Akzo Nobel - Better than expected 3Q13 results

Akzo’s 3Q13 results were better than our and consensus forecasts, with Operating Income landing at € 303m (KBCS € 266m, CSS € 281m) vs € 248m in 3Q12 (or € -1.86bn incl Deco Paints impairment). Note that the 3Q operating income includes restructuring charges of € 75m vs our € 55-60m forecast (3Q12: € 101m). 3Q revenue declined by 5% to € 3,778m (KBCS € 3,796m, CSS € 3,795m), broken downas follows: volume +2% (2Q13: flat y/y), price/mix +1% (2Q13: -1% y/y), FX -6% and M&A -2%. Net result landed at € 155m (KBCS € 146m, CSS € 157m).
Decorative Paints saw flat revenue at € 1,136m (KBCS € 1,147m, CSS € 1,125m), with volumes +5%, price/mix +2% and FX -7%. Revenue was up 1% in Europe and up 2% in Asia, while being down 3% in Latin America (impacted by the depreciation of the BRL as volumes were said to be strong). Operating income landed at € 107m (KBCS € 66m, CSS € 78m) vs € 48m in 3Q12 (excl impairment), helped by lower restructuring costs.

Performance Coatings saw revenue decline by 4% to € 1,415m (KBCS € 1,445m, CSS € 1,452m), with volumes +2%, price/mix flat and FX -6%. Revenue was flat in Powder Coatings, up 1% in Automotive and AerospaceCoatings and down in Industrial Coatings (-5%) and Marine and Protective Coatings (-8%). Operating income increased by 23% to € 160m (KBCS € 141m, CSS € 155m), also helped by lower restructuring costs.

Specialty Chemicals saw revenue decline by 10% to € 1,252m (KBCS € 1,240m, CSS € 1,254m), with volumes and price/mix both flat, FX -4% and divestments -6%. Operating income declined by 20% to € 107m (KBCS € 110m, CSS € 104m), mainly due to restructuring costs in Functional Chemicals. Interesting is that thecompany is seeing some recovery in volumes and initial signs of stabilization in the ethylene amines market.

Update on pensions and net debt: The pension deficit increased from € 0.4bn at the end of 2Q13 to € 0.7bn. Net debt decreased from € 2.2bn at theend of 2Q13 to € 1.82bn at the end of 3Q13.
Guidance: The company reiterated earlier comments to be on track with the targeted completion of the Performance Improvement Program in 2013 (recall € 500m savings target by end 2013 after € 250m savings were captured in 2012 and € 381m by mid 2013) – a precise 3Q update is not given.

FY13 restructuring costs guidance is lowered from € 325m to around € 300m (€ 144m in 9M13 of which € 75m in 3Q13) with about € 160m guided for 4Q13 (some restructuring costs are shifted to 2014). The company repeated earlier comments that the economic environment remains challenging and it does not expect an early improvement in the trends faced in their end-user market segments. The company still guides for an FY operating income (now before incidental items) which is unlikely to exceed the € 908m posted in 2012 (this figure excludes Deco Paints impairment), despite lowered restructuring costs guidance. The ‘before incidental items’ was added to exclude the impact from the capital gain of the sale of Building Adhesives (around € 200m). Guidance compares to our € 855m forecast and € 871m consensus.

Conclusion: 3Q13 results were better than expected despite slightly higher than expected restructuring costs. FY guidance is technically slightly lowered given lower FY restructuring costs guidance but we do not pay too much attention to that. Visibility remains fairly low but valuation is attractive enough to reiterate ourAccumulate rating and € 53 target price.