Azelis Group NV (AZE) Earnings Call Transcript & Summary

Good morning and welcome to the Azelis' 9 Months Trading Update Call. As usual, we have Anna Bertona, group CEO; and Thijs Bakker, group CFO. Anna will give us a brief update on the business and Thijs will talk about the financial results. Anna will also give a few words on the outlook before we open the call for Q&A. As a reminder. The presentation may contain forward-looking statements, and they are subject to risk. We will make a recording of this call available on our website later today. After the speakers' presentation, we will open the line for Q&A. [Operator Instructions] Let me now hand the call over to Anna.

Thanks, Pam. And good morning and thank you for joining us today. I will start with the key points from our results in the first 9 months of 2024. And these are very similar to the messages I have given in the previous earnings calls this year. First, the green shoots we started to see in some of our markets earlier this year continue to take root. Destocking seems behind us. Volumes are slowly recovering, and we are seeing tentative signs of price stabilization. The rate of deterioration has slowed progressively during the year, and we have delivered group organic revenue growth in the third quarter. Although this is partially due to easing comps, general trends are aligning in the right direction. And this is valid not only for Q3 but over the past 9 months. Second, we continue our balanced approach between managing our costs and at the same time being prepared for growth as the market recovers. We aim to maintain the best-in-class conversion margin levels we have achieved in recent years, which is reflected in staying at 47%. And lastly, although we see signs of recovery as the business pressures are dissipating, there remains a high degree of uncertainty across the industry. As I said in Istanbul, volatility is here to stay, but we have demonstrated in these last 2 years of industry slowdown that Azelis can deliver good performance across business cycles. Now let's go through the key updates, so far, of this year on the next slide. In the first 9 months of '24, we achieved a revenue of EUR 3.2 billion. Throughout the period, we saw a steady improvement in trends across our markets. And in Q3, we achieved positive organic revenue growth of 2.8% after 6 quarters of decline. We have achieved a gross profit of EUR 784 million, so far, this year. And that means a 59 basis point expansion in our gross profit margin, which is driven by positive mix effects due to our diversified portfolio. Adjusted EBITA was EUR 369 million, representing an adjusted EBITA margin of 11.5%. And as I mentioned before, our conversion margin remained strong at 47.1%, which is broadly in line with the level we achieved in '22. So far this year, we have announced 7 deals in total, of which 1 is still to close. Equally important, we continued to execute on our strategy to be the reference in our industry, as we presented during the Investor Day in Istanbul. We are executing on our strategy to be the global leading service provider in our chosen end markets. We continue to widen our lead in terms of innovation. So far this year, we have won already 6 industry awards for innovative formulation. And the latest one was for innovative products at Fi India just 2 weeks ago. In sustainability, we are full steam ahead with finalizing the next phase of our sustainability agenda. And in digital, we are on the next stage of our digital strategy. After successful rollout of our 150 portals, 30 e-Labs and principal portals for some of our largest strategic partners, we are executing on programs to accelerate efficiency gains and monetization of our pioneering investments in digital tools and platforms. Now let's look at some of the drivers of these results on the next slide. On the organic side, we see varying trends across regions and across end markets. Our diversified portfolio and wide footprint allows us to mitigate the impact of the ongoing volatility across different parts of the group. Within life science, we see that Home Care remains strong in all regions. We are seeing a recovery in the ag market after over a year of weakness. The recovery in the food market in EMEA and Americas is supported by signs of price stabilization, while food in APAC remains relatively weak due mainly to lower volumes. In Personal Care, business remains weak in Europe due to lower export volumes. In rest of the world, we are still experiencing volatility. And industrial chemicals, we are seeing a meaningful recovery in CASE in EMEA, while broadly stable in Americas and still weak in China where we have exposure into building and construction end markets. Lubes and metalworking fluids is broadly stable across the region. In terms of regions, Americas is doing well. The U.S. benefits from the recovery in life sciences, particularly in flavor and fragrances [ and food ]. And we are also starting to see stabilization in Canada. Latin America, we continue to see a slow, broad-based recovery. Europe is still a mixed bag, with the largest markets showing a high degree of volatility. Middle East, Africa, we are impacted by delays in shipments caused by the ongoing tensions in the region. And lastly, APAC's remains broadly stable. India is doing well, while China continues to be weak. Regarding our inorganic growth, we continued to execute on our M&A strategy as an active consolidator in the industry [indiscernible]. We closed 5 acquisitions in the first 9 months, across 3 regions, that either fill the gaps in our portfolio or reinforce existing market position. We have also just closed the acquisition of CPS Chemicals in South Africa on the 1st of October. And we expect to close Hortimex in Poland before the end of the year. The M&A pipeline remains full. And we see many opportunities to execute on our strategy of building global leadership in the focus end markets that we presented in Istanbul. We are in a position of strength, as we have the resources to invest and the time and patience to remain and maintain with a disciplined approach to ensure we are creating value with these investments. Now let me hand you over to Thijs for a walk-through to our financial results.

