Azelis Group NV (AZE) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for dialing in today. We are joined by Anna Bertona, Group CEO; and Thijs Bakker, Group CFO. Anna will give an overview of the developments in the first half of the year, and Thijs will present the financial results. Afterwards, Anna will give some color on the outlook. As a reminder, this call may contain forward-looking statements that are subject to risks. [Operator Instructions] A recording of the call will be made available on our website. I will now hand you over to Anna.

Good morning, and thank you for joining us today. I would like to start with the key points regarding our results for the first half of '24 and actually, these are similar to the messages I gave during the Q1 earnings call in April. So the results of H1 reinforce what I said then. First, we continue to hold the line in terms of conversion margin, while the market remains challenging. We worked hard to achieve over 47% conversion margin in '22, and we are determined to maintain a high level, while at the same time, ensuring that we are well positioned for the recovery in the market. Second Point is that we are in a period of stabilization in the industry. We started seeing some green shoots earlier this year, and some of them are taking root. In general, volumes are improving, even though it is taking time to translate to top line growth because there is still price pressure in some of our end markets. It is a slow recovery and especially in EMEA, still wobbly but the trends are going in the right direction, which leads me to the final point. The slowly improving trends as reflected in our results year-to-date supports my expectation that we will return to organic growth sometime in H2. And to give more context to this, we actually saw a positive organic growth in April, but volatility returned in May. Also, we had some exceptional items in Q2 like product shortage due to supply issues at one of our principles in the Americas and delays due to the Red Sea situations. And these are circumstances that add complexity to already challenging markets, but they also give comfort that even with these added unforeseen issues, we are able to navigate and deliver improvements. Now let's go through the key updates so far this year on the next slide. In the first half of 2024, we achieved a revenue of EUR 2.1 billion, which is a slight improvement compared to H1 '23 on a constant currency basis. In the second quarter, our revenue increased by 4.2% on constant currency supported by M&A contribution and stable organic revenue. Our gross profit in H1 was EUR 526 million, which is a 3% year-on-year improvement on a constant currency basis as we benefit from our diversified portfolio. Adjusted EBITA came in at EUR 254 million equivalent to an EBITA margin of 11.8%, which is stable from Q1. As mentioned earlier, our conversion margin remained strong at 48.2% and we also continued to execute our M&A strategy to fill the gaps in our portfolio. And in H1, we closed 4 acquisitions and announced 2 further acquisitions. And then lastly, we are proud to have won the Ringier Innovation award again this year for 2 categories in Personal Care. And this demonstrates our continuing commitment to our long-term growth and our 3 strategic pillars: innovation, sustainability and digital, even as we see temporary challenges in our industry. Now let's look at some of the drivers of these results on the next slide. On the organic side, we see several trends and some specific to a segment and the region. This plays to our diversified footprint as we are able to mitigate the impact of the ongoing volatility across different parts of the group. Home Care remains strong across the 3 regions. In Food, generally positive volumes are offset by continued price pressure. In A&ES, we are starting to see signs of improvement in EMEA, which had been weak for over a year. Personal Care in the Americas and APAC is starting to turnaround with volume improvement and price stabilizing, but this is not yet the case in Europe, where our Personal Care business is more skewed towards high-end brands which remains soft due to lower export volumes. And in Pharma, we see a bit of a slowdown in momentum after a very strong performance in '23, also some delays we have seen due to the