Welcome and thank you for standing by. Conference. This call is being recorded. If you have any objections, you may disconnect at this time. May I introduce your speaker for today, Lloyd Midwinter, Director, Investor Relations.
Please go ahead.
Hello, and welcome to the AkzoNobel Investor Update for Q2 2019. I'm Lloyd Midwinter, Director, Investor Relations. Today, our CEO, Thierry Van Langer and CFO, Maarten de Vries, will guide you through our results for the quarter. We refer to a presentation, which you can follow on screen and download from our website, axonobel.com. A replay of this call will also be made available.
There will be an opportunity to ask questions after the presentation. For additional information, please contact Investor Relations. Before we continue, I would like to remind you about the disclaimer at the back of this presentation. Please note, this is also applicable to the conference call and answers to your questions. I now hand over to Thierry, who starts on Slide 4 of this presentation.
Thank you, Lloyd. Good morning, everyone, and thank you for joining us on this call. AkzoNobel's 2nd quarter results prove clear progress is being made towards our 15 by 20 strategy, and that's despite continued external market headwinds. Adjusted operating income was 36% higher at €305,000,000 Our return on sales, excluding unallocated costs, was 13.7% versus the 12.1% last year. Our ongoing focus on value over volume resulted in price mix up 5%, while volumes were 6% lower.
Cost savings programs delivered €43,000,000 in the 2nd quarter. Last week, we announced the intended acquisition of the French aerospace coatings manufacturer, MAPIRO. This will further strengthen our already strong global position in aerospace coatings and is accretive to our 15 by 20 margin target. The Q2 was an important quarter for us to demonstrate that our strategy is working. It is therefore rewarding as a step for AkzoNobel's team and provides encouragement for the significant work still ahead of us as we continue our transformation journey.
In the face of softer market trends, we continue to focus on delivering our strategy while investing in strategic growth opportunities to become recognized as a reference in the paints and coatings industry. Some key financial highlights on the Q2 are shown on Slide 5. During the Q2, our revenue was flat and up in 1% in constant currencies. Pricing initiatives in response to continued raw material inflation contributed to a positive pricemix of 5% overall. Return on sales, ROS, excluding unallocated costs, was 13.7%, and adjusted operating income was 36% higher, mainly due to pricing initiatives and cost savings programs despite market headwinds.
Adjusted earnings per share was 85% higher, and our €2,500,000,000 share buyback is well underway with over €1,500,000,000 completed in the first half of this year. We've also announced that we canceled the 1st tranche of 14,000,000 shares. Now turning to Slide 6. Our Winning together: 15 by 20 strategy is delivering results. Pricing initiatives continued to deliver positive pricemix, mostly driven by pure price.
During the finals event of our Paint the Future Startup Challenge, we selected 5 startups for future collaboration. The innovations range from automated printing heads for coating large surfaces to totally novel polymer technology. These collaborations will help AkzoNobel push the boundaries of our industry and develop even more innovative solutions for our customers in the future. All AkzoNobel global business services hubs are now operational with 18 country transitions now completed. 45 country transitions are currently in progress out of a total of 120 to be completed by 2020.
We are also steadily moving forward with our ERP integration and have now completed 7 out of the 18 go lives planned for 2019. This ERP integration will play a key role in enabling our future performance improvement. We delivered €43,000,000 of cost savings in the Q2 and are on track to deliver the promised €200,000,000 bottom line impact by 2020 as announced in October 2018. We're also pleased to have now finally concluded the purchase price settlement for Specialty Chemicals. All of these items demonstrate our continuous focus on execution of the transformation plans in order to achieve our 15 by 20.
Now turning to the market trend Slide 7. Headwinds continue in the external business environment. Unfavorable currencies continue to impact the results and were mainly related to the Brazilian real and the Argentinean peso, but also the Turkish lira and the pound sterling had a negative impact. Raw materials and other variable costs continue to increase with €30,000,000 inflation in the quarter. Raw material costs are, however, expected to stabilize at the current levels in the second half of twenty nineteen.
Performance Coatings experienced softer market demand, including a slowdown in automotive OEM, which impacted our automotive specialty BU as well as our powder coatings businesses. Demand for Aerospace Coatings remained strong, and the order pattern for vehicle refinishes normalized. Demand for packaging coatings has increased due to more conversion from single use plastic bottles to cans, but also to specific AkzoNobel customer wins, while demand for wood coatings globally remained slow. Decorative Paints showed good momentum in EMEA. In China, volumes were lower, partly as a result of our value over volume strategy.
Volumes grew elsewhere in Asia, including India, Thailand, Malaysia and Vietnam. Positive developments continued for South America, excluding, of course, the adverse currency impacts. Going forward, demand trends are expected to continue to differ per region and segment in an uncertain macroeconomic environment. We still expect revenue growth for 2019, while our 2% growth assumption is unlikely to materialize this year. In the face of softer market trends, we continue to focus on delivering our strategy while investing in strategic growth opportunities.
And with that, I'll now hand it over to Maarten, who will run through the financial results in more details from Slide 9 onwards.
Thank you, Thierry, and hello to everyone on the call. A summary of our financial results is shown on slide 9. Revenue was flat and up 1% in constant currencies with positive pricemix offset by lower volumes. Volumes were lower due to our value over volume strategy and softer market demand including the automotive industry. Excluding Decorative Paints in China, volumes were 4% lower overall.