Thank you, Anna. And good morning, everyone. Let me guide you through the group's financial performance and those of our regions for the first 9 months of 2024. Now let's first start with a high-level overview of the P&L and the drivers of our performance in the third quarter and first 9 months 2024. On the next page, we have a revenue split between life sciences and industrial chemical. Group revenue for the first 9 months of 2024 were EUR 3.2 billion, representing a year-on-year growth of 2.3% at constant currency, as you can see here on the right side of this table. This growth reflects the performance of our resilient life science business, which grew by 4%, and a slightly weaker performance in industrial chemicals, which declined by 0.4% but is improving quarter-on-quarter, both at constant FX. In the third quarter, which you can see on the left side of the table, revenue came in at around EUR 1.1 billion, representing a year-on-year growth of 1.5%, or 4% in constant currency. I will take you through the growth breakdown a bit later, but as you will see, that -- without the impact of acquisitions, Azelis returned to organic growth in line with earlier communication. Gross profit for the first 9 months came in at EUR 784 million, representing a year-on-year growth of 3.1%, or 12.8% in constant currency. Gross profit as a percentage of revenue ended at 24.5%, an uptick of 60 basis points versus the prior year on constant currency basis. This gross profit margin expansion was driven by organic margin improvements in Asia Pacific, as we have made good progress on our portfolio development, and also the Americas. Over there, we have experienced positive mix effects from the recovery in life sciences as well as margin improvements in Latin America, so all positive. In addition, we see a positive margin impact from improved performance of recent acquisitions due to the execution of our integration efforts. For the first 9 months of the year, adjusted EBITDA, D, was EUR 400 million, around the same level as previous year. And adjusted EBITA came in at just over EUR 369 million, reflecting a year-on-year decline, 1.6%, but up on a constant currency basis. The slower absolute EBITA development during the period was driven by phasing, as impacts from cost control measures versus prior year are lapping. And the recovery of the top line and associated GP is coming back quarter by quarter, as you can see in the positive organic EBITA growth in the third quarter. Adjusted EBITA margin, therefore, came in at 11.5% for the first 9 months of 2024, representing a 19 basis points contraction on a constant currency basis. Despite this, conversion margins remained strong at 47.1%, broadly in line with levels achieved in '22 and '23. So overall, we're quite positive on the performance in the third quarter, where we witnessed return to organic growth. Let's have a look at the breakdown on -- of our growth numbers on Page #10. On this page, I would like to provide a high-level growth breakdown of revenue, gross profit and adjusted EBITA between organic, M&A and FX. I will take you through more regional details in a following slide, in addition to segment comments made by Anna. On the revenue line, growth contribution from acquisitions offset the decline in organic revenue; as well as the negative impact of FX translation, especially in this quarter. Organic revenue declined by 2% in the first 9 months of the year, with positive organic growth of 2.8% in the third quarter, reversing some of the organic decline in Q1 and Q2. The organic revenue growth in Q3 follows signals of organic revenue recovery in the second quarter already, so basically we're coming out of the [ bathtub ]. The positive organic momentum in the third quarter was driven by the recovery in several market segments, notably life science in North America, industrial chemicals in EMEA and F&F in Americas and Asia. Gross profit for the first 9 months was driven by strong performance from recent acquisitions, which contributed 5.1% of gross profit growth during the period, offsetting weaker organic gross profit growth and negative impact from FX translation. In the third quarter, organic gross profit came in at 6.6% following a 0.5% organic growth in Q2 and a 7.3% organic decline in Q1. The improvements in gross profit growth was mostly supported by positive mix effects in the Americas as well as improvement in organic gross profit margins in Asia Pacific. Now our adjusted EBITA for the first 9 months declined by 1.6%, supported by contribution from recent acquisition partly mitigating the 4.5% organic decline and a negative impact of FX translation. As you can see on this table, the organic EBITA decline was driven by lower benefit from cost control measures in America and EMEA compared to the prior year; as well as some margin dilution from higher contribution from our businesses in Middle East, Africa and Latin America. As a reminder: We started our contingency actions in the U.S. at the end of Q4 2022 and commenced in Q1 2023 in EMEA. As we are seeing an increase in our organic growth in the third quarter, adjusted EBITA grew by 3.1%, driven by a 3.9% organic growth, reversing some of the declines in Q1 and Q2. Overall in summary here, organic trends appear to be stabilizing across our end markets. Now let's now turn to the regional financial performance on Page 11. Let's first start on the left here. Let's start with EMEA, which makes up 42% of the group revenue. Revenue for the first 9 months ended at EUR 1.4 billion. That represents a year-on-year decline of 1.7% or an increase of 0.8% in constant currency. For the first 9 months, organic revenue declined by 2.4%. In the third quarter, organic revenue increased with 3.2%, reversing some of the declines earlier in the year, positive effect. Improvement in organic revenue in Q3 was driven by a recovery in our ag and food businesses as well as a broad-based recovery in industrial chemicals. [ For the ] first 9 months, gross profit in EMEA declined by 4%, resulting in the 66 basis points contraction in gross profit margin, mainly due to a mix towards industrial chemicals and food. Sequentially, in the third quarter, organic gross profit followed that mix shift. For the first 9 months, adjusted EBITA declined by 7.5%, resulting in an 84 basis points adjusted EBITA margin contraction towards 13.3% driven mainly by the product mix effect I mentioned earlier but also the impact of higher contribution of emerging countries in the region that come with a lower margin profile and, lastly, lower impacts from cost control measures compared to prior year as I mentioned before. Conversion margin ended at 51%, 51.3% compared to 53.2% in the prior year, so still well above 50%. Turning to the Americas, which makes up 37% of group revenue. Revenue for the first 9 months ended at EUR 1.2 billion, a year-on-year increase of 5.7%, year-on-year, to EUR 1.2 billion, driven by a 6.8% revenue growth contribution from recent acquisitions, offsetting the organic revenue decline in the first 9 months. We are pleased to see sustained improvement in trends in the Americas, reflected in positive organic revenue growth of 0.4% [ in Q2 ] further strengthening to 4.6% in third quarter. The positive momentum was driven by the recovery in life science, particularly in flavors and fragrance, as Anna already mentioned, Personal Care, Home Care; and continued stabilization in CASE, a large segment in the U.S. In Latin America, we continued to see positive momentum across [ end markets ] as we're integrating our M&A. For the first 9 months, gross profit in the Americas increased by 11.6%, driving a 131 basis points gross profit margin expansion to 24.8% driven by the positive mix shifts towards life sciences in the U.S. as well as gross profit margin improvement in Latin America as we are improving our portfolio positioning. As such, in the third quarter, gross profit margin ended at 25.2%, an increase of 262 basis points versus prior year. Adjusted EBITA increased by 1.9%, driving adjusted EBITA margin of 12.7%, representing a 48 basis points contraction over the prior year, driven mainly due to the dilution from Latin America, where our margins are improving but still lower than the U.S. and Canada. These effects drove conversion margin in the region down to 51% during the period but also still well above 50%. Let's move to the last one, to the right, moving to Asia Pacific. Over there, revenue declined by 3% to EUR 665 million in the first 9 months, driven by an organic decline of 2.9% and FX headwinds of 2.7%. Trends in Asia Pacific remained broadly stable in the region over there, except in China where we see limited signals of recovery. To put these results into context, however: The 3% decline in the first 9 months this year compares to 27.4% revenue growth in the region in the same period last year, out of which 2.4% was organic. For the first 9 months, gross profit in Asia Pacific grew by 6.4% to EUR 138.9 million, representing gross profit margin of 20.9%. The 183 basis points expansion in gross profit margin was driven by improving profitability of the product portfolio of recent acquisitions, as we are executing well on our -- on the integration of them. Adjusted EBITA increased by 10.4% to EUR 66 million, reflecting continuous margin and scale improvement initiatives. The improvement in both gross profit and adjusted EBITA margin resulted in a 172 basis points expansion in conversion margin to 47.5% during the period, again reiterating that, on the long run, we see no reason why Asia Pacific can reach similar levels like EMEA or Americas. Now let's turn to the main driver of our cash flow generation, working capital, on the next page. Net working capital-to-sales was 16% at end of September 2024 versus 15.3% in the prior year. The increase in the group working capital improvement was driven mainly by higher inventory levels, which should be perceived positive and in line with demand recovering across our markets and our open order book. This uptick also, of course, reflects the impact of acquisitions. On the picture on the right. We are expecting our working capital trend to trend down in Q4 in line with historical seasonality, as shown on the chart on the right. Based upon our current view on the order book, you can assume historical patterns. Our working capital investments year-to-date reflect our ongoing focus on managing the business as volumes recover across our end markets. As always, we are committed to strict control of working capital to protect our cash flows and manage our debt levels; and we have a good track record with this. In the first 9 months, we generated free cash flow of EUR 218.4 million, representing a cash flow conversion 58% for the period, driven by higher investments in working capital during the period, as in 2023 we had a cash inflow of working capital due to organic revenue decline. Now overall we will continue to optimize our working capital and focus on cash generation regardless of the business cycle. As a reminder: The working capital of M&A companies is around 25% to 30%, and it takes about 12 to 24 months to get this in-line. Now with that, I'm handing the floor back to Anna for some closing remarks and the outlook.