Red Sea situation. And in Industrial Chemicals, CASE is stabilizing, especially in the Americas and is also holding up in Europe. CASE in APAC remains soft, primarily due to weak construction sector, mostly in China. And lubes and metalworking fluids remained strong in EMEA, stable in Americas, while we see price pressure in APAC impacting our lubes in that region. Now if we look into the regions in more detail, Americas is actually doing well. LatAm is recovering. In the U.S., volume recovery is continuing. But in Kennedy, we continue to see general market weakness. In Europe, trends remained mixed across countries and segments with quite some volatility, while EMEA growth is moderating after a strong performance in '23. And then lastly, APAC continues to deliver good performance, except China in CASE, as I just mentioned, but the rate of decline is slowing. In terms of M&A, we acquired 6 companies in H1, closed 4 of these in the period, in addition to Oktrade in Turkey, Localpack in Colombia and Agspec in Australia, which all closed in Q1. We also completed the deal to acquire DBH, expanding our footprint in the DACH region. And we are working to complete the transaction to acquire MDK, which strengthens our footprint in lucrative Personal Care market in Indonesia and CPS Chemicals, which is a great addition to our CASE business in South Africa. We have many more opportunities in our M&A pipeline, and that will further lead to strengthening the capabilities to the benefit of our customers and principles. One of Azelis' most important strategic pillars is innovation, and that's not just a buzzword. It's part of our DNA and central to our business. Our key value proposition to customers is our ability to provide them with innovative formulations and solutions. For our principles, our expertise enable us to develop new application to grow the market for their products. And on this slide, I have 2 examples of how innovation plays an important role in how we create value for our customers and principles. The formulation on the left is an example of how Azelis innovates by incorporating sustainability and formulations to respond to market trends and customer needs. Our Personal Care team came up with this cleansing and exfoliating bouncy cube that holds its shape even when it comes into contact with water. That in itself is innovative, but true to our commitment to sustainability, the formulation uses 100% natural upcycled exfoliant particles, and 50% of the ingredients are biodegradable. Actually, with this formulation, we won the C&T Alle award in the U.S. for the Bath and Shower category. The second example on the right is an innovative formulation that raises the nutritional value of coffee. We utilized our LVC and our technical expertise to figure out a way to add protein in coffee. Our colleagues use the specific whey protein that is natural and sustainable and still allows coffee to taste and feel like coffee. Very often, customers come to us for help with a specific problem. Providing a solution is only the first step. We actually aim to go the extra mile by giving a solution that is innovative and sustainable. Some of you have already been to our labs and have seen innovation at work in Azelis. We hope to see you in Istanbul in September, where you will get an even deeper dive on this, not only in terms of lab formulation, but also how innovation plays a role in how we do business. Now before I hand over to Thijs, I wanted to briefly pause on the topic of sustainability, another key strategic pillar of Azelis. In our integrated report, you will find all the details of our sustainability agenda, but I want to highlight that our focus on this topic is not limited to our yearly reporting. It's ongoing, and we continuously push ourselves to set the bar higher. And a good example is that we have just signed the SBTi commitment letter to develop greenhouse gas emission reduction targets for Scope 1, 2 and 3, according to the SBTi guidelines. As one of the first in the chemical distribution industry to make this commitment, this is a testament to our ongoing efforts to minimize our environmental impact. We will share more details of our sustainability program in the next integrated report. And for now, I will hand over the floor to Thijs to talk you through the launch.

