AkzoNobel NV (OTCQX:AKZOF) Q1 2022 Earnings Conference Call April 21, 2022 3:00 AM ET
Corporate Participants
Kenny Chae – Head of the Investor Relations
Thierry Vanlancker – Chairman and Chief Executive Officer
Maarten de Vries – Chief Financial Officer
Conference Call Participants
Mubasher Chaudhry – Citi
Matthew Yates – Bank of America
Charlie Webb – Morgan Stanley
Gina Fraser – Goldman Sachs
Chetan Udeshi – JPMorgan
Alex Stewart – Barclays
Peter Clark – Société Générale
Jaideep Pandya – On Field Investment Research
Gunther Zechmann – Bernstein
Laurent Favre – BNP Exxon
Operator
Welcome and thank you for standing by. At this time all participants are on a listen-only mode. Questions will be taken after the presentation. [Operator Instructions]. This call is being recorded. If you have any objections, you may disconnect at this point. We’ll hand it over to your host, Kenny Chae, Head of Investor Relations. Please go ahead.
Kenny Chae
Thank you. Hello and welcome to AkzoNobel’s investor update for the first quarter of 2022. I’m Kenny Chae, Head of Investor Relations Team. Today, our CEO, Thierry Vanlancker, and CFO Maarten de Vries will guide you through our results. We’ll refer to the presentation which you can follow on screen and download from our website at akzonobel.com. A replay of this website will also be available. There will be an opportunity to ask questions after the presentation. For additional information, please contact our Investor Relations Team.
Before we start, I would like to remind you about the disclaimer at the back of this presentation. Please note this also applies to the conference call and answers to your questions. I will now hand over to Thierry who will start on Slide three of the presentation.
Thierry Vanlancker
Thank you very much, Kenny. Hello to everybody and a very warm welcome to the call. Before we dive into the key highlights of the first quarter, we would like to first of all cover the impact from the ongoing conflict in the Ukraine and Russia.
Our highest priority continues to be obviously the safety and well-being of our employees. We are in daily contact with our people and offering as much support as possible to all those affected in order to keep them and their families safe. We have launched a company-wide donation matching campaign where the company has three times the amount donated by employees. €250,000 has already been raised in this first month that way. And the money has been already handed over to our partner the disaster emergency committee providing humanitarian aid for the Ukraine. This comes up on top of the €140,000 that we’ve donated already through other parts of the organization. So we’re about €400,000 so far and counting.
Based on 2021 reporting our business in the Ukraine and Russia is rather limited, the 2021 revenue in the Ukraine was approximately 14 million euros and we had no operations there. And during Q1, we have suspended all business activities in the Ukraine. The business in Russia represented about 2% of our total revenue in 2021. During the first quarter, the aerospace coatings activities along with all new investment, and all marketing activities have been suspended in Russia. The Q1 financial negative impact of the Ukraine Russia conflict was approximately €5 million on our operating income.
Going forward and in line and as a result of the latest EU sanctions, the majority of our coatings business in Russia is being suspended and the residual business will be locally operated, which we expect to decrease by approximately [77.0%] [ph] compared to 2021. As you might suspect we’re evaluating the situation daily and also adjusted to the different ways of sanctions. And it may be that more of the remaining business in Russia could come to a halt in the next months, mainly due to the increasing practical difficulties around supply of raw materials into Russia.
With that, let’s turn to Slide number five. We continue to make strong progress in the first quarter with double-digit revenue growth and pricing up by 17% more than offsetting raw material and freight inflation for the quarter for both our paints and coatings businesses.
Revenue was up 12% and up 10% in constant currencies with strong revenue growth for both paints and coatings. In fact, this is the highest revenue first quarter for both paints and coatings on the record that we at least remember. Adjusted operating income was down 25% to €230 million due to the continued industry-wide supply constraints. The impact from the conflict in the Ukraine, and the COVID restrictions in China.
Total raw material and freight costs headwind of €334 million for Q1 was more than offset by our pricing of a total of €372 million. This resulted in a positive €38 million net pricing versus raw material and freight inflation for the quarter. This is the first time since Q1 2021 there are pricing outpaced inflation.
We also initiated a new €500 million share buyback program and have already purchased 64 million euros worth of shares in March and we announced the successful €1.2 billion dual tranche bond at favorable terms.
Now turning to Slide number six, we continue to make great progress in line with our grow and delivery strategy, delivering growth for the seventh consecutive quarter with strong pricing of 17% offsetting raw material and freight inflation for the quarter. And as said, it is one of the strongest if not the strongest revenue Q1 on record for both paints and for coatings.
Most of our regions and segments delivered strong revenue growth despite the ongoing industry-wide supply constraints. The past quarter marks the fifth consecutive quarter of delivering on our internal pricing and inflation forecasts. It’s a good proof point for us of the maturity of our business planning and margin management processes that have been the key enabler in delivering the positive net pricing versus inflation for the quarter despite the very challenging –remaining very challenging external environment.
We get our focus on creating an efficient high-performance company do all this having completed our plans prism SAP rollout in Asia. We continue to receive recognition for our efforts in the field of sustainability being awarded platinum status by EcoValley, maintaining the highest rating for eight years. And we were also recognized as a European top employer. Finally, we held our second global paints a future startup challenge in further driving our innovation pipeline.
Let’s now turn to Slide seven, which summarizes how we view current demand trends in the markets where we operate. As we have communicated in early 2022, we saw strong sequential recovery for all businesses in South Asia due to the easing of the COVID restrictions, especially at the latter part of the first quarter. China, however, was impacted towards the end of the quarter, as COVID restrictions led to approximately €5 million OPI impact in Q1.
We do expect a strong recovery in China once the restrictions are lifted in our paints retail business. Supply constraints continue to persist in the first quarter, with our total backlog increasing to around €120 million, which is higher sequentially versus Q1 2021, where we had about 100 million as a backlog.
North America especially continued to be the most constrained, while EMEA continued to see further signs of easing. The underlying demand for paints continues to be strong in all regions. Paints EMEA delivered higher revenue than what was a stellar Q1 2021 and volumes remain higher than the pre-pandemic levels. We continue to see robust demand despite the recent geopolitical headwinds.
For our coatings businesses, demand for industrial coatings and powder coatings remain strong, although also here supply constraints continue to impact these businesses in the first quarter. But in automotive and specialty coatings both vehicle refinishes and aerospace coatings continue to show sequential recovery. For marine and protective coatings given the state of the energy and shipping industries continued investments into relevant and markets are expected to drive further sequential recovery, albeit that the Russian sanctions may continue to have an offsetting negative impact.
Slide eight shows the volume progression for our paints and coatings businesses. Our global paints sales volumes continue to develop as we had expected, with lower Q1 sales volumes due to the normalized demand of do it yourself segment in EMEA, especially, as compared to the first quarter of 2021. Compared to pre-pandemic level of the Q1 2019, paints volumes were up strong due to robust market demand and share gains. The year-on-year do it yourself volume distortion that we saw in EMEA that was still with us in the first quarter of 2021 is expected to be a much less relevant factor moving forward with do it yourself demand having normalized as of Q1 2021 and now being about a year at mid single digits above the first quarter of 2019, or the run rate of 2019 in general.
