Welcome and thank you for standing by. At this time, all participants will be in listen only mode until the question and answer session of today's conference. 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.
Hello, and welcome to the Out in the Well Investor Update for Q2 2018. I'm Lloyd Midwinter, Director Communications and 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 the
presentation. Please note, this is also applicable to the conference call and answer to your questions. I now hand over to Thierry, who will start on Slide 2 of the presentation.
Good morning, everybody, and thank you for joining the call. We are making continued progress with our transformation, including disciplined execution of what we announced last year, the first phase of our creating a fit for purpose organization, which delivered €25,000,000 of savings in the 2nd quarter. Decorative Paints delivered a strong performance with ROS up year over year due to higher selling prices and cost savings compensating for higher raw materials. Pricing initiatives for Performance Coatings are also gaining significant traction and closing the gap, resulting in a sequentially improved trend for ROS. At the same time, we continued investing in our market leading positions, including the acquisition of Fabryo in Romania and the opening of the new Powder Coatings plant in Changzhou in China.
Slide 3 shows some of the key areas where we have made progress during the Q2 in our Winning together: 15 by 20 strategy. Selling prices were up 4% in quarter 2 as a result of our very focused attention on margin management, contributing to higher return on sales for Decorative Paints and the closing of the gap for Performance Coatings. During 2018, we are implementing integrated business planning and now all Performance Coatings businesses have been trained in the methodology. This is obviously a key enabler for future delivery. Our ALPS continuous improvement program has been delivering savings year on year since 2014.
In this quarter, we achieved more than €30,000,000 savings, in line with the historic run rate, which successfully offsets fixed cost inflation. In addition, what we announced last year as a Phase 1 of creating a fit for purpose organization is now fully implemented and delivering savings of €25,000,000 in the Q2. We are on track to achieve the announced €110,000,000 savings for 2018. We also continue to develop a more higher performance culture. Our incentives are now completely aligned to the achievement of 15 by 20, meaning 15% return on sales in 2020, following the approval at our AGM in April.
This is also the case for senior executives and other colleagues with a variable incentive program. So we are delivering towards our Winning together 15 by 20 strategy. I will now run through some of the key trends we are seeing in the markets where we operate as shown in Slide 4. As expected, higher raw material costs continue to impact us in the Q2 2018. This was due to the year on year effect of continued inflation through 2017.
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 are in place, as you've seen, to compensate for higher raw material cost. This remains our key focus for the commercial organization. For the remainder of 2018, we expect demand trends to differ per region and per segment. Generally, positive developments should continue for decorative paints, including the impact of our continued focus on pricing initiatives.
This is also likely to be the case for Performance Coatings, with the exclusion of Marine and Protective Coatings, where market conditions are still challenging, although also here the headwinds are reducing. In China, we have recently grown very rapidly. But as we are prioritizing our pricing initiatives, our year on year growth has been impacted by those initiatives. And also, of course, we compare with last year where we had significant new product launches. As predicted, foreign exchange rates have been significant headwinds during the first half of the year.
The adverse impact is likely to reduce significantly during the second half of the year based on current rates. Slide number 5 summarizes some highlights for the quarter. In constant currencies, our 2nd quarter revenue was up 2%, driven by a 4% higher selling price. This represents an acceleration of the increases we delivered in the 1st quarter. Raw material inflation resulted in a headwind of more than €130,000,000 during the Q2.
Despite this, the return on sales was up for Decorative Paintings year over year and Performance Coatings is sequentially very much closing the gap. During the quarter, we also announced the acquisition of Fabrian Romania, the number one decorative paints company in that country, and we opened our largest powder coatings plant in China. The quarterly trends for volume and pricemix are shown on Slide 6. The pricemix was 5% higher for the quarter, demonstrating the positive impact of our pricing initiatives. Selling prices increased 5% for decorative paints, with prices up in all regions, resulting in reported price mix being 4% higher overall.
Selling prices were up 3% for Performance Coatings, contributing to a positive pricemix of 5%. Volumes were 3% lower overall, mainly due to our focus on pricing initiatives. In some cases, we have walked away from non value adding business, for example, in Marine and Protective Coatings. I now hand over to Maarten, who will run through the financial results in more detail from Slide 7. Yes.
Hello, everybody, and thank you, Thierry. As mentioned earlier, our pricing initiatives are ramping up and selling prices were 4% higher overall. Revenue was up 2% in constant currencies. Volumes were lower mainly due to Marine and Protective Coatings. Return on sales, excluding unallocated corporate center costs, and that's consistent with the calculation for our 2020 target, was 12.1% versus 12.8% last year.
Adjusted operating income was mainly impacted by adverse foreign currencies as well as transformation related costs and other nonrecurring items. Operating income also includes €33,000,000 identified items mainly related to the transformation. Now turning to Slide 8, which shows the adjusted operating income bridge. The adjusted operating income was mainly impacted by €21,000,000 adverse foreign currencies and €20,000,000 nonrecurring items, which includes transformation costs. Raw material inflation was more than $130,000,000 during the 2nd quarter.
Price increases and cost savings are now compensating for higher raw material costs. Continuous improvement programs delivered around €30,000,000 savings during the quarter, successfully offsetting fixed cost inflation. This continues the run rate we have delivered in the past. Creating a fit for purpose organization resulted in €25,000,000 savings during the 2nd quarter, up from an initial $10,000,000 in the first quarter. Phase 1 is now fully implemented and we are on track to deliver €110,000,000 savings for the full year 2018.
