Akzo Nobel NV

AEX:AKZA

Earnings Call Transcript 2022-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 point.

I'll hand it over to your host, Mr. Kenny Chae, Head of Investor Relations. Please go ahead.

[Kyung Chae, executive]

Thank you. Hello, and welcome to AkzoNobel's investor update for the first quarter of 2022. I'm Kenny Chae, Head of Investor Relations team. Today, our CEO, Thierry Vanlancker; and CFO, Maarten de Vries, will guide you through our results. We'll refer to the presentation, which you can follow on screen and download from our website at akzonobel.com. A replay of this website will also be available. There will be an opportunity to ask questions after the presentation. For additional information, please contact our Investor Relations team.

Before we start, I would like to remind you about the disclaimer at the back of this presentation. Please note this also applies to the conference call and answers to your questions.

I will now hand over to Thierry, who will start on Slide 3 of the presentation.

[Thierry Vanlancker, executive]

Thank you very much, Kenny. Hello to everybody, and a very warm welcome to the call.

Before we dive into the key highlights of the first quarter, we would like to, first of all, cover the impact from the ongoing conflict in the Ukraine and Russia. Our highest priority continues to be, obviously, the safety and well-being of our employees. We are in daily contact with our people and offering as much support as possible to all those affected in order to keep them and their families safe.

We have launched a company-wide donation matching campaign, where the company adds 3x the amount donated by employees. EUR 250,000 has already been raised in this first month that way, and the money has been already handed over to our partner, the Disaster Emergency Committee, providing humanitarian aid for the Ukraine. This comes up on top of the EUR 140,000 that we've donated already through other parts of the organization. So we are about EUR 400,000 so far and counting.

Based on 2021 reporting, our business in the Ukraine and Russia is rather limited. The 2021 revenue in the Ukraine was approximately EUR 14 million, and we have no operations there. And during Q1, we have suspended all business activities in the Ukraine.

The business in Russia represented about 2% of our total revenue in 2021. During the first quarter, the Aerospace Coatings activities, along with all new investments and all marketing activities, have been suspended in Russia.

The Q1 financial negative impact of the Ukraine-Russia conflict was approximately EUR 5 million on our operating income. Going forward and in line and as a result of the latest EU sanctions, the majority of our coatings business in Russia is being suspended, and the residual business will be locally operated, which we expect to decrease by approximately 70, 7-0 percent, compared to 2021. As you might suspect, we're evaluating the situation daily and also adjusted to the different ways of sanctions, and it may be that more of the remaining business in Russia could come to a halt in the next months mainly due to the increasing practical difficulties around supply of raw materials into Russia.

With that, let's turn to Slide #5. We continue to make strong progress in the first quarter, with double-digit revenue growth and pricing up by 17%, more than offsetting raw material and freight inflation for the quarter for both our paints and coatings businesses. Revenue was up 12% and up 10% in constant currencies, with strong revenue growth for both paints and coatings. In fact, this is the highest revenue first quarter for both paints and coatings on the record that we at least remember.

Adjusted operating income was down 25% to EUR 230 million due to the continued industry-wide supply constraints, the impact from the conflict in the Ukraine and the COVID restrictions in China. Total raw material and freight cost headwind of EUR 334 million for Q1 was more than offset by our pricing of a total of EUR 372 million. This resulted in a positive EUR 38 million net pricing versus raw material and freight inflation for the quarter. This is the first time since Q1 2021 that our pricing outpaced inflation.

We also initiated a new EUR 500 million share buyback program and have already purchased EUR 64 million worth of shares in March, and we announced a successful EUR 1.2 billion dual-tranche bond at favorable terms.

Now turning to Slide #6. We continue to make great progress in line with our Grow & Deliver strategy, delivering growth for the seventh consecutive quarter, with strong pricing of 17%, offsetting raw material and freight inflation for the quarter. And as said, it is one of the strongest, if not the strongest, revenue Q1 on record for both paints and for coatings.

Most of our regions and segments delivered strong revenue growth despite the ongoing industry-wide supply constraints. The past quarter marks the fifth consecutive quarter of delivering on our internal pricing and inflation forecasts. It's a good proof point for us of the maturity of our business planning and margin management processes that have been the key enabler in delivering the positive net pricing versus inflation for the quarter despite a very challenging -- remaining very challenging external environment.

We kept our focus on creating an efficient, high-performance company to all of this, having completed our planned PRISM SAP rollout in Asia. We continue to receive recognition for our efforts in the field of sustainability being awarded Platinum status by EcoVadis, maintaining the highest rating for 8 years. And we were also recognized as a European top employer.

Finally, we held our second global Paint the Future start-up challenge in further driving our innovative -- innovation pipeline.

Let's now turn to Slide 7, which summarizes how we view current demand trends in the markets where we operate. As we have communicated in early 2022, we saw strong sequential recovery for all businesses in South Asia due to the easing of the COVID restrictions, especially at the latter part of the first quarter. China, however, was impacted towards the end of the quarter as COVID restrictions led to approximately EUR 5 million OPI impact in Q1. We do expect a strong recovery in China once the restrictions are lifted in our paints' retail business.

Supply constraints continue to persist in the first quarter, with our total backlog increasing to around EUR 120 million, which is higher sequentially versus Q1 2021, where we had about EUR 100 million as a backlog. North America, especially continued to be the most constrained, while EMEA continued to see further signs of easing.

The underlying demand for paints continues to be strong in all regions. Paints EMEA delivered higher revenue than what was a stellar Q1 2021, and volumes remained higher than the prepandemic levels. We continue to see robust demand despite the recent geopolitical headwinds.

For our coatings businesses, demand for Industrial Coatings and Powder Coatings remains strong, although also here supply constraints continue to impact these businesses in the first quarter.

Within Automotive and Specialty Coatings, both vehicle refinishes and aerospace coatings continue to show sequential recovery.

For Marine and Protective Coatings, given the state of the energy and shipping industries, continued investments into relevant end markets are expected to drive further sequential recovery albeit that the Russian sanctions may continue to have an offsetting negative impact.

Slide 8 shows the volume progression for our paints and coatings businesses. Our global paints sales volumes continue to develop as we had expected, with lower Q1 sales volumes due to the normalized amount of do-it-yourself segment in EMEA, especially as compared to the first quarter of 2021. Compared to prepandemic level of the Q1 2019, paints volumes were up strong due to robust market demand and share gains. The year-on-year do-it-yourself volume distortion that we saw in EMEA that was still with us in the first quarter of 2021 is expected to be a much less relevant factor moving forward, with do-it-yourself demand having normalized as of Q1 2021 and now being about a year at mid-single digits above the first quarter of 2019 or the run rate of 2019 in general.

Our coatings sales volumes were down in Q1 versus prior year but higher than Q1 of 2019. Volumes were strong prior year, mainly due to increased demand from restocking as many economies started to reopen. Sequentially, coatings volumes were slightly down from Q1 2021, but that was mainly due to supply constraints, along with the impact from COVID restrictions in China and the Russian sanctions as underlying market demand was strong in general.

