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Akzo Nobel NV
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Good morning, ladies and gentlemen. Thank you for holding. Welcome to the AkzoNobel First Quarter 2020 Analyst Call.[Operator Instructions]I would now like to hand the call over to Mr. Lloyd Midwinter, Director of Investor Relations. Go ahead, please, sir.
Hello and welcome to the AkzoNobel investor update for Q1 2020.Today, our CEO, Thierry Vanlancker; and CFO, Maarten de Vries, will guide you through the results for the fourth -- first quarter.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 also applies to the conference call and answers to your questions.I now hand over to Thierry, who will start on Slide 4 of the presentation.
Thank you, Lloyd. Hello to everybody, and a warm welcome on this call. And I sincerely hope that you and your loved ones are safe and well.It's obviously clear to all of us right now that the outbreak of COVID-19 is having a huge impact for yourself, for us and for the whole world. At AkzoNobel, our top priority remains the safety and the well-being of our employees, families and our partners. Thankfully, in the company, we've had relatively few confirmed COVID-19 cases in the company and mostly with relatively mild symptoms. Our whole organization is taking all responsible steps to be able to continue serving our customers and sustain our business operations.Our results for the first quarter showed our transformation was on track even though COVID-19 had a significant impact in China throughout the quarter and its effects were becoming more obvious in other regions as the quarter progressed. Despite these various and big challenges, our performance improvement accelerated. We delivered an impressive 31% step-up in adjusted operating income, and ROS, excluding unallocated costs for the quarter increased to 12.4% versus 9.1% last year. And this is driven by continued margin management and cost-saving programs. With the COVID-19 situation changing every day, I would like to pause and recognize all our employees around the world for their continued passion and commitment in serving our customers in these unprecedented circumstances. I'm particularly proud that our latest quarterly employee survey shows our people throughout AkzoNobel have never been more engaged than now.As recently announced, these significant market disruptions forces us to pause key parts of our transformation and hence to suspend our 2020 financial ambition. As you can imagine, this was obviously not an easy decision. The headwinds resulting from COVID-19 pandemic are evident now in most parts of our business and in the world and will have a significant impact during the second quarter. Once markets normalize, we remain eager to resume our Winning together: 15 by 20 momentum. And we still very much maintain our ambition to drive AkzoNobel's performance in line with industry front-runners this year.Some key financials are shown on Slide 5. Our Q1 results show continued progress towards our 2020 financial ambition even with this initial impact from COVID-19. As mentioned, ROS excluding unallocated costs increased an impressive 330 basis points to 12.4%, and the return on investment was also up significantly at 18.3%. Price/mix continued the positive trend and was 2% higher, and adjusted operating income was up 31% and adjusted EPS from continuing operations was up 54%. In addition, we have now almost completed the EUR 500 million share buyback we announced earlier.The charts you see on Slide 6 show the revenue development during the first quarter. COVID-19 has already had a significant impact in China and its effects were increasingly visible in other regions and segments towards the end of the quarter. Our Decorative Paints business in China experienced a very sharp decline in revenues earlier in the quarter, with the near-total lockdown impacting the distribution channels and end market demand, lasting for several weeks after the Lunar New Year. By the end of the quarter, things were gradually returning to normal. At the same time, headwinds were increasing in other regions and segments, including Decorative Paints outside of China, as further lockdowns started to impact distribution channels, sometimes despite strong underlying end market demand.In Performance Coatings, several of our segments in the meantime felt softening demand. This was clearly visible towards the end of Q1.Let's now turn to Slide 7. As mentioned earlier, we expect end market demand to be significantly impacted during the second quarter. Headwinds related to COVID-19 are unpredictable. There is currently little reliable visibility, and we review supply-demand plans in detail on a weekly basis as governmental decisions alter lockdowns conditions, et cetera. However, as shown on the previous slide, we saw clear negative revenue developments going into the second quarter for both Decorative Paints and Performance Coatings overall. All businesses are expected to be impacted to a greater or lesser extent in Q2.For Decorative Paints, the mandated lockdowns in South America and large parts of Southeast Asia, of both plant sites as well as distribution channels, will have a significantly negative impact in the second quarter. In EMEA, the underlying very strong demand we experienced in Q1 is continuing in Q2, but it's very dependent on where specific countries allow stores and distributions to receive customers. In those areas where business was open, we see positive demand traction, but Q2 will overall still be significantly down. It's good to note that we expect China to be close to last year's level in Q2 and the rest of the year.In Performance Coatings, the Automotive and Specialty Coatings business is being particularly impacted by the COVID-19 dynamics, and a significant and continued downturn in the automotive and aerospace industry will be felt. We also expect a decline in demand in our refinish business despite market gains, as both traffic density and average kilometers driven are significantly down. Powder Coatings continues to see strength in all its segments, but especially in the second quarter, we expect this to be more than offset by the headwinds in automotive. Demand for Marine and Protective Coatings has remained relatively stable. Industrial Coatings continues to hold up very well, with a slowdown for wood coatings being positively offset by strong demand for packaging coatings as lockdowns increase the demand for metal can coatings in the food and beverage segments.Overall, we expect end market demand during the second quarter to be significantly below last year than any of our previous expectations.Moving to Slide #8 now. Our strong focus on variable margin delivered positive price/mix of 2% in the first quarter, demonstrating our robust margin management process we now have in place, also in response to significantly higher raw material costs we saw in the previous 2 years. Due to the COVID-19 situation, we need to pause key parts of our transformation. However, in parallel, we're also taking all necessary measures, including steps to rapidly reduce costs and carefully manage cash flows in the short term. Practically, this means that we will pause our ERP integrations for the second quarter after having successfully integrated our ERP systems in the Middle East during the first quarter. When it comes to our Global Business Services or GBS, we completed a further 8 transitions in the first quarter, and 18 transitions remain in progress. The supply-and-demand balance is complex, constantly evolving and differs per region and segment. Therefore, we've increased the frequency of our demand-and-supply cycle from monthly to weekly. And in the meantime, our procurement team has done an extremely good job in ensuring continuity of supply for our raw materials.Although savings from our transformation were slightly lower than initially planned, we have stepped up other cost savings. So overall, we delivered a further EUR 44 million of cost savings in the first quarter from both transformation and other cost savings.Finally, our COVID-19 response in our organization demonstrates the high-performance culture we've been trying to create at AkzoNobel over the past years. We have put in place a global and regional COVID-19 response team to constantly adapt our actions as the situation continues to evolve. This is chaired by Maarten and myself. Our AkzoNobel Cares community program has been refocused, for example. An e-Health initiative in India now offers initial COVID-19 screening to villages in Bangalore, while in China we donated paints to help ensure the rapid construction of the new hospital buildings. I am particularly encouraged and proud that during this unprecedented situation we've seen a further significant increase in our employee engagement to the highest level recorded in our quarterly surveys we have used since 2017, and I would therefore like to applaud the efforts of everyone throughout the company who has been working hard to ensure we can continue to serve our customers and sustain our business operations all around the world.Let me now hand it over to Maarten, who will run you through the numbers of our financial results in more detail.
