Slow Europe market drives weaker AkzoNobel Q2 results

21 July 2011 17:34  [Source: ICIS news]

By Abache Abreu

LONDON (ICIS)--Weaker activity in European markets was the main driver behind AkzoNobel’s poor second-quarter results, the Netherlands-headquartered chemicals major said on Thursday.

The company’s net profit fell by 1.8% during the second quarter of 2011 to €268m ($383m), down from €273m in the same period last year, according to an AkzoNobel report.

Higher raw material costs were partly offset by a 5% increase in prices in high-growth emerging economies such as China, Indonesia, Brazil, and the Middle East.

However there was greater resistance to rises in the mature economies of Europe and the US, where price increases affected demand.

“Sales growth has been particularly disappointing in France, the UK and the Benelux [Belgium, Luxembourg and the Netherlands] region,” CEO Hans Wijers said during the company’s earnings press conference.

In these countries, margins were under pressure because of a combination of rapidly increasing raw material costs and slow demand caused by weak economic conditions.

According to AkzoNobel's report, raw material costs increased by 20%, which had a major impact on the company’s three main business areas: decorative paints, performance coatings and specialty chemicals.

The paints and coatings businesses account for two-thirds (67%) of AkzoNobel’s global revenue and 77% of a total of 55,590 employees worldwide.

In the paints segment, positive revenue developments in Russia and Turkey were largely offset by a deterioration in the market conditions of mature western European economies such as the UK. Consequently, overall sales growth in Europe halved to 3% on a constant currency basis, versus the first quarter.

According to the company’s report, additional price increases are planned for the second half of this year to partly offset these effects. However, the ability of producers to pass on increases in western Europe has been challenged by market fundamentals in the past few months.

Demand has suffered not only because of Europe's slow economic recovery, but also because of the impact of EU-wide restrictions on the marketing and use of chemicals such as methylene chloride (MEC), a carcinogenic and flammable chlorinated solvent sold by AkzoNobel and traditionally used in paint stripping.

New European legislation, effective from 6 December 2010, established that paint strippers containing MEC at a concentration equal to or greater than 0.1% can no longer be placed on the market for the first time for supply to the general public or to professionals.

According to suppliers, this has resulted in customers seeking alternative solvents, slowing demand in 2011, and bringing the 2010 upwards trend in MEC sales – up 13% from 2009 – to an end.

Other suppliers have argued that the impact of this restriction has not been so strong because derogation for professional use is still possible, while industrial use has not yet been affected.

However, from 6 June 2012, the use of MEC by professionals will also be banned, although EU member states will still be able to permit the supply and use by specifically trained professionals of paint strippers exceeding the 0.1 % limit for certain activities within their territory.

In order to underpin the company's performance and improve its profitability, AkzoNobel announced it will continue to focus on high-growth emerging markets, aiming to increase the share of its revenues in these regions from the current 40% to 50% by 2020.

AkzoNobel is already China’s biggest paints, coatings and specialty chemicals supplier, and aims to increase its presence in India, Brazil and the Middle East.

These markets have been the main drivers of AkzoNobel’s sales growth, which was up by 5% to €4.10bn in the second quarter from €3.91bn in the same period last year.

According to Wijers, full-year 2011 EBITDA is expected to be at least in line with the previous year, assuming no further deterioration in economic conditions.

“However, this is a very volatile world with very little visibility, and there are scenarios which are of course very scary,” he added.

($1 = €0.70)

For more on AkzoNobel visit ICIS company intelligence

By: Abache Abreu
+44 2086523214

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