Akzo Nobel (OTC:AKZOY) (AKZA.AS) reported continued volume growth for the fourth consecutive quarter in its Q3 2024 earnings call on October 25, 2024. Despite mixed market conditions, the company saw a 1% increase in volumes and maintained a steady EBITDA margin of 15%. However, the net debt-to-EBITDA ratio rose to 3x, attributed to temporarily elevated working capital.
Key initiatives, including the closure of three EMEA Deco sites and a reduction of 2,000 global positions, aim to achieve significant cost savings. The company anticipates flat volumes for Q4, with stronger growth expected in emerging markets.
Key Takeaways
- Akzo Nobel posts 1% volume growth in Q3, with an adjusted EBITDA of €400 million.
- The net debt-to-EBITDA ratio increased to 3x due to higher working capital.
- Closure of three EMEA Deco sites and reduction of 2,000 jobs are part of cost-saving measures.
- Strategic review in South Asia focuses on decorative paints, especially in India.
- Anticipated flat volumes in Q4, with mid-single-digit growth in emerging markets.
- Full-year adjusted EBITDA expected to be around €1.5 billion, with a net debt-to-EBITDA ratio forecast revised to 2.7x.
- Interim dividend ex-date set for October 28, with payment on November 7.
Company Outlook
- Full-year adjusted EBITDA expected to reach €1.5 billion.
- Net debt-to-EBITDA ratio forecast revised to 2.7x for the full year of 2024.
- The strategic focus on portfolio management, especially in Southeast Asia and India.
- Company open to partnerships or exits in markets with low consolidation potential.
- Q4 results to be announced on January 29, 2025.
Bearish Highlights
- Weak demand in China, particularly in the decorative paints segment.
- Vehicle refinish market expected to soften due to mergers and lower repair volumes.
- No further investment planned in Latin American decorative paints.
Bullish Highlights
- Mid-single-digit growth in Latin America and strong double-digit growth in Southeast Asia.
- Strategic review initiated for decorative paints in South Asia.
- Interest in BASF's coatings business if it becomes available.
Misses
- The company reported a rise in net debt-to-EBITDA ratio, primarily due to increased working capital.
Q&A Highlights
- Inflation assumption for 2025 is between 3% to 4%.
- Focus on coatings over decorative products, with a strategic shift towards a greater emphasis on coatings.
- Selective bidding strategy in the marine sector to focus on high-value technical ships.
- Anticipation of slight inflation in raw materials into 2025.
Akzo Nobel, a leading global paints and coatings company, continues to navigate a complex market landscape while achieving modest volume growth. The company's leadership is implementing strategic initiatives to enhance efficiency and reduce costs, which include consolidating operations and reducing the global workforce. These measures are expected to contribute to the company's financial health and competitive positioning in the long term.
In the face of softening markets, such as the vehicle refinish segment, and the challenges in China, Akzo Nobel remains committed to disciplined pricing and cost management. The company's strategic review and potential partnerships or exits in certain markets underscore its dedication to optimizing its portfolio for value creation.
Investors and stakeholders can look forward to more detailed guidance for 2025 in the upcoming full-year results, as Akzo Nobel continues to focus on strategic decisions that will maximize shareholder value amidst market complexities.
Full transcript - Akzo Nobel (AKZO) Q3 2024:
Operator: Thank you and good morning, everybody. I would like to welcome you all to the Akzo Nobel Q3 Results 2024 Conference Call. My name is Brika, and I will be coordinating your call today. [Operator Instructions] Thank you. I would now like to hand you over to our host, Kenny Chae, Head of Investor Relations to begin. So please go ahead, Kenny.
Kenny Chae: Thank you, Brika. Good morning and welcome to Akzo Nobel’s investor update for the third quarter of 2024. I’m Kenny Chae, Head of Investor Relations. Today, our CEO, Greg Poux-Guillaume; and CFO, Maarten de Vries, will take you through our results. We will refer to the presentation, which you can follow by webcast or download from our website at akzonobel.com. A replay of the webcast will also be made available following the event. There will be a Q&A session after the presentation. For additional information, please contact our Investor Relations team. Before we start, a reminder of our forward-looking statements disclaimer on Slide 2. Please note, this also applies to the conference call and answers to your questions. I will now hand over to Greg, who will start on Slide 3 of the presentation.
