Akzo Nobel NV

AEX:AKZA

Earnings Call Transcript 2023-Q1

[Operator]

Welcome, everyone, and thank you all for standing by. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this point.

I'll turn the meeting over to your host, Kenny Chae. You may begin.

[Kyung Chae, executive]

Hello, and welcome to AkzoNobel's Investor Update for the first quarter of 2023. I'm Kenny Chae, Head of Investor Relations. Today, our CEO, Greg Poux-Guillaume; and our 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 webcast will also be made 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 apply to our conference call and answers to your questions.

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

[Gregoire Poux-Guillaume, executive]

Thanks, Kenny, and good morning to everyone on the call. Let's start with our Q1 summary on Slide 3. I'm pleased to announce that our Q1 results came in above our expectation, driven by better-than-expected volumes and pricing. We delivered revenue of EUR 2.7 billion, representing a 5% growth versus prior year. Volumes were down less than anticipated as Europe proved to be resilient, while China delivered organic growth as demand accelerated following Lunar New Year, benefiting both paints and coatings.

Pricing was up 7%. The successful execution on inflationary pricing, along with pricing holding up better than anticipated in coatings, allowed us to deliver above our guidance range of 4% to 6%. As a result, the first quarter showed better-than-expected margin expansion of EUR 60 million. Adjusted operating income came in at EUR 218 million, which is at a similar level to prior year. Return on sales of 8.2% represents a strong sequential improvement in profitability versus Q4 2022. Overall, our Q1 results provide a solid start and bode well for the rest of the year.

Moving to our highlights for Q1 on Slide 4. Having entered the year anticipating a slow recovery in China, we are encouraged by the positive organic growth seen in Q1. We're also pleased to announce the intended acquisition of Sherwin-Williams Chinese Decorative Paints business, which encompasses the well-recognized Huarun brand.

The product portfolio strongly complements AkzoNobel's existing premium-focused Dulux brand and will further support our retail expansion strategy in Tier 1 to Tier 3, I'm sorry, in Tier 3 to Tier 5 cities in the second-tier cities.

Volumes in Europe for both paints and coatings held better than we had expected. We touched more on that in the next slide. Along with the positive volume developments seen in our Q1 results, we've secured a number of exciting wins that position well for the future.

In coil, we are gaining share through our new customer wins, including becoming the sole supplier of an Asian player that we can't unfortunately name. We are also excited to be selected as a global supplier of powder coatings to leading electrical vehicle OEMs in the U.S. and Europe. AkzoNobel continues to lead the market in power technology, and these wins are a testament to our competitive edge. And we're seeing a recovery in our Marine and Protective business in China as it gathers pace as we work on rebuilding that position in China over the next few years.

Finally, we continue to be recognized as the industry's leader in sustainability. AkzoNobel is rated as low risk from sustained analytics. Sustained analytics, which I always struggle to say and AAA from MSCI. And in Q1, we received an improved score from EcoVadis, which puts us firmly in the top 1% of all companies assessed. And well ahead of industry peers.

Turning to Slide 5. We outlined market developments compared to our expectations coming into the quarter. In Europe, demand was more resilient than we had anticipated. Q1 volumes were down but strengthened sequentially versus the prior year. We also saw minimal destocking as channel inventories remained stable at 2019 levels. Although we are only at the start of the painting season, the current trajectory anchors towards the upper end of our full year volume guidance of down mid-single-digit percentage. This is for Deco Europe, by the way, to be clear, and this is mid-single digit down for Deco Europe.

As I mentioned earlier, we're pleased with the market rebalancing in China. This is particularly the case for our paint business, where volumes in Q1 were up mid-single-digit percent. Momentum in Paints China continued to improve throughout the quarter. and we now expect volumes for the full year to be up double-digit percent.

The better-than-expected backdrop in China is also benefiting our coil business, while the economic slowdown and lower residential starts is impacting negatively our wood business in all regions. And while power was impacted by the slowdown in industrial and architectural markets, we saw demand improving faster than expected, with volumes improving as the quarter progressed.

