Azelis Group Nv

Good morning and welcome to Azaleas' nine-month 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 speaker's presentation, we will open the line for Q&A. Until then, you will be in listen-only mode. Let me now hand the call over to Anne.

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 nine months of 2024. And these are very similar to the messages I have given in the previous earnings calls this year. First, the green shoot we started to see in some of our markets earlier this year continued to take root. The stocking 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 these incomes, general trends are aligning in the right direction. And this is valid not only for Q3, but over the past nine 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 two years of industry slowdown that Azelis can deliver good performance across business cycles. Now let's go through the key updates so far this year on the next slide. In the first nine months of 24, we achieved a revenue of 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 six quarters of decline. We have achieved a gross profit of 784 million so far this year, and that means a 59 basis point expansion in our gross profit margin, which is driven by positive mixed effects due to our diversified portfolio. Adjusted EBITDA was 369 million, representing an adjusted EBITDA 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 2022. So far this year, we have announced seven deals in total, of which one is still to close. Equally important, we continue 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 six industry awards for innovative formulation. And the latest one was for innovative products at FI India just two 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 agro-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 APEC remains relatively weak due mainly to lower volumes. In personal care, business remains weak in Europe due to lower export volumes. In the rest of the world, we are still experiencing volatility. And industrial chemicals, we are seeing meaningful recovery Americas and still weak in China, where we have exposure into building and construction and markets. Loops and metalworking fluid is broadly stable across the region. In terms of regions, Americas is doing well. The US 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, APEX remains broadly stable. India is doing well while China continues to be weak. Regarding our inorganic growth, we continue to execute on our M&A strategy as an active consolidator in the industry. We closed five acquisitions in the first nine months across three 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 and 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 walkthrough to our financial results.

thank you and good morning everyone let me guide you through the group's financial performance and those of our regions for the first nine 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 our first nine months 2024 on the next page we have a revenue split between life sciences and industrial chemical revenue for the first nine months of 2024 was 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 effects. In the third quarter, which you can see on the left side of this table, revenue came in at around 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, Azaleas returned to organic growth in line with earlier communication. Cross-profit for the first nine months came in at 784 million, representing a year-on-year growth of 3.1% or 4.8% in constant currency. Cross-profit as a percentage of revenue ended at 24.5%, now a tick of 60 basis points versus the prior year on constant currency basis. Cross-profit margin expansion was driven by organic margin improvements in Asia Pacific, as we made good progress on our portfolio development and also the Americas. Over there, we have experienced positive mixed 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 nine months of the year, adjusted EBITDA was 400 million, around the same level as previous year, and adjusted EBITDA came in at just over 369 million, reflecting a year-on-year decline of 1.6%, but up on a constant currency basis. This lower absolute EBITDA development during the period was driven by phasing as the impact 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 EBITDA growth in the third quarter. Adjusted EBITDA margin therefore came in at 11.5% for the first nine months of 2024 representing 19 basis points contraction on a constant currency basis despite this conversion margins remain strong at 47.1 percent roughly 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 our growth numbers on page number 10. On this page, I would like to provide a high-level growth breakdown of revenue, cross-profit and adjusted EBITDA between organic, M&A and FX. I will take you through more regional details in the following slide in addition to segment comments made by Anna. On the revenue line, growth contributions 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 nine 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. Cross-profit for the first nine months was driven by strong performance from recent acquisitions, which contributed 5.1% of cross-profit growth during the period, offsetting weaker organic cross-profit growth and negative impact from EVX translation. In the third quarter, organic cross-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 mixed effects in the Americas, as well as improvement in organic gross profit margins in Asia-Pacific. Now, our adjusted EBITDA for the first nine 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 EBITDA 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 US 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 EBITDA 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 nine months ended at 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 nine months, organic revenue declined by 2.4%. In the third quarter, organic revenue increased by 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 agri and food businesses, as well as a broad-based recovery in industrial chemicals. First nine months, gross profit in EMEA declined by 4%, resulting in a 66 basis point contraction in gross profit margin, mainly due to a mix towards industrial chemicals and food, Sequentially, in the third quarter, organic cross-profit followed that makeshift. For the first nine months, adjusted EBITDA declined by 7.5%, resulting in an 84 basis points adjusted EBITDA margin contraction to 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 impact from cost control measures compared to prior year, as I mentioned before. Conversion margin ended at 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 nine months ended at 1.2 billion, a year-on-year increase of 5.7% year-on-year to 1.2 billion. driven by a 6.8% revenue growth contribution from recent acquisitions, offsetting the organic revenue decline in the first nine months. We are pleased to see sustained improvement in trends in the Americas, reflected in positive organic revenue growth of 0.4% due to further strengthening to 4.6% in the third quarter. The positive momentum was driven by the recovery in life science, particularly in flavors and fragments, as Anna already mentioned, personal care, home care, and continued stabilization in case, our largest segment in the US. In Latin America, we continue to see positive momentum across ad markets as we're integrating our M&A. For the first nine months, gross profit in the Americas increased by 11.6%, driving 131 basis points gross profit margin expansion to 24.8%, driven by the positive makeshift towards life sciences in the US, as well as gross profit margin improvements 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 EBIT increased by 1.9%, driving adjusted EBIT margin to 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 US and Canada. This affects growth 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 €665 million in the first nine months. Driven by an organic decline of 2.9%, and FIX had been 2.7%. The trends in Asia Pacific remain 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 nine months of 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 nine months, gross profit in Asia-Pacific grew by 6.4% to 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 the integration of them. Adjusted EBITDA increased by 10.4% to 66 million, reflecting continuous margin and scale improvement initiatives. The improvement in both cross-profit and adjusted EBITDA margin resulted in 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. Networking capital to sales was 16% at the 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 nine months, we generated free cash flow of 218.4 million, representing a cash flow conversion of 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. 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%. It takes about 12 to 24 months to get this in line. With that, I'm handing the floor back to Anna for some closing remarks and the outlook.