Adjusted operating income was up 36 percent to €305,000,000 driven by pricing initiatives and cost savings programs. Return on sales, excluding unallocated cost, increased to 13.7% versus the 12.1% in 2018. Operating income included net positive identified items of €3,000,000 mainly related to transformation cost of €54,000,000 and a gain on disposal of €57,000,000 which related to the sale of our former paint factory in Slough, the U. K. Slide 10 shows the quarterly trends in volume and pricemix.
We've been delivering positive pricemix for 6 quarters in a row resulting from our robust pricing initiatives. The 5% positive pricemix was on top of the 5% pricemix in the Q2 of 2018, which means we've almost fully offset the raw material price impact on a run rate basis. Decorative paints pricemix was 4% higher in the 2nd quarter, while volumes were 4% lower due to our value over volume strategy. Excluding China, volumes for decorative paints were flat. Continued focus on value over volume resulted in price mix of 7% for Performance Coatings, offset by 7% lower volumes, which were also impacted by external headwinds, including the slowdown in the automotive industry.
Slide 11 shows the main developments for adjusted operating income during the Q2. The impact of foreign exchange rates remained unfavorable during the quarter and was mainly related to the Brazilian real and the Argentinian peso. The positive impact from our pricing initiatives contributed €114,000,000 pricemix, partly offset by lower volumes. Higher raw material and other variable costs continued to be a headwind and adversely impacted the results by €33,000,000 in the quarter. Continuous improvement continued to offset wage and other fixed cost inflation, which together with our transformation plans delivered a total of €43,000,000 cost savings.
As a reminder, in the Q2 of 2018 was negatively impacted by one off items included within the operational results related to our transformation. These results show we are delivering towards our Winning together: 15 by 20 strategy. Q2 results for Decorative Paints are summarized on Slide 12. Decorative Paints improved profitability driven by continued strong performance in EMEA. Revenue was up 2% in constant currencies with positive pricemix of 4%, driven by pricing initiatives and acquisitions contributing 2%.
Volumes were 4% lower due to our value over volume strategy and lower volumes in China. Excluding China, volumes were flat. Adjusted operating income increased to €136,000,000 up 11% versus last year. Continued pricing initiatives and cost savings more than offset higher raw material costs and lower volumes, resulting in a return on sales of 13.5% versus 12.2% in 2018. At first, currency effects were driven by various currencies, mainly related to the Argentinian peso and the Brazilian real as well as the Turkish lira and the pound sterling.
Turning now to Performance Coatings on Slide 13. Revenue was flat in constant currencies with 7% positive price mix driven by pricing initiatives offset by lower volumes due to our focus on value over volume as well as softer market demand. Measures focused on restructuring and rightsizing, resulting in improved profitability from Marine and Protective Coatings. Industrial Coatings was impacted by lower demand for wood coatings in North America, partly offset by strong demand of packaging coatings. Powder coatings continued to focus on value over volume.
Volumes were also lower for the automotive industry. As pictured, AkzoNobel made a major contribution to New York's Hudson Yards development by providing powder and industrial coatings for the project. Adjusted operating income was up 15% at €197,000,000 as pricing initiatives and cost savings more than offset higher raw material costs and lower volumes. Return on sales was up at 13.6% versus 11.8% in 2018. Operating income was adversely impacted by €23,000,000 identified items mainly related to the transformation.
Now turning to slide 14. In the Q2, adjusted EPS from continuing operations was 85% higher at €0.96 mainly due to higher operating income. Profit from continuing operations increased to €226,000,000 in the 2nd quarter versus €123,000,000 last year. Adjusted earnings per share also increased due to the positive impact from fewer shares following the capital repayment and share consolidation as well as the share buyback program. Moving now on to slide 15.
Net cash from operating activities resulted in an inflow of 152 €1,000,000 during the Q2 versus €15,000,000 in the Q2 of 2018. This increase was driven by higher profits for the period and lower outflow of working capital. At the end of June 2019, net debt was €62,000,000 versus €2,900,000,000 the same time last year. These developments are mainly due to the receipt of proceeds following the sale
I'll now hand back to Thierry for concluding remarks on Slide 17. Thanks, Maarten. In conclusion, we are very encouraged by the progress we show in the Q2 of 2019 as it proves that our AkzoNobel team is delivering towards our Winning together 15 by 20 strategy. Our adjusted operating income was 36 percent higher at €305,000,000 and the return on sales ROS, excluding unallocated costs, increased to 13.7% versus 12.1% last year. Our ongoing pricing initiatives resulted in pricemix up 5%, and that is, as Maarten pointed out, on top of 5% in the 2nd quarter last year.
Our cost savings program delivered €43,000,000 in the second quarter and are completely on track. Our share buyback program is well underway. And last week, we announced the intended acquisition of French aerospace coatings manufacturer, MAP Aero, which will strengthen our strong already strong global position in Aerospace Coatings. Finally, turning to Slide 18, which shows our updated outlook. We are delivering towards our Winning together: 15 by 20 strategy and continue creating a fit for purpose organization for a focused paints and coatings company, contributing to the achievement of our 2020 guidance.
Demand trends differ per region and per segment in an uncertain macroeconomic environment. Raw material inflation is expected to stabilize during the second half of this year. Continued pricing initiatives and cost saving programs are in place to address the current challenges. We continue executing our transformation to deliver the next €200,000,000 cost savings by 2020, incurring one off costs in 2019 2020, as outlined earlier. We target a leverage ratio of between 12x net debt over EBITDA by the end of 2020 and commit to retain a strong investment grade credit rating.
