Akzo Nobel N.V. (AKZA) Earnings Call Transcript & Summary

Yes. Let's give it another minute. Yes. I think we're ready to start. So hello, everyone, and welcome to our analyst update. Happy to have all of you here today. Given recent developments, along with some announcements this week, we thought it would be a good idea to provide you with some additional color on the current trends that we see in our end markets. Thierry and Maarten will walk you through a couple of slides on demand as well as the raw material environment and pricing dynamics. These slides are also available on the Investor Relations section on our website. Please note this video call is being recorded, and a recording will be made available on the website. [Operator Instructions] This is not a formal quarterly call, so please limit questions to the scope of this presentation. We're happy to take your questions after the short presentation. Please note, we have a 30-minute call. So any questions that you have that we are not able to cover, please contact the Investor Relations team, and we will follow up thereafter. Now handing over to Thierry to start the presentation.

Thank you very much, Kenny, and thanks, everybody, for joining us on this call. It is indeed an update call based on the recent announcements from other painting and coatings company. So it's a bit of a different format, but because it was probably useful to have all the right information in the right context. What you'll see on this chart is basically the summary of the content that Maarten and I will walk you through. It gives you basically the view of what we will be covering in this short update. First of all, the underlying demand for our business remains very robust and is fully in line with what we indicated at the end of our Q2 results calls on where things were going. So there is actually good news for us. The demand remains robust, but ongoing lockdowns, COVID-related in certain parts of the world, and supply, raw material supply availability, do weigh on our third quarter on the short-term revenue. Especially Southeast Asia is quite impacted by renewed and extended lockdowns in such countries like Malaysia, Vietnam and Indonesia, and that impacts both our paints and coatings businesses in those regions. In addition, the raw material supply constraints continue to be a headwind. The impact of Hurricane Ida is still unclear at this stage. But it's clear that in an already-stressed supply chain environment, a hurricane impact in Louisiana is not helpful at all. As expected, and in line was also what we've indicated in the second quarter results call, there are significant raw material cost inflations that are not out of the -- of what we had expected, but actually are impacting the second half of 2021. And in response to these dynamics, we are implementing very strong pricing across the board and are actually delighted with the teams on how we're making fast and extremely good progress to catch up with the raw material headwind. And on a run basis, we believe will be caught up in the fourth quarter with that actually unprecedented run-up. If we move to Slide #4, it gives a view of what the situation is out there on the market. And in fact, in the red boxes, there are some indications of changes versus what we indicated in the second quarter results growth. Overall, if you take all of the headwinds together, we expect the revenue number in the third quarter to be about EUR 100 million lower than what the expectation was at the second quarter calls. This is driven for the largest part by the increased backlog due to supply constraints, and then there's also part which is the continued lockdowns in South Asia. Now the definition of the backlog is in fact where we have orders at hands of customers. So the orders are in hand, but we cannot fulfill them because of, somewhere, a disruption in the supply channel towards us. And this is kind of a rolling list that keeps actually being with us. That's the largest part of that. The other part is indeed, as I mentioned, in Southeast Asia, continued extended lockdowns in 3 significant countries for us in that region. So this is kind of the market situation. And I'll hand it over to Maarten to give the update on the raw material cost inflation and as well as the activities on pricing.

Yes. Thank you, Thierry. And also from my side, thank you very much for joining this call. As expected, we are seeing significant raw material headwinds in the second half of 2021. We currently expect around 20% raw material cost inflation for the full year 2021 versus prior year. And if you look at the Q3 raw material cost inflation, that is expected to be between EUR 260 million and EUR 290 million, higher versus the third quarter of 2020. And if we now move to the next slide. Basically, as indicated during the second quarter results, we are continuing to implement strong pricing initiatives across the board. We do expect third quarter pricing to be around 9%. And you can see in the graph, that is a significant step-up from the 4.5%, which we reported in the second quarter of this year. We are on track to offset raw material cost inflation on a run rate basis during the fourth quarter based on current market conditions. And with that, I hand over back to Thierry for some concluding remarks.