Our coatings sales volumes were down in Q1 versus prior year, but higher than Q1 of 2019. volumes were strong prior year mainly due to increased demand from restocking as many economies started to reopen. Sequentially, coatings volumes were slightly down from Q1 2021. But that was mainly due to supply constraints, along with the impact from COVID restrictions in China and the Russian sanctions, as underlying market demand was strong in general.
As has become our habit, we will zoom in on two of our business units in a bit more detail. Starting with powder coatings on Slide number nine. The growth in this segment, as you all know is driven by several factors. Powder coatings provide clear sustainability advantages compared to liquid coatings, because it’s completely solvent free and very highly efficient in re usage. By lowering the curing temperatures for our products, we have been able to open up new markets including coating wood substrates.
Despite continued supply constraints, our powder coatings business recorded its sixth consecutive quarter of year-on-year revenue growth in Q1. During this quarter, we opened our new powder factory in Hanoi, Vietnam, which is our 13th powder factory in Asia. This investment and added capacity is part of our multi-year investment program to support powder coatings growth and our leadership in this industry.
AkzoNobel continues to lead the industry’s liquid to powder conversion. And during the quarter we helped to convert application for chassis to powder at a well-known manufacturer in China. We also launched our interphone redox one code solution for the general industrial market, along with gaining three additional approvals at major electrical vehicle OEMs and battery manufacturers. While the coating is one of our crown jewels in our growth portfolio. And with increased investments improvements in our product range and the lower curing temperature technology, we expect to maintain our clear leadership position in this growing segment.
Turning to slide 10 For our decorative paints business in China. growth for this business is supported by our sustainability offering geographic expansion within the country and our increased and improved digital ecosystem. We are the number one player in the premium retail segment and delivered another double-digit revenue growth this past quarter despite COVID restrictions.
We continue to innovate and introduce leading products including the successful launch of our solvent free asthma and allergy friendly paints. Our geographic expansion into tier three to tier five cities made further progress in Q1, where we expanded to 66 new cities and increased our reach by around 700 stores. As a result of the market research that we did in 2018 to get our non value adding volume, our project market exposure in our China paints business is less than 20%. And since then we’ve been very selective with regards to what projects we participate in, over the past years, taking into account the historically high risks of receivables in the segments for the industry and our adults back then and justified about the longevity of some of the practices. And within the project segment or direct exposure to nationwide property developers is immaterial that means less than 2%. So we’ve been sheltered from what’s been going on in the real estate market there. With that, I will now hand it over to Maarten, who will share more about our financial results from Slide 12 onwards. Maarten?
Maarten de Vries
Yes, thank you, Thierry and hello, everybody on the call.
During the first quarter reported revenue was up 12% versus prior year and up 10% in constant currencies. We delivered strong pricing of 17%, which was sufficient to offset the impact of raw material cost and freight inflation for the quarter. Mix was negative 1% in the quarter, mainly due to relatively stronger paint sales in South Europe.
Volumes were a 7% lower as a result of continued supply constraints, normalized DIY demands for Paint EMEA and COVID resurgence in China. Adjusted operating income decreased 25% to €230 million as a result of positive net pricing versus raw material inflation offset by lower volume, along with approximately €10 million negative impact from the conflict in Ukraine and the resurgence of COVID in China.
This resulted in a result on sales of 9.1% versus 13.6% in the first quarter of last year. Adjusted operating income excludes the impact of identified items, which had a net positive impact of €2 million for the first quarter. Adjusted EBITDA was 19% lower at €317 million.
So moving over to Slide 13. I’m pleased to report that we achieved positive net pricing versus raw material information for both paints and coatings businesses in the quarter. Pricing of €372 million was enough to offset €334 million raw material and freight inflation, marking the first positive quarter since Q1 2021.
Lower volumes resulted in a negative €50 million impact, mainly due to continued industry wide supply constraints, and normalized end market demand in Paints EMEA. Currencies had a minor effect of positive €3 million, while mix was minus €20 million mainly due to stronger sales growth in our South European paints business.
Operating expenses and other one-offs were €48 million higher than the first quarter of 2021. This includes higher supply chain cost driven by the ongoing supply and logistic challenges, higher IT investments and the impact from the conflict in Ukraine, along with some positive one-offs in the first quarter of 2021.
As expected, the industry-wide raw material cost inflation continued in the first quarter. For Q1 raw material and freight inflation about €334 million versus the same period prior year. Combined with a €38 million inflation in the first quarter of ’21. The total inflationary impact over the two-year period is €372 million.
For the second quarter, we expect further inflationary pressure with an adverse impact from raw material and freight inflation between €290 million and €320 million reverses the second quarter of 2021. This is a lower value sequentially versus Q1. However, combined with €128 million inflation in the second quarter of ’21, the impact over the two-year period is expected to be greater than €420 million.
As indicated in our outlook statements, we expect raw material cost inflation and supply constraints to gradually ease during the second half of this year. At the same time, we delivered 17% pricing in the first quarter higher than previously expected. As a reminder, Q4 pricing was 12.5% with December at the 14% run rate. We expect the second quarter pricing to land between 14% to 16% when comparing to the second quarter of 2021.
In the previous cycle, after pricing was driven to offset raw material cost inflation, we saw margin expansion with pricing holding up and raw material costs started to ease. In the current cycle, we have responded with stronger and faster price initiatives in light of the magnitude of the raw material cost inflation. Having been negatively impacted for all of 2021, we have now reached the inflection point with a positive net price and mix versus raw material cost and freight in the first quarter of 2022. As indicated in our outlook statements, we aim to continue to offset raw material and other variable cost inflation including freight with pricing initiatives.
Now moving to the next slide, with the results for decorative paints. Reported revenue for paints was 8% higher versus the first quarter of last year with pricing of 13% more than offsetting lower volumes of 7%. For EMEA, revenue was up 1% and flat in constant currencies.
Pricing initiatives were enough to offset the lower volumes as a result of normalizing market demand and in the DIY segments. Mix was negative in EMEA with relatively stronger revenue from South Europe. Revenue for South America was up 23% and 17% in constant currencies. Revenue growth were driven by strong pricing initiatives.
In Southeast Asia, strong pricing initiatives offset lower volumes, partly due to the impact from COVID-19 with India and Vietnam showing strong revenue growth in the retail segments. China showed significant revenue growth supported by both pricing and volume growth in retail, partly offset by lower volumes for the project segments.
Overall, pricing for pain sustained ahead of raw material and freight inflation for the quarter. Despite the strong revenue and pricing performance and underlying demand being [decreased] [ph], the combination of lower volume supply constraints and COVID restrictions in China resulted in adjusted operating income 27% lower at €105 million and the return on sales of 10.4% versus 15.5% for the same period last year.