Yes. Thank you, Thierry. And hello, everybody on the call.Revenue for the first quarter was 6% lower and 5% lower in constant currencies, with positive price/mix of 2% more than offsetting the 7% lower volumes. Adjusted operating income was up 31% at EUR 214 million versus EUR 163 million last year, driven by margin management and lower costs. Return on sales excluding unallocated costs increased with 330 basis points to 12.4% despite softer end market demand.Now moving to Slide 11 and the quarterly trends in volume and price/mix. Having offset the significant raw material cost inflation with cumulative price/mix increases of 10% during 2018 and '19, we are now moving towards ongoing margin management. This resulted in a price/mix of up 2% for the quarter, continuing the positive trend. Volumes were 7% lower mainly due to the impact of COVID-19. Overall, we estimate that the COVID-19 negatively impacted the first quarter revenue by around 5%. Decorative Paints, particularly in China, was more immediately impacted than Performance Coatings, mainly due to the effect of lockdowns on the distribution channels.Slide 12 shows the development of adjusted operating income. Foreign exchange rates had a minimal impact during the first quarter. Lower volumes, mainly due to COVID-19 impacted operating income by EUR 88 million, and positive price/mix delivered EUR 55 million, mainly due to price increases at the start of the year. Raw materials and other variable costs had a favorable impact during the quarter and contributed EUR 50 million. As mentioned, the current situation means we have been forced to pause key parts of our transformation. However, we've taken various steps to rapidly reduce costs in the short term. Cost savings from our transformation as well as temporary measures due to the COVID-19 were EUR 44 million in the first quarter. Once markets normalize, we remain eager and passionate to resume our Winning together: 15 by 20 momentum.The Q1 results for Decorative Paints are summarized on the next slide. Revenue was 10% lower and 8% lower in constant currencies, with 1% positive price/mix more than offsetting 9% lower volumes; and 2% unfavorable impact from foreign currencies, mainly in South America. COVID-19 negatively impacted revenue for Decorative Paints by around 8% due to the effect of lockdowns in our distribution channels, mainly in Asia at the start of the quarter and other regions more recently at the end of March. Adjusted operating income increased 7% to EUR 64 million, with positive price/mix and lower costs offsetting lower volumes. This resulted in an return on sales of 130 basis points higher at 8.5% despite significant impact from COVID-19 in China.In EMEA, performance continued to improve, including the U.K. and France. Strong revenue trends in the first 2 months were negatively impacted by COVID-19 towards the end of the quarter. And revenue in South America was 13% lower while 5% higher in constant currencies as a result of positive price/mix effects and significant currency devaluation. In Asia, revenues were impacted due to COVID-19. Activity in China was showing initial signs of recovery in March after significantly lower sales in February.Turning now to Performance Coatings on the next slide. Volumes were 7% lower in Performance Coatings mainly due to the impact of COVID-19 on end market demand. Price/mix was 3% positive, driven by strong margin management. We estimate COVID-19 negatively impacted revenue for Performance Coatings by around 3% for the quarter. Volumes for Performance Coatings were impacted by the decline in the automotive industry, which was also impacted by COVID-19 as well as in Asia. For Marine and Protective Coatings, profitability continued to improve. Automotive and Specialty Coatings was affected by the impact of COVID-19 on customer demand, particularly for vehicle refinish and consumer electronics. Demand for aerospace coatings started strong and decreased at the end of the quarter. Within Industrial Coatings, demand for packaging coatings continued its strong momentum in all regions, while demand for wood coatings remained slow.Overall, strong focus on cost savings and margin management offset lower volumes and resulted in a result (sic) [ return ] on sales of 330 (sic) [ 430 ] basis points at 14.7% versus 10.4% last year. Adjusted operating income was 38% higher at EUR 190 million versus EUR 138 million last year, in the first quarter.Moving now to the next slide. Adjusted earnings per share for continuing operations was up 54% at EUR 0.71 versus EUR 0.46 last year mainly due to higher operating income. Adjusted earnings per share was also impacted by fewer shares following the return of proceeds from the sale of Specialty Chemicals in 2019 as well as the most recent EUR 500 million share buyback program.Moving now to free cash flow generation in the next slide. Net cash from operating activities resulted in an outflow of EUR 160 million during the first quarter versus EUR 885 million in 2019. This increase was mainly driven by higher EBITDA for the period and lower pension top-up payments as well as lower working capital outflow. Excluding the impact of pension prefunding and pension top-up payments, the cash generation in the first quarter of 2020 improved by EUR 82 million mainly due to higher EBITDA and lower outflow of working capital.At the end of the first quarter 2020, net debt was EUR 1.5 billion versus EUR 0.8 billion at the end of 2019, resulting in a leverage ratio of 1.2x net debt over EBITDA. This was mainly due to the share buyback program.Overall, we have a strong balance sheet and a solid cash position. At the end of the first quarter, cash and cash equivalents were EUR 0.8 billion. In addition, we have a EUR 1.3 billion unutilized revolving credit facility with a maturity of 2025, the next bond maturity of EUR 750 million in July 2022 and we have recently announced a EUR 750 million bond with a 10-year maturity and a coupon of 1.625%.Now moving out on to the next slides with our capital allocation priorities, which have remained unchanged.We have derisked, as you know, our pension liabilities and almost completed the EUR 500 million share buyback program which started at the very end of last year. Firstly, we focus on our own business, which has low CapEx requirements at roughly 2.5% of sales. Our dividend policy remains stable to rising, and we will remain open to value-creating and strategically aligned acquisitions. And depending on how the situation evolves and in line with our capital allocation priorities, we will review further shareholders' returns in the form of potential share buybacks. And overall, as we said earlier, we target a leverage ratio of net debt-to-EBITDA of 1x to 2x by the end of 2020 and remain committed to retain a strong investment-grade credit rating.And I now hand back over to Thierry for the concluding remarks.
