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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.
Thank you. Hello, and welcome to the AkzoNobel Investor Update for Q4 2018. I'm Lloyd Midwinter, Director, 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 on screen and download from our website, akzonobel.com. A replay of this call will also be made available. There will be an opportunity to ask questions after the presentation. For additional information, please contact Investor Relations. Before we start, I would like to remind you about the disclaimer at the back of this presentation. Please note, this is also applicable to the conference call and answers to your questions. I now hand over to Thierry, who will start on Slide 4 of the presentation.
Good morning, everyone, and thank you for joining our call. 2018 was a truly a landmark year for AkzoNobel, as we completed the sale of the Specialty Chemicals business and began returning the vast majority of proceeds of that sale to our shareholders. We made good progress towards our Winning together: 15 by 20 strategy, which increased return on sales, excluding unallocated cost, at 9% in the fourth quarter compared to 8.4% last year.In addition, we concluded the first phase of our transformation to create a fit-for-purpose organization, fully delivering on the promised EUR 110 million that was planned for 2018. And we have taken the next step in our transformation to deliver the next EUR 200 million cost savings by 2020.AkzoNobel is now a focused Paints and Coatings company, and we are channeling all our experience, energy and passion into being recognized as the reference in our industry. We also continue to invest in growth, and in 2018, we made multiple bolt-on acquisitions, including Fabryo in Romania; Xylazel in Spain; Colourland Paints in Malaysia; and the AkzoNobel Swire Paints joint venture in China. These deals will help accelerate our momentum, as we continue to build AkzoNobel into an industry leader.Another highlight in our trade was the introduction of our Paint the Future startup challenge during the last quarter, making sure that AkzoNobel becomes also the reference when it comes to open innovation.Some key financial highlights are shown on Slide 5. During Q4, revenue was up 4% in constant currencies or around 3% on a comparable basis, with positive price/mix partly offset by lower volumes. Pricing initiatives in response to higher raw material cost contributed to positive price/mix of 9% overall, of which the price impact was 6%. The ROS, excluding unallocated cost, increased to 9% from 8.4% in Q4 2017. A final dividend of EUR 1.43 per share post consolidation has been proposed for 2018, which would equal the total 2018 dividend of EUR 1.8. Just want to remind that 2017's final dividend of EUR 2.5 per share included EUR 0.85 related to the Specialty Chemicals business.Delivering on our commitment of returning the vast majority of the net proceeds of the sale of our Specialty Chemicals, we completed a EUR 2 billion capital repayment and share consolidation in January 2019. In addition, a EUR 1 billion special cash dividend of EUR 4.5 per share will be paid in February, and a EUR 2.5 billion share buyback will commence in February and is to be completed by the end of 2019.In February, we have also settled the cash top-up payments of our main U.K. pension plans. By doing so, we have removed a significant cash headwind for the company.Following the sale of Specialty Chemicals and in the context of our Winning together: 15 by 20 strategy, we will provide also an update at the end of this presentation on our capital allocation.Let's turn to Slide #6. Our Winning together: 15 by 20 strategy is delivering results and gathering a very nice momentum. Pricing initiatives achieved positive price/mix of 9%, including 6% higher selling price. Our Paint the Future startup challenge, now open for entries, is designed to combine our global scale, know-how and expertise with the solutions of startups and scale-ups. We have made continued progress on implemented Integrated Business Planning, also known as IBP, and we now have our monthly cycles in place for all our business units. This will enable both higher service levels to our customers while reducing working capital levels. We're also moving forward with the ERP integration. This plays a key role in our future performance improvement. In fact, we went live in January 2019 with the first batch of implementations.Savings from continuous improvement more than offset the fixed cost inflation, and Phase 1 of trading a fit-for-purpose organization was fully delivering on the EUR 110 million planned savings for 2018. We continue executing the next step of our transformation and are on track to deliver EUR 200 million savings by 2020. Successfully focusing on value over volume demonstrates how we're creating a high-performance culture. We've also been recognized as a top employer in China, in the U.K. and in Brazil, all important key markets for AkzoNobel.I'm encouraged by what we have so far achieved, as we continue to deliver towards our Winning together: 15 by 20 strategy.On Slide 7, you will see a summary of the current market dynamics. During 2018, demand for Powder Coatings remained strong, while demand for marine and oil and gas industries stabilized. Paint volumes in China normalized to 2016 levels versus an exceptionally strong volume growth for Decorative Paints China last year. Demand for Automotive and Specialty Coatings was mixed, strong for Aerospace, while we saw softer demand for Specialty Coatings, especially in Asia. Headwinds persisted from adverse currencies and higher raw material costs, while robust pricing initiatives successfully offset the impact of lower volumes and fueled revenue growth in constant currencies. We are making truly good progress towards delivering on our 15 by 20 strategy, despite continued headwinds.Slide 8 shows quarterly trends in volume and price/mix. Decorative Paints' price/mix was positive 8%, driven by pricing initiatives. Volumes were 6% lower versus an exceptionally strong quarter last year in China and driven by our value over volume strategy. Excluding China, volumes for Decorative Paints were just 1% lower. Price initiatives for Performance Coatings continued to gain traction, leading to positive price/mix of 11%. Volumes were lower, partly due to our value over volume strategy. Overall, robust pricing initiatives, combined with cost-saving programs, successfully offset the impact of higher raw material costs and fueled revenue growth in constant currencies. The main EBIT developments for the fourth quarter 2018 are shown on Slide 9. Foreign exchange rates continued to be a headwind. The positive impact from pricing initiatives, despite lower volumes, successfully offset the impact of raw material inflation and fueled revenue growth in constant currencies. Raw material inflation continued in the fourth quarter of 2018, although at a slower rate than during the start of the year. Productivity improvements from our ALPS continuous improvement program achieved cost savings to offset wage and other fixed cost inflation. Phase 1 of the transformation fully achieved the EUR 110 million savings planned for 2018. And we have already taken the next step in our transformation to deliver the next EUR 200 million cost savings as we announced by 2020. So we are delivering on our Winning together: 15 by 20 strategy. And I now hand it over to Maarten, who will run through the financial results in more detail from Slide 11 and onwards.
