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Welcome and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. May I now introduce your speaker for today, Mr. Lloyd Midwinter. Please go ahead.
Hello, and welcome to the AkzoNobel Investor Update for Q2 2018. I'm Lloyd Midwinter, Director of Communications and Investor Relations. Today, our CEO, Thierry Vanlancker; and CFO, Maarten de Vries, will guide you through our results. We will refer to a presentation, which you can follow onscreen 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 start, I would like to remind you about the disclaimer at the back of the presentation. Please note, this is also applicable to the conference call and answers to your questions. I now hand over to Thierry who will start on Slide 2 of the presentation.
Good morning, everybody, and thank you for joining the call. We are making continued progress with our transformation, including disciplined execution of what we announced last year, the first phase of our creating a fit-for-purpose organization, which delivered EUR 25 million of savings in the second quarter. Decorative Paints delivered a strong performance with ROS up year-over-year due to higher selling prices and cost savings compensating for higher raw materials.Pricing initiatives for Performance Coatings are also gaining significant traction and closing the gap, resulting in a sequentially improved trend for ROS. At the same time, we continued investing in our market-leading positions, including the acquisition of Fabryo in Romania and the opening of the new powder coatings plant in Changzhou in China.Slide 3 shows some of the key areas where we have made progress during the second quarter in our Winning together: 15 by 20 strategy. Selling prices were up 4% in quarter 2 as a result of our very focused attention on margin management, contributing to higher return on sales for Decorative Paints and the closing of the gap for Performance Coatings. During 2018, we are implementing Integrated Business Planning and now all Performance Coatings businesses have been trained in the methodology. This is obviously a key enabler for future delivery. Our ALPS continuous improvement program has been delivering savings year-on-year since 2014. In this quarter, we achieved more than EUR 30 million savings in line with the historic run rate, which successfully offset fixed cost inflation. In addition, what we announced last year as Phase 1 of creating a fit-for-purpose organization is now fully implemented and delivering savings of EUR 25 million in the second quarter. We are on track to achieve the announced EUR 110 million savings for 2018. We also continue to develop a more high-performance culture. Our incentives are now completely aligned to the achievement of 15 by 20, meaning 15% return on sales in 2020, following the approval at our AGM in April. This is also the case for senior executives and other colleagues with a variable incentive program. So we are delivering towards our Winning together: 15 by 20 strategy.I will now run through some of the key trends we are seeing in the markets where we operate, as shown in Slide 4. As expected, higher raw material cost continued to impact us in the second quarter 2018. This was due to the year-on-year effect of continued inflation through 2017. Raw material inflation is projected to continue for the remainder of 2018, although at a slower rate than during the start of the year. Robust pricing initiatives are in place, as you've seen, to compensate for higher raw material cost. This remains our key focus for the commercial organization. For the remainder of 2018, we expect demand trends to differ per region and per segment. Generally, positive developments should continue for Decorative Paints, including the impact of our continued focus on pricing initiatives. This is also likely to be the case for Performance Coatings with the exclusion of Marine and Protective Coatings where market conditions are still challenging, although also here the headwinds are reducing. In China, we have recently grown very rapidly. But as we are prioritizing our pricing initiatives, our year-on-year growth has been impacted by those initiatives and also, of course, we compare with last year where we had significant new product launches.As predicted, foreign exchange rates have been significant headwind during the first half of the year. The adverse impact is likely to reduce significantly during the second half of the year based on current rates.Slide #5 summarizes some highlights for the quarter. In constant currencies, our second quarter revenue was up 2%, driven by a 4% higher selling price. This represents an acceleration of the increases we delivered in the first quarter. Raw material inflation resulted in a headwind of more than EUR 130 million during the second quarter. Despite this, the return on sales was up for Decorative Paintings year-over-year, and Performance Coatings is sequentially very much closing the gap. During the quarter, we also announced the acquisition of Fabryo in Romania, the #1 decorative paints company in that country, and we opened our largest powder coatings plant in China.The quarterly trends for volume and price/mix are shown on Slide 6. The price/mix was 5% higher for the quarter, demonstrating the positive impact of our pricing initiatives. Selling prices increased 5% for Decorative Paints with prices up in all regions, resulting in reported price/mix being 4% higher overall. Selling prices were up 3% for Performance Coatings, contributing to a positive price/mix of 5%. Volumes were 3% lower overall, mainly due to our focus on pricing initiatives. In some cases, we have walked away from non-value-adding business, for example, in Marine and Protective Coatings.I now hand over to Maarten who will run through the financial results in more detail from Slide 7.
