Akzo Nobel NV

AEX:AKZA

Earnings Call Transcript 2022-Q4

[Operator]

Welcome, everyone, and thank you all for standing by. [Operator Instructions] Today's 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]

Thank you, Jackie. Hello and welcome to AkzoNobel's investor update for the fourth quarter and full year of 2022. I'm Kenny Chae, Head of Investor Relations. Today, our CEO, Greg Poux-Guillaume; 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 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 applies to 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]

Thank you, Kenny. Good morning, everyone, and welcome to our Q4 investor update, my first as AkzoNobel CEO. It's an honor to be the CEO of AkzoNobel. 2022 is a challenging year, and it shows in our Q4 results, but I'm confident that AkzoNobel has what it takes to thrive.

In Q4, we delivered EUR 2.6 billion of revenue and revenue growth of 8.4%, driven by better-than-expected pricing of 11% with double-digit percentage pricing in both paints and coatings. Pricing more than offset raw material inflation for the fourth consecutive quarter, but adjusted operating income was EUR 126 million as a result of lower volumes driven by weak demand, particularly in Europe, but also in China because of lockdowns.

Full year 2022 revenue grew by 13% to EUR 10.8 billion. Strong pricing growth of 14% more than offset the total raw material and freight cost headwind of over EUR 1.1 billion for 2022. Lower volumes and higher operating expenses resulted in a lower adjusted operating income of EUR 789 million for the year.

We completed a EUR 500 million in our buyback program in December, and we are proposing a final dividend of EUR 1.54 per share for a total dividend of EUR 1.98 per share for 2022 as per our policy of stable to rising dividends.

Now turning to Slide 4. I've been impressed by the caliber of people at AkzoNobel. I'm pleased to announce 4 appointments to our executive committee, 4 business leaders who bring a market view to the executive committee. This brings our executive committee to 9 people, including 3 women. Combined, our 4 new members have over 50 years of experience within Akzo, and we will increasingly expose them to you, our investors, addressing one of the suggestions from our investor survey.

I'm also pleased to have Ben Noteboom as our Chair-Elect of the Supervisory Board. Ben has a strong track record and brings years of experience in the chemical industry. He's currently meeting our people and investing significant time in getting to know AkzoNobel from the inside, and I look forward to working with him on our transformation.

Moving to Slide 5. In the fourth quarter, we completed the acquisition of Lankwitzer's wheel liquid coatings business. This is a smaller but strategic acquisition which complements our wheel Powder Coatings offering and makes us a one-stop shop for the automotive wheels industry.

We continue to work closely with our customers, and it's paying off. Tata Steel recently recognized AkzoNobel as their global supplier of the year. They only designate one, so I'm extremely proud that was us and that our team were recognized for the value we provide to Tata Steel and also to all our other customers.

We've also broadened our partnership with BYD, the world's leading manufacturer of electric vehicles. We're now their global refinish partner, and we are extending our relationship to serve their body shops and improve repair networks on a global level.

Finally, the launch of our new high-performance biocide-free anti-fouling technology is helping recreational boaters to reduce the impact on the environment and to protect the marine ecosystem. I'm excited that we continue to champion progress in the space through the international brand, an undisputed leader in Marine and Protective and yachts coatings.

Turning to Slide 6 and our ESG ambitions. AkzoNobel leads the paints and coatings market when it comes to sustainability. We hold the highest possible rating for ESG performance from external rating agencies like MSCI, and the company is considered low risk by Sustainalytics.

And we're making a difference from the ground up. If you take our Paint the Future platform, we're driving collaborative innovation with customers and suppliers to reduce Scope 3 emissions. Together with our partners, we launched 5 additional emissions reduction projects in Q4.

I'm also pleased to announce that our North American operations are now 100% on renewable electricity, as already are our European operations. We're halfway to reducing carbon emissions in our own operations by 50%. And with our new product launches, 40% of our revenue comes from sustainable solutions.

We achieved circular use of materials for 56% of our obsolete material and waste streams and have made good progress through social programs running through our AkzoNobel Cares umbrella, empowering almost 40,000 members of local community with new painting skills.

Moving to Slide 7. We provide an update and more information on recent significant acquisitions, Orbis and Kansai Africa. In April, we welcomed our new colleagues from Grupo Orbis, a strong business which will help strengthen our market position in Latin America. We're pleased with how this business is performing. 2022 revenue and profit was ahead of our plan. And based on last year's run rate, our total Latin American business is now more than EUR 1.4 billion in annual revenue.

In the midterm, we also see a great opportunity to realize synergies and bring profitability in line with the AkzoNobel LatAm business, Latin American business. Our historical businesses trade at 200 to 300 basis points higher than Orbis does today. Orbis is around 9% EBITDA today, so your math will get you around 12%. But actually, this is in a depressed year, 2022. Usually, we're mid-teens in terms of EBITDA profitability in Latin America for AkzoNobel.

We also announced in June 2022 our intention to acquire the African paints and coatings activities of Kansai Paint. Pending merger clearance, currently in Phase 2 in South Africa, we expect this transaction to close during the second half of 2023. Similarly to Orbis, this acquisition will strengthen our position in the region and provide an excellent platform for future growth.

Turning to Slide 8. We outlined the current state of market demand. In Europe, we continue to see the impact of low consumer confidence and incrementally weaker market demand, while the impact of destocking will continue to linger in some segments into Q1.

In China, COVID continued to impact demand in Q4, but we're encouraged by the reopening and the signs of demand recovery. However, we anticipate that the recovery will take a number of months as infection rates remain at elevated levels. As a result, we expect demand to remain weak in Q1 and to recover sequentially thereafter in China.

Within Coatings, the macroeconomic environment is driving softer demand in our Industrial Coatings business, but also in many segments of Powder Coatings. In Automotive and Specialty, we see strong demand in aerospace and automotive, especially in Asia, with Vehicle Refinish, which continues to show positive trends. The sequential recovery in Marine and Protective continues with particularly encouraging volumes in Asia.

I'll now hand over to Maarten to dive into the numbers on Slide 10.

[Maarten de Vries, executive]

Yes. Thank you, Greg, and hello, everybody on the call. In the fourth quarter, our reported revenue was up 8% versus prior year and up 9% in constant currencies. Volumes were 9% lower, which was more than offset by pricing of 11%. Grupo Orbis acquisition added 5% to revenue with top and bottom line performance ahead of plan. Adjusted operating income decreased to EUR 126 million.

