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Welcome and thank you for standing by. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. May I introduce your speaker for today, Lloyd Midwinter, Director, Investor Relations. Please go ahead.
Hello and welcome to the AkzoNobel Investor Update for Q1 2019. I'm Lloyd Midwinter, Director, Investor Relations. Today, our CEO, Thierry Vanlancker; and CFO, Maarten de Vries, will guide you through the results for our quarter. We refer to a presentation, which you can follow on screen and download from our website, akzonobel.com. A replay of this call will also be made available. There will be an opportunity to ask questions after the presentation. For additional information, please contact Investor Relations. Before we continue, I would like to remind you about the disclaimer at the back of this presentation. Please note this is also applicable to the conference call and answers to your questions. I now hand over to Thierry, who starts on Slide 4 of the presentation.
Thank you, Lloyd. Good morning, everyone, and thank you for joining us on this call. I'm very encouraged by the progress in the first quarter of 2019. Our adjusted operating income was 9% higher at EUR 163 million. This adjusted operating income was despite raw material inflation. This continued at a EUR 77 million higher variable cost. Our ongoing price initiatives resulted in price/mix up of 6% and cost-saving programs delivered EUR 38 million in the first quarter. Volumes were lower due to our of value over volume strategy.The ROS, excluding unallocated costs, increased to 9.1% versus 8.7% last year. Decorative Paints continued a good momentum in a seasonally low quarter while Automotive and Specialty Coatings was impacted by order pattern. Our transformation plans are very much on track, and we continue to focus on delivering our Winning together: 15 by 20 strategy. We are equally on track in returning a total of EUR 6.5 billion to our shareholders and have settled the cash top-up payments for the main U.K. pension plans.Some key highlights are shown on Slide #5. During Q1, revenue was up 1% in constant currencies with positive price/mix partly offset by lower volumes. Pricing initiatives in response to higher raw material costs contributed to positive price/mix of 6% overall. ROS, excluding unallocated costs, increased to 9.1% from 8.7% last year and adjusted operating income was 9% higher. All this despite continued headwinds from higher raw material costs and macroeconomic uncertainty as well as some positive one-off items in the quarter 2018 last year. Delivering on our commitment, we completed a EUR 2 billion capital repayment and share consolidation in January and paid a EUR 1 billion threshold cash dividend in February. Our EUR 2.5 billion share buyback is well underway with EUR 300 million already executed in Q1 and EUR 500 million to date. We've also settled the cash top-up payments of our main U.K. pension plans, removing a significant cash headwind for the company in the future. Now turning to Slide #6. Our Winning together: 15 by 20 strategy is delivering results and gathering momentum. In Q1, robust pricing initiatives achieved positive price/mix of 6%. Our Paint the Future open innovation challenge received an impressive 161 entries from start-up companies, of which 21 of those start-ups were shortlisted for our final event next month. This initiative is a great example of how we're leading the paints and coatings industry and to enable us to deliver even more innovative solutions to our customers in the future. All AkzoNobel's Global business services hubs are now operational with 8 country transitions complete and 54 in progress out of the total 120 to be completed by 2020. We're also steadily moving forward with our ERP integration, completing 5 out of 18 go lives with our plans for 2019. This will play a key role in enabling our future performance improvements. Our new procurement category management organization is now operational and focused on delivering future savings. In the U.S., we're investing in a major site upgrade at our Wood Coatings facility in High Point, North Carolina to strengthen our Wood Coatings position and deliver future efficiencies. This is one of our largest Paints and Coatings investments in the U.S. for more than a decade. Our succession planning pipeline has been successfully demonstrating with the promotion of David Prinselaar as Chief Supply Chain Officer and member of the Executive Committee. David was previously head of our manufacturing organization. He succeeds Dave Allen, who is assisting David Prinselaar with the handover until the mid of this year. We're adopting a very sharp focus to implement our transformation plans and achieve our Winning together: 15 by 20 strategy. A summary of the market dynamics is shown on Slide 7. The macroeconomic headwinds we discussed previously continue. Demand for Powder Coatings remained strong while Automotive and Specialty Coatings was mixed and impacted by the Q1 specific order pattern for vehicle refinishes. Strong demand for aerospace coatings will offset a lower demand for automotive OEM Coatings.Decorative Paints shows overall a good momentum. In China, volumes were lower, also due to our value over volume strategy. Volumes grew elsewhere in Asia, including India and Vietnam. Positive developments continued for South America, excluding adverse currency impacts.Headwinds persisted from adverse currencies, mainly related to the Brazilian real and the Argentinian peso although the adverse impact was lower than in previous quarters. Raw material and other variable costs continue to increase with EUR 77 million of inflation impacting the quarter. We are making progress despite these continued headwinds. Slide #8 shows the quarterly trends in volume and price/mix. The price/mix development shows the continued year-on-year progression of our pricing initiatives. We've now been delivering positive price/mix for 5 quarters in a row. Decorative Paints price/mix was 6% higher driven by our continued pricing initiatives. Volumes were 6% lower, partly as a result of our value over volume strategy. Excluding China, volumes for Decorative Paints were just 2% lower. Continued focus on pricing initiatives resulted in positive price/mix of 7% for Performance Coatings. Volumes were lower in all segments due to our value over volume strategy. Automotive and Specialty Coatings was, as said, adversely impacted by a quarter 1-specific order pattern and mix demand trends. I'm now handing over to Maarten, who will run through the financial results in more detail from Slide 10 onwards.
