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Akzo Nobel NV
Earnings Call Analysis
Q4-2023 Analysis
Akzo Nobel NV
The company expects to deliver adjusted EBITDA between EUR 1.5 billion and EUR 1.65 billion in 2024, driven by low-single digit organic volume growth. They plan to maintain disciplined pricing strategies and benefit from raw material deflation, especially during the first half of the year, which is projected to expand margins further. The company will also begin to see the initial benefits from industrial efficiency measures contributing modestly (EUR 25 million) as part of a larger EUR 250 million commitment. They anticipate an end-of-year leverage ratio around 2.3x with improved working capital, and dividends per share in 2024 expected to be consistent with 2023 levels.
The company outlines a strategy for sustained organic growth through structural market drivers, cyclical tailwinds, and sustainability-driven innovation. They expect volume gains to be modest in the midterm, with flattish volumes in Industrial Coatings and Deco EMEA, and moderate growth in the Automotive and Specialty business, particularly within their vehicle refinish segment. A strong presence in emerging markets, particularly in Deco Asia and Latin America, and segments such as Powder Coatings and Marine and Protective, are anticipated to achieve mid-single digit growth.
In Marine Protective, the company aims to continue its growth trajectory in volume and profitability following a strong 2023 performance. With previously lost market share being reclaimed, they are leveraging sustainability trends to re-establish themselves in the new-build market. Wins in the shipbuilding industry, advancements in biocide-free antifoulings, and projects in infrastructure and clean energy, particularly wind, position the company for mid-single digit volume growth in the midterm. Profitability in Marine and Protective is projected to reach double digits by the end of 2024 and aim towards mid-teens.
AkzoNobel aims for a comprehensive performance enhancement, expecting low-single digit volume growth over a period of 3-4 years. The company anticipates an adjusted EBITDA margin of at least 16% over this period, and a compound annual growth rate (CAGR) of over 6% in adjusted EBITDA. There's a focus on industrial excellence initiatives to achieve higher asset utilization and improve the return on invested capital from around 13% to between 16% and 19%. Maintaining a strong investment grade credit rating and a target leverage ratio of around 2x is central to the company's ambitions to regain capital allocation flexibility.
Key forthcoming events include the publication of the Annual Report on February 28th, first quarter 2024 results on April 23, the Annual General Meeting on April 25, the ex-dividend date for the 2023 final dividend on April 29, with the record date on April 30 and the payment date on May 7.
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Hello, and welcome to the AkzoNobel's Q4 and Full Year 2023 Results. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I'd now like to hand over to Kenny Chae, Head of Investor Relations. The floor is yours. Please go ahead.
Thank you. Good morning, and welcome to AkzoNobel's investor update for the fourth quarter of 2023.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.Refer to the presentation, which you follow by webcast or download from our website at akzonobel.com. A replay of this webcast will also be made available following this event. There will be a Q&A session after the presentation. For additional information, please contact our Investor Relations team.Before we start, a reminder of our forward-looking statements disclaimer on Slide 2. 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.
Thanks, Kenny, and good morning to everyone on the call. We'll start today's presentation with an overview of our performance for the fourth quarter and the full year. We'll then go over our guidance for 2024, as well as our midterm ambitions.Our Q4 results demonstrate a solid performance, building on the positive momentum from previous quarters. Revenue increased 4% in constant currencies, primarily due to organic volume growth of 3% with growth in all of our business units in the fourth quarter.We continued to benefit from raw material deflation, and this combined with resilient pricing and positive volumes, resulted in a margin expansion of 390 basis points.Adjusted operating income increased by 75% to EUR 220 million (sic) [ EUR 221 million ] in the fourth quarter. That EUR 220 million was really EUR 244 million, in line with our guidance, excluding the big hyperinflation accounting correction triggered by the elections in Argentina.Improved profitability and a reduction in our working capital contributed to a strong free cash flow of EUR 460 million in Q4, and this resulted in further deleveraging. We finished the year with a net debt to EBITDA ratio of 2.7x.Overall, 2023 was a year in which AkzoNobel delivered a clear rebound in performance. Despite facing soft market conditions in the first half, our businesses quickly stabilized and delivered flat volumes for the full year. A result of outperformance in many of our markets and a testament to the resilience of our portfolio -- the resilience of our portfolio, sorry.Despite persistent inflationary pressure and significant unfavorable currency effects during the year, our focus and execution enabled us to beat the targets we set ourselves, and there is more to come.Turning to Slide 4. Organic volumes were up 3% in Q4. We achieved positive volume growth in all our business units, the first since the second quarter of 2021, with Deco Asia, Marine and Protective and Powder Coatings being the top performers.In Deco EMEA -- I'm sorry, in Deco, looking at the regions one-by-one. EMEA bottomed out midyear and exceeded our expectations by delivering low-single digit volume growth in Q4.In Latin America, Q4 performance was driven by strong volume growth in Brazil during its peak trading season at the end of the year. Asia largely followed the trends seen earlier in the year.In Coatings, the momentum continues to gather pace. After a soft first half, the earlier than expected recovery in our Powder business continued in Q4 with mid-single digit growth.In Marine and Protective, we continued to build a strong commercial pipeline and to grow market share, a trend that should continue given our successes in technical new builds.In Automotive and Specialty Coatings, We had a solid Q4 in our vehicle refinishes business, especially in Asia. And in consumer electronics, we're seeing signs that the cyclical downturn in demand is close to bottoming out.That's also the case in the Industrial Coatings business unit where Q4 volumes were up year-on-year despite our expectations for low-single digit decline. Coil did well in Asia and Europe. Packaging demand showed signs of improvement after stabilizing in Q3.This gives us good momentum going into 2024. We expect positive volumes driven by improving end market conditions and share gains across many of our businesses. Our coating businesses have room to rebound with volumes remaining well below 2019 levels. But this is true also in Deco EMEA, where we expect a progressive rebound over the next few years.The slow market recovery in Deco China is expected to continue in 2024, although we are mindful of difficult comps in China in the first half, impacting the phasing of our performance for the year.I now hand over to Maarten to go to the numbers on Slide 5.