Greg Poux-Guillaume: Thanks, Kenny. Good morning to everyone on the call. Apologies for my voice. I need to trade in my company bicycle for a company car probably in this weather. But hopefully, you can hear me fine. Q3 is our fourth consecutive quarter of volume growth. Volumes increased by 1%, even as market conditions remain mixed. Price/mix was flat as pricing benefits were offset by a negative regional mix of 1%. Our gross margin continued to improve. Adjusted gross margin expanded by 60 basis points in Q3 and 180 basis points year-to-date. Adjusted EBITDA growth in the quarter was impacted by higher-than-expected adverse currencies. While OpEx was higher year-on-year, it was down sequentially from Q2 levels as our cost measures begin to yield benefits. This will only accelerate in the next quarters given the additional SG&A measures that we announced. Q3 adjusted EBITDA before hyperinflation accounting was €400 million, in line with guidance, resulting in an EBITDA margin of 15%. Our net debt-to-EBITDA ratio, while down year-on-year, increased to 3x from the prior quarter, mainly due to temporary elevated working capital. Moving to Slide 4, let’s look at the initiatives that support our ambitions. In May, we announced the closure of 3 Deco European EMEA sites as part of our industrial efficiency program. These closures should be completed by year end with volume transfers nearly over already. The next wave of closures is in preparation and will be announced in early 2025. We reaffirm the benefit targets outlined in our half year results, €25 million this year, €17 million next year and north of €250 million overall. Incremental to our industrial efficiency program we announced in September an SG&A program with cuts that will optimize our functional organization. We are too heavy and we have to get leaner, particularly with rising labor costs. We are simplifying and rationalizing our organization. This will lead to a reduction of 2,000 positions globally, functional positions, a lot of them in Europe and will deliver annualized savings of €120 million to €150 million. Actions are already underway and should be largely implemented by the end of Q1 2025 although the benefits will spread out over time as people exit our payroll, which takes a little bit of time in Europe. At the start of October, we initiated a strategic review of our portfolio. Our intent is to focus our capital allocation on positions of differentiating scale, particularly in our key coatings markets. The initial focus of the review is on decorative paints in South Asia, where Akzo Nobel is present in a number of countries. In India, particularly, we have a premium, highly profitable position, but with limited market share in a market that is right for consolidation. We are well placed to participate in this consolidation and this can take different forms, which we are evaluating. We do not have a set timeline for this review and we are focused on getting to the right outcome rather than a speedy outcome. We will update you as we progress. Together, these initiatives position us to be a winner in our core markets. They will sharpen our competitive edge and accelerate our transformation towards sustained profitable growth. Let’s now turn to Slide 5. Organic volumes in Q3 were up 1%, with 2% growth in coatings and flat performance in deco. Looking at our businesses one by one, starting with decorative paints. In deco, Europe, Middle East and Africa, Q3 volumes remained flat with a robust performance in the UK and in the Benelux offset by weaker demand in Central and Southeast Europe. We expect mix trends to continue likely resulting in flat to slightly negative volumes in Q4. Turning to our emerging deco markets, Latin America delivered mid single-digit growth on solid performance in Brazil, while Colombia remained soft. In Southeast Asia, strong growth continued in Q3 with double-digit growth, primarily driven by Indonesia and India, while Vietnam stabilized. For Q4, we expect mid single-digit growth for these two regions combined. In China, demand continued to be weak due to a challenging real estate market and low consumer confidence. Although recent economic measures signal a potential rebound, we view this more as a 2025 opportunity. I’d highlight that as you know, China is about 14% of our sales overall, half of it is deco, half of it is coatings. The deco business is down significantly in terms of volume this year, but the coating businesses are doing really well and continue to grow. So I urge you to have a balanced view of China, if you take our Q3 numbers in coatings in China, so not deco, but coatings. Our volumes are actually up mid single digits. Let’s now move to our coating businesses. In powder, we achieved another strong quarter with mid single-digit growth despite flat markets and softness in the automotive side. Marine and Protective also performed well, driven by technical newbuilds in marine, while Protective faced mixed market conditions. We expect mid single-digit growth for these two businesses to continue in Q4. Automotive and specialty volumes were slightly lower, with a clear slowdown in the automotive market and softness in vehicle refinish. Vehicle refinish in Q3 actually showed growth, but we see that market as a little bit softer going forward. Aerospace generated solid growth, particularly in our aircraft maintenance business, but the OEMs, Boeing (NYSE:BA) and Airbus primarily are slowing down production, either due to strikes in the case of Boeing or supply chain issues in the case of Airbus. For Q4, we expect volumes to be flat to down. In industrial coatings, demand weakened in packaging and coil, while wood adhesives delivered solid performance. We anticipate further softening into Q4 on declining industrial demand, which could result in a mid single-digit contraction. In summary, we are delivering growth despite flat to declining markets. Given further deterioration in some markets, we expect flat volumes in Q4. I’ll – maybe I’ll take that as an opportunity to comment on the Q3 volumes if you exclude China decorative, our Q3 volumes were actually closer to 3% to 4% up in Q3, if you exclude China decorative. And if you apply the same reasoning to Q4, we will still be down double-digit versus last year in Q4 in China decorative. So actually, the underlying volume trends at Akzo Nobel, excluding China decorative are more in the sort of low to mid single-digits in Q3 and low single-digits in Q4. So, it’s more robust than it looks. But China decorative hasn’t bottomed out in the sense that it’s not that the market is dropping, it’s more that we are still chasing comps that are a little bit higher last year. But as the market settles and as some of these stimulus measures start taking hold, we think we will see a little bit of an upswing in Q4. Maarten, over to you. I am sorry, we will see an upswing next year, not in Q4. Q4 will still be down in China decorative, given the baseline of last year. Maarten?
Maarten de Vries: Thanks for clarifying that. Thanks, Greg, and good morning, everybody on the call. Our Q3 results were in line with prior quarter and our guidance when adjusted for FX headwinds that worsened in the quarter. Organic sales grew with 1% in the third quarter, though reported revenue was down 3%, primarily due to FX. Volumes were up 1% with growth in coatings driving results, while deco volumes remained flat. Price/mix was flat with positive pricing offset by negative regional mix of 1%. Adjusted EBITDA, including impact of hyperinflation accounting, was €394 million. This reduction to prior year reflects higher year-over-year operating costs, though these costs are now trending down sequentially. Our cost mitigation measures are progressing well and expect to make further headway with our SG&A actions as Greg outlined earlier. Turning now to Slide 7, our year-to-date return on investment of 13.4% shows a solid expansion versus prior year. This marks a solid step towards our mid-term range of 16% to 19% ROI. Working capital as a percentage of revenue stood at 17.7%. This was influenced by elevated inventory levels, which were primarily a result of mixed demand in some end markets. We are stepping up our efforts to reduce inventory and working capital. We expect working capital to land at the end of the year at around 15%, a bit higher than we initially targeted. We still aim to get back towards the 13% of sales by the end of next year. Leverage was 3x at the end of the third quarter. Despite a temporarily high working capital, we delivered solid free cash flow of €217 million in the quarter. With that, I’ll hand over back to Greg to discuss our outlook on the next slide.
