Questions will be taken at the end of the presentation. At that point, if you would like to ask a question, please press star and then one. This call is being recorded. If you have any objections, you may disconnect at this point. Now, I will turn the meeting over to your host, Mr. Lloyd Midwinter. Sir, you may begin.
Good morning, and welcome to the Akzo Nobel Q2 2016 Investor Update Conference Call. 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 quarter. 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 this presentation. Please note this statement is also applicable to the conference call and answers to your questions. I now hand over to Ton, who will start on slide three of the presentation.
Thank you, Lloyd, and good morning, everyone. During the second quarter 2016, we delivered continued volume growth and further profitability improvements. Volumes were up, although revenue was down due to adverse currencies. EBIT was up 9% at EUR 491 million versus EUR 452 million last year. During the quarter, both return on sales and return on investments improved overall and for all business areas. These results represent records for Akzo Nobel. Net cash inflow from operating activities increased to EUR 453 million, up from EUR 407 million in 2015, and at the same time, further de-risking of pension liabilities has also been conducted. Moving to what is slide four. Second quarter 2016 represents another quarter of improved financial performance, with both higher volumes and improved profitability. Volumes were up 1%, driven by Decorative Paints and Performance Coatings. Specialty Chemicals volumes were flat in a difficult environment.
However, revenue was down 6%, mostly due to adverse currencies. EBIT, which constitutes operating income excluding incidental items, increased 9% to its Q2 record level of EUR 491 million. This reflects continuous improvement initiatives and lower cost, partly offset by adverse currency effects. Profitability improved further, with both return on sales and return on investments higher than Q2 last year for Akzo Nobel as a whole, as well as for all business areas. Net income attributable to shareholders was EUR 312 million, versus EUR 331 million in 2015, and 2015 included a positive incidental item, mainly related to the divestment of the paper chemicals business. The adjusted EPS increased by 2%. I've mentioned a number of times, foreign exchange effects have, during this quarter, impacted all absolute numbers in a significant way. I'll now conduct a quick operational review, starting with our end user segments on slide number six.
The buildings and infrastructure segment is most significant for Akzo Nobel. This segment is developing in very different ways, depending on region and country. Trends for North America and Asia remain positive. In Europe, recent developments, including the results of the U.K. referendum, have increased uncertainty and currency volatility. Conditions remain challenging in Latin America, mainly driven by circumstances in Brazil and Argentina. In the transportation segment, demand for aerospace and Automotive Coatings continues to be healthy. We have started to see a slowdown in marine, which we flagged for many quarters. We see that including the new build activity in Asia, as well as in the maintenance and dry docking activity. The medium-term outlook remains challenging due to reducing backlogs at the shipyards.
As a general rule, trends for the consumer goods segments are similar to GDP, but consumers are being cautious based on the many external events, especially in or around Europe. In the industrial segment, demand has been impacted by a downturn in the global oil and gas industry, which affects our Protective Coatings and Surface Chemistry businesses in particular. This impact is likely to continue during the medium term. In general, volatility has increased while visibility has decreased. Our improved agility, though, as a company, our flexibility and our continuous improvement programs help us to deal with this situation. Turning to slide seven. Global manufacturing trends differ per region and country as well. This metric is particularly relevant for our industrial end user segments. Recent PMI data shows some recovery in Europe, but France remains the outlier, with manufacturing remaining in contraction.
However, recent events, including the U.K. referendum outcome, may affect this generally positive trend in Europe going forward. Of course, they were not included in the numbers by June 2016 overall. China and Brazil continued to contract. The U.S. expanded at a slower rate than in the past, and Russia shows some initial signs of improvement, but that is from a very low base. Stepping to slide eight, it shows the latest consumer confidence published by Nielsen, and this is Q1 2016 data, and the development during the start of the year in comparison. Consumer confidence remains low overall, although trends differ as well per country and region. Consumer confidence is high and continues to increase in Asia and in the United States. However, consumer confidence is lower in Europe and Latin America and decreasing in many countries in these two regions.
France continues to be one of the lowest countries and shows no structural recovery at this point in time. Consumer confidence has a clear influence on consumer buying decisions, including houses, furniture, consumer durables, and is therefore especially relevant for our consumer good end user segments and our Decorative Paints business. Turning now to slide number nine, which is a question that we thought would be obvious in terms of what the impact may be of the outcome of the U.K. referendum. Overall, it is too early to determine the full impact as a result of the outcome of the U.K. referendum. Although in the run-up to the U.K. referendum, and immediately afterwards, we did see a slowdown in activity in our markets in the U.K. We have also seen housing transactions reacting to the outcome of the vote, but it is unclear whether this is short-term or a medium-term trend.
