Akzo Nobel's CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.18.13 | About: Akzo Nobel (AKZOF)

Akzo Nobel Nv (OTCQX:AKZOF) Q1 2013 Earnings Call April 18, 2013 3:00 AM ET

Executives

Jonathan Atack – Director, IR

Keith Nichols – CFO

Ton Büchner – Chairman and CEO

Analysts

Jeremy Redenius – Sanford Bernstein

Tony Jones – Redburn Partners

Paul Walsh – Morgan Stanley

Peter Clark – Société Générale

Andrew Benson – Citigroup

Micha Tiekink – CCRB

Fabian Smeets – ING Bank

Jean-Francois Meymandi – UBS

Mutlu Gundogan – ABN AMRO

Markus Mayer – Kepler Capital Markets

Jaideep Pandya – Berenberg

Chris Counihan – Credit Suisse

Sebastian Satz – HSBC Bank

Operator

Good morning, good afternoon, and thank you for standing by. At this time, all participants are on a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

And I will turn the meeting over to Jonathan Atack. Please go ahead, sir. Your line is open.

Jonathan Atack

Thank you very much. Good morning, everybody, and welcome to the AkzoNobel 2013 first quarter earnings call. Today, we have our CFO, Keith Nichols, to guide you through our Q1 results and lead the Q&A session afterwards. Ton Büchner, our CEO, is out in a business today, but we are expecting him to dial in later. So hopefully, he will be able to join the Q&A session.

This morning, we will also be referring to a results presentation which you can either download from our website, www.akzonobel.com, or you can follow it on the screen at the same site. A replay of this call will also be made available. For any additional information, you can also contact Investor Relations after the call.

Before we start, I need to remind you of the Safe Harbor statement that is contained in the back of the presentation. Please note that this statement is also applicable to this conference call and the answers to your questions.

I would now like to hand you over to Keith Nichols, who will start with the Q1 2013 highlights on slide three of the presentation.

Keith Nichols

Thank you, Jonathan. Welcome, everybody to our first quarter results call. All our key financials now reflect North American Decorative Paints in discontinued operations, IAS 19 changes, and incidental charges moved into EBITDA, all is explained during the strategy update on February 20. And comparative numbers for 2012 have been restated accordingly and are the basis for all prior numbers in this presentation.

So similar to Q3 and Q4 2012, the trend of weaker demand, particularly in Europe, continued during this first quarter. And this, along with the impact of discontinued operations, was primarily responsible for revenues being down 7% year-on-year in this quarter. Operating income was down 8%, reflecting lower volumes in all three business areas and specific one-off operating issues in specialty chemicals.

Overall, restructuring charges in the quarter were in line with the previous year. And to remind you, last year’s restated Q1 incidental impact in EBITDA was €31 million, of which €33 million is related to those restructuring charges. Decorative Paints had a higher proportion of the restructuring charges in the prior year compared to this quarter.

Cash flow improved mainly due to lower pension payments, and net income attributable to shareholders is €89 million and adjusted EPS is €0.51 for the quarter. But as you can see, we are facing challenging market conditions which further demonstrate the need for our strategy of ongoing performance improvement, as set out by Ton in the February strategy update.

Turning now to slide four, we see the results for the first quarter. As I said, revenue was down 7% year-on-year, primarily driven by volumes which were down 3% on the continued European slowdown which have an impact on all business areas. Revenue was also impacted by divestments, primarily Chemicals Pakistan, which contributed €69 million revenue in Q1 last year.

Overall, price mix was negative 1% and exchange rates having being positive last year had a 1% negative translation impact. Savings from the performance improvement program more than offset fixed costs increases, and raw materials were stable compared to the prior year. And as I previously mentioned, total restructuring charges were in line with prior year. They were higher year-on-year in Performance Coatings and Specialty Chemicals, and lower in Decorative Paints. We will give a further update on the performance improvement program with the second quarter results.

As a result of the above, operating income fell 8% to €217 million and the return on sales was 6.3%. Moving average return on invested capital was 7.8%.

Turning to slide five, we see quarterly volume and price/mix development. Volumes across the group declined, notably where business areas have European exposure. And in addition, Specialty Chemicals also experienced some production issues as well as a slow start for seasonal businesses like agriculture and construction, which were affected by the weather.

Positive momentum in price/mix is seen only in Performance Coatings. And Decorative Paints experienced an overall negative price mix, particularly driven by European down-trading. In Specialty Chemicals, price/mix was minus 2% overall driven by Ethylene Amines and Functional Chemicals, Pulp and Performance, and the production issues in Industrial Chemicals in the Rotterdam cluster.

I’ll now turn to the three business areas, and starting on slide six with Decorative Paints. Revenue was down 5% to €925 million, mainly due to lower volumes in Europe and Southeast Asia. And all European regions experienced substantial volume declines with the southern region being most impacted and partially offset by higher volumes in Latin America and double-digit volume growth in China.