Thank you, Maarten. On this chart, it's basically a repetition, but with some important changes on what we said earlier. To summarize what we just discussed, and then we'll go into a Q&A session, the underlying demand in our businesses remains very robust. So there is really no negative surprises there at all. But again, it is impacted by lockdowns in Southeast Asia related to COVID and then the supply constraints that create a significant backlog. Again, orders in hand, but not able to fulfill them. As a result, our overall revenues for Q3 are about EUR 100 million lower than what the expectation was coming into the quarter. We expect the impact on the raw material cost inflation to impact the third quarter by between EUR 260 million to EUR 290 million. But this is actually exciting news for us. In response to that, and as we had planned, we are implementing very strong pricing measures across the board, with the Q3 pricing to be around 9% higher versus the same period last year. So if we look at what the short-term impact is of what we just discussed, but the typical, more longer-term stickiness of our pricing activities, we reiterate what we said at the Q2 results that we remain as confident as ever in the average 50 basis points increase in return on sales between 2021 and 2023, in line with our Grow & Deliver strategy, as well as our target of EUR 2 billion EBITDA in 2023. So with that, that concludes the formal presentation. And then, Kenny, I would be happy to open it up for questions.

Thank you, Thierry. [Operator Instructions] I see that, I think, first of all, maybe we start with Laurent.

Yes. I have one comment and one question. And the comment is to say thank you for the update. Indeed, it's very useful after the last couple of days. I think for a lot of us and investors, it would have been even better to have it before the open or after the close. Then now on to the question. Thierry, you mentioned 9% realized pricing. Is that pricing and mix the way you report it? Or is that pure underlying pricing?

That, Laurent, is pure underlying pricing. So it's very clear the same methodology that we have been talking about in the previous quarter. So it's pure price, which, actually, is pretty impressive if you see what our teams are doing also.

So, Laurent, it's...

And then on the -- sorry.

It's really to the 4.5%, which we mentioned in the second quarter, and the 2% in the first quarter.

Okay. And have you had any change or is there any reason why we should assume a change in the mix versus what you were talking about at the Q2 stage for the rest of this year?

No. We have -- in the Q2, we have the same assumptions, which we have mentioned at the end of the Q2 results, are still valid, Laurent.

Thank you, Laurent. Moving on to Jaideep.

Yes. I echo Laurent's comment as well, thank you for doing this. Just a question really on pricing, more from not a short-term point of view, but from a little bit 12 months out. Current pricing strategy, you guys are putting surcharges and very special sort of pricing to, let's say, navigate from this crazy raw material situation. So Thierry, to your point about stickiness. When and if raw materials normalize, how confident are you that some of these pricing measures that you're taking, which is, frankly, extraordinary pricing, and well done again on that, will actually remain sort of in the bag versus some of it which we will have to reverse if raws do go down? And then just as a follow-up slight question really is, one of your key customers in the U.K. has started to offer price discounts on paint. So is it really just the fact that they're just -- this is one specific example, and we shouldn't read too much into it? Or is it the case that actually DIY in Europe, as it has tough comps, could have a situation next year where you will face some headwinds from your big box customers to push prices through if you need to?

