Welcome, and thank you all for standing by. At this point, all participants dialing will be in listen only mode until the question and answer session of today's conference. At that point, if you would like to ask any question, please press star followed by number one. This conference is being recorded. If you have any objections, you may now disconnect. Now I will turn the meeting over to your host, Mr. Lloyd Midwinter. You may now begin.
Hello, and welcome to the Akzo Nobel Investor Update for Q3 2017. I'm Lloyd Midwinter, Director of Investor Relations. Today, our CEO, Thierry Vanlancker, and Interim CFO, Hans De Vriese, will guide you through an update on our strategy and results for the quarter. Sven Dumoulin, our General Counsel, is also on the line. We will refer to a presentation which you can follow on screen and download from our website, akzonobel.com. A replay of the call will also be made available. There will be an opportunity to ask questions after the presentation. For additional information, please contact Investor Relations. Before we start, I would like to remind you about the disclaimer at the back of this presentation. Please note this statement is also applicable to the conference call and any answers to your questions.
I will now hand over to Thierry, who will start on slide four of the presentation.
Thank you, Lloyd. Good morning, everyone, and thank you for joining us on the call. As already outlined in our September eighth business update, Q3 was a challenging quarter due to a series of adverse external events. Despite that, however, we are continuing to achieve growth while dealing with these headwinds. During the quarter, our volumes and revenue increased despite these various challenges. We announced capacity expansions across all of our three major business areas, including officially launching Ashington, which is the world's most advanced and sustainable paint factory to support the Dulux brand. Industry specific headwinds continue, including higher raw material prices for paints and coatings. We are taking measures to deal with these challenges, including increased selling prices and additional cost control. On the next few slides, I will summarize the progress we are making towards achieving our strategy before returning then to the results for the quarter.
We are creating two focused, high-performing businesses, paints and coatings on the one hand, and Specialty Chemicals on the other side, as announced earlier this year. The phase one of creating a fit for purpose paints and coatings organization will deliver EUR 110 million of savings in 2018 on our way towards achieving our 2020 guidance. We are also putting in place a new management structure for paints and coatings, as you will probably have seen the announcements during the recent couple of months. We will hold an EGM on November 30th for shareholders to formally approve the separation, and following shareholder approval, a EUR 1 billion special cash dividend that will be paid on December 7th. The separation of Specialty Chemicals remains firmly on track. Now turning to slide number six.
The phase one of creating a fit for purpose paints and coatings organization is expected to deliver EUR 110 million savings in 2018 towards achieving our 2020 guidance. The one-off costs of this program will be around EUR 120 million, which will be incurred in 2017 and the first half of 2018, roughly half in each year. We have already announced a new, simplified, and performance-oriented management structure for the executive committee and their direct reports. This is now rolling out further in the organization during the coming months. Today, we are more focused on paints and coatings company. In this call, there are also significant opportunities to work closer together in a number of areas. This will include the reorganization of our supply chain and consolidation of infrastructure across the network, including warehouses and distribution. We will also be better leveraging our support functions, including SG&A and R&D.
Integrated supply chain will deliver roughly half of the savings, while the SG&A and the new management structure combined with better leveraging of support functions will contribute to the remainder. We are also making good progress with the separation of Specialty Chemicals, an integral part of our strategy to create two focused businesses. The internal separation is ongoing, and we will have a separate organization in place by January 2018. This will pave the way for creating a world-class Specialty Chemicals business. The separation will allow us to unlock further value and increase returns to our shareholders. Therefore, we will go ahead and ask our shareholders for approval of the proposed separation during the EGM to be held on November 30th. The requested approval covers both a private sale and a demerger, because we currently see both as viable alternatives without a clear preference for either option.
If we were to pursue the separation by way of an IPO, we will return to shareholders and request approval. A dual-track process is an established means for separating businesses from listed companies. This will ensure flexibility necessary to obtain an optimal result for our shareholders and our other stakeholders. The external separation is on track and to be completed by April 2018. The total one-off costs associated with the separation will be around EUR 175 million, incurred during the remainder of 2017 and the first half of 2018. These costs are in line with similar processes at other companies and with our earlier set budgets. Shareholders will benefit directly because we intend to return the vast majority of the net proceeds to our shareholders, starting with the advanced proceeds of EUR 1 billion, special cash dividends paid on December 7th, following our shareholder approval.
