Welcome. 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. At that time, to ask a question, please press star followed by the 1 on your phone and record your name clearly when prompted. 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 AkzoNobel Investor Update for Q2 2018. I'm Lloyd Midwinter, Director of Communications and Investor Relations. Today, our CEO, Thierry Vanlancker, and CFO, Maarten 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, 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 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 two of the presentation.
Good morning, everybody. 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 EUR 25 million of savings in the second 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 three shows some of the key areas where we have made progress during the second quarter in our Winning together: 15 by 20 strategy.
Selling prices were up 4% in quarter two as a result of our very focused attention on margin management, contributing to higher return on sales for Decorative Paints and a closing of the gap for Performance Coatings. During 2018, we are implementing integrated business planning. 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 EUR 30 million savings in line with the historic run rate, which successfully offset fixed cost inflation. In addition, what we announced last year as a phase one of creating a fit-for-purpose organization is now fully implemented and delivering savings of EUR 25 million in the second quarter. We are on track to achieve the announced EUR 110 million 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. 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 four. As expected, higher raw material costs continue to impact us in the second quarter 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 costs. 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 five summarizes some highlights for the quarter. In constant currencies, our second quarter revenue was up 2%, driven by a 4% higher selling price. This represents an acceleration of the increases we delivered in the first quarter. Raw material inflation resulted in a headwind of more than EUR 130 million during the second quarter. Despite this, the return on sales was up for Decorative Paints year-over-year, and Performance Coatings is sequentially very much closing the gap. During the quarter, we also announced the acquisition of Fabryo in 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 price mix are shown on slide six.
The price mix 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 price mix 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 seven.
Yeah. 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 an allocated corporate center cost, 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 non-recurring items. Operating income also includes EUR 33 million identified items, mainly related to the transformation. Turning to slide eight, which shows the adjusted operating income bridge. The adjusted operating income was mainly impacted by EUR 21 million adverse foreign currencies and EUR 20 million non-recurring items, which includes transformation costs. Raw material inflation was more than EUR 130 million during the second quarter.
Price increases and cost savings are now compensating for higher raw material costs. Continuous improvement programs delivered around EUR 30 million savings during the quarter, successfully offsetting fixed cost inflation. This continues the win rate we have delivered in the past. Creating a fit for purpose organization resulted in EUR 25 million savings during the second quarter, up from an initial EUR 10 million in the first quarter. Phase 1 is now fully implemented and we are on track to deliver EUR 110 million 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 nine. Revenue was 2% higher in constant currencies. Price realization is gaining momentum and selling prices were up 5% overall, slightly offset by geographic product mix, resulting in a 4% price mix.
Volumes were flat in EMEA, were 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 second quarter. Adjusted operating income increased with higher selling prices and cost savings offsetting foreign currencies, higher raw material costs, and lower volumes. Operating income was impacted by EUR 12 million 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 you would exclude Marine and Protective Coatings. 3% higher selling prices contributed to 5% price mix 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 second quarter versus 10% in the first quarter of this year. Operating income was negatively impacted by EUR 10 million 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. Turning to Slide 12. During the second quarter and half year 2018, Net income was impacted by lower Operating income while Profit from discontinued operations increased.
Earnings per share was €1.06 in the second 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. 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 first quarter, net debt was EUR 3.2 billion, versus EUR 1.9 billion last year, and EUR 2 billion at year-end 2017, up mainly due to the seasonality of operating working capital. Net debt also includes the EUR 1 billion special cash dividend, which was paid out in December 2017 as advance proceed for the separation of Specialty Chemicals. 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 million into the bottom line in the second quarter. Decorative Paints had a very strong delivery of performance with the return on sales up year-on-year, Performance Coatings pricing initiatives are gaining traction and sequentially closing this gap despite headwinds in Marine and Protective Coatings. 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 Decorative Paints and Performance Coatings, excluding Marine and Protective Coatings. In the latter 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. Now I'll hand over to Lloyd for information about upcoming events and handling the Q&A session.