We have a strong presence in the U.K. In 2015, our total revenue was around EUR 1 billion, around 7% of our revenue, and our invested capital was EUR 833 million, and we had around 3,500 colleagues based in the U.K., a very relevant country for us. One part, of course, is our Decorative Paints business. Market-leading paint brands like Dulux and Cuprinol are part of this business, and this business is mostly local and fairly naturally hedged, which means we make and sell around the same value products inside the U.K. Where we're not naturally hedged is in the area of raw materials, where we sometimes have to import dollar-denominated raw materials into the country, resulting in some transactional foreign exchange exposure, especially with the recent currency developments that have taken place. Our second significant activity in the country is our Performance Coatings business.
Through our Marine and Protective Coatings activities and the International brands, we have a strong export business that may actually benefit from the recent currency developments. Specialty Chemicals have had a relatively small presence in the U.K. The second bubble on this chart relates to the U.K. pension liabilities that we have as part of our overall pension liabilities of the company. The U.K. pension liabilities, including the ICI Pension Fund and the Courtaulds pension scheme, make up the vast majority of our defined benefit obligations that we regularly present. We have in 2015 and 2016 agreed with the pension trustees of these schemes a schedule of top-up payments until 2021. These top-up schedules will not be affected by the outcome of the U.K. referendum vote. We are proactively managing our pension liabilities.
Further de-risking of these liabilities has been conducted during the recent month, building on the actions taken in recent years. The cumulative effect of the de-risking activities means that around 80% of our liabilities are interest rate and inflation risk hedged, and around 55% of longevity is covered by insurance contracts and hedging. Most of these buy-ins have been related to the ICI Pension Fund, so these percentages would be higher for this particular scheme. If we look at the impact that it may have on Europe, the third bubble on the chart, we generate around 36% of our revenues from Europe, excluding the U.K. It is definitely too early to tell the potential impact on the rest of Europe. We will continuously monitor local developments in the markets. We will prepare for a variety of scenarios.
To go through these quick three bubbles in summary, there is a likely impact on the business if the U.K. housing transactions continues to decline. When it comes to our pension funds, the de-risking has reduced the uncertainty in the area and has been a positive development. If we look at the impact of Europe, it's definitely too early to tell. Now turning to our results, the Akzo Nobel results on slide 10. During the second quarter 2016, we have increased volumes and improved profitability. Volumes were up 1%, driven by Decorative Paints and Performance Coatings, while revenue was down 6%, mostly due to exchange rates. EBIT was up 9%. The numbers were mentioned before, €491 million compared to €452 million last year, reflecting the continuous improvement initiatives and lower cost, partly offset by adverse currency effects. Operating income was also higher.
Return on sales improved to 13.2% from 11.4% last year, the return on investment increased to 15.1% versus 12.2% in 2015. As mentioned earlier, we've not previously reached this level of second quarter EBIT or profitability, therefore, it constitutes a record for Akzo Nobel. Going to slide 11, it shows the quarterly trends for volume and price mix for Akzo Nobel and each of the individual businesses. As mentioned, volumes were up 1% for Q2, driven by Decorative Paints and Performance Coatings. Volumes increased to 2% for Performance Coatings, 1% for Decorative Paints, were flat for Specialty Chemicals, demand trends differed per region and segment. What you can see as well is that deflationary pressure continues. This is particularly the case for Specialty Chemicals, where price mix was negative 3% due to price deflation in several segments, often due to formula-based pricing.
Price mix was also negative 2% for Performance Coatings and 1% lower for Decorative Paints, although this was mainly a mix effect and not necessarily a price effect. I'll now run through the highlights regarding the quarterly results of each of the businesses. You can also find in our quarterly report the results for the half year, which is a better reflection of the business performance due to the fluctuations during the quarter and a generally small Q1 for some of our businesses, especially Deco. Let me start with Decorative Paints on slide number 12. Volumes increased 1%, mainly due to positive developments in Asia. Volumes continued to be down in Latin America and were slightly lower in Europe. Recent developments in Europe have increased uncertainty in some countries, for example, as a result of the U.K. referendum. Currency volatility has also increased, including for the pound sterling.
