Ladies and gentlemen, a very warm welcome to the Capital Markets Day of AkzoNobel 2015. My name is von Buchner, CEO of AkzoNobel. And I thank you very much for joining us to hear more about the company's progress and the next steps going forward, either in this room or during the webcast, if you're participating through that medium. Let me start by saying how much I love this particular video because it clearly shows how essential the role is that many of our products play when it comes to affecting people's lives around the world. You've seen an impact of the UN Cities Let's Color projects, both in Brazil and in India in this video.
In the area of salt where we actually continue to innovate, you see Norwegian roads that are being made more safe and actually we're reducing the maintenance costs of these roads with the new innovations that we have in that product. And of course, you've seen the famous international coatings that go on ships and on yachts, as you saw over here, that makes them faster and more efficient in the way they operate. It is great to be here today with the full team, the full Executive Committee team that we'll present to you today. These are the team members that are responsible for many of the products. These are a few examples of many more of those products that we sell as Aksu Nobel.
And of course, they're responsible for the passionate people that have made Aksu Nobel a better performing place. Now let's get to the business. As mentioned, the entire Executive Committee is here today, And they are available for questions during the breaks and for the most part also at the end of the presentations. The only one that does not have a presentation today is Sven Dimonin, our General Counsel. Sven, maybe you can quickly stand up, also available, of course, for questions during the break.
At Oxford Nobel, we've been on a journey, a change journey over the last three and a half years. Today, we want to provide you an update on where we stand on that journey. And not only an update, but also clear and tangible proof points that you can almost touch to show that we are actually moving towards a leading performance. We also intend to give you a clear view of what the next steps are as part of this strategy. I'll first provide a strategic update, and it will be followed by the business areas Werner for Specialty Chemicals, Conrad for Performance Coatings and Root for decorative paints that will update on the actions that are going on in those areas.
Martin will provide a summary when it comes to people, cultural change and leadership. We talk about cultural change, but also Martin will show you clear proof points what is actually taking place in the company. That will be followed by Melies, who will of course update you on the financial cornerstones of the company, the improvements that we've made, issues related to cash flow and also if there's questions on the pension related issues. In addition to the executive committee members, we also have an additional member that is joining us today, David Allen, responsible the Integrated Supply Chain and Research and Development. He will focus on the supply chain part.
In the move towards continuous improvements, he will show you examples on what we're doing to build that culture and where we're already seeing an impact. In addition to the team members and David Allen, we also have a special guest today, Byron Grothe, who is one of our Supervisory Board members. Byron, maybe you can quickly stand up. He's also the Chair of our Audit Committee, is joining us today. And a very warm welcome, Byron, to be here today at the Capital Market Day.
I'll begin with the executive summary and explain you more about the strategic developments that we have so far. And then we'll go to the economic outlook after which we'll explain the next phase of the strategy. But before I do so, first a reminder of what we are. Occ Nobel is a global paints, coatings and specialty chemicals company with a balanced portfolio of businesses. In 2014, we had a revenue of €14,300,000,000 And at the end of the Q3, we had around 46,000 employees and about 200 production sites worldwide.
We have strong global brands in both the consumer and the industrial businesses. And this balanced portfolio is not only from a business perspective, but also from a geographical perspective, which provides us kind of a natural hedge against business and geographical volatility. We're present in large and attractive markets. The global paints and coatings market is around €100,000,000,000 as you see on the chart on the left. About 40 2% of that market consists of decorative or sometimes called architectural paints, whereas the remaining 58% is what we call performance coatings.
The chemicals industry at €3,500,000,000,000 is a lot larger. This is a definition even excluding the pharmaceutical industry that sometimes is combined in the big numbers. Some even argue that the Paints and Coatings industry is part of this €3,500,000,000,000 in the chemical industry overall. And the actual success factor in the chemical industry is, course, that you choose the areas where you want to be in. You make sure that you have leading positions and you can in that way create customer and shareholder value.
Both of these markets have over the cycle generally grown in line and some segments even in excess of GDP. In early 2013, we announced a strategy that was clearly geared around operational excellence, organic growth and sustainability in everything we do. This strategy sets some clear strategic focus areas. It also defined which processes we wanted to standardize and how much we wanted them supported by standard tools. And it also defined a set of company wide actions that we wanted to pursue.
We introduced the concept of end user segments, not from the perspective of an organizational aspect, but very much to ensure that we follow customer centric indicators, leading indicators in the individual segments, just to be able to connect more closely to those customers and to ensure that our innovation spend and direction and our sales efforts were aligned with what is happening in those specific centers. And this particular strategy has clearly had an impact. It is already showing very distinct results in the last 3.5 years that we've been working very hard as a team together with our 45,000 people to make it happen. Here are a few things that have taken place in the last years. We've clearly transformed the operating models of each of the individual business areas.
And you'll hear more about it in the presentations that my colleagues will give for each of the business areas specifically. We haven't only changed the business areas in a significant way. We've also changed the operating model when it comes to the functions, and I'll explain a little bit more about that later in the presentation. We have done a significant reduction when it comes to our factory footprint, to the number of ERP systems, to the number of stock keeping units and all of that driven by the desire to reduce the complexity of the organization and to be able to serve our customers faster, more agile and with a clearer definition of products and processes. We've optimized our portfolio, focusing clearly on those leading market positions where we are truly leading, had to make a few tough decisions on some of the portfolio aspects of the company, but we did go through this divestment, the last one being the paper industry segment that we have divested most recently during the course of 2015.
We've also proactively managed our pension fund liabilities. These pension liabilities are not gone. They are still there. They still constitute a significant headwind to the company in the medium term, but they've also been significantly derisked. And therefore they are far more predictable than they were in the past.
Our continued focus on sustainability has also been very, very strong And it's made us for the first time 4 times in a row the number 1 in the Dow Jones Sustainability Index in the materials sector that we're operating in. We're clearly a different company than we were 3.5 years ago. And the presentations this afternoon will demonstrate to you what it is that has all changed. Each of the team will tell you more about these significant achievements in their presentations. Now these are actions, but of course, all of these actions have also been visible in the financial results of the company.
The return on sales has continuously improved, and you've also seen here the half year numbers. And of course, we've issued the 3rd quarter numbers, which have shown an additional improvement last week. Return on investment has also continuously improved. And here as well you see the first half results. Q3, of course, was part of last week's presentation.
During last week, we've also shown that we've increased our interim dividend, which is a positive proof point of our confidence when it comes to our future cash flow. Now these targets were coherent when we actually announced them. And they've, of course, diverged over time because of various market developments that have taken place either in our segments or in our geographies that were very different from the assumptions that we made at that point in time. As a result, you see that the return on investment part has kind of diverged from the return on sales side in its development going forward. And therefore, you see a clear challenge in making the return on investment target for 2015.
Our net debt has been around 1 times EBITDA for the last 2 years. But please note that it's incredibly important and relevant for us to not only look at net debt over EBITDA. We also need to look at the net debt over our free cash flow, which is quite strongly impacted by the top ups that we pay related to our pension funds. We know that we're not done. It is not the end of 2015 yet, and we're certainly not claiming victory of getting there.
But I'm delighted to say that we're clearly on track to deliver the 2015 targets, a topic I know many of you are extremely keeping a keen eye on. Now our priorities for the remaining part of 2015 are clearly to continue the transformations that we're doing and to make sure that we keep our eyes on delivering the 2015 targets. But we do recognize there is still some way to go to get to the vision of leading market positions delivering leading performance. And that is not just the financial results. That is defined internally for us also in the areas of customer satisfaction, innovation, supply chain excellence, employee engagement and, of course, sustainability.
We are leading in many of our segments and activities that we have. We're just not leading everywhere yet, and we'll continue to push those areas that don't to continue to deliver that leading performance. Our strategy was always intended to be longer than 2015. During the 1st years, we've undergone significant transformations in all of the business areas and the functions. The next phase of this strategy is going to be much more driven by continuous improvement and organic growth.
And that brings me to a very important slide of this presentation because this slide summarizes many of the parts that you actually hear during the course of today. We will maintain our existing vision of leading market positions delivering leading performance. We maintain our strategic focus areas and the focus and drive for standardization of processes and tools that we operate with. We're therefore very clearly aware though that we are in a different position than we were 3.5 years ago. As you've seen during the results of the Q3, we are now clearly in financially value creating territory.
This is achievement for us because we haven't been in that area for a long time before. And therefore, in the future, we're defining our operating ranges as financial guidance for the 2016 2018 period. Return on sales between 9% 11% and return on investment between 13% 16.5%. These are ranges that, of course, with our continuous improvement drive, we aim to be at the top of these brackets by the time we are at the end of this defined period. We've built a foundation at auctionobel that has been very different from what we had a number of years ago.
And we want to build on this foundation to not only continue to improve further, but also grow in line and faster than our relevant market segments. The world is experiencing a period of quite distinct volatility at the moment though. We see incredible macroeconomic fluctuations that we also have to deal with. But combining our assessments that we have today, we believe that our relevant market segments probably in this particular period will grow around 2% to 3% in terms of the compound aggregate growth rate over this 3 year period. Performance ranges will also be elaborated on for each of the individual business areas as an underlying explanation of how we got to this financial guidance at the company level, and you'll hear so in each of the individual business areas.
Also to note is a small thing but important. After discussions with you and your colleagues, we normally had our rather swingy incidentals in our operating income and defined the return on sales, including those incidentals. Based upon your request, we have a cleaner feel of what the operating return on sales is. We've actually taken those incidentals out. And these return on sales and return on investment brackets are therefore defined as EBIT over sales and EBIT over the average invested capital.
Let me step in a bit more detail into the strategic developments so far. While adapting many things at AkzoNobel, what was important, of course, was to adapt our culture, to change our culture to something that is more performance driven than what we perceived it to be before. We introduced a new set of values. We confirmed our principles that made them core principles of the organization. And Martin Beusmaier will elaborate much more on it in his presentation, what we've done and how we can actually see that this particular cultural change is taking place.
We talked about transformation in all of the business areas. Here you see 3 business areas and each of them will spend a lot of time in telling you what the transformations have been. But let me give you a very, very quick overview. Decorative Paints clearly changed our operating model in Europe, really leveraging on the scale that we have as the leader in the European Decorative Paints markets. Performance Coatings clearly optimized their factory footprint and in addition took several layers out of the organization to become more agile and have a far higher level of accountability in the organization overall.
And Specialty Chemicals is focused on delayering the organization to manage the business in line with the 5 key chemical platforms that we lead in and that we decided to focus on. And these actions have also been visible in the financial results. Besides the company targets that we defined in 2013 of 9% return on sales and 14% return on investment into the early part. We also communicated the way these targets were built up. We have always clearly stated that these were not targets by themselves and that smaller deviations in one or the other area were certainly okay as long as the company overall delivered on its 9% 14% targets defined.
But what you can see on this slide is that all business areas are improving and that all business areas are contributing to the improvements of the company overall. These improvements in the financial metrics also show that the operating model changes are working despite the fact that we have such difficult market conditions out there. But our changes have not been restricted to the business areas. We've also been changing the functions quite significantly. In 2012, the functions at Aktter and Bell were extremely decentralized.
Every single management team and every single entity in the world had its own full fledged management team with its own HR, finance, IT, procurement and other activities. And we fundamentally changed it in a number of steps. First, by aligning the reporting line and the functions and asking the functions to standardize processes, standardize tools and optimize their cost structures far more across boundaries as opposed to within individual units. On top of that, these functions have been building what we call this 3 pronged shared services, center of expertise and business partner segment, all to prepare themselves for a move in what we call a global business services structure. And you see by the progress of the functions that many are close to being ready for the transfer into this structure during the early course of 2016.
It's important to note that we've consciously staged these different transformation which have all been very significant for the organization. It's been an important success factor in the operating model modifications that we've made. It's been a lot for the AkzoNobel employees, but they've clearly put their shoulders underneath it and made this change work as you've also seen in the results. Also these changes have actually already had an impact on the numbers of AkzoNobel. Here you see that our operating expenses over our gross profits have reduced with 2% only comparing 2012 with 2015 not even including the improvements that we've made in 2015 year to date.
Ongoing initiatives, especially in the area of the move to Global Business Services and Commercial Excellence and Efficiency will continue going forward. And therefore, they'll be a clear contributor to the further improvements that we at auction Novell intend to make. Sustainability has always been part of the heart of what auction Novell does. And here you see the 3 clear targets that we've communicated to the outside world and how we've progressed. Many companies claim that 90% of their new products introduced are actually more sustainable than the products they replaced or that they previously made.
And of course, that is the case at auctionable as well. But for ourselves, we use a much tougher measure, a measure that compares the percentage of our products that provide a clear sustainable benefit to our customers, which is higher than the equivalent products of our competition. Our measure is driven by competitive customer benefits, not by the composition of our products nor by the comparison of what we used to sell before. That was 19% in 2014, adding up to €2,700,000,000 of our revenue and also gives you an indication of our innovation strength of the organization. We're also committed to reducing our CO2 footprint, the CO2 footprint across the entire value chain.
We ourselves only control about 15% of that footprint. And therefore, we need to truly mobilize our suppliers and our customers if we want to make a significant difference across the chain. Within our own fences, we've reduced our carbon footprint with 25% since 2010. But of course, we're now focusing on the partnerships with customers and suppliers that allow us to make an even bigger impact across the entire chain. Our safety performance has significantly improved over the last 3 years, and that really deserves a thank you for the employees.
Oxnard Vale has become a clearly safer place to work. And finally, I'm pleased to say that we've been for the 4th time in a row, the number one in the Dow Jones Sustainability Index in our own materials sector, which is one of the largest and some of the better performer sectors in the overall index. Let me give you a few examples of what we've been doing. We've recently signed a multi year agreement to purchase sustainably generated steam from a Dutch energy provider. And this will save us 100,000 tonnes of CO2 for the organization overall.
This will be noticeable for AkzoNobel as a whole. It will probably be noticeable for the country that this is actually taking place in. We also developed a carbon credits program for shipping, where besides the energy savings that ship owners will get from the special coatings that they can apply, they actually have an independent body that they can go to, will support them in that process. And they will then on top of the energy savings provide them with carbon credits that they can actually sell in the industry. We also have been rolling out the Deluxe Weather Shield Power Flex, which is a great exterior paint that's providing superior rain protection resulting in much cleaner and longer lasting walls.
But it also saves energy by being highly reflective and therefore it can reduce the temperature in those areas that require air conditioning with almost 5%. And that can actually save up to 10% of the energy use in those areas. And last but not least, the 4 dimensional profit and loss that we have put an example into our annual report in 2014 is the way that we're pushing the boundaries of establishing what the overall impact is that we have with our business on the environment, on the employees and society at large. Looking at society at large, we've also introduced our Human Cities initiative. This is an initiative that truly encompasses all of the activities that we do with and for society at Aksumabell.
We know our cities are growing. We know that 70% of our population of the world is expected to live in cities in 2,050. And we ourselves know that 60% of our revenue ends up in cities. And therefore, we have a role to play, and we've bundled our corporate social responsibility under the banner of the Human Cities initiative. Let me step to the economic outlook.
In general, the external environment has become more volatile. If you would have put us on the spot and say how do you feel today compared to 4 months ago, it's actually becoming more difficult to predict and it's actually becoming tougher in many of our industrial segments. Global economic growth has slowed. What used to be high growth markets are much lower growth or even in some ways contracting markets, and the mature markets have not picked up the slack and started to grow to compensate for the other areas. We look at it from the perspective of our own 4 key customer end user segments.
We follow leading indicators not just on these 4 high top levels, but very much also of the 10 underlying individual levels that you see here, the sub segments that we indicate. The Buildings and Infrastructure segment is a segment that has a very large set of geographical differences. It grew fast in China, Brazil, India and even Russia over the last many years, but that has truly turned. The mature markets have been in quite a tough situation, and we've seen some initial recoveries, partly in Western Europe, but Europe overall has clearly not been improving in the way we've tracked all of the leading indicators that we see in this segment. On the transportation side, you have seen growth in the automotive OEM segment, driven by the United States and China.
But this is a segment where Akzo Nobel does not have a very significant presence. We see though also that the Chinese growth is clearly slowing down in the recent months. The automotive repair segment has been far more steady. It's been far more driven by the repair cycle of different cars. And therefore, it's been quite a steady business for us at auction of El as well.
The Marine business has been a business that's shown quite some growth in the recent months quarters. But what we also see in parallel is that the backlogs of the shipyards is actually decreasing. Therefore, we don't believe that this growth is going to continue to take place going forward. On the Consumer Goods side, this is a far more steady segment as well. It doesn't really get receptive to the cycles on the way down, but it certainly also does not show the growth levels of some of the other segments when there is an upswing.
That is very different in the Industrial segment. We see good developments there when it comes to our chemicals that serve the pulp business in Latin America and other areas in the world. But we also here clearly feel the pain of the oil and gas segment that is also in this industrial block over here. The oil price being low has clearly resulted in capital expenditure cuts and a clearer look at maintenance and much less drilling activities, which is actually affecting us in Performance Coatings and Specialty Chemicals. We generally check 2 indicators at a very high level.
One is the Purchasing Manager Index, which is actually an indicator for our industrial businesses in Specialty Chemicals and in Performance Coatings. And on the other side, we also track what we call the Consumer Confidence Index, which has more of an indicator aspect when it's at the development of these and these are the 2nd quarter numbers because the 3rd quarter numbers are not available yet. But you see the European countries actually rising, whereas Brazil, Russia, Poland and China, you see the red arrows indicating a contraction of consumer confidence going forward. A lot of people speak about GDP when they attract many markets. And what we do with GDP is we actually try to dissect it to make sure that we separate the industrial GDP, which is far more applicable to us from the services GDP where we don't have a direct relation as an indicator for us.
And then the euro area, you see clearly that the industrial GDP growth levels are clearly below the overall growth levels. Only the U. S. Has been an exception in the last couple of years and is expected to continue to be an exception when it comes to the industrial GDP being above the overall GDP growth levels. Very different though is what you see in China and in Brazil.
In China, already in the past years, the industrial GDP growth levels have been clearly below the overall and certainly below the service growth levels, and it continues to be an expectation for the future. In Brazil, you even see a clear contraction there. And this is more what we track. We track more the industrial GDP as opposed to the general GDP, because these differences are actually very, very relevant for the businesses that we operate in. So the markets have not gone easier on us.
They're still quite different and difficult and quite volatile. And we've incorporated that in the next strategy that we've actually laid out in terms of the next phase of the strategy that we've had. Our strategy, including our vision of leading market positions, delivering leading performance, is achieving results and will continue to be the basis of what we do going forward. We had significant historical issues in 2012, of which we've addressed many during the course of the last 3.5 years. The vision and the strategy were always intended to be longer than just a 3 year period.
And we know we're not done with our vision. And therefore, we simply move into the next phase, which will be far more driven by continuous improvement drives and an addition of organic growth on top of that improvement trend. We've always driven the strategy in what we call a bit of a 3 step model. 1st, get your house in order. 1st, make sure that you build your operational excellence DNA.
And when you're firmly on the way by doing so, then add a component of organic growth to it on top of operational excellence, not instead. And if you've got these two blocks, clearly in terms of progress measures in place, you've earned your right to possibly even acquire. And although life is not this sequential, it is certainly very helpful for the businesses to drive their way forward. Our businesses are in different stages of development in the 3 step model, and some may be much further advanced than others and are also managed in a very differentiated way. And that brings me to the real next steps, what it is that our energy, our management attention and also our investment drive will be focused there.
We're committed to delivering our vision, but we do need to hardwire the changes that we've done. We've got significant changes done both in the business areas and in the functions, and we have to make sure that we don't fall back to previous behaviors, and we certainly don't fall back to previous performances. So we will continue to build operational performance, which we will do with what we call our ExxonMobil leading performance system. And David Allen, when he elaborates on the supply chain, will tell you a lot more about that. It is far more driven by a drive towards continuous improvements, not anymore these very, very large restructuring charges that are associated with transformations, but much more a continuous improvement that goes on during the entire period during many areas into the organization.
