Akzo Nobel (Euronext:AKZA) Q2 2026 Earnings Call

0:00 And thank you for joining the Akzo Nobel Q two results 2026. My name is Claire, and I'll be coordinating your call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. I would now like to hand over to Jan Willem, Head of Investor Relations at Akzo Nobel to begin. Please go ahead. Good morning, and welcome to Akzo Nobel's Investor Update for the Second Quarter of twenty twenty six. I'm Jan Merle N. Huss, Head of Investor Relations. Today, our CEO, Greg Pubillon and CFO, Markus 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, okzonobel.com. A replay of the webcast will also be made available following the event.

0:48 There will be a Q and 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 two. 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 three of the presentation. Thanks, Jan Willem. Good morning to everyone on the call. In Q2, we delivered a quarter of growth and margin expansion. Organic sales were up 2% year on year, with pricing up 3% and volume stable, with a 1% headwind from mix. We did what we said we would do. We implemented the pricing to protect margins. We kept volume stable and we continue to execute on costs. Profitability continued to trend up. Adjusted gross margin came in at 42.7%, up 70 basis points. And adjusted EBITDA margin was 15.4, up 40 basis points, marking making this the fifth quarter in a row of margin expansion year on year.

1:49 Adjusted EBITDA was EUR $398,000,000, up 5% at comparable scope with disciplined pricing offsetting raw material inflation. On funding, we issued a EUR $750,000,000 bond in June, completing the financing of the special dividend related to the proposed merger with Axalta. The merger preparations are progressing as planned with the shareholder vote to be held on August 5. I'd also like to highlight a milestone on sustainability that I'm particularly proud of. We achieved our 50% reduction target for Scope one and two carbon emissions, and we did it four years ahead of schedule, showcasing that we continue to probably lead the way in our industry. Moving to Slide four, Q2 volumes were stable year on year in line with our guidance. In Coatings, growth resumed with volumes up 2%.

2:38 Powder delivered mid single digit growth with Architectural up in all regions and strong momentum in Asia continuing. Marine and Protective had a smaller quarter with Protective up in Asia, but project delays impacting The Middle East because of the Iran war. Marine was lower on tougher comparatives and also the fact that a lot of ships were stuck at sea. Automotive and Specialty volumes were up mid single digit with aerospace remaining a clear growth engine. Refinish returned to growth overall while stabilizing further in North America. Industrial Coatings was up in the quarter with growth in coil partly offset by lower volumes in packaging. In deco, volumes were down 4% mainly driven by EMEA where slower DIY season in Western Europe was only partially offset by strong performance in Southern Europe.

3:30 Latin America was up mid single digits, driven by a strong performance in Brazil as well as in Colombia. China continued to outperform a soft market, while Southeast Asia delivered growth across all markets, led by a strong volume momentum in Vietnam and in Indonesia. I'll hand over to Martin for the numbers. Thanks, Greg, and good morning, everybody. At group level, organic sales returned to growth, up 2% with 3% price and flat volumes, partly offset by a negative mix impact of 1%. The divestment of our liquid businesses in India reduced revenue by 3%.

4:16 FX translation, which has been a headwind for some time, only had a slight negative impact this quarter. As a result, total revenue was down 1%. Coatings delivered healthy volume growth of 2% with 2% pricing. Mix impact was negative 2%, mainly driven by lower packaging volumes. Lower volumes in Deco were more than offset by rubric pricing of 3% and positive mix impact of 2% resulting from lower DIY volumes in Western Europe. Group adjusted EBITDA was EUR $398,000,000, representing a 5% increase at comparable scope, excluding our India disposal and in constant currencies.

5:06 The EBITDA margin improved further to 15.4%, up 40 basis points year on year. Both segments improved on pricing with coatings also supported by growth in aerospace and refinish and paints continuing to benefit from structural cost savings from industrial excellence program. The next slide, Q2 was operationally solid. Trade working capital improved to 15.6% of revenue, 140 basis points below prior year. This contributed to a higher return on investment of 13.8%. We delivered EUR108 million of free cash flow, driven by higher EBITDA and continued working capital efficiency.

5:59 Supported by the resilient underlying free cash flow, net leverage came in at 2.2 times. Now handing back to Greg. Thanks, Martin. Looking ahead, our 2026 adjusted EBITDA target of at or above €1,470,000,000 remains unchanged. The €100,000,000 step up continues to be driven by what we control, 90,000,000 of net savings from our industrial program, with SG and A carryover and productivity offsetting inflation. We remain firmly focused on completing the industrial program by year end while maintaining strict cost discipline. Raw material and logistics inflation is starting to moderate in certain regions through though the picture remains volatile, announced and implemented pricing will fully offset the inflation we currently see, and we will go further if required.

