Squeezed hard by skyrocketing raw material prices and a still-soft Western construction market, AkzoNobel is warning shareholders not to expect much of its second-quarter performance.
In a rare corporate statement designed to lower expectations, the world’s largest paint and coatings company said Monday (June 27) that its second-quarter report, due out July 21, “will be adversely impacted by ongoing challenging trading conditions and one-off factors.”
|Low expectations came from AkzoNobel’s high-rise headquarters on Monday.|
Raw material prices have increased about 20 percent year-over-year, the company said, and “sequential second-quarter contribution margins are expected to be flat compared with Q1.”
Maintenance, Markets Cited
The Q2 bottom line will also take a hit from “continued softness of demand in our mature [North American and European construction] markets and prolonged maintenance stops within Specialty Chemicals,” the company said.
The upshot: AkzoNobel is predicting an EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of about €550 million (about $785 million US)—an increase from the €437 million ($623.7 million US) of the first quarter, but a sharp decline from the €614 million ($876.3 million US) reported in the same period last year.
In the first quarter, the company noted that EBITDA improved by 10 percent for the quarter, “although overall EBITDA margins declined slightly compared with Q1 2010, reflecting the lag effect of pricing and margin management actions to compensate [for] raw material price increases.”
The company boasted strong first-quarter numbers overall and expressed confidence that higher prices and internal belt-tightening would help preserve its profit margin.
Monday’s statement indicates that that strategy has not been totally successful.
AkzoNobel said it expected full-year 2011 EBITDA “to be at least in line with” that of 2010, “assuming no further deterioration in economic conditions.” The company previously said it aimed to grow EBITDA and revenue by 5 percent this year.
“We are on track in terms of our medium-term growth ambitions,” said CEO Hans Wijers, who is due to step down from the company in 2012. “Our revenues for the first half will illustrate this, as they are expected to be ahead of full-year guidance, driven by positive price and volume development.”
He added: “Ongoing actions to mitigate raw material price inflation, company-wide cost containment actions, our continuing successful progress in turning around the performance of US Decorative Paints, and continued encouraging growth in high-growth markets will all help mitigate the weaker-than-expected market conditions.”
The profit warning sent AkzoNobel shares tumbling to their lowest level since December and weighed on Clariant, Kemira and BASF and other chemical producers, Reuters reported.
Investors have questioned AkzoNobel’s ability to pass on higher costs to consumers, Reuters said.
Yet, despite the “tough” environment, the company will continue to do so, AkzoNobel Chief Financial Officer Keith Nichols said on a conference call Monday.
Nichols said he expected the increase in raw materials prices to ease off toward the end of the third quarter.