Welcome and thank you all for standing by. All participants are on listen-only mode. After the presentation, we will conduct a question and answer session. To ask a question, you may press star, followed by the number one. This call is being recorded. If you have any objection, you may disconnect at this point. Now I will turn the meeting over to your host, Lloyd Midwinter. You may now begin.
Hello, and welcome to AkzoNobel's investor update for Q3 2020. I'm Lloyd Midwinter, Director of Communications and Investor Relations. Today, our CEO, Thierry Vanlancker, and CFO, Maarten de Vries, will guide you through our results. We'll refer to a presentation which you can follow on screen and download from our website, akzonobel.com. A replay of the webcast will also be available. There will be an opportunity to ask questions after the presentation. For additional information, please contact our investor relations team. Before we start, I would like to remind you about the disclaimer at the back of this presentation. Please note this also applies to the conference call and answers to your questions. I now hand over to Thierry, who will start slide 4 of the presentation.
Thank you, Lloyd. Good morning, everybody, a warm welcome to this call. I sincerely hope that you and your loved ones are also safe and well. As the complex situation regarding COVID-19 continues to evolve, we at AkzoNobel remain focused on taking care of our employees and serving our customers. Given that context, we believe we delivered an excellent performance for the third quarter, with revenue growth in constant currencies and increased business return on sales to 17.7%. These results were driven by strong discipline on margins and savings made possible by the continued commitment of all AkzoNobel colleagues around the world. During the third quarter, we delivered 3% volume growth with strong demand trends for most segments and regions. The total cost savings delivered EUR 49 million, of which EUR 27 million were structural cost savings related to our transformation initiatives.
Our strict temporary cost-saving measures delivered an additional EUR 22 million during the third quarter. Net cash from operating activities increased by 46% to EUR 457 million during Q3, and we have maintained a strong balance sheet due to rigorous cash management and robust working capital controls. Delivering on our capital allocation priorities, we announced an interim dividend of EUR 0.43 per share and a EUR 300 million share buyback to be completed in the first half of 2021. During Q3, we completed the acquisition of Stahl Performance Powder Coatings, giving us accelerated access to a unique low curing technology. I'm also proud that a couple of days ago we announced the intended acquisition of Titan Paints in Spain, which will further strengthen our position as the reference for decorative paints in Europe.
Although the macroeconomic environment remains uncertain for both the fourth quarter as well as for next year, we are continuing to build on our solid position as a frontrunner in the industry. On slide 5, you will see some key financial highlights. As mentioned, our return on sales, excluding unallocated costs, improved to 17.7% versus 13.8% for the same period last year. Return on investment, excluding unallocated costs and invested capital, was also up at 18.8% compared to 16.8% in 2019. Free cash flow increased by 51% to EUR 393 million for Q3, demonstrating our focus on carefully managing cash and working capital. Adjusted earnings per share from continuing operations was up 19% year to date at EUR 2.8. At the same time, we've maintained a strong balance sheet with a net debt EBITDA leverage ratio of one times at the end of September.
Slide number 6 shows how market headwinds have continued to ease during the third quarter. Revenue was up in constant currencies with 11% growth for Decorative Paints and Performance Coatings only 5% lower overall, having strengthened continuously during the quarter. Demand for Decorative Paints was strong for countries in all regions. This was particularly the case for Europe, including Turkey, the Middle East, and Africa. We also delivered growth in Brazil and Argentina, as well as China. Demand for Performance Coatings continued to improve during the quarter with growth for most segments. However, revenue was still impacted by continued weak demand from oil and gas projects as well as the automotive and aerospace industries.
With so many moving parts and different dynamics per segment and region, it's becoming more complicated than usual to show in one chart the underlying trends quarter-over-quarter, but I'm sure we'll be engaging more on this during the Q&A session later on. Let's now turn to slide number 7. As mentioned, demand for Decorative Paints is particularly strong in Europe, with higher growth in Turkey as well as the Middle East and Africa as channels were allowed to reopen during the quarter. In South America, our growth strategy is delivering market share gains in Brazil and Argentina. In China, our geographic expansion into Tier 3 and Tier 4 cities is showing the first results. However, parts of South Asia, including India, Vietnam, and Indonesia, continue to be adversely impacted by lockdown restrictions.
Demand for Industrial Coatings continue to improve, driven by growth for metal and packaging coatings, and there are encouraging signs in the demand for wood coatings that it is returning. Powder Coatings is returning to growth with market share gains in several segments, despite continued weakness in the automotive industry. Demand for yacht coatings remains very strong. Delayed oil and gas projects have impacted demand for Protective Coatings, and a decline in new build contracts for Marine Coatings is being partially offset by increased maintenance. Automotive and Specialty Coatings continues to be impacted by weaknesses in both the automotive and the aerospace industries, which we believe will take up to two years to fully recover. Despite this, demand for vehicle refinishes is returning, and we are outperforming the market. Moving to our key actions and achievements shown on slide 8.
During the quarter, we've successfully taken steps to rapidly reduce cost and resumed key parts of our transformation. We've continued to deliver strong margin management, resulting in higher gross profit margins for the Q3 of 45% compared to 43% last year. The powder technology acquisition I mentioned earlier gives us access to innovative low-cure technology, and despite the pandemic situation, we conducted a regional version 2 startup challenge in Brazil, showing how we continue to lead our industry when it comes to innovation. In addition, our October 19 announcement that we're acquiring Titan Paints in Spain means we'll be able to better serve our customers with innovation and sustainable solutions also in that part of the world, and providing us an even stronger platform for future growth as the reference for Decorative Paints in Europe.