Thanks, Tej. And I would like to conclude 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. The 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. 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. then 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.

If you would like to ask a question, please press star followed by one on your telephone and wait for your name to be announced. Star one if we ask a question. And your first question comes from Linus Shoshani Varanti from Goldman Sachs. The line is open.

Hi, good morning. Thank you for taking my questions. 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 2.9 times. 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? Thank you.

yeah sure i'll take the question on the outlook and maybe you can elaborate a bit more on the leverage um so the outlook we are positive on what we see in october and november however as you already heard me saying we are cautious december is always the smallest one together by the way with august And we still see, and we've seen that during the whole year, this volatility. Orders sometimes pushing out and being shifted to a next month. So yeah, 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.

You can maybe... Yeah, on our leverage, basically, we're currently at 2.9. Obviously, as our organic EBITDA growth comes back, and you see a signal in there in Q3, then there is basically a deleveraging effect. Obviously, the main area is in the working capital increase, as also mentioned in the working capital area, and also acquisition related. We still have quite some payments to do in that respect, and we have planned our investment 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 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.

Thank you very much.

Your next question comes from ING. Your line is open.

Yes, good morning and thank you for taking my questions. I have also two. First one is on the growth margin. Taking into account the differences in growth margin between industrials and life sciences, do you feel there is adequate recovery potential in the higher margin life sciences segment to stem any negative growth margin mix effect as the industrial recovery takes root? And then secondly, a key point of debate with investors is still on pricing. following these strong price increases that we saw in 2021-22. 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? These are my questions.

Sure. 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, although we see a more stable effect in the industrial segment. So for us, it's a good sign. That helps in, so 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.

