Azelis Group Nv

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

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

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

Thank you, Thijs. And it's actually difficult to give a near-term outlook, given how frequently and how rapidly the macroeconomic situation is evolving. We are facing unprecedented volatility, and not just in our industry, but across all industries and across all regions. In the near term, we expect the situation to persist and demand to fluctuate. And even if we see positive trends in some of our markets currently, for example, in EMEA, we saw in some segments, continued volume growth and stable pricing. The trends are very fluid and the risk that orders can shift is rising. I said before, with our diversified model and global footprint, we are able to navigate economic or trade cycles and to pick up demand wherever it shifts. We have limited control on where the tariffs go and what the impact on demand will be. But what we can control are our actions, and that is in two areas. First, we follow a clear commercial playbook for dealing with the potential tariff impacts. And we are experienced in processing bulk price increases quickly. And also, we have identified reformulation opportunities to offset potential tariff ingredients with local alternatives, And we are exploring portfolio extension opportunities based on the tariff situation. Second, we can manage our cost base to protect our profitability, as we have successfully done in the past. We already started to take action and are confident that we can deliver 20 million in annualized cost savings. by reducing our variable compensation, accelerating operational optimization programs, including the monetization of our digitalization programs and accelerating M&A integration. We will continue to focus on these cost control programs while the trading environment remains uncertain. And with these actions, I'm convinced that we will be able to deliver on our profitability commitments as we have consistently demonstrated in the past. Also, we must not lose sight of the long-term big picture. We are in an industry that is supported by multiple positive megatrends. As we presented during our strategy update last year, volatility is here to stay, so we organize for it. And today we are dealing with unprecedented volatility. But I'm confident that Azelis will navigate these market challenges successfully. We have the right strategy, the right business model, the right footprint, and the right team to manage the challenges and capture the emerging opportunities. With that, we are ready to take questions. Operator, you can open the line, please.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your questions, simply press star 1 again. If you were called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And again, that is star 1 to join the queue. Your first question comes from the line of Suhasini Varanasi from Goldman Sachs. Please go ahead.

Hi, good morning. Thank you for all the color on the different regions and the verticals. I suppose the main question is, if you think about the trends through the quarter, it felt like the year started out pretty well for you and probably slowed quite dramatically in March. Can you help us understand what changed, which regions changed the most? Looks like it was North America. And was there any difference by region? And how the early trading looks in April at this point in time? Thank you.

Yeah, good morning. Sure, I can give a bit of color and I think you nailed it. Indeed, actually, when we were presenting the full year results, We were quite positive on the quarter. I think we were somewhere in mid-February, and January was very strong, and the first half of February as well. And actually, it started to deteriorate when the first tariff announcements came from Canada and Mexico, and later on, of course, the announcements on all the global tariffs that the U.S. is planning to input. And then we saw a clear slowdown Slowdown has been, I would say, more visible in the US than in the rest of the territory. But we saw also in the rest, people are just waiting. We have seen also back in, if you look at the order patterns, they again become more frequent and frequent. lower in value. And that was exactly in 2023 also when the outlook and the demand was a bit less. Customers are cautious. And so they prefer to order smaller quantities to see what's going to happen. And we can see back at the trend where actually that was gone away, has been broken in the last months.

especially in the U.S., Suwashini, and also what we also see, we see quite some order shifts. So your question on April, actually our order moved for April and May. It's still looking good, but we will still see shifts all the time. And we saw actually also a good order move for March, but it didn't materialize. Therefore, we're a little bit more conservative in our approaches.

Thank you. And in terms of implications for second quarter, what you're seeing at this point, is it more reflective of what you're seeing in March? And therefore, is that the way we should think about 2Q?

I think it's very difficult to give that. As we said, when we were having the last poll, we had a very good order book and it didn't materialize. So I can't say anything about the next months because the order book

You see at the end of the month. So what happens to Sushini, what Anna was saying, this order frequency and the order quantity are very good leading in KPIs. Please note that the distributor is also serving small customers. So they're much more reactive. So they were sitting with stock very near to small customers. Obviously, these open orders are confirmed. And basically, we built up this open order book. So we have normally three months visibility. But what then happens is we saw actually a positive trend already from mid last year, where basically the order frequency was going down and the order quantity was going up. And in March, we saw it go the other way around. So the situation at this point in time is very fluid. So we have to be very careful.

