Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Akzo Nobel NV (AKZOF, Financial) reported a 2% organic sales growth in Q2 2024, marking the third consecutive quarter of volume growth.
- Gross margin expanded by 160 basis points year-on-year in Q2, and 270 basis points for the half year.
- The company is making good progress towards its midterm guidance range of 16% to 19% return on investment, currently at 13.7%.
- Operational improvements are expected to yield a benefit of about EUR25 million for 2024 and an incremental benefit of around EUR70 million for 2025.
- Targeted price increases and measures to combat inflationary pressure on OpEx are expected to improve financial performance in the second half of the year.
Negative Points
- Higher than expected operating costs muted adjusted EBITDA growth in Q2, with a EUR20 million deviation due to cost inefficiencies and wage inflation.
- Net debt to EBITDA ratio increased to 2.9 times from 2.7 times at the end of Q1, reflecting usual seasonality.
- Deco EMEA volumes were flat due to adverse weather conditions, impacting high-margin exterior paint sales.
- China Deco business experienced a mid-single digit volume decline, with competitive pricing pressures.
- Free cash flow was EUR77 million, showing a return to normal levels but still reflecting higher prior year comparisons.
Q & A Highlights
Q: In EMEA Deco, exterior paint was delayed due to weather. Can you catch up on this, and how did China perform with its double-digit decline in organic sales?
A: (Greg Poux-Guillaume, CEO) Exterior paint is higher margin and professionally driven. We were doing well in April and May, but June was bad due to weather. July is back on track, so we expect to catch up. In China, coatings grew double digits, but Deco volumes were down mid-single digits. We expect better performance in the second half due to easier comps and some market stabilization.
Q: How much higher than expected was labor inflation in Q2?
A: (Maarten de Vries, CFO) OpEx in Q2 was EUR20 million higher than planned, with EUR10 million from inefficiencies and EUR10 million from higher wage inflation. Total OpEx included EUR40 million from wage inflation and EUR10 million from inefficiencies.
Q: Can you explain the working capital development and free cash flow for the first half?
A: (Maarten de Vries, CFO) The free cash flow follows a normal seasonal pattern, with most of it unleashed in the second half. Working capital was 17.3% in Q2, and we aim to end the year at 14% or below. The timing of quarter-end impacts cash collection, but we expect to normalize inventory levels and improve free cash flow in H2.
Q: How are you able to accelerate the industrial transformation savings?
A: (Greg Poux-Guillaume, CEO) Progress in closing sites and transferring volumes has been better than expected, allowing us to pull forward closures. Improvements in existing plants and fixing OTIF issues have also enabled us to identify more rationalization opportunities, increasing the quantum of savings.
Q: What drives the better Q4 EBITDA versus normal seasonality?
A: (Maarten de Vries, CFO) Q4 last year had a EUR23 million hyperinflation hit. This year, targeted price increases and OpEx corrections will drive Q4 performance. We expect Q4 to be more in line with Q1 plus these improvements.
Q: Can you elaborate on the aerospace performance and supply chain issues?
A: (Greg Poux-Guillaume, CEO) We are the market leader in aerospace coatings, but PPG has a broader portfolio. Our slowdown is due to production issues at Boeing and Airbus, not supply chain constraints. The MRO market remains strong, and we expect long-term growth in aerospace.
Q: What is your current order book visibility, and any updates on the Australian Pipeline litigation?
A: (Greg Poux-Guillaume, CEO) Most of our business is transactional, except for marine and protective, where we have multiyear contracts. The Australian Pipeline litigation is ongoing, with no substantial updates expected before year-end.
Q: Can you explain your raw material procurement model and its geographical split?
A: (Greg Poux-Guillaume, CEO) Procurement is a global function. For example, 18% of our TiO2 for Europe comes from China. We maintain a geographical balance to mitigate risks. Tariffs and other macroeconomic factors are considered in our procurement strategy.
Q: Should we expect wage inflation to normalize in 2025, and will there be a positive outcome on net fixed costs?
A: (Maarten de Vries, CFO) Wage inflation is high this year due to catch-up agreements. We aim for more normalized wage inflation in 2025. We expect EUR70 million in benefits from industrial efficiency programs and additional actions to drive productivity.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
