Azelis Group Nv

Good day and welcome to Azalea's first half-year 2025 update call. With us today is Anna Bertona, Group CEO, who will give high-level insights into our progress in the first half of the year. Thijs Bakker, Group CFO, will take us through the numbers for the period. As a reminder, this presentation may contain forward-looking statements that are subject to risk. We will open the call for Q&A after the presentation, but until then, you will be on listen-only mode. I will now hand you over to Anne. Anne?

Thanks, Pam, and good day, everyone. Thank you for dialing in today. I understand from Pam that most of you are very busy with multiple companies queuing their results this week, and especially today, so we will be sharp and efficient. And let's start immediately on the next slide. I want to begin with the most important messages based on our progress in the first half of 2025. First, we see areas of growth across our business, even as volatility has increased throughout the past four months. This is reflected in organic revenue growth staying in positive territory for the first half of the year. As you may have seen from the half-year report, our positive results in EMEA offset the slowdown in the US in the second quarter and the ongoing pressure in APEC. I will go through the trends across end markets and regions on a later slide, highlighting the benefits of our diverse global footprint. Second, as the market becomes more challenging, the resilience of our business model becomes more evident. This is demonstrated in the higher cash flows, even as the impact of our cost-saving measures are not yet fully reflected in the results of the first half year. The last and key point is this. The market is going through some temporary challenges, mostly driven by trade discussions and geopolitical issues. But the fundamentals of the industry are intact, and the long-term drivers remain attractive. As I said before, volatility is here to stay, and it creates opportunities for global distributors like Azelis, who have the right portfolio and technical capabilities. Now more than ever, customers rely on us to reformulate or provide innovative solutions to help them address the market challenges or supply chain disruptions. And also principals continue to need a strong partner to grow their business, even more now that they are restructuring and refocusing on their core. Our diversified footprint allows us to capture growth in some end markets or regions to offset temporary weaknesses elsewhere. And I'm confident that we are taking the right course of action to navigate these temporary challenges and have the right strategy to achieve our long-term objectives. Now let's move to the results of H125 on the next slide. In the first half of the year, we achieved a revenue of 2.2 billion, a 3.3% increase over the prior year in constant currency. Organic growth for the first half was 1.2% despite the slowdown, specifically in the US in the second quarter. Our gross profit in H1 was 515 million, which is broadly stable versus last year on a constant currency basis. The gross margin contraction during the period was due to negative mixed effects from higher contribution from industrial chemicals, as well as from recent acquisitions, emerging markets, and increasing competitive pressures in Southeast Asia. Adjusted EBITDA came in at 234 million and resulted in an EBITDA margin of 10.9% and a conversion margin of 45.5%. The contraction in our profit margin reflects only a limited impact from our cost savings measures, as the benefits will come in the second half of the year, while we already absorbed the salary cost inflation for 2025. We generated 151 million in free cash flow resulting in an 11 percentage point increase in our cash conversion ratio. We ended June with a leverage of 3.1 due to slower organic EBITDA development as well as a peak in deferred payments in H1. We remain committed to our leveraging policy and we expect to manage this back to our stated range of 2.5 to 3. Now let's look at some of the drivers of the results on the next slide. Overall, we saw that life science was stable, while in industrial chemicals, we saw slight recovery in the first half of the year. Online sciences, we can comment this. There was a strong momentum in pharma. Food and nutrition was positive, whereas stable in EMEA, offset by a weak food market in APEC. Agri-recovery in EMEA continued throughout the first six months, but in the U.S. was weak. Personal care was positive in EMEA, but continued to see headwinds in the U.S. and APEC. And we saw a mixed picture in case and advanced materials and additives, with stronger performance EMEA offsetting weaker U.S. and APEC. For lubricants, metalworking fluids, we saw positive momentum, except in the U.S., On a regional basis, EMEA saw a positive momentum in the first half of the year, both in life sciences and industrial chemicals. But in the US, we saw a shift in sentiments, and the shift that we saw earlier in the year continued throughout Q2. Uncertainty over the short-term economic outlook is weighing on consumer demands and resulting on our customers not wanting to build up stock and going back to much smaller and more frequent orders. And then lastly, in APEC, we saw an uptick in competitive pressure across Southeast Asia with increased supply from China. In terms of inorganic growth, We are pacing our M&A and executing on only the most strategic acquisitions while our leverage is at elevated levels. Solkem represents the missing piece in our offering in Spain and gives us access to the very lucrative domestic nutraceutical markets. S-AMIT is a small baldon that complements our India business, and then with ACEF, Azelis creates by far the larger personal care distributor in Italy, providing skill benefits and synergies. Although we have an exciting pipeline, we are focused on managing our leverage to within the 2.5 and 3 range. I am confident that we will return to full M&A execution as soon as we have stabilized the balance sheet according to our leverage commitment. Now, before I hand you over to Thijs to talk about the financial results in detail, I would like to take a moment to highlight our strategic growth accelerators, innovation, sustainability, and digital. Now, you can wonder why are we focused on these even when we face temporary challenges. Well, because we think these are very important elements that demonstrate our ability to provide solutions for our customers and principals, whatever their requirements are and whatever the economic cycle is. And this is how we create opportunity during times of volatility and uncertainty. And that's why we continue to invest in them. And in the long term, these pillars strengthen the mode around our business. Now, why is innovation important? Well, customers rely on us for formulations and innovative solutions at all times. And currently, the focus is on addressing market challenges and supply chain disruptions. Principals rely on us to grow their business by developing applications for their products. And why is sustainability important? We believe it's the right thing to do and we play an important role in making the world a better place. But also because it makes economic sense. Reformulating for a more sustainable alternative is a revenue opportunity. And finally, digital, that's also very important. And why is that? Well, having the right IT and digital infrastructure makes it easier to develop digital tools, which are growth enablers and efficiency accelerators. we continue to focus on these strategic pillars across economic cycles, whether we are in growth mode or in more challenging markets. And these efforts are recognized by the industry, as shown by the awards we win every year. This year, we have received multiple awards already for our innovative solutions. And we also have achieved an industry-leading MSCI ESG rating, Some of you have already seen Innovation at Work at one of our labs, and we hope to see you in Hartford in September, where we will showcase our lab capabilities in the UK, as well as some of our digital tools. For now, I will hand you over to Thijs to talk more about the numbers.