Yes. Thank you, Greg, and hello everybody on the call. As Greg highlighted, we delivered another quarter of strong results concluding a successful year of rebounding performance despite significant currency headwinds.Our revenue for the fourth quarter increased by 4% in constant currencies and was down 3% in reported revenue. Organic volumes in both paints and coatings rose by 3%, further improving on flat volumes from the third quarter.Pricing continued to hold up well for both paints and coatings. M&A contributed 1% to revenue growth mainly from the Huarun acquisition in China.Similar to the third quarter, FX continue to pose a considerable challenge as our basket of currencies weakened, particularly in Argentina where we experienced a sudden devaluation of the peso in December. The macroeconomic situation in Argentina also resulted in an unexpected increase in the impact from hyperinflation accounting in the fourth quarter.Despite the FX and hyperinflation accounting headwinds, I'm pleased to report that our Q4 adjusted operating income improved by 75% year-over-year to EUR 221 million with return on sales expanding 390 bps as we continue to benefit from raw material tailwinds in our P&L.Now turn to Slide 6. Our adjusted EBITDA for the fourth quarter was EUR 313 million, representing a 42% increase from previous year. For the full year, adjusted EBITDA was up 24% to more than EUR 1.4 billion with our EBITDA margin expanding to 13.4% from 10.7% in 2022.We delivered the upper end of our original guidance and even more so when considering the FX headwinds we faced throughout the year.We are pleased to report further progress on the reduction of our working capital in the quarter. As a percentage of revenue, our working capital decreased to 15%, which is 2% lower than both Q3 and prior year level.This is a marked improvement compared to the level we reached in Q1 2023, where the combined impact of low demand and high cost inventory led working capital to peak at 18.6%. Notwithstanding the impact of seasonality, we expect to make further progress on returning to normalized level in 2024.Together with the improvement in profitability, working capital reduction contributed to a strong year-on-year increase in free cash flow, which was EUR 460 million in the fourth quarter. Our free cash flow for the full year was also much improved at EUR 840 million compared to a negative EUR 21 million (sic) [ EUR 29 million ] in the previous year.Moving to the next slide. Lower profitability and the unprecedented inflationary cycle drove our leverage from 1.9x to 4.2x in the Q1 of 2023 in a short period of just one year. 2023 has been a year of strict capital allocation with our focus on deleveraging.The improvement in profitability and free cash flow in the fourth quarter contributed to a further reduction in our net debt-to-EBITDA ratio, which fell to 2.7x compared to 3.2x in the previous quarter. We forecast our leverage ratio to improve to around 2.3x by the end of 2024, reflecting our continued focus to reduce the absolute level of net debt and improve our working capital position.At year-end, net debt was approximately EUR 3.8 billion, representing a reduction of EUR 300 million for the end of 2022. Interest on our long term debt of EUR 3.2 billion currently averages around 2%, while our short term debt, including commercial paper of EUR 2.4 billion averages around 4.5% interest. Again, reducing net debt remains a key priority for us in 2024 as we continue to deleverage in 2024.Turning now to the next slide. We are proud that AkzoNobel continues to be the clear leader in the paints and coatings industry when it comes to sustainability. 2023 marked another year of solid progress towards our key sustainability ambitions for 2030. We made progress on reducing our own emissions, Scope 1 and 2 as well as Scope 3 which encompasses our supply chain.We maintained industry leading ratings for ESG performance from the key rating agencies and are capturing the opportunities that sustainability presents as a catalyst for innovation to reach our 2030 targets as well as driving organic growth in the years to come.This is already the case across many of our businesses. In powder, we are pushing the boundaries of this exciting technology.In recent months, we launched an industry first powder for architectural use that cures at 30 degrees lower than traditional Powder Coatings, cutting energy consumption by up to 20%. We're excited about helping our customers reduce both their carbon footprint and their costs.Moving now to our 2024 outlook on the next slide. Based on current market conditions and at constant currencies, we expect to deliver adjusted EBITDA of between EUR 1.5 billion and EUR 1.65 billion in 2024. As Greg outlined earlier, this is based on our expectation of low-single digit organic volume growth.We will continue to remain disciplined on pricing, and for at least the first half of the year, realize the benefit from raw material deflation, driving further margin expansion in 2024.As we outlined with our Q3 results, we expect our industrial efficiency measures to deliver the first P&L benefits in 2024, a still modest EUR 25 million with a lot more to come towards our EUR 250 million commitment. Our guidance for CapEx reflects the incremental investment to drive these efficiencies as highlighted last quarter.We anticipate a leverage ratio of around 2.3x at year-end with continued improvement to our working capital position. Our policy of stable to rising dividends remains unchanged, while we expect our dividend per share in 2024 to be stable compared to 2023.For the first quarter, especially, we anticipate adjusted EBITDA to be around EUR 340 million, slightly higher than Q4, excluding hyperinflation.And I'll now hand over to Greg to speak about our midterm priorities.
Thanks, Maarten. Moving to Slide 10. On this slide, we lay out the roadmap for growth in the midterm. Our portfolio shows clear opportunities for organic growth, driven by a combination of structural market growth, cyclical tailwinds, and sustainability driven innovation and differentiation. Based on this, we believe we can deliver low-single digit volume growth over the midterm. Our high volume Industrial Coatings and Deco EMEA businesses are expected to deliver flattish volumes beyond a probable bounce back initially off a low base. We anticipate steady moderate growth, in our high value, low volume Automotive and Specialty business, primarily driven by our vehicle refinish business. We're also excited about the growth trajectory of our aero business in the coming years.The bulk of our organic growth will be driven by our strong emerging market presence in Deco Asia and Latin America, as well as our strong franchises in Powder and Marine and Protective, where we expect mid-single digit growth. We'll touch on these 2 segments in the next slide.The slide 11 talks about Powder Coatings. AkzoNobel is the clear leader in the global market for Powder Coatings. If you take, our market share worldwide, we've got twice the market share of the #2 player. And if you take our market share at European level, we've got closer to 3x the market share of the #2 player. So we are both the technology and technical service leader in the powder coating market.We have the most complete and competitive product portfolio, coupled with a supply network which positions us as the best partner across many end markets.We're a trailblazer on the liquid to powder conversion path, which has only scratched the surface. This is illustrated by the electrical vehicle market, where powder differentiates through its electrical insulation properties, but also could be an elegant solution for body panels as EV players don't have legacy paint booths like the traditional car players and, can therefore think out of the box as they build factories.Our recent focus has been on expanding our offering to unlock customer and application opportunities. This means not only color and premium finishes, but also lower curing temperatures for energy savings and sustainability. Lower curing temperatures also open powder to a wider variety of substrates like wood or plastics.As Maarten mentioned earlier, in Q4 AkzoNobel set an industry first by launching its full architectural powder range with curing temperatures 30 degrees lower than the competition. This is actually a big deal.While we're the market leader in the premium segment, we also see the opportunity to expand our presence in the mid-markets where volume growth is higher and technology can still be a differentiator.And we've -- we're already well underway, having successfully launched our cost effective Interpon 500 powder coating line in 2023. So, powder will be a growth driver for us in the years to come.Moving to Marine Protective on Slide 12. Marine Protective, at AkzoNobel also had a great 2023, and its positive growth trajectory, both in volumes and profitability, will continue for years to come.This is a business where we historically had a global leadership position, but where we chose to deemphasize the Marine new-build market business a number of years leading to market share loss.Our efforts to rebuild this position are well underway, and they're capitalizing on the new trend around sustainability, which necessitates more technical solutions and displays to our strength, hence the fact that we believe that we can be a significant player in new-build again.And, when I talk about technical trends and sustainability, it's things like biocide-free antifoulings in which Akzo is leading the market.We're benefiting from a buoyant shipbuilding market, but also regaining market share. Our rebound in the new-build space will boost our higher margin drydocking business in the years to come.And we've had a number of wins this year that haven't been booked because these are multiyear commitments, but that will show in our numbers in the coming years.We also have a solid pipeline of infrastructure projects where we are regaining ground in passive fire protection. And a significant opportunity exists in clean energy, capitalizing on our good market position in wind energy.We see volume growth in Marine Protective at mid-single digit in the midterm. We also expect the profitability of Marine and Protective to be back in the double-digits by the end of 2024 and to subsequently continue towards the mid-teens.Let's now turn to Slide 13 for our midterm ambitions. Our global -- I'm sorry. Our roadmap for both growth and profitability gives us confidence that we can make a significant step change in the performance of AkzoNobel.We see the opportunity for sustainability driven innovation and increased scale in select markets to drive low-single digit volume growth in the midterm, defining the midterm as, 3, 4 years out, very much like the -- our industrial excellence program where we have targets into '26, '27, that's, essentially the timespan we're talking about.Combined with our industrial excellence initiatives outlined with our Q3 results, we expect to deliver an adjusted EBITDA margin of at least 16% over that period, leading to an adjusted EBITDA CAGR of over 6%.Our industrial transformation will deliver higher asset utilization, which will be visible in our return on invested capital. Our ambition is to improve from the current level of around 13% to between 16% and 19% in the midterm.As Maarten outlined earlier, we remain committed to a strong investment grade credit rating and a normative leverage ratio of around 2x, which will enable us to regain capital allocation flexibility.In summary, we are encouraged by our rebound in profitability in 2023 despite continued macroeconomic volatility, including adverse currency impact. We are confident of resuming volume growth, while delivering further profit growth, in 2024. And we have the means to go beyond that in the midterm.Kenny will now close with information about upcoming events, and we'll start the Q&A session. Kenny?