Thank you, Thierry, and hello everybody on the call this morning. A summary of our financial results is shown on Slide 10. Revenue was up 1% in constant currencies with positive price/mix offset by lower volumes. Volumes were 7% lower due to our value over volume strategy. Excluding Decorative Paints in China, volumes were 5% lower. Adjusted operating income was up 9% at EUR 163 million, driven by pricing initiatives and cost-saving programs. Return on sales, excluding unallocated costs, increased to 9.1% versus 8.7% in 2018. Operating income increased to EUR 113 million and including identified items of EUR 50 million, mainly related to cost of further transformation and noncash impairments in Performance Coatings related to the implementation of our strategic portfolio review. Slide 11 shows the main developments for adjusted operating income during the first quarter. The adverse impact of foreign exchange rates has reduced during recent quarters that was mainly related to the Brazilian real and the Argentinian peso. The positive effect from our pricing initiatives contributed EUR 140 million price/mix, partly offset by lower volumes. And higher raw material and other variable costs continued to be a headwind and adversely impacted the results by EUR 77 million in the quarter. Productivity improvements from our ALPS' continuous improvement program achieved cost savings to offset wage and other fixed cost inflation. Our transformation plans are on track and delivered a total of EUR 38 million savings, and that's including the impact of changes made in 2018 and the next steps taken in 2019.The first quarter of 2018 was positively impacted by one-off items, mainly due to gains on disposals. Overall, our continued focus on pricing initiatives combined with cost-saving programs successfully offset the impact of continued raw material inflation. These results show we're delivering towards our Winning together: 15 by 20 strategy. The Q1 results for Decorative Paints are summarized on Slide 12. Decorative Paints continued to show good momentum in a seasonally low quarter. Revenue was up 2% in constant currencies with positive price/mix of 6% driven by pricing initiatives and contribution from acquisitions. Volumes were 6% lower, partly as a result of our value over volume strategy and lower volumes in China. Excluding China, volumes were just 2% lower for Decorative Paints. In Asia, volumes grew in India, Thailand, Malaysia and Vietnam.The acquisition of Fabryo in Romania, Xylazel in Spain, Colourland Paints in Malaysia as well as several stores in the U.K. added 2% to revenues. Adjusted operating income increased to EUR 60 million, up 7% versus last year. Higher selling prices and further cost savings offset increased raw material cost and lower volumes resulted in a return on sales of 7.1% versus 6.6% in 2018. And the adverse currency effects were mainly driven by various currencies, including the Argentinian peso and the Brazilian real.Turning now to Performance Coatings on Slide 13. Profitability increased in all segments except for Automotive and Specialty Coatings, which was impacted by order pattern and mixed demand dynamics. Let's just focus on restructuring and rightsizing continued for Marine and Protective Coatings, and strategic portfolio management was implemented by Industrial Coatings, resulting in some noncash impairments. Powder Coatings continued positive trends supported by new applications and pricing initiatives. Overall, revenue was flat with 7% positive price/mix driven by pricing initiatives offset by lower volumes. Adjusted operating income was up 3% at EUR 138 million as pricing initiatives and cost control more than offset higher raw material cost and lower volumes. Operating income was adversely impacted by EUR 41 million, identified items mainly related to the transformation and noncash impairments. The return on sales was up 10.3% versus 10% in the first quarter of 2018. Now turning to Slide 14. In the first quarter, adjusted EPS was 30% higher at EUR 0.46. Net income from total operations was EUR 65 million. The net income for the first quarter of 2018 included EUR 134 million results from discontinued operations and was positively impacted by interest and tax benefits. Adjusted earnings per share increased due to higher adjusted net income from continuous operations of 20% combined with the positive impact from fewer shares following the capital repayment and share consolidation as well as the start of the share buyback program.Moving on to Slide 15. Net cash from operating activities resulted in an outflow of EUR 724 million during the first quarter of 2019 versus EUR 456 million in the first quarter of 2018. Cash flow was mainly impacted by the pension top-up payments of EUR 478 million and normal seasonable working capital outflow of EUR 421 million. The working capital outflow was EUR 60 million higher than the previous year, mainly due to higher trade receivables and lower trade day payables including an adverse of acquisitions. At the 31st of March 2019, net debt was negative EUR 1.3 billion versus EUR 5.9 billion at year-end 2018. This was mainly due to the distribution of proceeds following the sale of Specialty Chemicals business and the pension top-up payments as well as a seasonality of operating working capital.I'll now hand back to Thierry for concluding remarks on Slide 17.