Earlier this year, the significant market disruption from COVID-19 forced us to pause key parts of our transformation. However, despite all that, we completed 10 global business service transitions during the third quarter and successfully transitioned our main ERP system for about 60% of our revenue to SAP HANA technology. In total, we delivered EUR 49 million cost savings during the quarter, of which EUR 27 million were structural savings related to the transformation initiatives. We continue to lead the way when it comes to sustainability and are progressing towards our zero non-reusable waste ambition by 2030, with 5% savings on waste relative to our production volumes and 2.6% savings on relative energy consumption year to date.
I'm also proud of our efforts in this area, that they continue to be recognized, and we received a platinum rating by EcoVadis, which puts us in the top 1% of the companies rated. We also keep a keen eye on our people in this period. 81% of employees took part in our most recent employee survey, which is the highest participation rate for AkzoNobel to date. The results show the ongoing engagement of our global team. The results of the survey will help us understand how we're doing when it comes to organizational health. With that, I'm gladly handing it over to Maarten, who will run you through the financial results in more detail from slide 10 onwards.
Thank you, Thierry. Hello everybody on the call. We are now on slide 10. Revenue was 1% higher in constant currencies with 3% growth in volumes, partly offset by 1% adverse price mix due to a combination of positive price developments and adverse geographic mix impacts. Adjusted operating income was up 18% at EUR 353 million, driven by strong margin management and strict cost-saving measures. This resulted in a return on sales excluding unallocated costs 390 basis points higher at 17.7% for the third quarter. Operating income of EUR 326 million includes EUR 27 million negative impact from transformation-related restructuring costs reported as identified items. Moving on to slide 11, the quarterly trends in volume and price mix. As mentioned by Thierry, with so many moving parts and different dynamics per segment and region, it's becoming more complicated than usual to show in one chart the underlying trends quarter-over-quarter.
Volumes were up 3% overall, driven by strong growth for Decorative Paints in most countries, leading to 14% higher volumes. Whereas volumes were just 5% lower for Performance Coatings, and that's compared to 23% lower last quarter. During the third quarter, price mix was 1% lower overall, mainly due to geographic mix for Decorative Paints. We continue to maintain or increase selling prices. For Decorative Paints, a combination of 2% positive price developments, similar to previous quarters, was offset by unfavorable geographic mix effects, in particular in Europe, Middle East, and Africa. This resulted in price mix being 4% lower overall for Decorative Paints during the third quarter. Price mix was up 1% for Performance Coatings. Moving to slide 12. Adjusted operating income was EUR 53 million higher for the third quarter.
Foreign exchange rates had an adverse effect of EUR 21 million in the third quarter, partly related to South America. Growth of volumes contributed EUR 32 million during the quarter, while price mix had an unfavorable impact of EUR 15 million. Raw material and other variable costs were EUR 38 million lower overall. The transformation initiatives delivered EUR 27 million and strict temporary cost saving measures added EUR 22 million, resulting in a EUR 49 million total cost savings. Several items have impacted the year-on-year comparison, including a one-off gain in a disposal and higher royalty income in 2019. Other activities was also adversely impacted by one-off items during the third quarter of 2020, including insurance and office footprint optimization.
Turning now to slide 13, the third quarter results for Decorative Paints. Revenue growth was 4% and 11% in constant currencies, with 14% higher volumes partly offset by 4% unfavorable price mix. Demand continued to improve overall and was particularly strong in Europe, South America, and China. The significant adverse impact of currencies was mainly related to South America. Positive price developments, including significant price increases in countries with high inflation, were more than offset by unfavorable geographic mix impacts. For Europe, Middle East, and Africa, demand was strong across the board, with higher than average growth for countries in the Middle East and Africa as well as Turkey during the third quarter. This created an adverse geographic mix impact in the third quarter. In South America, demand rebounded strongly, driven by reopening of distribution channels.
For Asia, China delivered growth as a result of our strategy to expand our business in Tier 3 and 4 cities, while other countries, including India, Vietnam, and Indonesia, continued to be impacted by lockdowns due to COVID-19. Adjusted operating income increased 54% to EUR 208 million, driven by strong demand, higher volumes, and cost savings. Moving now to the results for our Performance Coatings during the third quarter, as shown on the next slide, which is slide 14. Revenue was 10% lower, although just 5% lower in constant currencies. This was mainly due to the continued impact of COVID-19 on end market demand, in particular for oil and gas projects, as well as the automotive and aerospace industries. Revenue in constant currencies improved during the quarter and was up in September. We continued to maintain selling prices and manage margins.
Powder Coatings returned to growth despite lower demand from the automotive industry, and end market demand for Marine Coatings and Protective Coatings continued to be impacted. The Protective Coatings segment was mostly impacted by delayed orders for oil and gas projects, while Marine Coatings saw a decline in new build, partly offset by an increase in maintenance. Growth remained strong for yacht coatings. Industrial Coatings continued to deliver growth driven by strong demand for metal and packaging coatings, whereas demand for wood coatings was lower. Adjusted operating income was higher than last year at EUR 195 million due to strong margin management and strict cost saving measures offsetting lower volumes. Now turning to slide 15. Profit from continuing operations increased to EUR 235 million, and net income attributable to shareholders was up at EUR 220 million, resulting in adjusted earnings per share of 34% higher at EUR 1.30.
