Welcome, and thank you for standing by. At this time, all participants are on a listen-only mode until the question and answer session of today's conference. At that time, to ask a question, please press star, followed by the number one on your phone, unmute your phone and record your name when prompted. 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 Q1 2019. I'm Lloyd Midwinter, Director, Investor Relations. Today, our CEO, Thierry Vanlancker, and CFO, Maarten de Vries, will guide you through the results for our quarter. We refer to a presentation which you can follow on screen and download from our website, akzonobel.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 four of the presentation.
Thank you, Lloyd. Good morning, everyone, and thank you for joining us on this call. I'm very encouraged by the progress in the first quarter of 2019. Our adjusted operating income was 9% higher at EUR 163 million. This adjusted operating income was despite raw material inflation, which continued at a EUR 77 million higher variable cost. Our ongoing pricing initiatives resulted in price mix up of 6%, and cost-saving programs delivered EUR 38 million in the first quarter. Volumes were lower due to our value over volume strategy. The ROS, excluding unallocated costs, increased to 9.1% versus 8.7% last year. Decorative Paints continued a good momentum in a seasonally low quarter, while Automotive and Specialty Coatings was impacted by order pattern. Our transformation plans are very much on track, and we continue to focus on delivering our Winning together: 15 by 20 strategy.
We are equally on track in returning a total of EUR 6.5 billion to our shareholders and have settled the cash top-up payments for the main U.K. pension plans. Some key highlights are shown on slide number five. During Q1, the revenue was up 1% in constant currencies, with positive price mix partly offset by lower volumes. Pricing initiatives in response to higher raw material costs contributed to positive price mix of 6% overall. ROS, excluding unallocated costs, increased to 9.1% from 8.7% last year, and adjusted operating income was 9% higher. All this despite continued headwinds from higher raw material costs and macroeconomic uncertainty, as well as some positive one-off items in the quarter 2018 last year. Delivering on our commitment, we completed a EUR 2 billion capital repayment and share consolidation in January and paid a EUR 1 billion special cash dividend in February.
Our EUR 2.5 billion share buyback is well underway, with EUR 300 million already executed in Q1 and EUR 500 million to date. We've also settled the cash top-up payments of our main U.K. pension plans, removing a significant cash headwind for the company in the future. Turning to slide number six. Our Winning together: 15 by 20 strategy is delivering results and gathering momentum. In Q1, robust pricing initiatives achieved positive price mix of 6%. Our Paint the Future Open Innovation Challenge received an impressive 161 entries from start-up companies, of which 21 of those start-ups were shortlisted for our final event next month. This initiative is a great example of how we're leading the paint and coatings industry. It will enable us to deliver even more innovative solutions to our customers in the future.
All AkzoNobel global business services hubs are now operational with eight country transitions complete and 54 in progress out of a total 120 to be completed by 2020. We're also steadily moving forward with our ERP integration, completing five out of 18 go lives that are planned for 2019. This will play a key role in enabling our future performance improvement. Our new procurement category management organization is now operational and focused on delivering future savings. In the U.S., we're investing in a major site upgrade at our Wood Coatings facility in High Point, North Carolina, to strengthen our Wood Coatings position and deliver future efficiencies. This is one of our largest paints and coatings investments in the U.S. for more than a decade. Our succession planning pipeline has been successfully demonstrating with the promotion of David Prinselaar as Chief Supply Chain Officer and member of the Executive Committee.
David was previously head of our manufacturing organization. He succeeds David Allen, who is assisting David Prinselaar with the handover till the mid of this year. We're adopting a very sharp focus to implement our transformation plans and achieve our Winning Together 15 by 20 strategy. The summary of the market dynamics is shown on slide seven. The macroeconomic headwinds we discussed previously continue. Demand for Powder Coatings remained strong, while Automotive and Specialty Coatings was mixed and impacted by a Q1 specific order pattern for Vehicle Refinishes. Strong demand for Aerospace Coatings was offset by lower demand for Automotive OEM coatings. Decorative Paints showed overall a good momentum. In China, volumes were lower, also due to our value over volume strategy. Volumes grew elsewhere in Asia, including India and Vietnam. Positive developments continued for South America, excluding adverse currency impact.
