Participants are in a listen-only mode. During the question and answer session, please press star followed by the number one. This call is being recorded. If you have any objections, you may disconnect at this point. Now I will hand the meeting over to your host, Mr. Lloyd Midwinter, so we may begin.
Good morning, and welcome to the Akzo Nobel Q4 2015 investor update conference call. I'm Lloyd Midwinter, director, 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 that this statement is also applicable to the conference call and the 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 to everybody. We achieved our 2015 financial targets. These targets were communicated in early 2013, and despite very different market developments compared to our assumptions at the time, we were successful in implementing the measures necessary to deliver these targets. This demonstrates the new strength and adaptability of Akzo Nobel. We made significant progress towards our vision of leading market positions, delivering leading performance. We're a stronger, leaner, and more agile company, and that will help us in the future in dealing with challenging market conditions. We have new operating models in place for all businesses and functions. A continuous improvement culture is being initiated in the form of AkzoNobel Leading Performance System, or ALPS as we call it internally, and we continue to focus on operational excellence, including the implementation of our Global Business Services organization.
We also made progress on our strategic sustainability targets, further increasing our revenue from eco-premium solutions, reducing our CO2 footprint across the value chain, and improving our resource efficiency index. A particular highlight and a source of great pride for the people inside the company was being ranked top of our sector in the Dow Jones Sustainability Index for the fourth year running in our own sector. Our Global Human Cities Initiative, designed to help cities adapt to rapid urbanization, uses our key strength, essential ingredients, essential protection, and essential color to energize, inspire, and sustain communities. These achievements were made possible by our dedicated and enthusiastic workforce. Our annual Viewpoint survey showed engagement levels continued to increase, and safety performance also improved. Many of you were present in October when we launched the next phase of our strategy and communicated new financial guidance for 2016 through to 2018.
Moving to slide four. As mentioned, we delivered all our 2015 financial targets, both before and after incidental items. Return on sales improved to 10.6% from 6.9% in 2014, and compared to a target of 9%. Return on investment was 15%, up from 10% last year and higher than our target of 14%. We're now clearly in financially value-creating territory as a company, and as you will see on the next slide, for all of the individual business areas. Net debt to EBITDA, the ratio was 0.6, well below the 2.0 ceiling that we set in 2013, and the targets for ROS and ROI were exceeded and also met, excluding the impact of the incidental items. Taking on board feedback from the investors community, in the future, we will exclude the impact from incidental items when we communicate going forward.
Slide five shows how all businesses contributed to achieving our 2015 targets. Performance improved in all our businesses, exceeding expected outcomes for return on sales and making very significant improvements in terms of return on investment too. In addition, several actions optimizing our functions contributed to the overall results of the company. Moving to slide six, it shows the performance of Akzo Nobel from a more historical perspective. This demonstrates that for Akzo Nobel, these results constitute a new level of performance, actually a record over the period concerned. It's also clear, though, that further work needs to be done on operational excellence, and the team at Akzo Nobel is committed to deliver that. Although this new level of results for operating income, cash flow, return on sales, and return on investment are a significant achievement of the team.
Moving to the operational review and stepping to slide number eight, showing our various relevant market end user segments. As you know, the buildings and infrastructure segment is the most significant for Akzo Nobel, with 44% of revenue in 2015 in this particular segment. It's developing in very different ways, depending on the geographical region and country. We've seen Brazil clearly in difficult market conditions and Russia as well, whereas China has been weakening during the course of 2015. Europe has shown positive development in some countries, most notably the U.K. and the Netherlands. We've seen very challenging markets in continental and Eastern Europe, and in our definition of the European region, Russia and Turkey are also included, two countries that have seen serious challenges in 2015 and are expected to continue to do so going forward.
Overall, if you take Europe as a whole, the combination of a few positive developments and challenges on the eastern side of Europe, we've seen no significant overall improvement. Positive developments are visible in South and Southeast Asia, and North America continues to grow as well. We step to the transportation segment. Recent developments for marine have continued to be positive, but the longer-term outlook remains uncertain due to the backlogs that we see of the various shipyards, primarily in Asia. Demand for aerospace and automotive coatings continues to be healthy. As a general rule, when we step to the consumer goods segment, the growth is around GDP. This represents above-average growth in the U.S., balanced by more moderate growth in Europe. The growth rate in China has reduced, and there is lower demand in Brazil and Russia.
The industrial segment has been impacted by lower capital spending and delayed projects in the global oil and gas industry. This affects our Protective Coatings and Surface Chemistry businesses in particular. The impact is likely to continue during the medium term. Recent growth in China was subdued and demand remains stable in Europe in this sector. Stepping to slide number nine. We normally share with you the PMI index, both on a timeline perspective and the recent data for December, as you see here on this chart. The overall picture for global manufacturing is increasingly divergent. Recent PMIs show that the U.S. is still above 50, but is clearly lowering and showing some weakness in its developments. There's clear contraction in Brazil, China, and Russia on the industrial side, and there is some improvement in Europe, which is clearly above the 50 line.
Stepping to slide 10, that includes the most recent consumer confidence from Nielsen. These are data from the fourth quarter 2015. Consumer confidence has a clear influence on consumer buying decisions, including houses, furniture, consumer durables, and is therefore relevant for our consumer goods end user segments and for our Decorative Paints business overall. Recent data shows consumer confidence remains low, although trends differ per country and within regions. Many European countries became less pessimistic, including France, but confidence in this important European market still remains very low at the right side of the chart at 74. The U.S. became less optimistic, and Brazil became even more pessimistic than it already was. Optimism increased further for India and Vietnam, while China remained unchanged and Indonesia decreased. Slide number 11. Our financial performance for the full year showed continued operational performance.
Revenue was up 4% due to favorable currency effects, partly offset by divestments and lower volume. Operating income was up nearly 60%, reflecting the positive effects of process optimization, lower costs, favorable currency developments, and the impact of incidental items, as well as reduced restructuring expenses. Return on sales increased to 10.6% versus 6.9% last year, and Return on Investment increased to 15% compared to 10% in 2014. Akzo Nobel is now clearly in financial value creating territory. As shown before, all of the business areas individually are as well. You will also see in the presentation of Maëlys that we are free cash flow positive after paying dividends. This is the first time in many years and gives us confidence, also demonstrated by an increased dividend, which we'll come to later in this presentation.