Lower volumes were mostly related to Marine and Protective Coatings. A summary for Decorative Paints is shown on Slide 9. Revenue was 2% higher in constant currencies and price realization is gaining momentum and selling prices were up 5% overall, slightly offset by geographic product mix resulting in a 4% pricemix. Volumes were flat in EMEA but lower in Latin America and Asia as we focus on pricing initiatives. Return on sales was up at 12.2% versus 11.6% last year, the 2nd quarter.
Adjusted operating income increased with higher selling prices and cost savings offsetting foreign currencies, higher raw material costs and lower volumes. The operating income was impacted by €12,000,000 identified items related to the transformation. Moving on to Performance Coatings on Slide 10. Revenue was up 2% in constant currencies and 5% higher if we would exclude Marine and Protective Coatings. 3% higher selling prices contributed to 5% pricemix impact.
The volumes were 3% lower overall mostly due to Marine and Protective Coatings. In some cases, we've walked away from non value added business. Adjusted operating income was still impacted by foreign currencies, higher raw material costs and lower volumes. Pricing initiatives are gaining traction and closing the gap. Return on sales was 11.8% in the 2nd quarter versus 10% in the Q1 of this year.
Operating income was negatively impacted by €10,000,000 identified items related to the transformation. Slide 11 shows the results for Specialty Chemicals reported as discontinued operations. Revenue was up 7% in constant currencies driven by higher selling prices. Adjusted operating income was up 5% due to strong pricing and productivity improvements, partly offset by adverse currencies and one off environmental and restructuring costs. The sale of Specialty Chemicals is expected to be completed before the end of 2018 and the vast majority of the net proceeds will be returned to shareholders as we have communicated earlier.
Now turning to Slide 12. During the second quarter and half year twenty eighteen, net income was impacted by lower operating income, while profit from discontinued operations increased. Earnings per share was €1.06 in the 2nd quarter and €2.07 for the half year. Adjusted earnings per share excludes the impact of identified items. Moving over to Slide 13, where we show free cash flow and net debt.
The adjusted EBITDA was lower, while capital expenditures and pension top ups reduced. Operating working capital increased, mainly due to higher trade receivables and increased inventories also driven by higher raw material costs. At the end of the Q1, net debt was €3,200,000,000 versus €1,900,000,000 last year and €2,000,000,000 at year end 2017, up mainly due to the seasonality of operating working capital. Net debt also includes the €1,000,000,000 special cash dividend, which was paid out in December 2017 as advance proceeds for the separation of Specialty Chemicals. Now I'm handing back to Thierry for some concluding remarks on Slide 14.
Thank you, Maarten. In summary, we feel pretty good about the continued progress on our transformation into a focused paints and coatings company. We have now fully implemented what we announced last year as the first phase of creating a fit for purpose organization that is delivering €25,000,000 into the bottom line in the Q2. Decorative Paints had a very strong delivery of performance with a return on sales up year on year and Performance Coatings pricing initiatives are gaining traction and sequentially closing this gap despite headwinds in Marine and Protective. We also have continued to invest in attractive markets, including decorative paints in EMEA and Powder Coatings in China.
Our updated outlook is shown on Slide 5. We are delivering towards our Winning together 15 by 20 strategy by creating a fit for purpose organization for a focused paints and coatings company, contributing to the achievement of our 2020 guidance. For the remainder of 2018, we expect positive developments for Performance Decorative Paints and Performance Coatings, excluding Marine and Protective Coatings. In the Leather segment, the market conditions are still challenging and demand trends for all of the businesses will, of course, differ per region and 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 to mitigate the current challenges. I'll now hand over to Lloyd for information about upcoming events and handling the Q and A session.
Great. Thanks, Jerry. Before we start the Q and A
which will be announced on
the 17th October this year. Which will be announced on 17th October this year. This concludes our formal presentation, and we would now be happy to take your questions. Operator, please start the Q and A
session. Thank you. We will now begin the question and answer session. Our first question is from Tom Wrigglesworth. Your line is now open.
Gerry, Martin, Lloyd, good morning and thanks very much for your presentation. A couple of questions as I'm permitted. Firstly, on the volume side of the equation in Deco, when I look at the sequencing of 2017 and now 2018, how much do you think in the second half of twenty seventeen we saw restocking effects versus destocking effects coming through
in the in light
of obviously higher prices. And is your sense that that will abate and start to normalize in the second half? And then secondly, obviously, on the price versus cost dynamic, I think you indicated that there was €300,000,000 to catch up from 2017. And looking at the first half, we've had about €240,000,000 of incremental costs. Should we expect that pricing can accelerate in Deco or sorry, across the business from here and that we should expect in the second half?
Or is this kind of 5% price level, is that kind of going to accelerate from here? Or is that going to be the kind of the new normal is going to be this kind of level? So when would you hope to fully offset this year's and last year's costs, I guess, is the more simple question?
Yes. Thanks for the questions. Let me handle the first one on the volume in Deco and then Maarten, maybe you can address the price versus cost one. On volume and Deco, we are there's a couple of elements in there. To answer your initial question around destocking and restocking, that might have been somewhat the case in the Q4 in places like China, etcetera, because it was new products and that obviously drives stocking to go to the channel.