Fourth quarter revenue for Decorative Paints was up 7% versus prior year and up 9% in constant currencies. Paint volumes were 9% lower, mainly due to lower demand in Europe and COVID-19 impact in China. The decrease was more than offset by strong pricing of 10%, while acquisitions added 8% to revenue. Despite the strong revenue and pricing performance of Decorative Paints, the impact from volumes resulted in lower adjusted operating income of EUR 54 million.

Fourth quarter revenue for Performance Coatings was up 10% versus prior year and up 9% in constant currencies. Coatings volumes were 9% lower, mainly due to weaker demand in Industrial and Powder Coatings, along with COVID-19 impact in China, while Marine and Protective, Aerospace and Automotive segments saw positive volume trends in the fourth quarter.

Coatings volumes were also impacted by suspension of businesses in Russia, which has a negative 1% impact on volumes for the fourth quarter. Lower volumes in Coatings were more than offset by strong pricing of 12%, while acquisitions added 3% to revenue. In the fourth quarter, adjusted operating income for Coatings came in at EUR 96 million.

Now moving to the next slide. As highlighted earlier, I'm pleased to inform that we delivered our fourth consecutive quarter of positive net pricing versus raw material inflation. Pricing of EUR 275 million was more than enough to offset EUR 209 million of raw material and freight inflation in the quarter. The decline in volumes of 9% translated into a negative EUR 98 million impact on adjusted operating income, while mix impact was positive EUR 60 million.

Currencies though had a negative impact of EUR 8 million. Operating expenses and other one-offs, excluding the hyperinflation accounting impact, were EUR 43 million higher year-on-year. Savings initiatives were more than offset by higher operating expenses from supply chain and manufacturing costs. And then hyperinflation accounting for Turkey and Argentina led to a negative EUR 16 million impact versus prior year in the fourth quarter.

Now moving to the next slide. For the fourth quarter, the impact of raw material and freight inflation was EUR 209 million, as I just mentioned, versus the same period of prior year. Combined with the EUR 325 million impact from the same quarter prior year, the total cumulative inflationary impact over a 2-year period was EUR 534 million. With cumulative inflation having plateaued in Q4, we expect raw material and freight inflation to impact the first quarter 2023 results by EUR 80 million to EUR 110 million versus prior year.

On pricing, we delivered 11% in the fourth quarter, which combined with a 12.5% pricing from the same quarter last year, represents a cumulative pricing of 23.5% over the 2-year period. For the first quarter of 2023, we expect pricing to land between 4% and 6% year-on-year. Over the past 8 quarters, cumulative impact from raw material and freight inflation reached EUR 1.9 billion, which we have now fully offset with cumulative pricing.

Turning to the next slide. Operating working capital for the fourth quarter continued to be impacted by raw material inflation. Fourth quarter operating working capital as a percentage of revenue came in at 16.9% versus 13% for the end of the same period last year. Seasonal reduction in inventory and continued destocking in the fourth quarter resulted in EUR 275 million less inventory versus the end of the second quarter, an equivalent of EUR 177 million in constant currencies.

Payables decreased mainly as a result of our destocking initiatives in the second half of the year. Free cash flow was positive EUR 195 million for the quarter, which is an improvement versus prior year, mainly due to sequential reduction in working capital. Our destocking initiatives, which will continue in the first quarter in an effort to normalize working capital.

Now the next slide. At the end of '22, our total debt stood at EUR 5.9 billion, and we had EUR 1.9 billion in cash. Around 60% of our debt is long term with maturities staggered to 2032. Our outstanding bonds are at fixed rates with a weighted average coupon of 1.6%. Half of our short-term debt is in commercial papers and the rest is in bank loans, which will be rolled over as needed in the normal course of business. I would like to highlight that all debt is covenant-free.

We finished the year with a net debt-EBITDA leverage ratio of 3.8x, which is well above prior year. Moving forward, we expect to end 2023 with a leverage less than 3.4x, which includes impact from Kansai Paints Africa acquisition. And post '23, we will continue to delever to a target leverage ratio of around 2x.

Moving to the next slide. Adjusted EBITDA was EUR 220 million for the fourth quarter and EUR 1.157 billion for the full year. Despite positive net pricing versus raw material and freight inflation throughout the year, 2022 profit was mainly impacted due to lower volumes and higher operating expenses.

Fourth quarter adjusted earnings per share was down to EUR 0.16 per share, while the final dividend of EUR 1.54 has been proposed in line with our stable to rising dividend policy. Having completed our EUR 500 million share buyback program, we ended the year at around 170 million shares net of treasury shares. This represents a 33% reduction of share count versus the end of 2018.

Now back to Greg to talk about the outlook for 2023.

[Gregoire Poux-Guillaume, executive]

Thanks, Maarten. With the backdrop of continued macroeconomic uncertainties, we have set 4 clear priorities for the organization in 2023. The first is pricing, which will continue in the first quarter to be inflationary. As raw material prices progressively retreat, our focus will shift to protecting our pricing gains, and we believe this is achievable on around half of our portfolio where we are not indexed.

Our second priority for 2023 is to realize benefits from raw material deflation. It is key that we continue to destock and rightsize our inventories, not only to generate cash but also to capitalize on the ongoing raw material deflation. Given current inventories, the lag to get cheaper raw mats to our bottom line ranges from a month in China to 5 months in Europe, which is too much. As a word of caution, while we expect meaningful benefits from raw material deflation in the coming quarters, it is difficult to predict how much more deflation there will be in the second half of the year.

Our third priority is cost. While raw material prices are coming down, operating expenses, including wages, energy and inland freight, continue to ramp up with inflation to the tune of an expected EUR 200 million in 2023. We've launched aggressive cost-saving initiatives with the aim to fully neutralize the EUR 200 million in 2023. And once again, these initiatives are already launched.

Finally, we need to delever. As Maarten mentioned, our leverage is currently high, and we will focus on normalizing our working capital to improve cash flow. As our margin management and cost initiatives improve profitability, our leverage ratio should drop by 1 turn in 2023, excluding acquisitions. As we expected -- as we expect EUR 0.5 billion of cash out in the second half for the Kansai Africa acquisition, that means getting below 3.4x by the end of the year. This will require strict capital allocation with no share buybacks and no new M&A of significance.

With the 4 priorities in mind, we turn to Slide 18 and our 2023 financial projections. Based on the current market conditions, we expect to deliver adjusted EBITDA of between EUR 1.2 billion and EUR 1.5 billion. This is based on our expectation of volumes being down between 1% and 5% for the year. As the raw material baskets -- as the raw material basket declines, we also expect to realize margin expansion of between EUR 250 million to EUR 450 million, with most of the benefits to be realized in our P&L from Q2 onwards.

