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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome and thank you for standing by. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this point.
I'll hand the call over to you, Mr. Kenny Chae, Head of Investor Relations. Please go ahead.
Thank you. Hello, and welcome to AkzoNobel's Investor Update for the second quarter of 2022. I'm Kenny Chae, Head of Investor Relations team. Apologies to everyone on the call. We are having some technical difficulties this morning with the webcast provider and services. So the important thing, of course, is that the investor -- IR presentation is available online. So if you -- the webcast is not working, please go to the Investor Relations website and follow the presentation along with the presentation that is available there. Also, of course, the recording will be made available after this call. So please also, you can catch up in case you miss any part of this.
Today, our CEO, Thierry Vanlancker; and CFO, Maarten de Vries, will guide you through our Q2 results. We'll refer to the presentation, which you can follow on screen or download from our website at akzonobel.com, as I have just mentioned. A replay of this recording and webcast will also be available. There will be an opportunity to ask questions after the presentation. For additional information, please contact our Investor Relations team.
Before we start, I would like to remind you about the disclaimer at the back of this presentation. Please note, this also applies to the conference call and answers to your questions.
I will now hand over to Thierry, who will start on Slide 3 of the presentation.
Thank you very much, Kenny. Hello. Good morning, everybody, and a very warm welcome to this call.
As mentioned in our Q2 update from June, the paints and coatings industry and the world, for that matter, is coping with increased macroeconomic uncertainties and dynamic challenges. While we at AkzoNobel continued to make progress and stay focused on our Grow & Deliver journey, our Q2 operating environment was clearly significantly impacted from 2 very specific events: Destocking in a European do-it-yourself channels, on the one hand, and the China COVID-related lockdowns on the other hand. Despite these Q2 headwinds, the total Q2 volumes for AkzoNobel was above 2019 levels when we exclude the impact of the China lockdowns, and this is like-for-like, excluding acquisitions.
In the second quarter, we delivered double-digit revenue growth driven by strong pricing of 16%, which is more than offsetting the raw material and freight inflation for the second consecutive quarter. Revenue was up 14% and up 10% in constant currencies, with revenue growth for both the paints and the coatings.
Adjusted operating income amounted to EUR 249 million, which was 26% below prior year as positive net pricing versus raw material and freight was more than offset by lower volumes and higher OpEx. Revenue for the first half of 2022 was 13% higher compared to the same period of 2021, and the first half adjusted operating income was EUR 479 million.
Since the beginning of the current inflationary cycle, we have acted timely and have stayed focused on our margin management initiatives, and have achieved EUR 109 million of positive net pricing versus raw material and freight for the first half of the year versus prior year. By the end of June, we have completed EUR 249 million of the new EUR 500 million share buyback program that started in March.
Let's now turn to Slide #4. This past quarter marked the eighth consecutive quarter of revenue growth. Cumulative pricing over a 2-year period was above 20%. While Paints Europe was impacted by destocking in Europe do-it-yourself channels, and our Paints China business was impacted by lockdowns in major cities, our global Decorative Paint volumes, excluding acquisitions, in the second quarter were above 2019 levels with strong growth in South Asia, especially India and Vietnam, and Latin America, along with significant progress in our geographical expansion in China.
For Coatings, sequential recovery continued with volumes around 2019 levels when excluding the impact from China lockdowns. We also made significant progress in our M&A agenda with the closing of the Grupo Orbis deal, where business and integration is progressing well as expected, and we also announced our intention to acquire the Kansai Paints Africa business and Lankwitzer's wheel coatings business.
We continue to receive recognition for our efforts in sustainability with the inclusion of AkzoNobel in the Euronext Amsterdam's new AEX ESG Index. I'm especially pleased to share that we maintained an all-time high organizational health score from our organization as well as an all-time high participation rate in that survey.
The current macroeconomic outlook is increasingly less optimistic from where we started the year for everybody, but also for AkzoNobel. To ensure that we stay on track to achieve our 2023 ambition, we have launched our Focus 2 initiatives, which are expected to deliver EUR 200 million of EBITDA contribution and EUR 300 million of working capital reduction by 2023.
Moving to Slide #5. As mentioned just now on the previous slide, the current macroeconomic conditions are different than what we all had assumed in the start of the year and in our original EUR 2 billion EBITDA bridge for 2023. Economic growth forecasts have softened, while inflationary pressures on operating costs and other uncertainties have increased. That is why we've launched our Focus 2 initiatives as a contingency against a potential weaker macroeconomic backdrop, and to ensure that we stay on track to deliver the growth and deliver targets that we have set for ourselves. It's about reprioritizing and being agile to find an alternative path to reach our goal in lower-growth environment scenarios.
The Focus 2 initiatives will deliver about EUR 100 million EBITDA contribution to maximizing margin management, and another EUR 100 million of EBITDA contribution will be delivered through cost reductions as we rightsize our OpEx now that the supply chains are gradually stabilizing. Additionally, as raw material supply availability normalizes, we will reset and reduce our working capital level, which Maarten will cover later in his part.
Turning to Slide #6. In early June, we announced the intended acquisition of Kansai Paints Africa business, which fits perfectly with our Grow & Deliver strategy and strengthens our position in Africa. We are pretty excited by this acquisition as it is really cementing our position in a high-growth area. The Kansai Paints Africa business is around EUR 280 million in revenue, and it covers about 12 countries in South and East Africa. The deal includes the Plascon brand, which has more than 100 years of heritage. And together with our Dulux brand, they are the longest established paint brands in that region.
Acquiring Kansai Paints' activities in the region will help us to further expand our Paints and Coatings business in Africa and provide a strong platform for future growth. The completion of the deal is subject to regulatory approvals and is expected during the course of 2023.