But obviously, you can't have 6 months worth in the channel anyway. So that may have been some impact and we believe that it was an impact in the Q1, but a little bit from the Q2. If you go to the regions, frankly, there's 2 big items in there. First, our overpowering big region is, course, Europe and Africa. There, the volume is flat despite us being probably by far the first out of the gate and probably the more consistent on pricing.
So I think in that sense, it shows the underlying markets being pretty good, but we really went for pricing and also gave our sales and marketing forces coverage on that was the most important. Some of the key markets like the U. K. Are actually doing very well. Some of our key markets, so we see underlying a very strong or a strong strengthening market that we hopefully can capitalize up in the next quarters.
The bigger items is in Latin America and in China. Latin America is very confident, very good work from the team there, but really focusing on price also because the devaluation of the local currencies necessitates doing their markets are actually quite okay. So I do believe that is because of the pricing initiative. The more impactful one is indeed in China. You've seen us really having a significant growth in the last year, 12 months in China.
This is a deliberate pause for growth in China because we wanted to get the value back in and try to tension it for pricing. So I think that we'll see what happens. China is always a challenging market in that respect. But that is really deliberate results to go for pricing and value, which we have to do given the raw material impact and setting basically a tone hopefully where markets will be reacting on. So if you go back then for the second half, I think we're pretty optimistic because we've seen customers moving back in, maybe hoping that things would blow over and maybe destocking a little bit what they had as price increases came in, hoping that that would disappear.
So that's why in our outlook, we continue to be pretty positive and pretty optimistic for what Deco is concerned, hence also the step up in return on sales versus last year. So these are on their way on 15 by 20 to get there. On the price versus cost margin, you want to
Yes.
So on the raw materials, indeed, so last year, we had a raw material impact of $300,000,000 For the first half, we are looking at a raw material impact of in excess of 240,000,000 euros We have also indicated that we see continuous raw material inflation, although for kind of for the remainder of the year, we will see that as a slower rate compared to the first half. You've seen our initiatives around price increases, 5% in Deco and 3% in Coatings for the 2nd quarter. In fact, Deco, if you look at the Q2, our price increases have outpaced the additional raw material price increases in the second quarter. So we feel very positive about this. We've also indicated that we're implementing a second wave of price increases.
So we will have a further step up in the second half. And overall, our expectation is that from a run rate perspective, by the end of this year, we should have compensated with our pricing initiatives. And given how we currently look at the development of raw material prices that we have compensated both 'seventeen and 'eighteen.
Just want to add
to that, it is consistent, I think, what we've been communicating to investors and analysts that for the company, yes, there is revenue growth. In constant currencies, we grew 2 percent, but that we definitely wanted to go back to less an emphasis on volume, chasing volume that is not value adding, but to really put it on pricing and that has paid off. It's already paid off in Decorative Paints. And then from SKOVENIX, we're kind of halfway the journey there.
Does that answer your question?
Yes, that's very helpful. Thank you, both. Thank you.
Next question is from Paul Walsh. Your line is now open.
Good morning, guys. Thanks for taking my questions. My two would be, on the $20,000,000 one off that you guys call out in the adjusted EBIT number in the second quarter, you just help me understand what the one off nature of that $20,000,000 is? And in terms of my second question, just to come down back to the topic of volumes moving through the second half, can I read what you're saying, Thierry, in the outlook statement that you would expect volumes to be positive in Deco and in Performance, they'll be positive as well, ex Marine and Protective? Yes.
Paul, thanks for your question. Martin, do you want to go ahead and first
Yes. Paul, thanks for your question. Maarten, do you want to address
the first one? So on the €20,000,000 nonrecurring items in the second quarter, we have a a delta versus last year. And I think it's good to explain that. So this year, you see in Q2, €70,000,000 last year, it was CHF 30,000,000 I think it's 2x CHF 20,000,000 so CHF 20,000,000 this year of additional transformation related costs, and it was very much to accelerate the implementation of our transformation projects as well as some other incidentals. On the other hand, last year, we had some positive incidentals in BA Other.
And that kind of explains the €30,000,000 versus the €70,000,000 But again, the €20,000,000 is transformation project cost as well as some other incidentals. And
Martin, just on that front,
why wouldn't you classify those as incidentals rather than calling them out as one offs in the adjusted EBIT number?
No. What we have in our identified items is really the purely the restructuring costs as part of the €120,000,000 which we have communicated at the end of last year, And that is how we classify that. So these are more, yes, I would say, operational costs which are not recurring.
Okay. Okay.
Now second question, Paul, around volumes in the second half for our markets. I would say that and let's take a little bit abstraction of Marine and Protective and then talk about the rest of the business. That's probably easier. Let me just address Marine and Protective. I think for Marine and Protective, we told our teams to go for where we can add value, where there is basically a business that really contributes.
So as we've indicated, we actually instructed our teams to walk away from some deals where we feel given what's happening in raw materials, this is just not going to be adding any value. And we are happy if some of our competitors chase that and they can explain it to you in other calls. The second thing is for all the rest of the business, let me talk at the other business in Performance Coatings. I think the demand is actually pretty good in all of those businesses. As usual, powder is actually doing extremely well that we continue to see those increases in the market.
