All participants are in listen-only mode. After the presentation, we will conduct the question and answer session. For you to ask a question, you may press star followed by 1. This call is recorded. If you have any objections, you may disconnect at any time. Now, I will turn the meeting over to your host, Mr. Lloyd Midwinter. Sir, you may now begin.
Good morning, everyone, and welcome to the Akzo Nobel Q1 2016 Investor Update Conference Call. I'm Lloyd Midwinter, Director of Investor Relations. Today, our CFO, Maëlys Castella, will guide you through the results for the first 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 more 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 the answers to your questions. I now hand over to Maëlys, who will start on slide three of the presentation.
Thank you, Lloyd, good morning, everyone. We are delivering on our strategy of continuous improvement and organic growth. During Q1 2016, we increased volumes and profitability in all business areas despite challenging markets and currency headwinds. Operating income was up 17%, and net income attributable to shareholders was up 50%. The net cash outflow reduced significantly compared to last year. We also announced an agreed offer to acquire BASF's Industrial Coatings business, and in April 2016, we issued a EUR 500 million bond with 10 years maturity at a coupon of 1.125%. Turning now to slide four. Q1 2016 represents another quarter of improved financial performance with both higher volumes and profitability. Volumes were up for all business areas and up 2% overall. However, revenue was down 4%, with higher volumes offset by adverse currency effects, price mix, and divestments.
It is worth noting for both Decorative Paints and Performance Coatings that the volume growth was higher than the adverse price mix effect. EBIT, which is operating income excluding incidental items, increased 9%, and profitability improved further with both Return on Sales and Return on Investment higher than last year. EBIT provides a better picture of underlying business performance. In response to your feedback, we will refer to this measure going forward, and it will be used as the basis for calculating Return on Sales and Return on Investment as indicated during our capital market day in October. Of course, we will continue to be transparent and include operating income in our communication. Net income attributable to shareholders was up 50%, and adjusted EPS increased 28% to EUR 0.97. Now a brief operational review, starting with our end user segments on slide six.
The buildings and infrastructure segment is most significant for AkzoNobel, with 43% of revenue. This segment is developing in different ways depending on region and country. Trends for North America and Asia are positive, while developments are more mixed for Europe, and conditions are particularly challenging in Latin America. In the transportation segment, recent developments for marine have continued to be positive based on past backlog. The medium-term outlook remains uncertain due to backlogs reducing at shipyards. Demand for aerospace and automotive coatings continue to be healthy. As a general rule, trends for the consumer goods segment are similar to GDP. In the industrial segment, demand has been impacted by a downturn in the global oil and gas industry. These affects our protective coating and Surface Chemistry business in particular, and the impact is likely to continue in the medium term. Turning now to slide seven.
Global manufacturing, particularly relevant to our industrial and user segment, is essentially at a standstill. However, trends are mixed depending on country and region. Recent PMI data shows an upturn for China, although continuing to contract, as you can see, it's below 50, and it is unclear whether this trend will continue, and we'll see a slight expansion for the Eurozone with mixed developments across the region. The U.S. expanded at a slower rate than in the past, while Brazil and Russia contracted further. Slide eight includes the most recent consumer confidence from Nielsen. This chart shows Q4 2015 because more updated data is not yet available. Consumer confidence has a clear influence on consumer buying decision, including houses, furniture, and consumer durables, and is therefore relevant for our consumer goods and user segments and our Decorative Paints business.
The data shows consumer confidence trends differ per country and within region. Consumer confidence remains low for several countries, including France and Belgium. Although there are signs consumer confidence is increasing in Western Europe. Now moving to the financial review on slide 10. During Q1 2016, we have increased volumes, return on sale, and Return on Investment. Volumes were up for all business areas and up 2% overall. Revenue was down 4% because higher volumes were offset by adverse currency effect, price mix, and divestment. Both Decorative Paints and Performance Coatings showed growth with the impact from positive volumes higher than the adverse price mix effect. However, price deflation was clearly visible in Specialty Chemicals. EBIT, operating income excluding incidentals, was up 9% at EUR 334 million compared to EUR 306 in 2015, reflecting continuous improvement initiative and lower cost, partly offset by adverse currency effects.