Slide number 12 gives you a development of both volume and price mix over a more extended period of time. All businesses continue to be impacted by challenging market conditions. During the fourth quarter, volumes were positive for Decorative Paints and flat for Specialty Chemicals and Performance Coatings, as well as for Akzo Nobel overall. Price mix was -1% for Akzo Nobel, although with different trends for business area. Decorative Paints was flat, while Performance Coatings was 1% higher. Specialty Chemicals reported adverse price mix at 2% due to increased price pressure, and in some cases, formula-based prices to our customer. Maëlys will highlight some of the other features of the fourth quarter later in the presentation. I'll now run through the highlights regarding the full year results for each of the businesses. Let me start with Decorative Paints on slide 13.
Full year revenue was up in Asia, was flat in Europe, and down in Latin America. Volumes were down 1% overall for the full year, with positive development in Asia offset by Latin America and Europe. It's worthwhile noting that we saw positive volume developments for Decorative Paints in both Europe and Asia during Q4. Operating income increased 39% as a result of the new operating model and lower cost, as well as reduced restructuring expenses and currency developments. Return on sales increased to 8.6% versus 6.3% in 2014. Slide 14 shows the highlight for Performance Coatings. Revenue was up 7%, driven by favorable price mix and currencies. Volumes were down 2% across the segments impacted by market developments in Brazil and ongoing spending declines in the global oil and gas industry. It is worthwhile to note that in Q4, volumes were flat.
Operating income increased 35% due to performance improvement initiatives, including management delayering, reduced restructuring expenses, and currencies. Return on sales increased to 13.3% compared to 9.8% last year. Turning now to Specialty Chemicals on slide 15. Revenue was up 2% due to favorable currency effects, partly offset by the divestment of Paper Chemicals and adverse price mix. Overall volumes were flat. Growth in some segments, such as coating performance chemicals, was compensated by lower demand in oil drilling segments, which impacted Surface Chemistry and Functional Chemicals in particular. Volumes were affected by interruptions in the manufacturing and supply chain in Rotterdam and Tianjin. Especially in Q4, the Tianjin environment, which had a serious interruption in the supply chain still related to a large incident that happened earlier during the year, did impact our ability to produce in that region for the Chinese market.
Operating income increased 20%, with significant savings from continuous improvement programs and the positive divestment results from the sale of Paper Chemicals. Return on sales was 12.2%, up from 10.4% in 2014. I will now hand over to Maëlys for the financial review.
Thank you, Ton. We concluded the year with good financial performance in Q4. The key highlights are shown on slide 17. Revenue was up 1%, driven by favorable currency effects of 3%, which was lower than previous quarters, offset by divestments and adverse price mix. Volumes were flat overall, although higher for Decorative Paints. Operating income was significantly higher, reflecting the positive impact of incidental items, process optimization, and lower cost. Restructuring expenses were EUR 24 million compared with EUR 109 million in Q4 2014. Q4 represented the 10th quarter of year-on-year profitability improvement. Return on sale was 9.7% versus 2.4% in 2014. Even if we exclude incidental items, return on sale was 7.5%, up from 4.8% last year. Adjusted EPS more than doubled to EUR 0.72 compared with EUR 0.33 in 2014.
We delivered a record low operating capital of 9.7% of revenue compared with 10.1% at the same time last year, and the net debt reduced to EUR 1.2 billion versus EUR 1.6 billion last year. The summary slide per business area is provided in the appendix. Returning to the full year on slide 18. 2015 represents another year of improved financial performance. Revenue was up 4% and operating income almost 60% higher. Both return on sales and return on investment increased. Net income attributable to shareholders was up nearly 80%, and adjusted EPS increased more than 40% to €4.02. Net cash inflow from operating activity was EUR 1.1 billion versus EUR 0.8 billion in 2014. Return on sales and return on investment exceeded our 2015 financial targets, and even excluding incidental items, both metrics improved significantly and above target levels.
The operating income bridge on slide 19 shows all the main factors that contributed during the past year. Incidentals had an adverse impact of EUR 85 million in 2014 and a positive impact of EUR 111 million in 2015. Further details are provided on the following slide. I will comment on it. Excluding incidentals, operating income increased 36% to EUR 1.462 billion versus EUR 1.072 billion in 2014. ForEx moved in our favor during 2015, although the positive impact has reduced towards the end of the year. We divested the Paper Chemicals business in Specialty Chemicals during Q2. Volumes were lower and price mix had an adverse impact, as discussed in the previous section. Total restructuring charges in 2015 amounted to EUR 74 million, not including EUR 24 million restructuring charges linked to the divestment of Paper Chemicals. This was significantly lower than EUR 253 million in 2014.
The other bar in the chart includes the following items. The incremental benefit from our improvement program was the largest component, with a similar rate of last year, around EUR 200 million. Raw material prices were lower, although in certain regions, ForEx adversely impacted raw material costs in local currency. These items were partly offset by wages and other cost inflation, as well as other negative items, including the interruption in manufacturing and supply chain mentioned by Ton, pension, and insurance costs. Slide 20 summarizes the incidental and other items included in our results. 2014 was negatively impacted by EUR 85 million of incidental charges, most of them which were related to an external fraud, as well as provisions for legacy items and project costs related to a divestment.
There was also a cash flow impact of EUR -88 million related mainly to the settlement of the case following the divestment of Organon BioSciences in 2007. Conversely, in 2015, we were positively impacted by EUR 111 million of incidental items. We recovered a significant portion of the amount related to the 2014 fraud case and reported a profit of EUR 31 million in respect to the divestment of Paper Chemicals. The remaining amount relates to legacy items and post-retirement benefits. Moving to cash flows on slide 21. Free cash flow continues to improve, demonstrating the positive impact of higher operating results due to significant performance improvement and lower interest charge following repayment of higher interest debt. The effective tax rate was 28% for the year. We maintain our general guidance for 2016 on effective tax rate of around 29%.