Now over to the results of performance coatings. Reported revenue for coatings was up 14% year-on-year and up 12% in constant currencies. Volume for coatings was 7% lower, mainly due to supply constraints along with COVID restrictions in China, impacting all businesses at varying degrees. Revenue growth was driven by pricing initiatives at 19% while mix was flat.
For powder coatings, revenue growth was driven by strong pricing. Underlying demand for powder coatings remained strong but was impacted by supply constraints, especially in North America. Marine and protective coating showed double-digit revenue growth driven by strong pricing. Marine and protective coatings was also materially impacted by supply constraints.
Revenue for automotive and specialty coatings was 12% higher, mainly due to pricing initiatives despite slightly lower volumes. Vehicle refinish and aerospace continues to show strong recovery while automotive is still impacted by supply constraints. And undergrowth in industrial coatings was driven by pricing initiatives with revenue growth in all segments, especially in packaging and wood. Even though industrial coatings was also impacted by supply constraints during the quarter. Overall, pricing for coatings was up 19% which offset the raw material and freight inflation for the quarter.
Adjusted operating income was 21% lower at €140 9 million and return on sales at 9.8% mainly due to lower volumes and supply constraints, along with the impact from the conflict in Ukraine and Russia and COVID restrictions in China.
Now turning to Slide 18, operating working capital for the first quarter continue to be impacted by higher raw material costs and supply constraints, physical inventories value increased due to raw material cost inflation and supply constraints. This resulted in operating working capital as a percentage of revenue at 16.5% versus 13.4% for the same period of last year. Normalized for raw material cost inflation working capital would have been 2% lower around 14% of revenue.
Free cash flow was negative €159 million for the quarter due to the increase in working capital along with lower EBITDA for the quarter. Capital expenditures for the quarter were €57 million, we are investing in growth, the optimization of our assets footprint and ongoing integration of our ERP systems.
Going forward, we expect CapEx at approximately 3% of revenue. The net debt to EBITDA leverage ratio was 1.9x at the end of the first quarter in line with our target leverage ratio of net debt to EBITDA of one to two times. We remain committed to retain a strong investment grade credit rating.
Moving now to Slide 19, adjusted EBITDA was 19% lower for the first quarter, mainly due to lower volume, despite delivering positive net pricing price of material and freight inflation. The first quarter adjusted earnings per share was down to €0.86 per share. Delivering on our capital allocation priorities, we initiated our new €500 million share buyback program in March with a share count reduction of approximately 11 million shares versus the same period prior year.
And now overall, over to our capital allocation priorities, we are executing consistently on our capital allocation priorities. We are investing in organic profitable growth with roughly 3% CapEx and we have the stable to rising dividend policy. We are executing on our bolt-on acquisition strategy and making sure that they are value accretive. Hence we continue to do modular share buybacks. This is all in a framework of a leverage ratio between one and two while retaining a strong investment credit rating.
And now, back to Thierry for the concluding remarks.
Thierry Vanlancker
Thank you very much, Maarten. To summarize, we feel pretty good by delivering 12% higher revenues in the first quarter, driven by strong pricing of 17% and we feel even better the fact that it’s fully offset the impact of raw material and trade costs inflation for the quarter.
With our grow and deliver strategy, we target to grow at or above a relevant market and continue to build on our strong foundation. Trends differ wildly per region and segment with raw material and freight inflation and supply chain constraints expected to gradually ease during the second half of 2020. And going forward, we aim to stay ahead of the raw material and freight inflation with pricing.
Currently, market uncertainties have increased due to the sanctions on Russia and the resurgence of COVID-19 in China. But assuming there are no further significant market disruptions, we aim to deliver 2 billion adjusted EBITDA for 2023.
I’m now handing it over to Kenny for information about upcoming events and the Q&A session on Slide 23.
Kevin Chae
Thank you, Thierry. Before we start the Q&A session, I would like to draw your attention to some of the upcoming events shown on Slide 23.
Tomorrow on April 22, we will be holding our annual general meeting of shareholders which will be held virtually. The ex-dividend date of our 2021 final dividend is on April 26. The record date is on April 27, followed by the payment on May 4. And we will publish our second quarter report on July 20.
This concludes the formal presentation and we will be happy to address your questions. Please state your name and company when asking a question and limit the number of questions to two per person so others can participate. Operator, please start the Q&A session.
Question-and-Answer Session
Operator
Thank you. We will now begin our question-and-answer session. [Operator Instructions] Our first question is from Mubasher Chaudhry from Citi. Your line is open. You may begin.
Mubasher Chaudhry
Hi, thank you for taking my questions. I just wanted to focus a little bit on the volume decline. Can you talk a little bit more about or split between supply chain and COVID-related and normalization later than that maximum 7% for the first quarter? Related to that, I think in the Slide deck on Slide eight, you have given some thoughts on paints volume. Do you expect the paints to continue to normalize towards 2019 levels as we progress through the year or you expect to kind of normalize at a higher level because previously you did talk about kind of a new segment of DIY and decorators getting involved and redecorating and creating a higher level of demand? So just wanted to get your updated thoughts on that.
And the second question is more on the COVID restriction in China, if you could provide an update there and what the potential EBIT, impact could be should the lockdown law for the whole of second quarter. Thank you.
Thierry Vanlancker
Mubasher, thank you for your questions. In fact on the volume, we’re pretty positive about the volume that we achieved, because the underlying demand in all the segments continues to be quite strong. If you look at what we delivered, you have to take into account that in fact, our backlog of material we could not supply, in fact went up. So if you’re talking about the 7% volume there is at least 30%, 40% of that is stuff that we had orders for but could not supply. So that’s an important thing to note.
Now, let me then go back between paints and coatings, this two impacts effect on volume that we have an effect they will disappear or have disappeared or word disappearing by March in the quarter. One was Southeast Asia was a bit off on volume but that was mainly through quite a slow start in January, February, because of the cases of Omicron in that region. Now when that was released, sales came back very strongly in March. So that was actually more a Q1 effect.
For what EMEA is concerned for deco and paints. It is more a question of the exorbitant quarter we had in Q1 2021 people came out of COVID and there was a restocking across a number of segments but very visible in do it yourself in EMEA by the way, that then returned into the second quarter, a correction on that because it was a bit over enthusiastic that specifically and do it yourself in EMEA there’s a restocking.
So just to answer your question around the normalization. Do it yourself in EMEA has not normalized in the first quarter. It has normalized as of the second quarter of 2021. It continues to be 4%, 5% above 2019 numbers. And frankly we see no signs of down trading because of pricing. On the contrary, we have the impression that actually it works somewhat in our favor. With the young do it yourself people showing up that they want to have quality products to work with. So high confidence on the paint section again. There is more the comparison which was completely counter seasonable, abnormal first quarter in 2021 at that moment of time.