Now I'll hand it over to Lloyd for information about upcoming events and the Q and A session.
Thank you, Thierry. Before we start the Q and A session, I would like to draw your attention to some upcoming events shown on Slide 19. We will publish our report for the Q3 2019 on October 23, and our full year and 4th quarter results will be published on February 12, 2020. This now concludes the formal presentation, and we'd be happy to receive your questions. Please state your name and company when asking a question and limit the number of questions to 2 per person so that others can participate.
Operator, please start the Q and A session.
Thank you, Lloyd. We will now begin the question and answer session. Our first question comes from Tony Jones from Redburn. Your line is now open.
2. Firstly, can you talk a little bit about what you're seeing from a volume perspective as you look into second half? And maybe give us a bit of color in terms of how you see customer activity and also continued impact from volume over sorry, value over volume? And then secondly, on raw materials, my quick math this morning got me to about 4% cost inflation for Q2, so well down on the sort of 10% we saw in Q1. Could you just let me know where the mine numbers are even vaguely right?
And if we see that trend continuing, is there any reason why we shouldn't get a cost tailwind coming through by the end of the year?
Okay. Thanks, Tony. Thanks for your question. Let me tackle maybe the first one and then Maarten, maybe you can do the second one on the raws. On the value perspective for the second half, if you look at the chart we show on the volume evolution, you see that we basically are more or less stabilizing now.
The year over year comparison versus 2018 will probably get much easier now for the second half of the year. You already see in the charts we showed that in Deco, we basically are holding our volume. The only difference you still see year over year is the exit we did in the very beginning of 2018, where we exited the really low end and really at 0 margin economy lines in Deco Paint in China. So that is going to be year over year relatively now a much more normal comparison. The same effect is also what you see Performance Coatings.
So the comparison become better because we have been shedding already in 2018 the low end. So we aren't in fact shedding volume anymore. It's really the year over year comparison. So having said that, for the second half of the year, the volume comparison would be more or less even might be slightly negative, but it would really be in the very, very low single digit percentages difference across the board. Now on the markets, what we see there's ups and downs.
I think in Deco, except for that effect that is now a transient effect from the low end in China, we are actually pretty happy around the volume development we see around the world. Latin America is doing well, but of course, the currency is impacting that quite significantly. And our home market in Europe, Middle East, Africa is doing, in fact, very well, also Southeast Asia. If you go to Performance Coatings, I would say the bigger impact macroeconomically is around the automotive industry. It does have an effect, although for us, it's a minor impact than some other peer companies.
But it does have an impact and it does shave about 1 percentage growth out of the company for probably second half of twenty nineteen. And then if you go to the different extremes, I would say on the real winners, you would say aerospace is still very strong. Packaging is doing very strong, not only the market, but we are gaining also because of new technology. And then the second, on the other hand, I would say automotive, as already just mentioned, woodcoating business is in a is continues to be in a change, both a change in the market, but not helped by the China U. S.
Tariff. So Tony, I would say that's without getting into a big expose, these are probably the bigger differences I would see on volume. But you would probably see a year over year comparison that is more flat going forward.
Great. On
the second question, Martin, maybe you want to tackle it?
Yes. Tony, hi. Good morning. On the second question on the raw material, as we said earlier, we've seen kind of raw material at the high point at the end of last year. That's also flowing through our bottom line.
We've seen that in the first quarter with the €77,000,000 and the 2nd quarter with the €33,000,000 Yes, post the end of last year, we have seen some softening of the raw material markets. But going forward, we expect kind of a flat environment for the second half of the year, which basically supports our pricing initiatives and creates kind of the margin spreads we've been looking for because we have been over the past kind of 6 quarters trailing the raw material price increases which are now almost cumulative €900,000,000 And we believe with all the pricing initiatives that we kind of have almost offset this headwind of almost €900,000,000 on a run rate basis by the end of Q2.
Thank you very much. Great detail. Thanks.
The next question comes from Peter Clark from Societe Generale. Your line is now open.
Yes, good morning everyone. Two questions please. The first one, I don't expect to comment obviously on Axcelsior itself, but you made it quite clear no major deals as you rightsize the company is the plan. On the bolt ons, obviously, you've done some nice deals now over the last 18 months capped by the recent aerospace. In the past, of course, you were restricted with the pension having specialty chemicals.
Where do you see the sort of bolt on growth you can get? Because obviously, you're a laggard reflecting your history. And you talk about this nice active pipeline. Can it on a trend line, can it be sort of between 1% 2%? I know it depends on the deals appearing.
But clearly, historically, you were near a 1%, which was lagging the industry reflecting, I think, your legacy business and pension. And then the second question is really just around the U. K. And the U. K.
Deco. There clearly seems to be 2 winners in this market at the moment. Have you got some sort of volume growth in the U. K. Or a reasonable volume environment?
And how comfortable are you given all the uncertainty we've still got that you and your other peer can continue to do pretty well potentially against the other weaker players in the market in a difficult environment?
Okay. Peter, thanks for your questions. You're right. Everything that we had to say around Axalta, I think, and that rumor we have said. On the bolt ons, not sure if I would necessarily share your description as being a laggard.
I would say over the last 2 years, I think we had a lot of things going on with specialty chemicals and all the other stuff and getting our house in order. I would rather say that we wanted to be very disciplined instead of just going for stuff to become bigger. I just want to point out that last year, we did 10 acquisitions, which I think is probably bigger than anybody out there last year. But for the bolt on acquisitions, I think we pointed it out, it remains the same philosophy. First of all, we want to do acquisitions that are relevant for our business.
