Ton Büchner knew he was taking on a challenge when he agreed to become CEO of Akzo Nobel, a Dutch paint and coatings company, last year. Recession in much of the euro zone was depressing demand in Akzo Nobel’s core markets, the company’s subscale U.S. paints business was bleeding red ink, and its pension fund for U.K. employees, the legacy of its ill-fated 2008 acquisition of Imperial Chemical Industries, was a big cash drain.
What Büchner didn’t know was that he would briefly become part of the problem. The 48-year-old executive is a hands-on operations expert who previously was CEO at Sulzer, a Swiss maker of pumps, coatings and industrial equipment. He threw himself into the task at Akzo Nobel with vigor, touring the company’s worldwide plants and meeting with executives. In September, however, just five months into the job, Akzo Nobel announced that Büchner was taking a leave of absence because of fatigue. Speculation grew that the CEO wasn’t up to the job; Akzo’s share price tumbled more than 18 percent over the next two months.
“The company was not very open about what was going on,” says Laurent Favre, an analyst who follows Akzo Nobel at Bank of America Merrill Lynch in London.
Büchner has dispelled most of those doubts since resuming his duties in early December. To stanch those U.S. losses, he sold the company’s North American paints business, owner of the Glidden brand, to rival PPG Industries in December for $1.05 billion. He has accelerated the restructuring of the remaining paints business, which was built up by acquisitions over the previous decade. He has also overhauled management by replacing the heads of Akzo’s three main divisions — paints, industrial coatings and specialty chemicals — and basing incentives on true operating earnings, not earnings before exceptional items. In the eyes of this rigorous Dutchman, a “one-off” is no such thing if it keeps recurring quarter after quarter.
Büchner impressed investors and analysts by displaying a firm grip on the business and outlining a clear strategy at the company’s annual results presentation in February. Akzo Nobel posted a €2.2 billion ($2.9 billion) net loss last year, the result of a €2.5 billion write-down on its paints business, but earnings before interest, taxes, depreciation and amortization edged up 4 percent; higher prices and a weaker euro, which boosted the translation of overseas earnings, offset a modest drop in product volumes. The company’s stock has rebounded 30 percent from its November lows, to €52 on March 14.
“He was definitely engaged and clearly on top of the operational issues and the numbers,” says Favre. “It’s way too early to judge, but investors are prepared to give him the benefit of the doubt.”
A civil engineer with an MBA from Swiss business school IMD, Büchner will need all his operational skills going forward. He assumes no growth in Europe over the next three years, so he is consolidating production facilities to cut costs. At the same time, he is seeking to drive growth in emerging markets, which generate nearly half of the group’s revenue. And he is maintaining research and development spending, the fountain of future products, at a healthy rate of about 4 percent of sales — all while throwing about €300 million a year into those underfunded U.K. pensions.
A robust-looking Büchner sat down recently with Institutional Investor International Editor Tom Buerkle to discuss the outlook.
Institutional Investor: You had a rather unusual start at Akzo — probably not the way you wanted to jump in. How are you feeling?
Büchner: Doing well. And where I sit today, it’s behind me. The good thing was that when it took place, the cornerstones of a plan were on the table. The executive management continued in the relatively short time that I wasn’t there. And when I came back, we just picked up the ball. There were a number of big decisions to be taken. We made them and moved on.
The company’s health perhaps is a bigger question mark. Tell us about the structural dilemma that Akzo finds itself in.
Akzo is the largest paints and coatings company in the world today. We’ve built that by lots of acquisitions, some divestitures and an enormous amount of portfolio change. Upon my arrival some initial integration aspects had been done, but it was still a company that was very much dealing with its portfolio. We’re just embarking on the next piece of the journey, which is to operationally make the potential of this combined set of companies come out. Getting fit from within, as I’ve called it, is the journey for the next three years.
How do you do this? What are the main targets you’ve set?
Traditionally, the company was focused with a certain growth target, with an ebitda preincidental set of targets. We’ve basically drawn down more of the accountability to management, saying we want people to be fully responsible for operating income. And we’ve built an operational heartbeat in the organization. The CEO, the CFO and an operational crew go through the businesses on a very regular basis, almost monthly, and really look forward on what changes in the business are required. We’re really ticking off the numbers that have been reported and then truly looking at what the business is going to be in three, six or nine months. That regular follow-up piece was something that the organization didn’t have in a very strong fashion.
Can you cite an example?