Headwinds persisted from adverse currencies, mainly related to the Brazilian real and the Argentinian peso, although the adverse impact was lower than in previous quarters. Raw material and other variable costs continue to increase, with EUR 77 million of inflation impacting the quarter. We're making progress despite these continued headwinds. Slide number eight shows the quarterly trends in volume and price mix. The price mix development shows the continued year-on-year progression of our pricing initiatives. We've now been delivering positive price mix for five quarters in a row. Decorative Paints price mix was 6% higher, driven by our continued pricing initiatives. Volumes were 6% lower, partly as a result of our value over volume strategy. Excluding China, volumes for Decorative Paints were just 2% lower. Continued focus on pricing initiatives resulted in positive price mix of 7% for Performance Coatings.
Volumes were lower in all segments due to our value over volume strategy. Automotive and Specialty Coatings was, as said, adversely impacted by a quarter one specific order pattern and mixed demand trends. I'm now handing over to Maarten, who will run through the financial results in more detail from slide 10 onwards.
Thank you, Thierry, and hello, everybody on the call this morning. The summary of our financial results is shown on slide 10. Revenue was up 1% in constant currencies, with positive price mix offset by lower volumes. Volumes were 7% lower due to our value over volume strategy. Excluding Decorative Paints in China, volumes were 5% lower. Adjusted operating income was up 9% at EUR 163 million, driven by pricing initiatives and cost saving programs. Return on Sales, excluding an allocated cost, increased to 9.1%, versus 8.7% in 2018. Operating income increased to EUR 113 million and including identified items of EUR 50 million, mainly related to cost of further transformation and non-cash impairments in Performance Coatings related to the implementation of our strategic portfolio review. Slide 11 shows the main developments for adjusted operating income during the first quarter.
The adverse impact of foreign exchange rates has reduced during recent quarters, was mainly related to the Brazilian real and the Argentinian peso. The positive effect from our pricing initiatives contributed EUR 140 million price mix, partly offset by lower volumes. Higher raw material and other variable costs continued to be a headwind, and adversely impacted the results by EUR 77 million in the quarter. Productivity improvements from our ALPS continuous improvement program achieved cost savings to offset wage and other fixed cost inflation. Our transformation plans are on track and delivered a total of EUR 38 million savings, and that's including the impact of changes made in 2018 and the next steps taken in 2019. The first quarter of 2018 was positively impacted by one-off items, mainly due to gains on disposals.
Overall, our continued focus on pricing initiatives combined with cost saving programs successfully offset the impact of continued raw material inflation. These results show we're delivering towards our Winning Together: 15 by 20 strategy. The Q1 results for Decorative Paints are summarized on slide 12. Decorative Paints continue to show good momentum in a seasonally low quarter. Revenue was up 2% in constant currencies, with positive price mix of 6%, driven by pricing initiatives and contribution from acquisitions. Volumes were 6% lower, partly as a result of our value over volume strategy and lower volumes in China. Excluding China, volumes were just 2% lower for Decorative Paints. In Asia, volumes grew in India, Thailand, Malaysia, and Vietnam. The acquisition of Fabryo Romania, Xylazel in Spain, Colourland Paints in Malaysia, as well as several stores in the U.K., added 2% to revenues.
Adjusted operating income increased to EUR 60 million, up 7% versus last year. Higher selling prices and further cost savings offset increased raw material cost and lower volumes resulted in an return on sales of 7.1% versus 6.6% in 2018. The adverse currency effects were mainly driven by various currencies, including the Argentinian peso and the Brazilian real. Turning now to Performance Coatings on slide 13. Profitability increased in all segments, except for Automotive and Specialty Coatings, which was impacted by order pattern and mixed demand dynamics. Measures focused on restructuring and rightsizing continued for Marine and Protective Coatings, and strategic portfolio management was implemented by Industrial Coatings, resulting in some non-cash impairments. Powder Coatings continued to positive trends supported by new applications and pricing initiatives. Overall revenue was flat, with 7% positive price mix driven by pricing initiatives offset by lower volumes.
Adjusted operating income was up 3% at EUR 138 million, as pricing initiatives and cost control more than offset higher raw material costs and lower volumes. Operating income was adversely impacted by EUR 41 million identified items, mainly related to the transformation and non-cash impairments. The return on sales was up 10.3% versus 10% in the first quarter of 2018. Turning to slide 14. In the first quarter, adjusted EPS were 30% higher at EUR 0.46. Net income from total operations was EUR 65 million. The net income for the first quarter of 2018 included EUR 134 million results from discontinued operations and was positively impacted by interest and tax benefits.
