Azelis Group NV (AZE) Earnings Call Transcript & Summary

Good day, and welcome to Azelis' 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 period. 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 continue 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 EUR 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 -- flows 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 our 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 basis points. This was due to the mix effect from acquisitions and from higher contribution from Industrial Chemicals, which tend to come at lower gross margins than Life Sciences. Adjusted EBITA decreased by 3.8% compared to Q1 '24, which means that EBITA 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 with 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 EUR 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 slide. 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, 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. APAC, Agri was flat with volume growth partly offset by price pressure. And in the U.S., 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 U.S., and this is consistent with the slowing PMI. CASE in APAC continues to be pressured by a weak China. For Lubes and Metalworking Fluids, the continued positive trends in EMEA and APAC are more than offsetting the slowdown in the Americas. On a regional basis, we have seen a clear shift in sentiment. Especially in U.S., we saw a deceleration in organic growth in the last 4 weeks to 6 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 are not yet experiencing 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 APAC is supported by good performance in India and Southeast Asia. Our performance in these markets partly offset the continued weakness in China. In terms of inorganic growth, we continue to execute on our M&A strategy and the 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'll start with an overview of the group financial performance for the first quarter. Let me get going with Slide 9 with our headline P&L and revenue split between Life Sciences and Industrial Chemicals. In the first quarter, we recorded a revenue of EUR 1.1 billion, representing year-on-year growth of 4.5% or 4.7% in constant currency. This growth reflects the performance of our 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 mix effects across our operating regions, less pricing. Our gross profit for the first quarter was EUR 264 million, 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 grew 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 EBITA of EUR 120 million, resulting in an adjusted EBITA margin of 10.9%. The 93 basis point contraction was driven by mix 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 return to growth. That's where our budget is based upon. The slower development in adjusted EBITA 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 on 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 U.S. 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 Chemicals segment. The continued strong performance of Flavours & Fragrances in APAC offset this partially. Revenue growth contribution from M&A during the quarter was 2.2%, whilst FX remained a slight headwind of 4.3%. In the first quarter, group gross profit grew by 1.2%, driven by a 2% growth contribution from recent acquisitions, setting a slight decline in organic gross profit. The decline in organic gross 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 EBITA 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 EBITA. The organic EBITA decline, especially in EMEA and the 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 happen normally in April. Simply put, we added costs in line with our expectation for higher organic growth, especially in EMEA and the Americas, which resulted in an adjusted EBITA decline during the quarter. To prevent further deterioration in our EBITA margin, we have already started a contingency plan, it should deliver EUR 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 these programs 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 execution, and we're focusing on our M&A integration, which we bring forward, but also shared service hub migration programs and recalibration of variable compensation. 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 EUR 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 FX headwind 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 Lubes 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. Gross profit in EMEA grew by 4.2%, resulting in an 88 basis points contraction in gross profit margin. This is mainly due to a mix 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, but it's a pure mix effect. Adjusted EBITA declined by 5.6%, resulting in 177 basis points EBITA 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 EBITA 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 EUR 384 million, 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 FX 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, a deceleration in Personal Care, partly due to shift in consumer sentiment over short-term economic outlook. 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 EUR 92 million. with an 81 basis point contraction in gross profit to 24%. The margin contraction was mainly driven by mix effects across the businesses in the region with higher contribution from Industrial Chemicals and Latin America. Adjusted EBITA declined by 4.6% in the first quarter, driving adjusted EBITA 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 from Latin America. Overall, this resulted in a 223 basis point step down in conversion margin to 46.8%. Now lastly, Asia Pacific. During the first quarter, revenue decreased slightly to EUR 218 million. 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 Sciences business in the region actually performed really well, driven by good performance in F&F and Pharma, offset by weakness in China, especially in the Industrial Chemicals segment. Gross profit in APAC declined by 3.9% to EUR 45 million, resulting in a 70 basis points gross profit margin contraction to 20.8%, mainly due to a mix effect from higher contribution from EMEA, 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 decline in gross profit, adjusted EBITA increased by 7.6%, driving an 84 basis point adjusted EBITA margin expansion to 10.9%. This was mainly due to mix effect from recent high-margin acquisitions, therefore, margin accretive, 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 in conversion margin to 52.6%, reiterating 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 to 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, but 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 EUR 120.3 million, representing a cash flow conversion of 99.7% for the period. Azelis 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 the business cycle. With that, I'm handing the floor back to Anna for some closing remarks and the outlook.

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. As 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 2 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 EUR 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.

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

Thank you for 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? It 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?

Yes. 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 announcement on all the global tariffs that U.S. is planning to input. And then, we saw a clear slowdown. The slowdown has been, I would say, more visible in the U.S. than in the rest of the territory. But we saw also in the rest, people are just waiting. We have seen also a back in -- if you look at the order patterns, they again become more frequent and 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 end of the trend where actually that was gone away has been broken in the last month.