In Latin America, market conditions remain challenging due to economic instability and currency devaluation. Demand was positive in many Asian markets, in China, volumes were positive despite continued challenging conditions in the construction market in this country. Revenue was down 7%, as you can see on the chart, mostly due to unfavorable currency effects. Price mix effect was mainly due to mix. EBIT and operating income were up 2%, mainly due to higher volumes and lower costs, partly offset by adverse currency effects. Due to foreign exchange volatility in all regions, these foreign currency effects adversely impacted the often dollar-denominated raw material cost in local currencies. Return on sales increased to 12.4% from 11.3% in 2015, return on investment improved to 12.3% versus 10.4% last year. Q1 was also strong for Decorative Paints, although this was a smaller quarter.
Therefore, it's better to consider the performance for the half year by combining Q1 and Q2. Highlights for Performance Coatings are shown on slide 13. Volumes were again up 2% with positive developments in all reporting units. Demand trends differed per region. Protective Coatings volumes were up due to strong demand in Asia. However, volumes in Marine Coatings were impacted by the slowdown of new build activity in Asia, as well as reduced activity for maintenance and dry docking. Volumes in Automotive Coatings were up, particularly in Europe. New business in Asia helped to offset a general slowdown in Specialty Coatings elsewhere. Volumes for Powder Coatings were positive, especially in Europe, while demand was subdued for Wood Coatings. Coil and Packaging Coatings grew in Asia, while trends differed in other regions. Revenue was down 5%, mostly due to adverse currency effects, as you can see in the chart.
The price mix effect was mainly related to mix. EBIT and operating income were up 1% due to higher volumes, continuous improvement initiatives, and lower costs offset by unfavorable currencies. Return on sales increased to 15.1% versus 14.2% last year, and return on investment increased to 31% from 23.9% in 2015. Moving now to Specialty Chemicals on slide 14. Volumes were flat with positive developments in some segments offset by lower demand in oil-related segments. Volumes for Industrial Chemicals were higher, mainly due to increased manufacturing availability in our Frankfurt and Rotterdam facilities, while our Functional Chemicals activities was lower compared to a strong previous year. Development for Surface Chemistry were positive in Europe and Asia. Demand for Pulp and Performance Chemicals in the Americas was subdued, partly due to destocking of customers. Revenue was down 7% due to adverse currency effects, divestments, and price deflation in several markets.
EBIT, though, was up 10% due to operational efficiencies and lower costs, while price deflation and adverse currencies also affected the results. In Q2 2015, the divestment of the paper chemical business resulted in a EUR 30 million incidental gain in the operating income, affecting the year-on-year comparison on this line. The return on sales increased to 14.8% compared to 12.6% in 2015, and return on investment improved to 17.1% versus 16.1% last year. I will now hand over to Maëlys for a financial review.
Thank you, Ton, and good morning, everyone. Starting with some financial highlights on slide 16. The key indicators demonstrate that Akzo Nobel continues to improve. We deliver a strong financial performance in Q2 2016 with profits and margins increased, with EBIT, operating income, return on sales, return on investment all higher than last year, and EBITDA also increased. Net cash from operating activity was EUR 453 million, 11% higher than 2015. Cash discipline continues with CapEx around 4% of revenue, operating working capital lower than last year at 12.6% of revenue, higher than end of year due to normal seasonality, and net financial expenses down EUR 5 million. In terms of shareholder returns, adjusted EPS was up 2% at EUR 1.32 versus EUR 1.30 in 2015.
Net income attributable to shareholders was EUR 312 million, lower than last year due to positive incidental items related mainly to the divestment of the paper chemical business in Q2 2015. Therefore, net income is also improving, excluding these incidental items of 2015. I now run through some financial topics in more detail. Turning now to slide 17. It can be helpful to briefly consider, as Ton mentioned, the half-year due to fluctuations during quarters. In the first half of 2016, we have also improved profitability in all BAs. EBIT was up 9% at EUR 825 million compared to EUR 758 million last year, reflecting continuous improvement initiatives, including our OPS and GBS program and lower costs, partly offset by adverse currency effects. Operating income was also higher, up 7% for the half-year. ROAS improved to 11.6% from 10.1% last year, and return on investment increased to 51% versus 12.2% in 2015.