Operating income was also up at EUR 357 million and includes an incidental gains on sale of assets of EUR 23 million. Return on sale improved to 9.7% from 8.5% last year, and Return on Investment increased to 14.5% versus 11.5% in 2015. Slide 11 shows the quarterly trend for volume and price mix. During Q1, volumes were up for all business areas and up 2% overall. Volumes increased 6% for Decorative Paints, 2% for Performance Coatings, and 1% for Specialty Chemicals. Demand trends were different per region for both Decorative Paints and Performance Coatings. As indicated previously, they both grew as the positive volume impact clearly were higher than the offsetting price mix. However, for Specialty Chemicals, price mix was negative 4% due to price deflation and in some cases, formula-based pricing. I'll now turn to the highlights regarding the quarterly results for each of the businesses.
Let me start with Decorative Paints on slide 12. Volumes increased 6% due to positive developments in Asia and Europe, offset by Latin America. Positive developments continue in the U.K. and the Netherlands. Volumes improved for several countries within Europe, Middle East, and Africa. Demand was positive in many Asian markets, particularly in South and Southeast Asia. In China, volumes were positive despite continued challenging condition in the Chinese construction market. In Latin America, market condition remained challenging as economic instability continued. Revenue was down 3% due to higher volumes offset by unfavorable currency effect and adverse price mix. EBIT and operating income were both up 4% at EUR 52 million, mainly due to higher volumes and lower cost, partly offset by unfavorable currency. ROS increased to 6% from 5.6% in 2015, and ROI improved to 12% versus 9.8% last year. Highlights for Performance Coatings are shown on slide 13.
Volumes were up 2%, mainly driven by Marine and Protective Coatings, although demand was impacted by lower capital spending in the global oil and gas industries, and demand differed per region. In protective coatings, higher volumes were driven by project backlog, which continued from Q4, and marine coatings volume improved due to new build projects in Korea. New business in Asia for consumer electronics, our Specialty Chemicals, and automotive coatings grew, particularly in North America and Europe. Demand for Coil Coatings was strong in Asia and North America, and Packaging Coatings saw positive development in Europe and Asia. Volumes for Powder Coatings were also healthy. However, revenue was down 3% because increased volumes were offset by adverse currencies and unfavorable price mix. EBIT and operating income were up 9% at EUR 186 million due to higher volumes, management delayering, continuous improvement initiatives, and lower cost.
Return on sale increased to 13.5% versus 11.9% last year, and ROI increased to 30.4% from 22.9% in 2015. Turning now to slide 14. We recently announced an agreed offer to acquire BASF's Industrial Coatings business for EUR 475 million, which will strengthen our position in the Coil Coatings market. The business generated revenue of about EUR 300 million in 2015 and supplies products for a number of end users, including coil, furniture foil, and panel coatings, wind energy, general industry, and commercial transport. This fits well with our existing business. The planned transaction is expected to be complete in the latter part of the second half of 2016. We are moving now to Specialty Chemicals on slide 15. Volumes were up 1% with positive developments in Industrial Chemicals, partly offset by lower demand in oil-related segments, which impacted the Surface Chemistry business in particular.
Volumes for Industrial Chemicals were higher, mainly due to increased manufacturing availability in Frankfurt and Rotterdam. Production output for Functional Chemicals was still impacted by the interruption in the manufacturing and supply chain in Tianjin, China, affecting comparison versus Q1 2015, although availability improved compared with Q4 2015. Pulp and Performance Chemicals was impacted by the divestment of the Paper Chemicals business, which took place in Q2 last year, but excluding the divestment volumes, developments were positive. Revenue was down 7% overall due to the divestment, price deflation, and adverse currency effects. Both EBIT and operating income were up 1% due to operational efficiencies and lower costs offsetting the effect of price deflation and adverse currencies. Return on sale increased to 13.6% compared to 12.6% in 2015, and ROI improved to 16.5% versus 15.3% last year. I now move to the cash flow on slide 16. The cash discipline continues.
As you can see, our cash outflow is typically during the first quarter due to, first, the seasonal working capital requirements and pension top-up payments. Free cash flow generation continues to improve, demonstrating the positive impact of higher operating results combined with reduced interest, lower working capital in all business areas, less restructuring, and lower pension top-ups. Net cash flow from operating activity improved to EUR 336 million compared to EUR 622 million in 2015. Turning to slide 17. Net financing expenses decreased mainly as a result of reduced external interest expenses following the repayment of a high-interest bond coupon in Q1 2015. At March 31st, 2016, net debt was EUR 1.7 billion versus EUR 2.3 billion last year and EUR 1.2 billion at year-end 2015.
