Akzo Nobel NV

AEX:AKZA

Earnings Call Transcript 2018-Q1

[Operator]

Welcome, and thank you for standing by. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. May I now introduce your speaker for today, Lloyd Midwinter. Please go ahead.

[Lloyd Midwinter, Director of Investor Relations]

Hello, and welcome to the AkzoNobel Investor Update for Q1 2018. I'm Lloyd Midwinter, Director, Communications and Investor Relations. Today, our CEO, Thierry Vanlancker; and CFO, Maarten de Vries, will guide you through our results. We will refer to a presentation which you can follow 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 with Slide 2 of this presentation.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Thank you, Lloyd. Good morning, everyone, and thank you for joining us on the call. We are making progress on our transformation into a focused paints and coatings company. A key milestone for that was obviously the successful completion of the dual-track process with our announcement to sell Specialty Chemicals.We are also on track with implementing our Winning together: 15 by 20 strategy to deliver 15% return on sales percentage by 2020, including delivering a fit-for-purpose organization. The transformation process is gaining momentum, with the full-blown program office fully up and running. One of the key main streams -- work streams in our business is, of course, margin management, considering the fact that we're dealing with considerably higher and continuously increasing raw material costs. Robust pricing initiatives are ramping up, as we will explain through this presentation. We have been successful with price increases in Q1 2018, with a second wave of price increases to come later in the year. These price increases are intended to offset the variable margin compression due to high raw material costs throughout 2017 and in 2018.We also continue to invest in our business and as evidenced by us opening a new Powder Coatings plant in Mumbai, India. We are already the world leader. For Performance Coatings, by far, we are the leader. It's also the fastest-growing coating segment. And this investment in Mumbai will help us to become the leader in India, too.Let's move to Slide #3, that summarizes some of the key developments during the first quarter. Our selling prices in Paints and Coatings are up 3% overall in Q1 2018, and they're up for all businesses. This is a clear proof of our focused effort to restore variable margins.The measures we have in place to-date are not yet fully offsetting the high raw material costs. And therefore, a second wave of price increases is already planned, considering raw material costs are projected to continue to increase in 2018, especially during the start of the year.Price increases announced throughout Q1, as contracts allowed, were also a factor impacting the normal order pattern for the quarter. We are implementing Integrated Business Planning, which is an end-to-end business process, fundamental to our new operating model. During Q1, 3 businesses have been equipped for Integrated Business Planning to go live in the second quarter. It is our plan to have IBP in all businesses by end of 2018. And this common way of working will drive further efficiency and enable the achievement of top quartile performance.Our ALPS continuous improvement program has been delivering savings year-on-year since 2014, and a similar run rate continues in 2018, with about EUR 30 million savings realized during the first quarter alone, which more than offsets our fixed cost inflation.We have also delivered initial savings of EUR 10 million from phase 1 of creating a fit-for-purpose organization. The process of works council consultation is now largely complete and we are completely on track to deliver the EUR 110 million bottom line savings for 2018.The transformation to deliver 15% return on sales by 2020 is gaining momentum, with detailed plans in place. And while we ramp up the transformation initiatives, further cost discipline is contributing to savings in the short term.At the time of our full year 2017 results discussions, we indicated and elaborated on the more challenging start of the year, especially given the comparatives. Quarter 1, 2017 was a very, maybe historically, strong quarter, and raw material increases have really started to kick in from the second quarter onwards. But we feel we are completely on track with our own expectations for 2018 and our 2018 plan and completely on track with our own internal planning for the 2020 guidance.Turning now to Slide 4. On March 27, we announced that AkzoNobel will sell Specialty Chemicals to The Carlyle Group and GIC for an amount of EUR 10.1 billion. This was a key milestone in creating a focused, high-performing paints and coatings company. It represented the conclusion of a very thorough dual-track process that was executed very diligently. It resulted in the best outcome for all stakeholders. It was also ahead of an ambitious schedule to complete this process within 12 months.As earlier mentioned, the vast majority of the EUR 7.5 billion net proceeds will be returned to the shareholders. We are considering the various methods available, including dividend and share buyback, and will provide further details in due course. We expect the transformation -- or the transaction to be completed before the end of 2018.I will now run through some of the key trends we are seeing in the markets where we operate, as shown on Slide #5. As expected, higher raw material costs and adverse currency effects continued to impact us in the first quarter of 2018. Especially this is the case during the first half of the year when compared to the same period in 2017. Raw material cost inflation was about EUR 100 million higher in the first quarter as compared to last year. And this is comparing it to already the headwinds of EUR 300 million for the whole of last year. Again, this EUR 300 million and EUR 100 million is a cumulative effect of continued inflation throughout 2017. Robust pricing initiatives are ramping up, and were successful in quarter 1, with a second wave to come in 2018.Generally, we see positive developments continuing for Decorative Paints. However, during Q1, volumes were lower versus an exceptionally strong quarter last year, particularly in China. Volumes were up in EMEA following on from high volumes in Q4 and 2017 overall.Performance Coatings achieved growth, excluding foreign currencies, for all businesses accept Marine and Protective Coatings, which continues to be impacted by adverse conditions in the marine and oil and gas industries as expected and previously communicated.Revenue for Powder Coatings, excluding foreign exchange translation, increased 8%. We are dealing with temporary headwinds, increasing our selling prices and reducing our costs, while implementing our Winning together: 15 by 20 strategy.Slide 6 includes the quarterly trends for volume and price and mix. Volumes were 3% lower overall, mainly due to adverse conditions in marine and oil and gas industries. Volumes for Decorative Paints were 1% lower, with growth continuing in Europe despite very unfavorable weather in Western Europe for most of the quarter. In China, volumes for Decorative Paints were lower versus an exceptionally strong quarter last year, and due to different order patterns following announced price increases, while the rest of Asia continued to grow.Volumes for Performance Coatings were 5% lower overall, mainly due to adverse conditions in the marine and oil and gas industries, despite growth in other areas.Demand trends differ per region and segment. Higher for Powder Coatings as well as Automotive and Specialty Coatings, and bolt-on acquisitions contributed 1% to the growth of Performance Coatings.Selling prices were up 3% overall and for all businesses. 4% higher selling prices for Decorative Paints, with prices up in all regions, were offset by geographic product mix effects, resulting in reported price mix being flat overall. Selling prices were up 2% for Performance Coatings and for all businesses, contributing to the positive price mix effect of 3%. And now I hand it over to Maarten, who will run through the financial results in more detail.