So you probably will not see us venture too much into adjacencies, etcetera, because we believe there's plenty of stuff to do in boosting our current market segments in geographies and technologies in there. Secondly, I think we want to be disciplined in the sense that we want to have multiple we either want to pay multiples for items that have that are not higher than our own or we want to go for companies that really have are accretive to 15 by 20 at this moment of time. And there we've been pretty clear if the choice is between going on a rampant acquisition or returning that money to our shareholders and that it creates more value, we'll go for the second one anytime because I think that's what we need to do. So I think it's more on the discipline. Now where is that happening?
I think on Deco, there's still a significant amount of companies that we have in our pipeline. Now as we said before, those are often companies that either are family owned or are not listed, and that becomes always you have to soak on both sides a little bit, and the timing is not easily foreseeable. Since we are gainfully employed right now by doing the stuff we do in the company, we're not obsessing about that either. So we have a pipeline. You saw the MAPIRA1 coming out, something that we've been looking for 2 years, I mean, to see can we get there.
So very happy with that deal. And then there might be some spurts still this year or not as things are coming out. But one of the items that we keep hands on in the management team is really focused on 15 by 20. It's getting the house in order, the systems, the processes in place so that we can deliver the value when we do an acquisition versus just throwing up mud when at the moment of the acquisition. On the second part on Deco, on those markets, I would say the Deco markets underlying are quite stable.
So in that sense, it's more a GDP kind of business. For us, I think we're very encouraged by the resilience of our businesses. And I would say 2 secrets to it and a lot of moving parts also in our business is 1, getting our distribution right, both in our own stores, the network as distributors, all the channels. There's a lot of work ongoing in all of the markets, very tailored to what we need to do. We did it in the Netherlands, doing it in France, did it in the UK, and we continue to do this around the world.
So distribution is obviously a strong element for winning or losing in this market. And secondly, innovation. We have around the world, I think, where we're using our global portfolio of products allows us to introduce new products in another geography that haven't been there before. And in that sense, I think we can renew the product line helps in pricing, but helps also in just being relevant for customers. Not sure if, Peter, if I answered your questions.
Well, it was just the second question was about the U. K. Specifically. Obviously, you and your American peers seem to be doing pretty well. Others are suffering.
Just how confident you are looking ahead with all the uncertainty we have in the UK?
Yes. Well, actually, we're a bit more optimistic about the U. K. Now we commented before around consumer confidence. There was a doom and gloom period and maybe that just is still there, but it just wore off.
People just get on with it and start painting the shed in the garden just to get rid of their frustration. So the market has been holding up. The pound has dropped, so that didn't help us. But I think there again, I would go to the reach we have both in the big boxes as in our own stores as to distribution. I think that, of course, with our Dulux brand, we are so visible in that market that we're probably the first choice for consumers in the UK.
Okay. Thank you.
The next question comes from Lorraine Faivre from Exane BNP Paribas. Your line is now open.
Yes, good morning. My two questions, I guess, are related to on the first side on organic growth and on the cost side. On the volume side, could you maybe give us an update on the volume decline in Q2 and how much of that was in the different buckets between, I would say, what you regretted versus what was voluntary and maybe other? And then the second question is on the OpEx side. I think it was in the past few quarters €34,000,000 gain €38,000,000 now €43,000,000 Thierry, you keep on saying that the progression to 2020 is not going to be linear.
And I'm just wondering if we should be expecting at some point in time that this OpEx saving will go nonlinear or whether we should continue to assume a small improvement from 4Q3 into the second half in twenty twenty?
Yes. Okay. So let me address the first question on the organic growth. And then Maarten, maybe you can handle the OpEx question where I don't want to duck the fact that I said that, Laurent. So just call me out
on them. I don't
get a satisfactory answer. On the organic growth, I think we overall, the buckets are still more or less there. Onethree is market, onethree is non regretted losses and onethree is regretted losses, but maybe put a bit more depth on it by business. I would say on Decorative Paints, I would say its market is relatively flattish if you take everything together. You see also our volume being flat.
So I think we're in line with the market. The really only loss we still show is the non regretted loss in the economy part of decorative paints in China. So in Deco, I think it's a much more straightforward case. If I look at Performance Coatings, I would say 1% or 2% is probably out of the 7% that we've shown is related to markets. Mostly wood automotive is the key drivers there.
I would say then for us walking away from business is probably another 3 percentage points, which is the non regretted loss, mostly in the low end of the Industrial Coatings businesses, some of the Metal Coatings business, etcetera. And then I would say 2% is really, I would say, regretted loss because of prices. That's about the split I would give on that. Just want to point out though that and hopefully that became clear that sequentially, we're really not walking away from business anymore. In Marine and Protective, you still see us optimizing somewhat between not very attractive marine projects and putting that in much more attractive protective project, protective business projects.
So it's flat overall, but there is under the water line kind of a shift from one part of the business to the other part of the business. But sequentially, you would we would see a much more stable situation, where we wouldn't be moving away from business voluntarily anymore. I'm not sure, Lauren, if that answers your question, then I would go for Maarten for your OpEx question.
Yes. Maybe as a follow-up on just on the volume side very quickly. Did you see any strange pattern on demand in Europe in Deco in Q2 because of the weather, which has been mentioned by others? So either too hot or too wet. And do you think that maybe there's a bit of a catch up into Q3 because of the weather in European Deco?
