Akzo Nobel's (AKZOF) Management on Q1 2016 Results - Earnings Call Transcript

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Akzo Nobel N.V. (OTCQX:AKZOF) Q1 2016 Earnings Conference Call April 19, 2016 3:00 AM ET


Lloyd Midwinter – Director Investor Relations

Maelys Castella – Chief Financial Officer


Paul Walsh – Morgan Stanley

Tony Jones – Redburn

Jeremy Redenius – Bernstein

Peter Clark – Societe Generale

Patrick Lambert – Nomura

Mutlu Gundogan – RBS

Christian Faitz – Kepler Cheuvreux

Markus Mayer – Unicredit Group


[Operator Instructions] This call is recorded. If you have any objection, you may disconnect at any time. Now, I will turn the meeting over to your host, Mr. Lloyd Midwinter. Sir, you may now begin.

Lloyd Midwinter

Good morning, everyone, and welcome to the Akzo Nobel Q1 2016 Investor Update Conference Call. I’m Lloyd Midwinter, Director Investor Relations. Today our CFO, Maelys Castella, will guide you through the results for the first quarter. We will refer to a results presentation, which you can follow onscreen 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 more 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 now hand over to Maelys, who will start on Slide 3 of the presentation.

Maelys Castella

Thank you, Lloyd, and good morning, everyone. We are delivering on our strategy of continuous improvement and organic growth. During Q1 2016, we increased volumes and profitability in all business areas, despite challenging markets and currency headwinds.

Operating income was up 17% and net income attributable to shareholders was up 50%. The net cash outflow reduced significantly compared to last year. We also announced an agreed offer to acquire BASF’s industrial coatings business. And in April 2016, we issued a €500 million bond, with 10 year maturity at a coupon of 1.125%.

Turning now to Slide 4, Q1 2016 represents another quarter of improved financial performance with both higher volumes and profitability. Volumes were up for all business areas and up 2% overall. However, revenue was down 4% with higher volumes offset by adverse currency effects, price mix and divestments. It is worth noting for both decorative paint and performance coatings that the volume growth was higher than the adverse price mix effect.

EBIT, which is operating income excluding incidental items, increased 9% and profitability improved further with both return on sales and return on investment higher than last year. EBIT provides a better picture of underlying business performance. So in response to your feedback, we will refer to this measure going forward and it will be used as the basis for calculating return on sale and return on investment, as indicated during our Capital Markets Day in October 2015. Of course, we will continue to be transparent and include operating income in our communication. Net income attributable to shareholders was up 50% and adjusted EPS increased 28% to €0.97.

Now a brief operational review starting with our end user segments on Slide 6. The buildings and infrastructure segment is most significant for Akzo Nobel with 43% of revenue. This segment is developing in different ways, depending on region and country. Trends for North America and Asia are positive, while developments are more mixed for Europe, and conditions are particularly challenging in Latin America.

In the transportation segment, recent developments for marine have continued to be positive based on past backlog. The medium-term outlook remains uncertain due to backlogs reducing at shipyards. Demand for aerospace and automotive coatings continued to be healthy. As a general rule, trends for the consumer goods segment are similar to GDP. In the industrial segment, demand has been impacted by a downturn in the global oil and gas industry. This affects our protective coating and surface chemistry business in particular and the impact is likely to continue in the medium-term.

Turning now to Slide 7. Global manufacturing, particularly relevant to our industrial and user segments, is essentially as a standstill. However, trends are mixed depending on country and region. Recently, my data shows an upturn for China, although continuing to contract, as you can see, below 50, and it isn’t clear whether this trend will continue. And we’ll see a slight expansion for the Eurozone with mixed developments across the region. The U.S. expanded at a slower rate than in the past, while Brazil and Indonesia contracted further.