Greg Poux-Guillaume: Thanks, Maarten. We delivered in Q3 our fourth consecutive quarter, combining volume growth and gross margin expansion while starting to reduce our operating expenses, our ability to defend pricing while capturing growth shows that we can adapt and perform in volatile markets. Adjusted for higher ForEx or adjusted EBITDA in Q3 was identical to Q2 in line with our guidance. Our operating costs are now trending down sequentially. We launched further cost and portfolio initiatives during the quarter to support our mid-term ambitions. We are excited by the progress we are making and remain confident in our ability to deliver sustainable, profitable growth. For the full year 2024, we expect to achieve adjusted EBITDA growth to around €1.5 billion and to finish the year with a net debt-to-EBITDA ratio of 2.7x. The 2.7x is the consequence of two things versus our previous guidance of €2.3 million. We said that we would be at around 14% of sales, working capital – 14% of sales by the end of the year will be 100 basis points higher, so it will be 15% of sales. And the rest of it is not working capital or restructuring cash out, it’s that the net debt to EBITDA is based on reported EBITDA and the SG&A measures linked to additional restructuring and therefore, identified items and therefore, that lowers the reported EBITDA. Maarten can do the math for you, if you want as the follow-up. But these are the drivers of the 2.7. I’ll now hand over to Kenny, who will close with information about upcoming events, and then we’ll do the Q&A. Kenny?
Kenny Chae: Thank you, Greg. Before we start the Q&A, I would like to draw your attention to the upcoming events shown on Slide 9. The ex-dividend date of our 2024 interim dividend is on October 28 and the record date is October 29 followed by payment on November 7, and we plan to publish our fourth quarter results on January 29, 2025. This concludes the formal presentation and we would be happy to address your questions. [Operator Instructions] Operator, please start the Q&A session.
Operator: Thank you. [Operator Instructions] We have the first question on the phone lines from Thomas Wrigglesworth with Morgan Stanley (NYSE:MS).
Thomas Wrigglesworth: Good morning, everybody. Thanks very much for the presentation. My two questions. The first one, could you unpack a little bit further the ambition behind the restructuring in Southeast Asia? Could you give us a little bit of a sense of what the best outcome looks like and what you would do with proceeds or having restructured Southeast Asia where you might look to restructure next? First question. Second question, just to clarify on this net debt, what the actual debt that you are anticipating at year-end is, should we be thinking something in the region of the kind of €3.7 billion to €3.8 billion level. Is that the right way to think about it? Thank you.
Greg Poux-Guillaume: Thanks, Thomas. I’ll take the first question. Maarten will take the second. In South Asia, it’s really a portfolio management, portfolio evaluation. We are looking at these positions where we have actually strong businesses, but strong businesses without leading market positions. And in markets where there is a potential for consolidation and there is a path to scale and we are very happy to be leading the way. But in markets where there are more natural consolidators, we are very happy to be either a minority partner or to exit altogether and what South Asia is the main countries for us or India, Pakistan, Sri Lanka, I mean in that region, the main topic is India. Our business in India is publicly traded. I think market cap is around €2 billion, if you convert currently. And if you look at the profitability we disclosed despite the fact that we have got 5% market share, give or take, we are one of the most profitable, if not the most profitable player in the space, because we have a very strong premium position. Dulux is actually celebrating 70 years in India this year. So, it tells you that we are the standard. And as the market consolidates, you’ve been absorbing India, I’m sure, where you see that there is people pushing in, like the Grasim guy from the cement sector. There is a – there is an Asian paint solidifying its position. There is other companies also trying to figure out what their differentiating assets are over time. It’s a good time to have conversations with the various market players to see how we can contribute to winning hand, a winning play over time. But once again, it can range all the way from a partnership where we’d be the junior partner, because we are – we do that with somebody that has strong distribution than us, for example, all the way to a potential disposal. And to your question as to whether there are other countries in Asia that where we can ask ourselves the same question, potentially. But in some of those countries, we also see a way to get to a leading position, not just a profitable position. So we’ll talk more about that over time. Right now, the focus is on South Asia. And then in terms of proceeds, I mean, it’s way too early to count our chickens here. We’ll make sure we fight, we make the right portfolio moves and we come to the best outcome, and then we’ll talk about proceeds. But overall, Akzo is focused on a balanced capital allocation that includes share buybacks, particularly if our share price is where it’s at today and capital deployment into our core businesses and our capital deployment going forward is more likely to be in coatings than in deco. Maarten, take the second question?
Maarten de Vries: Yes. On your question on the net debt, you mentioned the range of €3.6 billion to €3.7 billion. Actually, it’s in that range, but then in the high end of the range. So, it is more closer to the €3.7 billion that is our assumption for the net debt by the end of the year. Did we answer your questions, Thomas?
Thomas Wrigglesworth: Okay, thank you both. Yes, very clear. Thank you both.
Operator: Thank you. Your next question comes from Christian Faitz with Kepler Cheuvreux. You may proceed.
Christian Faitz: Yes, thanks. Good morning. Two questions, please. First of all, why do we expect the car refinish market going softer? Is it change insurance policies, less miles driven, people not getting their cars repaired due to economic hardship or all of the above? And then the second question is, one of your key competitors looks at selling its Brazilian Deco activities. Some market participants might not even have noticed that this peer had a Deco business. In any case, can I just confirm that simply looking at combined market share in Brazil, this business is not an option for you? And are any of the other activities that, that competitor is putting on the block in coatings of interest to you? Thanks.