Yes. Thank you, Thierry, and hello, everybody, on the call today. On Slide 11, for the fourth quarter, revenue was up 4% in constant currencies, with positive price/mix offset by lower volumes. Volumes were 7% lower, while, excluding China, volumes were just 2% lower. Adjusted operating income was up, driven by our focus on pricing initiatives and cost-saving programs, despite the adverse impact of foreign currencies and raw material cost. The return on sales, excluding unallocated cost, was 9% versus 8.4% in the fourth quarter of 2017. Operating income includes EUR 113 million impact from identified items related to one-off noncash pension cost of 7 -- EUR 57 million based on a U.K. precedent set in October 2018 for the Guaranteed Minimum Pensions equalization regulations. And on top of that, we had the cost for the second phase of the transformation, which was EUR 56 million.On to Slide 12, the fourth quarter results for Decorative Paints. Revenue was up 3% in constant currencies with positive price/mix of 8%, driven by pricing initiatives and acquisitions contributing 1%. The volumes were 6% lower versus an exceptionally strong quarter last year in China and driven by our value over volume strategy. In fact, excluding China, volumes were just 1% lower in Decorative Paints. In Asia, particularly, volumes grew in India, Malaysia and Vietnam.Adverse currency effects were driven by various currencies, including the Argentinian peso, Brazilian real and Turkish lira. Adjusted operating income was EUR 52 million with higher selling prices and cost savings compensating for raw material cost inflation and lower volumes. And the return on sales was 5.8% compared to 6.3% last year, while return on sales in the second half of the year increased to 9% versus 7.9% in 2017.On to Slide 13, Performance Coatings. Revenue was up 2% and 4% higher in constant currencies with 11% positive price/mix. Adjusted operating income was EUR 20 million -- was up EUR 20 million, mainly driven by pricing initiatives and cost savings, more than offsetting adverse currencies, higher raw material cost and lower volumes. And the return on sales was up at 10.9% versus 9.7% last year. And return on sales in the second half of the year increased to 11.5% compared to 10% in 2017.Demand has stabilized for Marine and Protective Coatings, with revenue up 5% in constant currencies. And Powder Coatings continued the positive trend with growth of 6% in constant currencies, supported by new applications and pricing initiatives. And furthermore, demand for Automotive and Specialty Coatings was mixed. We saw softer demand for Specialty Coatings, especially in Asia.On to Slide 14. During the fourth quarter, net income from total operations was EUR 5,849,000,000, including the profit from discontinued operations of EUR 5,814,000,000. For the full year 2018, net income attributable to shareholders was EUR 6.7 billion.Now moving on to Slide 15. Operating activities in the fourth quarter 2018 resulted in an inflow of EUR 319 million versus EUR 302 million in the previous year. At the end of December 31, 2018, the net debt was negative EUR 5.9 billion versus EUR 2 billion positive last year. The decrease was mainly driven by the receipt of the cash proceeds for the sale of Specialty Chemicals. I'll now hand over back to Thierry to outline our updated capital allocation priorities.
Thank you, Maarten. As mentioned earlier, with all the moving parts, we thought it would be useful to provide an update on our future capital allocation, which you see summarized on Chart #17. It is especially relevant to do so following the sale of Specialty Chemicals and also in the context of our Winning together: 15 by 20 strategy. So we have updated our capital allocation priorities as shown on the Slide 17. Firstly, we are making good progress on returning a total of EUR 6.5 billion to shareholders following the sale of the Specialty Chemicals business. We also continue to invest in profitable organic growth, including around EUR 250 million capital expenditure per year with clear mandates per segment and geography to grow revenue by around 2% per year. In addition, we continue to target strategically aligned and value-creating bolt-on acquisitions. Our dividend policy, stable to rising, remains unchanged. We have also settled the cash top-up payments of our main U.K. pension plans, as mentioned earlier, removing a significant past cash headwind for the company. And we now target a leverage ratio of net debt to EBITDA of 1 to 2x by the end of 2020 and remain committed to retain a strong investment-grade credit rating. And for more details, I'll hand it back to Maarten, who will run through things in more depth.
Yes. Thanks, Thierry. Slide 18 shows how the net debt is expected to evolve in the coming years. At the end of 2018, net debt was negative EUR 5.9 billion, following the receipt of the proceeds for the sale of the Specialty Chemicals business. Delivering on our commitment to return the vast majority of net proceeds, a total of EUR 6.5 billion will have been distributed to shareholders by the end of 2019. Advanced proceeds were paid as a special dividend of EUR 1 billion in December 2017. And in January this year, the capital repayment and share consolidation of EUR 2 billion was completed. In addition, a special cash dividend of EUR 1 billion will be paid in February, and a share buyback of EUR 2.5 billion will commence soon. Following the conclusion of the negotiations with our main U.K. pension plans, the cash top-up payments will be settled with a EUR 620 million payment in the first quarter of 2019. More details will be shown on the next slides.Achieving our target leverage ratio of net debt to EBITDA of 1 to 2x by the end of 2020 allows potential for further capital returns to shareholders.Now turning to Slide 19, pensions. Following the sale of Specialty Chemicals business, the net balance sheet position of the pension plans according to IAS 19 was a surplus of EUR 0.4 billion. Negotiations on the triennial review of our main U.K. defined benefit pension schemes have just been concluded. A cash payment into the ICI Pension Fund and creation of an escrow account for the AkzoNobel quartile pension scheme means the cash top-up payment of our main U.K. pension plans have been settled. This removes a significant cash headwind for the company. The estimated cash top-ups for 2019 and future years have now also been updated and is shown on this slide.Moving now to Slide 20. We propose a final dividend of EUR 1.43 per share, that is post consolidation, which would equal a total 2018 dividend of EUR 1.80. The 2017 dividend of EUR 2.50 included an EUR 0.85 related to the Specialty Chemicals business. Our dividend policy remains stable to rising going forward. The dividends will pay -- will be paid in cash because a scrip option of selecting stock dividend has been suspended. And I'm now handing back to Thierry for some concluding remarks.
