Akzo Nobel Nv Ord New

Thank you and good morning, everybody. I would like to welcome you all to the Axanable Q3 results 2024 conference call. My name is Brika and I will be coordinating your call today. During the presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two and for operator assistance at any point, it's star zero. Thank you. I would now like to hand you over to our host, Kenny Che, Head of Investor Relations, to begin. So, please go ahead, Kenny.

Thank you, Brika. Good morning and welcome to Axon Nobel's Investor Update for the third quarter of 2024. I'm Kenny Che, Head of Investor Relations. Today, our CEO, Greg Puglione, and CFO, Martin DeVries, will take you through our results. We'll refer to the presentation, which you can follow by webcast or download from our website at axonobel.com. A replay of the webcast will also be made available following the event. There will be a Q&A session after the presentation. For additional information, please contact our investor relations team. Before we start, a reminder of our forward-looking statements disclaimer on slide two. Please note this also applies to the conference call and answers to your questions. I will now hand over to Greg, who will start on slide three of the presentation.

Thanks, Kenny. Good morning to everyone on the call. Apologies for my voice. I need to trade in my company bicycle for a company car probably in this weather, but hopefully you can hear me fine. Q3 is our fourth consecutive quarter volume growth. Volumes increased by 1% even as market conditions remain mixed. Price mix was flat as pricing benefits were offset by negative regional mix of 1%. Our gross margin continued to improve. Adjusted gross margin expanded by 60 basis points in Q3 and 180 basis points year to date. Adjusted EBITDA growth in the quarter was impacted by higher than expected adverse currencies. While OPEX was higher year on year, it was down sequentially from Q2 levels as our cost measures begin to yield benefits. This will only accelerate in the next quarters given the additional SG&A measures that we announced. Q3 adjusted EBITDA before hyperinflation accounting was 400 million euros in line with guidance, resulting in an EBITDA margin of 15%. Our net debt to EBITDA ratio while down year on year increased to three times from the prior quarter, mainly due to temporary elevated working capital. Moving to slide four, let's look at the initiatives that support our ambitions. In May, we announced the closure of three DECO European EMEA sites as part of our industrial efficiency program. These closures should be completed by year end with volume transfers nearly over already. The next wave of closures is in preparation and will be announced in early 2025. We reaffirm the benefit targets outlined in our half-year results, 25 million euros this year, 17 million euros next year, and north of 250 million euros overall. Incremental to our industrial efficiency program, we announced in September an SGMA program with cuts that will optimize our functional organization. We're too heavy and we have to get leaner, particularly with rising labor costs. We're simplifying and rationalizing our organization. This will lead to a reduction of 2,000 positions globally, functional positions, a lot of them in Europe, and we'll deliver annualized savings of 120 to 150 million euros. Actions are already underway and should be largely implemented by the end of Q1 2025, although the benefits will spread out over time as people exit our payroll, which takes a little bit of time in Europe. At the start of October, we initiated a strategic review of our portfolio. Our intent is to focus our capital allocation on positions of differentiating scale, particularly in our key coatings markets. The initial focus of the review is on decorative paints in South Asia, where ExoNobel is present in a number of countries. In India particularly, we have a premium, highly profitable position, but with limited market share in a market that is ripe for consolidation. We're well-placed to participate in this consolidation, and this can take different forms, which we are evaluating. We do not have a set timeline for this review, and we're focused on getting to the right outcome rather than a speedy outcome. We'll update you as we progress. Together, these initiatives position us to be a winner in our core markets. They'll sharpen our competitive edge and accelerate our transformation towards sustained profitable growth. Let's now turn to slide five. Organic volumes in Q3 were up 1% with 2% growth in coatings and flat performance in deco. Looking at our businesses one by one, starting with decorative paints. In deco, Europe, Middle East and Africa, Q3 volumes remain flat with robust performance in the UK and in the Benelux, offset by weaker demand in Central and Southeast Europe. we expect mixed trends to continue likely resulting in flat to slightly negative volumes in q4 turning to our emerging deco markets latin america delivered mid single digit growth on solid performance in brazil while colombia remained soft in southeast asia strong growth continued in q3 with double digit growth primarily primarily driven by indonesia and india while Vietnam stabilized. For Q4, we expect mid-single digit growth for these two regions combined. In China, demand continued to be weak due to a challenging real estate market and low consumer confidence. Although recent economic measures signal a potential rebound, we view this more as a 2025 opportunity. I'd highlight that, as you know, China is about 14% of our sales overall. Half of it is deco, half of it is coatings. uh the deco business is uh is uh is down significantly in terms of volume this year but the coating businesses are doing really well and continue to continue to grow so uh i i urge you to have a balanced view of china if you uh take our q3 numbers and coatings in china so not deco but coatings our volumes are actually up mid single digits let's now move to our coating businesses In Powder, we achieved another strong quarter with mid-single-digit growth despite flat markets and softness in the automotive side. Marine and Protective also performed well, driven by technical new builds in Marine, while Protective faced mixed market conditions. We expect mid-single-digit growth for these two businesses to continue in Q4. Automotive and specialty volumes were slightly lower with a clear slowdown in the automotive market and softness in vehicle refinish. Vehicle refinish in Q3 actually showed growth, but we see that market is a little bit softer going forward. Aerospace generated solid growth, particularly in our aircraft maintenance business, but the OEMs, Boeing and Airbus primarily, are slowing down production, either due to strikes in the case of Boeing or supply chain issues in the case of Airbus. For Q4, we expect volumes to be flat to down. And industrial coatings demand weakened in packaging and coil, while wood adhesives delivered solid performance. We anticipate further softening into Q4 on declining industrial demand, which could result in a mid-single-digit contraction. In summary, we're delivering growth despite flat to declining markets. Given further deterioration in some markets, we expect flat volumes in Q4. Maybe I'll take that as an opportunity to comment on the Q3 volumes if you exclude China decorative. Our Q3 volumes were actually closer to 3% to 4% up in Q3 if you exclude China decorative. And if you apply the same reasoning to Q4, we'll still be down double digit versus last year in Q4 in China decorative. So actually the underlying volume trends at Exxon Nobel excluding China decorative are more in the and the sort of low to mid single digits in Q3 and low single digits in Q4. So it's more robust than it looks, but China decorative hasn't bottomed out in the sense that it's not that the market is dropping. It's more that we're still chasing comps that are a little bit higher last year. But as the market settles and as some of these stimulus measures start taking hold, we think we'll see a little bit of an upswing in Q4. Martin, over to you.

