Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Akzo Nobel N.V. (AKZOY.PK)

Q2 2010 Earnings Call Transcript

July 23, 2010 4:30 am ET

Executives

Hans Wijers – Chairman & CEO

Keith Nichols – CFO

Hans Wijers

Yes, good morning, this sounds better. Welcome to the presentation of our second quarter results. A very good quarter of AkzoNobel on track and let me elaborate on that, ladies and gentlemen. I would like to go to an agenda where we talk about AkzoNobel what it currently is, its ambitions and plans, then the highlights, and then Keith will give you more granularity about our performance, the financial review. And then I will take it back talking about sustainability and the outlook. And at the end I have a couple of other remarks to make.

First, for those of you who are not aware of it, we are by far the largest coatings and paints supplier in the world and we have fantastic leading position in the area of specialty chemicals. What is probably also extremely important to remember, if you think about our company is that we are proud to be based in the Netherlands, but we have a very global spread and particularly our exposure to high growth markets. We used to call those in the past emerging markets. Because many of these countries have emerged, so we don’t talk about emerging markets anymore. Actually it’s considered to be an insult by some of the people living in countries like Korea and Mexico and Turkey if you talk about emerging countries. So, high growth markets are very important to us. It’s now close to 40% of or total revenue and it’s not only important for us in terms of revenue it’s also important in terms of profitability because these markets have an above average profitability in our company.

Close to 40% is in the high growth areas. This would mean the 60% is an important – very important. We are very proud to have leading positions and strong brands in Europe and North America and we’ll continue to invest in it, but you could say we are wherever the action is or the action could be, and that is very important world changing so rapidly.

Now, let’s talk about where we are with our agenda, our strategy agenda first. When we acquired ICI in 2007, we set a set of strategic ambitions. Now, we said we want to leading in value creation and that should be illustrated by outgrowing our markets, an EBITDA of 14% by the end of 2011 and a significant investment of working capital, about 0.5% per year on average.

That’s not enough. We also want to be a leader in sustainability and that should be illustrated by having on average over the full – over the different years a top three position as Dow Jones Sustainability Indexes. We want to improve safety in our company, move to a recordable injury rate of 2. And also make a step change in how we develop our people. We have a concept of the talent factory in our company.

Now, we do not incentivize our people only on the financials, we also incentivize them around the sustainability area because that’s what we feel is necessary to create a right balance between the short term and the longer term value creation.

Where are we with this agenda? Well, we have been delivering much faster on our agenda than we initially anticipated. First of all, talking about EBITDA margin, we proudly announced in our Q2 results that we have delivered one year and a half in advance on our EBITDA margin target. Not only did we surpass that target this quarter, that we surpassed over the first half year, but also if you take a trailing average of four quarters, so including some pretty tough quarters last year, we have achieved a 14% target.

How have we achieved this? By focusing on margin management, using the scale of our company on the raw materials side but also investing heavily in the skills of our people on the pricing side, building our brands, make our brands more relevant is also being very important. Of course, delivering on the ICI synergies and additional restructuring measures as the economic crisis hit us beginning of last year. But it’s a tick in a box.

Then talking about the ICI integration, we promised around 340 million of synergies, structural cost savings. That will be achieved in 2010. Still something to do this year, but we were very, very much on track. We’ll be done by the end of this year. Probably just as important if you look at the quality of the integration process, the footprint rationalization particularly in Europe of the whole supply chain is a very advanced change – a very advanced stage and even more important, if you look at the key people that we wanted to retain, it’s close to 95% of the retention of key people compared to the moment that we started.

Now, further, there was another piece of work as a consequence of the ICI integration, which was the divestment of bits [ph] of National Starch and as you have seen in the second quarter we successfully signed a deal with CPI. They will acquire the last element of National Starch. We expect that deal to close in the second part of the year. Another tick in the box.

Operating working capital. After a somewhat slow start in that area, in the course of last year, we started to significantly improve on our operating working capital performance. Last year we made an important first step in structural improvement of our operating working capital performance. If you see our performance in the second quarter of this year, we made an additional step. If you compare to last year 16.2%, this year 15%. Tick in the box, not done as a matter of fact, we will continue to work on further improve our performance around working capital. Of course, if you get closer and closer to what is really world-class, it gets more difficult. You have to get really into the structure of some of our processes and in the depths of some of our capabilities, but we are working on a program for that and we will continue step by step to further improve around working capital.