Yes. Hello, everybody, and thank you, Thierry. As mentioned earlier, our pricing initiatives are ramping up and selling prices were 4% higher overall. Revenue was up 2% in constant currencies. Volumes were lower, mainly due to Marine and Protective Coatings. Return on sales, excluding unallocated corporate center costs, and that's consistent with the calculation for our 2020 target, was 12.1% versus 12.8% last year. Adjusted operating income was mainly impacted by adverse foreign currencies as well as transformation-related costs and other nonrecurring items. Operating income also includes EUR 33 million identified items, mainly related to the transformation.Now turning to Slide 8, which shows the adjusted operating income bridge. The adjusted operating income was mainly impacted by EUR 21 million adverse foreign currencies and EUR 20 million nonrecurring items, which includes transformation cost. Raw material inflation was more than EUR 130 million during the second quarter. Price increases and cost savings are now compensating for higher raw material cost. Continuous improvement programs delivered around EUR 30 million savings during the quarter, successfully offsetting fixed cost inflation. This continues the run rate we have delivered in the past. Creating a fit-for-purpose organization resulted in EUR 25 million savings during the second quarter, up from an initial EUR 10 million in the first quarter. Phase 1 is now fully implemented and we are on track to deliver EUR 110 million savings for the full year 2018. Lower volumes were mostly related to Marine and Protective Coatings.A summary for Decorative Paints is shown on Slide 9. Revenue was 2% higher in constant currencies, and price realization is gaining momentum. And selling prices were up 5% overall, slightly offset by geographic product mix resulting in a 4% price/mix. Volumes were flat in EMEA while lower in Latin America and Asia as we focus on pricing initiatives. Return on sales was up at 12.2% versus 11.6% last year the second quarter. Adjusted operating income increased with higher selling prices and cost savings offsetting foreign currencies, higher raw material costs and lower volumes. The operating income was impacted by EUR 12 million identified items related to the transformation.Moving on to Performance Coatings on Slide 10. Revenue was up 2% in constant currencies and 5% higher if you would exclude Marine and Protective Coatings. 3% higher selling prices contributed to 5% price/mix impact. The volumes were 3% lower overall, mostly due to Marine and Protective Coatings. In some cases, we've walked away from non-value-added business. Adjusted operating income was still impacted by foreign currencies, higher raw material costs and lower volumes. Pricing initiatives are gaining traction and closing the gap. Return on sales was 11.8% in the second quarter versus 10% in the first quarter of this year. Operating income was negatively impacted by EUR 10 million identified items related to the transformation.Slide 11 shows the results for Specialty Chemicals, reported as discontinued operations. Revenue was up 7% in constant currencies, driven by higher selling prices. Adjusted operating income was up 5% due to strong pricing and productivity improvements, partly offset by adverse currencies and one-off environmental and restructuring costs. The sale of Specialty Chemicals is expected to be completed before the end of 2018, and the vast majority of the net proceeds will be returned to shareholders as we have communicated earlier.Now turning to Slide 12. During the second quarter and half year 2018, net income was impacted by lower operating income while profit from discontinued operations increased. Earnings per share was EUR 1.06 in the second quarter and EUR 2.07 for the half year. Adjusted earnings per share excludes the impact of identified items.Moving over to Slide 13 where we show free cash flow and net debt. The adjusted EBITDA was lower while capital expenditures and pension top-ups reduced. Operating working capital increased, mainly due to higher trade receivables and increased inventories, also driven by higher raw material costs. At the end of the first quarter, net debt was EUR 3.2 billion versus EUR 1.9 billion last year and EUR 2 billion at year-end 2017, up mainly due to the seasonality of operating working capital. Net debt also includes the EUR 1 billion special cash dividend, which was paid out in December 2017 as advance proceeds for the separation of Specialty Chemicals.Now I'm handing back to Thierry for some concluding remarks on Slide 14.
Thank you, Maarten. In summary, we feel pretty good about the continued progress on our transformation into a focused paints and coatings company. We have now fully implemented what we announced last year as the first phase of creating a fit-for-purpose organization that is delivering EUR 25 million to the bottom line in the second quarter. Decorative Paints had a very strong delivery of performance with a return on sales up year-on-year. And Performance Coatings pricing initiatives are gaining traction and sequentially closing this gap despite headwinds in Marine and Protective. We also have continued to invest in attractive markets, including decorative paints in EMEA and powder coatings in China.Our updated outlook is shown on Slide 5. We are delivering towards our Winning together: 15 by 20 strategy by creating a fit-for-purpose organization for a focused paints and coatings company, contributing to the achievement of our 2020 guidance.For the remainder of 2018, we expect positive developments for performance -- Decorative Paints and Performance Coatings, excluding Marine and Protective Coatings. In the latter segment, the market conditions are still challenging, and demand trends for all of the businesses will, of course, differ per region and segment.Raw material inflation is projected to continue for the remainder of 2018, although at a slower rate than during the start of the year. Robust pricing initiatives and cost-saving programs are in place to mitigate the current challenges.I'll now hand over to Lloyd for information about upcoming events and handling the Q&A session.
Great. Thanks, Thierry. Before we start the Q&A session, I would like to draw your attention to some upcoming events shown on Slide 16, including our Q3 results, which will be announced on the 17th of October this year. This concludes our formal presentation, and we would now be happy to take your questions. [Operator Instructions] Operator, please start the Q&A session.
[Operator Instructions] Our first question is from Tom Wrigglesworth.
A couple of questions, as I'm permitted. Firstly, on the volume side of the equation in Deco. When I look at the sequencing of 2017 and now 2018, how much do you think in the second half of '17 we saw restocking effects versus destocking effects coming through in the -- in light of obviously higher prices? And is your sense that, that will abate and start to normalize in the second half? And then secondly, obviously, on the price-versus-cost dynamic, I think you indicated that there was EUR 300 million to catch up from 2017. And looking at the first half, we've had about EUR 240 million of incremental costs. Should we expect that pricing can accelerate in Deco -- or sorry, across the business from here and that we should -- in the second half? Or is this kind of 5% price level, is that kind of -- is that going to accelerate from here or is that going to be the kind of the new normal is going to be this kind of level? So when would you hope to fully offset this year's and last year's costs, I guess, is the more simple question.