Great. Thanks, Thierry. Before we start the Q&A session, I would like to draw your attention to some upcoming events shown on Slide 16, including our Q3 results, which will be announced on the 17th of October this year. This concludes our formal presentation. We would now be happy to take your questions. Please state your name and company when asking a question. Please 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. To ask a question, press star followed by the number 1 on your phone and record your name clearly when prompted. To cancel your request, you may also press star followed by the number 2. Our first question is from Thomas Wrigglesworth. Your line is now open.
Thierry, Maarten, Lloyd, good morning and thanks very much for your presentation. A couple 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 that in the second half of 2017 we saw restocking effects versus destocking effects coming through in light of obviously higher prices? Is your sense that will abate and start to normalize in the second half? Secondly, obviously on the price versus cost dynamic, I think you indicated that there was EUR 300 million to catch up from 2017. Looking at the first half, we've had about EUR 240 million of incremental costs.
Should we expect that pricing can accelerate in Deco or, sorry, across the business from here, in the second half, or is this kind of 5% price level, is that going to accelerate from here or is that going to be the new normal, is going to be this kind of level? When would you hope to fully offset this year's and last year's costs, I guess is the more simple question.
Yeah.
Thank you.
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 in Deco, 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 fourth quarter, in places like China, et cetera, because it was new products and that obviously drives stocking to go through 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 first quarter, little on the second quarter. If you go to the regions, frankly, there's 2 big items in there. First, our overpowering big region is, of 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. 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 our key markets, like the U.K., are actually doing very well. Some of our key markets that 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 of devaluation of the local currencies necessitates doing their markets are actually quite okay.
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. I think that we'll see what happens to China, is always a challenging market in that respect. 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.
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. 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. These are on their way on 15 by 20 to get there. On the price versus cost margin, you want to.
On the raw materials, indeed. Last year we had a raw material impact of EUR 300 million. For the first half, we are looking at a raw material impact of in excess of EUR 240 million. We have also indicated that we see continuous raw material inflation, although 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 second quarter. In fact, Deco, if you look at the second quarter, our price increases have outpaced the additional raw material price increases in the second quarter. We feel very positive about this. We've also indicated that we're implementing a second wave of price increases. We will have a further step up in the second half.
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 2017 and 2018.
Just what I'll add to that, it is consistent, I think, what we've been communicating to investors and analysts that for the company, yes, there's revenue growth. In constant currencies, we grew 2%, 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 Performance Coatings, we're kind of halfway the journey there. Does that answer your question?
That's very helpful. Thank you both.
Thank you.
Next question is from Paul Walsh. Your line's now open.
Morning, guys. Thanks for taking my questions. My two would be on the EUR 20 million one-off that you guys call out in the adjusted EBIT number in the second quarter, can you just help me understand what the one-off nature of that EUR 20 million is? In terms of my second question, 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? Is that the right interpretation, i.e., we've had a negative three volume dynamic in the first half, you'd very much expect that to move into positive territory in the second half?
Yep. Paul, thanks for your question. Maarten, do you want to address the first one?
On the EUR 20 million non-recurring items in the second quarter, we have specifically called it out, because what you see is basically in other BA Other, you see quite a delta versus last year. I think it is good to explain that. This year, you see in second quarter, EUR 70 million. Last year, it was EUR 30 million. I think it is 2 times EUR 20 million, so EUR 20 million this year of additional transformation related costs. 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 EUR 30 versus the EUR 70 million. Again, the EUR 20 million is transformation project cost as well as some other incidentals.
Maarten, just on that front, why wouldn't you classify those as incidentals rather than calling them out as one-off in the adjusted EBIT number?
What we have in our identified items is really purely the restructuring costs as part of the EUR 120 million, which we have communicated at the end of last year. That is how we classify that. These are more, I would say, operational costs, which are not recurring.
Okay.