Outstanding share capital was 190.6 million common shares at the end of September 2020. Moving on to slide 16, cash flow during the quarter. We maintained a strong balance sheet due to rigorous cash management and robust working capital controls, with operating working capital as a percentage of revenue below the level of last year, at 13.5% for the third quarter. Free cash flow increased by 51% to EUR 393 million, compared to EUR 260 million last year. Net cash from operating activities resulted in an inflow of EUR 457 million, up 46% from EUR 312 million for the same period in 2019, mainly driven by, amongst others, higher profit for the period, as well as improved working capital and lower income tax paid. Operating working capital levels showed strong sequential improvement compared to the second quarter 2020, from 17.4%- 13.5%, due to an increased focus on cash collection.
Capital expenditures were EUR 64 million in the third quarter, as we continue to invest in our sites and systems, including transforming our North American wood coatings facility in High Point, North Carolina, and successfully transitioning our main ERP system to SAP HANA technology. The increase in net debt from EUR 0.8 billion at year-end 2019 to EUR 1.3 billion at September 30, 2020, was mainly due to a share buyback and the final 2019 dividend paid earlier in the year. This resulted in a net debt EBITDA leverage ratio of one times by the end of Q3. Now turning to capital allocation on slide 17. In fact, we are delivering on all our capital allocation priorities. Focused on profitable organic growth, we continue investing in our sites and systems with capital expenditure of EUR 200 million-EUR 250 million per year.
The interim dividend per share announced today increases to EUR 0.43 from EUR 0.41 last year, in line with our dividend policy of paying a stable to rising dividend. Earlier this week, we announced the acquisition of Titan Paints in Spain, following the acquisition of Stahl Performance Powder Coatings during the quarter, giving us accelerated access to unique low curing technology. We continue to pursue strategically aligned and value-creating acquisitions. In line with our modular approach to share buybacks, we have today announced a EUR 300 million share buyback to be completed in the first half of 2021. At the end of the third quarter, our leverage ratio was one times net debt EBITDA, compared to 0.5 times last year, and we target a leverage ratio of one to two times net debt EBITDA and commit to retain a strong investment credit rating.
With that, I hand back to Thierry for concluding remarks on the next slide.
Thank you, Maarten. On chart 19, in conclusion, you will see that we delivered an excellent performance for the third quarter, with revenue growth in constant currencies and increased business return on sales to 17.7%. These results were driven by strong discipline on both margins and cost savings, but mostly thanks to the continued commitment of all our AkzoNobel colleagues around the world. They deserve a big thank you, but at the same time, also encouragement for the fourth quarter as things continue to be very changing environment. We're clearly continuing to build on our solid position as a frontrunner in our industry and are committed to serving our customers with more innovative and sustainable solutions. That's why I'm, as I said earlier, very proud that we received a Platinum rating from EcoVadis for corporate social responsibility and sustainable procurement.
Finally, turning to slide 20, which shows our updated outlook. As you know, AkzoNobel has suspended earlier in the year its 2020 financial ambition in response to the significant market disruptions resulting from the pandemic. Headwinds related to COVID-19 continued to ease, although demand trends differed per region and segment in an uncertain macroeconomic environment. Raw material costs are expected to have a favorable impact for the fourth quarter of 2020. Continued margin management and cost saving programs are in place to address any current challenges. We target a leverage ratio of one to two times net debt over EBITDA and commit to retain a strong investment grade credit rating. With that, I'm handing it over to Lloyd for information about the Q&A session.
Thank you, Thierry. Before we start the Q&A, I would like to draw your attention to some upcoming events shown on slide 21. The ex-dividend date for our 2020 interim dividend is on October the 23rd, and the record date is October the 26th, followed by the payment on November the 5th. We will publish our report for the full year and fourth quarter on February 17, 2021. This concludes the presentation, and we would be very happy to take your questions. Please state your name and company when asking a question, and please limit the number of questions to two per person so others can participate. Operator, please start the Q&A session.
Thank you. We'll now begin the question and answer session. If you would like to ask a question you may press star followed by the number one. Please unmute your phone and record your name and company. [inaudible] Your name is required to introduce your question. To cancel your question, you may press star two. Speakers, our first question comes from Tony Jones from Redburn. Tony, your line is now open. You may proceed.
Good morning, everybody. Tony Jones, Redburn. I've got a question for Thierry. How do you think about the idea that semi-permanent home working after COVID will sort of structurally demand for Decorative Paints, especially through DIY? My second question to Maarten. In the past, you said that production sites, I think, are over 130, but you might end up targeting more like 100 over a few years. Is that still reasonable? Where are we in that site rationalization process? Thank you.
Tony, your first question was not easy to understand. There was some static on it. Let me play back what I think I heard, and then you tell me whether that is correct. I think you asked on how much the impact is of the staying at home lockdown on Decorative Paints and what it means for next year. Is that correct? Am I correct in understanding that is your question, Tony?
Yeah. If you can hear me, okay. Sort of like the idea that people staying at home a lot more, working from home several days a week, and whether that might structurally boost demand for Decorative Paints. Thank you.
All right. Good question. Let me tackle the two questions then. One, it is undoubtedly true that during the major lockdown we had early in the year, there was the do it yourself wave. I also want to point out, though, that there was also a drop in the trade business across Europe because nobody wanted to have a painter in the house. There is gains and losses, in fact, during the year. It is clear that the probably underlying structural trend, independent of what wave we're in in COVID or working at home or not, that home improvement across the world is on the rise. You see that in furniture, you see that in a number of items and also for the paint business. We've done quite some research in the meantime around what does it mean for 2021.
