Hello everyone and welcome to AkzoNobel's investor update 2020 and beyond. I'm Lloyd Midwinter, Director of Communications and Investor Relations at AkzoNobel. Thanks for taking the time to come here today and learn more about the company. This event is being broadcast live by video webcast, thanks to everybody joining there. A replay will also be made available. If you're here in the room, please remember to switch off your phones or mobile devices or set them to silent. Also, in terms of safety, before we start, please make yourself aware of the exits at the back of the room. If there is an emergency, please leave the room, turn left and make your way out of the building following instructions from staff. The presentation slides for today are available on our website, akzonobel.com.
I would like to draw your attention to the safe harbor statement at the back of the presentation. Please note this applies to the presentations as well as the Q&A session at the end of the day. The agenda. We'll start with an update on our 2020 strategy, what we've done, what we've achieved, and the things ahead of us in the year ahead. We'll then move on to beyond 2020 after a short break, and there will be an extended Q&A session at the end of the second half. We'll run through many of our markets and businesses along the way. Presenters for today. We're joined here by Thierry Vanlancker, our CEO, Maarten de Vries, our CFO, as well as Ruud Joosten, our Chief Operating Officer, and David Prinselaar, our Chief Supply Chain Officer.
Before we start the presentations, I'd just like you to watch this short video.
Imagine a world without color. How would you express yourself? Tell your story. Color is all around us. It's used to brighten things up and make them beautiful. You can paint something to make a fresh start, to forget the past, or to preserve it. You paint to color and to protect. When you paint, chances are you'll run into us. Because we've been setting the standard in color and protection for more than 200 years. We're right there when you need us, whether you're painting a single wall, coating a complete building, or transforming an entire city. Our products also keep transport moving and the wheels of industry turning. We even protect the things you hold in your hand. We do it because we believe in the power of paint. It can energize communities and transform people's lives.
That's why we use our expertise to inspire designers and architects and to help them shape the world that we live in. If you think paint is just paint, think again. Our product can clean the air, reduce fuel consumption, withstand extreme temperatures, even cope with the conditions on Mars. We're going even further. We're working with visionaries across the globe to accelerate our innovation, all because we want to make a difference, big and small. How do we describe ourselves? Well, we like to say we've got a passion for paint. It's been part of our story since 1792. How will we be part of your story?
Welcome everybody for joining us here. It's a good day for us. Some of us are a bit more nervous, I think, about this presentation, but that also shows we all put a tie on. By the way, David Prinselaar has a new sensation of having to button up his shirt. Congratulations, David, it still works. Congratulations. We're not gonna talk too much about the quarter four because we've already did that in long detail yesterday, and some of you will meet on the road somewhere in the coming days. We have gruesome time to go through all of the details when we do that.
What is, however, the pleasure here is to spend a little bit more time around, more in depth, more case histories on what we've been doing in the last couple of years, but also to talk about what the plan is for the future. The presentation really breaks up in three parts. One part before the bio break we take is really to look at the journey from 2017 to and including 2020. You'll have Ruud Joosten and Maarten de Vries helping out there. Ruud, who has all of the commercial activities reporting into him. He's going to describe on what we did in about half of the portfolio. He'll give the examples on that. Maarten will lead you in his inimitable way through all the processes and the 2020 plans.
After the break, the second part is really beyond 2020. When we say beyond 2020, it is really focusing on 2021, 2023. We take a relatively short period because that's probably bite-sized to see where the journey is bringing AkzoNobel. Then at the end, we have ample of time for Q&A, where basically it's going to be the old formula. You ask what you want, and we answer what we want and then see if there is some overlap in expectations. 2017 was a pretty pivotal year for us. We decided there and then to.
Focus on being a paints and coatings company. If you look at the identity card of AkzoNobel today, this is what we are. We are somewhere a EUR 9.5 billion paints and coatings company. We have what we believe to be the strongest groupings of brands in the industry. Last but not least, we're probably the most global of all the paints and coatings company. About 50% of our business is in emerging markets, and we're really spread out very nicely around the world. In that sense, strong local positions, strong global positions, strong brands. When we talked in 2017, in a relatively turbulent time at that moment, we made a couple of promises, and the promises were either completely underpinned or they were more or less underpinned on where the future was going to bring us.
This is a list of promises we did in 2017. Let me just start with the one promise we really did not keep, and that was around the growth. Couple of areas around it. When we started looking really under the hood of the businesses, it turned out that there was a number of products that we were marketing or in segments that were really underperforming and where we really had to step up, and therefore maybe walk away from some volume, and in certain cases also, of course, from revenue. In addition, in that three-year period, it was virtually a biblical situation. You had the Brexit that didn't help. You had huge devaluations in certain markets, and overall industrial markets being relatively soft where we were operating. We haven't done that. Hold your fire for after the break on what we look for the future.
For the rest, we feel pretty comfortable around the promises we made. We decided to have two focused companies and split it up. We said we were going to do this in 12 months. Well, the dual-track process, either listing or selling, was finalized in 11 months. Seems so long ago now, but it was clearly a massive amount of work for our organizations. We talked about the growth. We also talked about enhanced profitability. You'll see the numbers. We started out by about 10.6%. We now ended 2019 at 12%, but I'll show you some numbers on the second half dynamics that really show the trend line the company is on. Some of you were maybe doubting that we were going to go for the most value-creating route to separate from Specialty Chemicals.
We feel very proud that we were able not only to do this in the already mentioned 11 months, but that we will do this at what we believe was a very high valuation for that business by selling it to Carlyle and a GIC combination. We also talked about increasing return to shareholders. You see the list. The EUR 6.5 billion proceeds were returned before the end of 2019, which was a promise we made and a promise we kept. We committed to invest in sustainability, innovation, and as a society. More on that later in the presentation. One that really captured a lot of attention in the market was Paint the Future, where we really jazzed up on what we do really beyond the time span that we were talking on renovating and reinvigorating the paint industry.
You already found it out, there's a disclaimer, we are paint nerds. We like paint. We actually think that paint drying is one of the more sensual sensations in life, and we actually kind of come through on those emotions. Then last but not least, we talked about being the best placed to unlock value. We'll come back at one of the following charts around the value that we feel we created over the past years. How did we do that? In a very decentralized company with some very strong and very good, but a lot of strong subcultures, we really had to bring it all together. In a certain sense of urgency to deliver, we really captured it all with one simple slogan for the whole company, Winning together: 15 by 20.
In fact, most of the more mathematical-oriented people really only stick to the 15 by 20. That has helped tremendously to focus our whole organization, be it a salesperson in Brazil to an R&D person in our lab in Sassenheim, to an operator in China to really talk about 15 by 20 and why we do this. We also made relatively simplified versions on values or behaviors. You could almost call it behavior psychology on what we wanted to drive in the company. The passion for paint was, it's over. We're not a conglomerate anymore. It's around paint. That's what we should embrace. That's what we're good at, and that's what we should drive. Innovation, I think Ruud will come back on that also in his presentation. Precise processes. AkzoNobel was not exactly good at processes and following the processes. That has been a journey.
It continues to be a journey to really bring integrated business planning, bring really rigor in how we get precision around our numbers, our forecasting, and what we're going to be delivering. Powerful performance. How do we create a high performance team? How do we avoid having quarterly calls where we come with excuses on why we didn't, to having at least the plans in place and also the foresight on how the market is going to evolve to really still deliver in moments when there's maybe a fluctuation in the market. Last but not least, proud people. I'll come back to that at the end of the presentation. There was maybe not exactly the winning mentality in the team.
For a team to perform, you have to be energized, proud of what you do, and there is a lot of activities, again, I will come back to that, on bringing the pride back in the organization. Where are we on our journey? If you look at the first half of the full year, I have already covered that. We started at 10.6%, and we ended in full year 2019 on 12% return on sales. This is excluding the unallocated cost. A bit of a legacy from the time that we made the promises and we were still one company. We also announced yesterday that we feel pretty comfortable to fulfill our ambition to land in 2020 somewhere between 14.5% and 15.5%. This is not exactly in the category signaling. It is just, I think, a prudent bandwidth around where we think the company is going to end.
What is actually very interesting, because what is hidden somewhat in this chart, is while we were making those pledges, raw materials have been skyrocketing in virtually every category. That was not exactly something that was part of the plan when we announced it, but I'm very proud of the team on how we stepped up to not let it be an adversity. It hit a little bit, or it was hiding a little bit, the program the company was making. Therefore, it may make more sense to look at second half versus second half, versus second half, because that probably sketches more the momentum. In the second half of 2017, when the raw material prices were starting to go up, we were somewhere around 9% return on sales. A year later, despite significant inflation in raw materials, we were able to get to 10.6%.
If you look at the second half of 2019, we've been operating at 12.5%, and that is really the true benchmark for how we get into this year, 2020. There's a significant increase in performance, which is an extreme feat, I think, of the global AkzoNobel team to deliver that. We're also happy that our investors obviously have noticed, so thank you for noticing that, by the way. We're pretty proud that since the time in 2017, if you start from the start of 2017, you see here versus the AEX, which is at 24%, that we actually have outperformed the AEX significantly over those two years of time. If you then put in the total shareholder return, it's an 82% total shareholder return over that period, which I believe is a good testimony for your trust in what we were delivering for the long term.
The performance gap. Interesting to talk about where does the 15 by 20 come from. This is probably the chart that explains it the best. If you go back in 2014, 2015, AkzoNobel, where paints and coatings is concerned, was, let's not beat around the bush, was underperforming. We were, as one of the large players, obviously not taking control of our size. We were not necessarily delivering. We were probably having the complexity of a larger player, but none of the advantages of being a larger player. We, in 2017, had basically made it to, I would say, somewhere in the middle of the pack. We were now starting to be better than the smaller players in the market, but not really up to the best performing financial companies in our industry.
I'm happy to say that with the results of 2019, we're getting really close to where the best performers are. We're not exactly there yet. There is still a lag, but we're actually getting close. If this would be the Tour de France, we were hopelessly behind with a flat tire. We basically made it back into the peloton, and right now we see the leaders in the race somewhere ahead of us. We can actually start seeing the numbers on the back of their shirt, but we're not exactly that. That's in fact giving a little bit on what our ambition is for the next couple of years, is to take our rightful place in that best performing group. That is in fact, where we go with our presentation. The beyond 2020 is going to be much more around balancing growth and deliver.
It's about getting the growth back in now that we basically did the housekeeping on businesses where we felt Or product lines where we felt there wasn't much to gain. Ruud will give you all the gruesome detail on, and examples on, again, about half of the company on the impressive step-ups that have happened. For the future, we feel that growth has to be also part of the dynamic. We'll come back after the break on how we're going to do this. With that, Ruud, up to you.
Thanks, Thierry. My name is Ruud Joosten. I am COO of AkzoNobel, and in that job responsible for the commercial part of the company. Till the presentation of Thierry, I felt like a paint guru or a paint hero, but probably now I'm a paint nerd from now on. Thank you for that, Thierry. I'm 32 years in this business, and I can tell every time I see that video, I'm still extremely excited to work in this industry. It's a fantastic industry. It's a very attractive industry. Of course, with a very thin layer of paint, we protect almost all substrates in the world. On top of that, with that same very thin layer, we color the whole world. What else can you ask for for a job? A fantastic market with a lot of opportunity.
Today, I would like to present to you what we did over the last couple of years in some of our key markets, and indeed that's about for 50% of our portfolio. To start with, I would like to tell you a little bit about the market in general and where we are in these markets. Paints and coatings, it's a big market. It's a EUR 125 billion market with a lot of opportunity. AkzoNobel plays not in all subsegments, so we can say we play in about EUR 85 billion of that EUR 125 billion globally. You see for yourself the several segments coming together to that EUR 125 billion.
Deco being a big part, but also all the industrial segments, substantial markets indeed. You can also see on this slide that there is a level of consolidation going on in this market, but there are only three real big players, and AkzoNobel is clearly one of them. There is a long tail of smaller companies. After that, even a much, much longer tail of far more smaller companies who are, let's say, getting to the other 50% of this EUR 125 billion industry. A lot of room for consolidation in the future, but I will come back to that in some more detail, talking about several segments. Here you see our portfolio. We have a very strong portfolio. Almost everywhere in the segments where we operate, we are number one or a strong number two, which is really important in our markets.
Market share, relative market share is really correlated with profitability. First one is Deco, EUR 35 billion market for us, strong number one position, and indeed, a lot of opportunity for further consolidation in this fragmented market. Another important, let's say, opportunity in Deco is Asia. In the growth part after the break, I will come back to our Chinese operation. Asia in general is still a fantastic opportunity for AkzoNobel. Thierry already mentioned it. A big part of our sales is in that part of the world. That's in contrast to some of our big competitors who are merely focused on mature markets. If you look at the maintenance cycle in China or in other parts of Asia, the usage per capita is still extremely low. Long-term growth is absolutely in our portfolio, although it's not always on the very short-term available.
Marine and Protective, I'll come back to that in a few minutes talking about our improvements over the last couple of years. That was a very difficult business unit for us only a couple of years ago because of low investments in new ships. Now we see there a little bit of a change, more investment in oil and gas upstream, where we are really strong with our International brands. I will come back to the things we did to improve our profitability. Wait a second for what we did there. Powder Coatings is an EUR 8 billion business, and we are clearly number one in that segment. The number two is far, far away from AkzoNobel in powder. This is clearly talking about growth, one of the bigger opportunities. You see a little bit of a higher percentage there.
I have to say also this segment is a bit hit by the automotive downturn at this moment in time, but even then compensating and still getting to these kind of numbers is pretty impressive. I come back to the growth agenda here also after the break. The sustainability factor, of course, for powder is extremely important. Industrial Coatings. Industrial Coatings is a segment where we can talk about many, many sub-segments. In AkzoNobel, we talk about wood coatings, coil coatings, and packaging coatings together, getting to our number two position in this EUR 14 billion segment. The pros, very strong growth in Industrial Coatings in beverage, chem coatings. I come back to that later, too. There will be lots more opportunity there going forward. Another important development, strong geographical changes within the world where, let's say, our customers are operating.
One example is in wood coatings, where there was a change or a shift from furniture from the U.S. to China. Now we see strong change from China to, for example, Southeast Asia, Vietnam. We have to anticipate on that very clearly. Automotive Specialty Coatings, the last segment I'm mentioning, is EUR 11 billion segment. Clearly in a downturn at this moment in time. Last year was a very difficult year for the automobile industry. Luckily, we're not as much hit as our key big competitors because we are to a lesser extent in that segment because we're not in the metal OEM part of the business, but we are in the plastic part of the business, interior and exterior. We feel that, and I already mentioned powder coatings a little bit hit here as well.
Luckily, in this business, we also have our aerospace business, which is really a strong growth driver, and I come back to that later as well. Thierry mentioned, you see our brands, really our pride's strongest brands in the industry, Dulux, International, Interpon, and Sikkens. Just a few words on process, strategic process, before I get into the examples on what we did over the last couple of years. Here you see the way we handled, since the last time I presented to you two years ago, our, let's say, product market combinations. We did a very thorough analysis two years ago, we went very deep into all sub-segments of our total company. In the picture you see for every column, one of these segments. For example, one column can be Deco China, Powder U.S.A., Woods Europe, and what have you.
