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

Thank you for joining the AkzoNobel Q3 Results 2026 Call. My name is Claire and I'll be coordinating your call today. [Operator Instructions] I would now like to hand over to Jan Willem, Head of Investor Relations at AkzoNobel to begin. Please go ahead.

Good morning, and welcome to AkzoNobel's investor update for the third quarter of 2026. I'm Jan Willem Enhus, Head of Investor Relations. Today, our CEO, Greg Poux; and CFO, Maarten de Vries, will take you through our results. We'll 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. And 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.

Thanks, Jan Willem. Good morning to everyone on the call. In Q3, we delivered a quarter of organic growth and continuing margin expansion. Many of our markets were challenging, yet we still grew organic sales by 2%. And on strong pricing performance of plus 5%. We priced decisively to protect margins while remaining focused on costs. As a result, we increased profitability with adjusted EBITDA margin at 15.3%, up 20 basis points. That's our sixth quarter in a row of margin expansion. Adjusted EBITDA was EUR 388 million, in line with our guidance and up EUR 15 million at comparable scope and constant currencies. In parallel, we reached a new milestone in value realization with the sale of our Deco businesses in Southeast Asia for '25 -- 21x 2025 EBITDA, more than twice our current trading multiple. This transaction completes the review of our acquisitions in Asia. We're now set up for the long haul with the Deco portfolio of Europe, Latin America and China built on leading positions. Our balance sheet is in good shape. Leverage stood at 2.1x at quarter end, in line with our target of around 2x. And that's before any of the Asia proceeds coming in. Finally, our industrial excellence program is coming to an end. We've closed 4 sites this year. We've got 2 more to come. before the end of the year, and the program will be completed by year-end with significant carryover savings into 2027. Turning to Slide 4. And Q3 volumes were down 2% year-on-year, 2% lower in Coatings and 3% lower in paints. In coatings, power was flat with strong growth in North America setting out. Marine and Protective at a smaller quarter. Marine grew despite headwinds in the Middle East, while Protective was lower. Automotive and Specialty Coatings volumes were slightly up with aerospace delivering double-digit growth on a strong order book with plenty more runway ahead. Refinish was up in Asia, but not rebounding yet in the U.S., while automotive remains slow. Industrial Coatings within the quarter, core was stable, Packaging continued to underperform and wood was impacted by low construction activity. Turning to Deco. Europe, Middle East and Africa was flat with a strong sequential improvement in the U.K. and in the Medlex Latin America was down single digit as Brazil was healthy, but impacted in Q3 by the timing of price increases. In China, our business continued to outperform in a depressed market. Southeast Asia had a good quarter, led by a strong performance in Vietnam. Year-to-date, volumes were down 1%, another year that held promise for growth in Q1 that was stunted by macro events. We will continue to make our own luck as we wait for a much delayed market rebound. Handing over to Maarten on Slide 5. Maarten?

Yes. Thank you, Greg, and good morning, everybody. We achieved another quarter of organic growth, with organic sales up 2% at group level. Pricing of 5% was partly offset by 2% lower volumes and a 1% negative mix impact. Changes in scope reduced revenue by 5%. The FX translation turned into a tailwind this quarter after multiple years of headwinds, adding 3%. As a result, total revenue was flat in Q3. Coatings delivered organic sales growth of 3% with 5% pricing more than offsetting 2% lower volumes and mix flat. In Deco, Organic sales were up 1% with robust pricing of 5%, partly offset by 3% lower volumes and a 1% negative mix impact. Group adjusted EBITDA came in at EUR 388 million, up EUR 15 million or 4% at comparable scope and in constant currencies. The adjusted EBITDA margin improved by 20 bps year-on-year to 15.3%. Both segments executed price measures on plan to offset raw material inflation. The inflationary impact was more plans in Coatings, given its higher solvent content while pants continue to benefit from structural cost savings from our industrial excellence program. In Q3, Paints adjusted EBITDA margin rose 200 bps to 19.4%, a level never attained outside of the event inflated COVID DIY boom in Europe. Turning to the next slide. Q3 was another operationally solid quarter. Trade working capital improved by 130 bps year-on-year, decreasing to 15.7% of revenue. This continued efficiency, combined with higher EBITDA supported a stronger return on invested capital, which increased to 13.7%. Higher EBITDA and continued working capital discipline underpinned resilient underlying cash generation in the quarter. However, transaction costs incurred year-to-date stands at EUR 69 million, weighing on overall free cash flow. As a result, free cash flow came in at EUR 119 million in Q3 and EUR 83 million year-to-date. Supported by our underlying cash generation, we sequentially reduced leverage to 2.1x in Q3 already placing us within our target range of around by year-end. Now handing back to Greg for the next slide.