We do believe that the normal for Deco paint will be at a higher level than it was for the foreseeable future. That's actually a very positive sign. I do want to bring it a bit back, though, to the effort of our teams themselves. It's not just COVID. If you look at South America, we're clearly gaining market share in Brazil and Argentina. If you look at China, now that we have our margins set up, the strategy to go geographic expansion in Tier 3 and Tier 4 cities has brought us back to growth year-over-year in this third quarter. If you look at a number of European countries, we obviously are doing quite strong, too.
On the Decorative Paints business, once things normalize, we are actually continuing to be very optimistic with an underlying mega trend of home improvement probably boosting it to some extent. The second question around the sites, Tony, you are completely correct. I think that has not changed, that our installed, I would say, capacity is somewhat large. We still believe that over a period of time, we can bring it back to less than 100 sites. There's lots of work in the background to make that happen. That goes to aligning our raw material slate. It goes to aligning the product portfolio, implementing strict archetypes for plants around the high runners, the specialized product, et cetera. That's a work in progress. In fact, we did some plant rationalizations this year despite all the COVID-19 situations. Does that answer your question, Tony?
It does. Thank you very much. That's great.
Thank you.
Thank you. For our next question, we have Geoff Haire from UBS. Geoff, your line is now open. You may proceed.
Hi. Good morning. Thanks for the opportunity to ask questions. I wonder if you could give us some information on the one-offs within other, and why they're not considered exceptionals. Just to quantify that. Then just as we look into 2021, can you just outline some of the levers that you think you have to ensure that we still see profit growth in 2021 year-on-year, and we don't look back and see 2020 as a year that is as good as it gets for the group as a whole?
I suggest, Geoff, that, Maarten, you take the first question-
Yeah.
-and then maybe I can-
Yeah, Geoff-
-take the second.
- good morning. On the one-offs in other, I think what you should look here at last year, we had, in fact, some positives. We had a royalty income at the time still from Nouryon. We have, by the way, also some positives from disposals. On the other hand, this year, we had some negatives from insurance claims as well as a negative from a further footprint rationalization. What we do is we recognize the restructuring cost related to the transformation. We recognize these in identified items, but just operational one-offs, we recognize that in our normal adjusted operating income. The EUR 30 million is basically coming from some of the pluses last year and the negatives this year, and some other smaller pluses and minuses. That's how you should look at it, Geoff.
Geoff, with that, let me get to your second question on what we do for 2021. I think we've alluded to that, but it's probably good to repeat that. I think the most exceptional thing about 2020 is just the complete rearrangement of segments and the timing within the year, and sometimes geographies. Underlying, though, we see ongoing strength for our businesses. I just want to remind everybody that although our bottom line results, we are pretty proud of what we deliver. I just want to point out our top line is still, by COVID-19, significantly impacted, and it is often impacted, or it was impacted in very high margin segments. I want to point out the dynamic for Powder is maybe exemplary in that one. Powder is a high margin business where we have a very strong position in the significant segments.
What we've seen until the third quarter was a significant impact in the automotive that actually got back to almost a little bit off still versus last year, but still a bit below. What we've seen in the third quarter is really a very strong commercialization of developments that the team was working on, be it into electrical vehicles, which is pretty exciting for us, be it in appliance industries, et cetera. We often seem to be focusing on the upside in Northwestern Europe in Deco, but there is many other segments that we are very encouraged on how they come back and how they will continue to deliver. Another big driver for Deco that I would want to put forward is that we do see real signs of pricing strength. The inflationary pricing is continuing, and that will definitely go to the bottom line.
If we look at, I would say, the income both on the revenue, the volumes, and the segments that the margin that are associated, we're pretty optimistic. On the cost side, I think Maarten and I have been indicating that transformation-wise, we feel that by the end then of 15 by 20, we're about halfway done. There is a lot of work structurally now that the data clarity is much better given the SAP HANA situation and the sizable chunk of our 60% and more by the end of this year of our company that's in SAP HANA. There is a lot of work on actually structurally getting optimization and efficiencies out. We feel pretty confident around 2021. We just hope that it's going to be a smoother ride than a bit of a roller coaster between segments this year.
Thank you.
Does that answer your question then?
Yep.
Okay.
Thank you.
Thank you. For our next question, we have Mutlu Gundogan from ABN AMRO. Mutlu, your line is now open and may proceed.
Good morning, everyone. I had a few questions. The first one is on the temporary cost savings. These amount to EUR 22 million, while you had recorded EUR 78 million in Q2. Can you tell us why that number declined so rapidly, and how we should think about this number in the coming quarters? That's the first question. The second question is on the share buyback. Can you explain what will happen when your net at EBITDA drops below one? Does it automatically lead to new buybacks? If I can squeeze a third one in, given that we're close to your 15 by 20 target, we are almost at the end of 2020, will you soon come with new targets?
Yeah. Good question. Maybe, Maarten, if you handle the first, I think we can probably share the second, and I'll do the third.
Yeah. On the temporary cost savings, I think if you compare Q2 and Q3, Q2 was EUR 78 million, and the third quarter was EUR 22 million. The key driver there of the delta is the volume related cost and advertisement and promotion. The second quarter revenue was down, what was it? Roughly 18%, 19%. We are now up in revenue, 1.5% up. That drives volume related costs up again to normalized levels as well as in the third quarter, we returned our spends on advertising and promotion, which, of course, we stopped in the second quarter, given all the lockdowns. The EUR 22 million, what is it? It's mainly travel. It's some third-party labor contractors and some other discretionary costs. What would you expect going forward?