Turning to Slide 7. Earlier this month, we announced the intended acquisition of Lankwitzer Lackfabrik's aluminum wheel liquid coatings business. Lankwitzer's wheel coatings business is about EUR 30 million in revenue, with strong approvals for use by car manufacturers such as Daimler, Audi, VW, Opel, Fiat, and Renault. This acquisition is very complementary to our existing Powder Coatings business and enables us to provide a comprehensive liquid and powdered aluminum wheel coating offering to customers and become a one-stop shop for the wheels industry. We are currently already the #1 with Powder Coatings in this wheel segment. Completion, which is subject to regulatory approvals, is expected before the end of 2022.
Let's now turn to Slide #8. It shows the latest demand trends in the markets where we operate. We continue to see strong sequential recovery for all the businesses in South Asia, including double-digit volume growth in our Decorative Paints business for Q2. We are still experiencing supply and logistic constraints in North America but we do see sequential improvements, which gives us further confidence of availability of raw materials easing during the second half of 2022.
EMEA is where we saw an increase in macroeconomic uncertainties during the second quarter. For our EMEA Paints business, our professional trade business performed well as anticipated, but the slow start to the quarter in do-it-yourself in Europe, followed by a wave of destocking, impacted our Q2 operating income by almost EUR 50 million. Based on the June and the early July trends, we expect our EMEA Paints volumes in the second half to still be above the 2019 levels.
The lockdowns in China that continued throughout April, May, mainly impacted our Coatings businesses, whereas our Deco business was able to partly offset the negative headwind with its geographical expansion initiatives away from the larger cities. Overall impact from China lockdowns resulted in a negative EUR 44 million impact on our Q2 operating income. The reopening in June showed a return to normal trading activity, and we expect further recovery as the China economy normalizes.
As we announced shortly after our Q1 earnings announcement, we are pleased with the closing of the Grupo Orbis acquisition, which strengthens our position in Latin America. Grupo Orbis has an annualized revenue of EUR 360 million and added EUR 85 million revenue in the second quarter.
Let's turn to Slide 9. To illustrate the impact of one of those specific impacts in the second quarter, namely the lockdowns and the reopening in China. The volumes in China have been impacted since the lockdowns in Tier 1 and Tier 2 cities that -- as it began in March. Both Paints and Coatings were impacted, however, the impact in Paints was somewhat masked by the progress made in its geographical expansion initiatives. With the reopening in June, we saw a return to normal for both Paints and Coatings, and expect further recovery in the second half as the China economy normalizes and the inertia built in getting our size back to normal production levels.
Regarding China macroeconomic concerns, especially on new construction activities, it is worth highlighting again that our AkzoNobel exposure to the new construction market is very limited based on our decisions in 2019 to deprioritize the project market.
Turning to Slide 10. This gives a view of the -- or a bit of a deep dive into the Deco EMEA do-it-yourself volume progression, and we will do that specifically as taking as a case history, what happened in U.K. do-it-yourself. Due to the volume distortions in 2020 and 2021, we will use 2019 comparable volumes for the analysis on this slide.
Overall, the Q1 volumes for Paint EMEA trended above 2019 levels, with an anticipation for another strong do-it-yourself painting season in Q2 by our channel partners. When the sellout volumes for our Europe do-it-yourself channel partners unexpectedly dropped in the first half of Q2, it triggered a destocking wave across key do-it-yourself markets throughout the quarter. By the end of June, the sellout numbers returned to the normal trading levels we saw before that dip in Q2.
In the meantime, our Professional Trade business continued to be strong and performed as anticipated throughout the second quarter. And as such, it was the do-it-yourself business in Europe that caused the volatility for Deco EMEA in the second quarter.
The Q2 do-it-yourself destocking wave is well illustrated in the 2 charts shown for our U.K. do-it-yourself channels, where it is the most detailed data available. Looking at the sellout volumes in our U.K. do-it-yourself channel sales, there were strong inventory replenishment at the end of Q1, as you see, which was followed by disappointing sellout to what our partners sell to the consumers in April. This, together with an overall better availability of our products, triggered destocking in our U.K. do-it-yourself channel partners.
The chart on the right shows the inventory levels in our U.K. do-it-yourself channels, comparing the first half of 2022 versus the first half of 2019. Inventory levels were building until March in anticipation for the second quarter. The unexpected weak start to the Q2 sell-out volumes, which you see on the left-hand side, triggered a destocking wave throughout the second quarter, with channel inventory levels decreasing significantly back to 2019. Based on the latest trends and the feedback from our partners, we believe that most of the destocking is behind us, with do-it-yourself markets reset back to 2019 levels.
Turning to Slide 11. In line with what we have been doing in previous quarters, we will zoom in, in one of our business units. This time, it's the Industrial Coatings business, which is made up of 3 subsegments: Packaging, Coil and Wood.
Our packaging coatings are mostly used inside metal cans, which is a fast-growing segment as the world moves away from single-use plastics. We expect 19 new can manufacturing lines between 2021 and 2024. Forty six of these lines are already operational, and we have won business in 23 lines, which is another strong proof point in how we are gaining market share in selected growth segments as we indicated in our investor update at the beginning of the year. Coil coatings are used on large metal sheets, where growth is traditionally linked to the construction or the farming industry. The Wood coatings market is relatively fragmented, where we serve customers who make things from doors and windows to floors and furnitures.
Industrial Coatings is driving growth through sustainable innovation. In Packaging, we have introduced the next generation of bisphenol-free coatings to support our customers in the evolving regulatory environment. In Coil, we are reducing our customers' complexity with the launch of a CERAM-A-STAR 1050 Select standard color palette and removing chrome from our primary portfolio in Asia with a new COILTEC range of chromate-free coil primers to improve material safety while providing the same high performance. In Wood, we continue to drive waterborne conversion from solvent-borne technologies with the launch of Acquaduro waterborne polyurethane line in North America, and we're working closely with key furniture manufacturer in Europe on coatings, which have up to 5% bio content.