Let's now return to the results of the quarter on slide number nine. We are clearly dealing with a mixed market environment. Our paints business continues to grow, driven by China and the rest of Asia, while growth across much of EMEA has been offset by lower consumer confidence in the U.K. Latin America is stabilizing. Strong momentum for powder coatings and revenues from the acquired industrial coatings business means coatings grew overall, even though headwinds continued for marine and protective coatings. Despite significant global supply chain disruptions, including but not limited to Hurricane Harvey, specialty chemicals volumes were flat and a strong positive price and mix reflects the successful pass-through of raw material cost inflation. However, for paints and coatings, raw material cost inflation has led to margin pressure, and we are taking measures to deal with this, including increased selling prices and additional cost control.
A stronger euro versus currencies in major sources of revenue, the U.S., China, and the U.K., also means we are now experiencing adverse currency effects when translating our results into euros. We are, however, very encouraged by continuing to deliver growth in many of our markets while dealing with these various challenges. Turning to slide 10. In Q3, volumes and revenue were higher despite the before-mentioned strong external headwinds. EBIT was impacted by various challenges, including adverse currency effects, supply chain disruption, continued headwinds for marine and protective coatings, and greater than expected raw material cost inflation. The margin pressures for paints and coatings due to the higher raw material costs are not yet fully offset by mitigating actions impacted further the profitability in Q3. These measures were already effective for specialty chemicals, where returns were in line with last year.
Slide 11 shows the quarterly trends for volume and price mix. During the third quarter, volumes increased for paints, continuing the growth momentum that we've seen in previous quarters, and they were also high for coatings. Volumes were flat for chemicals, despite significant global supply chain disruptions. The acquired industrial coatings business also contributed to the growth. Price mix was positive for specialty chemicals, reflecting the successful pass-through of raw material cost inflation. A mix was flat for coatings. Changes in geographic and product mix as we grow faster in some markets than others continue to impact price mix effect for paints, even though we have increased local selling prices in most markets. I'll now hand over to Hans, who will briefly guide you through our financial results in a little bit more detail. Hans?
Thank you, Thierry, and hello to everyone on the call. Starting with a summary on slide 12. During Q3, volumes were 2% higher, driven by paints and coatings, mainly. Revenue increased 1%, mainly due to volume growth and acquisitions, partly offset by adverse currency effects. Raw material prices were higher than last year. We are taking appropriate measures to deal with an inflationary environment. These measures were already effective for specialty chemicals, while expected to take several quarters before fully realized for paints and coatings. EBIT at EUR 383 million was impacted by unfavorable currencies, temporary disruption to the manufacturing and supply chain, continued headwinds for marine and protective coatings, and margin pressure from greater than expected raw material cost inflation.
Disruptions to the manufacturing and supply chain had an impact of around EUR 25 million on EBIT in Q3, related to Hurricane Harvey and other events, with the majority of the impact in Specialty Chemicals. These factors collectively impacted profitability with ROS at 10.6% versus 12.3% last year, and ROI 14.2% compared to 15.2% in 2016. Operating income was impacted by identified items totaling EUR 45 million, mainly related to the implementation of the new strategy to create two focused, high-performing businesses. Turning to each of the business areas from slide 13 onwards. Volumes for paints were 5% higher in Q3 due to positive developments in Asia. Revenue was down 1%, with positive volume development more than offset by adverse currency and price mix effect, mostly due to strong growth in Asia.
EBIT was adversely impacted by continued higher raw material costs in the paints and coatings industry, including titanium dioxide, not yet fully compensated, as well as geographical product mix effect. Appropriate measures are being taken to address higher raw material costs, including increased selling prices and additional cost control. ROS was 9.4% versus 12% in 2016, and ROI was roughly in line with last year at 12.4%. Operating income in the previous year was positively impacted by identified items. Turning to Coatings on slide 14. Revenue was 2% higher in Q3, driven by the acquired industrial coating business, as well as 1% higher volumes, partly offset by adverse currency effect. EBIT was adversely impacted by ongoing weakness in the marine and oil and gas industries, as well as increased costs of raw materials in the paints and coatings industry.
Measures are being implemented to mitigate current industry-specific headwinds, while price mix was positive for most of the segments, an increasingly competitive and pricing environment exists for marine and protective coatings. ROS was 10.3% versus 14.2% in 2016, and ROI was 24.8% compared to 30.9% last year. Turning to Specialty Chemicals. Volumes for Specialty Chemicals were flat in Q3, despite significant global supply chain disruptions, including Hurricane Harvey. Excluding the impact of supply chain disruptions, volume growth would have been around 3%. Revenue was up 1% due to positive price mix effects, partly offset by adverse currencies. Positive price mix reflects the successful pass-through of raw materials price inflation. EBIT was up 1% with favorable price mix developments and cost savings, mostly offset by adverse currencies and global supply chain disruptions. The EBIT impact from the supply chain disruptions was around EUR 20 million for Specialty Chemicals.