As has become our habit, we will zoom in on 2 of our business units in a bit more detail, starting with Powder Coatings on Slide #9. The growth in this segment, as you all know, is driven by several factors. Powder coatings provide clear sustainability advantages compared to liquid coatings because it's completely solvent-free and a very highly efficient in reusage. By lowering the curing temperatures for our products, we have been able to open up new markets, including coating wood substrates.

Despite continued supply constraints, our Powder Coatings business recorded its sixth consecutive quarter of year-on-year revenue growth in Q1. During this quarter, we opened a new powder factory in Hanoi, Vietnam, which is our 13th powder factory in Asia. This investment and added capacity is part of our multiyear investment program to support Powder Coatings' growth and our leadership in this industry.

AkzoNobel continues to lead to the industry's liquids-to-powder conversion. And during the quarter, we helped convert application for chassis to powder at a well-known manufacturer in China. We also launched our Interpon Redox 1-coat solution for the general industrial market, along with gaining 3 additional approvals at major electrical vehicle OEMs and battery manufacturers. Powder Coating is one of our crown jewels in our growth portfolio. And with increased investments, improvements in our product range and the lower curing temperature technology, we expect to maintain our clear leadership position in this growing segment.

Turning to Slide 10 for our Decorative Paints business in China. Growth for this business is supported by our sustainability offering, our geographic expansion within the country and our increased and improved digital ecosystem. We are the #1 player in the premium retail segment and delivered another double-digit revenue growth this past quarter despite COVID restrictions.

We continue to innovate and introduce leading products, including the successful launch of our solvent-free, asthma- and allergy-friendly paints. Our geographic expansion into Tier 3 to Tier 5 cities made further progress in Q1, where we expanded to 66 new cities and increased our reach by around 700 stores.

As a result of the market reset that we did in 2018 to get out nonvalue-adding volume, our project market exposure in our China paints business is less than 20%. And since then, we've been very selective with regards to what projects we participate in over the past years, taking into account the historically high risks on the receivables in the segment for the industry and our doubts back then and justified about the longevity of some of the practices. And within the project segment, a direct exposure to nationwide property developers is immaterial. That means less than 2%. So we've been sheltered what's been going on in the real estate market there.

With that, I will now hand it over to Maarten, who will share more about our financial results from Slide 12 onwards. Maarten?

[Maarten de Vries, executive]

Yes. Thank you, Thierry, and hello, everybody, on the call.

During the first quarter, reported revenue was up 12% versus prior year and up 10% in constant currencies. We delivered strong pricing of 17%, which was sufficient to offset the impact of raw material cost and freight inflation for the quarter. Mix was negative 1% in the quarter, mainly due to relatively stronger paint sales in South Europe. Volumes were 7% lower as a result of continued supply constraints, normalized DIY demand for paints EMEA and COVID resurgence in China.

Adjusted operating income decreased 25% to EUR 230 million as a result of positive net pricing versus raw material inflation, offset by lower volume, along with approximately EUR 10 million negative impact from the conflict in Ukraine and the resurgence of COVID in China. This resulted in a result on sales (sic) [ return on sales ] of 9.1% versus 13.6% in the first quarter of last year. Adjusted operating income excludes the impact of identified items, which had a net positive impact of EUR 2 million for the first quarter. Adjusted EBITDA was 19% lower at EUR 317 million.

So moving over to Slide 13. I'm pleased to report that we achieved positive net pricing versus raw material inflation for both paints and coatings businesses in the quarter. Pricing of EUR 372 million was enough to offset EUR 334 million raw material and freight inflation, marking the first positive quarter since Q1 2021. Lower volumes resulted in a negative EUR 50 million impact, mainly due to continued industry-wide supply constraints and normalized end-market demand in paints EMEA. Currencies had a minor effect of positive EUR 3 million, while mix was minus EUR 20 million, mainly due to stronger sales growth in our South European paints business.

Operating expenses and other one-offs were EUR 48 million, higher than the first quarter of 2021. This includes higher supply chain costs driven by the ongoing supply and logistic challenges, higher IT investments and the impact from the conflict in Ukraine, along with some positive one-offs in the first quarter of 2021.

As expected, the industry-wide raw material cost inflation continued in the first quarter. For Q1, raw material and freight inflation were EUR 334 million versus same period prior year. Combined with a EUR 38 million inflation in the first quarter of '21, the total inflationary impact over the 2-year period is EUR 372 million. For the second quarter, we expect further inflationary pressure, with an adverse impact from raw material and freight inflation between EUR 290 million and EUR 320 million versus the second quarter of 2021. This is a lower value sequentially versus Q1. However, combined with the EUR 128 million inflation in the second quarter of '21, the impact over the 2-year period is expected to be greater than EUR 420 million.

As indicated in our outlook statement, we expect raw material cost inflation and supply constraints to gradually ease during the second half of this year. At the same time, we delivered 17% pricing in the first quarter, higher than previously expected. As a reminder, Q4 pricing was 12.5% with December at a 14% run rate. We expect the second quarter pricing to land between 14% to 16% when comparing to the second quarter of 2021.

In the previous cycle, after pricing was driven to offset raw material cost inflation, we saw margin expansion, with pricing holding up and raw material costs started to ease. In the current cycle, we have responded with stronger and faster price initiatives in light of the magnitude of the raw material cost inflation. Having been negatively impacted for all of 2021, we have now reached the inflection point with a positive net price and mix versus raw material costs and freight in the first quarter of 2022. As indicated in our outlook statement, we aim to continue to offset raw material and other variable cost inflation, including freight, with pricing initiatives.

Now moving to the next slide with the results for Decorative Paints. Reported revenue for paints was 8% higher versus the first quarter of last year, with pricing of 13% more than offsetting lower volumes of 7%. For EMEA, revenue was up 1% and flat in constant currencies. Pricing initiatives were enough to offset lower volumes as a result of normalizing market demand and -- in the DIY segment. Mix was negative in EMEA, with relatively stronger revenue from South Europe.

Revenue for South America was up 23% and 17% in constant currencies. Revenue growth was driven by strong pricing initiatives.

In Southeast Asia, strong pricing initiatives offset lower volumes, partly due to the impact from COVID-19, with India and Vietnam showing strong revenue growth in the retail segment. China showed significant revenue growth supported by both pricing and volume growth in retail, partly offset by lower volumes for the project segment. Overall, pricing for paints stayed ahead of raw material and freight inflation for the quarter.

Despite the strong revenue and pricing performance and underlying demand being reprised, the combination of lower volume, supply constraints and COVID restrictions in China resulted in adjusted operating income, 27% lower at EUR 105 million and a return on sales of 10.4% versus 15.5% for the same period last year.

