Welcome and thank you for standing by. Today's conference is being recorded. If you have any objections, you may disconnect at this time. May I now introduce your speaker for today, Mr. Lloyd Midwinter.
Please go ahead.
Thank you. Hello, and welcome to the AkzoNobel Investor Update for Q4 2018. I'm Lloyd Midwinter, Director, Investor Relations. Today, our CEO, Thierry Vanlanke and CFO, Martin de Vries, will guide you through our results. We will 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 start, 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 will start on Slide 4 of the presentation. Good morning, everyone, and thank you for joining our call. 2018 was truly a landmark year for AkzoNobel as we completed the sale of the Specialty Chemicals business and began returning the vast majority of proceeds of that sale to our shareholders.
We made good progress towards our Winning together 15 by 20 strategy, which increased return on sales, excluding unallocated costs, at 9% in the 4th quarter compared to 8.4% last year. In addition, we concluded the first phase of our transformation to create a fit for purpose organization, fully delivering on the promised €110,000,000 that was planned for 2018. And we have taken the next step in our transformation to deliver the next €200,000,000 cost savings by 2020. AkzoNobel is now a focused paints and coatings company, and we are channeling all our experience, energy and passion into being recognized as the reference in our industry. We also continue to invest in growth.
And in 2018, we made multiple bolt on acquisitions, including Fabryo in Romania, Xylazel in Spain, Colorland Paints in Malaysia and the AkzoNobel Swire Paints joint venture in China. These deals will help accelerate our momentum as we continue to build AkzoNobel into an industry leader. Another highlight in our trade was introduction of our Paint the Future start up challenge during the last quarter, making sure that AkzoNobel becomes also the reference when it comes to open innovation. Some key financial highlights are shown on Slide 5. During Q4, revenue was up 4% in constant currencies or around 3% on a comparable basis with positive pricemix partly offset by lower volumes.
Pricing initiatives in response to higher raw material costs contributed to positive pricemix of 9% overall, of which the price impact was 6%. The ROS, excluding unallocated costs, increased to 9 percent from 8.4 percent in Q4 2017. A final dividend of 1.4 3 per share post consolidation has been proposed for 2018, which would equal a total 2018 dividend of €1.8 Just want to remind that 20 seventeen's final dividend of €2.5 per share included €0.85 related to the Specialty Chemicals business. Delivering on our commitment of returning the vast majority of the net proceeds of the sale of our Specialty Chemicals, we completed a €2,000,000,000 capital repayment and share consolidation in January 2019. In addition, a EUR 1,000,000,000 special cash dividend of EUR 4.5 per share will be paid in February and a €2,500,000,000 share buyback will commence in February and is to be completed by the end of 2019.
In February, we have also settled the cash top up payments of our main U. K. Pension plans. By doing so, we have removed a significant cash headwind for the company. Following the sale of Specialty Chemicals and in the context of our Winning together 15 by 20 strategy, we will provide also an update at the end of this presentation on our capital allocation.
Let's turn to Slide number 6. Our Winning together: 15 by 20 strategy is delivering results and gathering a very nice momentum. Pricing initiatives achieved positive pricemix of 9%, including 6% higher selling price. Our Paint the Future start up challenge, now open for entries, is designed to combine our global scale, know how and expertise with the solutions of startups and scale ups. We have made continued progress on implemented integrated business planning, also known as IBP, and we now have our monthly cycles in place for all our business units.
This will enable those higher service levels to our customers while reducing working capital levels. We're also moving forward with the ERP integration. This plays a key role in our future performance improvement. In fact, we went live in January 2019 with the 1st batch of implementations. Savings from continuous improvement more than offset the fixed cost inflation and Phase 1 of creating a fit for purpose organization was fully delivering on the €110,000,000 planned savings for 2018.
We continued executing the next step of our transformation and are on track to deliver €200,000,000 savings by 2020. Successfully focusing on value over volume demonstrates how we are creating a high performance culture. We've also been recognized as a top employer in China, in the U. K. And in Brazil, all important key markets for AkzoNobel.
I'm encouraged by what we have so far achieved as we continue to deliver towards our Winning together: 15 by 20 strategy. On Slide 7, you will see a summary of the current market dynamics. During 2018, demand for powder coatings remained strong, while demand for marine and oil and gas industries stabilized. Paints volumes in China normalized to 2016 levels versus an exceptionally strong volume growth for Decorative Paints China last year. Demand for Automotive and Specialty Coatings was mixed, strong for Aerospace, while we saw softer demand for Specialty Coatings, especially in Asia.
Headwinds persisted from adverse currencies and higher raw material costs, while robust pricing initiatives successfully offset the impact of lower volumes and fueled revenue growth in constant currencies. We are making truly good progress towards delivering on our 15 by 20 strategy despite continued headwinds. Slide 8 shows quarterly trends in volume and pricemix. Decorative Paints pricemix was positive 8%, driven by pricing initiatives. Volumes were 6% lower versus an exceptionally strong quarter last year in China and driven by our value over volume strategy.
Excluding China, volumes for decorative paints were just 1% lower. Price initiatives for Performance Coatings continued to gain traction, leading to positive pricemix of 11%. Volumes were lower partly due to our value over volume strategy. Overall robust pricing initiatives combined with cost saving programs successfully offset the impact of higher raw material costs and fueled revenue growth in constant currencies. The main EBIT developments for the Q4 2018 are shown on Slide 9.
Foreign exchange rates continued to be a headwind. The positive impact from pricing initiatives, despite lower volumes successfully offset the impact of raw material inflation and fueled revenue growth in constant currencies. Raw material inflation continued in the Q4 of 2018, although at a slower rate than during the start of the year. Productivity improvements from our ALPS continuous improvement program achieved cost savings to offset wage and other fixed cost inflation. Phase 1 of the transformation fully achieved the €110,000,000 savings planned for 2018.
And we have already taken the next step in our transformation to deliver the next €200,000,000 cost savings as we announced by 2020. So we are delivering on our Winning together: 15 by 20 strategy. And I now hand it over to Maarten, who will run through the financial results in more detail from Slide 11 and onwards.