If you ask me to split up between the differences, I would say supply chain COVID in China and the normalization I haven’t done exactly the split on it, but it’s probably out of the 7% and I’m looking at you can hear because you probably do the math. The normalization is probably 1%, 2% and do it yourself on the total volume for the company that you can probably confirm that afterwards. And then the rest of it is actually split by frankly, not being able to ship whereby the COVID in China is actually in the same category.
So it is there, I would say 50:50 on whatever the remaining part of that. It is important to note, however, that the backlog for our products has increased. So the demand is definitely there. It’s a question of getting either raw materials but increasingly getting it on — shipped to our customers from our elements.
The COVID-19 China impact, let me do an introduction and then Maarten, you can probably put the numbers around it. The COVID situation in China, of course, started to escalate in the end of the first quarter, and then through April. What we do see, however, is that it’s mostly in the north, northeast, in the Jilin and in Tianjin that is normalizing as we speak, which is pretty important. And in Shanghai, for example, in our own case, we have three sites in the Shanghai area. Three of them have been released this week for production, albeit at an reduced capacity and people who have to stay on the site and have to stay in the bubble, et cetera.
Our team locally is expecting that this would be getting back to normal by somewhere the mid of the second quarter. So an effect that is around now. And that would probably recover. So that is the mental picture that they have recovering even in the second quarter. But maybe Maarten, you can now put more numbers around it on what we have taken as a view there.
Maarten de Vries
Yes. So first of all, as mentioned, Q1 impact was 5 million on the adjusted operating income line. And it was really the impact of the latter part of Q1. The question now in Q2 is really yes, we see an impact in the first half of the second quarter. But the question is, how does the rebound looks like for the latter part of the second quarter and how it will compensate. But I would say that the impact of what we’ve seen in Q1, and if you kind of forward us into Q2, I would say that it would be probably double or maybe a little bit higher than what we’ve seen in the first quarter.
Thierry Vanlancker
Again, I want to stress in the context that it may take longer to recover. But we see the first signs at least so that it may or may be somewhere in the next one or two weeks actually gets to a more normal situation. Mubasher, did you have a third question?
Mubasher Chaudhry
No, no. That was it. I’m sticking to the two. Thank you very much.
Thierry Vanlancker
All right. Thank you very much.
Operator
Thank you. Our next question is from Mr. Matthew Yates from Bank of America. Your line is open. Sir you may begin.
Matthew Yates
All right. Good morning everyone. Thanks for the questions. Maybe just to go on Slide 13 with your profit range, you called out the 48 million for the extra [indiscernible]. Can you just comment a little bit more about how much of that is a sort of what I would call cost inflation versus the more kind of deliberate structural investments you are making in the business and keeping with your kind of pivot to more of a growth mantra.
The second question would just be generally around raw materials, I mean last year you highlighted a vast number of force majeures that first you [disscramble] [ph] in the spot market material. If I’m understanding your comments around backlog, because it suggests that supply chains have perhaps got worse, not better. And I’m sure that’s not Akzo specific. But can you share any thoughts on how and when you clinically make more reliable supply chain? Firstly, to sell those pent up volumes. And secondly, hopefully get some relief from the cost inflation side. Thank you.
Thierry Vanlancker
Yes, thank you, Matthew. Let me handle the second question. And then for the first one, I mean, then maybe Maarten, you can chime in. On the force majeure effect, the force majeures were definitely improving during the first parts of the first months of the year. There was an ongoing trend. So you actually — I will talk probably more around the raw materials. We do see on the production site an improvement. What has happened is in the last month and mainly driven by the China lock downs is that that created a number of force majeures within China and then with shipping situations, creating some force majeures of those waiting for the raw materials, mostly at our supplier level, I have to say. They were waiting for an input to make their product that then we would take from them. So it was a bit of a resurgence.
So all in all, I would say if you look at the situation, it is at this moment of time, it’s about similar as what we discussed when we had our year end results call. But it was definitely, but it’s more of an uptick, based on the COVID resurgence in China whereas for the rest, it was, in fact, on a normalizing pathway. So we do see it more as a temporary flare up again, and getting more normalized. Overall, the other parts of it maintenance and all sorts of other stuff that has normalized. And I would say around the world, that the availability of raw materials, we do see that normalizing it is in fact getting more the shipping at some time from A to B, that specifically where the China situation became a more of a temporary situation, but we are guardedly optimistic on where things are going.
And that leads in I think, Matthew, in your question around the OpEx, part of it indeed wasn’t intended OpEx increase. But in fact, part of the explanation sits indeed in the wild raw material environment and Maarten can probably put some numbers around.
Maarten de Vries
Yes, sure. If you look at the 48 million in the bridge, because that’s where you’re referring to, I think there are a couple of elements to mention. First of all, it is indeed the supply chain in both manufacturing and warehousing. We’ve seen in the first quarter, quite a number of inefficiencies given the volatility and all the constraints in the supply chain. So where we normally and you were talking about inflation, wherever you normally offset inflation with all our efficiency initiatives, that was certainly not the case in Q1. In fact, we’ve seen negative productivity with higher overtime, and constantly changes in the schedules in manufacturing, which lead to require some extra cost. But similarly in our warehousing operations, so there is an important bucket, which of course, given normalization of raw materials and the constraints should also normalize, again, from a cost perspective. That’s one.
Secondly, we are investing more in OpEx from an IT perspective, that is, first of all, because we drive more software as a service initiatives versus CapEx that sits not only in our ERP rollout, but also in our advanced planning initiatives in fact [Cara Maria] [ph] has talked about it when she talked about one of the delivery initiatives, that’s a whole demand planning and supply chain planning Initiative. And third one is also in IT is procurement where we drive a digital procurement suite initiative. So we are by design, investing more in IT to support our delivery initiatives.
The third element is Ukraine, you’ve seen that we had impact of Ukraine that sits also mainly in the OpEx, as well as the some positive one offs which we had in Q1 last year, which then of course, this time is a negative impact. But these are the main buckets. And again, the most important messages here from manufacturing, warehousing and [indiscernible] supply chain cost that should normalize, and we should go back to the normal rate. And hope that gives some better update.
Thierry Vanlancker
Just to finish it off. I mean, the one thing and then I mean, the integrated supply chain team is all over that. And if they’re not over it, then Maarten and I are all over it. We also want to make sure that, I would say the chaos management on the raw material side, that doesn’t become an ongoing justification for a cost structure. So we are all over that collectively to drive that back. Now that we see some normalization arriving at the horizon to drive that back to the target numbers we had in mind ASCP.
Matthew Yates
Great stuff. Thanks, guys.
Operator
Thank you. Our next question is from Mr. Charlie Webb from Morgan Stanley. Your line is open. You may begin.
Charlie Webb
Good morning, everyone. Thank you for taking the questions. Maybe first just on the volume picture, minus seven in Q1 as we think about Q2, and think about those kinds of various factors of, the impact for easier content, what we had in Q1 on the DIY side in Q2, but then obviously, kind of the ongoing lockdown restrictions, maybe weighing a bit more in China.
