Akzo Nobel NV

AEX:AKZA

Earnings Call Transcript 2024-Q1

[Kyung Chae, executive]

Good morning, and welcome to Akzo Nobel's Investor Update for the First quarter of 2024. I'm Kenny Chae, Head of Investor Relations. Today, our CEO, Greg Poux-Guillaume; and CFO, Maarten de Vries, will take you through our results. We'll refer to the presentation, which you can follow by webcast or download from our website at akzonobel.com. A replay of the webcast will also be made available following the event. There will be a Q&A session after the presentation. For additional information, please contact our Investor Relations team.

Before I hand over to Greg, a reminder of our forward-looking statements disclaimer on Slide 2. Please note, this also applies to both the 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. Good morning to everyone on the call. Our performance for Q1 demonstrated a further rebound in profitability. Our results were driven by solid volume growth and continued margin expansion across both decorative paints and coatings. Volumes were up by 2%, building on the good momentum from last year. Price mix was flat with prices slightly up, resulting in organic sales growth of 2%.

Beyond the volume growth, raw material tailwinds and Brazilian pricing drove the 19% increase in adjusted EBITDA to EUR 363 million. Q1 EBITDA margin was up by 230 basis points to 13.8%. Despite the impact of seasonality on our free cash flow, net debt-to-EBITDA remained stable at 2.7x. We're investing in our future growth, particularly in our powder business. These new investments will modernize and expand our production capacity, particularly in North America and boost our R&D efforts. We also opened a new manufacturing plant in Pakistan, reaffirming our commitment to both Deco and Coatings for the region. Finally, we completed our transition to 100% renewable electricity in Latin America, something that we've already achieved in Europe and in North America.

Moving to Slide 4. Organic volumes were up 2% in Q1. And looking at our businesses one by one, I'll give you a little bit of flavor. In Deco EMEA, volumes were stable, remaining on track for a progressive rebound back to 2019 levels. U.K. DIY and South and Eastern Europe performed notably well. In Deco, Latin America, strong growth in Brazil was dampened by challenging macroeconomic backdrops in Argentina and Colombia. In Deco China, volumes were flattish, exceeding expectations given strong Q1 2023 comps. The market is in great with our signs of life. In Deco Southeast Asia, volumes rose double digit, driven by India and Indonesia, while Vietnam continues to struggle economically as a country.

Moving to Coatings. In powder, we built on our momentum from our last 2 quarters with mid-single-digit growth despite a market recovery that still has ways to go. We're gaining market share, capitalizing on our market leadership and product differentiation as shown by our recent lower architectural range announcement and by the penetration that we are successfully undertaking of the electrical vehicle market.

In Marine and Protective, we're benefiting from a dynamic market in marine with commercial successes in technical marine newbuilds, which bode well for the future. In Automotive and Specialty Coatings, refinishes group, consumer electronics showed promise and aerospace was flat on temporary supply constraints. In Industrial Coatings, packaging and coil did well, while the wood business continue -- sorry, while the wood businesses continue to be depressed, and that's wood finishes and wood adhesives, held back by a soft U.S. construction market.

Maarten will now take you through the financials on Slide 5. Maarten?

[Maarten de Vries, executive]

Yes. Thanks, Greg, and good morning, everybody, on the call. Organic sales in the first quarter were up 2% and reported revenue was down 1%. The volumes were higher in both Deco and Coatings, Price/mix was flat with slightly positive pricing offset by slightly negative mix. The 1% positive revenue contribution from M&A in our Deco business is primarily related to the wire wound acquisition in China, which completed in August 2023. FX remains a headwind in Q1, impacting group revenue by 3%. I'm pleased to report that our Q1 adjusted EBITDA grew by 19% to EUR 363 million as raw materials provided to high single-digit tailwind year-on-year to our P&L.

This improvement resulted in a 230-bps expansion in EBITDA margin to 13.8%. Turning now to Slide 6. I -- the increase in ROI to 13.8% in Q1 reflects a solid year-on-year improvement in profit. As a percentage of revenue, working capital improved year-on-year to 18% during a seasonally weaker Q1. We expect further progress towards below 14% by the end of 2024. The usual impact of seasonality for our Q1 trading period resulted in a negative free cash flow of EUR 211 million. Despite a stronger EBITDA performance, the higher outflow was driven by seasonal inventory build and due to an unfavorable working day calendar at the end of March, shifting receivable collection into early April.

And I'll now hand over to Greg for closing comments on Slide 7.

[Gregoire Poux-Guillaume, executive]

Thanks, Maarten. Our first quarter results marked a solid start to the year, driven by continuing volume growth and margin expansion. While it is early in the year with the important European painting season ahead of us, we expect our second quarter adjusted EBITDA to range between EUR 420 million and EUR 440 million. This keeps us on track to deliver our 2024 outlook, which remains unchanged. We continue to focus on the strategic priorities, which underpin our midterm ambitions, including our industrial excellence efforts, which we will accelerate in the second half of the year.