The second question, Paul, around volumes in the second half for our markets. I would say that, let us take a little bit abstraction of Marine and Protective, and then talk about the rest of the business. That is probably easier. Let me just address Marine and Protective. I think for Marine and Protective, we told our teams go for where we can add value, where there is basically a business that really contributes. As we have indicated, we actually instructed our teams to walk away from some deals where we feel, given what is happening in raw materials, this is just not going to be adding any value. 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 of 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. Also there, 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. 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 is 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? Underlying the volume is pretty good. It's really deliberate choices, I think, that we do with our business management teams around where do we choose to play and how do we achieve our numbers. Does that answer your question, Paul?
Yeah, sure. Just in conclusion, Thierry, you would expect a sort of better headline reported volume environment in the second half after the negative three in the first half.
Maybe, I think, Paul, 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.
Oh, understood. The way I should interpret positive developments, you got to include price mix in that organic development.
Correct.
Yeah, 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's now open.
Morning, everybody. Tony Jones at Redburn. I've got a couple. I just wanted to go back to Paul's question about the incidentals. I think Maarten, at the end, your explanation, you were saying that the reason it wasn't classified as a one-off is that the EUR 20 million isn't felt to be a one-time effect in this quarter. Maybe I misunderstood, should we be modeling that for Q3, possibly Q4? 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. Does it end up being a negative offset to slightly better underlying volume growth? Thank you.
Just to clarify the EUR 20 million, what I try to clarify is these are really specific implementation costs of our transformation projects, and therefore non-recurring, as we have accelerated our transformation initiatives. That is one. If you look at it, take a step back, because that is, I think, the background of your question. When we look at BA Other, we have indicated that BA Other will sit between the level of 2017 and 2016. If we look at the run rate where we are with BA Other, it will likely land in the upper end of the range between the 2017 and 2016 numbers. If I remind myself, 2017 was EUR 115 million BA Other, and 2016 was EUR 188. We will be at the upper end of that range.
Okay. Thank you.
On the second question, value over volume, I think I would say yes on your question. I think the underlying markets are pretty healthy in that sense. I think for us, that's also what we have been talking to our shareholders about. We actually go for the value of the portfolio that we have. 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. 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.
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, yeah. 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. Should that cash inflow now start to materialize in Q3 this year instead of Q2? Thank you.
Yeah. On working capital, first 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. The higher raw materials drives higher inventory levels naturally. Third point is a seasonality effect, but overall, working capital is too high, and that has our attention to bring that down in the second half.
On the receivables, if I add to that, Maarten, on the receivables, there's also a somewhat geographic segment mix that actually gives longer receivables on average. That is actually besides pricing, as we said, that's been the second 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's now open.
Good morning. My question's already been answered. Thank you.
Thank you. Next question is from Alex Stewart of Barclays. Your line's now open.
Hi, everyone. Thanks for the presentation. I was a bit surprised to see a almost 10 basis point deterioration in your return on invested capital in Performance Coatings and a almost 200 basis point deterioration in Decorative Paints in Deco, even despite the fact that adjusted operating income was up 50%. Could you possibly explain the erosion in returns, and why that's coming about? Thank you.
Yeah, 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. On the other hand, it's very much our working capital, which plays a role here. 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 Fraser. Your line's now open.
Morning, everyone. Yeah. It's Georgina Fraser from Goldman Sachs. I've got two questions, and they're both related to raw materials. The first one is, can you give an idea of your comfort level with your guidance of the EUR 550 million-EUR 600 million negative impact over 2017 and 2018? We seem to have digested more than 90% of that already. Is your expectation that we'll reach the upper end of that range, or could we actually go over the limit? The second one, just 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 EUR 300 million we had to absorb in 2017. We're now at about EUR 250-ish year to date. We see that flattening out.
We've given kind of a guidance that we expected EUR 250-EUR 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. In that sense, I think we will definitely be at the upper end, although, to be honest, I think we see significant flattening out versus where we were. It's still kind of creeping up, and the question is, okay, how much longer does that go? We don't expect big movements. Maarten, I don't know if you want to comment on that point.