[Maarten Jan de Vries, CFO & Member of Management Board]

Yes, thank you, Thierry, and good morning to everyone on the phone. First of all, I would like to highlight the terminology change we have made in our reports and presentations. Adjusted operating income equals operating income excluding identified items which was previously called EBIT. Likewise, EBITDA is now shown as adjusted EBITDA, because it also excludes identified items. Calculations of return on sales and return on investments remain unchanged. Now moving on to the financial results for the first quarter. Our pricing initiatives are ramping up and selling prices were 3% higher overall versus the first quarter of 2017. Reported revenue was down 8%, mainly due to adverse foreign currencies. Revenue was just 1% lower at constant currency. Volumes were 3% lower, mainly due to adverse market conditions in marine and oil and gas industries.Adjusted operating income was impacted by foreign currencies. Price increases and cost savings could not yet fully compensate for higher raw material costs. Operating income includes the impact of around EUR 40 million identified items, mainly related to the transformation of the organization.So on the next slide, you can see the main factors impacting adjusted operating income. Adjusted operating income was impacted by adverse foreign currency translation and lower volumes, mostly related to continued headwinds in the marine and oil and gas industries.Raw material prices were higher during the first quarter, leading to a headwind of more than EUR 100 million, due to the cumulative effect of continued raw material inflation. 3% higher selling prices have not yet been able to fully compensate for higher raw material costs, although savings from continuous improvements and further cost discipline helped reduce the impact in the first quarter.A second wave of selling price increases is already planned for 2018, with the intention to offset the margin impact from the higher raw material costs in 2017 and 2018. The continuous improvement program delivered around EUR 30 million savings during the quarter, a similar run rate to previous years, to more than offset fixed cost inflation and initial savings of EUR 10 million resulted from phase 1 of creating a fit-for-purpose organization. And then on top of that, strict cost discipline also contributed to the results.Turning now to Decorative Paints. Selling prices were up 4% overall in all regions, although this was offset by geographic product mix. Reported revenue was 8% lower, mainly due to adverse currencies, while just 1% lower at constant currency. The volumes for Decorative Paints were 1% lower, with growth continuing in Europe. Volumes in China were lower versus an exceptionally strong first quarter last year, while the rest of Asia continued to grow and volumes were only slightly lower in Latin America.Adjusted operating income was lower, mainly due to currency effects and higher raw material costs, partly offset by continuous improvement and cost control. Operating income was impacted by EUR 8 million identified items related to the transformation of the organization.Moving on to Performance Coatings. Revenue was 9% lower, mainly due to the adverse currencies, 1% lower excluding currencies. Pricing initiatives have continued to gain traction in all businesses, with 2% price increase during the first quarter contributing to a total 3% price mix impact.Volumes for Performance Coatings were lower, mainly due to the adverse conditions in the marine, oil and gas industries. Volumes grew for Powder Coatings as well as Automotive and Specialty Coatings, resulting in revenue growth of 8% and 4%, respectively. And these percentages are all excluding the currency impact. Demand for Industrial Coatings differed per region and segments. Excluding the Marine and Protective Coatings, the revenue for Performance Coatings was 3% higher, excluding the currency impact. Adjusted operating income was impacted by adverse currencies, higher raw material cost and lower volumes, partly compensated by higher selling prices, continuous improvement and cost control. Operating