Capital expenditure was slightly higher due to the impact of foreign currency in projects in countries where local currency has strengthened, and the implementation of various small projects in Specialty Chemicals. Pension top-up payments increased slightly during 2015 due to the foreign exchange effect of a stronger GBP. Top-up payments in GBP were equal to 2014. Turning to slide 22. We have restored a solid balance sheet, paying back more long-term bonds than we have issued, and with significantly lower interest rates. On average, cost of long-term bonds is now 2.9% versus 3.6% last year. During Q1 2016, we will repay long-term loans of EUR 339 million with an interest rate of 8%. At this point in time, there is no urgent need for us to refinance this. Our strong financial position provides a foundation for growth.
Cash management discipline continues to be an area of focus, as shown on slide 23. We have a strong performance with regards to operating working capital management, and in 2015, we delivered a record low for AkzoNobel at 9.7% of revenue, compared with 10.1% last year. Going forward, we aim to improve our effectiveness and achieve a more sustainable level, learning how to better deal with seasonal patterns while ensuring we can meet peak customer demand. We have a disciplined approach to capital expenditure based on return on investment and continued investment in growth. Our capital expenditure as a percentage of revenue has reduced from a peak in 2012 to nearer 4% in 2014, and we expect it to remain around this level for the foreseeable future. In 2015, as mentioned earlier on, we are at 4.4%, due mainly to the currency effects.
Pension liability according to IAS 19 are shown on slide 24. The funded status of pension plan at year-end 2015 was a deficit of -EUR 0.6 billion, versus EUR 0.8 billion last year. This was a result of lower asset return and de-risking of pension liability through lump cash buying in transaction totaling, for the year, £1.7 billion or EUR 2.4 billion. These impacts were offset by top-up payment of EUR 350 million, predominantly into certain U.K. pension plan, higher discounts rates in a keen country, and experience gain in plan liability following triennial valuation remeasurement. The triennial review of the ICI Pension Fund was completed in July 2015, and a new valuation and payment schedule was agreed with the trustees. The triennial review for the Courtaulds Pension Scheme is still ongoing, and we will communicate the outcome as soon as possible. We continue to actively manage our pension liabilities.
Turning to slide 25. We have, in 2015, for the first time in many years, achieved EUR 196 million free cash flow, that is a positive cash flow after paying dividends. This was one of our aims of the year. Net cash generation in total was EUR 341 million, as we have also the proceeds from the divestment mainly coming from our Paper Chemicals divestment, and that reduced our net debt to EUR 1.2 billion and our net debt to EBITDA ratio of 0.6. This concludes my financial review. I would like now to hand back to Ton for the summary.
Thank you, Maëlys. Slide 27 shows the proposed dividend for 2015. The dividend per share has remained stable during the recent years as we've concentrated on improving our financial performance and focused on achieving positive cash flows. During 2015, the interim dividend was increased by 6%. To EUR 0.35 per share. The proposed final dividend is EUR 1.20 per share. This would make a total dividend 7% higher at EUR 1.55 per share. The increase is a clear sign that we're more confident about our cash flow generation going forward. Our dividend policy remains stable to rising. Turning to slide 28. We're committed to pursuing our vision of leading market positions, delivering leading performance. During the coming years, the next phase of our strategy will shift towards continuous improvement and organic growth. We have therefore updated our guidance and communicated this during our Capital Markets Day in October last year.
Return on sales will be between 9% and 11%, and return on investment will be 13%-16.5% between 2016 and 2018. We have the clear aim to build on the foundation of operational excellence and other factors that we've built, and grow in line or faster than our relevant market segments. Finally, on Slide 29, in conclusion, all financial targets for 2015 have been delivered, and we've achieved positive net cash generation after paying dividends. The final dividend proposed for 2015 is up 7% to EUR 1.20, making the total dividend EUR 1.55 per share. We have a clear aim to build on the foundations we have created and are committed to delivering our vision. Looking ahead, we expect 2016, as we already indicated during the Capital Markets Day last year, to be a challenging year.
Difficult market conditions are expected to continue in Brazil and Russia, and also further weakening in China. No significant improvement is anticipated in Europe, particularly in the buildings and infrastructure segment. Deflationary pressures continue, and currency tailwinds are moderating. Upcoming events include the publication of our annual report on the 23rd of February, followed by our Q1 2016 results on April 19th, and our general shareholder meeting on April 20th. This concludes our formal presentation. We'd be happy to take your questions. Please limit your number of questions to a maximum of two so others can participate, and please state your name and organization. Thank you. Operator, we are now ready for 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 the number one. Please remain on the line and your folder name will be unmuted, and your name is required to be placed in question. To withdraw your request, please press star followed by the number two. We have one question from the line from Jeremy Redenius from Bernstein. Your line is now open.
Hi, it's Jeremy Redenius from Bernstein. Thanks for taking the questions. Firstly, on Decorative Paints, the year-over-year result for the fourth quarter operating income, before incidentals and before restructuring charges looks about flat. I would have expected some benefits from ongoing performance improvements, taking out costs, lower raw materials, some gains from volume growth. What were the negative factors affecting the Deco results? Perhaps you could build us a bridge from last year. Was there some type of one-off last year that boosted the performance, that we need to be taking that into account when assessing today's result? Secondly, could you size the EBIT impact from in Spec Chem from the supply and manufacturing disruptions in Tianjin and also in Rotterdam? Thanks very much.
Thank you, Jeremy. The first question related to Decorative Paints. I hope you do not hear the echo that I hear. You first have to, of course, as we always mention, realize is that the first and the fourth quarters are very small quarters for Deco. This is a very seasonal business. Small fluctuations in Q4 can have a significant impact. You've seen in the results as well is that for the full year, Latin America in its developments actually does look okay-ish, whereas in the fourth quarter, you really see that there's been a significant turndown in its revenues. We've clearly seen a strong weakening in Q4 in Latin America that had an impact, that comes on top of the fact that raw materials in Latin America with the currency developments showed negative transactional effects.