Thank you, Anna. Good morning, everyone. I'm going to take you through the business update. I will guide you through the group's financial performance and those of our regions for the first half year of 2024. Now let's start with a high-level overview of the P&L and the drivers of our performance for the second quarter of 2024 and the first half year on Page 11. Revenue for the first half year of 2024 to over EUR 2.1 billion, representing a year-on-year growth of 1.5% at constant currency. This growth reflects the performance of our resilient Life Science business, which grew 3.8%, offsetting the weaker performance in Industrial Chemicals, which declined by 2.3% year-on-year on a constant FX. Now let's move to the quarter. As you can see on the left side of the slide. For the second quarter, revenue came in at EUR 1.1 billion, representing a year-on-year growth of above 4% on both reported and constant currency terms. Excluding the impact of acquisitions, revenue was broadly flat compared to Q2 '23 with improving trends in the Americas, offsetting the continued softness in EMEA and APAC and general improving trends in Industrial Chemicals. Gross profit for the first half year came in at EUR 527 million, representing a year-on-year growth of 1.8% or at constant FX rate, 3.2% growth. Gross profit as a percentage of revenue ended at 24.5%, an uptick of 39 basis points versus prior year. This improvement of gross profit margin was supported by positive mix effect from improved performance from recent acquisitions as well as organic margin improvement in LatAm and Asia Pacific as we are working on expanding our lateral value chain at the acquired companies. For the first half of 2024, adjusted EBITDA ended at EUR 274.8 million, and an adjusted EBITA came in at EUR 254 million, reflecting a year-on-year decline of 3.6% or 1.5% in constant currency. This decline was due to lower impact from cost control measures compared to the prior year as impact of this contingency measures commenced already in H1 2023 and, to a lesser extent, normalized variable comp accruals for prior year. Adjusted EBITA margin, therefore, came in at 11.8% for the first half year, representing 36 basis points contraction on a constant currency basis, this translated to a 48.2% conversion margin. We illustrate our cost control efforts. This percentage is still well above the 47.6% and 47.4% achieved for the full year 2022 and 2023, respectively, are well in control of our cost. Net profit for the first half year was EUR 100 million, and I will discuss the drivers of the net profit and details in later slides. Let's move to Slide 12, where I would like to provide you a high-level growth breakdown of revenue, gross profit and adjusted EBITA. I will take you through more regional details in the following slide in line with the comments of announced segments. In this table, we have broken down the revenue, gross profit and adjusted EBITA between organic growth, growth coming from the first-time inclusion of acquisitions and, lastly, FX. On the revenue line, growth contribution from acquisitions offset the decline in organic revenue as well as the negative impact of FX. More specifically, our organic revenue declined by 4.4% in the first half of 2024, with improved and stable organic performance in the second quarter mitigating a large organic decline in the first quarter. Basically, our comps are getting better. The performance in the second quarter was supported by easing trends, notably in Industrial Chemicals and the Americas, which showed organic revenue growth in the second quarter. Some more color on this. In the first quarter of this year, our organic growth came in at a decline of 8%. So this translates into a sequential improvement quarter-on-quarter in line with Anna's comments. Gross profit, during the first half year, was driven by strong performance from recent acquisitions. Although it's worth noting to the -- pointing to the organic gross profit development, a decline of 3.5% versus a revenue decline of 4.4%. So our margin management and pricing discipline and improving our product mix can be witnessed in these numbers especially in Asia Pacific. Adjusted EBITA for the first half was supported by contribution from recent acquisitions, partially migrating the 8% decline in organic EBITA as well as the negative impact of FX translation. Organic EBITA decline, especially in EMEA and the Americas were driven by lower benefit from cost control measures compared to the prior period year and, to a lesser extent, normalized variable conversation. As a reminder, on these contingency actions, we're not done yet. In the U.S., they started already at Q4 2022 and in Q1 2023 in EMEA. Therefore, the magnitude of the impact of those measures were contained also in the first half of 2023, and you will see a lesser extent in 2024. Let's have a look at our regional financial performance. So turn to Slide 13. I'll start with EMEA here on the left, which makes up 43% of our group revenue. Sales declined by 2.9% or 0.8% measured at constant FX rates to EUR 917 million. On an organic basis, revenue declined by 5% combined with an FX headwind of 2.1%. These were partially mitigated by positive contribution from recent acquisitions. Weaker organic revenue was driven by continued volatility in prices and a weak Agri/Horti environment and limited benefit of the volume recovery across our major end markets. Anna mentioned, we do begin to see recovery in these segments in Q3, Q4 in our order book of Agri/Horti, for example. EMEA gross profit in the region declined by 4.7% year-on-year to EUR 241 million, translating to a 51 basis points contraction in gross profit, margin to 26.2%, driven by the mix shift towards Industrial Chemicals during the period. It's overall a solid performance considering that last year gross profit margin ended at 26.7%. And in the second quarter, it was even 27.7%, very high. Adjusted EBITA decreased by 8.6% to EUR 128 million, resulting in a strong conversion margin of 53.2%. At this point in time, we choose to monitor additional cost mitigating measures as we prepare for market recovery. Now let's turn to the Americas, which makes up 37% of group revenue where sales increased by 7.1% year-on-year, driven by an almost 10% revenue growth contribution from recent acquisitions, namely Gillco in U.S. and Vogler in Brazil offsetting the organic revenue decline in the first half. As communicated earlier, we are seeing sustained improvement trends in the Americas reflected in narrower declines compared to prior year. In the first half year of 2023, our organic growth was minus 13%. This confirms on our statements on improvement in the Americas, further