But also there, so the underlying demand is good. We're capturing the volume, but we also told people there for the second half, keep our eye on pricing, specifically Performance Coatings. There is still a little step to do. And I think we're leading the charge there for the industry, a little step to do to basically offset the raw materials completely. Decorative Paints, again, as I've indicated, the underlying market demand is actually pretty good across the world.
Where you see us on volume, I think we can capture as much volume as we want. We want to do it, however, in a very controlled way to really look at the value creation here. Europe is pretty good, pretty strong. In that sense, I think that gives us some leeway, I think, as being the leader in these markets to charge on the pricing that we deserve. China is the one that we kind of look a little bit because there the price elasticity is often a bit more vibrant in all directions.
That's the one where we continue to look, okay, can we actually move the market there, yes or no. But underlying the volume is pretty good. So it's really deliberate choices, I think, that we do with our business management teams around where do we choose to play and what how do
we achieve our numbers. Does that answer your question, Paul?
Yes. Sure. I mean, just in conclusion, Thierry, you would expect a sort of better headline reported volume environment in the second half after the negative 3% in the first half?
Maybe, but I think, well, we're actually more looking for a better bottom line reporting. And if that's with price or volume, that's the mix I think that
our teams obviously have been proving quite well the last two quarters that they're focused on that. Understood. So the way I should insert positive developments, you've got to include pricemix in that organic development? Correct. Correct.
Understood. Okay. That's what I was trying to clarify. Thank you.
Thank you. Next question is from Tony Jones of Redburn. Your line is now open.
Good morning, everybody. Tony Jones of Redburn. I've got a couple. I just wanted to go back to Paul's question about the incidentals. I think, Martin, at the end, your explanation, you were saying that the reason it wasn't classified as a one off is that the EUR 20,000,000 isn't felt to be a onetime effect in this quarter.
Maybe I misunderstood, but should we be modeling that for Q3, possibly Q4? And then going back to the focus on value over volume, this effect feels like something we should be considering now for the second half of the year. So does it end up being a negative offset to slightly better underlying volume growth?
So just to clarify the €20,000,000 what I tried to clarify is these aren't really specific implementation costs of our transformation projects and therefore nonrecurring as we have accelerated our transformation initiatives. That is 1. If you look at it take a step back because that is, I think, the background of your question. When we look at BA order, we have indicated that BA order will sit between the level of 201720 16. Now if we look at the run rate where we are with BA Euro, it will likely land in the upper end of the range between the 'seventeen and 'sixteen numbers.
And if you if I remind myself, 'sixteen 'seventeen was €15,000,000 BA order and 'sixteen was €188,000,000 So we will be at the upper end of that range.
Okay. Thank you.
On the second question is value over volume. I think I would say yes on your question. I think the underlying markets are pretty healthy in that sense. And I think for us, I mean, that's also what we have been talking to our shareholders about. I mean, we actually go for the value of the portfolio that we have.
So if that's what you mean with a somewhat negative offset by going for pricing and value versus the underlying volumes, I would say, yes, potentially. Having said that, I do believe that we are actually ahead on our pricing versus the rest of the industry. And that, of course, that you also see to some extent that I think we do in the segments where we are number 1, and there's plenty of them worldwide. I do believe we take our responsibility, I would say, for our own company in those segments. And that negative impact on volume may actually go away as others basically build their own plans on how they're going to handle the raw material headwinds.
Does that answer your question?
It does, yes. I appreciate the detail. That's very useful. Can I just sneak in one quick follow-up, which is on the working capital? I also wanted to just check because normally free cash flow is quite healthy in Q2 as you get an inflow.
I think you already flagged and called out there's been it's due to inventory movement. But should that cash inflow now start to materialize in Q3 this year instead of Q2? Thank you.
Yes. So on working capital, 1st of all, we've seen our receivables going up. So that is clearly a focus area to bring that down, and it's a matter of focus and discipline. That's one. On the inventory level, there we also see the impact of raw material coming through.
So the higher raw materials drives higher inventory levels naturally. But overall and third point is a seasonality effect. But overall, working capital is too high and that is our attention to bring that down in the second half.
On the receivables, if I add to that, Martin, on the receivables, there's also somewhat geographic segment mix that actually gives longer receivables on average. But that is actually besides pricing. As we said, that's been the 2nd marching order for our sales and marketing teams to get that in line ASAP.
Thanks very much. Thank you.
Thank you. Next question is from Geoff Haire. Your line is now open.
Good morning. My question has already been answered. Thank you.
Thank you. Next question is from Alex Twar of Barclays. Your line is now open.
Hi, everyone. Thanks for the presentation.
I was
a bit surprised to see it almost 10 basis point deterioration in your return on invested capital in Performance Coatings and almost 200 basis point deterioration in Decorative Paints in Deco even despite the fact that adjusted operating income is up to 8%. Could you possibly explain the erosion in returns and why that's coming about?
Yes. I think it's, in my view, pretty straightforward. It's one side is the return on sales as the development of the return on sales. And on the other hand, it's very much our working capital, which plays a role here. So we have basically called out both trends and where we are on both sides.
Okay, perfect. Thank you.
Thank you. Next question is from Georgina Ilomoto. Your line is now open.
