Akzo Nobel's (AKZOF) Management on Q3 2016 Results - Earnings Call Transcript

| About: Akzo Nobel (AKZOF)

Akzo Nobel N.V. (OTCQX:AKZOF) Q3 2016 Earnings Conference Call October 19, 2016 3:00 AM ET

Executives

Lloyd Midwinter – Director, Investor Relations

Maelys Castella – Chief Financial Officer

Analysts

Paul Walsh – Morgan Stanley

James Knight – Exane BNP Paribas

Martin Evans – JPMorgan

Peter Clark – Societe Generale

Alex Stewart – Goldman Sachs

Mutlu Gundogan – ABN AMRO

Patrick Lambert – Raymond James

Christian Faitz – Kepler Cheuvreux

Martin Dunwoodie – Deutsche Bank

Markus Mayer – Baader-Helvea

Jean-Francois Meymandi – Morgan Stanley

Lloyd Midwinter

Good morning and welcome to the Akzo Nobel Q3 2016 Investor Update Conference Call. I'm Lloyd Midwinter, Director, Investor Relations. Today, our CFO, Maelys Castella, will guide you through our results for the quarter. We will refer to a results presentation, which you can follow on screen and download from our website, Akzonobel.com. A replay of the call will also be made available. There will be an opportunity to ask questions after the presentation. For additional information, please contact Investor Relations.

Before we start, I would like to remind you about the Safe Harbor statement at the back of this presentation. Please note this statement is also applicable to the conference call and the answers to your questions.

I’ll hand over to Maelys, who will start on Slide 4 of the presentation.

Maelys Castella

Thank you, Lloyd, and good morning, everyone. In the third quarter of 2016, achieved volume growth in decorative paints and specialty chemicals and further growth in profitability over and also all business areas. Revenue was down 4% due to adverse currency and price mix effects. EBIT was up 1% at €442 million, and operating income 4% higher at €454 million, positively impacted by incidental items. Our return on sale and return on investment improved. Net income attributable to shareholders was €285 million. The cash generation continued to improve, with net cash inflow from operating activity up 3% at €600 million. And we increased the interim dividend by 6% to €0.37 per share.

Turning now to Slide 5, our Q3 2016 represents another quarter of improved financial performance. Profitability improved further, despite adverse currency and price mix effects and challenging conditions in several countries and segments. Volume growth in decorative paints and specialty chemicals was offset by lower volume in performance coatings and revenue was down 4% due to adverse currency effect and price mix. EBIT increased to €442 million versus €432 million last year, reflecting continuous improvement initiatives and lower costs, partly offset by adverse currency effects. Profitability improved further with return on sale up 70 basis points at 12.3%, versus 11.6% in 2015 and return on investment improved 220 basis points higher at 15.2% compared to 13% last year.

Overall financial results are shown now on Slide 7. During Q3 2016, we delivered higher profit, driven by continuous improvement initiatives and lower costs. Revenue was down 4% due to adverse currency and price mix effect. Volumes grew in decorative paints and specialty chemicals while volumes were flat overall. EBIT was up 1% at €442 million, with continuous improvement initiatives and lower costs, partly offset by adverse currency effects.

Restructuring cost during the quarter was much lower than the same period in 2015, although our guidance remains 0.5% to 1% of revenue over the medium term. We expect restructuring cost for the full year to be around the same level as 2015, with around half of this expected to take place in Q4. Operating income was up 4% at €454 million. Operating income was positively impacted by primarily non-cash incidental items with a net effect of €12 million including adjustments to provision amongst other post-retirement benefits and asset impairments. The incidental items impacted operating income of decorative paints, performance coatings and the operating income in other activities. Return on sales improved to 12.3% from 11.6% last year and ROI increased to 15.2% versus 13% in 2015.

Slide 8 shows the quarterly trend for volume and price mix for Akzo Nobel in each of the business areas. During Q3 2016, volumes were flat overall while volume growth in decorative paints and specialty chemicals – volumes were up 3% for decorative paints and 1% for specialty chemicals, while volumes were down 2% for performance coatings, affected by adverse conditions in the marine and oil and gas industries.

