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Weak Q3 Spurs New Plan at AkzoNobel

Thursday, October 20, 2011

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AkzoNobel delivered both a grim diagnosis and a treatment plan Thursday (Oct. 20), simultaneously unveiling a thin third quarter along with a “performance improvement program” to turn the numbers around.

The world’s largest paint and coatings company acknowledged its second consecutive difficult quarter with a third-quarter report that showed the company eking out just a 5 percent gain in revenues—mainly from higher prices.

Images: AkzoNobel

Coil coatings provided a rare bright spot in AkzoNobel’s gloomy third-quarter report.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) decreased 12 percent overall, to €507 million (about $696 million US) from €574 million (about $788 million US) in 2010.

Return on investment declined, and the company continued to take hits from the continuing global economic slump and skyrocketing raw material prices, particularly in the Decorative Paints business.

Second Tough Quarter

“We do not expect the macroeconomic situation to improve quickly,” said CEO Hans Wijers.

“Although our top-line revenue growth throughout the [third] quarter was relatively strong, we have seen the macroeconomic situation worsen…. We have also not yet fully offset the unprecedented raw material cost increases.”

Still, Wijers added, the quarter showed “good progress,” especially in price increases.

The Q3 report followed a second quarter so disappointing that AkzoNobel had paved the way for that quarter’s report with an announcement designed to lower expectations.

Turnaround Rx

But Thursday’s ailing numbers came with a stiff dose of medicine to reassure investors and shareholders: a comprehensive three-year plan to improve performance and deliver €500 million ($687 million US) in earnings in 2014.

The new performance plan is comprised of 20 “master plans” that include more than 100 detailed initiatives in Supply Chain and Sourcing; Research and Development; Shared Services for Finance; Information Management; and Human Resources.  

The third-quarter tale of the tape came with a plan for improvement.

AkzoNobel said the plan would “strengthen its competiveness, enhance its ability to grow, simplify its support structures, and reduce its cost base. The program will restructure underperforming parts of the portfolio, transfer best practices and standardize, as well as simplify key processes.”

Decorative Paints Europe and North America and Performance Coatings’ Wood Finishes and Adhesives business are all targeted for restructuring.

The company’s Executive Committee, established in January, will oversee the program, which will cost about €425 million (about $583 US). Progress reports will be issued every six months.

“This program will ensure that our growth ambitions are delivered at or above the mid-point of our 13-15 percent EBITDA margin guidance,” said Wijers. “Our strong fundamentals, commitment to deliver and this program give us confidence in the future.”

Q3 Business Performance

While Decorative Paints struggled with a 25 percent decline in quarterly EBITDA, the Performance Coatings and Specialty Chemicals segments held on to make modest gains in the third quarter.

Led by strong growth in Industrial Coatings, Performance Coatings posted a 5 percent increase in revenue for the quarter and an 8 percent increase for the first nine months of the fiscal year.

Demand in all residential construction-related businesses remained weak.

Revenue development also remained positive in Specialty Chemicals, with a 6 percent gain for the quarter and a 10 percent gain for the year to date. Volume declined slightly, but year-to-date was still 2 percent ahead of last year. The strength in manufacturing and industrial production, particularly in Asia and North America, resulted in stable demand across most business lines, the company said.

Segment Results: Marine, Protective, Industrial

Revenue for Marine and Protective Coatings was up 3 percent from last year, with flat volumes and negative currency. Marine Coatings volume levels fell as new construction output at the major yards continued to decline, along with a slow quarter for Coastal and Navy, partially offset by increase in Deep Sea Maintenance activity.

Protective Coatings’ strong growth continued, with Heavy Industry and Oil and Gas markets experiencing good rates of growth across all geographic regions, particularly in the Americas.

In Protective Coatings, launch activity is underway for Interchar 2060, a thin-film intumescent fire protection product.

One bright spot in the third quarter was Industrial Coatings, which saw 17 percent revenue growth over last year, due to higher volumes, higher prices and impact from an acquisition—offset by negative currency. The main growth driver was Coil Coatings, which continues to be strong in all regions, especially in the Americas.

AkzoNobel also noted that it had finalized the acquisition of Schramm Holding AG this month.

‘Perfect Storm’

“This performance improvement program represents a major change in the way AkzoNobel is run and managed,” said Wijers, who will step down as CEO next year. “It is a logical next step which will leverage our scale to support the delivery of the growth strategy that we announced in September 2010.

“We have a coherent portfolio of leading businesses in paint, coatings, and specialty chemicals, and delivering further operational and functional excellence will be a source of value creation across our company. 

“The perfect storm of unprecedented raw material price inflation, in combination with the effects of the financial crisis, only adds to our sense of urgency to capture the benefits of the program.”