Good morning, everyone. Yes, it's Georgina Iwamoto from Goldman Sachs. I've got 2 questions and they're both related to raw materials. So the first one is, can you give an idea of your comfort level with your guidance of the €550,000,000 to €600,000,000 negative impact over 2017 'eighteen. We seem to have digested more than 90% of that already.
So is your expectation that we'll reach the upper end of that range or could we actually go over the limit? And then the second one, taking a step back and looking at the 15 by 20 targets, can you give an indication or maybe just a reminder of what oil price scenarios you included to reach those targets, I. E, is there a price at which you would deem there to be a significant market disruption and therefore you wouldn't be able to reach the targets? Thanks.
Well, thank you for your question. Maybe on the first one, on the raw materials, as we've indicated, about €300,000,000 we had to absorb in the first in 2017. We're now at about 2 50 ish year to date. We see that flattening out. We've given kind of a guidance that we expected 250 to 300.
I think we'll definitely be at the upper end of that. And in fact, we're monitoring very much on what's coming in to see what we have to do with the pricing. So in that sense, I think we will definitely better upper end. Although, to be honest, I think we'll see we see significant flattening out versus where we were. So the it's still kind of creeping up.
And the question is, okay, how much longer does that go? But we don't expect big movements. Maarten, I don't know if you want to comment on that point?
Yes. So but more on a general point because you asked also on the 15 by 20. So in our modeling, the assumption is really that we compensate for raw material prices. And that is also and it has been the focus and is our focus for the raw material price impact we've seen in 'seventeen 'eighteen and also going forward. So from a margin perspective, the assumption is really that we compensate for raw material price.
And I
couldn't agree more with that statement. So to answer your question, is there a realistic oil price somewhere that would be disruptive? I think the answer of that would be no or we would be passing it on to customers through price increases. Having said it, the oil price has an impact, of course, and it has a more direct impact in certain solvents, but there is also then price amount, bottlenecks in the supply chain further downstream, which probably has more impact sometimes than the immediate oil price. So but having said that, our philosophy for 15 by 20 has been from the very beginning.
We will offset raw materials. So we will maintain at the minimum our margins there, our variable margins, and that will be in any scenario as we're implementing this year, by the way.
Does that answer your question?
Yes. That's very helpful. Thank you.
Thank you. Next question is from Gunther Zechmann of Bernstein. Your line is now open.
Good morning. Gunther Zechmann from Bernstein. You highlighted pricing initiatives and the increased focus on price of our volume, just circling back to that. What reaction I wonder do you see from your competitors? Are they picking up the volumes at lower prices or it's just the market contracting in terms of volumes?
And then with the comments that you made on H2, the pricing initiatives are ramping up and you've kind of alluded to that as well, should we expect to actually sequentially lower volumes as a result of that as well? Thank you.
Well, good questions on pricing. Now, of course, we are as eager as you to see what the reporting is of our competitors and what they've done on pricing. But if you put the whole picture together and you have to really have to go by segment by segment, but where we see look, we see healthy underlying demand for it. We've got now prices up and sometimes we know that we have walked away from business. So that means somebody else must have sold the paint at a much lower market margin there.
In broad strokes and in fact, we saw some of the first initial reporting from other companies. Obviously, others are not going for the pricing and the margin, which is their decision to do. We don't think that is a winning model to continue to do so. So in our sense, I think we don't think there's less surfaces or less paint being used. On the contrary, that is the demand in the segment, with the one exception, Marine and Protective, where indeed the market volumes are down.
And as we have commented on that, even there, we try to make sure that we do smart business things versus just chasing volume. And in fact, in Marine and Protective, we go through quite some restructuring cost reductions, etcetera, to make sure that we maintain profitability despite lower volumes that may be the result of that thing. Second thing, in the second half, I would say that we probably went through a lot of the churn already. I think the Q1 and the Q2 were actually the ones where if you go to a normal marketing situation where customers have to decide do I stay with my supplier or do I do something different. So I don't think that that would be an ongoing trend necessarily.
As the markets are good, I expect this to be at least flat or with at least flat for volumes, but at a higher pricing. The one element we're looking and as we're monitoring very closely obviously is in China, because in China raw materials actually have been a key issue, maybe one of the more impacted areas in any of the material space is in China for what raw material cost is concerned. And that's why we're looking at, okay, how much can we push the envelope there and that's one that we monitor. Does that monitor on price volume equation? Any does that answer your question or?
That's very helpful. Thank you.
Yes. Thank you.
Thank you. Next question is from Patrick Lambert of Raymond James. Your line is now open.
Hi. Good morning, everybody. Thanks for taking my three quick questions. The first one M and A contribution. I was a bit surprised that you had zero impact on Performance Coatings in particular where we had some end of last year?
And if you could comment on what happened there? Did I miss anything? Maybe it's my calculations of timing, which was wrong. First question. Second question, any update on the final steps of the separation in terms of timing, dividend payments or any other ways of returning the Specialty Chemicals upside on to shareholders?
That's the second question. And the last one, again, coming back to the one off of €20,000,000 Is there any other transaction related non operating costs to be expected from the separation would be the dividend, would be the legal issues over the next two quarters before you finally get Specialty Chemicals out? Thank you.