Thank you, Anna. Good morning, everyone. As Anna already outlined during the business update, a diversified footprint and resilient business model continue to support us through a volatile environment. Now I will guide you through the group's financial performance and those of our regions for the first half year of 2025. So let's start with a high-level overview of the P&L and the drivers of our performance for the second quarter of 2025, the first half year, on page number 10. Group revenue for the first half year of 2025 reached 2.2 billion euros, representing a year-on-year growth of 0.6% or 3.3% at constant currency. This reflects a 0.1% reported growth or 2.6% at constant currency delivered by our life science business, and a 1.5% reported growth of 4.6% at constant currency for industrial chemicals. For the second quarter, revenue ended at 1.1 billion euro, indicating a 3.1% year-on-year decline, driven by a 5.1% EVIX headwind, which offsets stable organic revenue growth and a 2.1% contribution from acquisitions. Cross-profit for the first half year was 550 million euros, representing a year-on-year decline of 2.2% or at constant eviction rate, 0.3% growth. Cross-profit as a percentage of revenue contracted by 68 basis points to 23.9%. This contraction was largely due to mixed effect as industrial chemicals, which tend to come with lower cross-profit margin levels, grew faster than life sciences, as well as some dilution impact from recent acquisitions. For the first half of 2025, adjusted EBITDA came in at 234.5 million euros, reflecting year-on-year decline of 7.7% or 5.3% in constant currency, resulting in an adjusted EBITDA margin of 10.9%. This decline was driven by higher operating costs, as the benefit from our cost-saving program is not yet fully reflected in our results. The cost mitigation program communicated at the first quarter results is well on track. We also accelerated, and Anna alluded already to that, our digital investments as seen in our holding cost and capital expenses. The lower absolute EBITDA development resulted in a conversion margin of 45.5% compared to 48.2% in 2024. Net profit for the first half year was 85 million euros, and I will discuss the drivers of the net profit in more detail in slide 13. Now let's take a look at the breakdown of our growth in slide 11. On this slide, we provide a high-level breakdown of revenue, cross-profit, and adjusted EBITDA into organic growth, M&A, and EVX. The breakdown by business provides insight into our regional diversification as well. Organic revenue grew by 1.2% in the first half of 2025 and was broadly stable for the second quarter, with continued strong organic growth in EMEA, offsetting weaker performance in Americas and Asia Pacific. Worth profit declined by 2.2%, driven by an organic decline of 1.8% and a 2.4% Fx headwind, partially offset by a 2.1% growth contribution from recent acquisitions. In the second quarter, organic gross profit declined by 3% by mixed effects from higher growth contribution from industrial chemicals, emerging markets, as well as price pressure in Southeast Asia. Adjusted EBITDA for the first half was supported by contributions from recent acquisitions, partly mitigating the 7.9% decline in organic EBITDA and FX headings. The organic EBITDA decline was most pronounced in absolute terms in EMEA and the Americas, driven by higher operating costs compared to prior year. Please note that the benefit from our cost savings initiatives are not fully reflected in the result for the period, as I said before. Our operating costs also came already down significantly quarter on quarter and is flat on prior year despite payroll inflation. So we're back on track. Let's have a look at our regional financial performance on the next slide. In EMEA, which makes up 45% of our group revenue, revenue for the first half year came in at 979 million euros, representing a year-on-year growth of 6.7% or 9% in constant currency. This was driven by organic revenue growth of 4.8% and revenue growth contribution from acquisitions of 4.2%, partially offset by 2.2% negative impact from a VIX headwind. In the second quarter, revenue increased by almost 6% year-on-year as organic growth accelerated to 5.1%, as we aggressively pursue growth across most end markets in both life sciences and industrial chemicals. These underscores are commercial technical capabilities, as Anna said, and adapting solutions for ever-evolving end markets, even under challenging conditions. Gross profit in EMEA grew by 3.4% year-on-year, or 5.2% in constant currency, to 249 million euros. translating to an 82 basis point contraction in gross profit margin to 25.4%. This is mainly driven by a mixed shift towards industrial chemicals at almost twice the growth rate as life sciences, emerging market, exposure as well, as these come typically both with a lower margin profile and lastly, dilution from recent acquisitions. Adjusted EBITDA decreased by 3.9% to 123 million Euro resulting in 139 basis point adjusted EBITDA margin contraction to 12.6%. This is driven mainly by the aforementioned mixed effects and also higher operating costs compared to prior year as the benefit of these cost saving actions in the regions are not fully reflected in the result yet. Furthermore, I can say that the region is well on track to deliver the cost saving commitments Turning to the Americas, which makes up 35% of our group revenue for the first half year ended at 760 million euros, reflecting a year-on-year decline of 3.4% or 0.2% in constant currency. Organic revenue and M&A revenue growth contribution were broadly stable, while FX translation represented a negative impact of 3.2% as the euro strengthened versus the dollar. In the second quarter, revenue decreased by 9.5%, driven by FX headwind of 6.3%, and an organic decline of 3.2%, reversing the organic growth achieved in the first quarter. The organic revenue decline was driven by a mixed performance in life science, where we see continued strong performance in