Finally, the ongoing recovery in Marine and Protective markets continues to gather pace. We saw organic growth across all regions with the strongest performance in China where the business is benefiting from a faster-than-expected rebound activity.

I'll now hand over to Marteen to dive into the numbers on Slide 7.

[Maarten de Vries, executive]

Yes. Thank you, Greg, and hello, everybody, on the call. Our reported revenue in the first quarter was up 5% versus prior year and up 8% in constant currencies. As Greg mentioned earlier, the volume decline of 3% was better than anticipated due to demand in Europe and the rebounds in China. The volume impact on revenue was more than offset by pricing of 7% in addition to 4% revenue growth from acquisitions, mainly related to Grupo Orbis.

Adjusted operating income of EUR 218 million was largely in line with prior year. Revenue in Decorative Paints was up 5% versus prior year and 9% in constant currencies. Negative volumes in Europe were almost fully offset by mid-single-digit volume growth in China as well as positive contribution from Latin America. Pricing in paints was up 7% and mix was down 2%, mainly driven by relatively stronger performance in Southeastern Europe. Acquisitions added 5% to the revenue.

First quarter revenue for Performance Coatings was up 6% versus prior year and up 7% in constant currencies. Volumes were 4% lower, mainly due to soft demand in Industrial Coatings, partly offset by positive volumes in Marine and Protective, aerospace and vehicle refinish. Pricing in coatings was up 7% with all segments contributing positively. Acquisitions added 3% to revenue.

I'm pleased to report that both paints and coatings delivered adjusted operating income in line with prior year, driven by better-than-expected volume developments and stronger pricing.

Turning now to Slide 8. Adjusted operating income in the first quarter totaled EUR 218 million, down EUR 12 million from the prior year. Pricing versus raw material and freight inflation came in ahead of plan at EUR 60 million as pricing delivered a positive impact of EUR 183 million, more than offsetting a negative impact of EUR 123 million of raw material and freight inflation.

The negative volume impact was EUR 35 million, reflecting 3% lower volumes in the first quarter versus prior year. The effect of mix mostly in paints had a negative contribution of EUR 14 million.

Movements in currencies reduced our adjusted operating income by EUR 11 million, while the negative effect of -- from hyperinflation accounting came in at EUR 12 million. The combined impact of changes in OpEx and one-offs was nil, although the underlying OpEx increased by EUR 15 million versus the prior year.

Moving now to Slide 9. During the first quarter, we saw a EUR 123 million impact on adjusted operating income from raw material and freight inflation compared to the same period last year. In the second quarter of 2023, we anticipate the impact of raw material inflation to invert and show a modest deflationary benefit in the range of EUR 0 to EUR 30 million.

Our pricing of 7% in the first quarter was ahead of the guidance range provided in the previous quarter. This represents a cumulative pricing of 26% over the past 3-year period. For the second quarter, we expect pricing to land between 4% to 5% year-on-year.

Since the beginning of 2021, the cumulative impact from raw material and freight inflation has been EUR 2 billion, which has been more than offset with pricing.

Turning now to Slide 10. In line with our expectations, our working capital for the first quarter increased due to seasonality and lower payables. Our inventory level was stable compared to the fourth quarter as we prepare for the painting season in the second quarter. In the first quarter, as a percentage of revenue, our working capital stood at 18.6%. This compares to 16.5% for the same period last year and 16.9% for the fourth quarter of 2022.

Free cash flow for the quarter was negative EUR 112 million, an improvement of almost EUR 50 million versus prior year. Lower reported EBITDA in the first quarter was fully offset by a lower working capital outflow as our inventory reduction plans continued. These elements contributed to our leverage peaking at 4.2x in the first quarter versus 3.8x in the fourth quarter 2022. So 4.2x in the first quarter versus 3.8x in the fourth quarter.

As we have indicated earlier, deleveraging is a key priority for AkzoNobel this year. To this end, we expect second quarter leverage to show a slight improvement to around 4x and we remain committed to achieving a leverage ratio of below 3.4x, including acquisitions by the end of 2023.