Thanks, Maarten. Looking ahead, we continue to expect to deliver 2026 adjusted EBITDA of around EUR 1.47 billion. Raw material and logistics inflation remains volatile. That said, with 1 quarter ago, we have good visibility on our input cost until year-end. Pricing will continue to fully offset the inflation we currently see and we will go further as required, including into next year. For Q4, volumes are forecasted to be flat. We expect pricing to be a slight net positive against raw material inflation while OpEx savings will be delivered as per plan. Turning to Slide 8. In October, we said we rebalanced our Deco portfolio -- I'm sorry, in October 2024, almost 2 years ago. actually 2 years ago. We said that we'd rebalance our Deco portfolio towards countries where we have a leadership position. that we monetize assets that are worth more to others than us and that we concentrate our capital on positions of differentiating scale, particularly in Coatings. As part of this process, the strategic review of our Deco portfolio has not been successfully completed. The final step of this Deco portfolio review came earlier this month when we signed a binding agreement to sell our decorative businesses in Southeast Asia to Nippon Paint for an enterprise value of EUR 1.2 billion, $1.35 billion. that's 21x EBITDA with around EUR 900 billion -- I'm sorry, EUR 900 million of net cash proceeds after minorities and taxes. Indonesia closes separately in December, bringing in around EUR 200 million. The remaining EUR 700 million follows in mid-2027, and all proceeds will be used for deleveraging. Together with India and Pakistan, the review realized more than EUR 2.6 billion of enterprise value at a blended multiple of 23x EBITDA. This outcome showcases that our active portfolio management creates significant value and highlights that Deco assets are more valuable than the market gives us credit for. The end result is a sharper, more focused AkzoNobel going into the merger with Exalta with a more compact Deco portfolio composed of leadership positions. As we head towards closing, we also announced our new name. ENSO, that's our new name, [indiscernible] will go further and faster than we ever could alone with the power to innovate the strength to deliver and a commitment to excellence. As you know, the combination unites our legacies and ushers in a new era for our industry. [indiscernible] will bring together a diversified and balanced portfolio of around 100 highly regarded and trusted brands across paints and coatings, spending more than 160 countries. We will focus on delivering uncompromising performance to sharpen our competitive edge while establishing a profitable and sustainable path towards a world leader in coatings. By combining our expertise, the best of each of us will become the standard for all of us. So welcome to [indiscernible]. Turning to Slide 10. Timing. Our merger is firmly on track with shareholders overwhelmingly approving the combination during the EGM in August. There's an EGM -- there's another AGM planned for the end of November, the 30th of November, and this is just a formality. It's to appoint the 3 additional [indiscernible] directors that have already been announced. Regulatory clearances are advancing with 2/3 of regulatory approvals already secured. A few merger control clearances are in the final stages, including in the U.S. and in the EU. Although final sign-off is still pending, we can confirm that we're planning to divest AkzoNobel's European vehicle refinish business and Axalta's North American wood business. You've not been asked to prepare any remedies on any other business in any jurisdiction. We understand that these 2 divestitures will allow us to obtain regulatory clearance in Phase I. As such, we remain on track to close in early 2027. So once again, Axalta wood in the U.S. and AkzoNobel refinish in Europe. Meanwhile, the integration work is progressing at pace. The Enzo Executive Committee has been announced internally. The operating model is being refined, and the teams remain focused on day 1 readiness and accelerating synergies. We the value case is unchanged by the proposed remedies, $600 million of cost synergies, around 90% within 3 years of closing and 100 to 200 basis points of revenue synergy uplift. [indiscernible] now has a name, a leadership team and a clear path to closing. Early next year, we will fully launch. I'll now hand over to Jan Willem, who will close with information on upcoming events, and then we'll do the Q&A. Jan Willem?