ROS was in line with last year at 14%. ROI increased to 17.9% versus 17.2% in 2016. Moving on to cash flow on slide 16. Free cash flow for Q3 was EUR 275 million compared to EUR 469 million in 2016. The difference relates mainly to a lower EBITDA, as well as the movement on the line changes in working capital provisions and other. This is due to changes in working capital, identified items and other provisions. Net debt was EUR 1.7 billion at the end of the quarter compared to EUR 1.3 billion at the end of 2016. The increase is mainly due to pension top-ups, most of which were paid in Q1, and the share repurchase program of EUR 160 million as well as currency effects. Turning to the IAS 19 pension deficit. The deficit remains stable at EUR 0.8 billion versus the end of last quarter, as shown on slide 2016.
I will now hand back to Thierry Vanlancker for some final remarks on slide 19 onwards. Thierry Vanlancker?
Thank you, Hans De Vriese. An interim dividend of EUR 0.56 per share, up 51% compared to 2016, will be paid in November, with the option for shareholders to receive a stock dividend up to a maximum of 40%. Shares from the EUR 160 million repurchase program earlier in 2017 have now been canceled. We will also pay a EUR 1 billion special cash dividend in December following shareholder approval of the separation of Specialty Chemicals. As we have announced, an EGM will be held on November the 30th. The agenda includes the appointment of supervisory board members, the appointment of our new CFO, and the approval for the separation of Specialty Chemicals. Let's now turn to our outlook on slide 21. As we've indicated in our September 8th business update, the quarter three had many challenges in it from a variety of extraordinary external adverse effects.
Going forward, we anticipate positive developments for the EMEA, excluding the U.K., positive developments for North America and Asia, while Latin America is expected to stabilize. Industry-specific headwinds continue, including higher raw material prices and challenges in marine and protective coatings. We are implementing various measures to mitigate the current market challenges, including increased selling prices and additional cost controls. The EBIT for 2017 is now expected to be in line with 2016 due to ongoing industry-specific headwinds and the quarter three supply chain disruptions impact. We're very pleased that we are continuing to achieve growth momentum while dealing with those industry specific headwinds. As these headwinds continue, including the higher raw material prices for paints and coatings, we are taking measures to deal with these challenges, including increasing selling prices and additional cost control.
I will now hand over to Lloyd Midwinter for information about some key dates and opening the Q&A session.
Thank you, Thierry. Before we start the Q&A session, I would like to draw your attention to some key dates shown on slide 23. These dates are relevant for the interim and the special cash dividend. Please note, the date for the full year and Q4 2017 results has changed due to the process to separate Specialty Chemicals. We will now announce results for the full year in Q4 2017 on March 8, 2018. This concludes our formal presentation. We'd be happy to address your questions. When doing so, please state your name and firm, and please limit the number of questions to a maximum of two so others can participate. Operator, we are now ready to start the Q&A session.
Thank you. We will now begin the question-and-answer session. Participants, to ask a question, please press star followed by number one. Please unmute your phone and record your name slowly and clearly when prompted, as your name will be used to introduce your question. To cancel your request, you may press star followed by number two. Our first question will be from Mr. Tom Wrigglesworth. Sir, your line is now open.
Gentlemen, good morning. Thank you very much for your presentation. Two questions, if I may. Obviously, there's been a lot of press discussion about the divestment process for Specialty Chemicals. Could I draw you on a comment to give us an update as to how that process is going? Have you got a timeline now for accepting bids? Could you give us a little bit more color around that and any tax implications? My second question is, starting to think about how you're going to recoup the hurricane outages. I note that your implied guidance for the fourth quarter suggests effectively EBIT will be up around EUR 50 million year-on-year in the fourth quarter. Is that assuming a full recuperation of the EUR 25 million EBIT impact in the fourth quarter? Is that how we should think about how you're going to recoup the hurricane outages?
It will all fall in the fourth quarter, then some growth on top of that. Any clarification on that would be very helpful. Thank you.
Yeah. Very good. Let me handle the first question, start the second question, and maybe Hans can chime in on that one, too. One, on the process for the separation. On November 30th, on the EGM, we will ask for the formal approval to do a dual track, which is either a full sale or a full demerger of the company. That means that then overlapping with that, there is some initial contacts already to see the pre-marketing, et cetera. We are completely on track for January 1 to have it, I would say the company within the company. It's of course, fully owned by Akzo Nobel, but as a separate operating entity as such. Then we're totally on track to have a separation taking place in April 2018 as we indicated earlier. We're fully on track there.