Negative currency effects were most visible in Latin America and India, South Asia, impacting results. And challenging market conditions in Europe continue, but operating income increased due to lower operating cost in Europe and lower restructuring charges, bringing the operating income and our return on sales percentage above prior year. Return on invested capital was 2.7% for the quarter, down from the prior year on last 12 months lower operating income.

Slide seven, Performance Coatings. Volume declined by 3% with the slowdown in Europe impacting all businesses and with some variability between individual business units. Overall, price/mix was slightly positive. However, automotive and aerospace were the only business unit that saw revenue growth year-on-year.

In Protective Coatings, higher activity levels were seen in oil and gas while Marine Coatings continues to face much lower levels of new-build activity. Some customer demand pickup was seen in specialty finishes and aerospace.

Despite an overall volume decline, operating income and the return on sales percentage have increased due to ongoing cost control, margin management, and restructuring. And as part of the performance improvement plan, a site closure in Australia was initiated during the quarter. And the return on invested capital moving average is up for the quarter on better recent business performance.

Turning to Specialty Chemicals on slide eight. As stated earlier, revenues were lower due to divestments as the Chemicals Pakistan business accounted for 5% of Specialty Chemicals revenue in 2012. Revenues were also impacted by lower volumes, mainly in construction-related products and pulp bleaching and plastic industries as the negative trends continue from the second half of last year.

Seasonal segments, such as agriculture, were impacted by the cold weather in North America. And Surface Chemistry announced the exit from the merchant fatty acid business in Boxing, China. Operating income was down 29% and return on sales down 2% due to unfavorable market conditions and several production-related issues, including a fire at a U.S. Functional Chemicals plant and ongoing large plant maintenance in Rotterdam, which will continue to have some impact into the second quarter.

The Pulp and Performance Chemicals business was also impacted by the devaluation of the Venezuelan currency and the start-up costs of our Chemical Island in Brazil, which will ramp up quickly during the year. Performance improvement programs are accelerated in all businesses. However, moving average return on invested capital is down for the quarter, driven both by higher invested capital and a lower business performance.

Moving to the rest of the P&L on slide nine, there are a few lines to note. Amortization and depreciation charge is up slightly due to investments in growth CapEx. Remember, we reported no incidentals in the quarter as most restructuring costs and non-recurring items are now included in EBITDA. As stated earlier, overall restructuring charges in the quarter, which mostly relate to our performance improvement program, were in line with the prior year. They were higher year-on-year in Performance Coatings and Specialty Chemicals and lower in Decorative Paints.

Financing expenses increased driven by higher net debt. And lower discount rates for pensions and provisions. And the Q1 effective tax rate is 29%. Discontinued operations include the results of the North American Decorative Paints for the first quarter as the divestment was completed at the beginning of April. Net income attributable to shareholders was €89 million and adjusted EPS was €0.51.

Slide 12, turning to cash flows. Q1 2013 resulted in an operating cash outflow of €406 million versus €704 million last year, mainly as a result of lower payments to pension funds. Pension top-ups during the quarter of €287 million were paid. Working capital movements increased €350 million, reflecting normal seasonal increase in Q1, but it’s slightly less than the prior year.

Q1 operating working capital as a percentage of revenue came in at 13.9%, below the prior year at 14.6% as a result of operational efficiencies and the focus on working capital management. CapEx was €131 million, which is in line with last year and represents our continuing organic investments in the business. And overall for the full year, we expect CapEx to be less than 2012.

Net debt at the quarter end is €2.9 billion, up from €2.3 billion year-end 2012, reflecting the seasonality, but it’s in line with prior year Q1. The divestment of Decorative Paints North America was completed on April 1 and will be included in the second quarter results update. And the proposed final dividend will also be paid in the second quarter. And going forward, management focus on improving cash flow remains an important priority.

Turning now the pension deficit on slide 13. The total IFRS deficit has fallen from just over €1 billion at the end of the fourth quarter to €642 million at the end of Q1. The top-up payments include the payments into the two large UK plants that take place each year in Q1, together with some other payments into the U.S. and Canadian plants and represents a vast majority of the €300 million indicated cash top-ups this year.

Adverse movements in UK inflation pushed up the obligations which were offset by strong performances in plan assets with returns ahead of expectation.

In conclusion, on slide 14, the economic environment remains challenging and we do not expect an early improvement in the trends that we see in our businesses. But despite these challenges, AkzoNobel has strong brands, an excellent geographic spread, and many leading market positions. We are confident that the acceleration of our performance improvement program and the strategic priorities and 2015 performance targets announced in February are the right focus to have in these markets.

Now this concludes our formal presentation. In a moment, we will open for Q&A. And I would remind you of Jonathan’s introduction where Ton, subject to technology, will be joining us in a few minutes hopefully during this Q&A session from one of the businesses.

With that, I’d like to hand back to the operator to open for Q&A.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) We do have our first question, and that’s from Jeremy Redenius. Please go ahead. Your line is open.

Jeremy Redenius – Sanford Bernstein

Hi, Keith. Good morning. It’s Jeremy Redenius from Bernstein. A quick question about the Specialty Chemicals business. Looking at the statement about Rotterdam for Specialty Chemicals, I’m just wondering what the nature of the shutdown. Is that – is this is a prolonged maintenance shutdown or is this kind of an economic viability issue that’s causing the downtime here? Can you give us some more description of the situation there please?