Slide 8 includes the most recent consumer confidence from Nielsen. These charts show Q4 2015 because more updated data is not yet available. Consumer confidence as a pure influence on consumer buying decisions, including houses, furniture and consumer durables, and is therefore relevant for our consumer goods and user segments and our decorative paints business. The data shows consumer confidence trends differ per country and within region. Consumer confidence remains low for several countries, including France and Belgium, although there are signs consumer confidence is increasing in Western Europe.

Now moving to the financial reviews from Slide 10. During Q1 2016, we have increased volumes, return on sale, and return on investment. Volumes were up for all business areas and up 2% overall. Revenue was down 4% because higher volumes were offset by adverse currency effect, price mix and divestment. But both decorative paints and performance coating showed growth with the impact from positive volume higher than the adverse price mix effect. However, price deflation was clearly visible in specialty chemicals.

EBIT, operating income excluding incidentals, was up 9% at €334 million compared to €306 million in 2015, reflecting continuous improvement initiative and lower cost, partly offset by adverse currency effects. Operating income was also up at €357 million and includes incidental gains on sale of assets of €23 million. Return on sales improved to 9.7% from 8.5% last year and return on investment increased to 14.5% versus 11.5% in 2015.

Slide 11 shows the quarterly trend for volume and price mix. During Q1 volumes were up for all business areas and up 2% overall. Volumes increased 6% for decorative paint, 2% for performance coating and 1% for specialty chemicals. Demand trends were different per region for both decorative paint and performance coating. As indicated previously, they both grew as the positive volume impacts clearly were higher than the offset in price mix. However, for specialty chemicals, price mix was negative 4% due to price deflation and, in come case, full year-based pricing.

I’ll now turn to the highlights regarding the quarterly results for each of the businesses. Let me start with decorative paints on Slide 12. Volumes increased 6% due to positive developments in Asia and Europe, offset by Latin America. Positive developments continue in the UK and the Netherlands. Volumes improved for several countries within Europe, Middle East and Africa. Demand was positive in many Asian markets, particularly in South and Southeast Asia. In China, volumes were positive despite continued challenging conditions in the Chinese construction market. And in Latin America, market condition remained challenging as economic instability continued.

Revenue was down 3% due to higher volumes offset by unfavorable currency effects and adverse price mix. EBIT and operating income were both up 4% at €52 million, mainly due to higher volumes and lower costs, partly offset by unfavorable currency. ROS increased to 6% from 5.6% in 2015 and ROI improved to 12% versus 9.8% last year. Highlights for performance coatings are shown on Slide 13. Volumes were up 2%, mainly driven by marine and protective coatings, although demand was impacted by lower capital spending in the global oil and gas industries and demand differed per region.

In protective coatings, higher volumes were driven by project backlog, which continue from Q4, and marine coatings volume improved due to new build projects in Korea. New business in Asia for consumer electronic and specialty chemicals and automotive coating grew, particularly in North America and Europe. Demand for coil coating was strong in Asia, North America, and packaging coating saw positive development in Europe and Asia. Volumes for powder were also healthy.

However, revenue was down 3% because increased volumes were offset by adverse currencies and unfavorable price mix. EBIT and operating income were up 9% at €186 million, due to higher volumes, management de-layering, continuous improvement initiatives and lower costs. Return on sale increased to 13.55% versus 11.9% last year and ROI increased to 30.4% from 22.9% in 2015.

Turning now to Slide 14, we recently announced an agreed offer to acquire BASF’s industrial coatings business for €475 million, which will strengthen our position in the coil coating market. The business generated revenue of about €300 million in 2015 and supplies product for a number of end-users, including coil, furniture foil and panel coating, wind energy, general industry and commercial transport. These fit well with our existing business. The planned transaction is expected to be complete in the latter part of the second half of 2016.

We’re moving now to specialty chemicals on Slide 15. Volumes were up 1% with positive developments in industrial chemicals, partly offset by lower demand in oil-related segments, which impacted the surface chemistry business in particular. Volumes for industrial chemicals were higher, mainly due to increased manufacturing availability in Frankfurt and Rotterdam. Production output for functional chemicals was still impacted by the interruption in the manufacturing and supply chain in Tianjin, China, affecting comparison versus Q1 2015, although availability improved compared with Q4 2015.

