Akzo Cost Savings Propel Profit as Rivals Look at Europe
Stock Chart for Akzo Nobel NV (AKZA)
Akzo Nobel NV (AKZA) beat analysts’ profit predictions for the first time in a year, with Chief Executive Officer Ton Buechner’s savings plan gaining traction as U.S. competitors test the Dutch chemical maker’s dominance in Europe.
Akzo rose the most in two years after reporting third-quarter earnings before interest, taxes, depreciation and amortization gained 7 percent to 456 million euros ($624 million). Profit exceeded the 444 million-euro average of six estimates compiled by Bloomberg. Markets remain challenging, and Akzo’s performance will largely be driven by reorganizing, Chief Financial Officer Keith Nichols said today.
“It’s going to be through a lot of self-help measures rather than a recovery in the market” that earnings will grow, Nichols said on a conference call with analysts.
Six years after the $17 billion purchase of Imperial Chemical Industries, Amsterdam-based Akzo is tackling the resulting overlaps and inefficiencies that have led cash generation to lag behind peers such as PPG Industries Inc. (PPG) Buechner is marking his second year in the CEO post by extending earnings-improvement programs as Pittsburgh-based PPG and Minneapolis-based Valspar Corp. look to expand in Europe.
Akzo, which supplies coatings for Airbus SAS’s double-decker A380 airliner, jumped as much as 9.5 percent to 53 euros, the biggest intraday gain since September 2011, and was trading up 9 percent at 1:06 p.m. in Amsterdam. Prior to today, the stock had declined 3 percent this year. By contrast, PPG has added 30 percent, buoyed by a U.S. decorative paint operation bought from Akzo for $1.05 billion after the Dutch company abandoned a push into that market.
Since taking the job, Buechner has replaced senior executives to help push his agenda and accelerate a 500 million-euro efficiency program’s deadlines by a year. Earlier this month, he assembled more than 200 managers for a two-day meeting where he pressed the need for change and detailed his vision.
“The proof is going to be how the next few quarters pan out and delivery of our 2015 targets as a first major milestone,” Nichols said today. “It’s getting our cash generation stronger, getting back to cash positive, improving our performance relative to peers, which is clearly something that these results begin to hint that it’s having some effect.”
Akzo is streamlining its manufacturing network, with production of organic peroxides being transferred from a site in Deventer, Netherlands, to other facilities. Such measures helped lift the return on sales to 8 percent in the third quarter from 6.3 percent a year earlier.
Additional savings measures are planned, and Akzo will update investors in February on how those will boost earnings, Nichols said. Cash inflow from operating activities improved to 552 million euros in the third quarter from a year-earlier 460 million euros.
“You mustn’t get too excited too quickly, as the economic backdrop remains challenging across the globe,” Nichols said in a phone interview. “The tailwinds aren’t going to be there.”
The Dutch company is shouldering added expenses as construction markets struggle to recover and U.S. companies, buoyed by upbeat home markets, look further afield for growth. Valspar won a contract last year to supply tinting machines at U.K. home-improvement chain B&Q, replacing Akzo’s equipment. Valspar acquired Inver Group this year to tap markets for industrial coatings in Italy, France, Germany and Poland.
PPG won’t “shy away from Europe” and will consider acquisitions, given there are signs that the deterioration in markets is abating, Chief Financial Officer Frank Sklarsky told analysts on an Oct. 17 call. Demand should stabilize and turn the corner in 2014, he said.
Takeover opportunities in the region’s paint industry may include a possible disposal involving the Materis business that Paris-based private-equity firm Wendel SA (MF) has owned since 2006.
Akzo’s brands and market share in markets such as the U.K. and the Benelux region are strong enough to withstand any encroachment, and the Dutch company is pursuing growth in Russia and Turkey, Nichols said.
Valspar’s expansion into Europe is small in scale, though Akzo is watching developments closely, the CFO said.
“We can defend our position, and you can see that coming through in these results,” he said.
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