In April 2016, a EUR 500 million bond was launched at attractive term with a 10-year maturity at a coupon of 1.125%, and a GBP 250 million bond was repaid during April 2016. Our strong financial position provides a good foundation for growth. Pension liability according to IAS 19 are showed on the slide 18. The balance sheet position of the pension plan at the end of Q1 2016 was a deficit of EUR 0.4 billion, versus EUR 0.6 billion at year-end 2015. This was the result of the net effect of top-up payments, predominantly into certain U.K. pension funds, higher asset returns and lower inflation, offset by lower discount rate in a key country and de-risking of pension liabilities. Turning now to slide 19.
The triennial review of the AkzoNobel (CPS) Pension Scheme was completed in March 2016, and a new valuation and payment schedule was agreed with the trustee, which resulted in a lower annual top-up contribution. The estimated annual cash top-up payment has been updated and are set out in the schedule down on this slide. During the quarter, also, further de-risking of pension liability was conducted with a non-cash buy-in transaction of EUR 490 million related to the ICI pension fund, which led to a EUR 90 million impact in other comprehensive income, but no impact on the payment schedule. Concluding with a summary on slide 21. During Q1 2016, we increased volumes and profitability in all business areas despite challenging markets and currency headwinds. Operating income was up 17%, and net income attributable to shareholders was up 50%. The net cash outflow reduced significantly compared to last year.
We also announced an agreed offer to acquire BASF Industrial Coatings business. In April 2016, we issue a EUR 500 million bond with a 10-year maturity and coupon of 1.125%. We are clearly delivering on our strategy of continuous improvement and organic growth. Looking ahead, the market environment remains uncertain, with challenging conditions in several countries and segments. Deflationary pressures and currency headwinds are expected to continue. Upcoming events are summarized on slide 22. Our AGM will be held tomorrow on April 20, and a sustainability update take place on May 19th, and our Q2 results will be announced on July 19th. Thank you for your attention. This concludes the formal presentation, and I would now be happy to take your question. Please limit your number of question to a maximum of two so others can participate, and please state your name before asking the question.
Operator, we can now move to questions.
Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star followed by 1. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To withdraw your request, you may press star followed by 2. Our first question comes from the line of Mr. Paul Walsh. Sir, your line is now open.
Thanks very much. It's Paul Walsh from Morgan Stanley. Morning, Maëlys . I just had two questions. The first question was around the cash flow, please. The improvements you've delivered in the first quarter, I think it amounts about EUR 300 million year-on-year, give or take. Question is reasonably simple. Do you think you can sustain that or improve upon that year-on-year delta as we move through the rest of 2016? My second question relates to sterling and the weakness of sterling and the broader impact across the group. I wondered if you could put some context within the Deco business, how much it weighed on EBITDA, debt, pensions, and so on, just to give us a fuller picture of the effects of sterling on the business right now. Thank you.
Yeah, thank you, Paul. Your first question on the cash flow. First, as I explained, as you know, the Q1 is particular because that's the quarter where we have a negative cash flow due to the small quarter in both Deco and also our cash top-up. If you see the improvements of the cash flow, as I explained, it is mainly due first to the improvement of our operation, then to a massive reduction of the interest paid, so that you've seen the interest payment went down from EUR 48 to EUR 4, as we repaid the big bond last year with the high coupon 7.25%. The payment of the interest, EUR 48 million, was the full amount of the interest due on the year. That's why you have this comparison.
This is the one-time effort for the quarter, as you see, our interest will continue to be low now that we have repaid all the expensive bond and in particular, the new bond. The other effect of the lower cash flow is due to a lower cash top-up, we are giving you the update schedule so you can see what will be the reduction for the full year. The other driver was the fact we had lower cash restructuring. In the Q1 last year, if you remember, we still had some cash payment of the past restructuring coming from 2014 over Q1. Last but not least, improvement of the working capital. This is really the driver.