I will now hand over to Maarten, who will share more about our financial results from Slide 13 onwards. Maarten?
Yes. Thank you, Thierry, and good morning to everybody on the call. During the second quarter, reported revenue was up 14% versus prior year and up 10% in constant currencies. We delivered strong pricing of 16%, which was sufficient to offset the impact of raw material cost and freight inflation for the second consecutive quarter. Mix was negligible in the quarter with positive mix in Coatings, offset by negative mix in Paints. The volumes were 9% lower, mainly as a result of destocking in Europe DIY channels and China lockdowns, which accounted for 7% lower volumes.
Adjusted operating income decreased 26% to EUR 249 million, resulting in return on sales of 8.7% versus 13.3% in Q2 last year. Adjusted operating income excludes the impact of identified items, which was net negative EUR 44 million for the second quarter. Adjusted EBITDA was 20% lower at EUR 337 million.
With the closing of Grupo Orbis on April 21, acquisition added 3% to revenue growth, while contribution to adjusted operating income was nil, mainly as a result of additional depreciation, amortization and cost of sales resulting from the provisional purchase price allocation.
Over to Slide 14. As mentioned in the previous slides, I'm very pleased to report that we achieved 2 straight quarters of positive net pricing versus raw material inflation for both Paints and Coatings. Pricing of EUR 392 million was enough to offset EUR 321 million raw material and freight inflation in the quarter. Lower volumes resulted in a negative [indiscernible] impact, mainly due to the destocking of Europe DIY channels and the China lockdowns. Currency had a positive effect of EUR 70 million, while mix was negligible.
Operating expenses and other one-offs were EUR 56 million higher than the second quarter of 2021, mainly as a result of higher operational manufacturing and supply chain costs, IEM project cost and EUR 7 million higher one-offs in the quarter.
Moving to Slide 15. For the second quarter, raw material and freight inflation of EUR 321 million versus same period prior year. Combined with the EUR 128 million impact in the second quarter of 2021, this represents an inflationary impact over a 2-year period of EUR 449 million. Although we do expect raw material costs to ease towards the end of this year, we expect further inflationary pressure in the third quarter with an adverse impact from raw material and freight inflation between EUR 260 million to EUR 290 million versus prior year.
On pricing, we delivered 16% in the second quarter which, combined with the 4.5% pricing in the second quarter of 2021, represents a cumulative pricing above 20% for the 2-year period. For the third quarter, we expect pricing to land between 12% to 14% when comparing to the third quarter of 2021. We have now delivered positive net pricing for 2 consecutive quarters and plan to deliver positive net pricing in the second half of the year.
Moving to Slide 16. And there, we show the progression of price and mix versus raw material cost inflation in the current inflationary cycles.
Having reached the inflection point with a positive net price and mix versus raw material inflation in the first quarter, we realized further margin expansion in the second quarter as shown by the red line in the graph. The current inflationary cycle over the past 6 quarters, we've been impacted by EUR 1.4 billion in total cumulative inflationary impact, which we have nearly compensated with our pricing initiatives.
Although the magnitude of pricing and inflation in the current cycle is quite different to the previous cycle, the margin expansion trends are quite similar. As Thierry mentioned earlier on, we have launched our Focus 2 program with plans to further maximize margin for 2023.
Turning now to Slide 17 for the second quarter results of Decorative Paints. Reported revenue for Paints was 9% higher versus the second quarter last year with pricing of 13%, more than offsetting lower volumes of 8%, while acquisitions added 3%. Volumes, excluding China and acquisitions, increased 3% compared with the second quarter of 2019.
For EMEA, revenue was down 7% and down 6% in constant currencies, with pricing more than offset by lower volumes. Revenue from Latin America was up 99% and 78% in constant currencies. The doubling of the revenue was partly due to Grupo Orbis. Organic revenue growth in the region was 56%, attributable to strong pricing and volume growth with progress in store expansion.
In China, the progress in geographical expansion and premium product innovation offset the impact from COVID lockdowns. South Asia delivered strong revenue growth, with pricing and volume growth, especially in India and Vietnam. Overall, pricing for Paints stayed ahead of raw material and freight inflation for the quarter.
Despite the strong revenue and pricing performance, the combination of destocking in European DIY channels and COVID restrictions in China, resulted in lower adjusted operating income of EUR 133 million and return on sales at 11.3% versus 17.2% for the same period last year.
Moving now to the second quarter results of Performance Coatings in Slide 18. Reported revenue for Coatings was up 17% year-on-year and up 13% in constant currencies. Top line growth was driven by strong pricing of 18% while volumes were down 9%, impacted by COVID restrictions in China and supply constraints, especially in North America. Volumes, excluding China and acquisitions, were around the second quarter 2019 levels.
Industrial Coatings showed 22% revenue growth as a result of growth across all segments, especially in Coil and Packaging. Powder Coatings revenue was up 3% with strong pricing, partially offset by lower volumes mainly due to lockdowns in China and supply constraints in North America. Marine and Protective Coatings showed double-digit revenue growth driven by strong pricing, while also materially impacted by supply constraints and lockdowns in China. Marine and Protective volumes were positive in the quarter when excluding the impact from China lockdowns.
And the revenue for Automotive and Specialty Coatings were 15% higher in the quarter mainly due to pricing initiatives. Aerospace and Vehicle refinish showed strong demand, while demand for Consumer Electronics slowed down. The second quarter volumes for Automotive and Specialty Coatings were close to the 2019 levels when excluding for the impact from China.
Overall, adjusted operating income was 16% lower at EUR 143 million and the return on sales at 8.6%, mainly due to the lower volumes and higher operating expenses.