Thank you, Maarten. We are encouraged by the progress that we are making especially considering the seasonally small quarter and the various headwinds, including raw material inflation. Our transformation plans for creating a more fit-for-purpose organization are on track. Our adjusted operating income was 9% higher than same quarter last year. Ongoing pricing initiatives resulted in price/mix up 6% and cost-savings programs delivered EUR 38 million in the quarter. Volumes were lower largely due to our value over volume strategy. The return on sales, excluding unallocated costs, increased to 9.1% versus 8.7% last year. We are also on track returning a total of EUR 6.5 billion to our shareholders, and we've settled the cash top-up payments for the main U.K. pension plans. Finally, turning to Slide 18. There is no change to our outlook. We're delivering towards our Winning together: 15 by 20 strategy and continue creating a fit-for-purpose organization for a focus Paints and Coatings company contributing to the achievement of our 2020 guidance. Demand trends differ per region and segment in an uncertain macroeconomic environment. Raw material inflation is expected to continue during the first half of this year although at a lower rate than 2018. Robust pricing initiatives and cost-saving programs are in place to address the current challenges. We continue executing our transformation to deliver the next EUR 200 million cost savings by 2020, incurring one-off costs in 2019 and 2020. We target a leverage ratio of between 1 to 2x net debt versus EBITDA by the end of 2020 and commit to retain a strong investment-grade credit rating. With that, I now hand over to Lloyd for information about upcoming events and to get the Q&A organized.
Thank you, Thierry. Before we start the Q&A session, I would like to draw your attention to some upcoming events shared on Slide 19. Annual general meeting of shareholders will be held tomorrow, April 25. We will also publish our report for the second quarter on July 24. This concludes the formal part of the presentation. We would now be happy to receive your questions. [Operator Instructions] Operator, please start the Q&A session.
[Operator Instructions] We have 8 questions in queue at this time. Our first question comes from Tom Wrigglesworth from Citi.
So my first one is regards to the volumes in Performance Coatings in the first quarter. You called out lower demand from automotive OEM Coatings and the volumes for vehicle refinishes. Could you help us understand the magnitude of impact between those two? I see that vehicle refinishes is the larger impact. Could you help -- and it's not just the timing effect when you say about order patterns, i.e., are you expecting these volumes to kind of catch up in the second quarter? If you try and quantify, that would be very helpful. And then secondly on the price cost mix that you identify. Obviously, the higher raw mattes that we're seeing coming through in the first half now that you're indicating, are those something that now require a further set of price or initiatives? Is that your communication today that you're going to need to increase prices again? How should we think about that price versus cost dynamic over the rest of 2019?