As I say, of course, I don't give forward-looking on the cash flow for the year because it will depend, at least you have the explanation of why we have this improvement, which also show the really strong focus of the company. If you've seen the capital expenditure, they have been also under control at about the same level of last year. Your second question was about the GBP. Indeed, we started to see in Q1 a weakening of the GBP, even a further weakening by the end of the quarter. Overall, an average for the quarter, we had a decrease around a little bit over -3%. This, of course, has an impact in terms of the foreign exchange effect. This is part of the negative Forex effect you've seen, in particular in Deco.
That's why they have a strong negative foreign exchange, the large part being from Latin America. We definitely have a translation effect that might continue, as we mentioned in the outlook, at least in Q2 because the GBP has weakened further, we'll continue to see that. Of course, this impacts all the different part of our P&L and our cash flow, that impacts overall. In terms of debt, as you have seen, we have repaid the bond in GBP, there is no outstanding debt in GBP going further. Of course, our cash top-up are in GBP, but we just paid the big amount in this quarter.
The lower GBP will definitely have a negative impact for some of the business in the U.K. and also could have a little bit of transactional negative effect as we have also some more material that could be imported in the U.K.
Brilliant. Thank you very much, Maëlys .
Thank you. Our next question comes from the line of Mr. Tony Jones. Sir, your line is now open.
Hi, morning. Tony Jones at Redburn. Two from me as well. Firstly, on promotional costs for Deco, we know that some of the major retailers have stepped up pay promotion or price deals. I wanted to know in this quarter or possibly for Q2, whether there was any added A&P cost. That's something to think about. Secondly, on headcounts. At the back of the release, it looks like that number continues to fall. A quick look suggests it's gone down another 1% year-over-year. Is this just a phasing effect for hiring of seasonal employees, or is this permanent, and can we expect further progress over the year? Thanks.
On your first question, as you know, we are now clearly focusing on organic growth and, of course, investing in our brand and in the promotion of our products is part of our focus, including innovation. You'll clearly see an increase during the quarter of our volume in Deco. You have to bear in mind, in Q1 last year, we had a very low volume of minus 3%. Now we are plus 6%, which shows a much better trend. On the other end, you see some price mix negative, but as I stated, the volume increase are clearly above. We are growing in Deco, and this is in particular due to a strong demand in Asia and mixed effect in Europe. There is nothing specific I need to mention about promotion. Your other question was about the FTE.
As you know, we have done our large restructuring, in particular in Deco, in previous year, in 2014. In 2015, we started to move to the continuous improvement. The shift you've seen between last year, Q1 and now, as we mentioned at the end of the booklet, as we are putting in place some global function with the GBS, we add some functional people that are moving out of the headcounts of the different business to the corporate headcount because they are pulled together to build on this GBS, which will give us additional efficiency in all our functional costs. We continue to restructure, of course, when it is needed. End of the year, we have taken some measure, for example, in Brazil. There are no major restructuring going on right now. We are moving really to the continuous improvement mode.
Okay, just a quick follow-up on that. I am pretty sure the number I was referring to was a group number. If there are people moving from divisions to corporate, it should always probably reflect that.
I thought you were mentioning the Deco number. Yes, at group numbers.
Yes
Well, compared to last year, yeah, we have continued to the group. I think, yeah, the figure was around -1% year-on-year compared to last year. As I say, we continue to do some program in some country and adapt our global workforce. I thought you were specifically related to Deco.
No, perhaps that was my mistake. Sorry about that. Thanks for the answer.
Thank you. Our next question comes from the line of Mr. Jeremy Redenius. Sir, your line is now open.
Hi, it's Jeremy Redenius from Bernstein. Thanks for taking the questions. Firstly, just in Decorative Paints, this 6% volume growth, I think I'm trying to work out why earnings growth wasn't greater than it was year-over-year. I'm just wondering maybe if you could help me think through some of the factors that led to what I would say the lack of operating leverage there, whether it was a negative mix effect in Asia or just low profit growth in Asia. Was this a big quarter in which dollarized raw materials were expensive to import into emerging market countries-
Yeah
sterling weakness, et cetera?
Yeah.
Secondly, in Specialty Chemicals, Industrial Chemicals was up on capacity expansions in Q1. I know you've upped your chlorine capacity about 50% in Frankfurt. Is that ramped up now, or will that continue to ramp up into subsequent quarters? Thank you.