There are more than 140 of these performance sales, as we call them, and that give you that nice colored picture on the right side. You can see the 2016 situation, 2017, sorry, 2017 situation at that moment in time, figures of that year compiling into this picture. Thierry later on will come back of the situation where we are today. It's also clear, in all honesty and all transparency, that we had some dogs in this picture, some chronically, let's say, low performing businesses that we really had to tackle. Now we'll come back to some of these examples and what we did.
That's normally in a portfolio, but only this very detailed analysis, of course, showed us what we had to do, because the risk in a company like this is that some of these worse or not so good performing entities are being compensated by other, let's say, good performing entities in the business unit, for example. With this clarity that we have now today, this led to an operating model where we, on a monthly basis, look at all these cells. The team, as you see here today, has complete transparency on the developments per performance cell, which is really driving the performance. A few examples, which is indeed, Thierry mentioned it already about all these together, the ones I am presenting to you here, is about 50% of AkzoNobel.
This is not a small detail that I try to sell to you, but this is really a substantial part of the company. The first one is Decorative EMEA. A business I worked in the past for a long time in, and I have to say that it was always difficult. It was always difficult to make use of our big scale because we are by far the market leader in Deco EMEA with a two times relative market share with EUR 2.2 billion sales. To translate our very strong position with our leading brands like Dulux, but also Levis or Marshall in Turkey or Flexa in the Netherlands. To translate it into real profitability was difficult. Maybe you can ask yourself the question, why? It sounds pretty straightforward.
Well, the trick in Deco is, and I think some of you who are following this already for a longer time know that Deco is a very local market. Products are different, distribution is different, the brands are different, culture is different. People in Greece use different titanium percentages than the people in Norway. Everything is a bit different. To make use of scale is difficult because on one hand, you have to keep your local agility in marketing and sales. On the other hand, you need to leverage your scale in the back office. Well, we came to a model, an operating model a few years ago, and now I think, let's say in transforming that model into a real workable, agile system, we cracked that nut, and I'm extremely proud to say that we increased profitability with 500 basis points over the last two years.
Finally, we can say that we are now really leveraging our scale in Deco EMEA. That is really important with our positions, 60% number one and 20% number two. Very good to mention as well here, I think the U.K. I know we are in London, and most of you know buying paint probably in the B&Q or in Homebase or in other stores within this country or in the Decorator Centre. U.K. is a very important market for us in EMEA. Some of the questions in the past were about, can you keep that position? Because probably you get attacked by others because it's an attractive market. I'm really proud to say that we improved our position over the last years. Brexit was a big threat.
Consumer confidence was a bit down, but in that whole, let's say, development, it shows you again the power of the brand, the Dulux brand. Based on that, we were even in a position to increase our shares and improve our position. A huge customer of us, Kingfisher, we tied it up with them. We have better relations than ever, and our sales with them increased dramatically over the last couple of years. Very, very happy with the U.K. On top of that, we opened up 50 new stores over the last two years in the U.K. to increase our network in the professional market. France, a difficult country for many people in the Decorative market. Difficult market. Consumer confidence, very low already for many years. Also there, we're seeing a clear progress.
Two main markets where we make big improvements, of course, that are big drivers of that 500 basis points increase. We talked about consolidation, opportunities in M&A to improve your position. Also there, we learned a lot in history. In the past, we bought a lot of companies, sometimes it was not so clear what strategic profile was, can we really improve our position in a country with that acquisition? I think we changed there, too. Acquisitions are really based on a very disciplined approach, clear rules. They have very strong M&A team supporting us with a very strong funnel of propositions and targets. Here you see a few good examples of that. First one I would like to mention is Fabryo, which is a strong number one player in Romania. A fantastic acquisition.
That's really what you want in Deco to be a number one local player. You can really easily fit it into the brands family, as I just presented to you, make use of the synergies and add all the things we have on a European global scale into the Romanian market, which is a growing market. Second one is Xylazel in Spain. This is a completely different strategic rationale. This is about adding wood care and metal care products on top of our position that we already had in Spain with Procolor and the Bruguer brand, much more mainstream-focused brands. Together now with Xylazel, we are number one in Spain, which is, by the way, a major Deco market in Europe. Last but not least, Colourland in Malaysia.
Malaysia, we had a clear issue with distribution. Weak position in distribution, and Colourland gave us the opportunity to really strengthen our position in Malaysia and also there a clear synergy case. I think next month, David will close the factory of the former Colourland, showing you that the synergies will come out very quickly. Overall, EUR 85 million revenue in 2019 of these acquisitions leading to stronger positions in Decorative Paints. Next example of improvement, Marine Protective Coatings. I mentioned it already. Already for a longer period, the investment in new ships is low. Clear overcapacity from building up from years ago in that industry hit us dramatically a few years ago in this market.
Very low profitability when I presented to you a couple of years ago, two years ago, here in London, and we really had to go very deep in analysis and strategy definition to improve this business. In the end, like many times before, you have to go back to your core. Our core is that we have the best brand in the world in performance coatings and in steel protection, which is the International brand, more than 100-years-old brand, coming from Felling here in the north of this country. Very strong, especially in steel protection, fire retardant systems, giving us an edge in the market.
What we did, we went back to our core in protective coatings in the oil and gas industry, and in the marine industry, much more focus on high-end segments of that market, maintenance in the marine, but also segments like cruise and coastal ships. Yeah, cruising is maybe a bit difficult at this moment in time if you see the corona ships drifting in the oceans. I can tell you this is a fast-growing segment in the world, cruising, with good margins for our International business. These developments, and then on top of that, further investment in upstream oil and gas, where we are very strong, led to a situation where we really said goodbye to volumes in lower, let's say lower margin segments that we're not really strong in. I'm really happy to say this is really working out.
Even though volumes are still difficult in marine, because the marine business is not really coming back to the old levels, we feel much more confident in this business. We feel proud again. The team is proud to be using their specialism, that led to a 600 basis points improvement of return on sales over two years. Completely different situation than two years ago. Indeed, we have a very strong number one position in this EUR 1.3 billion segment. Industrial Coatings. Like I said before, it is a business unit that has three sub-segments, Packaging, Coil, and Wood for AkzoNobel, with three different stories. Also here, when we did our analysis on the profitability, we saw big differences, but also some very low profitability indeed. What did we do? Well, we really looked at the raw material increases and how could we attack that?
How can we come back with higher margins? We cut out a lot of customers that were not profitable, which is a very difficult thing to do for sales teams. If you look at our service levels that we provide to our customers, you have to ask, of course, the value that we deserve in giving that service. A lot of our sales guys are also very technically developed guys, educated guys, and they are on the yards or on the premises of our customers almost all the time. There needs to be a balance in adding value and margin for our company. That's where we look at very carefully. We said goodbye to some customers. We said goodbye to a lot of products that were not really giving that kind of value.
We said goodbye to some of the factories we have in some of the segments. All in all together, that led to a fantastic increase of profitability. You see a 600% basis points increase. In some of the segments, that's much more because this is only an average of the sub-segments I'm mentioning here. An important case study here is Coil Europe. I think that was one of the most difficult ones we were facing two years ago. Coil is closely related to the steel industry. We sell paint to some big steel customers who are applying our paint onto coils, and they make products like, let's say, washing machines out of that or other bigger appliances.
There we saw the same development, difficult markets, slow growth or no growth, customers in difficult positions, and we indeed adding a lot of value to them, but not really getting paid for it. Probably in Coil Europe, the things I just mentioned were implemented in the most strong way over the last two years, and that led to an indeed more than 600 basis points improvement for profitability in Coil. Of course, it's also important if you, let's say, decrease cost and rationalize your business to provide a future for the business and to invest in long-term innovation as well.
On the right side of the picture, you see a EUR 50 million investment we are implementing right now in the U.S.A. in High Point, for our wood coatings. High Point for already a very long time is that the basis was a global and is still a very strong basis for the wood industry, furniture industry. We are very proud to be there and to invest in the long-term of future of this business. With that, I introduce to you Maarten de Vries, who will tell you more about our transformation process.
Thanks, Ruud. Good afternoon, everybody. Also welcome to everybody watching online. We are going through a profound transformation in the company. To be honest, I feel blessed and privileged to be part of this transformation since I joined early 2018. This is really a very exciting time to be part of this transformation and to be in AkzoNobel. We started the transformation early 2018, when we basically defined the different work streams. Basically, the 12 work streams. We set up the transformation office, and we set up a very strict rigor in reviewing the progress of our transformation streams. In fact, every week on Friday, we sit together with the executive team to see how is the progress and how are we tracking in the transformation. Where are we in this journey? Ruud talked already about the pricing initiatives.
Of course, with the run-up of raw material since 2017 till the middle of 2019, we've delivered on a 10% cumulative price increase. Since the second half of 2019, we started to move to margin management practices, and that is also the way we will move going forward. On the Global Business Services, basically what we did is we put a Global Business Services platform in place. I will talk about it further a little bit later, but we have made a lot of progress in terms of transitioning transactional activities to the Global Business Services. As an example, take finance. When I joined, I was looking at a finance function which was highly decentralized and highly transactional. Meanwhile, we have centralized the finance function. We have much more transparency, as you also saw in the example of the performance cells.
In the meantime, we are also transitioning all the transactional activities to global business services. In fact, by the end of 2019, we are smack in the middle. We are roughly at 50% of these transitions. Furthermore, we've done 16 ERP integrations in 2019, which is pretty massive. Specifically, if I look at the fourth quarter, where we had several integrations, but basically two big ERP integrations. One was in China, where we basically did a whole integration, and a second one on the 1st of December was in Europe, which was our biggest and most complex ERP integration. Drawing basically a lot of resources from our IT teams, but also, to be honest, from the business. All to further standardize our processes and ultimately take cost out of the business.
Talking about costs, apart of course, from our continuous improvement initiatives, which basically compensate inflation, I'm sure David will talk about it after the break. We are on track to deliver the EUR 200 million, we have delivered the EUR 80 million out of the EUR 200 million cost savings, net savings in 2019. That is basically what you see here on the next slide. In 2018, we delivered the promised EUR 110 million net cost savings.
Out of the EUR 110 million, there was a carryover of EUR 30 million into 2019. By the end of 2018, we launched basically the second phase of our cost-saving program, the EUR 200 million. Out of the EUR 200 million, we delivered EUR 80 million in 2019. A total of EUR 110 million as well in 2019. Still, if you calculate it well, still EUR 120 million to go now this year in 2020.
This slide, I think you've seen multiple times. I think it's good to reflect on this because it shows basically the steps we are making in the implementation of the different work streams and how we drive basically the execution. It's important to highlight the purple colors or the purple streams under 2020, because these are really the focus areas for delivery on our 15 by 20 ambition in 2020. Let me zoom in a little bit on these four work streams. First of all, margin management. I said earlier, we are moving more and more to margin management, but as part of margin management, and we said it before, we also go to a much more rigor in terms of pricing and pricing discipline and move to annual price increases.
As we mentioned also yesterday at the call, we are, as we speak in the first quarter, implementing a 1%-2% price increase in relevant segments and markets. Of course, we do this in a very specific way, but that is all part of our margin management this year. Further on the cost side, we continue to drive the transitions towards our Global Business Services. In fact, you see on the slide we have 36 transitions planned this year, which drives basically, first of all, labor arbitrage. After we have put them in Global Business Services, we start to drive the consolidation and the standardization. From an ERP perspective, we have four big ERP implementations, integrations planned for this year. Then by the end of 2020, 65% of our revenues will sit on our landing strip on our one ERP platform.
David will later talk about the supply chain footprint or supply chain network. In 2020, we have certainly still selective footprint optimization plans to drive further cost savings, as well as part of the transformation, we have a lot of functional initiatives plans to further take cost out. Again, this is all part of the EUR 120 million plan for this year, or as part of the originally underpinned EUR 200 million cost saving plan for 2019 and 2020. This basically brings it all together, the famous bridge, I would say. Thierry earlier talked already about the momentum we are seeing. If we look at the momentum we have in the second half of 2019, the full year 12%, the second half of 2019, 12.5%.
If we then take our margin management, basically a 1%-2%, as well as our net cost savings of EUR 120 million in 2020, and the recurring cost inflation, which is compensated by our continuous improvement programs, we land at our 15 by 20 ambition in the range of the 14.5%-15.5% gross excluding unallocated cost. Let me still talk also a bit about ROI. As you remember, in 2017, we communicated an ambition to realize an ROI of 25%. Clearly, as part of the transformation, we have dialed down our growth ambition for the company. Obviously, if you dial down the growth ambition, that is also a quite considerable impact on the ROI. That may be quite logical. If we look now where we are currently with our ROI, we reported a 17.2% ROI excluding unallocated.
The implementation of IFRS 16 has an impact on ROI. Excluding IFRS 16, in fact, it's 17.8%. With that momentum, we believe that we will land in an ROI which is above 20%. Maybe it's still also good to mention that the ROI of 17.8% is also impacted somewhat by the recent acquisitions. As Thierry mentioned earlier, we have delivered on the shareholder returns. We have delivered on returning EUR 6.5 billion back to our shareholders on the back of the divestment of Specialty Chemicals. We also, early 2019, in the first quarter of 2019, we have de-risked the pension funds, which has been a drag in terms of our cash flow over the past many years. We have basically settled that with a EUR 642 million top-up payment. It was mainly the U.K. pension funds.
With that, we ended 2019 with a leverage ratio of 0.7x. Now, in the meantime, we have announced a share buyback by the end of last year of EUR 500 million , which we will basically end probably somewhere before the mid of this year. Obviously, with our strong balance sheet and with the cash generation, we have optionality going forward in either M&A or a modular approach in terms of share buybacks. We keep on our commitment to move us to a net leverage ratio of one to two by the end of 2020. With that, I hand over to Thierry.
Thank you, Maarten. Thank you. This was basically looking back from the journey 2017 to 2020. We believe, but I'm sure we'll get feedback from you, I believe we delivered on the promises that we made back then. Some of them were pretty bold promises, but I'm extremely proud on how the team has delivered on that. The focus on 15 by 20 was essential to get our whole team on the same page, which was typically, as I said, relatively decentralized. That has worked fantastic. Internally, I often use the analogy that the journey of AkzoNobel so far has been a big construction site. Not sure if anybody ever lived in an apartment or a house while the construction was ongoing. I did this once with my wife, 30 years ago.
Spoiler alert, I'm still married with the same woman from back then, so we survived it as a couple. There's a lot of dust, there's a lot of noise. It is pretty disorienting as the shower and the kitchen are not functional anymore for a while, so it can be very stressful. That's exactly what has happened also to the AkzoNobel team around the world. Things that were certain were not certain anymore. Things that were the way of operating were not the way that we wanted to do it in the future. That has created quite some changes in the organization. I would be amiss looking over the journey over the last two, three years, not to call out the fantastic team around the world that has stepped up.
Asking a salesperson to walk away from volume is really an existential moment for any salesperson out there. Transforming the finance organization, taking our IT systems to the next level, yes, at certain times in a construction site, it felt that a little spot of humidity in the basement was nothing, but then it turned out it was really a catastrophic thing in the construction of the building. I have to call out here the team on how they delivered, and I'll come back to that at the end, how we basically have the momentum going. Definitely on the last part here being proud, justifiably proud, of what the team has delivered. Easy for people like us on the ninth floor in a building in Amsterdam to come up with big dreams. People out there have to do it. A big thank you.
With that, let's take a 20-minute break. Then we'll try to entertain you with a story beyond 2020. Thank you.