Thank you, Greg. Before we start the Q&A session, I would like to draw your attention to the upcoming event slide 11 on Slide 11. On November 30, an EGM will be held to propose the appointment of 3 additional nonexecutive directors for Dana. This concludes the formal presentation, and we'll be happy to address your questions. [Operator Instructions] Operator, please start the Q&A session.

[Operator Instructions] Our last question comes from Katie Richards from Barclays.

I have 2, please. Firstly, just on volumes. You've changed their volume guidance. Could you explain to us what deteriorated relative to your expectations? 3 months ago and whether you're seeing any evidence of volumes improving towards the end of Q3? And my second question, please, would be on the Southeast Asian decorative paints disposal [indiscernible]. Firstly, would you -- could you explain what was behind the decision not to sell this flanking assets here? And secondly, would you expect any antitrust issues for these disposals because I noted that NEP has a 75% market share in Singapore, for example, and 50% in Australia.

Thanks, Katie. I'll take the Southeast Asia question, and m will take the volume question. In Southeast Asia, we're essentially -- we're selling all our Deco businesses. Sri Lanka was part of what we called South Asia, which was India, Pakistan and Sri Lanka for a bunch of different reasons, we had to sell these countries separately, India because it was a listed entity. Pakistan because it was complicated to sell with India and Sri Lanka is a joint venture, and it's something that we're handling separately because we have a joint venture partner. But it's a very -- it's a small business. So it's -- this is more -- it's more of a an additional step that we have to take, but 1 that will not be very noticeable by you guys because it's a small business, and we only own part of it. In Southeast Asia, so Vietnam, Indonesia, Malaysia and the other countries that we've listed. We're selling everything. We're selling Indonesia separately because Indonesia is the 1 country where we have a joint venture partner. We own 55% of our business in Indonesia, but we have a partner that owns -- so it's a separate transaction. Everything else is being sold in 1 piece. All of it is going to Neon. And the merger agreement essentially puts the antitrust responsibility firmly in Nippon's hands. -- and we're confident that they'll handle that successfully. But once again, it's their responsibility. Did I answer your question on that one? And before Maarten volumes.

Yes.

Maarten?

Yes, Katie, on your question on the volume guidance. I mean if we look at then we've seen some impacts because of our phasing impacts because of pricing. So specifically, July and August were weaker. -- and we've seen a stronger September. And that is also the basis of our guidance for Q4, where we guide on flat volume. So it is really the timing of the pricing ethic also drove the phasing of the volumes during the third quarter. .

And just one follow-up. Sorry. Just one follow-up. Sort of you raised the pricing now quite significantly. Do you think that's any reason for the volume decline we've seen?

We don't think so, Katie. We're looking at price elasticity really closely. Pricing doesn't seem to be what's impacting volumes currently. And once again, all the Q3 looks a little bit weak. A lot of it is for timing reasons, as Maarten explained, it's more the -- just the economy globally is a little bit challenging and automotive is slower. There's a few markets, China consumer demand is also depressed. -- it doesn't have -- it doesn't correlate to pricing, at least not in the elasticity analysis that we do, and we keep a very close eye on it. So not the issue for now, but clearly, there's a moment where you run into disposable income, certainly on the consumer side. But that's not where we are at this point.