income was negatively impacted by EUR 13 million identified items related to the transformation of the organization. Turning now to Specialty Chemicals. In Specialty Chemicals, the revenue was 3% lower, although up 4% excluding the currency impact with higher selling prices. Industrial Chemicals in particular benefited from strong pricing.The adjusted operating income was higher, excluding the impact of EUR 32 million restructuring costs related to manufacturing network optimization projects in Specialty Chemicals.Next slide, free cash flow. Free cash flow from continuing and discontinued operations, as shown in this slide, Slide 12, was impacted by lower EBITDA, while capital expenditures and pension top-ups reduced. Operating working capital increased, mainly due to higher trade receivables. Cash management discipline will continue to be a focus area in the future. At the end of the first quarter, net debt was EUR 3 billion versus EUR 1.8 billion last year. The increase since year-end 2017 is mainly due to the seasonality of operating working capital. Net debt currently includes the EUR 1 billion special cash dividend which was paid out in December 2017, as advance proceeds for the separation of Specialty Chemicals.Turning to net income. During the first quarter, net income was 5% higher at EUR 253 million, including discontinued operations of EUR 134 million. Net financing expenses decreased, mainly due to a one-off interest benefit on a tax settlement. Regular income tax expenses were offset by re-recognition of certain deferred tax assets and the tax settlements.Earnings per share for total operations was EUR 1 per share compared to EUR 0.96 for the first quarter of 2017. If we look at adjusted earnings per share for continuing operations, it was EUR 0.35 compared to the first quarter 2017 EUR 0.50. Please note that adjusted earnings per share now only excludes identified items.I now hand back to Thierry for some concluding remarks.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Thank you, Maarten. In summary, we are making progress on our transformation into a focused paints and coatings company. We have achieved the key milestone with the announcement to sell Specialty Chemicals ahead of the schedule. At the time of our full year results a number of weeks ago, we indicated and discussed that it's got work -- what's going to be a more challenging start to the year, especially given the comparatives with the start of 2017. We are making progress in line with our own expectations and plans for 2018, and are on track with our Winning together: 15 by 20 strategy.The transformation is very much gaining momentum, and robust pricing initiatives, as discussed, are intended to offset the margin impact from higher raw material cost.There is no change to our outlook for the year, as shown on Slide 15. Higher raw material costs and adverse effects from foreign currencies are projected to continue in 2018, especially during the first half of the year. We anticipate ongoing positive developments for Decorative Paints in all regions, particularly Asia. Trends for Performance Coatings are expected to be positive for most segments and regions, while still being challenging for Marine and Protective Coatings.We continue to implement various measures to mitigate current market challenges, including increased selling prices and cost discipline. Our Winning together: 15 by 20 strategy will create a focused paints and coatings company and deliver on our 2020 guidance. I now hand it over to Lloyd for information about upcoming events and the Q&A session.

[Lloyd Midwinter, Director of Investor Relations]

Thank you, Thierry. Before we start the Q&A session, I would like to draw your attention to some upcoming events, shown on Slide 16. Our AGM will be held in Amsterdam on Thursday, the 26th of April. It will be made available via video webcast and on our website at akzonobel.com. We will announce our results for Q2 2018 on July 18, 2018. This concludes our formal presentation, and we would now be happy to take your questions. [Operator Instructions] Operator, please start the Q&A session.