[Break]
Welcome back. It's a good sign that most of you are still here. Why did we show you the video? It's a bit insulting to a crowd that's mostly based in London to give them kind of a tourist guide here. The one thing obviously that all these buildings have in common is that they are very much, coated and painted with our materials. From Westminster Abbey to the London Eye, we could have put in the Battersea Power Station remodeling in here, which is predominantly our material that's in there. Again, it's coming back to the wherever you are, we have our paint and our coatings relatively close to you. Before the break, we talked about the journey 2017 and 2020.
A key topic was around keeping our promises that we made, and we made that kind of a core value. Not just to throw out just mere statements out there, but to deliver on them. Secondly, this is all around retooling the company, whereby the 15 in 15 by 20, yes, was a very firm objective we want to achieve, but the whole idea was not to flame out, but really to use it as a locomotive for significant and structural retooling of the company. We're pretty excited that by the end of this year, we will be in this bicycle race extremely close to the best-performing companies, but with actually more steps to take for us. Let's talk about the three years beyond 2020 to 2021 to 2023 period.
Yes, this is, as you saw in the media release, this is much more a balancing story between continuing to deliver on our bottom line because the changes we make are really structural improvements on how the company can perform. At the same time, balancing that much more with the growth. In the spirit of keeping our promises, we're not going to promise you stuff from La La Land. That just doesn't make any sense. Ruud will walk you through about one-third of our portfolio, which are big segments where there is really tangible signs where we can grow, and we will grow faster. You say, "What were you waiting for?" Don't underestimate in the company the, I would say, the cleaning out of our portfolio, the restructuring of the segments, et cetera, that have happened.
Automotive, there are all sorts of dynamics that frankly have subdued the underlying good work that's been happening. For the whole presentation after the break here, the whole presentation has, of course, one premise. This is all around us, either organic growth or with smaller bolt-on acquisitions or tuck-ins, et cetera. That's kind of part of the business as usual. I know that you're all very interested on what are the bigger steps, that's not part of the horizon here. If there were to be a bigger step, okay, of course, some of these things may be reviewed. One thing we can promise you, and Maarten will go into gory detail on that, if there is somewhere a bigger move in the future, it will only be because it is a more value-creating step than what our base case is.
See this as kind of the baseline for what we see coming and what our plans are for the next three years. The presentation is basically falling apart in a couple of topics here. Ruud is going to walk us through the ongoing work around the portfolio management and how we now have a very clear and crisp view of significant market segments where we can deliver growth. He's also going to touch around the sustainable, and not only sustainable innovation, but sustainable open innovation in addition to that. I think we're particularly proud that during our whole construction of the AkzoNobel building, we really doubled down on getting our innovation pipeline in sync, and also healthy, so that we can really have a base for the growth that we talk about here.
Afterwards, David Prinselaar, who is leading all of our integrated supply chain, he's going to talk about all the work that's there around getting the integrated supply chain where it needs to be. Just a reminder here, when we talked two years ago around what integrated supply chain was going to deliver, they did deliver on everything we asked them to do, but we had narrowed down or we lowered the ambition on cost, because with everything going on, ERP systems and everything, we felt it was not necessarily very prudent to also put it to the maximum there. He'll talk about what's coming in the next episode. Value Engineering around procurement, getting, again, all from a decentralized portfolio, to getting much more powerful in what we procure.
Then Maarten is going to go around, so the so what of the whole ERP introduction and what's coming next, the end-to-end processes and then the attractive capital allocation. As an introduction to Ruud's presentation, let's show you where we were. Again, you saw this from Ruud, what our segments, our portfolio was in 2017, and where it was by the end of 2019. This is merely two years later. It shows the really granular look we have at the portfolio and where we are. A couple of things are pretty obvious. Well, of course, from the 10.6%, the waterline has risen to 12%, so that's a good thing. What you will see is two ends of the spectrum.
If you start with the maybe not so dazzling businesses that are there in the end part of the chart, you see that in 2019, a lot of those have actually been cleaned up, not all of them, but they've actually been cleaned up. We've really been focusing on those change the games on how to bring them to a different level. The second thing is also that you see, of course, a general increase and a lot of pressure that we took, that we implemented on getting those somewhat lagging businesses to either shape up or basically change the way that they were doing business. More interestingly, and that's what Ruud is going to talk about, you see some of the segments that were extremely strongly performing already in 2017, and how we in fact have been growing those businesses.
While we were exiting some of the low-performing and maybe chronically low-performing businesses, we've basically been able to compensate that with businesses that have a much stronger future. Why should I bore you with my details? Let me introduce that, or it's just as an introduction for Ruud, who's going to talk in much more significant case histories.
Thank you, Thierry. Of course, you can plot businesses in many ways, but this is an exercise we did lately to show a bit where are we, present to you a bit where are we with the several segments in size and opportunity regarding growth and the relative attractiveness of these markets. I already talked about Deco Europe. Fast improvement we made over the last couple of years in this relatively attractive market with growth opportunities, also in consolidation, by the way, as we presented. You see for yourself some of the other segments, sometimes in a bit more difficult area of the spectrum, sometimes in a, let's say, a bit more positive part of the world. An example, for example, Deco South America. These guys were being confronted with enormous inflation and turbulence in the markets, but still holding on in a very strong way.
Based on their very strong brands like Coral in Brazil, for example. Coil, I went already into some more detail. Difficult market, heavy, hardcore industrial market, where you really need to be extremely sharp, on the ball all the time, every day, to be profitable, and there also we made a fantastic improvement. Of course, I'm teeing up to move to the right top end of this slide. There you see in a combination of segments or businesses where we see more growth opportunity. Luckily, we are strong in these segments. Probably not a surprise for you that we present these, but this is really how we made the analysis and where we see the opportunity. It's about powder, it's about aerospace, it's about yacht coatings, Deco Asia or Deco China, and packaging.
Most of these segments are now to a certain extent presented, but now I would like to go one by one and show you how we look at the growth opportunity for these businesses. First one is Deco China. Deco China, let's say in your industry, sometimes is seen as a kind of controversial business. Some people think it's a problem child for AkzoNobel. Today, my key message to you, absolutely not. Deco China was a fast-growing business and highly profitable business for AkzoNobel. This business developed over many, many years based on the Dulux brand. Based on the fact that Western brands were highly appreciated in Asia and in China. The brand and the business grew for decades to a massive Deco business in that part of the world.
That's not only in China, the Dulux brand is also very strong in Vietnam, where we have a leading position. Leading position in Indonesia, India, and Thailand, some of the other countries in Asia. China, same story. Many decades of strong growth, 5%-10% on a yearly basis, and with that scale being very profitable for AkzoNobel. Where are we now? What happened over the last couple of years? After many, many years of growth, decades of high growth, it's a moment to say, "Hey, what are we going to do? What's the platform for the future? What's the platform for, let's say, the next steps in penetration into the Chinese market?" That was a very good moment. Also last year when the Chinese market stabilized.
After many years of these high growth percentages, clearly a cool down of the Chinese paints and coatings market, especially the Deco market. That was a kind of a bell ringing for us, a wake-up call. What are we going to do next? Of course, we don't have time to get into all the gory, let's say, marketing details, but we can tell you that the development of the brands and the love for Western brands needs to be much more deserved now in the Chinese market than before. In other words, in the past, when you sold Dulux, that was already good enough for a Chinese consumer to buy that product based on the brand strength. That is changing. Chinese consumers are developing rapidly, and they demand more, just like Western consumers. If they want to pay a premium, they need to see innovation.
They need to see extra services, otherwise they go for local competitors. Local competitors, of course, were developing in the same period as well, these guys are pretty aggressive, I can tell you, in that market. A wake-up call for us and maybe other bigger foreign brands in the Chinese market last year. That led as part of our, let's say, mandate analysis, like I presented before, to a thorough additional study into China. On top of our normal analysis, we did an additional review on the Chinese market, some things came up, most of them are related to opportunity for further growth locally. The first trend I would like to mention is indeed this innovation requirement. Chinese consumers are more and more very strong demanding for quality, but also sustainability innovation, air quality innovation is required.
We had to develop a pipeline of products, innovation pipeline based on better quality, like products that are easy to clean, for example. I come back to that later. In the household usage of products, but also products like you see on this slide. Pure A ir and, let's say, natural binders, bio-based binders are getting stronger in China faster than in other parts of the world. Nowadays, if you want to introduce a product like this, you have to go to China. Perhaps 10 years ago or 15 years ago, you first had to introduce it in a Western market and then try it out in a market like China. Things have changed dramatically. Now China is the market to go to. Another trend is digital. The same for digital, where in the past, probably you would have tested in the U.S.A. or in a Western market.
China now is by far leading in digital, and the Chinese consumers know much better what they want than other consumers in the world. Two consumer trends that we had to play into. On top of that, based on our growth over decades, probably we got a bit easy in looking at our distribution channels and penetration grades in the Chinese continent, as we can say. We call it a country, but of course it's much more than that. It's a massive market with all kind of sub-segments and sub-markets all over. We did indeed a very detailed analysis in all the little towns. Well, little towns are sometimes still bigger than London or anyway than Amsterdam, I can tell you, to look what are the opportunities. Whereas in the past we were really strong in premium, super-premium in tier 1, tier 2 cities.
That analysis gave us a fantastic overview of where can we penetrate deep into China, into cities and into regions, but also into segments. As our premium position was merely based on purely based emulsions, what can we do in the total range of products in all these segments, in all these regions to really grow? That is a very important question because growing is not so difficult in this market. Of course, we want to do it in a 15 by 20 way, and then of course it becomes much more difficult because it needs to be based then on better service, better innovation, better brand strength. That is what we built last year. Consequence of that is that we also changed the whole Chinese management team.
The key players were changed from people who were used to, let's say, easier growth in the past, to people who know that you need to fight extremely hard nowadays to gain share in China. That team is in place now as we speak. We look at the portfolio, and we cleaned it up. Products that were maybe easy to grow with, but low value, low margin, were given lower priority. Again, innovation in the products on this slide, for example, but also into other, let's say, high-end products were given priority. Indeed, support the brand. You cannot survive if you don't support, in this case, the Dulux brand, which is still by far the biggest brand in Asia. All these things together are now in place, and we are ready to make use of the next phase of the Chinese growth opportunity.
Maybe you say, well, today China is a little bit in a difficult, very short term situation, stabilization of the Deco market probably will go on for a few months. Looking further ahead, looking into the future, of course, we're very well positioned. Don't forget that with the Dulux brand, as AkzoNobel, we are the only Western company with a real strong Asian position. Indeed, the growth in China will be strong going forward. If you looked at the growth of the mid-income segment, which is growing fast in China, they will upscale. They will uptrend. They will want to use top brands like the Dulux brands. Again, you need to give the service and the innovation level. The second, let's say, statistical fact is that people don't use a lot of paint today in China.
That's a factor of three to four, sometimes even to five compared to other main markets on a global scale. That will come. People will use more paint. They will paint their house more than once every eight years as it is today. The maintenance cycle will help us dramatically in improving our sales and revenue in the next even decades to come. A strong case for growth in Dulux China for the next period, short term, but also long term. A bit completing the Deco story, because I told you a lot about Deco Europe, where we came from a low profitability to a very acceptable profitability, and Deco China, where we see strong growth going forward. Maybe it's good to show you a bit how we manage on a global level.
Here you see examples in marketing and innovation where we can clearly leverage our scale. Told you a bit on the difficulty in Deco in leveraging scale and being locally agile. Of course, what's the difference between a small local company and a company like AkzoNobel? Well, especially when we talk about marketing and innovation, that difference should be completely there. Here you see some of the examples where we are excelling compared to other local smaller players. One example is Color of the Year. That's a franchise that we implement in all countries of Deco globally.
Yearly introduction of a Color of the Year being supported by all units because they understand that this is a fantastic marketing event of the year to give attention to paint in general, increase the maintenance cycle or hurry up the maintenance cycle, and sell more color, which is more profitable for us, as you can imagine, than selling white paints. Second one is Easy Care. Easy Care is a franchise we started a few years ago. This is a patented product, and it means you can clean your wall very, very easily, even with very, well, not even dangerous attacks of some food, as you can see later on in the small film I will show you. Fantastic product that's being rolled out now in 31 countries. That's uniquely for AkzoNobel. No one else in the world of Deco can do this.
Our competitors are all local or organized in a way that they don't have this global leverage in marketing and sales. We can do that, and we are doing it. It is difficult. I can tell you this is a development over the last years. I remember times where we were organized in a different way and local organizations could decide themselves, yes or no, to use these kind of concepts. That time is over. Proven concepts like this, top quality concepts are being implemented from a central level. Color sensor. Small tool also introduced here in the U.K. Fantastic tool. You can link it to your iPhone or to your phone in general, and within few seconds you can have any color you want.
In this case, the brown of a telephone holder. You can go to your store, and you can have the color you want based with this very small and very cheap sensor, by the way. 18 countries are already using that. Wet tester, 22 countries. That's a unique roller tester. Nobody else has that one. Testers are not so well used in the, let's say, mature markets. With this roller, which you can use in a very easy way, it's fantastic to use it on a wall or on a piece of paper and test the color before you buy it. You can say, well, that's a very small innovation. It doesn't look very innovative. The conversion rate between people who use this and then really buy the paint is huge. It's more than 60%.
Having the tester available, for example, online, the consumers can order the tester online. It's a 60% or 65% probability they will go to the shop and order the paint of AkzoNobel, and then it's in that color. It's a guaranteed margin for AkzoNobel. In that sense, small tool, but with big impact on our profitability. I put the Sikkens one there as well, because that's a professional painter product. Sometimes when you let marketeers talk, they talk about retail and consumers all the time, but all in all, worldwide, painters are still a bigger customer group than consumers for AkzoNobel. Sometimes also with a higher profitability, by the way. Don't forget the power of a brand like Sikkens. Very old. That's a 200-year-old brand that we talked about.
This is one of these innovations being rolled out now also for the professional painter in 13 countries. Coming to the little video I would like to show you, because that shows you, I think, in a nice, humorous way, how you can leverage scale. In the past, every country made their own films. It was kind of a hobby of the local marketing manager to do that. That times are over, too. Where possible, we work together and develop the film together. Of course, you can save millions of EUR by doing it that way, and you get a better quality film altogether.
Maybe it's good I show you, maybe it would be nice if you look very sharply, then you can see where we change actors in the film from Asia to Europe, in this case, and just using exactly the same concept to convince consumers to buy the Easy Care product. Let's have a look.
[Presentation]
It's kind of a sneak preview for you guys. It'll only be on air in two months from now, but I thought it was a good idea to show you in real life how that works. One concept, several actors, and really minimizing costs and having a very high-quality film. Okay, one of my favorites, powder coatings. This is really a huge opportunity for AkzoNobel, already very profitable and growing. Thierry already mentioned it. Some headwinds because of the automotive industry. Maybe you don't know, but powder is being used on a big part of the wheels that we see under our cars. That's a little bit of an impact there at this moment in time, but still growing, substituting or compensating with other segments.
It's an EUR 8 billion market. We are clearly number one. The second player in this market is much lower than, let's say, the two relative market shares, so maybe one-third or even less of our business in the industry. I'm not lying when I say that we are leading in all elements of this business from innovation, but also in speed in market. I'm very proud of the supply chain there because this is a key element in getting share. In powder, it's very important that you're very fast with color. Customers need new colors all the time, very fast. We are very fast and agile in creating new colors and providing the product then, the color product to the customers. Probably that's one of the key wins that we have at this moment in time in gaining share.
