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UPDATE 3-AkzoNobel to cut more costs as China demand eases
October 20, 2011 / 7:55 AM / 6 years ago

UPDATE 3-AkzoNobel to cut more costs as China demand eases

* Abandons 2011 EBITDA guidance

* To target 500 mln euros in cost savings, efficiencies by 2014

* Q3 EBITDA 507 mln euros vs Starmine average forecast 522 mln

* Sales 4.05 mln euros vs Starmine average 4.02 mln euros

* AkzoNobel shares up 2.7 pct, outperform index

By Aaron Gray-Block

AMSTERDAM, Oct 20 (Reuters) - Dutch chemicals group AkzoNobel NV abandoned its 2011 core profit guidance and said it would cut 500 million euros ($690 million) of costs, in a bid to offset higher raw material prices and as softening demand spread to China.

The world’s largest paint maker, whose brands include Dulux, Glidden and Flexa, cut costs by about 700 million euros during the financial crisis, but has battled this year to offset higher costs with product price rises and as demand stayed weak in European and U.S. construction markets.

The group now aims to squeeze out another 500 million euros in savings by 2014 by cutting jobs, closing factories, through supply chain improvements and by streamlining R&D and IT to achieve an earnings margin within 13-15 percent.

The economic slowdown is not helping as AkzoNobel posted third-quarter earnings below market expectations. Continued raw material price inflation eroded margins at its key decorative paints business.

“Notably growth in China showed a significant slowdown,” ING analyst Fabian Smeets said, adding however that investors would likely cheer the restructuring and accompanied savings.

Shares in AkzoNobel initially opened lower, but later turned positive and were up 2.7 percent at 35.84 euros at 1132 GMT to outperform a 0.6 percent fall in the STOXX Europe 600 chemicals index .

Chief Executive Hans Wijers, who will step down in April, said the company had been hit by “a perfect storm” and that it was responding with a “massive plan” to shed costs.

In its last major overhaul, which lead to about 4,000 lay-offs in 2008-09, AkzoNobel achieved more than 700 million euros in savings, above its targeted 540 million euros.

Noting that cost inflation would continue, Chief Financial Officer Keith Nichols said there was an “extremely low” probability the company could still achieve its previous guidance of 2011 EBITDA in line with 2010.

Nichols said the savings, however, would keep AkzoNobel’s margin over the mid-term in the top bracket of its sector.

This is the group’s second profit warning within four months after AkzoNobel warned in June it would report full-year EBITDA in line with 2010 instead of a rise of more than 5 percent.


The savings are a parting measure from Wijers, who has reshaped AkzoNobel after divesting the group’s drugs unit to buy British paints maker ICI in 2008. He will be replaced next year by Swiss machinery maker Sulzer CEO Ton Buechner.

The first 200 million euros in savings will come in 2012 and the full scheme will result in one-off charges of 425 million.

Besides continued weak construction markets in mature economies, AkzoNobel said new home construction in China was also slowing as authorities were discouraging speculation around housing and construction to guide the economy to a soft landing.

“There is a clear move from a new construction wave in the coastal areas ... to maintenance, but there is ongoing growth in the rest of China, but it has an impact on our business,” Wijers said.

The producer of household paints said costs for raw materials, such as pigments and oil-related resins and solvents, are up 15 percent year-on-year and have outpaced the rate of product price rises aimed to offset this.

ABN AMRO analyst Mark van der Geest said AkzoNobel reported “shocking” margins at the decorative paints business, down to 10.3 percent from 14.4 percent a year ago.

AkzoNobel had quarterly earnings before interest, tax and depreciation (EBITDA) before one-off items of 507 million euros, missing the mean estimate of 522 million euros from Starmine, which ranks analysts estimates based on accuracy and timeliness.

Its U.S.-based rivals PPG and Sherwin-Williams report later on Thursday and on Oct. 25 respectively.

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