No, not really, to be honest. I mean, now weather, of course, Laurent, is always you can do anything with weather. It's raining always and it always rains somewhere, I would say, but not really. So I don't think that's really an issue that we've seen. No, I mean.
Okay. Yes. So then moving to the to your question on OpEx. So first of all, I think it's important to reconfirm. So we have announced a €200,000,000 savings program we announced at the end of last year.
We've indicated €100,000,000 this year and €100,000,000 next year. I think it's important to realize that we still have a carryover effect of the saving program of last year. We indicated that in Q1 and still a piece of that sits also in the Q2. So for the second half, if you compare to the 43,000,000 so we've been ramping up the savings for this new program from the Q1 onwards. But for the second half, so Q3 and Q4, that run rate will be lower versus the €43,000,000 and then that adds then up to the €100,000,000 purely because of the second quarter.
We still have some carryover, I would say, in the tune of 10 +1000000 sitting from carryover of last year's program. I hope that helps.
Yes. Thank you very much.
The next question comes from Ganther Jekman from Bernstein. Your line is now open.
Thank you. Good morning, Thierry, Martin and Lloyd. Two questions from my side as well. 1st is going back to pricing. Thierry, you said in your speech, you implemented price increases in response to raw material price increases despite the market headwinds.
Is there any scope or what's going on in the operating part of the value before volume strategy? And the second one, a quick bolt on pun intended question to the M and A discussion. Would you ever buy an asset below the 15% margins expected for 2020?
Okay. Gunther, well, pricing is probably a bit of a tech teaming between Maarten and myself. Yes, it was a response. As we all said, we wanted to recover what we lost since the beginning of actually, the end of 2016, to be precisely. So I think we have arrived, as the GPS tends to say, on doing that.
So that was on a catch up mode. What you've seen is that as the raw material stabilize, we've been chasing the raw material increases and therefore couldn't necessarily show it to the extent in the bottom line. As the raw material stabilize, as Maarten answered, we finally received a spread where you basically see the amount of effort the organization has put in. On proactive pricing management, definitely where we went to all hands on deck to recover what was being lost. There's 2 elements on that.
1 is, I would say, more on the value pricing, where our segments, which may be less blanket, but much more targeted on what is our the And secondly, I think for us also, it's a learning, but probably learning in the industry or across the whole industry that the maintenance of pricing maybe over the last 3, 4 years has been a little bit lost, and that would have helped a lot, I think, if that discipline had been in place for our company at least, to do this ongoing pricing management. I don't know, Matt, if you want to add on the pricing here.
I mean, we stated that also before is that we really need to go and want to go to an structural pricing management and you could call that in the category of pricing maintenance where we structurally on a yearly basis implement price increases to compensate basically for structural inflation. So that would be kind of the regular pricing per early year and that would, in this case, be for early 2020.
On your second question, Gunther, around would we ever do an M and A on a company that is less than 50%. I think the answer of that would be yes, but then we would have to be sure that with the synergies and the way that it helps our business case, that it actually gets us to close on the 15% and that it's not dilutive. That is actually less to do with the 15 by 20, but actually more overall hygiene. I think if people come up with proposals, and in fact, it's not if, when they come up with proposals to the executive committee, it's really like are we doing this just to boost the top line or are we doing this because it makes our business better. And that is definitely, I think, the focus we're going to keep.
And there's also certain businesses we said, we're not going to invest in that for M and A. We're just going to improve what we have. And there's others and our team knows that that have a priority. The Aerospace one we did, obviously, Aerospace for us is a key attention. We have an extremely big role in that one.
It is a very attractive segment. So as you might imagine, MAP Aero basically crossed all the boxes because it was in that segment. It was accretive to 50 by 20, and we do see quite some synergies in the delivery to big customers. But that I think is kind of how we think about M and A.
Thank you, both.
The next question comes from Geoff Haire from UBS. Your line is now open.
Hey, good morning and thank you for the opportunity to ask some questions. Could you help us by splitting out the price and mix part in Q2 of your price mix of 5%? And then looking forward into the second half, do you expect price mix to remain positive year on year given the strong performance you had in the second half of
last year? Yes. So if you look at the price mix in the second quarter, 5 percent basically on top of the 5% price mix in the Q2 of 2018. Both cases that is mainly price. So if you take kind of the total 10%, you should kind of think of that we are sitting at roughly 8% plus true price compensating the raw material impact.
And that's also the reason why we stated that kind of we've almost covered the total pricing impact, the raw material pricing impact of 2017, 2018 on a run rate basis at the end of Q2. If you look at the second half, we will still see kind of the carryover of our pricing initiatives, but it will be in a moderated way. So the price mix effect in the second half will be moderated versus what we've seen in the first half of the year.
The next question comes from Alex Stewart from Barclays. Your line is now open.
Hello, good morning. Two quite simple questions, I hope. First one, you have since the beginning of the year discussed a 1 to 2 times leverage target, which may include another buyback program at some point. Can you give us some idea of when you might tell the markets how you're going to spend that cash very useful. And then secondly, Martin, this is a quick question for you.
The depreciation charge in Decorative Paints was €41,000,000 in the 2nd quarter, but only €35,000,000 in the Q1. Could you possibly tell us why the D and A charge was materially higher in the Q2 and whether we should use €35,000,000 or €41,000,000 as a guide for the second half of the year? Thanks.