Greg Poux-Guillaume: Alright. I’ll take those questions. Vehicle refinish has slowed down a little bit. I think we commented on that. I think PPG commented on something similar. In the U.S., it’s in part because there has been large mergers in the distribution space and there is some adjustments as the dust settles. But there isn’t anything structurally problematic. We are just observing that the volumes are a little bit lower than they have been and might be a little bit of a wait-and-see attitude in terms of people getting things repaired. But I wouldn’t want to make too much out of it than it is, just trying to guide that. We have been saying consistently that vehicle refinish was dynamic and currently, vehicle refinish is slower both in the U.S. and in Europe. Your second question is it’s a BASF question. It’s – you are talking about the Suvinil business in Brazil, which is our direct competitor in decorative paints. And I think the question you are asking is we are number one and number two. They are actually slightly bigger than we are, but we are very close. And the question is, does the combination of number one and number two makes sense? The first part of the answer would be that we are not looking currently to deploy additional capital to Deco in Latin America. We made the Orbis acquisition. We are still digesting it, extracting the synergies. That’s our focus today, not on deploying further capital in Latin America in Deco. Would we – so do I rollout participating? I mean I’ll help the BASF guys by maintaining the suspense, so that they can drive up the price. I think it’s a really good asset. And I know there will be very interested parties, because Brazil is an important market to be in. It’s a good market. And once again, BASF, although they only had one deco business, it happened to be a strong deco business in Suvinil. So I root for them to extract a good price out of it. But once again, we are not looking to deploy additional capital in Latin America in Deco. And your question as to whether the rest of BASF, I think you are alluding to BASF Coatings, whether that would be of interest, yes, it’s of interest. I mean it’s – we’ve made no bones, no secret about the fact that business or some parts of that business, even all of that business could be a good fit with Akzo Nobel, but it’s too early to comment on any of that. I think BASF has a lot of things on its plate right now between the catalyst disposal, the Deco Brazil disposal. And I think the agro business, Agri business IPO that you are planning, so let’s wait until BASF decides what they want to do before we start speculating on what combinations would make sense. Christian, any follow-up or was that clear?
Christian Faitz: No, that was very clear. Thanks, Greg.
Greg Poux-Guillaume: Thanks a lot.
Operator: Thank you. Your next question comes from Chetan Udeshi with JPMorgan (NYSE:JPM). Your line is open.
Chetan Udeshi: Yes, hi. Thanks for taking my questions. I just wanted to come back to the working capital point, because we have been waiting for this number to come down, not this year, but actually over the last 2 years. And I’m just curious working capital is something that you can proactively manage. And yes, the volumes have been weaker. It doesn’t feel like it’s been terribly weaker. So I am just curious where things are not going right in terms of working capital reduction, because it seems this has been an ongoing focus for close to 2 years now. The other question I had was just looking into different buckets across your businesses. You have managed to keep the pricing flat to up, which is a pretty good achievement in an environment like we have been for the last 2 years. I’m just curious, do you see any changes in Q4 or as we look into 2025 in terms of pricing across any of your businesses?
Greg Poux-Guillaume: Thanks, Chetan. Maarten will take the working capital question and I’ll take the pricing question. Maarten?
Maarten de Vries: Yes. So on working capital, you are right, if you look at working capital, the key focus for us is the inventory levels. And inventory levels have not been normalized yet as we want them to be, because from days inventory outstanding, we are still north of the 100 days, and you know that normalized levels are more in the 90s. What is not helping is mixed and dynamic markets. So, some of the volatility doesn’t help us to structurally bring it down. There is a lot of focus to address this. And as we said earlier, we will make a step in Q4. You will also see working capital coming down from the current 17.7% to around 15% in the fourth quarter. And we will and we plan to make further steps next year. But your point is absolutely fair that we are not yet there, where we want to be in terms of normalizing our inventory levels.
Greg Poux-Guillaume: And then the pricing question, we don’t see any changes in the pricing trends. It’s a competitive market. We certainly feel that all around, but we’ve been able to defend pricing quite well. If you take the index contracts, in our case, we see that as the price givebacks linked to raw material indices. We see that as a story that is essentially complete. So we see the price giveback in the index businesses, particularly our industrial coatings business, which is packaging and coil. We see that we are at the end of that story. I know one of our competitors commented on the fact that this could go another one or two quarters, but we think that’s flattened out. And we are all, as we look into next year, the markets are not buoyant, but they are not depressed either. And we are shifting back to the way companies run their business in a world that had a little bit of inflation, that 3% to 4% inflation, which is that we will have price increases very early in the year that will reflect some of these additional costs, including some of the costs and used by the tariffs on TiO2 from China and Europe. And all of that will happen in Q1. So we are back to our, I’d call it, back to our regular program, except that in the case of Akzo, it’s a little bit better than what our regular program used to be. It’s essentially price discipline in a world of 3% to 4% inflation.
Maarten de Vries: Chetan, do we answer or do you have a follow-up?
Chetan Udeshi: Can I ask a follow-up slightly different one, which is, Greg, when you came initially, I think the message we got from you was Akzo has done too much cutting of costs than maybe in the hindsight that has also impacted the growth potential of the business. And I think now we are seeing the same sort of dynamic again that you announced 2,000 job cuts. I mean how is this different from the past?
Greg Poux-Guillaume: Yes, it’s a good question.
Chetan Udeshi: And is this a bit of a course correction in your view that frankly, the only way to grow earnings here is through cost-cutting?
Greg Poux-Guillaume: No, no, no, it isn’t. And it’s a fair question, but I think it ignores something important, which is that our cost-cutting is functional. And Maarten is sitting next to me, and I love Maarten and I have the utmost respect for the finance function, but there isn’t a business alive that hasn’t been able to grow, because instead of having three business controllers that have two in one part of its business. It’s – you need to have a certain functional quality and you need to be able to have the KPIs that are important to running the business and you need to be able to extract the analysis that allows you to do intelligent things on pricing and the likes. But functional organizations are costs that need to be addressed. And as much as we’re protecting the commercial functions, we are hitting the corporate functions a lot order, and this is where you’re seeing a lot of the 2,000 people that we are talking about. Beyond that, we are simplifying our organization fairly significantly and that’s driving the functional cuts. In our Coating businesses, we had taken the manufacturing and supply chain out of the businesses and we were managing that transversely. It generated a lot of efficiencies in terms of best practices and making sure that our – that footprint issues were being addressed, but it also created a lot of functional handovers. And as we reintegrate these businesses end-to-end, that functional – that functional overweight can be removed. So we are very careful to target our costs without targeting the muscle that drives the growth. And once again, these are functional cuts. I am not underestimating the importance of functions in an organization, but I having done this before in other environments, once again, it’s – this is not going to be an excuse for us to grow slower. Chetan, hopefully answered your question.