On top of this drive for continuous improvement and further operational excellence, which has been shown in the performance ranges that we showed, We want to add a component of organic growth and clear innovation. And each of the 3 business area managers will very clearly indicate what they're doing in these particular areas. We will build further on these two aspects. And when we see fit, we now with our increased cash generation, with our higher levels of performance, with our derisked situation when it comes to our pension funds, we now have earned the right to at least consider certain value generating bolt on acquisitions, although we'll be very disciplined in doing so. And this whole picture concludes us back to that very important slide, where we say we will be operating this guidance wise in these particular ranges with a clear aim to grow in line and faster than our relevant markets.
When we look forward in these markets, we do see that we think these markets on a CAGR basis will actually be at a 2% to 3% growth level over this particular time frame. But we clearly see on the basis of the market indicators today that 2016 may actually give quite a significant challenge. And therefore, we don't expect this particular growth rate to be a straight line. We do see concerns for 'sixteen. But over the period combined, we do believe that our relevant market segments will be growing with 2% to 3%.
So all in all, what I'm really trying to tell you is Aks Nobel is a very strong case for investment. A great portfolio of businesses, leadership positions in many markets, fantastic global brands in both our consumer and our industrial markets, long term growth potential, cyclical markets, but some really, really having a bit of a tough patch at this point in time. But if you look at the long term developments of these markets, they are truly attractive from their growth perspective. We've got a balanced exposure across regions, creating a bit of a natural hedge for us. And we've got a clear track record in improving our returns and our cash flows.
We have a history of successfully commercializing innovations and the business area managers will show you clear examples of it. And we're a clear leading leader in sustainability with a true commitment to our corporate social responsibility as well. Therefore, a strong case for investment, something that is a company that's clearly shown progress. And we hope this afternoon, we can very much show you in each of the individual aspects of the business. And with that, I would like to introduce Werner Forman.
Since I've been with the company, I have visited and spoken and met a tremendous amount of customers and suppliers. The person I have not met yet is the person that doesn't know Werner Fuemann. He is so known in this industry that he's used his incredible network and the experience that he's collected over these many years to make the Specialty Chemicals business perform significantly better. And he'll elaborate on this in his next presentation.
Bernard? Tom, thank you very much for the kind remarks. Chemicals are essential ingredients in our daily life. Chemicals are critical for food supply. Now think about fertilizers, think about crop protection.
Chemicals are indispensable here for car manufacturing. There are 1,000 of euros of chemicals in each and every car sold. Chemicals play a very broad role when it comes to building and construction, particularly here when it comes to sustainable construction and building. There is little, there's little, there's very little you can do without chemicals. If you look around in this room, tell me something what you could make without using chemicals.
The chemicals are everywhere. They are the frontline of the value chain of the entire manufacturing sector. And sometimes we say chemicals is the industry of the industry. The purpose of my presentation is about is talking about value. How I would like to show you how we could create values for our customers, how we create value here for our shareholders and other stakeholders.
Productivity and growth are the key drivers in this respect. And in fact, they go hand in hand. So productivity improvements lead also to lower cost and lower cost help us here to build and to increase our market share. So my story is about delivering leading performance in line with our company vision and our strategy. Just chemicals at a glance, so who we are and very rough numbers, about 10,000 people that delivered a turnover delivered a turnover of about €5,000,000,000 in 2014.
The return on sales of about 10% the return on investment of around 15%, now which compares pretty well also with our peers. The largest segment is the industrial segment and covering sub segments such as agro, cleaning, pulp and paper, plastics, mining and drilling and also electronics. Chemicals is a global business. One third is generated here in Asia, in Latin America and Emerging Europe. Twothree is generated here in what we used to call the Western world, so in mature Europe and North America.
Please remember, 2 thirds here in the Western world, now that is important when I come to expected growth rates later in the presentation. Now we made progress and currently we are on track to deliver on the expected 2015 outcome. Now the dotted lines show you what we said the expected outcome would be in 2015. On the return on sales, now we achieved a 13.7% for slightly exceeding the expected outcome in the first half. And I can tell you and you have seen the publications last week now that in the Q3, now we delivered similar ratios.
Year to date, we had similar ratios as you can derive here from this slide. And how did we achieve it? Now we focused our portfolio and we also made some disposals. Tom mentioned that the divestment of paper chemicals, which we did earlier this year. Now we did significant restructuring, particularly in 2013.
And I can tell you one thing. Here in the past, you saw more of these restructuring charges. And now if you compare our business with a car, you see much more continuous improvement under the hood. So it is not that we don't have restructuring, we simply do more continuous improvement and I will come back on this and so will David. Now that is an important value driver for our business, which helped us well is the investments now which we can now harvest from.
Now we invested here in particularly here in Plei Ching here in Brazil. We invested in all 5 of the value chains and now we are basically reaping the benefits from it. Now just some proof points. Start with the middle one ERP, so Enterprise Resource Systems. That is where we came from 8 and it was a few years ago and now we consolidated everyone in one SAP system.
I can tell you now this led to improvement of our productivity in information management of a double digit amount of 1,000,000. And corresponding here was a double digit amount of percentage wise. We reduced also the number of manufacturing plants. In fact, we added a few, for instance, here in China and also in Brazil. And we closed quite a few.
And so remainder was basically as a consequence now also of some divestments. If you look at the number of employees coming down by about 1500 in a 3 years period, half of whom were based on voluntary leave. And so we did people we did not replace. Now we covered here with the continuous improvement programs we had. Now the remaining half, about half of whom we severed and the other half was a consequence of divestment such as paper such as paper chemicals.
But we did not only deliver here on financials and financial ratios, we also delivered on our plan if possible agenda. Now a good example is the renewable energy usage. Now the 31% we achieved in 2012 is already high. We further improved it to 37%. And you all know that the discussions are going on, particularly on Europe.
Now what's the share should be on Renewable Energy as the target of the European Union is 20% for 2020. Other regions have mostly lower targets. And there are not many companies who have such a high share in renewable energies and nor are so many countries in this respect. What is also important to mention now that is the operations which are integrated with our customers, basically pipeline supply. So we are right in the heart of our customers' plans and we increased the number here from 'seventeen to 'nineteen.
But not to forget, last but not least is the safety record. We also improved the safety record here over the years. Now what you look here is people safety per million work hours, but we are even equally proud of is NASDAQ improved our records when it comes to process safety, the chemical industry, a lot of hazardous materials are being handled and also product safety. Now think about which think about TOSCA here in equivalent in North America. But before I dive into the strategy, into the specific strategy of our business, now let me just elaborate a little bit here on the macroeconomic environment.
And The first observation is, and Tom mentioned this number already, now that the chemical industry is huge. Then there's a €3,500,000,000,000 industry and 1 third of which so more than €1,000,000,000,000 euros is accounted here for in China. Now China came near basically from a very low number, they're hardly visible on the radar screen 20 years ago and evolved to the largest chemical player here in the world. And it is
the growth in the industry and is
now bigger, believe it or not, it's now bigger than the U. S. And Europe together. But there's another region which is driving growth, now that is United States. Now based on the shale gas revolution, and if you look here at this chart, the index is set on the 100 in 2012.
Now you and partly also here to China. But it is a €500,000,000,000 sector in Europe. And Europe basically generated a trade surplus with all regions. Now here with its neighbors here in Europe, but including China at rate surplus with China at rate surplus here with U. S.
And other regions. So what we have, the €500,000,000,000 business in Europe is very competitive. Otherwise, that is a significant trade surplus. That said, it's not just for 1 year. We saw that we see it for many, many years.
Now it shows really massive competitiveness here of our main base, that being Europe. Now on the right hand side, now you see the development here of the oil price. And what I can say, now the unexpected becomes the rule. Now who predicted the shale gas revolution? Who predicted plummeting oil prices?
Now who predicted currency patterns and the volatility we see? Who predicted the political crisis such as the Arab Spring and a huge number of refugees now fleeing their countries? Now we get many explanations, but mostly in hindsight. And so we will have to deal and we have to cope with this situation. And as you have seen here from the previous numbers, now we are able to do that.
Now some guidance in this respect. Now we do benefit here from a strong dollar in our Chemicals business. When it comes to the oil price effect, it differs platform by platform. Now in some areas, some are neutral, others are pluses and others are minuses. Now in summary, the chemical industry is a very large industrial sector and it keeps growing.
Now there are challenges, but also lots of opportunities. And we proved that we are able now to cope here with an ever changing business environment based on the resilient portfolio we have. And now allow me to talk about again, more specifically about AkzoNobel, about our position and our strategies. This shows now the area of my responsibility. Naton mentioned now that our business is organized in 5 chemical platforms and 2 or 2 of which are value chains or product chains, product trees.
And that is a salt and chlorine chain, that is one of which. Now we start with energy and salt, now transform it into caustic and chlorine. And then we go downstream into many other products. Another chain is the ethylene oxide network, Now where the main backbone is in Europe and also in China. Now we start here, we convert ethylene into ethylene oxide, go to ethylene amines and go to downstream products such as nacellulosic and chelates.
And the other three platforms basically offer a certain functionality. Now, bleaching obviously does bleach. It is for pulp bleaching. And so we have very significant positions here in all over the world and particularly here in the fastest growing area, which is Brazil. Here in the polymer chemistry, basically catalyst in order to transform monomers into polymers.
So these are initiators used for the manufacturing of plastics now such as PVC and polyethylene and many other products. And the last one, Nasrufectins and which offers functionality here for now for oilfield, for instance, a better extraction now for Aqua, better yields now lubricants in cars in order to make the engine run more smoothly. And actually, the both the ethylene oxide network and surfactants, now they have some similar technologies. They are linked through the ethylene oxide chain, which both have super surface active properties. We also organize from an organizational design point of view.
Now we organize our business here in these 5 platforms. So that is how the management lines go. And we do that since 1st January 2014. And we have located here our 5 platforms headquartered here in 3 regions. Now we move 1 of the units, the second one, polymer chemistry here from Europe to the U.
S. Now surface chemistry is already located there. We moved another unit, ethylene off-site network here to Shanghai. Now you saw here this incredible dynamics here in the Chinese market. And there are 2 units left here in Europe, 1 in Sweden, the power bleaching, the former Nobel Heritage, another one That was a regional scope here in Amerskrupp in Holland.
So you will ask now how do you grow your business? So we apply differentiated strategies. And last year at CMD, now I was elaborating here in more detail about the specific and differentiated strategies that we apply, Nahi per chemical platforms or even per product category. Now we have about half of our business, that we have the ambition of outgrowing the market based on the exceptional strength we have. So we are ready to invest in technology as a second class of businesses, improved performance but driving operational excellence.
Now we do have leading position. See it in one of the next slides also here in this area. But then we also have strong competitors in such areas. Now where it is more important here to balance operational excellence against organic growth opportunities. Now you may ask, if you look at the right hand numbers, now where does the growth come from.
And so that doesn't look like exciting growth business. Now if you look, if you take a somewhat longer perspective, now here I'll take a little bit more than a decade. Now Chemicals was able to deliver a growth 2014. And where did it come from? Obviously, it didn't come from volume growth.
It did come here from our from self help, from our productivity improvement measures. There was some tailwind here from currencies and but some quite some headwind here from a political macro perspective. So it is if you look on the Cerro de Autocco, come back to this comparison. Now if you compare it with a car, this is the same make, but there are many, many more horsepower now under the hood. And we created the basis here for further growth.
And here's the right hand charts that indicate what we are focusing at more specifically. So we strengthened our strategic focus, cash business is down, gross business is up. We have a highly focused portfolio. Now we built a significant asset base outside Europe, particularly in China and in Brazil. And we improved our customer portfolio based on effective key account management.
Now here's our strategy. Here's our strategy on the slide. So our business is centering around our vision that delivering leading performance, growing sustainable platforms, driving profitable growth. So everything what I said and what I will say is basically centered around this vision. And the performance range indications for the years out is on a return on sales basis, 11.5% or 13%.
Now that is a notch down from if you look at the lower floor compared to expected outcome of 2015, but the return on investment, so there where we generate here the premium also cost of capital is a notch up. And this is to create some more room here for growth in case not that we have the opportunity to go for it, including then investments in technology and other forms of investing here in the future. Now that is now in which areas are we active? So the chemicals industry is a very large one and but we don't compete here in all areas. Now on the left hand side on the left hand bar, now you see the chemical platforms again.
And the green bars indicate the size of the relevant market. And on the right hand side, you see the growth indications. So you see growth. It's not overwhelming, smaller than 1%, for instance, here in salt and chlorine chain. But I can tell you that here, that is a business unit, which is located mainly confined here to Europe.
Now the market is shrinking, but our business did not. So we basically gained even market share as the expense of others who don't have the competitive strength like us. And we see a similar situation here also in bleaching, where we grow much faster than our competition, particularly here in South America. And this is also reflected so we basically
have a
€5,000,000,000 business out of a point of €20,000,000,000 which underlines our leading positions, which you can see at the right hand chart. So that we have leading positions here in from a global leadership perspective or from a regional segment leadership perspective in almost 90% of our business. And based on that, we believe that we will be able to grow at the rate of the market or faster. And so that is what we have shown in the past as well. So we do have the right strategy in place to improve performance and drive growth.
And we are delivering on our actions. Our strategic focus areas and processes are entirely aligned here with the company's overall focus. And I have to touch a little bit here on when it comes to functional excellence and operational excellence. And in Chemicals alone, now we have a team of 50 people in the improvement engine who do nothing else, nothing continuous improvement. Help our factories and help from commercial excellence not to improve the processes.
And we learned one thing, here's the biggest room in the world, here's the room for improvement. And there's still a long way to go. And so we expect also going forward the significant benefits from that. But now I don't want to talk more about the productivity improvements. I would like to add some color, some flavor now when it comes here to growth expectations, now where growth may come from.
And so you have seen us that our strategy is not based here on massive CapEx, not based here on major M and A. It is based on cellophyl and it will be based here on growth initiatives. Now the growth drivers are process and product innovation, it is commercial excellence and it is leveraging geographical opportunities. And I will take you through all three categories here in a minute. But before I talk and I will start here with innovation, before I do say, just a few facts.
Now what are the resources we have available for that? Now we have 500 highly skilled scientists in this area that is 5% of our population. It's €100,000,000 spent for us. And we own more than 5,000 patents. So and many, many patent families in certain areas like value based chemicals, process technology.
And now we run programs across the PAs. And of course, we have numerous corporations here with our customer to help them here to build their business. And on the right hand side, now you see some indications how we can basically help to support to address societal changes going forward. But now it's time now to dwell a little bit on a few examples. And now this is an adjuvant.
Now in adjuvant, now this is a surfactant. And what it does, it sticks on the leaf and basically helps not have active ingredients with the pharma like fungicide now penetrate here into the plants and into the leaves. So it is it leads to a situation that farmers need fewer treatments. Now less active ingredients are used. So that is an advantage for the farmer.
It is an advantage for our customers. So we don't supply directly to the farmer. We supply to the Montentos, North SeaWorld, and as they can base on our technology, they can gain a market share. So it is a win win win for the farmers, for our customers, for us and last not least, also here for the environment. Another one, very ordinary, salt.
Now in the salt in the past, the word salt is coming from celery from salt. And in the year, if you go 2000 years back, people were paid in salt. Now people don't accept it anymore, but it is a very valuable and exciting product for us. So we are a very significant producer. And you know from you know that salt tends to clog, you know that from dispensers.
And here in the chemical processing, now we cannot have that. So we need free flowing properties. And this is why in the salt, anti caking agents are added. And we invented a new one, which reduces here the electrical resistance here, for instance, here in chlorine plants, now leading here to energy savings of 5%. Now you may think why does this guy bother me here with 5% energy savings.
Here's the 5% energy savings based on the quantities of salt we use or we sell to our customers. That is the equivalent of the energy consumption of a medium sized town of 70,000 people, yes? And it's a saving alone. And so that is a benefit that is clearly a cost benefit now also for our customers. And there is room here to share this benefit.
So again, room for a win win situation here in the entire value chain. And last but not least, obviously, NASDAQ is also good for the environment. Another example is now I talked so the last two examples were how do we add value here for our customers. Now that is more where does innovation come when it comes to process improvement. Now we run a large monoclonal acetic acid site here in the Shanghai area here in Taixing.
And now through process improvement, now we were able here to double the capacity. Now it's very attractive investment economics. Now these products are widely used, as they are used in pharmaceuticals and cosmetics and also in food. Now this allows us to be more competitive in the highly competitive markets, extremely highly competitive markets here like China. And another example is the initiator, continued to initiate the doses.
That is an example from our polymer chemistry platform. And you see a window frame, many window frames are made of PVC. And to make PVCs, now you use batch processes. And normally, you put everything in one pot and then you wait until the product comes out. And so we invented now basically a catalyst, which is continuously dosed.
It's a different molecule than we had before. Now which leads to situation now that the process can be run safer. Now the output can be higher by as much as 30%, so which has a significant CapEx savings for our customers. So it is again a good example here for value generation here in the chain and helps us here to build market share. I need to speed up a little bit now, so we'll be very short.
Now on this one, it is a biodegradable chelates. Now you have phosphate, you may know, is a problem here for the environment. Now you see it green also green in the water. So we have developed here a biodegradable chelates. So it's biodegradable in use.
And it is made from a biodegradable materials, which does a similar job. And so and avoiding here the disadvantage which is phosphate has in these days. And another example from the same product family is polycal, that is a micro nutrient that is a fertilizer. And it makes iron available here for plants. Now if plants don't have iron, then the plant cannot grow and the crop cannot grow.
And here
in
under very heavy and challenging soil conditions where normal first lines just don't work anymore, this one does. Now that is another example here to help us to build a business. Turner referred here to commercial excellence in his presentation, and growth doesn't only come here from new product development and processing development. It also comes here from improved processes. So a few 100 of our customers account for about half of our total sales.
So a few 100 add up here to €2,500,000,000 in sales. And the customer loyalty is high. I can assure you that these customers now get a lot of attention here from our business people, but thousands of others get less attention. And so we have a churn of 5% to 15%. So we lose too many customers even so 5% to 15 isn't based on industry standard not so high.
Now, but we want to gain share of wallet. Now we want to get better access here to key account. And this is a way now with a better based on a better penetration now here to grow segments such as agro, food and electronics and based on existing and new customers, regardless where they are. Now our products ship up pretty well, most of the products at least do. And so we don't always need to build new plant if we want to serve the new geographies.
Now North America is a brilliant sense of of the shale gas and polymer production offers plenty of opportunities for us for polymer chemics, chemistry platform and also Surfactants. In Latin America, we are very well represented, particularly here with the bleaching products. And in India, India and emerging markets, now we sell into the market, but there's a big agricultural sector and also big pharma sector already, which we do supply. Now there's more opportunities for us and also in other regions. So that is an additional lever how we will be able here to develop our business going forward.
Now summary and conclusions. Now you have seen this slide already. So we achieved significant improvements in our meetings, the expected outcome when it comes to financial ratios. Now we are clearly in the value creating zone when it comes here to return on investment and going forward. And so we will grow.
So we expect to grow with the market or outgrow the market here in certain areas and deliver the ratios as I indicated here on this slide. So all in all, in summary, a global player with a resilient portfolio in leading market positions. So we are a significant player in attractive markets now with good financial ratios and healthy cash conversion and while generating here a clear premium, a significant premium now on the cost of capital. We delivered considerable performance improvement and we delivered and will deliver performance also under tough conditions. So we built the improvement machine and so which will help to deliver the productivity improvements on a year on year basis.
We also keep to pursuing differentiated strategy. So we carefully balance out the operational excellence against outgrowing some market opportunities. And we will create an additional value through profitable growth at or above the market rates. So productivity and growth are our biggest levers to create value for our customers, for our shareholders. So we are living our vision.
Now we are delivering leading performance. So happy to take any questions.
Yes, please. I think I've got the microphone over here. Sorry, it's
Paul Wall from Morgan Stanley.
I want to have 2 questions, please. Maybe one for Ton first. Just under the definition of the new targets, Ton, can you just clarify what you meant around EBIT being pre or post special items, I. E. Is are the new targets comparable with the old ones in terms of return on sales and return on invested capital?
Just some clarity on that, because I didn't quite understand. And secondly, just on Specialty Chemicals. You sort of touched on it in the presentation, but are there any red flags that you're highlighting by giving guidance that essentially implies some potentially downward trajectory in your returns and margins? Or is it just to give you the flexibility of making acquisitions and investing more where you see the growth? Thank you.