Okay, Alex, thanks. So I'll entertain you with the first question so Martin can think about the second one. On the 1 to 2x leverage, in fact, that is a conversation we have in the Board of Management and then to propose to the Supervisory Board. As we said, I mean, we want to get we haven't said much more than that. We want to go between 1x and 2x leverage.
It's relatively straightforward to do the math on where we're going to be 0 leverage by the end of the year, what that actually would indicate. It's we also have been pretty quiet around is this through some acquisitions, is this through a share buyback, is it through dividend. Honestly, I think it's going to be somewhat decided on the spur during the year of 2020, depending on whether the other acquisitions that come on the table, as I just indicated, those are a bit choppy in many of those middle size acquisitions. And then either we might announce a share buyback or we might announce a special dividend, but we haven't necessarily decided that. And it might very well be that, that is during the year 2020 or at the end of 'nineteen that we start indicating what those partial plans are.
Again, the intent is pretty clear on where we want to end up at the end of 2020. And then that amount of money that would flow out of our balance sheet, I would say, would then be in those 3 buckets, but we haven't decided that yet.
And on the second question on the depreciation, you might be aware our depreciation is impacted by the implementation of IFRS 16 for the 1st January. You're right. There is a change between Q1 and Q2 of some €5,000,000 Yes, it could be that it is kind of a catch up of the implementation of IFRS16 because this is a major project. But maybe the best is that we still separately come back to you if there is any specifics in there.
The next question comes from Ocwen Olkentaggen from ABN AMRO. Your line is now open.
Yes, good morning, everyone. Two questions as well. The first on the volumes, these were down 6% in the quarter. Can you talk about the development within the quarter? So how was the performance in April, May June?
And also, since we are already in Q3, can you share with us how July has started given all the negative news flow we have seen? And then secondly, on pricemix, you talked about it. It was up 5% year on year in the quarter. Just can you talk to us tell us how the sequential pricing has been in Q1, in Q2 and then going into Q3? Thank you.
Okay. Okay. I think on the sequential price mix, I think that's probably in our data, but I think Martin can probably walk you through that. On the volumes in the quarter, now of course, you have seasonality in there. So every month is very different.
So as you go and there you may have some weather patterns, but that just shifts it from 1 week to the other. So I'm not sure that we are too hung up on that. I would say the beginning of the quarter was maybe slightly stronger than at the end, but I'm not sure that you can draw any conclusions out of that because then you have to go back to the order pattern in the Q1. So I mean that becomes probably a little bit too micromanaging to do this kind of stuff. So I would say, suffice it to say, it was a relatively normal quarter on volume developments as far as the second quarter goes.
On the Q3, how it started? I mean, again, there, I mean, we're like 2, 3 weeks in. July is typically a big month. I'm not sure that I would really want to comment on that. I don't think we've seen any extraordinary there on either side of that equation.
Sorry to be a bit evasive for it, but I wouldn't want to have a 1 week trading positive or negative influence of you because that's really not how our business works given the supply chains, the inventory in all the in the whole trajectory. It's not that precise. On the second one, price and mix?
Yes. So I think what you've seen and I'm now basically looking at the sequential pricemix over the past quarters where in Q4 we were at 9%, which had also a mix component. In Q1, we were at 6% and in the 2nd quarter at 5%. What you see and we've also indicated that we have still implemented pricing initiatives in the first half, very much focused on the Q1 and early second quarter, which is now coming through in our numbers. And that's why going forward a more moderated effect as these pricing initiatives are coming through our numbers.
So from a sequential perspective, most of the pricing initiatives have been now implemented and we will see that impact coming through.
All right. That's clear. Thank you.
The next question comes from Mubasher Chaudhry from Citi. Your line is now open.
Hi, good morning. Thank you for taking my question. Just on the pension, now that the triennial review has been done, we shouldn't expect any large costs going forward. But can you just confirm how much of the pensions are not covered by the insurance buy ins, if there are any? And then just second on the corporate costs.
2Q came in quite low. Now the overall guidance is €160,000,000 to €180,000,000 for the year. Now should we be modeling lower than that given that the 2Q was lower than the run rate expected? Thank you.
Yes. Let me first start with your last question on the corporate cost and allocated costs. So you're right, the first half, we were at EUR 63,000,000 euros And indeed also compared to last year in the second quarter, we indicated at the time that there was a one off in the corporate cost. That also was the reason why last year, Q2, it was substantially higher. For the full year, we've indicated the range between €140,000,000 €180,000,000 And as we sit right now, I would say we would come in at the lower end of this range between €140,000,000 180,000,000 where we recognize that Q2 was somewhat lower than the normal run rate.
But this is always we have some pluses and minuses, whether that's related to insurances or pensions or other stuff.
Just want to point out also that there were when we announced 15 by 20, there were some dark spirits who believed that we were going to shovel as much cost as possible in corporate costs just to get those business ROSs up. Hopefully, this is a proof point of what we've been saying that, that was not a plan all along because we would feel doing that is a bit cheating yourself, to be very honest, because it's really around resetting the company. So hopefully, it's a proof that we keep the hygiene there between the buckets.
Yes. And on the pension question, so first of all, but it was a Q1 event. We're very pleased that we have settled basically the top up payments for the U. K. Pension funds.
And we've also indicated going forward that we kind of see on a yearly basis maybe kind of roughly a €10,000,000 top up per year for the other remaining pension funds, which is mainly U. S. And Germany.
The next question comes from Christian Faitz from Kepler Cheuvreux. Your line is now open.