Chetan Udeshi: Yes, that’s very clear, Greg. Thank you.
Operator: Thank you. We now have Geoff Haire with UBS. You may proceed.
Geoff Haire: Hi, guys. I just wondered I could ask a few related questions on China. First of all, as you look at the China Deco business, is the sort of – I don’t want to be rude, but is this sort of strategy just wait until the market recovers and try and keep costs at a minimum to sort of keep profits up? And also related to that, when you looked at what businesses you want to put under strategic review, why was the China Deco business not within that limit, because if you look over the last probably 5 years, the China Deco business has been a little bit of a roller coaster for Akzo?
Greg Poux-Guillaume: Yes. I mean, the roller coaster point is a valid one. It was a really good business until about 2 years ago, really good business in terms of profitability. I mean, it was accretive to our Deco business until 2 years ago. And we are in the – like we are in the dropping part of the cyclone. I am not talking cyclone in terms of storm, I think I am referring to that rollercoaster in Coney Island. So it’s that market has [indiscernible] I think you are being precise here, so you don’t say Akzo is in the eye of the storm or something like that, which will get me in trouble. The reason we like that business is that, we are actually number two in Deco in China. Now if you look at it, you can call that, well, that isn’t issue number two, but actually, we don’t play in projects. We have a limited exposure to projects, projects for large volumes for real estate developers. That market has been hammered. So – but we essentially largely stepped out of it a few years back. But if you take the retail market, we’re number two in a really important market. And our debate was what do we have to do? So, we avoid being a marginal premium player, because if you see what happened in the China market in Deco the last few years, there has been consolidation driven by Nippon and [indiscernible] and essentially, that consolidation has been achieved by taking volumes from smaller domestic players. Akzo is largely until the volumes dropped recently, Akzo has largely remained flat, but remained flat by performing well in premium and being a marginal player in everything else. We work to rebalance the portfolio a little bit because as you expand into China two cities, you want to be more than just premium in order to make the distribution equation work. And we are still working on that. So we are working on our expansion into the smaller cities, and we’re working on rebalancing our portfolio to be more competitive in the mid-market. As we do that in a market that’s been dropping, so it doesn’t look very good from a numbers perspective, but it’s – it’s also our belief that the China economy is going to stabilize and then pick up. So there is no urgency to do anything. The urgency really for us is to consolidate that number two position and to be a strong player for the long-term in China. If the final part of the question is, will there be further consolidation in China in Deco possibly, we’ll see. But right now, it doesn’t seem to be the main move that’s happening in the market. It’s more a question of finding the bottom, which we think is pretty much where we are today. And then extracting the benefits of all the actions that we’ve undertaken when volumes start picking up and these actions and these benefits become visible, which are not today. Hopefully, I have answered your question.
Geoff Haire: Can I just follow-up?
Greg Poux-Guillaume: Yes.
Geoff Haire: I think in your prepared remarks, you mentioned there would be an upswing next year in China. What gives you the confidence that, that will happen?
Greg Poux-Guillaume: Well, I mean, we’ve been positive before. So I don’t want to be the guy that is calling the bottom and the pickup in China. But when we look at our volumes and we look at how the market has been for the last few months. First of all, collectively, the markets stopped pricing down. The guys were pricing down, it was Nippon Paints, so let’s be clear. I love them dearly, but they were really aggressive in order to make up for the volumes that they lost on the project side of the business. They have actually stabilized their pricing since the summer. And if you look at the market overall, the volumes are no longer dropping sequentially. In some areas, they are picking up a little bit. So there are signs that we found the bottom. And then if you look at the stimulus that’s currently happening, I mean, it’s paying off a lot more in the industrial businesses than it is in Deco because Deco is consumer confidence related. And I think the big challenge for the Chinese government is how do you get the real estate market to pickup again without recreating the same problem that you had before. So I think we have to be a little bit more patience – patient, I am sorry. But the combination of pricing that’s stabilized since the summer and volumes that are picking up in certain areas, that essentially signals that we are right for the beginning of a pickup and how quickly that will happen, I actually have no clue. But we don’t expect the market in China to be down next year in Deco. We expect it to be, I’d call it slightly up, but we’ll comment on that with the full year results as we give guidance for 2025. Alright. Other questions?
Geoff Haire: Okay, thanks.
Greg Poux-Guillaume: Thanks.
Operator: Thank you, Geoff. Your next question comes from Laurent Favre with BNP Paribas (OTC:BNPQY). Your line is open.
Laurent Favre: Thank you and good morning. Greg, you mentioned that we are resuming or we are returning to normal service in terms of pricing. I mean normal service I guess in terms of fixed cost inflation, used to be between €100 million and maybe €150 million. I was wondering if this is the kind of number that you would be expecting for 2025. And on the flipside, given all the different initiatives on the simplification plan, the restructuring that you said would be effective by the end of Q1. I mean, should we be assuming that your cost-cutting can offset fixed cost inflation and then we should see net fixed cost as a positive driver? Thank you.
Maarten de Vries: Yes, Laurent, let me pick up this question. So yes, I mean, cost inflation will start to normalize from what we’ve seen specifically this year. So that is one. But to your point, with all the actions we are taking, our industrial program as well as the actions we are taking with the – on the SG&A side, overall from an OpEx perspective, we expect cost to be below this year. At this stage, we will not be specific yet. We will come back and be more specific when we give guidance for 2025, but that is what I can confirm or reconfirm at this stage.
Greg Poux-Guillaume: It’d be really disappointing, Laurent.
Laurent Favre: Thanks, Maarten.
Maarten de Vries: It’d be disappointing if we continue chasing our tail. There is a moment where as these things – as inflation stabilizes and as we move away from that €200 million a year impact that we had in the last 2 years, and as you layer in all these measures, there is a moment where that has to point the arrow upwards, otherwise, the model doesn’t work. And we do think that moment is next year.