Thank you, Jeremy, for your question. First, on Deco, you have to bear in mind, as I mentioned, that Q1 is a small quarter. Therefore, already we have traditionally a lower return on this quarter because you have the full cost with lower volume. Therefore, your volume leverage are not that relevant. Secondly, what is important to notice, in particular, that we have a very negative foreign exchange impact on raw material in some country, in particular Latin America, but also Russia, Turkey, Indonesia, where the transactional effect of imported goods are really affecting the results. That would compensate a part of the positive volume. On the other end, as you can see, we continue to put some improvement action in place, but this is what affect, in particular, the quarter. This transactional effect is very significant.
For your second question on availability of IC, definitely as we mentioned, the better availability both in Rotterdam and the ramp-up of Frankfurt. Frankfurt is now fully on stream, that's the level, I would say, on which we operate. We're not going to see a further increase.
Great. Thank you very much. That's very clear.
Thank you. Our next question comes from the line of Mr. Peter Clark. Sir, your line is now open
Yes. Good morning, everyone. Good morning, Maëlys . It is actually following up on what you were just talking about. I am just wondering how big the Easter effect was, particularly in the Northern European business, because in a seasonally weak quarter, of course, where Easter falls can have quite a big impact, particularly on the volumes. The second issue is, I might have missed this, but what has been going on with the associates line, with the big contribution in the first quarter? Those are the two questions. Thank you.
On your first question, as I mentioned, there is no specific effect from Easter or other in the figure. As I mentioned in Q1, we are pleased with the performance in Deco, even though we have to bear in mind that Q1 last year was really low with the minus 3%. This is something to have in mind. As I mentioned, Asia was one of the very strong contributor of the growth. On your second question on the associate line, where you see an increase at EUR 20 million from, I think, EUR 2 million to EUR 20 million. This is including a one-off effect linked to the acquisition we mentioned of a chemical. We acquired 50% of a subsidiary we have in the bleaching chemicals, and this is one of accounting impact from this acquisition of this 50% stake.
Got it. Thank you.
Thank you. Our next question comes from line of Mr. Patrick Lambert. Sir, your line is now open.
Hi, good morning. Thanks for taking my two questions. The first one relates to, again, the building blocks of EBITDA, EBIT growth in 2016. Looking at Q1 2016, could you comment a bit on both the run rate of savings and raw material? I know you usually don't do that quantitatively. Can you comment how strong of a tailwind of raw material? I know, again, transactional is another issue, but prices have gone down pretty sharply in many resins and pigments, et cetera. If you could comment on the tailwinds of raw materials and your run rate of savings going into the rest of the year. First question, and second question on BASF margins, BASF acquisition, could you comment a bit on what we should think about in terms of dilution of margins and, yeah, basically, and synergies you can see from that? Thanks.
Yeah. On your first question, we do not provide, as you say, the bridge at the quarter. I think what is to bear in mind, as we mentioned always in the past on the raw material, is that, yes, we've seen a lower price, but we have a very strong negative foreign exchange headwind in some country. As I mentioned, in particular, very strong in Brazil, and in Argentina, where currency devaluates more than 30%. Also strong in Russia, in Indonesia, in Turkey. Those are really what we see as the effect tempering the raw material benefit. Overall, we'll still see some moderate benefit, as we have seen in 2015. If you remember, Q1 2015 was the first quarter only where we started to see some benefit. The benefit increased over the year.
We continue with the lower oil price to expect some moderate benefit over the year 2016. In terms of our run rate, we do best continue to benefit from both the restructuring program we had put in place last year, in particular in Performance Coatings, as you know, where we had major delayering of the top management, some management position, and also closure of several factories. We also have continuous improvement program. We continue to see a strong benefit of the run rate of our program. This is a major contributor to the improvement. Of course, we have the negative effect of the translation. On the BASF acquisition, we do not provide the detail. We have not provided detail on margin.
You also have to bear in mind that we are still in the process for this acquisition that will be confirmed at the end of the year. So far we have not provided, but as we mentioned before, it's a very good fit with our existing business that reinforce our position, and we also say that we are concentrating on acquisition that are generating value for the company.
Thanks, Maëlys .
Thank you. Our next question comes from the line of Mr. Mutlu Mutluer. Sir, your line is now open.