And then finally, sustainability. You cannot actually really tick the box there because that’s a huge challenge if you think about the future, but we are on track. Again here we have been a couple of years in a row now, number two or one or three, not three actually, two and one in the Sustainability Index. If you look more deeper into our company you see lots things of going on in improving on our sustainability. I will talk a little about that later on. But again, so far so good achieved.

So, all together, we have delivered substantiality on our strategic ambitions. The 14% was very important one also in terms of generating enough cash for this company to invest in the future. We are there, so we have said this is the right moment to think and discuss with the capital markets and kind of next set of strategic and medium term ambitions. And 28th of September, is that right, 28th September, you are kindly invited to join us in London where we will have a Capital Markets Day and where we will talk more in depths with the full Board being there around our medium terms ambitions going forward. Hope you can make your time available.

Now, let me move quickly to the second quarter, the highlights, before I hand over to Keith. All in all, a very good quarter, a very satisfying quarter. Revenue up 13%, of course helped by currencies. If you take that out, it’s still 5% up, moving to a revenue base of 3.9 billion.

EBITDA, north of 600 million compared to a somewhat north of 500 million last year, so that’s a 20%, more than 20% increase. If you take the currency effect out it’s still a 13% improvement, quite significant. EBITDA as a percentage 15.7% compared to 14.7% last year.

And then, if you want to take the one year rolling average, so taking on two quarters of last year, we are also at 14%. So, 14% we have achieved now one year and a half in advance of our ambitions. If you look at the net income effect also very positive compared to last year, 76%. And as I said the National Starch divestment has been agreed. So, all in all, pretty good numbers. Yes we do realize we compare to a weak quarter, but even if you take that element out, yes, supported by some currencies, you take that element out, it’s still a very good quarter.

Look at the details. Revenue is 13% up, EBITDA 21%, net income 76%. Great numbers. Look at the volume side, there is a substantial growth of 8% in volumes throughout our portfolio, a somewhat negative price effect that’s partially driven by mix effects, some acquisition, divestment effect. Exchange rates have been important, but altogether a 13% revenue development. If you look at the pattern of volumes and price over a couple of quarters, you see in the volume development, clearly the cyclical, the deep cyclical development we’ve gone through, Q2 last year we still – it looks like a former life actually if you see those numbers. We were down 16% last year when we met here with 10%, 19%, and 18% volume drops. And then you saw gradually catching up and then you see now Q2 where you see an overall 8% volume improvement against a somewhat stronger Q2 last year compared to Q1 last year of course. But, all in all, very positive.

If you look at the prices, of course, there have been some price – negative price developments compared to last year, but don’t forget that when you compare to a pricing level that helps actually also to the prices last year, because we increased our prices significantly in Q4, Q3, ’08, and then Q1 and Q2 last year.

And has some quite some mix effects because of different performance of the portfolio in Performance Coatings and there is also of course us growing more in high growth markets. But all in all you see the cycle here and you see the strong volume developments, for instance in Specialty Chemicals and Performance Coatings also in Q2, which tells you something about the strength of our businesses.

That's what I would like to leave it up till now. I now hand over to Keith who will give you much more detail on the performance of our different business areas and the financials. Keith.

Keith Nichols

Thank you, Hans. Good morning, everyone. As Hans said, I am going to step through the three business areas and pull the financials together. Apparently we are even able to add colors to people’s lives even if you live in an igloo. That’s the implication of this picture, just to get your attention and make sure you are all listening. But the important message is it’s about Glidden, it’s been about the relaunch of Glidden, the successful relaunch of Glidden. This indeed was one of the images from the national advertising campaign. Many people forget that it’s been a long relationship in the retail channel with this retailer and the relaunch that we kicked off in 2008 is really paying off, culminating in actually winning not only higher volumes for us, but also a top U.S. marketing award in the second quarter.

Now, Hans talked about the geographic footprint and the strong emerging market positions. I come at it with a slightly different angle to emphasize leading positions is deco. So, although we still talk about economic uncertainty in mature markets, we start from a position of strength. We have number one and two positions in many markets, not just building position in emerging markets, so this diversity, this breadth of footprint is a real strength for the deco business. There are very few other peer companies with a similar footprint. They tend to be in general more national or regional.

