Earnings Call: Q3 2018

Oct 17, 2018

Welcome. Thank you for standing by. At this time, all participants are in 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. Please go ahead. Hello. Welcome to the Akzo Nobel investor update for Q3 2018. I'm Lloyd Midwinter, Director of Investor Relations. Today, our CEO, Thierry Vanlancker, and CFO, Maarten de Vries, will guide you through our latest results. We will 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 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, including answers to your questions. I now hand over to Thierry, who will start on slide two of the presentation. Thank you, Lloyd. Good morning, everyone. Thank you as always for joining the call. During the third quarter of this year, we made further and firm progress towards becoming a focused, high-performing paints and coatings company. Profitability increased for both paints and coatings as a result of our pricing initiatives and cost-saving programs, despite challenging market conditions, including high raw material costs and adverse foreign currencies. Our price mix was 6% higher, while volumes were lower, the lower volumes partly driven by our intended strategy to move away from lower margins, given our value over volume strategy. We delivered EUR 35 million cost savings during the third quarter from phase 1 of creating a fit-for-purpose organization, and we are now taking the next step in our transformation to deliver the next EUR 200 million cost savings by 2020. Completing the sale of our Specialty Chemicals business was a key milestone for the Akzo Nobel company. We have continued to build on our leading positions in the paints and coatings market with the acquisition of Xylazel in Spain, which strengthens our position as a leader in the Spanish Decorative Paints market. We have also completed the Fabryo acquisition, thereby achieving the number one position in Romania, as well as expanding our Dulux Decorator Centre network in the U.K. Slide three shows some of our key highlights for the third quarter 2018. Price and mix was up 6% as a result of our pricing initiatives, one of the major factors contributing to higher return on sales for both the paints businesses and the coatings businesses. Excluding allocated corporate center costs, return on sales increased to 12.3% compared to 10% last year. We have also made continued progress on implementing our integrated business planning, also known as IBP. All coatings businesses have now started the monthly IBP cycles, and the paints businesses are currently undergoing the training to be ready before the end of this year. Having a successful integrated business planning will be a key enabler for future performance improvement. Again, we achieved more than EUR 30 million savings during the quarter from our ALPS continuous improvement program, which continues to successfully offset fixed cost inflation. In addition, we delivered a further EUR 35 million cost saving from phase one of creating a fit-for-purpose organization. We are exactly on track to achieve the promised EUR 110 million cost savings for 2018. I'll provide more details about the next step in our transformation on the following slide. Our focus on value over volume, despite challenging market conditions, demonstrates how we are creating a high performance culture. Sustainability has been and will remain one of our core principles. It is part of how we do the business. We are again recognized as a leader in sustainability by being ranked the fourth in the Dow Jones Sustainability Index. This is the 13th year in a row that we have been ranked in the top 10 for our sector. All in all, I'm very encouraged by what we have so far achieved as we continue to deliver towards our Winning together 15 by 20 strategy. We are now taking the next step in our transformation, as summarized on slide four. Our plans will deliver the next EUR 200 million annual cost saving by 2020, contributing towards achieving our target on 15% return on sales, excluding unallocated corporate costs. Almost half the savings will come from integrated supply chain, while the rest will be achieved in SG&A and R&D functions. Cost savings will be achieved throughout 2019 and 2020, resulting in an estimated run rate savings of around EUR 240 million in 2021. The one-off costs associated with this next step are expected to be about EUR 350 million and will be incurred between now and 2020, with around one-third before the end of 2018. Some of the one-off costs are related to asset network optimization, and around EUR 60 million of these will be non-cash items. As a focused paints and coatings company, there are many opportunities to work closer together as we take the next step in our transformation, delivering towards our Winning together 15 by 20 strategy. On slide five, I will run through some of the key trends we are seeing in the markets where we operate. As expected, high raw material costs continued to impact us in the third quarter of 2018. Raw material inflation is projected to continue for the remainder of 2018, although at a slower rate than during the start of the year. Our robust pricing initiatives, as well as our cost-saving programs, are in place to compensate for higher raw material costs. This remains a key focus for us during the remainder of 2018 and as we look towards 2019. Demand trends clearly differ per region and per segment as usual. On the one hand, Powder Coatings continued the positive trend, while market conditions for Marine Coatings and Protective Coatings are still challenging, although these headwinds are reducing versus last year. In China, as we discussed in the second quarter, our value over volume strategy has resulted in lower revenue, especially when compared with the rapid growth in recent years, while we continued to grow in countries like India and Vietnam. Foreign exchange rates continued to represent a significant headwind due to several emerging market currencies, including the Argentinian peso, Brazilian real, and the Turkish lira, which, for example, devalued by up to 15% versus the third quarter of last year. The challenging market conditions are likely to remain the case for the rest of 2018, and we are focused on dealing with those headwinds. Slide six summarizes some of the financial highlights for the quarter. Quarter three revenue was flat in constant currencies, and price and mix were up 6%, with price realization gaining momentum. Our volumes were lower, partly due to our focus on value over volume. Roughly half of the volume decline was due to us consciously moving away from lower margins. For example, economy lines of paint in China, some opportunistic resin sales in Latin America, and non-value-adding tenders for Marine Coatings. The remaining volume decline was due to specific market dynamics, including challenges in emerging markets