Let's now move to Slide 19, which provides a breakdown of how we see volumes across our businesses for 2023. We expect Paints EMEA to be down mid to high single digit for the year, with Q1 particularly weak before we hit easier year-on-year comps from Q2 onwards.

Within Coatings, we're expecting the weakness seen in Industrial and Powder Coatings during Q4 to continue, resulting in 2023 volumes down mid to high single digits. This is largely reflective of the slowdown within the construction-related segments, especially coil, wood and architectural.

We see a wide range of possible outcomes for our China business, reflective of uncertainty over the speed and the magnitude of the business rebound from Q2 onwards as the economy reopens. We also see the benefits of easier year-on-year comps in Q2 onwards. Altogether, we anticipate volumes at group level down 1% to 5%. In terms of phasing, Q1 will be weak before sequential improvement afterwards.

Turning to Slide 20. We remain confident that we will see margin expansion in 2023. We've experienced 2 years of significant disruption in raw mats and unprecedented inflation, which we have mitigated with pricing. In 2021, pricing lagged the inflationary impact, resulting in a negative impact of EUR 153 million in our P&L. As Maarten mentioned, we were successful in catching up with raw materials and freight inflation throughout 2022, resulting in a positive impact of EUR 212 million.

Based on the priorities we have laid out, we expect EUR 250 million to EUR 450 million of positive pricing versus raws this year, and this is based on our expectation of retaining prices in around half of our portfolio during the deflationary cycle. We continue to see clear signs of declining raw material prices and expect low to high single-digit percentage deflation in 2023.

Moving to Slide 21, which covers our expectation for operating expenses and summarizing our current position on cost savings across the group. We anticipate continued inflationary pressure on our OpEx in 2023, largely reflective of non-product-related expenses such as labor and energy. But we are working to fully offset this by our cost-saving program, which are expected to deliver EUR 200 million of savings in the year. Phasing-wise, savings should meaningfully ramp up from Q2 onwards with annualized run rate of EUR 240 million by the end of the year. It's important to say that all corresponding plans are already launched.

Turning to Slide 22, our midterm priorities. Our approach to growth will be focused. Our ability to innovate will generate targeted growth opportunities for us, even in difficult markets. And we will focus on further boosting our already strong market positions rather than planting new flags across the world.

We also see sizable potential from reducing complexity and driving efficiencies in our day-to-day operations. This is the case in the way we approach pricing through the cycle, but also through significant opportunities to simplify and transform our integrate supply chain, resulting in higher asset turnover. We believe this is a material value unlock, and we will give you more details later in the year.

We're also working to return our leverage ratio back towards 2x net debt to EBITDA, a good level for AkzoNobel. And we remain committed to maintaining an investment-grade rating. Our dividend policy remains stable to rising. And as leverage normalizes, we will reassess M&A and buybacks.

Moving to Slide 23. In summary, we continue to see uncertainties in the fourth quarter, especially with further macro and economic slowdown in Europe and COVID-19 impact in China. Significant pricing of 11% helped us deliver 8% revenue growth in the fourth quarter, while pricing more than offset the impact of raw material and freight inflation throughout the year.

In 2023, we expect macroeconomic uncertainties to continue to weight on organic volume growth, especially in Q1, with the year expected to be 1% to 5% down in volumes. Based on our 4 strategic priorities for 2023, we expect to deliver adjusted EBITDA between EUR 1.2 billion and EUR 1.5 billion and a leverage ratio of less than 3.4x by the end of the year.

I now hand over to Kenny for information about upcoming events.

[Kyung Chae, executive]

Thank you, Greg. Before we start the Q&A session, I would like to draw your attention to some of the upcoming events shown on Slide 24. On March 1, we will publish our annual report, and we will hold our Annual General Meeting of Shareholders on April 21. We will publish our first quarter 2023 report on April 25 and the ex-dividend date of our 2022 final dividend is on April 25, and the record date is on April 26, followed by the payment on May 5.

This concludes the formal presentation, and we would be happy to address your questions. Please state your name and company when asking a question. [Operator Instructions] Operator, please start the Q&A session.

[Operator]

[Operator Instructions] Our first question is from Matthew Yates of Bank of America.

[Matthew Yates, analyst]

Welcome, Greg. Maarten, maybe for you, you had pricing up 13% in the quarter, which is a bit better than the 9% to 10% you guided. I know the waterfall chart shows that there was a slight mix benefit. But even so, it looks like you had 11% pure pricing. Sorry to be a bit pedantic, but was there any particular part of the portfolio that did better than you expected in terms of price increases sticking?

And then the second question is whether you can give me a sense of how much inventory you were carrying at year-end versus what you would consider normal. I think earlier in the year, you talked about a couple of extra months of kind of buffer stocks. And in the introductory remarks, Greg referred to, I think it was a number of 5 months for Europe, which seems very elevated. But just where that inventory balance is sitting going into 2023 would be helpful.

[Maarten de Vries, executive]

Yes. First on the pricing. So the net pricing was 11%. And indeed, we originally guided 9% to 10%, so we are very pleased with the progress we are making. In fact, it's a little bit across the portfolio, and it also talks to the overall initiatives we have stepped up to ramp up further pricing, including in the first quarter. By the way, the 2% mix is very much a reflection of Marine and Protective, as Marine and Protective has generally higher ASPs, and that's also where we saw the sequential growth coming through. So no specific areas on the 11%.

And is there anything you want to add to this, Greg?

[Gregoire Poux-Guillaume, executive]

No, the -- if you take China, where market prices have been under pressure since last summer, we're holding pricing as much as we can, and we're essentially stimulating the channels with the promotions. But that's a market that's already under pressure for obvious reasons. But the rest of our business environment is pretty healthy from that perspective.

[Maarten de Vries, executive]

And on the inventories, maybe if we take a step back from mid last year onwards, we have launched this initiative to bring our inventories down with EUR 300 million. We realized EUR 200 million on a comparable currency basis in the second half of the year, still EUR 100 million to go in the first half. Part of that has to come down -- or the main part has to come down, by the way, in the first quarter. But where you -- and Greg talked about, is really the lag effect before we see the raw material, the lower raw material pricing coming through in our P&L.

And Q3, we see, from a price index perspective, we saw the peak in raw material pricing, and we clearly saw the peak from a P&L perspective in the fourth quarter. And we should start to see now raw material coming -- raw material pricing coming through in the first half. But to be honest, given the lag, mostly will come -- will be really visible in the second quarter of this year. And that is related to the lag effect of roughly the 5 months which we see in Europe.