food and pharma, offset by a softer personal care. which remains under pressure as consumer sentiment over the near-term economic outlook weighed on the demand. Our industrial chemical businesses in the Americas were broadly stable during the quarter. Gross profit in the region declined by 6% to €182 million, with a 67 basis point contraction in gross profit margin of 23.9%. The margin contraction is mainly driven by mixed effects across the businesses in the region with higher contribution from industrial chemicals and left in America, which come at lower margin levels. Adjusted EBITDA declined by 10.6% to €88 million, driving adjusted EBITDA margin to 11.6%. The 93 basis point contraction was mainly due to softer top line in gross profit and dilution from our less mature Latin America business. The results similarly like EMEA only reflect limited impact from recently in nation cost measures, which were executed in May, June. The lower adjusted EBITDA resulted in a conversion margin 48.4% in H1 2025. Also, America is on track on delivering these savings. Lastly, Asia-Pacific. Revenue declined by 4.9% to 420 million euros, driven by an organic decline of 3.6%. FX headwinds of 2.7%, partially offset by revenue growth contribution from acquisitions of 1.5%. In the second quarter, revenue decreased by 9.1%, driven mainly by a VIX headwind of 5.2%, and organic decline of 5%. The organic revenue decline was driven by slowing volumes in Southeast Asia, continued weakness in Australia and New Zealand, residual impact of our portfolio optimization program in the region, while China is bottoming out. Gross profit in Asia Pacific declined by 8.5% to 84 million euros, representing gross profit margin of 20.1%. The 80 basis points gross profit margin contraction reflects negative volume, negative mix effects, as well as competitive pressure in Southeast Asia. Adjusted EBITDA for the first half year declined by 4.9%, or 2.6% in constant currency, to €43 million. Also here reflecting an initial contribution from cost-saving measures. But Asia did a good job when it comes to conversion margin, because despite top-line pressure, the adjusted EBITDA margin remained stable at 10.1%, and conversion margin expanded by 194 basis points to 15.5%, demonstrating discipline across the P&L. Now let's move to the next slide on net profit, and I provide some comments on the line items here. Net financial expenses in the first half year came in at 70 million euros, down 3.4% compared to prior year as lower financial expense offset the decline in financial income during the period. The lower financial expense were mainly driven by significant reduction in interest expense, which decreased by almost 15% compared to the prior year, as well as a 5.9% year-on-year decrease in other financial costs. Tax expense for the period was 35.5 million euro, implying an effective tax rate of 29% versus 30% in 2024. The lower operating profit was partly offset by lower net financial expenses, resulting in a 14.6 decrease in net profit, which came in at 85.5 million euros for the first half of 2025. Now let's look at the next slide for the cash performance on the group on slide 14. During the first six months of the year, Azelis generated free cash flow of 151 million euros. While margins have compressed, our cash generation has accelerated. Free cash flow rose to 10.8% year-on-year, and conversion margin improved to 63.8%. A clear testament to our asset-light, resilient business model and operational desk discipline. enabling us to fund growth while maintaining flexibility under uncertainty. This resulted in a 10.6% point uplift in free cash flow conversion to 63.8% for H1 2025, compared to 53.3% in H1 2024. This improvement was driven by lower working capital investments, despite lower EBITDA, demonstrating the strength of our asset-light business model. Now let's look at the components of the working capital in the next slide, in slide 15. Networking capital as a percentage of sales was 15.8% at the end of June 2025, compared to 15.9% at the end of December and 15.4% at the end of June 2024. Compared to December, we have made progress reducing our working capital level as indicated in the Q1 call. However, the progress is slower than I expected, and timing of supplier payments did not support the ratios. So there's still quite some work to do here, especially on the inventory side, and we expect further improvements in working capital efficiency as the year progresses. Looking at the chart on the right, our working capital was flat for the first half year due to slow market demand. compared to historical seasonal patterns where we witnessed every year a ramp up towards the summer. You see this on the dotted lines of the chart. Overall, we'll manage our working capital in line with adjusted demand and expect to reduce working capital investment in the second half of the year, as this will also benefit our net debt that we can see on slide 17. The change in net debt during the first half of the year reflects a stronger operating cash flow of 177 million euros, stable interest payment and our M&A investments, which includes 99 million euros in deferred considerations with options in the first half of 2025. These cash outflows for deferred payments coupled with slower EBITDA development resulted in a leverage ending at 3.1 at the end of the period. At the end of June 2025, we have a strong liquidity position of €702 million, both in cash and unused credit facilities. As Anna highlighted, our innovation capabilities, ESG leadership, reflected in our MSCI AA rating, and digitization capabilities are key differentiators. We're not holding back investments indeed. These strengths combined with our financial resilience position us to emerge stronger from current market challenges. Whilst the environment remains challenging, we are well positioned and resilient to deliver for our principals, customers, and shareholders throughout the rest of 2025 and beyond. Let me give it back to Anna from here.