Yes. Thanks for the questions. Let me handle the first one on the volume in Deco and then, Maarten, maybe you can address the price-versus-cost one. On volume in Deco, we are -- there's a couple of elements in there. To answer your initial question around destocking and restocking, that might have been somewhat the case in the fourth quarter in places like China, et cetera, because with new products and that obviously drives destocking to go through the channel. But obviously, you can't have 6 months' worth in the channel anyway, so that may have had some impact and we believe it was an impact in the first quarter, [ but a little ] in the second quarter. If you go to the regions, frankly there's 2 big items in there. First, our overpowering big region is, of course, Europe and Africa. There, the volume is flat despite us being probably by far the first out of the gate and probably the more consistent on pricing. So I think, in that sense, it shows the underlying markets being pretty good, but we really went for pricing and also gave our sales and marketing forces coverage and that was the most important. Some of the key markets like the U.K. are actually doing very well. Some of our key markets that we see underlying are very strong or strong -- strengthening market that we hopefully can capitalize up in the next quarters. The bigger items is in Latin America and in China. Latin America, very confident, very good work from the team there, but really focusing on price also because of devaluation of the local currencies necessitates doing there. Markets are actually quite okay, so I do believe that is because of the pricing initiative. The more impactful one, is indeed, in China. You've seen us really having a significant growth in the last year or 12 months in China. This is a deliberate pause for growth in China because we wanted to get value back in and try to tension it for pricing. So I think that we'll see what happens, so China is always a challenging market in that respect. But that is really a deliberate result, to go for pricing and value, which we have to do given the raw material impact and setting basically a tone hopefully where markets will be reacting on. So if you go back then for the second half, I think we're pretty optimistic because we've seen customers moving back in, maybe hoping that things would blow over and maybe destocking a little bit what they had as price increases came in hoping that, that would disappear. So we -- that's why in our outlook we continue to be pretty positive and pretty optimistic for what Deco is concerned. Hence, also the step-up in return on sales versus last year, so at least these are on their way on 15 by 20 together. On the price-versus-cost, Maarten, you want to talk on that?
Yes. So on the raw materials, indeed, so last year, we had an raw material impact of EUR 300 million. For the first half, we are looking at an raw material impact of in excess of EUR 240 million. We have also indicated that we see continuous raw material inflation, although for -- kind of for the remainder of the year, we will see that as a slower rate compared to the first half. You've seen our initiatives around price increases, 5% in Deco and 3% in Coatings for the second quarter. In fact, Deco, if you look at the second quarter, our price increases have outpaced the additional raw material price increases in the second quarter, so we feel very positive about this. We've also indicated that we're implementing a second wave of price increases, so we will have a further step-up in the second half. And overall, our expectation is that from a run rate perspective, by the end of this year, we should have compensated with our pricing initiatives and given how we currently look at the development of raw material prices that we have compensated both '17 and '18.
Just want to add to that, that is consistent, I think, with what we've been communicating to investors and analysts that, for the company, yes, there's revenue growth. In constant currencies, we grew 2%. But that we definitely wanted to go back to less an emphasis on volume, chasing volume that is not value adding. But we really put it on pricing, and that has paid off -- it's already paid off in Decorative Paints and then Performance Coatings we're kind of halfway the journey there. Does that answer your question?
Yes, that's very helpful.
Next question is from Paul Walsh.
My two would be on the EUR 20 million one-off that you guys call out in the adjusted EBIT number in the second quarter, can you just help me understand what the one-off nature of that EUR 20 million is? And in terms of my second question, just to come around back to the topic of volumes moving through the second half, can I read what you're saying, Thierry, in the outlook statement that you would expect volumes to be positive in Deco? And in Performance, they'll be positive as well ex Marine and Protective? Is the right interpretation, i.e., we've had a negative 3 volume dynamic in the first half, you very much expect that to move into positive territory in the second half?
Yes. Paul, thanks for your questions. Maarten, do you want to address the first one?
So on the EUR 20 million nonrecurring items in the second quarter, we have specifically called it out because what you see is basically in other BA orders, you see quite a delta versus last year and I think it's good to explain that. So this year, you see in second quarter EUR 70 million; last year, it was EUR 30 million. I think it's 2 times EUR 20 million, so EUR 20 million this year of additional transformation-related costs and it was very much to accelerate the implementation of our transformation projects as well as some other incidentals. On the other hand, last year, we had some positive incidentals in BA order and that kind of explains the EUR 30 million versus the EUR 70 million. But again, the EUR 20 million is transformation project cost as well as some other incidentals.
And Maarten, just on that front, why wouldn't you classify those as incidentals rather than calling them out as one-off in the adjusted EBIT number?
What we have in our identified items is really the purely the restructuring costs as part of the EUR 120 million, which we have communicated the end of last year and that is how we classify that. So these are more, yes, I would say, operational costs, which are not recurring.
