Akzo Nobel announced the headlines of its Strategy Update in a press release yesterday morning, while presentations were given in the afternoon.
We recall that the new 2015 financial targets announced in the morning are :
9.0% return on sales (operating income post incidentals/revenue) vs 5.9% in 2012 (figure excludes the € 2.1bn impairment)
14.0% Return on Investment (operating income/average 12 months invested capital) vs 8.9% in 2012
Net debt/EBITDA should remain below 2.0x (vs 1.4x in 2012)
The targets assume sales CAGR of 4% over the period
The 2015 group financial targets were translated in the Strategy Update presentation on a divisional level, although the divisional comments were said to be ‘expected outcomes’ and should not be viewed as targets:
Deco Paints : ROS of 7.5% (2012: 2.2%), ROI 12.0% (2012: 3.0%) and revenue growth assumption 5.0%
Performance Coatings: ROS of 12.0% (2012: 9.5%), ROI 25.0% (2012: 21.7%) and revenue growth assumption 5.0%
Specialty Chemicals: ROS of 12.0% (2012: 9.0%), ROI 15.0% (2012: 13.6%) and revenue growth assumption 3.0%
Some additional elements revealed:
Profit Improvement Program : Recall this program has yielded € 250m excluding Deco Paints North America by the end of 2012 (with one-of costs of € 292m). The 2013 plan is to accelerate delivery of the targeted € 500m recurring EBITDA gain (which was originally planned for 2014). Associated costs in 2013 are estimated at € 205m. Note that the additional savings initiatives initiated in Deco Paints are targeted to yield € 100m savings in total, the 2013 part of which is included in the Profit Improvement Program while a part will fall in 2014 and comes on top of the overall € 500m target (exact breakdown not given).
Geo mix goal : high growth markets to increase from 44% in 2012 to more than 50%
Capex will be around 4% of revenue going forward, with 40-50% of budgets being growth related. Company requires a 3-5year payback period from capex projects and that target has also been reached on most of the recent investments (ethylene amines plant in china is a notable exception)
Sustainability targets are to derive 20% of revenues by 2020 from eco-premium solutions and reduce carbon emissions by 25-30% per ton by 2020 (vs the 2012 base). Sustainability gets a significant leg in the direction of innovation spend (2.5% of revenue)
Conclusion:
The switch of target system from a pre-exceptional EBITDA margin base to a post-exceptional items operating income base is in our opinion not a good thing. Obviously this sets a low base on 2012 which can then be used for future tracking/comparison. With an (pre-exceptional) EBIT margin already at 8.3% in 2012, the operating income target of 9.0% does not look very ambitious anyway. As the share price has over the past months reached our target price (of € 49), we decided to downgrade our rating to Hold, with an unchanged target price.