Thank you, Maarten.Let's indeed look at Chart #19. In conclusion, our first quarter 2020 results show our transformation was on track despite significant market disruptions from the COVID-19. We delivered an impressive step-up in profitability with return on sales 330 basis points higher and adjusted operating income up 31%. This is all down to the hard work and the perseverance of everyone at AkzoNobel, so I would like again to say a massive thank you to all of them for their continued passion and commitment during these unprecedented circumstances. And although we've been forced to pause key parts of our transformation and suspend our 2020 financial ambition, our transformation during recent years means we are far more robust and resilient to weather any storm and remain eager to resume our positive momentum once the markets normalize. More than ever, we maintain our ambition to deliver a financial performance at the level of industry front-runners this year.Finally turning to Slide 20, which shows our updated outlook.We have paused parts of our transformation and suspended our 2020 financial ambition in response to the significant market disruption resulting from COVID-19 pandemic. Headwinds relating to COVID-19 are increasing for most parts of the world and will have a significant impact during Q2. Demand trends differ per region and segment in an uncertain macroeconomic environment. Raw material costs are expected to have a moderately favorable impact for the first half of 2020. Continued margin management and cost-saving programs are in place and are being executed to address the current challenges. Once markets normalize, we intend to resume our positive momentum and drive performance in line with industry front-runners. The company targets a leverage ratio of 1 to 2x net debt over EBITDA by the end of 2020 and commits to retain a strong investment-grade credit rating.And with that, I hand it over to Lloyd for information about upcoming events and a 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 21. Tomorrow, we will host our fully virtual annual general meeting of shareholders, which you can follow live online via a webcast via our website. On July 22, we will then publish our report for the second quarter.This concludes the presentation, and we would be happy to receive your questions. [Operator Instructions] Operator, please start the Q&A session.
[Operator Instructions] Our first question is from Mr. Mutlu Gundogan of ABN AMRO.
Yes. Two questions it is. So the first one is on volumes and specifically on Slide 6, which I think is very helpful, so thank you for that. I mean you show on that slide the revenue development throughout the quarter with March being down some 30% to 40% year-on-year. I mean I know you usually don't want to give too much detail within the quarter, but can you give us an idea how bad April is so far so that we can have an idea how that quarter is developing? And then secondly, on your share buyback. So you have practically completed the EUR 500 million buyback that you had planned for H1. I know that you put a point on the agenda. Do you intend to continue with this buyback for the remainder of the year?
Okay. Thanks for the question. Let me handle the market one. And Maarten, maybe you can then get into the share buyback. First of all, I'm happy that you like Slide #6. We were kind of happy with it too, by the way, when we came up with it, but I would urge you not to get too surgically correct on it because it actually shows the typical variations of week over week. And that is often impacted by when holidays, vacation, working days, et cetera in a week are there. So it probably overstates, if you take the number, it overstates the negative that we saw in March. But having said that, yes, we did see a slowdown in some of the businesses, and maybe at the end of March. So maybe it's good to walk a little bit qualitatively to that. So -- and that gives you then also a view on how we look at the second quarter, very big differences in dynamics between deco and Performance Coatings. On Decorative Paints, when you get at the end of March and getting into April, you have China getting closer to normal. We're not exactly there yet, but it actually step by step is starting to normalize. And we think the second quarter and the rest of the year may be, in fact, close to what we had as expectations for China for the year. So that's on China. If you go to our biggest region, which is EMEA, in fact, the first quarter had a significantly strong underlying demand trend. I think the market was strong. I also think our team did a fantastic job to gain further share in Europe at good margins. So we had a very strong start in all of our key markets in Europe. What we've seen is that where there are lockdowns or where our distribution channel is being shut down, which has been in parts of Southern Europe, in the case, of course, there consumers are trying to get to the material through Internet sales, et cetera, but that dwarfs versus what the normal pickup is in the do-it-yourself stores or outlets. So in EMEA, the dynamic is purely driven by lockdowns. And as soon as lockdowns are, frankly, released, you see people queuing up for paint because this is the season. So there -- the underlying demand is there. You have to see there's a bit of a horse that is boxed in and ready to start the race as soon as the -- literally hear, the doors are opened for sales. So there you can almost do the extrapolation, based on lockdowns and duration, on how quickly the sales returns to what it is. So there we are pretty positive around the underlying trends and drive in the market. If you go to Southeast Asia and you go to South America, there, as you know, in many big parts of those regions there are total economic lockdowns for both plants and for any outlets or any activity in those countries, so there it is really waiting until these lockdowns go down. So that's significant impact. And there we're impacted by all of the rest of the economy that is down. So that's on the deco side. So I think the -- you have to disconnect the underlying strong demand with just the ability of buying the paint in many parts of the world.The second part is then on Performance Coatings. If you look at the negative trends that you see, in fact the business that is the most negatively impacted, and that's going to be in the second quarter and probably for a big part of the year is our Automotive and Specialty Coatings business because the OEMs, the car manufacturers are down. And in fact, that of course and sometimes are shut down still in their manufacturing. So that is an impact. The refinish business, although we gained market share at significant accounts -- the KPIs for refinish are the kilometers driven and the density of the traffic. If you look outside your window, you don't see too much traffic. So obviously that will have a lingering effect in that market. And then aerospace indeed was the market that was starting to come to a significantly lower level by the end of the quarter, and that's pretty obvious on what you see out there. For the rest of Performance Coatings, we are actually relatively upbeat. Powder will have a little bit of a dent in there because of the automotive part of it, which is a segment in that portfolio, but that will quickly be offset, as we progress through the quarter and the rest of the year, by the remaining underlying growth in the other segments. And for what Industrial Coatings and Marine and Protective is concerned, they're actually doing pretty well. They did very well during the first quarter, and we don't expect significant changes in demand there. So it's really -- we often say that in our outlook it's different from segment to segment, but this time it is really different to segment to segment. I just want to stress underlying deco is doing extremely well. As soon as the door is open -- we have really encouraging sales, but the doors have to be open of the outlets to pick it up. So let me, with that, hand it over to Maarten on the share buyback.