We will do the dual track in parallel. The indications currently are not clear yet what would be the most value generating. You implied the tax bill. If you look at what current assumptions are for sale versus what might be the merger, it is really within a very narrow bandwidth, at least on the current assumptions. I'll presume we'll have to go through the process for a while until we see whether there is a distinguishing factor showing up. That is as a response to your first question. The second one on the fourth quarter, you are right. Of course, also the comparables getting somewhat easier versus the fourth quarter of 2017. You indicated the impact of the hurricanes. It was not only hurricanes, it was hurricanes, environmental inspections at customer suppliers and industrial parks where we happen to be impacted.
A fire at a supplier into a big customer in Rotterdam. We had all sorts of almost biblical events taking place. Once you see the current momentum, if you see at the three different businesses, you are correct that we see a significant bump up versus the fourth quarter of 2017. Hans, I don't know if you would want to put more color on that.
No, Thierry, you kind of mentioned most of it. One of the elements is obviously that the comparables are somewhat different in Q4. We did see the full impact of marine and protective in Q4 last year. The other element is that we had a large restructuring element in the Q4 of last year, which we don't expect to reoccur in Q4.
Okay. You would expect a full recuperation of the EUR 25 million in the fourth quarter?
Well, just to put it in perspective, the EUR 25 million that we indicate is only the direct supply chain impact of what we could not produce or could not ship if there was an issue at the customer. As you might see from other industry announcements, there's also a market impact, which is not part of this EUR 25 million. In fact, the underlying impact in our business is larger than the number we mentioned, but that becomes a bit mushy to try to quantify that in detail. If your question is whether our plans of specialty chemicals And the one from Marine and Protective that were impacted directly, for example, in Harvey, whether they're back up and running, the answer is yes. We still see throughout the network, we see customers that have more damage, people or suppliers who have some issues, et cetera.
Hence, the somewhat more precision on the numbers versus what we indicated early on in September around the outlook for the rest of the year.
Okay. Thank you very much.
Thank you.
Thank you. Our next question will be from Mr. Jeremy Redenius. Sir, your line is now open.
Hi, it's Jeremy Redenius from Bernstein. Thanks for taking the questions. The first question I have is just on the cost savings you announced. I think your predecessor probably would have called this business as usual to take out this type of cost and the cost of the cost savings also business as usual cost. I'd like to hear if you're back to treating these as exceptional items, that is treating those costs as exceptional items, or if you'll continue to report those essentially as part of cost of doing business to keep the managers honest in their efforts to improve the performance of the business. Secondly, if I understand correctly, you'll probably get an insurance payment for some of the lost production related to Hurricane Harvey. What order of magnitude would you expect that to be?
Would that come in Q4 this year, or would you expect that to come next year? Thanks very much.
All right. Thanks, Jeremy, for your question. A couple of comments. It is not really business as usual. Maybe just to make sure there is no confusion. There is the ongoing EUR 150 million-ish continuous improvement processes that annually offset inflationary pressures, et cetera, in the business. That, of course, is not part of what we just announced. That is indeed business as usual, very institutionalized in the businesses and in our functions right now. That is part of the baseline. You may recall that in the April session, we talked about a EUR 50 million cost reduction plan. What we announced now, the EUR 110, the impact in 2018 accounting year, is actually an enlargement of that earlier said number. I would also say that the nature is somewhat different of these savings because this really goes about creating a focused paints and coatings business.
It is part of having a much simplified, much more operational focused management that is rolling now in the organization through. It is also based on levering much more supply chain warehouses infrastructure between the businesses, which was really not the scope of previous cost resets, which were much more focusing on functions in general. In that sense, it is somewhat larger. Now, around the treatment of it, there is some identified and unidentified that I handed over to Hans.
Yeah, Jeremy, as this is part of a phase 1 of transformation fit for purpose paints and coatings company, and it is quite a large amount and set up, those specific ones will be treated as identified items in this case.
Okay, thanks.
You had another question, I think, which referred to the insurance payment. Hans, maybe you can elaborate how much and when that is supposed to come in.
Basically, the insurance payment, as you know, we have a captive insurance company. As such, we are going through insurance claims. Obviously that from a company perspective will not have a positive impact as the costs will be carried by our captive, which are consolidated in the total of Akzo Nobel.
Okay, we see basically the cost move from a basically insurance payment from the other segment into specialty chemicals. Is it fair to say later this year?
That is correct.
Okay, great. Thank you very much.
Thank you. Our next question will be from Mr. Tony Jones. Your line is now open.
Morning, everybody. Thanks for taking my two questions. Firstly, on raw materials. Earlier in the year, many of the paint companies were guiding for mid-single digit pace of inflation. Looking at a basket of raw materials, this looks like it's now at least double digit, maybe even heading towards mid-teens. Could you maybe comment a little bit about whether some of that is correct and how we're thinking about it? In terms of the long-term targets, the ownership of the 2020 targets. The base this year seems to be deteriorating, and we'll see how it pans out in Q4. With that in mind, why do you feel the need to retain those targets?