Now turning to Slide 19. Operating working capital for the second quarter continued to be impacted by higher raw material costs and supply constraints. Principal inventory value increased due to raw material cost inflation and supply constraints. This resulted in operating working capital as a percentage of revenue at 17.4% versus 13.2% for the same period last year. Normalized for raw material cost inflation, working capital would have been around 3% lower. Also, Grupo Orbis added 0.4% to working capital.
Free cash flow was negative EUR 119 million for the quarter due to increase in working capital, along with lower EBITDA for the quarter. Capital expenditures for the quarter were EUR 67 million. As Thierry mentioned earlier, one of the key Focus 2 initiatives is the reduction in working capital where we aim to deliver a EUR 300 million reduction for 2023 mainly to inventory reductions. The net debt to EBITDA leverage ratio was 3.2x at the end of the second quarter, which is higher than our target leverage ratio of 1x to 2x. The higher leverage ratio was mainly due to the cash-out for Grupo Orbis, higher working capital and lower EBITDA.
Moving to Slide 20. Adjusted EBITDA was 20% lower for the second quarter, mainly due to lower volume and higher operating costs despite delivering positive net pricing versus raw material and freight inflation. The second quarter adjusted earnings per share was down to EUR 0.84 per share. Delivering on our capital allocation priorities, we have repurchased EUR 245 million of shares of the new EUR 500 million share buyback program initiated in March. Combined with our previous share buyback program, the total amount of repurchase in the first half of 2022 was EUR 402 million.
Turning now to Slide 21. We are executing consistently on our capital allocation priorities. We are investing in organic profitable growth with roughly 3% CapEx, and we have a stable to rising dividend policy. We are executing on our bolt-on acquisition strategy and our current share buyback program. This is all in the framework of targeting a leverage ratio between 1x and 2x while retaining a strong investment credit rating.
Now, I'm handing back to Thierry for the concluding remarks.
Thank you, Maarten. To summarize, Q2 was a challenging quarter for us given the external headwinds in do-it-yourself Europe and the lockdown in China, specifically in the first 2 months of the quarter before things started returning to normal levels in June.
Despite these temporary headwinds, we continue to make progress by delivering 2 consecutive quarters of net positive pricing while delivering volumes above 2019 levels when excluding the impact of China lockdowns. And this is, of course, like-for-like, excluding acquisitions. With our Grow & Deliver strategy, we target to grow at or above our relevant markets and continue to build on our strong foundation. Trends differ per region and segment, with raw material and freight inflation and supply constraints expected to gradually continue to ease towards the end of 2022. And going forward, we aim to stay ahead of the raw material and freight inflation with pricing.
Macroeconomic uncertainties have increased in Europe, at least due to geopolitical tension, the resurgence of COVID-19 and inflationary pressures, we aim to deliver EUR 2 billion adjusted EBITDA for 2023.
And I now hand over to Kenny for information about upcoming events and opening up for the Q&A session. Kenny?
Thank you, Thierry.
Before we start the Q&A, I would like to draw your attention to some of the upcoming events shown on Slide 24. In connection with our recent CEO announcement, we will be holding an extraordinary general meeting of shareholders in September. Furthermore, we will publish our third quarter results on October 20.
This concludes the formal presentation, and we would be happy to address your questions. [Operator Instructions]. Operator, please start the Q&A session.
[Operator Instructions] And we have our first question from the line of Mr. Christian Faitz from Kepler.
Yes. I have 2 questions, if I may.
First one would be on leverage. It's up quite a bit in this quarter. Is that a concern for you? And what are the measures you are taking to come off that 3.2x level?
And the second question would be kind of a conceptual one. If gas was curtailed for Europe, obviously, mainly for Germany, would you believe you're going to have some supply issues from your key suppliers? I'm thinking of polyurethanes, acrylics, et cetera? And have you put measures in place to mitigate this potential effect such as higher inventories, et cetera?
I suggest that Maarten, Christian, takes your first question, and I'll address the second one.
Yes.
On the leverage ratio, so indeed, we are, by the end of the second quarter at 3.2x. Of course, it's also good to take into account that in the first half of the year, we see, in general, a different phasing in our cash flow generation. So the cash generation generally is more in the second half of the year, but it has been aggravated in the first half with the run-up of working capital, mainly driven by the raw material inflation as well as, of course, the acquisition of Grupo Orbis and the related cash out.
So if you look forward, we do expect by the end of the year to sit at the leverage ratio, which is just still above the 2x, and then coming back to the targeted leverage ratio, which we have stated, at 1x to 2x by the end of '23.
Christian, let me add.
The second question around the risk around gas curtailment. First of all, it's important to point out that as any impact on a company like AkzoNobel would be indirect. We are a low-energy consumer, and specifically for what Europe is concerned, we are basically 100% on renewable energy anyway. So it would be an indirect effect, as you indicated, to potentially raw materials.
Now, very difficult to see to any of the potential scenarios. But to be honest, Focus 2 is addressing uncertainties that might be there in many aspects. We do source, of course, from around the world, so we typically source the raw materials and produce the paint in the same region as where we sell it. But if push comes to shop, we could actually change some of these predictions.
So now, it depends really on the severity and we're doing an analysis on that. Because, for example, if polyurethanes would be difficult to obtain, then frankly, that would mean that many of the objects that the paint goes on like cars, et cetera, would be difficult to obtain, et cetera. So that becomes a much bigger impact.
Answer your question, are we going to stock up for that? I don't think so because that would be an almost impossible situation to try to guess how insignificant gas curtailment would flow to the raw materials into our business. So that is going to be a question a little bit like we did in Covid for different reasons when there is less demand or when there was less supply. And we have had, unfortunately, 2 years of practice rounds on how to deal with that. But it is the reason why we thought it was good to at least focus on the things we can control and get our operating expense down to where -- to that reflects the more sustainable supply chain.
Does that answer your question, Christian?
