Akzo Nobel NV (AKZA) wrote down the value of its decorative paint business by 2.5 billion euros ($3.3 billion) after a prolonged attempt to turn around the business failed to counter falling demand for Glidden and Dulux paints.
The Dutch company overestimated market growth, with a slowdown in Europe overshadowing an improvement at the U.S. side of the paint division, which was profitable in the third quarter, Chief Financial Officer Keith Nichols said on a conference call today. Akzo will deepen cost cuts to counter the slowdown, he said.
“This writedown is really extreme,” said Micha Tiekink, an analyst at Rabo Securities. “It really gives an insight into Akzo’s view of the earnings potential for the deco business going forward.”
Akzo has now booked almost $5 billion in writedowns, casting a shadow over its $17 billion purchase of Imperial Chemical Industries in 2008 that transformed the company into the world’s largest paintmaker. The task of communicating the charge to investors fell to Nichols after Chief Executive Officer Ton Buechner took extended sick leave for fatigue, six months into his role. He’s expected to return at year-end.
Akzo dropped 5 percent to 42.32 euros as of 12:15 p.m. in Amsterdam, where the company is based. The stock has advanced 15 percent this year, lagging behind U.S. rivals such as Sherwin Williams Co. (SHW:US), which is up 73 percent this year.
Akzo, which already wrote down its paint business by 1.2 billion euros in 2009, reported a 7 percent gain in earnings before interest, taxes, depreciation and amortization to 540 million euros in the third quarter, excluding the goodwill writedown. Analysts in a Bloomberg survey predicted 552 million euros. Sales rose 6 percent to 4.28 billion euros, mainly driven by currency moves and pricing.
“Akzo has now cleared all almost all of its goodwill linked to decorative coatings,” Jaideep Pandya, a Berenberg analyst, said in a note. “One could see this as a fresh start for Mr Buechner or the acceptance of reality by the company with regard to the current state of its paint markets.”
Buechner is having only limited contact with Akzo, dealing with Antony Burgmans and another member of the supervisory board. Managers have been asked not to contact him to aid his recovery, Burgmans said on a call.
The company today announced that industrial coatings head Leif Darner will step down by mutual consent. The 61-year-old will be replaced by Conrad Keijzer.
“Conrad is one of his crew, he is of a younger generation and has the potential to step in and continue the business.” Nichols said.
Restructuring and penetration into home-improvement stores such as Home Depot (HD:US) Inc. helped eliminate losses at the U.S. decorative paint operations in the third quarter, though the fourth quarter is typically a weaker one for paint sales, Nichols said. There’s no sign the company is losing market share, he said.
Amid delays to implementing Buechner’s strategy, Akzo is rolling out restructuring measures initiated by predecessor Hans Wijers, which includes reducing IT systems and cutting back on the number of raw materials, to boost earnings by 500 million euros by 2014.
Akzo is largely done with site closures and will be focusing on improving customer focus, among other areas, Nichols said. During the integration of ICI, Akzo closed 29 factories and eliminated about 3,500 jobs. Akzo’s workforce fell by 870 posts in the first half amid the ongoing overhaul.
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