Let me start first, Werner. Yes, the target the financial guidance that we're giving, the range that we're giving is very comparable with the targets I gave at company level for in 2013. What we've done is the following. I mean, in the all of the reporting that you've seen in the quarters, we've given you the bottom line return on sales. And we've given you very often also the return on sales when you take out the incidentals and the restructuring charges.
That transparency has been very clear in each of the quarterly reporting. So what you've seen there is that when we sold, for example, buildings and adhesives in decorative paints, you saw this enormous swing in the return on sales level. And it's the swings that have distracted people on the underlying improvement. So we've done over here is we said let's take these swings out. We will report them.
We'll be transparent about it. We'll be clear about it. But to prevent the lines that you see in terms of its operational performance, we've gone to this level. So these financial guidances that we give are extremely comparable. They're only taking out the jerkiness that the incidentals had given in the past.
No, it is including the restructuring charges if there would be any in the future. It is just excluding these incidentals that are associated with certain levels of book gains or book losses.
Now we have a very resilient portfolio and it was not my intention here to raise red flags. But I must say that we are a little bit cautious on 2016. I talked about now the unpredictable is becoming the rule. And what you were indicating, is it here to create some room, some flexibility for investment? Yes, this is what it is meant for.
It is and we have seen that the return on investment actually is a full percentage point higher than the expected outcome we announced a couple of years ago for 2015. So we have full confidence in our portfolio. You're welcome. Now I think yes?
Yes, thanks. Christian Freit, Kepler Cheuvreux.
Couple of questions.
First of all, you talked about the resilient business. And your Specialty Chemicals business was remarkably resilient in 2018, if I remember correctly. While the world was falling apart, you still had operating margins of close to 10%. That got a bit more volatile in the last few years. So what was the difference between 2,008 and 2014, 2015?
2nd question is talking about order book visibility, what is your current order book visibility in general for your business? Is it a couple of weeks? Is it 6 weeks, 2 months, something like that? What is
your current? Order book visibility. Order visibility, yes. Yes.
Thank you.
Okay. Now let me ask respond to your first question, 2,008 2014, 'fifteen, now they were different worlds. In 2,008, now that was the peak year, which was just before the crisis hit. And you saw at one of the slides that at neither in the U. S.
Nor in Europe, there's a load in Europe, production rates are back here to this level. So actually, they are lower. And now we use this time basically to fix also our to improve our geo spread. So we made significant investments since then in China and in Brazil in order to get to the areas where we do see growth. So now we are participating in growth.
Now, but the growth in 2008 was a different one, I think 2014 and 2015. Now when it comes to the order portfolio, now that is not an there's no easy answer to that. Now yes, in the chemical industry, and most of you know that, now there we have many long term contracts in place, long term alliances and so on. But the visibility of the order now is less than a month. And so even if we have a single supply, let's say pipeline supply, now if the product is not used anymore or is not used, is not required in these quantities, nothing will be derated.
And so we have also to derate our factories. So the order portfolio is less than a month.
Thank you. Tim Jones, Deutsche Bank. Three quick questions, if I may. Firstly, you have 2 very clear targets, return on investment, return on sales. Have you shifted the emphasis between the 2 or are they both equally important?
The second question is on CapEx. Can you talk about what your planned CapEx spending chemicals will be over the next 3 years compared to what you have spent in chemicals over the last 3 years? And then thirdly and finally, have you put through all the operational management changes that you think need to be done to get to where you want to be by 2018? Thank you.
Let me start. Let me just start with the last one. As far as the management changes is concerned, now we had very, very significant management changes here into leadership of the UMDs and below. So we rearrange the entire supply chain actually. So streamlined the shorter lines of commands.
And what we call executive people, about half of the population changed jobs that was in the last 18 months. So and yes, there's always something going on, but I don't expect changes like this or major changes here in the near future. As far as CapEx is concerned, now you will hear from Melies later on that the now what the relation is about half of it is chemical support CapEx spend. And it is inherently more capital intensive, but we basically give some money back also again. And so we don't have major we don't have now such a bow wave in front of us as we had a couple of years ago.
Now when we did have to manage this geo shift, you will see now that our CapEx came down from a company perspective, and something like €50,000,000 to a €600,000,000 range. And Melies will elaborate later on launches as well. And your first question to return on sales, return on investment, no, it's not a shift. But based on also what we have to what we expect now on CapEx requirements going forward, it is just a better balance for us? And but I must admit, so if I had to prioritize, I would prioritize return on investment.
And because as long as it isn't the value generating, so But it was it is not a deliberate shift, it's just here to getting it better in sync.
Thank you very much. Thomas Gilbert, UBS. I've got 2 questions I'll ask you, CapEx question in a different way. What do you think Cost of staying low on the cost, obviously, your business are very low on global cost curves because they're very profitable. But is it getting more difficult and more costly to stay low versus competition?
Coming back to the CapEx question, Adi?
Across the regions. And I don't have a number, but the vast majority is local for local. And it may be in some magnitude. It is maybe 20% plus is basically cross regional. Yes.
So one more question and then yes.
Thanks a lot. One question actually about crop protection with plant becoming resistance to glyphosate. There is now more and more talk about dicamba and 24 d, etcetera. And the issue was actually the lack of the proper adjuvant because they're quite toxic. And as far as I understand, some of the U.
S. Companies like Dow are now launching less toxic 2 d and it can be potentially very high volume product. So I was wondering whether you will be participating in this market with your adjuvants?
Yes, we are in this value chain. And you mentioned a few companies but we do not agree with the conclusion strong without a scientific basis, which was in our opinion also have been slightly accepted from the World Health Organization. Now it is a scare which is going on, but it is not scientifically based, at least not as far as we can see. And but nevertheless, now that will be that could potentially be an issue. But we are in this value chain, but we also another value chain.
Actually, we would be the ones who help you also to look into alternative products in cases that you should be required. Okay. So thank you very much. And now we have to serve a break and 10, 15 minutes, I believe. So We will call you back after the break.
Thank you very much for your attention.
Estimates suggest that by 2,050, around 70% of the world's population will live in cities. Coping with the demands that this will create is one of the biggest challenges of our age. At AkzoNobel, around 60% of our business goes into buildings, infrastructure and transportation. So we have a big role to play in helping cities to meet the challenge they face. That's why we've introduced our Human Cities initiative, which was officially launched at the 2014 Venice Architectural Biennale.
It's designed to help the world cities become more inspiring, more livable and more enjoyable places for people to live and work. We're focusing on 6 main areas where our products and expertise can make the biggest difference: bringing color to cities, Embracing urban heritage. Connecting people and places. Encouraging education. Promoting healthier lifestyles.
Inspiring more sustainable living. We've already made great progress with Human Cities, building on work we've done in Bergamo, Italy, at Gardens by the Bay in Singapore and Malacca in Malaysia, to name just 3. As a progressive company, we are also working closely with a number of influential partner organizations and NGOs, and have already made a commitment to the Clinton Global Initiative, which established a partnership with 100 resilient cities pioneered by the Rockefeller Foundation. It's just one of many steps we're taking to help cities across the world become more human.
Over the next few decades, the world's population is projected to reach 9,000,000,000 people. This will lead to more and more of us living in energy and resource hungry cities. If we're to meet this growing demand, we have to learn to do more with less. AkzoNobel is committed to developing sustainable solutions that promote efficient and sustainable living. That's why we put a strong focus on driving resource efficiency and lowering energy use.
How does this benefit cities? Well, a great example is our fast increasing production of HPMOs, which are used in the manufacture of LEDs. LED bulbs help to significantly reduce energy consumption as well as maintenance costs. They also open up exciting new possibilities for smart urban lighting projects, making cities safer, more colorful and more enjoyable places to live and work.
Estimates suggest that by 2,050, around 70% of the world's population will live in cities. Coping with the demands that this will create is one of the biggest challenges of our age. At AkzoNobel, around 60% of our business goes into buildings and infrastructure and transportation. So we have a big role to play in helping cities to meet the challenge they face. That's why we've introduced our Human Cities initiative, which was officially launched at the 2014 Venice Architectural Biennale.
It's designed to help the world cities become more inspiring, more livable and more enjoyable places for people to live and work. We're focusing on 6 main areas where our products and expertise can make the biggest difference: bringing color to cities, Embracing urban heritage. Connecting people and places. Encouraging education. Promoting healthier lifestyles, inspiring more sustainable living.
We've already made great progress with Human Cities, building on work we've done in Bergamo, Italy, at Gardens by the Bay in Singapore, and Malacca in Malaysia, to name just 3. As a progressive company, we're also working closely with a number of influential partner organizations and NGOs, and have already made a commitment to the Clinton Global Initiative, which established a partnership with 100 resilient cities, pioneered by the Rockefeller Foundation. It's just one of many steps we're taking to help cities across the world become
more human.
To reach 9,000,000,000 people. This will lead to more and more of us living in energy and resource hungry cities. If we are to meet this growing demand, we have to learn to do more with less. AkzoNobel is committed to developing sustainable solutions that promote efficient and sustainable living. That's why we put a strong focus on driving resource efficiency and lowering energy use.
How does this benefit cities? Well, a great example is our fast increasing production of HPMOs, are used in the manufacture of LEDs. LED bulbs help to significantly reduce energy consumption as well as maintenance costs. They also open up exciting new possibilities for smart urban lighting projects, making cities safer, more colorful and more enjoyable places to live and work.
Estimates suggest that by 2,050, around 70 percent of the world's population will live in cities. Coping with the demands that this will create is one of the biggest challenges of our age. At AkzoNobel, around 60% of our business goes into buildings and infrastructure and transportation. So we have a big role to play in helping cities to meet the challenge they face. That's why we've introduced our Human Cities initiative, which was officially launched at the 2014 Venice Architectural Biennale.
It's designed to help the world cities become more inspiring, more livable and more enjoyable places for people to live and work. We're focusing on 6 main areas where our products and expertise can make the biggest difference. Bringing color to cities. Embracing urban heritage. Connecting people and places.
Encouraging education. Promoting healthier lifestyles. Inspiring more sustainable living. We've already made great progress with Human Cities, building on work we've done in Bergamo, Italy, organizations, we're also working closely with a number of influential partner organizations and NGOs, and have already made a commitment to the Clinton Global Initiative, which established a partnership with 100 Brazilian cities, pioneered by the Rockefeller Foundation. It's just one of many steps we're taking to help cities across the world become more human.
Over the next few decades, the world's population is projected to reach 9,000,000,000 people. This will lead to more and more of us living in energy and resource hungry cities. If we're to meet this growing demand, we have to learn to do more with less. AkzoNobel is committed to developing sustainable solutions that promote efficient and sustainable living. That's why we put a strong focus on driving resource efficiency and lowering energy use.
How does this benefit cities? Well, a great example is our fast increasing production of HPMOs, which are used in the manufacture and the U. S. And the U.
S. And the U. S. And the U. S.
And the U. S. And the U. S. And the U.
S. And the U. S. And the U.
S. And maintenance costs. They also open up exciting new possibilities for smart urban lighting projects, making cities safer, more colorful and more enjoyable places to live and work.
Estimates suggest that by 2,050, around 70 percent of the world's population will live in cities. Coping with the demands that this will create is one of the biggest challenges of our age. At AkzoNobel, around 60% of our business goes into buildings, infrastructure and transportation. So we have a big role to play in helping cities to meet the challenge they face. That's why we've introduced our Human Cities initiative, which 2014 Venice Architectural Biennale.
It's designed to help the world cities become more inspiring, more livable and more enjoyable places for people to live and work. We're focusing on 6 main areas where our products and expertise can make the biggest difference. Bringing color to cities. Embracing urban heritage. Connecting people and places.
Encouraging education, promoting healthier lifestyles, inspiring more sustainable living. We've already made great progress with Human Cities, building on work we've done in Bergamo, Italy, at Gardens by the Bay in Singapore and Balaka in Malaysia, to name just 3. As a progressive company, we are also working closely with a number of influential partner organizations and NGOs, and have already made a commitment to the Clinton Global Initiative, which established a partnership with 100 resilient cities pioneered by the Rockefeller Foundation. It's just one of many steps we're taking to help cities across the world become more human.
Good afternoon. My name is Konrad Kaesern. Some of you may recognize me from our Capital Markets Day in 2014 in March, also here in London. It's nice to be back. It's good to see you back.
Thank you for your continued interest in AkzoNobel. Positive change has happened in the last 18 months. You will be pleased that today, several of our businesses are in fact achieving leading financial performance. Moving forward, we now target these businesses to outperform their markets in terms of growth. We have, as you know, achieved a significant improvement in our overall profitability.
Our EBIT margins improved from 9.5% in 2012 to 13.4% year to date as you saw in our quarterly numbers that we announced last week. Our EBIT margins went up almost 400 basis points as a percentage of sales. This represents an improvement in our bottom line annual operating income of more than 200 €1,000,000 Good. During my presentation today, I will take you through the key changes that we made to our business, and I will also explain how these key changes will continue to drive value moving forward.
Okay. There's a bit of a delay.
In Performance Coatings, we enjoy strong leading market positions, and these are based on fundamental root core capabilities. As you know, we have a balanced portfolio with a balanced exposure to all of the 4 end user segments of AkzoNobel. We achieved today more than 50% of our revenue in high growth markets. As you know, our business has strong fundamental financials. Day in day out, we deliver true customer value.
This allows us to drive superior margins. We are a low asset intensive business with highly disciplined working capital management. This delivers superior returns on investments. Last year, we achieved an industry leading return on investment of 22%. The last 3 years, we achieved a significant improvement in our profitability.
Our return on sales improved from 9.5% in 2012 to over 13% in the first half of this year. Early 2013, we created a new strategy to drive leading performance including leading financial performance from our leading market positions. We created a differentiated growth strategy and defined 3 key improvement areas for profitability. Last year, we but we also invested in growth. We opened 2 new facilities, our new powder coatings plant that we opened in Dubai a year ago to strengthen our position in the Middle East and our new vehicle refinishes factory in Changzhou, China, which we opened this year.
We have been able to reduce our manufacturing costs through these site closures, and we are now at the almost completion of that activity. Like I said, we closed 17 factories. We still have 3 to go. We expect this to be finished by the Q1 of next year. We also took a look at our entire SG and A cost.
I'm pleased to say that we realized an improvement in our SG and A cost of €110,000,000 per annum, representing 2 percentage points of EBIT improvement. The transformation of our management structure was the biggest contributor to these savings. I'd like to explain that actually in a bit more detail. Here you see what we've done. In the past, our business consisted of 4 business units, 12 sub business units and a regional structure of 72 regional management teams.
In the past, we had as many as 11 layers of management from our CEO down to a co worker making paints in one of our factories. In our new organizational setup, we reduced the number of layers from a maximum of 11 to a maximum of 11 sorry, to a maximum of 6. In our new organizational setup, we also simplified the organization. We reduced the number of job descriptions from well over 1500 to a total number of job descriptions less today than 200. We created a standardized and transparent organizational setup with 7 customer centric market units, strategic market units.
This transparent and standardized organizational setup allows us to drive much more forcefully operational excellence. But our new organization has brought us also some other key benefits. We have less layers of management. We're all closer to our customers. We have less people involved in decision making.
We improved our decision making effectiveness, and we're able today to make decisions much faster. We also introduced single point accountability. We no longer have layers of management reviewing layers of management. We have single point accountability that allows us to empower our people, but it also allows us to hold our people accountable to really drive much more aggressive performance management. A big step forward, this new organization will really help us to drive sustainable profitable organic growth moving forward.
Now I would like to talk a bit more about our markets. Performance Coatings is a business that over the cycle has markets that grow in line with Industrial GDP. But we are facing some short term market headwinds. We all read the headlines in the newspapers about the oil and gas industry and the challenges that industry is facing as a result of the lower oil and gas prices. And yes, that is affecting in a negative way our Protective Coatings business where we see actually quite a significant contraction right now.
But we also have seen a slowdown in the emerging markets. As you are aware, more than 50% of our revenue is achieved in the former high growth markets. I say former because if I reflect back on the last 2 decades, typically high growth markets for us have grown 3 to 4 times as fast as our business in the mature markets. This year is a clear change. If you look at the environment this year, we see the former high growth markets growing only 1 to 2 times faster than the mature markets.
And some of them are actually declining. Finally, I'd like to make a comment about our Marine business. We have seen positive trading conditions this year. But as Tom mentioned in his introduction, the order books at all of the major shipyards in Korea, in Japan, in China are actually coming down. I'd like to present a bit more detail on that.
The graph on the left hand side shows the order book of the big yards as well as the deliveries of new ships. What you actually see is that the delivery of new ships for the 1st year in many years was actually positive this year. We've seen new build deliveries at yards up roughly 2% to 3% this year from prior year. That's the 1st year after many years of decline in this industry. So we actually were hopeful that this business was bottoming out this year.
Unfortunately, if you look at the contracting for new vessels, the Clarkson Industry data reports a decline of over 30% in contracting for new builds this year. And you see as a result the order book coming down again. This will mean that actually in the second half of next year and thereafter, you will see again most likely a slowdown in this market. Yet, we continue to be quite upbeat about this segment. This is a clear example of a market where we have a strong ability to win.
Even in a declining market, we show that we can grow our business. For the Marine business, this is very much based on differentiated technology. As some of you may be aware, we were the first to introduce many years ago in the industry a biocide free marine foulant control coating, our famous inter sleek product range. Last year, we introduced the newest generation of this product and it is actually being very well accepted by the market. It has an improved slime control and that was still one of the issues we wanted to fix.
This is truly a leading and superior product out there in the industry. And I'll come back on that later in my presentation with an example. I also like to mention our product offering in a more conventional marine antifoulin segment where we have a biocide based marine antifoulin product, but it does have a controlled release of the biocide over time. Again, this is a unique product offering in the industry based on patented resin technology that has been accepted very well by the market this year. So some challenges in the bigger macro environment, but our business actually well positioned to gain continued shares.
Yes. Oil and Gas, I mentioned it. We probably all have read the various headlines about the challenges the oil and gas industry is facing. Based on the lower oil price and also actually the lower gas price, a lot of big projects today get canceled or at least delayed. And yes, this is affecting our Protective Coatings business, where we typically supply large on and offshore projects, wells, rigs for the oil and gas industry.
We are seeing more favorable conditions though in the Downstream sector. Whereas upstream CapEx has been cut anywhere between 20% 30% by the majors. We see that downstream there is some reduction in CapEx spend, but it's in the order of magnitude somewhere between 5% 10%. This actually for us means we still have a good solid opportunity to grow our business downstream, where actually our share is weaker than upstream where we have a very strong leading position as you know. We do have the leading technology for the oil and gas segment and we're actually now building our distribution capability globally to also make the same inroads downstream in oil and gas.
Good. So if I summarize it, we have some shortwinds some short term headwinds in our markets. Yes, but we feel very well positioned to face these. You are aware we have industry leading global brands like our international brands. We have industry leading technology.
Most importantly, we have reference customers in all of these segments where we compete and we have strong relationships with these reference customers. I'm actually very pleased to be able to announce here, we continue to expand on these partnerships. This year, our vehicle refinishes business gained global approvals, global technical approvals with Daimler. And now actually we in a position to roll out our vehicle refinishes products to all of the Mercedes dealer network globally. So a good nice customer gain achieved this year.
Good. Talking a bit more about our strategic position and strategy. First, about our position. If you look at the 10 market sectors where we compete, you will see that in 9 out of 10 segments, we do have strong leading number 1 or number 2 positions. Looking at these market segments overall, over the cycle, they are attractive markets that typically grow in line with Industrial GDP.
Some of these segments would outgrow Industrial GDP like Powder, Specialty Plastics and Aerospace. Powder Technology continues to make inroads in replacing liquid technology. Our Specialty Plastics business continues to do well because of continued strong spending by consumers on all these nice electronics gadgets that we are painting. And finally, Aerospace, we continue to have a very healthy customer base with significant backlogs in orders. So that business continues to do very well.
Then we have a series of markets in Performance Coatings that grow more in line with Industrial GDP. Our Wood Finishes business, our Coil business, here we supply products to the building industry. These follow very much construction markets, metal building products, wood floors, wood window profiles, doors, kitchen cabinets, all these kind of products. Here we see growth, like I said, very much in line with Industrial GDP. Then we also have some businesses that are growing less than industrial GDP.
