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

Welcome, everyone, and thank you all for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'll turn the meeting over to your first speaker, Kenny Chae, you may begin.

Thank you. Hello, everyone, and welcome to our Q2 update call. Happy to have everyone with us today. Earlier this morning, we published a press release to provide an update on our Q2 outlook based on the impact of China lockdowns and a slower start that EMEA do-it-yourself season. Thierry will walk you through a few slides on our Q2 business, and both Thierry and Maarten are happy to take your questions after the short presentation. We will limit this call to 30 minutes. As such, please contact our Investor Relations team for any questions that do not get addressed during today's call. The slides will also be available on the Investor Relations section on our website. Please note, this call is being recorded and a replay will be made available on our website. Before we start, I would like to remind you about the disclaimer at the back of this presentation. Please note, this also applies to the conference call and answers to your questions. Now handing over to Thierry to start the presentation on Slide 2.

Thank you and [indiscernible].

Thierry? Operator, can you hear Thierry's voice?

I'm sorry, I cannot hear Thierry's voice, but his line is open.

Can you hear me?

Yes, Thierry, we can hear you now, but we weren't able to hear from the beginning.

All right. Okay. My apologies. So thanks, Kenny, and hello -- a warm hello to everyone on the call. The past 2 years have been nothing but normal for anybody. And every quarter seems also to bring its new dynamics into our paint and coatings industry. Also for this second quarter, while the overall demand for paint and coatings remains robust with North America still constrained in raw material availability and logistics, but sequentially improving, the macroeconomic uncertainty related to consumer confidence has increased, especially in Europe. In light of this, Q2 has had a slow start for consumer demand in the Deco do-it-yourself channels in Europe, mainly in Northwest Europe. This has subsequently been impacted by inventory reductions in the do-it-yourself channels. The June Deco do-it-yourself channel demand is now back to 2019 levels, while our Deco Professional business has been performing as anticipated all along. The other significant challenge during the second quarter has been the Q2 COVID lockdowns in China. This impact was mainly on our coatings business, while paints was able to almost offset the headwind with its geographical expansion initiatives. The reopening in June in China is showing a positive rebound, but not enough to catch up on all the missed revenue in the quarter. While trends in June are largely in line with earlier views given the macroeconomic uncertainties, we are accelerating adjustments in our cost base for the second half as well as our working capital optimization, while continuing to make progress on our growth initiatives. We continue to focus, therefore, on realizing our Grow & Deliver ambition without any changes. Let's turn to Slide #3, and let's look at the latest demand trends in the market where we operate. This chart reflects the Q2 demand situation. As we had communicated in our Q1 financial results call, we continue seeing strong sequential recovery for all the businesses in South Asia due to easing of COVID restrictions towards the end of 2021. We are still experiencing supply and logistic constraints, especially in North America, but we do see sequential improvements, giving us further confidence of availability easing during the second half of 2022. For EMEA, despite our Deco Professional business performing as anticipated along with further share gains, the slow start to the quarter in do-it-yourself Europe will have a marked impact on our Q2 financials. We expect our Decorative Paints segment to be negatively impacted by approximately EUR 50 million on our operating income versus the expectations entering the second quarter. Further to that, the lockdowns in China that continued throughout April and May, mainly impacted our coatings businesses, whereas our Deco business was able to offset most of the negative headwind with its geographical expansion initiatives, as earlier stated. Overall, we expect a negative impact on operating income through that China effect of approximately EUR 40 million for the quarter versus expectations entering in the second quarter. Again, the reopening in June is showing a positive rebound, and we expect further recovery as the China economy normalizes. As we announced shortly after our Q1 earnings announcement, we are pleased with the closing of the Grupo Orbis acquisition, which strengthened our position in the Latin America region. Grupo Orbis has an annual revenue of about EUR 360 million. Let's turn to Slide #4 now. To summarize, while the overall demand signals for paints and coatings remained robust, our Q2 financials are expected to be adversely affected by 2 very specific punctual events, the COVID lockdowns in China and the slow start to the do-it-yourself season in Europe, the combined impact of which is expected to be approximately EUR 90 million on our Q2 operating income. Although we expect the China economy to normalize and do-it-yourself trends in Europe to stabilize in the second half of the year, given the increased macroeconomic uncertainties, we will remain focused and act as needed in an effort to progress the company toward a EUR 2 billion adjusted EBITDA growth and deliver ambition. With that, this concludes the formal presentation, and we would be very happy to receive your questions. Kenny?