Yeah, life science versus industrial question, Stein. It's obviously the case that basically volume recovery in industrial chemicals will have a 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 Azaleas portfolio. We're extremely diversified. and the life sciences is very resilient. Please note that on both segments in Q3, we showed organic revenue growth 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. We see that in the Americas, we also see that in Europe, and we see that also in Asia. And then obviously agro, we indicated that we saw green shoots in Q2 already, that we saw green shoots in agro recovery. And that materialized in Q3. And that environment is quite okay for us. And then home care is also quite strong. On the other hand, pharma, as Anna mentioned there, that's where basically there's also a higher margin segment. That's where we see a more 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, take, for instance, one we did in Indonesia in the life science side. We're obviously packing our portfolio on it. And it's also demonstrated what you see in LATAM, where we are working, for instance, on the food side in the acquisition we did in Brazil.

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

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

Steiner, 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 two and a half to three range, the capital allocation policy. We have communicated that as well. in Istanbul. Obviously, as this organic EBITDA growth comes back, there's a leveraging effect of that over time. We'll see that in 2025. And then, of course, our M&A is mainly focused on small tuck-in M&As.

Understood. Thank you.

Your next question comes line of Chisan Udeshi from JP Morgan. The line is open.

Yeah, hi. Thanks, and morning. 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 Zealous has had in the last few years, despite the fact that maybe the environment is still not that strong. I'm just curious, how should we read into this? I think, Thais, 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 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, 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 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. Thank you.

So on the working capital, of course, you have to be prepared when the sales will be there. We have a good order book, as I said, so we definitely don't want to miss any sales. therefore we are preparing and also please note that you see our results but there's two effects there you have volume and you have prices and that is all the volume we see in several segments really with an optic and as you if 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 these are yeah apis for example are are many smaller much smaller in size so you have also this mixed effect in the networking capital in the inventory and we um we are not overdoing it on um on i would say being prepared but we definitely don't want to miss any sales and uh yeah it is a sign of confidence but i remain cautious because and then you come back maybe on the seasonality of the of the q4 as i said yeah december is always a strange month it's the smallest month but it's also a strange month because we yeah it's it's difficult to know how long our customers were going close down is it uh yeah one week two weeks that's not always clear for us now and as she has done uh please note that the chart that we have uh um in the presentation

I think you also see there that it's depicting a trend. So the starting point on the chart is not the same. Please note that our gross working capital is very low end of 2023. This year we see more normal trend since we start, of course, to see organic growth coming back. 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.

That's useful. Thank you.

Your next question comes from Luke van Beek from De Groot PCCAM. Your line is open.

Yes, thank you for taking my question. I have a question about the cost management, because obviously you've done quite a lot of the past one to two years. So can you give a bit more color on in which areas 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 uh for clarity's purposes uh 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 that it integrated our acquisitions and there we accelerated capturing the synergies on uh 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, Luca, I think this is a good question. Listen, we have taken, we say this is a very agile organization. We're very lean and we take action very quickly. We've demonstrated that also with a quick action on the things, the actions as we call them, already in Q4 2020 in the US. In EMEA, it started in Q1, and we have right-sized the organization accordingly to basically the top line. now we take out for instance these headcounts on our saying also we focus mainly on our back office yeah we look at integrating the M&A faster those kind of things that's where we're focusing 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 now obviously right now I said that already in the second quarter we're monitoring the situation yeah due to the fact that we see organic revenue and profit coming back. So we have not taken that many actions on the commercial side. For instance, digital efforts, we have accelerated. Please also note that if you look at the dampening on the cost side, there are the variable parts of our P&L that are coming back. So we're a bit like, yeah, it's our two communicating vessels. And we manage that accordingly. We've right-sized the organization where we are right now. So that's how we look at it.

Okay, thank you.

Your next question comes from the line of Matthew Yate from Bank of America. Your line is open.

Hey, good morning everyone. 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 you know, fairly horrible PMIs in Europe. So is that something specific in Azelus' portfolio and mandates you've run, or is that just sort of quarterly randomness? But if you wouldn't mind just spending a minute just to make sure I understand what happened in Europe in Q3. Thank you.

