Welcome. Thank you for standing by. At this time, all participants will be on a listen-only mode until the question and answer session of today's conference. At the time to ask a question, press star followed by 1 and record your name at the prompt. This call is being recorded. If you have any objections, you may disconnect at this time. I would like to turn the call over now to your host, Mr. Lloyd Midwinter. Sir, you may begin.
Good morning. Welcome to the AkzoNobel Investor Update for Q4 Full Year 2016. I'm Lloyd Midwinter, Director of Investor Relations. Today, our CEO, Ton Büchner, and CFO, Maëlys Castella, will guide you through our results for the full year. We will refer to a results 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 safe harbor statement at the back of the presentation. Please note this statement is also applicable to the conference call and the answers to your questions. I will now hand over to Ton, who will start on slide four of the presentation.
Thank you, Lloyd. Good morning, everybody. Our track record of performance improvement continued in 2016. We delivered a year of record profitability in terms of Return on Sales and Return on Investment. We continued to build on our foundation of operational excellence and drive growth. We now have a stronger foundation for adapting to market challenges and seizing growth opportunities, evident also by our acquisition of BASF's Industrial Coatings business. Our ALPS continuous improvement program has now been rolled out to more than 75% of our manufacturing sites. We've made significant progress with implementing our global business services model for our support functions, which together, meaning ALPS and GBS and the functions, have delivered cost savings in excess of EUR 200 million in 2016. All these actions have helped us create a more engaged workforce, underlined by our engagement levels improving for the sixth year in a row.
Safety also plays an essential role in this. We made good progress towards our 2020 ambitions. Our sustainability agenda was brought into sharper focus as we stepped up our activities in all areas. Our Human Cities initiative played a major role in bringing our purpose to life with more than 300 projects in the communities where we operate. We're now a stronger, more agile company with excellent brands and a solid operational and financial foundation. We've structurally improved our ability to respond to development in our markets and are better able to seize growth opportunities, including acquisitions. Stepping to slide five, we are building on our foundation of operational excellence to drive growth. We've continued to invest in growth, including in our brands and manufacturing plants. We've launched new sustainable and digital solutions for our customers.
Slide five just shows a few of the many highlights from 2016. Decorative Paints delivered higher volumes for the fifth quarter in a row and increased its profitability. We started producing at our fourth Decorative Paints plant in China, and our Visualizer app has now been downloaded more than 13 million times. Performance Coatings maintained a structurally higher level of profitability in a market environment that showed some challenges. This demonstrates how changes we made enable us to run our business more effectively. We completed the acquisition of BASF's Industrial Coatings business and continued to invest in production facilities, especially in key emerging markets. We've also taken decisive actions to align our cost structures in our Marine Coatings and our Protective Coatings businesses. Specialty Chemicals delivered a strong performance with both volume and profitability improvement. We continued to invest in our business in terms of both innovation and capital expenditures.
We also announced a partnership with Atul in India to construct a new MCA plant. Stepping to slide six, you see here that revenue was down 4%, mainly due to unfavorable currency effects. EBIT was up 3% and increased 6% excluding these adverse currencies. Profitability improved further with both return on sales and return on investment higher, and net cash flow from operating activities was up 14%. Slide seven shows that we've structurally improved the company with record levels of profitability and cash generation. Allow me to step through to slide eight relatively quickly. Slide eight shows the 2016 market developments that we've seen. Conditions did remain challenging in some of our markets, and as expected, we continued to face an uncertain and volatile economy, including currency headwinds.
Volumes for Decorative Paints increased, as mentioned, for the fifth quarter in a row, driven by Asia and Europe, Middle East, and Africa, while Specialty Chemicals achieved higher volumes with increasing momentum throughout the year. Volumes were up for Automotive Coatings and Specialty Coatings in most regions, and Powder Coatings grew in all regions. In general, Asian markets showed positive dynamics throughout the year with good momentum in India, despite some impact towards the end of the year due to the demonetization efforts. In Vietnam and Indonesia, we also showed good developments as well as in China. In Europe, volumes were higher overall and trends varied across the region. Market conditions continued throughout the year to be challenging in Latin America. Improvement actions and cost control remained the focus in 2016 for the region.
The oil and gas sector, especially the project activity, has been especially challenging, including in North America, while a significant downturn in the global shipbuilding industry also impacted our revenue in Performance Coatings. Therefore, we've taken decisive actions to align our cost structures in our Marine Coatings and Protective Coatings businesses to adapt to the new realities of their markets. We're seizing opportunities for growth and adapting to challenging markets. Slide number nine shows a look into 2017. Some of the market trends experienced in the second part of 2016, including the ones for the Marine Coatings and oil and gas industries, are expected to continue during the first half of 2017. Slide nine shows the updated expected growth rates for our relevant markets compared to what we communicated during the Capital Market Day in October 2015. Looking at 2016, we have grown in line or faster than our relevant markets.