Some investors might be sort of starting to speculate that you're just going to keep cutting costs further to try and get there, but that could be further disruption looking out over the next couple of years. Thanks.
Yeah. All right. A couple of questions. First on the raw materials. I think the expectation on the raw material increase in the beginning of the year was indeed lower than what was the result. It was also supposed to be over quickly. The elements of the raw material increase is that it is indeed higher than was originally thought. Over a longer period of time, that means that we are chasing with price increases, which we see coming through finally in the market. We are chasing with price increases those increases, but we're constantly chasing it. 3, since they have been gradual, that means there is a little bit more of a constant margin squeeze in addition to that. You are right that it is higher, it is longer, and it is more gradual, which gives some issues sometimes in getting price increases through.
That reflected the whole industry announcements you've been seeing coming over the last few weeks. They're all very similar in that respect. By the way, for some of those materials, we see it flattening out. There are also notable exceptions where we believe this may go on until the first half of 2018. Hence, also the reason to take measures. Now, going back to your question on the 2020 target, I think I've been on record a couple of times that the 15% ROS is to finalize the journey from being in the follower group in single digit growth to basically get to the leading group, not only in size but also in profitability. Therefore, I think in 2020, the 15% is a must and a continuation of the line we had.
You're right that the base, of course, due to a number of extraordinary events, has been impacted. The analysis that we've done, we don't think that this is a lasting chronic situation. This is more punctual. That also explains that if the base is somewhat more impacted in this year, that therefore, we accelerated the step we have to take for 2018 as the first episode to get to the 2020 numbers. Now around your cost cutting, I can assure you we would not cut costs if that would impact our agility in the market and our winning in the market. I may point out that the costs that have been taken out so far still result in us showing a healthy growth in the market. I think that's probably somewhat different than what you may hear from some others. That doesn't impact us.
I think for us it's around prices. Yes, there is, I believe, still some cost takeout, which is just duplication for not using our economy of scale before. Since I'm very much tying our company to the 2020 target, there is big vigilance in the management team not to do this short term because that defeats the purpose on why we do it in the first place.
Thank you. Thanks for detail.
Thank you. Our next question will be from Mr. Paul Lee. Sir, your line is now open.
Yes. Thank you very much. I had two questions, please. First one on specialty chemicals. Given the strength in the chloralkali chain that we're seeing globally, I was just interested to see industrial chemical revenues up 2% in the quarter, and I would have, I guess, expected better developments given the pricing dynamic in caustic soda in particular. I was wondering, frankly, what I'm missing there, given your size in that market. The second question, with the EGM coming at the end of November, I think you said, Thierry, that you'll make a decision on spin to existing shareholders or trade sale. Presumably, you've got a fairly good feeling at this stage as to which one is the more likely route. I wondered if you could just give more in terms of how that decision is going to be made.
What are the things you're balancing one way or the other right now? Thank you.
Okay. On your first question, if you talk about the specialty chemicals, there is a strong momentum. Yes, you are right, the industrial chemicals business has an even stronger momentum in it. In all the things that happened in the third quarter, one that was almost pale in comparison to hurricanes and China, et cetera, is there was the fire in the Shell Pernis refinery. We are not a customer of them, that goes into other companies that are big customers of ours in the cluster of Rotterdam. The third quarter has been impacted by a significant period in the beginning of the quarter that our business was not operating in one of its largest clusters. The fact that they actually are revenue plus, despite having been down for weeks in the quarter, shows you the underlying strength.
It's one of those things that probably, since so many things happened externally in the third quarter, almost gets forgotten. That business has indeed a lot of momentum, a lot of traction, and I think that's such a good tailwind going into 2018, obviously.
Just on that, Thierry. Sorry, just before we go and move on to the second question. Do I take it therefore that the volume disruption on industrial chemicals was probably double digits and therefore, that EUR 20 million of hit that you refer to in EBIT in specialty chemicals would have been largely industrial chemicals as well?
Well, in fact, when we talked about the euro impacted with more to do with the hurricanes, that business has been catching up. I mean, there is indeed a delay on that. Hans, I don't know if you want to give more detail on the numbers there.
The impact on the Rotterdam is low double-digit numbers on the revenue side. Yes, so low double digits.
In industrial chemicals?
In industrial chemicals.
In industrial chemicals.
All right. Low double-digit revenue here. Thank you. Sorry to interrupt.