Thank you, Maarten. On Chart 22, in 2018, we completed the sale of the Specialty Chemicals business. We began returning the vast majority of proceeds to our shareholders. And despite strong market headwinds, we made good progress on delivering on our Winning together: 15 by 20 strategy. We concluded the first phase of our transformation to create a fit-for-purpose organization and have taken the next steps to deliver the next EUR 200 million cost savings by 2020. We are now a focused Paints and Coatings company. And we continue to invest in growth, including bolt-on acquisitions. Our updated outlook is shown on Slide 23. We are delivering towards our Winning together: 15 by 20 strategy and continue creating a fit-for-purpose organization for a focused Paints and Coatings company, contributing to the achievement of our 2020 guidance. Demand trends differ per region and segment in an uncertain macroeconomic environment. Raw material inflation is expected to continue during the first half of 2019, although at a lower rate than 2018. Robust pricing initiatives and cost-saving programs are in place to address the current challenges. We continue executing our transformation to deliver the next EUR 200 million cost savings by 2020, incurring one-off costs in 2019 and 2020. We target a leverage ratio of between 1 to 2x net debt versus EBITDA by the end of 2020 and commit to retain a strong investment-grade credit rating. And with this, I'll now hand it over to Lloyd for information about upcoming events and handling the Q&A session.
Thank you, Thierry. Before we start the Q&A session, I would like to draw your attention to some upcoming events shown on Slide 24. On March 7, we'll publish our annual report. In April, we will publish our report for the first quarter 2019. And on the 25th of April, we will hold the AGM, the Annual General Meeting. This concludes the presentation, and we will be happy to receive your questions. [Operator Instructions] Operator, please start the Q&A session.
[Operator Instructions] Our first question is from Charles Webb.
So my 2 questions. First one on raw materials. Raw materials in 2018 ended up being a bigger headwind than we anticipated at the start of the year. So I understand, obviously '19, you're guiding it will be less of a headwind, but can you give us some sort of sense how much less of a headwind, at least, as we look at the first half? Because Q4 clearly, another EUR 120 million headwind was fairly sizable and I think people were expecting it a little bit less. So maybe first one, can you help us with the raw materials, what to expect in the first half in a more absolute basis? And then secondly, just on the volume development. Clearly, China weakness played a big role in Deco. How should we think about that into the first half of '19? Are there are any other areas of softness we should be thinking about in industrial activities, et cetera? It would be helpful.
Okay. Thank you. So let me start tackling questions. And then I think, we'll tag-team with you, Maarten, on it. Let me maybe start with the latter one and then go to the raw materials. On the volumes, again, as we pointed out in the presentation, China comparison in the fourth quarter is really very skewed because, in China, the fourth quarter was exceptionally high. That was as we said in more the lower end of the market. As raw materials wind up, that basically had no value any more, that business, so we basically exited it. But the comparison between the fourth quarter and this quarter really looks overblown. We actually just went back to the volumes we were selling in China in the fourth quarter of 2016, so it's a normalization of that. If you ask about the other -- and then as we indicated for Deco Paints, the volume in the rest of the world is actually very limited. It's actually a 1 percentage point reduction in volume, so that's pretty limited. If you go to industrial markets that you asked for, if I just go to some of the segments, Powder Coatings is steaming ahead full blast, so there is no issue there. If you go to Automotive and Specialty Coatings, that is really -- volumes have been impacted in consumer electronics in Asia, and that's basically aligned with other trends and other manufacturers. Also consumer electronics manufacturers have been ungiving, so we indeed have seen that. In the other segments, I would say, it's really where -- we really had the value over volume strategy, so the regretted losses are clearly minimal. As a result, I think that's probably going to be stabilizing very much as of now on volume-wise. So let me just take a pause here, but did it answer your questions on volume?
So as we think about 2019, how should we think about China? What was the first half in 2018, is it a tough comp? Should we expect similar type of volume loss in the first half of '19?
Well, it's a lesser tough comp, of course, because if you go back to our reports on the fourth quarter '17, that was actually a blip upwards and that was also because we had announced pricing initiatives. There was some pipeline filling. There were all things happening, which, of course, now, you almost have the reverse effect. So that would be a much more favorable comp, in general, on volume. Did that answer your question?
So we're looking at a growing volume environment in the first half of '19 or...?
Well, I think it's probably going to be a more stable volume and then depending on what the macroeconomics do. So I think you have to look at it as a steady from here on. That's more or less what we have in mind for -- on a volume basis. But again, I have to admit that we are really focusing on value over volume, and there's the 2 percentage points. I mean, that's basically what we try to manage towards depending on what the other variables are doing in the business. Now let me go back to what you said on the raw material. You are right. I think the raw material inflation in 2018 has been higher than anybody in the industry has been expecting. And you also saw us guiding high throughout the year in 2018 for those numbers. We still saw some pricing upward moves for raw materials in the -- at the end of 2019 -- 2018, sorry. But of course, given the inventory dynamics that is still coming into our numbers into -- well into the first quarter and probably a part into the second quarter. So our guidance around raw materials is, yes, we still see some -- we still saw some inflation at the latter part of '18, but that's in our books. It's still going to come out as for any of the paint manufacturers in the first -- I would say, the first third of the year, we're going to see that coming. I don't know if you want to take more detail, Maarten?
Yes. So indeed, the raw material price inflation in 2018, if you -- as you indicated, has been in excess of EUR 450 million. By the way, that includes also impacts, for instance, of freight costs. If you take the raw material situation right now as a proxy, we would see the positive effects coming through more end of Q2 and the second half of the year. And indeed, what we still will see for the Q1 and partly in Q2 is kind of the lagging effect of what will go through the P&L given our inventory level and what we've seen still in Q4. So this is how you need to look at it and this is how we -- why flag still this, particularly for the first half of the year.
Did that answer your question?
Yes. Just on that last, down the road, so when we talk about that lagging effect. Is that to assume a similar headwind to what we saw in Q4 and Q1? Is that the right way to look at that? Or is that wrong?
No. We don't want to particularly guide on this. As you've seen in 2018 -- hard as this developed. But again, I think I've tried to kind of give a picture of how we look at it right now.
Our next question is from Laurent Favre of Exane.