That depends a little bit, but of course, we are looking how we can turn some of this into structural cost savings because going forward in 2021, some of the travel behaviors will change compared to what we were used to early on this year or end of last year. We will look at how we can overall turn some of these temporary cost savings into structural savings. This is how you need to look at this. On the share buyback, I think it's important to say that we have positioned this as really as a modular share buyback. Given our capital allocation policy, which is broader in terms of investing in our organic growth, in terms of our stable to rising dividend policy, in terms of our M&A build on strategy, as well as share buybacks. You should see it in the total scheme of things.
That is how we decide on share buybacks going forward. Maybe Thierry, you want to add anything?
I think it's obviously not automatic and there's also other stakeholders that we have to take into account and some of the uncertainties with COVID-19 still out there. I think, what you see is probably us being victim of our upbringing, that we actually stick to the promises we make, and that we take the first opportunity to basically align on that. I think the capital allocation we've outlined for us, that is in fact the pretty rational way of going through that. Let me go to maybe on the targets from 15 by 20 and what are the new targets. It seems so long ago now, given the whole COVID-19 saga, but in February, we actually rolled out new plans for the 2021, 2023. 15 by 20 was all to catch up with the relevant competitors in the market on profitability.
I think we will have done that by the end of this year from what was more around 9% to where we will land this year versus our competitors. Feel pretty good about that. I would say that the 15 by 20 journey was maybe taking the fat out of the system. The grow and deliver strategy we announced is really building the muscle. The targets we gave there was to have above market growth, so CAGR that's above market. Frankly, we haven't waited until 2021. In fact, the third quarter shows in many of the segments that's exactly what's happening, because we also have much more insight, much more tools, much more options to deliver on that.
Secondly, on the delivering part, we said we were going to keep expanding our return on sales by 50 basis points a year, and we definitely stick on that. Those were actually the targets set, which it looks like we've been able in 15 by 20 to keep those promises despite real roller coasters in the market. We feel pretty comfortable that we're going to be able to do that in the next years.
Thank you.
Does that answer your question? Yep. Thank you.
Definitely. Thank you.
Thank you. For our next question, we have Peter Clark from Société Générale. Peter, your line is now open. You may proceed.
Yes, thank you. Good morning, everyone. Yeah, it's really a follow-up on Geoff's question, the first one. The high margin segments and the sort of tailwind or headwind you see in 2021. I think you mentioned Northwest Deco, you don't see a big tailwind there. Actually, it's a structurally high demand. Aerospace, you mentioned the two years recovery, but just how it looks year-on-year, your feeling for that. Auto Refinish should be better, feeling there. Probably most unclear, for me anyway, is Marine and Protective. Oil and Gas, I understand OEM Marine, but how you see Marine and Protective year-on-year in 2021? Aside from that, the second question really just about the raw material situation. Obviously, you're seeing another quite significant benefit in the fourth quarter.
How you feel that's pitching into 2021, because presumably that becomes a little bit of potentially a headwind. Thank you.
Thank you, Peter. Let me handle the first one, and then, Maarten, if you do the second one.
Yeah.
You're tempting me to go on one of my infamous long monologues to go around every segment. I'll try to refrain myself from doing that. Summarizing it for 2021 on Deco, you're right, we frankly are pretty comfortable on where we will be in 2021 for Deco. There will be in regions and subregions ups and downs. Frankly, our pricing power is pretty good. Our margin discipline is pretty good. We see indeed in many parts around the world, our market share trending up. That's all driven by very strong branding and distribution channels that the teams have worked on over the last year. There we feel, in general, pretty comfortable.
If you go to the segments you just mentioned, frankly, for 2021, there's a lot of optimism on our Performance Coatings businesses because we did indeed get a slam whack in the face in many of our segments because of COVID-19, and we see those returning pretty strongly. If I look at Powder Coatings, want to remind everybody, about 20% of our Powder Coatings business is related to automotive. It's clear that we're doing better than the market there. In addition, we see in all of the other segments, on appliances, on architectural, et cetera, in frankly every geography, by the end of September, we were ahead of where we were last year. We see really the underlying growth finally coming back.
In automotive, I alluded to that, there's some very exciting electrical vehicle applications related to the inner workings of the car, which actually create unexpected new options for that industry. There we've continued to be very strong. Automotive and Specialty Coatings, Refinish is in fact back for us to its normal glory in our key markets for us, which is North America and Europe. That is a pretty lucrative segment, so that coming back from really dark depths in the middle of the year is actually pretty encouraging. Aerospace, I think is going to be what it's going to be. I think it is at its low point. There's also probably some de-stocking and some other delays that are happening, so that can only go up.
We think we'll see that in 2021, but before it really gets to strength, I think you're probably a year later, but that is already in our numbers today. Just to jump over Industrial Coatings, which has in fact been a powerhouse both in packaging, very strong. Our metal coatings business around the globe is extremely strong, and the wood finishes business, the canary in the coal mine is, I would say, Asia. That seems to be coming back. It shifted from China to Southeast Asia. It wasn't clear where it was in the COVID-19 situation, but we really see in Southeast Asia, the wood finishes business where we have a strong franchise coming back. Last but not least, indeed, in Marine and Protective. Marine is basically at the same level as it was before. It's not moving upwards.