I'll now hand over to Kenny to close with information about upcoming events, and then we'll start the Q&A session. Kenny?

[Kyung Chae, executive]

Thank you, Greg. Before we move to the Q&A session, I would like to highlight some of the upcoming events on Slide 8. Our AGM will be held later this week on April 25. Our ex-dividend date for our final 2023 dividend is April 29, and the record date is April 30, followed by payment on May 7. Finally, we will update the market on our second quarter results on July 23. And this concludes the formal presentation. We will be happy to please -- we'd be pleased to open the floor to your questions. [Operator Instructions]

[Operator]

Our first question today comes from Christian Faitz from Kepler Cheuvreux.

[Christian Faitz, analyst]

Congrats on the results. Two questions, please. First of all, Greg, you talked about the relatively weak wood construction activities in the U.S. Do you see a turnaround at some point this year? And the second question is, do you see some early green shoots from your teams refocusing on new build in Marine Coatings?

[Gregoire Poux-Guillaume, executive]

The first question on wood, we don't see a turnaround this year. The market is depressed. It has stabilized both in wood coatings and in wood adhesives. But for that business to rebound, you'd have to see a rebound of the U.S. home construction markets. And you probably have a little bit of lag there. So we think it's more of a 2025 rebound story than a 2024 rebound story. We're certainly not baking into our numbers, any type of rebound in wood this year. And the second question was?

[Christian Faitz, analyst]

Marine new build.

[Gregoire Poux-Guillaume, executive]

What specifically about Marine build, Maarten? Christian?

[Christian Faitz, analyst]

Early successes, yes.

[Gregoire Poux-Guillaume, executive]

We are, yes, we do. And I think I probably over shared already, so I'll do it again, which is that last year, we won a couple of hundred million euros of new build business on technical ships and call it around EUR 200 million. As you know, because these are delivered over a number of years, that doesn't lead into a booking right away in terms of we don't recognize revenue. We only recognize revenue when we deliver. And that means that it's essentially underpinning the growth that we've announced for the Marine and Protective business for the next few years. We said that we grow mid-single digits in Marine and Protective in the next few years.

If you take that EUR 200 million and you start ventilating it across a little bit in '24, more in '25 and '26 and then you add the wins that I'm sure that we'll get this year too, you see that the growth pipeline in terms of revenue development in Marine and Protective is growing. And contrary to the new build market in general, the world has changed. There is a push towards sustainability. There's a lot of regulation in the shipping industry. And we focus on technical ships, ships that have a high unit costs and were therefore the shipowners are willing to invest on something that's future-proof, which means that they'll go for biocide-free antifouling, for example, and that plays to Akzo Nobel's strength. So the pipeline is growing. The margins are decent, and I think it bodes well for future growth and also future operational leverage. Did I answer your question, Christian?

[Christian Faitz, analyst]

Yes.

[Operator]

Our next question comes from Matthew Yates from Bank of America.

[Matthew Yates, analyst]

One of the things you talked about on the call was the timing of Easter. And I think Maarten mentioned it in his remarks, too. Can you just elaborate a little bit more what impact that had on the volumes shifting between Q1 and Q2, but also the impact on cash flow because that EUR 418 million build does strike me as quite a big number when we're in an environment of raw material deflation and limited volume growth. So you've kept the guidance for leverage target at year-end. So you're confident this is just a timing issue around seasonality?

And then a somewhat related cash flow question longer term, maybe for Greg, but as part of the industrial transformation, you've mentioned trying to reduce the number of products and simplify supply chains. Is there also an opportunity here to structurally reduce the working capital needs of the business and improve the cash conversion because a target of 13% working capital sales is essentially only a percentage point better than you'll be at the end of this year already. So why doesn't the industrial transformation have a more impactful sort of impact on the working capital intensity of the business model?

[Gregoire Poux-Guillaume, executive]

Maarten will take the first question. I'll take the second. Maarten?

[Maarten de Vries, executive]

Yes. So you're absolutely right. I mean it's much more a timing of cash flow. What we saw that at the end of Q1, the Friday was the 29th of March. So that means that quite some cash came in early April. In fact, the amount was over EUR 50 million of cash collection coming in early April. So that's much more a shift and the timing of the cash flow. By the way, just to manage expectations, we see a similar effect from a cash flow perspective at the end of Q2. But of course, for the full year, it doesn't matter.

So from a working capital perspective, we saw 2 effects; one timing of receivables coming in, but also the seasonal buildup of inventories. And by the way, that also includes some higher inventories because of the longer lead times because of the Red Sea. But overall, as I mentioned, it doesn't impact the cash flow forecast for the full year and the working capital view that we will end below 14% at the end of the year.