Also in performance chemicals was impacted by the divestment of the paper chemical business, which took place in Q2 last year. But excluding the divestment volumes, developments were positive. Revenue was down 7% overall due to the divestment, price deflation and adverse currency effects. Both EBIT and operating income went up 1% due to operational efficiencies and lower cost offsetting the effect of price deflation and adverse currencies. Return on sale increased to 13.6% compared to 12.6% in 2015. And ROI improved to 16.5% versus 15.3% last year.

I now move to the cash flow on slide 16. The cash discipline continues. As you can see, the cash outflow is typically during the first quarter due to, first, the seasonal working capital requirements and pension top-up payments. Free cash flow generation continues to improve, demonstrating the positive impact of higher operating results, combined with reduced interest, lower working capital in all business areas, less restructuring and lower pension top-ups. Net cash outflow from operating activities improved to €336 million compared to €622 million in 2015.

Turning to slide 17, net financing expenses decreased mainly as a result of reduced external interest expenses following the repayment of a high-interest bond in Q1 2015. At March 31, 2016, net debt was €1.7 billion versus €2.3 billion last year and €1.2 billion at year end 2015.

In April 2016, a €500 million bond was launched at attractive terms, with a 10-year maturity at a coupon of 1.125%. And a £25 million bond was repaid during April 2016. Our strong financial position provides a good foundation for growth.

Pension liability according to IAS 19 are shown on the slide 18. The balance sheet position of the pension plans at the end of Q1 2016 was a deficit of €0.4 billion versus €0.6 billion at year end 2015. This was the result of the net effect of top-up payments, predominantly into certain UK pension funds, higher asset reserve than lower inflation, offset by lower discount rate in the key countries and de-risking of pension liabilities.

Turning now to slide 19. The triennial of the Akzo CPS Courtaulds Pension Scheme was completed in March 2016 and a new valuation and payment scheduled was agreed with the trustees, which resulted in a lower annual top-up contribution. The estimated annual cash top-up payment has been updated and are set out in the schedule down on this slide.

During the quarter also further de-risking of pension liability was conducted with a non-cash buy-in transaction of €419 million related to the ICI pension fund, which led to a €90 million impact in other of comprehensive income, but no impact on the payment schedule.

Concluding with the summary on slide 21. So during Q1 2016 we increased volumes and profitability in all business areas despite challenging markets and currency headwinds. Operating income was up 15% – 17%. And net income attributable to shareholder was up 50%. The net cash outflow reduced significantly compared to last year.

We also announced an agreed offer to acquire BASF’s industrial coatings business. And in April 2016 we issued a €500 million bond with a 10-year maturity and coupon of 1.125%. We are clearly delivering on our strategy of continuous improvement and organic growth.

Looking ahead, the market environment remains uncertain, with challenging conditions in several countries and segments. Deflationary pressures and currency headwinds are expected to continue.

Upcoming events are summarized on slide 22. Our AGM will be held tomorrow, on April 20. And the sustainability update takes place on May 19. And our Q2 results will be announced on July 19.

Thank you for your attention. This concludes the formal presentation and I would now be happy to take your questions. Please limit your number of questions to a maximum of two, so others can participate. And please state your name before asking the question.

Lloyd Midwinter

Operator, we can now move to the questions.

Question-and-Answer Session


[Operator Instructions]. Our first question comes from the line of Mr. Paul Walsh. Sir your line is now open

Paul Walsh

Thanks very much. It’s Paul Walsh from Morgan Stanley. Morning, Maelys. I just had two questions. The first question was around the cash flow, please. The improvements you’ve delivered in the first quarter I think amounts to about €300 million year on year, give or take. The question is reasonably simple. Do you think you can sustain that or improve upon that year-on-year delta as we move through the rest of 2016?