Yeah, thanks, Greg.

I'm sorry, we'll see an upswing next year, not in Q4. Q4 will still be down in China decorative, given the baseline of last year.

It's good that you clarified it. Thanks, Greg. And good morning, everybody on the call. Our Q3 results were in line with prior quarter and our guidance when adjusted for FX headwinds that worsened in the quarter. Organic sales grew with 1% in the third quarter, though reported revenue was down 3%, primarily due to FX. Volumes were up 1%, with growth in coatings driving results, while deco volumes remained flat. Price mix was flat, with positive pricing offset by negative regional mix of 1%. Adjusted EBITDA, including impact of hyperinflation accounting, was €394 million. This reduction to prior year reflects higher year-over-year operating costs, though these costs are now trending down sequentially. Our cost mitigation measures are progressing well and expect to make further headway with our SG&A actions, as Greg outlined earlier. Turning now to slide seven, our year-to-date return on investment of 13.4% shows a solid expansion versus prior year. This marks a solid step towards our mid-term range of 16 to 19% ROI. Working capital as a percentage of revenue stood at 17.7%. This was influenced by elevated inventory levels. which were primarily a result of mixed demand in some end markets. We are stepping up our efforts to reduce inventory and working capital. We expect working capital to land at the end of the year at around 15%, a bit higher than we initially targeted. We still aim to get back towards the 13% of sales by the end of next year. Leverage was three times at the end of the third quarter. Despite a temporarily high working capital, we delivered solid free cash flow of €217 million in the quarter. With that, I'll hand over back to Greg to discuss our outlook on the next slide.

Thanks, Martin. We delivered in Q3 our fourth consecutive quarter combining volume growth and gross margin expansion. While starting to reduce our operating expenses, Our ability to defend pricing while capturing growth shows that we can adapt and perform in volatile markets. Adjusted for higher Forex or adjusted EBITDA in Q3 was identical to Q2 in line with our guidance. Our operating costs are not trending down sequentially. We launched further cost and portfolio initiatives during the quarter to support our midterm ambitions. We're excited by the progress we're making and remain confident in our ability to deliver sustainable, profitable growth. For the full year 2024, we expect to achieve adjusted EBITDA growth to around 1.5 billion euros and to finish the year with a net debt to EBITDA ratio of 2.7 times. The 2.7 times is the consequence of two things versus our previous guidance of 2.3. We said that we'd be at around 14% of sales, working capital, 14% of sales by the end of the year. We'll be 100 basis points higher, so it'll be 15% of sales. And the rest of it is not working capital or restructuring cash out. It's that The net debt to EBITDA is based on reported EBITDA, and the SG&A measures link to additional restructuring and therefore identified items, and therefore that lowers the reported EBITDA. Martin can do the math for you if you want as the follow-up, but these are the drivers of the 2.7. I'll now hand over to Kenny, who will close with information about upcoming events, and then we'll do the Q&A. Kenny.

Thank you, Greg. Before we start the Q&A, I would like to draw your attention to the upcoming events shown on slide 9. The ex-dividend date of our 2024 interim dividend is on October 28, and the record date is October 29, followed by payment on November 7. And we plan to publish our fourth quarter results on January 29, 2025. This concludes the formal presentation and we would be happy to address your questions. Please state your name and company when asking a question and limit the number of questions to two per person so others can participate. Operator, please start the Q&A session.

Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star then two. We have the first question. on the phone lines from Thomas Ricklesworth with Morgan Stanley.

Good morning, everybody. Thanks very much for the presentation. My two questions. The first one, could you unpack a little bit further the ambition behind the restructuring in Southeast Asia? Could you give us a little bit of a sense of what the best outcome looks like and what you would do with proceeds or having restructured Southeast Asia where you might look to restructure next? First question. Second question, just to clarify on this net debt, what the actual debt that you're anticipating at year end is, Should we be thinking something in the region of the kind of 3.7 to 3.8 billion euros level? Is that the right way to think about it? Thank you.