Yes. Especially in the U.S., Suhasini, and we saw -- what we also see, we see quite some order shift. So your question on April. Actually, our order book for April and May is still looking good, but we will still see shifts all the time. And we saw actually also a good order book for March, but it didn't materialize. Therefore, we're a little bit more conservative in our approach.

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 call, we had a very good order book, and it didn't materialize. So I can't say anything about the next months because the orders...

I see at the end of the month. So what happens Suhasini, what Anna was saying, this order frequency and order quantity are very good leading in KPIs. Please note that the distributor is also serving small customers. So they are much more reactive. So they were sitting with stock very near to small customers. Obviously, these open orders are confirmed and basically, we build up this open order book. So we have normally 3 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 order quantity was going up, and the March book, [ sort of ] going the other way around. So the situation at this point in time is very fluid. So we have to be very careful.

Your next question comes from the line of Chetan Udeshi from JPMorgan.

Again, just following up on Suhasini's question. I mean to the extent you can talk about it, you did 2.5% organic growth for Q1 as a whole and you talked about deterioration in the last 6 weeks, if I heard you correctly. 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 your revenue trajectory might be. So are you in the process of destocking your own inventory as we speak? Or do you think you are at the right level at this point? And the last question was, do you see a risk that this uncertainty, more volatility in your order book also eventually brings some pricing pressure again in the market? Or do you think that situation looks less likely given that we've already gone through some sort of a price normalization in the last 2 years?

Yes. 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. And if starts to shift, then probably the organic growth is less than we expect. 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, but -- 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, I would say, the raw materials from. And that's very different the situation from principal [indiscernible] principal. But we expect actually that prices will rise. And as you know, we pass that through immediately.

Chetan, on your working capital comment, you're right that we basically -- we made a projection basically in December, where we also said, hey, the stock is on the higher end. Hence, It was a bit of a trend bridge. So 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 is 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 EUR 20 million to EUR 30 million on a normalized basis and just to align basically -- to align the working capital with our volume projections.

Anna, sorry to a bit more difficult because when I read the press release and you guys talked about unprecedented volatility, rapid shift -- sorry, rapid shift in sentiment. I mean, 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 a positive organic growth in Q2. So it doesn't feel like things are as bad as perhaps the messaging is? Or am I missing something?

You know I think the situation in the market is volatile. I think everyone can look around and see what it also did for 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. We are local-for-local. So it can also help us to win from, at this moment, maybe Chinese competitors in U.S. that we're offering prices at a lower cost than we could offer because we present the local blue-chip principal. So -- but it takes a little bit of time to stabilize, and that's, yes, the situation is fluid and also, I think that at the moment that the tariffs 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.

Chetan, the story is very simple. Please note this is distribution business. So the customers are -- and the reaction if the customer 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 look good as Suhasini was also saying, and it was quite 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 yes, 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 will 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.

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

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 prebuy 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, sellout or from your standpoint, your sales 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 need to -- have no idea how to think about that one.

Yes. So we have not seen a lot of prebuying, only little bit in Canada, and that's it. And yes, so we don't think that what you see in the results of Q1 contains a lot of prebuying. And on the pharma, our pharma business in the U.S. is actually not that large. And the biggest part of the pharma business is sitting in EMEA and in APAC. And so, I think, therefore, we have less of a problem with tariffs in that respect.

So, Laurent, this is also a fluid situation. Let me be very clear. We make analysis on HS codes, et cetera, which one are exempted, which ones are not? Is it nutra? Is it pharma? So there's also a lot of unclarity on this topic, and one should understand that as well, of course. But overall, our pharma business is a very resilient business. Pharma had 2 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, we -- 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.

Your next question comes from the line of Stijn Demeester from ING.

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. And second, on M&A, given where your leverage is today and with sellers likely to adopt the wait and see stance and the discussion on multiples that you mentioned, isn't it sensible to focus on deleveraging this year instead of pushing hard on M&A? And then last one on the deferred payments that you flagged in the Q4 call, the deferred M&A payments, can you comment whether they have been recorded in Q1 or are still to be expected in Q2?

Okay. Stijn, 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 side 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 scale of 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 outsourced 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 because we said, okay, you did quite some stuff already in the past, can you do this again? 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're bringing -- brought in much more structured commercial excellence programs, operational excellence programs. We 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. 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 deleveraging 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 deleveraging profile, what we are trying to achieve, we see a lot of opportunities still for M&A. However, yes, will we do very risky M&A in 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 outside. But we have a very attractive pipeline where we execute very diligently upon. And Anna will certainly will see also there, we have some interesting conversations and that will come to you as well. On the deferred payment, we have been very clear about that. It's roughly about EUR 100 million, about 35% is already being paid in Q1.