And then secondly, just trying to get a feel for the size of the impact in Surface Chemistry, the shutdown or the announced exit from the fatty acids business. How material of an impact was that on the sales and also from a profitability point of view? Thanks.

Keith Nichols

Certainly. Good morning, Jeremy. Start in reverse, Specialty Chemicals; we reported that their volumes were down and that is almost entirely due to the exit from fatty acids in terms of profitability. Remember, we don’t split out by sort of sub business unit level, but it wasn’t that material was what I would say. But the volume comment in the booklet if that’s what you’ve seen is driven by that exit. And in terms of Industrial Chemicals, you may recall in the fourth quarter commentary we talked about customer-related outages or stoppages that had impacted us.

In addition to that, every roughly four years there is major maintenance that goes on within this cluster. We are going through that standard routine maintenance at the moment. It is large in scale. It is at an advanced stage now but I do expect that it will continue through into April and should finish indeed in this second quarter.

And in terms of what goes on there, when you have these major stops, and remember they’re embedded with our customers, a number of players, but most of the plant is shutdown during such a large plant stop. And then once we restart after maintenance, we should be back on good efficiency levels and we’ll be running full stop to catch up.

Jeremy Redenius – Sanford Bernstein

And perhaps just a follow-up on that one, if – I noticed so that industrial chemicals, which presumably is the one that’s impacted the most here, the sales are down just 3%. Is there some kind of building and drawing down of inventory that’s happened to help mitigate that impact or how has that been managed?

Keith Nichols

Indeed, it’s around 3%. There is an impact of course as we keep some residual production going on where we’re having to buy in raw materials from a third party because we’re not producing them, so there’s a contribution margin impact in the business. So there’s a volume impact and there’s an operating impact as you tend to keep base levels ticking over, et cetera, while some of the maintenance is going on. So there’s two impacts going on there.

Jeremy Redenius – Sanford Bernstein

Okay, great. Thank you very much.

Keith Nichols

All right. Next question, please?

Operator

Thank you. Our next question comes from Tony Jones. Please go ahead. Your line is open.

Tony Jones – Redburn Partners

Good morning, Keith. Tony Jones at Redburn, London. I’ve got two questions and they both relate to trading. Firstly on trading down, in Decorative Paints what impact did trading down or negative mix have? And could you sort of break that down in the minus 1% price that you just reported? And sort of related to that, is this – this sort of trend has been going on for quite a while now. So what I’m interested in is whether you think that your market is structurally changed for the worse or whether you think it’s bottoming or whether there’s some scope for it to develop.

And then finally, related to that, at the Capital Markets Day at the end of last year, the CEO stated that everything’s core and there wasn’t any intention to exit any base businesses at this point. But if the trading down continues, well, and this may be right for any of the businesses, but would there be trigger trading down where you might review that? Thanks very much.

Keith Nichols

Certainly. Good morning, Tony. Down-trading is most visible in the European businesses indeed. It is the bigger factor in the combined price/mix number that you see. So there is more mix impact than there is price impact. It is a feature of the business. Now the question about structural, although volumes were down 1%, that’s better than we’ve seen in some other quarters and this is quite a low quarter.

I think what we’re seeing is behavior that is fairly predictable in these times where people are either trading down within our brands, trading away into, for example, private label or in the volume side, actually postponing entirely maintenance stops. We keep it under close review. We look at all aspects of development and demand. We have got quite a breadth of brands, and we are working on making sure we can deal with this. I think the leading challenge we have has been weaker demand overall or the lack of consumer confidence. Hopefully, that answers that question.

In terms of the everything is core statement, I’d rephrase that a little bit and say I think Ton was trying to de-emphasize that we’re not going on a big acquisition-led strategy. You’ve seen us exiting businesses. We’ve exited Pakistan. We had a couple of smaller chemicals business in the fourth quarter, which we announced, Permascand, for example. And importantly, we’ve exited deco North America.

We’ve clearly looked at the strategic positioning and the returns we can expect to get on that business and made the tough decision accordingly. And that will continue. I mean, we are focused on improving returns, return on operating capital, invested capital, and improving cash flow. Where there are markets that we feel we are not ideally placed or we don’t have the right positioning or we’re not going to get to the kind of returns we want to get to. I hope the past is an indicator that we will continue to address those accordingly.

So please read the comment differently in terms of – he was talking about the mega acquisition-led strategy. We have three BAs and we’re sticking with three BBAs and focus on delivering 2015 targets.

Tony Jones – Redburn Partners

Thanks, Keith.

Keith Nichols

Okay. Next question, please?

Operator

Thank you. Our next question comes from Paul Walsh. Please go ahead. Your line is open.