[Operator]

Our next question is from Chetan Udeshi of JPMorgan.

[Chetan Udeshi, analyst]

I just wanted to follow up on Maarten's previous comment on seeing the peak of raw materials in Q1. I was just wondering, how do you think then about the first quarter absolute EBIT development? Because historically, Q1 EBIT is roughly similar to Q4. But given that you are talking about peak in P&L raw materials already seen in Q4, should we be expecting a big improvement in first quarter EBIT versus Q4? That was the first question.

And the second question was, I was just looking at the guidance on volumes and net pricing. And I was just curious because the top end of EUR 450 million of net pricing, at least when I look at my model, I've not seen Akzo deliver that sort of net pricing ever in the history, not to mention that -- with the volume decline of just 1%.

So I'm just curious, how do you see that 2 dynamics playing out together? Delivering on EUR 450 million of net pricing with a volume decline of just 1%. I mean, if you can shed more light on those 2 numbers because they tend to typically move in the opposite direction, that would be useful.

And last question, any guidance on the interest costs for 2023?

[Gregoire Poux-Guillaume, executive]

Very good. We'll take those 3 questions. I'll take 1 and 2. Maarten will jump in and he'll take 3.

So your question on raw materials, we've seen raw materials peaking. But as we said, we have a lag time which varies depending on the business and the region. We're not expecting a very significant margin expansion from that perspective in terms of pricing versus raws in Q1 because of the lag, but also because of the fact that we'll have some inventory revaluations in Q1, and that will neutralize part of the effect. So I think in simple terms, you should assume that Q1 is going to look remarkably like Q4, both in terms of year-on-year volumes and in terms of profit level.

If I move to your -- if you -- and I move to your margin expansion question, you said the EUR 450 million at the high end of the range is more than AkzoNobel's ever experienced. And I think that's actually correct. But I think it's also factually correct to say that the 24% increase in pricing as a stack in 2 years is -- I hate the word unprecedented, but it is unprecedented. And therefore, it's really a factor of how much of the pricing we believe we can hold on to.

And we've guided to about half of our business, and you're going to say, "Well, is it half in value? Or is it half in businesses?" And we can try to dwell further into that. But if we do manage to do that, and we see the raw material deflation that we're talking about here and that raw material deflation carries into the second half of the year, then there's an opportunity for significant margin expansion.

But there's also a lot of question marks. Because I think there's a number of market observers would argue with you that, in the second half of the year, raw material prices could go back up as China accelerates and as some of the European suppliers take out capacity because of the high energy costs.

So there's still a lot of volatility in the year, and that hence the wide range and hence the fact that we didn't have absolute answers for all these questions just because of that volatility. But I think that as we progress out of Q1, we'll start being able to give more intelligent answers.

Maarten, do you want to take the rest?

[Maarten de Vries, executive]

Yes. The last question you had on interest costs. So I mentioned the weighted average coupon, the 1.6% for our bonds. And of course, the short-term debt is higher. So the interest cost will go up a bit in '23 versus '22, but I would say it's not significant in the bigger scheme of things.

[Operator]

Our next question is from Christian Faitz.

[Christian Faitz, analyst]

I guess that's me, Christian Faitz, Kepler Cheuvreux. And yes, I have 2. First of all, can you give us an early indication of how fast Chinese demand has recovered for your product range after the New Year celebrations? What are your salespeople in the field telling you?

And then second, sorry to come back on pricing. But indeed, pricing in both Decorative as well as Performance Coatings has been rather robust since Q3 '21. So congrats on that. But when do you expect to see some resistance for further price hikes at the customer level, particularly given the still difficult demand environment in quite a few of your customer segments?

[Gregoire Poux-Guillaume, executive]

Christian, I'll take the first question. Maarten will take the second.

China demand, recovery post Chinese New Year. I mean, we are still very close to Chinese New Year, so I can't say that I have got meaningful information for you. What I would say is that we don't expect demand to go up significantly in Q1 in China. We believe there's a lag time in all of this. We believe that there's -- essentially, there's a COVID rollout effect, for lack of a better word. And I'll try to give you leading indicators so that you get a feel for what we're seeing.

We've got 4,000 people in China, and a number of factories. And if you take our 4,000 people, post the reopening that was decided by the government, 70%, that's 7-0, of our employees in China contracted COVID. And the quick recovery rate was 98%. So essentially, everybody recovered quickly. It was quite mild. We only had 3 people out of 3,000 that went to a hospital and all 3 of them got out safely.

So if you talk to our people in China, their belief is that AkzoNobel is mostly a Tier 1, Tier 2 city implementation in terms of our plans. But Chinese New Year essentially spread that to the Tier 3, 4, 5, 6 cities, and our people locally expect a similar phenomenon, and they're quite optimistic that the country is actually moving past COVID. I mean, famous last words. I don't want to predict something that I have very little control over, but that's what we're seeing today.

And therefore, we're seeing something that doesn't really lead to a significant volume up-spike in Q1, but starts improving sequentially thereafter. That's our thinking in China, and that's what we're seeing.

Maarten, do you want to add anything, words about pricing?

[Maarten de Vries, executive]

On pricing, maybe to give some more color on pricing. So what we are doing is we are still deploying price increases in the first quarter. I would say that is across the portfolio is kind of you talk about a low single-digit percentage. These are pricing initiatives which are staggered. So some are going for January, some for February, some for March, some even for 1st of April. So we will see some of that impact coming through still in the first quarter.

But there are also areas, like Greg mentioned earlier, in China, where raw materials started to come down already in the fourth quarter, and there is a lot of pressure in the market in terms of price pressure going down. Now we are holding our prices in China, but this is typically an area where we are not able to increase prices anymore. And overall, the argument is, of course, a further inflationary price increase given the overall inflationary environment.

[Christian Faitz, analyst]

Welcome to the team, Greg.

[Gregoire Poux-Guillaume, executive]

Thank you.

[Operator]

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

[Jaideep Pandya, analyst]

The first question is really on pricing. So if you think about the 50% portfolio that is indexed, how do we expect pricing to develop there as raws sort of normalize and go down? Do you expect to give back all the pricing that you've got?

And then on the other 50% which is not indexed, what is your confidence to hold prices? Especially in areas where demand is still relatively weaker and you might see more competition?

And the second question really is on Marine and Protective. What is your visibility on the order book these days? And what do you expect for 2023 in terms of organic growth? And how big is Marine and Protective as a part of the contribution to the EBITDA growth for 2023?