Yeah. More on a general point, because you asked also on the 15 by 20. In our modeling, the assumption is really that we compensate for raw material prices. It has been the focus and is our focus for the raw material price impact we've seen in 2017 and 2018 and also going forward. From a margin perspective, the assumption is really that we compensate for raw material pricing.
I couldn't agree more with that statement. To answer your question, is there a realistic oil price somewhere that would be disruptive? I think the answer to that would be no, or we would be passing it on to customers through price increases. Having said that, the oil price has an impact, of course, and it has a more direct impact in certain solvents, but there's also then price amount bottlenecks in the supply chain further downstream, which probably has more impact sometimes than the immediate oil price. 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 a 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.
All right. Thank you.
Thank you. Next question is from Gunther Zechmann of Bernstein. Your line is now open.
Good morning. Yeah, Gunther Zechmann from Bernstein. You highlighted pricing initiatives and the increased focus on price over 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? Is it just the market contracting in terms of volumes? 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. Of course, we are as eager as you to see what the reporting is of our competitors and what they've done on pricing. If you put the whole picture together, and you really have to go by segment by segment, where 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 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.
In our sense, I think we don't think there's less surfaces or less paint being used. On the contrary, there is a demand in the segment with the one exception, Marine and Protective, where indeed the market volumes are down. As we have commented on that, even there, we try to make sure that we do smart business things versus just chasing volume. In fact, in Marine and Protective, we go to quite some restructuring, cost reductions, et cetera, 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 first quarter, the second quarter 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? 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 for volumes, but at a higher pricing. The one element we're looking at, that we're monitoring very closely, obviously, is in China. 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. That's where we're looking at, okay, how much can we push the envelope there? That's one that we monitor. Does that monitor on price volume equation.
Does that answer your question or?
That's very helpful. Thank you.
Yep. Thank you.
Thank you. Next question is from Patrick Lambert of Raymond James. Your line is now open.
Good morning, everybody. Thanks for taking my three quick questions. The first one, M&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. If you could comment on what happened there. Did I miss anything? Maybe it's my calculations of timing. Which was one 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 to shareholders? That the second question. The last one, again, coming back to the one-off of EUR 20 million. Is there any other transaction relating 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. Not sure if I fully understand your third question. Let me try to, maybe I may have to ask you to repeat that one.
Yeah.
On the M&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. 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 Disa Technology, which were smaller acquisitions. You do definitely see it within the Powder Coatings business where V.Powdertech came in. You look at what the acquisitions and the whole item is, as we've gone through quite some pricing, I think that's probably where it balances out. I don't know, Maarten, if you want to give more detail.
For me, I think it's more or less rounding. In the first quarter, it rounded to 1%. In the second quarter, it just rounded to what you see here. I think there is nothing.
More 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. We still expect before year-end that this is going to close. Then it depends on who's an optimist or pessimist, what the date is. I think it's all on track. On the, I would almost say consultations or conversations we had with a big amount of shareholders around what they would prefer, I think it becomes increasingly a basket to return the proceeds, which is going to be partly share buyback, partly capital reduction, partly dividends.
It's going to be a combination, and then I think we want to do it in a reasonable timeframe, 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. Right that, so we are 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.
No, I think your third question was around the separation costs. Just to make sure, to reconfirm, the separation costs are booked in discontinued operations. If you see it in the report, it was EUR 8 million in the second quarter. We will still have some separation-related costs until we, of course, close. That will be booked as we do currently in discontinued operations.
Okay, 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 are halfway through on price initiatives in Performance Coatings. Now, if I look at the first half, I see that price mix added some EUR 112 million. Can you tell us how much of that is price and how much is mix? That would be the first question.
I think it's in the booklet, Maarten, if you want to go there. I think the numbers are spelled out.
Yeah. In fact, in the first half, 4% was price mix. Out of this price mix, close to 3% was price, and the rest was mix.