Adjusted in earnings per share increased due to higher adjusted net income from continuous operations of 20%, combined with the positive impact from fewer shares following the capital repayment and share consolidation as well as the start of the share buyback program. Moving on to slide 15. Net cash from operating activities resulted in an outflow of EUR 724 million during the first quarter of 2019 versus EUR 456 million in the first quarter of 2018. Cash flow was mainly impacted by the pension top-up payments of EUR 478 million and normal seasonable working capital outflow of EUR 421 million. The working capital outflow was EUR 60 million higher than the previous year, mainly due to higher trade receivables and lower trade payables, including an adverse impact of acquisitions. At the 31st of March 2019, net debt was negative EUR 1.3 billion versus EUR 5.9 billion at year-end 2018.
This was mainly due to the distribution of proceeds following the sale of Specialty Chemicals business and the pension top-up payments, as well as the seasonality of operating working capital. I'll now hand back to Thierry for concluding remarks on slide 17.
Thank you, Maarten. We are encouraged by the progress that we are making, especially considering the seasonally small quarter and the various headwinds, including raw material inflation. Our transformation plans for creating a more fit-for-purpose organization are on track. Our adjusted operating income was 9% higher than same quarter last year. Ongoing pricing initiatives resulted in price mix up 6%, and cost savings programs delivered EUR 38 million in the quarter. Volumes were lower, largely due to our value over volume strategy. The return on sales, excluding unallocated costs, increased to 9.1% versus 8.7% last year. We are also on track, returning a total of EUR 6.5 billion to our shareholders, and we've settled the cash top-up payments for the main U.K. pension plans. Finally, turning to slide 18, there is no change to our outlook.
We're 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 segment in an uncertain macroeconomic environment. Raw material inflation is expected to continue during the first half of this year, although at a lower rate than 2018. Robust pricing initiatives and cost-saving programs are in place to address the current challenges. We continue executing our transformation to deliver the next EUR 200 million cost savings by 2020, incurring one-off costs in 2019 and 2020. We target a leverage ratio of between one to two times net debt versus EBITDA by the end of 2020 and commit to retain a strong investment-grade credit rating. With that, I now hand over to Lloyd for information about upcoming events and to get the Q&A organized.
Thank you, Thierry. Before we start the Q&A session, I would like to draw your attention to some upcoming events shown on slide 19. Our annual general meeting of shareholders will be held tomorrow, April 25th. We will also publish our report for the second quarter on July 24th. This concludes the formal part of the presentation. We would now be happy to receive your questions. Please state your name and company when asking a question and limit the number of questions to two questions per person so others can participate. Operator, please start the Q&A session.
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star, followed by the number one on your phone, unmute your phone and record your name clearly when prompted. Your name is required and your company name to introduce your question. To cancel your request, please press star followed by the number two. One moment, please. Excuse me, speakers, we have eight questions in queue at this time. Our first question comes from Tom Wrigglesworth from Citi. Your line is now open.
Good morning, gentlemen. Thanks for my two questions. My first one is regards to the volumes in Performance Coatings in the first quarter. You called out lower demand from Automotive OEM Coatings and the volumes for Vehicle Refinishes. Could you help us understand the magnitude of impact between those two? I assume that Vehicle Refinishes is the larger impact. Is that just a timing effect when you say about order patterns? Are you expecting these volumes to kind of catch up in the second quarter? If you can try and quantify, that would be very helpful. Secondly, on the price/cost mix that you identify, obviously the higher raw mats that we're seeing coming through in the first half now that you're indicating, are those something that now require a further set of price or initiatives?
Is that your communication today that you're going to need to increase prices again? How should we think about that price versus cost dynamic over the rest of 2019? Thank you.
Tom, thanks for your questions. I'll probably take the first question, then Maarten de Vries can go into the price cost one. First on the volume and Performance Coatings, well, just like everybody else, there was an impact, obviously, from the OEM market that is the most visible in our smaller, but very much dedicated OEM business that we have. There, of course, we saw the same percentage impact as anybody else. There was also a wrinkle effect in some of the other businesses that actually coat elements. Powder Coatings has some OEM-related business in there, but the underlying strength of that business was enough to offset it, although the growth rate there was somewhat lower than we typically have seen in the past. On Vehicle Refinishes, your question is that a one-time effect? It looks like it definitely is. There's a couple of elements.