There are still lots of individual brands, lots of individual products, lots of individual factories and logistics. And there are lots of efficiencies that we can have by just bringing them together. It is consolidation; it’s simplification; it’s standardization.
Now we don’t really expect much help from the market, specifically not out of the European market. And therefore the next three years is a journey of improving from within. The good part is, we’re doing it from a position of strength. We do have these great brands, good products and good market position, also outside of Europe. Forty-four percent of our revenue comes out of the high-growth countries. It’s not that growth is gone for us. We have many places where we can build on high-growth positions.
You got rid of your decorative paints business here in the States last year. Was that a setback or just a tough decision that needed to be made?
It was a tough decision that needed to be made. The North American market position in decorative paints wasn’t the strongest that we had. We looked at what it would take in terms of getting to a position where we wanted to be to create the returns that we wanted to have and decided there would be a significant amount of resources and cash concern. And we’d rather put that in another location, either in the high-growth markets or in the strong positions in Europe.
Are you committed to decorative paints?
The commitment to decorative paints is complete. We’ve done a significant-size acquisition to get to where we are. We have very strong market positions in China, in Brazil, in Southeast Asia, in many areas in Europe. So we’re very much committed to it. Besides that, we also are still a $2.7 billion company in the U.S. So the U.S. market is still a very relevant one for Akzo Nobel, primarily now on the basis of specialty chemicals and performance coatings.
If the euro were to remain strong for a long period, would you need to think about bigger strategic decisions?
What we’ve assumed for the next couple of years is that Europe is not going to develop in any significant positive way. Let’s not assume wind in our sails in Europe. And on that basis we’ve developed our strategic plan, which means that in some areas we’ve launched additional and accelerated restructuring in Europe, like in decorative paints. But Europe is a core market for us. We have significant facilities. We have very good market positions. And as a result, it just means we have to adapt to the new realities.
What’s the key for you to building up your market presence in fast-growing economies?
When we look at China, we started very early. Same thing when it comes to Brazil. We start from brands that have been built over a very long period of time. We start from customer relationships that have been built for a long period of time. And on the back of that, we are continually expanding our distribution network and our manufacturing footprint in these countries. We’ve just launched an investment in the automotive-refinish business in the Chinese market. We’ve acquired a company that does electronics coatings in Asia. We’ve invested in opening a new facility in decorative paints in India. So as much as we’re restructuring in one area of the world, we’re very much accelerating in another.
How fast are you growing in China?
We’ve seen in 2012 quite a reduction of growth. That was because we’re very exposed to the buildings and infrastructure segment. What happened is that the Chinese government wanted to clamp down on a lot of the speculation that was taking place, primarily on the east coast. That was very successful, but it did, of course, contract the market a bit. The market in the west continued to grow, so we’ve basically continued to expand in the cities that are away from the east coast.
Even during restructuring you’ve managed to increase R&D spending. How important is that to Akzo?
We believe it is of core importance to what we do. One is making sure that the brands are top-of-mind to the people that buy. And second, making sure that there are tangible benefits in the products themselves. The moment it becomes a me-too product, we’re ending up in the wrong space.
Now, that drive in innovation has paid off with an additional benefit in many cases, a benefit in sustainability for our end users, whether it is faster drying times or less energy required for paints to dry. It can be much lower footprints for customers that use our chemicals in their processes; they use significantly less energy. There are lots of additional advantages that we try to create with research and development. Sustainability is a big driver.
What kind of complications does the U.K. pension deficit cause for you?
It certainly is a headwind, because we have regular top-ups when it comes to these pensions. What is important to realize is, these are very mature funds. They were closed a while ago. Our top-offs are not something that is volatile. It’s very predictable. We’re constantly de-risking this pension fund. We’re asking people to manage their own money where possible. We’re doing longevity hedges on it. It is what it is. There’s no silver bullet for it at this point in time, at least not one that makes economic sense.
What should politicians be doing to improve the business environment in Europe?
With buildings and infrastructure being close to 44 percent of our business, we basically say, “Listen, that market needs to be kept alive.” There are lots of countries that are constantly reevaluating their stimulus in terms of having people buy houses, mortgage regulations, banking rules and the like. That insecurity creates a wait-and-see approach with people thinking of buying a house or changing a house. Taking that insecurity away would be a great help. Clarity, crisp clarity, around buildings and infrastructure markets in Europe would help a lot to regain growth.