Now over to the results of Performance Coatings. Reported revenue for coatings was up 14% year-over-year and up 12% in constant currencies. Volume for coatings was 7% lower, mainly due to supply constraints, along with COVID restrictions in China impacting all businesses at varying degrees. Revenue growth was driven by pricing initiatives at 19%, while mix was flat.

For Powder Coatings, revenue growth was driven by strong pricing. Underlying demand for Powder Coatings remained strong but was impacted by supply constraints, especially in North America.

Marine and Protective Coatings showed double-digit revenue growth driven by strong pricing. Marine and Protective Coatings was also materially impacted by supply constraints.

Revenue for Automotive and Specialty Coatings was 12% higher, mainly due to pricing initiatives despite slightly lower volumes. Vehicle refinish and aerospace continues to show strong recovery, while automotive is still impacted by supply constraints.

And then the growth in Industrial Coatings was driven by pricing initiatives, with revenue growth in all segments, especially in packaging and wood even though Industrial Coatings was also impacted by supply constraints during the quarter.

Overall, pricing for coatings was up 19%, which offset the raw material and freight inflation for the quarter. Adjusted operating income was 21% lower at EUR 149 million and return on sales at 9.8%, mainly due to lower volumes and supply constraints, along with the impact from the conflict in Ukraine and Russia and COVID restrictions in China.

Now turning to Slide 18. Operating working capital for the first quarter continued to be impacted by higher raw material costs and supply constraints. Physical inventories value increased due to raw material cost inflation and supply constraints. This resulted in operating working capital as a percentage of revenue at 16.5% versus 13.4% for the same period of last year. Normalized for raw material cost inflation, working capital would have been 2% lower, around 14% of revenue.

Free cash flow was negative EUR 159 million for the quarter due to the increase in working capital, along with lower EBITDA for the quarter. Capital expenditures for the quarter was -- were EUR 57 million. We are investing in growth, the optimization of our asset footprint and ongoing integration of our ERP systems. Going forward, we expect CapEx at approximately 3% of revenue.

The net debt EBITDA leverage ratio was 1.9x at the end of the first quarter, in line with our target leverage ratio of net debt to EBITDA of 1 to 2x. We remain committed to retain a strong investment-grade credit rating.

Moving now to Slide 19. Adjusted EBITDA was 19% lower for the first quarter, mainly due to lower volume despite delivering positive net pricing versus raw material and freight inflation. The first quarter adjusted earnings per share was down to EUR 0.86 per share. Delivering on our capital allocation priorities, we initiated our new EUR 500 million share buyback program in March, with a share count reduction of approximately 11 million shares versus the same period prior year.

And now overall, over to our capital allocation priorities, we are executing consistently on our capital allocation priorities. We are investing in organic profitable growth, with roughly 3% CapEx, and we have a stable-to-rising dividend policy. We are executing on our bolt-on acquisition strategy and making sure that they are value-accretive, and we continue to do modular share buybacks. This is all in the framework of a leverage ratio of between 1 and 2 while retaining a strong investment credit rating.

And now back to Thierry for the concluding remarks.

[Thierry Vanlancker, executive]

Thank you very much, Maarten. To summarize, we feel pretty good by delivering 12% higher revenues in the first quarter, driven by strong pricing of 17%. And we feel even better with the fact that it fully offsets the impact of raw material and freight cost inflation for the quarter.

With our Grow & Deliver strategy, we target to grow at or above our relevant markets and continue to build on our strong foundation. Trends differ widely per region and segment, with raw material and freight inflation and supply chain constraints expected to gradually ease during the second half of 2020 (sic) [ 2022 ]. And going forward, we aim to stay ahead of the raw material and freight inflation with pricing.

Currently, market uncertainties have increased due to the sanctions on Russia and the resurgence of COVID-19 in China. But assuming there are no further significant market disruptions, we aim to deliver EUR 2 billion adjusted EBITDA for 2023.

And I'm now handing it over to Kenny for information about upcoming events and the Q&A session on Slide 23.

[Kyung Chae, executive]

Thank you, Thierry. Before we start the Q&A session, I would like to draw your attention to some of the upcoming events shown on Slide 23. Tomorrow, on April 22, we will be holding our Annual General Meeting of Shareholders, which will be held virtually. The ex dividend date of our 2021 final dividend is on April 26. The record date is on April 27, followed by the payment on May 4. And we will publish our second quarter report on July 20.

This concludes the formal presentation, and we'll be happy to address your questions. Please state your name and company when asking a question, and limit the number of questions to 2 per person so others can participate.

[Operator]

[Operator Instructions] Our first question is from Mr. Mubasher Chaudhry from Citi.

[Mubasher Chaudhry, analyst]

I just wanted to focus a little bit on the volume decline. Can you talk a little bit more about -- or split between supply chain and COVID-related and normalization related in that negative 7% for the first quarter? And related to that, I think in the slide deck, on Slide 8, you've given some thoughts on paints volumes. Do you expect that paints will continue to normalize towards the 2019 levels as we progress through the year? Or do you expect to kind of more growth at a high level? Because previously, you did talk about kind of a new segment of DIY and decoratives, getting involved and redecorating -- yes, redecorating and, therefore, creating a higher level of demand. So I just wanted to get your updated thoughts on that.

And the second question is more around the COVID restriction in China, if you could provide an update there and what the potential EBIT impact could be should the lockdown last for the whole of second quarter.

[Thierry Vanlancker, executive]

Yes, Mubasher, thank you for your questions. In fact, on the volume, we are pretty positive about the volume that we achieved because the underlying demand in all the segments continues to be quite strong. If you look at what we delivered, you have to take into account that, in fact, our backlog of material we could not supply, in fact, went up. So if you talk about the 7% volume, there is at least 30%, 40% of that is stuff that we had orders for but could not supply. So that's an important thing note.

Now let me then go back between paints and coatings. There's 2 impacts, in fact, on volume that we had, and in fact, they will disappear or have disappeared or were disappearing by March in the quarter. One was Southeast Asia was a bit off on volume, but that was mainly through quite a slow start in January, February because of the cases of Omicron in that region. Now when that was released, sales came back very strongly in March. So that was actually more a Q1 effect.

For what EMEA is concerned for deco in paints, it is more a question of the exorbitant quarter we had in Q1 2021. People came out of COVID, and there was a restocking across a number of segments but very visible in do-it-yourself in EMEA. By the way, that then returned into the second quarter a correction on that because it was a bit overenthusiastic. Thus, specifically do-it-yourself, in EMEA, there was -- there's a restocking.

So just to answer your question around the normalization, do-it-yourself in EMEA has not normalized in the first quarter. It has normalized as of the second quarter of 2021. It continues to be 4%, 5% above 2019 numbers. And frankly, we see no signs of downtrading because of pricing. On the contrary, we have the impression that actually it works somewhat in our favor, with the young do-it-yourself people showing up that they want to have quality products to work with. So high confidence on the paints section. Again, that is more the comparison, which was a completely counter seasonable at normal first quarter in 2021 at that moment of time.