First question is on capital allocation. We've seen, I guess, a bit more activity on the M&A side in the industry in the past 3 or 4 months from you and peers. I was wondering where do you see the pipelines for bolt-on acquisitions, I guess, between now and the end of this year or even in 2020. Would you expect to do a bit more than what you've done last year in total? That's the first question. And the second question, which is related, is on the 1 to 2x. Should we assume that there's a commitment to do more types of returns to get to the onetime and then the delta would be M&A? Yes, that's my -- those are my questions.
So let me -- yes, so, thanks for the question, and I'm happy that you're filling out the spreadsheet. That's good. Just a couple of comments on that. On the bolt-on acquisitions, I do not think that you have to see a spike coming there. In fact, we are fully focused on the 15 by 20 delivering. And in fact, also during 2018 already, we were really looking punctually whether there were good assets becoming available. So I don't think that you'll have to see a spike in there. And we have always a pipeline, but I think we get very much now into the execution of what we have to do. And larger deals if -- for the time window in 2020. That actually realistically gets outside of that time window anyway, so it is irrelevant for the 2020 guidance as we've given. If you talk about what does that mean with the leverage. What does that mean? I think, as we've indicated that this, to a large extent, around what we do as to potential shareholder returns. I think it's going to be a minor part, in my opinion, that's going to go to a bolt-on acquisitions. It's also clear that the good assets either are not necessarily available or they are overpriced. And we stepped away from many of those offers because it didn't create any value. So I don't think you'll see a barrage of other elements. I think it's more the reverse. I think you have to see us mentally focusing on shareholder returns and, just occasionally, when there is a good bolt-on to actually divert from that track. Maarten, anything to add?
Yes. So I think there are a few aspects. As one, we focus on our execution of 15 by 20. In the M&A space, we focus on bolt-on acquisitions, which are value-creating and, by the way, also supporting our 15 by 20 strategy. And indeed, as that then concludes on the potential preferred, our capital returns to shareholders, as we indicated, the leverage ratio of 1 to 2 net debt, EBITDA.
Did that answer your question, Laurent?
Absolutely, Thierry. And then just to sneak one in. Can you talk -- can you quantify the -- I guess, can you give us your best guess on the impact from bottom slicing on volumes in 2018? So when we look at Coatings minus the Xylazel Paint minus 3, can you tell us briefly what you're seeing your addressable market did? This is what you did and the delta being bottom slicing.
Yes. It's difficult to put numbers on that, Laurent. But I think what we feel is that -- and I think that's what you referred to, the regretted losses. That would mean volumes we lost when, yes, there was value behind that, is actually quite limited. And that's why you have to look at as 1, 2 percentage points at best. The rest is really either the variable margin had drifted close to 0 if we didn't get our prices up as we've indicated, or it was really as actions we took to get segments there to help. And as we've indicated before, certain Marine and Protective standards where we feel by the time we have to execute this, and if you look at where then all the ramifications are, this is going to be a negative operation to go into. So I would say, the -- it's difficult because with so many segments, to quantify for each of them. But the, what I would call, regretted losses is actually is pretty limited.
Next question is from Tom Wrigglesworth of Citi.
My 2 questions. Firstly, you executed the buyout of your minorities in the China business. I was wondering if you could help identify what the limiting factors of that JV have been in the past and how -- and quantify what the synergies and the kind of incremental profit opportunity might be coming forwards following that deal. The second question, if I may, is around the Marine business. I think you were seeing it return to growth. And you said that, that would have a positive mix effect coming through from a margin perspective. Is that still the case or are these early volumes actually at a weaker margin? And how should we see that Marine business going forwards in 2019?
Yes, good question. Let me take the first one on the joint venture in China. It has actually been a couple of years already that the company AkzoNobel really wanted to do that. But then basically, the -- with the perceived strength in the China market, the valuations were not really attractive to do this. With the other investor in there, basically, this was the opportune moment to get the valuation that really made a lot of sense. As you know, the joint venture was really around our Deco paint business, so we have a real very broad network, plants, et cetera, around China for Deco. But as it was a JV, we don't necessarily want to put some of your, for example, Performance Coatings business through there. You have some firewalls on how you manage the systems, et cetera, although it was being consolidated. So for us, it was really the opportune moment to bring it into our network and now basically have the strategic opportunities on what you do in your whole network. So it was a longstanding wish to do so that we've been able to do at what we feel was an extremely attractive valuation for us. So don't expect the big bang there, but you would -- it's just going to take a lot of the complexity out of our setup in China and then allowing us now to use that very strong geographic network for our whole business. So that was the main driver for doing that one. Secondly, you talked about Marine and Protective. That business is the -- it's stabilizing in the volumes and, in fact, there we talk around the really good projects. Protective, obviously, showing more life in projects than you see in the Marine business, which is more or less stable. You can see light at the horizon, but it is more stabilization from where we're seeing it. However, I have to say, that team has done a lot on pricing initiatives to make sure they look at value. They also took significant steps on how the cost structure was. And I'm happy to say that the Marine and Protective business on the bottom line has become, again, a really good contributor in our business with a significant step-up in profitability for that business, which is not reflected maybe on the top because of the elements I just brought, but it's really very much on the contributing side. I don't know, Maarten, if you want to add more. Did that answer your question?
Yes.
Next question is from Christian Faitz of Kepler Cheuvreux.
I just have one question remaining, please. Again on China, with your rather large exposure to Asia Pacific, can you give us any indication on Chinese demand at present? I realize it's rather early after the end of the Chinese New Year celebrations, but what are your salespeople reporting in terms of demand trends at present?
Yes, good question. Maybe just to point out that when you say Asia Pacific, about half of that is outside of China. And in fact, those markets are doing quite well, so that balances it to some extent. In China, it's -- I would say, it's more a psychological effect that we see, given that the trade discussions with the U.S., et cetera, so we see more some. I would say some hesitation on spending. And it's -- I'm looking at Maarten here. It's anybody's guess, I think, also from other competitors on what you might see in the next couple of months. In fact, I would say, for what China's concern the first 3, 4 months of the year are probably the higher uncertainty on what's going to come out. And then you have all people being somewhat reluctant to fill their inventory or how they do other things. It's obviously -- it's still a growth market, so that is important to know. I think we'll now just go through a reset both on the consumer level and we're going to reset in a number of the in-between inventories, the distributors, dealers, et cetera, the current route, the whole element. We're actually continuing to be quite optimistic around China, as such. I just think we're in a 4-month phase where everybody is expecting something to happen. You have Chinese New Year, et cetera, which makes it not easy to predict. Maarten, I don't know if you want to comment.