Now turning to Slide 11. Our adjusted EBITDA for the first quarter came in at EUR 305 million, which was largely in line with the prior year. Adjusted earnings per share for the quarter was lower, mainly due to interest costs. We also canceled 4 million treasury shares during the quarter, bringing down our share count to 171 million shares.

And now back to Greg to speak about the outlook.

[Gregoire Poux-Guillaume, executive]

Thank you, Marteen. In summary, our Q1 results were better than expected, driven by volumes in Europe and China as well as pricing. Despite this, we are still at an early point in the financial year with macroeconomic uncertainty continuing to persist and the important painting season ahead of us.

The start of the second quarter has been slow, especially in Europe with Deco impacted by bad weather. We expect group volumes to be down low single-digit percent for the second quarter and combined with our price versus raws expectations, we anticipate our second quarter adjusted operating income to come in slightly above EUR 300 million. With this in mind, the 2023 outlook communicated in February remains unchanged. We will continue to focus on our 4 priorities for 2023 and we expect to deliver adjusted EBITDA between EUR 1.2 billion to EUR 1.5 billion and a leverage ratio of less than 3.4x by year-end.

I now hand over to Kenny for information about upcoming events and the Q&A session on Slide 13.

[Kyung Chae, executive]

Thank you, Greg. Thank you, Marteen. Before we move to the Q&A session, I would like to highlight some of the upcoming events shown on Slide 13. Our ex-dividend date for our 2022 final dividend is today, April 25, and the record date is April 26, followed by the payment on May 5. Finally, we look forward to updating the market on our second quarter results on July 25.

This concludes the formal presentation and we will be happy to address your questions. Please state your name and question when asking a question and limit in a number of questions to 2 per person so that others can participate. Operator, please start the Q&A session.

[Operator]

[Operator Instructions] Our first question is from Charlie Webb.

[Charles Webb, analyst]

So my 2. Maybe first just on the raw material deflation. Thank you for the guidance for Q2. And any sense on how you see that shaping up in the second half? Obviously, EUR 30 million related to the amount of inflation you've seen is still quite a small number in the context of the inflation you've seen over the last 2 years. So just -- how do you see that raw material deflation through into the second half? And if you were to kind of take current pricing in the rules, do you still see further deflation in 2024 as things stand today? So that's the first question on the rural side.

And then just second, on pricing. Clearly, as you noted, coming in a little bit better expected on the Performance Coatings side in Q1. You kind of previously talked about 50% of that sticking or you would hope to be able to retain 50% of the pricing efforts you've got through. Just kind of trying to get a sense on -- is that still what you expect? Have you surprised yourself that you've been able to put through more pricing? And maybe at what point should we expect that to -- if you are to give back some of that pricing effort? When will we start to see that materialize itself?

[Gregoire Poux-Guillaume, executive]

All right. Thank you for your questions. The first question on the raw material deflation. We see raw material deflation continuing in the second half of the year, but we're cautious about this because there are pressures pushing things in the other direction. If you see the reopening of China and you also follow the various headlines from European chemical companies about taking capacity out and mothballing and there's been quite a few of those recently, particularly on the resin side and then TiO2, there are forces that would put raw materials up in the second half of the year. If you look at indices like IPEX. IPEX has started picking up again.

So we're cautiously optimistic, but there's not a whole lot of visibility at this point for the second half of the year. So we're not quantifying this. And once again, we're sticking to our strategy of defending our pricing and anything that we get as a further uplift from raw materials will be a bonus.

To your question on pricing and pricing stickiness, pricing has been better than we had expected in Q1. So that in part answers your question, it really stems from our ability to expand the pricing discussion, pricing versus raw to more than just raw material inflation. Our customers understand very well that we're facing wage inflation. We're facing energy inflation. We're facing transport inflation. And that has allowed us to essentially defend pricing above and beyond what we had forecasted, but also the beta is that long term? Or is that delaying the inevitable? Time will tell.

But at the starting point of answering your question is that we have been able to hold pricing higher and longer than what we had forecasted for Q1, and we hope that continues going forward.

To your question of when does that stop? I mean there are parts of our business where we have price indices. And it really is a factor of what happens to raw materials in the second half of the year. Does that answer your question?