Yes, thanks and good morning. Just a couple of questions, please. First of all, in Deco in Asia, can you give us a rough idea of price and volume moves in that segment, again, just in Asia? And then second, in automotive refinish, can you give us an idea of your geographical split as some of your peers seem to be suffering, particularly in North America? Thank you very much.
Yes. Christian, thanks for your question. Deco Asia, of course, is a very heterogeneous bunch. So maybe let me split it up before we go in a country view, where it would be probably would be out of my depth here either, to be honest. But if you go to North Asia, which is basically China and then South Asia, I think two dynamics.
I think the price for price increase for us has been for Deluxe has been relatively modest. The biggest change you see there on average price is that we exited that low end business, which would have been at a zero margin or negative margin even by now if we hadn't moved prices on that. So if you were buying a pot of Dulux Paint 18 months ago, the price hasn't gone up that much, but the mix in our business has been significantly different. Southeast Asia, there has been quite some pricing movements, also sometimes with new product introductions that allow you then to reset your pricing points there significantly. Volumes in Southeast Asia have not been impacted that much.
So that has been much more of, I would say, handling of the normal business, but a bit more aggressive, I would say, on pricing. Secondly, on the automotive refinish, well, as you well know, I mean, a big part of the refinish business is, of course, here in Europe, in the home market. We are a number 3 player in the North America, and we are a number 3, 4 player in Asia. So we are a smaller player out there, whereas we are, of course, have the bulk of our business here in Europe. Not sure if I've answered your question though, Christian.
All right. Thank you.
The next question from Nathalie de Bruyne from Degroof Petercam. Your line is now open.
Hi, good morning. My question was actually around the unallocated cost, but you basically answered it. But I was following up on that, wondering what should we model going forward rather towards lower end of that range? Or I mean it can vary from 1 year to the other?
Yes. So for this year, as I indicated, you should think of more at the lower end of the range between 140 and 180. For next year, we stick to the range of 140 to the 80. And the assumption would be that we more or less would sit in that midpoint of that range. But for this year, as I indicated, with the pluses and minuses, it would be more to the lower end of this range.
All right. Thank you.
The next question comes from Markus Mayer from Baader Helvea. Your line is now open.
Good morning. Only one question remaining on the Performance Coatings division. We've heard from other companies, for example, Covestro that demand for industrial protective coating came down. But when I look into your report, that is not that much effect. Maybe you can give us some light on this if you see any kind of demand flow down there or if any customers highlighted CapEx cut in particular in the protective coating environment?
Thank you.
Yes. No, actually, it's a bit the contrary. So if you look at our Marine and Protective business, the top line has actually been pretty stable. But it's a little bit like a duck on water. I mean, if you look under the water, there's a lot of stuff happening in there.
So what you see in marine, that market is still relatively flattish. In fact, the team is still very selective on the projects we go after so that they really manage the margin. So you would probably see that a little bit still reduced in our portfolio. At the same time, protective, however, is picking up quite nicely. Now our focus in Marine in the protective business and our forte for the business has been oil and gas related, the hardcore chemical industry where corrosion protection, chemical protection, fire protection is really is actually at the top end of what you need to have.
And those markets are, in fact, doing quite well. And we see, in fact, an increasing pipeline. And that is more or less around the globe. So while Marine and Protective looks like it's pretty stable, there is a shift from one leg of the business to the other leg of the business ongoing. I would also like to point out that, that business is margin wise as a significant step up and has, I would say, regained.
This is a bicycle race. They've regained their place in the key group of performers. And that has been done by pricing, the portfolio management and costing that you've taken out. But you do see a shift here to protective. So in our oil and gas segments, on the contrary, we see actually a very healthy pipeline.
Okay. Thank you very much.
The next question comes from Georgina Iwamoto from Goldman Sachs. Your line is now open.
Hi, good morning, Thierry. Good morning, Martin. I've got 2 questions. The first one is, we can just take a step back and look at the big picture view of 15 by 20. I think it's fair to say that you have both sounded consistently nothing less than very confident on delivering on 15 by 20 over the past year.
And I think that's despite the demand environment being a bit less supportive than you could have imagined. Can you remind us what gives you such confidence on delivering now that we're really getting down to it and what you're currently focusing on? And then my second question is, your peers in the U. S. Have been later in price raising initiatives than you have.
So pricing for them seems to be more in focus for the second half than volumes. Do you see a market share gain opportunity ahead? Yes.
Thanks, Georgina, for your questions. I think on the first one, we've as you know, we've actually kind of tailored down the growth for the company because we didn't want to bet on the market for achieving 15 by 20. In hindsight, that was the right decision because the market hasn't panned out as you would hope as a tailwind. So I think walking to the bridge, and I think Maarten, you want to do that, the bridge is still completely intact because we were not expecting strong markets. That has been the buffer that allows us to achieve it.
A couple of elements, I think, when we walk through the cost buckets and then the margin, one of the elements that as these programs get mature and they roll out, there's an enormous amount of work that's happening between our RD and I, our research organization, our integrated supply chain manufacturing organization and procurement around what we would call value engineering. And that goes to really getting order in our suppliers, getting to multiple suppliers, e auctioning, tail management, etcetera, which is probably a self created tailwind that is an additional buffer in case markets would deteriorate more. So it is on the self help. But Maarten, maybe you want to walk a bit to the bucket? Yes.