Yes, I think specifically in -- I mean, Q1 is, of course, in our Deco business always an seasonal lower quarter. And particularly, in China also, with Chinese New Year, which now -- yes, which is early February basically. So -- and the issues with the consumer confidence in China, it's more difficult to read. So the most important month in basically our first quarter is March. So difficult to read to the demand signals at this moment in time, to be honest.
It's interesting to point out that, for example, in our Deco business, the high end of our market is actually not that much impacted. It's really the other parts of the business where we were entering in 2017 that, given the raw materials, that have become unattractive. Does that answer your question, Christian?
Yes, Thierry.
Next is Patrick Lambert of MainFirst.
A few questions from me. First one, I'd like to come back on raw materials. If I look at our indexes, acrylics, vam, titanium dioxide, these are actually sharply down. And would you venture, actually in -- overall for me, they would be actually deficient over -- or maybe after Q2, as you said, winnowing out the inventories you have. But would you venture, in trying to quantify a bit the impact on margins of raw materials, everything else being constant in 2019? That's the first question around raw materials. The second question regarding, I think you mentioned, they were 5%, 10% of your portfolio in terms revenues, that they are challenged. Is there any update on that? And how active are you on tackling those assets on the disposal side? And the last one, very quick one. Can you remind me what's the difference between the cash payment and the escrow payment on the pension side? The EUR 620 billion -- EUR 630 billion.
Yes. Thank you very much. Now first of all, your questions on the raw. So as we said for the first quarter, we just see the impact rolling to our books of what we've seen. We saw the -- still some increases, but it was at a much more reduced level. What you indicate, yes, it's bit of a mixed bag. There are some raw materials that are definitely trending down, others specifically in the solvent area it's often a very punctual supply-demand that actually drifted. So I think we are, I would say, a bit more comfortable to say that the raw material prices, probably somewhere are going to plateau out. But as we said then, you probably have to get through the first 3, 4 months of the year to start seeing what the real effect is. I just want to point out that the whole industry, by the way, had a certain idea around what raw materials are going to do in 2018, and we were all gloriously wrong about what's going to happen. We do believe though that the dynamic is going to normalize significantly once you get to the latter 2/3 of the year. But that's probably as far as I would lean out of the window right now. So it's going to be a bit more, I would say, more overseeable. On the 5% of the portfolio, I presume you refer to what we said, that of the 140-plus segments that we said, there might be 5%, 6% of the segments that disappears. Is that what you're referring to?
Yes. I think sometime in Q3, you mentioned that.
Yes, that's totally correct. And in fact, we are executing on that. I was alluding to that on the mandate that we have, which is across the board for all of these segments. We also said that it might not always be with a big bang. That this is an announcement we have now done something on this segment. But it's something that's fully part of what our pricing strategy is, wherein some of these segments, we basically say look, this is -- this one of the actions is almost to see, can you get it in a healthy shape or do you step out? And for example, the segment that you referred to when you mentioned for China, I would say the low end of the market has been one of those segments where we said it's great, but if you get to 0 variable margin or worse, then frankly, it makes no sense and then you basically live with the consequence of the pricing. So we are executing on those, probably more than is visible, and that's also, of course in our, what you see in some of the volumes et cetera. That might lead to here and there a little divestiture, but that's probably going to be minor element instead of...
So it's mostly letting volumes out, more than disposals?
At this moment of time, but there may be some disposals at the end, but it's going to be smaller items that actually then end up in the disposal. So it's not excluded, and you may actually see some things during 2019 and 2020, but it's going to be really smaller activity then.
Yes, maybe, Patrick, to come back on your question on pensions. So it is more the mechanism of how we have negotiated this with the U.K. pension trustees. So for the quartiles pension fund the mechanism that we do this were in escrow, but basically the cash will flow out to an escrow account in Q1 for the quartiles fund, and we have indicated that it's EUR 159 million. With the ICI pension funds, the conclusion and the negotiation was directly in cash payments. So it's more the mechanism, but from a cash flow perspective, you will see the cash flow -- cash going out in Q1 as we have indicated in the presentation. And we're doing that. We have really, yes, derisked pension funds and basically, diminished the future cash top-ups, which has been an issue for the past many years in this company. So in fact, we are very pleased with the outcome here, to be honest.
And actually pleased is probably an understatement, because it is a legacy item that was haunting us for a long time. So if we hadn't been, call it, disciplined, it would be celebrated exclusively, but we actually shared a glass of water here to celebrate that we're [ signing it off ].
So may I, just -- how is the U.K. Deco doing? Brexit, I mean, is all over the place, we don't know. Is that the same as China, the same uncertainty?
No, Patrick, thank God, not. But I would say that the biggest impact of Brexit we've basically had already in the past. I mean the pound losing value was of course, for a Euro-based company, an unpleasant situation. Secondly, consumer confidence, specifically, I would say, in the first half of '18, was relatively -- was actually depressed. I think the team there has done the same combination of what they needed to do. So for us, the U.K. is actually pretty good. In fact, 2018 was a good year for our U.K. organization, both on share and on what they delivered to the bottom line. Also where Brexit is concerned, it is, of course, an issue if you are big player in the U.K. market, but it is somewhat of a contained situation. What we make in the U.K. is mostly for the U.K. -- well, it's almost everything we make in the U.K., sold in the U.K. and vice versa. So in that sense, we're a bit sheltered from what any cross-border situations might be. I would say somewhat because of course, you have your supply chains for incoming goods, but no, I think that market is still doing very well.
Next question is from Neil Tyler of Redburn.