[Operator]

[Operator Instructions] And our first question is from Paul Walsh from Morgan Stanley.

[Paul Richard Walsh, Managing Director]

It's Paul Walsh from Morgan Stanley. In terms of my 2 questions, the first one is just around the EBIT bridge for this year. Can you help me understand the percentage delta you're expecting in raw materials this year and against what base, i.e., I think you talked about EUR 300 million last year as a headwind. Can you give us a sense as to what that's looking like in 2018? And just to be clear, on your price increases, you fully expect to mitigate all of that in the fiscal year '18? That's my first question. And I guess, the conviction around the 2020 targets, around that. Second question, can you just help me understand the adverse mix developments in the Deco Paints business? Helpfully, you split out pricing versus mix in the commentary, can you just help me understand where that adverse mix in Deco is still coming through?

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes, let me try to unravel the question, then we'll probably going to be tag-teaming here between Maarten and myself. First of all, on the raw materials, as we've indicated, we had EUR 300 million in total in 2017 hitting our bottom line, that's the full 3 year, 3% of our -- of the EUR 10 billion company. As you've seen, the delta between the first quarter of 2018 versus the first quarter of '17 is about EUR 108 million just raw materials. So as you see, if anything, that gives you a little bit of an indication of the ramping up on the raw materials. So it's not exactly accelerating, but it's not much slowing down either. And in our plans, we had anticipated that this was going to go on for at least the first half of the year at a similar rate. So that was our planning assumption and we seem to be completely in that plan. On the -- Maarten...

[Maarten Jan de Vries, CFO & Member of Management Board]

Yes, sure. Maybe on the raw material, I think, indeed, the impact of 2017 and I think for 2018, it is very much a first half, second half situation, where we have flagged that we see still considerable headwinds from a raw material perspective in the first half. And meanwhile on the pricing side, we are taking actions to mitigate that, but maybe Thierry, you want to further comment on that?

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

So on the pricing, so we indicated that in the first quarter, everything was around -- well, since the end of the last quarter of last year, by the way, everything is around getting our prices and reestablishing our margins, at least the variable contribution, to get that back in shape. So again, the EUR 300 million, that gives you really in a nutshell, EUR 300 million you have to do. So very encouraged by the 3% price increase we've already established in our portfolio. That has been the primary target. And that's why we didn't bother too much in the first quarter around order patterns, et cetera, because it was really important for '18 and for getting to 15% by 2020 to get that right. So that's what we've done, so the 3% is in. But basically, if you annualize that, that kind of takes somewhat care retroactively what happened in '17 but not in '18. That's why we are planning a second wave of increases and somewhat later in this year to offset basically the 2018 effect. So that is for the raw material part of it. Secondly, your question was around, how does that link to the 15% by '20? So let me maybe go there. We've been indicating in the last months that our expectations for the first half of 2018 in our own working assumptions, in our plans going into the year, were pretty muted, given the comparatives, given all the things that if you compare the first quarter of '17, it's a very different world than where we are right now. So the trend line in the year is going to be almost the reverse as what we had in '17. So for us, I think the results or the, I would say, what we have in our own mind for the levers for '18 was much more muted. And I think I have talked to some of you around what we want to judge the end of 2018 on the run rate at the second half of the year, and we are, at least with our own planning, completely on track with that for 15 by 20, specifically because some of the transformational elements, like our fit-for-purpose organization, is only going to be starting to kick in really as of the second quarter. Not sure if I covered all the other -- on the mix, indeed, Decorative Paints, a couple of elements. Decorative Paints is doing very well. When we look at the April sales, for example, in China, they are very much on track on what you would expect. But there has been order patterns. When you increase prices, there are people who buy early. End of last year, people who postponed their buys, but that obviously is coming back. Deco was also very much impacted by weather conditions in Western Europe, having snowball fights in the U.K. it's still in the middle of March, does not help for our Decorative Paints business, despite increased market share. The mix effect is mostly because of those weather elements in some of our key markets, that Central Europe, Northern Africa, et cetera, have actually been outperforming in that sense, and therefore, have been similar effect, good margin businesses, but somewhat at a lower pricing point and that dilutes the mix. It's a geography mix item that we had in Deco. Does that answer your questions?