I already made some comments about Marine. I already made some comments about our Protective Coatings business. Let me now make some comments about our yacht and our packaging and our vehicle refinishes business. These are solid, strong, robust businesses that don't grow as fast as the GDP, but they are much more resilient. They are less cyclical than some of the others.
And you will see that in a downturn, they actually don't decline as much as the overall economy either. So we're actually quite pleased with these businesses in our assortment as well. All in all, strong leading positions in attractive markets that overall grow in line with industrial GDP. Looking at our strategy, looking at our guidance moving forward, continues to be our vision to stretch each of our businesses to their full potential, to benchmark them against best in class peers and to target leading profitability in all of our segments. We have made a lot of steps forward there.
And I'm actually pleased now to announce that our guidance in line with the company guidance moving forward is now for our business to trade with EBIT margins in a range of 12% to 14%. A big step up from our historic EBIT margins that were actually in a range between 9% 10% as many of you may remember. No change in our strategy. We will continue to execute our differentiated growth strategy. We will continue to execute our performance improvement programs.
These have actually helped us to achieve the big step up in profitability that you have seen. Now I would like to present some nice proof points of our delivery of our strategy. We are outgrowing our markets in targeted areas. You see nice examples here in Powder, nice examples in Protective, nice examples in Marine. In some of these markets, actually, when they are declining, we clearly see much less contraction than some of our competitors.
In growing markets, we are clearly outgrowing our competitors. An example in Powder. If you look at Automotive, an attractive segment in Automotive actually is the are the alloy wheels. They still take share from the conventional steel wheels. And you've actually seen growth rates recently somewhere between 6% 8% consistently per annum.
In this segment, we have a unique combination of a powder primer, a liquid base coat where we can make all kinds of nice metallic effects that you see on wheels nowadays, metallics, chrome looks. And then on top of that, a powder clear coat. This is a unique offering in the industry, and we're actually pleased to say here that we're making a significant case in this segment with this unique offering that we can only do because we're leaders in both powder as well as in liquid. Good. Then some comments about our profitability improvement initiatives.
These are the big levers that have improved our profitability and it will continue to improve our profitability moving forward. First of all, on external spend. We have installed a capability in our procurement organization, in our RD and I organization to achieve annual cost downs together with our suppliers, Taking cost out of the formulations of our paint through leveraging our negotiating power, but also through true value engineering, changing raw materials for cheaper raw materials with a similar performance. This is an important initiative. This is one of our biggest value drivers and we will continue to drive this moving forward.
Our supply chain costs. Yes, we have achieved significant improvements in our manufacturing costs. Our focus has not only been on taking out duplication out of our factories. We have also launched a significant initiative to drive operational excellence in our entire supply chain. Our target is to deliver annual productivity to offset the annual inflation in our cost lines.
David Allen, my colleague, our Supply Chain Director will later on present you with some nice examples of how we're driving productivity, how we're improving service levels in Performance Coatings. A key initiative that will continue to be a key initiative moving forward. Finally, driving commercial excellence. As you are aware, our focus has been in the last few years on creating a very lean and efficient setup for our commercial organization. Now our focus will be moving towards improving the effectiveness of our sales force.
Yes, we focused very much on the efficiency in recent years. Now we're rolling out a capability building program. This year, we started to leverage best in class selling practices for each of our go to market models in our commercial organization. These best in class selling practices, selling processes will be supported by training, capability building, but also by tools. We started at the beginning of this year to roll out a consistent single CRM solution for the entire business area.
The beginning of next year, all of our sales managers in the field, frontline salespeople will get a new redesigned sales force incentive program that will be a much directed tie to their ability to deliver organic growth and their sales compensation. All of these clearly drivers to accelerate our organic growth. And yes, that is becoming a much stronger priority as more and more of our businesses are shifting to achieving leading financial profitability. Good. I'd like to elaborate a little bit more on this growth agenda moving forward.
For an industrial business like Performance Coatings, innovation is a key value driver and is a key driver of organic growth moving forward. Looking at our RD and I organization, globally, we have roughly 2,000 people a little over 2,000 people 2,000 scientists that are based in the various strategic research centers all across the world. If you look at the strategic drivers for our RD and I program, there's 4 groups that you can distinguish, 4 areas of focus that you can distinguish. Customer efficiency. In an industrial business like ours, a lot of innovations are focused on improving the efficiency at our clients.
A lot of our innovations are targeting more robust paint systems that allow our clients, coil lines, packaging lines to run at higher first time quality. We're lowering film builds. We're taking out layers of paint. We're increasing throughput efficiency through lower bake temperatures, faster dry times. A lot of innovations focused around taking cost out for our customers, creating value through our products for our customers.
A lot of our innovations are also focused on enhancing the value of our customers' products. We bring added functionality to the products of our customers. This can be corrosion protection. This can be fire protection. This can be even things nowadays like the feel of a coating like you see on this nice cell phone here on the picture.
The feel of that coating is very important increasingly. But obviously, color continues to be one of our core capabilities as well. Color as a differentiator for the products of our clients. Increasingly, you see us making innovations around big developments like digital and the availability of big data. I'll actually share some nice examples with you later on in the presentation.
Internal efficiency, that as well finally is a key contributor for our RD and I organization, continuing to take cost out of the formulations of the paint, continue to improve paint manufacturing processes. Here you see a nice example of how we are achieving efficiency improvements for our clients in the airline industry. AkzoNobel was the 1st paint supplier to introduce a basecoatclearcoat concept for the airline industry, replacing the conventional monocode systems. These are actually thinner layers of films, thinner film builds that have a faster dry time. And on average, they take 1 or 2 days out of the paint process for large customers like Airbus, like Boeing.
This is a big value add for these clients. The industry is facing backlogs. And if you imagine a plane like this an Airbus 380 or new Dreamliner of Boeing takes about 8 days to paint such an aircraft. AkzoNobel taking 1 or 2 days out of that process is a big value add for these clients. Sustainability.
As Tom mentioned in his opening remarks, sustainability continues to be a strong driver for our business. Interslik, our biocide free marine fowlent control coating is achieving fuel savings for our customers. Typically, we can achieve 9% fuel savings for clients in the marine industry. It is very nice that this year we achieved also an independent external recognition for this. The gold standard, which is an NGO, now actually will also give carbon credits to our clients when they apply the intersleep products on their vessels.
And to give you an idea, if you look at a ferry boat like this, per annum, this company can actually claim carbon credits of roughly €25,000 through the reduction of carbon emissions should a reduction of fuel as a result of this company applying industry products. Again, an example of a strong value add to our customers. Now here you see innovation facilitated by digital, making use of big data. I think some of you may be aware of the digital colorimeters that we are now using in our body shops for our vehicle refinishes coatings that are replacing the conventional color documentation. Some of you might be aware also of Interplan, which is an iPad application software that predicts the maintenance requirements, the requirements for paint in the oil and gas industry.
What is our newest innovation, which we will roll out actually in the coming months, we kicked this off last month, is our Intertrack mobile software. What we do here is we make use of big data. As you may be aware, the routes of all vessels globally are tracked through the global positioning system AIS. We are now collecting these data and we're actually referencing that with the following requirements that are there for these ship routes. With this software, which is proprietary, we're the only paint supplier that does this.
With this software, we can actually predict the fouling needs, the fouling requirements for our customers. And we can design a very customer specific solution for their fouling requirements. Again, a big game for our customers. Finally, innovation continues to play a key role in taking cost out of our paint formulations. Value engineering, product rationalization continue to be key priorities for us.
In the last 2, 3 years, we've made a significant step in reducing our SKUs. But I am very pleased to explain this, Our clients have not been impacted by this. A lot of our customers do have customer specific products. We have customized products to optimize lines at our clients. And as long as customers pay for this complexity, we're obviously very pleased to offer this.
Where we have made a lot of reductions in our SKUs is at the level of raw materials. We have implemented for our core technologies a building block concept, where we've standardized our pigment dispersion lines, where we've standardized our resin platforms and where we even standardized a number of the additive packages. This has been a major contributor to the margin expansion that we've seen in the last 2, 3 years. Through this simplification, through this reduction in raw materials, our procurement organization is much more able now to leverage our spend and to drive down our raw material cost. This again continues to be a priority moving forward.
Good. Let me summarize now. You have seen a significant improvement in our profitability, improving our EBIT margins from 9.5% back in 2012 to first half profitability above 13%. And you saw our 3rd quarter numbers last week at 13.4%. Our expected outcomes, our guidance moving forward is that now we will actually use this foundation and we will use our current profitability as a floor and we're now expecting a range between 12% 14% EBIT margin in the coming 3 years.
The resulting return on investments for our business area, we are expecting an outcome here of more than 25% return on investment. Profitability improvement, like I said, has been very much achieved through execution of our differentiated growth strategy. Profitability improvement has been very much achieved through execution of our profitability improvement initiatives. That strategy is going to stay. You will see more and more businesses moving forward expanding into a situation where they have leading performance and where we target to outgrow our markets.
Yes, we have some short term challenges in our markets, but we feel well positioned to face these based on strong brands, strong technologies, strong relationships with our clients. But last but not least, based on the fact that we appointed 2 years ago, the best men and women in the industry to lead this business moving forward, to lead this business to leading performance in each one of their segments. With that, I'd like to close the presentation and open it now up for some questions.
Let me start at the end of the room.
James Stein, Exane BNP Paribas. A couple of questions, please. Firstly, on protective. Can you add a little bit more about your strategy of moving downstream? Clearly, if your view of the market is right, I'm sure it is, that's going to be more competitive.
How are you going to avoid pricing pressure? And then secondly, in Marine, can you remind us what the share of newbuild versus masons is? And the old question, is there any significant profitability difference between the 2? Thank you.
Okay. James, let me first comment on protective. We see downstream as well as maintenance as a big opportunity for our company. If you look at the pressures from the current low oil and gas prices, there have been some spend reductions in the order of 5% to 10%. But this market is big enough.
It is actually significantly bigger than oil and gas upstream. And for us, this represents a big growth opportunity. The most important assets that we have and these are clear competitive advantages are our leading technology specifically for fire protection. So our fire protection technology is specified by all of the major oil and gas companies. We are now building distribution globally to penetrate that market.
And for this market, we also have developed this iPad tool where we can actually predict the maintenance requirements of a refinery, for example, of a big chemical complex. And that is also an add value that is very much appreciated by clients. This is very been a very successful rollout. On Marine, you asked the question, what is the split between newbuild and maintenance or dry docking, as we call it? Overall, in the market, a little over 50%, let's say close to 60% of the market sits in new builds, with the rest of it being dry docking, maintenance and repair and some coastal activity.
We are well positioned and have a leading position in both of these segments. In terms of profitability, there is not much difference between these two. So they're both very attractive markets for us where we have a strong ability to win, as I said, even when markets are facing some challenges.
It's Jeremy Rodenius from Bernstein. Two questions please. The first one, we can see that the business has delivered margin and return improvements. But on average over the last 3 years or so volumes have not grown. So could you talk about the drivers behind the lack of volume growth historically?
And then secondly, you mentioned changing the incentives for the sales force to help encourage organic growth. Can you talk about some of the details behind those incentives, please?
Yes, sure. Okay, let me first comment on volumes. Let me be very clear, Jeremy. We prioritize profitability over volumes. You have seen a very significant pickup in our profitability.
If you look at volumes and the development globally, there are quite some differences by region, as you well know. There are quite some differences by segment. We are outgrowing our markets in targeted areas. But I will say there are also segments where 3 years ago, we were clearly not at the best in class leading performance in terms of profitability yet. There's examples where we have chosen to walk away from high volume, low price, low margin product.
Your second question about sales force incentives. Sales force incentives is one of the, in our opinion, key drivers to really drive performance in the commercial organization. As you might be aware, Jeremy, there is a company wide program on commercial excellence, initially very much focused on the efficiency of the setup of our sales organization. Now very much focused on the effectiveness, on the ability of our sales managers to deliver organic growth. What we found when we looked at compensation is that a lot of the target setting were actually group targets.
What we found when we looked at compensation is that there wasn't much difference in payout levels when you compare it to the various years. What we found was that there wasn't enough, let's say, individual accountability. So what you will see moving forward is that the sales managers will see a bigger part of their compensation becoming variable and more directly linked to their ability to actually deliver profitable organic growth.
Sorry, there's
a lot of questions.
I'm going to move
to the next question, sorry.
We can maybe come back later. Yes, sorry, gentleman in the middle.
Peter Clark, Societe Generale. I've got two questions on margin. The first one is the target, the 12% to 14% target. You're on course for over 13%. I know your restructuring is low this year.
You have a good mix. Is part of the caution or the restraint there the outlook in the Oil and Gas Protective and the Marine side because they're high margin segments? And the second question is, I think in March 2014, you were saying you were challenging yourselves to beat the competition in terms of the performance. And if I look at PPG and Valspar, of course, their Performance Coatings divisions are probably 400 basis points higher. Now except they're more North American focused.
PPG has OEM auto. Valspar has that very concentrated packaging coating, good industrial, but it's still a very big gap for me. So I would like your comments on that. Thank you.
Yes. Okay.
Let me first comment on margins and our guidance and what our guidance is based on. As you are aware, the expected outcome for this year for Performance Coatings that we set was actually an EBIT margin of 12%. We are very confident that we will deliver that outcome. Now that represents a step up improvement from historic trading which were for many, many years ranging between 9% 10% EBIT margin for the overall business area. So we have achieved a step change improvement in profitability, very much sitting in operating costs, but also indeed some margin expansion.
And actually, a lot of the margin expansion tied to the capability to drive down cost in procurement to value engineered products as well as margin management. The confidence that we have in our numbers this year, I think is reflected in this guidance moving forward is 12% Let me try to help you a little bit with insight in these numbers. Profitability is up. If you compare it to 2012, almost 400 basis points in EBIT margins. We went up from 9.5% in 2012 to 13.4% year to date as you saw in the 3rd quarter numbers.
Indeed, if you look at SG and A cost reduction that has been a big factor. The €110,000,000 representing 200 basis points in terms of EBIT margins,
it is a big factor.
ForEx, to your point, is actually having a favorable impact on the absolute EBIT and the absolute EBITDA, but not so much on the margins. We do have our costs very much sitting in the regions where we achieve revenue. So if you look overall at our profitability improvements, significant part came from fundamental changes in our operating costs, fundamental changes in the setup of our manufacturing, fundamental changes in our SG and A cost and another part did came from margin improvement. That's the headline. Thank you very much.
That was the Q and A for Performance Coatings. It's now a big pleasure to introduce Ruudj Josten, who's heading our Decorative Coatings division, a long and dear colleague of mine.
Good afternoon, ladies and gentlemen. Welcome to the Decorative Paints part of our of the Capital Markets Day of Luxembourg today. I'm extremely proud to be here today to lead this business. And practically all my life in this business, I'm still excited every day because this business adds color to people's life. Today, I would like to reflect on the actions we've taken over the last couple of years to improve our business and improve profitability.
Then I would like to focus on action going forward to even further improve our business and grow the business. I will follow the same agenda as my colleagues Werner and Konrad did before me. First, have a look at our Decorative Paints business at a glance. We are a leading supplier of decorative paints with a strong diversified geographical spread. We have a strong set of global brands like Julux, Corral, Flexa, Sickens and many more.
In 2014, we generated almost €4,000,000,000 of business with an operating income of €248,000,000 All our revenues are generated in the Buildings and Infrastructure end user segments. Most of these revenues are coming from the maintenance segment, about 75%. 25% is coming from newbuild or projects. This can differ along the maturity of our markets. For example, in China, a bigger percentage than 25% is in the newbuild or project business.
We are strongly represented in Europe, but also generate more than half of our business in markets outside of Europe, such as Latin America and Asia. Based on our strong capabilities, key capabilities, we drive value for our customers. For example, for our end user, for our customers in the retail segment, we provide them colorful cities, beautiful living spaces and innovations to make their lives easier and more inspiring. But also for our professional painters, very important group as well. We provide them with a package of services, products and tools to make their life easier, but also the life of their customers.
And to ensure sustainability. Sustainability is at the forefront of our innovation agenda. The focus is on bringing sustainable products and their benefits to our customers. It's our vision not to be just a leader in terms of size, but also in performance. On the next slide, I will show you the progress we made over the last couple of years since we've introduced our strategy.
Strategy we introduced in 2013 is focused on 2 key pillars. 1st, we wanted to grow profitably in high growth markets And second, we wanted to fix Europe. Since the rollout, we've generated profitable growth in many key countries outside Mature Europe, including China, Brazil, Indonesia, Turkey and South Africa. We also achieved profitable growth in mature Europe despite challenging economic circumstances in many of these markets. In recent years, we haven't seen a growth trend for Europe as a whole.
Although some countries performed well, many others remained challenging. We have implemented a new operating model in Europe, which has enabled us to significantly reduce cost and complexity. It allows our local companies, our local units to really focus now on sales and marketing to their end customers. Finally, we divested our non core building adhesives business in Europe and we changed our distribution model in Germany, where we sold our integrated network to our own customers, the wholesalers of trained page in Germany, enabling us to reduce cost and complexity and further penetrate the trade market in Germany. All these actions together are reflected in our profitability, which has been showing strong improvements since 2012.
As you can see on this slide, our internal sales increased from 2.2% in 2012 to 6.3% last year. And during the first half year of 'fifteen, it was 8.8%. We also made good improvements on return on investment, which increased from 3% in 2012 to 10.4% during the first half year of twenty sixteen. Please keep in mind that in 2013, we sold the Building Adhesives business, giving you the spike in operating income in that year. Moving to our markets.
Having an outlook on the Decorative Paints market, we use several leading indicators to look at our market. Tom already showed the consumer confidence one. That's, of course, important in Deco. But also housing transactions is very important as people tend to paint their house when they move house. Here you see the maintenance and renovation and repair part of the construction market.
And that's very important too, because 75% indeed, like I said before, of the decorative paints market is depending on the maintenance market. Unfortunately, markets have become a lot more volatile since the summer. And the outlook for many markets has worsened for the short term. However, it's still worth taking a look at the longer term developments in the markets. The graph on the left shows that in Europe, historical annual growth has been limited during the years 2012 to 2015.
North America, China and India showed higher growth. In Brazil, the market did not grow at all and actually shrank slightly. However, when we look at market forecast beyond 2015, we see prospects changing. In China, in particular, we see market expectations decelerating and smaller growth medium term. However, current market conditions in both Brazil and Russia are challenging, which is very clear on the 2nd graph.
And we don't expect this to change much in the short term. The North America market continues to show decent growth, similar to what we've seen over the last couple of years. In Europe, our largest Spain market, growth is expected to pick up to 2.8% year on year. However, there are big differences in Europe between the individual countries and the outlook is therefore mixed. Now let's take a look at AkzoNobel's position in the decorative payments market.
We have a strong number 1 position or strong number 2 position in all regions where we operate. We have a clear leadership position in the U. K. And Ireland, but also in Europe as a whole. In Southeast Asia and China, we have a strong number 2 position.
And in Latin America and South America, we have a number 1 position as well, based on our strong position in Argentina, Uruguay and of course, Brazil. These positions are important. As in Decorative Paints, relative market share and scale of operations is really driving growth and profitability. Just to remind you, in this slide, there is there's one picture there's one country or region that's not, let's say, shown in this picture anymore, and that's North America. In 2013, we sold our North American Decorative Paints business following a strategic review.
When we sold the business, we clearly had not a number 1 or 2 position in the market. And by selling the North American business, we got the strategic freedom to really focus on fixing Europe and grow profitable in the rest of the world. However, we are present in many other regions with strong These strong market positions in various regions across the globe provide AkzoNobel with a unique competitive position and demonstrate the resilience of our business model. AkzoNobel is the only player with significant scale of operations that's running the business through a diversified portfolio of regions, while also maintaining a strong presence outside mature markets. Many of our peers are either limited in terms of scale or have a strong focus on mature markets or a specific region.
Our scale and geographic diversification make our business resilient to local shocks and also provide us with flexibility to shift our focus to regions where we see opportunities for profitable growth. Besides having strong number 1 and 2 positions and improving these positions even further, over the last couple of years, we improved on many key business metrics in our business as well. And more and more that's based on continuous improvement program where indeed my colleague, Dave Allen, will tell you more about later in his presentation. And I already highlighted improvements in return on sales and return on investment. But we've also shown improvements in some other metrics.