Price increases announced for the beginning of the year, that resulted specifically in North America, as it is traditionally the case, in some more higher sales in December. A little bit of a pre-buy, you could argue. That, of course, pulls our profit from the first quarter this year. What we've also seen is a notable case of inventory management at one of the big accounts. We've even, as you might imagine, have been bird-dogging there around what's really happening. The sell-out of those accounts has been the same to the market, there's really no impact to the body shops, who of course, are very brand specific and are using our materials. We've also seen that then really returned after, I would say, a bit more of a month of relatively subdued sales at that account, given the magnitude there, that had an impact.
To answer your question on Vehicle Refinishes, that was a significant impact in our numbers in the first quarter. I think we helped to keep the business healthy there, and as far as we can see, at least in April, we see that completely returning as we had expected that it would happen. In that sense, hopefully, Tom, that answers your first question before I hand it over to Maarten.
That's great. Thank you.
Okay.
Tom. Price versus cost. First of all, I think it's important to note that we are actually pretty encouraged by price mix development in the first quarter, plus 6%. In fact, if you add it up on top of the first quarter of 2018, we're sitting at roughly 8%, because in the first quarter of 2018, it was 2%. That is how we look at it. We continue our plan, and that's the price increases, which we have and are deploying in Q1, but also in the second quarter, to compensate fully the raw material impact, as we've said before.
From a raw material perspective, we've mentioned earlier that we've seen raw material coming quite to a high level at the end of Q4 last year, and that's what we are now seeing flowing through our P&L in the first quarter, and we see that also partially in the second quarter. Overall, this is all in line with our plans in terms of our price initiatives compensating the raw material price increases.
Okay.
Does that answer your question, Tom?
Yes. Thank you both.
Thank you.
The next question comes from Charlie Webb from Morgan Stanley. Your line is now open.
Morning, gentlemen. Just a couple from me, then. Just around the volumes. Again, as we look into for the rest of the year, kind of, I remember at the full year, you were guiding that perhaps this year, volumes, for the group over the whole year would be something close to a wash, a mutual zero kind of number, being negative in the first half and more positive in the second half. Is that still true after what was a fairly soft quarter for volumes, in Q1, and hence a small quarter? That's the first question. Then just secondly, around raw materials. Again, obviously slightly more, possibly in the first quarter, maybe not. You've talked obviously about continuing headwinds in the first half.
Do you still expect, or are you positively optimistic or cautiously optimistic, I think you put it last time, that you'll see tailwinds in the second half of the year? Is that what you see in terms of where raw materials are today, mark to market?
Yep. Okay, good question, Charlie. Let me try to tackle them and then see if Maarten wants to build on them. First of all, on the volume, I think we indicated in the fourth quarter that we probably were sequentially starting to get to where we needed to be. I think that's also kind of confirming. Of course, you're still looking at comparison year-over-year versus a quarter a year ago, et cetera. Also, when we look underlying, I think the business is basically where we are. There are some smaller examples where we still, with our pricing, step away from a little bit of volume, but I think that should indeed start to wash out over the year as the comparisons go on. That's one item. I think we haven't changed our position there.
On where the raw is concerned, I think as Maarten explained the dynamic in the first quarter, and that may trickle over slightly in the second quarter. What we try to do with our organization, you can have a view on the pigments, additives, et cetera, where that might actually be a bit of a more relaxed situation for us. At the same time, you have the oil-based materials where it moves all over the place, depending on the political agenda of the day. In that sense, Maarten and I may have a hidden, more optimistic agenda, but frankly, since we cannot count on that, as we said also in the last quarter, we are not betting our 15 by 20 plans on any relief there. We don't think that in the second half, that would be a headwind.
I think that's not going to be a negative, but we're not calculating in our numbers a tailwind. We think it's going to be neutral, and if there is a benefit, we'll take it. That's not part of our underlying plans. Maarten, I don't know if you want to add to that.
I think Thierry said it. The raw material situation for our numbers is indeed different in the second half versus the first half, where indeed, the first half we see still the high level at the end of Q4 flowing through our P&L in Q1 and partly in Q2. That should see a more normalized picture in the second half. As said, we are not counting in our plans on any tailwinds, but it is more from an internal perspective.
Does that answer your question, Charlie?
Yes. Just sneak quick one in. In terms of Tom's question on the kind of auto refinish business, and you said it's kind of returned to normal levels in Q2. The volumes you lost in Q1, is that gone, or would you expect to get that back in Q2? Just to clarify that.