That's very clear. Thank you very much.

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

Yeah, hi. Thanks for taking my question. Again, just following up on Suharshini's question, I mean, to the extent you can talk about it, you know, you did 2.5% organic growth for Q1 as a whole. And you talked about, you know, deterioration in the last six weeks, if I heard you. So is it fair to assume that the run rate that you have at the moment is essentially no growth sort of environment for the group as a whole? The second question is maybe just going back to the point of working capital. It's come down at the end of Q1, but it still feels like inventory seems perhaps still quite high compared to where uh you know your your revenue trajectory might be so are you in the process of destocking your own inventory as we speak or do you think you you are at the right level uh at this point and the last question was do you see a risk that this uncertainty more volatility in your order book also eventually bring some pricing pressure again in the market? Or do you think that that situation looks less likely given that we've already gone through some sort of a price normalization in the last two years? Thank you.

Yeah, so I'll take the first question about how the rest of the quarter looks like. We still see organic growth. It's just not what we had anticipated. And as we said before, the situation is very fluid. So if I look at how the order book looks today, we would have a nice organic growth. If it starts to shift, then probably the organic growth is less than we expected. But we think there will still be organic growth, just not what we were hoping for. On the pricing, we actually expect that pricing will go up because we directly are not so much impacted by the tariffs because we have a local for local business. And we can also pass the prices completely through. But what is less clear for us is how the input prices from our principals are affected and where they get the raw materials from. And that's very different, the situation from principal for principal. But we expect actually that prices will rise. And as you know, we passed that through immediately.

No, Shetan, on your working capital comment, you're right. We basically, we made a projection based in December where we also said, hey, stock is on the higher end. It was a bit of a trend breach. We said, hey, we're going to bring it down. That's what we did. And we aligned basically our stock. Now we see in Q1, I still see that there's work to do, as I mentioned. So it's not that there will be massive destocking taking place, but we do need, there's still some work to be done there. So I think that should still come down with around 20 to 30 million on a normalized basis. And just to align basically, to align the working capital with our volume projections.

Thanks. Anna, sorry to be a bit more difficult because when I read the press release and you guys talked about unprecedented volatility, rapid shift in sentiment, this sounds far more alarming than what you are suggesting at this point in terms of your order book. You're still talking about possibly positive organic growth in Q2. So it doesn't feel like Things are as bad as perhaps, you know, the messaging is. Or am I missing something?

You know, I think the situation in the markets is volatile. I think everyone can look around and see what it also did with the stock markets. I think unprecedented. So I think the word is in place. It doesn't mean, though, that for Azelis all is bad. We also see opportunities. As I was saying, we also see opportunities for reformulation uh we are local for local so it can also help us to uh to win from from at this moment um uh maybe chinese competitors uh in us that were offering prices at a lower uh cost than we could offer because we present the local blue chip principle so but it takes a little bit of time to uh to stabilize and that's that the situation is fluid and also i'm i think that at the moment that the terrorists will be more clear then the customers will make their plans, and then we can also act on that. So I'm not only negative about the situation, but it is definitely very volatile. No one can deny that.

But Chetan, the story is very simple. Please note, this is distribution business. So the customers are, and the reaction of the customers is a small customer, are much more volatile, but many of them gives you a sense of resilience. Second, the growth is there, but it is different from our own expectations as communicated before. Because January still looked good, as Shoshini was also saying. And it was different than our own growth expectations end of last year. That's why you saw that working capital also going up. You see our investments in basically commercial execution going up. And right now, we see in March, we see the order frequency going down into a different direction. So, yeah, we can sit down and we can say, hey, this is a bit of an unprecedented situation. I think that word is justified. And then we say, okay, we're not going to sit still. We're taking some mitigating actions there to basically protect our bottom line. And if that market is coming back and the gross profit growth and the organic revenue growth is coming, we'll scale up again. So we're basically taking a little bit of a step back based upon the external conditions that are being communicated. And I think that is not an uncommon view.

Okay, understood. Thank you.

Your next question comes from the line of Laurent Favre from BNP. Please go ahead.