For Performance Coatings?
For Performance Coatings.
Okay. Thank you. That's helpful.
Maybe just to reconfirm, our price increase for Performance Coatings in the first quarter was 2%, in the second quarter was 3%. For Decorative, the price increase in the first quarter was 4% and 5% in the second quarter. That is also maybe to reconfirm the progress we are making in the implementation of our price increases. The rest is obviously mix.
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. That's still unfinished, and that's still ongoing. Now Deco keeps the pressure on, but I think in Performance Coatings, they still catch up versus the raw material impact, the compounded raw material impact.
Understood. Secondly, on the guidance. There's been various statements. I do remember that you said that also this year you expect to make a step in line with the 2020 target. One of those implications was that EBIT should show a growth this year. 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 we 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. 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, et cetera, around the transformation and rolling out those programs. 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. Understood. 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 EUR 400 million payment. Can you comment on the likelihood of that?
On the likelihood of the EUR 400 million payment?
Yes. What's your view on that? Obviously, there's two significantly opposing views. Just wondering what we should take as a potential relapse.
No, there's no opposing views. There are opinions on the one hand, and then there is the fact on the other hand, the fund is funded. It's probably one of the better funds in the Netherlands. We can't legally and account-wise do it. The EUR 400 million payment, the likelihood of that is actually zero.
Okay. That's what I want 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? My second question would be, can you please give us some more insight into the ongoing difficulties in Marine and Protective? 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 U.K. versus continental, because also continental, every single market has a different dynamic in it. I would say in Europe, as we have been indicating beginning of the year, where the market is concerned for Decorative Paints, I'm looking there at Europe, Africa, but let me focus on Europe. Volumes are actually okay. 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, then we have had all of the discussions around pricing for that. That goes across the board, including the U.K. The U.K. market is actually doing quite well. First quarter was very much impacted by the weather, negatively impacted, cold weather. Second quarter, we see that volume coming back, and we believe it's actually a little bit better than that.
For us, actually, the U.K. has continued to be positive. Now, consumer confidence could still be better. The pound could be better, of course, since we report in euros. 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 Centre 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. I would say the U.K. versus continental Europe, if you want to position it, that the U.K. has definitely been one of the better ones in this quarter.
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 where still the builds. 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. 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. 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. We actually see that on the docket, that is more segments.
Of course, we come in then kind of a year later or 18 months later when the coatings, et cetera, for corrosion or fire protection are necessary. In that sense, I think the dynamic for Protective, I think it's more positive 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 tenders there which are unhealthy. 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. Therefore, we gladly bow out. 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.
Okay. Very helpful. Thank you very much.
Next question is from Laurent Favre of Exane. Your line is now open.
Good morning, gentlemen. I've got a question on your M&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? What is the pipeline like for acquisitions? Thank you.
Thank you, Laurent. On the M&A strategy, I think we've elaborated a couple of times on that. I think we continue to look at bolt-on acquisitions. Can you put a size on it? It's EUR 150 is probably a big one but don't see that as an absolute number. The Fabryo one, 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 to strengthen us there. Very enthusiastic about the fit with the company and how that's going to help us. 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 necessarily acquiring. Pipeline-wise, we have always a number of active targets, to use a negative name, companies where we look at. I think some of them will still materialize this year. 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.
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. There we look at or geographies or certain product segments or certain technologies. The value creation is a core element behind this, obviously.
That's a good point, Maarten, because the two key questions for the pipeline is for each of those targets is one, does it create itself a stronger business when we put them in there? Secondly is indeed, what does it do for 15 by 20? We balance those two, to see does it, is it additive or not? Does that answer your question, Laurent?
Yes. Just on Fabryo, when you say contributing to 15 by 20, are we talking about the absolute profits or margins? Is there anything you can say on synergies and Fabryo margins post synergies versus the target?