Now second question, Paul, around volumes in the second half for our market. I would say that -- and let's take a little bit abstraction of Marine and Protective and then talk about the rest of the business, that's probably easier. Let me just address Marine and Protective. I think for Marine and Protective, we told our teams, go for where we can add value, where there is basically a business that really contributes. As we've indicated, we actually instructed our teams to walk away from some deals where we feel given what's happening in raw materials, this is not just going to be adding any value. And we are happy if some of our competitors chase that and they can explain it to you in other calls. The second thing is for all the rest of the business, let me talk to the other businesses in Performance Coatings. I think the demand is actually pretty good in all of those businesses. As usual, Powder is actually doing extremely well, that we continue to see those increases in the market. But also there, so the underlying demand is good. We are capturing the volume, but we also told people there for the second half keep our eye on pricing, specifically Performance Coatings, there is still a little step to do. And I think we're leading the charge there for the industry, a little step to do to basically offset the raw materials completely. Decorative Paints, again, as I've indicated, the underlying market demand is actually pretty good across the world. Where you see us on volume, I think we can capture as much volume as we want. We want to do it, however, in a very controlled way to really look at the value creation here. Europe is pretty good, pretty strong. So in that sense, I think that gives us some leeway, I think, as being the leader in these markets to charge on the pricing that we deserve. China is the one that we kind of look a little bit because there the price elasticity is often a bit more vibrant in all directions. That's the one where we continue to look, okay, can we actually move the market there, yes or no? But underlying, the volume is pretty good. So it's really deliberate choices, I think, that we do with our business management teams around where do we choose to play and what -- how do we achieve our numbers. Does that answer your question, Paul?
Yes, sure. I mean, just [ taking ] conclusions here. You would expect a sort of better headline reported volume environment in the second half after the negative 3 in the first half?
Maybe. But I think, Paul, we are actually more looking for better bottom line reporting and it's that with price or volume that the mix, I think, that seems obviously have been improving quite well in the last 2 quarters that they are focused on that.
Understood. So the way I should interpret it as positive development, you've got to include price/mix in that organic development?
Correct.
Yes, correct.
Correct.
Next question is from Tony Jones of Redburn.
Tony Jones at Redburn. I've got a couple. I just wanted to go back to Paul's question about the incidentals. And I think, Maarten, at the end, your explanation, you were saying that the reason it wasn't classified as a one-off is that the EUR 20 million isn't felt to be a onetime effect in this quarter. Maybe I misunderstood, but should we be modeling that for Q3, possibly Q4? And then going back to the focus on value over volume, this effect feels like something we should be considering now for the second half of the year. So does it end up being a negative offset to slightly better underlying volume growth?
So just to clarify the EUR 20 million, what I tried to clarify is these aren't really specific implementation costs of our transformation projects and are therefore nonrecurring as we have accelerated our transformation initiatives, that is one. If you look at it, take a step back, because that is I think the background of your question, when we look BA order, we have indicated that BA order will sit between the level of 2017 and 2016. Now if we look at the run rate where we are with BA order, it will likely land in the upper end of the range between the '17 and '16 numbers. And if I remind myself, '16 -- '17 was EUR 150 million, BA order and '16 was EUR 188 million. So we will be at the upper end of that range.
On the second question, value over volume. I think I would say yes on your question. I think the underlying markets are pretty healthy in that sense. And I think for us, I mean, that's also what we have been talking to our shareholders about. I mean, we actually go for the value of the portfolio that we have. So if that's what you mean with a somewhat negative offset by going for pricing and value versus the underlying volumes, I would say yes potentially. Having said that, I do believe that we are actually ahead on our pricing versus the rest of the industry. And that, of course, as you also see, to some extent, that I think we do in the segments where we are #1, and there's plenty of them worldwide, I do believe we take our responsibility, I would say, for our own company in those segments. And that negative impact on volume may actually go away as others basically build their our own plans on how they're going to handle the raw material headwinds. Does that answer your question?
It does, yes. I appreciate the detail, that's very useful. Can I just sneak in one quick follow-up, which is under working capital. I also want to just check because normally free cash flow is quite healthy in Q2 as you get an inflow. I think you already flagged and called out there's been -- it's due to interim movement. But should that cash inflow now start to materialize in Q3 this year instead of Q2?
Yes. So on working capital, first of all, we've seen our receivables going up. So that is clearly a focus area, to bring that down, and it's a matter of focus and discipline. That's one. On the inventory level, there, we also see the impact of raw material coming through. So the higher raw materials drives a higher inventory levels naturally. But overall -- and to that point is the seasonality effect with overall working capital is too high and that is our intention to bring that down in the second half.
On the receivables -- if I may add to that, Maarten, on the receivables, there's also a somewhat geographic segment mix that actually gives longer receivables on average, but that is actually besides pricing. As we said, that's been the second marching order for our sales and marketing teams to get that in line ASAP.
Next question is from Geoff Haire.
My questions have already been answered.
Next question is from Alex Stewart of Barclays.
I was a bit surprised to see an almost 10 basis point deterioration in your return on invested capital in Performance Coatings and an almost 200 basis point deterioration in Decorative Paints -- in Deco even despite the fact that adjusted operating income [ is about 2%.] Could you possibly explain the erosion in returns and why that's coming about?
Yes, I think it's, in my view, pretty straightforward. It's -- one side is the return on sales as the development of the [ internal ] sales. And on the other hand, it's very much [ how ] our working capital, which plays a role here. So we have basically called out both trends and where we are on both sides.