Yes. Thank you, Thierry, and hello, everybody, on the call today. On Slide 11, for the Q4, revenue was up 4% in constant currencies with positive pricemix offset by lower volumes. Volumes were 7% lower, while excluding China, volumes were just 2% lower. Adjusted operating income was up, driven by our focus on pricing initiatives and cost saving programs despite the adverse impact of foreign currencies and raw material costs.
The return on sales, excluding unallocated cost, was 9% versus 8.4% in the Q4 of 2017. Operating income includes EUR 113,000,000 impact from identified items related to 1 off noncash pension costs of €57,000,000 based on a U. K. Precedent set in October 2018 for the guaranteed minimum pension equalization regulations. And on top of that, we had the cost for the 2nd phase of the transformation, which was €56,000,000 On to Slide 12.
The 4th quarter results for Decorative Paints. Revenue was up 3% in constant currencies with positive pricemix of 8% driven by pricing initiatives and acquisitions contributing 1%. Volumes were 6% lower versus an exceptionally strong quarter last year in China and driven by our value over volume strategy. In fact, excluding China, volumes were just 1% lower in Decorative Paints. In Asia, particularly, volumes grew in India, Malaysia and Vietnam.
At first, currency effects were driven by various currencies including the Argentinian peso, Brazilian real and Turkish lira. Adjusted operating income was €52,000,000 with higher selling prices and cost savings compensating for raw material cost inflation and lower volumes. And the return on sales was 5.8% compared to 6.3% last year, while return on sales in the second half of the year increased to 9% versus 7.9% in 20 17. On to Slide 13, Performance Coatings. Revenue was up 2% and 4% higher in constant currencies with 11% positive pricemix.
Adjusted operating income was €20,000,000 was up €20,000,000 mainly driven by pricing initiatives and cost savings more than offsetting adverse currencies, higher raw material cost and lower volumes. And the return on sales was up at 10.9% versus 9.7% last year, and return on sales in the second half of the year increased to 11.5% compared to 10% in 2017. Demand has stabilized for Marine and Protective Coatings with revenue up 5% in constant currencies, And powder coatings continued positive trend with growth of 6% in constant currencies supported by new applications and pricing initiatives. And furthermore, demand for Automotive and Specialty Coatings was mixed. We saw softer demand for specialty coatings especially in Asia.
On to Slide 14. During the Q4, net income from total operations was €5,849,000,000 including the profit from discontinued operations of €5,814,000,000 For the full year 2018, net income attributable to shareholders was €6,700,000,000 Now moving on to Slide 15. Operating activities in the Q4 2018 resulted in an inflow of EUR 319,000,000 versus EUR 302,000,000 in the previous year. At the end of December, so December 31, 2018, the net debt was negative €5,900,000,000 versus €2,000,000,000 positive last year. The decrease was mainly driven by the receipt of the cash proceeds for the sale of Specialty Chemicals.
I'll now hand over back to Thierry to outline our updated capital allocation priorities. Thank you, Maarten. As mentioned earlier, with all the moving parts, we thought it would be useful to provide an update on our future capital allocation, which you see summarized on Chart 17. It is especially relevant to do so following the sale of Specialty Chemicals and also in the context of our Winning together 15 by 20 strategy. So we have updated our capital allocation priorities as shown on the Slide 17.
Firstly, we are making good progress on returning a total of €6,500,000,000 to shareholders following the sale of the Specialty Chemicals business. We also continue to invest in profitable organic growth, including around €250,000,000 capital expenditure per year with clear mandates per segment and geography to grow revenue by around 2% per year. In addition, we continue to target strategically aligned and value creating bolt on acquisitions. Our dividend policy of stable to rising remains unchanged. We have also settled the cash top up payments of our main U.
K. Pension plans as mentioned earlier, removing a significant cash headwind for the company. And we now target a leverage ratio of net debt to EBITDA of 1 to 2 times by the end of 2020 and remain committed to retain a strong investment grade credit rating. And for more details, I'll hand it back to Maarten, who will run through things in more depth.
Yes. Thanks, Thierry. And Slide 18 shows how the net debt is expected to evolve in the coming years. At the end of 2018, net debt was negative €5,900,000,000 following the receipt of the proceeds for the sale of the Specialty Chemicals business. Delivering on our commitment to return the vast majority of net proceeds, a total of €6,500,000,000 will have been distributed to shareholders by the end of 2019.
Advanced proceeds were paid as a special dividend of EUR 1,000,000,000 in December 2017. And in January this year, a capital repayment and share consolidation of €2,000,000,000 was completed. In addition, a special cash dividend of €1,000,000,000 will be paid in February and a share buyback of €2,500,000,000 will commence soon. Following the conclusion of the negotiations with our main U. K.
Pension plans, the cash top up payments will be settled with a €620,000,000 payment in the Q1 of 2019. More details will be shown on the next slide. Achieving our target leverage ratio of net debt to EBITDA of 1 to 2 times by the end of 2020 allows potential for further capital returns to shareholders. Now turning to Slide 19, pensions. Following the sale of Specialty Chemicals business, the net balance sheet position of the pension plans according to IAS 19 was a surplus of €400,000,000 Negotiations on the triennial review of our main UK defined benefit pension schemes have just been concluded.
A cash payment into the ICI Pension Fund and creation of an escrow account for the AkzoNobel Kurthals pension scheme means the cash top up payment of our main U. K. Pension plans have been settled. This removes a significant cash headwind for the company. The estimated cash top ups for 2019 and future years have now also been updated and is shown on this slide.
Moving now to Slide 20. We propose a final dividend of €1.43 per share that is post consolidation, which would equal a total 2018 dividend of €1.80 The 2017 dividend of €2.50 included an €0.85 related to the Specialty Chemicals business. Our dividend policy remains stable to rising going forward. The dividend will be paid in cash because the scrip option of selecting stock dividend has been suspended. And I'm now handing back to Thierry for some concluding remarks.
Thank you, Maarten. On Chart 22, in 2018, we completed the sale of the Specialty Chemicals business. We began returning the vast majority of proceeds to our shareholders. And despite strong market headwinds, we made good progress on delivering on our Winning together: 15 by 20 strategy. We concluded the first phase of our transformation to create a fit for purpose organization and have taken the next steps to deliver the next €200,000,000 cost savings by 2020.