[Gregoire Poux-Guillaume, executive]

And your second question on the industrial efficiency program that we're undertaking. You're completely correct. It has working capital benefits. These benefits are not baked into how we talk about working capital longer term. As we said, we'll simplify our business in the sense that we'll rationalize our supply chains. Well, in some areas, we use the number of products, we'll certainly reduce the number of plants. And as we reduce the number of plants, you have positive working capital effects. We'll also increasingly do things like late-stage differentiation, which means that instead of, I mean, it sounds very old fashioned, but instead of carrying finished goods inventory for similar products for different markets with different labeling or different colors that are already sort of in the can.

Late-stage differentiation is you do the common base, and then you finalize the product based on where the market demand comes from. So that's also part of our industrial transformation efforts. So if you take all of that together, the late-stage differentiation, the rationalized factory footprints and the supply chain and product measures, it will have a positive effect on working capital. We will need less working capital. But we really haven't quantified that externally. So your comment is correct. As much as we've talked about the cost aspect, we haven't talked about the working capital aspect. And the numbers that we do throw around don't reflect the efficiencies that we'll get from that program. Does that answer your question?

[Matthew Yates, analyst]

Yes, absolutely.

[Operator]

Our next question comes from Laurent Favre from BNP Paribas.

[Laurent Favre, analyst]

I think Maarten just referenced the rate situation, I think, in terms of inventory lead time. I was wondering if you could talk about what you're seeing on the raw material side. It looks like that red situation has helped quite a bit spot pricing for commodity chemicals. Is this something you started to see in terms of your invoices on a year-on-year basis? And then maybe a related question for Greg. You kindly offered us a Q2 sub guideline 40. I was wondering if you could talk about what you're baking in terms of volumes and net pricing. It seems that you're only basis margin improvement year-on-year. And I'm just wondering what's driving that.

[Maarten de Vries, executive]

Maarten. So maybe first on the -- on your question on the Red Sea, no. The answer is no. We've not seen the impact of any spot pricing related to the Red Sea. The only thing what I flagged is that we've seen longer lead times, and that's also partly reflected in our inventory, but no impacts of spot pricing, which you mentioned. And on the other topic on the Q2 guide, what we assume is basically a continuation of the trends we've seen in the first quarter in terms of volume, so a low single-digit volume development for Q2. And pricing, we -- price mix, we expect to be kind of flattish.

[Laurent Favre, analyst]

Deflation, right?

[Gregoire Poux-Guillaume, executive]

The raw material deflation hasn't changed. I mean it's on our balance sheet already.

[Maarten de Vries, executive]

Yes. So the raw material deflation for, I mean, for the full year and the assumptions we had going into the year are very, very similar. So we've said that the second half of last year would more or less mirror the first half. And then we would see still in Q3, maybe a slight, slight benefit and then probably a slight plus in Q4. So overall, second half is more or less flat. And that's then for the full year is a low to mid-single-digit decline from a raw material deflation perspective. So the assumptions have not changed around raw material.

[Gregoire Poux-Guillaume, executive]

And I think your question, Laurent, maybe I'm over interpreting this, but it's about our Q2 guidance. Is there an element of cautiousness in that guidance? Because if you take the volume growth that we're announcing and you take flattish pricing and you take the raw mat trends that we're seeing, you could argue that the numbers could be higher. What we have built in there is we have some element of cautiousness on the volumes because although we've delivered 2% volume growth in Q1, as you've seen from other industry players, the market is not really rebounding significantly. We're doing well in a market that doesn't have that much direction. And then the second aspect is that there is OpEx inflation in this industry, and we're working hard to mitigate, but there is also some element of cautiousness for how fast we can mitigate that OpEx inflation, which this year is mostly wage-driven and the wage stuff kind of happens when it happens. And we've done our CLA negotiations, so we know the impact and now we're working on the mitigation. So those are the pluses and minuses. Does that help?

[Laurent Favre, analyst]

Yes, it does.

[Operator]

Our next question comes from Aron Ceccarelli from Berenberg.

[Aron Ceccarelli, analyst]

I have 2 questions. The first one is on price mix in the Deco EMEA. Maybe it would be interesting if you can elaborate what drives this strong performance. Also if you can split between price and mix? And how you see this sustainable going into Q2? The second one is on volumes. It looks like you're seeing some green shoots from industrial coatings, packaging and also coil, ability on packaging, you are already benefiting temporarily from some issues at one of your competitors. Just trying to understand what kind of conversations you're having with customers, what kind of sustainability do you see in this performance? And lastly, maybe on Aerospace. Just trying to understand what's happening there. How should we think about aerospace volume in Q2?