Thanks, Thijs. And I would like to conclude the presentation with some comments on the outlook. And actually, my views on the outlook have not changed since I last presented to you at the end of April. Near-term, the macro uncertainty driven by tariffs, geopolitical instability and regional conflicts, they continue to weigh on demand across all markets. Yet, this environment also creates opportunity, as I said before. Customers turn to us to reformulate and adapt, whether to offset rising costs or navigate supply chain disruptions. We are right-sizing Azelis while staying agile, capturing growth wherever it emerged. And at the same time, we remain focused on executing our long-term strategy. We are controlling what we can, cost and working capital, with discipline. Our asset-light model enhances resilience and supports the strong cash generation, as you have seen. Medium to long-term, sector fundamentals remain compelling, Customers and principals need distributors regardless of market conditions to help them innovate and grow their business. And this has not changed. And in these volatile times, it is even more important. And also, the industry is still very fragmented with many opportunities to grow through M&A as well. Our global platform and strategic focus position is to unlock value despite near-term headwinds. Through cycles, our innovation, sustainability, and digital capabilities make us a key partner for customers and principals. And this is the Azalea's value proposition through every phase of the cycle. Operator, you are ready for questions and you can open the line.

Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone. We will pause for a moment to assemble the queue. Thank you. We'll take our first question from the line of analyst Vermilion with Morgan Stanley. Please go ahead.