The numbers, the same format as Hans used. The top line up 8%, again helped by currency, but it masks the positive, real positive story in places like Brazil, South East Asia and China. EBITDA strongly up 20%, really reflecting synergies landing and cost cutting also benefiting, improving the margins, pushing it ahead to 14.6%. Volumes for the whole up a positive one. There is real mix in there, some negatives in mature markets, and some very strong positives in the growing markets.

So, what are the highlights, and you probably have seen the press release by now, had a chance to look in the book, but as I said, revenues up 8% in total. If you dig into the details and the regional commentary, you will see places like China much stronger, north of 20%, the South East Asia market very strong, and Brazil. A deliberate strategy paying off investing in distribution capability, investing in A&P, leading to stronger market shares, bugger revenues, and more EBITDA to the bottom line.

Let’s talk a little bit about closer to home and the mature market. Soft demand continues. You see it particularly in Europe. We are right in the middle at the moment of testing the financial sector. It’s making consumers hesitant, housing markets sluggish, construction at the moment hasn’t picked and that impacts us. People are buying less paint in this segment. Where we are delivering is absolute more profitability in this business area due to the restructuring and the synergies that have landed in the business.

Turning to Performance Coatings, this picture really picks up on a recent acquisition of Lindgens. Lindgens is a manufacturer and marketing company of coating for the metal packaging industry. It gives us two things. It gives us technological capability, particularly around the inks that are used on these two-piece metal cans, but also gives us strong positions, for example, in markets like Turkey. And that deal is currently being consolidated at the moment.

Like deco, many strong market positions. This is a recap. Those of you who are familiar will know these business segments in which we operate. Marine and protective. Protective is protective coatings particularly into large infrastructure. It can be oil and gas, it can be bridges, it can be major construction, those kinds of things. Marine speaks for itself. There is two segments

new build, building new ships in places Korea, Japan, and China, and the maintenance side, the continuous maintenance of the global fleet I think indicators that can track our activity there world trade level. So the better world trade is doing, the more ships are in circulation and hopefully the more regular maintenance picks up.

That has not been the case over the last 12 months. Maintenance has been lower. Newbuild continues, will continue through 2010 because they are longer contracts, but we cautious about the outlook beyond that into ’11 and ’12.

Car refinish also includes aerospace in the new cluster, but it’s all about aftermarket coatings, body care coating for cars. Remember, we are not a leading player in the OEM segment.

Industrial coatings. Well it includes that first picture of cans. It’s packaging coating, steel coil, specialty plastics, and food cans, as well as beer and beverage. Wood speaks for itself. Strong global footprint. Really serving into the U.S. market, the European market, and the higher growth markets. We’ve seen that recovering strongly. It was hit earliest in the economic cycle, if you remember, back in 2007, now picking up. And powder, with the acquisition from Dow of the former Rohm & Haas business now also is the number one leadership position. And that really helps us in these uncertain economic times.

The numbers. Strong volume development here of plus 12% on the bottom bar in the graph and the revenue up almost 20% in reported terms and EBITDA also benefiting strongly. The margin is slightly lower and that’s because the mix of the businesses, the performance of the different parts that I talked to on the previous slide has changed. As we were going into the crisis, marine and protective was the strongest contributor to profitability. And they make fantastic margins, so do the other businesses, by the way, but we are now seeing those businesses picking up and less dependency on marine. The mix effect meant that we are slightly lower. Instead of 15.6% we are at 15.2%. Still a great performance underpinned by those leading positions.

The real message about the improvement is that it’s broad. It’s continued the trend that we saw at year-end and at the first quarter. It’s across all our industrial businesses. And as I said around mix it’s very good that we are less dependant on marine, particularly if we believe some of the statistics or indicators for the newbuild segment. And powder coatings, I talked about, we’ve started the integration of the new business from Dow Chemicals and it’s contributing already.

Many of you might be thinking or have just been holiday. Some of our products even touch what you use there. This is all about copper tone, sunscreen protection from our Personal Care business of Surface Chemistry, customized formulation giving you not only increased protection by easier application, higher SPF protection. Nice slide, especially at this time of the year.

Again, just to emphasize, one of the core strengths of AkzoNobel and its portfolio of businesses is either a strong, broad geographic footprint or strong market positions. Market leadership position theme continues in Specialty Chemicals. Functional, you all know about the salt specialties in north Europe, but you also need to understand about chelates, some of the peroxide products and ethylene amines, which feed into a huge variety of end user markets. Again, giving us resilience through difficult times.