Tom, thanks for your questions. I'll probably take your first question and then Maarten can go into the price cost one. First, on the volume in Performance Coatings. Well, just like everybody else, there was an impact obviously from the OEM markets. That is the most visible in our smaller but very much dedicated OEM business that we have. So there, of course, we saw the same percentage impacts than anybody else. There was also a wrinkle effect in some of the other businesses that actually coat elements. Powder Coatings has some OEM-related business in there, but the underlying strength of that business was enough to offset it although the growth rate there was somewhat lower than we typically have seen in the past. On vehicle refinish. Your question is, is that a onetime effect. It looks like it definitely is. There's a couple of elements. Price increases announced at the beginning of the year, and that resulted specifically in North America as it is traditionally the case in some of more higher sales in December. So a little bit of a prebuy, you could argue. So that has, of course, pulled out profit from the first quarter this year. What you've also seen is a notable case of inventory management at one of the big accounts. We've even, as you might imagine, have been bird-dogging there around what's really happening. The sellout of those accounts has been the same to the markets, so there is really no impact to the bullish-ups who, of course, are very brand-specific and are using our materials. And we've also seen that then really returned after, I would say, a bit more of a month of relatively subdued sales at that account and given the magnitude there that has an impact. So to answer your question on vehicle refinish, there was a significant impact in our numbers in the first quarter, but I think we helped to keeping the business healthy there, and we see that -- as far as we can see at least in April, we see that completely returning as we had expected that it would happen. So in that sense, hopefully, Tom, that answers your first question before I hand it over to Maarten.
Yes, that's great.
Okay.
Yes, Tom. So price versus cost. First of all, I think it's important to note that we are actually pretty encouraged by price/mix development in the first quarter, plus 6%. And in fact if you add it up for -- on top of the first quarter of 2018, we're sitting at roughly 8% because in the first quarter of '18, it was 2%. So that is how we look at it. We continue our plan and that's -- are the price increases, which we had to be -- have and are deploying in Q1, but also in the second quarter to compensate fully the raw material impact as we've said before. From a raw material perspective, we've mentioned earlier that we've seen raw material coming quite with high level at the end of Q4 last year, and that's what we are now seeing flowing through our P&L in the first quarter and we see that also partially in the second quarter. But overall, this is all in line with our plans in terms of our pricing initiatives compensating the raw material price increases.
Does that answer your question, Tom?
Yes.
The next question comes from Charlie Webb from Morgan Stanley.
Just a couple from me then. Just around the volumes again. As we look into the -- for the rest of the year, I remember at the full year you were guiding that perhaps this year volumes for the group over the whole year will be something close to kind of a wash, a neutral 0 kind of number being negative in the first half and then positive in the second half. Is that still true after what was a fairly soft quarter for volumes in Q1 and, in a sense, a small quarter? That's the first question. And then just secondly, around raw materials. Again, I see slightly more, possibly in the first quarter, maybe not, and you talked obviously about continued headwinds in the first half. Do you still expect? Or are you positively optimistic or cautiously optimistic? I think you put it last time that you'll see tailwinds in the second half of the year? Is that what you see in terms of where raw materials are today mark-to-market?
Yes. Okay, good question, Charlie. Let me try to tackle them and then see if Maarten wants to build on them. First of all, on the volume. I think we indicated in the fourth quarter that we probably were sequentially starting to get to where we needed to be, and I think that's also kind of confirming. Of course, you're still looking at comparing year-over-year versus a quarter a year ago, et cetera. But also when we look underlying, I think the business is basically where we are. There are some smaller examples where we still -- with our pricing step away from a little bit of volume, but I think that should indeed start to wash out over the year as the comparisons go on. So that's one item. So I think we haven't changed our position there. On where the ROS is concerned, I think Maarten explained the dynamic in the first quarter and that may trickle over slightly in the second quarter. What we try to do with our organization, you can have a view on the pigments, additives, et cetera, where that might actually be a bit of a more relaxed situation for us. At the same time, then you have the oil-based materials where it moves all over the place depending on the political agenda of today.So in that sense, Maarten and I may have a hidden, more optimistic agenda. But frankly, since we cannot count on that, as we said also in the last quarter, we are not betting our 15 by 20 plans on any relief there. So we don't think that in the second half that would be a headwind. So I think that's not going to be a negative. But we're not calculating in our numbers of tailwind. So we think it's going to be neutral. And if there is a benefit, then we'll take it. But that's not part of our underlying plans. Maarten, I don't know if you want to add to that.
Yes. So I think Thierry said that the raw material situation for our numbers is indeed different in the second half versus the first half where indeed the first half we see still the high level at the end of Q4 flowing through our P&L in Q1 and partly in Q2, and that should see a more normalized picture in the second half. But as said, we are not counting in our plans on any tailwinds, but it is more from an internal perspective.
Does that answer your question, Charlie?