Thanks, Thijs. And I would like to conclude indeed with a few words on how we see the future. We have been talking about improvements since the beginning of the year, after a long destocking that we saw. Some of those improvements are solidifying, as reflected in our results and specifically in this quarter. And trends are starting to align in the right directions. Volumes are continuing to recover. Price pressures are starting to dissipate, while comps have been progressively getting easier. Therefore, we believe that the recovery is underway and Azelis is strongly positioned to benefit from it; however, a word of caution because the market remains volatile due to uncertainty in the near term, mostly on geopolitical issues. And therefore, as I said, we remain cautious. And we will continue to focus on balancing growth recovery and managing our costs. And with this, we protect our ability to generate cash regardless of the business cycles. Longer term, we are focused on further strengthening our winning business model. As I presented during our Investor Day last month, the market for specialty chemical distribution remains very attractive. The increasing regulations and a shift to sustainable alternatives provide clear structural growth drivers. And we serve diversified end markets with formulation services across the globe. And as I said earlier, this enables us to mitigate the impact of volatility across different parts of the group. And the industry remains highly fragmented. And I also showed you in Istanbul we estimate that the top 10 global and regional players still have less than 15% of the total addressable market. This means there is more than enough M&A growth opportunities that we can pursue. Azelis is strongly positioned to benefit from these industry developments. Therefore, we expect to continue delivering growth and generating returns through the cycles. With that, we are ready to take questions, so operators, please open the line for Q&A.

