INSIGHT: AkzoNobel reflects coatings contrasts

17 February 2011 18:03  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--It’s when the chemicals business meets the consumer that the strains begin to show.

End-use product demand growth in the fourth quarter of last year, in some markets, was not as strong as many would like it to have been. Yes, the commodity markets powered ahead – with prices rising strongly – and demand from Asia and other emerging markets continued to expand.

But closer to the consumer in Europe, North America and Japan, the story was different.

The world’s largest coatings maker, AkzoNobel, provided a glimpse of that reality on Thursday, as did vinyls maker Solvay.

It is hardly surprising that AkzoNobel wants to expand its decorative coatings business in China, India and Brazil. It can do that on the back of brands such as Dulux, Glidden and Sikkens, or with new product offerings for new markets and niches.

This is a €5bn ($6.8bn) revenue business and will play a major role in helping the company target doubled revenues in China and strong top-line growth in India and Brazil and in the Middle East and sub-Saharan Africa.

AkzoNobel is not alone in facing tough trading conditions in parts of Europe. Solvay highlighted on Thursday the still difficult construction market for vinyls in some countries in the fourth quarter of 2010.

AkzoNobel said that its fourth-quarter and full-year decorative paints sales were down 1% in constant currency exchange rate terms in Europe.

Operating earnings before interest, taxation, depreciation and amortisation (EBITDA) for the segment were down in the latest quarter due to a weak performance in Europe, excluding the UK.

The company managed to lift full-year Europe decorative paints EBITDA, but sales in the mature European markets, apart from in the UK, were lower. “Western and northern Europe experienced challenging market conditions due to low consumer confidence, a weak construction and renovation industry and lower trade demand,” AkzoNobel said.

Not surprisingly, the focus had to be on “operational efficiency, complexity reduction, margin management and working capital improvement”.

The situation was worse in North America in 2010 but appeared to be somewhat better in the fourth quarter, when year-on-year profits improved.

But this was the third year in a row of declining paint demand in the US, with non-residential markets especially weak.

In the final quarter of the year, AkzoNobel began to ship branded paints to Wal-Mart after it was selected as the primary paint supplier to the retail giant’s US stores.

The business in these mature economies, hard hit by the financial crisis and recession, is difficult but in clear contrast to that in Latin America and other emerging markets.

The constant currency increase in sales for the paints maker in Latin America last year was 10% and in Asia 22%. “In southeast Asia and Pacific, we had a record year,” AkzoNobel said.

The Dulux brand that AkzoNobel acquired when it bought ICI is particularly strong in these markets, but has had to be pushed into new niches and through new delivery systems.

The brand was re-established as a quality leader in the India market in 2010 and continued to grow strongly, the company said.

The fourth-quarter regional paints performance was still buoyant but reflected the moves made by China’s government to curb rising property prices.

AkzoNobel’s performance coatings businesses performance was underpinned by margin management programmes in the mature economies, which made up for slower growth.

Volumes were higher across the board but driven by eastern Europe, Latin America and Asia.

Demand in Europe and the US was less strong and continued to be weak in the US housing market.

The regional paints and coatings segments picture makes it easier to understand why the focus at AkzoNobel will so very much be on emerging markets over the next few years.

CEO Hans Wijers said on Thursday that the company was on track to achieving annual revenues of €20bn within five years. Revenues were $14.64bn in 2010.

The sales target is likely to be reached by organic, as opposed to acquisition-led, growth, and by the focus on high-growth markets.

($1 = €0.74)

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By: Nigel Davis
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