Paul Walsh – Morgan Stanley

Thanks very much. Good morning, Keith. Just two questions from my side. Clearly, volumes are weak, but what surprised me is two things, which is, number one, the gross margin year-on-year appears to be up about 120 basis points. And actually if I back out the fixed cost developments in the first quarter year-on-year, it actually looks like fixed costs are down. I wondered if you could just make some comments around, therefore, cost developments year-on-year and the gross margins, because my understanding from the commentary is that you’ve not seen any real reduction in raw materials yet.

Keith Nichols

Certainly. Good morning, Paul. Two things there. The benefits of the significant restructuring charges that we’ve been incurring and there’s still more to do as we conclude with the performance improvement plan are paying off. As you see, for example, in Performance Coatings and particularly in deco, costs are coming down in the business and that’s part of the, for example, in deco, why the operating income has developed the way it has.

In relation to the comment on raw materials, there was an overall comment that raw materials are stable, but of course within that there has been some softening. TiO2 is not such a big proportion for us. Remember, it’s 7% now of our total raw materials bill, but clearly that is down somewhat. It’s not down significantly. Yes, I don’t believe all the headlines that you hear people saying, but clearly that has been beneficial. And there have been other things, for example, some of the energy costs related to Specialty Chemicals still remain high.

So in the mix of total raw materials, we say stable, also to not be too commercially transparent within the different business areas. But clearly, we’re not facing the kind of upward pressures that we were seeing, for example, in 2011.

Paul Walsh – Morgan Stanley

Great. Thank you.

Keith Nichols

All right. Next question, please?

Operator

Thank you. Our next question is from Peter Clark. Please go ahead. Your line is open.

Peter Clark – Société Générale

Yes. Good morning, Keith. Thank you very much. Quick one, again, it’s somewhat echo on sort of price mix. You seem to be indicating that price mix probably has turned negative in Europe, I guess, from the down-trading and year-on-year pricing obviously slowing. How much – just really – if that was confirmed?

And then by region within Europe, you talked about all the regions being substantially down in volume. And I’m wondering if I looked in southern for a start, would there be a significant difference now between France and Mediterranean because I would get the feel that the year-on-year declines in the Mediterranean are probably moderating from the very strong double-digit.

And then also following on from that. The northern and the eastern regions are surprising. I mean northern, obviously UK, Baltic, I think Scandinavia, down substantially. And then you talked about some emerging markets up, but yet the eastern region down substantially which I thought was primarily emerging markets. So I’m just trying to reconcile that with the commentary. Thank you.

Keith Nichols

Certainly. Good morning, Peter. You’re correct on your assumption about price mix in Europe. In terms of the volume development across Europe, what we have seen is some of the more northern – sorry, for example, the Benelux. We’ve clearly seen consumer confidence weaker and correspondingly in a weak quarter, to be fair, weaker volumes. So we see that, for example, here in the Netherlands. And in the UK, it’s sluggish. It’s a slow start at the moment. I mean, you know the kind of peers or outlets to be able to look at and see their like-for-like sales development.

And you’re right in terms of comparators in the south, it’s moderating. All the comparators are getting more even. However, there still are further declines. And some of the brightest spots are smaller markets, but the real picture overall is there has been further volume declines in Europe across the board. Some is more marked than others, and it is I would say more widespread perhaps in this quarter, for example, the Benelux example. Does that answer your question?

Peter Clark – Société Générale

Yeah. And just if you got could, a specific comment on how France is fairing then, I presume France is probably getting a lot worse than it was?

Keith Nichols

It has seen volume pressure. I mean, it’s the same. I must admit that the confidence at the moment in, for example, the Benelux countries seems to be weaker. But all – again, I would repeat all have got a negative volume pressure. I wouldn’t highlight or single France out particularly in this quarter.

Peter Clark – Société Générale

Thank you.

Keith Nichols

Okay.

Peter Clark – Société Générale

Yes, that’s right. Thank you.

Keith Nichols

Very good. Next question, please?

Operator

Thank you. The next question comes from Andrew Benson. Please go ahead. Your line is open.

Andrew Benson – Citigroup

Thanks very much. On the Specialty Chemicals, you talk about a whole raft of, I guess, one-off problems from the accident in one of your manufacturing plants to maintenance activity and then some decisions to exit some business. Can you, in so far as you can, define the impact of all of the one-offs, the impact of the decision to withdraw from certain areas so we can get an idea of how the underlying core businesses are developing? Thanks.

Keith Nichols

Yeah. Certainly, Andrew. What we – clearly, there is a mix. There is a mix of volume pressure across the board, as we had indicated, whether it’s Functional Chemicals or Surface Chemistry volumes being weaker or Pulp and Performance. And that is clearly visible and there in the numbers. On top of that, there are the specific one-off issues which will be worked through this quarter, next quarter, like getting the site back up and running in the USA.

We – they clearly have an impact. If they were significantly material in any one event, we would highlight that. But we don’t want to get into splitting out all the individuals. But it clearly is – they clearly are a contributor to the decline, but the volume one is the continuing threat from third and fourth quarters that is – remains weak across all the businesses.

Andrew Benson – Citigroup

So the majority of the decline in profit is due to difficult trading conditions...

Keith Nichols

Yeah.