Demand differed per region. However, deflationary pressures continue in line with the previous quarter. This is particularly the case for specialty chemicals where price mix was negative 3% due to price inflation in several markets. Deflationary pressures are expected to continue in Q4. Price mix also adversely impacted performance coatings by 2% and was 1% lower for decorative paints, although this was mostly mix effect.

I will now run through some highlights and growth initiatives for each of the business areas. Let me start with decorative paints on Slide 9. Volumes increased 3% mainly due to positive development in Asia and the Europe, Middle East and Africa region, while volumes continued to be down in Latin America. Demand trends differ per country in EMEA and uncertainty continues in some markets. Currency volatility remained, including for the pound sterling.

In Latin America market conditions remain challenging due to the economic instability and currency devaluation. Positive demand trends in many Asian markets continue, and in China volumes were positive despite continued challenging conditions in the construction market. Revenue was down 3%, mainly due to unfavorable currency effect, including the pound sterling. EBIT was up 2%, mainly due to higher volumes and lower cost, partly offset by unfavorable currency.

Operating income was also positively impacted by incidentals of €9 million. Return on sale increased to 12% from 11.5% and ROI improved to 12.5% versus 10.6% last year. We have recently launched our 2017 Color of the Year, which is Denim Drift this year, to help inspire customers to make confident color choices and drive growth for our businesses.

Highlights for performance coatings are shown now on Slide 10. Revenue was down 6% due to unfavorable currencies, lower volumes and adverse price mix effects. Volumes were 2% lower, affected by adverse conditions in the marine and oil and gas industries. Demand trends differed per segment and region. Volumes in marine coating were impacted by the slowdown of the new build activity in Asia as well as maintenance and dry docking. The outlook for the marine industry remains challenging. Protected coating volume remained robust, related to a strong project backlog, despite some headwind in the oil and gas industry. Volumes were up for automotive and specialty coating as well as for powder coating, while volume developments were mixed per region for wood and metal coatings.

Profitability continued to improve, despite lower volume. ROS was up at 14.2% versus 14.1% in 2016 and return on investment was 13.9%, compared to 26.5% last year. EBIT was down with continuous improvement initiatives and lower costs more than offset by adverse currencies and lower volumes. Operating income was also negatively impacted by incidental items of €7 million.

The intended acquisition of BASF industrial coating business is expected to be completed towards the end of 2016. We recently broke the ground on a powder coating plant in Mumbai that will bring us closer to our customers and provide several innovative lines, including products for pipes.

Moving now to specialty chemicals on Slide 11. Volumes were 1% higher with positive developments, especially in industrial chemicals, partly offset by lower demand in the oil related segments. Volumes for industrial chemicals were up due to increased demand and higher supply chain availability in Frankfurt and Rotterdam.

Revenue was down 3%, mainly to price deflation in several markets. EBIT and operating income were up 3%, mostly due to improved volume and operational efficiency. Return on sales increased to 14% compared to 13.2% in 2015 and ROI improved to 17.2% versus 16.4% last year. Our specialty chemical business recently launched an essential ingredient for outdoor cleaning products that successfully meets stringent U.S. EPA environmental standards.

I will now move to the financial review on Slide 15. In Q3 2016, we improved financial performance for another consecutive quarter. Profit and margin increased with EBIT, operating income, return on sale, return on investment all higher than last year. In terms of shareholder returns, net income attributable to shareholders was flat at €285 million and adjusted EPS was €1.20 per share. Net cash from operating activity was up 3% at €600 million.

Cash discipline continues with CapEx around 4% of revenue and [Audio Gap] lower than last year at €1.8 billion, although slightly higher as a percentage of revenue. We are delivering on our improve program and are maintaining the strong cash discipline and we decided to increase the interim dividend by 6% to €0.37 per share.

Moving now to Slide 14. Free cash flow generation improved 11% versus Q3 last year, demonstrating the positive impact of higher operating results with EBITDA margin of 16.5% versus 15.7% last year, combined with continued discipline on CapEx, working capital and interest paid. Interest continued to reduce, thanks to the redemption of high coupon debt and the refinancing at 1.125% below coupon. The year-to-date effective tax rate was 28%. Free cash flow from operations after CapEx and pension top-up payment improved 11% to €469 million versus €422 million in Q3 2016. On September 30, 2016 the net debt was €1.1 billion, down 35% on the same period last year.