[Gregoire Poux-Guillaume, executive]

All right. Price mix for Deco EMEA. We've got essentially flattish volumes in Q1, which is kind of similar to what we had in the second half of last year. So our business has really stabilized in a market, which isn't great, but is getting better. And we've done well in the U.K. DIY market, which is important for us, and we've done well in South and Eastern Europe also. So if you take pricing overall in Europe, we're not taking down pricing in Deco. We're defending pricing. There are areas where we are actually increasing pricing, but it's a market in which price increases are challenging because consumers are stretched and retailers are sensitive to this.

But you have to keep in mind that a big part of our presence is actually small retailers. The large-scale retailers represent 15% of our sales in Europe, so 1.5. So that means that 85% of our sales are between the smaller retailers for DIY and the professional channels. So there is pricing power. I wouldn't overplay it this year because it's a year of consolidation more than anything in Europe, but we can defend and, in some cases, increase pricing in Deco Europe.

And beyond that, the mix is mostly going to be geographical. There isn't really a big shift between segments in Europe. There's no significant down trading that we can see even after a few years of price increases. It's more about geographical mix. Southern Europe has a tendency to be lower profitability than Northern Europe. If you have more North Africa, you'll have a lower mix. The U.K. is a positive mix effect.

So as you see from what we're flagging for Q1, we did well in the U.K. That's a positive mix effect. We did well in South and Eastern Europe. That's overall a negative mix effect. But we'll leave it -- we'll try not to split hair too much. Price mix is okay, and Europe has been comparatively a bright spot for us in the sense that, that level of sustained performance, flat volumes and prices flat to up for a few quarters now is -- it bodes well for the future.

Keep in mind that this is still a market that's 4%, 5% below 2019 levels from a volume perspective. So there's still some rebound to come from that market. Your second question was on packaging. It was a Sherwin-Williams question. They had a fire in the U.S. We picked up some of their volumes. Whenever that happens, we're certainly not trying to benefit from other people's issues. But whenever you scramble to help customers usually try to extract some sort of volume guarantees for a longer period than just the period that is necessary to fix the issue at your competitors because scrambling to integrate that volume into our production planning does come with effort and cost.

So these are not necessarily -- this is not necessarily market share that will hang on to the long term, but these are volumes that we have some level of visibility on for more than just the short-term period. And therefore, this is something that you can extrapolate further into the year. But once again, these things come and go, and everybody has issues at some point. So we're just happy that we were in a position to help both the customers and in some ways, Sherwin.

And then the aero question, we -- well actually, I said that we were flat in aero in Q1 on temporary supply constraints. I guess this is an overly cryptic way of saying the market is really good. We've got a really strong backlog. We had some production challenges, which slowed us down a little bit in Q1, but that's just our way of flagging that we have strong aspirations for our Aerospace business going forward and nothing's changed. It was just a little bit of internal hiccup in Q1 that we feel is behind us now. Did I answer all your questions?

[Aron Ceccarelli, analyst]

Yes. Just maybe excluding packaging, I was interested about Industrial Coatings and Coil. Whether performance seems a bit better probably than we expected.

[Gregoire Poux-Guillaume, executive]

Yes. Coil has been okay. Coil has been okay. And then the 2 wood businesses have been challenging, but they flattened in terms of volumes. So, but yes, you're correct. I mean packaging has been good for the reasons that -- partly for the reasons that you've mentioned, and coil has been right and should continue to be okay. I mean there's nothing that's booming. Let's be honest here. Industrial Coatings is not an easy part of our business currently, but the metal side is doing okay, and the wood side is struggling.

[Operator]

Our next question today comes from Chetan Udeshi from JPMorgan.

[Chetan Udeshi, analyst]

I just wanted to explore this contingent liability that you have disclosed today, but also in the annual report. And what I was curious about and about is, I've seen some press talking about the claims against Akzo amounting to as much as [ AUD 2.5 billion ]. Can you confirm if that's the number that is being claimed, because it just seems pretty, pretty high for sales for Akzo which might have been much, much more smaller for that project? And second, I was just curious because I went back and looked at the annual report of 2022 or 2021 and it didn't seem this was flagged as a contingent liability then. And I think this lawsuit has been ongoing for 2, 3 years. So what has changed that you are now starting to disclose this now compared to maybe back in '22 or 2021?

[Maarten de Vries, executive]

Yes, let me share a little bit of context. So first of all, this is indeed about a large LNG project from, I mean, the period of 2015. Why we have disclosed this right now is that this is going to court on June 17. There was a court-mandated mediation, which was not successful. And I mean that's the reason why we are now kind of disclosing this. I mean, overall, we deny liability in this case. We also challenged the amounts which are out there because there is a lot of uncertainty around this also on uncertainty in terms of future repair. And on top of that, we have significant insurance coverage if there would be any liability on our side.

So in that sense, it's more the triggering event of the fact that the mediation was not successful, and it goes to court and the core data is in the open. But overall, this case has been public or for multiple years, and there are more cases where there are large claims coming at us, which are frivolous. Recently, there was a machine claim, which basically didn't relate to Akzo Nobel, but to Nouryon, so this happens more often. And again, there was more a triggering event to share this in our annual report and as well as in our Q1 disclosure.