How do we think about volumes for the second quarter? I mean, are we talking, should be less negative than what we see here in the first quarter year-on-year. We should see some somewhat of an improvement, whether that’s just easier comps, or whether that on the DIY side or just even perhaps raw material availability improving. Just question on that.
And then second question just on the raw material kind of price dynamic, obviously, very positive now that you’re kind of running ahead or over recovering raw materials? And how do we think about that through the year when you look at the raw material basket? Is it the case that we are kind of just continued to kind of offset or a little bit more, for the time being until the point in time when raw materials kind of fall away? Or is it the case that, we’ll continue to put price measures through so that we recover the lost, I guess, inflation that we saw in 2021, just to kind of reconfirmation of that will be helpful.
Thierry Vanlancker
Yes. Charlie, let me try to answer both questions on the volume for the second quarter, I want to come back on the volume for the first quarter. It is a case of standing like to take pictures of standing next to the most good looking person in the group, then you always don’t look too good, is the first quarter of 2021 that was a complete outlier. If you compare the volumes of what we did in the first quarter 2020, which was just before COVID, by the way, if you compare it to the first quarter of 2019. And that’s what we try to put into our deck, it is in fact a very strong quarter for all of the businesses that we have here. In fact, if you look at the first quarter of the seasonality and paints makes it difficult to do something sequentially. But the first quarter for coatings was totally in line with the fourth quarter of 2021. So in that sense, I think it is a normal strong quarter and also earnings wise, by the way, the first quarter of 2022 is, if you take exception of the first quarter of ’21, it is a strongest bottom line quarter that we had in a long time.
So just on the second quarter, again, the quarter 1 2021 was the outlier — for the second quarter of 2022, you might expect a much lower delta versus what the second quarter was in 2021. Because that was a quarter that actually was very much normalized already. So I think we will see something there in line and then it is dependent on how quickly does China come back online, et cetera, et cetera. But we should actually be relatively in line and volumize in the second quarter of 2021 was.
On the raw material pricing dynamics. As Maarten explained in his chart, we still see raw materials edging up. But we are ahead of the curve. So we are in fact, on the mountain, we now basically are ahead of what the slope is doing. So definitely in the second quarter, we want to continue that lead. In fact answering your question, we are still putting prices up here and there. In certain segments, we have significantly surpassed our raw material, inflation — variable cost inflation. In other segments, we still have to catch up and we still see the raw is going. So there is still a dynamic element of putting our prices up.
Now what do we expect for the raw materials now every time we talk about it, something happens in the world that actually throws it off a little bit. But unless there is another biblical plague coming in somewhere, what we do expect, we do see the signs for that in the second half of the year, you will see an easing of availability, also to some extent, because the macro economic activity may be less exuberant than people have found. And at the same time, you do see here and there are some inventories being built, actually affect also for Chinese suppliers, there is inventory in Europe and in Latin America that actually alleviate some of the bigger swings. And yes, we do get here and there the first supplier showing up to do, can we have a deal for supply et cetera, et cetera, towards us. So that shows that the dynamic we had in mind is actually evolving in the right direction. So we will definitely there, Charlie to answer your question is not only stay ahead of where we are, but we have all hands on deck to have the margin expansion that has been part of the industry. With wholesale, we think we deserve to have that happening in the second half of ’22 and then into ’23. Does that answer your question, Charlie?
Charlie Webb
So let me think about that raw material recovery of actually what you lost in 2021? Should we be thinking about that in over the next 12 months being the kind of period that you think is appropriate from today. So through to Q2 2023. Is that the right kind of timeframe, you would look to recover the raw materials you lost or the inflation you…
Thierry Vanlancker
Yes, I would love to say yes. And then probably Maarten would kick me on the table say be careful what you say. But to be very honest, there’s so many things that are happening. I mean, the COVID resurgence in China, the Russia situation, et cetera, that it’s not that easy to predict. But what we do believe and I think collectively here are very convinced about that the margin will start widening up as of the second half of the year. And we have all the systems in place, the ones that we had to get our pricing ahead of the curve is, we have all the systems in place to really have the margin expansion be as fast and as wide as it’s possible, so there we are fully convinced on it.
So I’ll would refrain to put a specific scenario around it. But let me put it this this way that we are more than guardedly optimistic for what the trend would be in the second half of the year. Now, we’ve also been saying that in the distribution type of businesses, we do expect to hold on to most of the pricing work that we’ve done, if not all of it, and then you have in the other 40%, more b2b and sometimes big B too big B there. I mean, it’ll become to maintain the margins as we have them right now, et cetera in line with what the raw materials do.
But there is a, I would say, Maarten, there’s a guarded optimism on what the trend line would be on the margin expansion as of the second half of the year.
Maarten de Vries
Yes. And I think there is a certain proudness on our side, on how we have executed this and that we are now at a situation to truly offset raw material as well as freight inflation. So we are — the machine is really is running very well in terms of margin management.
Thierry Vanlancker
Does that answer your question Charlie?
Charlie Webb
Thank you.
Operator
Thank you. Our next question is from Ms. Gina Fraser of Goldman Sachs. Ma’am your line is open. You may begin.
Gina Fraser
Hi, good morning, and thanks for taking my questions. The first one is just kind of looking for a big picture on what’s been going on in raw materials. So thinking, if I was an alien arriving from another planet, how would you explain what’s been going on in paints and coatings raw materials over the last two years? Is it fair to think that during 2020 and 2021, it was pandemic supply constraints that were driving chemical prices well ahead of the oil price, and now that the oil price is catching up? So are the risks going forward from here inflation from the oil price, but more likely, deflation from the supply chains easing?
And then, my second question is more medium term on performance coatings. We’re starting to see green shoots of investment. So lots of CapEx been coming through across European industrial sectors, especially in oil and gas. What would a pick up mean for Akzo’s performance Coatings business from a better European industrial CapEx cycle?
Thierry Vanlancker
Yes. Thanks, Georgina. Thanks for the questions. On the big picture, if you were an alien, and you came to the planet at this moment of time, you will probably get back into capsule and leave in a hurry, I would say, that’s another story. But on the raw material situation, I would say you’re indeed correct in 2020, I think all of our suppliers have winded down their capacity. And then we are somewhat surprised on the — as we all were probably on the rebound of the markets and the restocking and therefore then getting into force majeure, et cetera. So you’re right, Georgina, this two opposing trends, I would say in the raw material costs, one has been and that’s going to be in the second half of the year. One and I think we’re now at about 35%, 37% increase in raw material. We are somewhere between there. We aren’t even closer to 40%. So let’s say, the 40% for the sake of the argument, the 40% of increase in the raw materials has been scarcity based because that was not enough and people were desperate to get it. Either because it wasn’t produced or it couldn’t get on time through to logistics, to the buyers, in this case, the paints and coatings industry, that is the 40%. There, you really see and as I’ve said it before the availability of the products as the producer is getting much better. It’s now more the shipping and the inertia to get it to where it is. At the same time — so as that would be easing, yes, you will have an offset for us then as a negative sense, because the energy cost may be higher. But frankly, even in wild cases that would be in the high single digits to maybe low double digits impact, so that’s why it actually doesn’t change in our mind. The downward slope of the raw material cost curve, it does change the degree of the slope to some extent, depending on how wild oil would be doing. But the overwhelming scarcity cost in raw materials is so big that it has to normalize. And again, as I’ve indicated, we do see the first suppliers actually reaching out in that spirit on what they see happening for the second half of the year. Does that answer your first question Georgina?