ROAS and ROI improved for all business areas. I will now run through the main factors contributing to these results. On slide 18, you can see the EBIT bridge. EBIT was up 9% and operating income increased 7% for the first half 2016. The operating income bridge show the main factors that contribute to our performance improvement. In the first half 2015, total incidental items were EUR 34 million, of which EUR 30 million were related to the divestment of the paper chemicals business. In 2016, operating income was positively impacted by an incidental gain on sale of assets of EUR 23 million during Q1 2016. Foreign currency have become a headwind during 2016, and this adverse impact is expected to continue. Volumes have been higher, although deflationary pressures continue, leading to a negative impact from price mix.
This is particularly the case for Specialty Chemicals, where price mix was negative 3% due to price deflation in several segments, often due to formula-based pricing. Price mix was also negative 2% for Performance Coatings and 1% for Decorative Paints, although this was mainly mix effect. Other category includes the net impact of the following items. Restructuring charges were lower than 2015, although our guidance remains 0.5%-1% of revenue for the full year. Incremental benefits from both the tail of improvement action taken in previous years, as well as continuous improvement programs, in particular OPS and GBS, represent a substantial amount. Moderate additional raw material benefits also contributed to the improvement, although with oil and TiO2 prices stabilizing, we expect year-on-year benefits to be lower during the second half of the year. These items were partially offset by a normal level of wage and other cost inflation.
Moving now to cash flows on slide 19. Free cash flow generation improved 20% versus last year, demonstrating the positive impact of higher operating results, with EBITDA margin up from 15.4%-17.3%, combined with continued cash discipline on CapEx, reduction of working capital, and lower interest paid. Interest indeed continues to reduce, thanks to the redemption of high coupon debt and refinancing at a 1.125% with our new bond issued in April this year. Net cash inflow from operating activities was up at EUR 453 million, compared to EUR 407 million in 2015. CapEx remains under control at 4.1% of revenue. Free cash flow after CapEx and pension top-ups payment improved 20% to EUR 301 million positive. In slide 20, you have the pension liabilities according to IAS 19.
The net balance sheet position of the pension plans at the end of Q2 2016 remains a deficit of EUR 0.4 billion, in line with Q1 2016. This was the result of the net effect of lower discount rates and a buy-in transaction of GBP 0.6 billion in the quarter, resulting in EUR 131 million negative impact, offset by higher asset returns, lower inflation impact, and other items. Turning now to slide 21. Further de-risking of pension liabilities included annuity buy-in for the ICI Pension Fund of GBP 0.3 billion in Q1 2016, GBP 0.6 billion in Q2 2016, and an additional GBP 0.8 billion completed in July. This means a total of GBP 1.7 billion pension liabilities have been covered by non-cash buy-in during 2016 year-to-date. These buy-ins do not impact the recently agreed top-up schedule as mentioned by Ton.
The cumulative effect of the de-risking activities means around 80% of the interest rate and inflation risks and approximately 65% of longevity risk is covered by insurance contracts and hedging. Most of the buy-in have been related to the ICI Pension Fund, so the percentage would be higher for this scheme. This will reduce further our volatility and uncertainty related to the defined benefit obligation and associated top-up schedule. We continue to actively manage our pension liability. I will now hand back to Ton for the final section of our presentation.
Thank you, Maëlys. On slide 23, you see some business highlights of Q2 2016. One is, of course, fun because winemakers are increasingly turning to corks made together with a component called our Expancel microspheres, which help to ensure that wines are kept as perfect as possible, but still have a cork top. On the second picture, you see the technology center, the new technology center in Songjiang, in Shanghai. It is going to be the company's largest research facility in China, and it will support our customers in all our end user segments. The third picture is related to children in Brazil who can now test their all-around sporting skills, thanks to the inspiring and imaginative use of paints with the unexpected court initiative that we unleashed in the area. Turning to slide 24 for some concluding remarks.
During the second quarter 2016, we delivered continued volume growth and further profitability improvement in all our business areas. Volumes were up, although revenue was down due to adverse currencies. EBIT was up 9%. Both return on sales and return on investment improved overall and for all business areas. As mentioned, these results represent Q2 records for Akzo Nobel. Adjusted EPS increased 2%. Net cash flow from operating activities also improved and further de-risking of pension liabilities has been conducted. The market environment remains uncertain, with challenging conditions in several countries and segments. Deflationary pressures and currency headwinds are expected to continue. In these difficult circumstances, the company has shown that the newly built strength and agility allows us to perform well even in these difficult market circumstances today.
On slide 25, you see some upcoming events and while not commenting on those, I think we can now open up the floor for questions. Operator?