Thanks, Thomas. I'll take the first question. Martin, we'll take the second. In South Asia, it's really a portfolio management, portfolio evaluation. We're looking at these positions where we have actually strong businesses, but strong businesses without leading market positions. And in markets where there's a potential for consolidation and there's a path to scale, then we're very happy to be leading the way. But in markets where there are more natural consolidators, we're very happy to be either a minority partner or to exit altogether. what uh south asia is the main countries for us or india pakistan sri lanka i mean in that region the um the the main topic is india our business in india is publicly traded i think market cap is around two billion euros if you uh if you convert currently and um if you look at the profitability when we disclose despite the fact that we've got five percent market share give or take we are uh one of the most profitable, if not the most profitable player in the space, because we have a very strong premium position. Dulux is actually celebrating 70 years in India this year, so it tells you that we are the standard. And as the market consolidates, you've been observing India, I'm sure, where you see that there's people pushing in, like the grass and guys from the cement sector, there's There's Asian Paints solidifying its position, there's other companies also trying to figure out what what their differentiating assets are over time, it's a good time to have conversations with the various market players to see how we can contribute to a winning hand, a winning play over time. But once again, it can range all the way from a partnership where we'd be the junior partner because we do that with somebody that has a strong distribution than us, for example, all the way to a potential disposal. And to your question as to whether there are other countries in Asia where we can ask ourselves the same question, potentially, but in some of those countries, we also see a way to get to a leading position, not just a profitable position. So we'll talk more about that over time. Right now, the focus is on South Asia. And then in terms of proceeds, I mean, it's way too early to... to count our chickens here. We'll make sure we fight, we make the right portfolio moves and we come to the best outcome and then we'll talk about proceeds. But overall, Axo is focused on a balanced capital allocation that includes share buybacks, particularly if our share price is where it's at today. And capital deployment into our core businesses and our capital deployment going forward is more likely to be in coatings than in deco.

Martin, take the second question. Yeah, your question on the net depth, you mentioned a range of 3.6 to 3.7 billion. Actually, it's in that range, but then in the high end of the range, so it is more closer to the 3.7 billion. That is our assumption for the net debt by the end of the year.

Did we answer your questions, Thomas? Okay, thank you both. Yeah, very clear. Thank you both.

Thank you. Your next question comes from Christian Veits with Gepler Shakarov. You may proceed.

Yes, thanks. Good morning. Two questions, please. First of all, why do we expect the car refinish market going softer? Is it changed insurance policies, less miles driven, people not getting their cars repaired due to economic hardship or all of the above? And then the second question is, one of your key competitors looks at selling its Brazilian deco activities. Some market participants might not even have noticed that this peer had a deco business. In any case, Can I just confirm that simply looking at combined market share in Brazil, this business is not an option for you? And are any of the other activities that competitor is putting on the block in codings of interest to you? Thanks.

All right. I'll take those questions. Vehicle refinish has slowed down a little bit. We commented on that. I think PPG commented on something similar. In the U.S., it's in part because there's been large mergers in the distribution space, and there's some adjustments as the dust settles, but there isn't anything... structurally problematic. We're just observing that the volumes are a little bit lower than they've been and might be a little bit of a wait and see attitude in terms of people getting things repaired. But I wouldn't want to make too much out of it than it is. Just trying to guide that, we've been saying consistently that vehicle refinish was dynamic, and currently vehicle refinish is slower, both in the US and in Europe. Your second question is a BSF question. You're talking about the Souvenir business in Brazil, which is our direct competitor in decorative paints. And I think the question you're asking is we're number one and number two. They're actually slightly bigger than we are, but we're very close. And the question is, does the combination of number one and number two make sense? The first part of the answer would be that. We're not looking currently to deploy additional capital to DECO in Latin America. We made the Orbis acquisition. We're still digesting and extracting the synergies. That's our focus today, not on deploying further capital in Latin America and DECO. Would we, you know, so do I roll out participating? I mean, you know, I'll help the BSF guys by maintaining the suspense so that they can drive up the price. I think it's a really good asset. And I know there'll be very interested parties because Brazil is an important market to be in. It's a good market. And once again, BSF, although they only had one deco business, It happened to be a strong Deco business in souvenirs. So I root for them to extract a good price out of it. But once again, we're not looking to deploy additional capital in Latin America in Deco. And your question as to whether the rest of BSF, I think you're alluding to BSF Coatings, whether that would be of interest. Yeah, it's of interest. I mean, we've made no bones, no secret about the fact that that business or some parts of that business, even all of that business could be a good fit with ExxonMobil. But it's interesting. It's too early to comment on any of that. I think BSF has a lot of things on its plate right now between the Catalyst disposal, the Deco Brazil disposal, and I think the agribusiness IPO that they're planning. So let's wait until BSF decides what they want to do before we start speculating on what combinations would make sense. Christian, any follow-up or was that clear?

No, that was very clear. Thanks, Craig.

Thanks a lot.

Thank you. Your next question comes from Shiten Yudhishi with JP Morgan. Your line is open.