and for Marine and Protective Coatings, as well as other temporary impacts in supply chain. For example, changes of our distribution channels around the world. Return on sales was 230 basis points higher at 12.3%, excluding unallocated corporate center costs and up for both paints and coatings. I am very encouraged by what we achieved and the path that we now see to 15 by 20, even if we do not expect a straight line improvement of ROS to 15%, especially considering the smaller seasonal quarters of Q4 and Q1 ahead of us. During the quarter, we also announced the acquisition of Xylazel in Spain, and October 1, we completed the sale of our Specialty Chemicals business, as well as the acquisition of Fabryo in Romania. The quarterly trends for volume and price mix are shown on slide seven. Here you see that the price mix was 6% higher overall for the third quarter as a result of our pricing initiatives. Selling prices increased further, resulting in price mix up 5% for paints and 7% for coatings. Here you also see clearly that on the other hand, the volumes were 6% lower overall, as I said, partly driven by moving away from lower margin, given our value over volume strategy, as we already indicated the previous quarter. As mentioned, roughly half of the volume decline was due to us consciously and strategically moving away from lower margins. This was especially the case for Decorative Paints in China and Latin America. We have also walked away from some non-value-adding business, for example, some of those tenders in Marine and Protective Coatings. I now hand over to Martin, who will run through the financial results in more detail from slide eight onwards. Yes. Thank you, Thierry, and hello to everybody on the call. As mentioned earlier, our pricing initiatives are ramping up, and price mix was 6% higher overall. Revenue was flat in constant currencies. Volumes were lower, partly due to our focus on value over volume. Return on sales, excluding unallocated corporate center costs, consistent with the calculation of our 2020 target, was 12.3% versus 10% last year. Our pricing initiatives and cost-saving programs are dealing with market headwinds. However, we are not expecting our path to achieve 15% to be a straight line. Other activities, also known as unallocated corporate center costs, were EUR 42 million in the third quarter of 2018, nearer the current average quarterly run rate. Last year, this line item was favorably impacted by one-off items, as well as lower pension and insurance-related costs of around EUR 20 million. Adjusted operating income increased despite EUR 10 million adverse impact from foreign currencies. Operating income was also up, including EUR 6 million adverse impact from identified items, mainly related to the transformation, which now finalizes the EUR 120 million one-off cost associated with phase 1 of creating a fit-for-purpose organization, which we have announced in October last year. Turning now to slide nine. Raw material inflation was higher than previously expected, at more than EUR 100 million during the third quarter. Higher selling prices in both paints and coatings led to a positive price mix impact of EUR 140 million for the third quarter. Lower volumes, partly resulted from our value over volume strategy, impacted adjusted operating income by EUR 65 million. Our ALPS continuous improvement program achieved more than EUR 30 million savings during the quarter, successfully offsetting fixed cost inflation. Phase 1 of creating a fit-for-purpose organization delivered EUR 35 million cost savings during the third quarter. Price increases and cost savings were able to compensate for higher raw material costs during the quarter. We remain focused on dealing with the market challenges and delivering towards our Winning Together 15 by 20 strategy. Adjusted operating income was also adversely impacted by EUR 10 million adverse foreign currencies, primarily due to the translation impact of several emerging market currencies, including the Argentinian peso, Brazilian real, and Turkish lira. Moving now to slide 10, the financial results for Decorative Paints. Price mix was 5% higher versus 4% in the second quarter, with price realization gaining momentum. The volumes were lower in all regions, mainly due to continued focus on pricing initiatives. Revenue was flat in constant currencies. Exchange rates adversely impacted revenue of Decorative Paints by 6% due to the devaluation of the Argentinian peso, Brazilian real, and the Turkish lira. Return on sales was up 12.1% versus 9.4% last year. Adjusted operating income increased 21%, with improved pricing and costing savings more than offsetting higher raw material cost, currency effects, and lower volumes. This shows our value over volume strategy is working. Operating income was adversely impacted by EUR 3 million identified items related to the transformation. Turning to Performance Coatings on slide 11. Our pricing initiatives and Performance Coatings continued to gain traction, resulting in 7% positive price mix compared to 5% last quarter, with further increases planned. Volumes were lower mainly for Marine Coatings and Protective Coatings. In some cases, we've walked away from non-value-added business. Powder Coatings continued the positive trend with growth of 9% in constant currencies. Revenue for Performance Coatings was overall flat in constant currencies. Adjusted operating income increased 16% as results of the pricing initiatives, the positive impact of asset network optimization and cost control more than offset adverse currencies, higher raw material costs, and lower volumes. Return on Sales was up at 12.2% compared to 10.3% in the third quarter of 2017, and up for all businesses. Operating income was negatively impacted by EUR 6 million identified items related to the transformation. Over to slide 12, which shows the results for Specialty Chemicals reported as discontinued operations. Revenue was up 6% in constant currencies, driven by 10% higher selling prices as raw material price increases are being passed through. Adjusted operating income was lower, mainly due to adjustments to environmental provisions and other one-off items totaling EUR 35 million. The sale of Specialty Chemicals was completed on October 1st, 2018. Turning to slide 13. During the third quarter, total net income, that's for continuing and discontinued operations, increased as a result of higher operating income and lower net financing expenses, as well as higher profit from discontinued operations. Earnings per share was EUR 1.18 versus EUR 0.86 last year. Adjusted earnings per share excludes the impact of identified items. Moving to slide 14. Free cash flow for paints and coatings increased for the third quarter due to higher profit and lower capital expenditures, despite higher operating working capital. Operating working