Yes, on the share buyback. So our share buyback -- and the EUR 500 million that started at the very end of last year, that's now almost finished. We did, so far, EUR 473 million, so that will be finished by the end of -- latest by the end of this month, by the end of April. And as you will appreciate, in line with our capital allocation going forward, we will review as we go forward how we look at further distributions to shareholders. The focus right now is really on managing costs and cash in the near term. And specifically given the lower visibility, that is the key focus right now, and we will come back on that when time is appropriate again.
Does that answer your question?
It does.
Our next questions are from Mr. Matthew Yates, Bank of American (sic) [ Bank of America ].
A couple of questions, please. Just on the volumes, I think you said that COVID was about a 5% hit. So you're suggesting underlying volumes were down a little bit. Can you just give a sense, do you think that is the end markets? You already talked about gaining market share in a couple of areas. Or does this come back to the mix management you've been doing for a while?The second question is just about the cash flow. Can you just talk a little bit about the working capital performance and particularly where inventories were sitting at the end of the quarter, both in your own warehouses and in the channel and how that may affect production planning for April and May?
Yes. Thank you, Matt. Let me address the first question and then maybe the second question for Maarten. First of all, when a company tries to estimate the COVID-19 impact, to be honest, it's more of an art than a science because it all starts to intermingle if you go on that. I do believe that, when we went into the year, we pointed out that we expected the volume in all to be slightly negative. And I think we even pointed out about 1% that it might have been down. So in that sense, it's in line with our expectations. And you may remember that, in the fourth quarter of last year, there was actually for -- and all of the -- our peers in the industry were not exactly too exuberant on the volumes that they were selling. So it's a little bit here and there. It has to do with the fact that we are in fact managing our margins, et cetera, but I think that's not necessarily in the ordinary. Again, this was kind of the underlying trends that we had from coming out of the fourth quarter, if you remember still those numbers. Now I'm not sure if that answers your question. But again, the COVID and the normal market, we try to do as best as possible an assessment on there, but that gets, of course, increasingly difficult to find out which goes where and in which bucket if you do that analysis. Does that answer your question, Matthew?
Yes, that's fine.
Yes. So on working capital, what you've seen, and I think we've also mentioned that, is as percentage of sales, working capital went up, but I think there is an -- there is really a factor of the lower revenue in the first quarter. But if we look at the different elements, in fact, inventory, as we are moving really towards on weekly demand-and-supply cycle, we've started to make already corrections by the end of the first quarter in our inventory levels, and we continue to do so in the second quarter, obviously. Revenues -- or receivables is really our key focus area because we've seen some increase of overdues already at the end of the first quarter. So cash collection is really critical for us. And on the other hand, payables and the lower payables is somewhat also an effect of, of course, lower raw material but also pushing on the brake in terms of buying materials. So there are quite some different dynamics going through our working capital as we speak but all in the context of much more dynamically managing our working capital elements. If you talk about distribution, the only thing I want to say, and that's specifically on China, what we've seen is as we are ramping up the business again in China at the -- in March in fact and right now in April as well, that the focus is very much at the moment in sell-in to distribution. And subsequently, we will -- and we are monitoring more and more the sell-out towards the consumer, but that has kind of still a lagging effect in China.
Yes. And maybe, Matt, if I can add on, on the working capital management. We've alluded a couple of times in the past that we went to an Integrated Business Planning for a monthly cycle. Just want to underline that already mid of the quarter we went to a weekly cycle, and that's a lot of work in a complex business, to really go weekly demand. And we have a certain sense of pride over the fact that we were able to keep our inventory -- despite significant dislocations in regions and subsegments, et cetera, that we were able to keep our inventory under control. And that's going to be extremely important if we go into the second quarter because, if we look, for example, for Deco Paints, as I'm -- I was trying to explain that where there is a lockdown, you get to almost 0 sales. And then when the door is open in that specific channel, in that specific country, you really go to a very strong sales. So that is -- as you can imagine, is a challenge but hopefully, a positive challenge for our teams to keep managing working capital but at the same time be ready to supply once you really go in an almost binary system from 0% to 100% in a channel. So it's a good test for our systems, and so far, so good to keep managing that. Matthew, does that answer your question?
That's great. All the best, guys.
Thank you.
Thanks.
The following question is from Gunther Zechmann of Bernstein.
Yes. A couple of questions from my side as well, please. More broadly maybe on capital allocation, the lower end of your full year target for net debt-to-EBITDA of 1.2x. The business generates more cash than it needs even in more difficult times. How do you think at -- about M&A at this point, bearing in mind what Maarten has said about the share buybacks possibly resuming at a later point as well? Is -- what's the bottleneck? Is it an availability of target? Or are you tempted given that valuation has arguably come down across the sector as well? So that's the first question, just how you think about the use of cash. And then the second one on pricing, please. I understand 2% price/mix in the first quarter was mainly pricing. Is this too optimistic a run rate to extrapolate going forward? Is there any new price increases coming through as you're transitioning towards more margin management?