Well, there's two elements. As I said, there is a minor part of it was probably sold in the end of 2018, but that's a minor part. That is the typical dynamics. If you do a price increase, you have always a little bit of pre-buying happening. That's the minor part of it. If you really look at it was really kind of a stock management at one of our customers. I think that's going to be largely coming back during the coming quarters. Again, because the sell-outs to the body shops is actually unchanged, and there we have very specific data and very clear data. It is really an inventory one-time effect, and that should actually all correct itself as of now.
Okay. Understood. Thank you.
The next question comes from Tony Jones from Redburn. Your line is now open.
Good morning, everybody. Tony Jones at Redburn. I just got two quick ones. On price mix at +6%, could you split that up into which part of it was underlying price and which part was mix? From memory, I think mix gain in Q4 was about 3%. Back on raw material costs, to get to the cost in your EBIT bridge, backing out from COGS last year implies that raw materials were up about 10% in this quarter. Could you confirm whether that's not far off the mark, and specifically which cost categories are driving that increase? That was quite a bit above what I was expecting for this quarter. Thank you.
On the raw material, on your last question, Tony, that's more or less correct. As we have indicated from the high position end of Q4, we're basically at what we feel as a high point. That's flowing through on our P&L. If we look at invoice to invoice levels, that should kind of ease out over the second half. I don't know if that answers your question, but I think your analysis is correct. On the price mix question that you have, the 6% in this quarter is largely price and there's very little mix in there. There is some positive mix in some of the businesses, but for example, Automotive and Specialty Coatings in the first quarter, that is then a negative mix situation.
All in all, the 6% is almost completely pricing, which in fact is good news given where we, also with Deco, et cetera, as we head into the summer quarters, that's actually good news for us.
Thank you very much. Thank you.
The next question comes from Laurent Favre from Exane. Your line is now open.
Good morning, guys. I just have two quick questions. First one on the cash outflow for restructuring, about EUR 20 million, I think, in Q1. From memory, you're getting to EUR 150 for the full year. I was wondering if you could tell us a bit about the phasing of that for Q2, Q3. The second question and remark as well, on the one-off reversal that you mentioned in the bridge, could you maybe tell us if for the rest of the year last year, you had any significant, or at least, let's say, similar to Q1, one-offs, either positive or negative that you wouldn't have mentioned at the time, so for Q2, Q3, Q4?
Okay. Maybe to start with the last question. In fact, in Q1 2018, we've specifically mentioned that we have gains on real estate disposals. That was sitting, by the way, in BA Other. The delta, the positive delta at the time, we highlighted that it was coming from gains from real estate disposals. We thought that it's at least good to flag this to understand the underlying improvement of the results. On the restructuring, we have seen EUR 50 million in identified items. EUR 33 million is related to impairments in Performance Coatings. In fact, in Industrial Coatings is related to portfolio measures we are taking, and is part of the overall transformation and overall transformation cost. The remainder part is to restructuring cash out costs.
If you look at this, timing-wise, we are lagging behind, but it is more related to the timing of the discussions with the workers' councils. In fact, some of the elements just kind of crossed the 1st of April and are coming in in the month of April. It is purely a timing of the restructuring. Overall, we are on track in terms of our restructuring plans and in terms of our transformation.
Excellent. Thank you.
The next question comes from Georgina Fraser from Goldman Sachs. Your line is now open.
Hi. Morning, everyone. I've got just one long question about volumes. You helpfully indicated how much of your volume decline was related to China Deco. I was wondering what you could do to help us break out how much of the volume declines were self-inflicted versus actual underlying demand weakness. Maybe if you can give us some idea of which segments you're seeing the weakness in. Then you also mentioned, in terms of the Automotive and Specialty volume weakness that you saw pre-buying. Are there any other segments where there has been, or you are currently seeing pre-buying related to your own price increases? Then any kind of color that you can give us on so far this month, how demand trends have been going for you. Thank you.
All right, Georgina. See if I can actually remember all the different points of your question, we would like to go there. First of all, on self-inflicted versus market. Again, in Deco, clearly, maybe it's better if I just go segment by segment on that.