[Paul Richard Walsh, Managing Director]

Yes, that's great, Thierry. Should I take it to mean therefore that if you look at Deco, you've got the price up of 3%, but mix has offset that. Should I read from what you're saying is as we move through the quarters, there'll be less of a mix drag on -- so the net effect of those 2 won't negate each other?

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Well, so the -- actually, the net price is up 4% in Deco Paints.

[Paul Richard Walsh, Managing Director]

I'm sorry, 4%, I'm sorry 4%.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes, it's 4% and we're proud of that. But the one thing -- I think on the mix effect, the geography one is always a complicated one to see, but our prices are up in all of the regions, so it shouldn't necessarily deteriorate from the overall quality of the business, if you compare it year-over-year. So we're pretty optimistic about Deco. Also, if you look like in Western Europe, I mean, we talked about the U.K. If anything, I think our share is up. We have reaffirmed and actually strengthened our relationship with key players like Kingfisher, et cetera. So we feel pretty confident for the rest of the year on what we're going to be delivering in Deco.

[Operator]

Next question is from Jeremy Redenius of Bernstein.

[Jeremy Redenius, Senior Analyst]

It's Jeremy Redenius from Bernstein. The first one, just on price increases. I'm wondering what's -- if you've been facing any delays to these price increases? I guess, I'm looking back and you mentioned raw material inflation you started really seeing in Q2. I mean, we saw petrochemical inflation much before that, back in Q4 '16. So anything within the organization that's delaying the pace of these price increases? Or...

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes, Jeremy, thanks for asking the question. A couple of items. I think we, like the rest of the industry, probably saw the increases in '16 and the first half of '17 as a bit of an aberration that was going to mitigate itself, specifically, in the pigment area. And then some dynamics happened in China. So I do believe that we are as guilty as the rest of the industry to basically sit it out for 6 months and saying this will go away. It basically didn't happen. When then, when I got into the role in August, we definitely started to pick up, saying this is going -- not going to go away, so we stepped it up. But then between that decision and then the whole contractual arrangements, quarterly, 6 monthly, annual contract, that gives certain delay. So there were some increases on non-contractual business, but that was pretty much in the latter part of the fourth quarter, which is not uncommon, I would say, in the paints and coatings industry. But that is also explaining why you see that significant step up during the first quarter because then, of course, all of the contracts were again opened up and you could actually take those decisions. So I think that, Jeremy, it was partly of an industry inertia around what was happening. And secondly, then the typical, I would say, viscosity to get into contracts. So that's why you see this big step up in the first quarter.

[Jeremy Redenius, Senior Analyst]

And my second question, just around the BASF steel coatings business that you acquired. I understand when that came in, you basically acquired the sales but had to reconfigure the supply chain to effectively capture the profits. Any expectations you could set for the profit contribution from that business this year? Or whether or not it will be margin accretive or dilutive in Performance Coatings?

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Well, so as we said, it was a -- as you clearly pointed out, it was for a larger part, at the beginning, it was going to be a resale business, which it still is. What we did do is accelerate integrating that business there on site, because that would then reestablish the margins. That was actually planned originally to have this done somewhere by 2019. We've accelerated that, so within the second half of 2018, that is going to gradually get into our own plans, it's kind of a phasing because it's multiple SKUs, et cetera, to make that happen. So I think for 2018, it's going to be not much of an issue. In fact, you could argue that it's going to be somewhat dilutive to our margins, because it's going to be, for most of the year, lower margin as it's a resale business. So that is one that we really see coming in at the later part of the year, and then definitely in '19 to have it full in our numbers.

[Operator]

Next question is from Stephanie Bothwell of Bank of America Merrill Lynch.

[Stephanie Bothwell, Vice President]

So my first question was on the fit-for-purpose program. You mentioned in your earlier remarks that you now have works council approval for the EUR 110 million in savings. I just wanted to get a sense in terms of how you think about realization of the remaining EUR 100 million for the remainder of the year as it goes through the final 3 quarters? I think you also said in your remarks that you expect things to kick in more materially from the second quarter. And just linked to that, on the cash flow statement, can you give us a sense in terms of how much restructuring costs you've taken associated with this fit-for-purpose program in Q1? And remind us on how much you expect to take for the full year?

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Let me hand it over to Maarten. Go ahead, Maarten.