6:57 For Q3, we expect adjusted EBITDA of around EUR $390,000,000. Volumes are forecast to be broadly flat. Pricing will build further as the full impact of raw material inflation comes through, while OpEx savings will be delivered as per plan. Moving to Slide eight. Merger preparations with Xelta are progressing as planned. The F-four became effective, and the proxy was filed in late June. The shareholder votes to approve the merger is set for August 5. The value case here is substantial. We've identified north of $600,000,000 of cost synergies with roughly 90% expected within the first three years post close. Beyond cost, we're targeting 100 to 200 basis points of revenue synergy uplift.

7:43 In addition, the combined company will have a single listing on the New York Stock Exchange after twelve months of dual listing. Looking past the book, the roadmap is clear. We'll finalize integration planning to accelerate synergy capture, announce the operating model and the leadership team, complete the revenue synergy work supported by clean teams and obtain the remaining regulatory clearances. We remain firmly on course to close by the end of twenty six or early twenty seven. And fourth, this is a compelling combination. The preparations are fully on track, and we're focused on executing every step between here and close. I will now hand over to Jan Willem, who will close with information about upcoming events and the Q4 session. Thank you, Greg. Before we start the Q and A session, I would like to draw your attention to the upcoming events shown on Slide nine. The AGM for the merger with Akzo Nobel N. Be held in two weeks' time on August 5, and our Q3 results will be published on October 21.

8:38 This concludes the formal presentation, and we'll be happy to address your questions. Please state your name and company when asking a question and limit the number of questions to two per person so others can participate. Operator, please start the Q and A session. Thank you. Our first question comes from James Hooper from Bernstein Associates General Group. Your line is open. Please go ahead. Good morning, everyone, and thanks for the opportunity to ask questions. Two for me today, please. The first one is is on the disposal strategy.

9:28 So in in terms of the the offers that you've received, it's clear there is some interest in Deco. And in in the past on these calls that you've said that you're still looking into smaller disposals of the Asian businesses. Do these offers change that change your strategy on those disposals, particularly given that their Asian volumes look like they're running much faster than EMEA or Chinese deco volumes? And then the second question is about marine and protective. So it's been a strong growth driver for a few years, but it had a slightly slower start to '26. Do you think that the growth potential of this business has changed at all longer term? Is this a temporary effect? I you can't put ships stuck in the straight or is or do you think that there's or is there going to be a structural step down in the growth of this business?

10:17 Thank you. Thanks, James. I'll I'll I'll take your questions one by one. So at the disposals, our strategy hasn't changed. We said I think it was in September 2024, we said that we would refocus our Decco portfolio on countries in which we have a leadership position. We didn't have a leadership position in India or Pakistan, but these countries or these operations were more valuable to people other than us, and we ended up selling them. We are asking ourselves the same question with the Deco Southeast Asia. And we are in the process of evaluating next steps for that business. The fact that it's that business is growing only makes it more attractive.

11:08 I think that bodes well for a process if we decide to launch one. But it doesn't change anything to the fact that we have a leadership position in Vietnam, but the other countries are countries in which we'd have to do something to get to a leadership position. So no change, just more attractive. Marine Protective is one of our key franchises. It's a great business. It had a slower Q2, not really for anything for any structural reasons. Protective was fine. Marine was a bit down. And marine is down because as you rightly said, there's a lot of ships stuck at sea and the day rates are high. And even if they weren't stuck in the Strait Of Hormuz, they'd probably be sailing because now is not the time for most ship owners to go to dry docking. So there's a little bit of demand that's being pushed out into the future.

12:06 And also from an AKZO perspective, the Marine business is a fixed price business. You know, you work on tenders that are generally multi year tenders for multiple ships. And you commit to the fixed price with some escalations, but the challenge is to make sure that you don't get caught out by the raw material cycle. And I think the current market environment lends itself to a bit of caution because the direction of that raw material cycle is a little bit hard to predict. So a combination of Springer Hormuz, which is temporary and a little bit of cautiousness on our part as we wait to see in which way the wind is going blow in terms of the raw material cycle.