Gina Fraser
Yes, that’s brilliantly helpful. Thank you.
Thierry Vanlancker
Yes, thank you. On the capital investments, not sure if I can give you an exact number on that because there are plusses and minuses of course, capital investment would have more of a bigger, first of all in coatings. But it would probably have an over dimensional impact in our protective coatings business, the way that you phrase your question, and there are pluses and minuses on that. We think it’s going to be a plus indeed on the investment cycle, plus the disentangling of some of these flows to bring it back much more into Europe. So that’s definitely the case, not only on fixed assets, but also on floating assets to bring liquid LNG et cetera to Europe, which by the way, is a [40] [ph] of our business. But at the same time, that will also be balanced with projects in Russia that simply are not happening anymore, and where we are, either we can’t or we don’t want to participate anymore in those projects. So that’s going to be counterbalanced. But I think overall, that would be a positive. I think I owe it to Georgina to Kenny to probably come up with more of an over quantification because I would be making up a number at this point of time.
Gina Fraser
Okay, great. Thank you.
Thierry Vanlancker
There’s also I think, one of the elements, I would like to say that the fact that that same time the Green Deal, don’t underestimate the positive impact on that bolt on our deco business. Again, we’re not an insulation material, but all of the improvements end up by somebody taking a brush or a roller to put it back into shape. And you see that happening specifically in places in southern Europe right now, in Italy is a very constrained market for deco because there is a real ongoing strength because of the Green Deal. And secondly, in what is electrical vehicles, the consumption of powder coatings in batteries, the wind turbines, et cetera our businesses that continue to do extremely well in that portfolio. Does that answer your question Georgina?
Gina Fraser
It does. Thank you.
Operator
Thank you. Our next question is from Mr. Chetan Udeshi from JPMorgan. Your line is open. You may begin.
Chetan Udeshi
Yes. Hi, Chetan here. Yes. Couple of questions. If I go back to the point Maarten made about the general OpEx inflation outside of raw materials and freight cost. Can you give us some idea of how should we think about that for second quarter, as well and possibly for full year 2021? And how should we think about that number, incremental investments, versus the 200 million of net cost savings that you guys liked during the recent investor update earlier this year by 2023, I think it was, that will be useful.
And the second question, do you have any visibility at the moment on how the mix might look for second quarter in general? Thank you.
Thierry Vanlancker
Chetan, thanks for your question. On the first one on the OpEx, I think Maarten can put a numbers around it. But I want to stress that the largest part of the OpEx –so by the way, in our targets for 2022, we had an increase OpEx coming out of the fields we had and part of it is what Maarten explained. Secondly, the run up in OpEx was very much in our supply chain and our manufacturing network to be able to get to some sort of service levels to our customers.
Now as in the second quarter, and that’s what I’m working towards. In the second quarter, we definitely want to start making a dent of it. But in the second quarter things are actually not very stable yet. So you have to do certain things or certain agreements with your customers before you can do that. So I think the biggest impact of the resetting it back to something that resembles normal is actually going to be more in the second half of the year. Now, Maarten, maybe you can put some brackets around that.
Maarten de Vries
Well, Chetan, exactly what Thierry says, I think you still see an impact in the second quarter. And certainly in the second half we get more to a normalized situation. In the meantime, of course, we are executing on all our deliver initiatives, which will also going forward should start to bring the required say things in. That’s partly in this year, and mostly also visible in 2023.
But to your point on the second quarter, we will still see some dynamics in OpEx given the situation we are in.
Thierry Vanlancker
Yes. And mix wise, Chetan, I think the mix will be for the second quarter, which is always a gamble between different businesses, different geographies and different distribution channels, with all the uncertainties that are in. But we do expect the mix to be somewhat similar to what it was, or largely similar to what it was in the second quarter of last year.
Chetan Udeshi
Thank you.
Operator
Thank you. Our next question is from Mr. Alex Stewart from Barclays. Your line is open. You may begin.
Alex Stewart
Hi, there. Good morning, thank you for the call, it’s always very interesting. Your slide on the volumes relative to 2019, slide eight in your presentation pack. So it looks like if I just add up the last two years, it’s roughly 8% higher in decorative paints, compared to 1Q ‘19. The equivalent figure in 4Q ’21 was roughly 3%. So at the end of last year, you were running volume 3%, higher than 2019 and in the first quarter was 8% higher than 2019. Can you talk about what the incremental step up was between the fourth quarter last year and the first quarter 20. That would result in that because that’s quite a meaningful improvements given Southeast Asia was still sort of down you are there. Any comments now would be interesting? And then, also, I know, it’s a very crude calculation. But if I take your volume chunk in EBIT bridge and divide it by the volume chunk in the revenue bridge, it looks like the drop through was a little over 30%, which is considerably lower than what you’ve talked about in the past. I’d be interested to know if there’s any specific factors driving that and that’s the way you started to continue would be [indiscernible].
Thierry Vanlancker
On the second question, maybe, let’s say because it was not easy to understand, but the second question, I think, is just, Maarten, if you could?
Maarten de Vries
Yes. The second question, nothing special to mention here to be honest. But once again –
Thierry Vanlancker
I think it’s also because of the pressure of course, the margin pressure there of course, where the drops will then get lower than because the quality of the business given the raw material situation is just lower. So I think that explains it, I would say.
Maarten de Vries
Because we are again, if you compare to last year, Q1, we are comparing to a quarter which was, which had a number of dynamics, but the pricing for raw material was still pretty normal. And now in this corner, we have a completely different situation, of course, in terms of pricing versus raw material, but also from a volume perspective, specifically in deco as we mentioned earlier.
Thierry Vanlancker
Now your first question, was that referring to paint?
Alex Stewart
Yes, sorry, decorative paint. So if I look at Slide 18, in your deck you’ve given volumes of 2019. If I just compare the Q4 ’21, and the Q1 ’22, it looks like there was a big step up in volumes relative to 2019. I’m trying to understand what’s behind that. But yes, just in paints I’m talking about.
