-through price inflation and the hard work in executing our management mentioned programs across all 3 of our regions. This is reflected in the 43% organic growth in our gross profit line. So let's have a look at the regional financial performance in the next slide and provide some color on the underlying results. So what you see on this slide, you see our 3 regions that we have, and we also have a holding, but let's focus on the 3 operating regions here. Starting with EMEA, on the left, revenue increased by 51.6% to EUR 451 million. This growth was driven by strong organic growth of 33.9%. And out of this growth, 19.5% came from the first-time inclusion of acquisitions where in 2022, we closed Umongo in South Africa and Whitchem in late March. In addition, there was a 1.8% of its headwind. So this performance was very impressive. Dynamics in the resilient life science markets were positive, particularly in Food & Health where the recovery, which started in the second half of last year has continued strongly as well, and also demand in pharma was very slow. The rest of the life science markets as well as the industry chemicals activities in EMEA as well as our order book remained very strong. Based on the strong performance, our conversion margin ended at almost 54%, a year-on-year increase of 600 basis points. Now let's move over to the Americas. We continue to see a very strong growth trends there. Revenue increased more than 50% to EUR 367 million, driven by strong organic growth of 28%. The strong demand in both the life sciences and industrial chemicals reflects the strong economic activities across these sectors and also growth of new customers and new mandates. The conversion margin improvement was very small in Americas, going from 49% to almost 54% in Q1 2022. This is on the back of efficiency gains but also a positive mix effect from the inclusion filed in our numbers. In Asia Pacific, we continue to see strong growth momentum both organically as well on the execution of our M&A strategy with total revenue growth of 123% of which 44% was organic and the rest from acquisitions. An excellent performance considering also the newly impacted of the new lockdowns in China. Despite our ongoing investment in this growing region, we managed to deliver 145 basis point step-up in adjusted EBITA margin versus Q1 '21. Our Asia Pacific operations also recorded 900 basis points improvement in conversion margin, 43.2% as we gained scale and momentum in this fast-growing region. So I promise to move on to give some more details on our working capital performance. So let's move to our cash flow drivers on the next slide. Net working capital to revenue normalized for acquisitions ended at 14.6% at the end of March 2022 compared to 15.3% at the end of December 2021, and 10.8% at the end of March '21. Net returns has increased was driven mathematically by adapters to roughly at 45 days and then there is also the inventory ramp-up to support the strong growth during the quarter as well as our strong order book for the second quarter. To give you a bit more color on this inventory increase. In absolute terms, around EUR 196 million of the working capital for the period came from our recent acquisitions. These acquisitions are not yet at Azelis standards. They are not yet on our platform, all of them, as we are still in the process of integrating them and bringing them in line with group policies. We have a good record here. Out of this EUR 196 million, EUR 128 million delayed inventory. Then there are supply chain disruptions. We experienced a higher amount of goods in transit from our suppliers. This accounts for about 12% of our inventory value and almost doubled compared to prior year. To be clear, we do not expect it to be structural. And we expect working capital ratios to gradually return to normalized levels over time, but we have to support our growth volumes. Our leverage ratio reduced to 2.6x at the end of March 2022, despite this elevated working capital leverage compared to the 5x in the previous year to 2.7x at the end of December 2021. Now overall, we are very pleased with the group's financial performance in the first quarter of 2022 and we have a positive outlook based upon our order book development and the execution of our strategy around innovation formulation. With that note, I will hand back the presentation to Joachim for statement and outlook for the rest of the year.

Thank you, Thijs. Well said. We are really well positioned. So hopefully, we have provided you with some insights and how the year has started towards [indiscernible] At the moment, end market demands remain strong, and we have a solid pipeline for acquisitions, but also we are in progress, negotiations about mandate expansions. So that's all looks good. We continue to benefit from the strength of our network and the lateral value chain and the leverage of our growth there. So all on green for me. On the other hand, we also have to manage supply chain pressures, laying out in the industry. But given the strong performance in the first 3 months of the year, we expect to exceed the current consensus estimate of EUR 325 million in adjusted EBITA for the full year by at least 10%. With that, let's open the floor for Q&A.

[Operator Instructions] And our first question is coming from Luuk Van Beek from Degroof Petercam.