And my second question relates to sterling and the weakness of sterling and the broader impact across the Group. So I wondered if you could put some context within the deco business, how much it weighed on EBITDA, debt, pensions and so on, just to give us a fuller picture of the effects of sterling on the business right now. Thank you.

Maelys Castella

Yes. Thank you, Paul. So your first question on the cash flow. First, as I explained, as you know, the Q1 is particular because that’s the quarter where we have a negative cash flow due to the small quarter in both deco and also our cash top-up.

If you see the improvements of the cash flow, as I explained, it is mainly due, first, to the improvement of our operation, then to a massive reduction of the interest paid so that you’ve seen the interest payment went down from €48 million to €4 million as we repaid the big bond last year with the high coupon, 7.25%. And the payment of the interest, €48 million, was the full amount of the interest due on the year. And that’s why you have this comparison. So this is the one-time effect for the quarter. But as you see, our interest will continue to be low now that we have repaid all the expensive bond, and in particular the new bond.

And the other effect of the lower cash flow is due to a lower cash top-up. And we are giving you the update schedule so you can see what will be the reduction for the full year.

And the other driver was the fact we had lower cash restructuring. In the Q1 last year, if you remember, we still had some cash payment of the past restructuring coming from 2014 over Q1. And last but not least, improvement of the working capital.

So this is really the driver. And as I say, of course, I don’t be forward looking on the cash flow for the year because it will depend for that picture as the explanation of why we had this improvement, which also shows the really strong focus of the Company. And if you’ve seen the capital expenditure, they have been also under control at about the same level of last year.

Your second question was about the pound. Indeed, we started to see in Q1 a weakening of the pound, an even a further weakening by the end of the quarter. So overall, an average for the quarter, we had a decrease about around a little bit over minus 3%. This of course has an impact in terms of the foreign exchange effect. And this is part of the negative ForEx effect you’ve seen, in particular in deco. And that’s why they have a strong negative foreign exchange, the large part being from Latin America.

So we definitely have a translation effect that might continue, as we mentioned in the outlook, in the – at least in Q2, because the pound has weakened further. So we’ll continue to see that. So of course this impacts all the different parts of our P&L and our cash flow so that impacts overall.

In terms of debt, as you have seen, we have repaid the bond in pounds so there is no outstanding debt in pounds going further. And of course our cash top-ups are in pounds, but we just paid the big amount in this quarter.

So the lower pound will definitely have a negative impact for some of the business in the UK and also could have a little bit of transactional negative effect as we have also some more material that are – could be imported in the UK.

Paul Walsh

Brilliant. Thank you very much, Maelys.


Our first question comes from the line of Mr. Tony Jones. Sir your line is now open

Tony Jones

Morning. Tony Jones at Redburn. Two from me as well. So firstly on promotional costs for deco, we know that some of the major retailers have stepped up paint promotion or price deals. So I wanted to know in this quarter, or possibly for Q2, whether there was any added A&P cost. So that’s something to think about.

And then secondly on headcount, at the back of the release it looks like that number continues to fall. So a quick look suggests it’s gone down another 1% year on year. Is this just a phasing effect for hiring of seasonal employees or is this permanent? And can we expect further progress over the year? Thanks.

Maelys Castella

So on your first question, as you know, we are now in – we are clearly focusing on organic growth, and of course investing in our brand and in the promotion of our products. It’s part of our focus, including innovation. You’ll clearly see an increase during the quarter of our volume in deco. You have to bear in mind, in Q1 last year we had a very low volume of minus 3%. So now we are plus 6%, which shows a better – much better trend.

There is, on the other hand, you see some price/mix negative. But as I stated, they are clearly above, the volume increase are clearly above, so we are growing in deco. And this is in particular due to a strong demand in Asia and mix effect in Europe. So there is nothing specific I need to mention about promotion.

Your other question was about the FTE. As we have – as you know, we have done our large restructuring, in particular in deco in previous year, in 2014. In 2015 we started to move to the continuous improvement. And the shift you’ve seen between last year Q1 and now, as we mention at the end of the booklet, as we’re putting in place some global functions with the GBS, we have some functional people that are moving out of the headcount of the different business to the corporate headcount because they are pooled together to build on this GBS, which will give us additional efficiency in all our functional costs.