Yes, good morning. Two questions, please. The first one on the phasing during Q1. Now that you, I guess, can go back and speak to customers, are you getting any sense that there was pre-buy into the tariffs and then maybe those customers just destocked as the tariffs came through and you saw the weakness in March? So that's the first question, i.e. comparing, I guess, sell-in, sell-out or from your standpoint, your sense versus the usage of the customers. And the second question is on pharma specifically. That's one industry that you're exposed to where there's been exemptions so far. So I was wondering how internally do you think about that value chain? Is the current situation likely to be a positive or a negative? I admit I have no idea how to think about that one. Thank you.

Yeah, so we've not seen a lot of pre-buying, only a little bit in Canada, and that's it. And yeah, so we don't think that what you see in the results of Q1 contains a lot of pre-buying. And on the pharma, our pharma business in the US is actually not that large. And the biggest part of the pharma business is sitting in EMEA and in APEC. And so I think therefore we have less of a problem with tariffs. In that respect.

Okay. Also there in the situation. Sorry. This is also a fluid situation that will be very clear. We make analysis on HS codes, et cetera, which one are exempted, which ones are not. Is it neutral? Is it pharma? So there's also a lot of clarity on this, on this topic. And one should understand that as well, of course. But overall, our pharma business is a very resilient business. Pharma had two fantastic years, and actually this first quarter was a positive quarter for pharma.

But the pharma business outside of the U.S. is not exposed to a global supply chain that ends up in products in the U.S.

For us, as I say, our U.S. pharma business is not that large, so we are less exposed there.

Most pharma production is for us. We are in the generic side of things. Turkey is very large for us. Europe is very large for us. And certain spots in Asia where we're very strong.

Okay, thank you.

Your next question comes from the line of Stein de Meester from ING. Your line is open.

Yes, good morning. Three questions, if I may. The first one is on the self-help. Do you have enough leeway to rein in costs as you already launched several contingency actions over the last couple of years, and there have been fears that you would impact commercial firepower by taking out too much costs? Second, on M&A, Given where your leverage is today and with sellers likely to adopt the wave and C-stands and the discussion on multiples that you mentioned, isn't it sensible to focus on the leveraging this year instead of pushing hard on M&A? And the last one on the deferred payments that you flagged in the Q4 called the deferred M&A payments. Can you comment whether they have been recorded in Q1 or are still to be expected in Q2?

Okay, Stein, I think you brought this up on the self-help and our commercial excellence programs there. Please note, we also said, and we never touched the commercial size of our business because we are the extension of the sales force and we have the majority of our sales force, roughly 75% of all sales activities. Where we get skill off is when we do M&A and we look basically in the back office, in the middle office. So basically order entry, order processing. That's where there's a lot of hands taking place. That's where we can take synergy out. Now, it's not easy because it's not easy to run an outsource model. But for instance, with sales order automation, MRPs in planning and tooling, et cetera, there's a lot of possibilities what we can do there. The logistics side, We have so many warehouses where you can basically consolidate, bundle, and bring those warehouses near to your customer base for better service and better cost optimization. Those are basically some examples of operational excellence programs. Now, what have we done in the past? We said, okay, you did quite some stuff already in the past. Can you do this again? Yeah, that's true. But these were, of course, we were on a peak of the company where basically a lot of commercial expansion was done. And what Anna and the team have done, they've brought in much more structured commercial excellence programs, operational excellence programs. We've brought in COOs, for instance, to run those programs in each region. And what we're seeing, we presented those programs also in our Capital Markets Day in Istanbul. And right now, basically, we're accelerating those programs ahead of the curve, right? And so we see that this has no impact on our commercial ability at all. It will only strengthen it. And we have made a lot of investments in digital. And Anna is telling me very often, show me the money. And that's how it works right now. And this is the time to execute on that. On the leveraging versus M&A, obviously the M&A landscape, we see multiples coming down to a certain extent. We have made a strategy which is very focused on where we want to do M&A, and we still execute in line with that. And we have a lot of opportunities in the pipeline. We're not holding back from that strategy. And based upon our working capital where we are right now and the leveraging profile, what we are trying to achieve, we see a lot of opportunities still for M&A. However, yeah, will we do very risky M&A emerging platforms and those kind of things? This is not the time for that. You're right on that. And lastly, because also please note, this is an emotional process when companies are sold. So sellers are also not immediately going in a volatile period and saying, okay, this is the time to sell my company. They're sitting the volatility out this time. But we have a very attractive pipeline where we execute very diligently upon. And Anna will say, you will see also there, there's some interesting conversations and that will come to you as well. On the deferred payments, we have been very clear about that. It's roughly about 100 million, about 35% is already being paid in Q1.