Turning now to Slide 15. During Q3 further derisking of pension liabilities, including an additional non-cash buy-in transaction for £1.7 billion related to the ICI pension fund, means a total of £2.6 billion of pension liability has been covered by non-cash buy-in during 2016. The recent buy-ins do not impact the agreed top-up schedule we communicated earlier this year. Since 2014 a total of £8.2 billion pension liability has been covered by non-cash buy-in. The cumulative effect of derisking activities means around 80% of interest rate and inflation risk and almost 60% of longevity risk is now covered by insurance contracts and hedging. Most of the buy-in has been related to the ICI pension fund, so the percentage will be higher for this scheme.

This activity will further reduce volatility and uncertainty related to the defined benefit obligation and associated top-up schedule. We will continue to manage actively our pension liability.

Now if we look at the impact according to IAS19 – you have it shown on Slide 16 – an increase in the IAS19 deficit was mostly the result of the derisking of pension liability through the non-cash buy-in transaction I mentioned to you related to the ICI pension fund, with a total net impact of minus €391 million, combined with lower discount rates in key countries and higher inflation, partly offset by higher asset returns.

Moving now to Slide 17, about our dividend policy, which remains to pay a stable to rising dividend and in this quarter, as I mentioned, we decided to increase the interim dividend by 6% to €0.37 per share compared to €0.35 last year.

Slide 19 includes some recent highlights in a number of areas. Building on the work we are doing for our human initiative – human city initiative, we work with several partners to help improve the lives of residents in Quito, Ecuador. The launch of Aquasilk, an innovative native waterborne anti-scuff coating with superior hardness and excellent clarity, is designed to make it easier for the Chinese furniture industry to transition to more sustainable waterborne coatings. And Akzo Nobel, DSM, Google and Philips joined force in a long-term agreement to source power from renewable energy projects for part of the operation in the Netherlands.

Now turning to Slide 20 for some concluding remarks. So during Q3 2016 we achieved further growth in profitability with returns up in all business areas and positive volume development in decorative paints and specialty chemicals. EBIT and operating income were higher.

The net income to shareholders was €285 million and the net cash inflow for operating activity increased 3%. We increased our interim dividend by 6% and our outlook isn't changed. The market environment remains uncertain, with challenging conditions in several countries and segments. Deflationary pressure and currency headwinds are expected to continue.

We maintain our financial guidance and focus remains on driving continuous improvement and organic growth.

This concludes our formal presentation and we will now be happy to take your questions. Please limit your number of questions to a maximum of two so others can participate. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mr. Paul Walsh [Morgan Stanley]. Sir, you may begin.

Paul Walsh

Yes, thanks. Morning guys. It's Paul Walsh from Morgan Stanley. I had obviously two questions to fit with what you've just asked, Maelys, first on cash flow. What are you going to do with the cash flow? I guess you could grow the dividend more aggressively than you have but are you keeping capital aside for M&A and how should we think about that moving forwards from here?

The second question I had was just around the rate of profit growth and how you keep that momentum going. I think you mentioned PIP costs are going to be a 50% fall in the fourth quarter. Do you think you can still grow underlying earnings in the fourth quarter, or is it getting tougher, i.e. what additionally is being done at the Group level to continue to combat what are relatively lackluster markets? Thank you.

Maelys Castella

Thank you Paul for your questions. So first on the cash flow, as you've seen during this quarter, we continue to improve, so I think this is a strong reflection of our strategy to both drive the continuous improvement, the growth, and also a strong discipline maintained on our working capital and also our capital expenditure.

So this cash flow has enabled us to reduce our debt further. As you've seen, our debt at the end of the quarter was €1.1 billion. And as we said before, we are focusing to use our strong balance sheet first to grow the business organically but also to consider bolt-on acquisitions. We have announced at the beginning of the year the acquisition of the BASF coating business, and as we mentioned, we will be closing it by the end of the quarter, and we are again considering other bolt-ons to use this cash flow.

The dividend is also an important part of the way we return cash to shareholders, and that's why you have seen a further increase of our interim dividend at 6%.