Yes, absolutely. Very helpful.
Our next question is from the line of Mr. Laurent Favre from BNP.
I have 2 questions. The first one probably for Maarten, around the EUR 200 million of impact from Focus 2. As you said, a lot of this is related to the changing macro environment. There's been a lot of some more to think about in terms of inflation. So I'm wondering if -- and here, I mean, wage inflation. So I'm wondering if the EUR 200 million you're talking about is a net number? Or whether a lot of this is going to be sent away by, for instance, wage inflation for which [indiscernible] into, I guess, 2023? And also, how much of this program do you think can land in H2? That's the first question.
And then the second one is for Thierry. Thierry, there's been a lot of speculation around the CEO transition announcement, so I think it would be much better for all of us to hear it directly from you in terms of context perhaps. But also, if you can share any thoughts on what the Board has been focusing on to pick your successor?
Yes. Okay.
Maarten, do you want to --
Yes. So first of all, I think it's important to realize Focus 2, the EUR 200 million is EUR 100 million in OpEx reductions and EUR 100 million in margin expansion, and these are indeed net numbers. So why is this? Exactly what Thierry mentioned earlier, the economic uncertainty and the lower consumer confidence, it makes -- we need to make sure that we step up and mitigate for this. And also, therefore, mitigate for the impact in terms of our original Grow & Deliver strategy in terms of the growth, but also potential mitigation of the execution on our Deliver programs.
So how do we see this? It is, from an OpEx perspective, it is partly a cost reset because you've seen that we have seen the cost running up. So that will be a reset which will partly starting to come in, in the second half and a main part in '23, similar to the margin expansion. And when we talk about OpEx, it is the same old things. It is looking at discretionary costs, looking at contractors, et cetera, et cetera.
Laurent, does that answer your first question?
Would you have a specific cash costs attached to that [indiscernible] that we should have in mind?
There might be some cash costs linked to that, yes. But as we go along, we will be more explicit when that is more clear. And of course, as and when we also have internally been clear about this.
So it's fair to say, Laurent, that, that might be less than you would expect because this -- with attrition, and in fact, a lot of the flexing up that happened to address the supply chain issues, the flexing down is obviously less costly in restructuring itself in that sense.
But let me address your second question, not sure if I fully understood it. But first of all, me leaving the company was obviously a foretold situation since beginning of 2021 was my decision to only sign on for another 2 years, so that comes to an end beginning of 2023. So it is not a royal system, so it is not the CEO picking the other CEO because internally, the feeling was we did not have a candidate ready, but there was the opinion of the Board. So then, there was a profile input that was given the Board and for research. And then Gregoire Poux-Guillaume, I think, was chosen.
The question on what they were looking for is probably more appropriate to ask to the Supervisory Board, I think, on what they were looking for. But the context I had with Gregoire, he seems to be very much fitting the culture. He's very much an operator and hands-on on how to progress the agenda of the company. But I'd rather actually kind of refer more to probably our Chairman on what he was exactly looking for and how the design criteria was, to explain that to you. But at least until November, December of this year, it is very much business as usual. And we are starting the slow induction of Gregoire into the business.
Not sure if that answers your question.
As much as you can, I'm sure. Thierry.
Our next question is from Mr. Sam Perry from Credit Suisse.
Just surprised to see that pricing versus raws at the midpoint of your guide for Q3 is worse than in Q2, especially given sort of spot pricing, at least what I'm looking at, has come down slightly. Is that the same as what you're seeing? And is this just a timing lag? Or would you expect to see it widening again at Q4?
I think it's 2 things. First of all, it is indeed a time lag because it takes time before the raw materials flow through our P&L, and that will show the peak in the third quarter. And then as we have said, a gradual easing by the end of the year, that's one. But there are still some distinct raw materials which are still going up, and one specific example is latex. So it is a situation where we are getting to a plateau, that there are still pluses and minuses here.
And I don't know, Thierry, if you still want to --
No, it's correct. I think latex is a monomer. I mean, there was some of the energy shock that come through there. But if you really look at the raw material listing, first of all, the availabilities are not normal yet, but they are clearly normalizing. Latex and monomers are noted exceptions, I think, because of the number of technical force majeure and then the energy cost that comes in.
But if you really look at the bridges for these raw materials, most of them starting to actually show the deflation. And in fact, it's only these notable examples, but those are big products in our industry that actually offset that picture and actually make it a bit of the plateau going up to some extent.
But even there, I think our procurement organization foresees that it's a temporary situation, and that the stabilizing or going down of the raw material prices is there. But as Maarten indicated, that takes them another 1 to 2 quarters from predicting it to seeing in the numbers, I think. So that is really more an impact that probably will be, as of beginning of '23, starts being visible in our numbers.
So just to confirm, the lag is 1 to 2 quarters?
No. I mean, what we see right now is --
Contract.
Yes. Well, the difference when we have it in our inventory, it's about a quarter to -- by the time it gets in the P&L. What I was indicating is that sourcing starts seeing that those prices for those materials will be going down in the next 2, 3 months about the time we acquired it. By the time it froze our inventory, we have to look at 1 quarter when we have it. But when we see the pricing signal go down, about 5 to 6 months by the time it's actually in our P&L.
Our next question is from Mr. Matthew Yates of Bank of America.
Maybe a couple of questions for Maarten, just around the cash management. Going back to the gas crisis in Europe we talked about and the risk that, that either curtails chemical availability or just leads to more inflation. How are you seeing the risk that you can't alleviate the working capital in that sort of scenario?
The second question is around the buyback. If you wouldn't mind just refreshing my memory, that EUR 500 million program you started in March, was that intended to last 12 months? And if so, I'm curious why you've done half of the program already, especially given you knew that Q2 was off to a relatively weak start?
Yes. So let me start with the last question.