Thierry Vanlancker
Yes. Okay, so first of all, the paints indeed is on roll and in fact we are trying desperately to indicate that no, after the COVID, we will not going to fall off a cliff because of the dynamics. I think we think that when COVID was going to be over, you should not underestimate that the rest of the world, excluding do it yourself in Western Europe was significantly down because of COVID. So if I go around the world, China is on a complete roll. I mean, that’s we saw that in the charts that we have. In fact, that business if I look at where we are, our premium business, Dulux business up 55% in the first quarter versus 2022, versus the first quarter of 2021.
By the way, volume wise, we’re getting very close to where we were in 2018. But it’s not anymore with fillers or with non-value adding products is actually at high margin product. So that team is on a roll, can’t say enough on what they do there in growing Dulux. So China is a big factor on it. The same as in Southeast Asia, India, in fact, we also is kind of a little bit in the shadow, but it is I would say the geographic expansion number two, so significantly ups.
And if I then go back, Brazil and Argentina have been doing well, but that’s probably more pricing margin. And I would say more gradual increase versus 2019 in volumes, they’ve gained market share, but that market has been ups and downs. That is typical in those segments. If you go to Europe, and I think we put the line in there, our EMEA business if you go back to 2019, has been constantly growing, and has been gaining market share in key markets. And I think we’ve commented on that before, be the UK, be it Benelux, bet it Southern Europe. We’ve been gaining market share. It’s step by step because it’s a distribution business. But it’s actually been doing quite well.
The other element in there, which is minor, if you look at the global scale, and that is a slight impact of M&A, but that’s probably more on a percent level globally more than anything else. Does that answer your question?
Alex Stewart
Yes, thank you, Thierry. That’s really helpful.
Operator
Thank you. Our next question is from Mr. Peter Clark from Société Générale. Your line is open. You may begin.
Peter Clark
Yes, good morning, everyone. It’s a question for you, Thierry. The first one, you seem very confident on demand, if I look at European deco, no down trading on DIY. Just running on the trade business as well, I presume you’re still pretty confident with the momentum you’re seeing in markets like the U.K. where clearly there’s an inflation bomb going off, basically, but the trade paint business there. And then you mentioned China a lot, obviously and the strategy seems to be more focused, obviously, around these 37,000 outlets you now have through independence, et cetera.
Just wondering on the Dulux stores you used to have there used to have a handful of stores that were sort of procedure Dulux stores in key locations. Just wondering if you still have those and the number of those and the sort of strategy around that as well. Thank you.
Thierry Vanlancker
Yes, Peter, okay. On the inflationary impact of the market, we don’t see that and we don’t, if we talk to our channel partners, they don’t expect in fact, a significant buffer. So we don’t see any down trade because we also see not reducing. In fact, the trade business is doing quite well. And that was the one where there was pent up demand, by the way, because that has been an COVID was actually at a slow burner on there. So all of the partners we have in there all of the projects that are ongoing, and you’re probably specifically you’re talking about Europe, that seems to be ongoing.
I would like to point out though, that in the investor updates, when referred to the market growth, it was one of the reasons why we took a haircut on the [indiscernible] numbers. In fact, interestingly enough, that consultant has reduced the numbers, they’re still above where we had our basis for our review, because you just could see things happening. So that is very, I mean, I would say the forecasting and the understanding of the market, I think was there to see that it’s — that was and could be a potential issue in that now.
On the inflation, we don’t see that, in fact, we went back to this a bit of a weird situation when inflation by the way, the inflation bomb is not only in the U.K., I’m afraid it’s across many regions. But that has had very little to no impact to be honest on the deco business in the past. So we’ll see if this is also happening. As you might suspect, we think very close on that we don’t really necessarily expect it to have an impact.
Secondly, on China, we do have the flagship stores. The problem, I think in the past was that the flagship stores, five, six years ago were the ones that the business was catering towards. But that was only a minor part in the cities, we still have those and they actually act very well, I would say more as an Image Builder. And as a, I would say a PR positioning of the products as a premium/European product, especially because the team in China has done an extremely good job to position it as the wellbeing brand, the one you can trust for indoor qualities, et cetera. So they have a whole range of products that are doing extremely well in the market on that.
So we’ve done so that we kept, they are doing as before, I would say the business has kept up pretty well. But of course, the big changes that we’ve we showed the 55% I’m talking about by the way, if you go back to 2019, our Dulux brand is up almost 35% versus where it was in 2019. We have mid-tier brands they are up about close to 20% versus 2019 that has come much more from the geographic spread that is still ongoing.
And here, this is, Peter to summarize, this is now growing the business but with the margins that we deserve. So it’s actually — it’s a very invigorating story. Unfortunately our colleagues are now sitting at home in China because of the lockdown but I’m sure that once they get released literally they will continue to pass on that. So it’s a combination into tier one tier two cities, it’s still more flagship stores, et cetera. And then outside is really getting the distribution geographically expanded. Does that answer your question, Peter?
Peter Clark
Yes, it does. Thank you. And all this is closing in the next week or so I think, is that right [indiscernible] the deal?
Thierry Vanlancker
I would say any day now, Peter.
Peter Clark
Okay. Thank you.
Operator
Thank you. Our next question is from Mr. Jaideep Pandya from On Field Research. Your line is open. You may begin.
Jaideep Pandya
Thank you. The first question is on 2023 actually Thierry on a 2 billion EBITDA number. And a lot of focus really on marine and protective, could you just tell us like, what is happening when you think about your order book in marine and protective with regards to the recovery, given pretty much all of your customers, be it LNG carriers or dry bulk carriers, or what have are making ridiculous free cash flow yields, drydocking has been postponed in every part possible because of shortages. So what is with related to the pent-up demand on the maintenance side? And then, what is related with the new build deliveries in 2023. So, just want to understand, what do you see in terms of your outlook for marine and protective in 2023? That’s my first question.
And the second question is just to really understand the raw material shortages that you were describing, firstly on what materials are still short, I mean, you’ve heard a lot about the silicon chain PVDF, for instance. So, I know you and your peers like to talk about these knickknacks raw materials, which we contract, but could you just help us at least name some of these raw materials? So for us to really understand when will the situation improve because you obviously speak to us only four times a year.
And the second related point to that question really is, in your full year update for Q1 guide, you gave a raw material range, which was significantly higher than what you ended up with, which is interesting, given oil prices have gone up quite materially since then. So what is it that why raw materials actually came in lower than what you originally thought, at your full year results for your Q1 guide? Thanks a lot.
Thierry Vanlancker
Yes. Let me try to get to the questions Jaideep. On marine and protective, the guarded optimism is there definitely for 2023 that business effect has been I mean, if you talk Russia, that’s effect full frontal hits on the business effects that was in Russia, but on the pipeline for new shipbuilding for drydocking, et cetera, that’s definitely there. Again, the more I would say the financially more attractive business is the drydocking, and then the protective business as such. So all the arrows are upwards. As we said before, there’s probably more on the second half of the year, et cetera. And then you have to subtract part of the Russian business, but there is a significant positive.