[Gregoire Poux-Guillaume, executive]

Pretty good. I'll take the first question. Maarten will take the second. When we say the 50% of our portfolio which isn't indexed, it's a simplification. I think the actual number of -- so percentage of our revenue that is on index contract, I think it's probably closer to 25% or 30%. But there's another 20% which I called indexed for simplicity because these are in industries where there's concentrated buying power and customers that have very active discussions on those topics. So essentially, areas where we believe that we will follow the patterns of an indexed business. And in these situations, there will certainly be discussions on the raw material basket and that going down and are adapting.

But if you look at the inflationary environment that we're facing, it goes way beyond raw materials. It also impacts things like wages and impacts things like road transport and energy. And therefore, these will be active discussions throughout the year. It's not just a question of the supplier formula, and that's the number. It's a question of where is the balance in terms of the give and take that we have within these contracts and within these discussions.

As for the other 50%, I think we've demonstrated, in our retail businesses, in our Deco business, that there is pricing power to those brands and there is a constructive discussion with the channels. There will be an interesting discussion if there's a moment where retailers feel like footfall is falling, traffic is falling because paint is one of the categories that brings in people, that brings in customers.

But for the time being, we still see inflationary pricing. If you take Europe, for example, in our retail channels, we believe that there's still a strong argument for that, and we will continue to push pricing through -- in Q1. And then thereafter, it's really a question of assessing how the market develops and what's the raw material trajectory and how we can absorb the rest of the cost increases that we're facing in 2023.

Maarten?

[Maarten de Vries, executive]

Yes. And then on your question on MPY. Maybe a few remarks to be made. First of all, as we mentioned in Q4, we've seen sequential improvement in the MPY business. And for 2023, we flagged that we see a growth, an overall growth, of low single digits.

You're asking about the visibility. And specifically for Marine and Protective, we see more and more projects coming on stream, in fact, in the coming 3 years. Not only this year, but also '24, '25. So that bodes well for this segment. And in that respect, we have pretty good visibility for '23 on how we see the -- say, the low single-digit growth developing throughout the year.

And as you know, Marine and Protective went, from a profitability perspective, through quite a cycle. And we went through a situation that profitability went to kind of low single-digit levels from a profitability perspective. So yes, in '23, Marine and Protective has a material impact on the improvement for the total Coatings portfolio in terms of profitability. I hope that gives a little bit of color.

[Jaideep Pandya, analyst]

If I can just follow up on net debt, you were saying on -- I'm sorry, please go ahead. Go ahead, Greg.

[Gregoire Poux-Guillaume, executive]

If I can add one thing to that, Maarten said Marine and Protective cycled, then essentially went to low single digits. The market is better than that, and part of the impact has been essentially the cleanup of some of the contractual situations that we had from past years where we were not necessarily as observant and stringent on terms and conditions as we should have been.

Marine and Protective in many ways is a projects business masquerading as a products business. And when we look at 2023, we see a significant potential for improvement. Part of that will be volume, part of that will be the raw material deflation and part of that will be the nonrecurrence of those impacts that we've had for historical reasons. So we believe we have a good plan, and we're positive and optimistic about this business.

[Jaideep Pandya, analyst]

Right. If I could just ask one follow up on net debt-to-EBITDA ratio or leverage ratio. The below 3.4 you're targeting, is that on the midpoint between EUR 1.2 billion and EUR 1.5 billion? And do you expect to generate fundamental organic free cash flow, including Kansai's EUR 500 million cash outflow?

[Maarten de Vries, executive]

So the leverage ratio is really -- we say it will be below 3.4, so it's the minimum which we are targeting. And again, that is including Kansai. So Greg mentioned earlier that, overall, we should be able to reduce 1 turn a year. But that is, of course, that would be in a situation excluding M&A. Is that clear?

[Jaideep Pandya, analyst]

Yes. Welcome, Greg.

[Gregoire Poux-Guillaume, executive]

Thank you.

[Operator]

Our next question is from Mubasher Chaudhry of Citi.

[Mubasher Chaudhry, analyst]

Just a couple left on raws. I think, Greg, you mentioned there's a 5-month lag in Europe. So I guess you kind of got a feel for what the 2Q raw material picture is likely to be. Is it likely to be positive already on a year-on-year basis in the second quarter for raw materials? That's the first question.

And the second question is on the China volume development. You've talked a little bit around recovery already starting. Could you perhaps talk about the volume development, how that minus 1% to minus 5% breaks down within Asia, specifically just to try and understand what the assumptions you're using for Asia?

[Gregoire Poux-Guillaume, executive]

Sure. I'll take your second question first, and then I'll -- and Maarten will take your first one on the raws for, I think, the raws for Europe for the Deco business in Europe and the impact in Q2.

On the second question on Asia, if you look at what we're guiding on, I think it's Page 19 of our presentation, we say Paints China, we see that as weak in Q1, and we see accelerating for the year. And we believe that will be positive in volume, low-single digit to high-single digit, and it really depends on the steepness of the recovery. We -- we're convinced there's going to be a sequential recovery. We're just not sure how fast it's going to go. But we do believe that we'll see positive volumes in China this year, year-on-year.

As your question as to whether we see that currently, we don't. Q1, we're a month into Q1, and January was in line with our forecast but was not better. So if your question is are we seeing signs of life, we don't in terms of actual volumes. We see something in line with our forecast, which was for a low Q1. But what we do see is early indicators of an improvement. And I think as the year progresses, we'll be able to put a little bit more meat on that bone. But that's really what I can tell you today. Maarten, raw mats?

[Maarten de Vries, executive]

Yes. So on your question on Europe, yes, it's exactly what we said earlier, [indiscernible] the lack...

[Mubasher Chaudhry, analyst]

It wasn't specifically for Europe, I was just using Europe as base here. It was more for raw materials overall for the group going to second quarter. But I was just referencing the comment around Europe.

[Maarten de Vries, executive]

Yes. So for the group, specifically, Q2, we will see the impact coming through of the lower raw materials and, of course, the net impact in terms of pricing versus raw material. Q1 will be -- we will not see it yet and will be very similar to Q4 as we've indicated. But in Q2, we will see the margin expansion coming soon.

[Mubasher Chaudhry, analyst]

And you would expect it to be positive on a year-on-year basis already in the second quarter because in the first quarter...

[Maarten de Vries, executive]

Absolutely. This quarter will be positive, but will be still pretty small, I would say, overall.