Indeed, on the share buyback which we announced in March, the EUR 500 million, we did EUR 245 million. And originally, we said we would finish it in the first quarter of '23. But given where we are today and the current environment, we will finish it before the end of this year. So we will accelerate the current share buyback program of the EUR 500 million and finish by the end of this year. So I think that answers your second question.
Your first question on cash and inventories. In fact, Thierry just mentioned that, of course, we are -- the sourcing is local for local and regional for regional. And when we talk about our inventory levels and our working capital, it is really from a global perspective. And to be very fair, overall, we are sitting -- apart from the raw material price inflation, our inventory levels are in balance and it has to do with, of course, the whole volatility of the supply chain currently. And given how we see raw material gradually easing, we need to make sure that we can do that reset and come back to our inventory entitlement, so to a normalized level. And that is the EUR 300 million correction which we are basically, as we speak, implementing.
Matthew, if I may add something on top of that.
So if you look at the dynamics, first of all, and that's -- by the way, would trigger to destocking in do-it-yourself and EMEA from our channel partners. As materials were difficult to get and the prices went up every single month, sometimes twice a month, people have been -- in the channel have been hoarding and that we did. We've been trying to get some of it. As you can get it, you might as well put it in inventory. As things are normalizing, that is not a driver anymore. So you can start normalizing on your safety stocks again, which we haven't been doing in our raw materials. So that is one element.
The second part is there that, of course, in the second quarter, there was a bit of a distortion in the working capital because the do-it-yourself EMEA destocking is relatively big volumes, and all of a sudden, that came to a grinding halt. So that results in having more finished goods in our inventory ready to ship that they need to be shipped and also the raw materials. The same was in China where you have warehouses with material, but you couldn't even put it on the road to get to your customers. So it's a bit of an abrupt situation that happened there.
So what we are looking, indeed, as Maarten explained, but you have to see this. Almost you cut the tap and there's a bit of a whiplash, and then your -- specifically in the second quarter, the ratios don't work anymore. So that's what we're working through right now. The risk of not being able to get our working capital and our inventories in line is actually very non-existing. It is, given the visible normalization, something we can now start to work on and will work on.
Our next question is from Mr. Chetan Udeshi from JPMorgan.
I just have a couple of questions. First, I was just looking at that DIY channel inventory build chart. And I was just -- can you confirm whether that is volumes or whether that is value inventory? Because what I'm trying to get to is when I look at the numbers versus start of 2019, we are still at a much higher levels. So just trying to understand maybe there's a bit of seasonality per month, but like, why can't that number go back to the start of 2019 level? Because clearly, this is an indexed chart.
And the related question then would be, you quantify the impact from Chinese lockdowns and weaker DIY in Q2 of, I think, approximately EUR 90 million, EUR 95 million on EBIT. I mean, are we to assume that at least some of that comes back in third quarter? Because you are indicating the volumes are normalizing as we speak. And if that's the case, I think the base case should be that from EUR 249 million or so of EBIT, maybe we go to EUR 300 million, would you -- or more? Would you agree with that?
Chetan, let me address the first question on there. You're referring to the right-hand chart on Slide #10 in the presentation.
so maybe to explain it a bit more. So the 100% level -- first of all, the chart is volume in the channel, so that there's no misunderstanding there. Secondly, the 100% line is the starting inventory in -- so January 2019 in the do-it-yourself channel in the U.K. So what you then see in 2019, there was obviously a run-up in inventory preparing for the quarter. But people were, at that moment of time, a bit relaxed because paint was, in an old-fashioned way, available, could be replenished at every single moment of time. So there was really no need to have a lot of inventory.
Flash forward to what you see on the 2022 situation. So there, you see the effect somewhat similar to what I explained on our raw material. You see people trying to get their hands on the stuff as much as they can. And by the way, if they didn't get it, they have the risk that a couple of weeks later, the product is more expensive. So you see more products getting in the inventory. You also see that our channel partners in March were actually pretty bullish around how the season would go and actually wanted to make sure that it didn't have any stock out, and it actually stocked up in March versus that.
And what you then see is as of that March, that 180 points in March, that is then basically the sellout, which is the left-hand chart, as the sellout in April up until the beginning of May was exceptionally slow. Again, this was footfall in the retail stores not linked to paint, but also other categories. As the footfall was very slow, then people were sitting on expensive inventory which is somewhat seasonal, and therefore, started to basically stop ordering. So the impact on the orders that we got is way higher amplified because the destocking had to happen while the sellout was actually being low.
What you also see is that by June, the normal traffic in the stores was there. So the sellout was back to the 2019 plus levels. And the stocks in the meantime, basically our retail partners, have been selling out of inventory that they already have. You would also note that it's not completely at the same level as '19, yes. So we saw in June, but we also saw a little bit in the first beginning of July, we saw some destocking happening. The team believes that, that is now basically behind us and that we're basically are now seeing more strength translation of the sellout.
So let me stop here, Chetan, whether that was a semi-comprehensible explanation for your first question.
That's useful.
Yes.
And then on Paints and Coatings --
Yes. So on the second question, it's, in fact, very much linked to the first question because what we see right now, and that's what Thierry just mentioned, that from a DIY perspective, we see that volumes went back to the 2019 level. So we've seen this whole destocking impact in the second quarter. And from a Covid lockdown perspective, we also see that the market has been reopened. So we see us coming back, I would say, to normal trading, while it's fair to say that the Chinese economy is less vibrant as it was before.
Chetan, maybe to give some additional points on there, because I'm sure that's going to come up. Two questions would be on pricing.
Have you lost share? Well, if you look at the U.K. numbers, we don't publish those numbers, but we actually went up in market share in do-it-yourself in the U.K. in the first half of the year because it's actually at the end of the quarter that we only get those numbers. So there, actually, we're gaining market share in the U.K. So just to keep that in mind if we talk about our sales numbers in the U.K., and that gives this whole destocking effect in the middle.