We've got kind of a double whammy in that particular area where we have a relevant presence. Developments, otherwise, are really related to the fact that it is a very small quarter. On EBIT impacts, Tianjin, we flagged it in the third quarter that the incident would impact us because the harbor has been very difficult to access for the materials that we actually bring in and bring to our facility. That was one of the main harbors for our location where we brought in the raw materials. There is a disruption there. That disruption continues. Everybody tries to escape to a variety of other harbors, which of course now shows particular bottlenecks in their logistics. This is an impact that is not that quickly going to go away.
Specifically in Q4 is that some of the regulatory environment, the government, of course, clamping down on many things, basically reviewing a lot of the activities in the region, making production a little bit difficult as well. We were not impacted by the incident. Our facilities were not affected. Luckily, our people were not affected. All the impact that I'm describing are indirect impacts and not direct impacts on our facilities. We're actually ramping up the facilities again as we speak. Do expect the logistic challenges to remain. Details of that, in terms of exact EBIT impact, we do not provide. They've certainly been very significant for that particular location, that has been a very relevant factory for the business that it's focused at, which is primarily a polymer chemistry business. That in terms of Tianjin.
Rotterdam was definitely a smaller impact, which has been solved and should not reoccur going forward.
Sorry, just to follow up, Ton, on the Q4 and Deco. I appreciate that it's small. I saw the big decline in LatAm volumes, then that was offset by the better performance elsewhere, such that volumes were actually even up. If the raw mats imports were one negative effect, what else is limiting the benefit of performance?
The descriptions that we've provided in the document regarding the market developments, particularly also in Asia, where it is a smaller quarter. Latin America, of course, is normally the bigger quarter here because it's summer over there. We've seen, as we also indicate in the outlook, difficult development in markets such as China, such as Russia, that have also impacted this fourth quarter. Again, small impacts do have a big effect.
Okay. Thank you very much.
Thank you. Next question, please.
Thank you. We have another question from the line of Tony Jones from Redburn. Your line is now open.
Good morning, everybody. I've got two questions. Firstly, just coming back to the guidance. It's pretty cautious as expected. Could you explain what's changed that much since the Capital Markets Day? Because my understanding was that at the time, you didn't really expect any organic growth for the coming year, a pickup to get to your 2%-3% compound growth. Is that still the case, or are you backing away from that? Secondly, on the operating income bridge, the other gain, so the EUR 233 year-on-year, can you break that down into cost savings and raw materials? Thank you.
Right. The guidance we provided during the Capital Markets Day, nothing has changed in that guidance. Basically, the Capital Markets Day guidance is the guidance that we're providing for 2016 through 2018. We already indicated that we expected 2016 to be a difficult year. We're confirming that as we speak. There is no significant differences in terms of the assessments. We have been a bit more specific on the regions where we expect the challenges to be a bit bigger than in other regions. The guidance of October remains the guidance. When it comes to the operating income bridge, I can pass it indeed along to Maëlys. In short, as she mentioned, the incremental improvements from the improvement programs have been the large components. They are similar to last year. That's around EUR 200 million.
She mentioned lower raw materials and, of course, parts of the impacts that I described in the answer to Jeremy's question. Maëlys, you want to add anything to that?
No. As you mentioned, I think what is important is that we see that our improvement program continue to deliver another largest component. We see similar run rate than last year, around EUR 200 million. We did see some benefit from lower raw material, but as we mentioned several time before, we also see currency effect that adversely impacted those costs in some country like Brazil, Russia, or Turkey. This benefit offset by our general cost inflation and also some negative impact. The one we mentioned about the supply chain. We also can see in other operating income, we have a slightly higher insurance cost and some additional pension costs that are also compensating partly the positive effect of the raw materials.
Great. Thank you very much for that.
Thank you. Next question, please.
Thank you. We have another question from the line of Paul Walsh from Morgan Stanley. Your line is now open.
Yeah. Thanks very much. My two questions are around the sort of 2016 EBIT bridge and then on the balance sheet. Maybe I'll start with the balance sheet, Ton and Maëlys. You've come in with net debt at the end of the year, EUR 1.2 billion. Net debt to EBITDA is 0.6 times. There seems to be substantial wiggle room to do stuff with the balance sheet. Can you just tell us where you are with that? You obviously grew the dividend by 7% last year, but do you have any aspirations to sort of close the gap from a yield perspective with the sector averages and others out there in the coating space? Or is the focus primarily on finding the acquisitions to bolster utilization and drive organic growth? That's my first question. My second question around the EBIT bridge for 2016.
Look, I guess my view is that 2015 was also a difficult year. You saw your volumes down a %. Price mix was pretty stable. You had some divestments, yet operating income was still up by sort of 30%, 40%. When thinking about 2016 and your outlook statement, can you put some context around that? I mean, a difficult year. I mean, last year was a difficult year, but you still grew earnings. How are you sort of Thinking about the restructuring related stuff, the raw material related stuff as it relates to 2016 and making progress towards your targets. Thank you.
Thank you, Paul. The balance sheet question. We had a specific indication in Capital Markets Day as well, that as a first achievement, we were aiming to pay our dividend out of our operational cash flows. Where that may seem trivial for others, that hadn't happened at Akzo Nobel for an extended period of time. At the first year that we're actually doing it, we immediately wanted to give a signal by increasing the dividend and proposing an increase to the shareholder meeting for the total dividend as well. The moment that we've actually gone cash flow positive, we've immediately taken this measure. Yes indeed, the balance sheet, actually just taking that over EBITDA, is fairly low. The focus of that, neglecting the fact that we also have, of course, a pension carrying deficit out there.
The focus on the usage of the balance sheet is on entrepreneurial activity, and the focus is therefore on pushing for organic growth, and innovation. That is what we're going to be driving on top in addition to our operational excellence drive that is now more institutionalized into the organization overall. As mentioned, we still have pension top-ups. If there are built-on acquisitions possible, we feel we've earned the right to participate in there. The prime focus in using our balance sheet is in the entrepreneurial activity of the company. We have increased our dividends. We look at balance sheet effectiveness as well, and we will continue to look at that where possible. At this point in time, we wanted to show the signal that the moment we get cash flow positive, we do increase the dividends.