So I mean, the interesting thing is that indeed, we have been very consistent, but our bridge is still very consistent with what we've said earlier. And basically, if you take the 10.6% as starting point of last year, bridging to the 15% in 2020, it is really half is margin expansion through our pricing initiatives and creating that spread versus pricing versus raw material as we have trailing as we have been trailing the raw material price increases. So and the other half is really our OpEx cost saving actions on the back of the €200,000,000 which we've indicated plus some kind of carryover of the €100,000,000 program we did last year. So that bridge is still very much intact. And in fact, in my view, the Q2 results reconfirm that bridge as the Q2 is very much coming in, in line with our own expectations and our own planned trajectory towards 15 by 20.
On your second question, Georgina, on the competition being later in raising their prices and if they put more emphasis on that, does it give an opportunity for us for share gain? I would say, yes. I think I confirm, by the
way, the 2 parts of your question around perception around how others have been moving around on price. But that might be a little bit surprising. I think in a perverse way, we're probably managing the volume evolution that if we were to perk up on volume, we would probably ask the individual business leaders whether there isn't an opportunity for pricing. Because either we're that good in the segment and that happens or something else is happening with somebody else's prices if all of a sudden you're much more popular. So I would say that it would be a balanced view to see where we can do margin expansion.
But at the same time, I think we are committed to not losing more volume either. So I think we want to maybe more orient ourselves a bit on what the others are doing. I don't know, Georgina, if that answers your two questions?
Absolutely. Very helpful. Thank you.
All right. Thanks, Georgina.
The next question comes from David Simons from JPMorgan. Your line is now open.
Yes. Hi. It's Jatin here from JPMorgan actually. I just wanted to just clarify one point on the Deco pricing because it seems all of the volume decline was China. So I'm surprised you said there was no mix element to it.
It's all pricing. That's number 1. And number 2, probably I joined the call late, so I don't know whether this was discussed. But just looking in the past, typically, when the raw materials flatten out to decline, the paints industry pricing has usually followed with a lag. What are your thoughts at the moment on pricing evolution beyond maybe, say, 1 or 2 next quarters?
How would the raw material environment as you see at the moment feed through in
terms of the industry pricing environment?
Yes. Okay. So maybe
Deco In China, if you look at Deco Paint, we haven't done that much on the like for like pricing. Prices went up to offset some of the raw materials. But the biggest effect in China in Deco has been on the mix where we stepped away from the non value adding a literally zero margin low end of the business, which was big volume, but frankly didn't contribute to the bottom line. So yes, in China, obviously, there is a mix effect. But I think what Maarten's comment was around the pricemix effect for the total company.
And in the scheme of things, that's probably part of this low single digit mix effect, but the rest is all on pricing. So hopefully, that's clarified with us. On the past on pricing, etcetera, on what we're going to do, I think as we forecast that pricing that the raw material environment is stabilizing, we definitely, as a company, want to keep managing our margin versus what the raw materials are. We also indicated on getting back to good old fashioned pricing hygiene on annual cycles and looking at your pocket margins. So us definitely want to keep managing our margin in view of where the raw materials are and in fact, to keep that expanded margin or even slightly improve on that expanded margin across the board.
I don't know, Martin, if you want to comment more on that.
No. We've commented earlier. And on your question, what will we see in the second half, we still will see a moderated price mix impact, positive impact, but it is really the carryover from all the initiatives we've taken in the first half. And as we said earlier and indicated that as part of the pricing maintenance, we are looking to go to annual price increases and early 2020 will be part of that.
Understood. Yes, it did. And just coming back to I think there was a previous question on second half volumes. And I think you broke out sort of thoughts by different buckets in terms of Deco Performance Coatings. For the group overall, at this point, given what you see in terms of dynamics, would you say it's looking more like down volumes again in second half or the previous comment around flat volumes are still possible in the current environment?
I think that would be more the case because in fact, as we said, we're not really walking away from volume anywhere at this point of time. So it's more the sequential effect if you compare it to the second quarter of 2018 and all the steps that were taken in the meantime. So I think year over year comparisons are going to be flattish. Now that might be depending on some key markets like automotive, might be 1% down, might be 2% down, might be 1% up, but it's going to be probably very much the volume we have right now.
Understood. Thank you.
Great. I think we have time for one more question.
Thank you. The next question comes from Lorene Fabry from Exane BNP Paribas.
Just one final one on the Slough disposal. And I'm just wondering, as you're doing more asset footprints and assets rationalization, should we expect a few more disposals of sites you no longer need or you may have been shutting down? Maybe not as big as Slough, but anything there to be aware of?
Good question. So first of all, Slough indeed was a very exceptional deal and a large deal, and we also felt we had to separately indicate that and you've seen that that benefit of €57,000,000 is part of the identified items. Yes, we might see some, but it will be smaller ones. And of course, there is always a lag effect in terms of the footprint actions we take and then ultimately the sale of the real estate here and there. It's difficult to guide on this, but there might be here and there some smaller stuff coming on the market.
So in line with that, Laurent,
I think there's a number of legacy things that they'll be cleaning up. The pension was one of them, and this is the slough side was one of it, too. So yes, there's going to be some background noise of smaller deals, but don't expect too much. Unless you want to have you want to buy a villa on a piece of land in a Chinese industrial park, just give us a call and we'll have a deal for you. But not sure that's going to be significant in our numbers.
Okay. I'll give you the pass. Thank you.
Right. Thank you very much for everybody who joined the call. Thanks for your continued interest in AXA Nobel. All the details are available on our website, axanavel.com, and feel free to reach out to Investor Relations in case of further questions.
And that concludes today's conference. Thank you for your participation. You may
now disconnect.