Laurent Favre: Thanks, Greg. And as a follow-up, I think in the prepared remarks, you talked about aerospace being flat or down volume-wise in Q4, was that just on the OE part or is that including maintenance and repair?
Greg Poux-Guillaume: Now, it’s OEM.
Laurent Favre: Okay.
Greg Poux-Guillaume: If you benchmark us with PPG, PPG said aerospace is good. But as you know, PPG is very much defense and business aviation. The lion’s share of the market is the OEMs and the MRO. MRO is okay. OEM is slow for the reasons at Boeing and Airbus.
Laurent Favre: Thanks, Greg. Thank you.
Greg Poux-Guillaume: Thanks a lot. Other questions?
Operator: Thank you. We now have Aron Ceccarelli with Berenberg. Please go ahead.
Aron Ceccarelli: Hello, gentleman. Good morning. Thanks for taking my questions. My first one is on the portfolio review of Southeast Asia. Just wanted to clarify, that includes also Vietnam and Indonesia. And also, I mean, considering that India is a growing market, a good business for you, how quickly you think you can pull this out? And do you think you can do it like in a package of include other countries or you need to go with India in the first? The second question is around the proceeds from this portfolio review. You mentioned you want to invest more in coatings. I would be interesting to understand what areas you see the opportunities here? And what the kind of orders of priority would be for the capital deployment of these proceeds if you don’t find any kind of proper opportunity? And the final one would be on cost, the €120 million, €250 million cost cutting you recently introduced. Maybe can you be a little bit more specific about the cadence of this benefits going to 2025, please? Thank you.
Greg Poux-Guillaume: Alright. Thanks, Aron. I’ll take them backwards. The cadence of the SG&A cuts. I said earlier that they’d be completed – the actions will be completed by the end of Q1. It doesn’t mean you get the full P&L impact at the end of Q1 because you have to have people drop out of your payroll, which once again for bunch of legal reasons takes a bit longer in a number of countries. So, we are not giving a number yet for next year because we will do that as we give guidance for next year. But I think what that tells you is that it’s happening reasonably early in terms of actions. And that you will only get part of the impact next year, and we will qualify what that part of the impact is when we start guiding for next year. Your question on capital allocation linked to potential disposals, we can’t buy if we don’t sell. We are still working down our leverage to our settling point around 2x net debt to EBITDA. We are not selling specifically so we can buy. We are actually looking at our portfolio to see which positions can be consolidated into leadership positions and which ones can’t. And our focus right now, as I said, is on South Asia, which is if you take – if you list countries, that’s India, Pakistan, Sri Lanka and the neighboring countries. As to your question, whether Vietnam and Indonesia are included. I said earlier that we can ask ourselves similar questions on other Deco markets in Asia. But I also said that some of these Deco markets, we have a path to leadership. And therefore, we – as much as in South Asia, we are unlikely to be the consolidator and these other areas we could be. So, that’s – it’s a bit too early to comment, but don’t underestimate the strength of our business in Vietnam or in Indonesia. Any follow-up, Aron?
Aron Ceccarelli: No, maybe just on the order of priorities when it comes to the capital deployments once you sell India. And also, I mean the question was also, how quickly you think you can this portfolio review on India?
Greg Poux-Guillaume: How quickly we can pull the portfolio thing on India, India is a complicated market. It’s a publicly traded entity. So, there is a lot of – one, we wanted to make sure that we find the – we choose the right outcome for these businesses and something that maximizes value for our people, value for Akzo and creates the strongest partnership out there in order to take the fight to the market going forward. And two, once again, these legal intricacies linked to executing something like that in India will take a little bit of time. So, we are not on time pressure. We are not on the clock. The business is doing really well. We are – if anything, we will only get more attractive as we progress. So, we will take the time that we need on this. And then the capital allocation question, I could pass it on to Maarten, but I can also give you a non-committal balanced capital allocation going forward. And as I said, we are not allergic to share buybacks, especially at the current share price. And we don’t have – if we were to generate proceeds, we are not going to have a hole burning in our pocket because of it. It’s about making sure whatever we do creates value for Akzo and shareholders. Thanks Aron. Other questions?
Aron Ceccarelli: No, it’s fine. Thank you very much guys.
Greg Poux-Guillaume: Thanks.
Operator: We now have Alex Stewart with Barclays (LON:BARC). You may proceed, Alex.
Alex Stewart: Hello. Good morning. We will sign at the time, so we haven’t had a single question about raw materials. So, perhaps I could steal one in. You historically said that Q4 would be slightly inflationary, crude is still at $75, petrochemical spreads are still pretty weak. Are you sticking with that guidance for the fourth quarter? And if I pushed you to talk about 2025, excluding whether the tariffs are affecting specific product change, but what’s your medium-term outlook now given the conditions upstream? Thanks so much.
Maarten de Vries: Yes. Alex, let me take that question. So, first of all, in Q3, raw material was still slightly down, as we have indicated before and so no change there. Q4, very consistent with our initial original messages, slightly up. It’s more driven by residents. You are making a link to the oil price, but there was not a direct link more mid, longer term link, but not a direct link. And if you then going forward, we have always kind of six months visibility and ex what is happening with tariffs. There are no changes foreseen versus the trends we see in Q4 going into Q1. I hope that gives some color.
Alex Stewart: Thanks Maarten. So, I agreed to that, first half of ‘25 is slightly inflationary. That’s the conclusion I got. And then maybe a follow-up, you said around €1.5 billion for the year. Could you give us a kind of best case, worst case for the fourth quarter and what the likely range of your ebb [ph] expectations are as you see it at the Azko level to give some idea of what the main moving parts after the final quarter would be pretty helpful.