Next question is from Georgina Iwamoto.
Yes, it's Georgina Iwamoto from Goldman Sachs. I've got 2 questions and they're both related to raw materials. So the first one is can you give an idea of your comfort level with your guidance of the EUR 550 million to EUR 600 million negative impact over 2017 and '18? We seem to have digested more than 90% of that already. So is your expectation that we'll reach the upper end of that range? Or could we actually go over the limit? And then the second one, just taking a step back and looking at the 15 by 20 targets. Can you give an indication or maybe just a reminder of what oil price scenarios you included to reach those targets, i.e., is there a price at which you would deem there to be a significant market disruption and therefore you wouldn't be able to reach the target?
Well, thank you for your question. Maybe on the first one, on the raw materials, as we've indicated, about EUR 300 million we had to absorb in the first -- in 2017. We're now at about 250-ish year-to-date. We see that flattening out. We've given kind of a guidance that we expected EUR 250 million to EUR 300 million, I think we'll definitely be at the upper end of that, and in fact, we're monitoring very much on what's coming in to see what we have to do with the pricing. So in that sense, I think we will definitely be at the upper end. Although to be honest I think we'll see a significant flattening out versus where we were, so it's still kind of creeping up and the question is, okay, how much longer does that go. But we don't expect big movements. Maarten, I don't know if you want to comment on that point?
Yes, so -- but more on a general point because you asked also on the 15 by 20. So in our modeling, the assumption is really that we compensate for raw material prices and that is also -- and it has been the focus and is our focus for the raw material price impact we've seen in '17 in '18 and also going forward. So from a margin perspective, the assumption is really that we compensate for our raw material prices.
And I couldn't agree more with that statement. So to answer your question is there a realistic oil price somewhere that would be disruptive? I think the answer on that would be no or we would be passing it on to customers through our price increases. Having said that, the oil price has an impact, of course, and it has a more direct impact in certain [ solesmen bid ] results than price demand bottlenecks in the supply chain further downstream, which probably has more impact sometimes than the immediate oil price. So -- but having said that, our philosophy for 15 to 20 has been from the very beginning we will offset raw materials, so we will maintain at a minimum our margins there, the variable margins and that will be in any scenario as we're implementing this year, by the way. Does that answer your question?
Yes, that's very helpful.
Your next question is from Gunther Zechmann of Bernstein.
Gunther Zechmann from Bernstein. You highlighted pricing initiatives and the increased focus on price over volume. Just circling back to that, what reaction, I wonder, do you see from your competitors? Are they picking up the volumes at lower prices? Or it's just the market contracting in terms of volumes? And then with the comments that you made on H2, that pricing initiatives are ramping up and you've kind of alluded to that as well. Should we expect to actually sequentially lower volumes as a result of that as well?
Well, good questions on pricing. Of course, we are as eager as you to see what the reporting is of our competitors and what they've done on pricing. But if you put the whole picture together and you have to really have to go by segment-by-segment with where we see, look, we see healthy underlying demand for it. We've gotten our prices up and sometimes we know that we have walked away from business, so that means somebody else must have sold the paint at a much lower market -- margin there in broad strokes, and in fact, we saw of some of the first initial reporting from other companies. Obviously, others are not going for the pricing and the margin, which is their decision to do. We don't think that is a winning model to continue to do so. So in our sense, I think we -- we don't think there's less surfaces or less paint being used. On the contrary, there is the demand in the segment with the one exception, Marine and Protective, where indeed the market volumes are down. And as we have commented on that, even there, we try to make sure that we do smart business things versus just chasing volume. And in fact, in the Marine and Protective, we go to quite some restructuring cost reductions, et cetera, to make sure that we maintain profitability despite lower volumes that may be the result of that thing. Second thing, in the second half, I would say that we probably went through a lot of the churn already. I think the first quarter, the second quarter were actually the ones where, if you go through a normal marketing situation where customers have to decide do I stay with my supplier or do I do something different, so I don't think that, that will be an ongoing trend necessarily. As the markets are good, I expect us to be at least flat or with -- at least flat for volumes, but at a higher pricing. The one element we are looking and that we're monitoring very closely obviously is in China because, in China, raw materials actually have been a key issue, maybe one of the more impacted areas than any of the material space is in China for what raw material cost is concerned. And that's why we're looking at, okay, how much can we push the envelope there, and that's one that we monitor. Does that -- monitor on price-volume equation. Any -- does that answer your question or...
That's very helpful.
Next question is from Patrick Lambert of Raymond James.
My 3 quick questions. The first one, M&A contribution, I was a bit surprised that you had 0 impact on Performance Coatings, in particular where we had some end of last year. And if you could comment on what happened there, did I miss anything? Maybe it's my calculations of timing, which was one -- first question. Second question is, any update on the final steps of the separation in terms of timing, dividend payments or any other ways of returning the Specialty Chemicals upside onto shareholders? That's the second question. And the last one, again, coming back to the one-off of EUR 20 million. Is there any of the transaction-relating nonoperating cost to be expected from the separation, would be the dividend, would be the legal issues over the next 2 quarters before you finally get Specialty Chemicals out?