[Gregoire Poux-Guillaume, executive]

Yes. And to Maarten's point, if you take the [ Xene ] example, it's a claim that relates to Nouryon for which we have full indemnification from Nouryon, but we got a lot of questions from investors through back channels, which showed us that it's better to flag these things upfront so that you can have the discussion upfront about insurance coverage and liability and so on. So that's what we did. But once again, we feel that we have a very strong legal case. We have also strong insurance coverage. So it's just our fulfilling or disclosure obligations.

[Operator]

Our next question comes from Peter Clark from Societe Generale Group.

[Peter Anthony Clark, analyst]

Quick one. Well, first of all, I want to say thank you very nice for the fast presentation in under 10 minutes, I like that. It's on the EMEA price mix question that came up earlier. I just want to double check, you're sort of pointing to maybe modest price ahead in selected areas and mix because obviously, when you look at the Q1 numbers, it looks like it was mid-single-digit stripping out the volume. So effectively, just on that guidance for that sort of EMEA price mix going forward?

And then a number of companies obviously talking about wage inflation. You spoke about is in London in February. I mean just wondering what sort of number we should be looking at for this year? Is it a sort of low mid-single-digit number globally on wage inflation? And then a quick one on China. Obviously, the pricing there is exactly the opposite of EMEA. It's obviously down. It looks like double digit. Just any signs that, that can stabilize going forward, you'll obviously start backing against year-on-year comp gets easier. But China is a very competitive market. Just some comments on that.

[Gregoire Poux-Guillaume, executive]

Yes. I'll take the 2 price mix questions for EMEA in China, and Maarten will address the wage inflation. Europe, as I explained in Deco EMEA, we have pricing. We have channel fragmentation. We have in a lot of countries, high market share. So we are able to fulfill our role as a market leader. I wouldn't overread this, though. We're on the back of 25% of price increase on a 2-year stack before that. So you're also at the point where everybody is conscious of the need to drive demand and for traffic. And therefore, we also have to play our role in that discussion with the channels.

But overall, we have pricing power in Europe, and we don't have that pricing power in China because in China, we're the #2 player in retail. Number one is Nippon, which is significantly larger than we are. We're a lot more premium than they are. So we have a slightly different positioning. But our 2 big competitors in China, Nippon and Shanghai Shu historically have large project businesses. These project businesses are essentially selling large volumes of paint to real estate developers, promoters. These volumes are usually mass-market products or sort of lower quality products.

And what happened when the real estate market ground to a halt in China is that our competitors ended up with a lot of spare capacity on their hands and much lower volumes. And the way they counter that is that they stepped up their efforts, particularly in the mass market, kind of similar products but for retail. We're not a big player in the mass markets in China. We're a leader in premium. We compete in the mid-market, but we're fairly small in mass. But the push that they're undertaking on the mass market with price decreases has pulled a little bit the rest of the market with it. And therefore, that's led us to follow in order to be competitive.

Now, a lot of our measures today are more about cost competitiveness than they are about taking down pricing. And we see cost optimization potential in our operations in China, and we are extracting these opportunities. I would also say that the price decreases happened mostly before Chinese New Year, and I think the market seems to have stabilized now. But we'll see. It's really a bigger play in China, which is that Nippon and Shanghai Shu are squeezing out the domestic competitors in the mass market. And this is how they're consolidating market share in a segment which is not an important segment for us, but still has a knock-on effect overall in the business. So long explanation on China. Deco EMEA, I had addressed already. And so U.S., it's pluses and minuses. Pricing power in Europe, price giving in China and an overall pricing for Q1 for all of Akzo, which is flat to slightly up. Maarten, wage?

[Maarten de Vries, executive]

Yes. On the wage bill, a few comments. So first of all, we clearly see a catch-up effect of inflation in wage bill compared to previous years which were, I mean, where the inflation was more moderate. The overall impact is high single digits on our wage bill and really starts to kick in, specifically in the second quarter. It depends, of course, on the timing of new CLA agreements, but it is also part of our normal cycle of wage increases. So that will also be visible in our Q2 numbers. So if I talk overall from an OpEx perspective, sequential OpEx in Q1 was very much flat versus Q4, and we see a sequential increase in our OpEx driven by wage bill inflation, what Greg mentioned earlier, but also, of course, as we are investing to support our growth. So that is happening, and that is, of course, what we need to address going forward to make sure that we have the efficiency measures to at least offset part of this.

[Gregoire Poux-Guillaume, executive]

Peter, did you get what you need? Or do you have a follow-up?

[Peter Anthony Clark, analyst]

Yes, that's fine. Just finally on the EMEA price mix. Obviously, the mid-single-digit number in 1Q is about trend to you expect price, but obviously, that was a one-off number.