[Charles Webb, analyst]

That's helpful. Maybe if I could just follow up a little bit on the raw material side. I mean, normally, you guys have a good 3-, 6-month visibility. So just -- and it does feel like albeit we came from a very tight environment where we had overstated demand and understated supply. It does feel like that's kind of reversed. We've got kind of much lower levels of demand with destocking and clearly, a lot more available supply. Likewise, freight rates have really come off a long way now. So just any seaborne freight.

So just trying to gauge what do you see into the second half? I clearly understand to remain conservative as the right way to be, and you don't have all the visibility to 2024. But it does feel when you have in those conversations with your suppliers. I mean, does it feel like there's a lot of available product at the moment? Or do you -- are there still some pinch points that you kind of alluded to? Is that still the case?

[Maarten de Vries, executive]

Yes. I think what Greg just mentioned, and I want to reiterate is that the situation for the second half is still pretty uncertain and we see some raw materials indeed still coming down, but we see also some going up. And it has indeed to do with the dynamics in the overall supply chain between -- and on the other hand, China, but also the dynamics in Europe. So we are pretty cautious in fact, for the second half and what will happen to raw material. We have, of course, clear visibility for the second quarter, but it is also depending on the lag, the time lag that it takes to work through our inventories. But again, the second half is still uncertain, I would say.

[Gregoire Poux-Guillaume, executive]

I'll add maybe one thing to give a little bit of flavor to our answer. If you take TiO2, for example, which was where prices have dropped significantly driven by China because the Chinese market had a lot of capacity. And so landed in Europe, that was driving down prices. Prices have picked up again to some extent, but from a low level. But in the discussions that we have with suppliers, they're still trying to secure longer-term volume commitments, which tells you the risk capacity in the market. But the pricing trend is not as favorable as it was a few months ago. But still, they're trying to secure -- they're trying to secure volume from us, which tells you something. Does that answer your question?

[Operator]

Our next question is from Christian Faitz of Kepler Cheuvreux.

[Christian Faitz, analyst]

Yes. Two questions, please. First of all, can you give us a feeling for the bridge of how you intend to get what's the 2x leverage level by 2024? And the second question would be on Chinese demand. How is China demand performing at present, i.e., in Q2, both in Deco as well as in Performance Coatings? Has demand improved versus a rather slow pickup in Q1, I take it, after the end of the Chinese New Year.

[Maarten de Vries, executive]

Yes, question on the leverage ratio. I mean, first of all, it's important to realize that this business remains highly cash generative. There are a couple of drivers. One driver is, of course, working capital and driving working capital down that is in our plans for this year, and it will remain also focus obviously for next year. That is one.

Secondly, it's important to realize that for this year, at the end of this year, we still have the cash out for the Kansai acquisition. That's all included in our leverage ratio of 3.4 or below 3.4.

And thirdly, the other element is, of course, the adjusted EBITDA improvement, which is also a factor in the leverage ratio. So these drivers will help us to bring our leverage ratio down. And absent from acquisitions in a normal situation, that is roughly 1 turn a year.

[Gregoire Poux-Guillaume, executive]

Your second question on Chinese demand. We've raised our volume guidance for the year in China to double digit. And it's across the board. It's in Deco and coatings. But the Deco market is particularly active right now. We see that continuing throughout the year. And we hope to even strengthen our position by the integration of Sherwin-Williams business that we bought recently. I think, a low point in the market in terms of volumes.

So Q1 looked good. Q2 is going to continue, and we think overall, this is a year for Chinese volume upswing at double digit versus the lower guidance that we'd initially given. It doesn't mean that everybody is seeing it. If you talk to some of the chemical suppliers, they'll tell you that they see things are more subdued in China. But if I answer on what we see, that's your answer.

[Operator]

From Matthew Yates of Bank of America.

[Matthew Yates, analyst]

A couple of questions, please. Last year, we saw the cost base increase by about EUR 150 million or so because of supply chain inefficiencies. And I see on your bridge that in Q1, that OpEx was basically unchanged year-on-year. Are you having success in unwinding that extra cost that was put into the business? Or is that simply being eaten up by other inflationary things? I appreciate you had guided the EUR 200 million of gross savings, but assume there would be some inflation offsetting that. But PPG seemed a bit more vocal on their call that there's an opportunity to recover some of those inefficiencies over the last year or 2 to help drive the margins?