Yes. Just a quick one. In terms of Tom's question on the kind of auto refinish business, you said it's going to return to normal level in Q2, is that -- is the volumes you lost in Q1, is that gone? Or would you expect to get that back in Q2? Just to clarify that.
Well, so there's 2 elements. As I said, the minor part of it was probably sold in the end of '18, but that's a minor part. That is the typical dynamics if you do a price increase, you have always a little bit of a prebuying happening. Obviously, that's the minor part of it. If you really look at this, it was really kind of a stop management at one of our customers, so I think that's going to be largely coming back during the coming quarters. So again because the sell-out to the body shops is actually unchanged, then we have very specific data and very clear data. So it is really an inventory onetime effect, and that should actually all correct itself as of now.
The next question comes from Tony Jones from Redburn.
Tony Jones at Redburn. I just got 2 quick ones. On price/mix at plus 6%, could you split that up into which part of it was underlying price and which part was mix? For memory, I think mix gain in Q4 was about 3%.And then back on raw material costs. To get to the costs in your EBIT bridge backing out from COGS last year implies that raw materials were up about 10% in this quarter. Could you confirm whether that's not far off the mark? And specifically, which cost category is driving that increase? That was quite a bit above what I was expecting for this quarter.
Yes. On the raw material -- on your last question, Tony. That's more or less correct. So as we have indicated from the high position end of Q4, so we're basically at some -- what we feel as in high point, so that's flowing through our -- on our P&L. If we look at invoice-to-invoice levels, that should kind of ease out over the second half.I don't know if that answers your question, but that's -- I think your analysis is correct.
On the price/mix question that you have, the 6% in this quarter is largely price and not -- and there's very little mix in there. There is some positive mix in some of the businesses. But for example, Automotive and Specialty Coatings in the first quarter, that is then a negative mix situation. So all in all, the 6% is almost completely pricing, which in fact is good news given where we -- also with Deco, et cetera, as we head into the summer, of course, that's actually good news for us.
The next question comes from Laurent Favre from Exane.
I just have 2 quick questions. First one on the cash outflow for restructuring, about EUR 20 million I think in Q1. From memory, you're getting to EUR 150 million for the full year. I was wondering if you could tell us a bit about the phasing of that for Q2, Q3. And then the second or question and remark as well, on the one-off reversal that you mentioned in the bridge, could you maybe tell us if for the rest of the year last year you had any significant or at least, well, let's say, similar to Q1 one-offs either positive or negative that you wouldn't have mentioned at the time? So for Q2, Q3, Q4.
Okay. Maybe to start with the last question. In fact, in Q1 2018, we've specifically mentioned that we had gains on real estate disposals, which was sitting by the way in BA order. And the delta, the positive delta at that time, we highlighted that it was coming from gains from real estate disposals. So we thought it is at least good to reflect this to understand the underlying improvement of the results.On the restructuring, we have seen EUR 50 million in identified items. EUR 33 million is related to impairments in Performance Coatings. In fact, Industrial Coatings is related to portfolio measures we are taking, and it's part of the overall transformation and overall transformation cost. And then the remainder part is to restructuring cash-out costs. If you look at this, then timing-wise, we are lagging behind, but it is more related to the timing of the discussions with our workers councils. In fact, some of the elements just kind of passed -- crossed the 1st of April and are coming in, in the month of April. So it is purely a timing of the restructuring. But overall, we are on track in terms of our restructuring plans and in terms of our transformation.
The next question comes from Georgina Iwamoto from Goldman Sachs.
I've got just one long question about volumes. You helpfully indicated how much of your volume decline was related to China Deco. I was wondering what you could do to help us break out how much of the volume declines were self-inflicted versus actual underlying demand weakness. And maybe if you could give us some idea of which segments you're seeing the weakness in. And then you also mentioned in terms of the Automotive and Specialty volume weakness that you saw prebuying. Are there any other segments where there has been or you are currently seeing prebuying related to your own price increases? And then any kind of color that you can give us on so far this month how demand trends have been going for you.