For example, we've maintained or increased our market share for Decorative Paints in all regions, including Europe. Despite deteriorating market conditions for Marine & Protective Coatings, we've actually contracted less than the market, meaning we've grown our shares in these markets. In the salt-chlorine chain, our industrial chemicals business has increased market share, including as a result of higher supply chain availability. Going forward, we have a clear aim to build on the foundation we've created and continue to grow in line or faster than our relevant markets. We've structurally improved our ability to respond to developments in our markets, and our stronger operational and financial foundation means we are more agile and better able to seize growth opportunities, including acquisition. Stepping to slide 11 is a summary of our strategy and key strategic actions. Our strategy is starting to deliver results.
The continued achievement of our financial targets over several successive years highlights the significant progress we have made. In the first phase of our strategy, we focused on operational excellence and improving our returns and our cash flow. Having made significant progress in getting the basics right, we're driving the second phase of our strategy, which is more focused on organic growth, innovation, and value-generating acquisitions. Allow me to go through each of these key strategic actions on this slide, starting with hardwiring our new organizational models on slide number 12. In 2016, significant effort went into hardwiring our behaviors to the multiple new structures and organizational setups we have implemented since 2012. These efforts are crucial for our future success.
We delivered a year of record profitability in terms of return on sales and return on investment, as well as higher cash flows from operating activities, and we continued to build on our strong foundation of operational excellence. The new organizations we've put in place are close to being fully embedded, the fact that we were able to achieve cost savings of more than EUR 200 million with limited restructuring costs, and that for a second year in a row, shows our continuous improvement drive in delivering and is more than compensating for inflation. We've made good progress on safety, and our engagement levels improved for a sixth year. Stepping to slide number 13, it shows that we've delivered these cost savings for more than EUR 200 million from both continuous improvement and operational excellence in the business and in the functions.
Our ALPS continuous improvement program, the AkzoNobel Leading Performance System, has now been rolled out to more than 75% of our manufacturing sites, and we've made significant progress with ALPS. Having started in manufacturing and supporting the ALPS methodology in the global business services organization implemented on January 1, 2016, is starting to deliver benefits and increase transparency. We have five regional hubs in place, providing HR and finance support for many of our people and processes. At the end of 2016, we announced further changes in our IT and HR functions, some of that is also related to the restructuring charges you will see in 2016 Q4, which we'll highlight later on in the presentation.
We aim to achieve year-on-year productivity improvements to at least offset the inflation. With more than 1,000 projects running at any time, we have potential to generate between EUR 100 million and EUR 200 million savings every year with this methodology. Slide number 14 shows you two improved facilities that have had the ALPS methodology come through. It drives a standardized way of working, and it develops the capability of our people. It also helps identifying gaps in areas for improvement in safety, quality, cost, service, and people development. The two examples you see over here are clear examples of a 5S implementation and the tier 1, tier 2, and tier 3 boards that you see in every facility that has actually gone through the ALPS methodology education. Stepping to slide 15.
During 2016, we have invested EUR 634 million, around 4.5% of revenue, to upgrade and expand existing sites and open new facilities to drive organic growth in the future. Some of these investments are shown on slide 15. They include new plants for Powder Coatings in India and China and two new Specialty Chemicals facilities in China. We've also invested in existing sites in Los Reyes, Mexico, as well as Battle Ground and Pasadena in the U.S. Turning to slide 16. Our strategic focus on driving innovation to support organic growth gathered increased momentum as we invested EUR 363 million in this area. We launched a series of products, many offering major benefits in terms of their sustainability profile to our customer. For example, our Dulux Forest Breath, a range of interior paints which improve indoor air quality, was launched for the Chinese market.
Digital innovation is a major part of attention and is playing an increasingly important role in the product development and how we work with customers. A recent introduction making strong progress is Intertrac Vision. We also opened a new virtual reality center in our Decorative Paints customers for our Decorative Paints customers in the U.K. We believe that we're ahead of our peers in many of these areas. Stepping to slide 17. Acquisitions and joint ventures are supporting growth as summarized here. In 2016, we completed the acquisition of BASF Industrial Coatings business for EUR 425 million. That's including the closing adjustments and the working capital requirements of the business. It is expected to add sales of around EUR 280 million in 2017. The acquisition strengthens our position in the important coil coating market and fits well with our existing business.
During the next two years, some of the production volume will be transferred to nearby existing AkzoNobel facilities. This will bring synergies and additional production efficiencies. Full profitability will be realized by the end of 2018 and will be in line with the guidance provided for Performance Coatings. We've also invested in a number of joint ventures. For example, the acquisition of outstanding shares in EkO Peroxide in the U.S. and a partnership with Atul in India to build a world-scale monochloroacetic acid plant in India. Our stronger operational and financial foundation means we're more agile and better able to seize these growth opportunities, including acquisitions and joint ventures in the future. Turning to slide 18, our sustainability agenda was brought into sharper focus as we stepped up our activities in all areas and are continuing to identify areas of opportunity.
This will help us accelerate growth towards our strategic sustainability ambitions. Slide number 19 shows that Human Cities played a major role in bringing our purpose, creating everyday essentials to make people's lives more livable and inspiring, come to life. During 2016, more than 300 projects were launched around the world, impacting over 9 million people, highlighting our contribution to the communities in which we operate. I will now hand over to Maëlys for the financial review, starting on slide 21.