Well, you're right. EMEA is at the moment, I would say, market-wise the most difficult. We... It's also when we talk with our principals, they confirm that. But it is true that the 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 mixed effect. But we come, of course, from a low base. Don't forget that. Because last year, Q1 was still good in EMEA. But from Q2, there 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 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 to give you an idea, Matthew, I think it's a good question. We actually see recovery in our industrial chemicals division, as Coltis is coming back. So actually, the organic growth, you can calculate, you can back that out in EMEA. It's in the high 8% to 9% in this quarter. Please note, please realize what Anna is saying. This is coming from a very low base. Volumes have still not recovered in the industrial chemical side pre-COVID labs. But we're coming very gradually and very slowly. We're coming out of that bath tub. Now, on your EBIT question as well, please note that last year we took very diligent actions in Q3. We started basically in Q2 with this continuous 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 EBIT A organically in EMEA. So yeah, obviously that's a tough one to beat. Also, please note, you made a comment on the consensus. There's 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 effect of 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, Latam, China, Japan, and Europe, which are strengthened in this side as well. So there we have a little bit of a higher ethics impact as well, which shows you that picture, what you have there versus the consensus.

Thank you both for clarifying.

Your next question comes from Eric Wormer from Van Lanshot. Kempen, your line is open.

Good morning. Thanks for taking my questions. 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. Thank you.

That was Frank. 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 one 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 it 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, it's indeed the same picture. Organically, we are at 15, 15 and a half, and then the M&A pulls it up with about 25%. So that gives you a little bit of a mixed picture there on that.

Yeah, and then you had a question on the Maya. I think it's difficult to... Sorry, you asked about what the impact was of the delays in Maya 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 correctly. But in any case, in terms of business exposure, Maya is in total 14%. 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.

Thank you very much.

Your next question comes from UBS. Your line is open.

Hi, good morning, everyone. Just a couple of questions from me, please. The first one, is there any flavour you can give us maybe around your sort of early discussions that you're having with principals as you look into 2025 and what their view of markets is and, you know, 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? Thanks.

Yeah, sure. I think on the principles, I've been visiting the EPCA two 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 EPCAs, mostly industrial principles, that they don't see a lot of, I would say, big growth coming up. One person said it very well. He said, it's not booming, but it's also not crashing. And that's how they see it. I have the impression that we are in line with that, but we see it a little bit more positive than them. The pharma principles 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 conversation or many conversations we had with principals. And on what we've seen on the customer behavior, the order frequency is still high, still higher. The order quantities are still lower. So we don't see any change there to go back to pre-COVID levels. So 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 had an organic growth in Q3.

Great.

Thank you.

Your next question comes from Stefano Tofano from AVN AMRA. Your line is open.

Yes, good morning, everybody. Two questions remain from my side. One 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, very good acquisitions. and demand comes back really quickly, your leverage could easily move towards, let's say, above the three, let's say even three and a half. And I know that companies like Azaleas, they can work perfectly well with much higher leverage. But I was just wondering on that. And that the second question is, in terms of M&A activity, where do you see today, let's say, the most

uh the most interesting activity is that still asia pacific or maybe also latin as well yeah okay let me take uh uh points here uh on leverage yes you're correct we can go up up to 4.5 that's not a problem also our cash flow conversion uh uh can facilitate that it's not a 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. Obviously, we've also said very often, if we see the target of our dreams, and yeah, we can consider to go above that. But right now, our focus is on small, tucking M&As that we can fund from our own cash flow. And 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 it. HM1-2023, 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. It's very much aligned with our strategy, as we presented also in Istanbul. But you cannot really face 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 2.5 to 3 times that we mentioned. We're obviously nearing to the higher end of that. And yeah, we did basically 3% organic growth in Q3. And we're cautiously optimistic for in our order book, as Anna already alluded. And then this year, we also had quite some negative impact on a VIX in the third quarter that you need to take into account. Maybe, Anna, you can give a bit of background on M&As.

Yeah, 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 and markets. And yeah, 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 um and the shortlist obviously because we can't execute everything but that is in all the regions but also in the mature markets like emea the us but definitely also latin america and asia pacific thank you very much

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

Second. 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. We wish you a good day and speak to you soon.