If you ask me to split up between the differences, I would say, supply chain, COVID in China and the normalization, I haven't done exactly the split on it, but it's probably out of that 7%, and I'm looking at you, Kenny, here because you probably did the math. The normalization is probably 1%, 2% in do-it-yourself on the total volume for the company. But you can probably confirm that afterwards. And then the rest of it is actually split by, frankly, not being able to ship, whereby the COVID in China is actually in the same category. So it is there, I would say, 50-50 on what is the remaining part of that.

It is important to note, however, that the backlog for our products has increased. So the demand is definitely there. It's a question of getting either raw materials in but, increasingly, getting it on shipped to our customers from our elements.

The COVID-19 China impact, let me do an introduction, and then Maarten, you can probably put the numbers around it. The COVID situation in China, of course, started to escalate in the end of the first quarter and then through April. What we do see, however, is that it's mostly in the north and northeast in Jilin and in Tianjin that is normalizing as we speak, which is pretty important. And in Shanghai, for example, in our own case, we have 3 sites in the Shanghai area. Three of them have been released this week for production, albeit at a reduced capacity and people have to stay on the site and have to stay in the bubble, et cetera.

Our team locally is expecting that this would be getting back to normal by somewhere in the mid of the second quarter, so in effect, that is around now. And that would then probably recover. So that is the mental picture that they have, recovering even in the second quarter.

But maybe, Maarten, you can then put more numbers around it on what we have taken as a view there.

[Maarten de Vries, executive]

Yes. So first of all, as mentioned, Q1 impact was EUR 5 million on the adjusted operating income line. And it was really the impact of the latter part of Q1. The question now in Q2 is really, yes, we see an impact in the first half of the second quarter. But the question is how does the rebound looks like for the latter part of the second quarter and how that will compensate. But I would say that the impact, what we've seen in Q1 and if you kind of forward it into Q2, I would say that it would be probably double or maybe a little bit higher than what we've seen in the first quarter.

[Thierry Vanlancker, executive]

Again, I want to stress that in the context that it may take longer to recover, but we see the first signs at least that it may -- maybe somewhere in the next 1 or 2 weeks actually gets to a more normal situation.

Now Mubasher, did you have a third question?

[Mubasher Chaudhry, analyst]

No, no, that was it. That was it. I'll stick into the 2.

[Operator]

Our next question is from Mr. Matthew Yates from Bank of America.

[Matthew Yates, analyst]

Maybe just to go on Slide 13 with your profit bridge. You called out the EUR 48 million of extra OpEx there. Can you just comment a little bit more about how much of that is, what I would call, cost inflation versus the more kind of deliberate structural investments you're making in the business in keeping with your kind of pivot to more of a growth mantra?

The second question would just be generally around raw materials. I mean, last year, you highlighted a vast number of force majeures that forced you to scramble in the spot market material. If I'm understanding your comments around backlog, it suggests that supply chains have perhaps got worse, not better. I'm sure that's not actually specific, but can you share any thoughts on how and when you think we may get more reliable supply chain firstly to fill those pent-up volumes and, secondly, hopefully, get some relief from the cost inflation side?

[Thierry Vanlancker, executive]

Yes. Thank you, Matthew. Let me handle the second question and then for the first one, I mean, then maybe, Maarten, you can definitely chime in on that.

On the force majeure, the effect of force majeures were definitely improving during the first parts of the first months of the year, and there was an ongoing trend. So you actually -- I will talk probably more around the raw materials. We do see on the production side, an improvement. What has happened is in the last month and mainly driven by the China lockdowns is that, that created a number of force majeures within China and then with shipping situations, creating some force majeures or those waiting for the raw materials, mostly at our supplier level, I have to say. They were waiting for an input to make that product that then we would take from them. So it was a bit of a resurgence.

So all in all, I would say, if you look at the situation, it is -- at this moment of time, it's about similar as what we discussed when we had our year-end results call, but it was -- but it's more of an uptick based on the COVID resurgence in China, whereas for the rest, it was, in fact, on a normalizing pathway. So we do see it more as a temporary flare-up again and getting more normalized.

Overall, the whole other parts of it, maintenance and all sorts of other stuff, that has normalized. And I would say around the world, the availability of raw materials, we do see that normalizing. It is, in fact, getting more of the shipping it, sometimes from A to B. That's specifically where the China situation became a more temporary situation. But we are guardedly optimistic on where things are going.

And that leads in, I think, Matthew, in your question around the OpEx. Part of it indeed was an intended OpEx increase. But in fact, part of the explanation sits indeed in the wild raw material environment, and Maarten, you can probably put some numbers around it.

[Maarten de Vries, executive]

Yes. So if you look at the EUR 48 million in the bridge because that's where you're referring to, I think there are a couple of elements to mention. First of all, it is indeed the supply chain in both manufacturing and warehousing. We've seen in the first quarter quite a number of inefficiencies given the volatility and all the constraints in the supply chain. So where we normally -- and you were talking about inflation, where we normally offset inflation with all our efficiency initiatives, that was certainly not the case in Q1. In fact, we've seen negative productivity with higher overtime and constantly changes in the schedules in manufacturing, which led to quite some extra cost but similarly in our warehousing operations.

So that is an important bucket, which, of course, given normalization of raw materials and the constraints should also normalize again from a cost perspective. That's one.

Secondly, we are investing more in OpEx from an IT perspective. That is, first of all, because we drive more Software-as-a-Service initiatives versus CapEx. That sits not only in our ERP rollout but also in our advanced planning initiative. In fact, Karen-Marie has talked about it when she talked about one of the deliver initiatives. That's her whole demand planning and supply chain planning initiative. And third one is also in IT is a procurement where we drive a digital procurement suite initiative. So we are, by design, investing more in IT to support our deliver initiatives.

The third element is Ukraine. You've seen that we had impact of Ukraine. That sits also mainly in the OpEx as well as some positive one-offs, which we had in Q1 last year, which then, of course, this time is a negative impact. But these are the main buckets. And again, the most important message is here from a manufacturing, warehousing and the [ intercoast ] supply chain cost, that should normalize, and we should go back to the normal rhythm. That gives some bit of...

[Thierry Vanlancker, executive]

And Matthew, just to finish it up, I mean, the one thing, and then, I mean, the integrated supply chain team is all over that. And if they're not over it, then Maarten and I are all over it. We also want to make sure that the, I would say, the chaos management on the raw material side that, that doesn't become an ongoing justification for a cost structure. So we are all over that collectively to drive that back now that we see some normalization arriving at the horizon to drive it back to the target numbers we had in mind, ASAP.

[Operator]

Our next question is from Mr. Charlie Webb from Morgan Stanley.

[Charles Webb, analyst]

Maybe first just on the volume picture, minus 7 in Q1. As we think about Q2 and you think about those kind of various factors or perhaps you get confident in what we had in Q1 on the DIY side in Q2 but then, obviously, kind of the ongoing lockdown restrictions may be weighing a bit more in China, how do we think about volumes for the second quarter? I mean are we talking should be less negative than what we see here in the first quarter year-on-year, as in we should see somewhat of an improvement, whether that's just easier comps or whether that's on the DIY side or just even perhaps raw material availability improving? So just first question on that.