Maarten de Vries: No. Alex, what we have done, we have just refined our guidance. So, we said we would be in the bottom of the range when we came out of Q2. I mean given the fact that we are still two plus months to go, we have refined it and said that we will really be around the 1,500 to be much more precise instead of saying that we are – that we will be certainly above the 1,500 in the bottom of the range. So, that is the refinement we have done, and I would not read more into it.
Alex Stewart: Great. Thank you.
Greg Poux-Guillaume: Thanks Alex. Other questions.
Operator: We have another question from Georgina Fraser with Goldman Sachs (NYSE:GS). You may proceed.
Georgina Fraser: Thank you very much. Good morning Greg. Good morning Maarten. I hope you are both doing well. I have got two questions left. One of them is a follow-up to Laurent’s question on how to think about costs for next year. Greg, you mentioned something earlier in an answer about an inflation environment of 3% to 4%, is that what we should have in mind for 2025? And then my second question is related to the South Asia Deco review, what do you think this means for Akzo’s group strategy? I mean maybe Akzo didn’t see it this way, but I have always thought of Azko as being the developed market paint company that has emerging market growth exposure, so in the context of your strategic review, where should investors see long-term growth coming from in your portfolio? Thank you.
Greg Poux-Guillaume: Thanks Georgina. In terms of health, yes, Maarten is doing really well. And as a numb Dutch, I need to upgrade my company bicycle because this weather is getting to me, hence, my voice. But it’s – I will survive. Yes, the 3%, 4% in terms of our planning assumptions, it’s in that ballpark. We are not claiming to be the leading voice in the market in terms of macroeconomics, but at least and how we plan for the business, that’s kind of what we are looking at. And then the South Asia thing and your question on what is Akzo going forward. And the way I would answer the question is Akzo going forward will be more geared towards coatings than Deco, so right now, we are like 60-40, 60% Coatings, 40% Deco, and were likely to be higher than 60-40, higher than 60% in the future because we see ways to deploy capital in the coating businesses in ways that create differentiating scale. Because these are global businesses and these are still fragmented businesses, and therefore, you can add – you can bolt on additional positions that are virtuous in terms of scale because essentially, it’s the same product worldwide to which you add additional markets or additional product ranges. On the Deco side, Deco is regional market at best, more often, it’s a local market. And Akzo is the market leader in Europe, but also a Deco player with the emerging market exposure. But not all emerging market exposure should be rated in the same way. Emerging market exposure, where you are a market leader, one or two with enough scale in the market to differentiate versus some of the other players. That’s good emerging market exposure in markets where we are far from a leadership position. We have to figure out over time how we maximize value for Akzo, its people and its shareholders. And sometimes, that means they are partnering up. So, we are not making a bold statement out of – we are exiting Deco emerging markets, we are not. We bought, for example, Orbis in Latin America, and we are very happy about this acquisition. And Latin America is performing really well for us. But when I look at Asia, I see a correlation between – I mean it’s not only when you look at Asia, when you look at Deco overall, there is a correlation between profitability and relative market share. And what I mean, relative market share is what’s your market share versus the largest player in the market. If you try to do that correlation, you will see that this is not a bad correlation. So – but it’s – I am only highlighting something that we all know, which is that in the local market, pain is like cement, it’s stuff that Deco. It’s stuff that doesn’t travel very far because the cost to weight ratio is not favorable to transporting very far. So, in all these markets where your radius is limited to what you can economically manage in terms of transport cost, it becomes about scale and distribution and impact of the brand. And that is directly linked to relative market share. So, that’s what we are working on. And therefore, we are trying to make sure that we don’t overestimate our ability to maximize the value of our businesses when we could do that more effectively, either in partnership with somebody else or by essentially passing on to the business to somebody who has got stronger local distribution. That’s the essence of the review. So, it’s a long answer to a short question, but also it gives you a little bit of flavor as to how we think about this, Georgina.
Georgina Fraser: Thanks very much Greg. Thank you.
Greg Poux-Guillaume: Thank you.
Operator: Thank you. We have our final question from Peter Clark with The Bernstein Societe Generale (OTC:SCGLY) Group. You may proceed.
Peter Clark: Yes. Good morning everyone. I have got two questions and the clarification, please. The first question, just on the push into the new build again on the marine, just wondering how much of a margin drag that is at the moment for the Performance Coatings segment, if it’s meaningful? And then secondly, in terms of the guidance for the full year, the €1.5 billion, which now incurs the fourth quarter up I think 10% or so on EBITDA to get there. I know you have got the softer hyperinflation comp or expected. Obviously, a lot of the cost cutting or more of the cost cutting coming through, but again, volume is important in the seasonally weak quarter, and volume has been disappointing both in Q2 and Q3. I know you are trading flat, pretty tough comp. Both segments have, I think plus 3% in Q4 ‘23 in terms of volume growth, so just the confidence around that. And then just the clarification, Greg, I am right in hearing you didn’t say never say never an auto OEM with the color discussion around BASF.
Greg Poux-Guillaume: Let’s see. You asked quite a few questions. We will try to answer them all. The auto OEM thing because you ended with that and my short-term memory is short, so I will tackle it now. Auto OEM is a case of – I think go big or go home. You don’t want to be a small auto OEM player, but if you are a sizable auto OEM player like BASF is, you can actually make the money out of it, which they do. So it’s, we are not allergic to that market. We are skeptical that you can be a winning player if you don’t have the scale in that space. But I am commenting on other people’s businesses. So, as you know, our auto OEM business is a few hundred million euros, not more. Your question on marine, the new build business is dilutive to gross margin profitability but it’s – it adds to the EBITDA at the bottom line because essentially, it’s the gross margin is lower than the dry docking because dry docking is essentially aftermarket and aftermarket always has higher profitability. But as long as you pick your battles and we notice that every time we talk about marine, Kenny forces me to say in the high-value ship marine new-build market, which is math. This is our way of saying we are not going after like basic containerships and bulk carriers. We are going after stuff where these are technical ships where the – whoever is commissioned, the construction of that ship plans to use it for quite a while and they are spending a lot of money on it because things like LNG, LPG carriers, and the people that do that, they want high-end solutions. They want sustainable solutions that are more likely to go for bio-based anti-fouling and they want to minimize the drag because this thing is going to be in the water for a long time, and you need to also maximize your bank for the buck in terms of energy consumption. So, that’s a sweet spot for us. And then as we do that, then we still managed to do business at reasonable profitability levels. Therefore, we get the initial volume and we minimize the gross margin dilution while significantly contributing to the bottom line. So, it’s a hopefully, you understand the mechanics of it. We could grow faster in marine if we wanted to caster in it wider. But we are not trying to. We are I think the ratio in China is for every tender that we bid on, we declined to bid on probably another two, so it’s not – we are not trying to maximize volume. We are trying to – we are trying to maximize our hit rates in the sweet spot of the market, which is technical shifts. Maarten, the question on Q4 functions from a modified perspective?