Yeah, hi. Thanks for taking my questions. I just wanted to come back to the working capital point because we've been waiting for this number to come down, not this year, but actually over the last two years. And I'm just curious, working capital is something that you can proactively manage. And yes, the volumes have been weaker, but it doesn't feel like it's been terribly weaker. So I'm just curious where things are not going right in terms of working capital reduction, because it seems this has been an ongoing focus for close to two years now. The other question I had was just looking into different buckets across your businesses. You mentioned managed to keep the pricing flat to up, which is a pretty good achievement in an environment like we've been for the last two years. I'm just curious, do you see any changes in Q4 or as we look into 2025 in terms of pricing across any of your businesses?

Thanks, Chetan. Martin, we'll take the working capital question and I'll take the pricing question. Martin?

Yeah, so on working capital, you're right. If you look at working capital, the key focus for us is the inventory levels. And inventory levels have not been normalized yet as we want them to be, because from a days inventory outstanding, we're still north of the 100 days. And you know that normalized levels are more in the 90s. What is not helping is mixed and dynamic markets. So some of the volatility doesn't help us to structurally bring it down. There is a lot of focus to address this. And as we said earlier, we will make a step in Q4. You will also see working capital coming down from the current 17.7% to around 15% in the fourth quarter. And we will and we plan to make further steps next year. But your point is absolutely fair that we are not yet there where we want to be in terms of normalizing our inventory levels.

And then the pricing question, we don't see any... changes in the pricing trends. It's a competitive market. We certainly feel that all around, but we've been able to defend pricing quite well. If you take the index contracts, in our case, we see that as You know, the price givebacks linked to raw material indices, we see that as a story that is essentially complete. So we see the price giveback in the index businesses, particularly our industrial coatings business, which is packaging and coil. We see that we're at the end of that story. I know one of our competitors commented on the fact that this could go another one or two quarters, but we think that's flattened out. Overall, as we look into next year, the markets are not buoyant, but they're not depressed either. We are shifting back to the way companies ran their business in a world that had a little bit of inflation, that 3% to 4% inflation. We will have price increases very early in the year that will reflect some of these additional costs, including some of the costs induced by the tariffs on TIU2 from China and Europe. And all of that will happen in Q1. So we're back to our, I'd call it back to our regular program, except that in the case of AXO, it's a little bit better than what a regular program used to be. It's essentially price discipline in a world of 3% to 4% inflation. Chetan, did we answer or do you have a follow-up?

Can I ask a follow-up, slightly different one, which is, Greg, when you came initially, I think the message we got from you was, you know, Axel has done too much cutting of cost and maybe in the hindsight that has also impacted the growth potential of the business. And I think now we are seeing the same sort of dynamic again that you announced 2000 job cuts. I mean, how is this different from the past?

Yeah, it's a good question.

Is this a bit of a cost correction in your view that, you know, frankly, the only way to grow earnings here is through cost cutting?

No, no, no, it isn't. And, you know, it's a fair question, but I think it's, it ignores something important, which is that our cost-cutting is functional. And Martin is sitting next to me, and I love Martin, and I have the utmost respect for the finance function. But there isn't a business alive that hasn't been able to grow because instead of having three business controllers, it had two in one part of its business. You know, it's You need to have a certain functional quality and you need to be able to have the KPIs that are important to running the business and you need to be able to extract the analysis that allows you to do intelligent things on pricing and the likes. But functional organizations are costs that need to be addressed. And as much as we're protecting the commercial functions, We are hitting the corporate functions a lot harder, and this is where you're seeing a lot of the 2,000 people that we're talking about. Beyond that, we're simplifying organization fairly significantly, and that's driving the functional cuts. In our coating businesses, we had taken the manufacturing and supply chain out of the businesses and we were managing that transversely. It generated a lot of efficiencies in terms of best practices and making sure that footprint issues were being addressed, but it also created a lot of functional handovers. And as we reintegrate these businesses end-to-end, that functional overweight can be removed. So we're very careful to target our costs without targeting the muscle that drives the growth. And once again, these are functional cuts. I'm not underestimating the importance of functions in an organization, but having done this before in other environments, once again, this is not going to be an excuse for us to grow slower. Chetan, hopefully I answered your question. That's very good.

Yeah, that's very clear, Greg.

Thank you.

Thank you. We now have Geoff Hare with UBS. You may proceed.

Hi, guys. I was just wondering if I could ask two related questions on China. First of all, as you look at the China Deco business, is the sort of, I don't want to be rude, but is the sort of strategy just wait until the market recovers and try and keep costs at a minimum to sort of keep profits up. And also related to that, when you looked at what businesses you wanted to put under strategic review, why was the China Deco business not within that limit? Because if you look over the last probably five years, the China Deco business has been a little bit of a roller coaster for Axo.