And then second question, just on the raw material kind of price dynamic, obviously, very positive now that you're kind of running ahead or over recovering raw materials. How do we think about that through the year when you look at the raw material basket? Is it a case that we're kind of just continuing to kind of offset or a little bit more for the time being until a point in time when raw materials kind of fall away? Or is it a case that we'll continue to put price measures through so that we recover the lost, I guess, inflation that we saw in 2021? Just kind of a reconfirmation of that would be helpful.

[Thierry Vanlancker, executive]

Yes. I mean let me try to answer both questions. On the volume for the second quarter, I want to come back on the volume for the first quarter. It is a case of standing -- like if you take pictures of standing next to the most good-looking person in the group, then you always don't look too good. It is the first quarter of 2021 that was a complete outlier. If you compare the volumes of what we did in the first quarter of 2020, which was just before COVID, by the way, if you compare it to the first quarter of 2019, and that's what we try to put into our deck, it is, in fact, a very strong quarter for all of the businesses that we have here. And in fact, if you look at the first quarter of the seasonality in paints, it makes it difficult to do something sequentially, but the first quarter for coatings was totally in line with the fourth quarter of 2021. So in that sense, I think it's a normal strong quarter. Also earnings-wise, by the way, the first quarter of 2022 is if you take extraction of the first quarter of '21, it is our strongest bottom line quarter that we had in a long time.

So just on the second quarter, again, the quarter 1 2021 was the outlier. For the second quarter of 2022, you might expect a much lower delta versus what the second quarter was in 2021 because that was a quarter that actually was very much normalized already. So I think we'll see something there in line, and then it is dependent on how quickly does China come back online, et cetera, et cetera, but it should actually be relatively in line in -- volume-wise, with what the second quarter of 2021 was.

On the raw material pricing dynamics, as Maarten explained in his chart, we still see raw materials edging up, but we are ahead of the curve. So we are, in fact, on the mountain. We now basically are ahead of what the slope is doing. So definitely, in the second quarter, we want to continue that lead. In fact, answering your question, we are still putting prices up here and there. In certain segments, we have significantly surpassed our raw material inflation or our raw -- variable cost inflation. In other segments, we still have to catch up, and we still see the raws going. So there is still a dynamic element of putting our prices up.

Now what do we expect for the raw materials? Now every time we talk about it, something happens in the world that actually throws it off a little bit. But unless there is another biblical plague coming in somewhere, what we do expect in the -- and we do see the signs for that, that in the second half of the year, you would see an easing of availability, also to some extent because the macroeconomic activity may be less exuberant than people have found. And at the same time, you do see here and there some inventories being built. Actually, in fact, also for Chinese suppliers, there is inventory in Europe and in Latin America that actually alleviates some of the bigger swings. And yes, we do get here and there the first suppliers showing up to do, can we have a deal for supply, et cetera, et cetera, towards us. So that shows that the dynamic we had in mind is actually evolving in the right direction.

So we will definitely there -- Charlie, the answer to your question is not only stay ahead of where we are but we have all hands on deck to have the margin expansion that has been part of the industry, but also, we think we deserve to have that happening in the second half of '22 and then into '23.

Does that answer your question, Charlie?

[Charles Webb, analyst]

So when we think about that raw material recovery of actually what you lost in 2021, should we be thinking about that in over the next 12 months being the kind of period that you think is appropriate from today, perhaps through to Q2 of 2023? Is that the right kind of time frame that you would look to recover the raw materials you lost or the inflation that you [indiscernible]?

[Thierry Vanlancker, executive]

I would love to say yes. Yes, I would love to say yes, and then probably, Maarten, would kick me on the table, so be careful what you say. But to be very honest, there's so many things that are happening, I mean, the COVID resurgence in China, the Russia situation, et cetera that it's not easy to predict. But what we do believe and I think, collectively, here are very convinced about that the margin will start widening up as of the second half of the year. And we have all the systems in place, the ones that we had to get our pricing ahead of what the curve is. We have all the systems in place to really have the margin expansion be as fast and as wide as it's possible. So there, we are fully convinced on that.

So I would refrain to put a specific scenario around it, but let me put it this way that we are more than guardedly optimistic for what the trend would be in the second half of the year.

Now we've also been saying that in the distribution type of businesses, we do expect to hold on to most of the pricing work that we've done, if not of all of it. And then you have in the other 40%, more the B2B and, sometimes, big B to big B. There, I mean, it will become to maintain the margins as we have them right now, et cetera, in line with what the raw materials do. But there is a -- I would say, Maarten has regarded optimism on what the trend line would be on the margin expansion as of the second half of the year.

[Maarten de Vries, executive]

Yes, and I think there is a certain proudness on our side on how we have executed this and that we are now at a situation to truly offset raw material as well as freight inflation. So we are -- the machine is really -- is running very well in terms of margin management.

[Thierry Vanlancker, executive]

Does that answer your question, Charlie?

[Charles Webb, analyst]

Yes. That's brilliant.

[Operator]

Our next question is from Ms. Georgina Fraser of Goldman Sachs.

[Georgina Iwamoto, analyst]

The first one is just kind of looking for a big picture on what's been going on in raw materials. So I'm thinking if I was an alien arriving from another planet, how would you explain what's been going on in paints and coatings raw materials over the last 2 years? Is it fair to think that during 2020 and 2021, it was pandemic supply constraints that were driving chemical prices well ahead of oil price and now that the oil price is catching up. So are the risks going forward from here inflation from the oil price but more likely deflation from the supply chains easing?

And then my second question is more medium term on Performance Coatings. We're starting to see green shoots of investment. So lots of CapEx spend coming through across European industrial sectors, especially in oil and gas. What would a pickup mean for Akzo's Performance Coatings business from a better European industrial CapEx cycle?

[Thierry Vanlancker, executive]

Yes. Thank you, Georgina. Thanks for the questions. On the big picture, if you were an alien and you came to the planet at this moment of time, you'll probably get back in the capsule and leave in a hurry, I would say, but that's another story. But on the raw material situation, I would say you're indeed correct. In 2020, I think all of our suppliers have winded down their capacity and then were somewhat surprised on the -- as we all were probably, on the rebound of the market and the restocking and, therefore, then getting into force majeures, et cetera.

So you are right, Georgina. There's 2 opposing trends, I would say, in the raw material costs. One has been -- and that's going to be in the second half of the year. One, and I think it's -- we're now at about, what is it, 35%, 37% increase in raw material, I mean, somewhere between that or, yes, even closer to 40%. So let's say, the 40% for the sake of the argument, the 40% of increase in the raw materials has been scarcity-based because there was not enough and people were desperate to get it, either because it wasn't produced or it couldn't get on time to logistics to the buyers, in this case, the paints and coatings industry. That is the 40%.