Thank you, Ton, and good morning, everyone. Our strong financial performance improvement continued in 2016. Volumes were 1% higher, up 3% for Decorative Paints, up 1% for Specialty Chemicals, and flat for Performance Coatings. EBIT was up 3% and 6% higher, excluding adverse currencies, driven by volume growth, continuous improvement, and lower cost. We achieved record level of Return on Sales and Return on Investment. Adjusted EPS was at 3%, and total dividend proposed for 2016 is at EUR 1.65 per share. Net cash inflow from operating activities was up 14%. In Q4, the growth momentum continued with volume up 2%, driven by Decorative Paints and Specialty Chemicals. EBIT was impacted by higher restructuring expenses and significant downturn in the marine and oil and gas industries.
We completed the acquisition of BASF Industrial Coatings business and announced a share buyback to neutralize the dilution effect of stock dividends paid in 2016. Now turning to slide 22. Volumes for the full year 2016 were 1% higher. However, revenue was down 4%, mostly due to unfavorable currencies. EBIT was up 3% at EUR 1.502 billion, reflecting the positive effects of volume growth, continuous improvements, and lower cost. Operating income was lower due to positive incidentals in 2015. Profitability increased with record levels of Return on Sales at 10.6% versus 9.8% in 2015, and also record Return on Investment at 15%, compared with 14% the previous year. Total restructuring expenses in 2016 amounted to EUR 62 million, versus EUR 74 million in 2015, and more than half of 2016 restructuring was recognized in Q4. A summary of Q4 is shown on slide 23.
Volumes were up 2%, driven by Decorative Paints and Specialty Chemicals. Revenue was down 3% due to unfavorable currency and price mix effects. EBIT at EUR 235 million, mainly due to higher restructuring expenses and weakness in the marine and oil and gas industries. Restructuring expenses were related to implementing the next steps towards GBS in the support functions, as well as Marine & Protective Coatings. Return on Sales was 6.8% versus 7.5% in 2015. Please keep in mind, Q4 is a relatively small financial quarter for Decorative Paints. A summary slide for business area is provided in the appendix. Now turning to slide 24, we show the quarterly trends for volume and price mix. During Q4 2016, volumes were up 2% overall. Volumes were up 2% for Decorative Paints, increasing for the fifth quarter in a row, and up 4% for Specialty Chemicals.
Volumes were 1% lower for Performance Coatings due to reduced demand in the marine and oil and gas industries. Price mix was negative 3% for AkzoNobel, although with different trends per business area. Specialty Chemicals continued to experience price deflation in several markets. Price mix was also negative for Decorative Paints and Performance Coatings. I will now run through the highlights regarding the full year results for each of the businesses, starting on slide 25. Decorative Paints deliver higher volumes and profitability. Volumes were up 3% overall, with positive developments in Asia and EMEA, while volumes in Latin America were down. Revenue was down 4%, mainly due to unfavorable currency effects, in particular the pound sterling in currency in Latin America. Revenue was up 2% higher if we exclude currencies. EBIT increased by 3% due to volume growth, continuous improvement, and cost discipline, partly offset by adverse currencies.
Return on Sales increased to 9.3% versus 8.6% in 2015, and ROI was up 12.8% compared to 11.7% in the previous year. Turning to slide 26. Performance Coatings was able to maintain a structurally higher level of profitability. Volume growth in such segments was offset by adverse condition in the marine and oil and gas industry. Revenue was down 5%, mainly driven by adverse currencies as well as price mix. EBIT decreased 4% due to the adverse currency and price mix effect, in addition to weakness in marine and oil and gas industry, partly offset by continuous improvement. Return on Sales and Return on Investment were in line with 2015. Specialty Chemicals delivered volume and profitability improvement, as shown on slide 27. Volumes were up 1%, mainly driven by Asia and Europe, partly offset by lower demand in the oil-related segment.
Revenue was down 4% with positive volume development, more than offset by price deflation in several markets. EBIT increased 9% due to improved volumes and operational efficiency. ROS increased to 13.2% from 11.6% in 2015, and Return on Investment was up 17.9%, compared to 16.3% in previous year. Now turning to slide 28. EBIT increased due to higher volumes, continuous improvements, and lower costs. Foreign currencies were a headwind for 2016. EBIT would grow 6% excluding the impact of the unfavorable currency effect. Higher volume for Decorative Paints and Specialty Chemicals contributed positively, although adverse price mix impacted the results, in particular due to the price deflation in Specialty Chemicals. The other category in the chart include the following items. Continuous improvement and operational excellence delivered more than EUR 200 million savings, which is the largest component of this other part.
Raw material prices were lower at the beginning of the year compared to the same period in 2015. However, in Q4, raw material costs were roughly flat versus the previous year due to increases through the year. In most regions, foreign currency effects adversely impact raw material cost in local currency. These items were partly offset by wage and other cost inflation. Operating income was positively impacted by EUR 17 million of incidental items, including adjustment to post-retirement provision, asset impairment, and acquisition-related cost. Moving now to the cash flow. Our EBITDA is up for the year with an EBITDA margin increase for the group at 14.8% and increased EBITDA margin for each of our business. Decorative Paints, 12.8%. Performance Coatings is now at 15.9%. Specialty Chemicals, 19.9% of EBITDA margin.