No, that's fine. If we go to the EGM on November the 30th, we go with the two options for it. A, that is indeed to keep the flexibility on how either we sell or we spin. It wouldn't argue that if we already had a clear thought on what we want to do. I maybe alluded to that in one of the previous questions. With all the good work that we do internally and lots of people spending lots of quality time internally, as you might imagine, on working on the separation, when we get the financial analysis on one or the other, it is actually in a very narrow bandwidth. Therefore, I think it is wise to go with a dual track in that process to see that we maximize the value, but also in addition, to see what is the stakeholder view.
Once this business is divested. The decision is really going to be based on what is the value generation, what is the complexity of doing it. The third part is really going to be around, okay, what is the intent from the new owner for their business, and is it therefore better than to de-merge it or to sell it?
Just to be clear on that, Thierry. We'll get a headline on the 30th of November confirming either private sale or spin. The decision will be made that day.
No. We will ask for the approval to shareholders to allow us to embark on a dual track for either-
Fine.
-sale in full or de-merger in full from Specialty Chemicals.
Fine. Understood. Thank you.
Thank you. Our next question will be from Mr. Peter Clark. Sir, your line is now open.
Yes, good morning, everyone. Thank you. I want to pick up on Tony's question from a different tack. Playing with numbers, you're probably 400 basis points off the 2020 target. Obviously, a new efficiency program, if you keep it all, would add 100 basis points. Let's say raw material is short, 100 basis points. There's still this 200 basis point gap. Obviously you've got the ongoing efficiencies, you've got operating leverage. I just want to be clear. You basically see this 200 basis point gap clearing through those sort of issues. Secondly, on the gross margin performance in the third quarter, you were down 250 basis points, I think, and 200 basis points on the nine months.
Judging certainly from what your competitors are saying about Q3 as well as their performance in the first six months, and even trying to adjust for mix, there's clearly a differential here in terms of performance. You are performing far worse. I accept things like titanium in Europe might be an issue. I'm just wondering if there's anything you would point to that might be reflecting that. Those are the two questions. Thank you.
A couple of things. One, I think maybe more than other people, we were directly hit. For example, in the Houston area, we had four plants directly hit. You have China, where we have another two plants that were encumbered to produce. That is a bigger part of it. Yes, you have the titanium dioxide, but this is for the whole industry. If I look, for example, in our businesses, if I look at Performance Coatings, in fact, I'm pretty encouraged with what I've seen around the volume. We also see the pricing finally getting some traction. I think that's been notoriously vicious to get our prices up in those markets.
Where you see some more light maybe in some of our numbers is the marine and protective impact, which is for us, relatively speaking, was a bigger part of our portfolio than with some of our competitors. That may explain it. If you look at those businesses and you make a section on that, I think our Performance Coatings business, I'm pretty encouraged with what I see. At the same time, if you look at paints, exceptional growth in the quarter, and that's now a number of quarters in a row. We're definitely there. We're not only holding our own, but we're actually increasing our impact. You see the price and mix in effect is, of course I would almost say the more successful our mid-market growth is in Asia, the more you see that in the price mix.
It is definitely in return on sales, it is actually accretive. In that sense, it is positive on that. That you really have to look at the details, but compared to the others, you should definitely not underestimate the massive impact we had in the third quarter on a temporary basis in Specialty Chemicals. Again, our volume growth overall was 2%. If Specialty Chemicals had just been continuing to produce in those plants, it would have been three plus, which means that in market-wise, I think we're definitely on a good roll there. Which I don't want to be talking every quarter around external events, hence us accelerating the transformation plan, but I do believe that is an option. It's something that's necessary to be fit for use, and I think that's actually going to make us more agile.
Thank you. Can I ask just one clarification on the efficiency program behind the scenes, so to speak? Obviously, in the fourth quarter last year, I think you took a charge probably north of EUR 30 million. You're saying there's still some charge in the 2017 Q4 that helps that? Because obviously we're talking about this 20% up on the year-on-year comp. There still will be some underlying efficiency charge in that EBIT in Q4 for you?
Okay. Peter, you can elaborate on what was indeed what happened in the last quarter last year versus last quarter this year.
Fourth quarter last year, we took a charge, a restructuring charge, which from a comparative perspective, will help us in Q4 this year.
Okay. Thank you.
Thank you. Our next question will be from Mr. Geoff Haire . Sir, your line is now open.
Yeah. Hi. Can I just ask two questions, please? Could I just check the phase II and phase III of the restructuring program that you've got. How much cost savings do you expect to get from that? Given the comments you made at the start of September, I'd assume another EUR 100 million-EUR 150 million is what you're looking for. Secondly, could you tell us what the price increase was in Decorative Paints? Excluding the mix impact, please.
I'm not sure if I fully understood your first question, let me try to get some clarification. You're asking for the transformation plan, what the impact would be?