Thank you, sir. Yes, sir, we will now begin question and answer session. If you would like to ask a question, please press star one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To cancel your request, please press star two. Our first question comes from Mr. Paul Walsh. Sir, your line now is open.
Yes, thanks very much. Morning, Ton, Maëlys, Lloyd. three short ones if I can, please. Firstly, the sustainability of the operating performance from the first half, gross margins up, cost down. Do the headwinds on that front get more challenging in the second half of the year, or do you expect to be able to maintain a better operating performance despite the relatively benign top line? That's my first question. Second question on cash allocation. As net debt comes down, what's the temptation to do other things with your cash flow beyond the bolt-ons that you've mentioned? I'm thinking about accelerating dividends, maybe even buybacks, given the apparent undervaluation of your stock versus peers. Just thoughts on that.
Just finally, on the pension fund top-ups, which I understand are mostly struck in sterling, is there any temptation to hedge your current FX rates to secure lower EUR-denominated top-ups for the remainder of the schedule? Thank you.
Thank you, Paul. I will answer the first and second question. I will pass on the third one regarding the top-ups to Maëlys. When we look at the first half, small volume growth, strong in the first quarter, a bit less in the second quarter. We have seen continued improvements of productivity within AkzoNobel, which has been a significant contributor to the improvement of the results. If we look forward into the second half, we have seen, and I guess all of us have seen, significant additional geopolitical uncertainty coming in the direction of Europe and its near surroundings. We also see that probably year-on-year, the comparison on raw material prices will be less because that started by and large, in the third quarter of last year. Overall, we expect a continued tough operating environment going forward, with some additional uncertainty in the environment.
Overall, we believe that we're a better company though to deal with these situations, but we do not expect an improvement in the environment. In some areas, it may actually be the opposite. When it comes to the cash allocation, the priorities remain as presented at the full year closing. We have a strategy of operational improvement and organic growth. That will certainly be one of the priorities. We will focus on both on acquisitions and on paying the top-ups for our pension funds. Then we will make a sound assessment of what the next opportunities would be, but that's not the point at this point in time to communicate details there. Maëlys, in terms of the pension fund top-ups and the sterling impact?
Yeah. On the pension, top up and sterling impact, as you know, a large part of our top up are linked to our two U.K. pension funds, so actually are in GBP. Of course, we also have a large cash flow in the U.K., so we have a natural hedge. If there is any delta, of course, we monitor that carefully, and we take appropriate decision, but we first concentrate on the natural hedging.
Thank you very much. C an I just come back on the first question? How much of the gross margin improvement would you put down to raw material tailwinds in the second quarter?
Well, what we have shown in the bridge on slide 18 is a combination of factors. You also, on that page, have seen a significant price mix impact as well. It shows that these internal improvements that we've seen are absolutely required, that raw material effects are not something to count on, and they've indeed been moderate in this quarter. We expect them to be moderate going forward as well, although we think that the year-on-year comparison will dissipate.
Okay.
slide 18 gives you the best impression, also in terms of the deflationary pressures on both sides of the company.
That's great. Thanks very much.
Next question, please. Thank you, Paul.
Our next question comes from Jeremy Redenius. Sir, your line now is open.
Hi, it's Jeremy Redenius from Bernstein. I have three questions, please. The first one, in the Decorative Paints business in Europe, any evidence of market share loss this quarter or for that matter, this half year? Second, could you talk a little bit more about the other cash inflow in the cash flow statement? There's a +EUR 75 million. What's behind that and the recurring or one-off nature of that cash flow, please? Lastly, I believe you often give an update for an interim dividend at this point in time. Correct me if I'm wrong, has something changed there with the interim dividend? Thank you.
Let me start with your last question. Normally, we provide an update on interim dividend, I think at the Q3 reporting, not at the Q2 reporting. Nothing has changed there. To come to your first question, have there been any perceptions of market share loss in Q2 in Europe? The answer would be no. We checked this very carefully, we've not observed market share loss in any of the relevant European countries that we operate in. When it comes to the other cash flow, I'm referring to Maëlys.
If you look at the cash flow, the better way to look at it is by slide 19 that I commented. You can see that it's pretty straightforward, that the improvement of cash flow is mainly due to EBITDA improvement, lower interest payment, better change in working capital, and lower expenditure. In the line other change, you have a lot of the offset of the variation between interest payments on the P&L and the tax. If you look at the bridge from EBITDA to free cash flow, you can clearly see that there is no exceptional item. Last year, just if you refer to the booklet at page 11, you see other changes that was lower last year because you had the reversal of the charge, the charge EUR 30 million on it, you had also lower taxes last year.