And the second question, particularly for Marteen, on working capital. So that EUR 260 million outflow in Q1 despite volumes being down and raw mats essentially plateauing. It looks like you were really driving down the payables. How sustainable is that? I know you took on a lot of buffer stocks this time last year. Is that now back to normal? Or is it still elevated? Just curious if you have to reengage your own supply chain in Q2.

[Maarten de Vries, executive]

Yes. So maybe to start on the last one, which you see in the working capital is that we are very much on track in terms of managing our inventories, and we will still see further inventory reductions towards the latter part of the year. But what you see in the working capital at the end of Q1 is clearly a lower payable position. And the lower payable position is driven by 2 parts. 1 is the fact that we are pushing the brake and buying less raw materials to manage our inventories. But secondly, you should also realize that everything we buy in terms of raw materials comes with a lower price. So automatically, that also leads to lower payables.

I would expect that by the second half of the year, our payable position in terms of percentage of sales starts to normalize again to what we've seen in the past. So this is kind of a, I would say, more temporary situation, which we see still in the first half of this year. So that is the working capital question.

On the OpEx -- so what we have indicated that we see this year an OpEx inflation of EUR 200 million, it's wage inflation, freight inflation as well as energy inflation and other inflation and we have programs in place to offset the EUR 200 million, and that's exactly to address these inefficiencies in terms of our productivity, specifically in Europe because we have also said that the focus is mainly for 2/3 on Europe in terms of the integrated supply chain.

We are deploying these savings initiatives, but that goes -- we have implemented these in Q1 so they will come -- become more and more visible over the coming quarters. The underlying OpEx in Q1 is plus 15. And in fact, we are pretty pleased with the development.

One thing maybe still to mention that, of course, from a wage inflation perspective, we will see wage inflation still -- the impact of wage inflation to go further up in the second quarter because the wage increases are mostly per the first of April. But on the other hand, our savings programs are also ramping up. But it gives you a little bit of color where we are and what we are driving.

[Gregoire Poux-Guillaume, executive]

I'll add maybe a longer-term perspective to what Marteen explained very well for this year, which is that -- to your question of can we further drive out some of these inefficiencies and recover some of that cost advantage. We've been pretty vocal about the fact that the inefficiencies are mostly on the industrial side, essentially manufacturing and supply chain. And we're working on simplifying our portfolio, our footprint, our processes. And we said that we would be able to talk some more about that essentially after the summer.

A big part of the target is going to be on the decorative side in Europe because we have a lot of complexity, and some of that has been driven up by the supply chain difficulties in the last few years. And yes, there is an opportunity to work that back down. We will and we will communicate targets probably right after the summer.

[Operator]

Your next question Chetan Udeshi.

[Chetan Udeshi, analyst]

Hello. Can you hear me?

[Gregoire Poux-Guillaume, executive]

Yes, we can.

[Chetan Udeshi, analyst]

I had 2 questions. One was just on China. I saw a commentary in the report saying that Chinese prices and mix, both were down year-on-year. I was just curious if you can maybe just quantify how much decline did you see? And I'm just thinking China was the first region to see deflation in the second half of last year. Can we read through some of that, what is happening in China in terms of pricing pressure in rest of the world given that we might see some of that deflation come through in the rest of the world now in Q2 and maybe in Q3?

And second question was just on mix. Mix was negative in Q1. Can you talk about how you see the mix in general in Q2? Because it seems some of the drivers for that mix may not be changing as much when we go from Q1 to Q2.

[Gregoire Poux-Guillaume, executive]

So your first question on China. Pricing year-on-year was negative in Q1, but it was negative at, how can I quantify this, at a reasonable level. You're talking sort of single-digit million euros versus last year. So I wouldn't overstate that. I don't want to give you the impression that price -- Chinese prices are crashing.