capital increased mainly due to higher trade receivables, which have reduced during the quarter, and increased inventories driven by higher raw material costs. At the end of the third quarter, net debt was EUR 2.7 billion, versus EUR 1.7 billion last year. Net debt includes the EUR 1 billion special cash dividend, which was paid in December 2017 as advance proceeds for the separation of Specialty Chemicals. The sale of Specialty Chemicals was completed on October 1st. A timeline of recent and upcoming events is shown on slide 15. Akzo Nobel announced in April 2017 the plan to separate Specialty Chemicals within 12 months. Advance proceeds were paid as a special dividend of EUR 1 billion in December 2017. In March 2018, the sale of Specialty Chemicals was announced. Earlier this month, we announced shareholders will receive a further EUR 5.5 billion following completion of the sale of Specialty Chemicals business. The additional EUR 5.5 billion proceeds will be distributed using a capital repayment and share consolidation of EUR 2 billion, special cash dividend of EUR 1 billion, and share buyback of EUR 2.5 billion. The capital repayment and share consolidation will be subject to shareholder approval at an extraordinary general meeting to be held on November the 13th this year. This means a total of EUR 6.5 billion will have been distributed to shareholders, delivering on a commitment to return the vast majority of the EUR 7.5 billion net proceeds from the separation of the Specialty Chemicals business. Turning to slide 16. The ordinary dividend relevant for Akzo Nobel as a focused paints and coatings company is EUR 1.65 per share, EUR 1.65 per share, as announced on April the 19th, 2017. Therefore, an interim dividend of EUR 0.37 per share will be paid for 2018. The interim dividend will be paid in cash because the scrip option has been suspended until further notice. Our dividend policy remains stable to rising going forward. I now hand back to Thierry for some concluding remarks. Thank you very much, Martin. In summary, we made further progress towards becoming a focused, high-performing paints and coatings company during the third quarter 2018. Profitability increased both for paints and for coatings as a result of our pricing initiatives and cost-saving programs, despite challenging market conditions, including high raw material costs and significantly adverse foreign currencies. We delivered on phase one of creating a fit-for-purpose organization and continue to build on our leading positions with bolt-on acquisitions. Completing the sale of our Specialty Chemicals business was a key milestone for us. We're now taking the next step in our own paints and coatings transformation. I'm encouraged by what we have achieved and very proud of what the organization is doing. Although we do not expect a straight line improvement to 15%, especially considering the smaller seasonal quarters of Q4 and Q1 ahead of us, but are very much emboldened to reach the 15%. Our updated outlook is shown on slide 18. We are delivering towards our Winning Together: 15 by 20 strategy and continue creating a fit-for-purpose organization for a focused paints and coatings company, contributing to the achievement of our 2020 guidance. Demand trends differ per region and per segment. Raw material inflation is projected to continue for the remainder of 2018, although at a slower rate than during the start of the year. Robust pricing initiatives and cost-saving programs are in place and will remain in place to address the current challenges. We are taking the next step in our transformation to deliver the next EUR 200 million cost savings by 2020, incurring a total one-off cost of EUR 350 million between 2018 and 2020. I now hand it back over to Lloyd for information about upcoming events and for the Q&A session. Thank you, Thierry Before we start the Q&A session, I would like to draw your attention to some of the upcoming events as shown on slide 19. We will hold an EGM to approve the capital repayment and share consolidation on November 13th, 2018, and our Q4 and full year results will be announced on February 13th, 2019. 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 two 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 to introduce your question. To cancel your request, press star followed by the number two. One moment please, for our incoming questions. Speakers, the first question comes from Paul Walsh from Morgan Stanley. Your line is now open. Thanks very much. Morning, Thierry, Maarten, Lloyd. In terms of my two questions, firstly, Thierry, just on the phasing of the EUR 200 million that you've quantified this morning, how should we think about the phasing of the delivery of that EUR 200 in 2019 and 2020, both in terms of the P&L benefit, and the cash cost? My second question, I was a little bit surprised to see the gross margin down a few bits year-over-year in the third quarter. Admittedly, that's on a reported basis. I guess my question is, given the price initiatives and the positive mix, can you help me understand what's going on at the gross margin level, please, as well, and how we should think about that moving forwards? Thanks, Paul. Just let me try to get the two questions on, but let me start with the second question. When you talk to the gross margin, you probably refer to what we see the contribution margin in %, I presume. Yeah, that's right. I think if my math is right, it's about a 43 number in Q3 this year, and it was like a 43.3 number last year. I was just expecting, given the pricing dynamics and the mix, for it to have been up year-on-year. Yeah. Okay. All right. That we can handle also to just want to understand your question. On the phasing of the EUR 200 million and the cost, I think, Martin, before you give the details, just want to point out that the EUR 200 million is what we will see as the delivered cost savings in 2020. In 2021, that program would actually deliver EUR 240 million. As some of these things will be implemented during 2020, in fact, the scope of the program is larger than that. Martin, you maybe want to talk about the exact phasing that we have in mind. Yeah. The phasing of the EUR 200 million savings, first of all, you should think of a kind of a 50/50 phasing. Roughly 50% will fall in 2019 and roughly 50% in 2020. That's the phasing of the savings. If you look at the phasing of the EUR 350 million, I think it's important, and that's the one-off cost. It's important to first recognize that out of the EUR 350 million, EUR 60 million is non-cash. These are write-downs related to our assets network optimization. EUR 290 million is really restructuring implementation cost related. How we will look at this now is that we will recognize roughly one third in 2018 in the fourth quarter, the majority in 2019, and then there will be still a piece remaining in 