Maarten de Vries: From a Q4 perspective. First of all, you mentioned already that last year, we had a €23 million hyperinflation hit in our Q4 numbers got. That’s, we expect that, that will not happen this year. So, we – you could more calculate with the current trend of hyperinflation, which was €6 million in the third quarter. And by the way, should start to come down a little bit, so that is one. Secondly, the volume trend, which we indicated and how we see it at the end of Q3. That is how we see it going forward, and we commented on that, and it will be more or less flat. And then pricing perspective, we also commented specifically on Industrial Coatings that the indexing is kind of becoming lesser of an impact. So, pricing will be flat to slightly positive. Raw material, we commented already on it, which will be a slight impact on raw material. And then sequentially, we see further the OpEx sequentially will further come down, and that will be for Q4 flat to maybe slightly positive. So, if you take all these elements into account, you get to our guidance of around €1.5 billion for the year. I hope that gives color on the key elements for Q4.
Peter Clark: Got it. Thank you.
Operator: Thank you. We have our final question from Jaideep Pandya with On Field Investment Research. Please go ahead.
Jaideep Pandya: Thanks. Actually, I just have one question related to the Deco business, have you guys looked into the scenario of actually combining the whole Dulux business? And wouldn’t it be sort of more interesting from a strategic point of view for somebody who wants to enter into Deco, or is this, again, not an option because maybe exiting markets, you want to exit on a case-by-case basis makes much more sense. And I think a follow-up to a couple of the questions that has been asked. I mean, Greg, do you envisage a scenario if you go ahead and acquire BASF Coatings for Akzo to be a more of a pure-play coatings company. and exit paints in, let’s say, in the long run? Thanks a lot.
Greg Poux-Guillaume: Yes. Thanks for your questions. The last question you asked, will be – will increase our proportion of coatings versus Deco because once again, as I explained earlier, there is – we see ways to deploy capital in a way that creates value in the coating side because these are global businesses and still fairly fragmented. We don’t – we are not talking about exiting Deco. We are talking about making sure that our Deco positions are leading positions. Your question on Dulux overall, really two reasons why that is not something that we think would make sense. Essentially, the idea of packaging all the Dulux and selling that to somebody, I mean three reasons. One is actually we like our Deco positions. We just want them to be number one or number two positions. The second reason is that it already – it’s a regional or local markets. So, the notion that you gain a whole lot by putting all of that together is slightly overblown. You gain through scale, but the scale like scale of procurement. But there isn’t anybody that buys Dulux in India because they have heard that Dulux is doing really well in Vietnam. And then the final reason is if you look at Eurex overall, it hasn’t escaped you guys that Dulux in Australia is actually owned and run by Nippon. So, you already have large markets where Dulux is actually owned and managed by somebody else, just like, by the way, Huarun in China, which is a brand that Sherwin-Williams (NYSE:SHW) uses for its wood coatings business is also the Akzo Nobel Deco business. So, there is ample precedence in paints and coatings of brands that are being shared between multiple companies. The only limitation of that is that it works as long as the markets are independent of each other and in Deco, they are. Hopefully, that answers your question.
Jaideep Pandya: Yes. If I may just squeeze one follow-up on wood, interesting, you mentioned wood adhesives is doing well or has improved, but would finish is not. Could you tell us what’s going on in the wood market? And when have you seen the wood adhesives market improve?
Greg Poux-Guillaume: The wood adhesives market, it’s a combination of wood adhesives and board resins. So, it’s more construction oriented than the wood finishes, which has a lot of furniture exposure, things like kitchen cabinets. So, I guess that tells you that there is women construction activity. What are the countries that do construction with wood, I mean the U.S. is picking up slightly. There is other Latin America, but the wood finish – the wood finishes, which is are you remodeling your kitchen, or are you buying furniture, that’s still slow. So, two different speeds, but they serve in the case of wood finishes, it’s a lot of furniture. In the case of wood adhesives, it’s a lot of construction. Alright.
Jaideep Pandya: Thank you.
Kenny Chae: Operator, I think we are ready to close.
Operator: Thank you. I will hand it back to Greg to complete the call.
Greg Poux-Guillaume: Well, you are handing back to conclude, so I will hand back to myself. I want to thank everybody for spending time with us on this call. We had – I think we have something that we can qualify as a predictable and solid Q3. I would like it to be more dynamic, but the – our markets currently don’t lend themselves to that additional dynamism. We are still managing to extract volume growth out of markets that are tepid. If you isolate Deco China, you see that the volume growth is actually more like in the 3% to 4% range. And we are being disciplined on pricing, and we are taking a hammer to our cost base. And these things are progressively materializing, but they will continue over the next quarters. And essentially, we feel that we have the places – the pieces in place to support our mid-term ambitions and that we are making Akzo a strong business, a stronger business going forward. So thanks for your time. Thanks for your interest and we will talk to you soon.
Kenny Chae: Operator, please close the call. Thank you.
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