We continue to restructure, of course, when it’s needed. End of the year we have taken some measures, for example, in Brazil in the context of the difficult. But there are no major restructuring going on right now. We are moving really to the continuous improvement mood.

Tony Jones

Okay so just a quick follow-up on that. I’m pretty sure the number I was referring to was a Group number. So if there are people moving from divisions to corporate, it should already reflect that. But – so I suppose my question is…

Maelys Castella

I thought you were mentioning the deco number.

Tony Jones


Maelys Castella

Yes, so at Group numbers, well compared to last year, yes, we have continued to the Group. So I think the figure was around minus 1% year-on-year compared to last year. As I say, we continue to do some programs in some countries and adapt our global workforce. But I thought you were specifically related to deco.

Tony Jones

No. Perhaps that was my mistake. Sorry about that. But thanks for the answer.


Thank you. Our next question comes from the line of Mr. Jeremy Redenius. Sir your line is now open

Jeremy Redenius

Hi. It’s Jeremy Redenius from Bernstein. Thanks for taking the questions. Firstly just in decorative paints, there’s 6% volume growth. I think I’m trying to work out why earnings growth wasn’t greater than it was year over year. And I’m just wondering maybe if you could help me think through some of the factors that led to what I would say the lack of operating leverage there, whether it was a negative mix effect in Asia or just low profit growth in Asia. Was this a big quarter in which dollarized raw materials were expensive to import in emerging market – into emerging market countries, sterling weakness, etc.?

Secondly, in specialty chemicals, industrial chemicals was up on capacity expansions in Q1. I know you’ve upped your coating capacity about 50% in Frankfurt. Is that ramped up now or does that continue ramp up into subsequent quarters? Thank you.

Maelys Castella

Yes, thank you Jeremy for your questions. So first on deco, you have to bear in mind, as I mentioned, that Q1 is a small quarter. Therefore already we have traditionally a lower return on this quarter because you have the full cost with lower volume. Therefore your volume leverage are not that relevant.

Then secondly, what is important to notice in particular that we have a very negative foreign exchange impact on raw material in some countries, in particular Latin America, but also Russia, Turkey, Indonesia, where the transactional effect of importing goods are really affecting the results. So that’s what compensates part of the positive volume.

On the other hand, as you can see, we continue to put some improvement actions in place. But this is what affects in particular the quarter. This transactional effect is very significant.

For your second question on availability of IC, definitely the, as we mentioned, the better availability both in Rotterdam and the ramp-up of Frankfurt. Frankfurt is now fully on stream, so that’s the level I would say on which we operate. We’re not going to see a further increase.

Jeremy Redenius

Okay. Thank you very much. That’s very clear.


Thank you. Our next question comes from the line of Mr. Peter Clark [Societe Generale]. Sir your line is now open.

Peter Clark

Yes. Good morning, everyone. Good morning, Maelys. It’s actually following up on what you were just talking about. I’m just wondering how big the Easter effect was, particularly in the Northern European business, because in a seasonally weak quarter, of course where Easter falls can have quite a big impact, particularly on the volumes.

And then the second issue is, I might have missed this, but what’s been going on with the associates line with the big contribution in the first quarter? So those are the two questions. Thank you.

Maelys Castella

Yes. So on your first question, as I mentioned, there is no specific effect from Easter or other in the figure. As I mentioned, in Q1 we are pleased with the performance in deco, even though we have to bear in mind that Q1 last year was really low with minus 3%. So this is something to have in mind. And as I mentioned, Asia was one of the very strong contributors of the growth.

On your second question on the associates, the associates line, where you see an increase at €20 million, from I think €220 million [ph], this is including a one-off effect linked to the acquisition we mentioned of a chemical – we acquired 50% of a subsidiary we have in the bleaching chemical. And this a one-off accounting impact from this acquisition of this 50% stake.