All right. Georgina, I'll see if I can actually remember all the different points of your question. We would like to go there. First of all, self-inflicted versus market. Again, in Deco, clearly and maybe it's better if I just go segment by segment in that. In Deco, China is actually just hanging in there. It's not necessarily improving or not or going downwards. We'll see if the VAT element or the relief that the government gave us is stimulus whether that helps or not, but that's the known actor as you indeed indicate. For the rest of Deco, I would say Southeast Asia is actually doing quite well. If you look at -- Europe is actually doing very well. And then if you look at Latin America, it's -- volume-wise, it's okay. Then you have, of course, the devaluation, so that doesn't help it. Those markets for Deco are all, in fact, pretty strong. And I think even that our positions that were already strong in those markets, actually we continue to build on those. Those, for example, by the way, is the U.K. where everywhere is lamenting about Brexit. But frankly, our business is doing quite well there.If I go to the Performance Coatings businesses. Powder Coatings, that market is growing. I would say the underlying demand element there is related to OEM. You know that we are in wheel coating, et cetera. We have a very big position. So those are in fact somewhat impacted. But as I indicated before, the Powder Coating business is still strong that, in fact, it's a reduction in the growth rate, and it's not actually going on the other way around. I think also that there, on pricing, et cetera, really does not have an impact or it is very temporarily impact on demand. So I think Powder continues to be a tick in the box on all levels. If I look at Marine and Protective, a couple of elements there. By the way, if I go with it, the specific effect in automotive, all of the segments in Performance Coatings are showing a stronger bottom line than they had last year. If I go to Marine and Protective, that is actually a significant improvement in the performance for that business. But on the top line, I would say Marine is still more or less flattish. And there I think, yes, I would say, incrementally, we're walking away still from some business because of our pricing and what we want to achieve. Protective Coatings. I would say the pipeline looks healthier, but that's not exactly materializing just yet. So that -- there we see really demand coming. But on oil and gas, those are typically a 12 to 18 months before you actually see that coming when the project starts.So that's in fact for the first 2. For ICO, if I look at -- or Industrial Coatings, which is our internal lingo for Industrial Coatings. There, I think, you have a collection of businesses. With Coatings, it's slower in volume. That frankly has very little to do, I think, with self-inflicted or not self-inflicted. You have the housing markets in the U.S., which is a bit slower, and that goes into kitchen cabinets and all those things, which are also less buoyant. And then you have the China situation, which is also not helping there. So wood is actually more a slower demand. Packaging is very strong and our business is very strong. There, our new technology is obviously finding a sweet spot in what the customers want and at the same time being economically a very viable solution. So there we see significant pickup, end of the month actually being strong. And if you go to Metal Coatings, there, I would say it's probably more our own pricing strategy that subdues some of the demand. And then in Automotive Specialty Coatings, Aerospace, very strong, continues to be very strong business. Specialty Coatings, which does a lot in consumer electronics, that underlying market is weak. I would say that is largely the market dynamics in then Asian consumer electronics. And then automotive and vehicle refinish, that market continues to be doing very well. I mean we had this onetime effect where we really didn't want to get creative on how to solve in the first quarter, but that market continues to be on track underlying. So sorry for the long exposé, but hopefully that gives you a bit of a picture by segment on where we are.
Yes, that's very helpful, Maarten -- sorry, Thierry.
[indiscernible]
Yes.
I asked such a long question, such a long answer, I've forgotten where we are. So just to kind of summarize then, it sounds like most of the volume losses were self-inflicted, with really just some industrial and wood and automotive being called out as actually underlying demand is weak.
Yes. I think if you look at our volumes, I think we more or less summarized it at our regretted losses, which we call segments that we are -- actually, have lower sales because we are pushing our price. I think we estimated to be about 2% of that, then you have the China factor and then you basically have a little bit of pluses and minuses on underlying market.
Speakers, we have 3 questions in queue. The next question comes from Chetan Udeshi from JPMorgan.
Just a couple of clarifications. Firstly, I was just looking at your gross margin, and it seems like in Q1 it was down about 50 basis points year-on-year. I was wondering given the positive sort of net pricing in the quarter, why is it still down year-on-year. That is the first question. Second question, probably I missed the response to one of the earlier question, which is how much of the cash-out on restructuring has been reflected in the cash flow already so far until Q1?
On the gross margin, to be honest, I don't recognize immediately your question. So I think we better take it offline because I think you are looking at the gross margin including identified items and not a clean margin. But let's take that offline. From a cash perspective, most of that is also taken as cash in the first quarter, of course, excluding the impairments, which are noncash items.
Just going back on the gross margin, this is actually slightly up. But don't underestimate the impact there of the refinish shift we have because that is a big margin negative. But it's actually up. So maybe we're looking at different numbers here.
The next question comes from Nathalie Debruyne from Degroof Petercam.