Yes. Good morning, everyone. Two questions on Deco, please. The first one on the volumes. A very strong performance, up 6% year-on-year.
I think you mentioned, Maëlys , that it was mainly in Asia. Can you be a bit more specific and tell us in which countries and what the main reason behind that is? Secondly, on the EBITDA margin and Deco, I notice a lot of moving parts, but can you tell me what the main reason was for the 40 basis points decline in the EBITDA margin to 10% in this quarter? Thank you.
For Deco, I think it's important, I'm sorry, I'm going to repeat myself because I want to be clear on that. Q1 2015 volume were down minus three. We are now plus six. There is, of course, a comparison effect. If you see the rest of the year last year, then the volume were better in Deco as in Q2 we were at minus one, then 0, and we start to see the positive trend at the end of Q4. What I want to be sure is that you bear in mind that a plus six is not necessarily going to be the trend for the full year because of this comparison effect and because also Q1 is a small quarter. Nevertheless, it does indicate a good trend. The positive development are particularly visible, as we mentioned in U.K. and Netherlands.
We also have several country in Middle East and Africa that are improving and some in Europe. The demand was particularly positive in Asian markets and in South and Southeast Asia, Vietnam, very good, Indonesia, India, and in China were also at volume positive despite a context which is still challenging in the Chinese construction market. Overall, as I say, positive trends that are offset by markets very challenging in Latin America. As I mentioned, Q1 is a small quarter, we cannot yet see what will be the trend for the full year. The second part of your question was on the EBITDA improvement. In Decorative Paints, we see an improvement. As it is a small quarter, of course, we have the full cost, fixed cost with lower volume.
By definition, the return is always lower in Q1 compared to the rest of the year. Nevertheless, we have also some improvements coming from our continuous improvement program, but hampered by the negative foreign exchange and in particular, the transactional effect I mentioned before.
Oh, Maëlys , the EBITDA margin was down, if I'm not mistaken, by 40 basis points.
Yeah, I will return to you on this one specifically. As I mentioned, it's probably because as I mentioned, the negative effect of the transactional effect. We might have last year some specific effect I don't have in mind. Overall, as I said, in this quarter, the improvement of the volume was hampered by the transactional effect. That's the main explanation of the variation.
Okay, thank you.
Thank you. Our next question comes from the line of Mr. Christian Faitz. Sir, the line is yours.
Yes, my name is Christian Faitz from Jefferies. Just a quick follow-up question, clarification question. You mentioned in your introductory speech that Brazilian Deco volumes were up 3%, is that correct? Second question, in your chemical activity, Specialty Chemicals, can you please talk about demand trends in China during Q1? Has demand improved post the New Year celebrations, and how does demand look at present for chemicals specifically? Thank you.
I didn't get your first question. I'm sorry. I didn't hear you very well. Could you repeat the first question?
Okay. I just wanted to clarify that you mentioned that Brazilian Deco volumes were up 3%. Is that correct?
No, I said in the contrary that Brazilian situation was very difficult. Revenue down in Latin America, Deco was down 27%. We have a very strong negative environment in Latin America with both a big currency headwind and also volume pressure with slight positive price mix. I never said that Brazil was up. Second question about China and chemicals. As we mentioned last year, specifically for our functional business, we've seen some headwind coming in the Tianjin region because we have not been directly affected by the big explosion in China, but we have a plant there for our polymer business and who suffer some supply chain disruption because of the effect of this Tianjin explosion. That has put some issue on our operation that had negative impact in Q4 last year. It's starting to get better in Q1.
We still are affected, but we are back, I would say, we are ramping up progressively, so things are getting better. Overall, for chemical in China, as we're seeing it's still a mixed picture. As I mentioned, when you look at the PMI data that reflect the overall environment, we are now seeing that figure are improving, but it's unclear whether it's a trend or not. For chemical, for the moment, we have no specific issue apart from this Tianjin supply chain disruption.
Okay. Thank you.
Thank you. Our next question comes from the line of Mr. Markus Mayer. Sir, your line is now open.
Good morning. I have one question relating to the competitive environment. With the acquisition of Valspar of Sherwin-Williams, do you expect that something in particular in the U.K. and continental European markets will change after this acquisition? Basically for you, to be seen if something will happen there. Thanks.