First of all, our overall volume increased by 4% between 2012 2014, despite difficult market conditions and divestments. But we also reduced the number of warehouses in Europe with 38%. Our working capital went down another 4% to 8.5%. And focusing on complexity reduction, we reduced our number of SKUs with 20,000 to 50 1,000, taking out many duplicate products and looking at the tail end of our portfolios. And finally, very important, our percentage of revenue generated by innovation has increased from 17% to 30%, showing that innovation indeed is a key driver in our Addictive Paints business.
And many of these innovations have sustainability aspects in them. I will show you later a few examples of that as well. 1 of the key drivers of Fixing Europe was the introduction of a new organizational structure, a new business model in Europe. This was successfully implemented in the last quarter of 2014. The new structure is designed to take advantage of our scale in Europe, especially in back office functions, like finance, HR and I'm And these have been combined on a regional, European level or even at a global level.
The big advantage of the model is that our local operations, our local management is much more focused on the end customer, not our professional painters. So focusing on marketing and sales. As a result of all these improvements, we now have a more agile and competitive business, which is better positioned to achieve profitable growth in future years to come. Of course, continuous improvement is part of our culture, and we will continue to look for further improvements in efficiency on an ongoing basis. Given all these developments, we believe we're now better positioned and committed to our vision of becoming the leader in decorative paints worlds in both size and performance.
We will maintain our strategy and enter a next phase. After several years of significant transformation, we will move towards a period of more continuous improvement. We guide for a performance range, which reflects the expectations for the markets we operate in for the coming 3 years. We believe that our new operating model, better overall cost structure, our strong market positions and our strong set of international brands are providing us the basis to achieve the return of sales between 8% 10% and return on investment of higher than 11.5% by 2018. While we hardwire our changes in behavior, we also drive a component of organic growth.
Using the new foundation of operational excellence we built, we aim to grow in line or faster than relevant market segments. Given current market conditions, growth is around 2% to 3% for the period. However, from our perspective, there are some challenges in 2016. Several of our markets show contraction, and we will continue to build on internal development and solidify our recent transformations. Strategic focus areas and the standardization of processes and tools are entirely aligned with the rest of auction of Rome.
To reflect the next phase of our strategy, we reviewed our strategic actions. With Europe now fixed and changing global market conditions, especially as our mature Europe changing, our actions will again center around 2 pillars. We will focus on winning locally and leveraging our scale. Now what do these actions really mean for our Addictive Paints business? Let's start with a few examples of winning locally.
We already have a strong number 1 or number 2 position in all the regions where we operate. But we have a clear plan, a detailed plan per country to win locally for each of the markets where we operate. And to give you an example, where we have already a strong market position with very clear activities to get even stronger, I like to use the U. K. The U.
K. Is one of the largest paints market in Europe with €1,400,000,000 market size. It's a country indeed where we have already for a long time fantastic market position also based on our almost institutional brand, Dulux. And of course, we are keen to make that even stronger. So what are we doing now action wise to improve our position?
I'm delighted to announce the Dulux amazing space service. It's a completely new service we offer to our end consumers that's rolled out as we speak, where customers can make an online appointment with a professional designer using digital images to create a personalized decoration advice for their home, making their life, of course, much easier and inspiring them to indeed decorate their house. A huge new initiative that we're taking in the U. K. Today.
We also launched a series of products to work and to anticipate on the trend of well-being and energy saving. The range will be called Julux Living Spaces, Beautiful Living Spaces, giving consumers products that indeed will lower their energy bill by using interior systems mostly. Also in this slide, you see an example of the repositioning of our trade assortment in the U. K. With a brand new livery and a complete repositioning of our trade assortment.
And later on, you will see that we already use this image delivery also in China in the professional markets. Only a few examples proof points to show you that we will grow our position even further in the U. K. Another good example is Indonesia. Other side of the world, a market today of €400,000,000 I think a very interesting market.
We already have a strong number one position in this market, but with more than €200,000,000 in habitants, a strong growth driver on the long term. These people use still on the average a low volume per capita in decorative paints. So long term, this is a fantastic opportunity for AkzoNobel, again with our Julich brand. And indeed, the Dulux brand is also the driver for success in the short term. We are really driving sub brands under the Dulux brand like Weathershield and Easy Clean.
We're also leveraging the strength of the Julux brand by extending the portfolio of brands, for example, with Dulux PentaLite sealing emulsion range. And finally, which is very important in Indonesia, we further penetrate the big archipelago with an tailor made distribution model using distributors. Again, just a few examples on how we further strengthen our position in an already strong situation in Indonesia. Besides actions in specific countries to win locally, we also focus on 8 cross BA initiatives, which have the potential to support growth as driving further profitability improvements. The initiatives tie in with our processes and business area capabilities.
These initiatives are cross functional in nature, and we already have great examples of successful implementation across different geographies. I would like to spend some time on 3 of these initiatives to give you some more depth on what we mean by these global initiatives. The first one is brands. Our brands are one of our strongest assets. And the goal of this initiative is to build winning brands, both in trade and retail, and to gain maximum competitive advantage.
To achieve this, we will continue to identify further synergies across geographies to improve our effectiveness. And on the slide, you see a few examples of very strong local concepts like ambiance and course of the world that we are rolling out globally as we speak. You also see the example indeed again of the Trade U. K. Repositioning that's also being implemented now in many other markets in Europe, but also in China.
We will focus on developing best in class creative work as well. You see a few examples of this as well. You see the ambiance campaign, but also a strong sequence campaign that was developed for Holland that's now being rolled out over Europe. So finally, we want to maximize our investments. We need to ensure that we have the right product architecture and innovation pipeline globally.
This will include the further strengthening of our florist and trade brands. The next example is painters. Painters is an extremely important group for us because we did some research on that. And coming from the research, we see that more than 70% of decision making on paying brands is being influenced by painters. And that's globally.
So whether there are indeed different business models all over the globe, the professional, the professional painter is an extremely important group for us to further strengthen our relationship with. And in this slide, I show you an example of how we can win locally with the payments initiative in Brazil. For example, in Brazil, we introduced 6 years ago the local concept, 3rd Eco core, which was based on the global initiative, Let's Color initiative. In the meantime, we have implemented more than 1,000 projects in Brazil, small to very big from, let's say, 1 house of a consumer to whole parts of the city and even favelas. We painted, for example, the biggest favela together with the inhabitants in Rio de Janeiro this year.
This program is very important for the painters segment as well as we train painters as we do these projects, increasing their self esteem and their pride. Luckily, dozens of great personalities in Brazil and the likes of Neymar, for example, have supported us in this initiative by naming us in their on their social media. We also introduced Kluber De Core, and that's a local implementation of the global concept in loyalty programs. Till today, 45,000 painters are already active in Clouba de CORE concepts, giving us much more stronger tie with the local painters. A last example is sustainability.
Sustainability is business and business is sustainability. For us, these 2 cannot be separated. And we've been a leader in sustainability for many years. In many of our markets, the focus on the use of sustainable products is becoming more and more important. In many cases, it's also driven and encouraged by governmental actions.
China, for example, the government has increased regulation into VOCs. And we see the demand for more sustainable paints is rising rapidly amongst Chinese customers. AkzoNobel has been a front runner in the introduction of more sustainable products in the Chinese market, as you can see in the middle of this slide. You see also that in 2014 already a significant proportion of our Julux revenue is related to our non additive hero products. And we believe that this share will only increase in the coming years.
Therefore, it's of key importance that we continue to focus on innovating pipeline of new products with sustainability added value. Whilst we are known for leadership and sustainability, we believe we can should do more. When we look at the trends that we are seeing in our end user segments, it's clear that demand for more sustainable solutions is rising rapidly. With our overall well-being becoming more important, regulation driving lower VOCs and the demand for energy efficient solutions is rising. We are addressing these trends by choosing to focus on water based products.
We will begin moving the industry away from solvent based products to water based products as well as introducing more products that help manage energy use. At the same time, we also want to inspire our customers with color and offer them the opportunity to customers customize our product to their needs in stores. Now let's look at a couple of successful innovations we introduced in the last couple of years. First one is the Visualizer. And this is really a cool innovation we introduced in 2014.
It's based on real time augmented technology, only developed for auction Nobel. It gives the consumer the opportunity to walk through their homes and rooms, change in color real time and see the end result in their individual home and houses. Since 2014, when it was introduced in 40 markets, the Digitalizer 1.0, it has now been downloaded more than 5,000,000 times. And it has won multiple awards in the digital world. I'm proud to say that during fall 2015, we are now introducing the Visualizer 2.0, giving the consumer an even better experience, now adding the functionality of exteriors.
And also an important development I like very much personally is that now consumers can also share their own inspiration, their own ideas that they develop online with friends and family via social media, Facebook, for example. So we have high expectations from the Visualizer 2.0. It can be downloaded from the App Store free. So I always advise you to do that as soon as possible. It will be introduced in 120 countries in 28 languages.
Another example of a global concept BA initiative being implemented locally is EasyCare. EasyCare Dulux EasyCare is a paint that enables you to easily clean common household stains from your walls without damaging the surface. This activation concept was developed between global and local marketing, and it was first introduced in Ireland. After that, it was transformed or translated fast.
It was
introduced in Southeast Asia and the Middle East in 2014. Then in the spring of 20 15, it was quickly tailored for Poland and introduced there. Within just 4 months, the EasyClean the EasyCare concept was now has penetrated into more than 1100 stores in Poland, and we reached the full year target within 3 months. And that's all thanks to this global initiative we can with our scale, we can use to roll out fast in several geographical areas. And of course, it's also based on the great product.
Another example. I already mentioned that in China, demand for more sustainable paints is growing fast. The great example one of our products we're offering here is the Dulux Pro Solven Free Flooring Paint. This floor paint was introduced in 2015, so only this year, but already has received a lot of recognition by owners and users. And again, we are demonstrating our leadership in sustainability by introducing this in a market, the flooring paint market in China that's really recognized by high solvents based products.
The products we offer are environmentally friendly produced. So we look at the raw materials, but also at the production process. Going forward, we believe that our green flooring paints will help to further boost the construction of green buildings and promote new development pattern of domestic flooring industry in China. Now to summarize. Coming back to our performance.
We have made significant progress towards 2015. We believe we have the right strategy in place. We will continue the momentum that we built up over the past few years. And we believe there is scope for further improvement in the coming years as reflected in our range for 2018. Our new operating model, our better cost structure, our strong market positions and our fantastic portfolio of brands provide us with a strong basis.
With our focus now shifting to winning locally and leveraging our scale, we believe that we'll be able to achieve a return of sales between 8% 10% and the return of investments higher than 11.5% by 2018. To recap, we are a global leader in decorative paints with strong number 1 and 2 positions in all the regions where we operate. Our competitive position is unique and diversified. Markets have shown volatility lately and the outlook is uncertain. However, we can reasonably expect moderate growth in our markets and we are well positioned to benefit from this.
We have transformed our business by changing our organizational structure in Europe, by focused cost containment and by reducing our working capital as a percentage of sales. This means we are now in a better shape to improve ourselves further and become a leading performer. Finally, we will continue to leverage our sustainability leadership with Planet Possible through our impressive portfolio of innovations. With our strategic priorities now geared towards winning locally in our key markets and leveraging our scale, we believe we are on track to become the leading global decorative paint supplier in terms of both size and performance. Thank you very much.
The floor is open for questions. Please sorry, mic is there.
Thank you. Christian Faitz, a couple of questions. I was surprised to see your number 1 in Western and Northern Europe. Just I guess that figure does include Germany. How is your market position in Germany at the moment in terms of share?
And how do you plan to compete against, for example, the alpinas of this cup of roll of this world? And second, your strategy in China, what is your current strategy in China? I do remember that 5 years ago or so, you tried to go to the B and C cities. You seem to have changed that strategy. How are you competing against Nippon Kansai in China at this point in time?
Thank you.
Maybe you can later explain the first question. The second question about China, indeed, we the first introduction to the Chinese market was in Tier 1, Tier 2 maybe. More and more also the other cities, the other parts of China are developing. And of course, we are developing that. We also have investments to prove that in South China where we opened factory a couple of years ago, 2 years ago.
And we are now investing in Chengdu, in a Wukong factory that will be opened in 2015. So we are penetrating into the larger China as well. And we've seen double digit growth in China for many years in decorative paints and auction Nobel. And we believe also long term China is a very attractive market for us. The first question I couldn't really hear.
It's essentially about market share in Germany. I do understand that the German market is kind of a closed market to the international painters, not only to AkzoNobel but also to Sigma Carlin. So how are you competing against the Caporal Group? Unless you have changed the distribution channel
Yes, like I said, the
Sorry, everybody. I'm really happy about this, by the way. I hear from painters. But how do you tackle that important European market? Thank you.
Well, like I said, we decided last year to sell our distribution network to our own customers. So we picked the key distributors in Germany and we sold our 72 stores to these parties, because we believe in that way we have a faster penetration, because we make use of all their stores combined with our 72 stores. So the model is to reduce costs for us and to further penetrate into the German market. And that is working. I don't go into, let's say, local profitability or development, but can tell you it's working for us.
Another question. Where is the mic?
Thank you very much. Tom Wrigglesworth from Citi. Two questions, if I may. Firstly, just talking about pricing and margins, given your market share positions, it feels like the history of margin improvements been delivered by cost performance rather than kind of guessing higher prices through to the customers. Is that a fair assessment?
And in the future, how can you better extract the value of the premium positions that you have in the premium products? That's the first question. The second question is, when I relate the kind of the growth indicators that you've given on Slide 92, and then I look at the volume growth that you've achieved, it kind of has I see a bit of a disconnect in the future kind of outlook after 2018. What gives you confidence that you're going to be able to capture the volume growth that your end market that you anticipate the end markets to see? Thank
you. Yes. Going into that one, like Tom said also in his presentation, markets are volatile at the moment. There are serious headwinds in some of our big markets like Russia, for example, but also Turkey is volatile at the moment. We have strong positions over there.
So it's very difficult to predict on short term. So this is a more medium term prediction we do. And looking at the total mix of countries where we are with our strong positions, we believe that this is reasonable going forward. That's why we took this percentage into our estimates. Your first question, the combination of indeed cost containment and margin improvement on our pricing improvement to the customers.
I don't go into, let's say, line by line our profit and loss, but I can tell that this profit improvement is really based on a combination of growth over the last couple of years from 2012 to 2014 in a profitable way. Just as Konrad explained, we are going for profitable growth, both in Europe and in Southeast Asia, specifically over in this period of time, combined with less complexity and cost reduction. And these 2 together gave the profit improvement. Yes, you have the mic.
Yes, Peter Clark again. I've got 2 questions. The first one, one of the numbers that stands out for me in Deco is the CapEx to sales. Now I know you've been building Ashington. You've obviously had some restructuring CapEx.
But the big push has been the emerging markets CapEx. Given the outlook in some of the emerging markets, is that a number we can expect to fall from the 4% of sales? Because it stands out more than even specialty chemicals for me. And then the second question on the China story. The big story was always about renovation against the new build.
Presumably by default, renovation is now
Seaboard?
Okay. First, the CapEx, we indeed had very positive in China. The ones I mentioned, we have the CapEx in U. K. As well.
Don't expect big changes in our CapEx going forward for the next period. We still have growth in some of the regions. On the other hand, these, of course, big investments will give us the opportunity to grow in these markets considerably. That's also very clear, also in China. And talking about China, normally we don't go into specific strategies potentially, but we did indeed in China implemented a separate commercial structure to work on the project business about a year ago, because we see that project business is a different business than the maintenance or retail business in a country like China.
You can see for yourself The example I showed before painting, these are huge projects and they need a specific tailor made key marketing a key account approach with very strict and professional logistics as well to deliver the products in time, which is a bit more linked with the business of Konrad, who's doing these kind of projects all the time. So we've implemented that to improve our position for in the Chinese project market. But indeed, it's a volatile business at this moment in time, but still a very big potential for auction on Bell as well.
Yes. Thanks a lot. Yevgeniyamoto from Berenberg. I just had one question about the strategy. When you were talking about market share, you were talking about regions.
And Europe is quite a diverse region. So I was wondering what are the downside of actually downsizing your business in Europe and exiting markets such as Germany that we discussed, but also Italy, Spain and maybe Turkey where you have subscale market share and the markets are extremely fragmented. So what's the importance of having of being present in these markets and what kind of leverage you can get from it? And because you exited U. S.
North America rather, but you haven't moved you downsized your production and distribution as base. But in terms of the sales presence, you didn't change much in Europe. Why is that? Thank you.
Indeed, the whole strategy in Europe, the fixed Europe strategy was based on the change of the operating model, but not to downsize our operations in, let's say, marketing and sales efforts at all. So what we did do is to make use of the scale in Europe. So try to use our scale and especially in the back office functions to be able indeed to stay full presence in marketing and sales. So we didn't put at all in sales presence in all markets in Europe. We're in 34 markets in Europe.
And the whole model is just based on lower complexity, lower cost, but having the full presence of marketing and sales there. But also using like I presented today, the global initiatives, the scale that we have globally, the marketing scale that we have globally because of the innovation scale that we have to win in Europe. And a good example for me personally is the Polish example that I gave you with the EasyCare example, a global initiative that can be deployed very fast and win locally. One more question and then we have to that's the last question, yes.
Sorry, can you just clarify? So the target is to be number 1 or number 2 in each market in Europe where you are present? Or because if you are number 3 or number 4, I assume it will continue to negatively affect your assets turns and your profitability in certain countries. So would you ever consider exiting certain countries in Europe and Deco?
Well, I cannot, of course, look into the long future what we'll do in all the markets that we are. But today, we are happy with the scale we have in Europe. Because with our new operating model, we are in place to make use of that scale and be efficient and improve our positions locally. So we looked at that, of course, in introducing that new operating model, looking through detail in detail to all the markets and make specific plans, like I said, to win locally. So today, we are happy with the positions we have.
Okay. Thank you very much. I think it's time now for a short break.
Every day, more and more people and goods need to travel around the world, which means that global demand for safe and reliable transport has never been higher. We rely on modern transportation hubs like airports, bus terminals and train stations to connect our cities and keep modern life moving. They help cities to function properly and ensure that people and cargo can get around quickly and efficiently. This places big demands on all areas of transport, ranging from daily wear and tear to the environmental challenges such as weathering and corrosion. AkzoNobel's high performance coatings products are designed to protect and enhance vehicles, buildings and transport systems all over the world.
We keep airports in Hong Kong, London and Brazil safer and more comfortable for longer. And we protect trains and metro systems in Dubai and Shanghai. As our cities keep growing, we're helping to make transport more sustainable, better looking and more affordable for everyone. At AXA Nobel, we're committed to meeting the growing demands of a fast changing and making our cities better, more human places to live. Every day, more and more people and goods need to travel around the world, which means the global demand for safe and reliable transport has never been higher.
We rely modern transportation hubs like airports, bus terminals and train stations to connect our cities and keep modern life moving. They help cities to function properly and ensure that people and cargo can get around quickly and efficiently. This places big demands on all areas of transport, ranging from daily wear and tear to the environmental challenges such as weathering and corrosion. AkzoNobel's high performance coatings products are designed to protect and enhance vehicles, buildings and transport systems all over the world. We keep airports in Hong Kong, London and Brazil safer and more comfortable for longer.
And we protect trains and metro systems in Dubai and Shanghai. As our cities keep growing, Every day, more and more people than goods need to travel around the world, which means that global demand for safe and reliable transport has never been higher. We rely on modern transportation hubs like airports, bus terminals and and areas of transport, ranging from daily wear and tear to the environmental challenges such as weathering and corrosion. AkzoNobel's high performance coatings products are designed to protect and enhance vehicles, buildings and transport systems all over the world. We keep airports in Hong Kong, London and Brazil safer and more comfortable for longer.
And we protect trains and metro and metro systems in Dubai and Shanghai. As our cities keep growing,
we're helping
to make transport more sustainable, better looking and more affordable for everyone. At AXA Nobel, we're committed to meeting the growing Every day, more and more people and goods need to travel around the world, which means that global demand for safe and reliable transport has never been higher. We rely on modern transportation hubs like airports, bus terminals and train stations to connect our cities and keep modern life moving. They help cities to function properly and ensure that people and cargo can get around quickly and efficiently. This places big demands on all areas of transport, ranging from daily wear and tear to the environmental challenges such as weathering and corrosion.