The free cash flow continued to improve thanks to this EBITDA improvement and also lower pension top-up payments, lower cash outflow from restructuring projects, and reduced interest payments. The higher EBITDA, as well as the control of capital expenditure and working capital, contribute to this higher free cash flow. Our cash management discipline continued to be an area of focus, as shown on slide 13. We have a strong performance with regard to operating working capital management. In 2016, we maintained our leading performance with around 10% of revenue. We continue to improve our effectiveness at dealing with seasonal patterns and achieve a more sustainable level during the year. We have a disciplined approach to capital expenditure based on return on investment and continued investment in growth. Our capital expenditure for 2016 decreased slightly in EUR while was stable around 44.5% of revenue.
We expect around the same level in the coming year to help fuel organic growth. The IAS 19 pension deficit development in 2016 is shown on slide 31. The net balance sheet position on IAS 19 of the pension plan at year-end 2016 was a deficit of EUR 1 billion versus EUR 0.6 billion at year-end 2015. This was mainly due to de-risking of pension liability through non-cash buy-in transaction totaling EUR 3.3 billion, including a EUR 0.2 billion buy-in in the ICI Specialty Chemical pension fund in Q4 and EUR 3.1 billion buy-in in the ICI pension fund in the first three quarters, which together led to an adverse EUR 0.6 billion impact in other comprehensive income. Lower discount rates and higher inflation in key countries were almost completely offset by higher asset returns. Top-up payments of EUR 297 million, including EUR 33 million out of escrow account, were predominantly into certain U.K. pensions funds.
Turning now to slide 32. We continue to actively managing pension liability. In 2016 conducted further de-risking through non-cash buy-in transaction totaling EUR 3.3 billion. Around 60% longevity risk and around 80% interest rate and inflation risk is hedged. These percentages are significantly higher for the U.K. plans. This means we have far more certainty visibility regarding our top-up payments. Our pension top-up payments are projected to reduce in future years based on agreed top-up schedule. We have updated the schedule with the currency exchange rate. Please note that the majority of top-up payments for 2017 will be made in Q1. Moving to slide 33. We have, for the second year in a row, achieved positive free cash flow after paying dividends. Net debt at year end 2016 was roughly in line with last year at EUR 1.25 billion.
This was as compared with Q3 2016, which was EUR 1.1 billion as a result of the consideration paid for BASF Industrial Coatings business. Our strong financial position provides a foundation for growth, as shown on slide 34. We have a solid balance sheet with a strong investment-grade credit of A minus, although we seek to maintain triple B to allow for financial flexibility and a net debt of 0.6 times EBITDA. We also have an undrawn revolving credit facility of EUR 1.8 billion in excess to commercial paper programs. Our strong financial foundation mean we are more agile and better able to seize growth opportunity, including acquisitions. Generating positive free cash flow for the second year running allows us to invest in growth and improve shareholder returns. Slide 35 outlines our capital allocation priority. We support profitable organic growth through innovation and capital expenditure.
Our dividend policy remain to pay a stable to rising dividend. We pursue acquisition in a disciplined manner provided they are strategically aligned and value generating. We will continue to manage our balance sheet to retain our strong investment grade, our pension liability to limit risk and reduce uncertainty. I will now hand back to Ton for some concluding remarks.
Thank you, Maëlys. We are turning to slide number 27. Our dividend policy is to pay a stable or rising dividend each year. The proposed final dividend is EUR 1.28 per share. This would result in a total dividend for 2016 up 6.5% to EUR 1.65 per share. The further increase in dividend shows we're confident in our cash flow generation. Stepping to the next slide. Again, shows our strong track record of performance improvement continued in 2016 with the record profitability that we've shown. We will continue to build on our strong foundation of operational excellence to drive growth. We are a stronger, more agile company with excellent brands and a solid operational and financial foundation. We're better able to adapt and grow. Turning to slide 39.
Going forward, we anticipate positive development in Europe, Middle East and Africa, North America, and Asia, improving during the year, while Latin America is expected to stabilize. Some economic and political uncertainty is expected to continue. Market trends in the marine and oil and gas experienced in the second part of 2016 are expected to continue during the first half of 2017. We have structurally improved our ability to respond to development in our markets. We're taking appropriate measures to deal with higher raw material prices in an inflationary environment. Our stronger operational and financial foundation means we're more agile and better able to seize growth opportunities, including acquisitions. We maintain our financial guidance for 2016 to 2018. I now hand over to Lloyd for information about upcoming events and the Q&A session. Lloyd?
Thank you, Ton. Before we start the Q&A session, I would like to draw your attention to some upcoming events shown on slide 40. We will hold our annual general meeting on April 25th, the day after announcing our Q1 results. A capital markets day on September 26th. Both events will take place in the AkzoNobel Center in Amsterdam. Further details will be provided in the near future. This concludes our formal presentation. We would be happy to take your questions. Please limit your number of questions to a maximum of two so others can participate. Operator, please start the Q&A session.
Thank you. We will now start the question and answer session of today's conference. To ask a question over the phone, press star followed by the number 1, unmute your phone and record your name when prompted. Your name will be required to introduce your question. To cancel your question, press star 2. One moment please to check if we have questions in queue. Our first question is coming from Paul Walsh of Morgan Stanley. Your line is open.