2020. Okay. Did that answer your question, Paul? For sure. On the margin. On the margin. On the margin, I think, the way you need to think of, and we've been flagging that all the time, is that we focus on, with our pricing actions, to compensate the raw material impact in an absolute amount. As we flagged the EUR 300 million of last year, and in fact, year to date, we talk about roughly EUR 350 million. With our pricing actions, we are focusing on compensating this absolute amount. From a percentage perspective, that will look still differently because from a percentage perspective, we will continue to trail as we talk about the margin of 40+%. If you go to the math, Paul, if for a 50% margin business and if your raw materials, you would almost have to do double that percentage in price. That remains the objective, but that takes a longer time, and there you also have to see what the market does. As we compensate for the raw material, we will see a 1%, 2% impact in the percentages, just by the pure math of it. In terms of the Return on Sales margins, as it were, that's very much about the cost takeout then in terms of the main levers and any operational gearing you might get from volumes further down the line. Yeah, correct. On the pricing, we're not done with the pricing yet, that actually should give a bit of a clawback on where we are. Yes, you are right. The rest is really through variable cost optimization, fixed cost optimization, et cetera. Correct. Okay, gentlemen. Thank you very much. Yeah, thanks. Speakers, the next question comes from Thomas Wrigglesworth. Tom, your line is now open from Citigroup. Thank you very much. My two questions. Thank you. Just as following up on that, obviously you've indicated there's about EUR 350 million of costs this year as we look towards the fourth quarter. What are your total expectations for costs now for FY 2018? Given you've had some wiggle room delivering on the third quarter, can you offset that in the fourth quarter? A second question, just with regards to the actual mechanical one, the FX drop-through. You had a drop-through in your bridge of €10 million for about a 4% headline impact to FX this quarter. When I look at the second quarter, you had 5% FX impact, but a €20 million impact to operating income. Could you just help me understand why the drop-throughs change so much on the FX? Thank you. Yeah. All right. On the first one, I think, Martin, you should probably handle both questions. Yeah. On the first one, the raw material, as indicated, indeed, year to date, we are sitting at EUR 350 million. Going forward, we see the raw material impact flattening out, but at a higher level, clearly. You've also seen during the year that the oil price has further increased. We still see an impact in the fourth quarter. Given the comps versus last year, that impact is, as I said, flattening out on a higher level. On the FX part, the FX translation impact you see in the third quarter is very much related to the emerging markets currencies. I flagged that, the Argentinian peso, the Brazilian real, the Turkish lira. The thinking is that the impact you see in the third quarter, I think you could also see an impact going forward in the fourth quarter as well. Want to point out that in these hyperinflation areas, because that's frankly what those three countries are, we do have a very strong position. We are the number one in South America for paints and coatings. There, if you have devaluations of the order of magnitude like the Argentinian peso, which is about 100% devaluation. Despite that, I think the team has done extremely good work to try to offset as much as possible. I think we're encouraged that despite all those pretty big impacts on FX that have been happening, that we actually have been able to maintain our results. That actually bodes well for the future also. Does that answer your question, Tom? Yes. Thank you. Just as a follow-up on the raw mat. Should we expect an acceleration of prices into the fourth quarter? Is that possible within the context of the fourth quarter being a smaller quarter with a Christmas effect? Well, it is. There is ongoing. This is probably also going to be something beginning of 2019, because some of the businesses have more an annual cycle for price increases, and that definitely will be used. The question, the answer is yes, because we have the stated ambition to at least offset our raw material costs, and I think we are well on our way to do that. One of the items I want to point out, though, because on the volume question, it is because the % work out, it would be the wrong conclusion to say that the price increase results to share loss. The overwhelming part of that is really businesses we walked away from. Economy line paints in China, we discussed this last time, and in fact, given the raw material evolution, I think that was the right decision. Also like in LATAM, where we opportunistically divested big volumes, but there was no margin in it anymore. We took that business out and the cost out at the same time. Some auxiliary products like putties, which were often told for us, by the way, where given the raw material and the lack of pricing traction in those segments, we just decided to walk away. Give you an example, in South America, we sell four times the volume of putties versus what paint is. All of the money is made on the paint. The volume losses in our real paints and coatings markets are actually very limited. I just want to point it out that there is no wrong conclusion drawn from that. Very clear. Thank you very much. The next question comes from Tony Jones from Redburn. Tony, your line is now open. Thank you. Good morning, everybody. I had two. Just back on the volume and the value and bottom slicing. You've called out the lower value paints in China and the resins in Brazil and marine, but I just wanted to check, is there anything which is more late cycle that we don't see yet, perhaps as contracts expire? Something to think about for Q4 and early 2019. Then circling back to Martin Evans's comments on the raw material guidance. It's right to call out the additional headwind that you see. I'm already modeling EUR 380 there, which could be far too high, but is it possible you could give us maybe a new range, EUR 300-360 or whatever you think is appropriate? Thank you. Tony, thanks for your questions. Let me first handle the third one on the volume and value. To answer your question, not that I'm aware of. That goes back to the comment I made around I don't see any of our businesses where we really lost volume because of our pricing, and there I'm talking about the non-bottom slicing, as you call it, so in our core business. If I look at it, an impact that we had this quarter, we had made a significant amount of distribution changes, which I think are all for the better. Of course, if you