That's why you see the difference between the P&L and the net cash.
Thank you, Maëlys, Jeremy. Next question, please.
Next question comes from Mr. Tony Jones. Sir, your line now is open.
Morning, everybody. Tony Jones at Redburn in London. I've got three too. Firstly, on terms of trade, you've presented a very somber message, I think, for how we should be thinking about the second half of the year. From a practical point of view, have discussions with your major retail partners, big customers began to change already from a sort of inventory and planning point of view. Secondly, just coming back to the EBIT bridge. Is there any chance you can give a rough percentage weighting to the other gain? I think you've talked about the fact that raw materials was modest, was that 10% or 20% of the EUR 200 million gain? And then on the BASF acquisition, any update on timing, earnings contribution, and how we should be treating this from a modeling perspective? Thank you.
Okay. Thank you, Tony. Our intention was not so much to give a somber message, but to give a fair and balanced message. I guess there have been a lot of events in the recent weeks that have made a number of countries, whether it's Turkey or France or the U.K., have short-term responses to it, and we simply don't know how these short-term responses will translate into mid to long-term effects. Intentions were not to be somber, but to at least be realistic, that some of these events may have a longer term effect and will not dissipate out of the system in just a couple of weeks. That's really what we're trying to do. In terms of our discussions with customers, all of these customers are saying, volatility has increased, visibility has decreased, and these discussions have been going on over the last quarter in general.
These events have made that statement even more valid. That is a continuous discussion with our customers. We do not expect that to change going forward unless we do see volatility come down a little bit and visibility to improve again. I think everybody, our customers and ourselves are in the same position. We believe, though, that the increased agility of Akzo Nobel allows us to better deal with it. I think that's a positive development. On the EBIT bridge, as you know, we don't split up the other in another set of details. It has been a moderate raw material benefit. It has been a significant kind of contribution to the various continuous improvement programs that we now have institutionalized in the way we track and we run them, and it represents a substantial amount of that block that is there.
You also see that a significant amount of that block is compensated by deflationary pressure on the price or on the mix side piece of the business. We watch it very carefully. Overall, an extra level of detail we generally don't provide. When it comes to the BASF acquisition, basically, we said that we expect closing towards the end of the later half of this year. That hasn't changed. Until then, because there are, in the German environment, workers councils environments, we have been asked to be quite restrictive in providing additional details at this point in time. That's not because we don't want to, it's because the process needs to be properly maintained.
Okay, thanks very much, Ton.
Thank you, Tony. Next question, please.
Thank you. Before the next question, as a reminder, please limit the questions and to queue. Thank you. Our next question comes from Mr. Peter Clark. Sir, your line now is open.
Yes. Good morning, everyone. Just two questions. The first one on Deco. I hear, obviously, what you are saying about it is too early to tell, but in the housing downturns we have seen in the U.K., normally the trade paint gets hit hardest and earliest. I am just wondering if it is any signs that trade is just a bit soggier than retail with this uncertainty ongoing. The second question for Maëlys is really on the CapEx, or for you both, on the CapEx in the Spec Chems. I think in the first half it is back over 6% of sales. I know you have been doing quite a bit of spend in Europe, which I presume is still following through, but just wondering how you see that CapEx to sales in the Specialty Chem segment trend over the next year or two. Thank you.
Thank you, Peter. Regarding Deco, as I indicated when I highlighted around the slide that was dealing with the U.K. referendum, in the run-up to the actual referendum date, we have seen a slowdown, and the business has not recovered since as such because the insecurity is still there. As I indicated, we don't know whether that is a trend or whether that is a short-term effect. We are keeping close track of the housing transaction statistics in the U.K., and we will continue to do so. That is our exposure, of course, the housing market regarding the Decorative Paints business, both on the trade side and on some of the dealings with the big boxes.
There is no real difference between trade and retail, really, from what you can see so far?
Yeah. At this point in time, I guess we just see a clearly different general environment on both sides. I think both consumers and the trade are basically still trying to figure out what it means for them personally. At the moment, I can't really make comments on a different shaded response between those two. It's simply too volatile at this point in time. When I come to your second question, CapEx of Specialty Chemicals, we do see that Specialty Chemicals, of course, is the recipient of most of the capital expenditure. They also provide a very good return on that invested capital, and when there is a positive investment, we will certainly say yes to those.