evidenced by organic revenue growth for slightly positive in the Americas in the second quarter, driven by volume improvements in CASE, which is our largest single end market in the U.S. In addition, we also see wider volume improvements in Latin America, partially offset by lower price levels, driven predominantly by product mix. Gross profit in the region increased by 9.9% to EUR 194 million, with gross profit margin expanding 63 basis points to 24.6%. This uptick was driven largely by improved margin performance across our businesses in Latin America, offsetting lower margins in the U.S. Industrial Chemicals segment driven by price pressure in the CASE segment. Adjusted EBITA declined by 1.5% to EUR 98.5 million, mainly due to lower benefit of cost control measurements compared to H1 2023. As I mentioned before, we started already in Q4 2022, resulted in an adjusted EBITA margin of 12.5%. The lower adjusted EBITA resulted in a conversion margin of 50.9% in the first half of 2024. And lastly, let's move to Asia Pacific on the right. Revenue declined by 4.4% to EUR 441.8 million driven by an organic decline of 3.6% and FX headwind of 3.5%. The organic revenue contraction follows a strong performance in the comparable period last year when the region delivered 36%, I repeat 36% revenue growth, of which 7% was organic. Business trends are broadly stable in APAC, even compared to the strong performance in the prior year. In China, conditions remain challenging, where the business is focused on expanding and improving margin levels from prior acquisitions. And we're doing a good job at that. Gross profit in APAC grew 4.4% to EUR 92 million, representing gross profit margin of 20.9%. The 176 basis points expansion in gross profit margin was driven by improving profitability of the product portfolio of recent acquisitions, and we are on track with our ambitions. Adjusted EBITA increased by 8.6% to EUR 44.8 million, reflecting continuous margin and scale improvement initiatives. The improvement in both gross profit and adjusted EBITA margin resulted in a 186 basis points expansion in conversion margin to 48.6% in the first half of the year, solid performance. So let's please turn to Slide #14, which shows the net profit of the group. Net financial expenses remained relatively stable with an increase of 1.7% compared to prior year. Financial income increased mainly due to the higher interest income and mitigated the higher financial expenses, which include increased interest expenses due to the full year impact of higher gross debt and higher interest rates. Our results in the period also include a noncash charge of EUR 12.2 million from the impact of hyperinflation accounting in Turkey. Tax expenses for the period ended at EUR 42.2 million, implying a tax rate, an effective tax rate of 29.6% versus 29% in the prior year. Tax line was impacted roughly by 2% driven by the holding taxes due to upstreaming of dividends from [ trade ] cash countries and another 1% by hyperinflation. The lower operating profit as well as higher financial expenses resulted in an 8.3% decrease in net profit, which came at EUR 100 million for the first half of 2024. Let's move to Slide 15 for the cash flow performance of the group. During the first 6 months of the year, Azelis generated a free cash flow of EUR 136.5 million, a decrease of 44.3% compared to prior year. This was driven by the lower EBITA, but mainly by higher investments in working capital as volumes begin to recover across our end markets. Please note that working capital levels in absolute and relative terms are roughly stable. However, going back in time, in 2023, we witnessed a higher release of working capital compared to 2022, impacting the comparable in this table. I'll come back to that a bit later. This resulted in a 39 percentage point reduction in free cash flow to 53.3% for the period. And let's come back to the working capital as this is a key driver in our cash flow. So let's look at the components of our working capital in the next slide. Net working capital revenue normalized for acquisitions remained flat at 15.4%. Even with the higher investments in working capital as our business is in recovery mode, so you should read this positively. I would like to draw your attention to the right chart with the lines. Our working capital increase is, in general, driven by seasonality pattern we witnessed every year with a ramp-up towards summer. You see this in the dotted lines in the chart for the historical period. Last year, this effect was exceptionally low to the soft business performance at this time as we see the momentum of improvement. For example US CASE, India, so does their share in working capital requirements, LatAm as well. Similarly, when comparing versus full year 2023, net working capital to revenue was low in the fourth quarter of 2023 due to tight control and soft business. Currently, we see now a normalization towards historical trends levels as the increase in the first half of 2024 had a similar seasonal trend as in previous year. You can see in the chart that actually 2023 was an outlier. Those working capital investments in the first half of 2024 reflect our ongoing focus on managing the business as volumes begin to recover across end markets. We don't see a deterioration in relative KPIs with main impact coming from business mix changes, for example, U.S. CASE, LatAm, Southeast Asia and India. Obviously, we remain fully committed to strict control of our working capital to protect our cash flows and manage our debt levels and drive our working capital down by our programs and systems at acquired facilities. Let's move to the next slide, which shows our net debt. The change in net debt during the first half year reflects the weaker operating cash flow of EUR 153 million, higher interest payments and, lastly, our M&A investment. We ended the first half of 2024 with a leverage of 2.7x, well within our stated limit of 2.5x to 3x leverage. At the end of June 2024, we have a strong liquidity position of EUR 734 million both in cash and unused credit facilities and the strength of our balance sheet, both in terms of leverage and liquidity provides us with sufficient runway to continue to execute our strategy. In summary, we continue to make solid progress on our strategic and financial objectives in the first half year of 2024. Please note that we're still in a difficult operating environment and at the beginning of the recovery out of the bathtub. But we believe Azelis is ready to perform for our principles, customers and shareholders through the rest of 2024 and beyond. Now let me give it back to Anna to give some closing remarks and some comments on the outlook.