Yeah, I mean, the roller coaster point is a valid one. It was a really good business until about two years ago, really good business in terms of profitability. I mean, it was a creative to our Deco business until two years ago. And we're in the dropping part of... of the cyclone. I'm not talking cyclone in terms of storm. I think I'm referring to that roller coaster in Coney Island. That market has dropped significantly. You're being precise here, so you don't say Axo is in the eye of the storm or something like that, which will get me in trouble. The reason we like that business is that we're actually number two in Deco in China. If you look at it, you can go like, well, isn't Shanghai shoe number two? But actually, we don't play in projects. We have a limited exposure to projects. Projects for large volumes for real estate developers and markets have been hammered. But we essentially largely stepped out of it a few years back. But if you take the retail market, we're number two in a really important market. And our debate was, what do we have to do so we avoid being a marginal premium player? Because if you see what happened in the China market in the last few years, there's been consolidation driven by uh by nippon and shang kai shu and essentially that consolidation has been achieved by taking volumes from smaller domestic players axles largely until um until the volume until the volumes dropped dropped recently alston's largely remained flat but remained flat by performing well in premium and being a marginal player and everything else. We work to rebalance the portfolio a little bit because as you expand into China, two cities, you want to be more than just premium in order to make the distribution equation work. And we're still working on that. So we're working on our expansion into the smaller cities and we're working on rebalancing our portfolio to be more competitive in the mid-market. As we do that in a market that's been dropping, so it doesn't look very good from a numbers perspective, but it's... It's also our belief that the China economy is going to stabilize and then pick up. So there's no urgency to do anything. The urgency really for us is to consolidate that number two position and to be a strong player for the long term in China. The final part of the question is, will there be further consolidation in China and DECO? Possibly. We'll see. But right now, it doesn't seem to be the main move that's happening in the market. It's more a question of finding the bottom, which we think is pretty much where we are today. and then extracting the benefits of all the actions that we've undertaken when volumes start picking up and these actions and these benefits become visible, which are not today. Hopefully I've answered your question.

Yeah, can I just follow up? I think in your pre-prepared remarks, you mentioned there would be an upswing next year in China. What gives you the confidence that that will happen?

Well, I mean, we've been positive before, so I don't want to be the guy that is calling the bottom in the pickup in China. But when we look at our volumes and we look at how the market's been for the last few months, First of all, collectively, the markets stopped pricing down. The guys who were pricing down, it was Nippon Paints, so let's be clear. I love them dearly, but they were really aggressive in order to make up for the volumes that they lost on the project side of the business. They've actually stabilized their pricing since the summer. And if you look at the market overall, the volumes are no longer dropping sequentially in some areas. They're picking up a little bit. So there are signs that we found a bottom. And then if you look at the stimulus that's currently happening, I mean, it's paying off a lot more in the industrial businesses than it is in DECO because DECO is – consumer confidence related. And I think the big challenge for the Chinese government is how do you get the real estate market to pick up again without recreating the same problem that you had before. So I think we have to be a little bit more patient. But the combination of pricing that's stabilized since the summer and volumes that are picking up in certain areas that essentially signals that that we are ripe for the beginning of a pickup, and how quickly that will happen, I absolutely have no clue. But we don't expect the market in China to be down next year in DECO. We expect it to be, I'd call it slightly up, but we'll comment on that with the full year results as we give guidance for 2025. All right, other questions?

Okay, thanks. Thanks.

Thank you, Geoff. Your next question comes from Laurence Feather with BNP Paribas. Your line's open.

Thank you. Good morning. Greg, you mentioned that we are resuming or we are returning to normal service in terms of pricing. I mean, normal service, I guess, in terms of fixed cost inflation used to be between 100 and maybe 150 million. I was wondering if this is the kind of number that you would be expecting for 2025. And on the flip side, given all the different initiatives on the simplification plan, the restructuring that you said would be effective by the end of Q1, should we be assuming that your cost cutting can offset fixed cost inflation and we should see net fixed cost as a positive driver? Thank you.

Laurent, let me pick up this question. So yes, I mean, cost inflation will start to normalize from what we've seen specifically this year. So that is one. But to your point, with all the actions we are taking, our industrial program, as well as the actions we're taking on the SG&A side, We overall, from an OPEX perspective, we expect costs to be below this year. At this stage, we will not be specific yet. We will come back and be more specific when we give guidance for 2025. But that is what I can confirm or reconfirm at this stage.

It'd be really disappointing, Laurent, if we could... It'd be disappointing if we continue chasing our tail. You know, there's a moment where as these things, as inflation stabilizes and as we move away from that 200 million a year impact that we had the last two years, and as you layer in all these measures, you know, there's a moment where that has to point the arrow upwards. Otherwise, the model doesn't work. And we do think that moment is next year.

Thanks, Frank. And as a follow-up, I think in the prepared remarks, you talked about aerospace being flat or down volume-wise in Q4. Was that just on the OE part, or is that including maintenance and repair?

No, it's OEM. If you benchmark us with… Okay. A few benchmarks with PPG. You know, PPG said aerospace is good, but as you know, PPG is very much defense and business aviation. The lion's share of the market is the OEMs and the MRO. MRO is okay. OEM is slow for the reasons you know at Boeing and Airbus. Thanks, Ray. Thank you. Thanks, Lowell. Other questions?

Thank you. We now have Aaron Cicerani with Barenburg. Please go ahead.