Andrew Benson – Citigroup

And – right. Okay.

Keith Nichols

Yeah, yeah. Yeah.

Andrew Benson – Citigroup

All right. Thanks.

Keith Nichols

Okay, good. Next question please?

Operator

Thank you. The next question comes from Micha Tiekink. Please go ahead. Your line is open.

Micha Tiekink – CCRB

Good morning, Keith. Thank you for taking my question. I have one question regarding the restructuring expenses. You just said higher in Performance Coatings and Specialty Chemicals and lower in deco, in line with last year. Last year, it was €33 million in Q1 when we take the new restructuring expenses with U.S. deco out of it. And you also stated that they were to be expected around €205 million of restructuring expenses for the full year. I’m quite puzzled by the – in line with last year’s €33 million and the €205 million for the full year given the fact that I would anticipate a lot more in H1 as you speeded up the process. Yeah, so that was my question. Am I seeing something wrong there?

Keith Nichols

No, you’re absolutely right. There is more to come in order to deliver the full accelerated performance improvement plan one year early. So yes, you can draw your own conclusion as to phasing, but clearly there is more to come in subsequent quarters.

Micha Tiekink – CCRB

But Q1, I should see it in the €30 million, €40 million region?

Keith Nichols

No, you should see it in line with the prior year of €33 million as indicated.

Micha Tiekink – CCRB

Okay. Thank you.

Keith Nichols

Now before we go to next question, we just linked in to Ton. So Ton, good morning. Can you hear us?

Ton Büchner

Good morning. Can you hear me?

Keith Nichols

Yes, we can, loud and clear. So we’ll continue with the Q&A. We’ve not being going too long, probably about five or 10 minutes. So glad to have you on the call. With that, can we have the next question please?

Operator

Certainly. Our next question comes from Fabian Smeets. Please go ahead. Your line is open.

Fabian Smeets – ING Bank

Yes. Two questions from my side on the cost savings program. I’m a bit puzzled because when you look at the exceptional charges in the first quarter there, they’re relatively low when compared to your guidance for the full year. But you also guide for a €500 million EBITDA improvement in 2013, which in my view would suggest that at your current run rate it’s going to be tough to achieve that since you were at around €260 million at the end of last year.

And then on Decorative Paints, you saw a negative growth in Decorative Asia. I think you’re talking about Southeast Asia, but could you highlight maybe which countries exactly and what is happening over there?

Keith Nichols

Certainly. Good morning, Fabian. Again, your first part of your question is very similar to the early one which is an assumption you will make in your modeling about the phasing of restructuring charges in order to deliver the remainder of the program. We gave you an update in February where we said in total it’s around €200 million, €205 million. We expect to take, in terms of costs. Indeed, we have got a very comparable number in this first quarter which would mean like last year there will be a – there will be higher charges to come in subsequent quarters.

As to your observation on delivery of the plan, I can only say to you the confidence which we expressed in February about where we exited 2012; we would not have accelerated the goal by one year if we weren’t certain that we could deliver the full €500 million. We will be giving our normal six monthly update with our half yearly results, and there you’ll be able to see the progress.

Lastly, I would repeat what you see in Decorative Paints and in Performance Coatings, the benefit of some of the significant restructuring that’s already been taken is beginning to be transparent as I indicated with cost savings helping improve their operating results.

On the next one, I don’t know, Ton, if you have anything else to add on that?

Ton Büchner

No additions at this point in time. We accelerated already at the end of last year where you’ve seen significant charges in Q4. And I guess you see, as Keith mentioned, positive effects coming through.

Keith Nichols

Secondly, Fabian, you’re asking about Asia. I indicated specifically that in China we had seen strong volume growth. I also highlighted Southeast Asia, indeed, where there has been – and those are countries like Indonesia, for example, where we’ve seen more negative volume development.

Fabian Smeets – ING Bank

And so, what was the reason for the volume development?

Keith Nichols

As in previous quarters, there has been some volatility in the channels and the sell-in, sell-out side, and in this quarter we’ve seen that. I think in general, it’s been a bit of a slower start with things around holidays, et cetera.

Fabian Smeets – ING Bank

Okay. Thank you very much.

Keith Nichols

Very good. Next question please?

Operator

Thank you. Our next question comes from Jean-Francois Meymandi, sorry. Please go ahead. Your line is open.

Jean-Francois Meymandi – UBS

Hi, it’s Jean-Francois Meymandi from UBS. I have a question on your – a quick one on performance improvement program. The fact that you state on your quarterly document that you accelerate in Specialty Chemicals, would we see really the bulk of your performance improvement program coming already in Q2 in terms of cost in order to deliver the full €500 million by year-end?

And the second one is more on deco. Obviously weather was not great in Q1. Can you share a bit of your checks with your customer on the retail side on ending inventories please? Thank you.

Keith Nichols

Certainly, shall I take the deco one? I think the first question is really again trying to get an idea of the phasing of the remaining charges. I would just repeat we’re confident that we can deliver the full €500 million. The acceleration was taken into account in the update in February. I don’t want to get now into quarter-by-quarter what we expect. You know the full year, you know what the first quarter is, and I’ll let you derive for your models there the phasing.