[Maarten Jan de Vries, CFO & Member of Management Board]

Yes, so let me start first with your last question. So the overall restructuring costs associated to the fit-for-purpose program is EUR 120 million. Now you might remember that we have flagged that we've taken 1/3, so roughly EUR 40 million, in 2017. We took now, as you've seen, EUR 41 million in the first quarter of 2018, and I do expect that the remainder or most of the remainder will be coming through in the second quarter of 2018, as we also flagged that we are kind of finishing the process with the workers councils right now, basically early Q2. From a savings perspective, EUR 10 million savings, it's in the first quarter. We have -- and we have reconfirmed EUR 110 million savings for the full year, which means that most of the savings are still to come, and will step up as we go on. But I would like to say that's -- that really, most of the savings are in the second half, with an increase, of course, of the savings in the second quarter versus the first quarter. So that's how you need to look at it.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

I hope that answers your question?

[Stephanie Bothwell, Vice President]

Yes, and my second question was on Performance Coatings. So you had volumes down 5% in the quarter, and clearly, Marine was a drag, but I mean, that's been the case for some time. And it doesn't look like comparatives were particularly challenging in the first quarter. Can you perhaps provide a little bit more color in terms of what the underlying trends look like? Has anything changed over the course of Q1 versus the Q4?

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Well, a couple of items there. I think Marine and Protective was in fact somewhat down because it continues to be a market at the bottom, but then you have certain projects are being postponed, et cetera. And also to be honest, certain projects we decided not to participate because they were not at the margins that actually are sustainable in there. But on the other businesses, I think you have to look at much more into the category of order pattern. Again, as we have been indicating, and the rest of the industry has been indicating, that there would be price increases in segments, I think you had some people buying more material at the end of last year. That was one element. The second item was that you have then some people who postponed or basically kind of in a negotiation mode, try to see if they can get away with it. I would actually just want to point out, however, that it's less around the sequential weakness we see in the business, but I want to point out that the comparables for the first quarter of 2017, we knew that, that was going to be exceptionally difficult to go through, because that was a really strong quarter. In fact, if you compare it to all the other first quarters we had, it was exceptionally strong. So it is maybe less of a difference between quarter 1 and quarter 4. It is more a year-over-year with that specific quarter.

[Operator]

Next question is from Peter Clark of Société Générale.

[Peter Anthony John Clark, Senior Analyst, Chemicals]

I've got 2. Just on the pricing, I just want to go back to price. In my numbers, anyway, it looks like it's double-digit year-on-year in the first quarter. And then the raw materials, last year, that's following probably high single-digit. And you certainly seem to be suffering more than the competition or certainly your biggest peer, who were talking about mid-single-digit both in '17 and Q1. And I would have thought mix would actually hurt them more certainly in the first quarter this year. Just wondering, is it a timing thing, that you certainly had a delayed lag, I think, on mix because Q1 '17, as you made the point, didn't see much hit, but you seem to be suffering more than them. So I don't know if you've got anything you can say on that, perhaps some of the key raw materials that have been impacting there? And then the second question on Marine and Protective, where you point to the underlying sales down 14%. On my numbers, I think it's the worst of the cycle, apart from maybe the Q4 '16. It was against a very tough comp, which looked a bit out of trend last year. Just wondering where you see the inflection point? Now is this something that you'll probably push back into 2019? Or are you comfortable that could happen by the end of this year in Marine and Protective?

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes, well, first, let me answer the 2 questions. One on the pricing, as you may imagine, the ones who have been publishing, our peers, we have been micro-analyzing them, and we frankly don't see any real difference in pattern, which you would not expect, given where we are. So I'm not sure if I can recognize that, to be honest, because if we look at the flow-through, what we see is our main competitors, now then you actually have regional differences and segment differences, but I would say we're pretty convinced that the impact on raw materials is about the same. So I'm not really sure if I see any significant difference there. Maybe the way we communicate about it might be a bit more direct than anything else. The second item, maybe on Marine and Protective, yes, the comparable plays a role, but that market is still down. We have been saying several times that we don't see any improvement there before the end of 2018. Oil prices for us is a bit of a perverse situation because as oil prices goes up, that has a negative in certain other elements. But from a Marine and Protective, that actually starts giving new projects, et cetera, that we can go after. But the net effect, we don't see that business necessarily making a significant trend change before the end of 2018. Now, I'm not sure if I answered your first question or if I was just getting confused by your question, but...

[Operator]

Next question is from Geoff Haire of UBS.