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

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 mix effects, too, but can you just walk us through the drivers of that a bit more, please?

Yes. There's one and first element there. It's obviously -- please note that all the contingency plans, APAC was the last one. So this is the last [indiscernible] of the contingency plans that is still in that where you 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 with the Chinese New Year is a little bit of a slow quarter when it comes to cost. And then obviously, Asia as 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 the scale 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 taking out for some mix effects, of course, and some seasonality there. But again, as I said, in your models and in your projections, we remain convinced that Asia will have the same EBITA profile and conversion margins as the other regions because it comes from scale. Distribution is a scale business. In relation to the question of Stijn 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 EUR 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.

The next question comes from the line of Eric Wilmer of Kempen.

Are you seeing any signs of Asian suppliers reaching out to you as they are seeking to redirect capacity originally intended for the U.S. 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? And 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 EUR 20 million annualized cost savings will start to kick in?

Yes. So maybe starting with the Asian suppliers. As we presented in Istanbul, our objective is to work with the top-notch portfolio with the winners of the future and wherever they are coming from. And in the past, they were mostly or actually, yes, 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 -- yes, already, and that 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 U.S.-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 Azelis. 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, yes, 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'Oreal and Givaudan that the U.S. business has been growing less or even declining a bit. So I think, yes, what we have seen is a bit consistent with the rest of the players.

And Eric, on your cost saving, 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 as I said, I mentioned that to many of you already in the past, we have communicated very openly that, okay, we make a budget and then after the budget, we make a contingency plan. We have already been doing this for about 6 or 7 years. So this start -- this is part of our general process. Please also note that the 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 or running in a volatile environment. And a distributor in general, with an asset-light business nature is well equipped to that. We can pass through the prices, you basically align your 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 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.

Your next question is from the line of Alex Stewart of Barclays.

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 demand 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 increase 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 excess loading of costs. You talked, for example, about salary inflation, which presumably would have happened irrespective. And then finally, listen, I understand that the idea of pre-close 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 company. 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 2 years, there have been several quarters where you've had sizable misses. There have 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?

Yes. If I can take the first question, Alex, the lack of visibility and why we loaded up on costs. We saw a clear, 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 -- yes, 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 impact 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 need 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 will talk 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 effects. And I've communicated that very clearly also to the analyst community, where I could also guide on where I saw positive trends basically in order frequency and order quantity. I can explain that to you on the separate call 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. So you have basically the effect of, full effect in 2024, which is an effect of roughly EUR 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 [indiscernible] quarter. If you take those effects into account, it was roughly EUR 5 million. I am not quite sure what to do with your last comment. I'm not sure if I want to answer that. But okay, Azelis 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 can 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 yes, I think let me help you in educating you in the process and how basically the formulation works for basically getting to an earnings model. That's why I want to leave it at that, Alex.

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 cost that maybe could have been saved if you had perfect foresight, did I hear you say EUR 3 million on payroll and EUR 2 million on marketing, trade shows...

No, Alex, you didn't get it right. I said that basically the inflation effect for the quarter because we give our payroll inflation normally in April of the year, 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 EUR 3 million. And if I look at the investments that we make in the business, this is a combination of a couple of things, traffic is, these are replacements, that's roughly in the area of EUR 5 million, but it also includes trade shows, as I said, that quite 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 in marketing costs in there. So there, you have your 2 numbers; EUR 3 million and EUR 5 million.

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

Yes. Exactly. And so we 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 U.S. In the fourth quarter call you also heard 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 then. 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, 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.

Your next question is from the line of Matthias Maenhaut from Kepler Cheuvreux.

I have 3, if I may. Just 3 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, Thijs, 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? That are my questions.

Yes. So on organic growth, when we talk about that, 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 end markets. But overall, they were stable, but we know there will be price increases. Several of our principals already have announced that they were thinking about price increases. So the moment there are 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.

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

Yes, Q1 -- stable price. And on building down the leverage, maybe.

On the leverage, no, this is -- we expect that still to go down. As communicated before, I still have my working capital program where I can focus on. We have our growth programs where we focus on. We also -- please note that M&A that we did is growing and is growing quite fast. So no, I'm still convinced that the leverage will come down, Matthias.

And you have a follow-up question from Laurent Favre of BNP.

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.

It will go down, Laurent. It will go down. These are mainly, for instance, these are for 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. There 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 top line, our bottom line, where we basically continuously optimize our portfolio. This is roughly in the EUR 35 million to EUR 50 million a year. But in Asia, it's a specific program.

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, Anna Bertona, 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.