Hi. Good morning, Chase. Good morning, Anna. I have three questions, please. So firstly, just on the leverage, you mentioned once you stabilize the balance sheet that will resume M&A. Can we assume that you don't plan any further M&A for the second half? And in that context, is raising capital something that you're considering as we move through this year? Secondly, could you comment a little bit on pricing? I think when we last spoke, you know, pricing was or had stabilized, but we've seen a relatively volatile earnings season on the supplier side. So are you seeing any pricing deterioration anywhere? And then lastly, could you just elaborate on this increased competition in China? You said you saw an uptick in competitive pressure across Southeast Asia. Your peer yesterday also reported seeing pressure from China volumes in LATAM, for example. So are you seeing that in any other geographies beyond Southeast Asia? Thank you.

Yeah, let me first look at your question around leverage and M&A. We remain committed to our 2.5 to 3 range of leverage. And for M&A, it means pacing, and that means prioritization. So only strategic assets that might not come back anytime soon or that have a timeline that we can't influence, these are the ones at this moment that we are pursuing. As you might know from earlier communication, most of our targets, we are in bilateral discussion, so we can indeed pace and we can extend the timeline there. But we really look at what is very strategic and nice to have as it will have to wait. That does not mean that we will not do any acquisition anymore by the end of this year, but it's all what we have in the pipeline, very small bolt-on acquisitions. On pricing, there's not really a large development different than what we already have communicated before. I would say in some semi-specialties, a bit more pricing pressure than on the high end. And in the same markets that we already had anticipated before. So a little bit more on industrial chemical side and a bit more here and there in food. And for the rest, I would say, as we had communicated before, And then the last question you mentioned, competition in China increased. It was not in China, it's in Southeast Asia, but it's driven by more pressure from Chinese products. The goods that are not flowing into the US will flow and are flowing more to, I'd say, Latin Africa and Southeast Asia. And that last part, there we see most of these goods ending up at the moment. And that gives, of course, more pressure because there's oversupply.

Okay. And Annelies, on your last question, on your question, I think, or four questions you asked, we don't need a capital raise. We don't need to raise capital to run the business.

Okay. Very clear. Thank you.

This question comes from the line of Time, the Mr. with ING, please go ahead.

Yes, good morning. Thanks for taking my questions. Two from my end. One follow-up on the competition from Chinese competitors. Are these distributors with a similar business model or are these direct-to-consumer producers who may approach clients online? And does it manifest itself on the semi-commodity space, as IMCD was yesterday reporting, or also on the speciality side? That's the first question. Secondly, it's generally assumed that the outsourcing trend accelerates in tough economic times. Is that a trend or a development you are currently seeing or not yet because of the uncertainty? And more in general, do you feel that The business model has generally changed in the last two years. I think that's proven to be difficult to deliver on the premise of GDP++ growth, organic revenue growth in the last couple of years. These are my questions.

Can you repeat that second question, Stan, because you dropped for a second there?

Yes, sure. So it's generally assumed that the outsourcing trend accelerates in just economic times because principals outsource more to save on cost. Is that a development you are currently seeing or not? And more in general, do you feel that the business model has changed in the recent years? I think that has been proven to be difficult to deliver on the premise of QDP++ organic growth over the last couple of years.