There, you really see, and I've said it before, the availability of the products at the producer is getting much better. It's now more the shipping and the inertia to get it to where it is. At the same time, so that would be easing, yes, you will have an offset and then -- for us then as a negative sense because the energy cost may be higher. But frankly, even in wild cases, that would be in the high single digits to maybe low double-digit impact. So that's why it actually doesn't change in our mind, the downward slope of the raw material cost curve. It does change the degree of the slope to some extent, depending on how wild oil would be doing.

But the overwhelming scarcity cost in raw materials is so big that it has to normalize. And again, as I've indicated, we do see the first suppliers actually reaching out on -- in that spirit on what they see happening for the second half of the year.

Does that answer your first question, Georgina?

[Georgina Iwamoto, analyst]

Yes. That's brilliantly helpful.

[Thierry Vanlancker, executive]

Yes. Thank you. On the capital investments, I'm not sure if I can give you an exact number on that because there is this pluses and minuses. Of course, capital investment would have more of a bigger -- first of all, in coatings. But it would probably have an overdimensional impact in our Protective Coatings business, the way that you phrased your question. And there are pluses and minuses on that.

We think it's going to be a plus indeed on the investment cycle, plus the disentangling of some of these flows to bring it back much more into Europe. So that's definitely the case, not only on fixed assets but also on floating assets to bring liquid LNG, et cetera, to Europe, which, by the way, is a forte of our business. But at the same time, that will also be balanced with projects in Russia that simply are not happening anymore and where we are, either we can't or we don't want to participate anymore in those projects. So that's going to be counterbalanced.

But I think overall, that would be a positive. I think I owe it to you, Georgina, to Kenny to probably come a bit more of a quantification because I would make -- I would be making up a number at this moment of time.

There's also, I think, one of the elements I would like to say that the fact the -- at the same time, the Green Deal don't underestimate a positive impact on that, both on our deco business. Again, all the -- we're not an insulation material, but all of movements end up by somebody taking a brush or a roller to put it back into shape. And you see that happening specifically in places in Southern Europe right now. In Italy, it's a very constrained market for deco because there is a real ongoing strength because of the Green Deal. And secondly, in what is electrical vehicles, the consumption of powder coatings in batteries, the wind turbines, et cetera, are businesses that continue to do extremely well in our portfolio.

Does that answer your question, Georgina?

[Georgina Iwamoto, analyst]

It does.

[Operator]

Our next question from Mr. Chetan Udeshi from JPMorgan.

[Chetan Udeshi, analyst]

Yes, Chetan here. A couple of questions. If I go back to the point Maarten made about the general OpEx inflation outside of raw materials and freight cost, can you give us some idea of how should we think about that for second quarter as well and possibly for full year 2021? And how should we think about that number, incremental investments versus the EUR 200 million of net cost savings that you guys flagged during the recent investor update earlier this year by 2023, I think, it was? That would be useful.

And the second question, do you have any visibility at the moment on how the mix might look for second quarter in general?

[Thierry Vanlancker, executive]

So Chetan, thanks for your question. On the first one, on the OpEx, I think Maarten can put the numbers around it. But I want to stress that the largest part of the OpEx -- so by the way, in our targets for 2022, we had an increased OpEx coming out of the period we had, and part of it is what Maarten explained. Secondly, the run-up in OpEx was very much in our supply chain and our manufacturing network to be able to get to some sort of service levels to our customers.

Now in the second quarter -- and that's what I'm working towards, in the second quarter, we definitely want to start making a dent of it. But in the second quarter, things are actually not very stable yet. So you have to do certain things or certain agreements for your customers before you can do that. So I think the biggest impact of the resetting it back to something that resembles normal is actually going to be more in the second half of the year.

Now Maarten, maybe you can put some brackets around that, but...

[Maarten de Vries, executive]

No. So exactly what Thierry says. I think you still see an impact in the second quarter. And certainly, in the second half, we get more to a normalized situation. In the meantime, of course, we are executing on all our deliver initiatives, which will also -- going forward, should start to bring the required savings in. That's partly in this year and mostly also visible in 2023. But to your point on the second quarter, we will still see some dynamics in OpEx given the situation we are in.

[Thierry Vanlancker, executive]

Yes. And mix-wise, Chetan, I think the mix will be for the second quarter, which is always a gamble between different businesses, different geographies and different distribution channels with all the uncertainties that are in. But we do expect the mix to be somewhat similar to what it was or largely similar to what it was in the second quarter of last year.

[Operator]

Our next question is from Mr. Alex Stewart from Barclays.

[Alex Stewart, analyst]

Your slide on the volumes relative to 2019, Slide 8 in your presentation pack. So it looks like if I just add up the last 3 years, it's roughly 8% higher in Decorative Paints compared to 1Q '19. The equivalent figure in 4Q '21 was roughly 3%. So at the end of last year, you were running volumes 3% higher than 2019, and in the first quarter, it was 8% higher than 2019. Can you talk about what the incremental step-up was between the fourth quarter last year and the first quarter '20 that would result in that because that was quite a meaningful improvements given Southeast Asia was still sort of down year-on-year? Any comments on that would be interesting.

And then also, I know it's a very crude calculation, but if I take your volume chunk in the EBIT bridge and divide it by the volume chunk in the revenue bridge, it looks like the drop-through was a little over 30%, which is considerably lower than what you talked about in the past. I'd be interested to know if there's any specific factors driving that and whether that you started to continue would be [indiscernible]?

[Thierry Vanlancker, executive]

On the second question, maybe let's say -- because it was not easy to understand, but the second question, I think, is just the margin, if you could [indiscernible].

[Maarten de Vries, executive]

So on the second question, nothing special to mention here, to be honest. But again...

[Thierry Vanlancker, executive]

But I think it's also because of the pressure, of course -- the margin pressure there, of course, while the drop-through then gets lower than that because the quality of the business, given the raw material situation is just lower. So I think that explains it, I would say.

[Maarten de Vries, executive]

Because we are -- again, if you compare it to last year Q1, we are comparing to a quarter which was -- which had a number of dynamics, but the pricing versus raw material was still pretty normal. And now in this quarter, we have a completely different situation, of course, in terms of pricing versus raw material but also from a volume perspective, specifically in deco, as we mentioned earlier.

[Thierry Vanlancker, executive]

Now your first question, was that referring to paints?

[Alex Stewart, analyst]

Yes. Sorry, the Decorative Paints. So if I look at Slide 8 in your deck, you've given volumes versus 2019. If I just compare the Q4 '21 and the Q1 '22, it looks like there was a big step-up in volumes relative to 2019. I'm trying to understand what's behind that. But yes, just in paints, I'm talking about.

