Raw materials, Hurricane Harvey, weigh on Akzo Q3 profit

LONDON (ICIS)–A year-on-year fall in third-quarter net income for AkzoNobel was primarily driven by higher raw materials pricing, currency headwinds, a challenging market for some divisions and the impact of Hurricane Harvey, company CEO Thierry Vanlancker said on Wednesday.

Shares at the Netherlands-based Dutch coats and paintings major AkzoNobel were trading lower on Wednesday as results underperformed expectations, and the firm readies for an extraordinary general meeting (EGM) on 30 November to vote on the Specialty Chemicals division spin-off.

Company sales stood at €3.62bn for the July-September quarter, up 1% year on year, but earnings before interest and taxes (EBIT) 13% lower at €383m.

Net income came in at €216m, a fall of 24% year on year. However, sales volumes rose by 2% in the third quarter, year on year, on the back of increases of 1% at the Performance Coatings division and of 5% at Decorative Paints.

“EBIT [was] impacted by unfavourable currencies, temporary disruption to the manufacturing and supply chain [caused by the hurricane season in North America], continued headwinds for Marine and Protective Coatings [division] and margin pressure from raw material cost inflation,” said the company.

Challenging market conditions for marine coatings operations are likely to continue in the immediate future, and the company has moderated its guidance for full-year 2017 group EBIT to on a par with the previous year, rather than above it, as previously stated.

With EBIT also down in the second quarter of the year, the fourth-quarter earnings will need to be stronger to allow the company to meet even this reduced target, Vanlancker conceded, but AkzoNobel’s guidance currently points to a stronger three months than in 2016.

“The fourth quarter in in 2017 will have to be better than Q4 2016, but that is also what our outlooks show,” he said. “Also bear in mind that the fourth-quarter 2016 had some extraordinary negative impacts which we don’t have this time.”

Coatings industry-wide headwinds are likely to continue, particularly on raw materials pricing, Vanlancker added, and the company is attempting to raise prices and instate additional cost controls.

However, this has proven difficult for AkzoNobel so far in 2016, according to analysts at UK-based investment bank Barclays Bank.

“It’s clear AkzoNobel is having limited success passing on higher raw material costs, despite [former] CEO [Ton] Buchner’s confidence at the start of the year,” Barclays said.

The company, which has issued two profit warnings since Vanlancker stepped up as CEO in July following the departure of former chief ton Buchner for health reasons, was also impacted this quarter by Hurricane Harvey.

The Hurricane, which made landfall on the US Gulf Coast in August, led to €25m in direct EBIT impact for AkzoNobel during the quarter, with the last of the four plants that had been taken offline ahead of the Hurricane, only coming back on stream the week of 9-15 October, Vanlancker said.

Some AkzoNobel customers in the region are still bringing plants back online after the Hurricane and the supply chain in the region remains disrupted, he added, with the full impact of those issues not fully recorded in the €25m EBIT write-down during the quarter.

According to Bernstein, the negative evolution of AkzoNobel’s business in Europe, the Middle East and Africa (EMEA, although excluding the UK) as well as higher raw materials inflation had come as “negative surprises” for the quarter.

“[Third-quarter] Volumes were in line with our expectations of +2% though price/mix was less negative than we had expected (-1%). Currency headwind was at -4% for group sales. Free cash flow in Q3:17 was €279m, well below €472m in Q3:16, driven by lower earnings and higher provisions (likely related to the cost of the SC [Specialty Chemicals] separation),” added Bernstein.

Despite the below-consensus results for the third quarter, these analysts still forecast AkzoNobel’s shares to be worth €79 in a 12-month timeframe, placing a ‘Market-Perform’ recommendation on the stock, or ‘Neutral’ in other banks’ terminology.

Less optimistic, however, were chemical analysts at Barclays Bank, who on Wednesday forecast AkzoNobel’s shares have a 21% downside potential in a 12-month timeframe, with a target-price forecast of €62.

“AkzoNobel’s Q3 statement brought another cut to FY17 [full year] EBIT guidance from ‘higher than 2016’ to ‘in line with 2016’ less than two months after the first revision in early September,” said the UK bank, referring to AkzoNobel’s cut in guidance issued on 8 September.

(Update adds CEO comment, additional detail in paragraphs 1, 6-9, 11-13)

Additional reporting by Jonathan Lopez