[Geoffrey Robert Haire, Managing Director and Equity Research Analyst]

I just want to ask a quick question on pricing again. So if you sort of assume that 3% is achievable through most of this year, you won't be offsetting the roughly EUR 500 million of higher raw material costs that you seem to be suggesting will happen by the end of Q2 for about 8 quarters from where we are now. So are there -- could you just sort of talk about the second wave of price increases, are they going to be significantly more than what we've already seen going through in Q1? So that you cover off that raw material pressure quicker than probably the middle of next year?

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes, it would probably not be a smart idea to preannounce to everybody what our price increases are going to be. But yes, your observation is correct that if you look at the EUR 300 million we already have and you look at the trend rates, the numbers you mentioned on the total variable margin impact is probably about what we have in our models. So the 3% is indeed not sufficient to offset it. That's why we already mentioned that we will have to go for a second wave, which will be another wave of quarterly, annual, 6 monthly contracts, et cetera, and where we have no contracts to offset it. I think we definitely look at getting the variable contribution reestablished. That may still have a percentage margin impact because that gives them, just the math works out differently. But that's what we're going to go for. So I think we feel like this is the first episode of the 2 episodes that we have to do this year to reestablish it. In the meantime, as you can imagine, we do quite an amount of value engineering. There's a number of other costs reduction measures we can have to try to weather the storm in the meantime. But clearly here, the recipe is price increases to try to get back to where we need to be.

[Operator]

Next question is from Alex Stewart of Barclays.

[Alex J. Stewart, Chemicals Analyst]

First one is quite a straightforward accounting question. The depreciation charge you booked in Decorative Paints [indiscernible] 30% below the prior year period. Now obviously, currencies contributed to that, but can't explain all that. Can you explain why it was such a significant decrease? And then second question, you talked about wanting to achieve EUR 110 million by 2019. Can you just confirm that what you mean by that is a quarterly run rate which will get you to EUR 110 million. It seems to me that it will be tough to get to EUR 110 million for the year if you've only done EUR 10 million in the first quarter? So I just wanted to make sure you've given out the quarterly run rate rather than the absolute cost savings.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Well, let me just take the second question first on the EUR 110 million. So when we designed the program, the program is in fact on an annual run rate bigger than the EUR 110 million. So the EUR 110 million was what was going to the bottom line in 2018. And in fact, the program was such because we are, of course, aware of the works council program -- projects and the timing involved with that, that we didn't have anything into our models for the first quarter of 2018. So there's about EUR 10 million of the EUR 110 million that was dropped to our bottom line. As I think Maarten has been indicating, we do see a significant step up in the second quarter on that. So if you look at the outflow of the costs that's ramping up rapidly in the second quarter, third quarter, and then if you annualize it, that will indeed be in 2018, is EUR 110 million to the bottom line. But the secret to the recipe there is, indeed, the fact that we anticipated it and therefore, that the overall effort was, in fact, larger at an annual -- annualized way than EUR 110 million.

[Maarten Jan de Vries, CFO & Member of Management Board]

Yes, and then maybe coming back on your first question, I -- to be honest, I didn't understand completely your first question. But I think where you're a little bit confused is with the FX impact, because the main impact you see running through our results is basically the currency impact. But if needed, we could take this further offline.

[Alex J. Stewart, Chemicals Analyst]

Sorry, just to clear up on that first point. The depreciation charge, it seems it was EUR 23 million in first quarter of 2018, but it was EUR 32 million in the first quarter of 2017. And it was running at about a run rate of EUR 30 million in 2017 in Decorative Paints. So I wondered why the depreciation and amortization charge stepped down so dramatically this year?

[Maarten Jan de Vries, CFO & Member of Management Board]

Okay, let's take this offline.

[Operator]

Next question is from Patrick Lambert of Raymond James.

[Patrick Gerard Jean Lambert, Research Analyst]

Just a brief one. If you could comment on the start of Q2, I think you mentioned China back, but especially on the weather-related issues in Europe, and elsewhere here, [indiscernible]. Just to have a feel of how much one-offs were the strong comparable and the weather comparables? That's question number one. Question number two, again, on Marine and Protective, I still struggle to have your -- to understand your outlook for -- is it -- are you expecting flattish overall 2018 versus '17? Or are we still on the downside this year in terms of both those markets? And maybe finally, if I can, Industrial, I think PPG reported actually pretty decent volume growth in general industrial? And if you could comment on your performance and where you see the differences on that specific market?