Yes, yes, okay. Let's also then do this together here, Maarten. On the capital allocation, I'll let Maarten, I mean, probably repeat what we already said earlier, but on the M&A part, it's probably important. The reason why we paused the transformation for the second quarter is that it became clear, with all the things happening on COVID-19, it would not have been in the medium- or long-term interest to stubbornly stick to quarterly result. I think we were in that for the yearly results. We were in it for the long term. The whole idea was to create a company that's up there with structures, processes and performance that's up there with the best. And I think, if we had stubbornly stuck to that for the second quarter and be stuck in percentages we want to achieve, we would have to do damage to the organization. So you may have noticed that we haven't come out with any dramatic announcements. Because it's really circling the wagons around our own people, make sure that we are ready for when things take off again. So that has been a prime importance for the company. That also goes, Gunther, around M&A. Yes, we have a strong balance sheet. Yes, with the bond and all the other things we did, we have the firepower to do things. Yes, we also can expect some companies out there to get a little bit into issues, but we've been very disciplined in the past on how about these things. This is a very unusual situation, so I think discipline is now with capital letter D in our vocabulary. So we keep our eyes and ears open if there is a good M&A target, but it's probably a little bit too early in that whole dynamic for somebody to raise their hand or be even open for such conversations. And again, since we are circling the wagons, it's very much around getting through this 1 or 2 months of rough ride, I think, to really get back up on where we are. At the same time, I think Maarten indicated we recommit to the capital allocations we set, and all of those elements continue to be in play. The big issue here, Gunther, as you well know, is if we knew this was over in a month, you take certain set of decisions. Since then all of us are guessing whether this is a V, a U, a W, a swoosh or whatever vocabulary you can use for it, that's why we want to be a little bit more on the safe side until we have a bit more clarity. Is -- that answer your question, Gunther, the first one...
And can I just follow up with a quick one on the M&A side maybe to clarify. My question wasn't the usual big M&A kind of questions -- question. I was more wondering about bolt-on deals that you can do to consolidate the footprint...
No, no, no. I understood. It's -- yes, Gunther. And that's how I understood your question too because we do have a list of the targets we want to look at, but again there also -- since most of these smaller are more privately held, I think that is a bit too early, I think, for -- in the crisis for having people to step forward or at least be more open for those kind of conversations. But I can assure you our M&A team is keeping their eyes and ears open. I mean they sit, they work from home, so basically that's about the only thing they can do is keep their eyes and ears open. So we're very much looking at it. So I understood your question in that context. Maarten, you want to talk about price/mix?
Yes, price and mix. So yes, first of all, as we've said earlier, we executed on our price increases early on in the first quarter, but again this is now -- and we've said it earlier, evolves very much through margin management. So yes, as you said and mentioned, the 2% is mainly price, but there's also some mix in it as of course the revenue mix is changing as well as we speak. But the focus going forward is really around margin management. We have now put all the methodologies and the processes and tools in place to manage that, and that certainly in this dynamic and volatile environment is absolutely critical. So there we are well positioned. But don't extrapolate this that we will continue to increase prices because that would be not realistic in this environment, obviously.
Totally correct. Gunther, that answers your questions?
That's great.
The next question is from Mr. Tony Jones of Redburn.
Tony Jones of Redburn. I've got two. Firstly, on savings, is it possible to get your best estimate of what the potential total savings, cost savings, could be this year with some of the ALPS program on pause for a bit but it sounds like you've got some other savings coming through from areas like procurement. And then secondly, could you talk a little bit about the pension and some of the pluses and minuses? Because we saw the surplus improved in this quarter, and I wasn't expecting it to get better. I thought it actually might go down.
Yes. So on the transformation, it's all -- as you can imagine, I mean, it's difficult to look at the transformation and the savings, but you are right. You may remember that for the transformation we still had EUR 120 million to go. There was EUR 120 million of what we had registered for the total for our 15 by 20, in the second wave. So EUR 44 million is obviously higher. And it's difficult to basically extrapolate it, but if you say around savings in procurement, that's not exactly part of that. So the EUR 44 million is really around OpEx savings. Any potential savings from procurement are actually handled in a different bucket, and it comes to the variable margin of it.Now the savings we have is in fact, well, the running an ERP system or doing transfer costs money. The reason why we stopped it is pretty simple. We couldn't get the people to those places anymore, so it didn't became necessarily very useful. At the same time, of course, what we've done in that whole section of circling the wagons, to be really ready for when the market reopens again. And hopefully, that is sooner than we predict. In that sense, we basically have clamped down on out-of-pocket expenses in general. And we made it clear, and I'm very happy on how our organization has responded to that, that we want to keep the integrity of the organizations as much as possible despite lower volumes in a couple of months but basically to make sure that then we really clamp down on any cost that we have. And you see a whole level of creativity on how people actually stepped up on that. So the EUR 120 million, you have to see that as kind of the minimum. And obviously, we have to do more to try to offset, but it's hard to put a number on it because it's not easy to see how long we're going to be in this hunkering down in the whole economy. But maybe Maarten, you can...
And as you -- and just to add. So we are really stepping up to drive cost savings in discretionary cost elements, and that's particularly the case, of course, in the second quarter. Given the top line challenge, we're looking at all kind of elements, contractors, temps, discretionary costs clampdown, et cetera, et cetera. So the underlying EUR 120 million might be impacted somewhat because of the pausing of a number of transformational initiatives, but on the other hand, we are pushing really the battle on other discretionary cost savings. And by the way, travel is also one of them, where obviously with everybody locked down there is -- yes, there is hardly any travel.
But just maybe on the travel maybe, Maarten, before you talk about pensions. Travel is a good example, that being managing your travel budget these days is still too difficult because people are not allowed to travel for a variety of reasons. But for example, we are pretty optimistic and bullish around the reopening, so we are sending out letters on people around what their individual their so-called travel wallets, what their travel wallets are going to be for the remainder of the year because what we don't want to have is that people sit 1, 2 months at home and then basically feel, "I have still left money in my wallet and I can spend it now on rest of the year." So we're already putting the frugality as a lifestyle for the rest of the year. Maarten, do you want to talk about pensions?