The next question we have is from Laurent Favre from BNP Paribas.

Two questions, please. The first one on the remedy disposal. How does it impact the EUR 600 million cost synergies, please? I understand that the wood part of the business may have been base case on the remedies that necessarily refinish? And then the second question, taking into account the Nippon disposal, the remedial on my numbers, you should be below 2x leverage during 2027 on pro forma on what is called Axon. How do you think about capital allocation? Could we see accelerated share returns, I guess, fairly quickly rather than in the back-end loaded manner?

Yes. remedies, we always said that we -- we're committing to the $600 million number of -- I'm sorry, remedies, the impact of remedies. We always said that we'd commit to the $600 million synergy number, cost synergy number, kind of rain or shine. So we said it's independent remedies because we had calculated that number based on the possible remedy scenarios the outcome, the likely outcome because it still has to be executed. But the -- of the antitrust process, as we said, the disposal of 2 businesses, Refinish Akzo Europe and wood Axalta U.S. If you sum up these 2 businesses, you're talking less -- a bit less than EUR 500 million of revenue -- and the profitability is roughly at the target level for [indiscernible], which was between 19% and 20%. And -- so that kind of gives you the order of magnitude. And once again, it leaves that $600 million number protected, we're certainly aiming to make that number higher than $600 million. But right now, we're just sticking to our message. As we put the finishing touches to the regulatory process. That's for the remedies. If you have a follow-up, we'll take it afterwards. And the leverage question, Maarten?

Yes, on the leverage ratio, Laurent, I mean, clearly, the cash flow out of the Southeast Asia disposal will support the faster deleveraging and therefore, also will support a faster situation of getting to normal capital allocation. I think it's too early to to commit now to leverage ratios by 2027. But certainly, this is very supportive of our case.

And I would add to what Maarten said that the -- our aim is to be in a position to have a normal capital allocation as quickly as possible, and that includes share buybacks. And Share buybacks were particularly attractive as long as the market continues not to reflect the value of the merger in our share price and in the [indiscernible] price potentially. So to put ourselves in a position to be able to pull the trigger, I think, is healthy for the company. Laurent, did we answer your question questions?

Yes, absolutely.

The next question we have is from Christian Faitz from Kepler Cheuvreux.

Yes. Two questions, please. First of all, can you elucidate a bit why your pricing strategy in Brazil Deco is rather different from your key competitor in this market. Or is that in your view with a new owner still trying to get used to market dynamics in Brazil? And my second question is also on Deco. When do you expect the Chinese market to recover. We have now seen several quarters of decline in the country. Any hope for 207 recovery? What are your people in the country saying?

All right. I'll take the politically incorrect question on Brazil, and Maarten will take the macro question on China. On Brazil, why does our pricing strategy differ from that of Sherwin-Williams now that they've bought the Suvinil business, which is our main competitor. Frankly, the Sherwin have been a little bit surprising. I would never have expected Sherwin to be volume-driven. That hasn't been their MO over the years. But for whatever reason in Brazil, they are dropping pricing and going after volumes -- in most markets were -- that are fairly established that that's not a winning strategy, but we'll see how that unfolds over time. We're sticking to our plan. And our plan is to continue to increase margins in Brazil through a combination of cost action and pricing and to make sure that we have enough pricing to mitigate the inflation that you have in Brazil. When you can actually compress your margins without decreasing your prices. All you have to do is not priced for inflation and then the market sees that as a reduction. I think, look, it's still in the early phase of the market stabilizing after the transfer of that significant business, Suvinil to Sherwin and the Brazilian market overall is healthy. And then beyond that, whenever you do a price increase, usually there is a little bit of volume that comes in before because people are buying before the price increase. And there's a little bit of a volume drop afterwards because the distribution has increased their inventories and therefore, doesn't have a need immediately afterwards. This is just kind of normal operations in these businesses. Hopefully, I've answered that question. Maarten, China?