Well, Fabryo was a pretty healthy company already. 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're actually kind of are the key player in that market. We feel marketing wise, if we can put some of our products to the same channels, that is an unreal direct upside. There's also operational efficiencies that come out of it. This would be a net positive contributor on the 15% return on sales, absolutely. 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? Then at the 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 two years, lagging end market growth by, say, 8%-10% cumulatively? Can you give some kind of sense for what the total bottom slicing opportunity might be?
Okay. Let me try to answer the questions, then Maarten chime in then at the end. First on, when you say Industrial Coatings, you probably refer to Performance Coatings, I presume.
Actually, there was a comment in one of the decks about how Industrial Coatings volumes were weak. I just meant specifically in Industrial Coatings.
Our Industrial Coatings business has the Metal Coatings business, packaging business, and the Wood Coatings businesses in there too. That is correct. I am not sure if this is necessarily structurally. Pricing is of course a topic in there. Those markets do tend to fluctuate quite significantly. Again, Wood Coatings, goes on furniture, goes onto a number of elements. I do not think that it is necessarily a structural situation. And I think, price will be the same elements we had before, where we basically were not necessarily chasing volumes as such. Did I answer your question? I think that is probably more in the realm of the normal fluctuations you have quarter-over-quarter.
Yeah.
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 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 I have 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 a lower growth than what the market does. It 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.
The numbers you mentioned, 8% is such a cumulative, I do not think that is going to happen. I do think we are going to be, in the very end, in line with markets or tens of percentages behind it. We wanted to keep the optionality to go for value versus being driven, just going for the growth number. We did do a lot of work, and we talked to some analysts about the portfolio work, where 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 doing differently on costs. We are very happy with that work because it is in one format, and it gives a whole dashboard on what you have to do.
Yes, like in any company, there are obviously segments there where we say, "We are not sure what we are doing there," and there are other segments where we feel there is a great opportunity, either in growth or investment or in pricing. We actually have started to execute on that since this quarter. I think overall, we are probably going to be in line with the market or just decimal points behind the market growth.
Maybe to reconfirm, 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 de-risked our plan with a 2% growth to create for ourselves flexibility in driving value versus growth.
Perfect. Thanks.
Yes.
Our last question is from Markus Mayer. Your line's now open.
Yeah. Good morning, Markus Mayer, Bank of America. 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. Secondly, this weak market environment in Marine and also Protective Coatings, do you expect that this might trigger consolidation in this market? That's all from my side. Thank you.
Okay. On the first question, the visibility of Marine Protective, both markets actually fall apart into the new builds with the new plants in Protective Coatings of a new structure, and then basically the maintenance, the ongoing repair, et cetera. In both Marine Protective, you would probably say for new builds, 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 coated is also about 18 months. For new builds, it's about 18 months.
Of course, in both markets, increasingly the more attractive part is the servicing part, and that's a much more dynamic outlook, I would say three, four months ahead of time on what the repairs and what the maintenance effect is going to be. I'm not sure if that answers your question, but that's kind of what the visibility is.
May I add a follow-up question on this? Do you then expect the recovery to come first from the service part? Is this the right understanding?
Well, yes, because frankly, if you look at the Marine Protective businesses, in fact, to a large extent, it has been much more than half of that business that you see reported right now is the service part. That has never gone away. I would always say the corrosion doesn't stop for a recession. That one, the maintenance keeps going on, also for marine businesses, et cetera. 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 site in both of those businesses that was impacted significantly. If you go for consolidation, you mean in Marine Protective, you mean consolidation on the customer base or consolidation on the supplier base?
Basically both.
Not sure. Industries that are under pressure, I think you would expect it to be consolidated. 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 recess, et cetera. On the supplier side, I'm not sure if that necessarily would lead to it because most of the marine protective coating suppliers are basically companies that have their own businesses. It's often intertwined with their own service teams and other segments, not totally sure if that would lead to a significant consolidation.
Okay. Thank you very much.
Okay. I think that's the end of the question and answer session for today. Thank you all for joining the call. Please get in touch with Investor Relations in case of further questions or comments.
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