On the deco, weather comment, I wouldn’t make any – say any specific comments there. I have made specific comments, for example, around some of the chemicals businesses, like agri. But clearly, the seasonal build or the seasonally strong quarters for us are this one, Q2 and Q3. And that’s where we’ll be able to make more meaningful comments. There has also been, of course, the impact of Easter in this quarter. So there will be slightly less working days, which is also a factor to take into account. That’s okay?

Jean-Francois Meymandi – UBS

Fair enough. Okay. Thank you very much.

Keith Nichols

Good. Next question please?

Operator

Thank you. Our next question comes from Mutlu Gundogan from ABN AMRO. Please go ahead, your line is open.

Mutlu Gundogan – ABN AMRO

Yes, good morning. Thank you for taking my questions, two left. The first one is on coatings; your revenues were down 3% mainly due to Europe. Can you tell me what the growth was in the other major regions such as the Americas and Asia?

And then secondly, on your performance improvement program. It seems that the end markets – that your end markets have deteriorated further than when you announced the program. Do you see any potential or need to increase the scope to offset the decline on the top line that you see? Thanks.

Keith Nichols

Good morning, Mutlu. I’ll pass over to Ton in a second for the – do we think we need to extend the scope of the performance improvement plan. In terms of Performance Coatings, these are global businesses. I’ve highlighted that Europe has been the area where we’ve seen the most pressure on volumes with the exception of the global automotive and aerospace which has actually showed positive volume development year-on-year. The drag factor, again, is Europe. I wouldn’t specifically highlight the other markets as being or as requiring specific highlighting being the opposite.

In terms of the scope of the PIP, Ton, can you hear us?

Ton Büchner

Yes. Good morning, everybody. Allow me to take a more broader picture on the performance improvement program by starting to say that this is not a static program. So it’s not a program that was designed in 2011 and we’re just executing on the program itself. It’s a living program. The program has been continuously assessed. It’s on more than a monthly basis with continuous bilateral discussions with the businesses, and we adapted to the realities of the markets as they occur. And we sometimes postpone certain work streams and we draw other work streams forward. We’ve even added some other work streams.

So it’s a continuously living program. And as we indicated to you in the February 20, we had an assumption of certain market growth in there. The first quarter certainly hasn’t shown that market growth. And as a result, this living program will again look at the details and what we can further accelerate or add to it and we do that as part of the overall program. It’s a living thing. It’s not a static thing. So the end markets in Q1 have certainly been a bit weaker than the prognosis and the assumptions that we’ve communicated in the February 20 document, but we are continuously adapting the program accordingly.

Mutlu Gundogan – ABN AMRO

Ton, can I ask a follow-up question? How would you communicate to the market if the program changes significantly? Is there a certain threshold in which you communicate an amount or is the timing-wise every six months?

Ton Büchner

We communicate every six months. Again, the living piece is not that it is a drastic change. It’s just a living program. And as Keith indicated, we do a six-month update where we then say specifics on the actions that we’ve executed, the restructurings that have taken place, the businesses within those have taken place. So every six months, we – as we’ve done in the past, we’ll update you in more detail than we do in the intermediate quarters.

Mutlu Gundogan – ABN AMRO

Okay. Thank you.

Keith Nichols

Next question please?

Operator

Thank you. Our next question comes from Markus Mayer. Please go ahead. Your line is open.

Markus Mayer – Kepler Capital Markets

Yeah. Markus Mayer from Kepler Capital Markets. Two questions left. The first one is on the quarter, the other plant, is this a good run rate going forward? And then secondly, on the underlying weakness in specialties, can you give us more flavor where this exactly is coming from. And you elaborated that this one-off only had a – not a very significant effect. So is this then mainly coming from the electrochemistry? And here, has something specifically changed in the end market? Yeah, more flavor on this would be very helpful. Thanks.

Keith Nichols

Good morning, Markus. I’d like to come back to your first question. Firstly, I’ll deal with chemicals, and then I think part one and part three I need to just ask you to clarify. But Specialty Chemicals, you asked about the underlying trends and where we were seeing the weakness. Let me start with Surface Chemistry. Volumes were down there partially really because of the exit of the fatty acids business, but also to some degree affected by cooler weather, for example, the agri and the asphalts segments that I mentioned.

Now Industrial Chemicals, volumes and margins were impacted, margins by low caustic inventories and volumes through some of the outages. In Functional Chemicals, where you see more of the business-related issues, we see some of the construction-related products like performance additives and polysulfides, some of the polymer initiatives, all volumes being under pressure. And Ethylene Amines, it’s the issue of more capacity coming on. So more an imbalance in supply and demand.

And lastly, Pulp and Performance, it was lower volumes, but also there is a small divestment impact in there as announced in Q4 when we mentioned Permascand. So that deals with the underlying weaknesses by BU within chemicals. Could you just clarify the costs? I think it was a phasing question as well. Is it – is Q1 a good indicator, did you say?