Yeah, thanks very much. Morning, Ton. Morning, Maëlys. 2 questions from me. You started to touch on it in your closing comments, Ton, around adjusting to a more inflationary environment.
Can you elaborate on that? Obviously, price mix was down 3% in the fourth quarter. I don't think you saw much cost inflation in Q4. Thinking about raw material inflation for 2017, how much are you seeing right now, and do you think you can fully price for it? That's my first question. The second question is, operating income was lower than the market was expecting in the fourth quarter. Looks like other costs were higher. When I think about 2017, will that stuff repeat? Do you think, given your outlook, you can actually grow operating income in 2017? I have to say, I thought the outlook comments were a little bit more optimistic than what we've seen in recent quarters geographically. I want to know if you think you can grow EBIT this year.
Thank you, Paul. Indeed, in our outlook, we have addressed the fact that we expect a somewhat inflationary environment on the side of raw materials. If we look at 2016, at the beginning of the year, raw materials were clearly down compared to the same period in 2015, whereas at the end of the year, they were basically level. That means that basically any raw material benefits compared on the year-on-year comparison had dissipated by then. We do believe that some raw materials may increase. We have 3 types of actions that we're already actively executing as we speak. One is that we have relatively firm discussions with our supply base. Second is that we continue to optimize our processes to produce more with less.
There where we can, we will certainly do everything to share it with our customers, which would mean that there would be some price increases included. Those are the actions that we are expected to deal with in 2017 when it comes to increasing raw materials. When it comes to the operating income, indeed, we had mentioned in Q2 and Q3 that we're going through our global business services, that we're going into loading that organization, and that we would expect restructuring costs in the functions. This is indeed what you see, increased restructuring costs. Compared to 2015, these restructuring costs have also been a little bit more back-end loaded in the fourth quarter. Basically, it's a further optimization of the functions, and therefore benefiting us in 2017 and beyond.
If you look at the overall guidance, I guess we maintain our guidance 2016, 2017, 2018 when it comes to the return on sales and investment brackets. We expect to grow in line or faster than our relevant markets. There's certainly a possibility that we grow operating income as well.
That's very clear. Thank you.
Thank you. Our next question is coming from Jeremy Redenius of Bernstein. Your line is open.
Hi, it's Jeremy Redenius from Bernstein. Thanks for taking the questions. I guess the first question I have is, I understand the Deco and Performance Coatings businesses were hit by a combination of price and mix. I'm wondering if you could describe the dynamics specifically in those businesses that led to price decreases, and then also the mix decrease. I would imagine in Performance Coatings, the mix had to do with lower sales volumes in Marine & Protective Coatings, but I'd like to hear from you the dynamics behind the price decreases and the mix decreases. That's my first question. The second one would be on the business strength you're seeing, or let's say the more positive outlook statement. What's the evidence of strength you're seeing, particularly in the European market? Thanks very much.
Thank you, Jeremy. If we look at the three businesses, we can actually be quite clear on where the price mix effect has been. In Specialty Chemicals, it's been primarily price, based often on formula-based pass on of energy and raw material costs. In Specialty Chemicals, that has not impacted in any negative way, the EBIT or the return on sales. On the contrary, they've actually improved their EBITs, and they've improved their returns. This particular pass on does not hurt the financial performance of this business. In Deco, it has been primarily mix. The vast majority is the relative growth of the variety of regions that we have. In Performance Coatings, it's a combination of the two. There you have basically part mix, part price, and that's basically the way it's been built up among the three business areas.
If we look at the business trends going forward, we basically have a better feeling in Europe. In 2016, we saw Europe stabilizing and several areas even growing, as we indicated in our 2016 market update slide. That feeling actually continues. Therefore, we do believe that there can very well be positive developments in Europe, Middle East, and Africa, which is a combined region for us. Europe as a whole does feel better than it's done in a long time economically. Whereas, of course, political uncertainty is expected to retain with the several elections that we see over here. Economically, it feels more positive.
Thanks. Just to follow up then, in Performance Coatings, what was it about price though, and mix? Am I on the right track to think that it's Marine & Protective Coatings that's causing the negative mix effect? Then in Deco, it sounds like you're suggesting it's like a geographic mix where slightly lower margins in emerging markets are growing.
Yeah. In Deco, the vast majority is mixed. In Specialty Chemicals, it is a vast majority is price. In Performance Coatings, it's more kind of distributed between the two. Indeed, the marine and protective side, including the oil and gas side, has a significant impact on that in PC.
Okay. Thank you very much.
Thank you. Next is coming from Alex Stewart of Barclays. Your line is open.
Hi there. Good morning. Two questions. In the marine business, how much of the margin weakness was restructuring? You probably won't want to give a precise number, but some indication. Then we don't have the full balance sheet yet, I don't think, but you paid in 2016, EUR 500 million into your pension and provision out of your cash flow. Yet, if I look at what disclosure's been given, the provisions on your balance sheet seem to have gone up. How do you reconcile a net addition to the provision to the liability despite a half billion euro payment? Those are my two questions. Thank you.
