AkzoNobel's Q3 net income falls because of feedstock inflation

20 October 2011 15:36  [Source: ICIS news]

By Abache Abreu

LONDON (ICIS)--Hikes in raw material prices and depressed consumer confidence in some of AkzoNobel’s key markets are responsible for the 37% year-on-year decrease in the company’s third-quarter net profits, the Netherlands-headquartered chemicals major said on Thursday.

“We have experienced a tsunami of price increases which has raised the raw material bill by €700m-800m this year,” CEO Hans Wijers said during the company’s earnings press conference.

The negative quarterly results are also partly attributed to sluggish demand caused by weaker global economic conditions, in particular the European debt crisis.

Wijers said: “We have seen consumer and entrepreneur confidence in Europe dropping like a stone in key markets such as the housing and construction industries, not only in the south of Europe but more and more so in the north.

“People are concerned about the jobs, they are concerned about their pensions, they are concerned about the values of their house, and as a consequence they are not selling, buying or painting as much as they normally do”.

Chief Financial Officer Keith Nichols added: “The crisis has also taken far longer and hit far worse than many of us feared.”

Among AkzoNobel’s three business areas - decorative paints, performance coatings and specialty chemicals - the outlook seems particularly negative for decorative paints, which has suffered a 25% reduction in operating profits. 

“This decrease is certainly not normal but you don’t experience that often a perfect storm of substantial raw material price increases and, at the same time, drops in the volumes in some of your key markets,” Wijers said. 

Although third-quarter net profit dropped to €149m ($204m), sales revenues were up by 4.7% year on year to €4.05bn, driven by pricing actions to offset raw material cost inflation.

“This is the first quarter in which we have managed to catch up with raw material price increases. We are now moving faster,” Nichols said.

The company also announced an additional medium-term strategy, involving a number of initiatives aimed at underpinning the company’s performance and improving its profitability.

These include improving the efficiency of manufacturing processes, reducing the cost of warehousing and transportation, reducing the number of raw materials used and increasing employee productivity.

The restructure of underperforming parts of the company's portfolio could involve future employee layoffs as well as the shutdown of some of the company's 225 factories, Wijers said.

The full impact of this new strategy is expected to save AkzoNobel an estimated €500m by 2014.

“Although there are some pricing elements, close to 90% of this amount will come from cost cuts,” Wijers said.

According to the CEO, labour costs represent an important but limited number in the company’s total cost structure. “Labour costs are about €3bn/year but we've spent €5bn annually only on raw material,” he said.

AkzoNobel aims to standardise key processes by repeating a best-practice model in order to facilitate accelerated growth.

“If you have a good example of how you run a factory in Brazil why would you not have the same mechanism and apply the same methodology in a factory in Indonesia?" Wijers said.

Finally, AkzoNobel expects high-growth markets to become significantly more important throughout the decade.

Emerging economies in Latin America, the Middle East and Asia-Pacific are expected to account for around 50% of the company’s revenue by 2020.

“Even if the mature world is in very difficult times we are able to grow our company in other [geographical] areas,” Wijers said.

($1 = €0.73)

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By: Abache Abreu
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