Morningstar | Akzo’s Value-Over-Volume Strategy and Cost-Cutting Continue to Bear Fruit in 2Q
No-moat Akzo Nobel reported a 36% increase in EBIT during the second quarter, which beat consensus expectations. However, the consensus beat primarily resided in the "other" segment. Nevertheless, we continue to be impressed with the progress the company made in its turnaround strategy. Prices were up 5% in the second quarter and EUR 43 million in cost-cutting savings were achieved, which more than offset a 6% drop in volumes. The EBIT margin, excluding unallocated costs, reached 13.7% in the second quarter, a 160-basis point increase over the prior year. As raw material inflation looks set to stabilize in second-half 2019, the potential for continued margin increases is improving. Consequently, we are likely to boost our future margin expectations for the company, but don’t expect a significant change to our EUR 82 fair value estimate. At current levels, the shares look fairly valued.Decorative-paints EBIT increased 11% over 2018. Europe was the main driver with a 6% increase in constant-currency sales. We have some doubts that European performance will be sustained, given other economically sensitive sectors are deteriorating. China continues to be the main drag on growth, evidenced by a 9% drop in constant-currency sales is Asia. Restructuring the China business is a key pillar of the value-over-volume strategy and we think shunning low-value business in the country is the right strategy.
Performance-coatings EBIT increased 15% over 2018. Growth was generally flat because prices increases offset volume losses. Demand was reported to be soft in general, and particularly in automotive. We are pleased to see the marine business is showing signs of stabilization with flat sales growth. The marine business has been a major drag on the segment in recent years.
Akzo Nobel N.V. is a holding company. Through its subsidiaries, Co. is engaged in the production and marketing of paints, coatings and specialty chemicals. Co. has three segments: Decorative Paints, which supplies products for the professional and do-it-yourself markets, including paints, lacquers and varnishes, as well as products for surface preparation; Performance Coatings, which is divided into the following businesses: Automotive and Aerospace Coatings, Industrial Coatings, Marine and Protective Coatings, and Powder Coatings; and Specialty Chemicals, which are used in products such as ice cream, soups, disinfectants, plastics, soaps, detergents, cosmetics, paper and asphalt.
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