We are now a focused paints and coatings company and we continue to invest in growth, including bolt on acquisitions. Our updated outlook is shown on Slide 23. 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 segment in an uncertain macroeconomic environment. Raw material inflation is expected to continue during the first half of twenty nineteen, 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 €200,000,000 cost savings by 2020, incurring one off costs in 2019 2020. We target a leverage ratio of between 1 to 2 times net debt versus EBITDA by the end of 2020 and commit to retain a strong investment grade credit rating. And with that, I'll now hand it over to Lloyd for information about upcoming events and handling the Q and A session.
Thanks, Thierry. Before we start the Q and A session, I would like to draw your attention to some upcoming events shown on Slide 24. On March 7, we will publish our annual report. In April, we will publish our report for the Q1 of 2019. And on the 25th April, we'll hold our AGM, the Annual General Meeting.
This concludes the presentation, and we would 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 others can participate. Operator, please start the Q and A session.
Thank you. We will now begin the question and answer session. Our first question is from Charlie Webb. Your line is now open.
Good morning, gentlemen. So my two questions. First one on raw materials. Raw materials in 2018 ends up being a bigger headwind than we anticipated at the start of the year. So I understand obviously 2019, you're guiding that it will be less of a headwind.
But can you give us some sort of sense how much less of a headwind, at least as we look at the first half? Because Q4, clearly, another $120,000,000 headwinds was fairly sizable and I think people were expecting a little bit less there. So maybe first one, can you help us with the raw materials, what to expect in the first half in a more absolute basis? And then secondly, just on the volume development, clearly China weakness played a big role in Deco. How should we think about that into the first half of twenty nineteen?
Are there any other areas of softness we should be thinking about in industrial activities, etcetera, would be helpful.
Okay. Thank you. So let me start tackling questions, and then I think we'll tag team it here with you, Maarten, on it. Let me maybe start with the latter one and then go to the raw materials. On the volumes, again, as we pointed out in the presentation, China comparison in the 4th quarter is really very skewed because in China, the 4th quarter was exceptionally high.
That was, as we said, in more of the lower end of the market. As raw materials went up, that basically had no value anymore exited it. But the comparison between the 4th quarter and this quarter really looks overblown. We actually just went back to the volumes we were selling in China in the Q4 of 2016. So it's a normalization of that.
If you ask about the other and then as we had indicated for Deco Paints, the volume in the rest of the world is actually very limited. It's actually a one percentage point reduction in volume. So that's pretty limited. If you go on industrial markets that you asked for, if I just go through some of the segments, Powder Coatings is steaming ahead full blast, so there is no issue there. If you go to Automotive and Specialty Coatings, that is really volumes have been impacted in consumer electronics in Asia, and that's basically aligned with other trends that other manufacturers also consumer electronics manufacturers have been on giving.
So we've indeed have seen that. In the other segments, I would say it's really where we really had a value over volume strategy. So the regretted losses are pretty minimal. As a result, I think that's probably going to be stabilizing very much as of now on volume wise. So let me just take a pause here whether that answers your questions on volume.
So as we think about 2019, how should we think about China? And what was the first half in 2018? Is it a tough comp? Should we expect similar type
of volume loss in the
first half of twenty nineteen?
Well, it's a lesser tough comp, of course, because if you go back to our reports on the Q4 2017, that was actually a blip upwards. And that was also because we had announced pricing initiatives. There was some pipeline filling. There was all things happening, which, of course, now you almost have the reverse effect. So that would be a much more favorable comp in general on volume.
Does that answer your question?
So we're looking at a growing volume environment in the first half of twenty nineteen or Well, I
think it's probably going to be more a stable volume and then depending on what the microeconomics do. So I think you have to look at it as steady from here on. That's more or less what we have in mind for on a volume basis. But again, I have to admit that we are really focusing on value over volume. And there's a 2 percentage points.
I mean, that's basically what we try to manage towards depending then on what the other variables are doing in the business.
Okay. Thank you.
Okay. Now let me go back to what you see on the raw materials. You are right. I think the raw material inflation in 2018 has been higher than anybody in the industry has been expecting. And you also saw us guiding higher throughout the year in 20 18 for those numbers.
We still saw some pricing upward moves for raw materials in the at the end of 2019 2018, sorry. But of course, given the inventory dynamics, that is still coming into our numbers into well into the first quarter and probably apart into the Q2. So our guidance around raw materials is yes, we still see some we still saw some inflation at the latter part of 2018, but that's in our books is still going to come out as for any of the paint manufacturers in the first I would say the 1st third of the year we're going to see that coming. Adolf, you want to take more detail, Marc? Yes.
So indeed, the raw material price inflation in 2018, as you indicated, has been in excess of €450,000,000 By
the way, that includes also impact, for instance, by freight costs. If you take the raw material situation right now as a proxy, we would see the positive effects coming through more end of Q2 and the second half of the year. And indeed, what we still will see for the Q1 and partly in Q2 is kind of the lagging effect of what will go through the P and L given our inventory level and what we've seen still in Q4. So this is how you need to look at it, and this is how we why we flag still this particularly for the first half of the year.
Okay. Thank you. Did that answer your question?
Yes. Just on the last on the rules. So when we talk about that lagging effect, is that to assume a similar headwind to what we saw in Q4 and Q1? Is that the right way to look at that? Or is that wrong?
No. We don't want to particularly guide on this. As you've seen in 2018, how this has developed. But again, I think I've tried to kind of give a picture of how we look at it right now.
Yes. Thank you very much.
Thank you. Our next question is from Laurent Favre of Exane. Your line is now open.
Yes, good morning, gents. First question is on capital allocation. Thanks for the slide and the guidance on 2020. We've seen, I guess, a bit more activity on the M and A side in the industry in the past 3 or 4 months from you and peers. I was wondering where do you see the pipelines for bolt on acquisitions, I guess between now and the end of this year or even in 2020?