Thanks, Thijs. And indeed, I will conclude the presentation with our view on the outlook. And actually, it's a repetition of the last earning call at a sustained points remain valid. Currently, we still have challenges and the visibility has not yet improved, and we still see volatility in the market. But the volume recovery that started at the beginning of the year has largely been sustained. The price pressure is still present in some of the markets, but the tough comps are behind us. If you look at our order book, and our results year-to-date, I remain cautiously optimistic that we will return to organic growth before the end of the year. As said earlier, we already had 1 month of organic growth, and we had some exceptional circumstances that had a negative impact on the results. And that gives me comfort to maintain these statements if no large negative events occur. While the industry is still recalibrating towards recovery, we continue to watch our costs as we have been doing until now, but we are also ensuring to be prepared for the growth. On the midterm, the distribution market remains fundamentally attractive, and I see many opportunities we can build on for the future. And that concludes our presentation. We are ready to take your questions now. So operator, could you please open the line for Q&A.

[Operator Instructions] Your question comes from the line of Suhasini Varanasi from Goldman Sachs.

Appreciate the color given on the [indiscernible] and the outlook, but your commitment to suggest that maybe Americas has probably passed the word at this point. EMEA is supposed to be lagging a little bit by 2, 3 quarters. Is that a fair assessment? And secondly, can you maybe discuss the sequence of trend on pricing? Because it feels that the volumes are definitely recovering. But are you still worried about pricing on a sequential basis? Or has that like -- and secondly, given the growth has been stabilized in Q2, is there any commentary that you can add in July that suggest that maybe growth has come back?

Well, first on the difference between the Americas and EMEA. It's true that Americas is actually ahead in the recovery. As said, the Americas, LatAm is doing better. We have the U.S. where CASE is still, I would say, a problem with price, but we see the volumes recovering and the rest of the business is also doing okay and going into the right direction. Only Canada there is the -- on EMEA, it's more difficult. It's really patchy and we still have pressure, I would say also on the life sciences part. And the good thing is we see the A&ES coming back, so the agro is coming back. We have some orders in the order book, so that is positive but my main concern remains indeed EMEA, where the market, in general, remains a bit soft. Your second question about sequential trends in pricing. I think what I was already explaining, we have some improvements, for example, in the F&F in pricing. But on food, we continue to see price pressure, I would say, the EMEA and APAC. And in CASE, we also see a continuous price pressure. Your last question.

I'll pick it up. July, Suhasini, please note that June, we of course, had 2 working days. Last, July, we have 2 working days more. July is actually looking quite positive.

Yes. And the volatility, as we said, remains, which also means that, yes, we have a good outlook for the next month, the month after becomes a bit less and September, it's too difficult for us to make any statements.

Your next question comes from Stijn Demeester from ING.

Three, if I may. First one is on China. Can you give an idea to what extent China is a drag on margins in the APAC segment? And this segment is now 2 quarters above 10%. I'd like to know whether there is a material difference between margin in China and the rest of Asia Pacific. Second one, also related to China. Can you give a rough idea on the revenue potential in that region? Is -- this time, I would request what you believe are normalized revenue level. And the last one is housekeeping, is there a hyperinflation impact on Q2 EBITA? Or is it elsewhere in the P&L?

If you're okay, I take the first 2. Thijs, you can talk about hyperinflation. China margin, as I said, China for us is doing well, but not on the industrial side. It's linked to the building and construction sector that is no surprise, probably is depressed. And we are having problems there, not only in pricing but also in volumes. I don't have a crystal ball, but my expectation is not that, that will improve a lot during the rest of the year. So we have to have the growth coming from the other segments and they are indeed growing. We did some acquisitions there, WWRC that we bought at a very low margin. And we are working our way into improving that, and we are making very good progress on that. So I would not say that China is dragging everything down and is -- will continue to do so. Yes. And maybe I already then answered your second question on the China revenue potential. China is, of course, a very big market. We remain committed to be in that market and growing there but we have to focus more on the life sciences for the moment to capture the growth then on industrial, like building and construction. Thijs, maybe for you, on hyperinflation.

Yes. Stijn, this hyperinflation is obviously a very difficult topic. But let me first also give you a bit of answer also on the China side because you asked for a reference towards Asia Pacific as well. In China, overall, our margins are about 4% lower than the average margin than we have in Asia Pacific. However, this is also driven by WWRC, as Anna is mentioning, and we're making every quarter, we're making progress there by optimizing the portfolio. And sometimes that has, of course, an impact on our top line. For Q2, let me say something about Turkey on the hyperinflation. Please note that we trade mainly in hard currency. So what we do, basically, we quote in euros, we quote in dollars, and then basically at the point of time, they pay us in Turkish lira, and we convert this back into hard currencies. So actually, Turkey is a best practice when it comes to having a natural hedge base. But the main impact is coming mainly from the balance sheet due to the fact you have to restate basically your balance sheet for hyperinflation purposes. I would say the operational impact is limited. It's mainly a balance sheet impact. And in Q2, there's basically a hyperinflation adjustment but it's not really material, I would say, in due course. We also have a section in our year-end in our half year report where we can relate to a bit more questions on that aspect. It's mainly balance sheet impact, I would say.

Your next question from line of Chetan Udeshi from JPM.