[Thierry Vanlancker, executive]

Yes. Okay. Well, okay. So first of all, the paints is, indeed, is on a roll. And in fact, we're trying desperately to indicate that no, after the COVID, we were not going to fall off a cliff because of the dynamics. I think, in fact, that when COVID was going to be over, you should not underestimate that the rest of the world, excluding do-it-yourself and Western Europe, was significantly down because of COVID. So if I go around the world, China is on a complete roll. I mean that's -- we saw that in the chart that we have. In fact, that business, if I look at where we are, our premium business, that's the Dulux business, up 55% in the first quarter versus 2022 versus the first quarter of 2021.

By the way, volume-wise, we're getting very close to where we were in 2018, but it's not any more with fillers and with nonvalue-adding products. It's actually a high-margin product. So that team is on a roll. Can't say enough on what they do there in growing Dulux. So China is a big factor on it.

The same is in Southeast Asia. India, in fact, we also -- it's kind of a little bit in the shadow, but it is, I would say, the geographic expansion #2, so significantly up. And if I don't -- then go back, Brazil and Argentina have been doing well, but that's probably more a pricing margin and, I would say, a more gradual increase versus 2019 in volumes. They've gained market share, but that market has been ups and downs. That is typical in those segments.

If you go to Europe, and I think we put the line in there, our EMEA business, if you go back to 2019, has been constantly growing and has been gaining market share in key markets. And I think we've commented on that before, be it the U.K., be it Benelux, be it Southern Europe, we've been gaining market share. It's step by step because it's a distribution business, but it's actually been doing quite well.

The other element in there, which is minor, if you look at a global scale, and you know there is a slight impact of M&A, but that's probably more on a percent level globally more than anything else.

Does that answer your question?

[Alex Stewart, analyst]

Yes.

[Operator]

Our next question is from Mr. Peter Clark from Societe Generale.

[Peter Clark, analyst]

It's a question for you, Thierry, the first one. You seem very confident on demand. If I look at European deco, no downtrading on DIY. Just wondering on the trade business as well, I presume you're still pretty confident with the momentum you're seeing in markets like the U.K., where clearly, there's an inflation bomb going off basically, but the trade paint business there. And then you mentioned China a lot, obviously, and the strategy seems to be more focused, obviously, around these 37,000 outlets you now have through independents, et cetera. Just wondering on the Dulux stores you used to have there. You used to have a handful of stores that were sort of prestige Dulux stores in key locations. Just wondering if you still have those and the number of those and the sort of strategy around that as well.

[Thierry Vanlancker, executive]

Yes, Peter. Okay. On the inflation and the impact of the market, we don't see that. And we don't -- if we talk to our channel partners, we -- they don't expect, in fact, a significant -- well, first of all, we don't see any downtrade. We don't -- we also see not it reducing. In fact, the trade business is doing quite well, and that was the one where there was pent-up demand, by the way, because that has been in COVID. It was actually at a slow burner on there.

So all of the partners we have in there, all of the projects that are ongoing and you probably, specifically, here talk about Europe, that seems to be ongoing. I would like to point out though that in the investor update, when we refer to the market growth, it was one of the reasons why we took a haircut on the Orr & Boss numbers. In fact, interesting enough, that consultant has reduced their numbers. They're still above where we had our basis for our review because you just could see things happening. So that is very -- I mean, I would say, the forecasting and the understanding of the market, I think, was there to see that it's -- that, that was -- and could be a potential issue in that.

Now on the inflation, we don't see that, and in the fact, we went back. This is a bit of a weird situation with inflation. By the way, the inflation bomb is not only in the U.K., I'm afraid. It's across many regions. But that has had very little to no impact, to be honest, on the deco business in the past. So we'll see if this is also happening. We don't -- we have -- as you might suspect, we think very close on that, but we don't really necessarily expect that to have an impact.

Secondly, on China, we do have the flagship stores. The problem, I think, in the past was that the flagship stores 5, 6 years ago were the ones that the business was catering towards, but that was only a minor part in the cities. We still have those, and they actually act very well, I would say, more as an image builder and as, I would say, a PR or positioning of the products, as a premium/European product, especially because the team in China has done an extremely good job to position it as the well-being brand, the one you can trust for indoor qualities, et cetera. So they have a whole range of products that are doing extremely well in the market on that. So we've done so that we kept. They're doing, as before, I would say, the business has kept up pretty well.

But of course, the big changes that we show there, the 55% I'm talking about -- by the way, if you go back to 2019, our Dulux brand is up almost 35% versus where it was in 2019. We have mid-tier brands there up about close to 20% versus 2019. That has come much more from the geographic spread that is still ongoing. And here, this is -- Peter, to summarize it, this is now growing the business with the margins that we deserve. So it's actually a very -- it's a very invigorated story. Unfortunately, our colleagues are now sitting at home in China because of the lockdown. But I'm sure that once they get released, literally, they will continue to part on it.

So it's a combination in the Tier 1, Tier 2 cities, it's still more flagship stores, et cetera. And then outside, it's really getting the distribution geographically expanded.

Does that answer your question, Peter?

[Peter Clark, analyst]

Yes, it does. And all this is closing in the next week or so, I think. Is that right, Grupo Orbis, the deal?

[Thierry Vanlancker, executive]

I would say any day now, Peter.

[Operator]

Our next question is from Mr. Jaideep Pandya from On Field Research.

[Jaideep Pandya, analyst]

The first question is on 2023 actually. So you're on a EUR 2 billion EBITDA number. And I want to focus really on marine and protective. Could you just tell us like what is happening when you think about the order book in marine and protective with regards to the recovery, given pretty much all of your customers, be it LNG carriers or dry bulk carriers or what have you are making ridiculous free cash flow yields and dry-docking has been postponed in every part possible because of shortages? So what is with related to the pent-up demand on the maintenance side? And then what is related with the newbuild deliveries in 2023? So just want to understand what do you see in terms of your outlook for marine and protective in 2023? That's my first question.

And the second question is just to really understand the raw material shortages that you were describing. Firstly, on what materials are still short? I mean you heard a lot about the silicon chain, PVDF, for instance. So I know you and your peers like to talk about these knickknack raw materials, which we can't track. But could you just help us at least name some of these raw materials so for us to really understand when will the situation improve because you obviously speak to us only four times a year?

And the second related point to that question really is in your full year update for Q1 guide, you gave a raw material range, which was significantly higher than what you ended up with, which is interesting given oil prices have gone up quite materially since then. So what is it that -- why raw materials actually came in lower than what you originally thought at your full year results for your Q1 guide?

[Thierry Vanlancker, executive]

Yes. Let me try to get to the questions, Jaideep. On marine and protective, the guarded optimism is there definitely for 2023. That business effect has been -- I mean, if you talk Russia, that's, in fact, full frontal hits on the business, in fact, that was in Russia. But on the pipeline for new shipbuilding, for dry docking, et cetera, that's definitely there. Again, the more -- I would say, the financially more attractive business is the dry docking and then the protective business as such. So there, all the arrows are upwards.