Okay. I'm not sure if I fully understand your third question, but let me try to. Maybe I may have to ask you to repeat that one. But on the M&A front, you're probably referring in the booklet, I think, around the impact on the revenue and on others, basically on the revenue line. Yes, I mean, I'm not sure if there's too much to talk about it. We had, of course, the acquisitions we did in, last year in V.Powdertech, in Flexcrete and in Disatech, which were smaller acquisitions. You do definitely see it within the Powder Coatings business where V.Powdertech came in. If you then look at what the acquisitions and the whole item is, as we've gone to quantum pricing, I think that's probably where it balances out. I don't know, Maarten, if you want to give more details on that.
Yes. For me, I think it's more or less rounding. So in the first quarter, it rounded to 1%. In the second quarter, it just rounded to what you see here. So I think there was nothing...
Unusual or anything else.
Nothing has changed fundamentally here.
On the second one, on the separation, there is really no new news I would say, in the sense that the regulatory process is running its course. It seems to be going as planned. So there is no surprises there. So we still expect before year end that this is going to close. And then it depends on who is an optimist, a pessimist, what the date is, but I think it's all on track. On the -- I would almost say consultations or conversations we had with a big amount of shareholders on what they would prefer, I think it becomes increasingly kind of a basket to return the proceeds, which is going to be partly share buyback, partly capital reduction, partly dividend. So it's going to be a combination. And then I think we want to do it in a reasonable time frame so that then puts a bit of a caveat around how much you can do in each of the buckets. I think that's a bit the consensus that's developing. But right that, I mean, so we are on, I think, as such, there's not much more to say around the fact that we are in the implementation phase of what we have been promising last year and been saying all along. Not sure if I fully captured your third question, though.
No, I think your third question was around the separation costs. Just to make sure and to reconfirm, the separation costs are booked in discontinued operations. And if you see it in the report, it was EUR 8 million in the second quarter. We will still have some separation-related costs until we, of course, close. But that will be booked as we do currently in discontinued operations.
Okay. So there's nothing into the Paints and Coatings remaining?
No, no, no.
Next question is from Mutlu Gundogan.
Yes, a few questions, first on price. You are being quoted on Bloomberg that you're halfway through on price initiatives in Performance Coatings. Now if I look at the first half, I see that price/mix added some EUR 112 million. Can you tell us how much of that is price and how much is mix? That will be the first question.
I think it's in the booklet. Maarten, if you want to go there, I think the numbers are spelled out.
Yes, in fact, in the first half, 4% was price/mix. And out of this price/mix, yes, close to 3% was price and the rest was mix.
For Performance Coatings.
For Performance Coatings.
Okay, okay. That's helpful. Then the second...
I think -- and maybe just to reconfirm, our price increase for Performance Coatings in the first quarter was 2% and in the second quarter was 3%. And for Decorative, the price increase in the first quarter was 4% and 5% in the second quarter. So that's also maybe to reconfirm the progress we are making and the implementation of our price increases and then the rest is obviously mix.
And the halfway-through comment I made in Bloomberg is basically saying, look, in Performance Coatings, there are still segments that are rolling it out. There's also contracts that actually you have to wait until they start to get the new pricing in. So that's still unfinished and that's still ongoing. Now Deco keeps the pressure on, but I think in Performance Coatings there's still catch-up versus the raw material impact, the compounded raw material impact.
Understood, understood. And then secondly, on the guidance, now there have been various statements. I mean, I do remember that you said that also this year you expect to make a step in line with the 2020 target. So one of those implications was that EBIT should be -- should show growth this year. So just wondering if you could repeat that amount.
Well, what we said is that on the return on sales percentage, we would want to see a significant increase on that. I think we still feel pretty confident that, that is going to happen. If you really go back, if you look for the whole industry, as we were trying to catch up on our 15 by 20, the whole industry got a flat tire in the bicycle race because of raw materials. So we actually are, I guess, the first one out of the gate and probably the more consistent one to get our prices up because we want to get back on the bicycle and catch up. What you also see in the first half is lots of implementation cost, et cetera, around the transformation and rolling out those programs. And for us, it's very important to start looking at the second half run rates versus the second half last year where we feel pretty confident on where we're going to go on return on sales.
Okay, okay. Understood. And if I may squeeze in a third small one. Especially here in the Netherlands, there's been some articles in newspapers about the pension funds here in The Netherlands, that they want a EUR 400 million payment. Can you comment on the likelihood of that?
So the likelihood of the EUR 400 million payment?
Yes, yes. So what's your view on that? Obviously, there's 2 significantly opposing views. So just wondering what we should take as a potential [indiscernible] ...
But that's not opposing views. They are opinions, on the one hand; and then there is the fact, on the other hand, the fund is funded. It's probably one of the better funds in The Netherlands. We can't legally and accounting-wise do it. So the EUR 400 million payment, the likelihood of that, is actually 0.
Okay, okay. That's what I wanted to hear.
Next question is from Christian Faitz.
Two questions, if I may. First of all, can you please elucidate the Deco performance in Europe and compare and contrast U.K. versus Continental Europe. And my second question would be, can you please give us some more insights into the ongoing difficulties in Marine and Protective? I mean, you talk a lot about problems, but what are the actual problems in the market from your perspective?