Would you expect to do a bit more than what you've done last year in total? That's the first question. And the second question, which is related, is on the 1 to 2 times. Should we assume that there's a commitment to do more capital returns to get to the one time and then the delta would be M and A? So that's my
yes. So thanks for the question, and I'm happy that you're filling out your spreadsheet. That's good. Just a couple of comments on that. On the bolt on acquisitions, I do not think that you have to see a spike coming there.
In fact, we are fully focused on the 15 by 20 delivering. And in fact, also during 2018 already, we were really looking punctually when there were good assets becoming available. So I don't think that you'll have to see a spike in there. And we have always a pipeline, but I think we get very much now into
the execution of what we have to do. And larger deals, if
for the time, So it is irrelevant for the 2020 guidance that we've given. So it is irrelevant for the 2020 guidance that we've given. If you talk about what does that mean with the leverage, what does that mean? I think as we've indicated, that is to a large extent around what we do as a potential shareholder returns. I think it's going to be a minor part, in my opinion, that's going to go to bolt on acquisitions.
It's also clear that the good assets either are not necessarily available or they are overpriced, and we stepped away from many of those offers because it shouldn't create any value. So I don't think you'll see a barrage of other elements. I think it's more the reverse. I think you have to see us mentally focusing on shareholder returns and just occasionally when there is a good bolt on to actually divert from that track.
Martin, do you have a
Yes. So I think there are a few aspects. 1, we focus on our execution of 15 by 20. In the M and A space, we focus on bolt on acquisitions, which are value creating and by the way also supporting our 15 by 20 strategy. And indeed, that then concludes on the potential preferred capital returns to shareholders as we indicated the leverage ratio of 1 to 2 net debt EBITDA.
Excellent. Thank you. Did that answer your question, Laurent?
Absolutely, Pierre. And then just to sneak one in. Can you talk can you quantify to the I guess can you give us your best guess on the impact from bottom slicing on volumes in 2018? So when we look at coatings minus 6%, or paint minus 3, can you tell us basically what you think your addressable market did versus what you did and the delta being bottom slicing? Thank you.
Yes. It's difficult to put numbers on that, Laurent, but I think what we feel is that and I think that's what you refer to the regretted losses that would mean volumes we lost and yes, when there was value behind it is actually quite limited. And that's where you have to look at this 1, 2 percentage points at best. The rest is really either the variable margin had drifted close to 0 if we didn't get our prices up, as we've indicated, or it was really as actions we took to get segments there to help. And as we've indicated before, certain marine and protective standards where we feel by the time you have to execute this and if you look at what then all the ramifications are, this is going to be a negative operation to win to.
So I would say the it's difficult because we're in so many segments to quantify for each of them, but the what I would call regrettable losses is pretty limited.
Next question is from Tom Wrigglesworth of Citi. Is now open.
Good morning, gentlemen. Thanks very much. My two questions. Firstly, you executed the buyout of your minorities in your China business. I was wondering if you could help identify what the limiting factors of that JV have been in the past and how and quantify what the synergies and the kind of incremental profit opportunity might be coming forward following that deal?
The second question, if I may, is around the Marine business. I think you we're seeing it return to growth. And you said that, that would have a positive mix effect coming through from a margin perspective. Is that still the case? Or are these early volumes actually at a weaker margin?
And how should we see that marine business going forward in 2019? Thank you.
Yes, good question. Let me tackle the first one on the joint venture in China. It has actually been a couple of years already that the company, AkzoNobel, really wanted to do this. But then basically, the with the perceived strength in the China market, the valuations were not really effective to do this. With the other investor in there, basically, this was the opportune moment to get the valuation that really made a lot of sense.
As you know, the joint venture was really around the Deco paint business. So we have a real very broad network plans, etcetera, around China for Deco. But as it was a JV, you don't necessarily want to put some of your, for example, Performance Coatings business through there. You have some firewalls on how you manage the systems, etcetera, although it was being consolidated. So for us, it was really the opportune moment to bring into our network and now basically have the strategic opportunities on what you do in your whole network.
So it was a long standing wish to do so that we've been able to do at what we feel was an extremely attractive valuation for us. So don't expect the big bang there, but you would say it's just going to take a lot of the complexity out of our setup in China and allowing us now to use that very strong geographic network for our whole business. So that was the main driver for doing that one. Secondly, you talked about Marine and Protective. That business is the it's stabilizing in the volumes.
And in fact, there we talk around the really good projects. Protective, obviously, showing more life in projects than you see in the marine business, which is more or less stable. You can see light at the horizon, but it is more stabilization from where we're seeing it. However, I have to say that team has done a lot on pricing, pricing initiatives to make sure they look at value. They also took significant steps on how their cost structure was.
And I'm happy to say that the Marine and Protective business on the bottom line has become, again, a really good contributor in our business. So it's a significant step up in profitability for that business, which is not reflected maybe on the top line because of the elements I just brought, but it's really very much on the contributing side. And I'll let Martin if you want to add one more. Does that answer your question?
Yes. Thanks very much.
Thank you.
Thank you. Next question is from Christian Faitz of Kepler Cheuvreux. Your line is now open.
Yes. Thank you very much. I just have one question remaining, please. Again, on China, with your rather large exposure to Asia Pacific, can you give us any indication on Chinese demand at present? I realize it's rather early after the end of the Chinese New Year celebrations.
What are your salespeople reporting in terms of demand trends at present?
Yes, good question. Maybe just to point out that when you say Asia Pacific, about half of that is outside of China. And in fact, those markets are doing quite well. So that balances it to some extent. In China, it's I would say it's more a psychological effect that we see, given the trade discussions with the U.
S, etcetera. So we see more some, I would say, some hesitation on spending. And it's I'm looking at Maarten here. It's anybody's guess, I think, also from other competitors on what you might see in the next couple of months. In fact, I would say for what China is concerned, the 1st 3, 4 months of the year are probably the higher uncertainty on what's going to come out.
And then you have all people being somewhat reluctant to fill their inventory or how they do other things. It's obviously it's still a growth market, so that is important to know. I think we now just go through a reset both on the consumer level and we're going to reset in a number of the in between inventories and distributors, dealers, etcetera, that cloud, the whole element. We actually continue to be quite optimistic around China as such. I just think we're in a 4 month phase where everybody is expecting something to happen.