We continue to guide, though, that the CapEx levels for the corporation, which means all three business areas combined, will likely be going from, say, we've guided 4% of sales to something that also based on currencies, can hover between 4% and 4.5% of sales.
Thank you.
That will be for the company overall, and we will then determine the most attractive projects to put that money in.
Thanks very much.
Thank you. Next question comes from Mr. Martin Evans. Sir, your line now is open.
Yeah. Thanks. It's just a question following up on the price mix comment, which was obviously negative for Deco and Performance. You said it was mostly mix, not price. If that's a trend that we can expect to continue going forward? Essentially, I'm just understanding that to mean that you're selling a higher proportion of relatively low value or low priced products. Is that correct?
Well, what we've mentioned is that in the price mix indication that you've seen for this, that we've seen that within Specialty Chemicals, the weight has been towards the price part of that equation, whereas the weight in the Decorative Paints and the Performance Coatings businesses have been more towards the mix part. Now, mix is a very broad definition, it's not only product mix. That doesn't mean that people are downtrading. It can also be geographical mix, where the price per liter in one country that's growing in Asia is simply lower than the price per liter of a country in Europe that is growing less. There is a whole variety of mixes in this mix block. We haven't seen any concerning signals. What we have seen, of course, is that Asia has been a region that has been growing relative to the other regions.
Right. Okay, thanks.
Next question, please.
Thank you. Next question comes from Mr. Alex Stewart. Sir, your line now is open.
Hi. Good morning. Congratulations on the results. Quick question from me. The central costs, which were negative EUR 41 million in the second quarter, is there anything unusual, one-off in nature, or can we interpret that as a reasonable runway for the rest of the year? It is well below where it was last year and the first quarter. Anything you can give us on that would be great. Thank you so much.
All right. Allow me to pass that question on to Maëlys, please.
Yeah. The other cost in Q2 2016, EUR 41 million versus EUR 58 million, as we indicated, we had an impact of a favorable one-off adjustment on a legacy provision. Although this is the main difference, the corporate cost and other costs were in line with the previous years.
You should not take EUR 41 as the forward-looking part. You would be better to do it with the previous years.
Perfect. Thank you so much.
Next question, please.
Thank you. Next question comes from Patrick Lambert. Sir, your line now is open.
Hi. Good morning, everybody. Three questions, very brief. Ton, can you comment a bit more on details on the positive +2 mix effect in Performance Coatings? I think for a long time we had pretty weak numbers there. If you could put some more colors on which business, which region actually drove those mix effects. That's question number one. Question number two, again, on the bridge of others, the EUR 17 million one-offs legacy. Just quickly, does it actually not impact EBITDA? I think it's on the EBIT side, but that should not affect the EBITDA line. Second question, and last one on PIP numbers. I think if I'm correct, in H1 2015, you were still around EUR 30 million or so in terms of PIP. Could you just mention if the run rate is about the same as last year? Thanks.
Okay. Let me start with Performance Coatings. Volumes were up 2%. Price mix was actually down 2%, and as we discussed earlier, the majority of that was mix related. Overall, all three reporting units that we have shown in the booklet, Marine and Protective, Automotive and Specialty, and Industrial and Powder Coatings, these three segments, they have all shown growth. If you then go 1 level below, I refer to the comments that I made earlier. Overall, I guess we have seen growth in all of these three reporting units, whereas Marine was down, Protective Coatings was up. There's been, underneath it, several parts and changes. The price mix, again, was, in this particular case, primarily mix. If I go through PIP or restructuring costs, of course, we don't refer ourselves to the improvement as a project anymore. We've moved into a more continuous improvement cycle.
We expect to have restructuring costs between 0.5% and 1% of sales. That means that we do expect additional restructuring costs to come through during the second half of the year in comparison to the first. Overall, the benefits are included in the other block on page 18. That is where the incremental benefits for the improvements, both in terms of the AkzoNobel Leading Performance System and in the Global Business Services improvements, represent a substantial amount. When it comes to the EUR 17 million, Maëlys, maybe you can add to that.
Yeah. I confirm you that it is on the EBITDA, but it's a non-cash item, so in the cash, it is retreated, but it's included in the EBIT and EBITDA.
Thank you. Next question, please.
Next question comes from Mr. Christian Faitz. Sir, your line now is open.