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

Just a couple from me, please. Given the order book that you have today, can you maybe provide some color on how you see Q4 evolving on an organic basis? The second one is on leverage. It has gone up to 2.9x. Can you discuss what's changed in the cash flow statement below free cash flow to drive the increase? And how do you see leverage at year-end?

Yes, sure. I'll take the question on the outlook. And maybe, Thijs, you can elaborate a bit more on the leverage. So the outlook, we are positive on what we see in October and November. However, as you already heard me say, we are cautious. December is always the smallest month, together, by the way, with August. And we still see, and we have seen that during the whole year, this volatility, yes, orders sometimes pushing out and being shifted to a next month, so yes, if that happens in December to January, that changes the whole picture. So we remain very cautious, yes, optimistic, but the volatility is really not gone. We still have smaller orders, [ more ] orders. And so it's not yet a very stable environment. Thijs, you can maybe...

Yes, [ next question ], on our leverage basically. We're currently at 2.9x, yes. Obviously, as our organic EBITA growth comes back, and we, you see a signal in there in Q3, then there is basically a deleveraging effect, yes. Obviously the main area is in working capital increase, yes, as also mentioned in the working capital area; and also acquisition related. We have quite some payments to do in that respect. And we have planned our investments also in line with our leverage commitment that we have given. Please also note that, if we look a little bit at the M&A contribution, we basically -- we have quite signed some deals, especially last year. There you also have basically an impact on that. If you want detailed calculations, I can take that offline for you.