Yeah, clear. Good morning. First on China. They use actually mostly traders, which they did already in the past. We have not seen anything done online. They use distributors, they use traders to penetrate these markets. Ambulance traders don't have technical capabilities. So the moment, and that answers maybe the second part of your question, of your first question the moment it becomes more difficult or technical uh to replace um i would say a specific ingredient or chemical that these traders are not able to support really at the um the companies and so yes we see that more on semi commodities and less on specialties On your question of outsourcing, yes indeed. We've seen, of course, a lot of announcements in the press that the chemical companies are restructuring. It means they refocus more on their core. Their core is often R&D production and, of course, serving larger customers. So you can indeed see that there are opportunities for distributors. I am convinced nothing has changed in the GDP++, as we said before. Customers, even I would say maybe more accelerated today, with all the complexities, they need support with formulation, but they can't do it themselves, especially the smaller ones. They just don't have the technical capabilities and also the large amount of ingredients that They just can't follow up on that. And the second part from principles, as I said, yes, the trend is there. We always said that the trend to outsourcing is a slow one. It doesn't go with big percentage points year on year, but it is there. And I have not seen any change of this.

Okay. Thank you very much.

Your next question comes from the line who has seen a Varanasi with Goldman Sachs. Please go ahead.

Hi, good morning. Thank you for taking my questions. Just a couple from me, please. I just want to understand if you saw any changes in the growth patterns over the course of the quarter or if you saw any changes in early July, especially in Europe and America's. That's my first one. The second one is obviously you've been implementing the cost-saving program. Can you help us understand or quantify the benefit that we should expect to SG&A in 3Q and 4Q? Thank you.

Okay. On the movements within the quarter, I think Right now, the environment is not conducive of giving any comments relating to basically movements in the quarter. Obviously, as Anna already alluded, that the order frequency is quite high. And then you get basically, it's a fluid situation. And then you get basically shock effects at the end of the month when customers all of a sudden want their goods. This also does not help inventory planning. Yeah. But overall, what we see is not a real change for one quarter. It's more continuation at the end of Q1. And the order frequency, yeah, you have to shift more orders. You have to put more work in. There's more uncertainty on the forecasting and our material requirements planning. So it puts, of course, more pressure on the supply chain disruptions, as Anna was alluding to. On your second question. Thank you. on the GNA side. Can you please repeat in a nutshell what you're after?

Just the benefit from the cost savings. How should we think about OPEX evolution, 3Q, 4Q, once you get the full benefit of the cost savings program? Thank you.

Yeah, so we communicated in the Q1 call that we say an annualized run rate savings of 20 million, and of which roughly half will be in this year. Now, we have started executing those programs, of course, after the Q1 call in April. So May and June, these items have been executed. We're well on track with those items. Currently, there is limited benefit in our results inhibited. So you will see these cost savings throwing in in basically the second half. So they already have been executed for roughly halfway with it. So you will see them in H2 coming in.

Thank you very much.

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

Yes, hi, good morning. I'd like to dig into the personal care side of things in the U.S. And I was wondering if you could talk about how much of that weakness there, do you feel, is about the market versus market share versus operational issues that you would have had in the first half?

So we see a weakness in the personal care U.S. We talked a lot, of course, with our partners and our principals, and actually they confirmed they see exactly the same developments. It's discretionary spending, and when things are a bit, I would say, uncertain, which they are, of course, in the U.S., that's the category that gets hit quite soon, I would say, and that's exactly what we've seen.

You don't think that you've lost share or you've had issues explaining a weaker performance versus the market?

No, as I said, we have the impression, and that's confirmed by our principles, that it's just a trend that's happening at the moment in the U.S., and we have no indication we're losing share. We have a very strong personal care team in the U.S. that has a strong reputation in the market, and that has not changed.

Okay. And then as you mentioned that the lack of, I guess, ability to export to the U.S. for Chinese competitors was leading to pressure in the rest of the world, including Asia. On the flip side, doesn't that mean that there should be a fairly better environment for pricing in the U.S. with less competition from those exports or imports, I guess, from a U.S. standpoint?

So eventually, yes, of course, but at this moment, not yet, because nothing has been decided between, I would say, China and the US on tariffs. So as long as that is in flux, Yeah, we have a lot of conversations with our customers with a campaign made in America. I think I already explained that last time in the poll to promote products. We source most of our products for the U.S. in the U.S. So our direct tariff exposure is not so much. I think we have opportunities, but today and we We proposed alternatives of Chinese products already to our customers. They have a wait and see attitude at the moment and they will move. We are ready to move on the moment that things become clear on the tariff situation. And that, I expect, should be in the coming weeks.

Maybe our labs are quite busy, of course, with reformulations, Laurent. We can see that our labs are very busy, where customers are trying out, where they're testing, where they're looking for alternatives, where they're trying to anticipate on these things, but it's not coming to fruition yet.