First of all, I have a question about the gross margin improvement, which was largely driven by or partly by mix improvements. Can you indicate if that is structural because of the opportunity of putting into reaching higher value-added products? Or is there -- to a large extent an influence from, say, quarterly fluctuations could be lower next quarter? And my second question is on the -- your midterm targets. Because if I look at Q1, you are well, well ahead of it. So even if the rest of the year is flat, this year will be much above the midterm trajectory that you've indicated. Is that -- is your guidance on the conservative side? Or should we take into account the possibility that in the future, maybe in a more difficult macro environment, it will also be a down year? And I think you currently mentioned guidance, so can you give a bit more color on that?

Let me start on the second one on -- with regard to the outlook, which we're referring to that. Yes, we have increased our outlook of the guidance for the year by 10%. But also, yes, it is a conservative one. Our trading remains strong. We have shown in the past whenever a crisis did come to us, be it COVID, but also what happened in 2008, '09, '10, this business is very resilient to crisis situations. We all are in the same boat knowing what's out there in the world with all the uncertainties, but despite all that, we are confident in not only delivering the 10% which you spoke about which are conservative, but also we obviously go. So the outlook is good and stable despite all the turbulence we're seeing. On your gross margin question on the gross margin improvement, I hand it over to Thijs.

Yes. That is a good question. We actually do not see that this is from quarter-to-quarter fluctuation. Obviously, it's driven by mix where that's why we also report the industrial chemicals segment and the life science segment. Industrial segment is a little bit more fluctuating, but life science is very resilient. And then also, please note that in this gross margin there is also the inclusion of our M&A, which is a little bit at a lower gross margin level. We get that up as we do get part of our integration where we sell more products into a similar customer base for multiple principles. So I do not see that this quarter fluctuations other than mixed seasonal trends only in the second quarter. We go more into the summer, and that has an effect on our mix, but I do not see any fluctuations there.

And our next question is coming from Stijn Demeester from ING.

Congratulations on the very good start of the year. I have two questions. The first one is also on the guidance. I assume you have some good visibility on the second quarter. And given the very strong results in Q1, you mentioned it yourself, there is quite some conservatism for the second half, I assume. Is that driven by purely limited visibility? Or have you recently seen a change in order behavior from your clients? Yes, what is sort of driving the conservatism for the second half? And then the second question, can you help me bridge the strong quarter-over-quarter margin improvement on EBITA from 8.5% in the fourth quarter to 11.9% in the first quarter of this year? I believe there was an impact from employee compensation in the last quarter of last year, but was that the main driver? Or was there also an impact of these bonus accruals in Q1? Some color here on the strong margin improvement would be helpful. These are my two questions.

Thank you, Stijn. Yes, on your Q2 question, we're currently seeing, order pattern hasn't changed, right? We're still seeing strong tailwinds so which kind of supports our increased guidance to the market. But there is also this level of being conservative in this equation because we all know there's a lot of unknowns out there, right? The impact potentially the spread of the crisis we've seen in the Ukraine, these are things and then supply chain disruption, these are things which we don't take lightly. Currently, the order behavior of the pattern hasn't changed which gives us confidence that also second half year sailing will be a good one. But we all have read about consumer confidence coming down in Europe. We've all seen that housing starts in the U.S. have slowed down. So these are already indicators for industrial side of the business, going into some sort of the accelerating bill expansion, but maybe not this longest growth we have been seeing over the last couple of months. All taken into account though, we will sail through whatever lays ahead in a good way. Thijs, please?

Yes. Stijn, so your question is actually -- we answered that very simply for you. First of all, as you know, we're always careful in our outlook, and that's what we project. We have quite good insight in our supply chain. So we call that the open order book about 3, 4 months out, it's very positive. And there are also some seasonal trends that's why also we have the working capital that is associated to this open order book because a lot of these orders are already confirmed. So taking that into account, the coming 3, 4 months is basically looking positive. So it's not based on what we're seeing, but because we announced that Joachim just alluded to. And on Q4, normally, Q4 is always a little bit lower. You can look at the working capital chart that's only a little bit a good indicator for the trends. And Q2 and Q3 is actually a little bit stronger. If we look at your question regarding bonus accruals for Q4, because the performance was higher than we anticipated, we had to catch up. We fully accrued based upon our targets. And the Q1 result also incorporates a full accrual basis for the bonuses. So there are no lower accruals if you are referring to that. It's basically the main driver is new business and is doing really well. And obviously, you benefit from the sale effects of that. So there's no basically cost effect in there that's driving that EBITA growth -- that EBITA margin increase. Does that help?

