Akzo Nobel will focus on chemicals growth potential

25 April 2002 15:43  [Source: ICIS news]

Akzo Nobel has set itself some tough targets in chemicals but they are not unreasonable for the medium term. The company’s own competitor analysis suggests that it is currently performing on a par with the best in speciality chemicals with a 2001 return on investment of 11.0%, not bad in view of the depressed operating environment. But, not surprisingly, it wants to outperform this peer group.

A review of all 57 chemicals business segments over the course of 2001 showed that while the chemicals portfolio has shifted heavily towards specialities, focus is needed if it is to move further. Dag Stromqvist, the board member responsible for chemicals, says that the general strategy remains valid but chemicals needs to grow and create value ‘within our own cashflow’. If that is the case, the focus will be on the broad areas of global businesses with high growth potential and support from the cash generators.

The businesses with potential are in pulp and paper chemicals, polymer chemicals, surface chemistry and resins, Stromqvist says. The lower growth cash generators are in salt, energy, catalysts, base chemicals, functional chemicals and plastic & processing additives.

One outcome of the analysis is a broader realisation that some specialty chemicals are maturing fast. There is nothing wrong with that, of course. Chemical companies are adept at managing commoditisation and making good money in the process. On the other hand, Akzo Nobel wants to grow fast in chemicals and it wants to generate superior returns – its pharmaceuticals, animal health and coatings businesses set difficult targets for chemicals in that respect. Senior management is realistic in not expecting stellar performance but it wants chemicals to achieve decent top line growth (of more than the 4% a year achieved over the past few years) and a return on investment of better than 17% over the chemicals cycle. That sort of growth and level of return in chemicals would be appreciated by investors.

It is not difficult to see why the company has chosen its four growth areas. In resins, Akzo Nobel is a global player with a broad technology base in coatings and printing inks. It focuses on industrial coatings and holds good positions in high value market segments such as automotive OEM (own equipment manufacturers) and car refinishes.

Although a small business in sales terms, resins growth overall has been 12.5% a year over the past five years and 2002 has been earmarked as a year for introducing greater efficiencies. In pulp and paper chemicals, a big business for Akzo Nobel, the company wants to get closer to the customer – taking over chlorine dioxide production on client’s premises, for instance – and sees this as a route to growth. Surface chemistry sales have grown at more than 9% a year for the past five years. One target, which the company expects to reach soon, is to produce 25% of sales in the business from products introduced over the past five years.

Stromqvist makes the point that there is no crash programme for chemicals but that the chemicals vision will be realised. That much is clear. Some businesses are being moved into different business units to better fit the new strategy. Acquisitions and divestments will for part of the process. Stromqvist has not said yet which businesses are for sale and what he hopes Akzo Nobel can acquire in chemicals but the carboxymethylcellulose business, and lubricants and specialities are to be moved from the functional chemicals business unit to surface chemistry from the beginning of next year. The Akcros business is to become part of functional chemicals from October this year.

The point is that Akzo Nobel wants to concentrate resources on fewer growth areas. If it does it has a better chance of achieving its financial targets, which include a 25% improvement in EBIT (earnings before interest and tax) in the four growth businesses in two years' time.

Akzo Nobel expects an accelerated pace of merger and acquisition activity in chemicals after this recession and will be keen to play its part in the re-shaping of the industry. In the first quarter of the current year chemicals sales fell by 1% to Euro1.18bn ($1.05bn) but EBIT improved by 3% to Euro102m taking the chemicals return on sales to 8.7% from 8.4%. Akzo Nobel feels that the bottom has been reached in chemicals. Across the rest of the company pharmaceuticals sales improved by 13%% and coatings sales were 22% higher. Pharmaceuticals EBIT rose by 10% over the three months and coatings EBIT by 2%. Chemicals has some way to go to match the growth, and performance profiles of businesses like these.

Akzo Nobel chemicals sales breakdown 2001/2000

Chemicals business unit	2001	2000	Change
	(Euro m)	(Euro m)	(%)
Polymer Chemicals	584	648	-10
Pulp & Paper Chemicals	1020	990	3
Catalysts	367	356	3
Surface Chemistry	715	763	-6
Functional Chemicals	785	817	-4
Salt	261	233	12
Base Chemicals	357	382	-7
Plastics & Processing. Additives	211	238	-11
Resins	419	410	2
Energy	165	152	8
Chemicals total	4604	4740	-3

 

 

By: Nigel Davis
+44 20 8652 3214

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