It's just that if you look at when raw materials peaked, it was in July last year, if you look at the lag of our Chinese business, on the raw material side, ours than anybody else's. It's about a month, give or take. So essentially, the impact has been felt early, and there's a moment in highly competitive markets that was hammered last year where some of our competitors have gone out a little bit more aggressively into the market.

I still think that it's -- it's not a catastrophic drop that we're talking about. If you refer to Nippon's recent -- Nippon Paint's recent comments, I think they qualified that, too. They essentially said that it's pricing aggressiveness, but at a reasonable level.

Does that apply to other markets in the future? I think that the Chinese market is maybe a more dynamic market in terms of evolutions of market share. If you have a look at China over the last few years, there's been a significant aggregation of market share by some of the big players and the local historical guys getting squeezed out. It's really not the case in places like Europe where the market shares are a lot more stable and the brand recognition plays a larger role and distribution is a lot more established.

So I wouldn't extrapolate too much. But yes, over time, as raw material prices drop. And as we work through the lag, there will be more pressure everywhere. But once again, China is a very dynamic, very quickly evolving environment in terms of market share where you can bounce up or down very quickly, and that lends itself to more aggressive and sometimes extremely aggressive pricing, but we're not seeing anything extremely aggressive. We're seeing something, which is just a reflection of the market is picking up and people see opportunities, including AkzoNobel by the way, we see opportunities. But we're certainly not the price leader on the way down.

We -- one of our competitors commented on that recently, [ Shanghai Xu ], and they alluded to AkzoNobel's price discipline in China. I invite you to refer to their fireside chat. If you want further proof that we're sticking to our guns. Does that answer your question?

[Chetan Udeshi, analyst]

Yes. And on mix?

[Maarten de Vries, executive]

Yes, deep on your question on mix, I can be pretty short. What we saw in Q1, I think we will see a similar development in the second quarter..

[Operator]

Our next question is from Peter Clark of Societe Generale.

[Peter Clark, analyst]

It's a quick one on the EMEA Deco, the first one anyway. You've been pretty clear with the guidance. You think that the volumes will be down mid-single digit. Obviously, a very bad April. It's not stop raining. It's actually sunny now, but anyway. And effectively, you've got the cost cutting in Europe, most of the cost cutting anyway, certainly the hard cost cutting. You were against very soft comps, particularly in the second quarter. I think June it collapsed in the U.K., EMEA Dulux. So that implies to me that you're going to get very strong EBIT growth even if the volumes remain slightly depressed. So that's the first question. I'm just wondering how you see EMEA Deco relative to your profit assumptions for the year. I'm assuming it's one of the stronger businesses in the second half even if the volumes are soft.

And then the second question about price, obviously, up 7%. Just wondering incremental price within that against the carryover because I would assume it was 1% to 2% maybe incremental price you're getting, and you see most of that wash out in the second quarter.

[Gregoire Poux-Guillaume, executive]

I'll take your first question, Marteen will take the second one. I think your comments on EMEA deco are directionally correct. It's -- give or take, it's about 1/4 of our business. It is a business in AkzoNobel that has the longest lag in terms of our -- the time we take between the moment where we buy raw materials in the moment where it impacts our bottom line. Lag is a bit below 5 months, somewhere between 4 and 5, but significantly longer than the rest of our business. And therefore, a lot of the margin expansion due to raw mats is still to come.

The pricing has been resilient. We're probably not looking at anything significant and further pricing increases in that part of the market in the near future because once again, raw materials are at this point, settling, and we'll see what happens in the second half of the year. So we got the pricing carryover from what was known in the first quarter. We've got the -- not any significant further pricing in Deco Europe to be expected later in the year. There will be some price increases in some countries, but we're not talking about big numbers versus what we have in terms of carryover.

The raw materials, the impact will start making its way to our bottom line in Q2 for Deco Europe. And as you said, the cost actions are the EUR 200 million. It's mitigation. It's 2/3 Europe, and it's 2/3 industrial, but we're mitigating inflation. So that's more of a wash than an uplift. But hopefully, that gives you a little bit of perspective. Yes, Deco Europe should be should be a significant contributor to our margin expansion for the rest of the year.