Yes. Good questions, Jaideep. And by the way, thanks for the compliment for doing this. But on the pricing, I just want to point out, we try to stay away as much as possible for surcharges so that we had actually pricing effect that lasted. The surcharges is, basically, you see them and now they're gone. So we've actually been pretty successful. So the 9% is real price and not surcharges. Secondly, if you look at the price stickiness, I think we've commented on that. If you look at our business, about 50%, 60% is distribution, and that is an extremely high likelihood that the pricing sticks independent of the raw materials. Because I think that also, frankly, the channel partners are, in fact, I would say, motivated to keep that in there. If you then look at the other side of the other 40%, I would say there is a part where the pricing goes up with raw materials. And then there are pricing escalators in the contracts that are in there, that's probably for parts, specifically in industrial coatings, that happened. But that would mean that, in fact, the margin actually will reestablish itself before or after. In fact, we are currently in a bit in a squeeze in that margin because these escalators, by definition, kick in at the end of the period. But -- so that means you're always later with your price increase, then you have the P&L impact. On the other side of the curve, it's the reverse. We actually hold on to your pricing longer so we actually have a margin expansion happening there. And then I think for -- there's probably 20% of the total 25%, that's where you might see if raw materials really start going down, where you get competitive pressures coming in, et cetera. But I think, Jaideep, it is fair to say that the vast majority of the pricing, and specifically, I think, with the machine we have built to get the pricing done and to monitor the pricing, that the vast majority could stay. And hence, a certain mix message around, okay, it's a bit tough slight right now, but actually, the confidence -- I would say that the confidence is moving forward. Last but not least, on your question around price discounts. Well, first of all, discounts in LSOs is pretty common, I mean, that always happens. Don't forget we're getting at the end of the season. So that's where paint is typically an attractive product -- an attraction product for getting people into a do-it-yourself in store. So that is pretty common. I don't think you should read anything into that. And by the way, I can say, whatever we were saying at the end of the second quarter around how our EMEA business is doing is still very valid. It confirmed completely what we thought this normalization at a higher level than 2019 is, it's -- even despite the bad weather, by the way, that has completely confirmed itself. So there's no concern.

Thank you. And then next, moving on to Christian Faitz.

Yes. Also, thanks for doing this, Thierry and Maarten. One question, please. Can you please indicate which one of your 2 segments is most affected by higher raw material costs and the logistical/supply issues? I take it, it's mostly Performance Coatings, a little bit to Deco, I would infer. And within Performance Coatings, which customer segments are hurting most for you? And then second question, what happened to distance rules in the Netherlands, looking at you guys? Just kidding.

Just answering your questions, yes, the percentage or the impact of the raw materials is heavier in Performance Coatings, and that has to do with the nature of the products that are used in the Performance Coatings businesses. That is one. Funnily enough, the backlog file is by -- backlog around the world, and that has to do with the availability. So that's a bit -- all in all, it's a higher impact in Performance Coatings. If you really want to subsegment it, I would say, it's -- the biggest impact are in our Powder Coatings business, again, because of the raw materials that go in there, and our Industrial Coatings business, so there's a Metal, Wood Coatings, et cetera. Now I have to say both businesses have been also, I would say, pretty impressive on how to try to recoup those costs. And in fact, that's more a delayed factor, but actually, with a couple of months only to try to recover that. So hopefully, that answers that.

Yes, absolutely perfect.

Thank you, Christian. Moving on to Peter Clark. Peter?

Yes, it doesn't want to let me in.

It does now.

Yes, you're there.

Well...

He's back on mute again.

No, we don't hear you now, Peter.

Can you hear me now?

Yes, we can.

Yes. Yes.

Yes. It's going on and off. Okay. Yes, sorry about that. I apologize. I'm not as efficient as you guys. But effectively, I've got 2 questions together. On the second quarter call, you wouldn't commit to a margin uplift this year. Obviously, things have got tougher. So I presume that certainly has not changed. But I think you are more confident about the absolute EBIT improvement. Given that we're seeing this big thump in Q3, which clearly is the much more important quarter in the second half, just wondering if you're still that confident on the absolute EBIT?

On the absolute EBIT, there is -- there is still a confidence. Obviously, if you look at the second half, there are particularly more challenges, as we indicated, in the third quarter. But overall, we're still confident.

Thank you, Peter. Moving on to Geoff. Geoff Haire from UBS.

Just one question, really, from me. In terms of the price increases that you've got in of 9% for Q3, has that impacted demand by anyway? Because I noticed that you're almost double what your competitors are pushing through. I mean PPG talked about 5% across the group for Q3, and I think Sherwin was slightly below that.

