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Akzo Nobel's second quarter profit surges despite car industry weakness

Akzo Nobel's second quarter profit surges despite car industry weakness
FILE PHOTO: AkzoNobel's logo is seen in Amsterdam, Netherlands, February 16, 2012. REUTERS/Robin van Lonkhuijsen/United Photos/File Photo -
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By Bart H. Meijer

AMSTERDAM (Reuters) – Dutch paints and coatings maker Akzo Nobel <AKZO.AS> posted a 36% jump in core profit in the second quarter as higher prices and cost savings offset weak demand from the car industry and higher raw material prices.

The results topped forecasts by analysts, helping spur a 3% rise in Akzo shares to 85.82 euros in morning trade.

Still, the company – which makes the Dulux and Flexa brand of paints and supplies to sectors ranging from aerospace to yachts – acknowledged the pinch from a global industrial slowdown, especially troubles in the auto sector.

Revenues remained flat at 2.45 billion euros (£2.19 billion) as falling demand for coatings from the car industry and weakening economic growth drove sales volumes down 6%.

“It’s clear that the car industry has weakened, and of course that trickles down to suppliers as well,” Chief Executive Thierry Vanlancker told reporters.

Car makers around the globe are wrestling with slowing growth in China, weak markets in Europe and a rise in global trade tensions, leading to profit warnings by producers such as Daimler <DAIGn.DE>. On Wednesday, the German maker of transparent plastics for panoramic car roofs and headlights Covestro <1COV.DE> said the car industry had developed “much weaker than expected”..

Overall, Akzo’s adjusted operating income climbed to 305 million euros, easily topping the 287.4 million euros expected in a poll of analysts by the company.

Analysts said Akzo’s results were better than expected, with JP Morgan noting that the beat could offer some relief for investors after a string of “more or less consistent misses.”

Still, ING cautioned against too much optimism, saying the earnings were helped by a one-off gain on asset sales.

Improvement in the traditionally strong second quarter was also not enough to prove that Akzo would meet its 2020 targets, ING analyst Stijn Demeester said, as these “continue to feel stretched”.

NOT A STRAIGHTLINE

Akzo in 2017 promised frustrated shareholders that it would improve profitability and deliver 15% return on sales by 2020 as it refused to consider an unwanted takeover offer by U.S. rival PPG Industries <PPG.N> at the time.

Akzo increased its return on sales to 13.7% in the second quarter and stuck to its target of lifting it to 15% over the course of next year, but warned progress might be uneven.

“It’s not a straight line”, Vanlancker said. “The second quarter is one of our two bigger quarters, where we can really see the effects of our work. This could taper off in the fourth quarter.”

Return on sales in the fourth quarter would probably be lower than in the second quarter, he added.

As part of its strategy, Akzo last year sold its speciality chemicals unit for 10 billion euros to a group of buyers led by Carlyle Group <CG.O>, with the proceeds distributed largely to shareholders.

“This was an important quarter for us to demonstrate our strategy is working,” Vanlancker said, as he predicted the effects of rising prices of oil and other inputs would stabilise in the second half of the year.

(Reporting by Bart Meijer, Editing by Deepa Babington)

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