You have China New Year, etcetera, which makes it not easy to predict. Maarten, I don't know if you want to comment. Yes.
I think specifically in the I mean Q1 is, of course, in our Deco business always in a seasonal lower quarter. And particularly in China also with Chinese New Year, which now yes, which is early February basically. So and the issues with the consumer confidence in China, it's more difficult to read. So the most important month in basically on our Q1 is March. So difficult to read the demand signals at this moment in time, to be honest.
It's interesting to point out that, for example, in our Deco business, the high end of our market is actually not that much impacted. It's really the other parts of the business where we were entering in 2017 that given the raw materials that have become unattractive. Does that answer your question, Christian?
Yes, Gerry. Thank you very much. Thanks also, Martin.
Thank you.
Thank you. Next is Patrick Lambert, MainFirst. Your line is now open.
Hi, good morning, gentlemen. A few questions for me. First of all, I'd like to come back on raw materials. If I look at our indexes, acrylics, titanium dioxide, these are actually sharply down. And would you venture actually in overall for me, there would be actually deflation over maybe after Q2, as you said, rolling out the inventories you have.
But will you venture in trying to quantify a bit the impact on margins of raw materials, everything else being constant in 2019? That's the first question around raw materials. The second question regards the I think you mentioned there were 5%, 10% of your portfolio in terms of revenues that are challenged. Is there any update on that on how active are you on tackling those assets on the disposal side? And the last one, very quick one.
Can you remind me what's the difference between the cash payment and the escrow payment on the pension side, EUR 630,000,000, EUR 630,000,000. Thank you.
Patrick, yes, thank you very much. Now first of all, your questions on the RAS. As you said, for the first quarter, we just see the impact rolling through our books of what we've seen. We saw there is still some increases, but it was at a much more reduced level. What you indicate, yes, it's a bit of a mixed bag.
There are some raw materials that are definitely trending down. Others, specifically in the solvent areas, often a very punctual supply demand that actually drifted. So I think we are, I would say, a bit more comfortable to say that the raw material prices probably somewhere are going to plateau out. But as we said, you probably have to get to the 1st 3, 4 months of the year to start seeing what the real effect is. I just want to point out that the whole industry, by the way, had a certain idea around what raw materials were going to do in 2018, and we were over gloriously wrong on what's going to happen.
We do believe though that the dynamic is going to normalize significantly once you get to the latter twothree of the year. But that's probably as far as I would lean out of the window right now. So it's going to be a bit more, I would say, more overseeable. On the 5% of the portfolio, I presume you refer to what we said that of the 140 plus segments that we said, there might be 5%, 6% of the segments that disappear. Is that what you're referring to?
Yes. I think sometime
in Q3, you mentioned that.
Yes. That's totally correct. And in fact, you're executing on that. I was alluding to that on the mandates that we have, which is across the board for all of these segments. We also said that it might not always be with a big bang that it's an announcement.
We have now done something on this segment. But it's obviously, it's fully part of what our pricing strategy is, where in some of these segments, we basically say, look, this is this one of the actions is almost to see can you get it in a healthy shape or do you step out? And for example, the segment that you referred to when you mentioned for China, I would say the low end of the market has been one of those segments where we said it's great. But if you get to 0 variable margin or worse, then frankly, it makes no sense. And then you basically live with the consequences of the pricing.
So we are executing on those probably more than is visible. And that's also, of course, in our what you see in some of the volumes, etcetera. That might lead to here and there a little divestiture, but that's probably going to be minor elements that are
It's mostly letting volumes out more than disposals.
At this moment of time, but there may be some disposals at the end, but it's going to be smaller items that actually then end up in a disposal. So it's not excluded, and you may see some things during 2019 2020, but it's going to be really smaller activity there.
Yes. Maybe, Patrick, to come back on your question on pensions. So it is more the mechanism of how we have negotiated this with the U. K. Pension trustees.
So for the quartiles pension fund, the mechanism that we do this through an escrow, but basically the cash will flow out to an escrow account in Q1 for the quartiles fund. And we have indicated that it's €159,000,000 with directly
in
cash payments. So, directly in cash payment. So it's more the mechanism. But from a cash flow perspective, you will see the cash flow cash going out in Q1 as we have indicated in the presentation. And with doing that, we have really derisked pension funds and basically diminished the future cash top ups, which has been an issue for the past many years in this company.
So in fact, we are very pleased with the outcome here, to be honest.
And it's actually pleased is probably an understatement because it is a legacy item that was haunting us for a long time. So if we hadn't been in cost discipline, we would be celebrated exclusively, but we actually shared a glass of water here to celebrate when we're signing it up.
No, congrats. May I just squeeze in, how is the U. K. Decode doing? Brexit, I mean, it's all over the place.
We don't know. Is that the same as China, the same uncertainty?
No, Chris. No, thank God not. But I would say that the biggest impact of Brexit we've basically had already in the past, I mean, the pound losing value was, of course, for a euro based company, an unpleasant situation. Secondly, consumer confidence, Specifically, I would say, in the first half of twenty eighteen was relatively was actually depressed. I think the team there has done the same combination of what they needed to do.
So for us, the UK is actually pretty good. In fact, 2018 was a good year for our UK organization, both on share and on what they delivered to the bottom line. Also, what Brexit is concerned, it is, of course, an issue if you're a big player in the UK market, but it is somewhat of a contained situation. What we make in the U. K.
Is mostly for the U. K. Well, it's almost everything we make in the U. K, sold in the U. K.
And vice versa. So in that sense, we're a bit sheltered from what any cross border situations might be. I would say somewhat because, of course, you have your supply chains for incoming goods. But no, I think that market is still doing very well.
Okay. Thank you very much.
Thank you. Next question is from Neil Tyler of Redburn. Your line is now
Couple of questions, please, still. Firstly, can you share with us whereabouts you are big picture in the value over volume strategy? I think you said you'd more or less sort of reached the point at which there wasn't a lot more of unsatisfactory margin that you needed to shed. But can you just confirm that and perhaps split the comments between the two sides of the business? And then the second question, following up on an earlier question relating to the series of bolt ons that you've achieved.