Okay. I'm not sure if
I fully understand your third question, but let me try to maybe I may have to ask you to repeat that one. But on the M and A front, you're probably referring in the booklet, I think, around the impact on the revenue and on others. Basically, on the revenue line, yes, I mean, I'm not sure if there's too much to talk about it. We had, of course, the acquisitions we did in last year in V PowderTech, in Flexcrete and in Dizotec, which were smaller acquisitions. You do definitely see it within the Powder Coatings business where the Powder Tech came in.
If you then look at what the acquisitions and the whole item is, as we've gone to quite some pricing, I think that's probably where it balances out. I don't know, Martin, if you want to give more color on that.
Yes. For me, I think it's more or less rounding. So in the Q1, it's rounded to 1%. In the Q2, it just rounded to what you see here. So I think there
is nothing Visual than anything else.
Nothing changed fundamentally here. On the second one, on the separation,
there is really no new news, I would say, in the sense that the regulatory process is running its course. It seems to be going as planned. So there is no surprises there. So we still expect before year end that this is going to close. And then it depends on who is an optimist, a pessimist, what the data is, but I think it's all on track.
On the I would honestly say consultations or conversations we had with a big amount of shareholders around what they would prefer, I think it becomes increasingly kind of a basket to return the proceeds, which is going to be partly share buyback, partly capital reduction, partly dividends. So it's going to be a combination. And then I think we want to do it in a reasonable time frame. So that then puts a bit of a caveat around how much you can do in each of the buckets. I think that's a bit of consensus that's developing.
But right now, I mean, so we're on I think as such, there's not much more to say around the fact that we are in the implementation phase of what we have been promising last year and been saying all along. Not sure if I fully captured your third question, though. Yes.
I think your third question was around the separation costs. Just to make sure and to reconfirm, the separation costs are booked in discontinued operations. And if you see it in the report, it was €8,000,000 in the second quarter. We will still have some separation related costs in until we, of course, close. But that will be booked as we do currently in discontinued operations.
Okay. So there's nothing into the paints and coatings remaining?
No. Okay. No.
Thank you very much.
Next question is from Mutlu Gundogan. Your line is now open.
Yes, good morning. A few questions. First on price, you are being quoted on Bloomberg that you're halfway through on price initiatives in Performance Coatings. Now if I look at the first half, I see that price mix added some €112,000,000 Can you tell us how much of that is price and how much is mix? That will be the first question.
I think it's in the book of Marcellus, if you want to go there. I think the numbers are spelled out.
Yes. In fact, in the first half, 4% was pricemix. And out of this pricemix, yes, close to 3% was price and the rest was mix.
For Performance Coatings? For Performance Coatings.
Okay. That's helpful. And maybe
to reconfirm, our price increase for Performance Coatings in the Q1 was 2% and in the 2nd quarter was 3%. And for decorative, the price increase in the Q1 was 4% 5% in the 2nd quarter. So that is also maybe to reconfirm the progress we are making in the implementation of our price increases. And then the rest is obviously mix.
And the halfway through comment I made in Bloomberg is basically saying, look, in Performance Coatings, there's still segments that are rolling it out. There's also contracts that actually you have to wait until they expire to get the new pricing in. So that's still unfinished and that's still ongoing. Now Deco keeps the pressure on, but I think in Performance Coatings, it still catch up versus the raw material impact, the compounded raw material impact.
Understood. Understood. And then secondly, on the guidance. Now there have been various statements. I mean, I do remember that you said that also this year, you expect to make a step in line with the 2020 target.
So one of those implications was that EBIT should be should show up growth this year. So just wondering if you could repeat that or not?
Well, what we said is that on the return on sales percentage, we would want to see a significant increase on that. I think we still feel pretty confident that that is going to happen. If you really go back, if you look for the whole industry, as were trying to catch up on our 15 by 20, the whole industry got a flat tire in the bicycle race because of raw materials. So we actually are, I guess, the first one out of the gate and probably the more consistent one to get our prices up because we want to get back on the bicycle and catch up. What you also see in the first half is lots of implementation costs, etcetera, around the transformation and rolling out those programs.
And for us, it's very important to start looking at the second half run rate versus the second half last year, where we feel pretty confident on where we're going to go on return on sales.
Okay, okay. Understood. And if I may squeeze in a third small one.
Especially here
in the Netherlands, there's been some articles in newspapers about the pension funds here in the Netherlands that they want a €400,000,000 payment. Can you comment on the likelihood of that?
On the likelihood of the €400,000,000 payment?
Yes, yes. So what's your view on that? Obviously, there's 2 significantly opposing views. So just wondering what we should take as a potential relaunch.
No, but there's not opposing views. There are opinions on the one hand and then there is the fact on the other hand that the fund is funded. It's probably one of the better funds in the Netherlands. We can't legally and account otherwise do it. So the €400,000,000 payment, the likelihood of that is actually 0.
Okay. Okay. That's what I wanted to hear. Thank you.
Thank you. Next question is from Christian Faitz. Your line is now open.
Yes. Good morning, gentlemen. Two questions, if I may. First of all, can you please elucidate the Deco performance in Europe and compare and contrast U. K.
Versus Continental Europe? And my second question would be, can you please give us some more insights into the ongoing difficulties in Marine and Protective? I mean, you talk a lot about problems, but what are the actual problems in the market from your perspective? Thank you.