Markus Mayer – Kepler Capital Markets

Yeah, exactly. Is Q1 in the others line a good indicator for the costs going forward to 2013?

Keith Nichols

Well, I think, as both I and Ton have been saying, and in February, the expected costs for the performance improvement plan we’ve indicated are around €200 million. And we’ve incurred similar levels around €30 million in this first quarter for restructuring charges. Therefore, there will be more charges to come in the subsequent quarters.

Markus Mayer – Kepler Capital Markets

Okay.

Keith Nichols

Next question please?

Operator

Thank you. Our next question comes from Jaideep Pandya. Please go ahead, your line is open.

Jaideep Pandya – Berenberg

Yeah, good morning. I have two questions. Just coming back to Ethylene Amines, could you give us a little bit of flavor where demand has doubled up in the last couple of years. So are we at the same level of demand and there is significant increase in supply or have we actually seen fall in demand and increase in supply, just to sort of understand when do we actually see some margin improvement in this business?

And then the second question is really on your gross margin. If you sort of back out the issues in production that you had, I mean what kind of gross margin improvement would we have seen on a year-on-year basis for the group level?

And then just finally on the Decorative Coatings, I mean I appreciate your comments on the PIP and it’s living program, but the €100 million that you have highlighted additional restructuring for deco mainly due to the European deco, does this assume the market trends which we’re currently seeing? So it means that if market trends deteriorate further there is scope for you to increase that €100 million? Thank you.

Keith Nichols

Just in reverse, deco does – is including further restructuring Europe as announced in February in light of current market conditions. Remember, we’ve sold a big business within deco, but we’ve held the overall total the same. So yes, it’s in light of what we see in current market conditions.

On your question on gross margin, I’ve indicated earlier that there are two factors, particularly in chemicals. It is volumes and it is one-off items like the fire, like the stoppage, like start-up costs. The main pressure, I repeat, has been the volume development in the quarter in the businesses and where you can see that from the bridges that are published we’re not highlighting operating results, or gross margin, or EBITDA excluding those kind of operational items, which we think are part and parcel of the operating results of the business and what we’re focused on improving by 2015 given the financial targets that have been announced.

Lastly on Ethylene Amines, it is about increased supply. It is about having added additional capacity on ourselves, and other players have been adding capacity and the market is digesting that. That has been the primary pressure that we have seen during last year and now in this first quarter. And that will take a little bit more time to work itself through.

Jaideep Pandya – Berenberg

What – can you give us...?

Ton Büchner

Yes…

Jaideep Pandya – Berenberg

Sorry, go ahead.

Ton Büchner

Yeah, maybe in addition from my side. Of course, the capacity investments that the various players have done were done on the basis of certain growth assumptions made two or three years ago. And those growth assumptions in the present economic environments are just not what they were when the investment decisions were taken. So it is basically not a – it is primarily the decision for additional investments and to continue these investments coming on stream last year and also this year that are affecting this EA situation.

Jaideep Pandya – Berenberg

Thank you. Very clear.

Keith Nichols

Next question please?

Operator

Thank you. Our next question comes from Chris Counihan. Please go ahead, your line is open.

Chris Counihan – Credit Suisse

Thank you. Keith, I just want to come back to something you said earlier about TiO2 saying that, I mean don’t believe everything you read, et cetera. I’m seeing it down 25% year-on-year over the last 12 months. I mean, when do you start buying TiO2? I imagine you are buying and pre-buying now from the move in your working capital. Are you seeing any risk on paint prices? I mean, you talked about within Decorative Paints the price/mix predominantly being on the mix side as opposed to pricing.

And then the working capital number improved year-on-year. Obviously, some of it’s because of TiO2 price is down. But how much of the working capital improvement year-on-year do you think is a part of the sustainable savings under the performance improvement program? Thank you.

Keith Nichols

Hi, Chris. Good morning. I did also say that we have seen some relief around TiO2. I also pointed out that it’s a smaller proportion of our total raw material bill, at 7%. So yes, we do see some relief around TiO2. I’m not going to comment on the numbers that you hear in the market, but TiO2 relatively to the past is still at high levels.

In terms of OWC, we do – we have – we are making structural improvements. You saw at year-end that we were sub-12% of sales in terms of OWC and you see us retaining – so structurally retaining those benefits as we move forward with the Q1 and Q1 comparator that is also better relative to lower sales. So that is encouraging. It has been a specific focus as part of the performance improvement plan for 18, 24 months now, and it’s ongoing as we speak. So yes, we are confident that it is structural and we – you see that further proof point in this quarter.

Chris Counihan – Credit Suisse

And I suppose the final follow-up is, is there any risk – are you seeing any risk on your paint prices? I mean, traditionally, they’re sticky through a input cost decline environment. Is there any risk, you think, in the current environment to paint prices?

Keith Nichols

Again, the comment I made was that the price/mix impact is all about mix or more about mix, particularly in Europe. So – and history, we – you’re right about the stickiness of pricing. The challenge has been the down-trading that I was referring to.