Now on your second question about the performance and the growth, you have seen in this quarter further growth, in particular in decorative paints in the fourth quarter of growth in a row, chemical also has posted growth, and lower growth in performance coating, mainly due to challenging conditions.

As you know, for Q4, Q4 is traditionally a small quarter for Akzo Nobel, due to the seasonality effect, and I also mention to you that we will probably see higher restructuring cost in this last quarter, even though overall we mentioned now that restructuring costs stay at the level between 0.5% to 1%. And we are -- those restructuring costs are mostly targeted in areas where we see challenging conditions, in particular in the marine business this year or in also to support the continuous transformation we are doing in our global business services or functional transformation effort.

Paul Walsh

But just coming back to that last one, is there any reason to believe why the underlying progress can't continue? Or, forgetting about the costs of restructuring, on an underlying basis are you still expecting to make progress?

Maelys Castella

As we say, we continue to drive our continuous improvement, so the progress -- we continue to focus on that, and this will remain the focus for the next year also.

Paul Walsh

Okay. Thank you very much.

Operator

Thank you Mr. Walsh. The next question comes from James Knight [Exane BNP Paribas]. Sir, your line now is open.

James Knight

Morning. Actually picking up a couple of points from Paul's questions, firstly, can you quantify or give some dimension to the degree of cost cutting charges you expect in the fourth quarter and how that compares with the fourth quarter last year, just so we can get an idea of the dynamic?

And secondly, we've seen a lot of bolt-on activity in coatings and paints year-to-date which Akzo hasn't played in, it's made the bigger deal. But what's stopping the activity there? Do you think the multiples being offered there are still too high? Thank you.

Maelys Castella

Well, so on the cost cutting, as I mentioned, we are really now on a phase of continuous improvement basis. So all the efforts we are doing right now rolling up matters in our supply chain or in driving the function is regular. So the pace of the improvement is going to be on a regular basis so we don't expect major change on the pace.

As I just mentioned, in terms of restructuring charges we will probably see higher charges in the last quarter than what we have seen. So this is more the cost benefits are expected to remain on the same pace.

On your second question about bolt-on acquisitions, yes you've seen a lot of activity in the M&A area in the different business -- on the coatings side but also very active on chemicals. Multiples are clearly high. We are determined to stay and focus on the bolt-ons we think can bring value to the business. I think we've been very disciplined.

You've seen the acquisitions we have realized at the beginning of the year. This is typically the acquisition we want to do in one of our core businesses, bringing us an increased position in a market where we're already a strong leader and also bringing some new technology. So that's what we will focus when we look at potential new acquisitions, and that is definitely part of the strategy to have this bolt-on, on top of our organic growth.

James Knight

Thank you very much.

Operator

Thank you, sir. Next question comes from Mr. Martin Evans [JPMorgan]. Sir, your line now is open.

Martin Evans

Yes, just picking up again this M&A theme. You’re on the wires, the newswires, Maelys, saying that you’re prepared to undertake multiple bolt-on purchases, and as you say, acquisition prices are high. I mean, is this almost now an admission of defeat in as much as the growth within your restructured business is clearly very poor, volume growth of 0% for the Group, prices down another 2%? Is it an admission that you need to change the structure of the Group materially?

And the other thing is you say you’ve earned the right to M&A. I’m not entirely sure what you mean by that. Surely what you’re saying is that you need to make acquisitions; I think earning the right following restructuring may not necessarily be logical.

Maelys Castella

So to be very clear, this is absolutely in line with the strategy we have announced one year ago in our Capital Markets Day. So nothing has changed; it is absolutely not something new. We had at that point clearly highlighted that we have been in the past year concentrating in restoring the profitability in the business, building the foundations, and we are now in the second leg of our strategy, which was to focus both on profitability and also on growth. And this growth will be on organic growth primarily focused but also on pursuing with bolt-on acquisitions. So it is absolutely in line, nothing new.

The concept of earning the right is to say that we have built the foundation. Before you can acquire a company you need to be able to have achieve internally restore the capacity within the Company. And therefore we have done that and now we think that we’ve reached a level with the way we run the business and the profitability and the value generation, in particular in term of cash generation is restored. And that is what is derived from earning the right.