AkzoNobel's high performance coatings products are designed to protect and enhance vehicles, buildings and transport systems all over the world. We keep airports in Hong Kong, London and Brazil safer and more comfortable for longer. And we protect trains and metro systems in Dubai and and
more affordable for everyone. At AXA,
and more affordable for everyone. At AXA Nobel, we're committed to meeting the growing demands of a fast changing world and making our cities better, more human places to live. Every day, more and more people than goods need to travel around the world, which means the global demand for safe and reliable transport has never been higher. We rely on modern transportation hubs like airports, bus terminals and train stations to connect our cities and keep modern life moving. They help cities to function properly and ensure that people and cargo can get around quickly and efficiently.
This places big demands on all areas of transport, ranging from daily wear and tear to the environmental challenges such as weathering and corrosion. AkzoNobel's high performance coatings products are designed to protect and enhance vehicles, buildings and transport systems all over the world. We keep airports in Hong Kong, London and Brazil safer and more comfortable for longer. And we protect trains and metro systems in Dubai and Shanghai. As our cities keep growing, we're helping to make transport more sustainable,
better looking
and more affordable for everyone. At AXO Nobel, we're committed to Every day, more and more people and goods need to travel around the world, which means that global demand for safe and reliable transport has never been higher. We rely on modern transportation hubs like airports, bus terminals and train stations to connect our cities and keep modern life moving. They help cities to function properly and ensure that people and cargo can get around quickly and efficiently. This places big demands on all areas of transport, ranging from daily wear and tear to the environmental challenges such as weathering and corrosion.
AkzoNobel's high performance coachings products are designed to protect and enhance vehicles, buildings and transport systems all over the world. We keep airports in Hong Kong, London and Brazil safer and more comfortable for longer. And we protect trains and metro systems in Dubai and Shanghai. As our cities keep growing, we're helping to make transport more sustainable, better looking and more affordable for everyone. At AkzoNobel, we're committed to meeting the growing demands of a fast changing world and making our cities better, more human places to live.
Every day, more and more people and goods need to travel around the world, which means that global demand for safe and reliable transport has never been higher. We rely modern transportation hubs like airports, bus terminals and train stations to connect our cities and keep modern life moving. They help cities to function properly and ensure that people and cargo can get around quickly and efficiently. This places demands on all areas of transport, ranging from daily wear and tear to the environmental challenges such as weathering and corrosion. AkzoNobel's high performance coatings products are designed to protect and enhance vehicles, buildings and transport systems all over the world.
We keep airports in Hong Kong, London and Brazil safer and more comfortable for longer. And we protect trains and metro systems in Dubai and Shanghai. As our cities keep growing, we're helping to make transport more sustainable, better looking and more affordable for everyone. At AXA Nobel, we're committed to meeting the growing demands of a fast changing world and making our cities better, more human places to live.
Okay. Good afternoon. I am Martin Beuschmaar and it is with great pleasure to be with you today and talk about the major transformation that has taken place towards a high performance culture. Since my start 2 years ago, I've been visiting the business and meeting people around the globe. And each time, I come back with a lot of energy because our people are proud on auction Nobel.
They are proud on our products and our brands. And even in the difficult circumstances and a lot of change that has taken place, they stay committed and they stay against and they stay against. And that makes us a very great company to work for. Over the last few years, major change, major transformation has taken place that impacted all employees in all our businesses and functions. A company of the size and complexity of AkzoNobel take multiple years to transform, but we can see many proof points that we are going into the right direction.
We are a safer place to work. We are seeing incidents. And year end 2014, we were at 1.8 total reportable injury rates. Our vision is to have 0 incidents because we believe that caring for each other is the way to win together and achieve leading performance. We have simplified the organization by taking out layers and increasing span of controls.
Konrad explained earlier about his new organization in Performance Coatings, where we have come from 4 business units, 12 sub business units to 7 strategic market units. Good. Last year, at the Capital Markets Day, talked about the Central European model. And this year, he also explained the model in Europe, which is a new way of working in Deco. In the new organizational setup, the customer facing side of the business is fully focused and I repeat fully focused on sales, marketing and innovation to grow the business.
And on
the functional side of the business, we focus on harmonization, standardization, global processes and systems and service delivery. By putting the functions in Global Business Services, we will scale. And together with the exchange of best practices, we will achieve further efficiency improvements. Commercial excellence is a key initiative to drive organic growth. And by training and developing our salespeople and technical sales rep, we build commercial capabilities in the organization.
Continuous improvement is also taking place in our factories. And my colleague, David Allen, will tell how he is building capabilities to strengthen the foundation of operational excellence. And the question you might ask is, how are we making this happen? We do this by making continuous improvement, the core capability of our people. And I see many proof points.
Take, for example, the progress we have made on productivity, sustainability, safety and engagement. We reinforced the role of our leaders to inspire our people. And together and in line with our core principles and values, we are driving a high performance culture where everyone has clear roles, responsibilities and accountability. By changing leadership, you will change the culture. We needed leaders who represent the new direction of the company, leaders who drive and shape an inclusive high performance culture.
Let me give you a few facts. Facts that show that we have made significant change in leadership and therefore are changing the culture. 6 out of 7 Executive Committee members changed in the last 7 years. In 2014, 50% of leadership top 200 leadership changed, of which more than 25% left the company. And we continue to evaluate our leaders on performance and behaviors.
But we also promoted people from within, especially for commercial positions. As we believe the know how, expertise and experience from within is a key factor for these roles and in line with our value customer focused. As I said, strong diverse teams perform better. That's why diversity and inclusion is one of our key building blocks in creating a high performance culture. We believe our people should reflect the societies where we operate.
We need to truly represent the many and various cultures of the markets we serve. And over the last year, we have placed stronger focus on inclusion as an important element of building winning teams. Although we make good progress, we can do a lot more. Again, let me give you a few some facts. 24% of our total workforce is female, 18% of our executives are female, 50% of the Board of Management.
And with our Women in Leadership Training Program, we give concrete follow-up on our ambition to have at least 20% female executives. 48% of our total workforce is from Asia Pacific, Latin America and Emerging Europe. 16% of the executives come from these regions. And again, we wanted this to be in a higher number. Initiatives such as the Fast Track Management program is a good example of how we want to achieve this.
More than 90% of the participants come from these regions. And also in Succession Planning and Talent Management, we focus on candidates from Asia Pacific, Latin America and Emerging Europe as well as all diversity
candidates.
I believe that people make an organization. And by energizing the whole organization from the bottom to the top around a simple and clear set of core principles and values, we will ensure that everyone is playing a role to meet our strategic goals and delivering leading performance. Safety, integrity and sustainability are our core principles and what we stand for as a company. It's a condition of doing business and working for AkzoNobel. The values and behaviors is how we behave and work together.
And we believe that the way we work and interact with our customers and amongst ourselves drives our performance and results. We have embedded the values deeply in our organization. They are part of the yearly appraisals. They are part of the Tenant Assessment Centers and they are included in the leadership competencies which we use to develop our leaders. We see evidence that the people are embracing our values and core principles.
We asked 4,200 people in the company and the survey showed that 96% of our people know the values and the vast majority see added value for their own job and helping them to perform better. They also see leadership role modeling the values and behaviors. In summary, after only 2 years of implementing the values, we see strong indications that they are becoming part of our culture. Seeing people living them is both encouraging and essential to our future success. It is a fact.
Better engagement leads to better performance, lead to better results of the company. And we are very pleased to see that we are making progress on engagement. Actually, our progress since 2010 is in the top quartile compared to the best companies of the CALEP survey. CALEP conducts the engagement survey on our behalf, which is also a good opportunity to benchmark. And progressing in a period of immense transition is something to be proud of.
Engagement is not something taken for granted. It's not a given. It's a great contribution from everybody in the company. Feedback and trust, supported by clear values and behaviors, are key components to making this possible. While we are pleased to see our improvements over the last years, we recognize that we still have some way to go to achieve top engagement levels.
As I said earlier, I see evidence that culture change is taking place. Our customers give positive feedback on the quality of our products, innovations and the way how we cooperate in the supply chain. They say,
on a
personal level, AkzoNobel's customer intimacy is very good. They recognize their customers' challenges. We have increased transparency in many areas to deliver on our commitments: Deskboards, key performance indicators and having clear roles and responsibilities are becoming the norm. All our top leaders around the world are trained to give feedback to drive continuous improvement. We doubled the cross business area move to 13% in 2015, Coming from a fairly siloed and decentralized world, this is a major step forward and only a beginning of winning together.
In HR, we improved the human capital rating in the Dow Jones Sustainability Index as a proof point for passion for excellence. So what are our next steps? As I said earlier, this is not a quick fix. For us, it's the story of embedding a culture of continuous improvement. We will build on what we have achieved in the last years and aim to get better every day.
Like Tom said, Global Business Services operating model is evolving. Functions and regions are at different stages of development, but significant steps have already been taken. The next level will be kicking off in January when we launched the new Global Business Services Organization. We will focus on building our people's capability, especially for our leaders and people managers. By doing this, we expect an acceleration of our change journey towards leading performance.
And we will continue to build and develop commercial excellence capabilities to drive organic growth. While we are pleased to see the improvement in the area of engagement in Diversity and Inclusion, we recognize that we still have some way to go to achieve leading engagements and leading team performance levels. And that's why engagement and high performing diverse teams remain key to us to deliver on our ambitions and make auction Nobel a great place to work. Thank you for your attention, and I'm open for questions. If there are no questions, then I'm happy to introduce my colleague David Allen.
Dave and I started at the same day 2 years ago and Dave has done a terrific job in making our operations better every day. Dave?
Martin, and good afternoon, everyone. Again, my name is Dave Allen. And as Martin mentioned, I joined Axle Noble 2 years ago. When I first met Tong, I was really inspired by his drive for operational excellence and really wanting to build this culture of continuous improvement and take the company to the next level of performance. This is very aligned with my own passion and how I've operated in the past the variety of previous roles that I had throughout my career.
Today, this is what our team is doing, building and embedding the continuous improvement culture across the company. In the previous conversations that you've heard today, you've heard my colleagues talk about the importance of an integrated supply chain in driving sustainable value for the company. Today, I'd like to share with you our story in transforming the integrated supply chain function in delivering leading performance. So let me talk about who are we. Well, first, we are the largest function within Occidental Bell with well over 22,000 colleagues across our 3 business functions.
Our function is the backbone of the company. We are responsible for all activities and work processes from purchasing of raw materials, manufacturing of our products from over 200 manufacturing sites and finally the delivery of finished goods at our customers on time and in full. In order for us to continuously meet our customer expectations and remain competitive, it is absolutely crucial that our supply chain focuses on cost efficiency, while also be accompanied by a high degree of agility and flexibility. Similar to every other function within the company, integrated supply chain has an essential role to play in achieving our best in class sustainability targets. Tong already mentioned earlier the fact that we are number 1 in the Dow Jones Sustainability Index within the Material Sectors Groups for the 4th consecutive year.
A significant contributor is how we manage and control our raw materials, energy usage and the occupational health and safety within our facilities. Today, we also have defined our plans and targets in these specific areas in order to drive continuous improvement. 2 years ago, we set out and conducted extensive internal and external benchmarking of our operational results to really define what are those gaps and required actions that our function needs to deliver leading performance. Through this process, we identified our key strategic imperatives to achieve our operational excellence strategy, which are listed here. 2 that I'd like to highlight that are really critical to our success are: 1, the need to build a performance based continuous improvement culture across all levels of the company and 2, to really create sustainable value through the deployment of standardized best in class supply chain processes.
I'll talk a little bit more about this in the next couple of minutes. Also key to our strategy was establishing best in class metrics in the key areas of safety, service, cost, capital and employee engagement. And finally, after extensive review with our key business leaders, our functional excellence strategy was development, encompassing these strategic imperatives in world class metrics, which subsequently was approved by the Executive Committee in March of 2014. Realizing our vision is a long term journey, which we have defined in a 7 year functional excellence roadmap as shown here, with clear performance levels that we want to achieve within specific milestones. We are currently in the first phase of the transformation to achieve the level of what we call internal best performance.
This really entails building that continuous improvement foundation by standardizing the way we work across the entire supply chain to eliminate that significant variation that we see today that prevents us from operating at peak performance each and every day. The exciting news for us is that we're already beginning to see financial benefits in the first phase of which I'll share some examples later on. Last year, we also implemented a new organizational model with many internal and external CI experts across the business to begin designing and deploying our continuous improvement framework, which we call ALPS. ALPS stands for AkzoNobel Leading Performance System. Again, I'll provide you with some more details on this in the next couple of slides.
In the second phase in our roadmap is to achieve what we call industry best performance. We will accomplish this by continuously optimizing and improving our ALPS framework, while also investing both in the state of the art process and automation technologies and capabilities at our sites through our what we call our Advanced Manufacturing Excellence Program. And finally, in the 3rd phase in our roadmap is to achieve what we call world class performance as we truly integrate our supply chain and production facilities around the world. So let me tell you a little bit about ALPS. As I indicated earlier, ALPS is the name of our continuous improvement transformation within the integrated supply chain function.
This is a company wide framework, which fundamentally defines how we source, plan, make and deliver products to our customer. ALPS is a holistic approach of continuous improvement, which consists of these 4 strategic elements listed here, which are critical success factors in our transformation as well to drive sustainable performance. As you can see from the top of the slide, we started designing and deploying these work processes based on industry best practices that define how we operate, maintain and improve our facilities in a standardized and integrated approach. In addition, we also developed a set of clear metrics and goals and of course cascaded all those down to the factory floor. This now provides us with a platform to really drive improvements at all levels of the organization, thereby allowing for greater internal benchmarking and sharing of best practices.
2nd, we focus on enablers to develop the technical capabilities of our people, utilizing leading edge principles, methods and tools to continuously improve our processes. In addition, we've implemented IT enabler systems that support the automation of our work processes, but also the work that people perform. 3rd, we are aligning our organizational structure with the work processes to create clear roles and responsibilities. In addition, we've streamlined our organization, which now allows for decision making to be performed not only faster, but at the appropriate level of the organization to drive improvement. 4th, we're integrating our company values, the critical organizational leadership behaviors to create this performance based culture.
This will define how we manage our business going forward. And finally, we are using change management techniques to ensure ALPS is firmly embedded into the fabric of our culture and organization. So let me take a minute to explain a little bit about the deployment model, which is really the heart of our approach of implementing the ALPS framework. It begins with our Corporate Center of Excellence organization, which designs the ALPS blueprint based on best in class models and practices from industry. Deployment is the responsibility of each of the business areas.
They prioritize the list of sites for implementation based on size, improvement opportunities, criticality and readiness, just to name a few. In addition, the ALKS deployment teams work with our sites in utilizing a very rigorous implementation process, as you can see at the bottom of the slide. This includes conducting boot camps to help the sites understand what ALPS is all about and what the transformation in state looks like. This includes also performing due diligence assessments at our sites to define how large the improvement opportunity is versus current practice and of course to set target objectives for improvement. 3rd, it's about implementing the ALPS foundational and primary and secondary processes, which really entail about 6 months of hands on training and capability building with all our site employees.
In addition, we utilize a governance process consisting of members from our business area leadership teams to monitor the progress of critical milestones, but also to ensure that the improvements being achieved to the assessment targets that have been established. And finally, after go live, the sites transition from the deployment stage to the continuous improvement stage. This includes annual assessments and maturity audits to continually monitor the health and effectiveness of our processes in delivering and sustaining the annual improvement goals and targets that we've established. You can imagine that it does literally take 2 to 3 years to firmly embed in hardware outs into the fabric of the culture and organization. But the good news is that it doesn't take long for results to be achieved.
In fact, we're already beginning to see benefits at our initial sites shortly after go live, which I'll share within our 3 business areas next. As I indicated earlier, we are now a little bit over a year and a half in our journey and are already beginning to see some tremendously exciting results. Let me start with the Decorative Paint business. This is a batch operation where we tend to make stock and use warehouses to distribute to retail. Roop mentioned earlier the importance of driving operational excellence within the supply chain.
Paintmaking is a seasonal business, so we tend to see a huge spike in volume in the spring summer months. Historically, this spike has significant amount of downtime on our filling lines, resulting in additional work and shifts to produce paint. With the implementation of ALPS at this one European site, downtime dropped dramatically by over 79%. This is because every day the shop views their production schedule and if they don't meet their target, they perform root cause problem solving. When they realized in this case that machine downtime was their one number one issue preventing them in meeting their production targets, changes were made to their preventive maintenance schedule, which on course reduced equipment failures, which drives improved uptime.
In turn, this also impacted the time they need to produce a batch of paint. As you can see on the right side of the chart, by reducing machine downtime, we also were able to reduce batch production time by 11%. Even better, you can see a decrease in the variation in seeing today a much more stable operation. As we continue to roll out Alps at our sites, we will begin to see much more of these benefits going forward. Here is another example of results achieved within our Performance Coatings business.
Performance Coatings is a batch operation where we frequently deliver directly to our customer. Our key metric here is on time in full. As the customer, you want the entire order and you want it on time. Conrad talks specifically today about how customer satisfaction in Otis is a critical enabler for driving growth. Before we deploy ALPS at this one U.
S. Site at the beginning of the year, they had been struggling with meeting customer service expectations. The implementation of a standard sales and operation planning process created better clarity on the demands of the customer, which could then be translated to the factory floor. In just a few short months, they went from 60% to 95% on time in full with their performance continuing to improve every month. With the implementation of ALPS planning processes, we will continue to see this level of improvement across all our sites.
And finally, this is an example within our Specialty Chemicals business, which has a slightly different supply chain model. In many situations, they are continuous operation with plants located adjacent to the customer to transfer product directly into their facilities. Werner indicated earlier today that cost productivity is a key enabler for achieving their business strategy. Again, this is an example of one of our European sites, which was actually experiencing negative productivity at the beginning of the year. The Alps team spent several months at the sites to train the new sites on the new make processes.
The site was really able to solve some long term quality issues by improving yields and reducing material losses. As a result, cost productivity improved dramatically and is delivering solid financial benefits well over €700,000 Again, you can see that they still have a way to hit their goal, but we are fully confident that indeed they will achieve their target. Of course, the success of our integrated supply chain transformation is not only about cost reduction, service and quality improvement. To truly embed and drive a continuous improvement culture, you need all our colleagues to be engaged and involved. To show you how building a continuous improvement culture can have a huge cultural impact, I'd like to share the results of one of our very first sites through the Alps journey.
This was a plant in Europe. They were working in a rather very challenging environment without really an engaging continuous improvement culture. They started their ALPS journey with an employee engagement score of 3.74 out of a possible 5. Through the works of ALPS and the site leadership teams, the employees were trained into new processes and learn basic continuous improvement and root cause analysis techniques. Their performance increased dramatically and of course convincing everyone that the changes they were making were really making a big difference.
A year after the launch of ALPS, the annual engagement survey showed an impressive 15% increase, one of the largest increases we had in the entire company. Their total score now is an engagement level of 4 point 31. Again, when you visit the site today, the employees are truly proud and will show you the work they are doing as well as the improvements they've made. So in summary, we are off to a strong start in our integrated supply chain transformation with our new strategy, operating model and leadership team now fully in place. We are already beginning to see visible improvement and benefits from our ALKS deployments and we expect that to continue as we ramp up in the coming year and gain even more momentum at all our sites.
And finally, we are fully confident that our operational excellence strategy will deliver leading performance and sustainable value, not only within the integrated supply chain function, but for the entire company. Thank you. And now I'll be glad to answer any questions.
Thank you. Tim Jones, Deutsche Bank. Two questions, if I may. Can you give us a rough idea of the euro savings from moving AXO to internal best performance? That's based on the 1, 3 year.
And then also the euro savings if you go from internal best performance to industry best performance? That's the first question. And the second question is, when you look at AXO against its global peers, where do you think the biggest deficit in its performance is at the moment based on your 5 world class metrics that's safety, service, cost, capital and people? Thank you.
