13:40 PM | February 20, 2013 | Ian Young
AkzoNobel has accelerated its previously announced restructuring program, and announced a new set of financial targets to be achieved by the end of 2015. The company also announced a strategy that focuses on end-user markets, operational excellence, and sustainability. It says that the strategy builds on the company's leading market positions in mature and high-growth markets.
AkzoNobel says it aims to achieve the full annualized €500-million ($668 million) Ebitda benefit of its performance-improvement program in 2013, 1 year early. The program, announced in October 2011, delivered annualized Ebitda gains of €250 million in 2012, ahead of the expected €200 million. One-off costs of the restructuring totaled €292 million last year. The figures do not include include the decorative paints business in North America, which AkzoNobel is selling to PPG Industries. Accelerating the program means that AkzoNobel will incur higher restructuring costs this year, estimated at €205 million. The acceleration will involve "lots of simplification—mundane work that needs significant traction," AkzoNobel CEO Ton Büchner told a press briefing in London today. However, there will be additional restructuring of the decorative paints business in Europe, as well as "organizational redesign" of the marine and protective coatings, wood finishes and adhesives, and pulp and performance chemicals business units, he said. AkzoNobel will provide updates on the additional restructuring measures during the course of 2013, he added.
Targets for the end of 2015 include a return on sales—defined as operating income divided by revenue—of 9%, compared with 5.9% in 2012; a return on investment of 14%, compared with 8.9% in 2012; and, to improve cash generation, a net debt-Ebitda ratio of less than 2 times (2x) compared with about 1.4x in 2012. The 2012 return on sales and return on investment figures exclude a €2.1-billion impairment charge announced last year on continued operations. AkzoNobel says the targets assume that the company will generate sales growth of about 4%/year in 2012–15.
AkzoNobel says it will focus on four end-user segments—buildings and infrastructure, transportation, industrial, and consumer goods—to become more responsive to market conditions. Buildings and infrastructure is by far the largest, accounting for 43% of revenues, reflecting AkzoNobel's leading position in more than 5 sectors of the paints and coatings market. Industrial accounts for 25% of revenues and the other 2 segments each accounts for 16%. "They drive the business of AkzoNobel and will drive the future of AkzoNobel," Büchner said. The company has also trimmed the size of its executive team and aligned executive pay with the updated targets.
About 44% of AkzoNobel's sales today are generated by strong positions in high-growth markets, and the company intends to increase that to more than 50%, Büchner said. "We have completed a series of portfolio adjustments and that has left us with a number of leading market positions. Our new strategy is to take these leading market positions and deliver a leading performance," he said. "This is not the case right now." The priority has switched "from revenue growth, to quality of earnings and from acquisitions, to continuous operational improvement," Büchner said. "The targets will ensure that in 2015 we are creating more value from fewer resources," he said. The company, in line with the strategy switch, has dropped a target to increase annual revenues to €20 billion in the medium term, from €15.4 billion today, AkzoNobel CFO Keith Nichols told the press briefing.
AkzoNobel's many acquisitions in recent years have created complexity within the company that it intends to eradicate. "We became a collection of acquired entities. We want to reduce product and process complexity and align product slates through operational excellence and standardization of processes," Büchner said. The company's focus, as a result, is no longer on big transformational moves. "Big divestments and big acquisitions are not the focus because we have such strong market positions," he said. "In future, we're aiming for organic growth."
AkzoNobel posted a net loss of €59 million for the fourth quarter of 2012 compared with a net loss of €68 million in the corresponding period of 2011, on sales up 3%, to €3.7 billion. The company says that the loss reflects higher restructuring costs, mainly in mature markets, after it stepped up restructuring efforts in its European decorative paints business in the fourth quarter.
Fourth-quarter adjusted earnings per share were about 9% ahead of analysts' consensus estimates at €0.50 and quarterly Ebitda increased 3% year-on-year, to €363 million, about 2% below consensus estimates. The lower-than-expected Ebitda reflects slower demand in the specialty chemicals division in the second half of 2012, although the performance coatings division outperformed expectations because of efficiency improvements, the company says. Raw material costs were stable compared with the previous year, with upward pressure on oil prices offsetting softer titanium dioxide (TiO2) prices, the company says. The price of TiO2 is likely to "stay similar to where it is today, based on supply and demand," Büchner said.
AkzoNobel is seeing signs of an upturn in key emerging markets after a pause last year. "Growth in markets such as China and India, as well as Brazil, is returning, but not to the good levels we had in 2010–11," Büchner said. "We don't expect those growth rates to come back to the levels of the past." AkzoNobel is also planning to build its presence in other key emerging markets such as Turkey, the Mideast, and North Africa, he said.
The company expects the economic environment to remain challenging this year. "AkzoNobel delivered a strong set of results in difficult markets, underpinned by the performance-improvement program, which exceeded our intermediate targets," Büchner said. "But we don't expect significant wind in our sails for 2013. So we will have to improve from within." Decorative paints in North America are included in the fourth-quarter figures as discontinued operations.