The other way, also it’s important to look at our balance sheet. We have now a stronger balance sheet, and this is coming from this. So just to be clear, no change, it’s exactly the strategy we have announced and it’s in line with the step we have taken this year with this first acquisition. But as I mentioned, we will remain disciplined as cash generation is a key focus for us.

Martin Evans

Thanks very much.

Operator

Thank you, Mr. Evans. The next question comes from Mr. Peter Clark [Societe Generale]. Sir, your line now is open.

Peter Clark

Yes. Good morning, Maelys. I just want to clarify one thing, and then there are two questions. Just clarify on the restructuring charges, you indicated that Q3 was similar year-on-year, which is certainly what you get by what you’re suggesting on Q4. And then the two questions. On the UK, obviously you said it was down ahead of the vote and it remained down. And I’m just wondering if it was down for the whole of the third quarter. And the reason I ask that, of course, your competitor suggested that July actually was a bit better for them. God knows what happened in August and September, of course, subsequently, but effectively they said that. Because obviously the big paint season is over in the UK. It’s very important for you.

And then the second question is related to the marine. Obviously judging by the numbers you’ve given, you could probably gage the business is probably down 10% or so. You obviously have maintained it’s challenging, going to remain challenging. Is that sort of a trend line you see continuing or are we going to be lapping something soon or is it – was it the low trend, that sort of volume on price hit we saw in the third quarter? Thank you.

Maelys Castella

Yes. So first question on the restructuring, as I mentioned, we expect the restructuring cost for the full year to be about the same level as last year, but around half of it to take place in Q4. So clearly, we will see more in Q4 on comparison compared to Q4 last year. But overall, for the full year, would be about the same level, which were around €74 million for the full year last year.

On the UK, I have not mentioned anything. I have not mentioned that we are down in the UK. Overall, as we mentioned, Europe, Middle East, Africa, was up. In UK, what I have indicate is that we do not see any clear trend on the market today. It is really to determine what is going to be the trend. We have seen a very various trend in the quarter. If you look at statistic out also, they are all over the place. PMI dropped sharply in the two first months, then improve and bounce back in September.

You see some figure that say that GDP will be lower, but we also have index that show a steady and stability, for example in IHS Index for construction growth. So no clear trend, and therefore I have given no indication on the downturn in the UK. Overall, as I said, Europe remain – Europe, Middle East, Africa remain, during the quarter, positive.

And your last question was about the marine. Indeed, marine is not a surprise. We had already flagged that to you in – since the beginning of the year, that we were expecting the downturn because that’s where we’ve seen that the backlog was clearly down. And yes, we do see that this negative cycle will remain in the future, so this is part of the challenging condition which are part of our outlook.

Peter Clark

Thank you.

Operator

Thank you. Next question comes from Mr. Alex Stewart [Goldman Sachs]. Sir, you may proceed.

Alex Stewart

Hi, Maelys. My question’s been answered. Sorry about that.

Maelys Castella

Thank you.

Operator

Thank you, sir. Your next question comes from Mutlu Gundogan [ABN AMRO]. Sir, your line now is open.

Mutlu Gundogan

Yes. Thank you. It’s Mutlu Gundogan at ABN AMRO. Two questions. The first question is on the accident at BASF. I was wondering, have you seen or do you expect an impact of the accident at Ludwigshafen on your businesses, be it positive or negative? And then secondly – and sorry about this because a couple of questions have already been asked on M&A, but also I want to ask something about it. Your large coating peers are doing major acquisitions. Don’t you fear that your market positions will weaken as your competitors become bigger and stronger by doing these larger acquisitions while you’re keeping with bolt-on acquisitions? Thanks.

Maelys Castella

Okay, so on the BASF, as I mentioned, the acquisition will close at the end of the year, so will contribute in 2017 to the growth. Related to the incident, no, the incident does not affect any of the operation we are planning to acquire from BASF.

Mutlu Gundogan

Maelys, apologies. I meant BASF as a competitor or as a supplier, not so much the transaction of the coating assets.

Maelys Castella

Well, at the – on – I’m sorry, so can you repeat your question exactly? Because I thought you were meaning for our acquisition. What is your question?