In Deco, China is actually just hanging in there. It's not necessarily improving or not or going downwards. We'll see if the VAT element or the relief that the government gave as a stimulus, whether that helps or not. That's the known actor, as you indeed indicate. For the rest of Deco, I would say Southeast Asia is actually doing quite well. If you look at Europe, is actually doing very well. If you look at Latin America, volume-wise, it's okay. You have, of course, the devaluation, so that doesn't help. Those markets for Deco are all in fact pretty strong. I think even that our positions that were already strong in those markets, actually, we continue to build on those. Notable example, by the way, is the U.K., where everybody's lamenting about Brexit, frankly, our business is doing quite well there.
If I go to the Performance Coatings businesses, Powder Coatings, that market is growing. I would say the underlying demand element there is related to OEM. You know that we're in wheel coating et cetera. We have a very big position. Those are in fact somewhat impacted. As I indicated before, the Powder Coatings business is so strong that in effect it's a reduction in the growth rate and it's not actually going on the other way around. I think also that there on pricing, et cetera, really doesn't have an impact or it is very temporarily impact on demand. I think powder continues to be a tick in the box on all levels.
If I look at Marine and Protective, couple of elements there, by the way, if I go with it, the specific effect in automotive, all of the segments in Performance Coatings are showing a stronger bottom line than they had last year. If I go to Marine and Protective, that is actually a significant improvement in the performance for that business. On the top line, I would say Marine is still more or less flattish. There, I think, yes, I would say incrementally, we're walking away still from some business because of our pricing and what we want to achieve. Protective Coatings, I would say the pipeline looks healthier, that's not exactly materializing just yet. There we see really demand coming. On oil and gas, those are typically 12 to 18 months before you actually see that coming when the project starts.
That's in fact for the first two. For ICO, if I look at our Industrial Coatings, which is our internal lingo for Industrial Coatings, there, I think you have a collection of businesses. Wood Coatings is slower in volume. That frankly, has very little to do, I think, with self-inflicted or not self-inflicted. You have the housing market in the U.S., which is a bit slower, and that goes into kitchen cabinets and all those things which are also less buoyant. You have the China situation, which is also not helping there. Wood is actually more a slower demand. Packaging is very strong, our business is very strong. There our new technology is obviously finding a sweet spot in what the customers want and at the same time being economically a very viable solution.
There we see significant pickup and the demand actually being strong. If you go to Metal Coatings there, I would say it's probably more our own pricing strategy that subdues some of the demands. In Automotive Specialty Coatings, Aerospace Coatings, very strong, continues to be a very strong business. Specialty Coatings, which is a lot in consumer electronics, that underlying market is weak. I would say that is largely the market dynamics in the Asian consumer electronics. Vehicle Refinishes, that market continues to be doing very well. I mean, we had this one-time effect where we really didn't want to get creative on how to solve it in the first quarter, but that market continues to be on track underlying. Sorry for the long expose, but hopefully that gives you a bit of a picture by segment on where we are.
That's very helpful, Maarten. Sorry, Thierry. Thank you. I asked such a long question, such a long answer. I've forgotten where we are. Just to kind of summarize then, it sounds like most of the volume losses were self-inflicted with really just some industrial wood and automotive being called out as actually underlying demand is weak.
Yeah.
Is that fair?
I think if you look at our volumes, I think we more or less summarize it as our regretted losses, which we call segments that we are actually have lower sales because we are pushing our price. I think we estimate it to be about 2% of that. You have the China factor, you basically have a little bit of pluses and minuses on underlying markets.
Okay. That's very helpful. Thank you very much.
Thank you.
Speakers, we have three questions in queue. The next question comes from Chetan Udeshi from JPMorgan. Your line is now open.
Yeah, hi. Thanks. Just couple of clarification. Firstly, I was just looking at your gross margin, and it seems like in Q1 it was down about 50 basis points year on year, and I was just wondering, given the positive sort of net pricing, in the quarter, why is it still sort of down year on year? That's just the first question. Second question, probably I missed the response to one of the earlier question, which is how much of the cash out on restructuring has been reflected in the cash flow already so far through Q1? Thank you.
On the gross margin, to be honest, I don't recognize immediately your question. I think we better take it offline because I think you're looking at the gross margin, including identified items, and not a clean margin. Let's take that offline.
Most of that is also taken as cash in the first quarter. Of course, excluding the impairments, which were non-cash items.
Just coming back on the gross margin, it is actually slightly up. Don't underestimate the impact there of the Refinish shift we had, because that is a big margin negative. It's actually up, maybe we're looking at different numbers here.
Okay, fine. Maybe I'll follow up. Thank you.
The next question comes from Nathalie Debruyne from Degroof Petercam . Your line is now open.