I was just curious, you've talked about if I'm not mistaken, we had the same dynamic at the time of Q1 call where you said April was good. But I guess the follow through from April to rest of the quarter probably wasn't that smooth. Just looking at July and I heard you talk about good July so far. Based on what you see today, our order book for August, do you feel Q3 earnings could be better than Q2 also given that you talked about some one-off impact in Q2? Or is that too early to take? And just from a broader market perspective, you talked about some challenges in EMEA, is that specific to any specific end market? Or would you say Europe as a whole feels like across the board, there's still some weakness across most markets.

So on Q3, I think it's too early, as I said, to really make a statement. There is volatility there. And we see, especially EMEA, which is the largest region, is evolving. So it's difficult to say something about September. July was good. August looked okay. And with September, as we said, a bit too difficult to read the signs there. On EMEA as an end market, we have 2 wars going on in Europe. And I think if you read in the newspapers about [ war, ] there's still inflation. It is generally, I would say, the most difficult market for us, and we don't expect a huge improvement but also not a deterioration. We have actually better Industrial Chemicals results than in the life sciences. Because in life sciences, we also see 2 effects. One is our Personal Care business where we are in the high-end brands, as I was mentioning, the exports is less. And then we have some price pressure like, for example, in food and pharma had a very good last year. So yes, that's normalizing. The good thing is that we see on Agro, we see an improvement. So we have some orders in the book that look really good.

And there's a high margin profile as well, Chetan.

Our next question comes from Annelies Vermeulen from Morgan Stanley.

Three questions, please. So firstly, on CASE, particularly in the Americas, you've talked a few times about volume recovery in CASE. Given some of the construction data for the U.S. is still quite choppy. I'm just wondering if you could talk about the drivers within that CASE business. Is it not coming from construction? Is there anything else where you're seeing an improvement in that market? And then secondly, just on agriculture, I think you just touched on it in the previous question. But I think that business from memory in Europe has been very bad because of the bad weather. So is it a case of customers now planning for crops later in the year in anticipation of a warmer autumn? Or again, what are the drivers -- factors driving behind that? And then just lastly on M&A. Clearly, your leverage has picked up in the half year, you've done 6 deals year-to-date, are you confident in completing further deals in the second half and do you have the capacity to do so?

So on the first one, CASE in the Americas, we are not only in building and construction, so we have many other subsegments that are picking up and this volume increase is actually quite steady. It started already a bit in the last quarter last year, and we see continuously uptick. So I think that's an ongoing trend, and it's less wobbly. The wobbliness, I would say, is more in -- if it is a word, more in EMEA on the CASE side, while we still see improvement in the volumes, it goes a bit more up and down, while the Americas is a steady increase. On the Agro, the drivers, I think that you're correct. There will be -- there's probably a bit more, I would say, a later postponement of the season and that's also why we see these orders now coming in.

We missed basically a crop to the weather, but let's not go into weather as an explanation. We look at our open orders and we see those orders coming in there, confirmed. Yes and will that be September, October, November, that area. Lastly on the M&A, yes, it's 2.7, I think, is an excellent performance considering the current climate. We obviously -- we stay within our capital allocation, 2.5 to 3x, and we planned our M&A around that commitment. So yes, we will see more M&A in the second half of the year in line with that capital commitment and we're focused mainly on small tuck-ins. That's where our focus is at this point in time.

Next question come from the line of Eric Wilmer of Kempen.

First question, can you elaborate a bit on why your Personal Care business is difficult in EMEA. I think your principles were indicating very strong volumes, also specifically in EMEA and also specifically for higher-end products. I believe you mentioned something about difficult exports, but I was wondering if you could please elaborate. And then another question, maybe somewhat more housekeeping. But was there a particular reason not to include a qualitative guide?

Yes. So on Personal Care in EMEA, actually, we are constantly talking with our principles, and they see exactly the same trend as we have. We are present in high-end brands, and they have much less export to mostly China. And again, it's a trend that they have in the same way that we see. Yes, what -- the good thing about being global is that the Chinese consumers are buying less of the luxury European brands, but are buying more local brands. As we are present in China, we see actually our Chinese Personal Care business picking up. So that's the good part of being, I would say, broad and gives us resilience. The second question is about the guidance.

Yes. That's a good question, obviously. As Anna already mentioned, it's quite a volatile environment where we are -- so as Chetan already mentioned, April was good and then May, first part [indiscernible] also we had some -- the last weeks were tough. The same we see now in July. Under the current environment, we don't want to give a quantitative guidance. And I think we performed in line with consensus and for this quarter. And I think we will leave it at that. We have some -- we see some green shoots, some positive ones that we alluded to in the call, but please note, if you look at the bathtub scenario, yes, we're definitely going up, seeing organic growth. But it's too early to say.