Mutlu Gundogan

No, no. It’s two different questions. So the first question is on BASF as a potential supplier or as a competitor to Akzo Nobel, just wondering whether that will have an impact on our business, the fire at Ludwigshafen. And then secondly…

Maelys Castella

Okay. So on this, the details are still emerging. So you can understand that it’s really too early to say what will be the impact of this incident, so I cannot comment at that stage. On the other question, which was related to the M&A that’s going on in the industry, as I mention, we are – part of it, with the bolt-on acquisition, the landscape is changing. We are of course a strong player in this market and we expect to remain so through our continuous focus on innovation and technology.

We have shown you several example that we’ve launched this quarter of products, in particular for the Chinese market, with clear sustainable advantage. We’ll continue to grow in India with this new factory we have just opened for powder business. We are developing further products in chemical for cleaning and surfactants. There are many example all across our business where we launched new products. And that’s clearly a strength that will help us in this industry to continue to grow.

Mutlu Gundogan

Okay. Thank you.

Operator

Thank you. Next question comes from Patrick Lambert [Raymond James]. Sir, your line now is open.

Patrick Lambert

Hi Maelys, hi Lloyd. Hope you’re doing well. A few questions for me, two I think, or three maybe, again on marine and protective. Would it be possible to get a split between maintenance and OEM in both marine? And a rough estimate would be fine, just to see how sustainable the maintenance business – because you mentioned also maintenance being a bit weak on marine. And if you can comment that also, maintenance on protective will be interesting to know. First question.

Second question, again on decor UK, could you comment a bit more on the parts of Europe, Sweden, UK? I know you – I think Peter tried, but in terms of volume growth versus the 3% average of the region.

And the third one, raw materials. We’re starting to see raw materials going up on the back of the oil price, but also on supply tightness I guess in TiO2 and restructuring of some plants there. What’s your outlook for the remainder of the year and maybe early 2017? Thanks.

Maelys Castella

Okay. So on your first question about the marine business and protective, as we mentioned, what we’ve seen, the pressure on the volume in marine coating are impacted both by new builds and also by maintenance and dry-docking. You’ve probably seen the news on all Asia, a lot of distressed company in the CTR industry. So this industry is really facing a significant downturn and that affect both the activity of maintenance and also on new build.

On the protective side, as we mentioned, on this quarter we remain robust because we also have a backlog of projects. But we clearly see the headwind continuing in the oil and gas industry and so for the moment the outlook remains negative for this sector. On the other hand, as we mentioned, we have, in performance coating, other markets that are growing, in particular the automotive and the consumer electronics. In specialty coatings, we also see good trends in powder. And overall, Asia, has really shown a good progress.

Now, if we look at Europe, as I mentioned, for decorative paint, we see a strong growth [indiscernible] of 3% [indiscernible] the growth in Asia. So we continue to see very good demand, overall, Asia and also including in China [indiscernible] is also positive, but I would say it’s clearly Asia which is the largest contributor. And Latin America is really negative. We have flagged that. It continues to be a challenging market even though the currency now is getting better, but that’s really the main driver.

On the raw material side, in this quarter we continued to see raw material prices lower, although, as we mentioned before, in some of the region the currency adverse impact on raw material has hampered this reduction. If we look forward, when you look at the curve – and I recall you know that perfectly. We do not buy oil. We buy derivative of oil, so there is also a lag effect. But when you look at the curve of oil price, we are now back to about the same level of last year. Therefore, we do expect the year-on-year benefit on raw material to dissipate over the end of the year. And in TiO2, we, for the moment, expect benign effect on the short term.

Patrick Lambert

Well, thanks Maelys. Thanks.

Operator

Thank you. Next question comes from Christian Faitz [Kepler Cheuvreux]. Sir, you may proceed.

Christian Faitz

Yes, sir, morning. Thanks for taking my two questions. First of all, deco in Europe, can you please talk about underlying volume trends in the various countries? I know you talked about UK, but how about France, Benelux and the Nordics, for example?

Then second of all, in your specialty chemical activities, can you please talk about demand trends in China during Q3, maybe sequentially how demand developed? And in that context, other companies are talking about easing supply pressures in China, i.e. quite a few local competitors are leaving the market. Can you confirm that in your specialty chemical activities as well? Thank you.