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

I have also 2. First one is on the gross margin. Taking into account the differences in gross margin between industrial and life sciences, do you feel there is adequate recovery potential in the higher-margin life sciences segment to stem any negative gross margin mix effect as the industrial recovery takes root? And then secondly, a key point of debate with investor is still on pricing following the strong price increases that we saw in 2021 and '22. Can you maybe give a bit of comment on how prices have evolved throughout this quarter and what your expectation is going forward? Even though I know that this is a very fragmented area, yes. These are my questions.

Sure. And let me start with pricing. I think we saw a continuation of what we saw the quarter before, so stabilization of prices. We've seen actually that life sciences is still a bit more subject to some price fluctuations. [ However ], we see a more stable effect in the industrial segment, so for us it's a good sign. And that helps in also, I would say, the order pattern stabilization because, if customers think that prices will go down much more, they are always ordering much later because they wait till the next price decrease. And as this is now stabilizing, we expect that, at a certain moment, also the order pattern will come back a bit more normal than we have seen in the last year.

Yes. On the life sciences-versus-industrial question, Stijn, it's obviously the case that basically volume recovery in industrial chemicals will have dampening effect on our gross profit, because the industrial side has a lower GP profile than the life science side, but also in the life science side. And that's the beauty of the Azelis portfolio. We're extremely diversified; and the life sciences, it is very resilient. Please note that on both segments, in Q3, we showed organic revenue growth, yes, and also gross profit growth. Now within the life science side, there are also components that are basically recovering. As Anna alluded to, F&F is coming back, yes. We see that in the Americas. We also see that in Europe and we see that also in Asia. And obviously, agro, we indicated that we saw green shoots in Q2 already, that we saw green shoots in agro recovery; and yes, that materialized in Q3. [ And that ] environment, it's quite okay for us. And then Home Care is quite -- is also quite strong. On the other hand, pharma, as Anna mentioned there, that's where basically it's also a higher-margin segment. That's where we see more a flattening pattern. So there is enough space to grow. And there's enough space to grow in this area in my books. And also, of course, when we do M&A, yes, take for instance one we did in Indonesia in the life science side, yes, we're obviously [ packing ] our portfolio on it. And it's also demonstrated in what you see in Lat Am, where we are working, for instance, on the food side, in the acquisition we did in Brazil, yes.

Okay. If I might squeeze in one follow-up. Given leverage at 2.9x, close to the upper threshold, does it mean that M&A will take a back seat until leverage normalizes?

Well, we have a good M&A pipeline. And we are managing prudently within the guidelines that we have given. That's a commitment. And we have not lost any deal due to that reason. And we have, I would say, looked at which [ acts ] to execute when. And again it's not, at the moment, limiting our M&A firing power or execution.

Stijn, okay, I think, as I always said, these M&As, you cannot plan. They come and they go. Obviously we have a commitment to stay within the 2.5x to 3x range, the capital allocation policy. We have communicated that also in Istanbul. Obviously, as this organic EBITA growth comes back, there's a deleveraging effect with that over time. We'll see that [ in 2025 ], so -- and then of course, our M&A is mainly focused on small tuck-in M&As, yes.

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

I'm just curious again on working capital evolution. And I'm looking at that chart which shows that, at the end of September, this is the highest level of working capital-to-sales that Azelis has had in the last few years despite the fact that maybe the environment is still that -- not that strong. I'm just curious. What is -- how should we read into this? I think, Thijs, you mentioned this is a sort of a positive indicator, but I don't see the same sort of positivity when I listen to Anna about, like, the visibility, so I'm just trying to tie the two together, high inventory. And at the same time, the visibility is not high, so why should the inventory be high, in the first place? The second question is just again coming to short term -- you did organic growth in Q4. The comps become a little bit more -- tougher, I think, on a year-on-year basis in Q4, but do you think you can grow organically in Q4? And remind -- can you please remind us, what is the kind of seasonality we should have in mind in Q4 when we think about evolution of Q4 versus Q3? Because you also talked about lower working days in December.

