Akzo Nobel NV (AKZA), the world’s largest paintmaker, said restoring its U.S. decorative paint unit to break-even this year will be a “significant challenge” as incoming Chief Executive Officer Ton Buechner takes the reins.
The maker of the Glidden paint brand is relying on cost cutting amid a sluggish U.S. construction market, Chief Financial Officer Keith Nichols said on a call today. The Amsterdam-based company reported first-quarter earnings that beat analysts’ estimates.
Akzo, the U.S.’s No. 2 paintmaker after Sherwin-Williams Co. (SHW:US), revamped Glidden’s image and landed an exclusive agreement to supply Wal-Mart Stores Inc. (WMT:US) a year ago. North American household paint volumes fell in the first quarter, though Nichols said Akzo didn’t lose market share to rivals. Akzo should consider pulling out of the U.S. paint market after a prolonged attempt to improve the fortunes of the business, said Mark van der Geest, an analyst at ABN Amro.
“I think Akzo should exit Deco in the U.S.: They are loss making for four years now and haven’t been able to turn it around,” said van der Geest, who doesn’t expect any decision until the market stabilizes.
Analysts including Laurent Favre of Bank of America (BAC:US) Merrill Lynch have highlighted the looming decision over what to do with the under-performing U.S. decorative paint unit as one of the chief challenges Buechner will face when he takes over next week. Akzo has already eliminated hundreds of jobs.
“We’re maintaining hopes we will be break even in the U.S going into 2013,” said Nichols. “We’re going to get this business contributing rather than being a drag. It’s still remains a significant challenge but the ambition is there.”
Sherwin-Williams said April 9 that first-quarter earnings exceeded both its guidance and analysts’ estimates amid rising demand and prices. A mild spring and improved pricing helped bolster demand. Paint-store revenue increased about 20 percent because of improved sales volumes for architectural paint and higher prices, the U.S. company said.
For Akzo, trading levels in North America remained stagnant through March, with demand remaining soft until the housing market recovers, Nichols said.
The U.S. and Europe are bearing the brunt of a company revamp initiated by outgoing CEO Hans Wijers, who has outlined annual savings of 450 million euros ($590 million) to help mitigate the effects of higher raw-material costs like titanium dioxide, used as a whitener in paint. The maker of Dulux-paints has set a target to boost earnings by 500 million euros for 2014 as it improves manufacturing as well as adding plants in India and Brazil.
Earnings before interest, taxes, depreciation and amortization before one-time items declined to 423 million euros in the first quarter from 437 million euros a year earlier. Analysts predicted 413 million euros.
The earnings beat means Wijers exits his nine-year stint at the helm on a high. The company’s shares advanced as much as 4 percent higher. They were down 0.3 percent to 43 euros as of 1:50 p.m. Prior to today, Akzo had climbed 16 percent this year, raising its value to 10.2 billion euros.
‘Nice Ride’ Ahead
“These are fine results, with better than expected price increases, particularly in Decorative Paints,” ING analyst Fabian Smeets said by phone. “With the impact from restructuring measures going forward and Buechner taking the helm next week I think we can have a nice ride with the share price in the rest of the year.”
Sales in the quarter increased 6 percent to 3.97 billion euros as cost cutting helped counter weaker volumes in markets like Europe and North America. Asia and Latin America have become key drivers of household paint sales.
Wijers was planning to review the options for the U.S. operations once they have been restored to health. The final decision on the business will fall to Buechner, the former chief of Swiss pump maker Sulzer AG. (SUN)
“Looking at Sherwin-Williams comments, you can conclude Akzo has been losing market share in the U.S.,” ABN Amro’s van der Geest said.
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