Thank you, Thierry. We now open up the floor for Q&A with Thierry and Maarten. Operator, you may open up the lines.

[Operator Instructions] Our first question is from [ Jason ].

I think it's Chetan from JPMorgan. Maybe first question, quick one. Thierry, can I confirm, when you say the DIY demand has returned to normal or flat levels, are you talking about the volumes here? Are you talking about the absolute revenue? Because I suspect the absolute revenue is clearly boosted by very high price increases that we've seen over the past 12 months. So just any clarification on that will be helpful. And second quick question was you referred to market share gains. I mean none of your competitors, at least still now, have talked about a similar magnitude impact in Q2. So what is your -- like where are you basing or what -- based on what are you talking in terms of market share gains? Is it the customer feedback? Is it the external data that you have seen? I think the point here is, have we seen a situation where Akzo's prices have gone up way too much versus the competing products? And is that sort of starting to result in some sort of higher attrition in terms of demand for Akzo with its competitors?

Yes, Chetan, good questions. First of all, on the volume in June, we are obviously in the middle of June, but the June outlook for volume for Deco EMEA is actually higher than -- but now we always compare with the similar months in 2019. So June will again be slightly higher in volume than in June 2019. In fact, if you go sequentially to the quarter, there was a significant drop-off, a little bit surprising to everybody in the do-it-yourself channel in April. It came back, but it was still at lower volumes than last year -- than 2019 in May, and effect is now trending higher than in June of 2019. So that's on the volume question that we just talked about. The second element around why do we believe in share gains. In fact, it's a direct feedback that we got from the -- I would say, the top 5 largest LSO chains in Europe that Maarten and I had face-to-face contacts, so it's clear that is happening. We also, by the way, see the sell-out data and we can see the relative shares in the sell-out data, and there, we're actually doing quite well. Also want to point out that, in fact, in April and partially in May, specifically in U.K., Benelux and France, which are 3 big areas for us, the footfall in the stores, in the do-it-yourself stores, was actually to some extent off, which, by the way, then also triggered a subsequent inventory reduction. Has no effect on the sell-out from the stores to consumers in the latter part of the quarter, but in fact, of course, has an impact on us selling into the LSOs. Given in that, Chetan, is probably also the question why nobody else has reported it. I'm pretty sure that, that will be very much across the board, a visible thing given how close we are to that market. But I want to point out that we are, by far, the largest player in do-it-yourself and that the phenomenon effect of the slowness of the beginning of the quarter was more pronounced in the U.K., France and Benelux, and 2 of those regions are actually where we are, by far, leading. So that's probably why we saw more of that. I don't know, Chetan, if that answers your question.

Yes, that's clear.

Our next question is from Peter Clark.

Obviously, U.K. and Benelux, which your friends in Pittsburgh have actually warned about a little bit as well. Looking at Q3, I see from [ number ] ICI, U.K. particularly, Q3 was as strong as Q2. You're pretty confident on Q3, from what you say, with June coming back. Are you not really concerned about what's happening with the consumer over here? Because I have to say, every day it seems to get worse. And then on the guidance, the number you're suggesting the EUR 90 million again the [indiscernible] consensus, I presume you use in pre -- early, early in the quarter. I mean that effectively means you're down 25% on the second quarter on EBIT and in the first half. Clearly, that's going to be a challenge to catch up. I know you're aiming most of your focus on '23 targets, but would you concur that trying to catch that up in the second half is going to be a tall order?