[Operator]

Our next question is from Charlie Webb of Morgan Stanley.

[Charles Webb, analyst]

Maybe just a couple more for me. Just first off on the OpEx inflation. Can you just elaborate a little bit what's in the others, kind of negative effect in OpEx inflation? I mean if I think back to the last 12, 18 months, we obviously talked about carrying a lot more OpEx in terms of contractors and the overruns because of raw material disruption you had to kind of carry more cost in that environment. As that normalizes, and I'm just trying to gauge why perhaps the inflation is what it is when you should be taking some of that out, which is always the plan. I'm just trying to understand what others amount to, I guess, energy and salaries is somewhat clear.

And then secondly, just on leverage, just thinking beyond '23, and I thank you very much for the clear steer on where you see pro forma leverage for '23. But over what kind of time frame do you expect is you think is realistic based on what you see, all else being equal, to get towards that 2x leverage. Is that by -- is that achievable by '24? Or is that kind of really folding into 2025? Just trying to understand the flexibility you have in the balance sheet and when you expect that to materialize again.

[Gregoire Poux-Guillaume, executive]

Thanks, Charlie. I'll take the OpEx question. Maarten will take the leverage question. The OpEx question, I think you're referring to Slide 21, we say salaries and wages, we say energy, and we say others. If I try to give you round numbers for AkzoNobel, 2023 in terms of wage inflation, we're talking about EUR 100 million. We're talking about EUR 40 million of energy inflation. That's the delta. I mean we're -- energy is only 1% of our sales, and it's hedged, but these contracts are staggered and we've got about 1/3 of our contracts expiring and that's a EUR 40 million year-on-year hit.

So EUR 100 million of wages, EUR 40 million of energy and about EUR 30 million of road transport because the whole discussion about transport prices falling, that's really true for shipping, but it really is not true for road transport, particularly in Europe. And that's still going to be a significant impact for 2023. And I think I've accounted for EUR 170 million to EUR 200 million and the rest is various things. I'm not sure I have a breakdown for that. Hopefully, that helps.

[Charles Webb, analyst]

Yes, that's helpful.

[Gregoire Poux-Guillaume, executive]

Maarten, do you want to take?

[Maarten de Vries, executive]

So on the leverage, I think if you take a step back, we focus this year to get the leverage beyond the 3.4. We've also said that in a normal situation, excluding M&A, it's roughly a turn a year. So in that situation, we should get by the end of '24, roughly in the 2 to 3 zone. And beyond '24, close to the 2, that's how you should see it. But again, this is based on a lot of assumptions and the world can change in the meantime. But our focus is really to -- in steps to get our leverage down to the roughly 2x.

[Operator]

Our next question is from Tony Jones.

[Tony Jones, analyst]

Maybe a question for each of you, 2 final ones. Firstly, I wanted to follow up a bit on the cost savings and get a bit more clarity there, especially the supply chain costs. Is this mainly something in central procurement? Or is it site rationalization or something else? And could you help us with the split between decorative and coatings? That would be great.

And my second question is quite a high level, probably more for Greg. Since you started at Akzo, do you think the company is too diverse geographically with paint being quite a local business or maybe also from an end market perspective?

[Gregoire Poux-Guillaume, executive]

All right. Tony, I'll try to take both questions. Maarten will jump in on the numbers, if I get fuzzy. But on the cost savings, the EUR 200 million, there's about -- 1/3 of that, which is already fairly advanced because these were actions that we launched late in 2022, there's 2/3 of that, which is based on actions launched in early January. And if you take the EUR 200 million, there's about 60 -- 2/3 of that, which is people related and 1/3 of that, which is not people related.

The stuff that's not people related is essentially non-product-related procurement and formulation optimization so that we use cheaper or less raw materials and things like that. But the 2/3, which is people related, is essentially -- it's on the industrial and the commercial side, but it's mostly on the industrial side, actually.

And there's not going to be big social plans because one, we started some of these measures in 2022; and two, we are getting to the limits of what we can do without significantly rejigging our industrial footprint. And I'll explain that in a second. But essentially, if you take the breakdown, about 2/3 of the EUR 200 million, 60% to 66% of EUR 200 million is Europe related. And in Europe related, as you know, in Europe, as you know, a big chunk of our business is Deco. Deco is more than half of the business. And things like Marine, Protective and Automotive are going up. So you can safely assume that the lion's share of the 2/3 in Europe is actually related to the Deco business.

So hopefully, that gives you a little bit of flavor. If we take our what we call our integrated supply chain, so essentially manufacturing and supply chain in Europe, since over 2 years, we will have taken down our headcount essentially by something like 15%. And if you bring that back to an efficiency ratio, something like kilos of paints per head, we will, at the end of this program, be more efficient than we were pre-COVID in 2019. So that kind of gives you a little bit of perspective on this. Hopefully, this is enough to give you comfort that this is detailed. And then Maarten?

[Maarten de Vries, executive]

Yes, I may only [indiscernible] to add to that. So we have indicated that the restructuring costs, which will be reflected in identified items will be between EUR 100 million and EUR 125 million. And that is normally kind of a 1:1 ratio. So here, you see what kind of the people aspect will be. Mostly that, as Greg mentioned, that is mostly in Europe. That is all the expense, and especially in the fourth quarter to underpin this is all in motion, and we will start to see this coming through from the second quarter onwards.

So overall, this EUR 200 million from a restructuring perspective, but also from other cost-saving actions perspective has been detailed out and underpinned, and it is a matter of now executing. And of course, it's very much a reset of our cost base in -- mainly in Europe. Now you had a second question?

[Tony Jones, analyst]

I did, yes. Which was the higher level one about geographic diversity and that kind of thing, yes.

[Maarten de Vries, executive]

Your question around the -- how one actually sees portfolio...

[Gregoire Poux-Guillaume, executive]

Is the portfolio too diverse? That was my new CEO question about should we be trimming the edges of the empire. I think we say somewhere in the document that we'll focus on our leadership positions. And Coatings businesses are global businesses and therefore we need to have scale at global level. The Deco businesses are really local businesses. It's important to have scale for procurement reasons and for some of the product development.

The reality is that the brands are local, the distribution is local, the products don't travel very far. So I think there's a valid point that you can be the market leader in China without having a presence in Latin America. You can be strong in Europe without having a presence in the U.S., so it's a multi-local business, Deco, rather than a fully global business, and our intent going forward is to look at some of our more marginal positions, countries where we're #4 and we don't have a path towards #2, and to decide once and for all whether we need to be in these countries or not.