Yes. I mean the statement that we are giving is that we expect to be back to organic growth by the end of the year. And I think that's as far as we can go with visibility.

Your next question will come from the line of Thibault Leneeuw from KBC.

Speaking of the leverage ratio. In the June report of S&P, it's seen that they forecast a net debt EBITDA of 3.4% to 3.6% for 2024. Yes, obviously, M&A will pick up in the second half of the year, but still, that seems quite a high. Is S&P including full year EBITDA of the acquired companies? Are they looking at weaker organic EBITDA? Or are they just looking at a very, very high pace for the second half?

Yes. It's a good question. I think I don't want to get into technicalities on this call, but it is a completely different calculation how they look at that from a leverage point of view. We can pick that up offline. As I said before, we managed within the constraints of our capital allocation, the 2.5 to 3x. And they're using gross debt there. So S&P, please note that. And on finance leverage, it does calculation differently. I think what you need to take away here is that what I mentioned before that we stay within our financial policy, 2.5 to 3x, and we plan our M&A around that.

Okay. That's clear. And then final question, given the importance of the net debt, [indiscernible] better investment grade, do you basically look at the dividends to keep it in the foreseeable future at the lower end of the guidance?

It's too early to tell. I don't want to answer that at this point in time.

Your next question comes from the line of Stefano Toffano from ABN AMRO.

So I have one question left. And if I can come back on the working capital. I very much appreciate the explanation and I do understand that the 2023 base perhaps exacerbate a little bit the movements that we have seen. But I mean, nonetheless, also given the free cash flow conversion was more than 90% in Q1; 50%, 52% over H1. It's a very, very strong move over Q2, also in the normalized line that you can see on the chart on Page 16. Am I reading too much into this because I look at this and I say, wow, I mean, momentum is really coming back here. And again, I appreciate you being a little bit careful with the outlook, but this is showing a better picture than perhaps the cost percent that you are taking?

Well, you should not forget that volumes are going up. So you see, of course, maybe less this effect in the top line, but volumes are going up, and we are preparing ourselves and also acting on it already.

Stefano, it's a good question. I think if you look at the chemical industry and you look at all the companies and you look at the half year report, you see exactly the same effect. So I don't think it should be too much into this. So yes, you see there basically 2023, you see basically 2024 and then you see basically the delta effect, I think it's just regular seasonality. You shouldn't read too much into it. However, I think we flagged a couple of comments: One, when we talk about, of course, contingency, we're monitoring that situation because we're at the end of the bathtub. So if you look at our organic GP and our organic revenue, you see actually that we're ticking up. And second, obviously, we want to have these activities that we want to serve our customers where inventory needs to be there. Overall from a ratio perspective, we're very much in control in this area and we improve, of course, every quarter based upon the M&A portfolio. So the ratios are quite okay. And I think you need to also see a little bit of a product mix in there. I think LatAm is coming back. Americas' CASE is coming back, as Anna referred to that. So net working capital percentages are the same like prior year. I think that's how you should take it.

Our next question comes from [ Fares Shweiky from S&P Global. ]

If I may, I will take them one by one. First question is maybe on the organic gross profit margin. I think you already hinted on this, but could you maybe quantify and do you think you can hold on to this space of expansion? Can you even maybe accelerate?

I think it's a very difficult question. Yes, it's a defect, but these are 12 end segments, right, in the 60-plus countries. So to give a very granular level in the buildup of this GP percentage and this group GP per margin, if this is sustainable, I think it's difficult to tell. We still see price pressure, which means that we, on one hand, we always have inventory, which is priced probably at a little bit higher level, but there is always some upside in this aspect, but overall, we expect this GP margin to obviously improve over time, but that depends completely on the product mix at the moment that China is -- that was alluded into the call by Stijn. If China starts growing again, yes, they grow with a lower GP percentages, which will impact our mix. LatAm is the same. CASE North America, normally, the margins in industrial chemicals are lower than in life sciences in our case. Yes, I think those mix effects, if you take the calculation from industrial chemicals and life sciences into account, I think you can come to quite some good conclusions.

Second question was actually on your medium-term outlook. I think you mentioned that there's still significant value to be unlocked from new strengths and competencies. Could you maybe elaborate a little bit on those new strengths and competencies?

I didn't understand what you're saying, competencies?

We couldn't hear you. Can you repeat the question?

Yes. So I want to refer to your medium-term outlook. There you mentioned that there's still significant value to be unlocked from new strengths and competencies. So could you maybe elaborate on those new strengths and competencies?