Yes. So on the working capital, of course, you have to be prepared when sales will be there. We have a good order book, as I said, so we definitely don't want to miss any sales. And therefore, we are preparing. And also please note that you see our results, but there's 2 effects there. You have volume and you have prices. And so the volume we see in several segments really made an uptick. And as you know, we have different segments, so you can understand that, if CASE is coming back, these are normally higher volumes, while if pharma is slowing down a bit, these are -- yes, APIs, for example, are many -- much smaller in size, so you have also this mix effect in the net working capital in the inventory. And we are not overdoing it on, I would say, being prepared, but we definitely don't want to miss any sales. And yes, it is a sign of confidence, but yes, I remain cautious because -- and then you come back maybe on the seasonality of the Q4. As I said, yes, December is always a strange month. It's the smallest month, but it's also a strange month because, I mean -- yes. It's difficult to know how long our customers were going -- close down. Is it, yes, 1 week, 2 weeks? That's not always clear for us now.

Yes. And Chetan, please note that -- a chart that we have in the presentation, yes. I think you also see there that is depicting a trend. So the starting point on that chart is not the same. Please note that our gross working capital is very low end of 2023, yes. This year, we see more normal trend since we start, of course, to see organic growth coming back, yes. Well, I think that's how you should read the trend a little bit more. And if you look at the absolute numbers, I don't feel that there is a lot of difference from a trend point of view. The only thing we're flagging is that, on the inventory right now, August, September are normally your peak months for preparing for the end of the year. And we expect a working capital effect to come down in December, as per normal, yes.

Your next question comes from the line of Luuk Van Beek from Degroof Petercam.

I have a question about cost management because obviously you've done quite a lot over the past 1 to 2 years. So can you give a bit more color on in which areas do you think you can do additional measures and where you want to relax or maybe invest in to be prepared for future growth?

Well, maybe for clarity's purposes: There's one area where we've always been very prudent, and that's on sales. We need to have feet on the ground, and that's not something that we have touched. And we have, of course, integrated our acquisitions. And there we accelerated capturing the synergies on, say, double functions, but on sales, we have not compromised. And that's also something that we don't intend to compromise, for sure, in the next couple of months.

Okay, Luuk, I think it's a good question. Listen. Like we have taken -- I say this is a very agile organization. We're very lean and we take action very quickly. We've demonstrated that also with quick action on the contingency actions, as we call them, already in Q4 2020 in the U.S. In EMEA, it started in Q1. And we have rightsized the organization accordingly to our -- or to basically the top line. Now we take out, for instance, these head count. As Anna was saying also, we focus mainly on our back office, yes. We look at integrating the M&A faster. Those kind of things, that's where we're focusing. Now no matter what -- and you can see that in our conversion margin. No matter what part of the cycle we are, we're delivering because those conversion margins show that. Obviously right now, and I said that already in the second quarter, we're monitoring the situation, yes, due to the fact that we see organic revenue and gross profit coming back. So I'm -- we have not taken that many actions on the commercial side. For -- our digital efforts, we have accelerated. And please also note that, if you look at the dampening on [ gross ] side, there are the variable parts of our P&L that are coming back, so we're a bit like -- yes. It's our 2 communicating vessels and we're -- manage that accordingly. We've rightsized the organization where we are right now. So that's how we look at it.

Your next question comes from the line of Matthew Yates from Bank of America.

I'd like to just go back on and dwell on the EMEA results, please, for a moment because that seemed to be where the biggest delta to consensus expectations were today. So I'm looking at Slide 11. So I think you had 3% organic revenue growth in the quarter, but EBITDA was flat organically. I guess the question is why no operating leverage on that sales recovery. Did I hear you correctly earlier talk about negative mix with more industrials? If so, I mean, I guess that somewhat surprises me given what we see in the macro data in terms of fairly horrible PMIs in Europe, so is that something specific in Azelis' portfolio and mandates you've run? Or is that just sort of quarterly randomness? But if you don't mind just spending a minute just to make sure I understand what happened in Europe in Q3.