We hope that that is also interpreted as a sign of confidence in our future cash flows. Looking at the EBIT bridge, going forward. Yes, indeed, 2015 was not easy. We were working against negative operational leverage that was certainly not in the assumptions when we launched targets in 2013. We have taken a significant amount of additional measures to be able to deliver the targets despite a very different set of market conditions. That should show that on the one side, we absolutely want to deliver what we commit to and communicate. It should show that we've made a stronger, more agile, and better company that can respond better to market conditions. What you also know is that we've moved towards a more operational improvement. That means less chunky, big restructuring charges, much more small ongoing activities that continuously improve the effectiveness of the organization.
That will then help us. We also still see that some of the restructuring activities that we commenced in 2014 and 2015 still will show effects in 2016 as well. They will be less large than in previous large restructuring because we've had less restructuring charges. You'll see a tail of benefits coming out of existing restructuring programs. You'll see the benefits of continuous improvements. There's a tough market out there that will not help us, but you also see a stronger company that is more agile and can deal with market circumstances better than it could have done a couple of years ago.
Okay. Just maybe to push once more on the 2016 stuff. Do you think you've got enough in the back pocket as it relates to continuous improvement, the residual benefits from restructuring and raw materials and so on? That if we have a similar environment of no volume, no price mix in 2016, would the view be that you can still make progress in absolute terms?
It is certainly our intention, and we provided financial guidance in October, that we're absolutely sticking to.
Thank you very much. Thank you.
Thank you. We have another question from the line. Peter Clark from Societe Generale. Your line is now open.
Good morning, everyone. Good morning, Ton. To follow up on that, actually, I just want to be clear because obviously reading your statements and looking at the macro, are you assuming the volume environment in 2016 is going to be similar to 2015 or worse? Then a follow-up on that. On the pricing scenario, when we look at 2016, certainly in coatings, I know the deflation pressures can affect everything, but you particularly emphasize the chemicals there. On coatings, your biggest competitor has gone out and said they're expecting price to be flattish with a bit of lower cost going through. Just wondering your view on price for coatings for 2016. Thank you.
Thank you, Peter. It is very difficult to make firm volume statements going forward. What we do see is that Brazil really turned, I guess, for the negative. You look at Latin America overall, we certainly don't expect positive development in the markets in general. Similar for Russia and the environments there. We do see, as we say, a flattening of the growth in China that we do expect to continue. Overall, I guess from a market outlook, what we're trying to flag is that we will not get help from the market. If there is organic growth to be had, it is going to be our own doing with our own commercial strength, with our own innovations, and with our own product introductions.
We're not trying to flag anything else on the fact that the market is unlikely going to help us significantly, and that it has to come from ourselves. If I look at pricing, many of you have asked over several quarters what is happening with oil price and how does it impact. We've always gone through great lengths to explain you the various impacts. There is certainly pressure in chemicals. Both related to the fact that some pricing is formula-based and that the industry has a lot of intermediates and partially even not so specialty products in the portfolio. On the paints and coatings side, the industry has generally been able to hold on to prices. Of course, the customer pressure is extraordinarily strong at this point in time.
Whether this is going to be entirely possible during the course of 2016, where we expect raw materials to be benign, that is something that cannot firmly be said. Overall, the industry, and that includes us, has generally been able to hang on to the prices also in periods of difficult market environments.
Thank you.
Next question, please.
Thank you. We have the next question. Your line is now open.
Hi. Good morning. Sorry, can you hear me? Because there's a lot of echo, I'm not sure you can.
We can hear you loud and clear. I apologize if there is a big echo on the line for the listeners. There is little we can do for it at this moment in time.
Okay. Two questions. The first one is really relating to China. If you could comment a little bit more on AkzoNobel China through the different divisions on Q4, and what you're seeing in 2016, and what you're doing to counter any potential headwinds in demand in pricing in China in particular. The second question, again, I think on the bridge 2016, or I guess the other bucket would be the main contributor in 2016. I calculated that if you keep the same ratio, benefits to cost in terms of a PIP, you should get about EUR 100 million plus savings on a rolling basis in 2016. Is that also something that you feel able to achieve in 2016? Thanks.
Thank you for the two questions. I do hear some of the echo as well. I hope that it's not too disturbing for you. We look at China. We have flagged since, I think it's in the third quarter 2014, that we saw the growth levels coming down. That has gradually continued over time. China has never flipped in a negative direction, it's just reduced its growth levels. What we now see is that it's a country that is geographically behaving differently in terms of the east versus the west, and it's segment-wise behaving differently when you look at property and construction versus industrial segments versus the consumer side of the business.
Already in 2014, when we were flagging it, we actually went as far as reviewing our CapEx in the country, we did adapt the CapEx plans, we even went as far as reducing CapEx that were already approved. We're talking 2014, not 2015. We also made sure that all the delayering that we were doing in the different organizations, that we also did some of that delayering in China. We actually reduced a number of our FTEs. On that basis, we went into 2015 indeed showed a further reduction of the growth levels, specifically in the industrial segments that were active in primarily through Performance Coatings and Specialty Chemicals. Whereas on the property side, for Deco, the reduction of growth basically continued as well in a controlled manner.
We've again reviewed CapEx plans for the country, we've adapted it to the benign expectations that we have in terms of growth for 2016. We're carefully watching which segments are growing, we're investing in those. We're making sure that we're carefully watching those segments where we see some weakness occurring. We are basically treating China, as I call, as a more normal country, when it comes to assessing market segments and geographical parts of the country that behave. We feel that we're well positioned in China in the segments that we're in. We have very strong market positions. We have a very healthy team that knows how the Chinese markets work. They're adapted to the realities of 2016, we believe, therefore, China will continue to be a very relevant country.
It's the second largest country in terms of revenue for the company, and it will continue to be very relevant going forward. On the ratio of 2016, I know that in the past, we've given you indications that restructuring charges of X probably benefit us with a 0.8 factor in the year after. We are continuing to provide that guidance. That's a good approximation, and with that, you can make your own calculations when it comes to the approximate benefits. The benefits from restructuring programs is obviously going to be less because we have significantly less restructuring charges, but on top of that come the benefits of our continuous improvement programs. Next question, please.
Thank you. We have the next question from the line of Jaideep Pandya from Goldman Sachs. Your line is now open.