Couple of questions, please, still. And firstly, can you share with us whereabouts you are, big picture, in the value over volume strategy? I think you said you'd more or less sort of reached the point at which there wasn't a lot more of unsatisfactory margin that you needed to shed. But if you could just confirm that? And perhaps split the comments between the 2 sides of the business. And then the second question, following up on an earlier question relating to the series of bolt-ons that you've achieved. Will there be any sort of quantifiable revenue synergy that we should anticipate through the next 12 months from those acquisitions, not the actual acquisition contribution, but perhaps revenue synergy elsewhere?
Yes, okay, good question. On the value over volume, I think, as we signaled, we've probably come to a point if our underlying assumptions around the raw materials are correct, where you say, look, we are where we are now. So I think that, much what you say, that's coming to an end. I mean, the value focus is going to continue to be there, but I think it is our underlying hypothesis that volumes are basically stabilizing from what -- based on our actions at least, of what's going to happen in the market. So that's maybe as a response to your first question. If you go to the 2 businesses, I would say in Deco, I think that's definitely correct there, with all the caveat around what are the China dynamics and what does the market do, but that is different than the value over volume strategy. The second thing for what Performance Coatings is concerned, similar. There are probably still a number of elements where we look that there might be some steps that have to be taken, but we'd probably do that much more in a restrained way or looking at, at least keeping the balance there with some of the volume. Again, the underlying assumption, of course, is that the raw material situation starts at least stabilizing over 2019. That's maybe as a first answer on that question. Secondly, on the bolt-ons, so the revenue synergies, absolutely, and in fact, we weren't just on a shopping spree to buy bolt-on acquisitions. All of those have actually been done for clear synergies. Fabryo, we were a significant player in Central -- in that part of Eastern Europe. With Fabryo, we bought the #1 in Romania. So all of a sudden, you have significant synergies in their distribution network. So it was really on synergies for that aspect. Colourland Paints in Malaysia is probably even a stronger example on that because in Malaysia, we had a market position. Colourland had a stronger position, but it's really again where you get the synergies on all levels, including the synergies to a very strong distribution network we had in Malaysia. Xylazel, we also in Spain indicated that, that is wood and metal trim, which was somewhat of the weaker element in our portfolio and that typically tends to be the more profitable part of the portfolio. So that's already happening right now, that by having that strong Xylazel offer, which goes beyond Spain by the way, that you now see traction at big boxes et cetera to have a much stronger offering in there. So, yes, those were really more based on strengthening our businesses in a specific region or a specific segment. So we do expect revenue synergies from all of those.
Next we have Gunther Zechmann of Bernstein.
My 2 questions, can I firstly ask on M&A? You've done a number of bolt-on deals, quite limited financials that you disclosed and they were not huge in itself. But could you share what the combined earnings multiples are that you paid on those acquisitions? And margins, any color, not on an individual basis but on a conglomerate basis that you can give? And if you look at similar deals within that pipeline to get to 1 to 3x EBITDA? So that's the first one. And the second one is on pricing in China. Thanks for splitting out the volume impact from walking away from less profitable, unprofitable business in that country. Can you give a comparable how much of the price increase that you saw in the quarter was actually from that price before volume strategy in China?
Okay, so let me try to get to the first question. I think we haven't split out what we paid, what the multiples were. The big over -- there were 2 basically decision factors for each of the bolt-ons, is one, does it help us on our 15 by 20 strategy? And I think we have indicated that in previous calls that it's a big hurdle to say we're going to do an acquisition here, but it has to deliver on 15 by 20 and not some kind of a longer situation. And, two, yes, on each individual cases, it was really based on what is it going to do for our business. And I think we feel -- and I'm probably going to stay away from details there. But we feel that each of those deals were actually very nice bolt-ons, both in the quality but also in what we were able to get them for. And I indicated, as for our Swire joint venture, given some things in the market there, we felt we actually had a good valuation point to do this. So we've actually been very restrained on doing such. But just to understand your comments around out how the M&A works in the 1 to 2x leverage. As I indicated in a previous answer, the bolt-on acquisitions are very punctual. I would say that the majority is going to be probably more -- or getting to this 1 to 2x, is probably going to be more towards shareholders than that would be a bigger percentage into acquisitions as far as we can see it right now. Maarten, I don't know if you want to comment on that one and on the pricing part?
Yes, maybe on the pricing. So first take a step back, if you look at the Deco price mix in Q4 it was 7%. Out of that 7%, roughly 6% was pricing. That goes across the portfolio in Deco, and that includes China and Asia as well. There is a little bit underlying those differences in the regions in terms of pricing. In China, it tends to be a little bit lower because the Chinese market is also much more competitive in terms of the price increases we have pushed through. And as you know, we have a relatively strong business in China, with a strong margin profile. So -- but again, we don't give any particular numbers on the underlying price increases of the different units there. But this gives you a little bit of color.
Maybe if I can give one added comment, just on the M&A pipeline and bolt-on acquisitions, if we have no misunderstanding there. Every item that we do is focused on 15 by 20, so when our M&A team, together with the businesses identify a target, the question is really, is that the best way of getting us to 15 by 20? Because in acquisitions, integration takes time, systems, you name it. So we -- you will probably see us getting increasingly challenging for bolt-on acquisitions. And if there's an extremely good object or asset, we'll go off to it. But I think it's really around getting our house in order and getting to 15 by 20, and that's the glasses we have on to put on any of those things that come across desk.
Your next question is from Nathalie Debruyne of Petercam.
Most of them have been answered, actually, but if I can just quickly come back on Marine and Protective Coatings. So I understand very well that you see some, well, stabilization in the market in general, and especially in the good projects on your side. But at the same time, you will be very selective with, well, further moving away from low margin businesses, probably not as much as you did in 2018. But I was wondering going forward, so especially for 2019 on balance, do you expect that business to actually grow in terms of top line? That's the first question. And the second one, a more annoying one, accounting. Can you remind us how you treat the cost related to the transformation of the company, incidental versus what you would take into adjusted operating income? That would be helpful. And also, what kind of costs can we expect for 2019? And what would be the cash portion of it?