Okay. Maybe addressing question number 1, which is the marine business. Basically what we've done, seeing in a long cycle business like both the marine and the oil and gas project CapEx side is, we could actually see this downturn coming. We mentioned it to everybody in the first quarter already that we would feel it in the second half of the year. At the second quarter, we told people we were starting to feel it. In the third quarter, we were in it, and in the fourth quarter, we're clearly in it. While we're going through guiding the market on the development, we ourselves have already taken action. We've closed factories in different locations, both serving the oil and gas upstream industry as well as the marine industry. We restructured the existing entities in Asia that serve the different yards, which are themselves also restructuring.
That has gone associated with some restructuring costs as well. They are, of course, included in the EBIT of Performance Coatings. We don't do pre-restructuring EBIT. We basically make it part of the business as we've always done. Indeed, we don't give exact details of what the individual restructurings are. We've basically adapted ourselves to the realities of this market, which we believe will not so quickly recover. As we are late in the cycle, living off some backlogs for a while. When the yards start getting business, it will take a small period for us then to receive the paint volumes coming later. When it comes to the balance sheet, I will pass on to Maëlys.
Yeah. I didn't really hear your question, but if you look at the pension deficit I have highlighted in slide 31, you know why the deficit is at the end of the year at 1 billion versus 0.6. As I mentioned it, we had what we call buy-in transaction mainly in the U.K. funds, and those are non-cash buy-in, and this is the IAS 19 deficit. On the actual deficit, we show you that we continue to pay a top-up, which is reducing. If I didn't understand the question, please refer to IR to come back to it.
Okay. Thank you very much. I'll give them a call after. Sorry, Ton, just to go back on the original question. The EBIT margin in Performance Coatings was down 200 basis points in the fourth quarter. Can you give any indication, even qualitative, how much of that was higher restructuring costs and how much of that was underlying weakness? I appreciate you don't want to give the full details, but was it 50/50? Was it 75/25? Just any indication would be great.
A significant portion has been the business, part of that has been the restructuring. The larger portion has been the business itself.
Perfect. Thank you.
Thank you. Our next question is coming from Peter Clark of Societe Generale. Your line is open.
Yes, good morning. It is following on from those points, actually, two of them. One was Paul, certainly the raw materials. One of your competitors talked about the coatings industry probably seeing low single-digit inflation in 2017 year-on-year. They were being particularly hit by titanium, but I think they were talking about the industry. Is that the sort of flavor that you would be comfortable with? Then just on this drag we are seeing in Performance Coatings and the margin hit, the 210 basis points you saw in Q4. Obviously, you are not giving the number on the restructuring by division. You made that clear. I am just wondering if there is some sort of seasonal impact. Do you see that 210 hit we have seen in Q4 not representative if we look at the first half when you still see it challenging in Marine and Protective?
Certainly, again, another of your competitors sees the order book stabilizing, of course, that's still a long way out before you see things improve. I'm just wondering if there was some sort of one-off that you feel that you see, be it seasonal, year-on-year comp, a little bit of restructuring that you've had in Q4, particularly in that Performance Coatings margin. Thank you.
Coming to your first question, it depends on the combination of businesses that individual players have to what extent individual raw material prices will affect it. If you are purely a Deco player, then titanium dioxide will be your biggest impact. If you have a significant presence of Performance Coatings, certainly oil-related resins will be part of that as well. Of course, in our case with Specialty Chemicals, we see energy and oil-related raw materials playing a part as well. For us, it's a slightly more complicated calculation than a small restricted number of raw materials that affect us. There are a lot of delays in this And therefore, it is more difficult to give you a general guess of what it may be for 2017.
What we do know is that we have seen fluctuating raw materials for an extended period of time, and we've strengthened our ability to deal with it, both on the way we have discussions with our supply base, both with the optimization of our processes, as well as the ability to share some of it with our customers. I think our ability to deal with it has only improved, and the fact that raw materials have fluctuated is not an unusual part of this industry. If you look at the Marine & Protective side, as mentioned, the major part of the change is in the business, and a small part of it is on the restructuring side. We do feel that indeed the marine business itself has bolted out, but it is also at levels which are unseen low. From that perspective, that's a small consolation.
We do believe that the challenges in this industry will stay for a while, as well as in the oil and gas CapEx side. On the other side, we have a lot of industries that grow. Whereas we will continue to see some weakness in these two businesses, we will see our Specialty Coatings business. We've seen our Deco business. We've seen the Specialty Chemicals business grow, and we've seen them actually increasing their growth quarter-on-quarter, certainly on the Specialty Chemicals side. Overall, these are two market segments that we expect to be challenging for certainly the first part of 2017. At that point in time, we'll update you for the remaining part of the year. There are plenty of segments where we see positive developments and some even in our expectation, improving during the course of the year.
Okay, thank you.
Thank you. Next is coming from James Richards of HSBC. Your line is open.
Hi, Ton. You've continued over the last few quarters to flag a sort of deflationary environment on the top line, and we've seen that again in Q4. Given what's happened with raw material inflation, should we expect that to flip to flat to up from Q1? Or how long does that turnaround take?