Of course, also quality is really important. Also our bonding technology is really important as well. Bonding gives you the metallic look that are so nice on wheels, but also on other products. That kind of innovation technologies are really pushing our brands, the Interpon brands in this case, but also making the use of powder in general bigger. Then I come to the new application part as a source of growth. How we will see growth in powder? Well, the share gain, I think is pretty clear based on our very strong position already, but there are more things to come, and probably the key breakthrough is new application. Powder can be used, of course, on metal, and then it's baked to a very nice product and a very nice appearance on your substrate.
What if you can use powder on woods and plastic? We are convinced this will give a fantastic breakthrough for the revenue and volumes of powder. People want to use powder. Why? It's a very sustainable product. It's very sustainable because there are no VOCs in the product. There's almost no waste. Maybe you remember the picture on powder coatings, but it's very clear that if you use powder, the waste is very low because you can get the stuff, the powder again together, and you can use it again in the next phase of application. That's a completely different thing with liquid paint, where you have overspray and the waste is probably pretty high. From a sustainability point of view, this is a fantastic product. No VOC, no waste.
If you can have more substrate applications, especially wood and plastic, customers would be extremely excited. Customers like IKEA, for example, will take it on immediately for a big part of their furniture. IKEA is now a big customer for us already in liquid. This can give a fantastic growth opportunity going forward. We are working on this very, very hard on the breakthrough in technology. It's a key innovation process for the total company, by the way. I can tell you that we as a team are very close to that all the time now, following these kind of big innovation projects to make sure that this will happen. That will give a real breakthrough for powder. In the meantime, we also increased capacity big time in powder.
Anticipating growth, you need to have the capacity in place as well. We opened up big powder factories. One of them is in China, in Chengdu, where we built the biggest powder factory in the world. We think we are ready for this breakthrough because, of course, you need to produce and supply very quickly if the demand comes. We are ready for that increased demand. Market share growth. On top of the breakthrough in innovation and new applications, we are going for share growth, especially in North America. North America is a very attractive powder market with very good margins and based on our very strong market position, we feel we really need to focus on growth there.
I'm really happy to say that in the last quarter of last year, we saw the first strong signs of further increasing share in that part of the world. Really hopeful that that will give another breakthrough of growth for powder in North America. Last but not least, indeed, sustainability. Waste is a smaller problem in powder or no problem in powder compared to liquid, and there is zero VOC. Today, VOCs are important. Tomorrow, they will be much more important. We feel customers are more and more pushing for low-VOC products. Of course, with powder, we have the solution in our hands. Of course, competitors will not push this so much, as you can imagine why. We, with our market share, are ready for that. On the right side, you see a few of the innovations we did last year.
That are four main innovations that were introduced in 2019. Some for energy consumption improvement, because indeed, if you can have a lower bake temperature, you can imagine for the customer, big sustainability gain, but also cost gains, less energy use in their factories. Better crash resistance products, and corrosion enhancement as well, as powder is being used big time in architectural high-rise buildings, frames, claddings. Of course, corrosion protection is extremely important as well. If you can delay the maintenance with one or two years because of the powder quality, that's extremely important for the customers. [ Color]. As we have more applications, also in powder, we see more and more need for trendy colors. That's the funny thing.
We can now combine our color experience in markets like automotive, VR, Deco, together with powder, in using our global aesthetic center that we have for more segments than only Deco as we had before. That's really nice as well, for the Color of the Year is not only used in Deco but also in industrial segments. All things together, a very, very bright future for our powder coatings business. Again, some headwinds with the automotive industry downturn, but long term, for me, extremely good outlook. Packaging. As presented before, packaging is part of the industrial coatings business units. We had some more tough segments in that business unit, like the coil coatings business that I explained before. This one is really a very exciting business. Two years ago, we had problems with packaging coatings.
When we did the mandate study, the analysis on where we were in profitability and future attractiveness, it was difficult. We looked at it, and we didn't know what to do. After some very detailed analysis and a lot of discussion with customers, we came to a conclusion that the future, when you look a little bit further, is extremely bright. That is because of the three things you see on top of this slide, and that's especially in the food and beverage segment of can. Sometimes you also have to be a bit lucky in life, and that's what happened as well in the packaging coatings industry. Almost from one day to the other, there is a huge consumer trend from plastic to metal. Maybe you see that as well with your children or yourself.
There is sometimes even a kind of hatred in using plastic cans to drink from nowadays. It started with the little wooden elements to spoons to use in your tea or coffee that were all plastic. Now they are from wood. You see that was the first thing. Straws as well were all plastic. Now they're from paper. That was a kind of test from that industry to see how fast they could move away from plastic, single-use plastic. The same thing is now happening with plastic bottles. Maybe you don't realize it, but that's a fast movement going on. It's extremely good for our customers in the can industry. They cannot deliver because the numbers of cans are humongous. Talk about billions of cans here, all the time being used, growing dramatically as well.
From a difficult product from a volume point of view, packaging coatings is now a huge opportunity going forward because it's not only the shift from plastic to can, to metal cans, but also the people in the metal can industry develop new categories together with the food and beverage people. Suddenly you see now also still water in cans, but you also see, for example, wine in cans. The growth opportunity there for cans on top of plastic to can, of course, is really, really strong. You also see that brands are now differentiating in the size and the form of the cans. Maybe you recognize that you see suddenly all kind of beers in different forms or in different type of can sizes.
You see, for example, Coca-Cola in a 15 cl kind of can, where in the past you only had a 0.33 cl or a 33 cl can. A lot of differentiation going on there as well. All in favor, of course, of AkzoNobel in can coatings, where we are the number one in the world. Of course, you need to have innovation as well. On top of the market asking for can coatings big time, we were in the same time also ready to come up with new technology, which is really important for consumer confidence. That's the BPA-NI product, and maybe you heard about that one. Really important because of legislation to use the BPA-NI products inside the can instead of the epoxy products that we had before.
We have now a mixture of this kind of revolutionary products with our epoxy products, and that's giving us a big, big growth opportunity. We see the growth already in 2019 going forward. If you can imagine all the opportunities here together are looking at very favorable CAGRs going forward. Another part Thierry already mentioned, one third of the portfolio is being described in this segment. We've already discussed before the break, a 50% improved portfolio. This is one third of the business growth scenario, let's say segment part. Aerospace already for a long time a growth driver for AkzoNobel. Last year that was accelerated by the acquisition of Mapaero. Here indeed a lot of things came together.
First of all, the industry itself is growing fast, 3%-4% a year. Sometimes in some years there are big peaks of hundreds of planes coming from the production belt into the market. There's a strong drive for the growth of the fleet of new planes in the world. Of course, when you are the number one in exterior coatings, that's a very good position to be in. We have extremely strong key account management. We are with Airbus and Boeing of course. That's not the only thing because also eight of the 10 world's top 10 airlines are using AkzoNobel. That was not the case five, six years ago. Based on our leading position in technology with a simpler system, lesser codes for the customers, one by one leading airlines are choosing AkzoNobel products.
Of course you can imagine in a world where marketing and styling is more and more important, these airlines are changing their layout and their styling faster than in the past. Maybe you recognize when you fly more color being used on their tails of the airplanes. More complex color compositions. All these things are being extremely important for us because you can imagine how more complex, how faster the maintenance cycle and new styling, the better for AkzoNobel being the number one also in maintenance. Then Mapaero. Mapaero was an acquisition we did last year and that is really one of these jewels that you can have because it strengthens your number one position in sales and revenue, which is really nice in this very profitable segment, but it also adds to technology. You have all the good things coming together.
AkzoNobel very strong in exterior coatings, cabin coatings, exterior cabin. You have Mapaero, very strong and approved technology in interior cabin. These things coming together to our customers, where Mapaero is living, let's say next door to Airbus in France. You can imagine how the strength of our position now in aerospace coatings with a kind of guaranteed growth in this industry for many years to come. Yacht. Not a huge segment, but I still want to mention yacht. Because maybe you don't know, but with the AWLGRIP brand we have absolute reference in-house together with the International brand in yacht coatings. AWLGRIP is a top coat and everybody who has a yacht or a small yacht talks about AWLGRIP.
Everybody wants to have an AWLGRIP top coat because it's by far the best top coat in the world and the appearance of it is amazing. We have a number one position. It's a EUR 400 million market, and we have a very big share in this market. We have a professional segment, a retail, and a yacht business. Within all segments, we are leading. Last year, we had a fantastic innovation in the yacht business with a sprayable filler, and that's a breakthrough technology again. The filler technology is important for the people who produce the yachts, because that's really the preparation for a fantastic top coat. That breakthrough will give us a lot of conversion into the top coat as well, and will further increase our sales going forward. This is a very nice business, because it's not so much linked to the economy.
Super yachts are being sold in bad times and in good times. The rich are getting richer, and they buy bigger and bigger yachts. If your neighbor has 100-meter yacht, you need a 110-meter yacht. Otherwise, you are not part of the boys club anymore, and that's really what happens. If you have one 110-meter yacht and your neighbor has two, you have a big problem. You have to have three. If you only have a super yacht in the Mediterranean, you also need one in the Caribbean, because otherwise you have to fly all the time. That is what's happening. There is a kind of natural growth of the super yacht business. Also the smaller yacht business is growing with a very nice stable growth rate. I just wanted to mention that one to you. We have a fantastic position.
Nobody can touch our number one position with International AWLGRIP. This is a clear growth area for us as well. That was a little bit of a summary of growth opportunities. I hope convince you that we have a kind of market trend positive to us in these segments, but also based on our position and innovation agenda, we will grow in these segments. Talking about innovation, here you see the base of our innovation, the base organization, as I call it, with 3,000 scientists around the world. That's a huge group of highly educated people supporting our customers, the customer support group, but also product development. These guys produce the day-to-day new innovation, new products for our customers. Last year we did a breakthrough, or two years ago already, we did a breakthrough change in that organization, which is really helpful going forward.
We split the R&D organization in two big groups, one product development and customer support, and one technology group. That sounds maybe not so revolutionary for you guys, but that makes a big difference because the long-term strategic scientists, the people who really go for breakthrough innovation, are 200 scientists, and they're part of this technology group. That's also a bit teeing up to the next slides, where we are now able to say, let's open up technology and innovation within AkzoNobel, and that's really new. I have to say, in the past, AkzoNobel was very closed with regard to innovation. Maybe for good reasons, people were always very afraid to talk about the latest technology with outsiders. We are changing that a little bit.
Not that we are now throwing away all the patents we have to everybody who wants to know it, we need to accelerate. We need to have faster innovation in the segments I just described. We need to support our brands with faster and bigger innovation. I'm really happy with the Paint the Future initiative. An evidence of opening up to startups in this case to come up with new, innovative, strong ideas, big ideas that AkzoNobel can support and maybe roll out faster than these small startups all over the world. Last year, we started this initiative. I think it was a huge success and much bigger than we expected, because we didn't know what to expect. How many startups are, let's say, attending or will follow the initiative? Well, many did.
It was a huge success with many good ideas, and we're now looking at all these ideas to see what we can do with that going forward. Based on that, we now also introduced our suppliers to this project. Also with them, of course, there is a huge reservoir of technology to share, and we want to share and we want to innovate, and we want to bring AkzoNobel forward as the key partner to work with for innovation going further. It's not an easy trend, of course, because after many years of keeping everything close to our chest, we also have to convince people to play along with us. I think we made a strong move last year, and this will give a lot of opportunities going forward. I'm happy to say that in South America, they're following up the regional startup now this year.
This will be more and more kind of global approach to involve startups, suppliers, universities into the innovation agenda of AkzoNobel. I want to finalize my presentation with that, with a short video of our Chief Technology Officer, Klaas Kruithof, getting you a bit more enthusiastic for this Paint the Future initiative. Thank you.
The world of paints and coatings is resourceful and dynamic. So are we. Our products can already clean the air, withstand extreme heat, and even reduce fuel consumption. Now we're going even further by stirring things up. AkzoNobel is building a launchpad for innovation in paints and coatings. We're creating a global ecosystem where startups are partners, and knowledge and resources are shared. We're exploring new frontiers to accelerate the development of breakthrough innovations. Paint the Future is the first step in bringing innovators and visionaries together. By combining our expertise, we can revolutionize the world for the better.
Thank you. Thank you, Ruud, and also Klaas Kruithof, Creative Chief Technology Officer, for this great video. I'm myself, David Prinselaar. I'm Chief Supply Chain Officer for AkzoNobel. I've been with Akzo for four years. I am a paint nerd. However, I don't have the same emotions as Thierry when I see some paint dry, but I am a paint nerd. In the next couple of slides, I will take you through some of the key changes that we are driving to create a customer-centric supply chain. However, before I do that, just an overview of what is integrated supply chain. Well, it is 13,500 employees operating over 125 factories in 47 countries and in all continents. Truly a global operation. We have 365 warehouses delivering to more than 100 countries. Investment ratio per year is about 2.5% of net revenue, about EUR 250 million.
The cost that is managed, which means the manufacturing cost and the distribution cost, is about EUR 1.5 billion per year. In terms of 2023 ambitions, we have a couple. The first one is to remain the reference from a safety point of view. The proof point is clearly our statistics as we have them, but it's really to stay at this reference level. The second is to become top quartile from a service point of view while reducing inventory. Service, from my point of view, means quality, lead time, competitive lead time, like we saw for powder, and on-time in-full delivery. This is what I mean by service. The third item is to continue a trajectory of year-on-year cost productivity improvements. We have had a very successful run rate, and the idea is to continue at a 4% year-on-year productivity improvement, cost productivity improvement.
The final one is, as in all functions, is to create an environment where all our employees feel engaged and feel that they can develop themselves in the company. A proof point was the recognition that we just received being top employer in five key countries, including in China, where we've had this recognition for the last seven years. In the last couple of years, we have functionalized integrated supply chains. That means that we have one integrated supply chain serving the eight businesses. Moving from eight different integrated supply chain into one, but serving the eight businesses. That delivered a couple of benefits. First, we've managed to functionalize and to really create some capabilities within the supply chain function. The second was the ability to create synergies at local and regional level.
For example, now about 40% of the factories actually deliver to more than one business. Before we had one factory delivering to one business unit only. Now we have 40% of our factories delivering to more than one business. A big transformation in terms of portfolio of products. Therefore, the focus for the last couple of years was really the organization transformation. That means creating the capabilities, but also we regionalized the organization. We organized the manufacturing and the supply chain function, and also created quite a lot of synergies by delayering two levels with an integrated supply chain. A major transformation here. The second was ALPS, and ALPS is a continuous improvement methodology that we have in AkzoNobel.
ALPS stands for AkzoNobel Leading Performance System, that has been delivering significant results in the last couple of years, and I will be showing that this continues forwards. The final is integrated business planning. This is the process to ensure that all the different functions are coordinated and synchronized towards the targets. It's really an extension of the S&OP process, but really ensuring that all functions are working and synchronizing themselves towards the same targets. 2020 and beyond, we are focusing on reinventing our supply chain to ensure that it becomes customer driven and a competitive advantage to the businesses we serve. Okay? This is a bit of a shift and an evolution from where we were. What it means, it means end-to-end customer service.