Thank you, Greg. Excuse me. Before we move to the Q&A session, I would like to highlight some of the upcoming events on slide 14.On February 28th, we will publish our Annual Report, and the date of our first quarter 2024 results will be on April 23. Our AGM will be held on April 25. The ex-dividend date of our 2023 final dividend is April 29. And the record date is April 30, followed by the payment on May 7.This concludes the formal presentation, and we would be happy to address your questions. Please state your name and company when asking a question, and please limit the number of questions to 2 per person so that others can participate.Elliot, please start the Q&A session.
[Operator Instructions] First question today comes from Charlie Webb with Morgan Stanley.
So just first off, on pricing and rules into 2024. Just interested to hear about how pricing is going as you look into 2024. Do you expect that to be a positive number or somewhat more neutral? And just, yes, latest around that relative to what you see in the raw material basket. That's kind of question number one.And then question number two, just around the midterm ambitions, considering, obviously, leverage coming down to about 2.3x target leverage of 2x. Just how do you think about capital allocation within that midterm ambition, the kind of debate between M&A and buybacks. What's the preference? Is any of this included in your assumptions around margins and returns or not? Just understanding if that's kind of a standalone Akzo as we see it today or how you think about capital allocation within that construct?
Charlie, I'll take your pricing and raw question, and Maarten will take the midterm ambition and capital allocation.So pricing was positive for us in Q4. We estimate that pricing will be essentially flattish in Q1. And when we look into 2024, price is going to be a mixed bag. It's going to be keeping up with the devaluations in Turkey and Argentina, more happened. And as you know, that's about 4% of AkzoNobel.It's going to be some price givebacks in businesses like packaging where we have index contracts like all our competitors. It's going to be price taking in markets where it's more of a seller's market. If you take aerospace, where we can barely keep up with demand. There is an opportunity to absorb inflation and potentially more through pricing.And then if you take our Deco business, it's really a regional thing. It depends on local situations. We'll be increasing prices in Latin America. We are currently decreasing pricing because the market leader, Nippon has been doing that in China.And in Europe, it's -- there is inflation, so we have to have price discussions with our customers. But it will be a reflection of the pricing power and the dynamics that you have currently in Europe. Some of the larger retailers struggled more with the notion of price increases as we saw with Carrefour and PepsiCo in France. But in the smaller outlets, I think this is less granular and probably more flexible.So, overall, we expect pricing to be positive in 2024. But with a picture that's more complex and diverse than it was in '23. And it's positive, but positive marginally. It's -- pricing is not going to be a big story, positive or negative for us in 2024.Raw material deflation continues. We said price versus raw continues to be a big story for us. It was -- we said it was EUR 113 million of raw mat deflation in Q3. Q4 was more than that by -- do you even say these numbers Maarten.
No, it was slightly more...
It was like 20 more than that maybe. So, Maarten gets me in trouble -- I'm going to get myself in trouble with Maarten by giving you too many numbers. And Q1 continues along that trend and essentially the first half of 2024 continues to be a raw mat deflation story, more for Akzo than anybody else.Because, as you know, we started the downcycle in raw mats with higher inventories than anybody else. So we're trading later than everybody, which means that we've got that upside. And in the second half of the year, it's looking flattish to slightly favorable depending on the market.So overall, a pretty good picture, but margin expansion in '24 is going to be more about raws than it will be about pricing. Maarten, do you want to complement or jump into the midterm question?
No. So on your capital allocation, as we said, first of all, 2024, will -- the focus will be on further deleveraging as we said. And from a capital allocation perspective, we've indicated that dividend will be stable. Beyond that, I think that's for a discussion to come up by the latter part of this year where we -- when we are with the leverage ratios which we aspire to, and that's around 2.3x by the end of this year. That will open up the discussion then on how that capital allocation will involve M&A, share buybacks. But for now, the focus is on deleveraging.
And just a clarification, the midterm ambitions out to 2027, that doesn't include any M&A in the thinking in the 16% CAGR a number you put out for EBITDA. That's just act as standalone. Is that correct?
That's absolutely correct. So the numbers we put out there are all based on our organic plans.
We now turn to Laurent Favre with BNP Paribas.
The first one would be maybe just going back to those bridge elements that you're volunteering, Greg. When we try to reconcile Q4, it looks like you've had very marginal leverage on volumes, especially as you just mentioned the strong net pricing.Can you maybe talk about the connection between, I guess, the P&L and also the very strong working capital improvement we've had, so -- and you had, I guess, lower absorption of fixed cost than what we should be assuming going forward?And the second question is on, I guess, the Red Sea since the beginning of the year. Can you talk about how it's changing or maybe your purchasing patterns, what you're seeing in terms of invoices sequentially? Are you seeing sharp inflation, but also are you seeing any change in behavior from your customers in terms of maybe temptation to be restocking?