All right. Okay. Thank you. It's maybe not the U. K.
Versus Continental because also Continental has every single market has a dynamic in it. But I would say in Europe, as we have been indicating beginning of the year, what the market is concerned for Decorative Paints, I'm looking there at Europe Africa, but let me focus on Europe. Volumes are actually okay. So you know that European market has been flat to actually slightly shrinking over the last years. We see that actually a positive development on volume.
And then we have had all of the discussions around pricing for that. So that goes across the board, including the UK. The UK market is actually doing quite well. 1st quarter was very much impacted by the weather, negatively impacted cold weather. 2nd quarter, we see that volume coming back and we believe it's actually a little bit better than that.
So, for us, actually the UK has continued to be positive. Now consumer confidence could still be better. The pound could be better, of course, since we report in euros. But as a market, the U. K.
Has been doing quite well. We've also been able to get our prices there adjusted. And we've also announced that we've basically been opening Dulux decorator centers in the U. K, more in the south of the U. K, where we felt we even despite being such a strong leader in the U.
K. Market, there are still spots where we can actually continue to grow in that market. So I would say the U. K. Versus Continental Europe, if you want to position it, the U.
K. Has been definitely been one of the better ones in this quarter. But overall, Europe is doing quite well, which for us is pretty encouraging, given that it's such a big market for us. Secondly, on Marine and Protective, on the issues, well, still the builds. I mean, on Marine, the builds are still down.
It's going to come back a little bit, but it's not a V shaped, it's a very flat U shaped recovery. And then we come back 18 months later to paint those ships in what is the new builds. Half of the market is, of course, maintenance, dry docking and sea stores, so that is less impacted. So that is still ongoing. In oil and gas, we're actually more optimistic in the sense that as oil prices go up, there is much more activity in capital investment in that market, and we actually see that on the docket that is more segments.
But of course, we come in then kind of a year later or 18 months later when the coatings, etcetera, for corrosion or fire protection are necessary. So in that sense, I think the dynamic for protective, I think, is more positive than on in the medium term than for Marine. What we were indicating for that is we look at as people are still looking for the lower volume, we and other competitors are looking to serve the lower marine volume, you see some price standards there, which are unhealthy. And if we extrapolate what raw material cost is, at least our pocket calculators do not indicate that there is any money you can make on that business. And therefore, we gladly bow out.
We don't get I don't think investors are happy with volume. They want to see returns and that's what we're focused on in our business.
Very helpful. Thank you very much.
Next question is from Laurent Faz of Exane. Your line is now open.
Good morning, gentlemen. I've got a question on your M and A strategy. I was wondering if you could tell us a bit more about your intentions in terms of size area of focus. Do we take the Fabryo acquisition as a sign that you're trying to consolidate the European market? And what is the pipeline like for acquisitions?
Thank you, Laurent. Well, on the M and A strategy, I think we've elaborated a couple of times on that. I think we're looking at you continue to look at bolt on acquisitions. Can you put a size on it? I mean, it's 150 is probably a big one, but don't see that as an absolute number.
And the Fabry 1, very enthusiastic because it's the number one player in Deco. It is not only within Romania, puts us there in the lead spot, but it's a very well run company. It's very well as a hub for the whole Central Europe and to strengthen us there. So very enthusiastic about the fit with the company and how that's going to help us. So I think that is more how we're looking towards versus just an overall consolidation strategy, because of course, in Europe, there's thousands of companies and ones where we probably don't want to be acquiring.
Pipeline wise, we have always a number of active targets, using negative name, companies where we look at. I think some of them will still materialize this year, but we really want to do it at a pace where it really makes sense in our network. As I just indicated, our whole emphasis is around, I would say, keeping our size and improving on that. And Fabryo fits in that. We don't, Maarten, are looking at a consolidation strategy just for the sake to get bigger.
And I think maybe to add here is that, of course, when we look at our pipeline and we look at possible opportunities, it really needs to add to our 15 by 20 ambition. And there, we look at all geographies or certain product segments or certain technologies. But the value creation is a core element behind this obviously.
And that's a good point, Maarten, because the 2 key questions for the pipeline is for each of those targets is 1, does it create ourselves a stronger business when we put them in there? And secondly is indeed and what does it do for 15 by 20? And then we balance those 2, I mean, to see if it is additive or not. Does that answer your question, Laurent?
Yes. Just on the Fabry, when you say contributing to 15 by 20, are we talking about the absolute profits or margins? Is there anything you can say on like synergies and Fabryo margins, post synergies versus the target?
Well, Fabryo was a pretty healthy company already. So what we do feel that by having that integrated in our network that there are a number of marketing synergies. They have a very strong network in Romania. They actually kind of are the key player in that market. So we feel marketing wise, if we can put some of our products to the same channels, that is unreal direct upside.
There's also then operational efficiencies that come out of it. So this would be a net positive contributor on the 15% return on sales absolutely. And it's a combination of those elements.
Okay. Thank you.
Thank you. Next question is from Laurence Alexander of Jefferies. Your line is now open.
Good morning. One focused one and then one larger picture one. Just to be clear on the trends in Industrial Coatings, are you seeing any soft spots in end market demand around the world? And then as a larger picture, just to go back to the discussion earlier in the call on the volume, the bottom slicing in the portfolio. How should we think about this with respect to the 15 by 20 pathway?