The second element, is that trading down? The answer is no. Spent quite some time with our key retail partners across Europe, by the way, and including the U.K. And what they're basically saying is that the low end of the market where we were not playing, that's frankly has disappeared. Those customers are simply not showing up. Whereas the rest from medium to premium products, frankly, they don't see much happening.
The biggest explanation, and let's say, hope that is true, is that frankly, in April, beginning of May, people were standing in line in airports for going on -- finally going on a trip, and we're less doing home renovations or do-it-yourself work in general. That's at least what they believe as a general topic.
So I just wanted to address that because those are maybe 2 other elements, share and value trading. But those are definitely not part of this equation here.
Our next question is from Mr. Alex Stewart from Barclays. The line is open, you may begin.
Two questions, just one point of clarification.
So on this working capital guidance you've given the EUR 300 million additional release by 2023. Can I read that as being a volume reduction? Because you've spent EUR 700 million for 6 months of the year, so presumably that will unwind in H2. Just wanted to understand how H2 relates to that EUR 300 million. And then --
You're difficult to hear. Can you maybe repeat your question?
I think, Alex, if I may play back to you, I think you talked about a EUR 300 million reduction. Would that be volume, and how would that be unwinding in the second half of the year? Correct?
Yes. Yes. Thierry.
The second one was on third quarter volumes. If you strip out the isolated events in the second quarter, it looks like your underlying volumes were down 2% to 3%. Where do you see that being in the third quarter?
And then just a point of clarification, the slide in your deck where you talk about China paint volumes. You told us that there was very little impact in paint from the China lockdowns, and yet you presented a slide where you've got volumes down roughly 15% to 20%. How do we square those 2 comments, please?
Yes. Can I maybe address the last question, and then maybe go from 3 to 2 to 1. It's [indiscernible] for one.
On the China paint, you have to look at 2 dynamics there, and we commented on that in the first quarter. Our China Dulux business is actually growing quite spectacularly, mainly through the geographic expansion. So we hold on to the Tier 1 cities. That's the real premium products, and then we have a premium mid-tier offering for the geographic expansion. And those are solid, big double-digit growth in volume, and then definitely in revenue that happens there.
So when we say you don't see it in paints, it's true because, frankly, what happened is that where you saw in Q1, a big step-up, and we think that will resume in the second half of the year. That geographic expansion work as the Tier 1 and Tier 2 cities normalize. What basically happened in the second quarter is that the Tier 1, Tier 2 business, the big cities were actually closed for business. So it's a bit treacherous because year-over-year, you would say, well, there is no impact, and that's what we stated. The whole idea is though that the growth was actually decapitated in the second quarter on that. So that's why it's a bit treacherous because you have this growth momentum that was stopped and it looks year-over-year like nothing happened. So it's probably good to put it in perspective.
Does that make sense, Alex? Or --
Yes, that does make sense.
Then on the Q3 --
For the Q3 volumes, but maybe let me take it in a bigger context.
So first of all, if you look at last year '21, first half was relatively strong in volumes and the second half was weaker because it was very much impacted by all the supply constraints and all the issues we had in the supply chain. In fact, this year, you see a little bit different picture because the first half Q1 and Q2, we see negative volume development versus last year. In the second half, we see over Q3 and Q4 kind of a mid-single-digit growth versus last year. And if you then take the total for the year, I think we will end up more or less flat over the full year.
And then on the working capital?
Yes. On the working capital, the EUR 300 million and the unwinding of our relatively higher inventory levels, of course, we are focusing very much to drive this in the second half of this year, but as well also partly be next year. That's why we said it will be by next year. But of course, for us, it is very important that as raw material pricing will gradually start to ease that we set our inventory levels and get with a very healthy inventory level in terms of finished goods, but also in terms of raw materials that we get into 2023.
And then Alex, as a balancing act, by getting a raw material inventory where it should be, because we want to get the high expensive material out as soon as we can. At the same time, with still availability that's normalizing but it's not normal yet, so we don't want to actually then get into stock house either. So that's a bit of balancing act.
Our next question is from Mr. Tony Jones from Redburn.
I just had one last one. So going back to Slide 5 and Focus 2, some of the things you talked about to reduce the cost, things like reduction in contractors, things like that, that sounds quite similar to some of the things we saw in the pandemic with lower OpEx. So I guess the question is how much of this is temporary? And then does it reverse when growth returns in 2024?
Yes. Tony, good question. I think what you have to see is that because the raw material situation was so sketchy, and if you want to guarantee some level of service to customers, there are indeed a significant amount of overtime contracts that we're putting in, extra shifts, et cetera, et cetera. Now as the raw material situation normalizes, that is actually the part that we can take out.
Secondly, there's also -- it's not only organizational by the way, there's also out of pocket expenses that actually kind of came back in.
So answering your question, if our volumes would spectacularly increase, you would say, well, yes, you may have to flex it. But I think where we are right now versus the volumes, the emergence, our integrated supply chain to try to get the products out of the door, that is actually the one that we start building or actually starting to take down. Whereas if volume would grow well, then you will do it, but then it would be more in line with volumes actually that are growing.
Does that answer your question?
Yes. That's great.
Our next question is from Mr. Geoff Haire from UBS. Your line is open, you may begin.
Actually, all my questions have been asked, so I'll pass in the interest of time.
Thank you, Geoff.
Thank you, Geoff.
Our next one is from Mr. Rob Hales from Morningstar.
Just a couple of quick ones. You talked about a backlog before, I think it was EUR 120 million last quarter. Can you just tell us where that sits now?
And then on Deco Latin America, just looking at the 40% revenue increase in constant currencies, excluding Orbis. Can you just give us an idea of what the volume growth was and where that -- where volumes sit versus 2019?