The fantastic thing -- thanks Nathalie, thanks for your questions. The fantastic thing of these calls is with Maarten, is that annoying questions, I can elegantly put to him. So I will do that also. But on the Marine and Protective, I would say that, all in all, probably you can look at the, relatively, balance of the revenue from where we are right now. I think you see some positives coming in definitely on the Protective. I would say that also gives some opportunity then to really be somewhat critical on some of the projects. But all in all, I would think that you're going to see a relatively stable revenue line from now on. That's with all pluses and minuses, I think they're going to be balancing themselves out. So that's probably kind of the high-level answer for Marine and Protective. If that is okay as an answer for your question?
No, that's really very helpful.
Okay. And then, Maarten, I mean if you can go on the...
Yes. So the costs of the transformation are really related to restructuring costs, and we have indicated that this is, for the second phase, is EUR 350 million. Out of the EUR 350 million, EUR 60 million is noncash and it has to do with impairment of our asset as we're optimizing our footprint in the Integrated Supply Chain. You have seen that in the fourth quarter, we took EUR 56 million. That's a bit lower than we earlier had indicated for the fourth quarter. But overall, we're still on track in delivering the EUR 200 million, which will roughly be half-half in terms of savings in '19 and '20 from an transformation cost, to which we recognize in the identified items, so basically the restructuring cost. So the EUR 350 million minus what we took in the fourth quarter of 2018, the EUR 56 million, the remainder will be more or less half-half in 2019 and 2020. So this is how you need to look at this. And of course, it's also an important indicator, how we are tracking because the restructuring is an important factor also to drive the savings.
Okay, okay, sure enough. And what would be the part that would be taken in -- I mean, that would be allocated to the different businesses and the part that would be treated as incidental? Because it's not yet, really not super clear to me, to be honest.
Okay, so the number, I'm talking about the EUR 350 million that is what we treat as, what we call identified items. So it's below adjusted EBIT and that is really related to the restructuring, the restructuring-related cost as well as impairments, so noncash items in our -- of our asset network.
All right. But you regularly -- when I read the press releases, you regularly flag some allocated costs related to the transformation and all of that. So can you perhaps, give us an indication of what that could be in 2019?
No, I think I've been very clear. So the cost that we book in identified items is purely the restructuring costs related to the transformation.
All right. And nothing is expected to come on top of that?
No, this is -- that is how we treat it, correct.
Next question is from Geoff Haire of UBS.
Just wanted to ask 2 very quick questions. I was wondering if you could give us some help with where you see the phasing of the cost savings, both the EUR 200 million from ALPS and fit-for-purpose and then the additional savings from the supply chain work that you're doing. And then secondly, just to confirm, if you're seeing raw material prices continue to increase into this year, will you have to see further price increases to balance out the raw material pressure you're seeing as you had stated last year?
Yes, thank you, Geoff, for your questions. First of all, on the phasing, I think, we said in the, at the third quarter results that there was going to be about EUR 100 million this year, EUR 100 million -- as costs that we're going to take for it, EUR 100 million this year, a EUR 100 million in '19, a EUR 100 million in 2020. As Maarten indicated, the timing of that first EUR 100 million in the fourth quarter was a bit slower because that's just how the way that these costs land, but you still have to look more or less at that spacing that we have. So it's almost a -- '19, '20 is almost 50-50, I would say, as the costs are going to be landing. So that's just as an overall number there. Secondly, on the raw materials, as they go up, indeed yes there are still pricing initiatives ongoing in those businesses. Because in that sense, I think, we want to make sure that we stick to what we indicated was our target, to recover those raw material costs, as there are still pricing initiatives ongoing.
Next we have Peter Clark of Societe Generale.
Interesting comments on the Swire deal. You were talking about sort of dissynergies with the firewalls and suggesting, obviously, synergies of putting the 2 together. Just in that general context, I presume you're a big advocate of having Deco and Performance together clearly, with something going on across the water? And then the second question, just to be clear on the bottom -- or the value over volume strategy and the bottom slicing. In terms of the fourth quarter, I don't know if you gave a number, but was it similar to the 3% you saw in terms of volume hitting the third quarter? I presume so. And that just tails off as we go through 2019?
Yes. So let me take the Swire conversation and then Maarten, you can talk about the value part. Not sure if I totally understand your question, but yes, I mean, if you look at part of the improvement in efficiencies is where we look how to do things much more jointly between Deco and the Performance Coatings. That has been a clear item in our Integrated Supply Chain because there's no reason to have warehouses at the opposite side of the street for each part of the business, and you also have to see the Swire situation in that context. Now I don't want to leave the impression that it was very, very dysfunctional, et cetera. That's not the case. But, of course, if you want to put businesses through distribution, 2 plants, et cetera, and it is a joint venture, it becomes a bit more complicated. And if you look at some of our businesses in Performance Coatings, obviously, having a total network with multiple plants across China, multiple distribution channels, some of them owned by that joint venture, now by us, of course, gives you quite some opportunities to leverage that across the whole situation. And given the fact that the mature and big market of China and definitely still growing in the future, again for us, making sure that we had all the strategic options to drive it as efficiently as possible was obviously a nice opportunity to take, and that's what we did. Maarten, do you want to talk about the...
Yes, so maybe, going back to the fourth quarter, so a volume loss of 7%. If we basically take out China, we talk about in -- excluding China, we discuss China and specifically the comparisons with an exceptionally strong volume growth in the fourth quarter of 2017, you see, excluding China, basically a volume loss of 2%. And if you look at this 2%, which is, by the way, a different magnitude compared to the third quarter, you could take roughly the same proxy where half is driven by us, value over volume, and half is also market dynamics. But again, the picture in the fourth quarter is a completely different picture from the third quarter, given the China dynamic in comparison to the fourth quarter of 2017. I think it's important to point that out.
Sure, sure. I understand. Can I just clarify one point on this? In terms of the bottom slicing, if I call it that way, it's appearing all on volume. You're not seeing a counter effect also that helps price mix?
No, you see that coming through in the mix and that is, in fact, what we also flagged in the fourth quarter results, where our price mix, in total, is 9%. And we wanted to point out that, out of that 9%, basically 6% is pure pricing, so the rest is mix. And maybe on the pricing -- and on the pricing initiatives, building on what Thierry said earlier, yes, we continue to drive pricing initiatives in the first quarter as we have said all along, that in total, we want to compensate a total raw material price impact, as in an absolute amount and that is still the aim. And we intend to realize that basically during the first quarter with our pricing initiatives we are now implementing.