Well, to answer your first question, what I would tell you is that our ALPS framework is really a key enabler for us to drive continuous improvement. And again, what it does is it allows our BAs that you talked to you heard today achieve their performance level and financial objectives that they're trying to achieve. As far as the second question that you answered in terms of where our opportunities are relative to our peer groups. Again, I would say that for us, we feel that there are opportunities across all dimensions of our business, quality service, productivity. And of course, that's what we're really going to be focusing on.
And this is really what drives for us as a company. Really for us, ALPS is our competitive advantage for our company.
Thank you very much. I've got a couple of questions. Who designed Alps? Was it you? Was it a consultancy?
2nd, was it when you say you identified industry best practices, is that employees that weren't heard before? Or was it your customer selling? Or did you have to hire people from the competition? And then just on the numbers, the €700,000 in the Specialty Chemicals plant, is sorry, is that the annualized benefit or just what happened during the Q2, the step up?
Okay.
Well, let me try to answer all three questions. First question is, who designed Alps? We did. What we have done is, again, within our company, there are a lot of best practices that we wanted to share across the business. We align those with industry best practices that we, of course, benchmark across the world.
And with our organization that I mentioned, the Center of Excellence team, we have designed our ALPS processes from that. So that was all internally. We did not use any external consultants in Designer Ralphs. So it's very customized to our business. It's aligned to drive the business strategies that you mentioned.
And of course, each of the business areas has a specific focus that is different. For example, in case of Werner and Specialty Chemicals, it's all about driving productivity. In case of performance coatings, it's about service improvement, those kind of things. So we customize Alps to drive the improvement based on the business requirements. 2nd question was the euro impact.
What you see here is this is the euro impact year to date from that effort of improving and reducing material losses at that one site.
Was there in the company or did you have to get competitors
in? We do extensive benchmarking across the world. We look at best practices, whether it's within our peer group across the industry. An example would be sales and operation planning, right? We typically go out and we look at companies that do that.
And obviously, we bring those kind of best practices into with a Knoxville Bell. So the answer is a lot of that is through our own knowledge of going out and looking at best practices and of course bringing those in and sometimes obviously customizing those to the needs that we have to drive the specific business strategies that our business areas have laid out. Okay?
Thanks a lot. Yuki Yamamoto from Berenberg again. I just I used to do 6 Sigma for the chemical companies and it does look a lot like that. And I assume it's just based on the statistical analysis, so it will look a lot like that. But our issue with my company, some chemical, was that the fact how to actually retain the cost savings because we all had very clear cost cutting targets.
And during the 1st year, we were able to achieve them. But then actually, the production slipped back into the old tracks and they kind of were raised. So how do you manage to how long do you actually measure the efficiency? And the second question, when you are looking at productivity improvements, There is only so much you can do with improving eliminating waste, etcetera. But if utilization rate is not high enough, it will affect your productivity.
So when you look at your asset base, are you satisfied now with your footprint? Do you use the same program for the global asset base and not only for local plants? How does it work on a global scale?
Thank you.
Okay. Let me start with the first one. You mentioned again that your experience has been about implementing tools like 6 Sigma and Lean. Obviously for us we use those same kind of methodologies. But again what I would say is that Lean 6 Sigma is a method, a tool to apply to a problem to solve.
So you use different
tools to be
able to solve different types of problems. Okay? The beauty of ALPS is that it drives that sustainable performance. As you mentioned, what you tend to see over time is performance decay because you're not continuously improving that asset and you're not necessarily making sure that those improvements are built into your process, okay? So we measure performance every day and we make sure that that performance stays at that peak performance.
And when we find an issue, we do what cause problem solving and of course that continuous plan do check act is what really drives that sense of sustainability. In terms of you talk about the asset base. I mean for us what's important as we drive improvement in our assets is that we continue to find ways to generate free capacity. And that is the best productivity that you can deliver to a business. And of course, for us driving free capacity is how do we continue to eliminate the defects that are reducing downtime because of mechanical issues or process issues.
So a lot of Alps is focused on generating fee capacity as Werner said to really drive that volume leverage, which is for us a key competitive advantage.
Thank you. It's Paul Washermorgen Stanley again. Can you help me understand the concept of deflation as it relates to your business? We've seen more than a halving in the oil price or at least a halving in the oil price over the last 12 months. And it's not obvious to me that the company has seen significant tailwind from that.
So from your unique position, can you help us understand why we haven't seen that? Is it timing differences? Is oil the wrong proxy? Or is it still to come? Thank you.
I think maybe that would be a better question to ask our business leaders. I mean, today they talked a lot about deflation. But I think for that particular question, I would suggest that we include that as part of the roundtable and have one of our business leaders
answer that one.
I think that's it. Again, thank you. And now I'd like to introduce my distinguished colleague, Melise Castella, who has been a critical support for us. As I mentioned to you earlier, one of the things that we do with relative our processes, we automate and digitize our processes and metrics. And of course, her organization is a key supporter of that.
So again, thank you. And I now introduce Malice.
Thank you, David. Good afternoon, everybody. I'm very pleased to be with you this afternoon for my first Capital Market Day with Exxon Abao, CFO. I joined the company 1 year ago. And when I'm traveling around the world, I've been very impressed about the amount of change that is going on in the company.
The change are not only visible at the top management, but they're also visible down the organization in our offices, in our factory, where our people every day are improving the way they work, improving our processes, putting in place new organization, simplifying. And there is really a lot that is going on there. I was recently in Sweden, and I visited one of our large complex of chemical. And usually, when I do those tour around, people always try to show me at some point one of their units that is not going that well to try to ensure they will get some capital allocation when the thing will come on my desk. But this time, it was different.
I had a local team that was really proud to explain to me how much they have been able to improve the productivity of their units, avoiding a large CapEx. So that's for me a real example of the change that is going on and this new culture of performance and as described earlier on by Martin, by the strong engagement of our people. I will start with another view of our finance priority and the major achievement we have realized in the past 3 years. Our focus remain on performance improvement, and it is clearly visible on our results. And the Q3 results we have published last week is another proof point.
We are continuing to pay a close attention to our cost. And David Allen just explained you through us how much this new culture is deployed within all the VA. And our VA at Konrad, Groot and Werner, I'll also show you all the transformation that has been taking place to reduce our cost. We are putting a lot of end phases also on internal control, which is for me very important to keep our house in order and also manage actively our risk. Cash is, of course, one of our top priority, and I'm very pleased to show you that we are on track to be cash positive this year.
We have restored very strong balance sheet, paying down our debt and also addressing our pension liability. And our capital allocation, our aim at supporting our strategy of growth and of increased shareholder return. Operating performance is clearly improving, And you have here our financial results, which show that our operating income and our earning per share have increased regularly each year since 2012 despite a challenging environment. In Q3, we have increased further. Our operating income was up 30 percent and our earnings per share up 35%.
This has been mainly driven by 4 levers. First, our improvement programs in all the business areas and all the functions secondly, our portfolio optimization with the pruning of nonstrategic assets third, our lower operating cost and fourth, our lower restructuring expenses that went down from EUR 350,000,000 in 2013 to around €100,000,000 this year as we're moving to this new phase of continuous improvement. We are on track to deliver our 2015 targets of return on sales of 9% and return on investment of 14%. Both return on sale and return on investment have increased year on year since 2012, and this improvement has accelerated in 2015. The RAS increased from 5.9% to 6.9% in 2014.
And year to date, Q3, the ROCE was 10.9%, which is 250 basis points up from the same period last year. The return on investment also improved significantly, steadily from 8.9% in 2012 to 10% in 2014. And year to date Q3, we have reached 12.5 basis points above the same period last year. You may think there is still a gap between the 12.5% and the 14%, But I want to recall you that the ROI is computed on the 12 months average. Therefore, year to date, we still have the impact of Q4 last year, which includes large negative incidental and also high level of restructuring.
That's why we remain confident that we are on track to reach our 14% this year. 2014 was around 10%, which is leading performance versus our peer. The working capital variation are determined by the seasonality of the business, in particular, our decorative paint. But in average, through the cycle, we aim to operate during the year between 10% 12%. We are currently facing some temporary inventory buildup in our plants in Performance Coatings, as Ken Red explained to you because he's closing some site and to ensure we continue to deliver properly our customer, we had to do those inventory buildup, which impacted our working capital.
But as Konrad has explained, those closures should be finished by mid-twenty 16. And therefore, we think we'll go back to a more regular working capital, and we'll continue our discipline to manage it forward. We also have a very disciplined approach towards capital expenditure. Our capital expenditure as percentage of sales has reduced from a peak of 5 0.4% in 2012 to around 4% end of last year. And we expect it to remain around the sales level for the foreseeable future.
Year to date in Q3, we were at 3.7%, and we're aiming at around 4% for the year. Around half of this capital expenditure is dedicated to Specialty Chemical Business, which is a more capital intensive by nature. But as highlighted early on by Werner, after payment of the CapEx, chemical is still a very strong cash contributor to the group. We will build upon the significant investment made during the recent years, which provide the strong foundation for our growth and will continue to drive a strong discipline regarding both the evaluation of the project and also the way we implement them. Our prioritization on project are based on the cash return, cash generation and also the return, but they have also to be in line with our strategy.
Around 40% to 50% of the project are investment in growth. The rest is dedicated to efficiency, safety and maintenance. You see in this map some of the recent investment we have done supporting our growth strategy and our operational excellence. Our investments in Europe are focused mainly on operational excellence. Chemical business, where we invested in new production unit to comply with the new regulation on mercury free and also take this opportunity to increase the efficiency.
In China, we have invested significantly in the recent years. And despite the fact we have mentioned that China is slowing down, we're thinking for the future, this is a key foundation for the growth as China remain a major market in Chemical as outlined by Werner, but also for other business in Deco and in Performance Coatings. We are currently building a new decorative paint factory in the West, as mentioned by Ruth. And this is to address the growth of this region. And that will bring also efficiency because we are currently shipping our products from the our factory on the East side.
We have also invested in South America in our pulp industry, which is growing as it's mainly driven by exports, while the economic environment in Brazil is not that great. Moving to pensions. As you know, an important topic for the company. There has been continued progress of our defined benefit obligation. The vast majority of our pension obligation are related to 2 of U.
K. Pension fund, the ICI pension fund and the quarters in the U. K. For more than 83% of obligation. We have conducted in the recent year major operation of derisking through what we call buy in.
That means transferring the risk to insurance company. And we did it in 2014 'fifteen for a total amount of £5,600,000,000 We also conducted a buyout of some of our liability in the U. S. For $700,000,000 We also had done some hedging. Overall, thanks to all these active management, we have now a total amount edged on interest and inflation for about 80%.
And on longevity risk, we are hedged up to 45% of our total obligation. This means the risks associated with our pension liability have been reduced significantly, and we'll continue to manage them actively in the future. And we also have created through those operations more visibility for our cash flow. As you know, with the U. K.
Regulation, we have to form the deficit through some cash top up. You have here the total pension cash payment for the year to come of all the different defined benefit obligation. The main contributor are the 2 UK plan we just discussed. As you can see, the cash contribution will reduce in the medium term from €350,000,000 this year down to €200,000,000 This taking into account the new valuation we have concluded in July with the ICI pension plan, where we have reduced the contribution and extended the timing of the contribution. The increase you can see between 2014 2015 are only due to the exchange rate variation the pound haven't strengthened against the euro.
Through the extensive derisking of liability that I just mentioned, we are now having a much more visible cash flow contribution for the future. Therefore, our pensions still remain a big cash headwind because we have to pay those top up on top of our regular contribution, which are around €125,000,000 for our defined benefit. But as you can see going forward, we first have lower risk. And secondly, we will this amount will decrease over time. So our free cash flow continues to improve as we have addressed each of the line of our cash flow statement.
The top line, the EBITDA, which is a contribution really from our e business, is continuing to improve, thanks to all the improvement program we have conducted and the increase of profitability of each of our business. In Q3 2015, we continued to increase our EBITDA. So our EBITDA margin is now 14.7% versus 12.6% for the same period last year. In term of interest expense, we also continue to reduce our contribution. And I will show you that this year, this will go down further.
Our tax rate is roughly stable, around 29%, and our cash tax rate around 24%. And I've shown you that we'll maintain a strong discipline on our working capital and our capital expenditure. And moving forward, our pension contribution will continue to reduce. Therefore, our free cash flow will continue to improve over the year. In term of dividend policy, our dividend policy remain stable to rising.
During the fall last year, we have maintained our dividend stable as we were cash negative. But we're pleased to have announced last week an increase of our interim dividend by 6%. I think this is a strong signal of the confidence in our strategy and on the fact that we will be cash positive this year. During this period, we also have been very actively managing our portfolio. We have divested some nonstrategic asset to focus on our market leading position.
In the decorative feed, as mentioned by Ruth, we have divested our North America business and also our building adhesive. And more recently, Werner has divested the paper chemical business, closed transaction in Q2 this year. So during this period, we were focusing on improving our profitability, increasing our cash generation. Therefore, we really did not conduct any acquisition. But now, I think we have built a strong foundation.
And as mentioned to Tom, we have earned the right to grow and the right to acquire. Therefore, going forward, we can consider some bolt on acquisition, but we'll be very selective in our choice, making sure that we're focused on the market where we have the right position and also being very selective on the cash return of those acquisition. We have the strength now in term of financial position to conduct some of these acquisition. As you can see, thanks to the divestment I have mentioned, we have paid down our debt, and our debt level was €1,600,000,000 end of last year. So for
2 years in a
row, we had a net debt to EBITDA repay very expensive bonds of as we repay very expensive bonds of more than 7%. And we have done recently some new issue at 1.75%, reducing our cost down to 3.6% last year and year to date will be probably around 3%. Major improvement and we'll continue to maintain a strong balance sheet. S and P has just confirmed that we have a BBB plus rating and believe that we have some headroom to conduct some bolt on acquisition within this rating. If we look at the net cash generation, as I mentioned, in 2012 'thirteen, we conduct major in divestments, which contributed to the cash generation.
But if we exclude them, you could see that we were really negative during 2012 'thirteen. Only last year, we started to be almost neutral. But going forward, which what I've shown you and the progress, we are confident that this year will be cash positive after the payment of our dividend. So now that we have restored this cash generation, how do we allocate our capital? We'll continue first to support the growth of the business, investing in innovation and in capital expenditure.
We want to maintain a disciplined balance sheet. We'll continue proactively to manage our pension deficit. And our dividend, as I mentioned, will remain stable to rising. And we can consider bolt on acquisition, but provided they are strategic aligned and they're also value generating. So in summary, I think I've shown you that we have built a strong financial foundation to move forward to the new phase of our strategy of profitable growth and leading performance.
We are on track to deliver our target 2015. We are building a new performance, culture and discipline within the company. We have restored our cash generation, capability. The pension are significantly derisked and we have a solid balance sheet to invest in the growth. Therefore, we are very confident that we can go through this new phase with all the good ingredients.
Thank you for your attention. And before we move to the Q and A session, I would like to hand over to Tom for the conclusion.
Thank you very much, Maelis, for the overview on the financial section. It leaves me to wrap up with 4 distinct slides. First one is the focus that we have going forward.
From all
of the colleagues you've heard that we've built a new foundation in each of the businesses and in the functions, and we need to hardwire these new organizational models into our organization. A significant part of our energy is going to be invested there. But as David showed you, we're also going to build further on the initial stages of building the continuous improvement culture where we've also and already seen some of the examples that he showed. And of course, we have many more examples throughout the organization. So we will continue to build our operational excellence skills further.
And therefore, we have presented performance ranges that are higher than the targets that you've seen from us for 2015. We will add on top of the continued building of operational excellence, organic growth and innovation. And each of the business areas has hopefully shown you very clearly what they're doing on the commercial excellence side, on the innovation side to make this happen with past examples and future intentions. And as Maelise mentioned, because of the strength, because of the fact that we are a different company than 3.5 years ago, because of the improved cash flow that we've seen, we can certainly consider on top of the main focus that we will have on operational excellence and organic growth, we can consider doing value added, value generating bolt on acquisitions as well. Martin very clearly showed you what we've done on the culture, how we've been changing it, what the proof points that are there and how we will continue to move it forward.
And all of this shows you the next phase of the strategy that we launched in early 2030. And all of these actions that you've heard, all of these drives going forward that you've been explained by all of my colleagues have resulted in the following financial guidance that we've provided for the periods 2016 to 2018. It is based on the fact that we've done all these actions and these preparations and these rebuildings of the foundation, and it does include the actions that David has described, the organic growth actions that we foresee for ourselves to be able to deliver, and that is all included as part of this financial guidance. The markets out there have not become easier. We've not had significant tailwinds at all in the last three and a half years, but we certainly don't expect to receive much of it going forward.
You've heard from many of the colleagues all the areas where we see in some ways reduced growth and in some areas even contractions. That doesn't mean that everything is negative going out there. It does mean it's more volatile. And we do see, of course, positive aspects as well in some of the markets that we operate in. In some of the segments like Aero, we do see that there are positive developments and continued strength.
In the area of North America, still our largest revenue as a single country, we do see increasing strength for the 2 businesses, Performance Coatings and Specialty Chemicals that are operating there. And with the extraordinary measures that we see taken by central bankers and governments in Europe, we do expect a small recovery that will show increased strength going forward in Europe as well. But this is something that we believe is still a little way out. We have expressed concerns on 2016 because on the industrial GDP side, we have seen clear downturns in several other countries. But if we look at those markets, we do believe that in our relevance market segments, we do see a growth of 2% to 3% over the period combined.
And in that environment, we do clearly aim to use the foundation that we built to grow in line and faster than our relevant market segments going forward. Our definitions are clearly entirely comparable with the definitions that we've used in the past. We've tried to accommodate one of the requests that came from you and your colleagues to actually make sure that we look at the operational performances of the businesses that we have, and therefore, we've aligned ourselves with the wishes that are there. But the actual financial guidance and the way this is defined is entirely comparable with the way the targets were defined for 2015. You've also seen how this financial guidance was built up.
Similar to the targets of 2015, which were only targets at the company level, the financial guidance is only a guidance at the company level. But in line with what we did in 20 13, also today, we give you how these financial guidances for the company have been built up because the businesses clearly have different capital intensities, They clearly have different performances relative to their peers. And therefore, we thought it'd be very useful for you to see the performance ranges that were the foundation for the company's financial guidance that we've included on the previous slide that I've shown you. Each of the business area managers has clearly explained how they aim to build on the foundations that they've built to grow in line or faster than their relevant market segments. And each other business area managers has explained how they actually make their improvements on the operational side to actually lift the brackets of operation even in excess to what they have as targets for 2,050.
That leads me to reiterate that AkzoNobel is a very strong investment case. A fantastic portfolio of businesses that is geographically and business wide spread, which also has a built in resilience for individual volatility and fluctuations in the different regions and the different businesses. Strong global brands in both our consumer side and our industrial markets and a long term growth potential in all of our end user segments that we're operating in. Maybe a tough patch at this point in time, but if you look at these industries, if you look at auction of Bell over a longer period of time, we're in truly attractive markets that do show long term growth. We've got a clear track record of improving returns, certainly shown in the period of the last three and a half years, and we've also shown improved cash flows, which have made us decide that our interim dividends have been lifted with 6% for the recent announcement that we made last week.
So with that history and with that track record that we've elaborated on today, we are firmly convinced as a team that we are a strong investment case as a company overall and as the individual businesses as well. Thank you very, very much for being with us during the course of this afternoon. And to close today, I would like to ask all of my colleagues to join me on stage here for an overall session of questions for which we've approximately reserved an additional half hour. Thank you. Thank you very much for joining and the floor is open for questions and I see many.
So let's start there on the left. Thank you.
Yes. Thanks. Christian Faitz, a couple of questions. One for Melis. What for you in your definition is bolt on in terms of size, maybe sales amount you would want to spend or EBITDA, something like that.
And talking about acquisitions, one white spot you have in performance coding is automotive OEM, as we know, as you mentioned. If there ever was a chance to get into that business, would you go for it? Would that make sense? I guess I know the answer because I've asked that many times in the past several years. And the answer is no, it doesn't fit.
But can you elucidate why it wouldn't fit? And then staying in Automotive Refinish, is my understanding correct that the automotive refinish business is very much tied to insurance policies? And you basically doing business with big insurers like I believe you have a big GEICO contract in the U. S. How long is that contract going on?
And can you just highlight the business ins and outs?
Thank you. I would suggest that Nelisse answers the first question. I will pick up on the second, and maybe Conrad can explain some of the vehicle refinish dynamics going forward.