Yes, very helpful.

Our next question is coming from Laurent Favre from BNP Exane.

My first question is on China. With all the changes on acquisitions, I was wondering if you could tell us roughly on the APAC number, how much of that is in China? And also as we've been hearing a lot about chemical companies who had to shut down, in particular in April with a very gradual improvement in May. I was wondering, I guess, what you're seeing in China now and what should we expect for Q2? That's the first question.

So on your question on China, China represents 5% of group, still 5% of [indiscernible] you see the effects of the lockdowns, it's the similar like in COVID. We do not really see the effects there because our customers are being served. They can all work from home. We're fully mobile. So we went, of course, to the COVID exercise, but that's not a real change for us. Obviously, supply chain disruptions are elevated due to this lockdown effect. But we're talking here about, let's say, in the second quarter about an effect of about EUR 5 million in revenue per month. So it's rather limited. Maybe on the second question, Joachim? I was not quite clear what you meant there. Maybe you can repeat that question?

No, I haven't asked it yet. My follow-up question is around M&A and the M&A pipeline. I just noticed that you increased the credit facilities by over EUR 300 million. I was wondering, should we expect this to be a signal of the amount of M&A that you're looking at? Or is it just standard practice?

Well, as we have said all along, M&A is an integral part of our growth story. We promised to the market and we always obviously shoot to over deliver. We promised the 5% organic growth and associated with inorganic growth through M&A of 5% year-after-year. Last year, we have to deliver 12 acquisitions. And this year, we are on a very good run rate to get close or repeat or exceed. We have to see what we did last year. The M&A pipeline is very vibrant, solid. We don't see -- this might be a question. We don't see in the exclusive negotiations that we do and that multiples were creeping up. So from this point, yes, there is more to come. And Thijs and the team was successful in securing the funds needed for things we expect to happen within the next couple of weeks and months.

And the next question is coming from Thibault Leneeuw from KBC Securities.

I have a question with regards to the EBITA margin. Do you expect that the margin that you reported this quarter is sustainable for the whole year, taking into account that last year, the EBITA margin decreased slightly over the year?

I think, we follow the same -- So we follow the same method as last year, this is more mix and seasonality driven, where you normally see margins they were off in Q4, as to do also with working days. So in that respect, we do not see any change. But obviously, we're working in at elevated levels. And obviously, our mix has also changed towards life sciences, FNF, where we made a strategic play into as well that you need to incorporate into that figure as well. We do not expect [indiscernible]

And the next question is coming from Rajesh K. from HSBC.

The first question is on gross margin again. I know you've had received a lot of questions on this, this morning. I just to be sure, from what I understand that you've had some additional formulation work and more technical content, which has helped the mix and therefore, the gross margin. So when we think of first quarter next year, should we assume that some of that cannot repeat and they will revert to a more normal level? Or should we expect that as an ongoing tailwind? That's the first question. The second question is I fully appreciate your desire to be conservative for the second half guidance and that's reasonably prudent. Despite that, your -- just based on what we know as of now on trading, you have increased the guidance, which is significantly ahead of what the market was expecting. Are there any implications for 2023 numbers as well because of this? Because the question we're getting is, do the comps become tough and therefore, should we model a bit of tapering if the chemical prices come down, et cetera. I've heard your answers on this topic before, but just updated thoughts would be very helpful. And last question on the construction leading indicators. Yes, some of the front of the curve indicators have started softening. Can you give us some color on what type of exposure you have to that industry? It doesn't need to be precise, 10%, 12% or something like that. Just an order of magnitude would help.