Should we be thinking about maybe say over the next 2 years lagging end market growth by say 8% to 10% cumulatively? Or can you give some kind of sense for what the total bottom slicing opportunity might be?
Okay. So let me try to answer the questions and Martin chime in at the end. First, when you say Industrial Coatings, you probably prefer you refer to Performance Coatings, I presume?
Actually, there was a comment in one of the decks about how Industrial Coatings volumes were weak. So I just meant specifically in Industrial Coatings?
Well, our Industrial Coatings business has the Metal Coatings business, Packaging business and the Wix Coatings business in there too. That is correct. I'm not sure if this is necessarily structurally. I mean, okay, pricing is, of course, a topic in there. But those markets do tend to fluctuate quite significantly.
Again, wood coatings goes on furniture, goes on to a number of elements. So I don't think that it's necessarily a structural situation. So and I think, okay, price will be the same elements we had before where we basically weren't necessarily chasing volumes as such. But did I answer your question? I think that's probably more in the realm of the normal fluctuations you have quarter over quarter, yes?
Then the second thing, you talked about the portfolio and the bottom slicing. It goes back to how I believe we reset our 15 by 20 strategy somewhere in October, November last year, where it was we were not going to the original intent was to get to 15 by 20 by growing, keeping the cost flat growing and therefore things fall to the bottom line. I think we've been abundantly clear that our target is really to go to the value we generate and not bet on the growth. If you go to what we presented during the analyst roundtable, we made it clear that in fact we have in our plan a negative or lower growth than what the market does. Also was clear that that was not something that we were necessarily hoping
for or
wanting, but that was actually the assumption to get to 15 by 20. I don't the numbers you mentioned, 8%, such a cumulative, I don't think that's going to happen. I do think we're going to be in the very end in line with markets or tens of percentages behind it, but we wanted to keep the optionality to go for value versus being driven just going for the growth number. Now, we did do a lot of work and we talked to some analysts about the portfolio work, but we went in-depth in our portfolio in granular detail, 140 plus segments on where we make money, where are we not making enough money, what are the costs, what should we be in cost? Very happy with that work because it's in one format and it gives a whole dashboard on what you have to do.
And yes, like in any company, there are obviously segments there where we say, well, we're not sure what we're doing there. And there's other segments where we feel there is a great opportunity or either in growth or investment or in pricing. And we are actually have started to execute on that since this quarter. But I think overall, we're probably going to be in line with the market or just decimal points behind the market growth.
Yes. So maybe to
reconfirm, so the original plan presented in April last year was based on a 4% growth. When we had the roundtable in March, the analyst roundtable, we presented our 15 by 20 plan. We have mentioned that we see a market growth of 3%, but we have kind of derisked our plan with a 2% growth to create for ourselves flexibility in driving value versus growth.
Perfect. Thanks.
And our last question is from Markus Mayer. Your line is now open.
Good morning. Markus Mayer, Badriere. Two remaining questions. Coming back to Marine and Protective Coatings, you said you're optimistic on Oil and Gas, but see the Marine recovery quite slowly. How long is your order book visibility in these two businesses?
That's my first question. And secondly, this weak market environment in the Marine and also Protective Coatings, do you expect that this might trigger consolidation in this market? That's all from my side.
Okay. So on the first question, the visibility of marine protective, both markets actually fall apart into the new builds be it the new plant in protective coatings of a new structure and then basically the maintenance, the ongoing repair, etcetera. So in both Marine and Protective, you would probably say for new build, it's probably about 18 months, because that's about the cycle to start a new ship and then basically having to coat it. It's also more or less the same timing between an oil installation being ordered and then basically having it coded is also about 18 months. So for newbuilds, it's about 18 months.
Of course, in both markets, increasingly the more attractive part is the servicing part and that is a much more dynamic outlook, I would say, 3, 4 months ahead of time on what the repairs and what the maintenance effect is going to be. So I'm not sure if that answers your question, but that's kind of what
May I add another question on this? Do you expect the recovery to come first from the service part? Is this the right understanding?
Well, yes. I mean, because frankly, if you look at the Marine and Protective businesses, in fact, to a large extent, it has been now much more than half of the business that you see reported right now is the service part. So that and that has never gone away. I mean, even if we I would always say the corrosion doesn't stop for a recession. So that was the maintenance keeps going on also for marine businesses, etcetera.
So that has not been that much impacted. There was some pricing pressure, of course, but I think that's been relatively holding up the fort pretty well. It's actually been the new build size in both of those businesses that was impacted significantly. If you go for consolidation, you mean in Marine Protect, you mean consolidation on the customer base or consolidation on the supplier base?
Basically both.
Not sure. So I mean businesses under industries that are under pressure, I think you would expect that to be consolidated. So I'm not sure if there's anything happening there, but I think a number of people in the marine shipbuilding are going through all sorts of resets, etcetera. So on the supplier side, I'm not sure if that necessarily would lead to it because most of the marine and protective coating suppliers are basic companies that have their own businesses. It's often intertwined with their own service teams in other segments.
So not totally sure if that would lead to a significant consolidation.
Okay. I think that's the end of the question and answer session for today. So thank you all for joining the call. Please get in touch with Investor Relations in case of further questions or comments.