Revenue is down 4%, currency effect is about 3%. A significant portion of that revenue down is actually currencies. That's been a deflationary currency kind of environment, as you may say so. Also, you've got, I guess, in the course of the year, already increasing raw material prices compared to the beginning of the year. We've had a bit of both during 2016. Looking into 2017, these currency effects certainly level out or may even reverse in small numbers. The raw material part, we expect to go into a small inflationary environment, as we indicated throughout the call. Yes, the situation there is we are focusing on growth. We are investing in growth. We've shown you that we're hardwiring the continuous improvement and the cost takeouts. We invest in innovation, we invest in joint ventures, we invest in CapEx, we've acquired a company.
We do see the possibility to grow revenue going forward. Again, our aim is to grow in line or faster than our markets.
Thanks.
Thank you. Our next question is coming from James Knight of Exane. Your line is open.
Morning. Just one question. I heard the word acquisitions mentioned perhaps more than ever this morning. What do you think is happening to M&A multiples at the moment in coatings? I think you've said in the past that or implied that they're looking a little bit high. One of your key major competitors said that in the last two or three weeks as well. What do you think is happening to current multiples? Do you see them falling? Do you see yourselves being able to make attractive bolt-ons in the next six to 12 months? Thank you.
Thank you for the question. I'm not sure if we're mentioning it more often. It's just an integral part of the capital market day presentation that we made in 2015, where acquisitions are a part of the strategy. With our strength in cash flow and balance sheet, we're certainly able to participate in the consolidation. We did that last year with the BASF acquisition. The synergies are partly related to the fact that the volumes of business or a significant portion of the volumes of business are being taken out of an existing facility of the seller and are putting on top of an existing facility of AkzoNobel without any significant requirements of CapEx. That is a nice synergetic acquisition for AkzoNobel. We will always look at financial value creation and making sure that it works. Indeed, I've made two statements in the past.
One is that in the paint and coatings industry, there seem to be more willing buyers than willing sellers at this moment, which drives part of these multiples. The multiples that we've all publicly seen do seem a touch high. You need to make sure as a company that you have sufficient synergies to justify those. We will be disciplined in pursuing acquisitions as we've always been in the past.
Thank you.
Thank you. Next is coming from Christian Faitz of Kepler. Your line is open.
Yes. Morning, gentlemen and Maëlys.
Morning.
Can you please explain the weak performance in Deco in Europe? Their sales were down 8%. Country by country comments would be quite helpful. I know that Q4 is obviously the bottom of the season, but at least we talk about rather favorable weather year-on-year in Q4, if I'm not mistaken. Second question. I want to positively challenge you on the relatively negative oil and gas comments you made. Rig count is up since quite some time now. Don't you see positive momentum already also in H1 for the oil and gas part in Performance Coatings? Thank you.
On Decorative Paints, please don't forget that the U.K. pound has seen a very significant turn towards the downside quarter-on-quarter comparison between Q4 2015 and Q4 2016. On top of that, it's a relatively small quarter for Deco, so small fluctuations in individual countries look like a big impact on the %. It's really Q2 and Q3 that are the Deco quarters to look at. Q1 and Q4 are generally hard. We've seen positive developments in Asia and EMEA when it came to the volumes. If you look at the weak performance, as you indicated, it was actually strong when it came to volumes. It did have significant currency effects and some fluctuations that look bigger than they are because the overall quarter is quite small. If you look at the oil and gas business, you're absolutely right.
First of all, I think the oil price was in the 20s in the beginning of 2016. It's in the 50s now in the first quarter as we speak today. There are three parts of the business that we distinctly separate. One is the drilling activity in oil and gas. We do have an activity in the Specialty Chemicals side of the business, and on the drilling side of the business, we indeed see certainly onshore drilling activity increase. That affects our Specialty Chemicals business. Look at the production side of the business, we've seen, depending on the region, production to be flat to slightly rising. The third one is the capital expenditure that oil companies, both national and international oil companies, put into the ground. It is that capital expenditure, large project spend that has been significantly reduced.
You can see that in all the yards in the engineering companies that are serving this CapEx industry. It is this CapEx industry that Performance Coatings serves when it comes to their coatings. When a big FPSO is being built, when a significant refinery is being built, when an oil platform is being built, it is that capital expenditure phase that Performance Coatings serves so significantly. You've probably seen how much the oil majors have decreased their CapEx, that will be one of the later cycle recoveries. First, production will increase, then drilling will increase, and then investment will increase again in that order. That's also the way they came down, which is why we felt the downturn so late. This is also why there will be some delay when the oil and gas comes up before we feel the recovery.
Okay. Very helpful. Thank you.
Thank you. Next is coming from Geoff Haire of UBS. Your line is open.
Good morning. Just have two very quick questions. I was wondering, could you tell us what % of your raw materials are pass-through, as in the Specialty Chemicals business? What % of the COGS is raw materials?
I'm not sure if we generally provide the exact pass-through %. By and large, it is a Specialty Chemicals specific issue. It's not titanium dioxide, it's not things like resins. For Specialty Chemicals, by and large, it is things related to energy because we are a significant energy user. Customers know that the products they buy have a raw material between brackets called energy. A lot of the energy has a general pass-through when it comes to Specialty Chemicals. This pass-through remark that we make is really basically almost exclusively related to the Specialty Chemicals business. It improves our returns, and it's because these formulas are based on protecting your absolute margin.