Will there be any sort of quantifiable revenue synergy that we should anticipate through the next 12 months from those acquisitions, not the actual acquisition contribution, but perhaps revenue synergy elsewhere?
Yes. Okay. Good question. On the value over volume, I think as we signaled, we've probably come to a point if our underlying assumptions around the raw materials are correct, where you say, look, we are where we are now. So I think I'm not sure if you say that's coming to an end.
I mean, the value focus is going to continue to be there. But I think it is our underlying hypothesis that volumes are basically stabilizing from what based on our actions at least of what's going to happen in the market. So that's maybe as a response to your first question. If you go to the 2 businesses, I would say in Deco, I think that's definitely correct there with all the caveat around what is the China dynamics or what does the market do but that is different than value over volume strategy. The second thing for what Performance Coatings is concerned, similar.
There are probably still a number of elements where we looked at might be some steps that have to be taken, but we probably do that much more in a restrained way or looking at at least keeping the balance there with some of the volume. Again, the underlying assumption, of course, is that the raw material situation starts least stabilizing over 2019. That's maybe as a first answer on that question. Secondly, on the bolt ons, so the revenue synergies, absolutely. And in fact, we weren't just on the shopping spree to buy bolt on acquisitions.
All of those have actually been done for clear synergies. Fabryo, we were a significant player in Central in that part of Eastern Europe. With Fabrio, we bought the number 1 in Romania. So all of a sudden, you have significant synergies in their distribution network. So it was really on synergies for that aspect.
Colorland Paints in Malaysia is probably even a stronger example on that because in Malaysia, we had a market position. Colorland had a Colorlands had a stronger position, but it's really again where you get the synergies on all levels, including synergies through a very strong distribution network we had in Malaysia. Xylazel, we also in Spain indicated that, that is wood and metal trim, which was somewhat of the weaker element in our portfolio and that typically tends to be the more profitable part of the portfolio. So that's already happening right now that by having that strong Silasal offer, which goes beyond Spain, by the way, that you now see traction at big boxes, etcetera, to have a much stronger offering in there. So yes, those were really more based on strengthening our businesses in a specific region or a specific segment.
So we do expect revenue synergies from all of those. That's very helpful. Thank you. Thank you,
Neil. Next, we have Gunther Zechmann of Bernstein. Your line is now open.
Good morning, everyone. My two questions. Can I firstly ask on M and A? You've done a number of bolt on deals, quite limited financials that you disclosed, and they were not huge in itself. But could you share what the combined earnings multiples are that you paid on those acquisitions and margins?
Any color, not on an individual basis, but on a conglomerate basis that you can give and if you look at similar deals within that pipeline to get to 1 to 2 times EBITDA? So that's the first one. And the second one is on pricing in China. Thanks for splitting out the volume impact from walking away from less profitable, unprofitable business in that country. Can you give a comparable how much of the price increase that you saw in the quarter was actually from that price before volume strategy in China?
Thank you.
Okay. So let me try to get to the first question. I think we haven't split out what we paid, what the multiples were. The big over there were 2 basically decision factors for each of those bolt ons is 1, does it help us on our 15 by 20 strategy? And I think we've indicated that in previous calls that it's a big hurdle to say we're going to do an acquisition here, but it has to deliver on 15 by 20 and not some kind of a longer situation.
And 2, yes, on each individual cases, it was really based on what is it going to do for our business. And I think we feel, and I'm probably going to stay away from details there, but we feel that each of those deals were actually very nice bolt ons, both in the quality but also in what we were able to or what we were able to get them for. And I indicated that for our Swire joint venture, given some things in the market there, we felt we actually had a good valuation point to do this. So we've actually been very restrained on doing such. So if I understand your comments around how the M and A works in the 1 to 2 leverage, as I indicated in the previous answer, the bolt on acquisitions are very punctual.
I would say that the majority is going to be probably more getting to this 1 to 2 times is probably going to be more towards shareholders than that, that would be a bigger percentage into acquisitions as far as we can see it right now. Maarten, I don't know if you want to comment on that one and on the pricing part?
Yes. Maybe on the pricing. So first take a step back. If you look at the Deco price mixing, Q4 was 7%. Out of that 7%, roughly 6% was pricing.
That goes across the portfolio in Deco and that includes China and Asia as well. There is a little bit if underlying, there's differences in the regions in terms of pricing. In China, that tends to be a little bit lower because the Chinese market is also much more competitive in terms of the price increases we have pushed through. And as you know, we have a relatively strong business in China within a strong margin profile. So but again, we don't give any particular numbers on the underlying price increases of the different units.
But this gives you a little bit
of color. Maybe if I can give one added comment just on the M and A pipeline and bolt on acquisitions, we have no misunderstanding there. Every item that we do is focused on 15 by 20. So when our M and A team together with the businesses identify a target, the question is really, is that the best way of getting us to 15 by 20 because in acquisition, integration takes time, systems, you name it. So we you will probably see us getting increasingly challenging for bolt on acquisitions.
And if there's an extremely good object or asset, we'll go after it. But I think it's really around getting our house in order and getting to 15 by 20. And that's the glasses we have on to put on any of those things that come past our desk.
Thank you. Our next question is from Nathalie De Bruyne of Petercam. Your line is now open.
Hi, good morning. Thank you for taking my questions. Most of them have been answered actually. But if I can just quickly come back on Marine and Protective Coatings. So I understand very well that you see some, well, stabilization in the market in general and especially in the good projects on your side.
But at the same time, you will be very selective with well, further moving away from low margin businesses, probably not as much as you did in 2018. But I was wondering going forward, especially for 2019, on balance, do you expect that business to actually grow in terms of top line? That's the first question. And the second one, a more annoying one, accounting. Can you remind us how you treat the cost related to the transformation of the company, incidental versus what you would take into the adjusted operating income?
That would be helpful. And also, what kind of cost can we expect for 2019? And what would be the cash portion of it?