Effectively there is a major acquisition taking place with this Sherwin-Williams deal that show consolidation is taking place. We also, as I mentioned, have done an acquisition of a much different side as we have said that we're concentrating more on bolt-on acquisition with this BASF Industrial Coatings acquisition. For Sherwin-Williams, as you know, they are mainly a very large U.S. distributor presence. In particular in Deco, we are not in North America. In Deco, we divest the business there. We don't compete with them there. In Europe, Valspar is present and then enter the U.K. market with a tinting offering in B&Q. We'll continue to see them, and it's yet too early to see what will be the impact of this acquisition. The deal is announced, they will take place beginning of 2017.
We don't expect a big change, at least in the short term. On our side, we continue to focus on our strategy clearly of organic growth and continuous improvement. That doesn't change the scene for the moment of what we see in Europe.
Okay. Perfect. Thanks.
Thank you. Our next question comes from Mr. Peter Clark. Sir, your line is now open.
Thank you again. Actually, I was preempted. I was a similar question, but just one specific thing you may or may not want to answer. Is Ronseal bigger than Cuprinol at the moment, or is Cuprinol the bigger brand on the wood finishing in the U.K. as a matter of interest?
Well, I would not go into detail of position per market and per brand. We are very strong player as you know, in the U.K., in our different markets.
Perfect. I didn't expect anything. Thank you.
Thank you. Our next question comes from the line of Mr. Paul Walsh. Sir, your line is now open.
Yeah. Thanks a lot. Sorry. Just some follow-up questions, if I can. I just want to talk a bit about Specialty Chemicals, actually, Maëlys . I think it feels like it's a business that people have been waiting for it to turn over, and it just keeps improving its margin structure. Look, I just wondered if you could talk a little bit about what's behind that. In particular, what pockets of strength in that business are continuing to push the margins up year-on-year? That would be my first question, please.
Yeah. On chemicals, as you noticed it, yes, we continue to improve significantly our business. It's also a sign of that realize now people that we have restructured our business and prune our portfolio to really concentrate on a business where we have strong leader position either regionally, either worldwide. We are doing and continue to do a lot of efficiency program. We're improving our assets. The investment on Frankfurt was there to comply to regulation but also bring additional efficiency. We continue to do so. We have announced this year a production joint venture with Evonik in our Ibbenbüren site for also conversion to a mercury-free membrane in the Industrial Chemicals. Those are examples of a lot of program we're doing to continue to improve our efficiency.
I think the good margins are really showing that we have very good business with good position, and that we are combining further improvement and with good demand. As we mentioned, if you exclude the divestment of the Paper Chemicals business, we see that our Pulp and Performance Chemicals is doing quite well. The Surface Chemistry is still impacted by the oil segment, and that's practically a negative headwind. On the other business, we're doing quite well.
There's nothing in that Specialty Chemicals margin that you would classify as unusual?
No, it's really the improvement we have done on our efficiency. There is no exceptional, as we've explained to you, when there's something material, we do flag it.
Okay. Just a second question, please. Deco volumes. I know you want to be cautious about volumes as the comps get tougher, particularly in Europe from the second quarter onwards, but can you be a little bit more detailed around some of the volume developments in Europe by country? If I looked at the Euromonitor paint data, it felt like U.K. was actually getting tougher, but it seems like you're still growing. Is that a question of taking market share? Of course, the big drag last year was France. I'm just wondering if you're now beginning to see improvements in the French market.
As I say, I think I made it very clear that the Q1 is a small quarter, do not make a trend for the full year. Yes, we want to remain cautious, as we have flagged it in our outlook, there are still challenging market conditions. I think we are there, wanted to clearly flag that. In terms of the overall demand, yes, we've seen, as I mentioned, especially good demand in Asia, strong there. In Europe, it's still a mixed picture. Yes, U.K. and the Netherlands was doing quite well in this quarter. For France, as you've seen in my graph, it's still a very low level of consumer confidence. There are signs of improvement, but it's still a very challenging market. Belgium also, it's the same situation.
We know that the unfortunate event, both in France and Belgium, of the terrorist attack end of year in this first quarter had some influence on consumer behavior. We're still very cautious about what's happening in this country. We cannot yet really talk about recovery in those countries yet.
Okay, fine. Thanks a lot.
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