Can you give us some idea of sort of what the magnitude of that is in terms of your total raw material base?
Maëlys, you want to provide the details to the extent that we provided in the annual report?
In the annual report, we provide you a breakdown of the cost of sale, which is you have a part which are related to employee benefits and to depreciation and amortization. We just do not provide the detail of raw material, but the total purchase and other costs are around EUR 7 billion, which included the raw material. Which is important, as Ton mentioned, is that our raw materials are not oil-directed products or are derivative of oil. Of course, some are different dynamic. As we mentioned, we've seen this raw material increasing through the year. Therefore, the benefit year-on-year that has decreased and with Q4 completely dissipated. We do indeed foresee some increase in the year 2017. As Ton mentioned, we are taking measure to deal with this higher inflationary environment.
That we don't give the specifics on the % of the pass-through. What we can say is that there where it's been passed through in one direction in the last couple of quarters, you can expect it to be passed through when it goes in a different direction as well. Again, it's specifically related to Specialty Chemicals. The dynamics in paints and coatings are distinctly different. There is more of a supply/demand situation in those markets.
Okay. Thank you very much.
Thank you. Next is coming from Markus Mayer of Baader. Your line is open.
Good morning. Two questions. One on the electrochemical business in your Specialty Chemicals division. Do you expect significant impact from the legislation change or from the deadline basically at the end of 2017, and from maybe consolidation of this market in Europe? Secondly, with the strong balance sheet, do you see further buybacks maybe for this year as a option?
We've always said in the industrial chemicals business, which is our chlorine, chlor-alkali chain, that 2017 would be an interesting year because the regulations would come to force that certain technologies to produce this would not be allowed anymore, and this would result in the significant shutdowns of a number of plants in Europe specifically. Therefore, those who've already moved towards new technologies would be the ones that would be able to continue to operate. We have basically transferred our plants to the new technologies already a long time ago. One we're basically in progress of finalizing as we speak, therefore, we do see a consolidation. You see that certainly in the caustic prices that you can look up on the internet. You see already the effect of some of that consolidation.
Indeed, that so far has resulted in positive effects on the business as we speak.
On the second question.
The second question, we are at this moment in time in a phase of buying shares back. That is part of the share buyback that we announced at the end of 2016 to compensate for the dilution created by the scrip dividend in 2016. That shows you that Maëlys and I have an active conversation on this topic with the supervisory boards of AkzoNobel. These are one-off decisions. No individual decisions have been made, but it is part of the discussions that we have.
Okay. Thank you very much.
I'm getting a signal that there is one more question that we can take today.
Yes. One last question in queue is coming from Patrick Lambert of Raymond James. Your line is open.
Hi. Good morning everybody. I have actually two questions, but they are pretty brief. Could you comment on BASF acquisition? You gave us the top line. Could you comment a bit more on the margins and the synergies you can extract from that? That would be the first question. The second question regards the continuous improvement for 2017. You are seeing a big range between 100 and 200. Could you comment a bit on the volatility of those numbers? Why so big, EUR 100 million variation there? What can go wrong? What can go positive, I guess? Thank you.
Thank you very much for the two questions. The BASF acquisition, this was a carve-out, so it's a bit of a scalpel cut in an existing business. Therefore, not because we haven't wanted to, but just because it was integrated in somebody else's business, it has not really shown the exact margins which we had to, of course, calculate after taking the business out of the existing operations into our own operations.
One of the main synergies is that we will lift, as I indicated earlier, a significant amount of the volume out of an existing factory of the seller, and we will move it with a few extra shifts and very limited CapEx to a nearby factory of AkzoNobel, which would mean that we basically are creating operational leverage in the facility of AkzoNobel, whereas we don't have to close any factories in terms of consolidating these activities. That is one part of the synergies. On top of that, we've seen that we can actually integrate a variety of these businesses, whether it's the foil business in our wood business, whether it is the windmill business into our protective business, where we already have a significant activity serving windmills, that a number of these activities will be nicely synergetic with already existing activities from AkzoNobel.
This will be the combined synergies. One is significant leverage, some cost takeout, and some front-end synergies by combining businesses that now have larger sales forces to a broader audience. That will be the part of the synergies. Because it's been a carve-out, and because we're going to be transferring these volumes in the next years, we've basically given guidance related to the profitability of this business, it being in the Performance Coatings range towards the end of 2018. That is the guidance that we can give, because we will take some time to lift these volumes out and bring them in a controlled fashion without interrupting any customer service into our own facilities. Indeed, the continuous improvement has a bit of a variation, and that is not related to project being successful or not, but it is more related to the timing of these projects.
You've seen significant gains in 2015 and 2016 with very limited restructuring costs. That should be proof that we're actually hardwiring this. What we believe is that in some periods, there could be a slightly lower and primarily timing related effect, and that's really just because of the calendar year effect that we calculate. We do believe that it will be a significant contributor to the compensation of inflationary cost in the system also going forward.
Thanks, Ton.
Thank you very much for your interest and all your questions. Thank you for joining us here in the call. I wish you a wonderful day. Operator?
Thank you. That concludes today's conference. Thank you for your participation. You may disconnect.