The fantastic thing, the Marine in particular, I would say that, all in
all, probably you can
look at the other on the Marine in Protective, I would say that all in all, probably you can look at the relatively balance of the revenue from where we are right now. I think you see some positives coming in definitely on the Protective. I would say that also gives some opportunity then to really be somewhat critical on some of the projects. But all in all, I would think that you're going to see a relatively stable revenue line from now on. That's with all the pluses and minuses, I think they're going to be balancing themselves out.
So that's probably kind of the high level answer for Marine and Protective, if that is okay as an answer for your question.
No, that's already very helpful.
Okay. And then Maarten, I mean if you can go on the Yes. So the cost
of the transformation are really related to restructuring costs. And we have indicated that this is for the 2nd phase of €350,000,000 Out of €350,000,000 €60,000,000 is noncash and it has to do with impairment of our assets as we're optimizing our footprint in the integrated supply chain. You have seen that in the Q4, we took EUR 56,000,000. That's a bit lower than we earlier had indicated for the Q4. But overall, we are still on track in delivering the €200,000,000 which will roughly be half half in terms of savings in 2019 2020 from a transformation cost to which we recognize in the identified items, so basically the restructuring cost.
So the €350,000,000 minus what we took in the Q4 of 2018, the EUR 56,000,000 the remainder will be more or less half half in 2019 2020. So this is how you need to look at this. And of course, it's also an important indicator how we're tracking because the restructuring is an important tracker also to drive the savings.
Okay. Okay. Fair enough. And what would be the part that would be taken in I mean, that would be allocated to the different businesses and the part that would be treated as incidental because that's not yet really super clear to me, to be honest.
Okay. So the number I'm talking about the EUR 350,000,000 that is what we treat as what we call identified items. So it's below adjusted EBIT. And that is really related to the restructuring, the restructuring related costs as well as impairments, some noncash items in our of our asset network.
All right. All right. But you regularly when I read press releases, you regularly flagged some allocated costs related to the transformation and all of that. So can you perhaps give us an indication of what that could be in 2019?
No. I think I've been very clear. So the cost we that we book and identified items is purely the restructuring cost related to the transformation.
All right.
And nothing is expected to come on top of that?
No. This is that is how we treat that, correct.
Okay. All right. Thank you.
Thank you.
Next question is from Geoff Haire of UBS. Your line is now open.
Good morning, gentlemen. Just wanted to ask 2 very quick questions. I wondering if you could give us some help with where you see the phasing of the cost savings, both the EUR 200,000,000 from Alps and Fit for Purpose and then the additional savings from the supply chain work that you're doing? And then secondly, just to confirm, if you're saying raw material prices continue to increase into this year, will you have to see further price increases to balance out the raw material pressure you're seeing as you had stated last year?
Yes. Thank you, Jeff, for your questions. First of all, on the phasing, I think we said in the at the 3rd quarter results that it was going to be about 1 100 this year, 100 as costs that we're going to take for it, 100 this year, 100 in 'nineteen, 100 in 2020. As Maarten indicated, the timing of that first 100 in the Q4 was a bit slower because that's just how the way that these costs land. But you still have to look more or less at that spacing that we have.
So it's almost 2019, 2020 is almost fifty-fifty, I would say, as the costs are going to be landing. So that's just as an overall number there. Secondly, on the raw materials as they go up, indeed, yes, there are still pricing initiatives ongoing in those businesses because in that sense, I think we want to make sure that we stick to what we indicated was our target to recover those raw material costs as there are still pricing initiatives ongoing.
Okay. Thank you.
Next, we have Peter Clark of Societe Generale. Your line is now open.
Yes. Good morning, everyone. Thank you. Interesting comments on the Swire deal. You were talking about sort of dissynergies with the firewalls and suggesting, obviously, synergies of putting the 2 together.
Just in that general context, I presume you're a big advocate of having Deco and Performance together clearly with something going on across the water. And then the second question just to be clear on the bottom or the value over volume strategy and the bottom slicing. In terms of the Q4, I don't know if you gave a number, but was it similar to the 3% you saw in terms of the volume hit in the Q3, I presume so, and that just tails off as we go through 2019? Thank you.
Yes. So let me take the SWIRE conversation and then Maarten, you can talk about the value part. Not sure if I totally understand your question, but yes, I mean, if you look at part of the improvements and efficiencies is where we look how to do things much more jointly between Deco and Performance Coatings. That has been a clear item in our integrated supply chain because there's no reason to have warehouses at the opposite side of the street for each part of the business. And you also have to see the Swire situation in that context.
Now I don't want to leave the impression that it was a very, very dysfunctional, etcetera. That's the case. But of course, if you want to put businesses through a distribution, through plans, etcetera,
and it is a joint venture,
it becomes a bit more complicated. And if you look at some of our businesses in Performance Coatings, obviously, having a total network with multiple plants across China, multiple distribution channels, some of them owned by that joint venture now by us, of course, gives you quite some opportunities to leverage that across the whole situation. And given the fact that the mature and big market is China and definitely still growing in the future, Again, for us, making sure that we had all the strategic options to drive it as efficiently as possible was obviously a nice opportunity to take, and that's what we did. Maarten, if you want to talk about the Yes.
So maybe going back to the Q4, so a volume loss of 7 percent. If we basically take out China, we talk about excluding China and we discuss China and specifically the comparisons with an exceptionally strong volume growth in the Q4 of 2017. You see, excluding China, basically a volume loss of 2%. And if you look at this 2%, which is, by the way, in different magnitude compared to the Q3, you could take roughly the same proxy where half is driven by us, value over volume, and half is also market dynamics. But again, the picture in the Q4 is a completely different picture from the Q3 given the China dynamic in comparison to the Q4 of 2017.
I think it's important to point it out.
Sure, sure. I understand that. Thank you very much. Can I just clarify one point on this? In terms of the bottom slicing, if I call it that way, it's appearing all on volume.
You're not seeing a counter effect also that helps pricemix?
No. You see that coming through in the mix, and that is in fact what we also flagged in the 4th quarter results where our pricemix in total is 9%. And we wanted to point out that out of that 9%, basically 6% is pure pricing. So the rest is mix. And maybe on the pricing initiatives, building on what Thierry said earlier, Yes, we continue to drive pricing initiatives in the Q1.