I think the team has done everything on margin management and cost to manage that. Secondly, where the Protective Coatings is concerned, I think we are now in the darkest period because a lot of it is oil and gas related, and the oil and gas companies have been delaying a number of maintenance and project work, but you can't delay that forever. That actually will have to come back. Rust and corrosion doesn't stop for a recession, that has to come back in 2021. If you look at our Protective Coatings business, it's mainly the infrastructure and power around the world that's doing very well. Notably, the whole China franchise in Marine Coatings and Protective Coatings is exceptionally strong, and it's coming back.
I would say, Peter, long story, but those segments have been at their deepest points, and we see them gradually coming back to where they were or actually at strength. As some other segments may have a different dynamic, overall, we are pretty confident about 2021, both on the top line and on the bottom-line delivery. Maarten.
Yeah, now, over to your question on raw material. We have indicated that raw material for the fourth quarter will be favorable, but I just want to make sure that we temper expectations a little bit because if you look at the comps, last year, we had an unfavorable effect of raw material in, so that was Q4 2019 of EUR 42 million, while the third quarter 2019 was only EUR 4 million. Kind of the favorability or the run-up of the raw material cost savings really started in the fourth quarter of 2019. It will be favorable, but there is comps, which we have to take into account. Now, saying that, I think it's also good to mention that we do see some prices in some raw material categories going up at the moment. That is kind of on a price to price level.
We will start to see with a delay effect, of course, during the coming quarters, we will start to see that coming into the different businesses depending on the delay effect per business. Early next year, that still will be favorable, but that will, at a certain moment during next year, start to turn.
Brilliant. Thank you. Well done on Titan.
Thank you.
Thank you.
Thank you. Our next question comes from Matthew Yates. Matthew, your line is now open. You may proceed.
Morning, everyone.
Morning.
I'm sorry. One moment, please.
Maybe that was the question.
Between mix in terms of price point and profitability for the Deco business. The second question is around the buyback. I appreciate what you're saying about a modular approach. The business is obviously generating a good amount of cash, but can you just elaborate a little bit on why you decided not to preserve that firepower to do M&A? Can we infer from that really your focus is on modest size bolt-on deals? Thank you.
Yeah, Matthew, we'll try to answer your second question, but you will have to repeat your first question because you dropped completely off, so we only heard your conclusion of the question. We will do that after, but let me answer on the share buyback. We've talked about it before, that the modular share buyback is really, we gave a leverage we want to be at as a company to do that. We also at the same time have indicated that we do want to keep focusing on bolt-on acquisitions. By the way, the Titan acquisition is a real textbook example.
If you look at our position in Spain, where we went after the acquisition of where we were in 2017, the acquisition we did of Xylazel and now of Titan, it really resets a major European country for us, both in impact and also into performance for us. That continues to be the case. What firepower is concerned for potentially bigger deals, I think we do have firepower enough for doing those. I don't think that one necessarily is in conflict with the other. I don't think you should read any real decisions in there. That's on the second question. The first question, Matthew, you will have to repeat because you were not audible at that moment of time.
Sorry, let me try again. It's around the Deco business and the relationship between mix or price point and profitability. In the quarter, you're showing that the mix was a headwind, but clearly there was very good margin delivery. Can you just talk a little bit about why there's no simple relationship between mix and profitability?
Because if you look at Deco in Europe, but then it even gets more complicated if you do worldwide, but if you look at Deco in Europe, you have, first of all, different dynamics in do it yourself and the trade business. You also have significant differences between Northwest Europe, South Europe, Middle East, Africa, Turkey, et cetera. That is partly because of market prices, but it's also partly because sometimes you go to distribution, sometimes you go direct, so the price is very different. You saw in the second quarter, all of a sudden we had this 4% up in Deco, and then in the third quarter you see 4% down. Actually, there is no mystery to it. There was an over proportional high demand in Northwestern Europe and a low demand in North Africa, Turkey, Middle East, because many of the channels there were closed.
In fact, not a mystery in the third quarter, it just reverts. The Northwestern business continued to do very strong. Now you had a real surge as distribution and channels opened up in the very south, which then gave an high volume demand that was pent-up demand from the second quarter before. It's really nothing else than geo mix. You have some mix in countries, et cetera. There is no simple relationship. The only thing that we wanted to point out in the charts in the presentation, that the price for price, that means if you're in a specific country, in a specific channel, buying a product from us in Deco, the price has actually trended up, is either the same or has trended up, and that is what we will continue to do.
The rest is basically just COVID shift between segments and markets. Does that answer your question?
Absolutely. Very clear. Thank you, guys.
Thank you. Our next question comes from Charlie Webb. Charlie Webb from Morgan Stanley. Charlie, your line is open. You may proceed.
Morning, gentlemen. Morning, everyone. Just maybe two, one qualifying some of the comments you've made. Clearly, you see raw materials as a tailwind, although perhaps less than what we've just seen in Q3. Structural margin management and temporary effects should still be a positive in the fourth quarter. Volumes presumably are still trending positively. Do you see a scenario now where you deliver 15 by 20 for the full year? Presumably, kind of taking the 14.5%- 15.5% as you kind of redefined it earlier. Do you think that is now achievable, given what you see in front of you in the fourth quarter? Then just secondly, on the comment you made around pricing earlier on the call, saying that you saw a good outlook for further price inflation, price increases into next year. Just what's supporting that?