Maelys Castella

Yes. So for Europe, although, as we say, it’s still a very different mixed bag of country – we are in more than 30 country – but on the major country, as I mentioned to you, UK is still very – no clear trend on this market. In France, the market remain challenging. I think that’s the important part. But overall, we are slightly up in this – in the region.

Going to China, as I mentioned, we have seen a good deal of progression during the quarter. And I must say, this is across the board in all the businesses. You have seen some figures this morning about GDP in line with expectation, around 6.7%. So, so far, we continue to see a good trend in China and also in overall Asia region, which represent a significant part of our growth for all our businesses, including for chemical. As you’ve seen this quarter, volume growth in chemical are 1%.

Christian Faitz

Thank you.

Operator

Thank you. The next question comes from Jean-Francois Meymandi [Morgan Stanley]. Sir, you may proceed.

Jean-Francois Meymandi

Hello. Jean-Francois Meymandi from Morgan Stanley. I have a quick one I want to [indiscernible] on the dividend. Let’s say after years of leaving dividend unchanged you upped it last year, but you’re still not at industry standard, which would be a 3% yield on your competition. If I take a 3% yield on your current share price that would point out to a €1.80 dividend, which would be a 15% to 16% increase year-on-year.

And the same way you say you’ve earned the right to do M&A, after years of net-generating cash you’ve turned a corner and generated significantly more cash, so it’s six times more year-on-year in Q3. And I would have thought that your investors also have earned the right to earn a market-rate dividend yield. So can you a bit elaborate why you’re not addressing your dividend to competition? That’s the first one.

And on the second one, is there any reason to think that your cash generation in Q4 would be materially below last year? Thank you very much.

Maelys Castella

So on the dividend, as you pointed out, we had several year of stable dividend in a time where we had cash negative, so it was also to show the confidence we had in the future. I think since last year we are in clearly a different trend. We have increased our dividend last year of 7% and now we continue to increase the dividend.

Our policy is really stable to rising, though dividends are very important and we do indeed focus on the cash generation and also returning the cash to the shareholders. So I think this two-years-in-a-row increase of the dividend is a sign of the fact we want to clearly give the benefit to our shareholders. In term of how we compare with other, as I said, we have to have a policy which is sustainable in the long run.

Going back to your…

Jean-Francois Meymandi

Is there a simple reason why not to go to industry standards? Because that would cost you €40 million additional, which is nothing compared to your cash generation. So is there any reason behind?

Maelys Castella

If you – as you said, there is no pricing. There is not an industry standard. We're looking at our own – if you see last year, we had obviously a payout ratio which was quite significant, above 40%. We have a policy which is stable to rising dividend, so it's a long-term trend which is important. We want to reward regularly our shareholder. And I think two years, and I think this one, the interim dividend continuing to show progress on the dividend is a very good sign.

So about the cash generation, as I mentioned, we continue to be focused on the cash generation. You've seen good progress on this quarter, and yes, we do expect to continue to show progress. I recall that in the Q4 we expect to close the acquisition of BASF, but excluding the acquisition, we continue to aim at being cash positive for the year.

Jean-Francois Meymandi

Good. Thank you.

Operator

Thank you. Our last question comes from Mr. Paul Walsh [Morgan Stanley]. Sir, your line now is open.

Paul Walsh

Yes. Thanks, Maelys. Just one follow-up question please on the pension top-ups. So I think they're denominated in sterling. The next one's due in the first quarter. Are you doing anything to take advantage of current sterling weakness to reduce the net present value out of those top-up payments? Is there anything you can do to lock in the current favorable rate to reduce the euro burden?

Maelys Castella

Now, for the moment, as we have indicated on our cash top-up, first, important to notice that the recent buy-in that I mentioned have no impact on those top-ups. The only positive impact is that, as we mentioned before, it reduce the potential volatility of those top-up, so increase the visibility.

In term of these top-ups, we have given them to you, an indication in euro. At that time it was €0.71 versus pound exchange rate. With the lower pound, you can expect to see a lower effect. We do sometimes hedge a part of it, but not all. And, therefore, we expect to benefit for some of the lower currency when we pay our top-up next year.