Yes. On the backlog number, I'm looking at -- you can, I think it's around EUR 110 million, EUR 112 million or something.
Correct. EUR 112 million, all of it.
Yes. So it actually came -- I would say it came down, but not necessarily that spectacularly. So again, I want to stress. We see a normalizing environment, but it's nowhere near normal as such.
Maybe to add there. If you look at the backlog, it is very much still distinctive in North America because that's what we have also highlighted that if you look at some of the constraints, it's more related to our North American Coatings business.
And then if you go to Latin America, volume growth, so excluding Grupo Orbis, so what was like-for-like, the volume growth -- so the second quarter versus the second quarter of last year is mid-single-digit percentages in volume up.
So actually, our markets there are doing well, and a lot of it is actually market share growth in both in Argentina and in Brazil.
Yes. I guess I was still wondering if it's kind of below 2019 right now or above? Any idea on that?
In Latin America?
Yes.
Yes. It's substantially above 2019.
Yes, because this has been an ongoing trend, to be honest. They are substantially above 2019 and -- yes.
Great.
Our next question, from Mr. Gunther Zechmann from Bernstein.
Gunther Zechmann from Bernstein. Just a couple of follow-ups, please. Firstly, on the financial leverage. To Christian's question earlier, can you talk about this in the context of your M&A pipeline, please, given where cash flow is at the moment and [indiscernible]? And would you still take advantage of the lower market valuations to snap up any bolt-ons? Or should we expect a pause in the acquisitive growth for the time being at least?
And then secondly, just going back to the China growth chart that you added to the presentation. After the lockdowns ease, should we expect a catch-up of demand? Is that part of the order backlog that you've included and that Maarten just mentioned and Kenny just mentioned? Or are there still difficulties in Akzo's own production to ramp that up fast enough that we will see any meaningful contribution in the second half this year? How should we think about that, please?
Let me handle the lockdown later. I mean, I'll hand over the M&A and leverage question to Maarten. But I just want to point out M&A is not only just a question of having cash or not having cash, it's also having the manpower to integrate it in a decent way. So -- and that is probably more an overarching limitation.
But Maarten, maybe you want to comment more?
Yes. So I only want to say that we have been very active. I mean, we -- we just closed the Grupo Orbis acquisition, which we are integrating as we speak. We announced Kansai with expected closing by '23, and we just announced also the Lankwitzer, which is a more smaller bolt-on to be closed by the end of this year. And indeed, that requires quite a lot of integration work.
But meanwhile, it doesn't mean that we are not active anymore. We keep on looking at value-creative bolt-on opportunities. And as you know, we are very critical to ourselves. It needs to help us to drive value, but also help us to make the company better. So we have quite tough criteria, which we internally use as part of our pipeline.
Yes. Secondly, Gunther, on the -- what is the "bounce back" or recovery after the China lockdown. It is interesting because we have had quite some contracts with different parties and different [indiscernible] in China. I would say we're not that [indiscernible] that is going to spring back so that everything that was lost in the second quarter will come back. Because I do believe that the Chinese economy is obviously -- and also their projections for the economy are less exuberant. So I do believe that we see our business coming back. It's almost like you have this 2 months lockdown is cut out of the year. We go back to the normal levels we had before, but we haven't seen too many traces of actually a catch-up from that system.
So I think it's not going to be -- I'm pretty confident that the business will hold up as it was, and we will go back to our own growth plan with now seeing the -- also visibly seeing the growth in the geographic expansion. But I do not think that these 2 months will be that you can pile that on to the second half of the year at all. So I think that is -- I don't think that's going to happen.
Very helpful.
Our last question is from Mr. Mubasher Chaudhry from Citi.
Just one thing. Can you split out the China versus EMEA or China lockdown versus EMEA DIY impact in that [indiscernible] provided?
I'm not sure as what the last part was. Is the China --
Yes. So and I think in one of the slides, you talked about China. So the negative volume, 9% volume, it's impacted by the China lockdown and EMEA DIY by negative 7%. Could you break that out, please, between EMEA DIY and China lockdown, please?
Yes. So the impact is 7% out of the 9%. If you split it out in Paints and in Coatings, Coatings would be, excluding this impact, would be minus 4%. And if you look at Deco, it would be plus -- between 1% and 2%.
And also, Mubasher, and that is actually for everybody. If you take our volumes, and again, take out the acquisitions we have. If you take the volumes in the second quarter and you compare it to the second quarter of '19, actually, our volumes for Deco are up more than 3% versus the second quarter of '19, and are basically flattish for what Coatings is concerned. So I just want to put it in perspective on where we are versus '19 on volumes. And that's -- the only thing we do there is excluding the China lockdown.
And again, don't forget that in our numbers, there's still the Russia situation as such which is going down. But even with that, the China impact, if you only exclude that one, is up 3% for Deco and basically flat for Coatings.
And just as a follow-up. For the 3Q, should we be expecting margin to be up sequentially or year-on-year, given that the pricing is remaining positive? For net pricing and raw material remaining positive?
Yes. We have -- I mean, we have clearly indicated what raw material will do in the third quarter and what we expect pricing to be done. We just discussed that. So that is, I think, how you can -- how you should look at it. And we have also indicated how we look at the volume equation for the second half.
So Mubasher, I think we do very much intend and will offset the inflation of raw materials and freight that would be there in the third quarter by our pricing. So I think in that sense, I think there's no change in our conviction and in our actions.
Yes. Understood.
Thank you, everyone.
I think we are out of time, operator. I think we -- with that, we will close the call. Thank you, everyone, for participating. A recording of the call and the presentation is available and will be available on the website, so please refer to that. Thank you, everyone.
Thank you.
Thank you.
Thank you. And that concludes today's conference call, and thank you all for joining. You may now disconnect. Thank you very much.