That means that all supply chain functions have a role to play in customer service, in supporting the businesses we serve. The second is that the asset network that we are driving will be organized around archetypes, and I will give a bit more details of what it means, the different archetypes. The third item is to expand ALPS. We've been very strong in implementing ALPS in the manufacturing area. The idea is really to move it and expand it to the other functions. If I drill a bit more into ALPS, to make it very simple, ALPS is a continuous improvement tool. It contains a number of processes that you implement and a number of capabilities that you build. To keep it simple, for example, any factory, when you implement ALPS, you have suddenly the whole organization that uses this methodology to drive the targets.
Instead of having maybe one continuous improvement manager and maybe one or two initiatives driving an improvement, you suddenly have the whole organization within the remit and the influence that can help drive a target. It is extremely powerful. If we look where we've implemented ALPS, I'll start with the center, so make, which is inside the factory, so making. All our factories, except the latest acquisition, have already deployed the ALPS processes. However, they do have a different level of maturity. Two examples I would like to share with you. The first one is on the top right, which is waste, which is an important resource productivity indicator for us, which also drives significant benefits, financial benefit. You can see a reduction year-over-year on the waste produced per ton produced. The second one, it's around the cost productivity improvement.
Here we compare the sites that have the highest level of maturity to the average. You can see that once you have a site which really has achieved a certain level of maturity, you really see a step change in the productivity that you gain. Again, through the fact that suddenly you have the whole organization that is helping drive the improvements. That is for make. Now if I look into plan, planning functions, here we have already implemented 35% of the processes in the different planning hubs, and we've already seen some significant benefit. Maybe one example that I could share is in Deco EMEA, where we've seen the OTIF performance increase by 100 basis points from a level which was already relatively high. That enables us to support the business in its growth. Third item is deliver.
This is really warehousing and distribution, and here we have already implemented 35%, but with the ambition to increase to 100% in the next couple of years. The reinvention of supply chain, we're moving from having one footprint, which is designed by the business unit lens only, to archetypes. The idea is really to move it, understand the customer demand, and link the supply chain, or the best supply chain, by archetypes. That created quite a lot of opportunities, and if we look on the top left, the number of the EBIT per site. Currently, you can see that we are performing at EUR 7.8 million or EUR 8 million per site. It is our ambition to increase it further, to increase it to about EUR 10 million.
The idea is through productivity, through making sure that we are locating the best product in the best plant, helping the business in the growth strategy, and then also to some extent, reduce our network when it's necessary. Ruud gave a couple of examples where we have made some changes in the supply or in the demand. Of course, there we take some actions from a footprint point of view. If we look at the number of warehouses, you can see also a reduction here. In the last couple of years, we've reduced by about 100 warehouses our network. The idea is to continue this trajectory and continue consolidating the warehouse as well. Now, if I move to the archetypes, and maybe the best way is to explain them one by one.
The first archetype, again, it's driven by the customer demand from today, also the future expectation on the customer demand, understand where they best fit. Simple and efficient. You have to think that this would be the supply chain where we are making to stock, so it's make to stock items. It's predictable. It's high volume. We can anticipate. The change will not happen dramatically quickly. There is relatively long time in terms of building capacity. This would be about 50% of our total volume. Here, what we want is highly automated supply chain, very fast, very competitive, big volume, big batch, highly automated. We could imagine also a situation where you have a suppliers managing all the inventory coming in. This is big volumes, moving very fast. If we go into agile and adaptive, this is a bit the other extreme.
This would be the extreme where we need to be extremely competitive from a lead time point of view. We've had some examples where being extremely competitive from a lead time point of view really gave us some competitive advantage. Powder with the rapid service unit, also aerospace and the repair. We get an order. In some instance, we need to ship the next day. You want to be extremely fast and agile. We need to create a supply chain that is agile by design. In the middle is where we have managed complexity. This is the supply chain where we allow as much complexity as we want, but within a certain framework. Within this certain framework, we allow whatever complexity that we want.
The complexity is designed and organized so that it's very efficient and very effective from a production point of view, however, as long as we stay within this framework. Again, from the customer demand, we allocate them to the three different types of archetypes. From an investment point of view, as I mentioned, we invest about EUR 250 million. The idea is that our investment strategy follow the mandates that Ruud shared. For each performance sales, we have a very clear mandate, and through there we decide what kind of investments we are willing to make and archetypes. Here you can see we have a differentiated approach to our investment. We allocate a disproportionate amount of investments on the invest side. That would be about 30% of our network where we want to grow.
It's an allocation, or allow the allocation of budget to where we have the biggest return. Couple of examples of investments, I'll start with the plan. Advanced planning system. This is a new technology or new tools that enables you to plan end-to-end your entire supply chain. It's called the advanced planning system. What it means is that you are, with one system, able to completely manage and plan your whole supply chain. The second example I would like to make is maybe in deliver, in the warehouse and transportation. We have invested with leading 4PL companies into a digital transport management system.
That tools enable us, at any given time, to understand exactly what is the cost to serve to a specific customer, which means that we are able to understand whether that is the right cost that we want to do with this customer or not. About 45% of all our freight cost goes through this 4PL platform as of now. That's also quite an advanced system. Finally, in terms of make, this is where we invest into a site. This is where goes majority of our investments. Clearly this is where we would be doing the footprint, the automation investments, but also more digital tools like the performance portals. Those are portals that we have started implementing in our sites, which enables you to understand exactly at what level a site is operating at.
I have a small video that I would like to show on the performance portal.
In our site in Como, in Italy, we have deployed an industrial Internet of Things solution, which is already generating productivity savings after one year. This is only the starting point.
It was a good installation because we had the possibility to check in real time the performance of the plant. In the past, we were in control one day after. Now we are in control every second.
In the very first moment, most of the operators were scared about this technology and this change in the mindset and the way of working. Now almost all of them get used on the system, find new solution and proposals improvement on the system.
We will be having those performance portals in all our invest sites. Clearly this will continue and help us deliver more productivity. Now if I move to the procurement organization, again, major transformation from an organization point of view, where we've moved from having an organization, a procurement which was linked to BU, to having a category-based procurement organization. Instead of leveraging the different bits and pieces within the different businesses, now we are really leveraging the total spend from a category across AkzoNobel. Okay, so quite a significant change. However, unfortunately, we still have quite some complexity in our network. We still work with more than 4,000 suppliers, and we still have 12,000 raw materials. That is actually extremely high cost to manage. Clearly there is some action plan to move from mono sourcing to dual sourcing.
We have created a transformation, which is what we call Value Engineering 2.0, which is a transformation engine to decomplexify all our sourcing network. It's working with two areas, or in two areas. The first one is a raw material slate or pallet of raw materials. The idea is out of a set of materials which are predefined, all the new formulation should go and fit and use this pallet of formula. When you do product transfer from sites between sites to follow the archetypes, you don't create new raw materials. Actually, you try to leverage the existing raw materials. The second is the supply management and simplification of supply chain.
Clearly we will get some benefits also not only from a procurement leverage by simplification, but clearly we will also see in the sites some optimization due to the fact that we have much less complexity. Two examples I would like to share. The first one is TiO2 rationalization in China, where per site we have reduced the number of different SKUs from TiO2 by 20%. Again, this delivers significant savings from a procurement point of view, but also from a site point of view, you are able to really manage in a much simpler way and much more optimized. Finally there's also some inventory benefits because you can work with less inventory. The second item, which is on the way but has already started, is the latex simplification in Europe. We have 120 different categories, and the idea is to move to 50 grades.
Delivering significant procurement leverage, but also some efficiencies in the manufacturing area. That is all for me, and I leave the floor to Maarten.
Thank you, David. I must say, it's always great to listen to David and to hear what kind of opportunities we still have in the integrated supply chain from a productivity and cost perspective, but also from a working cap perspective. Thanks, David, for your introduction. What I want to do now is talk about our roadmap in terms of our ERP and applications rationalization, our end-to-end processes, and of course, capital allocation. Let's start first with IT and our initiatives we have in IT to basically de-complex a landscape where we're coming from to simplify it, take cost out, and basically help to enable the business much better. We talked a little bit about the ERP landscape. In fact, we're coming, you know that we're coming from 43 ERP systems.
In fact, as we went along, we have added a few with some of the bolt-on acquisitions, but we will land by the end of 2020 at 29 ERP instances and have 65% of our revenue on one ERP system. As next steps, we move to really one ERP system for the global paints and coatings business by end of 2023. While we do that, we also implement new technology, basically the S/4HANA technology, that at the same time, at the end of 2023, we run our ERP system on the latest technology, which is basically S/4HANA. Similarly to our application landscape, where we're coming from more than 1,000 applications, we are having a program to drastically rationalize our applications, ultimately to 350 applications by the end of 2023. That will help, again, to take complexity out and to take cost out.
An example is, for instance, our rollout of our one CRM system, to enable each organization to basically run on one platform, one process, and with better master data. Another example is, as we speak, the rollout of SuccessFactors for our HR suite. On the IT infrastructure side of the house, similar programs, but then for the workplace and for the network and connectivity. As we speak, we are moving to a completely standard workplace for the total company based on the latest technology. Again, this is implementing standards, taking complexity out, and driving costs down. Similarly for our networks. In fact, there are quite a number of sites, roughly 20 sites, which have still very old legacy networks. Here we make a step to implement basically the latest technology from a connectivity perspective.
If you do that, you do it always against the latest standards and at lower cost. That will help initiatives like digital manufacturing, where David was just talking about, or digital innovation, digital color initiatives, where Ruud was talking about, or other Internet of Things kind of capabilities which we need in the future in the company. Last but not least, important to mention is, of course, our cybersecurity and our resilience in this space. What we do in parallel, we are rolling out our cybersecurity operations center. That is happening basically this year. Ultimately, we need to make sure that cybersecurity is completely embedded in the design of our total landscape, our total IT landscape. That is another core priority, and I think you all know that this is important to manage the risk in the company.
Moving now to end-to-end processes. I talked about the global business services platform already earlier. Maybe it's still good to mention that by the end of 2017, we were at 350 people in GBS. By the end of 2020, we will be at 2,600 people in our global business services. That is our own employees, also our partners. Basically, we run that partly captive and partly outsourced also to have a right tension model in place where, of course, some of the services, which specifically the added value services, we keep in our captive centers. As you know, we first lift and shift. We move and consolidate everything in our GBS platform. The next step beyond 2020 is really to vigorously standardize our processes, drive automation, and therefore drive productivity.
It is not a surprise that when you do that, you can realize at least a productivity level of 7%-10%. That gives also much better transparency, drives standard processes, but also improved master data. As we go beyond 2020, we will further expand the scope of Global Business Services in order processes like, for instance, order-to-cash or plan-and-deliver. There is still ample scope to further expand our Global Business Services platform. Cash. I talked about it earlier. Post the settlement of our pension fund, we are really stepping up our cash generation, and we are becoming very cash generative. You see that here in the slide. If you look at 2019 and you take our free cash flow excluding the pension top-ups, you see a free cash flow of EUR 461 million, which basically represents a 5% free cash flow yield.
Going forward with, of course, further improving our profitability with minimal further pension top-ups, with further opportunities to improve our working capital with the notion, by the way, that our working capital, if we compare it to our peers, is already pretty good. With the assumption, as was mentioned earlier, of a 2.5% CapEx over revenue, we will see a further step up of our cash generation, free cash flow generation going forward. Dividend. Our dividend policy remains a stable to rising dividend per share. You've seen yesterday, we announced the final dividend for 2019. It's another step up from EUR 180 to EUR 190, so a 5.6% increase in our dividend.
In fact, if I look at our dividend and we look at the payout ratio and also at the dividend yield, and we compare it to our peers in the industry, we basically stack up pretty well there. If you look at the other side of the slide at the adjusted earnings per share, we've seen quite an increase in the adjusted earnings per share of 62% in 2019. Of course, also on the back of the capital consolidation as also on the back of the share buybacks. You see in the share count, we are sitting now with a share count which is just below the 200 million shares. M&A. You heard Ruud talking about our strategic mandates. You heard Ruud and also Thierry talking about our portfolio and our 144 performance cells.
Basically, the portfolio and 144 performance cells are the starting point for our M&A analysis, where we really take that portfolio and we look what are the white spaces from a geography perspective, from a segment perspective, from a technology perspective, from an innovation perspective, and where do we see opportunities to further enhance our portfolio and to, of course, extract synergies. We do that in a very disciplined way, and you heard also Ruud earlier talking about the M&A team we put in place since the last two years. We do this in a very disciplined way, where we look at the cultural fit, we look at the ability to execute, we look at, of course, the regulatory side of things.
Of course, and it's a very important aspect in this industry, the availability of the target, because as we speak, a target like Mapaero was already long on our radar screen. Something needs to happen in these privately owned companies to be able to act on our side as well. Of course, this all goes with high financial discipline because this is all about value creation for the company, where obviously we look at the obvious financial metrics like the multiple, like the IRR, and like the ROS accretion after synergies, obviously. That brings me to our overall capital allocation priorities beyond 2020, which of course starts with our profitable organic growth and the earlier mentioned CapEx of roughly 2.5% of revenues. Of course, the dividends, stable to rising dividend per share.
The acquisitions, as we just earlier mentioned, which need to be strategically aligned and value creative. Shareholder returns, share buyback in a modular fashion, again, making sure that we have the flexibility depending also on timing of M&A. That all in the context of a leverage ratio of between 1x and 2x. That all in the context of maintaining a strong investment grade credit rating. With that, I'm handing over back to Thierry.
Well, thank you. I have the pleasure to kind of wrap it up. We were hesitating should we have People. Planet. Paint. first or last, but we decided to end with a bang. Go with the People. Planet. Paint. at the end, and then some concluding remarks. In all the changes and all the transformation that's going on in the company and will be going on in the next couple of years, there's a couple of things we do not want to change, and those are, of course, the core values of the company. They served us pretty well since 1792, so we didn't necessarily felt an urge to change those in those transformation. Again, in the whole context of being a decentralized organization, the way that sustainability was filled in was quite different from side to side.
When we talk about sustainability, we talk about the environmental, but also the social impact, what’s happening with people, what we do in the communities we operated in. Also there, we did a whole inventory on what we’re doing, and we basically rebranded it, put it in one package, which is called People. Planet. Paint. A little bit in line with what we showed around the operational approach in the company, we want to make sure, and I think we all share in the group the same allergy for all sorts of hollow talk that doesn’t really come to any fruition. We really kind of put a pause button in for a moment to really go back and said, "Where is there a real impact in our portfolio?" I’m going to walk you through each of the three elements.
An important thing for us is that the whole drive for more ESG as an important factor for the future of a company is applauded by us. In fact, it brings the market to where AkzoNobel has been already. We see the whole ESG sustainability not as a break on our success, but actually as an enabler. It's not getting to delivering performance despite ESG, it is because of ESG. Let me give one example. On the people side, it's both internally and externally. The chart focuses more on the internal part, and I'll go back to that. In fact, externally, we had a number of programs where we were engaging with the communities around our plants and around the sites we have around the world to basically streamline that, and we actually are very active.
Between 2017 and 2019, and that will go on, we had more than 600 projects in 120 countries, and they were touching, in fact, the lives of more than 20 million people. That's going to go on. It has a lot of benefits. It's our teams who really use our products in the community to embellish, be it orphanages, schools, et cetera. It has a couple of benefits. A, it's the right thing to do. Secondly, it makes our people use our paint, which is extremely instructive when we say it's easy to apply. It becomes a very subjective measure and it always helps with the input for tailoring our products. Three, it is also, of course, doing good, but having great team building for our teams.