Industrial chemicals is a north, west European business. MCA and the chlorine chains also feeding into some of our bleaching businesses, but a clear leader here, you know with a big site Rotterdam and also a plant up in Devsile [ph].

Pulp and paper is really for 80% all about bleaching chemicals for wood pulp that ultimately feed into the different chains of paper and we do provide chemicals for specific niches in the paper industry, things like retention, water retention, the tissues that you might use in a kitchen or Kleenex, the strength that’s in those papers, the chemicals that we make contribute to that.

Lastly, but by no means least, because it’s having a really good strong demand and performing very well at the moment is surface chemistry serving again a wide variety of end users. Think Personal Care products, the shampoos, the sunscreens, the conditioners, detergents, things you use to wash your cloths, dishwasher tablets with the green chelates, the new environmentally friendly chemistry behind these so that you will find those on your shelves already out in many of the markets, which we operate.

The agriculture segment, the sprays that go into the crops and the industrial segment including mining. So a broad variety of businesses.

Specialty Chemicals performance, volume is strongest here, 15% as you see on the graph, leading to revenues up more than 10% and strong EBITDA performance. Margin actually at 20% at this point in the cycle because of the strong volume growth, and because we’ve been restructuring through the crisis and taking out cost. So you see the mix really helping the margin despite some of the pressures we have on raw materials.

The highlights really is that all units are contributing, but particularly Functional and Surface Chemistry. You know, we’ve announced the sale of Starch. We agreed a sale with Corn Products International of the USA. The closure of that for $1.3 billion is expected in the second half.

Let me move away from the three business areas and make a bridge to something that is the glue behind the results hat we deliver, which is cash, the cash performance of the business. It’s being – it is always important that you focus on cash. Cash is king. But it’s been particularly important as we’ve come out with the financial crisis and we’ve had a focus around working capital about ensuring that we have enough liquidity in the bank, that our bank maturities are spaced nicely, going forward so that we don’t have to continuously worrying about turning maturities over in the market.

We’ve been careful about prioritizing CapEx. Still investing in our business, we are still investing organically for growth and as you’ve seen we still made a couple of acquisitions. Our dividend policy is unchanged, 45% of an adjusted net income.

One of the constituents of cash is working capital. We’ve been working hard on that since acquiring ICI. We put the two businesses together. We’ve share best practice. We’ve measured ourselves on our equal footing. There were some differences prior to that. But the important thing for me is that we’ve gone beyond those performance levels. We knew how we were combined. We said it wasn’t good enough. We looked at our peers and now you see really a strong performance.

We have seasonality in the business, so you see a build of working capital in the first half and a cash release in the second half, but I think this graph shows it very well. Here in Q2 at 15% compared to the Q2 of the previous quarter at 16.2%.

The balance sheet, very important. It gives us the flexibility, the ability to invest in our business and to grow and to make acquisitions. The point is our maturities are spaced well. We have a manageable level of net debt. We have a stable net pension deficit. It’s unchanged, it’s slightly lower than where it was at the end of 2009 at $1.8 billion and we have undrawn bank facilities. So, if we need them we can draw on them and we have no commercial paper outstanding at the moment.

That concludes the financials. And I turn back to Hans to wrap up with an overview of sustainability.

Hans Wijers

Thank you, Keith. Ladies and gentlemen, sustainability is something in AkzoNobel that goes beyond the sustainability report and some nice brochures. It is – we have been working in the past couple of years systematically to make it part of how we run the company. So, it is integrated in all our normal management processes. It’s the way we do business. We’ve set ourselves a set of ambitious targets. I already referred to the ambition to be in the top three of the chemicals industry with the Dow Jones Sustainability Index.

Under that level there are a couple of – there is quite a lot of specific targets we have per area actually, balanced score card with targets like we want to have sustainable water management by 2015. And we have set targets for eco-premium products and many other areas we’ve set pretty stretching targets. We do not believe sustainability is something that you can do in a couple of years and then you have achieved your target. This is something about the longer term. It’s about gradual changing how you produce products, what kind of products you produce, how you work with your supplier and your customers to reduce the overall carbon footprint. It is about how you develop your people. It’s about [ph] how you operate in communities in which you operate so that there is a continuous effort.

So, it’s a long term thing while of course you have to measure your day-to-day progress. That’s how we do it. And as I said, we have linked remuneration to these targets. We were the first company to link 50% of our long term remuneration package to the performance in the Dow Jones Sustainability Index. So, there is a lot of things going on in our company.