No. What I'm suggesting is, I think in the conference call on the 8th of September, you said that the overall plan to make AkzoNobel Coatings a world-leading business would take about two to three basis points out of your cost base. I'm trying to understand then the phase 2 and phase 3 to get to that point, what additional cost savings do you expect to get from that? Or is there any additional cost savings coming from that?
Yes. Okay. We're rolling out first one, so you want details on the second or the third one, so that's maybe not that easy to answer. Let me tell you what the sequence is in that's going to make it easier, I think. Since the new management team is in place, we've been very much deep diving on, specific on the paint and coating side, how to get more traction, how to get more agile, how to get more standardization. Actually, economy of scale versus having the different vertical integrated business working next to one another. What you see here is the first rollout because we want, as quickly as possible, to get the steering wheel in our own hands, given the external effects that we have.
Now, we'll continue to work, so it's not going to be we do one plan and then we wait until this is done and we do the second plan. We roll it out as actually the elements are being clarified. You won't see any references in this first transformation to procurement. You won't see anything to non-product related procurement or product related procurement, because those plans are not finalized yet or not quantified enough yet for me to talk about it in public. We will roll them out as we are. Don't see them as a sequence. They may actually be overlapping as one phase is ongoing that we actually announce the second phase. I'm not sure if that answers your question.
I assume, given that you're confident on the 2020 target of 15% EBIT margin, you must at least internally have some idea of what these ultimate cost savings are going to be, combined-
No. Absolutely not. There's also a part here, if you look at the underlying prices and the cost control we do, you see us edging up. In fact, this is with all the external noise that's on the business. You see our margins stabilizing or getting back up there because the price increases are getting through. That's or narrowing the gap because we've constantly had this margins squeeze during the year. That if we extrapolate what we expect is going to happen with raw materials, et cetera, there is strength in the underlying business. It is not all just through cost. Yes, when we quantify the buckets, that's why we feel we can definitely get to the 15% ROS in 2020. To announce those buckets in detail, they're not fully baked yet as we've done with the ones that we've announced today.
Okay.
Your second question was about the price increases in Deco. I would say, suffice it to say that in and again, in the whole paints and coatings area, maybe with the exception of marine and protective, we are seeing traction on our price increases. That will be overtaken again with raw material increases, so it's been the chase during the whole year. We see price increases. If you look at Deco, you see in regions, you see in local pricing for the same product, like for like, we see our prices going up. I think it would not be wise to give detail on this call on how much it is exactly. We do see positive pricing momentum in the system.
Okay. Thank you.
Thank you. Our next question will be from Mr. Laurence Alexander. Sir, your line is now open.
Good morning. I have two quick ones. First, were Decorative Paints volumes positive outside Asia in aggregate? Secondly, with the call out of the environmental inspections in China, have they given you any guidance on what to expect for 2018?
Okay, the first question on the volumes. The volumes in Asia were, as you've seen, are very positive. In the other regions, it's either flat or actually slightly down. In the markets where we're down, we've done obsessively looked at share and what we're doing there, so there is no issue there. On the volumes in certain parts, specifically, I think in Europe, has been in certain markets relatively static. The second question was?
Oh, just to clarify, with the call out of the environmental inspections in China, if the government has given any indication on what to expect in 2018.
Not really, because these were not necessarily environmental inspections on us. In fact, that was not the case. These were inspections either at big suppliers, at customers, or sometimes in the area or the industrial parks where we were just one of the units operating. I think the whole chemical industry is a little bit watching where it's going to happen next. It's difficult to predict. I presume since the industrial parks in China where we're operating have been inspected, one would assume that basically keeps us whole for a while. I think we're probably not the only ones who kind of are a bit puzzled on what the process exactly is and when it might hit. Including, by the way, local Chinese players who often been taken out of the market if they're not compliant with environmental regulations.
not sure we have a straight forecast on that, but I presume this should be stabilizing as of now.
Thank you.
Thank you. Our next question will be from Mr. Laurent Favre. Sir, your line is now open.
Yes. Good morning. Good morning, Thierry. Just one question from me. You've talked about the ability to win in the market, and you've talked about how you demonstrated better growth than your peers despite the cost-cutting. You've also not demonstrated pricing, and I understand the mix issues, but should we not assume that you are being a bit less disciplined than your peers in the marketplace, and that's how we can justify the growth on one side, and on the other side, the delta in margins to U.K. that seems to be widening, not narrowing. Thank you.