Purely from a complexity reduction perspective but also from a margin management perspective, because in Deco, you're a lot more profitable if you have a large market position in 1 country than if you have 3 smaller market positions in 3 other countries that add up to similar volumes. Does that answer your question?

[Tony Jones, analyst]

It does. Yes, that's really helpful.

[Operator]

Our next question is from Geoff Haire of UBS.

[Geoffery Haire, analyst]

Actually, all my questions have been asked, so I don't need to ask any, but thanks very much.

[Gregoire Poux-Guillaume, executive]

Well it was good meeting you Geoff.

[Operator]

Our next question is from Laurent Favre of BNP.

[Laurent Favre, analyst]

Two small questions, please. The first one for Greg, related to what that was just being said. Have you already done a strategic review of the portfolio? Or is it something that you intend to do? I mean it sounds like -- and I just want to make clear that it sounds like you're thinking of selling small noncore assets to accelerate the deleveraging. So I just want to make sure that I got that right.

And then the second question is related to that Slide 22 on the medium-term opportunity around integrated supply chain transformation. I mean, I'm sorry, but this is something that I think Akzo had talked about consistently since 2017. So I was just wondering, are we talking about the same old plan that has not been executed yet? Or are you thinking of having a step change in terms of the footprint?

[Gregoire Poux-Guillaume, executive]

That's a good question, and it's a fair question. It's a tough one, but it's a fair one. I think I commented that on -- in an interview recently in Financial [indiscernible], you'd have to Google translate. But essentially, the journalist said the exact same thing. Every single one of your predecessors talked about the industrial simplification. You guys have never done it, why should we believe you this time? And it goes back to the earlier question that I answered where I said that we're getting to the limits of what we can do in terms of industrial efficiency by just painting the corners of the boxes that we have, i.e., keeping our plant network the same and just adjusting locally.

What we have to do is a step change is we really have to rethink our footprint. But the reason why this hasn't been done is that there's a lot of preparation work that goes with that because essentially to transfer production from one plant to another, you've got to harmonize the raw materials because you can only have so many raw mats in the tanks in a given plant and Akzo grew through acquisitions, and has never harmonized formulations. And therefore, we've got very similar products with very different raw mats.

You've got to harmonize the -- you've got to simplify the formulations. We sometimes have too much complexity that don't add customer value. And then if you can do that, then suddenly you gain the ability to do load balancing and transfer from one place to the next. I mean we have a famous example of the -- during COVID, where we had a shortage of white paint, white wall paint in the U.K., and we had white wall paint capacity in France, but we couldn't send it over because it was a different formulation with different raw mats for what should be one of the most basic products.

So yes, there's healthy skepticism on that, but I think that we've made progress over the last 2 years on some of that preparation work on simplification. And our intent is to come out with something that we can talk to you guys about with actual numerical targets and the phasing. We need a little bit of time to work on that for obvious reasons. As you said, we get one chance to overcome your skepticism and to present something that you'll measure us on.

But I think you should expect something around the midyear, maybe right after the holidays in September or something like that. And it will be detailed, and it will be phased, and we will be measured upon that. So all I can say is that we're putting some skin in the game because we believe that there is a significant value unlock for the company. It's not going to have an impact on 2023, but it's going to have a material impact beyond that. What was the second question? Maarten, do you recall?

[Maarten de Vries, executive]

The second question was in fact...

[Gregoire Poux-Guillaume, executive]

On selling assets, deleveraging, right. It's the -- was what I was saying a cryptic way of saying we're going to sell some smaller stuff in order to delever. So it is and it isn't. We will make these -- we will manage our portfolio actively because companies like ours should manage their portfolio actively. And because some of these smaller positions may not make business sense, that will contribute to deleveraging, but smaller positions will have smaller impact on deleveraging.

So it's not so much because we believe that we've got to sell stuff in order to drive our ratios down further. We think we've got the cash flow generation that essentially will reassure the markets that we can deliver on our plans to get back towards 2x in a reasonable time frame. It's really more -- so it's less the proceeds and more the complexity reduction. There's too much complexity in AkzoNobel, and this is something we have to tackle. Hopefully, I've answered your questions.

[Laurent Favre, analyst]

Absolutely.

[Operator]

Our next question is from Peter Clark of Societe Generale.

[Peter Clark, analyst]

Yes. It's a question on the defensive part of the portfolio. This has come out before. And I know you're very confident that you have this pricing resilience, particularly in the distribution-focused businesses. I want to nail down on something like powder because powder, I know you have got this leadership, great positions. But for me, powder is a business where I thought there might be some risk of pricing deflation along with costs going down. So if you could address that.

Then the second question, Greg, you're coming at a business that hasn't delivered volume growth over the long term. It has delivered value growth. So in a lot of the businesses are more value-focused like auto refinish. Just how you see that conundrum because there tends to be a lot of focus on volume even if value is the more important. But how do you see that frankly?

[Maarten de Vries, executive]

Yes, your first question on pricing and powder coatings, I think you need to really look at the different segments because there are absolutely more commoditized segments in powder coatings which are extremely competitive from a pricing perspective. And in fact, these -- some of these segments we have stepped out because of raw material shortages and because of the margin profile, and we can step in back any time.

But there are other segments which are very much driven by our position and our innovation, which are less sensitive for pricing. So if you look at these different segments, that is where you see the pricing differentiation. That is what I wanted to indicate.

[Gregoire Poux-Guillaume, executive]

Yes. And I'd add to that, that in powder coatings, Maarten's answer is spot on. But in power coatings, we're the market leader globally, and we have a responsibility. Volumes went down in 2022. I think as the leader of that market, we will be quite observant on making sure that we defend our pricing and that we didn't chase volume for the sake of volume.

So I think that the proof will be in the pudding. Akzo doesn't have the greatest track record of price management on the way down, but this is something that is 1 of our 4 priorities for the year 2023 because we think it's important that we show the market that we will behave differently, but we'll report based on actuals rather than on promises.

And your question on volume versus value. Look, I couldn't agree more that the debate sometimes has been overly on volume rather than value. But we're in a market where people are looking at the pricing and rightfully asking questions about volumes. Is this level of pricing killing volume?

Our focus is not going to be volume driven. We gave an indication of minus 1% to minus 5%. Our aim is not to stimulate that by dropping prices. But certainly, we aim to defend market positions that we have around the world because we believe that over time, scale matters. But once again, it's not -- we're not giving our people volume objectives. We're giving our people margin objectives.

[Operator]

Our next question is from Alex Stewart of Barclays.