Hello, gentlemen. Good morning. Thanks for taking my questions. My first one is on the portfolio review of Southeast Asia. I just wanted to clarify if that includes also Vietnam and Indonesia. And also, I mean, considering India is a growing market, good business for you, how quickly do you think you can pull this out? And do you think you can do it like in a package if it includes other countries or you need to go with India first? The second question is around the proceeds from this portfolio review. You mentioned you want to invest more in coatings. It would be interesting to understand what areas you see the opportunities here and what the kind of orders of priority would be for the capital deployment of these proceeds if you don't find any kind of proper opportunity. And the final one would be on cost, these $120 million to $150 million cost-cutting introduce. Maybe can you be a little bit more specific about the cadence of this benefit going to 2025, please?

Thank you. All right. Thanks, Yaron. I'll take it backwards. The cadence of the SG&A cuts, I said earlier that they'd be uh, they'd be completed. The actions would be completed by the end of Q1. Um, it doesn't mean you get the full P&L impact at the end of Q1 because you have to have people drop out of your payroll, which once again, for a bunch of legal reasons, takes a bit longer in, uh, in, in a number of countries. So we're not giving a number yet for next year because we'll do that as we, as we give guidance for next year. But, uh, you know, I think what that tells you is that, uh, it's, it's happening reasonably early in terms of actions. And, uh, and that you will only get part of the impact next year and we'll qualify with that part of the impact is when we start guiding for next year. Your question on capital allocation linked to potential disposals, we can't buy if we don't sell. We're still working down our leverage to our settling point around two times net debt to EBITDA. We're not selling specifically so we can buy. We're actually looking at our portfolio to see which positions can be consolidated into leadership positions and which ones can't. And our focus right now, as I said, is on South Asia, which is, if you list countries, it's India, Pakistan, Sri Lanka, and the neighboring countries. As to your question whether Vietnam and Indonesia are included, I said earlier that we can ask ourselves similar questions on other DECO markets in Asia. But I also said that some of these DECO markets, we have a path to leadership. And therefore, we, as much as in South Asia, were unlikely to be the consolidator in these other areas we could be. So it's a bit too early to comment, but don't underestimate the strength of our business in Vietnam or in Indonesia. Any follow-up, Aaron?

No, maybe just on the order of priorities when it comes to the capital deployments once you sell India. And also, I mean, the question was also how quickly you think you can pull this portfolio review on India.

uh how quickly we can pull the the portfolio thing on india india is a complicated market it's a it's a it's a publicly traded entity um it you know so there's a lot of uh one we want to make sure that we find the uh we choose the right outcome for these businesses and you know something that maximizes uh value for our people value for exo and creates the strongest partnership out there in order to uh take the fight to the market going forward. And two, once again, these legal intricacies linked to executing something like that in India will take a little bit of time. So we're not on time pressure. We're not on the clock. The business is doing really well. We're, if anything, we'll only get more attractive as we progress. So we'll take the time that we need on this. And then the capital allocation question, I could pass it on to Martin, but I can also give you a noncommittal balance capital allocation going forward. And as I said, we're not allergic to share buybacks, especially at the current share price. And we don't have, if we were to generate proceeds, we're not going to have a hole burning in our pocket because of it. It's about making sure whatever we do creates value for Exo and its shareholders. Thanks, Yaron. Other questions?

No, it's fine. Thank you very much, guys.

Thanks.

We now have Alex Stewart with Barclays. You may proceed, Alex.

Hello, good morning. It's a real sign of the times that we haven't had a single question about war materials. So perhaps I could steer one in. You historically said the Q4 would be slightly inflationary. Crude is still at $75. Petrochemical spreads are still pretty weak. Are you sticking with that guidance for the fourth quarter? And if I pushed you to talk about 2025, excluding where there's a tariff affecting specific product chains, but what's your medium-term outlook now for walls given the conditions upstream? Thanks so much.

Yeah, Alex, let me take that question. So first of all, in Q3, raw material was still slightly down, as we have indicated before, so no change there. Q4, very consistent with our original messages, slightly up. That's more driven by residents. making a link to the oil price, but there is not a direct link, more mid-longer term link, but not a direct link. And if you then going forward, we have always a kind of six months visibility and X what is happening with tariffs. There are no changes foreseen versus the trends we see in Q4 going into Q1. I hope that gives some color.

Thanks, Martin. So I read to that the first half of 25 is likely to be slightly inflationary. That's the conclusion I got. And then maybe a follow up. You said around 1.5 billion for the year. Could you give us a kind of best case, worst case for the fourth quarter and what the likely range is? of your expectations are as you sit at the ExCo level to give some idea of what the main moving parts are for the final quarter would be really helpful.

No, Alex, what we've done, we've just refined our guidance. So we said we would be in the bottom of the range when we came out of Q2. I mean, given the fact that we have still two plus months to go, we have refined it and said that we will really be around the 1500 to be much more precise, instead of saying that we will be certainly above the 1500 in the bottom of the range. So that is the refinement we have done, and I would not read more into it.

Thank you.

Thanks, Alex.

Other questions? We have another question from Georgina Fraser with Goldman Sachs. You may proceed.