Thank you, Peter, for the question. Let me start and then probably Maarten can also fill in on that. First of all, on the confidence about the consumer, I don't think that anybody has any confidence in any consumer at any place right now for things that are happening. We have a bit more confidence because we saw a relatively strange quietness in -- throughout our channel partners in the beginning of the quarter, and that came back. Lots of theories out there when it has to do with the beginning of the energy prices spiking with the war, where people are actually traveling more, which is another leading convention, et cetera. And then, of course, on top of that, as the sales a bit disappointing, you get the inventory reduction. I'll come back to that later. So, so far, so good. I would say, and if you look from, I would say, the middle of May, things have somewhat normalized. But normalized, not overperforming to what was missing in the beginning of the quarter. So that's the answer of the first question, Peter. The second thing for the remainder of the year. Underlying -- I mean, of course, we are focusing also on the sell-out of the stores and do-it-yourself. If you look at the other businesses and on our trade business, also the incoming orders there are actually pretty healthy. The China situation will recover itself, but it will not recover itself completely during the second quarter because there are still lockdowns in Beijing, et cetera. It's still not completely over. Now there's 2 elements I want to point to in addition to that, the consumer is or the sales are going to be what the sales are going to be. We can monitor, of course, our sales share and that we do very vigorously. And there, we are actually very encouraged. The second element is we can only go on what we can control, hence, that we accelerated elements around cost, elements around working capital, et cetera, et cetera. So the delivery part, in fact, have accelerated to partly make up for that. I also want to point out that we talked about the raw material cycle, our pricing versus raw material. There, we're completely on track. Maarten can give more of the details. But of course, needless to say that in bigger volume end markets, the volume is under pressure as we've seen in do-it-yourself. That means, of course, that we are looking at rightsizing our working capital. And since we are a significant player for some of the base products for paint, we do expect that, that's going to accelerating the normalization or the at least the correction downwards of the raw materials. So we've always been focused on margin management, and we believe that, that actually will now be somewhat earlier in the year than what we had anticipated going into the second quarter just because of the significant pivot that's taking place volume-wise in markets. I don't know, Maarten, if you want to add to that?

Yes, maybe, Peter, to add to what you said. So indeed, for the second quarter, we use the consensus early on in the second quarter as a proxy for the expectations for the second quarter, just to be clear. And to your point on consumer confidence, of course, in anticipation -- and that is also Thierry confirmed, in anticipation we are accelerating measures around our cost base and also around our working capital, specifically inventories. And that will, of course, trigger in also towards our suppliers, so that only confirms that we will see a turn in terms of the raw material situation in the second half, where we now, at the second quarter, at really at the highest point in terms of raw material inflation.

Our next question is from Georgina Fraser.

Actually becoming a bit of a follow-up because I wanted to ask on the raw material trends. Maybe if you can just remind us how much raw material headwinds you've absorbed over the last 2 years, and it sounds like you're quite kind of explicitly expecting raw material deflation in the second half. If you can help us with kind of any magnitude on that. And if you have any visibility of the deflation in terms of contracts outside of just your expectations given your own inventory management. And then maybe just one other question around demand. I mean it feels like we're kind of looking at kind of unexpectedly weak demand quarter. And I'm just trying to figure out how much visibility we have apart from the kind of recent month-on-month trends and what to expect for the second half of the year. Are you actually planning for this to be the kind of trough volume quarter? Or how do we think about that into the second half?

Georgina, let me maybe take the second question, and then Maarten, you can then maybe quantify more on the second question. The effect in a combination of do-it-yourself channel in EMEA from 2 effects. One, there was quite some optimism going into the second quarter from our channel partners. So the orders were pretty solid. Also based on the fact that they were still expecting some upcoming inflation on the raw materials and therefore also in our pricing. Then when the footfall all of a sudden went down in key countries, then you can basically -- the whiplash in the other direction, where people stopped ordering, reducing it, et cetera, and that's a bit what we experienced quite unexpectedly. And it's almost on the map, you can see it almost as of the sector, the 5 days, 6 days into April, where it was an unexpected trough, with people calling each other on what's happening across many parts of Western Europe. So on that, I mean it's anybody [Audio Gap] and if we then take out the destocking, so the whiplash that I just talked about, that thing actually started to normalize to some extent, but there's still a big gap as we just talked about for the second quarter. So we -- it may be a [indiscernible] what's happened from a channel partners. So is that the shortest was invested [indiscernible]...

Thierry, I can't hear you very well. I'm not sure if everyone else on the call can, just for the last kind of 30 seconds or so.

Okay. Is it better now, Georgina?

We can hear you now. .

Is this better? Yes. All right. So I was just saying that, that, of course, gave them the whiplash in the system, which also is fading as people cannot destock for too long, there's not that much in the situation. That hasn't been whiplash [indiscernible]...

Thierry, you've broken up again. Thierry? Maybe, Georgina, if you don't mind, maybe Maarten can address the first question and then we can come to that.

Yes, absolutely.

Okay. Thank you, Georgina. Maarten?