Yes, we did, of course, with positions where we acquired, I would say, expertise in subsegments in that country or region that we didn't have yet. And these are, for us, building platforms from when we get further growth on. I invite you to come also to Istanbul, where I will tell a bit more about our strategy going forward and where we see our growth coming for the future.

In terms of guidance. If you take the medium-term guidance , obviously, we are a growing company. We have a new footprint in regions, lot of verticals, segments that we add, geographies we add. So there's always a skill factor that you have -- you only need one CFO, for instance. So from that perspective, there's always an uptick from a basis point. So in the medium-term guidance, yes, we gave guidance on the -- and 15 basis points improvement year-on-year. We have significantly outperformed that since we communicated that. And I think, as Anna said, you're more than welcome to come to the lab tour in Turkey.

Yes, I will. Just follow up. Is the goal to put a new midterm guidance at the Capital Markets Day?

I didn't hear you. The line is very bad, excuse me for that, but I can't hear the last question that you had.

Yes. No, I think, I understood it correctly, is the goal to issue a new midterm guidance at the Capital Markets Day then?

No. Actually, that's not what I said. I will present the new strategy in September and tell us about our ambitions that we have for the future, but it doesn't mean it will translate into a guidance.

Your next question come from the line of Nicole Manion from UBS.

Obviously, for the last few quarters now, you've been talking about the price soaring that's ongoing in the market and obviously impacting clients. [indiscernible] for a moment between the lower prices on your principles that you're passing on compared to maybe pricing on your own business in terms of your markup, what are you using now? And can you make any [indiscernible] between the 2? And then secondly, on the SG&A, [indiscernible] a fair bit year-over-year in Q2. And on a sequential basis, I think sort of flat, still very slightly up. How do you think about the development of the cost base from here given your expectation for a volume recovery and the investments you want to make into that given the backdrop as well as the price pressure that's ongoing in the market? I mean what is the confidence in explaining the conversion margins at the current level or close? Those are my 2 questions.

I'll take the first. Maybe, Thijs you can take the second. So pricing for us, it works that we buy from our principles and we actually with a markup we resell to our customers. And the markup is actually very detailed per customer. We don't work with list prices. But of course, we pass on the trends that we get from our principles. As markets have been contracting in the past, obviously, our principles eventually have been lowering the prices to us. You have a bit of a, I would say, time lag because we have inventory. As you've seen, we manage when market goes down, we try to also manage the inventory levels lower to avoid that we sit on expensive inventory. So yes, I would say the trends for us are in the end, the same as the principles, but there is a bit of a time lag in between. And then it's up to us to define and decide for each of the customers, and it's a very granular process. If we keep prices high, because we maybe sell 20 on products into the customer and, therefore, we can have a better mix or whether we really want to have that customer, it's a new customer and that we then will sell with a lower margin, but to get the customer. So it's a very granular process, but the principal crisis are, in general, in line with our prices as a trend. Thijs, maybe you can take up the second question on our cost base.

Yes, yes, sure, sure. I think the cost base basically, let's please note that we first have an excellent track record in managing these conversion margins. We're currently at 48.2% conversion margin, and that's still well above the 47.6% and 47.4% in '22 and '23. So we take direct action and we have a very good track record with that. There are a couple of components to it as well. Of course, we see we're getting out of this bathtub. So we're currently in the monitoring mode. In U.S., we took very strict action already in Q4 '22. Next one, EMEA and, lastly, APAC. So there is a different phasing of these programs as well and that's why we made that comment as well. We also have to, of course, incur inflation. But if you take all these kind of things into account, it's an excellent profile what we're having there. And lastly, we also have scale and operational program, which is more ongoing. And that's part of our execution of our operational excellence programs. We're executing that. That's more business as normal. And lastly, there's the M&A, look at Asia, you bring in new products. You basically get cost into the service teams that we're having. You bring the operating model from Azelis in that gives better governance, per guidance, better working capital management, but those programs are also ongoing. If you take these things all combined, there are sufficient lead way in the conversion margin and this, at this point in time, not a key concern for us. I'm currently in monitoring mode to see if this bathtub is basically continuing.

There are no further questions on the conference line. We have come to the end of this call. I will now hand over the floor to Anna Bertona for closing remarks.

Thank you for listening to our H2 earnings calls, and we trust we provided you with sufficient insights and we are available to address any follow-up questions on one-on-ones. I've now been 6 months in my role and have worked on an update of our strategy, which we will present during our lab tour in Istanbul in September, as I mentioned already before. We wish you a good day and look forward to seeing you in Istanbul. Thank you.