Okay. On the GM one, whether, yes, it's driven out by formulation work. And yes, it's driven out by innovative solutions we're bringing to the market. But it's also driven out by enhancing our lateral value chain offering to existing customers and new customers through combining portfolios, winning new mandates and by doing M&A. So all of this is work we are doing to get more from a given customer, which kind of obviously increases his buying service level he's getting from us with more population is higher. So we're very confident that the margins we are generating this year will not go back to the ambition is, and I think we promised this all with the market that we do continue to expand our value offerings to be an innovation service provider to the markets. Hence, we are confident that this will also in 2023, that this will be sustainable. On your question on exposure with regard to industrial markets and what we are seeing as a harvester on the horizon on a slowdown on demand and inflation going up and so on and so forth, purchase power value, the growth is coming down. Well, as said, we have 61% of our business is on this, the business which is on the life science. So from life science, also when you go back to whenever we were previous disruptive situations, life science turned out to be super. So I know, we shouldn't expect any different going forward. On life science, it was 61% before and the 39% of the portfolio, it's really -- it's more of a mixed bag. But there, again, we have seen that, we then have to go for some submarket segments. Some of the markets we're involved with like decorative coatings and the housing industry, right, they are coming at basically at the end of a project. So even if the economy slows down, nobody will start by building a house with these middle building out. We have another segment, which is a not so significant segment, let's say, EUR 30 million, EUR 40 million segment, which is going into kind of more of the construction chemicals, stabilizing motor and all of these things, right, they're kind of early in the cycle, there you would see an early impact. I guess what I'm trying to say is also on the industrial side, we have so many different segments that we will see individual streams of market growth or slower growth. So all-in-all, again, as to what we have seen, let's just go back to what we've delivered in 2021, even at the height of -- crisis of COVID, we were able to come on a like-for-like basis out of '20, it was a stable top line and with an increase of EBITA to our increased service offering. Does that answer your questions? Or is there anything Thijs, you like to add on?

No, I think on the construction side, there are many subsegments. Cases around 20% of our total revenue base. Not and it's different segments. That's where it is.

That's clear?

This is very helpful. No, it's very helpful.

And we do not have any further questions for now. [Operator Instructions] And we have one more question from Luuk Van Beek.

Just had one follow-up question on the way you're passing on cost increases. You pass on basically the absolute amount, which would be that the margin that you reported, do you -- are you able to maintain your margin may be it increase it on top of the cost increase that [indiscernible]

I didn't hear you. Whether we were able to expand over and above what we are getting from our partners as cost increase, and obviously, when you look into our margin expansion, yes, we do. It has something to do. We are in the specialty side of things, and we are offering services over and above. So yes, to us, just when you look into fundamentals and when you cannot increase prices, these type of an environment where everybody knows, there is inflation going on, obviously. It's also easier for us to up-price our offerings. So this is really clear. Clearly, you can see that I'm looking at it, you know, but. Thijs?

I think, look, where we create value is through innovation and formulation by our lab. So we offer multiple products to multiple customers. And obviously, we help them with technical solutions. And we apply value-based pricing. So first of all, on the price mechanism, we pass through any price increase that we get from [indiscernible] that is normal. And then second, will we work on the technical solutions for the customer and that drives basically our margin.

And we have one more question from Stijn Demeester.

Yes. A follow-up on the acquisition so far. You mentioned the EUR 160 million of sales acquired. I assume there's little contribution in the first quarter and the revenue guidance is helpful. But yes, what sort of margins do these acquisitions should we think of? Is that below the group? Can you sort of give some color here on what to expect and what to model?

We currently -- it's a mixed bag, but they are not all at group level, but we have a strong conviction that we will be able to manage them at group level. Again, through combining lateral value chain or service offerings we already have in the countries we are in. So we will manage this up over time. And the same is true, obviously, and Thijs alluded to that on the working capital side, where we see -- when we acquire, there's a lot of best practice in the management, when it comes to how to manage working capital. But obviously, we have our processes in-house, which we will implement over time to manage the sale.

Yes, and Stijn, Whitchem, which is in CASE, we acquired in -- we closed that in the last week of March. So that is -- the balance sheet is fully in, but the P&L effect you cannot see there.

We do not have any further questions. [Operator Instructions] Ladies and gentlemen, that concludes today's question-and-answer session. I will now hand over to the management team for closing remarks.

Well, thank you all again for your interest in Azelis. You have seen we've started a journey quite a few years back on being a leading innovation service provider of our industry with the core target of being also delivering sustainable solutions to the end market. All the acquisitions we did, supported this target. We are on a good track to do this, what my first part of our 30 years ago told me, always under promise and over deliver. We will continue to stick to this. And I'm confident that with a great team we're having at Azelis that we will have core results with more good results to report about in the months to come. With this, I thank you again, and look forward talking to you next time. Thank you.