It’s also by the way, the business that has been the most impacted with raw material issues because it is the business that has the most specialized products that often can only be made in one or two plants around the world. And therefore, if you have a dual logistics situation, getting the raw materials in or getting them the final product else has been a real ordeal in the first quarter. So there is all these offsetting things, but directionally, there is optimism for it.
On the raw materials that are impacted, I will have to disappoint you Jaideep because it is mostly in the knickknack fields. But having said that, it is yes, you have like the ones you mentioned, the PVDF, et cetera, the silicon cycle hits us a bit less to be honest, because it’s less of a direct impact. But actually it’s less and less an availability situation than getting it from A to B situation. And there it’s probably better to talk about products that have to come from Asia into Europe is improving, but it’s still a struggle to get it on time in the place that we are. So it’s not so much that we don’t get it. It could be weeks delayed. But having said that Chinese suppliers are putting some inventory in place to try to alleviate it. And then secondly, I would say North America and that’s across the board independent of the chemistry is actually a real ordeal to get either our suppliers to get the raw materials or getting them the raw materials to us. So that continues to be the most constrained situation.
So it’s difficult probably to mention you chemistry because it’s frankly whack a mole as they say in the U.S. It’s now you have it and then there was another shipping thing that happens and now you don’t get it. Now it’s a disappointing answer I would say on that. Your third question…
Maarten de Vries
The third question is on the — what we projected early on for Q1 on the raw material impact versus where we landed. And indeed, we landed below the kind of the bottom of the range. I think there are two elements here. One element is basically [indiscernible], because we’ve seen more supply constraints in the first quarter. And we’ve been talking about that. On top of that, we had, of course, the Russia Ukraine situation, as well as the COVID situation in China. So that volume elements, of course, also translates in the absolute amounts from a raw material perspective, as well as a slightly different mix. So that’s the absolute number of raw material impact, just below the bottom end of the range, which we mentioned.
Thierry Vanlancker
Does that answer your question Jaideep?
Jaideep Pandya
Yes, it’s just sorry, but just on, apologies for zooming in so much on marine and protective, but just want to understand, like you’ve been guardedly optimistic for a few years now. But like, if we go back to the peak of the previous cycle, which was, I guess, 2015-16? Do we think that the market dynamics today warrant that we will see another peak in the next, sort of 18 to 24 months in your vision? Or will we remain guardedly optimistic forever?
Thierry Vanlancker
I mean, do we turn it into a religious program? No, that’s not the plan. To be honest, the peak in 2015-2016 was artificial and effect, and it came crashing down because there were too many ships that were in the catching up. So we’d be surprised if it goes back to 15-16 levels. But Jaideep, I think your comments are totally justified, just like you, I think we would want to see a significant trajectory change as of the second half of this year. And I think, yes, 2023 should be the best year since 2016, let me put it this way. But I think it’s still going to be somewhat intermittent them.
Now to be to be fair to the marine and protective business. COVID has kept ships out of harbors two years in a row. Russia comes in, does the raw material situation. So that is a business that has been had a blow on the head in the bottom and on the chin in addition to that so. But we do expect to see a significant trajectory change as of the second half of this year, so that it doesn’t become a religious program, or it doesn’t happen. Thank you.
Jaideep Pandya
Thanks a lot.
Operator
Thank you. Our next question is from Mr. Gunther Zechmann from Bernstein. Your line is open. You may begin.
Gunther Zechmann
Hi, good morning, everyone. Just a quick one, following on from the raw material cost discussion, please. Thanks for giving the disclosure on pricing and the exit run rate out of Q1. Could you also share the exit run rate out of Q1 for the cost side of things, please? Thank you.
Maarten de Vries
You mean for the raw material cost?
Gunther Zechmann
Yes, indeed. If you certainly like to include freight cost in that as well, like you can split it either way.
Maarten de Vries
We normally split it but the raw material, we should take approximately 40% increase. But then as far as 2020. And I think on freight and that’s a good question that you ask it. The freight inflation, we are looking at the moment is a 10% rate inflation. So definitely increase of the inflation and freight that is why we have in the discussions with the commercial teams really included this in pricing and making sure that we offset the total basket.
Thierry Vanlancker
Gunther, maybe one additional comment. The graph on the left hand side on chart 14 that gives you the increase of raw material costs, et cetera. It’s not a pictogram it’s actually an actual graph. So that probably gives you a bit of an idea of what exit rates are and what expectations are for the second quarter. Because I think that was your question also around, how was it going in? And how is it going out? So hopefully that gives you a bit of a picture. What you see if you go back to that one. You see indeed that the oil and gas situation energy costs that gave this little increase in the first quarter. And that is now more or less absorbed. And then, that gives you probably a good view on how this trend is.
Gunther Zechmann
Yes. And of course the right-hand chart is an average and the left-hand chart gives you an idea of the exit run rate. Maarten, could you just remind us what’s freight cost is percent of your cost of goods sold is nowadays please?
Maarten de Vries
We have not disclosed this. And I don’t want to go in all these details. But again, the materiality of the freight inflation and the impact, makes it as such that we have included this now to make sure that we offset also this piece.
Gunther Zechmann
Okay, thank you both.
Operator
Thank you. Our next question is for Mr. Laurent Favre from BNP Exxon. Your line is open and you may begin.
Laurent Favre
Thanks. Good morning, and thanks for squeezing me in. Two questions, please. The first one on pricing. Are you given, all that has been said on freight, for instance? Are you now looking to add surcharges to pricing? And was that part of I guess, Q1 already? And then, the second question is on Orbis closing at any day now, should we assume a significant margin dilution from that deal and in particular, should we assume that you have a lot of work to do on pricing? Is the obvious to be less proactive as actually been over the last year, as you’re set in inflation? Thank you.
Thierry Vanlancker
Laurent, good question by the way. It’s always a bit of guess when you get down who it is because you name it seems to be pretty giving all sorts of cause of creativity. But on the surcharges, we have not implemented surcharges so what you see is price. And that there’s always a choice how you do this. So we chose to do price because we thought there was a better route. And I would assume that what we will be doing this quarter will be all price and not surcharges just on just to make that clear.
Secondly, on Orbis, yes, it’s imminent. To close the assets in fact, it’s also what — they actually publish their numbers? So it’s a listed company in Colombia. We do not expect that to be a dilution of any significance in our Latin American market. Those have been pretty. Apparently, from what we’ve seen, they’ve been pretty active and pretty disciplined on their pricing, too.
Laurent Favre
Excellent. Thank you.
Operator
Thank you. [Operator Instructions].
Kenny Chae
I think we’re almost close out of time. So if there are no more calls, anyone who does have a question, you can reach out to the investor relations team, so please do so. And with that, I think we can conclude the call.
Operator
Thank you. And that concludes today’s conference call. And thank you all for joining and I was going to turn the call in. Thank you very much.
Thierry Vanlancker
Thank you very much.
Maarten de Vries
Thank you, everybody.
Kevin Chae
Thank you.
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