Yes. Good morning, Ton, Maëlys, and Lloyd. A couple of questions, please. First of all, in Deco, can you please give us an indication how much volumes were affected by the weak Brazilian economy? Second of all, in your Specialty Chemicals activities, can you please walk us through demand trends in China during Q2, i.e., maybe talk about sequential volumes in April, May, and June? Last but not least, just quickly, what's your exposure to Turkey in terms of group? Thanks.
Okay. The Deco question that you ask, what you see in the Decorative Paints is that revenue was down for the quarter with 22%. The only thing I can add to that number is that if you would look at the currency fluctuation between Q2 this year and Q2 last year, that is approximately 20%. The vast majority of that revenue downturn is actually currency. We generally don't provide the details what then the difference between price mix and volume is for the individual regions.
You can assume that with the 22% being around 20% currency, that at least the business has had the agility to adapt in such a way that the combination of volume price mix has been reasonably close to zero, which I think is a compliment to the team in Brazil and in Latin America overall, which is an added number for the entire region. When I look at Specialty Chemicals, there's no simple answer to that because each of the platforms have seen different dynamics. We have seen that the Chinese economy in general, also for Specialty Chemicals, has actually grown, and it has grown a bit stronger also in terms of Deco than we would have projected to you at the beginning of the year. We see that a lot of it is related to stimulus activities of the Chinese government.
We cannot assess whether this is a trend, but we do see that China has shown, at least in the first half of this year, a slightly better environment than we had anticipated and prepared for at the end of last year. If I look at the differences between the surfactants business, where we've just commissioned an additional activity with a new investment that was just activated, we've seen some growth there. If I look at the ethylene oxide chain of activities, it depends very much on which part of the chain you would be talking about. It's a varied development with a slightly general more positive environment than expected, also for Specialty Chemicals. When it comes to Turkey, we have an active business in Turkey, both on the Deco and the Performance Coatings side are probably the most active businesses with local manufacturing in the country.
It is not in the top 10 of our countries, therefore, not a published number like with the U.K., where we can say it's around EUR 1 billion and 7% of our revenue. It is clearly less, but it's another country where instability will not show a positive development for business. Of course, we feel sad for the events on the ground and the loss of life. The same counts for, of course, France and other areas. From objective, these developments are bound to not be positive.
Great. Very helpful. Thank you.
Thank you. Our last question comes from Mr. Markus Mayer. Sir, your line now is open.
Good morning. Only one question remaining. The 3% volume decline at Functional Chemicals. Can you shed more light on those, please?
That is probably a revenue decline that you're talking about. At Functional Chemicals.
The volumes were down 3% compared to some previous period. Isn't that correct?
Correct. Indeed. Functional Chemicals, you're right. The volumes were down 3% compared to a strong previous year. We've seen there that comparison has been tough, and has been related to the combination of polymer chemistry and the ethylene oxide chain, primarily ethylene amines and ethylene oxide. That is the area where the volumes have changed the most.
Okay. Perfect. Thanks.
There is one more question, I understand.
Yes. Our next question comes from Mr. Philip Scholz . Sir, your line now is open.
Yes. Good morning, everybody. Last question on your volume development in Deco in Europe. You say they were slightly lower. Can we attribute that mainly to maybe a slower environment in the U.K., or are there any other markets which have changed course in terms of volumes during the quarter?
Yeah. Our definition of Europe is quite broad. It includes from Russia all the way to the U.K., and includes the Middle East and Africa as well. In that combined region, which is of course very broad, it is slightly down. We basically have indicated that for the company as a whole, Europe was slightly positive. For Deco, it was slightly negative. It's just the addition of many different developments in different places, and that includes some Western European countries, but primarily activities in Middle East and Africa as well. You may know that there was a very early Ramadan. This normally affects some of the businesses as well. It is a combination of additions of 30-plus countries that we add up to a slight down for Europe, for Deco specifically. Although for the company as a whole, Europe was slightly up.
Okay, thanks.
Allow me to thank everyone for their presence this morning. Thank you for calling in. Allow me to wish you a good holiday season for those who are on the Northern Hemisphere. I wish you a wonderful day. Thank you, and bye-bye.
Thank you. That concludes today's conference.
Allow me to thank everyone for their presence this morning. Thank you for calling in. Allow me to wish you a good holiday season for those who are on the Northern Hemisphere, and I wish you a wonderful day. Thank you, and bye-bye.
Thank you. That concludes.