Obviously, we see lots of deflation out there on the raw material side. Just what gives you the confidence on the pricing? Is that just better demand that gives you more ability to continue to push higher prices? Just trying to understand that. What kind of order of magnitude are we talking kind of 1%, 2% as we think into next year? That'd be very helpful. Thank you.
Charlie, thank you. Let me try and then Maarten chime in. On the 15 by 20, I think beginning of the year, we suspended any guidance because it was just not clear what was going to happen in the year. I think we took all the measures, and I think the we is actually the organization took all the steps they could on cost and on margin and on pricing, et cetera. We are pretty encouraged by the year. We're actually not going to give guidance for the year, though, because we're going to keep pushing, but at the same time, the fourth quarter is a smaller quarter for us. At the same time, with the second wave, we don't want to put ourselves onto tens of percentages on where we're going to happen, et cetera.
The one thing is that we feel pretty confident that this year we will have caught up with our competitors, and then where we exactly land versus the 15, we won't stop pushing, by the way, it will not be by the lack of trying to get there. I'm not going to give guidance, but I think hopefully we come across as pretty confident around where we are with our business and we have definitely also 2021 looks like. On pricing, a couple of elements there, Charlie. First of all, lots of work has been happening in the last three years to get the transparency on our raws and how that translates to our complex inventories in our numbers, so we have a much better forward look on when it's going to land in our P&L.
Specifically for markets like Deco, for example, what we've seen is that we have a very strong brand, very strong distribution, lots of customer support, both on the trade and on the do it yourself. What we've seen is that frankly, as long as we are coherent in our pricing strategy throughout the channels, that in fact everybody is kind of on board and supportive for those pricing management. That's why that happened now over the last two, three years, that we feel we have the power to do inflationary pricing, and that also I think the market seem to be adjusting to that as a practice in general. That's why we feel pretty comfortable. For the more industrial markets, I think that's the way we said it before, there it's really focusing on margin management.
In fact, the thing that matters for us is the expansion of the margin of the product. If raws were to go really down, well, then maybe you have to adjust your pricing, but we definitely will keep working on the spread between those two. Maarten.
Maybe to add Charlie, we've said it before, that we focus on driving really annual price increases of 1%- 2% to cover inherent inflation. That's mainly focused on Deco, on the back of our strong position in Deco and our brand strength, but also in coatings there where we talk about the distribution channel. Not the two industrial sides, but more the distribution side of the house. The 1%- 2% is indeed confirmed there as what you mentioned.
Okay. Thank you very much. That's very helpful.
Thank you.
Thank you. Our next question comes from Laurent Favre from Exane. Laurent, your line is open and may proceed.
Oh, thank you. Good morning, all. Two questions, please. The first one is regarding cash management into Q4. Given the strong cash in both Q2 and Q3, I was just wondering, where are you on inventories? Should we still expect the usual seasonal boost in Q4, or do you need to replenish inventories and also have a bit more CapEx to spend, et cetera? Any comments there would be helpful. Thierry, the second question is on M&A. Your three largest competitors are openly talking about M&A. I was wondering if there's any shift in the nature of the M&A pipeline. Presumably, there might be more sellers now that the bid-ask spread can be narrowed. Can you remind us on your value creation criteria for M&A? Otherwise it seems that it could be easy to overpay for small acquisitions when you have four big buyers that are interested. Thank you.
Yep, thank you. You want to do the first one, Maarten?
On cash management, first of all, we are very pleased with how we have managed our working capital in the third quarter. You know that we went to kind of weekly demand and supply cycles to really manage our inventories in a tight way, but also our cash collection, because we had a run up of our receivables during the second quarter, and you see that now coming down again on normal levels. For the fourth quarter, normally the third quarter and the fourth quarter are strong quarters in terms of cash generation. For the fourth quarter, we continue to focus on working capital management and to focus on cash collection and our demand and supply cycles, given still the uncertainty and the volatility we see in some of the markets. In that sense, we continue our focus on working capital.
Laurent, your M&A question, it's true that everybody's talking about it, but I just want to remind you, we did two this quarter. I think there's talking and then doing, I guess. There is some activity now. At the same time, there has been a bit of a lull where everybody was looking at it, but during the COVID-19, you just have the logistical issues to do due diligence in faraway places, et cetera. I think that's hampering the style of everybody. I just want to remind that we've been very consistent, I think, on looking for bolt-on acquisitions that actually lift our business performance in Deco in specific geographies, because if you can put it through the same channels, et cetera, obviously the top line or the bottom line synergies, and/or the bottom line synergies are pretty impressive.
That allows us to pay the right price for those assets. That's what you see with the acquisitions that we've done over the last, I would say, 18 months to 2 years. It's been a consistent pattern. There are a number of items that come up. There is a little bit more, I would say, noise in the system, sometimes a bit driven by opportunistic. Somebody believes this is the moment to get out of the business. We are very vigilant. I think we're actually looking at many of those items. At the same time, we want to be good stewards of the funds in the company and don't want to start overpaying. Any of those acquisitions, we need to make sure that it is actually value accretive.
I think we've been on record and if the multiples start getting higher than ours, we think twice. Myself and Maarten, who sits next to me, we are very vigilant on, is the synergy plan here, is that realistic or are we just getting into buyer obsession for doing the things? The buys we did actually completely refer to that. It's pretty mechanical for us on making sure that we create value in those, and it's pretty detailed views versus just trying to inflate top line because it feels good. Does that answer your question, Laurent?