make a distribution change between distributors, you have to take the inventory back, which is actually a negative volume at that moment of time. That's all in our numbers, and there were a couple of these events around the world where we did that. There is no contracts which would be expiring where we feel we're going to fall off a cliff at all. Absolutely not. I think we are more assertive. I think we take more drastic actions on our pricing maybe some of our peers doing, but I think that's just a matter of timing more than anything else. There, I think there's no other shoe to drop that I'm aware of that I see coming in our portfolio. On the raw material guidance, Martin, if you want to make some comments. Yeah. I mentioned earlier the EUR 350 million, indeed that the raw material prices are up, and we see them flattening out although at a higher level. If I would give a number attached to this, the current thinking would be more around the EUR 400 million. I'm careful to be too specific, and I think it's also important to mention too that this includes impacts also of increased logistic cost and packaging material, et cetera. That is kind of the way you need to think about it. Perfect. Thank you very much. That's really helpful. The next question comes from Gunther Zechmann from Bernstein. Gunther, your line is now open. Hi, good morning, everyone. Staying with raw material costs, I'm afraid. What's your outlook for 2019? You mentioned that it's flattening, that for this year it should be somewhere EUR 350-EUR 400. If we just assume a straight line there, just from a lapping perspective, it should be half of what we've seen in 2018. That's the first question, if that's the right way to see it. The second on pricing, running against that, you mentioned in the release and on the call that you have further price increases that you're looking to implement. If you only take the currently announced and price increases that have gone through in the market, would that be sufficient to offset next year's raw material cost inflation? Thank you. Gunther, thanks for your question. Of course, you ask us to have the crystal ball out and see what raw materials are doing. Just suffice it to say that the principle we're going to be holding is whatever raw material increases we see, we will pass on through price increases to the market. We'll probably do that more in real time than what the industry has been doing over the last 18 months. In that sense, we just monitor what's happening, and that's how we do our pricing policy. More importantly, I think we do expect for 2019, and again, these are famous last words because it's probably going to be different what's happening in 2019. Right now I think we see it more stabilizing at the level that it's going to be coming out of 2018, which is a bit of an upsize margin-wise, because if you see how we did our pricing over the year, we basically would have done the full impact of offsetting than anything else. I think that's on the raw material. I don't know, Maarten, if you want to comment more on that. No, that's indeed how we look at it, and I'd like to refrain from giving specific guidance on 2019. For us, it's very important that we offset this with our price initiatives. Thierry mentioned earlier already that apart from what we're doing in Q4 and continue to do, we are also preparing the price increases on the 1st of January next year. Really the focus is on the raw material pricing coming in to offset that in amount with our price increases, and that's the full focus. Then of course, on top of that, the cost initiatives which we mentioned earlier. Gunther, your second question is around how are we going to be versus the raw material with the pricing, with what we have in place. I think when we look at all the different segments and everything that's happening with currencies, et cetera, we do believe we're getting very much at par with what the raw materials is. I think with then the last wave, we should be actually being at the same level or even a little bit ahead of the current raw material increases by the end of this year. I mean, Martin, I think that's how we look at it. Yeah. Including the 1st of January price increase. Correct. Yeah. Correct. Does that answer your question, Gunther? Yeah, absolutely. Thank you. Thanks. The next question comes from Alex Stewart from Barclays. Alex, your line is now open. Hi, thanks for taking my questions. First one, on the EUR 110 million program that you've got going this year, can I just check whether you mean that you're going to achieve EUR 110 million in 2018, or whether you're going to be at EUR 110 million run rate by the end of 2018? They have very different implications. Yep. Okay. Well, can we maybe just answer that question first? There's EUR 35 million in the third quarter, there's going to be about EUR 35 million in the fourth quarter. We had EUR 25 delivered in the second quarter, and we had like EUR 10 in the first quarter. Actually it really adds up to the EUR 110 million that we said. That's all implemented, and that would be then an underlying run rate, of course, also as EUR 35 going into 2019. As we said before, the EUR 110 was what was going to be delivered to the bottom line in 2018. EUR 35 would be four times 35 per quarter. I mean, that's what we expect as the underlying delivery of that first step in 2019. Okay, that's really helpful. Thank you so much. Yeah. Go ahead with your second question, though, because I interrupted you. Apologies if you've answered this already, and do say if you have answered it, the commentary in your release suggests that the high raw material costs have been offset by a combination of pricing and costs and asset optimization and stuff like that. The bridge in your presentation implies that actually just pricing and raw materials as a balance is positive. Can you clarify whether pricing on its own has offset raw materials, or whether you need the contribution from cost savings as well? If you said it already, please do shout. I'll just read the transcript, I might have missed it. Yeah. If you look at price mix in the third quarter, that is offsetting the raw material price impact. Price mix is EUR 140 million, the raw material price impact in the third quarter is EUR 108 million. Indeed, compared to previous quarters, it's the first quarter where in the quarter we are offsetting this. Overall, I think we talk about the total package of price mix as well as cost savings to mitigate all the headwinds we have from a raw material perspective, also from an FX effect perspective. Plus also, Alex, to build on that, we have been saying that the industry, as included since the end of 2016, when the raw material inflation started, hasn't really caught up with pricing. In fact, we made it a very clear goal that we wanted to offset everything that had happened since