[Maarten de Vries, executive]

And then maybe on your pricing question in the first quarter, the 7%. Yes, it's correct that, of course, the main part of the pricing is carryover. We've also indicated that already when we went into the first quarter. But we've also indicated that we have done still price increases during the first quarter. And if you make a rough split, then I would say that roughly 2% is what we realized as new price increases and the rest is all carry over for the first quarter.

[Operator]

Our next call is from Jaideep Pandya On Field Research.

[Jaideep Pandya, analyst]

The first question I have is on Marine. It's sort of a 2-part question. Firstly, could you just help us understand sort of what was driving the 22% organic growth? And how should we think about this business sort of going forward for the rest of the year? And the second part to that question really is, Greg, you've alluded to the EUR 100 million sort of EBIT growth opportunity. So could you just explain to us like what is the time frame of this, whether this is on a 12-month view or on a 24-month view?

And the second question I have is around the acquisitions that you guys have made in the last 12 months. Could you give us some color on what sort of EBIT expectations do you have from [Indiscernible], Kansai and the Sherwin-Williams assets once these are integrated into the AkzoNobel family.

[Gregoire Poux-Guillaume, executive]

Okay. Let me take those questions. Marteen will jump in. On the Marine protective side of things, the significant demand in the market, shipyards have order books that are full. So the investment level is quite high, and that is allowing us to grow with the markets. I think beyond that, there's an exo-specific focus on rebuilding our position in China. We deemphasized China a few years ago because we felt that the margins on -- the pricing level on sort of OEM paints. The first coat of paint in a shipyard in China was we felt those levels were insufficient and it was significantly dilutive.

It's still a challenge to a large extent, but we have a better handle on how to compete on some of the more technical vessels and the more technical opportunities.

And also the -- our performance in the marine market in the last few years has convinced us of something that we needed to demonstrate to ourselves, which is that despite the fact that the OEM market in China might be dilutive from a margin perspective, it's an important part to competing in the global level and to capturing first dry dock opportunities. So market growth was a push in China, but a selective push in order to focus on the more differentiated opportunities that offer some pricing potential.

The question on the EUR 100 million, I've said publicly that our Marine business was a business that had the operating profitability in the high teens a few years back. That we've suffered significantly over the last few years and are closer to -- last year, we're closer to low single digits than the high teens. There's really no reason why that business can't get back to the teams. And the EUR 100 million is based on essentially getting to something like the mid-teens. And it's not a 12 or 24 months thing. It's probably more of a 3-year thing.

But we are already banking on a significant uplift in the Marine business. This year we'll still be -- we'll move from the low single digits to something like the high single digits. And hopefully, we'll be able to cross into the teams next year, but one step at a time. But it's -- we do believe that there's EUR 100 million of bottom line value to be extracted from the Marine business.

International is still the best brand in the industry. We've got great products. And we've cleaned up the issues that we had in the last few years, and we think we're in a very good position to grow that business profitably and get back to where we should be in the market.

Acquisitions, we commented last time, I think we had a slide on acquisitions where we talked about Orbis versus the Akzo in Latin America and the gap and what we're going to be. Marteen, do you want to take that one?

[Maarten de Vries, executive]

Yes. So first of all, we are very pleased with the Grupo Orbis acquisition and indeed, once integrated, we have said that we would have the Grupo Orbis acquisition and the business performing at the level we are at in Latin America. And that represents, and if I remember well, 300 bps improvement into our numbers.

I mean, Kansai is a little bit too early to tell. But clearly, we are -- we have a strong business in Africa. With also good margins. And also there, we see an opportunity to further improve as we integrate the Kansai Africa business. So for -- from our perspective, these targeted acquisitions give really opportunities to drive synergies and to drive margin improvements.

[Operator]

Our next question is from Laurent Favre of BNP.

[Laurent Favre, analyst]

I got two questions, please. Greg, I think you indicated that you were thinking volumes would be down low single digits in Q2. I was wondering what you had assumed within that for European Deco? And then the second question on -- well, M&A, I guess. So I think based on the last call, some of us were expecting that the next announcement from Akzo would be a bolt-off rather than a bolt-on. I was wondering if you could perhaps tell us a little bit about, I guess, the progress you're making on portfolio analysis and your thinking around disposals. Could we see them this year, that is from an announcement standpoint, necessarily closing standpoint.