Perhaps just 2 quick questions from my side. The first one would be on working capital. So you flagged obviously that's part of the high working capital percentage in Q1 is linked to acquisition. Could you perhaps help me understand what is acquisition-related? And the other part of it, whether it is timing effect or whether there is something structural in there like, I mean, shorter repayment terms with your supplier something the like? And the second one would be actually a more general question. What is your view on the consolidation of -- in the market today? We have seen, I mean, a big announcement from Nippon Paint in the recent weeks. So I was wondering what was your view on this? And what is your strategy going forward? I know that you are very, very much focused on the 15 by 20 strategy. But I mean, yes, what is your M&A pipeline? What are you kind of targeting at this point in time? And what are the opportunities in the market?
Thank you, Nathalie. Maybe Maarten can answer the working capital, and then I'll gladly talk about consolidation.
Yes. So on a working capital, what we are flagging here is that, of course, the acquisition -- the bolt-on acquisitions, which we've done mostly by the latter part of last year, are now in our numbers. So from an absolute amount, that shows a higher working capital FO. We've not specifically splitted it out, but I think it's important to flag. If you look at the different items in working cap, inventory clearly is driven by the raw material price increases, but underlying inventory is really flat. So that is one element. Secondly, receivables. We see the regional mix impact. So that is an underlying driver. And we see on top of that as we have been there, we have extended our terms. So that basically is more an internal process to make sure that we stick to tightness in our processes. From a payable perspective, it's also some regional mix as well as timing differences.
So then, Nathalie, on your question on consolidation. I think we said a couple of times before that, for us, what's happening in AkzoNobel is really to integrate all those separate functioning businesses as one. So that's why you hear us a lot talking about such exciting stuff like ERP platforms, costings and then organizational design, et cetera. So that's what we keep doing. Last year, we said and we continue to do so that bolt-on acquisitions is what we are looking for. Last year, we did about 10 of those bolt-on distribution and acquisitions of producers. The hurdle rate that we put ourselves is that it has to be accretive to 15 by '20. That is, of course, as we get closer to 2020 and increasing the high hurdle rate. But for us, you really have to see it as building the house, the structures, the process and the systems getting our pricing and value generation right. So that if there were to be a larger deal somewhere in the future, that is in fact something where we can deliver the value and the synergies that should come out of that kind of a deal. So in that sense, we are -- we can kind of congratulate Nippon Paint with their acquisition in Australia. It's one that we were aware of and that really wouldn't have made any sense for us given the situation in Australia, given the valuations, given et cetera.So I think it's also for our own M&A team to have a pretty nice pipeline of bolt-on acquisitions, which we don't want to force so that we basically can get to the true valuations of such. But also I want to compliment them on the discipline for not chasing everything that comes on to the market. So I think we keep it disciplined there as we are in the fitness room for the company until 2020. Did that answer your question? Or...
Yes, it does. But perhaps, if I can come back on the working capital. You mentioned that you extended rooms where -- here and there. Is there anything that we can, I mean, extrapolate for the remainder of the year? Is that typically Q1? How does that play out for the rest of the year?
No, I -- we are -- first of all, we are not so specific about it, but I think it's -- it could be partly also timing difference. I think it's important to mention, by the way, that actually if you look at our total working cap, we are actually doing pretty well as we compare to our peers. So in that context, there is no provision for concern here.
The next question comes from Peter Clark from Societe Generale.
Yes. I want to drill down on 2 of the businesses. It was I think in response to Georgina or a bit more. The first one on Powder. I've heard your comments about the OEM sluggishness, but underlying demand is pretty good. Just wondering if there was any impact at all from the fact that you had a little more capacity available last year that might have helped that line. I realize that you probably still got plenty of room to fill. But effectively, I think the big plunge in China was coming onstream and I think with some capacity elsewhere.And then the second question around Marine and Protective, which remains pretty choppy. I know mix is different. One of your peers is already seeing that starting to accelerate. But I'm just wondering, for you, I think, you've told us that we shouldn't expect too much particularly on the Marine side until 2020. That's your expectation. It's more a 2020 thing than a 2019 thing.