Yes. Is it working? Yes. Yes. For your question about bolt on bolt on bolt on for me is about more in the €100,000,000 level than €1,000,000,000 So this is what I make a difference.
And of course, I'm not I will hand over to Tom. But I would say today, we don't precise any specific target. As I mentioned, it could be in any part of our business, if it makes strategic sense, bringing us either a new access to a technology or to a new market, adding also synergy and definitely had to be value creating. So we will be very selective. As we mentioned, we are going to be cash generative.
It doesn't mean that we're going to rush to make acquisition. We want to pick the good one.
Thank you, Melis. When we look at the automotive OEM Coatings business, this is not a business where as an organization I would advise to try and organically grow yourself into. So you would talk about a significant move forward and to line up with what Melis has said, we've earned our right to grow. We've earned our right for bolt on acquisitions. Those bolt on acquisitions will be in the 100 of 1,000,000, not in the 1,000,000,000.
So from that perspective, I guess it's a choice made that would be very clear in that particular business if you want to take a significant position. The vehicle refinish business has been very successful, can be operated very successfully without that link on the automotive OEM. And Konrad, may you can elaborate on the insurance linkages that are in the business and are important. Sure. So if
you look at the vehicle refinishes business,
if you remember the slide that
I presented, we have a global number 3, number 4 position. If you're a little more ambitious, you would say we have a shared global number 3 position. Vehicle Refinishes business is determined by several stakeholders. There is a segment in vehicle refinishes that's very much tied to car dealerships. We do have approvals with all the major OEMs.
We're actually very pleased that this year we added to that the technical approval technology approval with Daimler. That's a big game for us. So if you look at car dealerships, the body shop is actually now a big part of their profitability. And that is for us, yeah, an interesting segment where we have a good global coverage. Then there is the segment of the independent body shops.
And here what you see is that the insurance companies play a role. What they do is they specify actually in their preferred dealer networks, yes, a number of paint suppliers. And that is very much based on performance. This is an area where we actually have been very successful. So if you look at where is Akshon well successful in our vehicle refinishes business, it is very much in this segment of the independent dealerships and that's very much a technology play.
We're known in the industry for excellent color accuracy. And color accuracy is not only the match to the OEM color, but the moment that you have a car in the field, after a few years, the color actually changes. And it is about matching that color in a very accurate way. We're leaders when it comes to digital. I showed this slide.
I didn't have a lot of time to explain it, but our digital color measurements and then our retrieval of the right formula for the body shop, that's actually an area that is really bringing efficiency to the body shops and therefore also to the insurers. So we actually feel that we're well positioned to this trend where insurers indeed play a growing importance in specifying to the people that have their car insurance with them, where they have to repair their car.
Thank you. Another question.
Hi. Thank you. It's Paul Walsh again from Morgan Stanley. Two questions if I can. Tom, I just want to come back to you around the messaging for 2016 because I don't think it'd be wrong to come away with some of those messages around 2016 looking tougher than 20 15.
And you guys all know where consensus expectations are pitched for 2016. And I'm just wondering if that's the right message to come away with. You alluded to some of the counterbalancing items in your wrap up. But just wondering if you really are trying to keep a lid on expectations or if we're sort of no change on that front. And my second question to Majelis, would you ever consider buybacks in the future as a use of surplus capital?
Let me start with the first question. What we're trying to provide you is a balanced and realistic picture going forward. We've looked in detail at our various market segments. We've tried to give you our best estimate of what we think the compound aggregate growth rate will be over the next 3 years. But what we do see is that visibility forward has reduced because of the increased volatility that we've seen in very specific market segments.
The various business area managers have elaborated on some of these segments. They've shown that some of them have reduced growth rates and some of them even have shown contraction in it. That is not the general picture across the board. But what is a general picture that has been harder to actually give a 3 year outlook than it probably was even a year ago. So from that perspective, we don't want you to walk away with a negative kind of outlook for 2016, but a realistic outlook that also admits that it is harder to look far into 2016, harder than it has been in the recent history.
Magsia?
Yes. So about buyback, I will first recall that we are aiming to be cash positive this year. And when we reach that, the first priority of our cash allocation, as I mentioned, is really on the entrepreneurial business. So it's growing our business through our CapEx and possibly bolt on acquisition. But of course, we're also focusing on return on shareholder, and that's why we have announced the increase of our interim dividend.
So this is really our first priority, but we don't we could envisage if really all these allocation has been fulfilled, also other type of return that could include share buyback, but it's not a priority in the short term.
Peter?
This is Asahi Chen, Raul. Just on the restructuring guidance to sales, the 1% number you have, which I know is the long term record if you can go back to the 2000s. You've just been through this big hike of transformation. You're getting more efficient to taking out costs. You're going for continuous improvement.
Is there not likely to be a phase that's below that? And then tied in with that question, obviously, if I look at the emerging markets, the big push there, putting the CapEx on the ground, one would have thought there might be scope for some investment payback, better efficiency there perhaps if the restructuring to sales remains 1%?
Allow me to move some of the emerging market thoughts to the business area managers. Your first question is a quick restructuring part. So what we've guided in the years has been something as a, call it, general maintenance charge that a company of our magnitude has, which is around 1% of sales. Now that we're actually moving more towards a continuous improvement, kind of level of performance going forward, we actually believe that it will be a notch lower and actually will hover between about 0.5% and 1% of sales going forward. So that is a notch less than what you've historically seen.
I think what we have shown you is that we are moving from the large restructuring plan to the continuous improvement mode. It means we can conduct some time to time very focused restructuring plan. But as mentioned, in term of magnitude, it will be lower. So the 0.5% to 1% is the guidance for it.
Maybe, Conrad, you can start with a quick view on emerging markets. And if there are abilities to invest, and then we move to Werner and Roed.
Yes. If you take a broad view at the emerging markets, I think it's fair to say that for Performance Coatings, most of the CapEx is actually behind us. So we're very pleased with our footprint. If you look at Latin America, if you look at Asia, if you look at the Middle East, if you look at key growth regions around the world, most of the CapEx is actually behind us. What you see is we still have one new plant, which we likely will open early next year in Thailand.
That is more of a consolidation. It allows us to actually concentrate production in the industrial zone outside Bangkok, combining 3 factories. There's also one more consolidation that we will do in China, where we will actually concentrate on our Changzhou side for vehicle refinishes also powder production. It allows us actually to close our Powder Ningbo facility. But these are more consolidation place than that we're actually adding capacity to support growth.
We are happy with our footprint. We have enough capacity. Most of the CapEx for us in the growth markets is behind us.
When it comes to Specialty Chemicals, I mean, we have 2 new plants under construction in China, one, an ethoxylation plant here for surfactants at Ningbo and another one here for our polymer chemistry chain here for a pretty large plant. So we keep investing here in these areas. But since the growth rates do decelerate, now it takes longer before we make the next plans, and we will benefit here from the AllOps Actionable leading performance systems in order to get more out of the existing plans. Naturally, the plants are pretty new, and there's always a relatively cheap way to get incremental capacity out. So we keep investing also in this area.
Yes. For Decorative Paints, the investments made in emerging markets were mostly in Asia and indeed based on growth. We opened a factory in India, I think, 2 years ago. And we opened a factory in South China for Deca last year. And we are finishing the Wukong factory, the West China factory early 2016.
So with that capacity in place, on midterm, we are in pretty good shape to support further growth, especially in China.
Thank you. Next question,
sir. Yes. It's Chadi from Goldman.
Just a question really on your portfolio. If I look at the vision statement you're putting out on the divisions, Specialty Chemicals and Performance Coatings, to me at least, it absolutely ties in with the current situation. If I look at Decor, you say that you're a leading global decorative paints company in size and performance. Now having exited North America, I suppose one region is sort of gone. So my sort of direct question is, are you the best owner of decorative coatings?
Because when you exited North America, PPG post that has had a significant improvement in operations. And if I look at your 2016 to 'thirteen return on sales targets of 8% to 10%, it's sort of still roughly in line with best in class coating peers, if that. So just the honest question is, do you think are you the best owner of decorative coatings? Or do you think that there is strategically something up for to be done here?
We are extraordinarily happy with the way our decorative paints business has been developing compared to what we saw in the 2012 2011 timeframes. We've seen the decorative paint business in absolute core and we continue to see it as absolute core. We do run auction Nobel as a company with 3 distinct businesses, decorative paints, performance coatings and specialty chemicals. As you're aware, we're not driving it from a communication perspective as a synergy case. We clearly do have synergies from a supply chain, operation, research and development and even intercompany supply perspective.
But we're driving it in such a way that we want the individual businesses to perform in line or better than their peers. And we've seen significant incremental steps in all of the businesses, including decorative paints and taking place. And that incremental improvement is actually what we're containing. So we're very happy with our decorative paints. We think we have the core ability to run it.
We're very different in terms of our geographical presence than many of our largely and heavily American based peers that we've seen. So you also need to clearly take that into consideration because there's different dynamics in these different markets. But we're clearly a good performer if you look at the broad base of decorative fence players, and we will continue to drive that performance going forward, as Ruth has shown.
Just to follow-up on the supply chain presentation, you said that about 22,000 people were sort of linked to supply chain. Just want to understand what has that number been historically and if there is any scope for reduction in personnel in that area?
Maybe Dave you can give an indication. Of course, our factory footprint rationalizations has taken a number of people out. But overall, maybe you can give an indication of the 22,000 people that are there and what has historically been the case there in the last couple of years.
Well, 22,000 that we talk about in supply chain obviously includes all
our production factory workers all the way
up through our management ranks. And of course, we have kept that in the last couple of years relatively stable. And of course, for us, what's important now is we continue to drive productivity labor productivity improvement is really what we really focus on.
So what we've done, as indicated, is with the factory rationalizations and with some of the layers that we've taken out, that has also affected the integrated supply chain community. But overall, we've been really focusing on getting the best out of it in terms of performance delivery performance and quality of performance were some of the individual examples David has shown. Next question, please.
Yes. Tim Jones, Deutsche Bank. Two questions, if I may. The clear tone today, obviously, is a slight shift towards growth as opposed to pure cost cutting. But let's presume that 2016 is significantly weaker.
Should we also assume that as in the past, there is a sort of plan B in respect of cost savings and that you could slightly reduce the emphasis on growth if that growth doesn't come through from a macro perspective through 2016 2017? That's the first question. And the second question is in regard of Deco. Probably for the last two and a half years, every single quarter, there is speculation that your Deco performance will blow up simply because of Valspar in the U. K.
So I wonder if you could address the issue of competitive pressure from Valspar in the U. K. How tough Valspar is? How much you've been impacted by that in the last year or so? And what you're doing to counteract the competitive pressure?
Thank you.
Yes. I will try to take your first question, and then I would ask Ruth to answer the second question related to Valspar in the U. K. One of the strengths that I think this team has developed overall in all of the areas of responsibility is to make sure that we have a built in flexibility to respond. In 2013, very early in 2013, we not only communicated the targets for 2015, we also communicated what we thought the growth rates would be from that moment on until now.
And that certainly was a growth rate that was significantly different from what occurred. And the skill that we built as part of delivering this strategy so far has been that what I call drawer number 1 and drawer number 2, when the actual growth or other aspects of the business do not occur. And we've had to open several drawers during the course of 2013 through and including 2015 to deliver. And that skill, of course, is something that we've now built into the organization. That may not be in the European environment, which was a very heavily affected area during the last 3 years.
It may actually start occurring in other areas, but we have now a broad based skills that has a contingency planning on top of what we normally envisage the markets and our own businesses to do. Ute, on Bascomere?
Yes. As I presented in my, let's say, specific example on the U. K, this is a big market in Europe, €1,400,000,000 as I mentioned. And we have a very strong position in the market, especially with our institutional jewelage brands. Of course, there are always competition dynamics in the market and also in the U.
K. And we are closely following this. But I have to say that the tinting market is still a small part of the U. K. Market because the U.
K. Retail market, which is let's say 50% of the total Deco market is still heavily reliant on ready mixed assortments, where we of course also have a very strong position indeed. So overall, yes, we follow closely the competition. We are happy to say that our position is improving. We are growing the business in the U.
K. And still, yes, enforcing our very strong position.
Next question, please. Can I
follow-up on the slide from Mileage on investments? One blank spot on the recent investment is North America. Now in Deco, you're not there. Can I just ask the heads of Performance Coatings and Chemicals business, are you skeptical on the gold rush into shale gas? Or is there limited demand for new investments from your end customers?
Why is North American map empty on CapEx?
I think, Werner, you're probably the most suitable one to answer as a participant in the North American Chemicals business.
Okay. Here, the shale gas revolution, I think that is a big asset, gives provides very promising growth perspectives here for the chemical industry in North America. You know that in the Gulf region, more than €100,000,000,000 is being invested based on that. Now how do we benefit from it? Now we benefit in different ways.
Now we have quite some business in North America, a manufacturing network here for bleaching and also the other business unit with the exception of industrial chemicals are there. Bleaching has a very is a very good energy incentive business, so we do benefit here from the low energy cost here in our manufacturing. So that is a very effective base from our for our operating business. The second business, which is benefiting from it, that is our polymer chemistry or polymer chemicals platform. They have to provide us here for the initiative for the catalyst for the manufacturing of plastics.
And the manufacturing of plastics will increase and we will grow with this business. And the 3rd platform is surface chemistry. Now there are ups and downs. We are now suffering a little bit due to the lower number of rigs or lower trading activities. But on the other hand, the production didn't come down.
So when it comes here to the stimulation of oil wells, now where we also provide products for, now we are benefiting from it. So all in all, we do have some benefits here from in the businesses we are, but we don't need significant investments here to further support it.
But it is a significant structural benefit for the North American environment. Yes, you called it a bonanza. I think whether it is that or not, it is certainly a mid- to long term benefit for the North American producers, of which we are 1.
Just follow-up on the polymer additives. The other region where there's still chemical CapEx put into the ground is Middle East. How are you positioned in terms of polymer additives there?
In the Middle East, we have no hard assets in the ground. It is for us a target market. And just by way of example, as the Middle East is, of course, growing with this low oil and basic petrochemicals, But the chemical industry in the Middle East is not bigger than the chemical industry in the Netherlands. And so when it comes here to supplying here additives here for instance here for the plastics industry, now we cannot justify manufacturing there. For us, it is an important market here for the polymer chemicals chain and potentially also for surfactants and for building additives.
And so we have presence here with having sales and marketing people on the ground. And once the that the book is sufficient, business efficient, the market will be big enough, we would also consider putting concrete and steel into the ground.
Next question please.
Hi, it's Jeremy Rodenius from Bernstein. I'm just curious to hear about the risks to achieving the top end of these new set of targets. Let's set aside external factors like the markets and currency. But what are the risks that you can control that worry you the most perhaps because you're overall and by business segment? What are the key risks to achieving your targets?
Very broad question. I've been trying to pass some questions to Martin and Sven, but these ones don't work this way. But basically, it's hard to assess individual risks by completely neglecting the outside world. The environment we operate in, in the various segments, in the various geographical areas, One great aspect of that is that there is an inherent hedge in individual volatilities in individual regions and individual businesses as well. Of course, it is important that we deliver on the creation of the culture of performance that Martin has elaborated on.
Of course, it's important that we deliver on developing the culture of continuous improvement and the tools and the ALPS initiatives that Dave has been elaborating on. If there is an execution ability hiccup, that is something that would be a small risk associated with it. Overall, we believe that we have the people to make it happen. We have the management teams to make it happen. We're driving a lot of training.
And Martin, maybe you can elaborate on that part to make sure that we continue to have the talent attraction in the various regions. But overall, I guess the risks are associated by and large by disruptions in the external environment that we may not have foreseen today.
As I said in my presentation, we are building and developing commercial excellence capabilities in the organization by training our salespeople, by training our technical sales reps really to drive organic growth. And we put a lot of energy in that and a lot of training hours as well. And also with Conrad and Lebret, it is to support it with sales incentives and the right sales incentive is the right line of sight for those people. That's how we drive organic growth and that's how we grow the businesses.
Next question please.
Yes. From Klas from Rabobank. Got a question on R and D. What do you see as currently see as your main topics challenges for your R and D departments? And what do you see as a trend going forward for R and D expenses as a percentage of revenues?
I think why don't each of the individual business areas have a clear indication of what you think is key for your individual businesses. Ruike, do you want to start?
Yes. I presented the key pillars for innovation with Executive Paints. A key pillar is sustainability. Like I presented more and more now also, let's say, outside mature Europe and North America, you see the trends for demand for sustainable products, especially with China. Also where the government is really pushing for low VOC products and even raising taxes on VOC products.
I really endorse that and I think it's an advantage of auction of the hell as we are the driver for many, many years with more sustainable products. So that will be a key pillar for RD and I to come up with more sustainable products, non additive products and stay on the front line of these developments. Another thing I would like to mention is color in combination with digital. So the visualizer that I showed you today, I think, is a key breakthrough development where we see I think we've only seen the beginning of the advantages for AkzoNobel by introducing it last year and now having the second version introduced in 2015. And that's linking with our color knowledge, which of course is shared with Performance Coatings as well.
We are extremely strong at a huge scale in creating technology, creating the right color and then combining with inspiration and digital. For me, together with sustainability key pillar are the are fantastic opportunities for AkzoNobel.
Ben? Yes.
Okay. So capitals, now we spend about €100,000,000 a year on RD and I and on RDE. And our research is very close to the business. Although we have organized here our 75, threefour of our people are organizing 3 art in research institutes in order to ensure that we have professional teams. So we have also world scale laboratories and people in place.
But we have, on the other hand, we have it very close to the business. Now what is important for us? It is one area is to create value here for the customers. I showed you some examples in this regard. Another one is new products.
But equally important here for chemicals is process improvement. Now we are in some areas, it is important that we have scale. Now that we have good technology in order to achieve a cost advantage, not to create advantaged assets compared to our competitors. So that is the balance that we try to do. And so far, now we never say no against good projects.
So to address here now what is the level you're looking for. Now that is the current level we are spending. We feel comfortable with it. But in case that we had requests and good projects, now we would increase our RD and I budget.
Yes. Commenting on RD and I for Performance Coatings, what we've seen actually in the last three years is that we've been able to free up a lot of our RE and I resources. So if you look at what we did in the last 2 years, all these factory closures, before we closed a facility, we actually made sure that we standardized the product range before we relocated product to another facility. So the last slide that I showed actually when I was talking about innovation, what you saw is an enormous reduction in the number of technology platforms. In the past, a lot of our RD and I people were basically occupied to keep in the air all these many different technology platforms for 1 and the same segment.
Now we've actually reduced the number of building blocks. We've reduced the number of technology platforms, which really has allowed us to free up the research guys to work much more on product development and focus a lot more on big innovations. We're seeing big innovations not only around the product, but increasingly around services around the product. I gave you some of the examples about InterTrax where we're gathering the data, the global AIS positioning data. I gave you the example of our protective business where actually we're using iPad application to predict maintenance requirements for large chemical plants or refineries.
And actually, if you look at color, there's a lot of innovation around not only reading colors digitally with a colorimeter, matching them, but also actually developing them through algorithms. In the past, we were spraying manually panels and then developing colors manually. We've made actually big steps forward where now we do that actually through computer algorithms and we established the color factory in India to do that. That means a lot more efficiency, a lot more output from the RD and I organization. It's not our ambition to cut resources, our ambition to really allocate into product development and bolder innovations to support growth.
Thank you, Konrad. With an eye on time, I know that many of you have remaining questions. We are, of course, still gathering outside here where all of you can continue to ask questions to the individual executive committee members and David Allen. But I do think with an eye out of time that we should closely wrap it up. Of course, additional questions can also be asked to our Investors Relations community who are present here in significant numbers.
I do trust that we as a team have been able to show you that we've made significant steps in improving Auk Nobel as a company and that we want to use this foundation to not stop improving, but continue that, but on top of that add a component of organic growth. We hope that we've been able to show you more about how these businesses are intending to do it, what the people aspects are and how we want to build that continuous improvement culture from within without the consultants, but truly in building the skills with our own people, with our own efforts, with our own tools and with our own processes. Thank you very, very much for your attention for this long afternoon, and I look forward to the quick break that we have at the end of this for continued discussions. Thank you very, very much.
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