Yes. So on your first question -- and I think you are referring to how OpEx has developed throughout the years. In fact, if you look at it, we've indicated that we would have roughly EUR 200 million inflation in 2023 that happened. We have compensated net or roughly half of that and the other half -- I mean, we had actions in place to compensate, of course, but we had also additional cost including what we have indicated before, amongst others, slow-moving and obsolescence material. So part of that cost inflation sits in the Q4 numbers, and that's why you probably see not the maximum operating leverage coming through.I think it's also important to manage -- to mention that from an overall bridge build perspective and other bridge build related accruals, they were somewhat higher in the fourth quarter.
Yes. As Maarten said, slow-moving inventories. We've talked about that multiple times in the year. We've been cleaning up that cleanup -- having a solid year in 2023 gave us the opportunity to make sure we accelerate that cleanup, and you see that in the Q4 numbers.And as you know, we missed on our objectives in 2022. So you can imagine that from a bonus accrual, '23 was a higher year than '22. So the delta as you can find in there.The Red Sea question. The Red Sea situation is -- obviously, impacts Akzo. It means at this point that some of our goods sit on boats for longer periods. It also means that transport is a bit more expensive. At this point, from a working capital perspective, it's manageable. And from a cost perspective, it's also manageable. So we're not seeing it -- as long as it doesn't amplify, we're not seeing it as a significant issue that would impact our performance, but we monitor the situation.Laurent, did we answer your question?
Yes, largely.
We now turn to Alex Stewart with Barclays.
2 questions. You ended the year at 2.7x net debt to EBITDA. You're talking about a flat dividend in 2024, and it sounds like some further improvement in working capital. So I'm surprised that your deleveraging target for 2024 is only 0.4x net debt to EBITDA from 2.7x to 2.3x. Could you talk us through the drivers of that? And then there's something else in the cash flow statement, we should be aware of? Because typically, you delever more quickly that in a normal year.The second point really is that, if we look at your raw material basket, as you have disclosed until recently, the costs are still well above what the equivalent monomer costs are, in other words, the input for your suppliers. So there's quite a significant gap in the raw material chain.Why do you think that is? And why has that persisted despite having very weak volumes in the whole painting, coatings industry for the last couple of years? And why would you not expect that to converge over time? Those are my 2 questions.
I missed part of the second question. Did you get it, Maarten?
But I don't understand your point, because from a raw material perspective, we see raw material coming down very much in line with what we expected and what we have indicated earlier. And that is within a high-single digit percentage. So I don't understand exactly where you're referring to, Alex, on the second question.
Do you want to clarify, Alex?
Maybe I'll have it offline and speak to Kenny about it. But if we can adjust the free cash flow portion that's probably more...
Yes. But as Maarten said, you're looking at kind of low-single digit, low-to-mid single digit raw mats relief in 2024. So that trend continues for us, and it's mostly in H1 trend. And that's pretty much in our inventories already, because what we're trading, what we're talking about until the middle of the year, into early Q3 is already in our books. So there's a reasonably high level of certainty from that perspective. The 2.7x to 2.3x question?
Yes. So the key driver, Alex, is of course, first of all, the EBITDA improvement, but secondly, also the further improvement in working capital. But I think it's important to mention here that from a cash flow perspective, the big cash flow impact has been in 2023.In 2024 from a working capital perspective, it will be less because what we see in our plans is that it's in H1 and an H2 story. From a volume perspective, we are a little bit more careful in the first half where we see a stronger volume development in the second half. So you need to take that also into account in the development of working capital from an absolute perspective.
Yes. Because from a percentage perspective, you saw that we went from, what is it, 18.6% to 15.1%. If you adjust for hyperinflation, what, 14.6%, I think.
Correct.
And our aim is to get back to roughly 13% of sales and working capital. But we're also aiming to grow volumes in 2023 and some of that is a bit backloaded. So depending...
'24.
'24, I'm sorry. So depending on the sort of end of year conditions, we might deliver that percentage of sales and working capital within a higher absolute number if we -- I mean, actually, my math doesn't work. But if we see that volumes are more positive than we expected, then it will mean slightly higher inventory.So all in all, if your question is, is there an element of cautiousness. So also if I convince Maarten to allow me to pull the trigger on a small acquisition at some point that we don't have to come back to you guys every 5 minutes by saying, Oh, by the way, we bought a business for EUR 100 million and our target for the end of the year has changed.So it's a little bit of a balancing act, but that 2.3x number is a good number. And once again, you know our aim is to get to the 2x level. And to resume the normal discussions on capital allocation, which we see coming in the second half of the year.
Our next question comes from Matthew Yates with Bank of America Merrill Lynch.
Couple of just small ones really. You're guiding a pretty sizable EUR 100 million to EUR 150 million of identified items in 2024. How much of that relates to the industrial transformation and how much falls outside of that into other sorts of items?And my second one, I think, it's a follow-up on what Laurent may have asked. So you mentioned that you had EUR 200 million of cost inflation last year, of which you offset roughly half or so. Any indication on what sort of cost inflation you're budgeting for 2024 -- and equally, what proportion you might be able to offset.I think when we met late last year, you did mention about some new wage agreements, for example, that have been negotiated.
Yes. I'll take the second question. Maarten will take the first question. '23, as you said, was EUR 200 million. We managed to neutralize that through our actions. If you look at the net-net number, you can make the point that there's about EUR 30 million that's missing, but this is a reflection of our cleanup in terms of slow-moving inventories. It doesn't really have to do anything with the structural costs.If you take a 2024, you can roughly assume a EUR 200 million number again, but that number is in parts inflation and it's in part investing in our growth and our future. So, we can neutralize about half of that number through continuous improvement in efficiencies and the rest of it has to come through pricing.So we're not saying we're going to do EUR 100 million of pricing in 2024, but we're saying that pricing will contribute. And once again, it is investing in growth because we believe that we'll be growing low-single digit for the next few years, and we'll have the operational leverage, but we also will invest to support that growth. Maarten?
Yes. On the identified items, EUR 200 million, EUR 250 million. I think there is, of course, and I cannot be precise here. But the reason it's an important part of the industrial transformation as part of the identified items. But it's a little bit too early to tell. We come back on further precise milestones by the middle of this year. And you will probably appreciate that our savings are back-end loaded, but it means that our key actions need to be front-end loaded to be able to realize the savings by '26 and '27.So let us come back with the precise milestones mid this year and then there will also be more visibility how this shapes up.
Yes. And once again, as Maarten said, it's not because we don't want to answer the question. It's because there is a calendar to these social consultations. And if you start throwing out numbers, then you create a lot of anxiety that doesn't really suit a purpose at this point. We'll be explicit in the middle of the year. Other questions?
Our next question comes from Geoff Haire with UBS.
I just wanted to come back to the slide you've given on the sort of medium-term volume growth targets. I was just wondering what gives you the confidence of being able to deliver on the low-single digit volume increase per year, up 27%, given when we look historically at Akzo's business, the volume growth is lower than that.