Peter Clark

Got it. Thank you.


Thank you. Our next question comes from the line of Mr. Patrick Lambert [Nomura]. Sir your line is now open.

Patrick Lambert

Hi. Good morning. Thanks for taking my two questions. The first one relates to again the building blocks of EBITDA/EBIT growth in 2016 and looking at Q1 2016. Could you comment a bit on both the run rate of savings and raw materials? I know you really don’t do this quantitatively. Can you comment if – how strong was the tailwind of raw materials? I know again transactional is another issue, but prices have gone down pretty sharply in mainly resins, and pigments, et cetera. So if you could comment on the tailwinds of raw materials and your run rate of savings going into the rest of the year, first question.

And second question, on BASF margins, BASF acquisition, could you comment a bit on what we should think about in terms of dilution of margins and basically any synergies you can see from that? Thanks.

Maelys Castella

Yes. So on your first question, we do not, as you know, provide, as you say, the bridge at the quarter. I think what is to bear in mind, as we mentioned already in the past on the raw materials, is that, yes, we’ve seen a lower price, but we have a very strong negative foreign exchange headwind in some countries. As I mentioned, in particular very strong in Brazil and in Argentina, where currency devaluated more than 30%. Also strong in Russia, in Indonesia, in Turkey. So those are really what we see as effects tempering the raw material benefit.

Now overall we’ll still see some moderate benefit, as we have seen in 2015. If you remember, Q1 2015 was the first quarter only where we started to see some benefit. The benefit increased over the year and we continue, with the lower oil price, to expect some moderate benefit over the year 2016.

In terms of our run rate, we do continue to benefit from both the restructuring program we had put in place last year, in particular in performance coatings, as you know, where we had major de-levering of the top – some management positions, and also closure of several factories. So – and we also have continuous improvement programs, so we continue to see a strong benefit of the run rate of our program. This is a major contributor to the improvement. And of course we have the negative effect of the translation.

On the BASF acquisition, we do not provide the detail, we have not provided detail on margin. You also have to bear in mind that we are still in the process for this acquisition that will be confirmed at the end of the year. So, so far we have not provided. But as we mentioned before, it’s a very good fit with our existing business that reinforces our position. And we also say that we are concentrating on acquisitions that are generating value for the Company.

Patrick Lambert

Thanks, Maelys.


Thank you. Our next question comes from the line of Mr. Mutlu Gundogan [RBS]. Sir, your line is now open.

Mutlu Gundogan

Yes. Good morning, everyone. Two questions on deco, please. The one is – the first one is on the volumes. A very strong performance, up 6% year on year. I think you mentioned, Maelys, that was mainly in Asia. Can you be a bit more specific and tell us which countries and what the main reason behind that is?

And then secondly on the EBITDA margin in deco, can you tell me – I know there’s a lot of moving parts, but can you tell me what the main reason was for the 40bps decline in the EBITDA margin to 10% in this quarter? Thank you.

Maelys Castella

Yes. So for deco, I think it’s important – I’m sorry, I’m going to repeat myself because I want to be clear on that. Q1 2015 volumes were down minus 3%. So we are now plus 6%. So there is of course a comparison effect. If you see over the rest of the year last year, then the volumes were better in deco. As in Q2, we were minus 1%, then zero. And we start to see the positive trend at the end of Q4. So what I want to be sure is that you bear in mind that the plus 6% is not necessarily going to be the trend for the full year because of this comparison effect and because also Q1 is a small quarter.

Nevertheless, it does indicate a good trend. The positive developments are particularly visible, as we mentioned, in UK and the Netherlands. We also have several countries in Middle East and Africa that are improving, and some in Europe. And the demand was particularly positive in Asian markets. And in South and Southeast Asia, Vietnam very good, Indonesia, India. And in China we also had volume positive despite a context which is still challenging in the Chinese construction market.

Though overall, as I said, positive trends that are offset by a market very challenging in Latin America. But as I mentioned, Q1 is a small quarter so we cannot yet see what will be the trend for the full year.