Also, when you relate it to our research and development activities in AkzoNobel, we have around 4000 people employed worldwide working on sustainability, around 60%, a little bit less than 60% in Europe, more and more, of course, in Asia where a lot is happening, but also 20, around 20% in the America. Over 60% of our current research and development work is actually focused on sustainability projects. So, just to illustrate how much we focus on this target. And let’s be very clear, this is not only because we are people that believe in a better world. We believe in a better world, but also in earning money. And many of these products and processes give us either lower cost, less waste – it’s also lower cost, or they give us product with a higher margin. So, it is, it’d finding – it’s a terrible expression now, but it’s finding win-wins and we do it regularly.

It is paying off, as I said, give you some of the fruits, the recent fruits of our research and development activities. A very interesting product is the new Weathershield SunReflect Dulux product, also now getting more important in this part of the world. What it does, if you apply it, it lowers the temperature of the external walls up – by up to five degrees Celsius and as a consequence reduces the need for air conditioning because it reflects up to 90% more of the infrared light that comes on houses.

Another example is a waterborne peelable coating that you can apply to cars and commercial vehicles. You know many companies have actions. Many companies – there is special events happening. If you have to paint your car for that, then repaint it again, of course it takes a lot of money and also a lot of coating. This is a way to basically put it on your car, peel it off without using all kind of complex chemicals, cleaning chemicals. The colleagues of (inaudible) of course don’t like this particular product. But it is a very interesting product.

A third one, may be not so sexy, but also pretty interesting if you look what it does. It’s an industrial salt where we have an eco-efficient anti-caking agent that saves up to 5% of a chlorine production plant’s total energy consumption. You know you need salt to make chlorine and chlorine is used to use [ph] plastics and all kind of other materials. So, it also reduces the waste, its increases production, and enhance product quality of our customers.

Again, very important things that go into the small veins of society, but helps to deliver on higher performance when it comes to sustainability.

Finally, talking about Q2, our outlook, how do we look at the future. We think Q2 illustrates what I tried to say on this slide. We are well positioned for growth. We have strong position I brands. And as Keith rightly said, not only in the high growth environment, but also in the established markets.

We have, compared to our peers probably overall better a geographic spread also into all the highly attractive sectors. Many of our peers are either regional or local players. We are global players. I thing what we have proved compared to last year is that our portfolio is much less cyclical than people anticipated and very resilient to certain cyclical developments. And I hope to illustrate we will continue to do that and we realize we have to build on that further.

But sustainability is really integrated in everything do. We now have – with the new company, the new AkzoNobel, we have a strong track record in terms of operational excellence. Don’t forget we achieved our 40% target one year ahead of planning.

Cash flow, very strong, the balance sheet is very strong. And what I also showed last year and also the beginning of this year, we are able although we are a large company, we are able because of our organizational structure and the quality of our people to quickly adapt to changing market circumstances, something to be very proud of for those people working at AkzoNobel.

So, if we now look at the future then I think we can say that we have achieved another kind of qualitative ambition. We said it a couple of times early ’09 we want to get out of this crisis, this economic crisis in better shape than we got in. And it gets illustrated by – if you look at most of the statistics. What we see in our environment is that developed markets remain challenging. There is a lot of uncertainty about what’s happened macro economically in the U.S. and in Europe. But we see, of course, also very positive developments that go beyond just restocking. So – and also if you take into consideration what we see in the emerging markets, there is a lot of opportunities there.

So, we remain cautiously optimistic despite the economic uncertainty. We will focus more and more on accelerating our growth agenda and our presence in key markets. We will continue to focus on customers, cost, and cash and the latter element particularly in the mature markets.

And, of course, moving now to the next stage of our development, we will provide with an update of our medium term ambitions during our capital markets day on September 28 in London.

Now, ladies and gentlemen, that concludes the sheets of the Q2 results, but before we start with the Q&A, I would like to apologize to our non-Dutch attendees as I now prefer to switch to Dutch since I would like to discuss a couple of recent events around (inaudible) in my own and I guess the language of most of the people being here.

[Foreign Language]

Question-and-Answer Session

Unidentified Analyst

[Foreign Language]

Hans Wijers

[Foreign Language] Next question please or [Foreign Language]

Unidentified Analyst

[Foreign Language]

Hans Wijers

Could you use the microphone please?

Unidentified Analyst

[Foreign Language]

Hans Wijers

[Foreign Language]

Unidentified Analyst

Can I move on to the earnings, now?