Okay, that's helpful. Thank you very much.

The next question comes from the line of Nicole Mannion from UBS. Please go ahead.

Hi, good morning. Can you discuss a bit more the APAC conversion margin, please, which was strongly up despite quite a significant organic gross profit decline in Q1? I know there's M&A in there and likely some mixed effects too, but can you just walk us through the drivers of that a bit more, please? Thanks.

There's one first element there. It's obviously, please note that all the contingency plans, APEC was the last one, so this is the last row of the contingency plans that is still in that way, see the positive effect on that. Also, please note that there is a timing element into it, especially the marketing and the trade shows. Q1 is normally the Chinese New Year is a little bit of a slow quarter when it comes to cost. And then obviously, Asia begins to get a certain amount of size with all the M&A that we're doing and the programs that we're running that we begin to see these skill benefits, we begin to see that to materialize. Will we see the 53% going forward every quarter? No, I don't think so. But it's definitely a signal that this is where the cost base of Asia can be running on a prolonged basis and taken out for some mixed effects, of course, and some seasonality issues. But again, as I said in your models and in your projections, we remain convinced that Asia will have the same EBITDA profile and conversion margins as the other regions because it comes with scale. Distribution is a scale business. In relation to the question of style as well, we always said just by executing our programs alone, we think that we can do roughly 10 to 15 basis points margin expansion year on year, which we have outperformed year on year. If you take that amount already and you take a conservative step at it, you're talking already about 7 million roughly a year on cost measurements, just purely by scale. And obviously, the benefit goes more towards the growth regions like Asia and Latam, where we're building our organization. And in Asia, we're already quite mature.

Got it. Thank you. The next question comes from the line of Eric Wilmer of Kempen. Your line is open.

Hi, good morning. Thanks for taking my question. Are you seeing any signs of Asian suppliers reaching out to you as they are seeking to redirect capacity originally intended for the US to other markets? Or is it more likely that they'll use Asian distributors, for example, in Asia itself, who may be more receptive to lower pricing? Then I was also wondering what in particular is happening in personal care in the Americas. Are customers less receptive to innovations and are end consumers simply buying less product? And last question, and apologies if I missed it, but could you shed some light on as per when the 20 million annualized cost savings will start to kick in? Thanks.

Yeah, so maybe starting with the Asian suppliers, as we presented in Istanbul, our objective is to work with a top-notch portfolio with the winners of the future and wherever they are coming from. And in the past, they were mostly or maybe solely coming from Western countries. But in the last years, Asia has developed some very good specialty, high-quality players. And these players are actually already, and it has nothing to do with the tariffs or the current situation, are already looking into finding inroads to sell the products outside of China or Asia or Korea where they are sitting. And where in the past they were more looking for traders, this has been changing and they are actually behaving like the Western European or US-based companies. They want to have partners, distributors that can work with them globally. And then you come, of course, to the type of players like Nazelys. And this is something that's going on already for quite some time. We work with our current partners. We always evaluate portfolio options. And that's exactly what we will continue to do also in a new situation if that might arise due to tariffs. On personal care Americas, yeah, we can see that, of course, when there's insecurity in the market, people hold off some spending. And I think that that's also something that... we have been seeing consumers are getting just more cautious. And it's also been reported by, for example, L'Oréal and Chippewa Down that the US business has been growing less or even declining a bit. I think, yeah, what we have seen is a bit consistent with the rest of the players.

And Eric, on your cost saving, a good question. Thank you for that. Let me also allow me the opportunity that Cost savings and contingency plans is part of our budget process. So at Azaleas, and I've mentioned that to many of you already in the past, we've communicated very openly, that's okay, we make a budget, and then after the budget, we make a contingency plan. We have already been doing this for about six or seven years. So this is part of our general process. Please also note that a distributor is an asset-light company with limited investments in CapEx programs where you're stuck with and where basically you're very close to your customers. So you need to be equipped for running in a volatile environment. And a distributor in general with an asset like business nature is well equipped to that. You can pass through the prices. You basically align the organization where the market growth is going. You have to be very agile and put a lot of working for your principals, for your customers. As such, these plans basically, based on January, Part of February, first part of March, not really necessary. But in March, we said, hey, we need to get to work. So the execution of these programs, they will start, of course. Immediately, we already have started them. So yeah, you can expect the first cost savings to see somewhere in May, June, in that area where we start commencing on the execution of those programs.