end of 2016 by the end of 2018. There was even some catching up to do from the year before. That's why we are offsetting what came in in the last year already very much, we actually are well on our way to offset what came in before that in end of 2016 and in 2017. Okay. That's great. Thanks so much for your answers. Thank you. The next question comes from Georgina Iwamoto from Goldman Sachs. Georgina, your line is now open. Hi, good morning, everybody. I just wanted to see if you could give us some guidance around your corporate costs going forward. I think they keep coming in just a little bit above market expectations. If you could give us an idea of what to look at for the fourth quarter and then next year. If you could also maybe give some comments on how to think about the top line for 2019. How do volume trends look in your end markets, regardless of what you're doing on the mixed front in terms of your bottom slicing initiatives? Thanks. Yep. All right. Maarten, do you want to cover the corporate cost one? Yeah, the corporate cost, you've seen that corporate cost came in at EUR 42 million in the third quarter. I've also indicated that that is kind of what we see as the current run rate of the corporate cost. I think it would be fair to assume, looking forward to the fourth quarter, that we are more or less at this run rate. Going forward, as part of the overall initiatives to further reduce our cost, we also are looking forward to make further reductions in the corporate cost, but we don't give specific guidance on how this will look like in 2019, apart from the fact that we have said that by 2020, we are looking at a corporate cost level which sits in the middle of what it was for 2017 and 2016, which is in between the EUR 115 million-EUR 188 million. You talk about roughly EUR 150 million, EUR 160 million by 2020. Your second question then, Georgina, is around the top line in 2019, and there's a number of effects that are actually going to be coming in there. FX has been a big impact on this. If you look underlying, I think we feel that the revenue line has been flat despite all the bottom slicing that we've been doing in our business. In Deco, actually, we're pretty positive. In the product line that we have right now, we see pretty positive. If I go to the extremes, I would say on China, what is really our Dulux brand is doing quite well. I think there's no real worry there. Other key markets like the U.K. are actually doing very well. In that sense, that is pretty positive for 2019. In Deco, same is actually for Latin America, where we have a very strong performance, totally overshadowed with the current FX. If you look underlying, significant steps in the quality of the business and in size of the business in South America. If you go to our Performance Coatings, there you really go from the extremes. You have Powder Coatings continues to be a rock star in our portfolio, and really getting close to double digits, and I think that's going to continue to advance. The other businesses, Industrial, ACS, we think that's going to be the GDP-like growth that we will continue. Marine and Protective, that for us may be the most difficult one to forecast because on the one hand, Marine is still not back on its feet, and you see that also in this quarter. At the same time on Protective, which is the other half of the universe in that business, there you do see a significant increase in projects, capital projects in oil and gas, which is our forte. The question is, how much of that sales are going to be happening in 2019? That bodes well for 2019 and for 2020, by the way. We typically come 12 months after the start of those programs to put the corrosion of fire protection on it. For the revenue line, I think we pretty much see the 2% we gave as a very realistic view for next year. Very realistic. Thanks very much. The next question comes from Jeff Hare, UBS. Jeff, your line is now open. Good morning. Just two quick questions. One is, I'm just wondering what benefit did you get from the hyperinflation that you saw in the emerging market in Turkey, sorry, in the emerging market countries, in the top line, if there was any? If you could quantify that. Just how much more bottom slicing is there to go in the portfolio in both Deco and in Performance for next year? Yeah. On the hyperinflation on the top line, it's true, Maarten, if we've done the addition on what the real impact is, but giving some of the examples, in Brazil, for example, or in Latin America, if you look in local currencies, in fact, our revenue went up quite significantly just under the double-digit growth, which is actually enormous for a number one in the market. If you now translate it back, it's almost like 18% down, I think, in currency, if you bring it back to EUR. I don't know, Maarten, if you can maybe comment a bit on the overall impact. Yeah. If you look at the impact is very much in Turkey, Brazil, and Argentina. In Turkey, we've seen an inflation of, what is it? Roughly 50%, Brazil 20%, and Argentina around 100%. That, of course, drives a translation impact of the results in EUR. Plus the fact that in those markets, and we've seen that specifically in Turkey and Argentina, there's also a consumer confidence issue, which impacts then our volumes and our top line as well. That is the way you need to think of it. Just to give an example, in certain places like Argentina, if you bought the same pot of paint beginning of the year and you buy it now, you look at a 76%-80% increase in local currency pricing. It's probably a good investment for people to put their money in paint versus in the bank, I think. That's one thing. The second thing is around the bottom slicing. I think as we progressed, I think we've been indicating that when we did the whole portfolio work, that we identified a significant part of the portfolio that was not generating its fair share of earnings, as you would expect. We looked, I think we even discussed it, was this 10% of the portfolio we felt we had to take steps. Part of these steps was indeed getting the prices back in line or take other measures. Some of these segments, in fact, are turning more to the yellowish green as we do the pricing movement. I think if you talk about a bottom slicing, I would not be surprised that as we go through this movement, there is still a couple of percent of the business that frankly is where we decide to walk away from. I would be hard pushed to put a percentage around it right now. That's ongoing, I think, where we do the mix enrichment, the pricing, where the cost saving work, to stay with our two percentage of growth as we gave as the target for the company while delivering on the 15 by 20. That's frankly all the KPIs you look at is through those glasses. Okay. Does that answer your question, Jeff? Yep. Thank you very much. Thank you. The next question