Well, you're right that EMEA is, at the moment, I would say, the -- market-wise, the most difficult. We've -- it's also when we talk with our principals. They confirm that. It is true that industrial segments for us are coming back. By the way, lubricants, metalworking fluid was already going quite well; and that is continuing. The CASE business, coatings and so, is coming back in volume but also stabilization in price. So that helps to -- I would say, to see the organic growth. And that has, of course, a mix effect, but we come, of course, from a low base. Don't forget that because, last year, it was -- Q1 was still good in EMEA, but from Q2, they also started to be the deterioration. We saw actually, globally, Americas was the first that had problems in the market and therefore impact on our results. Then it was EMEA and then it was APAC. So at this quarter, EMEA was already not doing well. So yes, coming from a low base, it's obvious that we have this uptick even if maybe the macro numbers are not showing that well.

And the -- so to give you an idea. Also, Matthew, I think it's a good question. We actually see recovery in our industrial chemicals division, as coatings is coming back. So actually, the organic growth, you can calculate -- you can back that out in EMEA -- is in the high 8% to 9% in this quarter, but please note, please realize what Anna is saying. This is coming from a very low base. Volumes have still not recovered in industrial chemicals side pre-COVID levels. We're coming very gradually and very slowly. We're coming out of that [ bathtub ]. Now on your EBITA question as well, please note that, last year, we took very diligent actions in Q3. We started basically in Q2 with this -- Q1. At the end of Q1 2023, we started with those things with the contingency planning. So last year, we had minus [ 2.3 ], contraction [ in organic ] on revenue but a 14% improvement in EBITA organically in EMEA, so yes. Obviously that's a tough comp to beat. And also please note, yes. You made a comment on the consensus. There is quite some negative FX impact as well. The FX impact is much higher than normal. To give you a bit of an idea: In Q3, we had [ an FX back ] effects about -- rough 2.2%, roughly 2.5%. And if you look, for instance, in H1, this was minus 1.2%. So it's just a mix of the businesses where we see growth coming from. This is mainly Turkey, Middle East. This is Lat Am, China, Japan; and Europe, which has strengthened in this side as well, though there we have a little bit of higher FX impacts as well, which shows you that picture what you have there versus the consensus.

Your next question comes from the line of Eric Wilmer from Van Lanschot Kempen.

First one is regarding your Q3 working capital uplift. Would it be possible to give a rough split of your Q3 investments in working capital, on the one hand; and the impact of recent M&A, with targets possibly having a different working capital strategy than you are used to, on the other hand? And my second question is whether it would be possible to quantify the impact of Middle Eastern shipment delays on your EMEA overall business performance, either on sales or EBITDA.

Thijs...

Yes, no, it's fine. On the working capital side of things, I think there is nothing spectacular there. And please note -- I think it's a good question. As I said before, [ our ] working capital of the M&A companies is roughly 25% to 30%, as these companies do take, as you mentioned rightfully so, a different view on working capital. Obviously you don't switch that on from day 1, when you buy them. They first need to get onto our systems and our supply chain. Processes need to be implemented, so I always say that takes about 12 to 24 months. And that depends then a little bit on the mix of the M&A that you are also doing. If I look here, for instance, at the M&A, contribution here that we are seeing here from the M&A companies is indeed the same picture. Organically, we are at 15%, 15.5%. And then M&A pulls it up with about 25%. So that's to give you a little bit of a mixed picture there on that, yes.

Yes. And then you had a question on EMEA [ impact ]. I think it's difficult to...

Okay, that's very clear. That's very -- yes.

Sorry. You asked about what the impact was of the delays in EMEA due to the -- I would say, the difficult situation there, but I think it's a bit difficult to quantify. I don't have that number here ready, but in any case, in terms of business exposure, EMEA is in total 14%...

Of EMEA.

Of EMEA, of course. And Israel is only around 3%. So on the total impact as a group, EMEA is 6%. Israel is 1.4%, so it doesn't move the needle enormously, but I think it was worthwhile to mention.

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

Just a couple of questions for me, please. The first one: Is there any flavor you can give us maybe around your sort of early discussions that you're having with principals as you look into 2025, what their view of markets is? And maybe if that's sort of changing or has changed in recent quarters. And the second one is just a follow-up really, as I think you touched on it, Anna, in your responses to a few of the questions, but given that Q3 clearly does look quite a bit better from a volume perspective than Q2, is there anything that's changing in terms of that customer ordering behavior or maybe even just customer discussions that you've picked up on? Or is it really just kind of more of the same and quite consistent with what you saw in Q2?

