Akzo Puts Savings First to Protect Profit From Slowdown

Akzo Nobel NV Chief Executive Officer Ton Buechner said it’s too early to work on a blueprint for growth as an extended market slowdown makes it critical to first execute savings to meet profit targets.

“There will be a next leg, but at this point in time I want the focus of the employees to be on the self-help case,” Buechner said in a phone interview. “By the time we reach our targets in 2015, and the direction is clear, people will ask for the next leg.”

Buechner has used town-hall meetings at many of Akzo’s 250 locations to convince workers of the need to improve efficiency. The Amsterdam-based maker of Dulux paint, airplane coatings and cosmetic ingredients today announced an extra 120 million euros ($157 million) in revamp costs this year, including 350 job cuts at a functional chemicals unit, after a slowdown spread from southern Europe to the Benelux area.

Akzo shares today fell the most in two years after the company predicted a fall in earnings in 2013. Buechner, who became CEO in April 2012, has marked his first 15 months in charge with an exit from the U.S. decorative-paint market and a pledge to adapt and bring forward a 500 million-euro savings goal by a year. Markets remain tough with no recovery in sight, meaning additional measures are needed to reach 2015 goals, including a return on investment rate of 14 percent, Buechner said.

Harder Task

The additional measures are being “costed out” and the ratio to the financial benefits generated will be “something a bit below one, with a timing delay,” Buechner said. “The easy restructurings are done, so it gets tougher, but overall the adaptations are necessary so we get on with it.”.

Akzo reported a 14 percent decline in second-quarter earnings before interest, taxes, depreciation and amortization to 474 million euros. Analysts in a Bloomberg survey estimated 516 million euros. Sales fell 4 percent to 3.87 billion euros, in line with estimates, with an improvement in return on sales on a six-month basis.

Akzo fell as much as 9 percent to 43.05 euros, the biggest intraday drop since June 2011, and was trading down 8 percent at 2:24 p.m. in Amsterdam.

Buechner is updating a savings plan inherited from his predecessor, Hans Wijers, who first outlined the project in late 2011 amid a surge in raw-material costs, including titanium dioxide, used as a white pigment in cosmetics and paint. Costs of the program -- predicted to total 325 million euros -- have been spread across the performance-coatings, decorative-paint and specialty-chemical divisions.

Limited Disposals

“We’re only six months into our updated strategy," Buechner said. “If anything the second quarter has confirmed that this is the right strategy.”

Akzo is getting final bids for a building-adhesives business trading under the Schoenox brand with annual sales of about 200 million euros, people with knowledge of the situation said in May.

A sale would follow the disposal of the 138-year-old Glidden brand to U.S. competitor PPG Industries Inc. for $1.05 billion and the divestment of decorative paint shops in Germany. Yet those two deals don’t mark a trend for disposals, Buechner said.

Having replaced managers at some weaker-performing businesses, executives are focusing on operation improvements, though “they can certainly come forward if they feel other needs,” he said.

Mix Problem

Rather than a big strategic growth plan, innovation and improvements to areas such as distribution will be drivers for Akzo, he said. Research and development centers will be merged into hubs as the company rolls out new products such as drag-reducing coatings for ships and planes and paint with anti-bacterial properties for hospitals and clinics.

“While we appreciate the company’s move to the front foot with regard to its cost-cutting measures, in our view this will only have an impact on profitability if Akzo fixes its problem of deteriorating product mix,” Jaideep Pandya, a London-based analyst at Berenberg, said in a report to clients.

The CEO’s approach has prompted a mixed response among analysts, with Barclays upgrading Akzo stock to equal-weight from underweight this month while Kepler Cheuvreux cites the company as its “top avoid stock.” In contrast to Akzo’s decline, shares at U.S. competitors have gained, including a 16 percent jump this year at PPG Industries.

Worker Feedback

Earnings at Akzo have been held back after a slowdown in construction spread from southern Europe to the U.K., Buechner said today. The building and infrastructure industries account for about 45 percent of Akzo’s business. So far, customers have been buying cheaper paints within the company’s range, rather than switching to private labels. Factories can adjust production to produce premium or cheaper brands.

Akzo also saw growth slow in India, Brazil and China. Buechner said he spent a week in China earlier this month and found that, although demand for products locally remains robust, companies that export goods to Europe have cut orders.

At the regular town hall meetings, which attract between 60 and 250 people, Buechner said the biggest chunk of time is spent on the question and answer session after his presentation, whether in the U.S. or China.

“It’s also fun: if you bring a strategy closer to the people, you see the understanding, the shoulders that people want to put underneath it,” he said. “It’s a very motivating factor. That’s why I am doing so many of them.”

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