Paul Walsh

And just one final one from me. Sorry. Pricing power, if we do move into an inflationary environment next year, how confident is the Group that they can manage that with pricing initiatives across the three divisions, please?

Maelys Castella

Well, as you know, we are constantly reviewing and adapting to a situation on the pricing. We have flagged, nevertheless, that for the past few quarter we have seen a deflationary environment with deflationary pressure, in particular in chemical. If the environment change, of course our policy is always to see how we can reverse this trend. And we will adapt, as we've done, in some markets that have seen this pressure. You've seen what we've done in Latin America, in Russia, in Brazil. It was a good example of what we were able to achieve. But on the short term, we see that the deflationary pressure will probably remain.

Paul Walsh

So remain for how long? And just to be clear, you think you can get prices up if you need to?

Maelys Castella

Well, that's always been our policy and will remain our focus. As we say in our outlook, for the short term we continue to see deflationary pressure and we see challenging condition. But our policy is always the same, to look at how to improve our margin. And pricing is one of the aspects when we see environmental change condition.

Paul Walsh

Understood. Thank you very much.

Operator

Thank you. Next question comes from Martin Dunwoodie [Deutsche Bank]. Sir, your line now is open.

Martin Dunwoodie

Great. Thank you very much. I've got two questions. Firstly, just coming back to the pricing again, not really relating to raw materials. I know you say it's an inflationary environment, but more in the case of sterling in the UK, whether you're doing anything on pricing there to offset the weakness you're seeing in the currency.

And then secondly, on marine, you alluded to restructuring coming through there. Have you already been restructuring in marine or is there an awful lot more to come that you're doing within that? And what kind of actions are you taking to cut costs within that area? Thanks.

Maelys Castella

So, on the currency, as you've seen in this quarter, overall, the impact on the revenue was around 2%. And as we have put in our outlook, we expect currency headwind to remain. And if we look at the current currency, at the stage where we are, might be even a little bit higher in the last quarter, mainly because of the pound. This is mostly translation effect.

As you know, we are producing, and locally, in the UK, so we are fairly natural hedged, except for some of the raw material that we import. But we’ll continue to adapt, as we mentioned before.

Your other question was on the marine and restructuring. As we mentioned before, we are now – we have done very large restructuring in the past, and in particular in performance coating. We did close many sites, and marine was of course part of the overall change we done in our performance coating business, where we delayered a lot of management, where we also closed a factory. So marine was already part of that.

Of course, as we mention, when we see further downturn on the sector we could take additional measure. That’s what we did in Brazil last year when condition were not favorable. And we’ll continue to adapt, going further in the specific market where we see weakening trend happening.

Martin Dunwoodie

Okay. Thank you very much.

Operator

Your next question comes from Markus Mayer [Baader-Helvea]. Sir, your line now is open.

Markus Mayer

Yes. Good morning. Markus Mayer, Baader-Helvea. Only one question remaining, [indiscernible] and the times of merger mania. For you, does a merger among coating companies make sense and would you also be willing to do such a step if there would be a logic behind that?

Maelys Castella

I didn’t get, I’m sorry, your – I’m sorry, I couldn’t hear. So on merger, as we mentioned, our strategy is really to drive growth through organic growth volume development and also bolt-on acquisition. So this is part of our strategy that we are pursuing for more than a year now, and the acquisition we’ve done from the BASF industrial coating are part of this strategy. We of course continue, as I mentioned before, to be very disciplined in the way we acquire and make sure the target or the company we want to acquire or merge are really fitting with our strategy of growth and profitability.

Markus Mayer

No. The question was if there – if a merger among two large coating companies would make sense, and from business logic, and how you, the management of Akzo Nobel, would see such a merger if someone would approach you.

Maelys Castella

Well, I do not make any comment on, again, speculation. Our strategy is clear. We want to pursue a bolt-on acquisition and that’s what we are focusing on.

Markus Mayer

Okay. Perfect. Thanks.

Operator

Thank you, sir. We have no questions at this time.

Lloyd Midwinter

Okay. Thank you very much to everyone for the call and your questions. We’ll end the call now.

Operator

Thank you, sir. That concludes today’s conference. Thank you all for joining. You may now disconnect.

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