As we said before, there's probably more on the second half of the year, et cetera. And then you have to subtract part of the Russian business, but there is a significant positive. It's also, by the way, the business has been the most impacted with raw material issues because it is the business that has the most specialized product that often can only be made in 1 or 2 plants around the world. And therefore, if you have into a logistics situation, getting raw materials in or getting then the final product out has been a real ordeal in the first quarter. So there is all these offsetting things. But directionally, there is optimism for it.

On the raw materials that are impacted, I will have to disappoint you, Jaideep, because it is mostly in the knickknack. But having said that, it is yes, you have like the ones you mentioned the PVDF, et cetera. The silicon cycle hits us a bit less, to be honest, because that's less of a direct impact. But it actually has -- it's less and less availability situation than getting it from A to B situation. And there, it's probably better to talk about products that have to come from Asia into Europe. It's improving, but it's still a struggle to get it on time in the place that we are. So it's not so much that we don't get it. It could be weeks delayed. Having said that, Chinese suppliers are putting some inventory in place to try to alleviate that.

And then secondly, I would say North America, and that's across the board, independent of the chemistry, is actually a real ordeal to get either the -- our suppliers to get the raw materials or getting them the raw materials to us. So that continues to be the most constrained situation. So it's difficult probably to mention you chemistry because it's, frankly, whack-a-mole as they say in the U.S. It's now you have it, and then there is another shipping thing that happens, and now you don't get it. Now it's a disappointing answer, I would say, on the -- your third question [indiscernible].

[Maarten de Vries, executive]

Your third question is on the -- what we projected early on for Q1 on the raw material impact versus where we landed and, indeed, we landed below the kind of the bottom of the range. I think there are 2 elements here.

One element is basically volumes because we've seen more supply constraints in the first quarter, and we've been talking about that. On top of that, we had, of course, the Russia-Ukraine situation as well as the COVID situation in China. So that volume elements, of course, also translates in the absolute amount from a raw material perspective as well as a slightly different mix. So that landed the number -- the absolute number of raw material impact just below the bottom end of the range, which we mentioned.

[Thierry Vanlancker, executive]

Does that answer your question, Jaideep?

[Jaideep Pandya, analyst]

Yes. Just -- sorry, but just on -- apologies for zooming in so much on marine, protective. But just want to understand like you're being guardedly optimistic for a few years now. But like if we go back to the peak of the previous cycle, which was, I guess, 2015, '16, do we think that the market dynamics today warrant that we will see another peak in the next sort of 18 to 24 months in your vision? Or will we remain guardedly optimistic forever?

[Thierry Vanlancker, executive]

I mean we've turned it into a religious program, you mean? No, that's not the plan. To be honest, the peak in '15, '16 was artificial. And in fact, then it came crashing down because there were too many ships that were in there. There's a catching up. So I would be surprised if it goes back to '15, '16 levels. But Jaideep, I think your comments are totally justified.

Just like you, I think we would want to see a significant trajectory change as of the second half of this year. And I think yes, 2023 should be the best year since 2016, let me put it this way. But I think it's still going to be somewhat intermittent there.

Now to be fair to the marine and protective business, COVID has kept ships out of harbors 2 years in a row. Russia comes in. There's the raw material situation. So that is the business that has been -- had a blow on the head in the bottom and on the chin in addition to that. So -- but I -- we do expect to see a significant trajectory change as of the second half of this year so that it doesn't become a religious program, or it doesn't happen, right?

[Operator]

Our next question is from Mr. Gunther Zechmann from Bernstein.

[Gunther Zechmann, analyst]

Just a quick one following on from the raw material cost discussion, please. Thanks for giving the disclosure on pricing and the exit run rate out of Q1. Could you also share the exit run rate out of Q1 for the cost side of things, please?

[Maarten de Vries, executive]

You mean for the raw material cost?

[Gunther Zechmann, analyst]

Yes. And if you certainly like to include freight costs in that as well or if you can split it, either way.

[Maarten de Vries, executive]

Yes. I mean we normally split it. But the raw material, we're sitting approximately at a 40% increase, but that is versus 2020. And I think on freight -- and that's a good question that you asked it. The freight inflation we are looking at, at the moment is a 10% freight inflation. So -- and given the increase of the inflation in freight, that is why we have, in the discussions with the commercial teams, really included this in pricing and making sure that we offset the total basket.

[Thierry Vanlancker, executive]

Yes, good to maybe one additional comment. The graph on the left-hand side on Chart 14 that gives you the increase of raw material costs, et cetera, it's not a pictogram. It's actually an actual graph. So that probably gives you a bit an idea of what exit rates are and what expectations are for the second quarter because I think that was your question also around how is it going in and how is it going out. So hopefully, that gives you a bit of a picture.

And what you see, if you go back to that one, you see indeed that the oil and gas situation, energy costs that gave this little increase in the first quarter and that, that is now, more or less, absorbed and so that gives you probably the good view on how is the trend is. Did it help?

[Gunther Zechmann, analyst]

And of course, the right-hand chart is an average, and the left-hand chart gives you an idea of the exit run rate. Maarten, could you just remind us what freight cost as percent of your cost of goods sold is nowadays, please?

[Maarten de Vries, executive]

We've not disclosed this, and I don't want to go in all these details. But again, the materiality of the freight inflation and the impact makes it as such that we have included this now to make sure that we offset also this piece.

[Operator]

Our next question is from Mr. Laurent Favre from BNPP Exane.

[Laurent Favre, analyst]

Two questions, please. The first one on pricing. Are you -- given all that has been said around freight, for instance, are you now looking to add surcharges to pricing? And was that part of, I guess, Q1 already?

And then the second question is on Orbis. Closing at any day now, should we assume significant margin dilution from that deal? And in particular, should we assume that you have a lot of work to do on pricing if the Orbis team has been less proactive than AkzoNobel over the last year to offset inflation?

[Thierry Vanlancker, executive]

Yes. Laurent, good question, by the way. It's always a bit of a guess when you guess announce who it is because your name seems to be pretty giving all sort, of course, of creativity. But the -- on the surcharges, we have not implemented surcharges. So what you see is price. And there's always a choice how we do this, so we chose to do price because we thought there was a better route. And I would assume that what we will be doing this quarter will be all price and not surcharges just on -- just to make that clear.

Secondly, on Orbis, yes, it's imminent to close the assets. And in fact, it's also what -- they actually publish their numbers. So it's a listed company in Colombia. We do not expect that to be a dilution of any significance in our Latin America market. Those have been pretty -- apparently from what we've seen, they've been pretty active and pretty disciplined on the pricing, too.

[Operator]

[Operator Instructions]

[Kyung Chae, executive]

Operator, I think we're almost close and out of time. So if there are no more calls, anyone who does have a question can reach out to the Investor Relations team. So please do so.

And with that, I think we can conclude the call.

[Operator]

Thank you. And that concludes today's conference call, and thank you all for joining. You may now disconnect from the call, and thank you very much.

[Thierry Vanlancker, executive]

Thank you very much, everybody.

[Maarten de Vries, executive]

Thank you.