Hans Wijers

Yes, of course, okay.

Unidentified Analyst

I was wondering whether you see your exposure to emerging markets growing at the same rate as the past years.

Hans Wijers

Okay, first and foremost, we are very optimistic about our potential to continue to grow and to actually accelerate growth in high growth markets. I am not suggesting that it will be at the speed as we have seen in Asia, for instance, in the second quarter, because don’t forget we compare to a week quarter and there was a lot of fiscal stimulus going into, for instance, the Chinese markets. That will not continue, but we have recently reviewed, for instance, our businesses in China, India, and Brazil. And we have identified significant opportunities to further accelerate growth to build market shares and to gain market shares in those markets.

You may have captured that a couple of weeks ago in China. We gave a further growth ambition for 2014, end of 2014-2015, move to €3 billion sales in that country. We have comparable pretty aggressive ambitions for other markets. A lot has to happen to do it. We will have to invest significantly in people, in brands, in infrastructures, but we are making our plans. We are having our plans. We are doing it. It is something we will absolutely work on and having now reached a certain level of profitability also allows us to make the money available to accelerate that growth. So, overall, yes.

Unidentified Analyst

And the exposure is now 40%, as you said, and how much will it be in one year, five years?

Hans Wijers

Yes, that depends, of course, on the one hand on how high the growth in those markets, but also how low the growth will be in the more mature markets. So you can speculate a lot, but somewhere don’t try to pin me on an exact year, but somewhere in this decade, we will surpass the 50%.

Unidentified Analyst

And when you said that you are looking for bottom acquisitions, but your priority is organic growth, will that mainly will be in the emerging markets as well then?

Hans Wijers

No. No, let’s also put things in perspective. We now see a period of low growth. Lot of volatility in the Western world. There will be point in time that the – for instance the American housing market will start to grow again. I mean, cumulative now we must be 35%, 40% down compared to the highest point in 2006. There comes a point in time that it will start to grow again and the North American economy has a history of a lot of strength to regain growth. And also in Europe, at a certain point of time, people will start building houses again, will start repainting their houses.

So, I am not that negative about the longer term perspective of these markets. But in the – I mean there has to be – the housing markets are currently under pressure. There is over capacity in the commercial real estate. That will take some time. But then it will start to grow again. And we have strong leading positions there. And we really like them. And we will invest in them as well.

Unidentified Analyst

Okay, thank you.

Unidentified Analyst

I have a few questions. Mr. Nichols, you said National Starch this year, but in the press release you said end of Q3. I was wondering what the difference was.

Keith Nichols

Yes, it’s still the intention end of Q3, but nothing is guaranteed. I think we are on track for that. What I actually said was in the second half, so end of Q3 –

Unidentified Analyst

Now, this year isn’t –

Keith Nichols

It’s still achievable.

Unidentified Analyst

End of Q3?

Keith Nichols

Yes, still achievable.

Unidentified Analyst

Okay. Then, the volumes of deco, it was plus five in first quarter and now plus one. What happened?

Hans Wijers

Well, it is – it’s a combination of two things. It’s about substantial growth in the high growth markets. But it is also depressed markets in the U.S. or actually North America, overall, and in selective markets in Europe. I mean, look at this country, the housing market is under pressure. If you look at southern part of Europe, although our position is relatively small there, they are under pressure. Actually, across Europe, there is – particularly the trade segment is pretty weak. And that has had its impact on the volume developments.

Unidentified Analyst

Okay. And then about deco U.S. some analysts, UBS, Nomura, said – suggested that Akzo could exit deco U.S. for a partnership or even a right out sale. And I was wondering what your opinion is on that. I – your board member isn’t here, but –

Hans Wijers

No, but we share opinions usually –

Unidentified Analyst

Okay.

Hans Wijers

– on these kind of subjects. So – the current strategy for the U.S. is basically to strengthen our position significantly and bring the business back to an acceptable level of profitability. We are optimistic that we are going to achieve this, although the market does not help very much. The Glidden relaunch and Home Depot has been a very good success, gaining market share, well received, even received one of the most prestigious marketing prizes in the U.S. recently, but also Home Depot is happy with it. An additional initiative is the Martha Stewart brand also being introduced in the Home Deport stores.