Yes. It's -- you're historically, factually right. And -- but the past is not always a good predictor of the future, I guess, you have in your presentations. So what we have here is we've got -- we try to break it down in order to give you guys a little bit more reassurance and underpinning.The first point that you have to look into is that, it's the percentage of volume column, because it reminds you that we have certain businesses that really distorts the picture at Akzo. So for example, the Industrial Coatings business in itself is 25% of volumes. When that business has a bad year, it really skews all the numbers downwards.Now, Industrial Coatings is pretty much at a trough currently. So there's a lot more upside down the road than downside Industrial Coating. That upside is not going to materialize very quickly. This is why we're guiding as flat, but we don't believe that will be a drag. Now if you take our Deco business, Europe is still at low to mid-ish single-digit volume percentage down versus 2019. There is structurally no reason why Europe Deco shouldn't return to 2019 levels.If you take that as a -- I don't know if you take that as a 4% number, for example, and you say that recovery happens over the next 3 years, which we think is roughly the timing. That means that structurally, you have a little bit of volume growth. Whatever we do with market share. And on top of that, we do have market share ambitions.So Deco EMEA flattish. It's a bit up in the first few years and structurally flat beyond that. But that's a reasonable analysis, we believe, based on the state of our business and the structural aspects of the European market.Now, Deco emerging markets, I think we'll all agree that these are countries that should be generating volume growth structurally because of population growth and emerging middle classes and so on. So that leaves you with the questions on Powder and Marine & Protective.Marine & Protective, you guys all know the story. We're the market leader in that space. We lost our way a little bit. We showed a very strong momentum in 2023, both in terms of volumes and in terms of profitability. We still have a lot of runway in front of us. And order books and shipyards are full until the end of the decade.So the combination of the strength of our portfolio, our early investment in sustainability and the fact that we are probably the strongest name out there, but our market share currently doesn't reflect the strength of our brand and our product range, I think that gives us also an open road in front of us. And -- I mean, open road sounds pretentious. We have sizable and very competent competitors, but we are one of the strongest franchises in that business.And then powder, everybody has been talking about powder and some of our competitors are talking about it as if -- with the zeal of the recently converted, but we are the market leader by factor of 2. And we've been talking about powder for a long time.We invested in powder early on. And powder has structural tailwind because of the liquid to powder conversion, because of the expansion of opportunities in powder given the lower cure aspect and the other substrates and so on. And then your argument can be well as the growth of powder, is it going to happen at the expense of the liquid coating businesses. And we have an interesting positioning in part because, for example, if you take automotive, were largely absent from the automotive space in Liquid Coatings. We do -- we're -- new-build I'm talking. We do a little bit of work in light vehicles and trucks, but in cars, we don't do body panels. We don't do any of that.And probably coating, as you -- as it develops, the finish now is incredible. The metallics are really good. I mean we do powder coating trials with some of the EV players on body panels, and the results are exciting. So the combination of the structural aspects of the development of the powder market, which apply to all players, plus the unique aspects of Akzo with our really leading product range and portfolio and our advance in sustainability, I think that, that makes us a strong candidate to grow mid-single digit in powder in the next few years.So hopefully, I didn't give you the impression I was rehashing the same stuff. But we think that there is a strong case for this. And then I'd finish by saying that if you look at Akzo over the decade, a lot of the nongrowth has been essentially the result of arbitrating for profitability, which has been -- I get out of markets where I think that I can't compete or I can't compete at those price levels and I give up those volumes.Now, we're not a volume player. We'll never be a volume player. But if you take the powder market as an example, we're very strong in premium. We're less represented in the mid-market. Mid-market powder margins in the U.S. are equal or higher than premium market margins in powder in Europe. So we have to be a little bit more selective in how we think about the mid-markets. And there are really good battlegrounds for us in which there is technology differentiation, and we intend to capture that, and that also leads to operational leverage.So a long answer to a short question, but hopefully, that gives you a sense that we're excited about this and that we are willing to defend that commitment.
Is it okay?
Yes, that's fine. Can I just ask a slightly different question? Just on the Q1 '24 EBITDA guidance that you've given of EUR 340 million if I caught Maarten's comments right. Can you just explain where the -- is that a volume driven to get from either Q4 or even Q1 last year. Is that mainly driven by volumes? Or is it mainly going to be the net pricing benefit you're getting through to get to that number?
Yes, Geoff, this is Maarten. For Q1, it's mainly driven by margin expansion because the Q1 volumes will be slightly up, I would say. We also talk about comps. And specifically, if we talk about China, if you remember, Deco China had a very strong rebound post COVID in the first quarter of 2022. And it is likely that the volumes of China might press our volumes down. So that's why I talked earlier about the first half and the second half where the volume growth will be relatively stronger in the second half versus the first half.
And Geoff, without minimizing our commitments, Q1 is essentially Q4 minus the hyperinflation, because Q4 EBITDA was EUR 313 million, hyperinflation was EUR 23 million. So you're talking EUR 336 million. We're guiding for around EUR 340 million. It's not predicated on anything magical. Once again, I'm minimizing our commitment. So I kind of feel I'm underselling here, but just to give you the full picture.
Okay. Better to undersell than oversell.
Yes.
We now turn to Chetan Udeshi with JPMorgan.
The first question was a bit more technical, but just worth trying. The hyperinflation accounting, which you are saying is a negative on earnings. I'm just trying to understand, don't you have the benefit of hyperinflation on pricing? Because I suspect in some of these hyperinflationary economies, your prices are up maybe 50% just to compensate for the high inflation in the business.So can you maybe break out how much of your pricing in Q4 is actually driven by these hyperinflationary account -- sorry, hyperinflationary economies. Is that actually a number which is included in the earnings headwind? Or is that not part of the hyperinflation accounting impact number?And the second question was, just looking at your payables, we've seen a decent decline. I was just curious, when you compare your payables in terms of volumes today versus what you might have been buying before, let's say, the buildup of 2022. Are you now back to, from a volume perspective, to a more normalized level? And the reason I'm asking this is who knows what happens with the Red Sea dynamic. But I'm just curious that you've not cut that purchasing to such a level that then you have to scramble again for materials if the Red Sea sort of disruptions continue?
Chetan, thanks for your question. And actually, thank you for your note earlier this morning. You called our results decent, which I'm excited about. I feel this is a turning point in our relationship. And Maarten and I are excited. What we'll do is I'll take the hyperinflation question, and Maarten will take the payable question.So the hyperinflation question is, you're right. I mean, in countries where we have hyperinflation, we adjust pricing continuously. And this is why, for example, when we talk about -- we talk about pricing, we say that it's a mixed bag of places where we have pricing power, areas where we have to give up pricing based on contractual commitments or market pressure and a little bit an inflationary element in Argentina and Turkey.We separate those numbers. So we're price positive in Q4. We're price positive, including -- even excluding hyperinflation in Q4. I think the pricing in Q4 is, what, 4% and the hyperinflation...
Its more about 2%. Its 2%.
Yes.
Pricing was 2%. But the hyperinflation -- so what happens here, the EUR 23 million impact is really going back. There was a massive devaluation of the pesos in December. And the accounting goes back to the 1st of January of 2023 to revalue the balance sheet and all the accounts for the full year. And that's why at the end of the year, you see such a massive impact.
