Akzo First-Quarter Profit Drops on European Paint Volume

Akzo Nobel NV, the maker of specialty chemicals and Dulux paint, will look to make more cutbacks to offset a slump in Europe that’s left an existing 500 million-euro ($653 million) savings target outdated.

Markets continue to be weak and Chief Executive Officer Ton Buechner today pledged to respond by tweaking efficiency measures to reflect the current market reality.

Shares of Akzo fell the most in almost two months today after reporting a drop in first-quarter profit. The prolonged economic slowdown in Europe is leading decorators and homeowners to switch to cheaper paints and private labels sold by home-improvement stores, Chief Financial Officer Keith Nichols said. While recovering, margins are still short of paintmaking peers such as Sherwin Williams Co., analysts said.

“There is definitely room for more improvement, particularly when you compare Akzo’s cost base to its peers,” said Micha Tiekink, an analyst at Rabo International.

Akzo shares dropped as much as 5.3 percent in the Dutch capital, the most since Feb. 21. They traded 3.7 percent lower at 45.28 euros as of 1:31 p.m.

Buechner, now one year at the helm, is accelerating an efficiency drive initiated by his predecessor in 2011. The plan -- which involves improving software systems, grouping together marketing activities and cutting back on raw materials -- is one year ahead of originally scheduled.

The weaker demand seen in 2012 is continuing and Akzo isn’t budgeting for a quick rebound, Nichols said in an interview on Bloomberg Television today. The onus is on management to unearth additional cutbacks to salvage profit, analysts said.

Promotion Campaigns

Akzo’s paint operation includes key brands including Dulux and Sikkens that attract a price premium now at odds with wider market as decorators look to make savings. Nichols said marketing and promotion campaigns are being employed to bolster sales and capture customers who traded down to cheaper products.

First-quarter operating profit fell 8 percent to 217 million euros as plant closures and jobcuts helped bolster margins. Analysts predicted 212 million euros. Sales dropped 6.5 percent to 3.47 million euros, compared with an estimated 3.67 billion euros.

Buechner set new targets in February, including a 9 percent operating margin and a 14 percent return on investment by the end of 2015. He dropped a goal to increase revenue to 20 billion euros by 2015 in a much awaited strategy plan after he took four months of sick leave for exhaustion.

‘Living Program’

“It is a living program, it’s not static,” said Buechner, who contributed to the call remotely from a performance coatings management meeting.

While opting to sell Akzo’s struggling 137-year-old Glidden brand to PPG Industries Inc., the CEO has yet to make an impact on the share price. Since unveiling his vision for the company, the shares have dropped 9.7 percent, excluding today’s decline. The Dutch benchmark AEX Index is down 2 percent.

The first effects from the restructuring program are already visible with an operating-profit increase at the company’s decorative paints division in Europe, Tom Muller, an analyst at Theodoor Gilissen Bankiers with a hold recommendation on Akzo, said by phone.

“Slowly but surely, you’ll see some effects from the cost initiatives,” Muller said. “Still, they have to deal with the reality of tough conditions in Europe,” Muller added.

Before it's here, it's on the Bloomberg Terminal.