Okay, thank you.

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

Good morning. Thanks for taking my questions. I have two, please. Firstly, just on the portfolio optimization piece in APAC, this has been a bit of a headwind on growth for you for a while now. Can you elaborate a bit on how far you think that has to run and sort of what you're looking to achieve there? I understand there's always sort of some tweaks you'll be looking to make, but yeah, if you could just elaborate specifically on that, that would be great. And then secondly, if I may, just to briefly follow up on the previous question about personal care in the US. I think previously, maybe there was a sense in Q1 that some of the issues were execution related around sort of previous acquisitions. Can you confirm whether that's been sort of fixed or wasn't the case? That would be really helpful. Thank you.

I will take the one on the portfolio optimization, and I will go back on the business side of personal care US. Obviously, I think to provide some context, what we call a portfolio optimization program. In Asia, we've done a lot of M&A over the years. When you acquire companies, there is always a part of SEMI. specialties in those companies where you say, hey, this doesn't gel with our industry footprint. This doesn't gel with our lab footprint, how we want to do things. So these are items where we basically phase things out when there are some assets involved, like plans, those kind of things. And we phase these items out. Now, obviously, the phasing of this is much less over time. And the peak of this was basically, if we look at when we phased things out, there was still business in the first half of 2024. If you look in Q3, the effect is getting less and less. And Q4, so gradually we're spacing this out. Normally, and I'm just giving here a normal number, we phase out roughly between 30 and 50 million in semi-commodities or product lines that are ESG related, like tobacco lines, those kind of things, where we phase it out. on an annual basis.

Yeah, and on the second question, I believe you're confusing personal care with Wigan. Wigan was that position. We reported some operational issues, ERP implementation issues in Q1. That's fully resolved. They're back on track. But that had nothing to do with the personal care business.

Great. So personal care was purely market-driven and the execution issues that were sort of elsewhere have been fully rectified within the quarter.

And they were in the FNF side in the US. Those issues have been fully resolved.

Great. That's very helpful. Thank you.

Your next question comes from the line of Eric Wilber with Kempton. Please go ahead.

Hi, good morning. Thanks for taking my questions. I also had a question on vegan. In North America, I was wondering if the recent, let's call it challenges in portfolio integration, which I believe indeed lasted a few months, have perhaps resulted in some of your local suppliers reassessing their current or future contracts. Is there a risk that this would restrain near-term organic sales growth for this particular business, which I believe is highly life science geared? And also, apologies for this, but digging a little bit deeper on the China flows, I believe that you have previously highlighted to be willing to work with more Chinese suppliers. And despite challenges on pricing for your existing business, could this event potentially in the longer term turn out to be a bit of a volume to win? Thank you.

Maybe first on your first question, I don't think I understand your question completely. Can you maybe repeat it or elaborate on it?

Yeah, so what I understand is that there was an ERP integration issue and that led to delays of sales. So I can imagine that as a supplier, maybe if you want to expand business with Azelis, you may want to reassess. Just wanted to get some comfort there. Thank you.

Okay, no, there's no risk. It has been a very short leap in their performance. And we have no suppliers who have doubts. Weigel is also there, a very strong company with a service that actually no one can really copy at the moment in the US. And yeah, strong reputation. strong connectivity with customers. So there's no reason for a small bit to move away from us.

So Eric, we have every quarter, we have three or four ERP implementations. That's how we are wired here at Azedis. They come with various degrees of complexity, of course. And when we flag to the market, there is a delay basically in goal life and those kinds of things. We produce stock ahead of time, those kind of things. There's always an operational or disruptional effect of these goal lines. We're very transparent in communicating that to the market, especially in a high margin, high velocity, where we have an excellent value proposition in the US. Over my existence here, we have implemented roughly 150 of these implementations. I can say actually that we're quite good at that. we are achieving a centralized data model at the core of all that we do, because that's a key enabler for digital opportunities that are out there, where we can use agentic AI, master data planning. We can use, for instance, cross-selling opportunities. So it is critical that those companies get online. So every quarter, we have a team working on that. That has no supplier risk. It actually makes the connection even better. And it also has, of course, some customer interruption at the point of go-live. That's why I want to leave it a little bit there.