If I can say something on -- I'll have my rant on IFRS. And, hopefully, Maarten will not cut off the microphone while I'm doing it. But look, hyperinflation accounting, you have elections in Argentina. They devalue and whatever 20th of December, we have to restate the whole year. Now, that year, the profits already in. They've already been converted to hard currencies. So it does feel like it overstates the impact to some extent because it's a significant impact to take in the quarter full year adjustment. But that's what IFRS hyperinflation accounting is, and that's what we apply.But these are good businesses. These are just good businesses, Argentina and Turkey, where we have to minimize our receivables exposure because we are making good money in these markets. But if we stay exposed from a receivables perspective, then we have an issue. That means that we have shorter payment terms so that we make the economic equation work. But it's a little bit of a juggling act. Maarten, back to you?
Yes. So your question on the volumes, I mean, if you look where we are now, volumes have normalized. And therefore, also because you were referring to payables, payables have normalized. But from a working capital perspective going forward, the opportunity is further to drive our inventory levels down. We've always said that we want to ultimately get to a normalized level of roughly close to 90 days. We are not there yet. So step by step by step, we will get there. But overall, working capital elements, including payables have normalized.
Chetan, did we answer your question? Do you have a follow-up?
No, I just wanted to clarify, sir. So did you -- I didn't hear a number, but how much of your pricing, which was 2% is actually due to just the hyperinflationary economies. Do you have that number, within that 2%, how much would be the impact from Turkey and Argentina? I mean, I can follow up separately it's fine if you don't have at your end.
We don't have that exact number here, but it is included in the 2% price mix. But even if you would take these, as Greg mentioned earlier, if you would take those effects out, Argentina and Turkey, pricing still has been positive, and that's the most important. So we look at it, of course, separately per business and per business segment.
And Chetan, just -- I mean, I stated it, but I'll state it again. As we look at pricing at AkzoNobel, we actually separate Argentina and Turkey. So we don't let those inflationary numbers distract us from the task at hand, which is to have a dynamic pricing policy and to make sure that we capture the value and that we neutralize some of the inflationary trends that we'll still be exposed to for the foreseeable future.
We now turn to Christian Faitz with Kepler Cheuvreux.
2 questions, please. Sorry to come back on FX/hyperinflation. But can you please share with us your expectations for further FX impact on your P&L in Q1 coming from these hyperinflation countries such as Argentina and Turkey. Would it be correct to take your roughly 4% exposure to hyperinflation countries times the FX devaluation there?And then second, coming back to China, I noted your comments on Deco, but any growth trends in China for your overall business you kind of observed that are worth sharing? Or would you only see growth momentum returning after the end of the Chinese New Year celebrations?
Christian, I'll take the China question, and Maarten will take the ForEx guidance question. China is really interesting, because the -- when we talk about China at AkzoNobel to investors, we have a tendency to focus on Deco China because it's a business that we report separately. But coatings in China is also very significant for us. And the coating market has been really good.So we're -- we have double-digit volumes in coatings in China -- volume growth in Coatings in China in Q4, for example. So in a market where people have the impression that China is a depressed economy, I mean, there are challenges, particularly on the construction side of things. But our coating businesses are doing really well. And once again, double-digit low-teen volume growth in coatings China in Q4.On the Deco side, it's a market that is -- it's a market that is growing. If I take the Q4 numbers, we're talking low-single digit volume growth. Q1 is going to be a bit more challenging because you had the -- in the first half of the year in 2023, you had the post-COVID rebound. So the numbers will not look as enticing. I think -- but the Chinese Deco market is continuing to grow. It's continuing to develop.The challenge for us is not our exposure to new construction because we are not. We've had a tendency to deemphasize the new construction market for Deco. But -- so we're really -- we're in the market #2 in retail in China for Decorative Paints. The challenge that our competitors were very active on the project side, on the new construction side, and therefore, they've shifted their capacities to the retail market, and that's creating a little bit of price pressure.But we saw price erosion in Deco China in 2023. That has now leveled out. And it will be interesting to see what happens after Chinese New Year. Nothing is going to happen between now and early Feb Chinese New Year. And then we'll see how the market develops beyond that.But we remain positive on Deco China. It's just a slower recovery with a bit more pricing pressure than what we were hoping for a year ago. But it's still a market in which we're competitive, and we're actively defending our #2 position in retail. And once again, coatings is a really good market in China. So a tale of really 2 different dynamics. Maarten, the FX question?
Yes, Christian, on the FX, yes, first of all, I mean we do not speculate about FX and how FX will evolve. And that's also not our field and it's very difficult. But I think what we've done for Q1, and we said it earlier. We've guided for an adjusted EBITDA of around EUR 340 million. That is basically the Q4 run rate, excluding hyperinflation, which implicitly says that we do not expect these kind of impacts in the first quarter.The reason only already is what I said earlier, an hyperinflation impact becomes larger towards the end of the year if there is a massive devaluation because we don't have to revalue completely back to the 1st of January. So again, we do not expect material impact in the first quarter per our indication earlier.
And then we'll wait for the next question, so I don't start my IFRS rant again.
Our question comes from Aron Ceccarelli with Berenberg.
I had one on your midterm guidance. When you look at '27 -- '26, '27, what assumption are you making for gross margin?
I mean, we're already guiding on EBITDA percentage, EBITDA, CAGR volumes and return on invested capital. So I think we're already tackling quite a few elements of our P&L and balance sheet. We're not guiding midterm on gross margin.
Okay. And maybe one question on EMEA Deco. Can you provide a little bit more color around the performance in South and Eastern Europe, which has been quite good and compared to the rest of the continent, please.
EMEA Deco, I'm sorry, the performance in.
I think the performance in South Europe and Eastern Europe was better than Central and North Europe. So maybe if you can provide more color around this would be great.
I'm trying to think what I can tell you granularly, not because I want to avoid your question, but I'm not sure I can give you an intelligent analysis per market. The big drivers of our Deco business or really it's the U.K. and the Benelux, that's the 500-pound gorilla in our business. And everything else, it's a mixed bag of trends. So we see markets that are overall heading in the right direction. We're not talking about significant volume growth, but we're talking about volume rebounds.The exception is probably France, which from a retail perspective, has been complicated, and Nordics, which has been also complicated. But everything else has been okay and it's all kind of trending according to consumer confidence, which is really the main driver of our Deco business in Europe because it's a renovation business really. So the sore points for us are France and Nordics and everything else is kind of going along the same lines. And then the actual percentages will be a factor of what the baseline is from a year ago.But yes, think about France and Nordics as areas where we have to raise our game and everything else is moving according to the trends that we highlighted. And once again, we see opportunities to continue managing pricing, although we have to be conscious of the trends in the market in terms of purchasing power and consumer sentiments. But we will have active pricing discussions in all these European markets in 2024.I think it's really important as a business that -- and as an industry that we resume that general hygiene of having discussions on price versus inflation every year because for a long time, we lived in a world with no inflation, but now we're in a world with inflation for the foreseeable future, and that has to be a regular discussion that we have with our retail partners.