All right. Okay, thank you. It's maybe not the U.K. versus Continental because also Continental has, every single market has a different dynamic in it. But I would say, in Europe, as we have indicated beginning of the year, what the market is concerned for Decorative Paints, I'm looking there at Europe, Africa, but let me focus on Europe. Volumes are actually okay. So you know that European market has been flat to actually slightly shrinking over the last year. We see that actually a positive development on volume and then we have had all of the discussions around pricing for that. So that goes across-the-board, including the U.K. The U.K. market is actually doing quite well. First quarter was very much impacted by the weather, negatively impacted cold weather. Second quarter, we see that volume coming back and we believe it's actually a little bit better than that. So for us, actually the U.K. has continued to be positive. Now consumer confidence could still be better. The pound could be better, of course, since we report in euros. But as a market, the U.K. has been doing quite well, we've also been able to get our prices there adjusted and we've also announced that we've basically been opening Dulux decorator centers in the U.K., more in the south of the U.K. where we felt even despite being such a strong leader in the U.K. market, there are still spots where we can actually continue to grow in that market. So we say the U.K. versus Continental Europe, if you want to position it, that the U.K. has definitely been one of the better ones in this quarter. But overall, Europe is doing quite well, which for us is pretty encouraging given that it's such a big market for us. Secondly, on Marine and Protective, on the issues [ we're still builds ]. I mean, on Marine, the builds are still down. It's going to come back a little bit. But it's not V-shaped. It's a very flat U-shape recovery. And then we come back 18 months later to paint those ships in what is the newbuilds. Half of the market, of course, maintenance, dry docking and sea stores, so that is less impacted. So that is still ongoing. In oil and gas, we're actually more optimistic in the sense that as oil prices go up, there is much more activity in capital investment in that market and we actually see that on the docket that is more segments. But of course, we come in then kind of a year later or 18 months later when the coatings, et cetera, for corrosion or fire protection are necessary. So in that sense, I think the dynamic for Protective, I think, is more positive than on -- in the medium term than for Marine. What we were indicating for that as we look at -- as people are still looking for the lower volume, we and other competitors are looking to serve the lower marine volume, you see some price standards there which are unhealthy. And if we extrapolate what raw material cost is, at least our pocket calculators do not indicate that there is any money you can make on that business and therefore we gladly bow out. We don't get -- I don't think investors are happy with volume. They want to see returns and that's what we're focused on in our business.
Next question is from Laurent Favre of Exane.
I've got a question on your M&A strategy. I was wondering if you could tell us a bit more about your intentions in terms of size, area of focus. Do we take this Fabryo acquisition as a sign that you're trying to consolidate the European market? And what is the pipeline like for acquisitions?
Thank you, Laurent. Well, on the M&A strategy, I think we've elaborated a couple of times on that. I think we're looking at -- we continue to look at bolt-on acquisitions. Can you put a size on it? I mean, it's -- EUR 150 million is probably a big one, but don't see that there's an absolute number. And the Fabryo one, very enthusiastic because it's the #1 player in deco. It's not only within Romania, it puts us there in the lead spot, but it's a very well-run company, it's very well as the hub for the whole Central Europe and to strengthen us there. So very enthusiastic about the fit with the company and how it's going to help us. So I think that is more how we're looking towards versus just an overall consolidation strategy because, of course, in Europe, there are thousands of companies and ones where we probably don't want to be necessarily acquiring. Pipeline-wise, we have always a number of active targets, to use a negative name, companies where we look at. I think some of them will still materialize this year. But we really want to do it at a pace where it really makes sense in our network. As I just indicated, our whole emphasis is around, I would say, keeping our size and improving on that and Fabryo fits in that. We don't -- Maarten [ are ] looking at a consolidation strategy just for the sake to get bigger.
And I think maybe to add here is that, of course, when we look at our pipeline and we look at possible opportunities, it really needs to add to our 15 by 20 ambition. And there, we look at our geographies or certain product segments or certain technologies. But the value creation is a core element behind this obviously.
And that's a good point, Maarten, because the 2 key questions for the pipeline is for each of those targets is, one, does it create itself a stronger business when we put them in there; and secondly, is indeed and what does it do for 15 by 20. And then we balance those two, I mean, to see if it's additive or not. Does that answer your question, Laurent?
Yes. Just on the Fabryo, when you say contributing to 15 by 20, are we talking about the absolute profits or margins? Is there anything you can say on like synergies and Fabryo margins, post synergies versus the target?
Well, Fabryo is a pretty healthy company already. So what we do feel that by having that integrated in our network that there are a number of marketing synergies. They have a very strong network in Romania. They're actually kind of, are the key player in that market. So we feel, marketing-wise, if we can put some of our products through those same channels, that is a real direct upside. There's also then operational efficiencies that come out of it. So this would be a net positive contributor on the 15% return on sales, absolutely. And it's a combination of those elements.
Next question is from Laurence Alexander of Jefferies.
One focused one and then one larger-picture one. Just to be clear on the trends in Industrial Coatings, are you seeing any soft spots in end market demand around the world? And then at the larger picture, just to go back to the discussion earlier in the call on the volume, the bottom slicing in the portfolio, how should we think about this with respect to the 15 by 20 pathway? Should we be thinking about maybe, say, over the next 2 years lagging end market growth by, say, 8% to 10% cumulatively? Or can you give us some kind of sense for what the total bottom slicing opportunity might be?