Thank you very much. Good morning, Greg. Good morning, Martin. I hope you're both doing well. I've got two questions left. One of them is a follow-up to Laurent's question on how to think about costs for next year. Greg, you mentioned something earlier in an answer about an inflation environment of 3% to 4%. Is that what we should have in mind for 2025? And then my second question is related to the South Asia DECO review. What do you think this means for Axel's group strategy? I mean, maybe Axel didn't see it this way, but I've always thought of Axos being the developed market paint company that has emerging market growth exposure. So in the context of your strategic review, where should investors see long-term growth coming from in your portfolio? Thank you.

Thanks, Georgina. In terms of health, yeah, Martin's doing really well. And as a non-Dutch, I need to upgrade my company bicycle because this weather is getting to me, hence my voice. But it's... I'll survive. Yeah, the 3%, 4% in terms of our planning assumptions, it's in that ballpark. We're not claiming to be the leading voice in the market in terms of macroeconomics, but at least in how we plan for the business, that's kind of what we're looking at. And then the South Asia thing and your question on what is actually going forward. The way I'd answer the question is... Axel, going forward, will be more geared towards coatings than Deco. So right now we're like 60-40, 60% coatings, 40% Deco. And we're likely to be higher than 60-40, higher than 60 in the future because we... We see ways to deploy capital in the coding businesses in ways that create a differentiating scale because these are global businesses and these are still fragmented businesses and therefore you can add, you can bolt on additional positions that are virtuous in terms of scale because essentially it's the same product worldwide to which you add additional markets or additional product ranges. On the DECO side, DECO is a regional market at best, more often it's a local market. And AXO is the market leader in Europe, but also a DECO player with emerging market exposure. Not all emerging market exposure should be rated in the same way. Emerging market exposure where you're a market leader, one or two, with enough scale in the market to differentiate versus some of the other players, that's good emerging market exposure. In markets where we're far from a leadership position, we have to figure out over time how we maximize value for XO, its people, and its shareholders. And sometimes that means partnering up. So we're not, you know, we're not making a bold statement out of, you know, we're exiting DECO emerging markets. We're not. We bought, for example, Orbis and Latin America and we're very happy about this acquisition and Latin America is performing really well for us. But when I look at Asia, I see a correlation between, I mean, it's not only when you look at Asia, it's when you look at DECO overall, there's a correlation between profitability and relative market share. And what I mean, relative market share is what's your market share versus the largest player in the market. If you try to do that correlation, you'll see that this is not a bad correlation. I'm only highlighting something that we all know, which is that in a local market, paint is like cement. It's stuff that doesn't travel very far because the cost to weight ratio is not favorable to transporting very far. So in all these markets where your radius is limited to what you can economically manage in terms of transport costs, it becomes about scale and distribution and impact of the brand. And that is directly linked to your relative market share. So that's what we're working on. And therefore, we're trying to make sure that we don't overestimate our ability to maximize the value of our businesses when we could do that more effectively, either in partnership with somebody else or by essentially passing on to the business to somebody who's got stronger local distribution. That's the essence of the review. So it's a long answer to a short question, but hopefully it gives you a little bit of flavor as to how we think about this, Georgina.

Thanks very much, Greg. Doug, thank you.

Thank you. Thank you. We have our final question from Peter Clark with the Bernstein Society General Group. You may proceed.

Yes, good morning, everyone. I've got two questions and a clarification, please. The first question, just on the push into the new build again on the marine, just wondering how much of a margin drag that is at the moment for the performance coating segment, if it's meaningful. And then secondly, in terms of the guidance for the full year, the 1.5 billion, which now infers the full quarter up, I think 10% or so on EBITDA to get there. I know you've got the softer hyperinflation comp or expected. Obviously, a lot of the cost-cutting or more of the cost-cutting coming through. But again, volume is important in this easily weak water, and volume's been disappointing both in Q2 and Q3. I know you're riding flat, but you've got a pretty tough comp. Both segments have, I think, plus 3% in Q4-23 in terms of volume growth. So just the confidence around that. And then just the clarification, Greg, I'm right in hearing you didn't say never say never at Auto OEM with the discussion around BSF.

Let's see. You asked quite a few questions. We'll try to answer them all. The Auto OEM thing, because you ended with that and my short-term memory is shot, so I'll tackle it now. AutoEM is a case of, I think, go big or go home. You don't want to be a small AutoEM player. But if you're a sizeable AutoEM player like DSF is, you can actually make good money out of it, which they do. So we're not allergic to that market. We're skeptical that you can be a winning player if you don't have the scale in that space. But I'm commenting on other people's businesses. So as you know, our AutoEM business is a few hundred million euros, not more. Your question on Marine, the new bill business is dilutive to gross margin profitability. But it adds to the bottom line because essentially the gross margin is lower than the dry docking because dry docking is essentially aftermarket and aftermarket always has higher profitability. But as long as you pick your battles and you notice that every time we talk about marine, Kenny forces me to say in the high-value ship marine you build market, which is a mouthful. This is our way of saying we're not going after basic container ships and bulk carriers. We're going after stuff where these are technical ships where whoever's commissioned the construction of that ship plans to use it for quite a while and is spending a lot of money on it because things like LNG, LPG carriers, And the people that do that, they want high-end solutions. They want sustainable solutions. They're more likely to go for bio-based anti-fouling. And they want to minimize the drag because this thing's going to be in the water for a long time. And you need to also maximize your bank for the buck in terms of energy consumption. So that's the sweet spot for us. And as we do that, then we still manage to do business at reasonable profitability levels. Therefore, we get the additional volume and we minimize the gross margin dilution while significantly contributing to the bottom line. So hopefully you understand the mechanics of it. We could grow faster in marine if we wanted to cast our net wider, but we're not trying to. I think the ratio in China is for every... For every tender that we bid on, we decline to bid on probably another two. So we're not trying to maximize volume. We're trying to maximize our hit rates in the sweet spot of the market, which is technical ships. Martin, the question on how Q4 functions from a workflow perspective.