comes from Laurent Favre from ODDO BHF. Laurent, do you have your question? From MainFirst, they're open. Good morning. I have two questions left on cash flow conversion. The first one is on CapEx. Looks like you're run rating below EUR 200 million. I mean, is this a realistic level given the weak volumes environment? Or should we expect that this year's a bit exceptional and that CapEx goes up again next year? The second question is on working capital management. Given the inflation in the system, I was a bit surprised by the inflow in the third quarter. I'm just wondering, again, is there something a bit exceptional there, or should we assume that you found a few areas that you can improve working capital management? Thank you. Okay. Well, Laurent, let me try to do the CapEx one and then hand it over on the other working capital elements for Maarten. On CapEx, we are indeed somewhat lower on what the normal spend is. We have been saying a couple of times that a EUR 250 million a year should be plenty to cover what we do. As we have been setting up another governance on the capital projects, which is probably a bit more tighter than it was before. It's actually an active debate in our Executive Committee, are we being too stringent now on it? I think we feel that we're somewhat understanding the capital weight that we should have, although I think we do all the critical CapEx that we need. There is probably CapEx we could use to get our efficiency in some of the plants up on filling lines, et cetera, and we want to make sure that we don't miss those opportunities. I think that's more because of the more rigorous system that we put in place, that there is a bit of a delay. In fact, if you look at it, the capital spend is getting back to what it should be. It's more, I think, the beginning of the year, there was some understanding as we were getting to different controls, et cetera, for that. I think for the guidance, as we said, with everything that we are planning to do, even the changes in our network, et cetera, I think the EUR 250 million guidance for CapEx spend on annual basis, you should still see as the upper range of what we should be spending to maintain a business like ours. Maarten on the second. Maybe to add to that, indeed, for this year or so going forward, the EUR 250 million is how you need to look at this. For this year, it's indeed correct that we will sit below the EUR 200 million. That's a correct observation, adding to all the comments Gerry made. On working cap, I think there are a few topics there, which first of all, inventory. If you look at the absolute amount of inventory, it's good to note that it includes roughly a EUR 70 million impact from the higher raw material prices. From an absolute amount, that is sitting in that number. On the receivables, the receivables we saw coming down somewhat in the third quarter, if you look at the total working cap, there is still work to do to further decrease and address this during the fourth quarter, and that has also our focus. Does that answer your questions, Laurent? Absolutely. Thank you. Thank you. The next question comes from Peter Clark from Societe Generale. Peter, your line is now open. Yes. Good morning. Thank you. I have got a couple of follow-ups. On Jeff’s question about the bottom slicing. Would I be right in thinking though, you are not expecting that sort of 3%, 4% to continue for long or repeat? Because it seems quite a lot of bottom slicing going on that we saw in the third quarter. The second question is around the marine and the continuing decline in the new build, particularly. Just wondering if you were prepared to give us a sort of feel for what the new build proportion is of marine against the refinish or maintenance as we look at, say, a 2018 year. Thank you. On the first question, Jeff, you cannot keep bottom slicing forever, of course, otherwise you have nothing left. We have already been indicating it is not our ambition to shrink. On the contrary, we want to stick to the 2% growth that we have. I think at one point, this is going to even out. Again, as I am saying, the percentages that we talked about was also a lot with, I think, good steps we did in our distribution, which then also temporary has an impact on the volume, which we share. On the bottom slice, I think that should go back to normal in the next coming one or two quarters. I think we should be back to the normal rate. The second thing on marine and protective, I do not have the exact build numbers here in front of me. In fact, in the third quarter, what we saw was some delays in actually the refinish, the repair part, because that industry is still suffering quite a lot. Having said that, our marine and protective business on the bottom line is doing better. I think that if you would call that bottom slicing, focusing on where we really add the value, I think it is working out for that business. Bottom line-wise, it actually looks much more positive for us. On the volume-wise, I think there you could say we really go to a more targeted approach. We can follow up, Lloyd. I do not have the new build numbers in front of me. Okay. Thanks very much. That shifted with the declines in the new build, which have been double-digit during the last 12-18 months. Okay. Thank you. Thank you. The next question comes from Mutlu Gundogan. Mutlu, your line is now open. Yes, good morning. Two questions on volumes. Apologies, maybe I missed it, but did you quantify the impact of the bottom slicing in the third quarter? Well, we did. If you look at the 6% in total, half of it is actually very consciously us stepping away from those volumes. That includes the low economy lines and auxiliary product in China. Same as I said, auxiliary products like putties, et cetera, in Brazil, and some opportunistic resin sales that we had, all big volume items, but frankly, with not much margin even historically associated with it. That's about half of it. The other half of the volume is basically split between the ups and downs in specific markets, also because we're more aggressive on price, so there is some temporary impact there. Plus other elements around supply chain, et cetera, that we've done that basically is the other half of the half in the volume. Yeah. Plus what we mentioned earlier, the lower volumes of Marine and Protective- Correct which is basically the market dynamics. Yeah. Another question on, you said that you expect that to normalize in maybe one or two quarters. Would you say that the 6% decline that you report is the low point? Well, it's not the intent to keep that at that level. I mean, that's definitely correct. If we look at what happened in the third quarter, I would say that there is a number of things coming together. Don't underestimate it also for the hyperinflation countries. We talk about the currency, but you can imagine if