Yes. So the 2 questions on Powder, not sure if the capacity is necessarily there a factor. Capacity in the Powder is actually very well utilized. Yes, we did do an investment in the plant in China, but Powder tends to be an extremely local product. So that is very local around that site because it's a finished product, and it's not a semi-finished. So in that sense, I think the capacity that we have available is actually a constant activity to make sure we keep our capacity expanding to fill market demand. So I don't think that's an issue. I think the drivers for Powder are partly on the upside. It's the sustainability, environmental elements, the fact -- coupled with the fact that the aesthetics and the performance of Powder Coatings is now definitely at par with liquid coatings. So that is more the effect. And on the downside, we have some segments like automotive that are a bit down, but that's -- the growth is still happening in there. So not sure if that gives you enough detail on Powder, but there we really don't have a concern. I think what we have seen since the last 12, 14 months is that when we do a price increase, you see a little bit of a down in volume that, that actually recovers in the next 45 days afterwards, which is also a typical phenomenon.If you go to Marine and Protective, yes, we've been pretty cautious on when we're going to see the real turn of it because we didn't want to have it as a religious program where the great day is always happening next time. For Marine and Protective, that team is really doubling down on their internal efficiencies and putting the Marine and Protective team together. So they took a lot of cost out and a lot of efficiency up in that team, which I think has been very positive.Secondly, in Marine. Yes, we see some light here and there. Protective, definitely, we see some options. We definitely see our pricing work taking hold. So in that sense, that business becomes increasingly a healthy performing business again. On the upside for the market, I think we want to balance some of the market dynamics by keeping the discipline and going for value. We do keep an eye, of course, on our position in that market, and I don't think that's endangered. But I think we have such a big position that if we gave up a percentage, that is actually a big jump for somebody else out there. But in the whole framework of our value over volume, I think we're completely on cruising altitudes in there.And then in that business, there are some other jobs like our resulting business that continues to be a great business on every sense of the word. Also seems to be very robust in economic cycles and is actually a very value-adding product. So that's -- if you're here being cautious, it's just that we don't want to oversell the dynamics in Marine and Protective before we are really sure where things are going.
The next question comes from Martin Evans from HSBC.
Yes. It's just a question again back on the 15 by 20 because you do refer to it throughout the presentation, not least Slide 6, with all the good things that are happening in terms of margin management ALPS, cultures on -- I'm just looking at the timing now because, I mean, to stick with this target or ambition, we've roughly got, what, 7 quarters less than another 600 basis points or thereabouts to find. I mean, internally, you must have a game plan or a road map of when you think the margins will accelerate, and there is a seasonality, obviously, within the business quarterly as we saw in this current first quarter. So could you maybe share with us how ideally, all things being equal, you would see that the margin is progressing and when we'll begin to see a quantum leap upwards or equally where the possibly you feel you're running out of time?
Yes. Good question. And in fact, as you may imagine, we're not just saying 15 by 20. There is a massive amount of processes, projects, spreadsheets behind that. So that's why we feel quite comfortable around it. Again, on the first quarter, if you look at the one-off, if you look at what we just said about the vehicle refinishing, you add those things in. I mean the quarter has actually been pretty robust. So that probably shows our somewhat positive vibe on the first quarter. Just also want to point out we are 10% up. I'm not sure anybody else is going to come up with 10% in that market. I think in the rounds we did at the end of 2018 for February with the annual results, I think we want people to abridge on how to get from where we are and where we're going to be, and that is actually annualizing the effects that we -- that the savings plans that we have, annualizing the pricing events that we are doing. And then a lot of background work around managing the nonproduct-related, our procurement work, et cetera. So that bridge is pretty much intact. Don't underestimate that, as I've been indicating, it's not going to be a linear impact because some of the work is further progressed in one business than in another. If you look at our Deco, EMEA has done quite a lot of work but, of course, in the first quarter, it doesn't necessarily come to shine because it's a small quarter. And then you have the nervousness with some cost and the timing of some cost that, in a small quarter, makes a big difference. So for us, that bridge -- and I'm sure we're going to go there with individual shareholders, that bridge is still very much intact on where we're going to go. And in fact, if you look at the raw materials, whether we do the pricing, what is the dynamic of raw materials, all comes in there. So as we go through the results business by business, plan by plan, function by function, we are very much looking at what's coming in. Just making sure though that it is well understood that we are focusing on 2020, that the steps we take or the costs we take in a specific order are because that actually is the best pathway to deliver as we get to 2020. And then we really didn't want to start climbing things just for one specific quarterly result. So for us, we are very much on track on where we are. And the quantum leap, as you call it, I think in the next quarters, you will see proof points on where we go with the business.
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