From a Q4 perspective, first of all, you mentioned already that last year we had a 23 million hyperinflation hit in our Q4 numbers. We do expect that that will not happen this year. So you could more calculate with the current trend of hyperinflation, which was 6 million in the third quarter. And by the way, it should start to come down a little bit. So that is one. Secondly, the volume trend, which we indicated and how we see it at the end of Q3, That is how we see it going forward. And we commented on that and it will be more or less flat. And then pricing perspective, we also commented specifically on industrial coatings that the indexing is kind of becoming less of an impact. So pricing will be flat to slightly positive. Raw material, we commented already on it, which will be a slight impact on raw material. And then sequentially, we see further, the OPEX sequentially will further come down. And it will be for Q4 flat to maybe slightly positive. So if you take all these elements into account, you get to our guidance of... of around 1.5 billion for the year. I hope that gives color on the key elements for Q4. Thank you.

Thank you very much.

Thank you. We have our final question from Jaideep Pandya with on-field investment research. Please go ahead.

Thanks. I actually just have one question. with related to the Deco business, have you guys looked into the scenario of actually combining the whole Dulux business? And wouldn't it be sort of more interesting from a strategic point of view for somebody who wants to enter into Deco? Or is this, again, not an option because, you know, maybe exiting markets you want to exit on a case-by-case basis makes much more sense And I think follow up to a couple of the questions that has been asked. I mean, Greg, do you envisage a scenario if you go ahead and, you know, acquire BASF Coatings for Axo to be more of a pure play coatings company and exit paints in, let's say, in the long run?

Thanks a lot. Yeah, thanks for your question. The last question you asked will increase our proportion of coatings versus deco, because once again, as I explained earlier, we see ways to deploy capital in a way that creates value in a coating site because these are global businesses and still fairly fragmented. We're not talking about exiting Deco. We're talking about making sure that our Deco positions are leading positions. Your question on Dulux overall, really two reasons why that is not something that we think would... would make sense. You know, essentially the idea of packaging all the Dulux and selling that to somebody. I mean, three reasons. One is actually we like our Deco positions. We just want them to be number one or number two positions. The second reason is that it already, you know, it's a regional or local market. So the notion that you gain a whole lot by putting all of that together is slightly overblown. You gain through scale, the scale like scale of procurement. But there isn't anybody that buys Dulux in India because they've heard that Dulux is doing really well in Vietnam. And then the final reason is if you look at Dulux overall, it hasn't escaped you guys that Dulux in Australia is actually owned and run by Nippon. So you already have large markets where Dulux is actually owned and managed by somebody else. Just like, by the way, Huahun in China, which is a brand that Sherwin-Williams uses for its woods coatings business, is also the Exxon Nobel deco business. So there's ample precedence in paints and coatings of brands that are being shared between multiple companies. The only limitation of that is that it works as long as the markets are independent of each other and in deco they are. Hopefully that answers your question.

Yes, if I may squeeze one follow-up on Voodoo. Interesting you mentioned wood adhesives is doing well or has improved but wood finish is not. Can you tell us what's going on in the wood market and when have you seen the wood adhesives market improve?

The wood adhesives market, it's a combination of wood adhesives and board resin, so it's more construction-oriented than wood finishes, which has a lot of furniture exposure, you know, things like kitchen cabinets. So I guess that tells you that there's wooden construction activity. What are the countries that do construction with wood? I mean, the US is picking up slightly. There's other, you know, Latin America. But the wood finishes, which is, you know, are you remodeling your kitchen or, you know, are you buying furniture, that's still slow. So two different speeds, but they serve, in the case of wood finishes, it's a lot of furniture. In the case of wood adhesives, it's a lot of construction. All right. Thank you.

Operator, I think we're ready to close.

Thank you. Greg? Well, you're heading back.

So I'll head back to myself. I want to thank everybody for spending time with us on this call. I think we have something that we can qualify as a predictable and solid Q3. I'd like it to be more dynamic, but our markets currently don't lend themselves to that additional dynamism. We're still managing to extract volume growth out of markets that are tepid. If you isolate DecoChina, you see that the volume growth is actually more like in the 3-4% range. And we're being disciplined on pricing, and we are taking a hammer to our cost base. And these things are progressively materializing, but they will continue over the next quarters. And essentially, we feel that we have the pieces in place to support our midterm ambitions and that we are making XO possible. a strong business, a stronger business going forward. So thanks for your time. Thanks for your interest. And we'll talk to you soon.

Operator, please close the call. Thank you.