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes, okay. On the weather-related, we haven't necessarily broken that out in what is weather-related, because that always is a bit of a guesswork and we didn't necessarily want to have it all based on weather-related either. But what maybe it's more important to look at what we see for the trend rate. For April at least, I've already commented on China. China is back, as we have been seeing in the last quarters, on steep growth. There was maybe a little bit of weather, but it's also some of the pricing stuff that had to come in. Secondly, Europe, definitely Northern, Western Europe, which for us, Benelux countries, U.K., which is a big set, is obviously, that's coming back to normal. So we see, in fact, April being a much more normal month which you would expect. So that's on the Deco. So we haven't necessarily broken that out on what is now weather-related or not. The second item is on the Marine and Protective. Marine and Protective, I would say it is down. It is mostly down versus the first quarter of 2017. Here you have to look more sequential. And that just continues to be somewhat at the bottom. And so we don't see any recovery just yet. There's a number of new products that we're introducing, specifically in the Protective. Also encouraged by some of the reset in Protective to infrastructure, but those things have to work themselves through the channel, and I'm not really sure that, that would be -- well, pretty sure that would not be realistic to say there's going to be a big revival in 2018. So hence, the relatively flattish development we would see versus, I would say, the last 2, 3 quarters of 2017 for Marine and Protective. On Industrial, we have to be somewhat careful, I would say, with what the definition of Industrial is, because PPG and ourselves have vastly different definitions of those. But just maybe running quickly through, Performance Coatings and some of our segments there, so Marine and Protective, we just covered. Powder is exceptionally strong. There you see some order pattern situations within the first quarter based on significant price increases we had to have in the market. But also, there we see things coming back to normal. There we had 8% growth in revenue. Now if you then go back to euros, it's 1%, but it just shows the continuing underlying growth. If you go to our Automotive, Aerospace, Specialty business, 4% growth, which I think is higher than anybody else has reported. Very encouraged with what we see there in all the segments, both on pricing and on volume, share, et cetera, so that is very positive. If you go to the other segment, which is the Wood and Metal Coatings. I would say, there you have a mix situation between regions and by segments, but overall, you see there a positive, although, be more muted compared to the 2 examples I gave. So for us, the picture continues to be the fact that Marine and Protective is the one where we are -- where we look as when is it coming back. But the rest of the businesses, we feel very strong. And in fact, in Deco, you didn't ask that question, but it's pretty clear that in Deco, where we operate, we feel we actually have been increasing our share or at least very successfully defending it, despite going maybe more aggressive than some others for price increases. Does that answer your question?

[Operator]

Next question is from Laurence Alexander.

[Laurence Alexander, VP & Equity Research Analyst]

Laurence Alexander from Jefferies. A few quick ones. Do you expect the Performance products overall volumes to be positive in the back half of the year? Can you offset the pressures that you're seeing in Marine and Protective? And secondly, just from a high level, do you have a way that you can characterize the way your Integrated Business Planning differs from, for example, the DuPont Integrated Business Management system philosophically? I mean, like, what is it that you're trying to do that's different? Or should we see them as fairly analogous efforts?

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Okay, so Performance Coatings, we do believe that the first quarter was, given all the effects that were happening around pricing, et cetera, and some of the order patterns, that that's going to balancing out somewhat through in the year. Having said that, the marching orders to our teams are to focus on the margin that they bring and not to be obsessing around the 0.5% or 1% volume, given just the very high impact of the margin. So we're really very margin-focused versus the growth. Of course, we keep an eye on it, but not to be obsessing about that one. But we don't expect significant changes in that respect. The second thing around our Integrated Business Planning, I think we've been commenting that we have a pretty big venture going on with Oliver Wight to get all our 8 businesses to Integrated Business Planning. And in that sense, knowing that very well, that DuPont implemented also what was called a DIBM, DuPont Integrated Business Management, which was, in fact, the Oliver Wight methodology. In that sense, it's very similar.

[Operator]

No additional questions in queue. Speakers?

[Lloyd Midwinter, Director of Investor Relations]

Okay. Thank you, operator. Thank you for everyone joining the call and your continued interest in AkzoNobel. Please get in contact with Investor Relations via the usual numbers and e-mail addresses in case of follow-up questions. Thank you. Bye-bye.

[Operator]

And that concludes this conference. Thank you all for your participation. You may now disconnect.