Just a clarification. On your raw materials guidance for 2024, so you said its mid-single digit decline for the full year?
Yes. So maybe to clarify, Aron. So the first half, we continue to see high-single digit decline in line with what we've seen in Q3 and Q4 in '23, we will see a similar in the first quarter and the second quarter of 2024. And then in the second half, we will see it flat to probably even if we look at the current index is slightly up in Q4. So if you all middle that out, you get to more or less what Greg said earlier, an single digit to -- what is it, low-single digit to mid-single digit percentages down.
For the full year. Okay.
For the full year, which, by the way, is not -- I mean, from what our competitors have talked about, it's not disconnected from the views they've expressed. So we're all kind of seeing the same thing. And any discrepancy will be a geographical discrepancy because, as Maarten said, there are markets where -- China, for example, the indices are going up currently. But these things come and go, and some of those aspects are very geographical dependent.
We now turn to Peter Clark with Societe Generale.
It's a question, I think, for you, Greg. Actually 2 bits to it. The low-single digit projection in organic volume growth seems pretty sensible, not to be ahead of that. I'm just wondering how important you've seen mix in that? Because, obviously, your faster-growing businesses are the higher-margin ones, Marine Protective, Powder, auto refinish. And then obviously, you have the Industrial may be flat. And then following on from that, I was just having a quick glance back.It's amazing that it's back in 2018 when Performance Coatings had the higher EBITDA margin of the 2 divisions. I'm just wondering your thoughts on where that goes and when it overtakes Deco again? Because inherently, this should be the higher-margin business. You've got some industrial transformation benefits that kick in, particularly towards the end of the time frame there. And it should be doing better and obviously, the mix effect that we're just talking about. So just those 2 issues.
Thanks, Peter. 2 good questions. The low single-digit volume growth, I think, as you said, it's -- we think it's a reasonable target and assumption. The mix aspect, what you said is almost correct, and the almost is probably -- it's probably our fault. Hopefully, we're not getting ahead of ourselves. Powder is a higher-margin business.Marine Protective is a business that had suffered over the last few years where profitability went from being in the mid-teens to a bottoming out in 2022 in the low-single digits. It bounced back in 2023 to be high-single digits. In 2024, we'll cross the double-digit threshold. And over time, we're going to get back to the mid-teens.So if you extrapolate a few years out, Marine and Protective should be one of our higher profitability businesses, but it's not currently. So therefore, you've got the volume trend that's essentially happening at the same time as the margin rebound trend in Marine and Protective. So it's a little bit more balanced than what you mentioned. But otherwise, your comment was directionally correct.And Coatings versus Deco in terms of profitability, I mean, there's good trends on the Coatings side, but what we've seen in Deco over the last few years is that Deco has significant pricing power. And I think at times, the market and certainly Akzo has underestimated the pricing power of what are essentially branded products.It's really an important discussion to have in a European context because a lot of investors that we see ask us questions that are really chemical industry-related questions. They behave as if paints and coatings are -- is part of the chemical industry. But the reality is that the Deco business is really more of a Unilever, Procter & Gamble, kind of branded product, B2B2C distribution kind of thing. And what we saw during COVID and we're still seeing now is that consumers are loyal to brands. They trust the brands. And if you manage those brands correctly, you're able to price.So it's -- I agree with the point that the technology differentiation is higher in coatings. It's -- these are B2B applications that have specs and where you can have really performance as a significant differentiator. But the pricing power in Deco is not to be underestimated. So I couldn't give you a clear view of that as to which business should be more profitable over time. I think it depends on where we are in the market cycle. Maarten, do you want to add anything to that?
No, I think that's a very balanced picture across the businesses.
Any follow-ups, Peter?
Yes. No, that's very helpful. Can I just add the incremental margin you're getting on fresh volumes in Marine and Protective? I presume they're pretty high though. Would that be right on the incremental volume you're getting there or not yet?
It's partially right. So I'm sorry, I'm giving you like answers or qualified answers to your questions, but I think it's interesting to understand. In Marine and Protective, I think Marine in itself, Marine is a business where you've got the new build market, which has structurally lower margins because it's a large volume sale to a concentrated buy side, the shipyards.So therefore, it's structurally going to be lower profitability. But the money is made disproportionately in drydocking and C-stores, take drydocking most significantly. Now drydocking, you have the guy who does the OEM paint has a 70%, 7-0 capture rate in drydocking. So essentially, what you have to do is you have to have a new-build business in order to feed the drydocking business, which means that you -- if you take kind of the lifetime sale and lifetime profitability, the margin is a little bit backloaded.Now you can look at it by saying, well, then that means that in the first few years, you're going to book lower margin volumes so that you can feed the beast later on. But actually, the reason why we're stepping back dynamically into this market is that the new-build market used to be a commodity market almost. And with sustainability and the emissions directives for ships, what you have is you have a market that favors increasingly biocide-free antifouling which is a really technical product in which we lead and favors technical solutions that limit drag because energy is a big cost item and it's also a big generator of emissions.So that means that the new-build market has -- as long as you tackle more technical ships has higher profitability than it had in the past, which is why we're comfortable in our efforts to develop, but it's still lower profitability in the drydocking. So it's kind of like a 2 pronged thing. Initially, you're going to see the volumes clicking in at decent margins but lower than the drydocking stuff. And then you see the dry-docking thing, which is the kind of the second stage of the rocket that starts firing kind of 3 years out. So in terms of building a mental model, that's how I would think about it. Does that help?
Yes, yes, it certainly does.
Our next question comes from Jaideep Pandya with On Field Investment Research.
I want to ask on raw materials a little bit more long-term question. Most of your raw materials, at least that we can track, are an overcapacity zone right now. And a lot of your suppliers are talking about utilization at 70% zone.So I'm just curious, first of all, are you getting a lot of inquiries for volume contracts on a longer basis? Because I guess volume is really key for the coating supply chain. And what makes you think that raw materials actually will go up in Q4? Is this more an overall inflation comment you are talking about? Or was this more raw material specific? That's my first question.
Let me get into that one first. I'm sorry. Ask your second question, and then I'll answer the first one. Go ahead.
Yes. No. So Greg, I was just saying it would be great if you do an acquisition, but I just wanted to check on the previous 3 that Maarten has made on Grupo Orbis, I guess, Kansai and also the old BASF acquisition. So what's really been the progress of these acquisitions, like you bought them at very low profitability. So are they now at par with Akzo profitability? Or what is the path recovery?And then last question for Maarten is on free cash flow. Should we expect a flat free cash flow this year, so around EUR 840 million again for 2024?