[Gregoire Poux-Guillaume, executive]

Yes. I'm not sure I get to the same number you do in terms of -- what are we trying to -- I'm not sure I get to the same number you do in Q1, but I would say that, once again, I wouldn't extrapolate Q1. I think Europe, Deco EMEA is a healthy market for us, but don't overplay the pricing power in a year of consolidation. There are market pressures. We feel that all things being equal, we can take prices up and certainly not down, but it'll be modest because this is a year once again where I think everybody in Europe needs to reassure themselves that consumers are working the floors of their shops. And as we do that, then we'll have other opportunities down the road.

[Operator]

Our next question today comes from Georgina Fraser from Goldman Sachs.

[Georgina Iwamoto, analyst]

Could we just revisit the 2Q guidance a little bit here. The typical seasonality implies something decently above the EUR 420 million to EUR 440 million. Can I just check that what you're saying is you've got very good visibility of this increase in OpEx into the second quarter, and that's why we won't see the usual sequential increase?

[Maarten de Vries, executive]

Yes, I would say of all the elements, the one sticking out is really the sequential OpEx increase driven by wage inflation and driven by additional investments to support our growth trajectory.

[Georgina Iwamoto, analyst]

Okay. The sequentially -- yes, but then so what we're seeing is that sequentially better aero probably sequentially better China is not going to kind of help offset that. And so the kind of 30% jump that we usually see from Q2 versus Q1 doesn't apply?

[Maarten de Vries, executive]

What we said, and I think Greg mentioned it earlier that we are, of course, cautious in terms of our volume trajectory when we look at the guidance we've given in terms of the EUR 420 million to the EUR 440 million.

[Operator]

Our next question today comes from Geoff Haire from UBS.

[Geoffery Haire, analyst]

Actually, all my questions have been asked, so I don't need to tick up people's time.

[Operator]

Our next question comes from Jaideep Pandya from On Field Investment Research.

[Jaideep Pandya, analyst]

First question really is on your plant performance, these investments for growth. I mean if I'm being a bit cynical, you guys and not just Akzo, but the industry in general is certainly in a low single-digit growth environment, and there is clearly capacity that is out there. So could you help us understand where are these investments and what is the return on these investments when you are focusing on growth? And then the second part of that question is back in a day, a few years ago, you had similar supply chain issues in Marine when orders are coming through. Now it feels like you have some internal issues in Aerospace.

Why is it that every time there is a sort of a sharp jump in order book, you start having some production issues, especially given Greg, your plan is to shut capacity on a 3-, 4-year view? I'm very curious how are you looking at this given you're not -- I wouldn't call you an Akzo veteran, you're still fresh. That's my first question.

The second question, and I really appreciate you guys want to be cautious, it's around your -- how you're guiding the market. So, because when I look through your assumptions, what you mentioned and how Q1 planned, but more or less were in line, but you came EUR 22 million above what you were guiding. So now when you're guiding in Q2, how much conservative are you sort of baking into the Q2 guide? That's my second question. And the last question really comes back sort of on Marine and Protective, where are we with the improvement plan with regards to margin improvement there? If you could just help us understand.

[Gregoire Poux-Guillaume, executive]

All right. So Jaideep, you're not cynical, but you're generalizing a little bit though. It's not like every time something grows, bad things happen at Akzo. That's a bit of an exaggeration here. The only thing that we did and maybe I have to stop being so talkative, but my thoughts looking at our own results was that Q1 Aerospace volumes flat would raise questions because Aerospace is a really good market and which we're the market leader. We've got north of 40% market share.

So in the spirit of full disclosure in helping you guys understand the business, I pointed out to the fact that it's not that the market is the issue is that we struggled a little with some internal issues in Q1 that don't change at all our capacity to book orders or to serve our customers. It's just that we push less product out the door. It's a temporary thing, as I said, and what's the technical expression, s*** happens. Sometimes you're ramping up and you have breakdown -- that's the nature of running a large business. It's not something that will hinder the Aerospace business going forward, but flat volumes in Q1 for me is a disappointing outcome for Aerospace.

And therefore, I wanted to explain why that was. Issues in the past in Marine and Protective, I can really tell you. But what I can tell you is that service levels at Akzo Nobel have improved very significantly over the last 18 months to the point where we are in, pretty much all of our businesses with a few exceptions because there's always a few pressure points, at levels which are fully delivering on the expectations of our customers. So I probably created an issue where there wasn't one by trying to explain why volumes were flat in Aerospace. I expect Aerospace to be a mid-single-digit growth business in the next few years and the next few years starts now. So you'll see next quarter that this is a healthy business.