Yes, I guess it does. Maybe as a follow-up to Maarten's points on cash flow, end the point on the view that raw materials are ticking up. Why not stock up a little bit on raw materials? If you are indeed that optimistic about volumes and demand into 2021, there's quite a high likelihood then raw materials will continue to tick up.
Sorry, I didn't catch your question. Why not?
Buying.
Forward buying.
Build inventories as a strategic view on raw materials over the next few months and buy a bit more than what you need.
We don't want to speculate on raw materials in terms of forward buying. We have, of course, our purchasing contracts in place. Depending on the raw material baskets, they are 3-6 months. We have clear visibility, also forward visibility for at least for the coming six months. No, we don't go into a mode of speculation here.
Laurent, speculating raw materials is actually always a dangerous game. Probably anybody who ever did that can be 50% of the times you're right and 50% you're wrong. Over a certain period of time, it is not necessarily the most value-creating way of using your cash. I think our procurement has done an extremely good job the last two years to have contracts that give us flexibility if there were big changes. By the way, it all depends if COVID-19 in 2021 might be, again, a headwind for the economy, then actually raw materials might start going down again because it's a bit of communicating vessels out there. In that sense, that's why I don't think anybody in the trade really engages in significant inventory hedging.
Sure. Thank you.
Thank you. Our next question comes from Chetan Udeshi from J.P. Morgan. Chetan, your line is now open. You may proceed.
Yeah. Hi, thanks. Just a couple of questions. I know you don't want to guide specifically on Q4, but just looking, there is some seasonality, especially in the Deco business in Q4. How would you characterize your view at the moment in terms of Q4 versus, say, the historical seasonality that we see in Q4? Do you believe it could be better, it could be similar, worse? That would be useful. Just the second question was just looking into next year to the item that you can control, which are costs. Do you think, given some of the temporary savings this year, can we see a net reduction of cost again next year? Do you see actually there might be some increase given some of these temporary cost savings for this year might come back? Thank you.
Two comments, Chetan. For the fourth quarter, I think hopefully we portray some confidence, but okay, then Deco is always kind of going a little bit off the radar. That might be slightly different and a bit more optimistic, frankly, the COVID news is every week is a bit different. We feel relatively reassured, but we'll see. I think there's a guarded optimism there on the fourth quarter. On the cost question you have, I think Maarten has alluded that some of the temporary cost savings will continue. Having said that, hopefully we get back to normal on many of the visits out there, et cetera, so that some of it may disappear.
I think overall, we definitely want to offset inflation, and we've done a lot to get fat out of the system over the last two years, which caused some stress in the organization. I think we definitely want to hold on to the gains that we have. A lot of the travel, I think you alluded to that earlier, Maarten, definitely some of the virtual ways of doing things definitely seem to be staying to a large extent. The cost discipline continues. As I indicated, there is much more structural items around our infrastructure, office infrastructure, footprint, et cetera, that continues to trickle in during the years.
Yeah. Indeed, three elements. One is making sure that we offset inflation, and it's mainly wage inflation. Secondly, indeed looking at retaining some of the temporary cost savings. Three, the structural programs we have in place, which obviously continue also into next year and thereafter.
Understood. Thank you.
Thank you. Our next question comes from Mubasher Chaudhry. Mubasher, your line is now open. You may proceed.
Hi. Thank you for taking my questions. Just two quick ones, please. Firstly, on the negative mix, as we look out further into next quarter and next year, do we expect the uptick in the remaining geographies as they open up to continue to have a negative impact on mix like it has had in the third quarter? Then just one question on the M&A side of things. In terms of your other competitors also talking about M&A, is it quite competitive out there? Was Titan a competitive acquisition? Were there other bids in there? You didn't acquire the Powder Coatings part of the business and Powder Coatings part of the business. Any comments around as to why that was not interesting given, I think at the CMD, you talked about Powder Coatings is quite an attractive end market for you. Thank you very much.
No, correct. Maybe in telegram style on the negative mix, is that going to stay? The answer is really no, because frankly, if you look at the second quarter, one region was a bit higher, so we had plus four in Deco, and then on price mix, we had minus four in the third quarter. What you see is really different timings, disruptions in markets, et cetera. All in all, if you take the average, it's pretty predictable, plus one, plus two on that. I think as things stabilize, that's actually going to be going forward. You just see these jerking reactions in supply chains and markets at this moment of time. Again, I want to point out it's not that one went up and the other went down.
It's just the timing in the second quarter, third quarter that was a bit different than we are used to. That on the first [audio distortion] et cetera. It was a competitive bid. Again, there we do stick to what we want to offer, what can we justify, what is the real synergy, et cetera as well. We don't know who else was in the bid, at least we feel comfortable and satisfied with then the final price we had to pay. Why did we not go for the powder part of Titan? It's a business, our powder team felt that it didn't really add much to our already existing powder franchise in Spain and the market position we have there. It felt it was going to be a superfluous acquisition for us. That's why we very consciously did not go for that powder coating part of Titan.
Which indeed is a proof point of the discipline which we apply these kind of processes.
Thank you very much.
Does that answer your question?
Yes. Yes. Thank you.
Thank you.
Okay. I think that's the end of our Q&A session today. Thank you very much to everybody for joining our presentation and Q&A session. If you do have further questions, feel free to reach out to the investor relations team. Thank you, and have a good day.
Thank you. Bye-bye.
Bye.
It's okay.
That concludes today's conference. Thank you for participating. You may now disconnect.