All right. So Maarten will take the free cash flow question. Acquisitions, BASF is a long time back. Orbis, Orbis we're delivering ahead of the investment case. Orbis was a lower profitability business than our Deco business in Latin America, but we have -- as part of our investment case, we have a path towards getting into that profitability and we are delivering on that path.So we're very happy with Orbis. It's a good acquisition. I can say that with the confidence of a guy that had nothing to do with it. But I'm the happy recipients of a good transaction, and you'll continue to see a margin uplift from delivering our plan on Orbis and our synergy plan. So that one is good.Kansai has gone away and it's gone away for good. So the Kansai deal is over, it's not coming back and we're focusing on deleveraging. So acquisitions are not really a significant topic for us in in the months to come, certainly not in the first half of the year.Your question on raw materials is it's kind of a macro question, which it's interesting to understand the trends. You're right that a lot of what we buy is in markets where you have overcapacity. But that is dominated by the Chinese markets that produces all those components and those chemicals and does have overcapacity.Now any time the Chinese economy picks up a little bit then suddenly, you see the raw material index in China going up because the domestic market has historically a significant consumer of these products. And when the market is down, then there's more volume to be redeployed in other parts of the world. That leads to interesting dynamics, which are that in Europe.You're able to purchase blended products from China that are significantly cheaper that's what being produced in Europe. But if you do that, then you are essentially increasing your exposure to China, which means that most players like us, we know we manage dynamically and we kind of play with the line a little bit, but we try to make sure that we keep the component of European supply if only in terms of geographical derisking.Whenever you want to say something smart, you put Larry Summers and he said, We're in a world -- we've gone from a world of just in time to a world of just in case. And just in case means that I need to make sure that geographically have dual sources of supply, which means that I will continue buying for part of my supply raw mats at a higher price from Europe than lend it from China. But once again, it's a balancing act.And then the final thing is that all these global players and particularly the ones in Europe, they look at the trends and they spend a lot of time thinking about whether they should shut down capacity or not. And if they do shut down capacity because they're not economically viable, then in all likelihood, you're creating an opportunity for the Chinese economy to start pricing up these raw materials. So it's kind of like if you go all in on where it's cheap, be careful what you wish for because there are consequences and everything is interconnected. Does that help?
It kind of does. I was just wondering because the coating supply chain lost 15% to 20% volume last year. And you guys, along with some of your peers, had roughly flat volumes. And that just helps me when I speak with the coating suppliers, they're crying for volume. And that sort of what I was referring to. Are you looking in one of these volumes leads?
Yes, that was part of your question, and I forgot that part. Yes, when we have discussions these days, we have discussions with suppliers that are more focused on locking in volumes and on price, which creates an opportunity. But we'll see how that evolves over time. Maarten, there was a free cash flow question.
Free cash flow, yes I think to -- I mean we have not given guidance on free cash flow, just to be very clear. But to think about this is, first of all, of course, we've indicated the adjusted EBITDA guidance for 2024.We've also indicated that we will invest more in CapEx, plus EUR 50 million to support the industrial transformation. And I've indicated earlier, from a working capital perspective, the '23 we've seen from a value or an amount perspective and a pretty big takeout in terms of working capital. That will not be the case in 2024, yes, the percentage will go down. But given the fact that our plans are more second half loaded, the takeouts in terms of amount of working capital will be substantially lower. So these elements are at play, and that is what you have to think about without being specific or giving any guidance on the free cash flow.
Other questions? I think we've got one more.
We now turn to Chris Counihan with Jefferies.
I had a short-term and a longer-term one. Firstly, sorry, Maarten, to come back to Q1, but just to understand your EUR 340 million. So I get the Q4 equals Q1 ex hyperinflation. But I think you also said you had some inventory devaluation throughout the year and presumably in Q4, and you normally would have some positive earnings seasonality quarter-on-quarter?Or if I think about it from a year-on-year perspective, you're saying flat volumes and pricing which I think, Greg, you said a raws benefit of EUR 130 million year-on-year, which would get me well above that. So I just wanted to try and figure out what I'm missing in that math on the Q1 guidance.And then on the medium-term plan, I think you said, Greg, last time we caught up a dozen or so plants in Europe through operating at suboptimal utilization rates. So I think you mentioned a number around 50%. I assume it's too early to give an update operationally as to what is changing or what's that happened already, but given that sort of plan can't happen overnight. But maybe more as an operational question as opposed to a financial savings question, what we should expect to be happening on the plant rationalization side in 2024?
Thanks, Chris. I'll take your second question, and then we'll go back to your first question. We've got 133 plants around the world. A bit less than half of that are in Europe. In Deco, we have a bit less than 30 plants in Europe. Capacity utilization a year ago was in the kind of in the mid-50s. Our aim is to get capacity utilization to the kind of the high 70s. We don't want to go higher than that because these are seasonal markets. And if you start being too tight in terms of capacity, that means you've got to build up inventory, which also comes at a cost. So think about going from the mid-50s to the mid-70s roughly.We said that, that would involve closures. And as we alluded to earlier, we'll be in a position to make those first announcements this summer. It doesn't mean that we're not working on this in the meantime. What you've got to do in order to be able to close the plant is to decide where the volume is going to go and to reformulate the products for the raw materials that are already in use in the receiving plants. Otherwise, you're transferring complexity and it ends badly.And all of that is important because service levels at times have been an issue for us and for the industry in general, particularly coming out of the raw material cycle. And in Europe, we're back to service levels in the 90s, and that really underpins our ability to grow and to capitalize on opportunities going forward. And we don't want to jeopardize those service levels.So it's all coming. First announcements will be the summer. The work is already underway, and it will be done in a way that where the preparation happens upfront so that the service levels are protected. The other question was...
Of Q1 versus Q4. I think first of all, I think it's important to mention that Q1 is relatively smaller quarter. The big month is always in March as the Deco season starts. So that is a key driver for our Q1 results. But overall, what we said as the key element is volumes will be flat to slightly positive, pricing will be flat, costs will be more or less flat. There are some pluses and minuses. I think it's also important to mention that some of the CLA agreements start to get into our numbers on the 1st of January of this year.
The collective labor agreements for those of you who don't speak Akzo.
Sorry, collective labor agreements. And margin expansion will be very similar as Q4. So most of the elements are similar, and we will see how Q1 evolves. And as I said, the most important driver, ultimately, for the Q1 result is always March, which is for us a big month.
Are there other questions or we're done.
No, I think, Chris, if that answers your question, I think we can wrap up. Operator?
I think we're out of questions, and you guys are probably out of time because you invested a lot of time in that discussion with us, which we appreciate.To wrap up, we're happy with the developments that we saw in Q4. We see good signs on the volume side of things. We continue to be very disciplined from a pricing perspective. And we enter 2024 with positive momentum and more margin expansion to come.So we will work to deliver on our plan in 2024. And as we said, we have midterm targets that go beyond that. So we look forward to briefing you on the progress in the quarters to come. Thank you again for your time, and have a great day.
Operator, please close the call.
Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.