Chris Counihan – Credit Suisse

Okay. Thank you, Keith.

Keith Nichols

All right. Next question please?

Operator

Thank you. Our next question comes from Tony Jones. Please go ahead, your line is open.

Tony Jones – Redburn Partners

Good morning. Sorry, I just wanted to ask two quick follow-up questions, and they relate to pension and then also cash. Firstly, on the pension, you reported improvement this quarter back down below €1 billion for the deficit. I know that your inflation assumption has gone up and it’s always volatile, but could you just clarify what – how you see this moving over the next quarter or so? I know it’s difficult, but any help would be great.

And then finally on working capital, it was also good to see some improvement reported, but is this good as it gets? So do you think that the measures you’ve taken, we should see this trend to accelerate over the year? Thank you.

Keith Nichols

Okay. Maybe Tony, I’ll come back to you for the OWC because it’s linked into PIP. On the pension side, Tony, it’s always difficult to predict how the IFRS numbers are going to evolve as you’ve seen over the last few years. I think for me, I’m really focused on the cash demands on our business relative to pension, so the funding deficit. And there, I’m pretty certain and refer back to the February 20 guidance about top-ups going forward. You’ve seen those come down over the last two triennial reviews in both of the large UK plants. And this quarter in particular, we don’t’ have the €239 million outflow from the balance sheet that we had last year.

It is difficult to predict the leading indicators to watch or how discount rates are developing and how inflation rates assumptions are developing. And at least you’ll be able to anticipate roughly how you think it’s going to go.

Tony Jones – Redburn Partners

So just to clarify then, that your guidance on cash contribution, you don’t see that changing at this point?

Keith Nichols

No, absolutely not. No. No, I will stick with what we’ve said in February. I’m really dependent more on the triennial reviews and any de-risking action that we do during the year that would impact that positively or negatively. And we will update you if it’s material at the time and otherwise at our quarterly results times.

Tony Jones – Redburn Partners

Thanks, Keith.

Keith Nichols

Okay. Ton, do you want to comment on the cash OWC?

Ton Büchner

Yeah.

Keith Nichols

Is this as good as it gets?

Ton Büchner

Yeah. It was very much part of the performance improvement program and it was largely driven with tremendous amount of actions in taking inventory out of the chain, dealing with the accounts receivables in a strong way. And I guess our procurement teams have added to it as well. We’ve told you in February 20 that the 12% at the end of last year was not entirely – or the below 12% level was not entirely structural. So we’re continuing to get to that level in a structural way, and it is primarily on process improvements and lean blocks that allow us to take inventory out of the chain as a big contributor to it.

You’ve seen a year-on-year improvement on the quarter one to quarter one as well. And I guess what we’ve told you in the Feb 20 presentation is that the 12% level is something that would be good to continue to assume, that there wouldn’t be a significant structural improvement from there as an overall 12% level full year-end to full year-end.

Tony Jones – Redburn Partners

Thanks very much. Ton, that’s great.

Keith Nichols

Okay, Tony. Next question please?

Operator

Our next question comes from Sebastian Satz. Please go ahead, your line is open.

Sebastian Satz – HSBC Bank

Thanks, good morning. I have two questions on China, please. The first one is on deco. You’ve reported, I think, double-digit volume growth there. How much of that is coming from the opening of new stores and how much of that is actually like-for-like growth? And if you could give us an update on your expansion plans here?

The second question is on chemicals demand in China. And overall, I think we’ve heard about relatively broad-based de-stocking happening in March. I just wanted to check whether that has continued into April or whether you’ve actually seen demand picking up again here? Thanks very much.

Keith Nichols

Okay, very good. I’ve lost my connection. I know Ton is still on the line. I’ve lost that one. Maybe he would like to come back to the China comment. Ton, I can see you, so come back to China.

On Specialty Chemicals, I wouldn’t highlight anything material around de-stocking in the quarter that we’ve just reported on other than the general comments around volumes in the specific areas in functional, which relate more to mature markets; Surface Chemistry to the exit of the business; and Pulp and Performance, mainly due to divestments. And again, it’s more Latin America than in Asia.

Ton, do you want to comment on the deco growth plans expansion?

Ton Büchner

Right. I guess, the answer is reasonably short. It’s really a mixture of both. So it is a combination of expanding stores into the west and additional sales in some of the stores. We have seen slowdown in the, and I mentioned that in the February 20 discussion as well, on the East Coast side primarily in 2012. But the present growth is really a combination of existing stores increasing their sales and additional stores that are part of our expansion plan.

Sebastian Satz – HSBC Bank

Thank you.

Keith Nichols

Thank you very much, Ton. Sebastian, okay?

Sebastian Satz – HSBC Bank

Thanks so much.

Keith Nichols

Okay. We’re coming to the end of the hour, but is there any last question in the queue. I don’t see any. So...

Operator

We have no more questions.

Keith Nichols

Very good. Okay, thank you very much everybody for participating. Ton, thanks for joining. That’s the end of the call.

Operator

Thank you for participating in today’s conference call. You may now disconnect. Thank you.

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