Yes. So Georgina, on the raw material trend, just a few topics to mention here. First of all, until the end of the first quarter, we have absorbed roughly EUR 1.1 billion in raw material inflation. That is one. And you know that in the first quarter, we, for the first time, were positive in terms of pricing versus raw material and freight inflation. We reconfirm with our pricing -- and pricing is on track for the second quarter of the 14% to 16%, and we reconfirm that we will be positive from a pricing versus raw material and freight inflation for the second quarter as well. What we see in the second quarter, and we mentioned that after the first quarter, a further raw material inflation coming through in the second quarter, although we see clearly the signals and the signs that this will start to turn that. It's also related to the fact that suppliers are coming to us to discuss longer-term contracts. We feel that with the dynamics happening currently, the destocking we mentioned earlier, but also our actions to further address our inventory situation, our raw material inventory situation and further reduce that, that will trigger probably even faster in turn in the second half. Now, so in the second half, we feel we will clearly see an easing and a start of the deflation of raw material. It's important still to mention that, of course, there will be a lag effect before we start to see that in our P&L as well. But it all reconfirms what we have been saying all along around the raw material pricing cycle. I think that is what I wanted to address with your question. I don't know, Thierry, are you...

I think Thierry lost connection for a bit. Georgina, do you mind if I just pick up Thierry separately on your second question later on to kind of finalize that?

No, of course, that's very helpful.

Thank you. Thank you, Georgina.

Our next question is from Alex.

Hello. I assume that's me. I hope it's me. Just 2 very quick ones, hopefully. The earnings guidance you've given for the second quarter, the EUR 90 million. Can you confirm that, that is mostly volume rather than having to take price cuts in order to clear inventory? Any confirmation you can give on that would be helpful. And then secondly, could you quickly tell us or remind us in European Decorative Paints last year, was there a big difference in volumes between April, May and June? Or are they roughly similar? I'm trying to understand whether the comparable changes in June. Any comments you can give around that would be extremely helpful.

Yes. So first on the first question, the EUR 90 million, as we have stated, is very much volume related. It's the impact of what we mentioned DIY in Deco EMEA as well as the China lockdown impact. So I only can confirm what you asked for. If you look at second quarter last year, I think -- so we have been very specific of comparing our Deco EMEA business with 2019. But that's given the volatility we have seen over the past year, it's best to use 2019 as kind of the baseline and also how the development has been across the quarter and what we've seen in April, May and June, which Thierry just pointed out. I need to check again exactly the numbers month by month in the second quarter. But what was clear last year is that the normalization of DIY started to kick in, of course, from the beginning of the second quarter. But if needed, we can come back to you in further details.

So I suppose if I just ask that a different way. Are you saying that there has been an improvement in the volume run rate is June this year relative to April and May? So it's not simply a question of comparables getting easier, there has actually been a month-to-month improvement. That's I suppose what I'm trying to get out.

Yes, absolutely. And that is so -- again, comparing to the baseline 2019, we saw the significant impact in April in DIY in Deco EMEA. It improved in May. And as we mentioned, in June, we are now trading again slightly -- in a total, slightly above 2019 and DIY is on par with 2019.

Does that answer your question, Alex?

Yes.

Our next question is from Geoff Haire.

I think my question might take a little bit longer, but I was wondering how you look at sort of -- the fact that you've seen pushed prices up quite aggressively in the industry as a whole, how do you look at sort of destocking versus underlying volume destruction? And can you distinguish between the 2?

I mean, let's be clear, in our discussions with the big retailers in Europe, I think one of the underlying reasons of the destocking is also that they see the end of the price increases. Of course, they see also what is happening in the market and with raw materials. And in anticipation of the end of the price increases, they don't have any need to stock up or to be more safe in terms of their stocks that they are holding for sell-out. So it's a similar situation, in fact, as how we look at. Because we have also -- given all the volatility in the supply chain, we've also been holding in balanced raw material inventories and we also need to start to correct this going forward. So that is what you see. But we don't see any demand destruction because of pricing, as we mentioned earlier.

Thank you, Geoff. And with that, we will conclude this conference call. And again, as we said, if there are questions that have not been addressed, please contact us at Investor Relations and we will follow up accordingly. Thank you very much. Have a great day. And operator, please close the call.

Thank you, everyone, and that concludes today's call. Thank you for joining. You may now disconnect.