As I alluded to before the break, the transformation and the ongoing changes in the company, of course, you can't forget the employees. These are the ones who really do it. It's our AkzoNobel team who has to implement all these brilliant ideas that we basically come up with. In that whole transformation, we've been quarterly managing and measuring the organizational health. We did it pretty rigorously. It's a quarterly assessment that goes to all of the employees, including operators who don't have a laptop. It's actually pretty broad. We get about a 65%-70% participation rate, which is not easy if you do it every quarter to every person around the planet. What we see there is that our organizational health is trending significantly up over the last, I would say the last year, 18 months, it's trending up significantly.
The engagement in our company is very high. In fact, if you go at the, what I would say, the broader executive group, which is 300+ people, the engagement and the scores, in fact, are very high. We are, the technical term, we are the second quartile, and we are, in fact, above what is the leadership benchmark for the companies, the thousands of companies that have been measured over the years. It's a significant enabler for what we want to do. David already alluded on that. We're extremely proud that we got accreditation as being a Top Employer in five of our key markets, some of them for many years already. China is one of them, but also now Brazil, the Netherlands, the U.K., and the U.S., we got a Top Employer award. You see some other of the awards we have.
The nice thing of being one focused paints and coatings company and talking about winning together is that we have one team. In fact, with a little bit improvised for this meeting, we got this morning a video and it shows you a bit of an example from our Chinese team. It is, in fact, a video that was made by our Chengdu team in China that a lot of them are still from home office because of what's happening with the coronavirus, but spontaneously made a video for their colleagues in Wuhan. We thought it was actually nice to give you a bit of the vibe on the very vibrant internal social media in the company. Maybe we can take a quick look at it.
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Besides the rightful question, what are our Chinese colleagues doing in their home office? Also the fact that we in Amsterdam could never get so coordinated as our Chinese colleagues do it. It is maybe a little touchy example of how people really connect on this topic. A big shout-out for our Chengdu team for doing that. On Planet. As I said before, we get a skin rash, and I get a skin rash, when I hear other colleagues of ours outside of the company make bold statements about 2050. Frankly, I'm willing to make any promise around what we're going to deliver in 2050, because I'll probably be sitting in a retirement home, not even remembering my own name by that time, so what do I care? We thought, this is actually not very serious.
We actually went it down to very serious and actually challenging ambitions for 2025, the year that we're probably still going to be around in the company, and that you guys can ask us questions afterwards. These are our ambitions for 2025, and in our style, they're extremely quantifiable. We want to go to a 25% reduction in carbon emissions, and that's the baseline 2018, not a baseline very far away. How are we going to do that? Some examples. Our Dutch sales team, about 100 people, they all switched to electrical cars. It's a nice way of doing good and also doing something good for the bottom line. The leasing rates for electrical cars is, in fact, lower. You got a higher grade car, electrical, good for the planet, good for our bottom line. That's what we implemented.
The second thing we did, and this goes to the renewable energy, we want to be over 50% renewable energy around the planet. To certain countries like Belgium, the Netherlands, Spain, we are already at 100% renewable energy that we use, but we're installing at relatively fast speed also solar panels. What did we do? Well, frankly, the investment hurdles that were in place in the company to install solar energy were so prohibitive that we might as well have sent out the edict not to install solar energy. We really went to a situation where as long as the amortization is lower than what you save in energy cost, that frankly, you can go ahead. You see in David's team, there's a quick ramp-up of solar energy, which is a nice way of offsetting ever-increasing electrical energy costs around the globe. Water usage, 50%.
Of all the water that we use, we want in 2025 to reuse 50%. That's already happening to quite an extent, but 50% water usage is way out there when we compare it to any of our competitors. Otherwise, 75% reusable waste. It's a significant reduction from where we are already. These are really beneficial, and I go back on the resource productivity. I remember as a small boy, joining my mother and father, visiting a sister of my grandfather. She was single, and I understood very well why. She was nasty. She was stingy. Now I would not say that she was stingy. She was actually resource productive. Being good for the planet, because her footprint was probably very low, was also an enabler for the inheritance she left for the rest of the family afterwards.
That's basically the same style we want to approach. It's really a competitive advantage for us. What can we do with paint? That's actually pretty important. Our whole product portfolio gets reviewed on a quarterly basis around where are we offering a sustainable solution, very clear definition around sustainable solution. That means there has to be no one better in the market, so we are at par with the best environmental offerings out there in the market. You'll see that's about 40% of our total portfolio is in that category. As a subcategory, there is, in fact, the eco premium products. There's a pretty stringent internal test whether our solution is, in fact, offering more environment or less footprint or more environmental demonstrable benefits that's out there in the market.
A couple of the elements I think Ruud touched upon, Interpon Low-E, a powder coating that uses much less energy to apply. It gives an immediate benefit for our customers and definitely an immediate benefit versus anything that's out there from our competition. We launched about a month ago, Dulux Trade Evolve, which is a high-end product that actually contains 35% recycled paint. That's kind of a first in the market, not just to recycle as a B product, but really as a top end of the market. It is for us very important, and you will see that also in our annual report, we really are the first in our industry to go to an audited report on environmental footprint. We take it very serious.
I think, as I said, we get a skin rash from people who come up with claims that are frankly not there or are only going to come to fruition much later on. The whole ESG trend, we were there, and it actually brings the market to us, which is pretty exciting. As a closing comment before we go to the Q&A. Before the break, we talked about the 2017- 2020 period. Basically, the whole construction, ripping out the walls, getting the wiring done, the plumbing, and everything at the same time. Bit stressful, but frankly, we're pretty happy on where we are and how that actually creates and enables us to deliver 15 by 20, which was always about the future. As we get into the 2020 delivery, the question is what's happening in the next year.
Hopefully, we've been able to demonstrate to you that we have tangible markets, about a third of the portfolio, where we see the growth not only as a hope, but happening in the market. That's why we feel pretty comfortable on the claims we made around the targets for growth for the future. Secondly, that we want to continue to deliver. More specifically, if you go to the targets that Maarten just showed, if we look at our portfolio, we look at the market trends, we look at what's happened in the past three years in those segments and what the dynamic is going to be for the future, we definitely feel that we are comfortable talking about a revenue growth that is market growth plus in the three years that we talk about.
Secondly, when we talk about return on sales, in the same philosophy of sticking to our promises, we feel very comfortable to talk about a 50 basis points CAGR in that period, growth of our return on sales. That would be 150 basis points over three years. For those of you who might be mathematically challenged, that's basically what we want to achieve. The planning assumption, as I said before, yes, you have the currencies. You see the whole list of what's next to that and the other parameters for that. Again, this is all in the assumption. It's organic growth. It is bolt-on acquisitions and tuck-ins as we have been doing in the past.
Again, if there would be larger opportunities somewhere down the line for an M&A opportunity, as Maarten indicated to you, it is very clear that we want to stick to having the best scenario when these things come up. I think we showed that discipline already in some of the recent dossiers that came to our desks. With that, I would like to show a little video and then basically have the colleagues on stage for talking about the Q&As. Thank you.
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That was quite quick. It says behind the curtains, but there were no curtains. When we go to the Q&A, there's going to be two microphones. That might be a little bit silly because we're sitting relatively close together, but since it's a webcast, if you really ask your world-class question and nobody hears it's kind of a waste of time for everybody. If you have a question, please just put your finger up, say your name, and then fire away.
Hi, Gunther Zechmann from Bernstein. Thanks for taking my questions. I know this is more strategic, but just to tick off one question on Q4 around the cost savings was just EUR 10 million in a quarter, quite a bit below the run rate, if you could give some color why that is.
Yep.
Yeah.
All right. Let me kick that off, and then Maarten, as always, is going to give much more gruesome detail to that. That's also good. If you look at the fourth quarter, there was two key elements on that. We feel we're pretty much on track, by the way. I've been saying a couple of times, this is not exactly going to be linear given all the stuff we do. Maarten has already alluded that what I would call the mother of all ERP introductions we had to do this quarter. There's going to be a couple of fathers, et cetera, in the year to come. That obviously was a cost that we knew was going to come in the fourth quarter.
Secondly, when we look at our restructuring, that was on track, but a lot of the right sizing of organizations happened at the end of the year, and that's typically a phenomenon. It was more on the 31st of December than actually on average within the quarter. That's why there was a slight delay on that. I don't know, Maarten, if you want to...
Yeah, these are the two elements, basically, the ERP introduction. In fact, in Q4, the biggest and also the most complex ERP integrations were done in the fourth quarter, and particularly the one in Europe on the 1st of December, which basically created extra costs from an IT program perspective, but also on the business side. Indeed, the phasing of some of the reductions which were phased more towards the end of the quarter. Indeed, these are not fully linear, but we feel very comfortable where we are in terms of executing the programs and delivering on the total EUR 200 million.
Thanks. If I can follow up with a second question on the new targets, please. Can you just clarify what your planning assumptions are around market growth and how much out-growth you're budgeting? There's a lot of operating leverage in the business to get to an absolute margin improvement target from a relative market out-growth target.
Yep. Good question, Gunther. There are all sorts of breadcrumbs in the booklet that you received for the presentation. If you look at Ruud's charts that actually show the market segments, how the market is constructed, there is a column that shows the market growth. Not our segments, but the market growth. You can probably pretty triangulate on what our assumptions are, the market growth. We do not necessarily expect the market to start growing significantly. Of course, you have some of the dynamics that are happening, like the automotive industry had a serious correction. We kind of assume that it's going to stay more or less at that level so that it's not going to deteriorate further, but we don't expect it to perk up, by the way.
Because that's been hampering, as Ruud has indicated, some of the underlying growth has been hampered by some of the corrections in those markets. In our numbers, for market growth, we do not necessarily expect a significant step-up. Now, that might happen, by the way, but that's not what we expect in our planning assumptions. Does that answer your question or? Yep.
Maybe how much do you expect to outgrow the market?
Well, the question is, how much are we going to outgrow the market? That's the plus. I don't say this to be funny, but the one element here, I think, and that comes back on the keeping the promises. We feel with our portfolio, we can outgrow the market because we did all the corrections, the value over volume in the past year. That's why we feel pretty confident we can outgrow the market. I think what we wanted to be sure is that this is not a revolutionary, but it's an evolutionary situation. In fact, it's going to be growing and delivering.
For us to grow faster than the market is not a big problem. As Ruud indicated, if you look at the market of China, that probably happened over too many years too long, and then having a portfolio which is frankly, qualitatively, is not what we should have. That's why we stayed away from giving exact numbers, because that would be slightly just putting stuff out there that depending on where the markets go, there would be a give and take on the bottom line. That's why we didn't want to be more descriptive on it.
Hi.
Yeah .
Hi. Mubasher Chaudhry from Citi. Just a couple of questions, please. Could you give some color behind that margin management portion in the bridge? Does that bake in raw material tailwinds in that? The second question is around the switch from an absolute margin, a Return on Sales target from 15 by 20 to a relative target of more than 50 basis points per year. Any reason for why that switch or not just go for 16.5% by 2023?
Do you want to do the margin management, I'll maybe answer on the 50 basis points
Yeah. On the margin management and the margin in the bridge for 2020, there are a couple of elements to take into account. First of all, as we have mentioned, we're still deploying price increases in the first quarter of roughly 1%-2%, but it depends also on the different segments and the different businesses. That's one. Secondly, there is also, of course, a mix element in there as well. From a raw material perspective, just to reiterate the assumption. The assumption is basically that raw material stay as it is today, which means that, for the first half, we will see a moderately favorable environment, given the fact that there was still the first half of last year, there was still a run up of raw material. That will be a favorable environment for us in the first half of the year.
For the second half of this year, we will see how this will pan out. On top of that, of course, we have our internal initiatives like for instance, some of the Value Engineering initiatives. It's a number of elements play a role, but why do we speak about margin management? Just to make sure that in case raw material goes down at a certain moment, that we also make sure that with the businesses, that we manage the margin in a proper way.
It may actually be that in the future, there may be segments if the raw materials significantly drop. With a sophisticated customer, you can't basically keep expanding that. It might be that we actually lower prices, but the whole idea is to get the spread between the raw material costs and the pricing to keep optimizing that. Secondly, you say, why don't we just go to a percentage? I think we've talked to most of you that the ROS percentage, which is the 4th March we are on since 2017, actually has done wonders to sharpen the spirits on how to get our portfolio cleaned out. It is probably not the smartest percentage metric to run the company longer term.
You start walking away from certain growth projects, you start walking away from stuff that you would say, "This is short-term, a bit diluted, but it's actually good for the long term." In fact, the reason why we made that change is that if we were to go to, all right, let's go to another percentage by 2021 and X% ROS in 2022, we start doing stuff that is not so intelligent for the long term. That's why that gives us a bit more freedom to play with the portfolio without having to walk away from opportunities that might go there. The three years have actually been good because it is short enough not to do damage to the portfolio, and I think we've really been good parenting on what the portfolio is, but you can't do that forever.
Just maybe to add there, we talk about the total adjusted operating income. When we talk about ROS going forward, it's really including, of course, an allocated cost, which was a little bit an heritage from the past. It is really the balancing between growth and adjusted operating income.
Yes. It's Sam Martin with HSBC. Just on Ruud slide 36 on Deco Paint in China. You discuss a lot of the things you're doing to improve the market in terms of the product portfolio, management changes and so on. There is an emphasis on Dulux being a premium brand, obviously, in China. What's been happening that's created the issues to you in that marketplace? Is it that Chinese competition and consumers are still actively pursuing a premium brand, or is there a trading down which you're having to respond to in terms of the marketplace?
Ruud?
Well, as I presented, several things are going on in the Chinese market. I think the Chinese market is getting into a more mature market. In a more mature market, there is more place. Clear segments and customers having clear preferences for specific segments as well. The premium segment in the Chinese market is still growing, and the opportunity for the premium segment is really strong because of the effect that people will have more income.
The mid-income group will be hundreds of millions of people, and that will drive up trading and a better position for premium brands. On the other hand, there's also a clear need for premium or sub-premium brands or mass brands for lower income groups as well. There, the local competitors are doing a better job than in the past. I think it's a natural development that the Chinese market is getting to a mature level more and more. We have all kind of different customers going for specific brands and products.
AkzoNobel is having, with the Dulux brand, a very strong position in premium, super-premium. Also, we have second brands, for let's say, going to the mass market or a little bit below the premium, super-premium. In that sense, nothing special going forward with China. Huge mid-income group developing with, let's say, higher demands regarding brands. I mentioned the sustainability products, but also higher quality color products, special effects and what have you. The market in itself can never be a problem or an issue. The market is huge. There's a fantastic differentiation going on, a lot of purchasing power in the future. It's up to us to make use of that. That was a bit what I tried to do to explain to you guys how we are anticipating on that and how are we getting ready to make use of that development.
Ruud, if I can make one additional comment. I think the fact that the Dulux brand has been growing since the middle of the year quite noticeably is probably also more to do with internal attention to it. I think if you sell huge truckloads of putties and you can sell tanker ships of cheap white paint, that actually has been detracting the sales force to some extent. I think what Ruud was indicating, it's now about Dulux, lo and behold, you see us back growing the high value adding part of the portfolio. I think that's why the changes that Ruud was talking about have been very beneficial in the organization.
It's Laurent Favre from Exane BNP Paribas. I've got one question on each division. On the Deco side, could you give us a little bit of qualitative and quantitative color on A&P spending? Have you been cutting, for instance, on percentage of sales? Have you been cutting A&P as you were focused on margins? As you're now focusing on growth a bit more, should we expect first an upfront investment on A&P before then you get a bit more growth?