It's -- which is amazing, isn't it? But no, no, kidding apart, it's not really. I think our teams have been pretty much holding to the line that, frankly, it was important to get our prices up "no matter what." Because we don't have to be a mathematical genius to see how does these headwinds -- there's only one way you can offset that. But having said that, I would say, no, I mean, the underlying demand is pretty robust. There is a short pitch on raw materials that hits the whole market. So in that sense, I think we've been pretty efficient to get the prices up. Now I would say, if we had -- in specific segments in Asia, Deco actually has been doing quite well. But in some Performance Coating segments in Asia, we probably could have gotten incremental revenue if we had slight on the price. But frankly, the raw materials weren't there to cater to those markets. So in that sense, I do not believe, really, that we would have seen a different outcome in the top line. Again, I want to go back to the backlogs that I discussed. These are actually orders we have in hand, and it's almost a rolling amount that, quite frankly, we cannot supply. So it's -- in that sense, I think, if we would have increased our price or dropped our pricing pressure, the result would have been that we still could not supply those customers but at a lower price. So I really don't think that has made any impact on our positions at all. This is not a quarterly call, but I think in the ones where we can really track official market share numbers, in fact, we're doing pretty well, in fact, trending upwards.

Thank you, Geoff. We will take a question from Gunther. Okay then, I think he dropped out. Let's move on then to Georgana. So I think...

Georgina.

Georgana -- Georgina, I'm sorry.

Can you hear me?

Yes.

Yes. We can hear you now, Georgina.

I thought I had to e-mail my questions. This is very exciting, sorry. Okay. Great. So I was just wondering, you've said the 3Q revenues would be EUR 100 million lower. I don't know that we knew exactly what you guys were kind of expecting for the third quarter. So I was just wondering if you could spell that out for us, like EUR 100 million lower versus what? And then I totally understand pure price, 9%. Do you stand by the comments that the mix impact would be neutral in the third quarter that we got a couple of months ago? And then just wondering, if you look into the fourth quarter and also 2022, do you have any sense of what kind of raw material supply availability looks there? That would be helpful.

Should I take the first and the last one?

Yes.

And you do the second one? So the EUR 100 million difference here, Georgina, we don't give guidance. So therefore, it is indeed a bit of a, call it, quantitatively tricky qualitative statement. But I think we said it's EUR 100 million less than what we collectively expected. So that maybe gives you a bit of a hint on what we're looking at. If you look at what the external expectations are for what we're going to do, I think that probably gives a good picture on where we are...

Okay, so consensus. Okay.

And for example. Now if you go to the raw material availability, that's probably the biggest surprise, I would say, the shift versus what the feeling was getting into the third quarter. We talked about these hundreds of force majeures we had in the beginning of the year, typically the large products, that went, I mean -- I think we commented on the second quarter to about 50 force majeures, again, out of 10,000 in the network during the third quarter. We had hoped that, that would continue. But frankly, we are still at about the same amount of force majeures. Ironically, it is less volume of raw materials that's impacted, but it's now going through the channel to more of the additive, but the essential additives and modifies in our product, whereby we really -- then we can't ship the paint if we don't have them. So that has been very persistent. Again, we don't know around Hurricane Ida impact, but it looks like it might not be a direct hit on our business. But it's going to have peripheral effects, which, I think, it's too early to see what that is doing. So it has been very stubbornly hanging in there. Another element, by the way, when we talk about constraints is, in fact, steel for packaging. And we have to put our paint into something, and that has been, in specific cases, actually pretty tricky to just find the pots to put the paint in. So that has been more persistent. Now the good news there, but this is not a quarterly call, is that our 2,000 people in R&D are vastly occupied by reformulating some of these additives out. In fact, if nothing else, that may not be an [ aid ] in the next 2, 3, 4, 5 months. But we do have a much broader pallet now of double, triple sourcing possibilities for these exotic additives, which, if anything else, will actually make our supply chain much robuster coming out of the other side. But hopefully, that gives you for -- 2 of the 3 questions, Georgina, a picture. And if that is okay, then I'll hand it over to Maarten then.