you're a distributor in Argentina or in Brazil or in Turkey, you don't necessarily want to order your warehouse, so you manage the cash, et cetera. That has an impact where people really almost do what they have to do. I would say that is probably a lower point. To be very honest, it's not a KPI that we follow. As we go to our portfolio work, frankly, if we see elements where through pricing, we can redirect resources to businesses that have much higher value and actually would have a much higher growth potential, we will not hesitate to walk away from just volume that has no value associated with it. That, by the way, creates opportunities for our whole network to get it much more tighter to basically work on our cost base. The good example I gave is in our teams in Latin America who walked away from opportunistic resin sales, big volume, but no margin associated with that, and at the same time, took out the cost, the production cost and all of the costs associated with it. I'm not adverse for doing those actions where it makes sense. Understood. Thank you. The next question comes from Markus Mayer, Baader Helvea. Markus, your line is now open. Yeah. Good morning, gentlemen. Two questions left. The first one is on your competitive environment over the past years looked like that your competitors are quite aggressive in at least trying to gain market share, and now it looks like that they also have quite significant problems from the raw material cost side. Do you see a change in their business behavior in their respective markets? Secondly, again, on Marine Coatings. In the past, also the higher oil price was always a good trigger for higher volumes when it comes to the maintenance work of the ships. Is this something you expect to happen over the next quarters? Thank you. Thanks for your questions. On the first one, the competitive environment, I think it's fair to say that we've probably been more assertive on pricing, because we have the value over volume. Nobody here gets a salary paid by share, it's by the money that we make, so that's what we keep focusing on. It's twofold. I think the big players, we do see in different degrees of trying to get their prices in line with raw materials, because the raw material impact has been so significant that you can't ignore that for very long if you want to do the share gain. I think that's happening, maybe with a bit of a lag, maybe at least in our perception, but I think that hopefully will come in those markets. What we do see, though, in specifically some emerging markets, That's in the segments where we consciously walked away from, you have some local players, smaller companies then, who frankly go after business where we believe that they really are not making any money anymore, but just keep the volume. We've seen that in fact in some of the tenders in Marine and Protective, where if we do the simulation of where raw materials go, then the tender prices, where they go, we know that it actually is going to be as a zero-sum game to go there. In addition, these are complex markets with quite some liabilities associated to it. That's why we actually didn't want to go there. It's probably more the smaller players we see diving onto some of those peripheral businesses. The second thing around oil and gas. Yes, Marine does respond to oil and gas. We haven't seen that just yet. That is maybe coming, but again, that may be with a time lag. We are not building our 15 by 20 on a big recovery in Marine. If it comes, it's a plus. If it doesn't, well, we have the plans in place. For oil and gas markets themselves, that's where you see really the pipeline filling of capital investment by the oil and gas industry. There we have had traditionally a number one role, very good value businesses where we have the right portfolio. There we're a bit more optimistic to see that coming. That's probably going to be more as of the second half of 2019, depending on the length of these projects and how they get finalized. Okay. Does that answer your question? Yes, very clear. Thanks very much. Okay. Thank you. The next question comes from Martin Evans from HSBC. Martin, your line is now open. It's just a very quick presentational question, actually, on the margin on ROS. You're very hard to understand. Can you hear me now? Yes, we can. Hi, sorry about that. Just a very quick presentational question. You probably answered it before on ROS, the margin calculation and the fact that, if I'm correct, on the two key divisions, coatings and paints, you haven't allocated any corporate center costs, therefore the margins would appear to be sort of probably 200 basis points higher than they might be if you did. If that's correct, can you just sort of remind me of the rationale for not allocating corporate center costs between the two remaining divisions? Is this simply due to the dislocation from exiting Specialty Chemicals, and therefore you will subsequently restate at a lower level, or not? Thanks. A good question. The short answer is yes, because when we came out with the 15 by 20, that goes back to April 19 of 2017. That's when we were still one company. We wanted to make sure that there was no confusion on what numbers we're talking about. It also wasn't very clear at that moment of time which costs would exactly go where, with Specialty Chemicals, so now Nouryon and then with us. That's why we focus on the businesses. We also have been saying, though, that there is a bracket with this corporate cost. There is no moving tricks here by having costs going to the corporate level. We've actually chosen to, and we actually will continue to do that, to stick on what the businesses deliver under the premise that the corporate cost is very well maintained and contained, and there's a lot of effort on that one to bring it back, too. That's why you often read that 15 by 20 refers to the businesses, but I think we've made it pretty clear every step of the way since April 2017 what we're talking about. Maarten, I don't know if you want to have more comments on that. No, I think this is exactly how we have positioned this, I think it's important to be aware. Yeah. In fact, what actually has worked very well for a company that was probably a bit more decentralized, if you go from any plant deep somewhere in China to Brazil to the U.S. to in Europe, 15 by 20 is tattooed on everybody's left shoulder. If we now start changing that number, we have to redo the tattoo, that would be a waste of time. That's why we stick to that target internally and probably also externally. Okay, thanks. This is all the time we have for questions today. Okay, thank you very much for joining the call. If you do have follow-up questions, please contact Investor Relations, we'll be happy to help you. Thank you. That concludes today's conference. Thank you for your participation. You may now disconnect.