Thanks. First question really is on Performance Coatings. A very good year last year. Can we just sort of understand where are we today, both in terms of growth, what are the key measures that you are actually doing to jumpstart growth over the next couple of years? Also with regards to the measures you've taken on the cost side. So the plant closures that happened in 2014 and 2015, how much of the benefit have already been in 2015, and how much should come in 2016, 2017? That's my first question. The second question, apologies, but around raw materials, I know it's a very difficult one to answer concretely, but if you can give us some color on what was the percentage drop in your raw material basket adjusted for FX in 2015, and what should we expect in 2016? Thank you.
Thank you for your questions. On the Performance Coatings side, I guess we've done a number of things in Performance Coatings. We've communicated indeed that we've closed a number of factories, almost 17, of which some of the closures are still ongoing and are moving into 2016, and therefore, you will still see some of the benefits, which are in that overall basket that your colleague previously made an assessment of in the earlier question. The delayering of management has been a very important measure. We have increased the span of controls for almost all of the managers in the system. As a result, the managers and the teams, and the management teams overall are much closer to their customers. As a result, after having gone through this rather drastic delayering exercise, the organization is more flexible and more agile to actually respond to customer needs.
That's very much a focus as Conrad Keijzer, as the head of Performance Coatings, presented during the Capital Markets Day in October last year. Overall, you've seen significant benefits from the restructuring that took place in 2014 and 2015. Some of these full-year benefits of the delayering will come through in 2016. They also have geared up on the continuous improvement side after going through their large restructuring efforts, and they've ramped up their commercial excellence activities to drive growth. You've also seen that for the year, their growth has been negative, but for the last quarter it was flat. You've seen both for Deco and for Performance Coatings that the volume developments have gone less negative and in Deco's case, even positive in the last quarter. That should show some of that drive that we've seen from within the company also in Performance Coatings.
On raw materials, yes, it's an answer that we've provided in the past. It's a two-edged sword, where on the one side, customers have immediately responded with reduction of drilling activities and capital expenditures. They've even delayed some of the maintenance activities in a rather drastic manner. On the other side, we've seen moderate and over time, with quite a delay coming through raw material benefits that have, on the one side, benefited us in several of the regions. In some of the regions, such as Latin America, have created a significant transactional effect on the raw material purchases when it comes to buying these raw materials, including oil-related raw materials in dollar-denominated currencies, whereas the local currencies have significantly reduced. Of course, then it's the art in how can you pass on this raw material price increase in local currencies to your customers.
We've had similar issues in Turkey, in Russia, in Indonesia, and in other places where the transactional effect on the input side of the cost has impacted us. It is always difficult to answer it easily. We're not ducking the question, but these three components have resulted in a moderate benefit that we've received in 2015. We expect raw mats to continue to be benign in 2016 and should see, therefore, moderate benefits as well.
Just a question, a follow-up on Performance Coatings. The way things are progressing, this business should be in the 14%-15% margin range over the next couple of years for you. Everything else equal, of course.
We have provided financial guidance during the Capital Markets Day for the company overall, which this presentation, and in that document, you can also see the guidance for the individual business areas that the individual business managers projected. Indeed, all of the business areas have looked forward to a guidance that shows some upside potential to the performance that they have.
Thank you.
Stacy?
Next question, please.
We have a few questions on the line from analysts. First from the line now.
Was that me?
It probably is, because you're there right now.
Okay, good. Thomas Gilbert, UBS. Thank you very much. Sorry for the delay. Two questions. You only give this in the annual report, but maybe you can highlight this. The other big cost stack in the business is wages and staff costs, personnel costs. Can you give an idea with very different trends on deflation but also inflation in emerging markets around the globe? What sort of pressure on wages up or down was in 2015, and what you think salary costs across the company are going to be in 2016? Assessing that kind of the cost stack. The second question is on the cash flow performance and trying to assess the very, very strong working capital performance. Can you talk around the position of unit inventories going into 2016, and whether the improvement has come actually from reduced stock of finished goods or raw materials?
Whether there was also an impact on the value of finished goods and inventories. That we can assess how lean the inventories are going into 2016. That would be helpful. Thank you.
Thank you very much. Indeed, on the working capital side, we're certainly showing a very positive performance also compared to our peers in the various industries. Allow me to pass these two questions on to Maëlys, who will provide you the details.
Yes. On the working capital, as I mentioned, we have a record low at 9.7. If you see the main variation, it's coming by efforts we did on the inventory and the receivable side. I think this is seen in most of the different businesses. It's really a combined effort, and that's also the result of the improvement we have made in our supply chain. We mentioned the continuous improvement, and this is really more due to improvements to handle our supply chain rather than really managing the stock down. This is really something we want to pursue on an ongoing basis. In term of the wage inflation, as you know, in the annual report, with the total salaries for the total employee benefit is around EUR 2.8 billion. The wage inflation in average is around 3%.
What happened is, of course, in mature country, we're seeing a lower level, but we are still in the, I would say, three countries higher level. In average, I think you can take around 3%.
Maëlys, thank you very much. Maëlys, if I can I do follow up on the first one? This is a question that only a financial analyst can ask this way. Was there, in the fourth quarter, as AkzoNobel saw that the financial targets for the P&L were in good territory, any incentive for the company to prioritize the cash generation over the operational leverage in the P&L? Is it obviously not a way to drive the financials? There has been any incentive for divisional managers to maximize the cash generation in the fourth quarter and let a bit of earnings go in the fourth quarter.
No. To be very clear, as you know, we have incentives that are set at the beginning of the year, so we do not adjust any of our incentives in the middle of the year. Our incentives, and they are published, they are linked to our ROI and cash flow. There's nothing that has really put an additional incentive. We always had mentioned that we wanted to be cash positive, and we planned to be cash positive since the beginning of the year. I think the efforts, this has been constantly over the year. To be very clear, no, there's not been any drive to compensate, to maximize the cash, and to impact the P&L.
We run the company with a long-term strategy, and the entire management team is committed to the long-term performance of the company. Therefore, you've seen the working capital also is done with inventory and receivables, and that should be giving you some trust that that's a positive development.