The second part of your question was on the EBITDA improvement. So in decorative paints we see an improvement. As it is a small quarter, of course we have the full cost, fixed cost with lower volumes. So by definition the return is always lower in Q1 compared to the rest of the year. Nevertheless, we have also some improvements coming from our continuous improvement program, but hampered by the negative foreign exchange and in particular the transactional effect I mentioned before.

Mutlu Gundogan

Maelys, the EBITDA margin was down, if I’m not mistaken, by 40bps.

Maelys Castella

Yes. I will return to you on this one specifically. But as I mentioned, it’s probably because we have, as I mentioned, the negative effect of the transactional effect and we might have last year some specific effect I don’t have in mind. But overall, as I said, in this quarter the improvement of the volume was hampered by the transactional effect. That’s the main explanation of the variation.

Mutlu Gundogan

Thank you.


Thank you. Our next question comes from the line of Mr. Christian Faitz. Sir, your line is open.

Christian Faitz

Yes. Good morning. It’s Christian Faitz from Kepler Cheuvreux. Just a quick follow-up question, clarification question. You mentioned in your introductory speech that Brazilian deco volumes were up 3% especially.

And then second question, in your chemical activity, specialty chemicals, can you please talk about demand trends in China during Q1. Has demand improved post the New Year celebrations and how does demand look at present for chemicals specifically? Thank you.

Maelys Castella

I didn’t get your first question. I’m sorry. I didn’t hear you very well. Could you repeat the first question?

Christian Faitz

Okay. I just wanted to clarify that you mentioned that Brazilian deco volumes were up 3%. Is that correct?

Maelys Castella

No, no. I said in the contrary that the Brazilian situation was very difficult. Revenue down in Latin America, deco was down 27%. So we have a very strong negative environment in Latin America, with both a big currency headwind and also volume pressure with slight positive price/mix. So I never said that Brazil was up.

Second question about China and chemicals. As we mentioned last year, specifically for our functional business, we’ve seen some headwind coming in the Tianjin region because we have not been directly affected by the big explosion in China, but we have a plant there for our polymer business and who suffered some supply chain disruption because of the effect of this Tianjin explosion. And that has put some issues on our operation that had negative impact in Q4 last year. It’s starting to get better in Q1 so we still are affected. But we’re back, I would say, slightly now to – we’re ramping up progressively. So things are getting better.

Overall for chemicals in China, as we think it’s still a mixed picture and, as I mentioned, when you look at the PMI data that reflect the overall environment, we now see that figures are improving. But it’s unclear whether it’s a trend or not. But for chemicals for the moment, we have no specific issue apart from this Tianjin supply chain disruption.

Christian Faitz

Okay. Thank you.


Thank you. Our next question comes from the line of Mr. Markus Mayer [Unicredit Group]. Sir, your line is now open.

Markus Mayer

Yes. Good morning. One question relating to the competitive environment. This acquisition of Valspar of Sherwin-Williams, do you expect that something in particular in the UK and Continental European markets will change due to this acquisition or basically for you is seen as something to happen there? Thanks.

Maelys Castella

Well, so effectively there is a major acquisition taking place with this Sherwin-Williams deal that some consolidation is taking place. We also, as I mentioned, have done an acquisition of a much different size. And we would say that we’re concentrating more on bolt-on acquisitions with this BASF acquisition.

For Sherwin-Williams, as you know, they are mainly a U.S. – a very large U.S. distributor presence, and in particular in deco. We are not in North America in deco. We divested the business there. So we don’t really – we don’t compete with them there. In Europe, Valspar is present and entered the UK market with a tinting offering in B&Q. So we’ll continue to see them. And it’s yet too early to see what will be the impact of this acquisition. The deal is announced but it will take place beginning of 2017 so we don’t expect a big change that we’ve seen in the short term.

On our side we continue to focus on our strategy clearly of organic growth and continuous improvement. That doesn’t change the scene for the moment of what we see in Europe.