We are revamping, currently all the stores. The stores have been unprofitable for a decade actually in – also in the former ICI. We closed down stores. All the stores are revamped. They look pretty old-fashioned. They now look much better focused on the professional segment. Also reduced complexity significantly, reduced the whole supply chain, taken costs out. At a certain point of time and not too far away from now, we will see really that we go from red number to black numbers for that business and we bring it to an acceptable level of profitability.

That’s where we focus on now. Now, then the next question is the following. The American market is the largest integrated market still and for years to go for deco in the world. So this is a market where you typically would prefer to be. It is a market that is – has market structure where there is one very dominant player with a very high market share and there is a couple of players with market shares let’s say around the 10%.

This is typically a market where further consolidation will happen. We have not made up our mind yet about what the good solution is for the next steps. We have excluded no option. And in the end, we are business people, but also strategic business people. we will see what we will do at that point in time and it has also to do with how do you allocate your capital and how much capital you have available and where would you like to expose it.

We have not made any decision about that. All the attention is now focused on bringing the company to where it has to be, it’s to a level of profitability, to start growing again. We’ll get there. We create a lot of value by doing that. And then we will take next steps. That’s the strategy.

Unidentified Analyst

Okay. And last question, you gave savings number for ICI 2010 in the sheets –

Hans Wijers

340 million overall, yes.

Unidentified Analyst

Yes –

Keith Nichols

It’s not about ’10, it’s about the history.

Unidentified Analyst

Sorry.

Keith Nichols

You said for 2010.

Unidentified Analyst

I thought it was in the sheets 2010, but I can be wrong –

Hans Wijers

Okay, we have set a target of 340 million overall for ICI cost synergies and we are in a very advanced stage of reaching that.

Keith Nichols

Yes.

Hans Wijers

We are not completely there. So, there is two numbers, right? 540 and this is 340.

Unidentified Analyst

‘340 million structural cost savings will be achieved in 2010.’

Hans Wijers

Yes, yes, so at the end – so where we are now, we have not achieved the 340 ’10 completely but by the end of the year we will be there.

Unidentified Analyst

Okay, my question was at ICI, you had additional cost savings for restructurings. Last year last number we saw for that was in fourth quarter results. It was 600 something –

Keith Nichols

Right, that’s the combined.

Unidentified Analyst

Yes, the combined number. What’s the combined number for 2010?

Keith Nichols

We had two targets, one was synergies, the 340, and then we had 200 of cost savings in the crisis on top of what we normally do as regular restructuring.

Unidentified Analyst

It was 540, yes.

Keith Nichols

540 and we tick the box on that. It’s 642, as you say at the end of the last financial year. At the same time we said, we are not going to give specific additional targets, but given our footprint is 60% in matured markets, we will always have a level of restructuring in our business. That can be in a range of anywhere between €50 million and €150 million a year. So far, year-to-date, it’s below 50.

Unidentified Analyst

Below 50.

Keith Nichols

Year-to-date.

Unidentified Analyst

So, for this year, you – ?

Keith Nichols

But that’s incidental charges for restructuring.

Unidentified Analyst

So, this year you are – for cost savings you – ?

Keith Nichols

It’s an ongoing part of our business. We’ve not given specific guidance for the –

Hans Wijers

Because there is no big restructuring –

Keith Nichols

Because there is no additional need for an intensive focus that may – it may come back. I mean we watch very carefully in the mature markets. You know, I think that’s fundamentally weaker than where we are today. We might have to press the accelerator again on more restructuring, but at the moment, we are back to the more normal level of restructuring.

Unidentified Analyst

Between 2008 and 2009 you did restructurings. How many jobs got lost from the beginning of that restructuring period?

Keith Nichols

Well, you can see our numbers if you go back in 2009 –

Unidentified Analyst

Yes, just for deco 2400 or something – ?

Hans Wijers

It will –

Keith Nichols

It is close to 3000.

Unidentified Analyst

Yes.

Hans Wijers

The company – but there is a lot of pluses and minus because we also acquired companies, we also grow in emerging markets, but net-net, when we embarked on the whole thing we were around 60,000 people, we are not around 55,000 people. But there is a lot of pluses and minuses around that.

Keith Nichols

Including salt business –

Hans Wijers

The divestiture of National Starch, for instance, but also the acquisition of the Rohm & Haas business. So it is more.

Keith Nichols

And we will need to add people. As we grow strongly in these high growth markets, we need people in order to build our distribution capabilities, our marketing teams.

Unidentified Analyst

Okay, thank you.