Yes, sure. I think, on the principals, I've been visiting the [ EPCA ] 2 weeks ago. And there was also the CPHI. CPHI is a pharma trade show, where we have spoken with, I think, in total maybe 50 principals. So that gave us a good view on how they see the market evolving. I think there's a bit of a consensus on the [ EPCA ], it's mostly industrial principals, that they don't see a lot of, I would say, big growth coming up. One person said it very well. They said it's not booming, but it's also not crashing; and that's how they see it. I have the impression that, yes, we are in line with that, but we see it a little bit more positive than them. And the pharma principals were a little bit more positive, I would say, on the outlook for next year. They see the same things. The pharma market has been booming after COVID. And of course, this year, compared to that boom, it has been stabilizing. And so the comps are difficult, but they expect actually that, next year, this stabilization will continue and maybe pick up a bit. So I think this is more or less based on some -- or many conversations we have with principals. Then on what we've seen on customer behavior. The order frequency is still higher. The order quantities are still lower, so we don't see any change there to -- going back to pre-COVID levels. So this -- that's why I remain cautious, because I think, this volatility, it's still there. And we also see, for example, orders shifting from one month to the other. That, we have been seeing during the year; and that is continuing. And that's again why I remain cautious, although I'm, of course, very happy to see that we see -- that we had an organic growth in Q3.

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

2 questions remain from my side, 1 again on the leverage. And the question is how comfortable are you in perhaps moving above the higher end of the range. I'm asking this because -- let's say, tomorrow, you can close a few very good acquisitions. And demand comes back really quickly. Your leverage could easily move towards, let's say, above the 3%. Let's say even 3.5%. And I know that, companies like Azelis, they can work perfectly well with much higher leverage, but I was just wondering on that. And then the second question is in terms of M&A activity. Where do you see today, let's say, the most interesting activity? Is that still Asia Pacific? Or maybe also Lat Am as well.

[ Yes, okay ]. Let me take, [ I think ], points here on leverage. Yes, you're correct. We can go up, up to 4.5%. That's not a problem. Also our cash flow conversion can facilitate that. It's not the point, but we also have basically -- Anna and I, we basically have also -- we run the ship in a prudent way. We have always done that and you have [ seen that ]. And obviously we've also said very often, if we see the target of our dreams -- and yes, we can consider to go above that, yes, but right now our focus is on small tuck-in M&As that we can fund from our own cash flow. That strategy has not really changed. Also this M&A -- I think your question is quite good because, this M&A, you cannot really plan. In H1 2023, we did much more M&A, but it's purely phasing. This pipeline, as Anna already said, is strong. It's focused on small tuck-ins, yes. It's very much aligned with our strategy as we presented also in Istanbul, but you cannot really phase these things as well. And you cannot really use also in your consensus. I see people making assumptions on consensus in Q4 on additional M&A contribution. You cannot do that. You cannot forecast on historicals. Our focus is obviously -- first, what you need to do is organic growth. Otherwise, you come into problems with your capital allocation policy. The 2.5x to 3x that we mentioned, we're obviously nearing to the higher end of that. And yes, we did basically 3% organic growth in Q3. We're cautiously optimistic for -- in our order book, as Anna already alluded. And then this year, we also had quite some negative impacts on FX [ in end of ] third quarter that you need to take into account. Maybe, Anna, you can give a bit [ platform on the M&A side ].

Yes. And also let's not forget, I mean, Hortimex that will close before the end of the year, but the others, it's very unlikely that new M&As that we will start discussing will close this year. So to go back to your question: "Where do you have activities?" We have activities everywhere in all the markets and regions we have. I presented in Istanbul the strategy, that we want to be the leader in the chosen market -- end markets. And yes, we have been doing our homework to see where we are not strong enough and where we have opportunities to grow. That created, of course, a long list and a short list, obviously, because we can't execute everything, but that is in all the regions but also in the mature markets like EMEA, the U.S. but definitely also Latin America and Asia Pacific.

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

[indiscernible]. I want to thank everyone that dialed in and also for your questions. And we trust we provided you with sufficient insight on how the year is developing and how we see the future. As usual, we are at your disposal for any follow-up questions. And we wish you a good day. And speak to you soon.