Awesome. Thank you very much.
Next question, please.
Thank you. We have another question from the line of Andrew Benson. Your line is now open.
Yeah. Hopefully, you can hear me.
Yes, we can.
Great. Thanks. I just want to explore your growth potential. You talked about what would differentiate your growth from the market is your own endeavors and your own entrepreneurship and how you're trying to incentivize and create that. I was wondering if you could perhaps dimensionalize the potential impact of that this year and during your target 2016 to 2018 period. The second thing, obviously, you talked about having earned the right to make a bolt-on acquisitions. If we assume you're going to stay within your targets of less than two times cover, and with the knowledge that you've substantially de-risked your pension deficit, so you're in a stronger, lower risk environment in order to assume more debt. You've got about EUR 3 billion of potential firepower out there. Clearly in a difficult market, synergies is a good way of achieving growth.
Can you, obviously without giving anything away, sort of shed some light on your entrepreneurship-driven growth and the potential you could envisage for acquisition-driven growth?
Jeff, thank you for that question. Basically, while we were building a different foundation with different operating models, with a stronger ability to respond to market conditions, with a higher level of agility, while we were coming into 2015, we of course looked at the next phase, which was adding organic growth to that much stronger company that we built overall. During 2015, we've been looking at all of the systems all the way from our competencies that are related to the commercial side of the business, the capabilities, the setup, its organizational structure, the target setting, the potential incentives.
We've gone through every business area and have truly made the building of what we call the next leg of adding organic growth to our operational excellence, something that by the time we would hit 2015, that the processes and the incentives will be in place to not have to start working on the organic growth chapter at the end of 2015. We ramp that up during 2015. You see some developments in the fourth quarter, that despite difficult market conditions, you see volume developments for certainly the paints and coatings businesses to be slightly more positive, and we will continue to do so. On that basis, we provided our financial guidance in October last year, during the Capital Markets Day. We said that we aim to grow in line or faster than our relevant market segments.
We, at that point in time, said that it is approximately 2%-3% CAGR over the three-year period. Where 2016, we already flagged at that point in time, would be much more difficult than that, and growth levels would not reach that particular level. That is kind of the feedback in terms of dimensionalizing and building on what we've done to make sure that this becomes an integral component and not just something that we're waiting for the market to bring us. We do see that it's going to be quite tough, and that will be up to us to actually get it out of the market. Indeed, we said that the focus would be on adding organic growth and innovation to our operational excellence foundation that we built, but that we indeed are now a cash flow positive after paying dividends.
With that earn the right to participate. The first thoughts are bolt-on acquisitions, investing in that organic growth as well. Overall, that is what we're going to be focusing on going forward. Indeed, both the organic growth and the innovation will need either some investment or spending, but also, I guess, if we would participate and be successful in bolt-on acquisitions as well. I cannot comment on your balance sheet power. That's in the eye of the beholder a little. Overall, the strategy that we've communicated in October is what we're going to pursue, certainly during 2016.
Okay. Perhaps just one follow. If you don't want to comment on the scope or scale of acquisitions, can you give any indication of, over the next 12 months, just to give a, obviously, we can't hold you to it, but the level of potential acquisition activity if things went well. Just some dimension to that.
Well, our focus of the strategy is on the organic growth and innovation part. The only indication that we've given is that if there is an opportunity or opportunities out there, we believe we have the right to participate. The activity levels, I guess, you're as good of a judge as we are. Overall, we don't comment on that. The focus again remains on the actual business itself. Any form of possibilities going forward on the side of bolt-on acquisitions will be entirely opportunity driven.
Okay. All right. Thanks very much.
Thank you. We have another question from the line of Barnaby Kenk of Berenberg. Your line is now open.
Yes, good morning. I've got a quick question on marine and protective, where Q4 sales were actually very strong, plus 9%. From memory, you were thinking that the marine cycle would probably carry over until the end of 2016 before it would go into a downturn. Can you talk about your latest expectations on that side, and whether your product activity can actually continue to be as strong as in Q4 for the first half of 2016? Thank you.
Yeah. Indeed, the marine business has shown a very strong performance during the course of 2015, that's been based on the back of an increase in the backlog that the shipyards in Asia had in the newbuild business a year and a half, two years ago. This is where there is some predictability in this business. We saw this wave coming through. What we now see, though, is that these backlogs are actually reducing again. Whereas indeed we've seen positive growth and quite a strong performance of the marine business during 2015, we expect that during the course of 2016, the reduced backlogs are starting to flow towards our business as well. On top of that, the protective business is highly affected by the oil and gas exposure that they have. That we do expect to continue in 2016 also.
Whereas it's doing well, we really like also the performance of our teams in being present in this market, we're not trying to predict any doomsdays, we do see that backlogs are reducing and therefore activity level, that reduced activity level, will come in our direction during 2016.
Okay, thank you.
Thank you. We have another question from the line of Markus Mayer. Your line is now open.
Yeah, thank you for taking my two questions. My first question is on the deflationary pressure you elaborated on the outlook statement. Where do you see this in particular from the product side? Is this mainly a special chemical kind of thing, or also for the paints and coatings business? The second question on the volume development in Q4, maybe you can elaborate how the volumes developed within the months going into December, was there a particular seasonal weakness there in December, or was this just a normal December as it was years before? Thank you.
Thank you for your questions. Deflationary pressures, what we see, as I indicated on the Specialty Chemicals side, we have some formula-based pricing. When raw materials would decline, with a certain smaller delay, but with a certain impact, it does go through towards the customer base, especially when it concerns intermediates as opposed to the specialty parts in our portfolio. On paints and coatings, it depends. I'm going to explain that it depends. It depends on whether you're dealing with large OEM customers that generally re-tender the business on a regular basis, or whether you deal with more fragmented customer bases, which can be either paint shops or it can be individual body shops and vehicle refinishes. In those two different sectors of the business, where both businesses have both types of customers, you do see a difference in pressure.
