08 March 2013 09:28 [Source: ICB]
The Dutch paints, coatings and specialty chemicals producer alters its financial targets as it seeks to improve profitability through a focus on emerging markets and organic growth
Like many other companies operating in home markets that could charitably be described as lethargic, the Netherlands-based paints, coatings and specialty chemicals producer AkzoNobel is looking east for growth opportunities.
CEO Ton Buchner is looking east for growth opportunities in emerging markets
"44% of revenue came from high-growth markets in 2012," he said. "We have a strong presence in [those] markets, and are planning a continued over-proportional growth investment into these markets."
Organic growth is also the key theme of the company's new strategy, announced at the same time as AkzoNobel's fourth-quarter and full-year 2012 results on 20 February.
Rather than pinning its hopes on a rally in the eurozone or attempting to galvanise growth in spite of weak markets through mergers and acquisitions (M&A), the company says it intends to improve profitability through efficiency savings and playing to its strengths through building its presence in core end-markets.
"The focus for us is not going to be on big transformational moves, it's going to be about improving from within," said Buchner. "If you're talking about significant divestitures or significant acquisitions, that is not the focus of what we're doing with this strategy."
With the eurozone stuck in a parlous state - first-quarter GDP is expected to contract by 0.3%, according to February PMI data from financial data company Markit - and the stronger-performing North American market less significant for AkzoNobel, Buchner ruled out strong macroeconomic improvements as a driver of growth in 2013.
"We do not expect significant winds in our sails in 2013," Buchner said.
AkzoNobel derived 38% of its revenues from mature European markets and 15% from North America in 2012, excluding its North American decorative paints business, which it sold to PPG Industries for $1.05bn (€810m) in December.
AkzoNobel is also planning to focus more sharply on its four key end-markets, and intends to ramp up its analysis of and marketing into those areas. Buildings and infrastructure will be at the heart of the company's growth plans, as it represented 43% of group revenues in 2012, while the industrial sector comprised 25% of revenues, and transportation and consumer goods each generated 16% of revenues.
Although construction output remains weak, falling by 2.7% in the EU in December, according to statistics agency Eurostat, a significant portion of the company's revenues in the building sector come from renovations of existing houses, instead of new builds, according to Buchner.
The company has also put in place new measures to aid responsiveness to fluctuations in the prices of feedstocks and raw materials, which will be monitored on a continuous basis, according to Buchner.
"We have introduced strong processes to do value product margin management assessment on a continuous basis, and that includes raw material fluctuations that are done through central procurement," he said.
"We can predict forward indicators much better through central procurement and that, as an input to the businesses that need these materials, is a significant improvement on the past," he added.
The company has benefited from current pricing conditions for titanium dioxide (TiO2) which have softened from the highs of 2011, to the point of being a serious drag on the balance sheets of many producers of the material. However, the current trend of rising oil and oil derivatives prices may be set to continue.
"TiO2 has come down in the recent timeframe, and we expect it to stay relatively similar to where it is today on the basis of supply and demand in that market," Buchner said. "A much larger part of our raw materials is oil and oil derivative products, and we see upward pressure there, so that may affect our supply costs going forward."
The way AkzoNobel quantifies success is also to change, a shift Buchner characterises as "from revenue growth to quality of earnings".
The company - which reported a €2.2bn full-year loss for 2012 on the back of a €2.1bn impairment to its decorative paints arm - has moved away from its former target of increasing annual revenues to €20bn in the mid-term, in favour of a new target to increase return on sales to 9%, from its current level of 5.9%, by 2015.
Another target of increasing earnings before interest, tax, debt and amortisation (EBITDA) by a margin of 13-15% per year has also been replaced with a goal of achieving a return on investment of 14%.
The company brought forward its efficiency savings programme - which has a target of €500m in recurring earnings before interest, tax, debt and amortisation (EBITDA) savings - forward a year to 2013. To date, the company has realised EBITDA savings of €250m, and anticipates the cost of achieving the remaining efficiency savings at €205m.
Part of those savings will come from rationalising the sometimes overlapping product lines of various businesses acquired by the company.
"We have acquired a number of companies over time, and many of those companies have overlapping product lines with different indications, with different packaging, and what we're doing is consolidating those product lines," Buchner said.
"Packaging them as a new business and selling them out is not a focus, it's simplifying what we offer to the customer and making it modular so that it also simplifies our manufacturing processes," he added.
A notable exception to the company's plans to avoid major acquisitions or divestments was the decision to sell its North American decorative paints business. The rationale for this sale was that the company had decided against committing the level of investment necessary to bring it in line with the performance of other business units, and is unlikely to be repeated with other units, according to Buchner.
"[The North America divestment] was quite significant for us. We looked at the market resources needed to make [it] into a leading [business], and decided to focus that energy elsewhere," he said.
Emerging markets are already of particular importance to AkzoNobel, with revenues from the Asia-Pacific region in 2012 representing close to double that derived from North America, at 26%. At 11% of revenues in 2012, Latin America is already of nearly equal importance to North America for the company's operations.
AkzoNobel also has a presence in "emerging Europe", where it derived 8% of its revenues last year. The company has little presence in the Middle East or Africa, which represented a combined total of 2% in 2012, but AkzoNobel will be considering increasing its exposure to those regions, according to Buchner.
However, China is likely to be a priority for the company in the immediate future, as demand for paints, performance coatings and speciality chemicals is starting to increase in the country.
"What we see in China is that the reduction of growth we've seen in the last year in some of our activities is actually returning, not to the levels of the good past that we saw in the early days, but it is returning at growth levels that are significantly higher than those seen in Europe and North America," Buchner said.
In keeping with its strategy of steady incremental growth, the expansions in all markets are likely to be incremental, and driven by marketing and capex, Buchner concluded.
"We've indicated that we are primarily aiming in the near future at organic growth," he said.
"That could be growth through increased sales force effectiveness, that could be growth on the basis of increased capital expenditures with a gearing towards high-growth markets, but it will primarily be based on organic growth," he added. "That is the focus of what we are trying to do."
AKZONOBEL RACKS UP LOSSES IN 2012
AKZONOBEL ANNOUNCED on 20 February that it had reduced its fourth-quarter net loss to €59m ($78m), from a loss of €68m in the same period a year earlier, partly a consequence of higher earnings at its performance coatings business.
The company's sales were up by 3% year on year at €3.67bn in the October-December 2012 period, while earnings before interest, tax, depreciation and amortisation (EBITDA) also rose by 3% over the same period to €363m.
AkzoNobel's performance coatings business witnessed EBITDA rise 35% year on year to €190m in the fourth quarter of 2012, with the strongest growth coming from the industrial coatings and marine and protective coatings units.
Fourth-quarter EBITDA in the group's decorative paints business fell by 23% year on year to €47m as challenging market conditions continued in Europe and Latin America, while the specialty chemicals business reported a 17% fall in EBITDA to €172m as demand started to weaken in the second half of the year, particularly in Europe.
For the full year of 2012, the company swung to a net loss of €2.17bn, compared with a net profit of €477m in 2011, weighed by an impairment charge of €2.11bn in the third quarter related to its decorative paints business.
Its sales were up by 5% year on year at €15.4bn in 2012, driven by favourable currencies and pricing offset by lower volumes. EBITDA for the year was 4% higher at €1.90bn.
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