Georgina, on your question on the mix. It's basically very consistent with what we said post the Q2 results, that the mix will be more or less flat. So no change from what we said post Q2.

Thank you, Georgina. We do have about 4 or 5 minutes more. The next will come from Matthew Yates.

I have one. I think you might have touched on this, I believe it was Geoff's question. But in terms of the competitive landscape and whether or not people are following you, you're suggesting that there's no evidence here that you've lost share because, yes, the people haven't followed, or simply they just haven't had the road maps, if you can just clarify that? The second question was, is there any evidence here of demand destruction? A 9% price increase is a pretty big number. Are there any orders you think have gone and won't be coming back?

So on the -- so I think we talked about the previous one. I really believe that there would have been an upside if the raw materials would have been there. But since it's a constrained market, so I do believe that there is really no share loss and, in fact, we've been -- as you might imagine, we've been really looking at where are we going. It doesn't mean there's not been tough discussions, et cetera, but it's really a situation of you win some, you lose some, in this case. So I think it's a bit of on share and volume. It's been, I would say, a zero-sum game. So all the more reason then to push, which is necessary to put the prices through. So that's -- hopefully, that answers the first question, Matthew. The second element -- second question was around the demand destruction. I really don't think so. I think if you look at the markets where we play in, either you need paint or you need coatings or you don't. So I really don't think that there was -- that was demand destruction effect. But that would happen when people cannot pass on the price of their products to somewhere else. And we haven't had any -- I would not know where it would happen, and we haven't had any feedback on that either, to be honest. Does that answer the question?

Yes, absolutely.

Thank you, Matthew. I think we have time for one more question, and Mubasher from Citi.

Just a quick one, actually, just on the supply chain side of things. When you talk about kind of it's difficult to get hold of materials, are you finding yourself kind of double booking or trying to get material [ avenues ] available? And then do you have to take that material once the supply picture gets better and then, therefore, you're kind of contracted to take whatever the shipments you're buying in? I'm just trying to say -- I guess, the point is, could there be an excess of raw materials when things get better further down the line just where you're trying to get to?

Mubasher, I wish that was a problem with [ the difference ]. But really, it really isn't. Because in fact, the reason why it's so volatile is that, I think, and obviously, it seems like the other colleagues who came out with the statements this week is actually -- are all planning themselves increasingly to spot buy, where it's really hand to mouth. So I think building up inventory at some of the stakes is just not happening.

Sorry, my point isn't about building up inventory now. But my point is like, because it's quite difficult to get hold of material, so you're just -- I'm assuming, you're trying to go to anyone who's got anything. And so I'm just trying to get -- if something booked up and, therefore, is that binding? So when it does become available at the supply side, I think you have to take it?

No, no, because it's really a sellers' market there on the raw materials. So it's basically not binding at all. It's basically, you have a chance to buy. Then if you don't buy it right now, it goes up. There's very little long-term commitment because many of our suppliers don't have a clue on what the future is going to be either. So it actually has turned much more to the flavor of a spot market than any long-term commitments. The one element, of course, that you might imagine that we are really looking at is in those raw materials, the rare raw materials, where there is some relaxation. We also want to make sure that we don't start overstocking because some of those inventories are pretty dry. Because at this moment of time, we wouldn't be restocking at a high pricing point. So we just want to make sure that, on the curve down, we also keep our eyes and ears open for sliding it down so that we actually can reenter or replenish stocks at a much lower pricing point. But the element that you sketched, that is, unfortunately, not the way we have so far on having long-term too much commitment.

Thank you, Mubasher. Unfortunately, we are out of time now. I want to thank you -- to all the participants who have been able to join today. For all the questions that we have been -- not been able to cover today, please contact us, Investor Relations team at AkzoNobel. And thank you again. Stay safe, and talk to everyone again very soon.

Okay. Thanks, everyone.

Thank you. Bye-bye.

Bye-bye.

Have a good day. Bye.