As we have said all along, that in total, we want to compensate the total raw material price impact as in an absolute amount. And that is still the aim, and we intend to realize that basically during the Q1 with our pricing initiatives we are now implementing.
Next question is from Georgina Iwamoto of Goldman Sachs. Your line is now open.
Thank you. Good morning, everyone. And I just wanted a kind of final question. You've given us here and there a little bit of color on the components for the earnings bridge for 2019. But I was just hoping you could summarize in one go how you think earnings are going to progress.
Does your 2% organic growth mandate already apply in 2019? And what is comprised within that number? You've kind of talked about volumes flat and continuing to raise prices. And then you've got the cost savings program coming through as well. It'd be helpful if you could just kind of summarize how you think earnings are going to progress this year?
And is it really more self help driven? Or are you actually going to be able to participate in market growth, too?
Yes. Good question, Georgina. So this is a sneaky way of getting a guidance number. But let me go back to what we said in 2018. I think in 2018, we basically indicated that you should see the progress on the second half in 2018 on our return on sales because with all the raw materials and not necessarily seeing the cost actions yet in the first half, we said look at the momentum in the second half.
So very happy that frankly we have almost 1.5% increase in ROS in the second half despite all the dynamics where we, in fact, margin wise, we've always been kind of catching up with raw material prices, which kind of shaves some of the effect off. For 2019, answering your question, the 2% mandate definitely applies. And in fact, if you go to the Q4, I mean, that is already applying. So that remains there. Secondly, on what the elements are, we keep managing the variable contribution or the contribution margin based on what do raw materials do and then our own actions that we have to do.
OpEx, we talked about the €200,000,000 that we want to get out by 'nineteen, 2020. We kind of give an idea of how we see that staged over those 2 years. And then last but not least, I think if you look around self help, given the fact that there's hyperinflation in Argentina, Brazil, important countries for us, the fact that there is a shutdown in the U. S. Potentially still a risk.
Turkey is hyperinflation. China is uncertain. Brexit is not there. It is definitely self help. So what we with our team doing are being conservative on how much help or how little help we're going to get from the market, And it's really around our own cost discipline, efficiencies, etcetera, which gives us a little bit of a shelter from having to look too much around what's going to happen in this market and that market because what we can do internally is overwhelming for that.
I would say similar as we said for 2018, it is definitely for the management team. We are looking at the momentum we have on return on sales in the second half of the year because that, of course, sets us up for achieving 15 by 20. So that's how we're going to focus on it. I don't know if that answers your question.
It's certainly helpful. I'm just wondering if maybe you will feel more confidence in a couple of months' time, maybe with a quarter under the belt to be able to give us some 2019 guidance. I know it would help the market understand how we can expect the margin progression to 2020. That's all.
Now Georgina, if I give you guidance for 2019, I would get so mistreated by Lloyd that it would not be nice to look at anymore. But I think that's the same. But the confidence, I would say, for 2019 is there. I think given everything that's happening in the geopolitical and macro economic space, you probably see us just like others being a little bit wobbly around what exactly is going to happen in the Q1 because it only takes some delay in order, some pipeline fill or pipeline emptying, and it makes the swing. But for 2019, given that it's mostly driven by self help, we feel comfortable to focus on getting us at the end of 2019 to something that really sets us up for 15 by 20.
Okay. Thank you very
much. Okay.
And I think we're almost out of time. So maybe one more quick question.
Thank you. Next, we have Alex Stewart of Barclays. Your line is now open.
Hey, thank you very much
and thanks for the presentation. I'll take the 2 questions 1 by 1 to make it easier. The first one, in light of your comments about hyperinflation in Argentina and Brazil, etcetera, were there any transactional currency impacts in the Decorative business, which might have impacted your percentage margin in the Q4? I'm thinking perhaps selling paint in local currencies in Argentina but buying raw materials in dollar terms. Let's do that one first.
Yes. Well, maybe before Martin gets into the numbers, if you look at our Latin America business, Brazil and Argentina, Argentina, the market is down because there the situation is, of course, economically stressed. But if you look at that business in the local currencies, it's fantastic. I mean, they the team there really has gone against the tide on everything they did, and it's actually a highly, highly attractive business. Yes, if you then translate it back to good old euros, it's a little bit less impressive.
And I think, Martin, you can answer the hyperinflation there.
Yes. So basically, that's what you see. When you look at the Deco results that from a translation perspective and specifically if you look at the revenue, you see an impact of 6%, where on a reported basis, we are down 3%, but on a comparable currency basis, we are up 3%. And that's basically reflecting these markets. But what Thierry just indicates is that we are very pleased how these teams are reacting in these environments by driving prices up in an inflationary environment and in also the local inflationary situation.
So overall, strong actions taken there by the teams.
Okay. And just on the second question, I'm bit down into 2 parts, which I hope Lloyd will forgive me for given I think on the last question. But they're very clear. The first one, EUR 110,000,000 cost savings is in 2018. Can you confirm if that's a total for the full year?
Or is that the run rate of the Q4? And then the second one yes?
That is actually we said it from the very beginning and we delivered on that. It is CHF 110,000,000 in year bottom line impact in
the year. Okay. Perfect. And then finally, could you give us some idea of what the ongoing cash pension cost will be for the business now that the chemical business has been stripped out and the top up payments are no longer there for the pension?
Yes. So we've indicated that in your presentation. So basically, the cash top ups after the settlement we do in the Q1 are basically diminished. And we've indicated in the slide that this in the coming years, it's a kind of €10,000,000 plus top up payment every year. So it's basically diminished.
That's I wasn't clear about. I'm not just talking about the top up payments. I'm talking about the total cash contributions from all of your pension schemes, including the European schemes.
Yes. But that's actually very limited because the U. K. One was actually so we used to have also the German one, but that actually went with the chemicals sale. So in fact, on other schemes, it's actually extremely limited or actually negligent.
But you have
to have payments into the pensions every year is limited to the top up payments in the UK schemes?
Yes. That is that's actually it, yes.
Okay. Very interesting. Thank you.
Okay. So that's it for the questions today. Thank you for joining the call. And for additional information, please contact Investor Relations.
Thank you. And that concludes today's conference. Thank you all for your participation.