Okay. A couple of questions. No, the answer is no, because if we look at markets, even the markets where we're growing, what the local pricing has done versus before, that's actually going up. I would be as suspicious as you are if that was by lowering prices, et cetera. That is definitely not the case. That's the one element. Two, I think the margin widening, I'm not so sure. I would actually wait a little bit until we see the results coming out. We are, as I said, in paints and coatings impacted very adversely in the marine and protective. We also have to say the currency, and if you probably compare ourselves then with some of the U.S. players, the fact that the EUR is strong makes it at least a translation headwind if you see those numbers.
I can assure you that we are slicing and dicing this by segment, by competitor, et cetera, and that is not the sentiment that we have here.
Okay. Just on marine and protective pricing, as marine and protective is about a quarter of Performance Coatings, you talk about price increases for the other segments. Overall pricing being flat. Does it mean that pricing in marine and protective has deteriorated by about 4%? Is that a take?
Indeed, when you look at Performance Coatings, if you would look at the seven elements in that business, it actually looks pretty good for five of them. The good news is that's where we finally start seeing some pricing tractions, and that was good, given the raw material impacts that we've seen in those businesses. You are right that in marine and protective, I think we alluded to that in the previous call. If you have a market that is down to such an event, it is just a matter of time before people start trying to get to share and buy share. We are defending our turf as the big player there. Yes, there is a significant price pressure in those markets, absolutely.
Thank you.
Thank you. Our next question will be from Mr. Mutlu Gundogan. Sir, your line is now open.
Yes, good morning. The first question is on the Deco business in EMEA. Your revenues that were down 4% year-on-year. Can you tell us what the split was between currencies and price mix? Secondly, on marine, obviously revenues are down. Can you just tell me how your order book is doing in the new build business? Is that also still declining?
All right. The first is on Deco in Europe. Well, as you know, of course, the U.K. market is, for us, a significant market. It is probably the single largest country market that we have in our Decorative Paints business. Our overall exchange rate impact in our business is -3%, that encompasses more than just the European point. You probably have a pretty good idea of how big our U.K. business is, and if you then look at what the pound has done versus the euro, that is a significant impact in our business indeed. The second question was around marine new builds. Well, new builds are trending up, but it's still from a very low base.
I think those statistics are pretty well known, that it went from 2,000 plus ships to a real dip of around 400 or 500, and is now coming up with a big sigh to 800. We see that going up gradually. I would say it is still in the valley, and I would not call it a valley, I would call it a bathtub, where we're actually at the bottom there. That upside is actually not enough to really look at the upside on that. Yes, it is so that if you look preliminarily, we see a bit more build. To be very honest, that comes relatively late. If there's new builds right now, the painting of those ships is about 18 months later.
I think I've indicated in a previous call, if there is any trending up in the bathtub, I think it's going to be end of 2018, early 2019, that we're actually going to see some impact on that, even that's going to be relatively limited.
Okay. Thank you very much.
Thank you. Our next question will be from Mr. Christian Faitz. Your line is now open.
Hi. Christian Faitz from Kepler Cheuvreux. Thanks. Coming back to the U.K., could you please share with us organic growth in Deco U.K. and contrast that with organic growth in continental Europe in your Deco activities? The second question would be, it looks like your current message into your sales force is to go for volume rather than price, even especialty chemical prices are moderately up, but far less than I would have expected, even with the hurricane impact and Rotterdam impact. Why is that? Thanks.
All right. The first question, I think I've answered that partially, that where Europe is concerned, there is really no organic growth in our Deco market, if that's what you're asking for. There was some growth in EMEA, but the U.K. was definitely still impacted by lower consumer confidence. The U.K. market is not growing. As you know, we are the very strong player and large player in the U.K. market. We are holding our share definitely, but that is actually the reverse of organic growth if you look at the U.K. market right now.
Consumer confidence in the non-food sector, I think the numbers came out a week ago, continue to be negative. If you add in the pound and you add in inflation, et cetera, there's a number of elements that are all trending in the wrong direction for now for the U.K. for now. The second thing, when you say the marching order to go for volume versus price, that is not the case. I think the marching order is to go for contribution and get the margins back reestablished. Again, if you look at our markets, that is happening, as I indicated. If you look at the local markets for Deco and you look at the majority of our segments, we are seeing our local prices going up. That goes against that trend.
Again, when you look at Deco, you should not underestimate the huge success in the mid-market in China. Now since a couple of quarters, that skews the price mix comparisons if you go year-over-year. When you talk about specialty chemicals, that is even neither an option or a lack of option. The biggest part of that business is on price formula contracts. There is no pricing up, pricing down. I can assure you that in those parts of the business that's not on pricing formula, the prices went up.
Okay. Very helpful. Thank you.
Thank you. At this time, speakers, we don't have any questions in queue. You may proceed.
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Thank you. That concludes today's conference. Thank you all for participating. You may now disconnect.