What else, your -- the low single-digit growth in the industry versus the capacity available. And your question is, why are we investing in capacity? Well, that capacity is not spread out evenly. So average capacity utilization is not always very high in our industry, and it's particularly not very high at Akzo Nobel. Not very high in our industry because pings and coatings is not a capital-intensive industry. If you take Akzo, which is an EUR 11 billion business in terms of turnover, a fixed manufacturing cost for EUR 1 billion.

So people have a tendency to be a little bit lazy about manufacturing capacity because there is a view that it's not costing you that much and it's giving you flexibility. Now I don't subscribe to that view. I think that over time, factories that are under loaded have a tendency to be underperforming. And this is why we're addressing that overcapacity in places where it exists. So if you take Deco EMEA manufacturing capacity, I was very clear that capacity utilization is in the mid-50s. It should really be in the high 70s and not higher than that because it's a seasonal business.

And if I start going higher in terms of capacity utilization, then I will have to compensate by inventory buildups at the beginning of the season, and that's expensive, too. So think about capacity utilization for something like Deco in the high 70s, where we'd be happy with those numbers. And that's why we're going to be closing factories and that's why we're going to be rationalizing. But if you take our Powder business, our Powder business is operating at very high-capacity utilization, and there, I need additional capacity. And the way we free up that additional capacity is I don't want to be building factories because, one, it's costly and two, it's time consuming. So instead, what we're doing is we're investing in debottlenecking. We're doing investment upgrades. We're doing automation, and we're essentially freeing up additional capacity in existing plants.

So once again, you got to look at the businesses in a differentiated way. There are places where there's excess capacity. Deco, certainly in Europe being a key example. But another example is wood in North America. So we have to address that structural overcapacity where it exists. And there are places where if we had additional capacity, the business would grow faster and would be more profitable. And that is the case in Aerospace, that is the case in Powder, and I could give you a few other examples. So overall answer to your question, I hope it helps. There was a question on guidance, I think. Maarten, do you want to take that one again?

[Maarten de Vries, executive]

Yes. You mentioned our Q2 guidance and whether we are conservative. I would say we're not conservative. We are just realistic. And looking at the pluses and the minuses, what we see in front of us and give a realistic view of how we see Q2 shaping up. And again, if there is more volume support, it might be a little bit better. But let's see as we go forward. So for now, the guidance is EUR 420 to EUR 440 million. And I think it's much more important to look at the full year guidance, which we reconfirm to the EUR 1.5 billion to the EUR 1.65 billion adjusted EBITDA because for us, our focus is really to hit the full year guidance.

[Gregoire Poux-Guillaume, executive]

You had a final question. I'm sorry, I'm taking them sequentially. I should have bundled it with your earlier Marine and Protective discussion. Marine, our Marine Protective improvement plan is going really well. What we said is that this is a business where we were a market leader, where we've dropped in the rankings in large part because of self-inflicted pain. We have realigned our business in the sense that we are investing on the protective side and passive fire protection to rebuild our competitiveness on the infrastructure side of the business. We're doing really well in oil and gas, but we are underrepresented in infrastructure. And in Marine, we stepped up our efforts on these technical newbuilds that I've talked about earlier.

If you take that business, which was the Marine and Protective business, which was a mid-teens profitability business 7 years ago, which bottomed out as a low single-digit profitability business. I'm talking operating profitability here. Bottom that is a low single-digit profitability business in 2022. We were mid-single digits last year. We are going to be -- my aim is to get to the teams in terms of profitability this year. I think that we're more likely to get to the high single digits in the teens because as we ramp up, some of that cost realignment and some of that operational leverage takes a little bit of time to click in. But this is a business that we see in the midterm back in the teens in terms of profitability.

And a lot of that is going to be driven by growth because it's a business that has significant growth potential that we didn't capitalize on the last few years. And as I said to an earlier question, we have already won a lot of the business that will drive the growth in Marine in the next few years, and we'll recognize that business in terms of recognizing revenue as we deliver. So think about them in terms of almost like a project business, the backlog is filling up. The order book looks good, and the sales will naturally come as we execute and as we deliver. So I'm excited about the Marine and Protective business, and there is absolutely nothing that's changed to my expectations for that business. If anything, I'd like those expectations to materialize earlier because of the potential that we have. Anything else on that? Or did I answer your question?

[Jaideep Pandya, analyst]

No, that's all.

[Operator]

Our next question is a follow-up from Chetan Udeshi from JPMorgan.

[Chetan Udeshi, analyst]

Quick follow-up, Maarten. I think I heard you say or mentioned that the working capital at the end of second quarter will be showing a similar dynamic to what we saw in Q1, or did I miss or something? I was just trying to just understand whether this buildup that we see or saw in Q1, is that going to unwind a little bit into Q2, just given that there was this timing issue associated with the Easter holidays? Or did you actually meant that the second quarter working capital will be more or less same as in Q1? And if that's common, then why are we not seeing some of that increase from Q1 unwind in the second quarter?