Yeah, your second question, so on China and Chinese suppliers. Our ambition is to bring to our customers the best portfolio, the most innovative, sustainable, new molecules that we can offer so that our customers can innovate. And we are constantly looking at who are what we call the winners of the future. In the past, these winners of the future were all coming, mostly from Europe and a little bit from the Americas. We are watching what's happening in the world. And it's our ambition to continue to have the best portfolio now and in the future.

Very helpful. Thank you.

Your next question comes from the line of Karl Reinsford with Barenburg. Please go ahead.

Good morning. I have two, if I may. The first is on the working capital. Is improving on this level difficult in the short term just because of the current macro? I'm interested to know how you handle inventory in these moments. Do you still think it's important to retain high inventory levels given where demand is at the moment? Just be prepared for a volume uptick, and that makes working capital improvement pretty difficult. then in the short term, I'd have thought. So I'm interested to know what your ideas are in the second half to sort of improve that level. And the second question, just on the cost savings, you mentioned half the program has been executed, benefits in the second half. Could you delve into exactly what you've executed so far and what's left to do on this front, please? Thank you.

Let me give you an indication on the working capital first, Carl. Thank you for that question. As I already alluded to, if you look at basically our working capital performance, we see basically compared to prior year, we see our DIO has been higher, about three days higher. it needs to be roughly around the 50 to 51 range. So there you can get your calculation running, what I see, what it should be. Obviously, as Anna also indicated in an earlier question, I think one of these was that, yeah, the order frequency, when you get peaks in demand at month end, you need to facilitate that also with order replenishment. So the forecast accuracy, when we look at and we order, we do... We do, obviously, order planning in a very much detailed manner. The forecast accuracy is basically deviating much because of the shock effects at the end of the month. I think that was also flagged in Q1. That makes planning a little bit more difficult. And then you create, basically, stock at elevated levels. But also, the EIO is basically two to three days higher. There's still best practice there because if you see, for instance, you see everywhere, you see elevated inventory levels. It doesn't really change the planning side towards the principal, but you will see a gradual basically adjustment of your order patterns when it comes to inventory planning. On the contingency planning that you mentioned, we run an asset-like business model. where basically a distributor has to basically adjust in the middle office. You have to basically adjust yourself to the new volume trends and demand trends. So you do not touch your salespeople. You do not hold back on digital investments, those kind of things. They normally take about four or five months to come to execution. Now these announcements and the work that has been done started mainly in May and June. And I indicated already, we gave a careful step with 20 million in an annual run rate for savings, a big number in scheme of things, but around 10. A million will come in the second half, and all the items that we have requested and where we are working on, roughly half have been executed already. So you will see, I said already in my speaker notes as well, that we are well on track on achieving across the various regions these operating plans. Does that give you a sufficient answer, Carl?

Yeah, no, they're very helpful, Ty. Thank you as always. Cheers.

Your next question comes from the line of Thibault Lenu with KBC Securities. Please go ahead.

Good morning. I just have one question left. With respect to the market share in the U.S., given the tariffs, while import duties lower overall the month, is there an opportunity to improve the competitive position, especially since you have a much broader supply and network with local sourcing compared to smaller players?

Yeah, it's a good question. And of course, we don't know yet how all the tariffs will pin out. That's a caveat. But if indeed tariffs are going to be so high that only U.S.-produced products remain competitive, we are very well positioned. The good thing is, as you mentioned, we are global. We have also, I would say, in different countries, contacts with many different principles. And that's the beauty of our model. We can really be very flexible and find the right products for the right markets. And these things take time, of course, and it's not happening overnight. But that's the beauty of being global.

Yeah, maybe to add, Those players in the industry have a broad and technical portfolio with labs that can make many combinations for the customers and have the capabilities to be very agile and close to the customer base, and they will benefit on the longer run.

Thank you.

There are no further questions on the conference line. We have come to the end of this call. I will now hand over to the Chief Executive Officer, Anna Bertone, for closing remarks.

Thank you. We trust today's call has provided meaningful insight into how we are navigating the current market environment and why we remain confident in the medium and long-term potential of our market. We believe we are well positioned to seize the opportunities ahead and we are excited about what the future holds. As always, our investor relations team is here for any questions or follow-ups you might have, so please don't hesitate to reach out. We'd be happy to continue the conversation. For those taking some well-earned time off, we wish you a relaxing and enjoyable summer. Thank you for your continued interest and support, and have a great day.