Yes, the pension. So as you know, we did the top-ups last year, and therefore we have basically derisked the pension funds for us. And the good thing is also, given the way we have structured this with insurances, with hedging, the pension fund is pretty well shielded against any shocks, so in a pretty good position, I would say.
Now I'm getting here the sign of our Investor Relations that there's a lot of questions, so we probably -- we have to speed it up, so -- [ around ]. So we'll speed it up.Okay. Okay. Lloyd, the things we do for you, I mean.
Next question is from Christian Faitz, Kepler Cheuvreux.
Yes. Two questions, please. First of all, can you remind us of the split in deco between private demand, so for example, DIY; and demand from professional painters, i.e., what's happening on the construction sides and bigger renovations? And second question. Your balance sheet in Q1 '19 still looks slightly different versus Q1 '20, particularly with respect to higher short-term liabilities, yet your financial result is unchanged. Can you please elucidate this a bit?
Okay. So let me maybe do the split in deco. If you talk about, I would say, consumer and trade, it varies from region to region and from country to country, but it's about 50-50 between consumer and the professional trade. And if you then really go to, I would say, the big do-it-yourself stores because some people go to the shops, also the individual stops, et cetera, it's about 25% that goes to the bigger shops, the more general do-it-yourself areas where it's being sold through. So those are kind of, Christian, numbers to look at. Yes. Maarten?
Yes. I don't exactly recognize your question, so maybe it's good to take it off-line. And let's come back on this because I don't exactly know what you -- what your question -- what you mean with your question...
Well, [indiscernible] I would -- yes. I would have expected higher interest rate charges. That's it. That's the simple question.
Okay, but basically our financing costs are more or less in line with last year. But there are some different dynamics playing around there but nothing specific.
Next question, Markus Mayer, Baader-Helvea.
Two questions from my side. First one is on the raw material impact. You said in your opening remarks that you expect the positive raw material impact only in the first half. Was this have I understood correctly? How about the recent oil price decline, shouldn't this help you by -- for at least the fourth quarter as well? That's the first question. The second question is again on the receivables. Have you seen any customer default so far?
Yes, good questions, Markus. On the raw materials, I think the sentences were around that we did see indeed some impact in the first half of this year. And yes. I mean, if things evolve around all, you might expect some other tailwinds in the second half. I just want to repeat, however, that in our business low oil price really only has an effect if it stays at the same level for 3 months before you can actually see that happening. Now the second element is -- and that's probably more on the offsetting part of that, is that a number of suppliers are under significant stress. There is also a lot of dislocations in those supply chains, so it remains to be seen whether some people actually take capacity out for some of the more further stream materials and therefore that we don't see that necessarily trickling through. We remain optimistic that there might be some tailwind in the second half, but things are so fluid that we're not necessarily betting on that. But okay, that might be definitely a tailwind in the second half. And as you rightfully say, that might be latter part of the third quarter, fourth quarter that we might see something if that in fact comes up. The last element around receivables. The answer is, not really. We do see that there is a high vigilance of our sales teams to basically make sure the money comes in. And definitely, like in deco and the retail, that is high vigilance. And in fact, that is probably percentage-wise a higher conversation with -- or a more intense conversation with some of our customers. I would say a lot of it is with our big customers around the world and not only in deco but also in Performance Coatings. It's actually a very constructive conversation, and that is slightly helped by the fact that we have a balance sheet that allows at least having conversations around how we jointly can get stronger through this period. I don't know, Maarten, if you want to add to that.
No. So the answer is, no, we have not seen any customer defaults by the end of Q1, no.
Does that answer your question, Markus?
Yes.
Next question is from Laurent Favre, Exane BNP Paribas.
I'll stick to one question. On operating leverage, if we look at your Q1 bridge, it looks like on average you had a drop-through of about 43% on the volume decline, but I guess it's an average on averages. So I was wondering. As more -- bigger chunks of your businesses will be down more significantly in the coming quarters than in Q1, should we expect a different drop-through on the volume decline i.e., is fixed cost absorption also going to be an issue around your volumes leverage?
Yes. So a good point, what we will see. I mean in general you can use the similar percentage as we have indicated already earlier, but with a more significant impact in the second quarter, it will be more difficult to flex our cost base. So -- and especially to flex some of the fixed cost elements. So where we're focusing on is to flex the variable costs and the discretionary spend, but the fixed cost base is, of course, more a challenge. But in general, the way you describe it is fair.
Okay. And then my follow-up is on Performance Coatings. In industrial you mentioned a strategic portfolio management, and the use of the word strategic makes me think that it might be longer term than just Q2 or Q1. Can you maybe tell us a little bit more about what you're doing there?
Sure, Laurent, what we mean about strategic portfolio management. But I think what is clear, that for our Industrial Coatings business unit, as you know, that 2, 3 years ago this was not exactly performing very well. I have to say the management team that's now been 2, 3 years on that has -- is doing a fantastic job on looking at which segments that they want to serve, how can they better serve it, looking at costs, et cetera. So that's probably what's intended around the strategic management. In that business right now, there's 3 big businesses. One is wood coatings, which is not doing too super given the economic impact of all these things happening. And that was already starting, to be honest, at the end of the fourth quarter last year or middle of last year. Metal Coatings is doing extremely well, and packaging is doing well too. So maybe we should take this off-line, but there was no signaling happening there except that the reset in Industrial Coatings is ongoing. So don't expect any big announcement there. It's just that business is really coming back to actually a strong performance. And I think that's actually going to be a very resilient business in this whole year.
Our next question is from Georgina Iwamoto of Goldman Sachs.
Maarten, Thierry, I've just got one question. You said that in Europe you have roughly a 50-50 split between DIY and professional sales. If we think about the gradual recovery that you described in the China deco market, can you maybe talk about how that blueprint would translate into Europe given, I think, that the Chinese market is pretty much all professional? So could you see a faster recovery in EMEA deco than we've seen in China is what I'm asking.
