AkzoNobel vows action to boost flagging profit

AMSTERDAM Thu Jul 21, 2011 3:23am EDT

AMSTERDAM (Reuters) - Dutch chemicals group AkzoNobel (AKZO.AS) promised new, unspecified measures to improve its earnings as it reported a 10 percent drop in second-quarter core profit, hurt by rising costs and weak demand.

The world's biggest paints company was hit by faster-than-expected increases in prices of raw materials such as pigments and oil-related resins and solvents.

It has struggled to offset this through product price rises due to weak demand in European and U.S. construction markets.

The group said raw materials costs have risen 20 percent year on year, higher than its forecast for a 15 percent rise. Chief Financial Officer Keith Nichols said costs will keep rising in the third quarter.

It reported quarterly earnings before interest, tax, depreciation and amortization (EBITDA) before one-offs of 551 million euros, down from 614 million a year ago having warned last month that profits would fall.

The 551 million euros matched the average expectation of 10 analysts polled on behalf of Reuters.

"I am not satisfied with our performance in the quarter, despite positive volume and pricing developments. Recent months have been challenging and it does take time for price increases to work through," outgoing AkzoNobel Chief Executive Hans Wijers said in a statement.

Shares in AkzoNobel fell 0.7 percent in early trade to 41.85 euros, underperforming a 0.6 percent rise in the Stoxx 600 European Chemicals index .SX4P.

AkzoNobel, producer of brands such as Dulux, Sikkens and Flexa, said it planned new measures to ensure it achieves an EBITDA margin at or above the mid-point of its 13-15 percent target range, but did not say what these would be.

It had cut costs by almost 700 million euros by end-2010 via job cuts, plant closures and synergies from its acquisition of paints firm ICI. Wijers said the company would take additional action in its supply chain and logistics.

The group will provide more details this year.

AkzoNobel competes with U.S.-based rivals Sherwin-Williams (SHW.N), which has forecast a weak second quarter due to rising costs, and PPG (PPG.N). Both companies open their books later on Thursday.

Despite net profit of 273 million euros topping estimates of 215 million euros due to one-off items, ABN AMRO analyst Mark van der Geest said AkzoNobel's operating cash flow generation has been "extremely poor." Operating cash fell 58 percent to 165 million euros.

AkzoNobel said in June when it issued its profit warning it expected to report full-year EBITDA at least in line with the 1.96 billion euros made in 2010. It reiterated this on Thursday.

Wijers said the company is not planning any major deal to secure cheaper supplies of titanium dioxide, used as a paint pigment, after it struck a deal to build its own production plant in China last month.

(Reporting by Aaron Gray-Block; Editing by David Hulmes)

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