Okay. So let me try to answer the questions, then Maarten chime in at the end. First, when you say Industrial Coatings, you probably prefer -- you refer to Performance Coatings, I presume?
Actually, there was a comment in one of the decks about how Industrial Coatings volumes were weak, so I just meant specifically in Industrial Coatings.
Okay. Well, our Industrial Coatings business has the Metal Coatings business, Packaging business and the Wood Coatings businesses in there, too. That is correct, I'm not sure this is necessarily structuring. I mean, okay, pricing is, of course, a topic in there. But those markets do tend to fluctuate quite significantly. Again, Wood Coatings goes on furniture, it goes on to a number of elements so I don't think that is necessarily a structural situation. So -- and I think, okay, price will be the same elements we had before where we basically weren't necessarily chasing volumes as such. But did I answer your question? So I think that is probably more in the realm of the normal fluctuations you have quarter-over-quarter.
Yes, yes.
Then the second thing you talked about the portfolio and the bottom slicing. It goes back to how, I believe, we reset our 15 by 20 strategy somewhere in October, November last year where it was -- we were not going to -- the original intent was to get to 15 by 20 by growing -- keeping the cost flat growing, and therefore things fall to the bottom line. I think we've been abundantly clear that, that target is really to go to the value we generate and not bet on the growth. If you go to what we presented during the analyst roundtable, we made it clear that, in fact, we have in our plan a negative -- or lower growth than what the market does. Also was clear that, that was not something that we were necessarily hoping for or wanting. But that was actually the assumption to get to 15 by 20. I don't -- the numbers you mentioned, 8% and such accumulative, I don't think that's going to happen. I do think we're going to be in variance -- in line with markets or 1/10s of percentages behind it. But we wanted to keep the optionality to go for value versus being driven just going for the growth number. Now we did do a lot of work and we talked to some analysts about the portfolio work where we went in depth in our portfolio in granular detail, 140-plus segments, on where we make money, where are we not making enough money, what are the costs, what should we be doing differently in costs. Very happy with that work because it's in 1 format and it gives a whole dashboard on what you have to do. And yes, like in any company, there are obviously segments there where we say, well, we're not sure what we're doing there and there's other segments where we feel there is a great opportunity or -- either in growth or investment or in pricing and we actually have started to execute on that since this quarter. But I think, overall, we're probably going to be in line with the market or just decimal points behind the market growth.
Yes. So maybe to reconfirm. So the original plan presented in April last year was based on a 4% growth. When we had the roundtable in March, the analyst roundtable, we presented our 15 by 20 plan. We have mentioned that we see a market growth of 3%, but we have kind of derisked our plan with a 2% growth to create for ourselves flexibility in driving value versus growth.
And our last question is from Markus Mayer.
Markus Mayer, Baader-Helvea. Two remaining questions. Coming back to Marine and Protective Coatings, you said you are optimistic on oil and gas, but see the Marine recovering quite slowly. How long is your order book visibility in these 2 businesses? That's my first question. And secondly, this weak market environment in Marine and also Protective Coatings, do you expect that this might trigger consolidation in this market? That's all from my side.
Okay. So on the first question, the visibility in Marine and Protective, both markets actually fall apart into the newbuilds with the new plant in Protective Coatings with a new structure and then basically the maintenance, the ongoing repair, et cetera. So in both Marine and Protective, you would probably say for newbuilds, it's probably about 18 months because that's about the cycle to start a new ship and then basically having to coat it. It's also more or less the same timing between an oil installation being ordered and then basically having it coated is also about 18 months. So for newbuilds, it's about 18 months. Of course, in both markets, increasingly the more attractive part is the servicing part and that is a much more dynamic outlook obviously 3, 4 months ahead of time on what the repairs and what the maintenance effect is going to be. So I'm not sure if that answers your question, but that's kind of what we see.
May I add one more question. Do you then expect the recovery to comes first from the service part, is this is the right understanding?
Well, yes, I mean, because frankly if you look at the Marine and Protective businesses, in fact, to a large extent that has been much more than half of the business that you see reported right now is the service part so that -- and that has never gone away. I mean, even if we -- I would always say that corrosion doesn't stop for a recession, so that's why the maintenance keeps going on also for Marine businesses, et cetera. So that has not been that much impacted. There was some pricing pressure, of course, but I think that's been relatively holding up the fort pretty well. It's actually been the newbuild side in both of those businesses that was impacted significantly. If you go for consolidation you mean in Marine and Protective, you mean consolidation on the customer base or consolidation on the supplier base?
Basically both.
Not sure. So I mean, businesses under -- industries that are under pressure, I think you would expect it to be consolidated, so I'm not sure if there's anything happening there. But I think a number of people in the marine shipbuilding are going through all sorts of resets, et cetera. So on the supplier side, I'm not sure if that necessarily would lead to it because most of the marine and protective coatings suppliers are basically companies that have their own businesses. It's also they often intertwined with their own service teams in other segments. So not totally sure that would lead to a significant consolidation.
Okay, I think that's the end of the question-and-answer session for today. So thank you all for joining the call. Please get in touch with Investor Relations in case of further questions or comments.
Thank you. And that concludes today's conference. Thank you all for your participation. You may now disconnect.