Yeah. Let me start and then Ruud can color it in. The answer is actually yes. I mean, the spend on A&P has gone down for two specific reasons. One, procurement. We have now a category manager in line with what Ruud was indicating on getting the global spend. Actually using our procurement power to get our cost down for what we do. That doesn't have any impact in the market. It's just a better sourcing of it. Secondly, as Ruud has shown with advertising, there is much more smart leveraging. Instead of everybody coming, one with the Eiffel Tower and one does it with London and etcetera, as you saw in the video, it's much more pooling so that you have the production cost only once. That has lowered it.
That does not necessarily impact on the visibility or what's happening there in the market. Now, Ruud, you can put some color around the percentage.
Maybe to recalibrate a little bit the numbers. I'm pretty proud if I look at the investment of the last couple of years in A&P in Deco, it's almost stable. It's not that we really cut dramatically in A&P. That's not at all what happened. The numbers will show you that. Indeed, it stabilized, but the working part of the A&P improved, and that's the most important thing, because in the past, we spent a lot of money on producing films, producing A&P material, like color material, for example. Now by working together, we can dramatically decrease the number of production of film and films like I showed you, and color material, for example, and doing things together. There's more material. There's more we can airtime with the same investment, and that's something we clearly saw in 2019 coming through.
It's also very clear that if you want to increase future growth going forward, you need to support the brands. It's also very clear that the world's changing there as well. It's not only television and above the line advertising anymore. Some of our regions are now 100% only in social media, for example. Also there you have to be very agile and flexible on looking at A&P investment. A&P investment is still important to support the brand in Deco.
That's actually a very good point, Ruud. On the social media, actually kind of an unintended consequence of having 15 by 20 and the internal story being exactly the same as the external story is that we didn't have to be policing on who says what to whom. If you look at our Twitter, LinkedIn, et cetera, I don't have exactly the numbers on hand, but it is a multiple of the engagements we had two, three years ago, because frankly, everybody can retweet or everybody can send on social media. In places like Asia, for example, television and other stuff is actually not that impactful. It's frankly the social media that drive it. That's been pretty beneficial for us.
Thank you. My second question was on coatings. Of the four major players there, it seems that everybody has been focusing more on value over volumes. It seems that everybody has been a bit undershooting, I guess, the volumes of the end market. I guess my question for you would be, do you think that we've seen an impact from destocking, or would you say that this has just been pricing elasticity and some of those customers are gone? I know that you guys have also been bottom slicing, but on top of it.
Yeah
Every player seems to be undershooting. Would you expect a bit of restocking, or would you say that this is just the situation as it is today?
Well-
Then you move on with it together with the markets?
Well, Ruud can color in. What you saw is that our volume was, of course, driven by some of the pricing action. I just want to make clear though that it's not as simple as you increase your price by 1% and you lose 1% volume. If you really look at it, there's segments where we put the prices up higher and nothing happened on volume. There's others where it's pretty binary. It is really cutthroat. If you increase a little bit, you lose it. Frankly, we weren't necessarily too emotional because it was the low end of the market. I think the dynamics in the end of the year, I'm not sure if that has to do with pricing because it was across the board. I just think that in the fourth quarter, markets were weak, full stop. I don't know if you want to put?
Yeah. No, not much. Especially December was an industrial, very weak month. Europe had the lowest production rates, I think, ever. We feel that especially in the hardcore industrial markets. I think everybody felt that as the whole quarter, but December was especially weak.
Thank you. As a follow-up, on the question on the slide, I think 33, where we see all the performance lines and how they've performed. Is there anything you can tell us in terms of the, I guess, the bottom quartile, where it seems that you're still undershooting or the difference between that bottom quartile and the average margin is basically as high as it was back in 2017? I'm just wondering, where do you think the, I guess, the upside here and there? Is it net pricing or is it just the cost-cutting that we're about to see in 2020, 2021?
It depends a bit on both. I mean, it can be both depending on the segment that you're in. In fact, when we launched the 15 by 20, I think the marching order was not everybody has to be at 15 because that was going to be pretty undoable for some. It was really everybody has to lift themselves up by six. That was basically the whole item. Some of them, I think, and we kind of had this conversation in our executive committee, some segments that claimed that the Lord had decided that they were never going to get to profitability. Once they saw the exit sign, they were obviously able to do things. That actually has been very beneficial.
Yes, there is still a tail, I think, which remains to be looked at. That can be cost, it can be price. Some of these segments are often with global customers that actually are in a much more attractive segment, and therefore, you have to serve them in other parts of the world. I don't know if you want to say more on that, I mean.
No, I think that's the whole story, Thierry. I think we have to be very dynamic in managing these segments all the time. With the system we have now of this monthly, let's say, rigor of going through all the mandates, we will be very keen, of course, in improving the profitability of these mandates as well. Indeed, it was remarkable how some of these, let's say, change the game mandate segments increased dramatically when we put real focus on it.
Yeah.
Around just the tail end, we are all over that every time we look at it. Is it shape up? Is it other actions that have to be taken?
Thank you very much. Charlie Webb, Morgan Stanley. Maybe just one around capital allocation. Clearly, the discussion's kind of turned a little bit more to how do we grow inorganic opportunities. I'm just wondering how buybacks kind of fits in. Is that something you still have an appetite for doing, looking forward over the next three years? Or should we kind of start to see that more phase out as you kind of take this slightly more proactive approach towards inorganic growth? That's the first question.
Yep. Maarten, you want to handle that?
Yeah. In fact, it is exactly like I said earlier. We are in a place that we have a strong cash generation. We are in a place that we have a very solid balance sheet. We are in a place that we have flexibility and optionality. As I also said, if there is no optionality, so if there isn't a near term, no M&A opportunity, we might elect for a modular share buyback approach. That's basically how we have positioned this, and this is how we go forward. That is also how we have approached it with the announced share buyback at the end of last year, the EUR 500 million , kind of taking it more in a modular approach.
Thank you.
Yeah, if I may make more comments on that. That's going to be part of the future going forward. I mean, it's kind of a luxury situation, but we can't spend it on debt. Actually, we want to get to a leverage that is kind of more realistic leverage, as we've indicated. As the business performs more and as David does his work on the working capital items, et cetera, there's actually more cash available.
Investment-wise, the EUR 250 million that we mentioned is about as much as we would need, and that would be plenty for what we need to do. Either you give it back to shareholders or you do something with. It's not like the M&A pipeline is going to be this fireworks of every month we announce something. Given the hurdles we put, it has to create value. I think it's going to be those instruments are going to continually be part of the proposition, absolutely.
Thank you. Secondly, just around R&D, you put out, obviously, you spent EUR 1.25 billion in R&D over the last five years. Just wondering if you can help us understand the efficiency of that R&D. What kind of top line do you expect that to drive in terms of mix or volumes from that EUR 1.25 billion on a kind of five-year annual kind of view kind of looking forward?
Of course, when you look at R&D, there's a lot of application development, product development, product adjustments. I'm not sure if we can quantify that because that's what the coatings business is about, by the way. If you don't do it, you're not in the business, so it's difficult to quantify that. I think the split we did between the technology group and the, I would call it the R&D, or more close to the business unit, is probably based on the fact we didn't see enough medium, longer term innovation coming out of the pipeline because everybody got sucked into the day-to-day work.
I'm not really sure. It was clear that we weren't getting enough traction out of the big R, the big research part of it, and that's actually why we got on the journey. I think you would agree, Ruud, on coatings, if you don't have that big application product-
Yeah
Color development, you're just not there.
The only thing we do measure is the number of the, let's say, the percentage of revenue that comes from new products.
Yeah.
We trend to be something like 30% of new products introduced over the last three years, which is an indicator that the innovation is pretty successful, yes, for now, and I think that's a good number for AkzoNobel. I agree with Thierry, it's not so black and white. A big part of the investment goes to customer support, and that is extremely important, especially in coatings, going forward, to keep that customer intimacy, and that can be an expensive hobby, of course, but that's why we need, indeed, the value back for that.
It's interesting, probably on just giving a look behind the scenes, is that Ruud and I have every quarter with the, I would call it the R&D leader and the technology leader. We look at our roadmaps, we link it back to the mandates. That's for us a strong belief that if we put our R&D and our technology effort in the growth areas, that obviously is going to make a big difference. We sit with the four of us Ruud, myself, and then the two technology leaders, we sit hours in a room going through the roadmap in detail because it is crucial for the future to stay ahead. We don't think we're behind, on the contrary, but to stay ahead and to fuel the growth engine that we want to be.
Yeah. Hi, it's Chris Counihan from Credit Suisse. The first one I wanted to ask is back on slide 33, whereby there's obviously a tail at the top end as well that's quite favorable. Maybe you could talk about some of those products and talk about the sustainability of the premium margins across the top end. The second one was for David, with regards to utilization rates of factories and warehouses. Could you talk about operating leverage? It's been a pretty low volume growth business for a while, so I imagine it's okay, but could you talk about utilization rates across some of these factories and warehouses and when you might start to top out on that as well?
Chris, on the chart 33, that's the chart because we didn't learn by heart.
That's the rigorous portfolio management chart that you show...
Portfolio.
...the change over the last few years.
Okay. All right. The performance charts. Yeah.
Yeah.
Yep. You want to go there?
I think the advantage of doing it this way, so the rigorous look at all the cells, also make sure that we will have a lot of attention also for the top quartile performance cells. Maybe in the past it was like, "Yeah, these guys are doing a good job anyway, so let them go ahead." That's a huge mistake because especially when you're already doing a good job, probably it's easier to do an even better job than sometimes putting a lot of attention for weaker brothers in the family. That is being taken care from a procedure or a methodology point of view now, because all these cells are now being, let's say, stressed and challenged on their targets, even the high performance.
Normally, we don't discuss in this group, let's say, all the cells in detail because we try to keep that a bit to ourselves. You can imagine if you have high shares in Deco, you probably have high profitability. If you have high shares in, if you're number one in segments in coatings, like we described today, in some of the segments, there will be high profitabilities. I think some of the acquisitions we show today is a proof that we then invest more easy in that segment than in the other segments. Without going into the segments or the cells themselves, yes, a lot of attention for these cells, and if we have M&A opportunities, of course, we are a bit more active then. I think that I can say that, for example, the Mapaero acquisition is clear proof of strength in our position in a well-performing performance cell.
All right. I'll start with the warehouses. Indeed, if we look at the footprint of warehouses, about 50% is outsourced, and here we've managed over the last couple of years to significantly reduce the total number of warehouses. We reduced by about 100. Of course, we did a couple of acquisitions, so that gave back a couple of warehouses. The fact that we have 50%, which is with 3PL, so outsourced, it's actually relatively easier to, let's say, to reduce and to adapt to lower volumes. From a factory point of view, what we've obviously done is to reduce the number of shifts. We cut production as much as we could. In some situations, when it fitted the archetype and it fitted the business mandate, we did reduce some of the sites.
Ruud mentioned, for example, one site in Italy where we reduced the volume in core Europe. That was part of the total program. Okay, it didn't make sense to keep this factory. The time it took to move the remaining volume to the other site. Then we closed the factory. This is something that we do ongoing, and we will obviously continue.
Can I make one additional comment on the acquisitions part? If I look at the end of going back to your question, as Ruud explained, our Deco China business is extremely profitable business. As we were going more for the value and actually kind of healthier base to grow from, one of the tools together was in fact acquiring all the shares of the Chinese joint venture that we had with a partner. Because obviously, the strategy we wanted to follow was not exactly where the silent financial partner was actually wanting to go. That had more to do with size than actually with quality and performance on it. I think that has enabled us very much to implement a strategy we want to implement. There's a number of these acquisitions that I feel pretty good on how we as a team have been looking at.
What do we want to achieve? What's the acquisition? As Ruud explained, it's for synergies, it's for size, or it's just to enable a strategy that we feel we have to follow.
Thanks for the presentations, by the way. It's Andrew Stott, UBS. Couple of things. Start with Deco. I was intrigued by this slide 35, which is very useful. To see Deco paint South America close to the naughty step, was surprising. I always thought this was quite a healthy duopoly, you, BASF, making high return on capital. I've obviously got that completely wrong. Unless there's something else in that picture that I'm missing about how you've positioned Deco in South America.
Yeah.
That's the first question. Maybe linked to that, I don't know, Ruud, I was really interested in your comments about the U.K., where you felt two, three years ago, you were under attack, you turned it around. Is there anything you can take from that and export to China, to Latin America, maybe, in terms of that success? Is the U.K. unique because of Dulux as the scale? Sorry, that's the first question on Deco. I'm still going.
Okay.
The second thing was, Sorry, I'm going to go back to capital allocation. It feels like M&A has been mentioned a lot in the last three hours, and at least 100 times more than the last two years.
Okay.
It feels like the share buyback is a lot more conditional than it was, and yet you said at the beginning of the whole presentation, there's not a lot out there. There's the top three, and then there's a lot of smaller players. Unless Axalta has come back into play, and I thought you always said the price is wrong, and the price hasn't changed in 12 months. I'm sort of struggling to understand that whole equation, that shift in message.
All right. Let me do the second question and then hand it over to Ruud. By the way, there is no naughty section on that. It's all very relative. We're very happy with our Well, not really. Don't underestimate the hyperinflation that those teams have gone through over the last couple of years. Yeah, let's go to the capital allocation, because that came up yesterday, too. Out of five questions we get from an audience like this, four are about M&A. Then, as polite as we are, we answer all four questions, and then we get like, "You talk a lot about M&A." It's like, well, yeah, because you ask a lot of questions M&A. I don't think you have to see a marked difference in our behavior.
The reason why we had the chart in that Maarten showed around the hurdle rate for doing M&A is pretty high. If people are waiting here every month, the fountain of M&A, that is just simply not going to happen. For us, it's really to get the company operating as a real high-performance machine, get it in place so that if we do M&A, we can get the value out of it versus just the size and instant gratification from that. If we at any point here indicated that we are going to be the M&A in all sorts of direction, that is not true. I think as we get more cash generative, as we talked about the leverage, as we talked about, all right, the capital allocation, what we can do. We do get more questions around M&A.
In that sense, I think for us, and I think you said it, and I'll say it one more time for the record, we will only use the money if it is the most value accretive for ourselves and our shareholders. Don't see us here as swarming to conquer the universe. We'd rather have a company that grows organically and with good bolt-ons, by the way, than doing any wild goose chase just to be for a second the largest there. We'd rather be the best than the largest.
Yeah. Maybe to take away a misunderstanding about the South American business, because I don't want to start a new maybe discussion on one of the Deco units. We have a very strong position in Uruguay, Argentina, and Brazil, and some good export positions in the rest of South America. Indeed, no issue about strategic position. The plays in that matrix just had to do indeed with high hyperinflation and some political instability in South America last year. Of course, that gives questions on attractiveness of markets. That was the only reason why we put it over there. We're not unhappy with our performance at all in that part of the world. In a way, we are very proud of the margin management they did in these units to further improve to 15 by 20. That's one. U.K., yeah.
U.K., for a very long time, a very good and profitable, market-leading position, as you know. Also there, to be very transparent and honest, looking at the mandate, also there, with building on the question of the gentleman behind you, we can do more. To be very transparent in the analysis, we saw with Brexit coming up, some lack of consumer confidence in the U.K. We felt it was a very smart move to strengthen our professional or trade position in the U.K. That's why we had a very strong plan together with the U.K. management to further increase penetration, further control our distribution, and that's why we opened the 50 outlets. That was the trade strategy that we implemented and which is almost ready as we speak. To secure our position.