[Maarten de Vries, executive]

Chetan, my comment was purely related to accounts receivable. So we've seen a shift in the collection to the first days in April because of the ending of the quarter at the Friday was the 29th of March. And we see a similar collection effect at the end of June, where we have a similar case where the end of the quarter is in the weekend. So probably I said that the collection we had in April will not be an advantage for Q2, but we see a similar shift at the end of Q2. That's the only comment I made.

[Gregoire Poux-Guillaume, executive]

We all have our excuse. Our competitors, it was like they were taken by surprise by Easter, and we were taken by surprise by the weekend, so. None of these are very good excuses, but the last few days, the last 2 days of the quarter were on a weekend. We got a lot of cash receivables collection, a lot of cash coming in, in the first couple of days of the second quarter. It is what it is. We wish we would have managed it a little bit better. But look, it's a few tens of million euros of cash slipping from a couple of days earlier, a couple of days later. It doesn't change the face of the earth. We're still fully committed to our efforts to improve working capital. We've got much better planning visibility now than we've ever had and that should lead to our optimizing the working capital back towards that 13% of sales level that we talked about. And to one of the very good earlier questions that we received as part of our industrial transformation that number will still improve over time as we rationalize our footprint.

[Operator]

Our last question today comes from Alex Stewart from Barclays.

[Alex Stewart, analyst]

You don't give a bridge anymore as we know, but just trying to understand what the OpEx inflation is year-to-year. I guess in the first quarter, it was something like EUR 40 million year-on-year. So if I look to the second quarter and I hear what you're saying about wage settlements, if we assume it's up EUR 50 million year-on-year in the second quarter, that's about EUR 200 million annualized. Your employee costs at a group level of EUR 2 billion. So even if I assume that's up 8%, that's EUR 160 million for the year, but you should be able to offset a decent amount of that. I suppose the bottom line of my question is, how can you be doing EUR 50 million a quarter with OpEx inflation when your total employee salaries was only EUR 2 billion and you've got measures in place to offset some of that. It just seems like very big numbers.

[Maarten de Vries, executive]

Yes, Alex, I'm just repeating what I said earlier. So sequentially, OpEx in Q1 was flat versus Q4. We will see a tick up of our OpEx in Q2 driven by weak inflation. But what we're also investing in growth, for instance, in additional advertising and promotion in Deco EMEA as an example. But overall, your comment is right. So if you look at the total inflation for the company this year, you're talking around about EUR 200 million. The bulk of that inflation sits indeed in wage inflation. And we have said earlier that we have programs to offset close to half of that, and that is all in progress, obviously.

[Alex Stewart, analyst]

Okay. So the inflation is EUR 200 million gross, maybe EUR 100 million net or EUR 25 million a quarter. Is that the right way to think about it?

[Maarten de Vries, executive]

Yes, more or less. But I think it's important again to look at the sequential developments from Q1 to Q2 as I flagged out.

[Gregoire Poux-Guillaume, executive]

Yes. Because you're roughly EUR 100 million on the year as the net number is roughly correct. But Q1, as Maarten said, was sequentially flat. The wage is a big driver and these collective labor agreement discussions usually happen in Q1 get finalized in Q1. So you see more of the impact in Q2 that you get in Q1. So it's a bit more backloaded than that. But it's, as Maarten said, we've got measures to mitigate and to compensate. But it's the worst year in terms of wage inflation. Last year was despite the fact that inflation was higher, we were still protected by some of the labor agreements that we had in place. I think next year, you'll see people coming back to reality because inflation has tapered off. And therefore, the logic for further increases has largely disappeared. But this year is that painful catch-up effect where everybody is trying to reclaim some of their purchasing power. And that's -- you're seeing it with us, you're seeing it with our competitors. But once again, our job is to mitigate that.

[Alex Stewart, analyst]

Very helpful. Can I just finally ask, is the wage settlement, the wage inflation you're seeing in the P&L? Is that roughly what you expected it to be for the year?

[Maarten de Vries, executive]

It's higher. It's a bit higher because some of the CLA outcomes have been higher compared to what we originally expected in our numbers.

[Operator]

That concludes the Q&A portion of today's call. I will now hand back over to Gregoire Poux-Guillaume for any closing remarks.

[Gregoire Poux-Guillaume, executive]

I'll keep it short. As Peter earlier mentioned, we managed to keep the presentation to 8 minutes. I actually timed myself, so. And I'll try to not compensate by making the closing remarks longer than they need to be. Q1 was a good quarter for us in the sense that we delivered both volume growth and margin expansion as we did in Q4 last year. We're on track to deliver our year as guided. We are certainly cautious about the market, but we're confident about our momentum. And we look forward to reconvening with you guys a little bit later to tell you how Q2 has gone. But -- Operator, please close the call.

[Operator]

Thank you. That concludes today's call. You may now disconnect your lines.