Yes. Georgina, the markets are quite different, of course. As you know, in China it is -- there's no do it yourself. People go to the store with the painter to buy the paint, bring the paint back home. And then the painter comes. So that everybody knows what's -- in the can is also what's on the wall when -- after the job is being done. So that is a totally different story in Europe. So in a way, yes. Now there's many other differences, I think, where there were still -- in March and in April, there were still some restrictions on movement from people to get from A to B. So that means the footfall in the stores was, anyway, somewhat artificially reduced in China because of that. But in Europe, yes, I would say we've seen that all over, that the -- first of all, the trading market, where it was possible -- and again, in certain parts of Southern Europe, including Belgium, that was not possible, but where it was possible, like here in the Netherlands, for example, markets were extremely strong for the professional. And for do it yourself across the board, when a shop is open, the sales are strong. And that is, yes, it's a little bit maybe the lockdown effect when you sit at home, I mean. So what do you do? But at the same time, that was already very strong from the beginning of the quarter. So our sales in EMEA have been very strong. And I think that has to do a lot with the overhaul of the product portfolio, our distribution strategy and what we've done in significant markets. So we might be somewhat more hopeful that, that returns faster once the closed sign is flipped on the door of the shop.
Our next question is from Mr. Peter Clark of Societe Generale.
Just a quick one. Can I ask specifically on two of quite important markets for you, the U.K. and France? My understanding is all the outlets are pretty much shut still. I gauge from what you're saying you're very confident on demand when stores open, et cetera, but am I right in thinking, U.K. and France, things are all still shut?
No, not really. So in the U.K. half of our stores -- a little bit more than half of our stores, in fact, were open, so it's maybe more 50% closed. And that's we expect that to loosen up as we speak, big retailers who in fact have closed down. And that was often a little bit more under, I would say, like in general, more on public pressure more than that there was a need to do so. In France, you're right. It was more or less a 100% shutdown; again less mandated, if I'm informed correctly, by governments but more by the unions, who in fact didn't think in those stores it was safe to operate. There also we expect that to actually resume. So in France, for what we are concerned -- and France is for us a big country, but it's not one of our largest markets that we operate in. In France it was mostly kind of cash and collect. And in fact, we saw that in many of the countries where Internet sales through click and collect were actually taking off. Now before the enthusiasm gets going: That still dwarfs versus the normal sales, but it's actually encouraging to see that, at last, the e-commerce part starts to have some life, some pulse to it. But France was -- in that context, I would say U.K. was about 50-50 open. And I would say that France was about 85% shut in retail.
Our next question is from Mr. Mubasher Chaudhry of Citibank.
Just two quick ones, please. On deco, you've mentioned that the demand bounce back will be fairly sharp, and it makes sense, but on -- my question was more around the Performance Coatings side of things. Do you expect the supply chains to be up and running at a similar pace and the demand to come back fairly sharp there as well? Or is it going to be a much slower return to demand, for example, in autos and aero? And then my second question is a bit more longer term, around your expectations around marine being fairly stable. Given the oil price coming down and a lot of the oil majors cutting CapEx and -- how do you see the outlook for that business going forward?
Yes, good question. So indeed, for deco, we think that's a bit more vibrant on and off. If people can get to the paint, they want to get the paint. So I think that's clear around the world. It's also, by the way, the business is the most impacted by lockdowns, by the way, because that -- okay, if the shops are closed, that's the end of your sale. On Performance Coatings, to be honest, the downturn is much less, and therefore the upturn will also be much more gradual. I think Automotive and Specialty Coatings is the one that's -- probably will see a bit more sharper downturn given the automotive situation, given refinish, et cetera. So that might be the outlier. For the others, we think, yes, I mean, the beginning of the second quarter is a bit rough for a number of countries trying to figure out what the regulations are, but there I think we're fairly confident that, that will be coming back but maybe not springing back because the supply chain is somewhat longer. I'm looking around the table here, I mean, but I think that's kind of how our view on it is: much more gradual, I would say, with maybe the exception of Automotive and Specialty Coatings. On the longer term, we think, if we go to our Performance Coatings businesses, that Industrial Coatings businesses will come up pretty well. So it's doing well it's doing well through the crisis, and we see really no reason why that would not be continuing.If we look at Powder Coatings, yes, it's temporarily hit by automotive, but there we see the signs for that to really come back pretty quickly to what the normal trend lines were in that business because automotive is only a part of the segments. And automotive, specialty coatings, I think we already addressed that. For what marine and protective is concerned, that is there's going to be some impact on that, but for, I would say, the next couple of years, I mean, a lot of our business sits in long-term committed capital projects mostly to do with natural gas. At least now the signals we have is that they all continue to go. And then even in the marine business -- again a lot of these things are also linked, by the way, to natural gas, that in marine, there we don't see a significant change yet. And when I talked to the business unit leader on Friday, we had a relatively long conversation. He doesn't necessarily see that in such big swings for that market. Now again corrosion does not stop because of a recession. I think, over a longer period of time, you could, of course, start thinking about, if capital projects for oil companies get stopped, what does that do, but in theory, we have seen that then the maintenance of older equipment continues to be still quite a good income stream for us. So we don't expect that business to evolve as you would expect with the oil price.
Our next question is from Laurence Alexander of Jefferies.
Just very quickly. And how are you thinking, at least initially on adaptation longer term, what the costs might be in terms of just run rate to make your workers comfortable coming back and dealing with social distancing? What should we think the effect might be on CapEx and productivity at your facilities?
Yes, good question, Laurence. I think in our plans that's going to be relatively limited, I would say, because a plant operation is not exactly where you have this heap of people who actually all stand next to one another. So social distancing is more a question of discipline and how you reorganize but not necessarily a big adaptation. The same is in our stores. In fact, we had a very good rehearsal on that in China but also in the rest of the world now, keeping the social distance. There is relatively capital or people -- without capital or people expense, I will say, to do so. Around our offices, that's going to take some rearranging, I think, to do, but we've proven -- and I think this is kind of a shoutout to our IT organization. We've proven that we are robust in working remote. So you will probably see a little bit more of a shift thinking in our offices. And in fact, we have a working team working on the coming back to the office, how can we organize that, assuming that it's going to be the 1.5 meter society for a significant period of time. So we don't think that's going to be a significant disruption of how we do things, nor a cost factor.