That's very helpful. Thank you. Your next question is from the line of Alex Stewart of Barclays. Please go ahead.

Hello. Hi, good morning. Thank you. I've got a couple of questions all sort of related to the same thing, really. You've talked a lot about lack of visibility, short order books, volatile ordering patterns. Why load up on cost in anticipation of a certain level of growth or demand if in reality you don't really have any idea whether that demand is going to materialize. It seems like a very risky business strategy to me to make a decision at the end of 2024 that you need more people in order to satisfy demands when confidence in that demand must be very low. So I just wondered if you could comment on that. And then related to that, this is a slightly tricky question, but if you hadn't increased the headcount or increased the marketing spend or increased the cost base in Q1, and instead you had anticipated with perfect foresight, which is of course impossible, how the demand environment would have played out. Is there any way you could give us some rough sense of where the first quarter earnings would have come out? I'm just trying to understand how much of this was, was excess loading of costs. You've talked, for example, about salary inflation, which presumably would have happened irrespective. And then finally, listen, I understand that the idea of pre-closed calls is getting a lot of attention. It can be quite toxic in some parts of the market. But the reality is that this industry is opaque to the management of the companies. So you can imagine how opaque it is to equity investors and sell side analysts. Do you think perhaps it would be additive to your investment case in light of that lack of visibility to maybe start speaking to the market a little bit more ahead of your corporate results? Because if I look back over the last two years, there've been several quarters where you've had sizable misses. There've been quarters where you've had sizable beats too. But the reality is that we're flying blind going into these quarters because there's very little communication, very little information being passed from the company to the market. Is that something that you would consider in future to avoid these surprises, both one way or the other? Thank you.

Yeah, if I can take the first question, Alex, the lack of visibility and why we loaded up on cost. I would say, improvement of the situation, Q3, Q4, January, mid-February. And then something happened that I think no one could foresee. And that was, I would say, what the Trump administration has announced on tariffs. And first, as I said, on Canada and Mexico. And then what happened on the announcement on the rest of the countries. I don't think that anyone could really foresee what that would do to the market. Again, look at what happened in the stock markets. I believe that was one of the worst impacts that happened in the last years. So I don't think that anyone could foresee it. And the loading up of costs, was completely in line with the growth that we were seeing. And just only in mid-February, when this event happened, then of course things came to a halt. And that's exactly after a couple of weeks we said something needs to happen structurally in adjusting. for this volatility and that's exactly what we are doing now with our cost measurement programs that as Thijs was saying we actually have these plans already made when we do the budget and now it's time to execute on them so we didn't load up on cost knowing that something would that would happen it's exactly the opposite Alex I think the whole industry

We came out of this bathtub, which we communicated very clearly to the analysts. I haven't talked to you about that. But what we did in basically November, December, if we look at November and December, we saw basically a couple of trends. And I've communicated that very clearly also to the analyst community, where they could also guide on. Where I saw positive trends basically in order frequency and order quantity. I can explain that to you in a separate poll if you want to. If we take a look at the first quarter, there's always, of course, an effect on the payroll side, because our payroll inflation normally kicks in in April. We have basically the effect of full effect in 2024, which is an effect of roughly 3 million. And if you then take into account, you see basically building up the workforce. Basically, we have some phasing of marketing and trade shows. Quite some of you visited the trade shows. You take those effects into account. I'm not quite sure what to do with your last comment. I'm not sure if I want to answer that. But okay, Azelius is always open and engages regularly with analysts and investors. But we just have not decided to guide And none of the other players in the industry are doing that in such a specific way. We make a very clear statement in performance and industrial chemicals and life sciences by region. And we split organic growth and inorganic growth. M&A is always a difficult factor to factor in. And I think that we help you in educating you in the process. and how basically the formulation works or basically getting to an earnings model. That's where I want to leave it at, Alex. Thank you.

So, sorry, can I perhaps pick up on that second point again, because the line wasn't very good. So if we're talking about the costs that maybe could have been saved if you had perfect foresight, did I hear you say 3 million on payroll and 2 million on marketing training? Was that right?