[Gregoire Poux-Guillaume, executive]

Thank you. Marteen will take the first question on volumes for Deco and I'll take the second.

[Maarten de Vries, executive]

Yes. So volumes for Deco, we have assumed as part of the Q2 indication, the mid-single-digit down.

[Gregoire Poux-Guillaume, executive]

And we think this is weather dependent, but we think most of the negative impact will be in April. We're expecting that May and June will be a lot more robust given the direction of the market until it started raining continuously in Europe. But time will tell and weather will tell.

To your question on portfolio bolt-ons versus bolt-offs, we did say that we manage our portfolio dynamically. We are looking at opportunities, both in terms of bolt-on and in terms of bolt off to use your expression in our portfolio. I mean I can't comment on the Sherwin-Williams China acquisition, where I say this was business, which is a better fit for us, and it's a small position for them and that we're good #2, and that strengthens our business without also conceding that there are opportunities the other way around. Everybody has things that they want to trade on and things that they want to trade off.

We've completed our analysis of what we want to do in the next couple of years. And we are working on these topics actively. We really don't have a whole lot to report at this point because nothing's been launched per se or is public. But if there's anything that progresses, we'll talk about it.

I wouldn't expect that anything closes this year. But once again, we will look at opportunities both to buy and to sell. And we fully understand that given our leverage ratios buying involves also selling.

[Operator]

Our next question is Mubasher Chaudhry of Citi.

[Mubasher Chaudhry, analyst]

Just a couple, please. Just on the 2Q guide, I think you said more than EUR 300 million. Should I understand that as being quite close to EUR 300 million because when I put in the price volume rules guidance that you've given today, I get closer to the mid-300s for EBIT. So just wanting to understand where I'm going wrong or what I'm missing. That would be helpful.

And the second question is on volumes in China. Could there be some restocking happening that's helping drive the better-than-expected volumes ahead of the summer season? Or do you think this is a genuine demand at the moment?

[Gregoire Poux-Guillaume, executive]

To your question on China, it doesn't appear to be restocking. What we see is really demand increasing as people feel better about the economy as the Chinese government stimulates the economy as -- they're not -- the Chinese government is not pushing new construction, but they have given funding and they've given support to completing construction that had been started and had stalled. So there's a lot of things in the market that actually correlate with real demand, and we've got enough channel information to feel that it's not restocking. So we're comfortable that the trend in China should continue and will continue.

On the guidance, Q2 slightly above EUR 300 million. Is that how I phrased it, we said slightly above EUR 300 million because we meant slightly above EUR 300 million. And your question on if you do -- if you kind of do the math, you get more towards the mid-300s.

Once again, Europe is significant for us. Deco Europe is about 25% of our business. April has not been a good month. I'd like to think that statistically at the moment where the weather improves. But some of -- that's really hard to predict. And some of those volumes, you get back and some of the volumes you don't. If you take, for example, all the professional painter volume, you don't get that back because essentially, professional painters have only so many hours that they can work in the day. And if the month of April was a wash because it was raining and they couldn't work outside these guys can't add working hours to do more of that in May or June. So essentially, that volume doesn't come back.

So the -- there's an element of -- certainly of a balance that we want to introduce in terms of our guidance on Europe. We are pleasantly surprised by the volume performance in Q1, but the jury is still out about Q2. And once again, April was not very good. Hence, the fact that we're pushing you towards the lower 300s rather than mid-300s.

[Maarten de Vries, executive]

It's just a matter of being cautious with the volume developments, which we see specifically in Deco Europe and there is a reflection of the comments regarding how we see -- currently see Q2.

[Operator]

Speakers, we don't have any questions on queue. You may proceed.

[Kyung Chae, executive]

Thank you, Jackie. I think that concludes the Q&A session and our Q1 2020 investor update. Thank you, everyone, for participating. Operator, please conclude the call.

[Operator]

Thank you. That concludes today's call. Thank you for joining. You may now disconnect.