And in fact, just to add and from an IT perspective. We've shown, we've stepped up to play it big time. And we've shown that we have the right backbone and infrastructure and tools to really deal with working from home and also deal with the connectivity that goes with it. And the interesting thing is that we've seen over the past weeks, in fact, more for the office workers productivity increasing and because of focus on what is at hand and basically also teams collaborating much better than we've seen before. So there are some interesting side effects here as well.
It's probably also driven by the fact that the hairdressers in Amsterdam have been closed for more than a month now, so nobody wants to look at it on video that long. So that helps the productivity too. Does that answer your questions, Laurence?
Yes.
Next question is from Charlie Webb of Morgan Stanley.
Maybe just one around coming, circling back on DIY. Is there any difference in kind of the value proposition for DIY versus contractors? As in, in DIY markets do people typically waste more paint, buy more expensive products? Just trying to get a sense if there's any difference in kind of value proposition of the 2 markets if we get a bit of a shift for longer towards DIY renovation, et cetera. And then just coming back on raw materials as we think -- look into Q2. Is it fair to suspect we should see a similar-size order-of-magnitude tailwind from raw materials in Q2, or is it more difficult to say given the volume correction?
All right, let me do the DIY. And then Maarten, you can address the tailwind. I'm not sure there's necessarily a market value proposition difference there, Charlie. I mean, if you're alluding that all the do-it-yourself people are klutzes who just throw the paint all over, that's fine by us too, but I don't think that's necessarily the reality. I don't think there's going to be a long-term shift between do it yourself and the trade or -- I would say. The value proposition is somewhat similar in the sense that the trades tends to be extremely loyal to the brands that they work with because that's how they know their projects. They have the -- they kind of know how the paint feels, how it works, how it dries, et cetera. So you -- I continue to be really surprised about the loyalty that people have around the products they work with. And do it yourself, I think, is a brand recognition. And there I have to say that the work that's been done over the past years to really streamline our brands, like Dulux or Sikkens or Flexa or whatever the brands are, around the world. I think that has -- actually has put us for the do it yourself in a much stronger position, with also new product introductions we kept doing. And there -- and we said it before. And I'm probably extrapolating here the European situation, but the same is for other parts of the world. I will say you see us actually gradually increasing market share because it's a nice thing that it becomes a go-to brand. And in fact, in the market where you live, like the U.K., we have a very, very strong position. And it's surprising that we keep chipping away on growing franchise. So I think it's more the brands and the value proposition in general. I don't see any big differences there necessarily because of this crisis or in the short term. Maarten, if you want to talk about the...
Then on the raw material. As we mentioned already earlier, for the first half of the year and therefore now for the second quarter, we will see a similar dynamic as we've seen in the first quarter. And that's also, we mentioned already earlier this year, the visibility we had for the first quarter and the second quarter, although I think you mentioned it yourself. Given the volume dynamic in the second quarter, the uplift in amount will be significantly lower, obviously.
Our final question is from Mr. Chetan Udeshi of JPMorgan.
Yes. I just wanted to follow up on the relative price/mix development between deco and Performance Coatings in Q1, where I think deco was up 1%; Performance Coatings, I mean, 3%. I think in general the expectation will be more pricing power in deco just given more stronger brands there and some industrial customers tend to have more pricing power. So maybe can you talk about why that delta? And how do you see the pricing discussions in Performance Coatings especially evolve over the next few quarters and in the light of the current raw material environment?
Yes. It's a good question, Chetan. Now of course, there are such dislocations in certain markets. You have to be careful to look at it as continuing because then you put all these things together and it looks like you can come to a simple conclusion. I would say, as we've already said, it's that with China being down, for example, which is predominantly a premium market for us after all the portfolio, product portfolio, changes we did there and the enrichments on the value over price. In fact, the Dulux franchise in China is quite a high-priced franchise we have, so with that being down for most of the quarter, now you start distorting a lot of the pictures. And then by having channels like trade versus do it yourself, you have so many dislocations by country that I wouldn't draw any conclusions on that, but I would say that for deco, the pricing plans, we have the pricing plan we have and the margin management plan we had for around the globe. Those have been executed. Okay, China, obviously they went in such a turmoil in the first quarter, but that is maybe the notable exception. And on for what Performance Coatings is concerned, those steps were actually all done in the first quarter, and they went as planned. Again we also want to point out that we already last year announced we went from the price, price, price to basically margin management because the raw material cycle was indeed starting to stabilize and maybe shift. So that margin management, as you see, hopefully, from our numbers, I think our teams have been executing on that pretty well. Does that answer your question, Chetan?
Yes.
So maybe just on closing, maybe.First of all, for -- the teams, I think, do a fantastic job working from home. For some, it's fun for a while, but then it gets old very quickly, so I think everybody is longing to get back to normal.As usual, I think I'm tend to be a bit more upbeat for the future and Maarten is a bit more downbeat, and typically the reality comes out somewhere in the middle. So the second quarter is going to be really hitting a rough patch because of the macroeconomic situation. I think medium, longer term, we feel pretty confident around all the fundamentals we have in place around margin discipline; cost discipline; the processes to have a weekly view; and frankly, the balance sheet, if there's opportunities that come up in whatever way, to make advantage of it. So despite all the hardship out there, we are in fact pretty upbeat around where the company is going. And we hope to do that live to you, hopefully, sooner than later, than via these calls.So thanks for being on the line.
Thank you, everyone. That closes off the call. If you do have any follow-up questions, please get in touch with investor relations, contact numbers all available on the website.Thank you, and have a good day.
Thank you.
Thank you.
Thank you. Bye, everyone.
Thank you, ladies and gentlemen, for your attention. You may now disconnect your lines.