Yes, Christian, on China, I mean, clearly, China is still -- our Deco business in China is still very much impacted by the weak property market. In fact, the market, as we see it is down roughly 11% this year. I would see, I mean, the scenarios we are using also for 2027 is that we don't expect a recovery of that market anytime soon at least not for 2017. What you see is that there is more movement and transactions in secondhand housing but for sure, not in new builds. So it remains a challenging market to operate in.

The next question comes from Chetan Udeshi from JPMorgan.

The first question I had was just to clarify on the scope of the remedies. I heard you talked about $500 million of combined sales for axles European refinish business and Axalta's good coating business. Can I clarify is this EUR 500 million? The second question was have you started shopping these businesses around? Is it going to be like sort of coordinated sale with 1 particular buyer because there are that many buyers. And what -- the reason I'm asking this is I look at the room multiple of the group depending on what numbers you might use, 7 to 8x. But I'm just curious, all the asset sales or all the transactions we've done in -- or we've seen in the coating businesses have been in double digit multiple wages. Is this is reasonable to assume you see the similar dynamic with the planned revenues? Or should we see more -- this is more like a spot sale and hence the multiples would be probably lower -- the second question was -- I know you're not giving Q4 specific guidance, but should we back out for 1.47 minus first 3 quarters of the year? Or are there variables that are something we should keep in mind in terms of how Q4 may play out. So in other words, what is your visibility today for Q4 because in Q3, you did give us a clear guidance. And last question, I saw you raised the cash outflow or the cash out for identified items in Q4 full year 2026. And I'm curious -- is this going to be a constant trend now for the next 2 years as you deliver on the merger synergies that there is a chance that the total cash out just keeps ballooning because as you go deeper into the project, you probably have better visibility on the total cash cost.

All right. I'll take the remedy question, and Maarten will talk guidance and cash or identified items. On the remedies, I said the sum of the tubes is less than EUR 500 million of revenue. If I convert it to dollars, it probably be around that $500 million number 2, but call it less than EUR 500 million of renew. It's -- have we launched a process yet, the Axalta guys are running a process for the wood business in the U.S. I think they put out a press release this morning or last night. And that started earlier because of the regulatory discussions with the FTC came to a result on this a little bit earlier. So that that one is ongoing in a structured process. And on Refinish Europe, AkzoNobel, we have started reaching out to potential buyers. We're in the early phases because that discussion has only recently come to fruition with the merger authorities in Europe. You have to keep in mind that the difference between the U.S. and Europe is that in the U.S., you have to close a remedy as a condition precedent to closing the merger, whereas in Europe, you have to have a signed agreement with an acceptable buyer, you don't have to have a closing. So therefore, the fact that the process on refinish Europe is only starting now. doesn't necessarily put it on the critical path because it's handled differently at U.S. and European level. Hopefully, that answered that part of the question. If not, say so. I'll take that as a yes. Maarten, [indiscernible].

Let me go into first Q4 guidance. So to be very specific, the assumptions below the Q4 guidance are really volumes flat. If you look at the price versus raw material, we expect slight to be slightly positive. And on top of that, we expect to deliver on our OpEx savings as we have done throughout the year. So these are the key building blocks for our assumptions. On free cash flow, indeed, the merger-related cash out in the first half was pretty immaterial. -- but it's started to be material in Q3. And that's why we reflected also increased kind of the total cash out from identified items because the merger-related cash out for the full year will be roughly EUR 100 million, maybe just above EUR 100 million. And that is, of course, trending upwards in the second half versus the first half as we are preparing for the merger and also for the integration. For next year, merger-related cash out is a little bit early to tell -- but for sure, there will be still cash out. As an example, the advisory fees for the bankers on both sides of the house, on the Axalta side and on Axo side. But again, that is a little bit early to tell at this moment. Is that clear?