No, Alex, it didn't get that right. I said that basically inflation effects for the quarter because we give our payroll inflation normally in April of the year. Yeah, it's roughly there's a quarter effect because I have basically higher cost. And from a like-for-like basis to Q1 2024 is an amount of roughly 3 million. And if I look at the investments that we make in the business, this is a combination of a couple of things. These are replacements. That's roughly in the area of 5 million, but it also includes trade shows. As I said, quite a lot of the other analysts visited quite some trade shows as well. And they were all happening in the first quarter of the year. So there's also some phasing and marketing costs in there. So there you have your two numbers, 3 and 5.

But I suppose the 3 million, presumably, you already knew, because it's the annualization effect of inflation that came in April last year.

Yeah, exactly. And we also indicated that we saw the organic growth coming back out of the bathtub, and that's where we made our projections on. Our business projections, also for 2025, was based upon a recovery of industrial chemicals, a recovery in the U.S., in the fourth quarter cold, You also hear us talk about the recovery of case in North America, where we have a large position. We see that organic growth coming back. Let me be very clear that we see organic growth. But it is not in alignment with the expectations that we set for ourselves. So therefore, we have to go back to the drawing board. And we said, let's basically align ourselves to basically an unprecedented environment that occurred. And as Anna indicated, Alex, in December, when I showed basically a bathtub and where we were, that's where we also saw a little bit like, okay, hey, this is coming back. The market is coming back. I'm not so worried about it. But then, of course, we made also certain investments.

Things changed, as I said, mid-February.

Yeah, very helpful. Thank you so much.

Your next question is from the line of Matthias Meinhardt from Kepler-Severo. Please go ahead.

Yeah, good morning. Thanks for taking my questions. I have three, if I may, just three short follow-ups. You spoke about organic growth in the order book. Could you maybe just detail on which level we're then speaking? Are we speaking about sales, gross profit, or EBITDA? And a question on pricing. I understood you anticipate pricing to be stable or up, but could you maybe elaborate a little bit on the pricing comments throughout Q1 and also in April? And then thirdly, I think previously, Tess, you commented on leverage as anticipating to organically go down throughout 2025. Looking at present environment, taking into account working capital, et cetera, et cetera, do you think that it's still manageable to build down leverage, also taking into account that you still have to pay 70% of your deferred payments in Q2? Thank you. No more questions.

Yeah, so on organic growth, when we talked about it, it's about sales. And as we said, we still can see that that's happening, but not at the same rate that we were expecting at the beginning of the year. Pricing, as we said, there's very many differences between regions and markets. But overall, they were stable. But we know there will be price increases. Several of our principals already have announced that, that they were thinking about price increases. The moment there is certainty on that, we will pass that on. But we expect that there will not be any price decreases, but really much more price increases.

Q1, it was pure volume effect, as I mentioned in my notes. It was purely volume and makes no price.

Yeah, Q1, not stable price.

And on the building down the leverage, maybe? On the leverage, no, we expect that still to go down. as communicated before, I still have my working capital program where I can focus on these. We have our growth programs where we focus on people. So please note that the M&A that we did is growing and it's growing quite fast. So no, I'm still convinced that our leverage will come down. Yeah. All right. Thank you.

Then you have a follow-up question from Laurent Favre of BNP. Please go ahead.

Yes, thank you. Just a question where you do have visibility. On the portfolio optimization impact in Asia, is there a reason not to believe that the 2.3% would apply every quarter for the rest of the year, or should it be coming a bit lower or higher? Any help would be useful for us. Thank you.

We'll go down, Laurent. It will go down. These are mainly, for instance, some acquisitions that we did where we closed the plant. We exited a line with indirect tobacco lines, that kind of stuff. Some business lines that we did. It will be a little bit of effect in the second quarter, but then I think... This identified program will be done. Please note, and I've mentioned that to you before, that we always optimize our portfolio, especially in M&A, where we discontinue certain business, which will impact our bottom line, where we basically continuously optimize our portfolio. This is roughly in the 35 to 50 million a year, but in Asia, it's a specific program.

Okay, thank you.

This does conclude our questions on the conference line, and we have come to the end of this call. I will now hand over to Chief Executive Officer Ana Bertone for her closing remarks.

Thank you. We trust we gave you enough insights in our progress, what we are facing, and addressing both in the short term and in the long term. And we will, as usual, make ourselves available for any follow-ups that you may have. Please do not hesitate to reach out to our IR team. And I thank you. Have a good day.