Akzo Nobel - Not out of the woods yet

The 2Q13 results were below our and consensus forecasts on an operating level. Volumes were flat in 2Q13, which was an improvement on the 1Q13 trend (-3%), but the CEO warned that momentum slowed in emerging market towards the end of 2Q. Implementation of the Performance Improvement Program seems to be on track, with €381m savings captured by mid-2013 vs the €500m year-end target. Akzo is embarking on new restructuring initiatives, which will add €120m to restructuring costs in 2H13 vs previous guidance, with the additional benefits not visible until 2014 and beyond. Higher restructuring charges explain most (but not all) of the difference between the fresh FY operating profit guidance and consensus forecasts, leading to some additional disappointment. With end markets in pretty bad shape and continued downtrading effects visible in Deco Europe, it is admittedly difficult to find a short-term trigger. However, we still believe management is on the right track (by focussing on restructuring and self-help profit improvement) and we are sticking to our Accumulate rating, on the back of the reasonable valuation.

2Q13 operational results are below our estimates and consensus, with 2Q13 Operating Income down 17%. Positive was the stabilization of the volume trend in 2Q13 (y/y) after a 3% y/y drop in 1Q13. The price/mix trend is unchanged from 1Q13 (i.e. -2% y/y), with a deterioration in Deco Paints and a stabilization in Performance Coatings.
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More restructurings
Akzo remains committed to hitting the €500m Performance Improvement Program target by end-2013 and had already achieved €381m savings by mid-2013 (€250m at year-end 2012). The company has embarked on new restructuring initiatives and has upgraded its 2013 restructuring charge guidance from €205m to €325m. (Unquantified) benefits from the additional restructurings will not be visible until 2014.
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Outlook
Akzo has guided that FY13 Operating Income is unlikely to exceed the €908m posted in 2012. Thiscompares to our and consensus forecasts of €997m and €1061.5m. Most of the difference is explained by the €120m step-up in restructuring charges.