Hi. Good morning. Thank you for taking my questions. Perhaps just two quick questions from my side. The first one would be on the working capital. You flagged, obviously, that part of the high working capital percentage in Q1 is linked to acquisition. Could you perhaps help me understand what is acquisition-related? The other part of it, whether it is timing effect or whether there is something structural in there, like shorter payment terms with your suppliers or something alike. The second one would be actually a more general question. What is your view on the consolidation of the market today? We have seen a big announcement from Nippon Paint in the recent weeks. I was wondering, what's your view on this and what is your strategy going forward?
I know that you are very much focused on the 15 by 20 strategy, what is your M&A pipeline? What are you targeting at this point in time, and what are the opportunities in the market?
Thank you, Natalie. Maybe Maarten can answer the working capital, I'll gladly talk about consolidation.
Yeah. On the working capital, what we are flagging here is that, of course, the bolt-on acquisitions, which we've done mostly by the latter part of last year, are now in our numbers. From an absolute amount, that shows a higher working cap level. We've not specifically split it out, but I think it's important to flag. If you look at the different items in working cap, inventory clearly is driven by the raw material price increases, but underlying inventory is really flat. Secondly, receivables. We see the regional mix impact. That is an underlying driver. We see on top of that, as here and there, we have extended our terms. That basically is more an internal process to make sure that we stick to tightness in our processes.
From a payable perspective, it's also some regional mix as well as timing differences.
Natalie, on your question on consolidation. I think we said a couple times before that for us, what's happening in AkzoNobel is really to integrate all those separate functioning businesses as one. That's why you hear us a lot talking about such exciting stuff like ERP platforms, costings, and organizational design, et cetera. That's what we keep doing. Last year, we said, and we continue to do so, that bolt-on acquisitions is what we are looking for. Last year, we did about 10 of those, both in distribution and acquisitions of producers. The hurdle rate that we put ourselves is that it has to be accretive to 15 by 20. That is, of course, as we get closer to 2020, an increasingly high hurdle rate.
For us, you really have to see it as building the house, the structures, the processes, the systems, getting our pricing, our value generation right, that if there were to be a larger deal somewhere in the future, that is in fact something where we can deliver the value and the synergies that should come out of that kind of a deal. In that sense, we can congratulate Nippon Paint with their acquisition in Australia. It's one that we were aware of and that really wouldn't have made any sense for us, given the situation in Australia, given the valuations, given et cetera. I think it's also for our own M&A team. They have a pretty nice pipeline of bolt-on acquisitions, which we don't want to force, that we basically can get to the true valuations of such.
It's also I want to compliment them on their discipline for not chasing everything that comes onto the market. I think we keep a discipline there as we are in the fitness room for the company until 2020. Does that answer your question?
Yeah, it does. Perhaps if I can come back on the working capital. You mentioned that you extended terms where here and there. Is there anything that we can extrapolate for the remainder of the year? Is that typically Q1? How does that play out for the rest of the year?
No. First of all, we're not so specific about it, but I think it could be partly also timing difference. I think it's important to mention, by the way, that actually, if you look at our total working cap, we are actually doing pretty well as we compare to our peers. In that context, there is not a reason for concern here.
All right. Thank you. Very helpful.
The next question comes from Peter Clark from Societe Generale. Your line is now open.
Yes. Good morning, everyone. I want to drill down on two of the businesses that was, I think in response to Georgina a bit more. The first one on Powder. I've heard your comments about the OEM sluggishness. That underlying demand is pretty good. Just wondering if there was any impact at all from the fact that you had a lot more capacity available last year that might have helped that line. I realize that you've probably still got plenty of room to fill, but effectively, I think the big plant in China was coming on stream, and I think there's some capacity elsewhere. The second question around Marine and Protective, which remains pretty choppy. I know mixes are different. One of your peers has already seen that starting to accelerate.
I'm just wondering, for you, I think you've told us that we shouldn't expect too much, particularly on the marine side, till 2020. That's your expectation. It's more a 2020 thing than a 2019 thing. Thank you.
The two questions on Powder, I'm not sure if the capacity is necessarily there a factor. Capacity in the Powder is actually very well utilized. Yes, we did do an investment in the plant in China, Powder tends to be an extremely local product. That is very local around that site because it's a finished product, and it's not a semi-finish. In that sense, I think the capacity that we have available is actually a constant activity to make sure keep our capacity expanding to fill market demand. I don't think that's an issue. I think the drivers for Powder are partly on the upside. It's the sustainability, environmental elements, coupled with the fact that the aesthetics and the performance of Powder Coatings is now definitely at par with liquid coatings. That is more the effect.
