Akzo Profit Beats Estimates as Savings Drive Gains Traction

Akzo Nobel NV, the Dutch maker of chemicals and Dulux paint, reported third-quarter profit that beat analysts’ estimates as costs to improve its household paint business eased and planned savings began to trickle in.

Earnings before interest, taxes, depreciation and amortization gained 7 percent to 456 million euros ($623 million), the Amsterdam-based company said today in a statement. Analysts in a Bloomberg survey estimated 444 million euros, on average. The shares rose 4.9 percent to 50.8 euros in Amsterdam at 9:03 a.m., the most since December 14.

Six years after the $17 billion purchase of Imperial Chemical Industries, Akzo is tackling the resulting overlaps and inefficiencies that have led cash generation to lag behind peers such as PPG Industries Inc. While Chief Executive Officer Ton Buechner is marking his second year with programs to boost savings and streamline operations, Akzo is having to shoulder extra costs as construction markets are still struggling.

’’Market conditions remain challenging but we see that volumes are stabilizing,’’ Chief Financial Officer Keith Nichols told journalists on a call.

Shares of the maker of chlorine, cosmetics and coatings for Airbus A380 planes, have declined almost 3 percent this year before today, giving it a market value of 11.7 billion euros. By contrast, Pittsburgh-based PPG has added 30 percent, buoyed by recovering construction markets in the U.S. and the integration of Akzo’s U.S. decorative paint operation, bought for $1.05 billion in December 2012.

Savings Delivered

Buechner has replaced senior managers to help push his agenda and accelerate the efficiency program, expected to cost 300 million euros this year. Management is budgeting for 160 million euros in expenses in the fourth quarter, Akzo said, reiterating that annual operating profit is unlikely to exceed 908 million euros.

The so-called profit improvement program is expected to generate an Ebitda boost of 500 million euros by the end of this year. Cash inflow improved to 552 million euros in the third quarter from 460 million euros.

“The actions we have taken to address the challenges our businesses are facing are starting to have a positive effect,” Nichols said.

Akzo is streamlining its manufacturing footprint, with production of organic peroxides being transferred from a site in Deventer, the 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.

Trends Reversing

A strengthening euro led quarterly revenue to fall 5 percent to 3.78 million euros. Asian markets led growth in decorative paints, with sales advancing 2 percent. The company is investing about 44 million euros on a new facility in Chengdu to tap demand in the west of China.

“The good news is that volumes of decorative paints have been higher in all our regions,” Nichols said. “We’re making clear progress in getting costs down, helping the profitability.”

Pockets of growth, such as airplane coatings, haven’t been sufficient to counter weakened construction, automotive and marine markets. Customers have opted for cheaper paint brands within Akzo’s range, though the effect of downtrading has now stabilized, Nichols said.

Akzo has also suffered from inflated raw-material prices as well as currency costs in markets including Latin America and India. That trend is also starting to ease, Nichols said. On average, input costs that include titanium dioxide used as a whitener in paint should be slightly lower in the fourth quarter, on a year-on-year basis.

“We expect continued pricing power from all three segments to enable gross margin expansion, a new CEO to drive change, and the potential for volume growth from emerging markets or a European recovery,” Jeremy Redenius, an analyst at Sanford C Bernstein in London, said in a note.

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