Like I said before, on the retail side, we strengthened our relationship with a very important customer, Kingfisher. Retail and trade are very much on the ball in the U.K. Can we learn? Yes, I think we can learn. Also, in a strong market, where you have a good position, you have to stay sharp because there is always a tendency of loosening up a little bit. Of course, it's our job now and with this mandate, let's say follow through process, there is no escape for nobody, even when you are a very profitable country.
Thank you. It's Matthew from Bank of America. Couple of questions. The first one is just to go back to the return on investment target that's been downgraded. You said a main reason for that is growth has been lower than expected. You've clearly outlined that that's partly proactive decisions you made around the portfolio and walking away from businesses. My question is: Is there anything on the capital employed side you can now implement to reduce the footprint or the working capital to help that equation? The second question, sorry, is on M&A. I guess with respect, it's normal for CEOs to say that we'll only do it if it creates value.
Reality is often different.
If we look at the last significant deal that AkzoNobel did was probably BASF in 2016. Which, if I'm not mistaken, has already been impaired. What lessons have we learned from the process around that deal in particular?
All right. Let me answer the second question, and you can do the first question. You are right. That is a lesson exactly why the chart came up. In fact, in the last 14 months, Well, not walked away. We were actively courted in three cases to buy, and we said no, because it was neither a synergy case, neither a growth case. It was just pathetically trying to get over EUR 10 billion by doing these acquisitions. We said no. I think what the lessons learned are pretty clear. I think the business you referred to, by the way, parts of it have been impaired. Just don't over-exaggerate the situation either.
I think probably in hindsight, it was a too complicated business that went through too many other businesses, and frankly, probably put too much complexity and added stress in our supply chain. Now, you rightly said there was a decision end of 2016. Not sure if you can hold any of the people on the stage here necessarily responsible for that, but we do learn. We live with it every day. You love all your children, but we learn a lot from this specific child on what not to do again in the future. All right? So
On your point on ROI, you're absolutely correct. First of all, basically, the improvements in profitability is a key driver to further improve our ROI, as I also mentioned earlier. Another area is working cap. I mentioned also that we see further improvements in working cap, this is not kind of instant gratification, that it goes with further improving our end-to-end processes. As we go along improving our end-to-end processes, we will see also further improvements coming through in terms of our working capital, inventory reductions, where we see still opportunities, and there are still other areas in working cap. I would not want to flag this as an opportunity, specific opportunity in 2020.
Hi, it's Georgina from Goldman Sachs. I'm afraid I've got two questions also on M&A. I thought we could like just have a whole segment on it. Going back to the slide 35 that we referred to earlier, which is the attractive growth opportunities. It's all of your different kind of product segments ranked by relative attractiveness and then growth. I wanted to just check if that applies solely to organic growth opportunities or whether the relative attractiveness kind of applies to a kind of M&A acquisition screen as well. The second question is, certainly from a raw material and customer perspective, adhesives seem to have quite a lot of overlap with paints and coatings. Would you consider going outside of your kind of base?
Yeah
Product base in acquisition territory?
Yeah. Well, one, I think on your first question, it's a little bit of both. If you look at, I think Ruud has indicated Mapaero, you see where aerospace is, it's pretty obvious. At the same time, though, as you also indicated, there are acquisitions in businesses that actually transform it. I think we talked about the Romanian story, which obviously lifts the business to a totally different level. You have to see what problem are you solving for. It's maybe not that black and white, clearly, if an acquisition were to come up in one of those, I would say the chosen ones, if I may say, they obviously get a bit quicker view. We're more positively biased, I would say, than on the others, it's not black and white. That was your first question, the second question.
Adhesives.
Adhesives. Well, all right. Maybe we should do a query here on stage. I'm probably more, we still have so much stuff to improve on the stuff we know. The other side of the street always looks nicer until you're there, then it looks pretty much the same. The problems are the same. If we really get bored out of our minds, we could look at something else. Frankly, right now, I think we have a way to go still on paint.
Yeah.
Yeah.
We sold the Deco Adhesives five, six years ago. To Sika to further focus on paints and coatings. We still have some adhesives in the group that are pretty profitable. I agree with Thierry, I think we have enough work to do in paints and coatings today.
Yeah. I would say if somebody came in with one of those chosen segments, whether they may, maybe we would lean in. If somebody came with an adjacency, we would probably kind of say, "Convince us.
[Roland Bos] from Hermes EOS. You mentioned, You touched upon human capital and organizational health. Given all the organizational change and almost like two-third of your senior leadership team have changed in the last few years, how or where are you on your, in the, on that journey of improving organizational health in your key parts of the organization?
Yeah. Talk about the leadership team, I think we are more or less there, I would say. I probably, because I said on stage, maybe it's you guys to talk about. I mean, now, David, if no, this is not an announcement to your leadership team. If you look at your broader organization, I mean, how do you
Absolutely. Indeed, we did make quite a lot of change. If I just look in my direct team, about 70% of them are new and less than 18 months in their role or in the company. If we look broader, I think it has been a transition where we see the senior leadership really engaged. They like the transformation. They very much like the vision where we're going. At a lower level, you have the operator and here they also understand that we are making investments. Well, they see more automation, they see also that the plants are getting in a better shape. We can see some very good engagement in both extremes.
In the center is where we are still working on because basically they are the one who really feel the pain of the transformation. We see some progress, but it went low and now every quarter we see some evolution. This is where, if you ask me where I am focusing, it's really on the middle manager because they really feel the heat, the pain and the heat.
Ruud, I don't know if you want to comment on it.
Yeah, we made some dramatic changes. Well, dramatic, I mean, in number of people in the leadership team who was running the business over the last couple of years. We talked about it only not so long ago. I'm very confident, I'm really happy with the team that we have today to drive the plans that we presented to you today. In that sense, I'm comfortable as we speak. It's always a dynamic thing. It's not a prison, people can also leave, but I think the team is pretty strong and it's also indeed what David is saying, you see the OHI score, as we call it, increasing in a good pace in the top of the organization. Maybe we need more attention...
Yeah
...for some levels below.
It's been pretty impactful. David talks about middle management, but that's the people who've seen all the changes, some processes were not completely done yet. There's all these transitions that I think we managed well, but you know, sometimes something fell through. I mean, that's kind of the honest reality of it. Secondly, we talked about capabilities. It's a word on a slide, but somebody who has had a 20-year career, was very successful at doing certain things based on old systems, collecting data, et cetera. If you now go to an ERP system, well, frankly, that is a skill that is less desired and some people have been really super at transitioning and doing that and some people haven't. I mean, that's kind of the normal transformation.
When I talk about the impact in the organization and I would say a heartfelt pride on how the organization basically stepped up to a, maybe not 180 degrees, but 120 degrees different orientation. It is actually remarkable. That doesn't hide individual cases that are, you know, just not fun to watch. I mean, absolutely.
Thank you.
Adrian Cattley from CapeView Capital. I mean, two unrelated questions, one for David. Just on your slide with the EBIT going up per factory, should we assume that the reduction in factories is about the same as the reduction in warehouses?
No, I would not do that correlation. The EBIT growth will come from different factors, from productivity, from the also different product allocation. Indeed, there will be some element also on the asset footprint. Again, linked to the archetype and linked to the business mandates. There will be some asset footprint, yes, I would not do the correlation between warehouse and the number of factories.
The second question to Ruud. From your first set of presentations, you gave the margin improvement on three divisions, like the sort of 600 basis points, 500 basis points. If I weighed that by the sales, that describes pretty much all of the margin improvement that the business has delivered over that period of time. The other 50%, can that do the same through the next two years?
That would be also a very false conclusion, I think. It would be very nice, but I don't think that's the right way to calculate. Of course, we looked at a total portfolio as you saw the, I think the famous slide 33. We did, of course, over the last couple of years, the increases that we could do also in the other mandates. It was not that we only focused on the mandates that I presented. That was of course, that were the most remarkable improvements to present.
Hi there. It's Alex Stewart from Barclays. There's always an endless debate on your quarterly conference calls about whether quarterly, or the annual corporate cost line is gonna wash out. It's one of the less interesting parts of the call. Given that you're now focusing on a margin gain for the group relative to 2020, that corporate line could make or break your margin target. How do you think about the way that that influences that 150 basis point gain?
The margin target beyond 2020 is really on group level. All the initiatives we are driving are across the group. In fact, I think the margin target till 2020, the 15%, excluding unallocated cost, has been there basically a little bit artificial way because we are coming from a situation where we still had Specialty Chemicals included, and it was in fact not exactly clear what were the corporate costs post Specialty Chemicals. Going forward, beyond 2020, all the actions we take are across the group, across the functions, so including the corporate functions, and further drive efficiencies and drive savings in those categories as well.
Maybe just to be clear, for 2020 on unallocated cost, we've said it's in a range between EUR 140 million and EUR 180 million, and it's important to state that if you take 2019, that still included the benefits we had from the brand royalty fees from Nouryon, from Specialty Chemicals, which ended at the end of December 2019. That's roughly a EUR 20 million benefit, which we will not see any more next year.
I'm not sure why that should be a drag on the or a problem. On the contrary, I think we've been saying from the beginning that the unallocated costs that were out was based on we had no clue what the cost was going to be before the split with Nouryon, so that's why we went there. I think from the beginning we've been making clear that that was not exempted. That's as much, and here my neighbor is the forensic expert on our corporate costs, so we actually go through that in x-ray quality too.
Sorry, to be clear, it's not at all a criticism of adding the corporate cost. I think that's the right thing to do. If the corporate cost is EUR 140 million in 2020 or EUR 180 million, if it's EUR 140 million, you sort of, a third of your margin gain over the next two years could simply be, or some portion of it, could just be normalization of corporate cost. It's just because it's a big swing factor, and it moves around a huge amount. I'm just interested to know what you think.
Yeah
The baseline will be....
Okay.
...steadier over the next few years.
All right. The swing factor has probably been also with all the stuff that has happened in the last two, three years, I mean, with all the changes on that, but it typically shouldn't be a big swing factor then?
No, in fact, it should normalize more and more. In fact, you should just take at the 15 by 20, including corporate costs, you come to, say, 13.5%. That's the basis going forward in terms of our profitability improvement. Again, the corporate costs are as much under scrutiny as any other cost, I can assure you, and maybe even more.
Hi. Over here. Mark from JP Morgan.
Yeah.
Go back to slide 33 and just get a sense of where you think the current health of the organization. You had 144 business units on that chart, and I noticed in 2019, some of them are still colored red. About 10% of the business changed the game. Is that an historical classification, or how much of the current business would you say would be characterized as need to change the game? Is it 10% still, or is it?
Well, I think if you look at the, whatever chart it is, where you have the 2017, 2019, I would say we very much scrutinize the tail on the right-hand of the chart. As I said, some of them I turned to Ruud this, he's on this like bird dogging this on a day-to-day basis. As he's indicated, some of these segments are not that easy to break out. I mean, that's one of the items. You look at, okay, is this a really change the game, or is it a harvest? Can you maintain? Do you get the cost? Whatever you get to get it up there. There's also, as I said, some of these segments that frankly are in a geography, in a segment, then they're not necessarily super in color if you look at the chart.
They are pretty essential because they are a need because somewhere else in the world there's a big customer who needs this, and that actually generates there. It's not as black and white. The portfolio work, I think, Ruud, you go through this on an ongoing basis.
Yeah. It's a relative picture. Yeah, the more time you have, I think, to look at all the cells, I think the more questions will come up. It's a relative picture. If you look at the two, the years, you see that the quality of the total portfolio improved big time. There will always be, in every portfolio, let's say, dogs or people who are not performing at the same as the top performers. That's the fact of life, of course.
I guess what I'm really asking you is, of the portfolio you've got today, how much of it is really in intensive care, and how much of it would you might walk away from over the next couple of years?
Probably the percentage of intensive care will stay the same, at a higher level as it was two years ago. There will always be a group where we need special attention also to push them to the higher targets we have presented to you guys today. The percentage will probably be the same of game changers. The absolute volume with the portfolio, of course, changed dramatically in these two years.
Just one small additional question. The bottom end of that curve, is it mostly on the coating side or is it Deco side?
Start over.
No, that's pretty well distributed. Deco, of course, it's also a global business with many units, with many smaller parts as well as in coatings, which is a completely different segmentation with all weaker and better parts as well. That's a well-distributed mix. Yeah.
Maybe time for one more question before we go and entertain ourselves with a drink outside. 15 by 20 is going to be sparkling water, but [audio distortion], w hatever works.
Thanks. Katy Raven GIC, c ould you just talk about how you're changing your incentive structure to align it to the beyond 2020 for the sales force as you sort of have that next mindset shift?
Yeah. Well, to be honest, of course, the sales teams, I mean, are obviously remunerated on the ongoing year, so we haven't necessarily designed the full detail behind to 2020. And then Ruud, you can...
Yeah
...talk about it. Definitely the volume part up till now has been, and the revenue part had been subdued. We actually went to the quality of the business.
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I mean, if we say value over volume, then you have to incentivize your people in that direction. On the 2020, there's probably going to be a bit more of the growth element depending on the portfolio. I think also there we'll get much more granular around businesses that generate value through your cost, through your system optimization. That would be one remuneration for the sales force because you don't want them to run out and just basically run the prices in the market down because we're often such a big player to do things. If it is really around growth, I think we'll have to balance exactly those two elements in our remuneration part of it.
Which is always tricky because for a sales force and depending on the business, it tends to be a significant impact. You have to be careful that you don't do the wrong thing to people who financially are really waiting for their paycheck. I don't know, Ruud, if you want to?
Yeah, pretty clear. We changed the incentive program, of course, more to margin than to volume as part of our 15 by 20 strategy. Going forward, that will be a major part of the strategy, but it will be a more balanced approach. Probably also to the mandate decisions we made in the past for the growth regions, for example. I think the clear message is from volume to value was also in the incentive scheme's pretty visible. Process change is that we are much more also here centralized in setting targets together with our BU leads, also for STIs, we call it for short-term incentives for management, but also for the sales force.
That gives, let's say, much more transparency in setting targets for a big part of our organization. In the commercial organization, we have 16,000 people. Something like 12,000 people are directly related to sales. The right incentive programs are crucial and indeed extremely important for the people involved to drive these targets.
That is going to require some time because definitely, variable pay, you get exactly what you ask for, and that may not be in hindsight what you wanted to ask for when you do that. One of the things we did for the management in the company, the broader definition of the management is it is a more higher weighting of the AkzoNobel results. In a decentralized view, I would say it was often, I'm in my business unit, I'm in the next level, down the strategic marketing unit, so that's how I get remunerated. We actually been shifting this gradually to a significantly higher weighting also for the company results.
That is in fact to enable to work like what David is doing, where it was, "This is my warehouse, so if you get in there, I get more costs, and who's going to do it?" Really drive the one approach. We try to tailor that to what the behaviors are that we want to get. As you well know, remuneration tends to be an art form with a lot of trial, sometimes an error, but luckily, we're able to recognize the errors and correct it quickly. Well, thank you very much. Thanks for joining us here. I hope it was as pleasant for you as it was for us. Hopefully we can chat a bit more next door. Where is Lloyd? Lloyd has disappeared. He's probably drinking already. No, he's there. If you can escort us to where we have to be.
Thank you very much. Thank you.
Thank you.
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