Next question is from Georgina Iwamoto of Goldman Sachs.
I just wanted a kind of final question. You've given us here and there a little bit of color on the components for the earnings bridge for 2019. But I was just hoping you could summarize in one go, how you think earnings are going to progress. Does your 2% organic growth mandate already apply in 2019? And what is comprised within that number? You've kind of talked about volumes flat and continuing to raise prices, and then you've got the cost-savings program coming through as well. Be helpful if you could just kind of summarize how you think earnings are going to progress this year. And is it really more self-help driven or are you actually going to be able to participate in market growth, too?
Yes. Good questions, Georgina. So this is a sneaky way of getting a guidance number. But let me go back to what we said in 2018. I think in 2018, we basically indicated that you should see the progress on the second half in 2018 on our return on sales because with all the wrong appeals and not necessarily seeing the cost actions yet in the first half, we said look at the momentum in the second half, so very happy that frankly, we have almost 1.5% increase in raws in the second half despite all the dynamics where we, in fact, margin-wise, we've always been kind of catching up with raw material prices, which kind of shaves some of the effect off. For 2019, to answer your question, the 2% mandate definitely applies, and in fact, if you go to the fourth quarter, I mean, that's -- it's already applying, so that remains there. Secondly, on what the elements are. We keep managing the variable contribution or the contribution margin based on what the raw materials do, and then our own actions that we have to do. OpEx, we talked about the EUR 200 million that we want to get out by '19, 2020. We kind of give an idea of how we see that staged over those 2 years. And then, last, but not least, I think, if you around look self-help, given the fact that there's hyperinflation in Argentina, Brazil, important countries for us, the fact that there was a shutdown in the U.S., potentially still a risk, Turkey is hyperinflation, China is uncertain, Brexit is not there, it is definitely self-help. So what we with our team are doing are being conservative on how much help or how little help we're going to get from the market. And it's really around our own cost discipline, efficiencies, et cetera, which gives us a little bit of a shelter from having to look too much around what's going to happen in this market and that market, because what we can do internally is overwhelming for that. I would say similarly as we said for 2018, it is definitely for the management team. We are looking at the momentum we have on return on sales in the second half of the year because that, of course, sets us then up for the, for achieving 15 by 20. So that's how we're going to focus on it. I don't know if that answers your question.
It's certainly helpful. I'm just wondering if maybe you will feel more confidence in a couple of months' time, maybe with the quarter under the belt to be able to give us some '19 guidance? I know it would help the market understand how we can expect the margin progression to 2020, that's all.
Now, Georgina, if I give you guidance for 2019, I will get so mistreated by Lloyd that it would not nice to look at anymore, but I think that's a debit. But the confidence I would say for 2019 is there. I think, given everything that's happening in the geopolitical and macroeconomic space, you probably see us just like others, being a little bit wobbly around what exactly is going to happen in the first quarter. Because it only takes some delay in order, some pipeline fill or pipeline emptying and it makes a swing. But for 2019, given that it's mostly driven by self-help, we feel comfortable to focus on getting us at the end of '19 to something that really sets us up for 15 by 20.
Okay, and I think we're almost out of time, so maybe one more quick question.
Next, we have Alex Stewart of Barclays.
I'll take 2 questions one by one, to make it easier. The first one, in light of your comments about hyperinflation in Argentina and in Brazil etc., were there any transactional currency impacts in the Decorative business which might have impacted your percentage margin in the fourth quarter? I'm thinking perhaps, selling paints in local currencies in Argentina, but buying raw materials in broader terms. Let's take that one first.
Yes, well maybe before Maarten gets into the numbers, if you look at our Latin American business, Brazil and Argentina, Argentina, the market is down, because there, the situation is of course, economically stressed. But if you look at that business in the local currencies, it's fantastic. I mean, the team there really has gone against the tide on everything they did, and it's actually a highly, highly attractive business. Yes, if we then translate it back to good old euros, it's a little bit less impressive. And I think Maarten, you can answer the hyperinflation there?
Yes, so basically, that's what you see. When you look at the Deco results, that's from a translation perspective and specifically as you look at the revenue, you see an impact of 6%, where on a reported basis, we are down 3%, but on a comparable currency basis, we are up 3%. And that's basically reflecting these markets. But what Thierry just indicated, that we are very pleased how these teams are reacting in these environments by driving prices up in an inflationary environment and in also the local inflationary situation. So overall, strong actions taken there by the teams.
Okay. And just on the second question, I've split that into 2 parts, which I hope Lloyd will forgive me for, given, I think, I'm the last question. But they're very quick. The first one, the EUR 110 million cost savings you done in 2018, can you confirm if that's the total for the full year or if that's a run rate of the fourth quarter? And then...
No, that is actually, we said it from the very beginning, and we delivered on that. It is EUR 110 million in year, bottom line impact in the year.
Okay, perfect. And then finally, can you give us some idea of what the ongoing cash pension cost will be for the business now that the chemical business has been stripped out and the top-up payments are no longer there for the pension?
Yes, so we've indicated that in the presentations, so basically, the cash top-ups after the settlement we do in the first quarter are basically diminished. And we've indicated in the slide that is in the coming years, it's a kind of a EUR 10-plus million top-up payment every year. So it's basically diminished.
Perhaps I wasn't clear, but I'm not just talking about the top-up. I'm talking about the total cash contributions from all of your pension schemes, including the European schemes?
Yes, but that's actually a very limited one, because the U.K. one was actually -- so we used to have also the German one, but that actually went with the chemicals sale. So in fact, on other schemes, it's actually extremely limited or actually negligent -- negligible.
So you cash payments into the pensions every year is limited to the top-up payments in the U.K. schemes?
Yes, that's it, that's actually it, yes.
Okay. That's it for the questions today. Thank you for joining the call. And for additional information, please contact Investor Relations.
Thank you, and that concludes today's conference. Thank you all for your participation. You may...