On the downside, you have some segments like Automotive that are a bit down, but the growth is still happening in there. Not sure that gives you enough detail on Powder, but there we really don't have a concern. I think what we have seen since the last 12, 14 months is that when we do a price increase, you see a little bit of a down in volume, that actually recovers in the next 45 days afterwards, which is also a typical phenomenon. If you go to Marine and Protective, yes, we've been pretty cautious on when we're going to see the real turn of it, because we didn't want to have it as a religious program where the great day is always happening next time. For Marine and Protective, that team is really doubling down on their internal efficiencies and putting the Marine and Protective team together.
They took a lot of cost out and a lot of efficiency up in that team, which I think has been very positive. Secondly, in Marine, yes, we see some light here and there. Protective, definitely we see some options. We definitely see our pricing work taking hold. In that sense, that business becomes increasingly a healthy performing business again. On the upside for the market, I think we want to balance some of the market dynamics by keeping the discipline and going for value. We do keep an eye, of course, on our position in that market, and I don't think that's endangered. I think we have such a big position that if we give up a percentage, that is actually a big jump for somebody else out there.
In the whole framework of our value over volume, I think we're completely on cruising altitude in there. In that business, there are some other gems, like our yachting business, that continues to be a great business on every sense of the word. Also seems to be very robust in economic cycles and is actually a very value-adding product. If you hear us being cautious, it's just that we don't want to oversell the dynamics in Marine and Protective, before we are really sure where things are going.
Sure. Thank you.
The next question comes from Martin Evans from HSBC. Your line is now open.
Yeah. Thanks very much. It's just a question again back on the 15 by 20, because you do refer to it throughout the presentation, not least slide six, with all the good things that are happening in terms of margin management, ALPS, culture and so on. I'm just looking at the timing now because, to stick with this target or ambition, we've roughly got, what, seven quarters left and another 600 basis points or thereabout to find. Internally, you must have a game plan or a road map of when you think the margins will accelerate. There is a seasonality, obviously, within the business quarterly, as we saw in this current first quarter. Could you maybe share with us how ideally, all things being equal, you would see the margins progressing and when we'll begin to see a quantum leap upwards?
Equally, whether possibly you feel you're running out of time. Thanks.
Yeah. Good question. In fact, as you may imagine, we're not just saying 15 by 20. There is a massive amount of processes, projects, spreadsheets behind it. That's why we feel quite comfortable around it. Again, on the first quarter, if you look at the one-offs, if you look at what we just said about the Victory finish and you add those things in, the quarter has actually been pretty robust. That probably shows our somewhat positive vibe on the first quarter. Just also want to point out we are 10% up, I'm not sure anybody else is going to come up with 10% in that market.
I think in the rounds we did at the end of 2018 in February with the annual results, I think we walked people to a bridge on how to get from where we are and where we're going to be, and that is actually annualizing the effects, the saving plans that we have, annualizing the pricing events that we're doing, and then a lot of background work around managing the non-product related procurement work, et cetera. That bridge is pretty much intact. Don't underestimate that, as I've been indicating, it's not going to be a linear impact because some of the work is further progressed in one business than in another. If you look at Deco, EMEA has done quite a lot of work, but of course, in the first quarter, it doesn't necessarily come to shine because it's a small quarter.
You have the nervousness with some cost and the timing of some costs that in a small quarter makes a big difference. For us, that bridge, and I'm sure we're going to go there with individual shareholders, that bridge is still very much intact on where we're going to go. In fact, if you look at the raw materials, when we do the pricing, what is the dynamic of raw materials, all comes in there. As we go through the results business by business, plant by plant, function by function, we are very much looking at what's coming in.
Just making sure, though, that it is well understood that we are focusing on 2020, that the steps we take or the costs we take in a specific quarter are because that actually is the best pathway to deliver as we get to 2020, and that we really didn't want to start timing things just for one specific quarterly result. For us, we're very much on track on where we are. The quantum leap, as you call it, I think in the next quarters, you will see proof points on where we go with the business.
Thanks very much.
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Okay. Thank you. If there are no further questions, we'll close the call now. Thank you very much for joining the presentation and your questions. If you do need further information, please contact Investor Relations. Thank you.