[Alex Stewart, analyst]

Two very similar questions on OpEx. You typically face fixed cost inflation, non-COGS inflation something between EUR 100 million and EUR 150 million a year. This year is obviously higher. But you can't keep taking out EUR 100 million to EUR 150 million of cost every year to offset that. So what is your medium-term plan to combat what is ultimately a 5% to 10% earnings headwind each year just from the gradual increase in your fixed cost base?

And then related to that, you talked a bit earlier about the measures you're taking in Europe, particularly personnel, particularly paint, decorative paint costs to rightsize the business, which sounds very sensible in this scenario that inflation is pushing margins down. But what's the risk here that you've taken already low growth or low demand growth business and jeopardize further your future ability to grow volumes and the business can't keep cutting costs and keep cutting personnel and expect to make the same amount of business. So very interested to hear your perspective, Greg, and indeed Maarten on those points.

[Gregoire Poux-Guillaume, executive]

These are good questions, and Maarten and I will both try to give you answers on that. Your question on how long can we keep cutting and does this ever end, I mean I think they're connected questions. I would say that you can't have a program of EUR 100 million to EUR 200 million every year where you're kind of leaving everything the same from a structural perspective and then you're nibbling at the edges every year. There's a moment where the business runs out of steam. I mean, essentially, you can't guide your way to being an Olympic athlete. It doesn't work that way.

But as the market stabilizes, I think the conversation has been dominated by conversations on inflationary pricing in compensating raw mats. But the really important lesson, I believe, for AkzoNobel has been that we've rediscovered pricing management and margin management. And I believe that going forward, we should have a much more value-oriented way to look at pricing and that we do have possibilities to manage our margins without having the tailwind of inflation, which is not really a tailwind because it's actually depressing our margins, because all we're doing essentially compensating for raw mats.

So I believe that we're building a better engine in terms of our ability to do differentiated pricing, to do value pricing, and I think that will pay off over time. That's one aspect of the answer. And the second aspect of the answer is that industrial transformation that I was referring to, it ties to your second part of your question, which is how much extra capacity we have. And I'm not going to give you a number at this point, but I would say that we are in no danger of running out of industrial capacity to produce paints and coatings.

Sometimes, we struggle with service levels because of supply chain issues, raw material availability in the last few years. But in terms of the size of our industrial assets and how their dimension and the capacity that we have, we do have the opportunity to look at our industrial footprint in a very significant manner. And then, if we're able to transfer production from one place to the other by simplifying these formulations and harmonizing raw materials, then we can get to more sustainable levels of capacity utilization.

And what I mean by that is more sustainable from an economic perspective, i.e., currently were too low, but not at a level where we lose the ability to grow or to react. So it's a really long answer to say that we've got a lot of wiggle room from that perspective. And we haven't been capitalizing on it, and this is what we aim to do going forward. Maarten?

[Maarten de Vries, executive]

Yes. Maybe to -- Alex, to add here. So '23, clearly, we're doing a reset in our cost base, also based on the volumes and specifically the volumes in Europe, which we commented on earlier. I mean, in a normal situation, as you mentioned it in a normal of situation, cost inflation sits more at a EUR 70 million, EUR 80 million type of level. And in a normal situation, we would be able to just compensate it with productivity because that's what you normally do in a business as usual. Clearly, business has not been usual over the last years, but we need to get to a situation where we do a reset, but also do a structural simplification, and that's where Greg was alluding to.

[Operator]

Our next question is from Georgina Fraser of Goldman Sachs.

[Georgina Iwamoto, analyst]

Just one question, and it would be great if Greg could answer, please. Not asking for an early look on the strategic update. I've got a bit more of a backwards-looking question. So if we go back to kind of the 2017, 2018 time when Akzo paints and coatings was delivering EUR 1 billion-ish in EBITDA, if you think about volume growth since then. All of the cost saving programs have been enacted and all of the M&A transactions that Akzo has performed, if we think about a normalized raw material environment, where do you see a normalized EBITDA level for Akzo as of today? Or maybe another way, to what extent is Akzo [ underearning ] in the guidance that you've given for 2023?

[Gregoire Poux-Guillaume, executive]

Well, what I'll try to do is I'll try to stay away from midterm targets because I believe that there's a healthy skepticism as to the promises that we make and that my incentive as an incoming CEO is to give you visibility for 2023 and then to deliver on that and to rebuild that confidence that from our investor survey has been slightly eroded. So I've stayed away from making promises for the long term.

Let's have a look at how we perform this year. Let's look together at what we can do to unlock that value on the industrial side, and that will underpin longer-term targets that we will come out with at some point. But I don't intend to give midterm targets this year because I believe it's about short-term delivery, and it's about essentially demonstrating that what we say is something that we can deliver on. I'm sorry, I can't give you more substance at this time.

[Georgina Iwamoto, analyst]

Okay. But as you're still not willing to kind of even say if 2023 is generally a quite depressed environment for the business overall still or...

[Gregoire Poux-Guillaume, executive]

For sure, for sure. Hopefully, that was clear. 2023 is a complicated environment for the business. We've got -- half of our coating businesses that are shrinking. We've got the Deco market, which is under pressure around the world. We've got Deco volumes that are going to be down in Europe, which is 50% of our business. We've got Deco volumes that are going to be flat at best in Latin America, it will be give or take, I think we gave you guidance in the document. We're expecting a rebound in China. But based on the 2022, that was a really tough year in China. So it really is not a great market environment.

The only thing that brings a little bit of sunshine to our prospects in 2023 is that we've shown our ability to keep up with inflation in terms of pricing. We believe that part of that pricing can be retained in deflationary environments and that we see that raw materials have peaked and have started to drop and that we see the potential for margin expansion from Q2 onwards, as Maarten explained. So that's the story in 2023. This is not the story of a very supportive market environment at all, quite the opposite.

But it's also -- we already have some of that impact last year in Europe because we have quite a European exposure. And therefore, we're banking that this impact will be negative but less drastic again in Europe in 2023. And that all these other elements that I talked about will click in and that we will be restoring profitability at a higher level and delivering within that range that we gave you. That's the thinking, but it's not a story of a supportive market environment driving performance in '23. That will come later.

[Operator]

At this time, we don't have any questions on queue. I'll turn it back to Kenny for some closing comments. Thank you.

[Kyung Chae, executive]

Thank you, Jackie. Well, this concludes the Q&A session and our Q4 investor update. Thank you, everyone. If you have any further questions, please reach out to the Investor Relations team here at AkzoNobel. Operator, please close the call.

[Operator]

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