Markus Mayer

Okay. Perfect. Thanks.


Thank you. Our next question comes from Mr. Peter Clark. Sir, your line is now open.

Peter Clark

Thank you again. Actually I was preempted; there was a similar question. But just one specific thing you may or may not want to answer. Is Ronseal bigger than Cuprinol at the moment or is Cuprinol the bigger brand on the wood finishing in the UK, as a matter of interest?

Maelys Castella

Well, I would not go into detail of position per market and per brand. We are a very strong player, as you know, in the UK in our different markets.

Peter Clark

Okay. I didn’t expect anything. Thank you.


Thank you. Our next question comes from the line of Mr. Paul Walsh. Sir, your line is now open.

Paul Walsh

Yes. Thanks a lot. Sorry, just some follow-up questions, if I can. I just want to talk a bit about specialty chemicals actually, Maelys. I think it feels like it’s a business that people have been waiting for it to turn over and it just keeps improving its margin structure. So I just wondered if you could talk a little bit about what’s behind that, in particular what pockets of strength in that business are continuing to push the margins up year-on-year. That would be my first question, please.

Maelys Castella

Yes. So on chemicals, as you noticed, yes, we continue to improve significantly our business. It’s also a sign that realize now people that we have restructured our business and pruned our portfolio to really concentrate on business where we have strong leader position, either regionally or either worldwide. We are doing and continue to do a lot of efficiency programs. We’re improving our assets. The investment on Frankfurt was there to comply to regulations but also bring additional efficiency. We continue to do so. We have announced this year a production joint venture with Evonik in our Ibbenburen site for also conversion to mercury-free membrane in the IC.

So those are examples of a lot of programs we’re doing to continue to improve our efficiency. So I think the good margins are really showing that we have very good business with good position and that we are combining further improvement and with good demand. As we mentioned, if you exclude the divestment of the paper chemicals business, we see that our pulp and performance chemicals is doing quite well. But surface chemistry is still impacted by the oil segment, and that’s particularly a negative headwind. But on the other business we are doing quite well.

Paul Walsh

So there’s nothing in that specialty chemical margin that you would classify as unusual?

Maelys Castella

No. It’s really the improvement we have done on our efficiency. There is no exceptional. As we’ve explained to you, when there is something material, we do flag it.

Paul Walsh

Okay. And just a second question, please. Deco volumes. I know you want to be cautious about volumes as the comps get tougher, particularly in Europe, from the second quarter onwards. But can you be a little bit more detailed around some of the volume developments in Europe by country? It feels – if I look at the Euromonitor paint data, it felt like UK was actually getting tougher. But it seems like you’re still growing. So is that a question of taking market share? And of course the big drag last year was France. And I’m just wondering if you’re now beginning to see improvements in the French market.

Maelys Castella

So as you say – and I think I made it very clear that the Q1 is a small quarter so do not make a trend for the full year. And yes, we want to remain cautious. And as we have flagged in our outlook, there are still challenging market conditions. So I think we are there wanted to clearly flag that.

In terms of the overall demand, yes, we’ve seen, as I mentioned, especially good demand in Asia, strong there. In Europe it’s still a mixed picture. So yes, UK and the Netherlands was doing quite well in this quarter. For France, as you’ve seen in my graph, it’s still a very low level of consumer confidence. So there are signs of improvement, but it’s still a very challenging market. And Belgium also is the same situation.

We know that the unfortunate events both in France and Belgium of the two terrorist attacks end of year and this first quarter had some influence on consumer behavior. So we’re still very cautious about what’s happening in this country. There are – we cannot yet really talk about recovery in those countries yet.

Paul Walsh

Okay. Fine. Thanks a lot.


Thank you. At this time there are no more questions on queue. Speakers, you may now proceed.

Maelys Castella

Okay. So if there is no more questions, I thank you for your participation. And I will end now this Q&A session and the call. Thank you very much.


That concludes today’s conference. Thank you for participating. You may now disconnect.

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