We are in continuous discussions with customers. The first impact you have already seen in the Specialty Chemicals business, the impact has not been noticeable yet in 2015 on the Paints and Coatings side in a significant way. We, as a Paints and Coatings industry, as I indicated before, have generally been able, and that includes AkzoNobel, to maintain our price levels also in difficult environments. Deflationary pressures also refer to the raw material side of the business. With that statement, we're basically referring both on the input side and on the output side of our businesses. As indicated, we do expect raw materials to remain benign, therefore see some moderate benefits in 2016 as well.
May I ask you an add-on question on this topic? So far, this kind of risk of a wait-and-see behavior of customers has nothing to do, or this risk so far has not appeared that customers wait for lower prices in specific products.
I'm not sure if I understood your question entirely, as I said, it's not necessarily related to specific products, more to the distribution channels that we are participating in. That is more the differentiation when it comes to the magnitude of price pressures. Move to your second question. We normally don't give individual developments on volume development per month. What we can say is that some of the weakening of markets was visible in Q4 2014 as well, so there is some base effects in 2015's fourth quarter. Individual monthly developments, we normally don't provide. On a quarterly basis, the developments are depicted in the appendix, where you see per business what the Q4 developments have been.
Okay. Thank you.
Thank you. We have another question from the line of Evgenia Molotova. Your line is now open.
Sorry, is it me? Because I almost can't hear anything.
It's Evgenia Molotova from Berenberg.
We can hear you.
Yes. Great. Perfect. Thank you so much. I just had one question regarding Deco and being Russian, the development in my country is not particularly positive. I was wondering if in some regional markets, because it seems that the economic situation is not going to improve over one year, it can be quite a longer-term situation. Would you be considering some new strategy or potentially reviewing your presence in some geographic regions in Deco? It is not serious enough yet to take the drastic measures? Thank you.
Thank you for the question, Evgenia. Indeed, Russia, as we indicate in our outlook, we don't expect 2016 to become significantly better. What we have as a strength in our Russian business is that both on our paints and coatings side, we primarily produce the product locally. Therefore, we can supply the local market with our quality that is basically benchmarked, of course, with our global quality. We can supply the Russian market through local manufacturing with our global brands. With that, I guess we have a fundamental strength in that market. We are committed to the country, and therefore will remain active through these local manufacturing locations. We just do expect a reduced activity that we've seen in 2015 already, and we do not expect a recovery, as I hear you also don't expect going forward.
We have looked, of course, at the various growth levels in the various regions. We have reviewed our capital expenditures and the plans that we had for those regions. For those regions that are growing significantly lower than we may have had in longer term strategic plans, we've adapted those capital expenditures, and in some of these regions, we've even mentioned for China, adapted our employee base. We will basically continue to adapt. The good part of AkzoNobel is we are much better able in the present configuration and strength that we have to adapt to market conditions than we were three or four years ago.
Okay. Thanks a lot.
Thank you. We have another question from the line of Tony Jones with Redburn. Your line is now open.
Oh, thanks for taking a follow-up. I just wanted to come back on raw materials. I noticed at the back of the slide deck, you've got an oil price assumption of EUR 60 in for the coming year, which seems somewhat optimistic and unchanged on the assumption at October in the Capital Markets Day. I suppose two things. Firstly, why do you think that's still the right number? Secondly, is that the guidance for only modest raw material gains in the coming year, is that tied to that EUR 60 assumption? Thank you.
Yeah. We are a company that when we provide a guidance, and apologies for the echo that I have here as well, that provide a guidance towards the market, we don't generally change that guidance every three or four months. We try to stick to it. We've set our target that we communicated in 2013, we basically wanted to provide a consistent picture with the guidance that we provided during the Capital Markets Day. The oil price, if we make a statistics on what the various national and international oil companies propose, it is a very large bracket. It is anybody's assumption, and everybody will be right or everybody will be wrong on it. We've made an assumption for our guidance here.
If it is going to be less, again, I don't think it will significantly impact the raw material gains simply because most of the materials that we buy have their own supply and demand dynamics compared to oil. There may be an impact, but it will be nowhere near the impact that oil shows itself. We've already seen that in 2015, that will not change in 2016. We've not changed it because we don't want to change the small print in a slide. It is a continuous assessment that we make when we look at the market and the specific raw materials that we buy, because we buy very, very little oil, if not almost nothing. Overall, again, it's the assumption that is kept constant.
We're watching it carefully. If it is less, it will provide only a very delayed and moderate further impact going forward. It does not change significantly the assumptions that we've made in terms of the guidance.
Thank you.
One last question.
Yes, we have one last question from the line of JD Pandya. Your line is now open.
Thanks. I appreciate your comments around 2016, if I just look at H2 2015 and run rate that for 2016, you're already sort of north of EUR 1.4 billion EBIT. Volume comments, at least from a year-over-year point of view, have been improving towards H2. It also seems that you are now spending more time in jumpstarting volume growth in AkzoNobel after a lot of efforts on the PIP side. I appreciate all the comments around caution around Brazil, Russia, China, but could you give us some more color in terms of what are the specific measures on the volume side which we can expect from Akzo, specifically in terms of new product introductions? Am I right in thinking if I annualize H2 as sort of a basis for 2016? Thank you.
You described the situation in what we've tried to depict during this call. On the one side, you have a much stronger company, more agile, better positioned, lower cost base, a stronger focus on continued operational excellence and adding organic growth. On the other side, you have a market that will not help us, which basically makes us come to the realization that we'll have to do it ourselves. The latter part is not new. We have had to do it ourselves in the last two and a half, three years as well. That should not concern you. It should actually show to you that the underlying strength that we've built in actually should give confidence. We've tried to depict that confidence as well with a dividend increase.
Overall, you've summarized exactly the stronger company that goes into a challenging 2016 and has a set of guidance out there that they are committed to, and that strength we're going to continue to build going forward. On the year-over-year volume development, there are two aspects. On one side, it is our efforts that are going to continue going forward. On the other side, a base effect of a volume year in 2015 that in some businesses has shown some declines. That combination gives us some confidence that we're certainly going to be able to drive some organic growth going forward.
All right. Thank you.
With that, I would like to conclude the call. Thank you very much for joining us today. I wish you a very nice day. Bye-bye.
Thank you. That concludes today's call. Thank you all for participating. You may now disconnect.