Hans Wijers

Next question. [Foreign Language]

Unidentified Analyst

Could you maybe say a bit more on where or within which division you are looking for the bolt-on acquisitions?

Hans Wijers

We are now in a – in the very comfortable position that the vast, vast majority of our portfolio is – has a leading position, is profitable, and has a growth potential. That means that we focus first and foremost on organic growth, but as a matter of principle no – none of our business – let’s say none, but there may one or two that are not performing currently – but the vast majority is principally excluded from acquisitions provided the business is in good shape, provided that the management is not involved in other challenging things that would make it difficult to integrate. Certainly the target makes strategic sense and of course that we can make a business case that allows us to get – to basically justify the premium that you typically pay with an acquisition. If those criteria are met, all our businesses have access to M&A capital, you could say.

Unidentified Analyst

Okay.

Hans Wijers

I have the impression –

Unidentified Analyst

But then – yes, another question on the emerging markets. The growth you have there is that just growth that more people are – that demand is increasing or are you also taking market share from competitors?

Hans Wijers

It’s typically a combination of the two. As you see, as these markets develop, you see a lot of companies also disappearing. I think at this point in time in China you have 7000 kind of registered paint companies. This is how I have formulated, because there is also –

Unidentified Analyst

How many?

Hans Wijers

7000.

Unidentified Analyst

Okay.

Hans Wijers

After the war, correct me if I am wrong, I think there were about 5000 in the U.S. there is now a couple of hundreds. You will see comparable developments in China. So you will see a lot of the small players disappearing either because they sell out more likely because the higher regulatory hurdles in terms of product safety, product consistency, working conditions are now being implemented in these countries, they basically can't do anymore. And, besides, we are using our scale, we are investing in advertising and promotion. Our brand gets better known. We move from the coastal area more and more western into the rest of the country. Our major competitors as well. So gradually you move step by step to a more normal a kind of what we could call a normal structure where you have a couple of big leaders with relatively high market shares and a tail of smaller players.

That is the second element. So, you gain relative market shares. And then we also have the ambition in most of these markets to gain relative market share against the larger players. So, it’s a combination of these three factors.

Unidentified Analyst

And these small players are local players?

Hans Wijers

No, but some of them are also large players.

Unidentified Analyst

Okay, yes.

Hans Wijers

Okay.

Unidentified Analyst

And then may be one final question –

Hans Wijers

You have lot of final questions.

Unidentified Analyst

Just another one came to my mind. The advertising spend was up as well this quarter. Do you – is that going to continue that you – ?

Hans Wijers

So we have spent this quarter 7% more or less A&P. We would normally expect structurally longer term spend around 5%. At this point in time given our accelerated growth plans, we will spend over the full year around 6%.

Unidentified Analyst

The efforts for 2010 will be 6%?

Keith Nichols

Can I just say something? It’s a positive leading indicator. So, it’s running 6%-7% at the moment because we are confident that it’s the right time to spend it and it will lead to bigger sales, bigger market share, bigger revenue, bigger profits. So, you need to wait really until we update also in September because the structural, if we have higher growth ambitions, and we are going to be focusing on some of these growth markets. It may indeed be that the weighted average drifts closer to 6% or even 7%. And don’t get too hung up on the number. Read it as if they invest, it’s like any fast-moving consumer goods. If you spend smartly and carefully, it’s a strong leading indicator that sales will follow.

Unidentified Analyst

Yes. And is the – the advertising all over you regions or – ?

Keith Nichols

Well, there are specific things going on. I had the slightly humorous slide about the igloo – getting color to igloos. But that’s about Glidden and relaunch. That’s a mature market. We are deliberately repositioning Glidden, changing the packaging, revitalizing it in the market. In China, in Turkey, in Brazil, painting pavilions [ph] in Sao Paolo, that is a whole other level of A&P, a whole other layer of media interaction. But it really positions the brand more strongly. We are also coming down from being premium to more mid-market products, winning more sales. So it depends on which markets you are going on, but the key point is in the recession you would seen lower levels of spend because there wasn’t a demand and there wasn’t the sales. As things get comfortable, as they get more confident, if you see a spending a bit more, generally speaking it’s a good leading indicator.

Unidentified Analyst

Okay, thank you.

Hans Wijers

Okay. Any other person that has a final, final question? If not, then we leave it here. Thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Akzo Nobel N.V. Q2 2010 Earnings Call Transcript
This Transcript
All Transcripts