12:52 But the business in itself has a lot of potential and the story is far from over in terms of the rebound, not only in terms of growth, but also in terms of profitability. Did I answer your question, James? Can I just ask a quick follow-up on the first one? Yeah, go ahead. So just to clarify, if you were to think about launching a process for the SCA businesses, you don't think that would impact the value of potential sales that perhaps some of the parties who've made you offers in the past few months? The only party that has made an offer for all of Deco in the last few months is Nippon. And this is really a question that you'd have to ask them, not us.

13:40 What we are is focused on our strategy, and our strategy is to refocus the business on leading positions. Now if Nippon has an interest and is willing to step up, who knows? But the reality is that we're not a seller of these businesses apart from a question mark on Southeast Asia. And then the rest of it, you know, Nippon's timing, they're coming in late in the game. And I'm not sure that anything needs to be discussed in a hurry, because once again, we're focused on our merger and we're focused on finding an outcome that we are happy with for Deco Southeast Asia.

14:31 And everything else is a question for somebody else than us. Okay. Thank you, Greg. That's very helpful. Thank you. Our next question comes from Christian Frights from Kepler Cheuvreux. Your line is open. Please go ahead. Good morning, guys. I had technical difficulties, so I might have missed some comments, but I'm going to ask these questions anyway. Can you comment a bit on the negative volumes you saw in Q2 in fact, in Europe and in China? And pertaining to Europe, could this be a weather related issue due to the early heat waves we have seen in large parts of your relevant regions? And what kind of feedback are you getting how those volumes in Europe have developed in the early part of Q3?

15:17 And my second question, powder. In powder, you saw a leasing come back in Q2 on the volume side, I guess. Obviously, benchmarking against a rather weak Q2 last year. Any drivers behind this? Is this also automotive driven or also architecture? Thanks. Let me start with the first one on Deco EMEA first. What we saw in Deco EMEA is softer DIY volumes in Western Europe. It's very much consumer confidence driven, specifically in The UK. But overall, we see, I mean, this is also a quarter, of course, where we have increased prices.

16:08 But overall, we see a continuing trends, I mean, a stronger trend in Q3 and Q4 for DecoEMEA. For China, it's more the real estate market as you know. The real estate market is down and that is impacting, structurally impacting our volumes. But overall, we are pleased with the trajectory specifically how Deluxe is doing the premium, Deluxe brand is doing in the retail markets. Okay, thanks. And powder? Powder, you want to take some? Yes, powder has been doing well. Powder has rebounded in architectural and The U. S. Market has been active.

17:02 We've done well in pretty much all the geographies. And, know, I mean, I'll get the proportions wrong, but is something like 30% or 40% architectural and about 20% is auto related. So that just shows you that after a little bit of disruption linked to tariffs on the auto side, you know, we do a lot of wheel coating where there were debates about production in Mexico versus The U. S. And tariffs and the likes. That situation is normalizing. And on the deck on the architectural side, it means that there's good signs of life in the market. We're happy with the direction of the powder business. And I think apart from North America was roughly flat in Q2 in powder, but everywhere else in the world, we were growing volumes.

18:02 And that bodes well for the rest of the year. Okay, great. Thanks both. Very helpful. You. Our next question comes from Matthew Yates from Bank of America. Your line is open, Matthew. Please go ahead. Hey, good morning, everyone. I just wanted to ask a question about the full year guidance. Consensus, it's a little bit below the guidance that you've reiterated today. And I guess, given you've been explicit about Q3, we can infer what is implied for Q4. And if I've done this math right, it looks like you're assuming a bit of a step up in terms of year on year growth in Q4 compared to most recent quarters.

18:56 What is the basis for that? Where would the optimism come from in terms of volumes or trajectory of cost savings as to why Q4 would land something like up 10% year on year? Thank you. Now our assumptions for Q4 are very similar as our overall assumptions in terms of our cost savings on the back of the Industrial Excellence Program in terms of pricing versus pricing offsetting raw material. I think there is one thing to mention is that Q4 last year was a very weak quarter. So we have, I would say easier comps from a volume perspective in Q4 And that will support some of the coatings businesses and also how we see the phasing in some coatings businesses, specifically in Marine and Protective, which is also a project business.

20:04 Okay. That was everything. Thank you. Thanks, Matthew. Thank you. Our next question comes from Jadik Pandur from On Field Investment Research. Your line is open. Please go ahead. Thanks. First question is around actually sort of tagging into what Matthew was asking. Could you give us some color of what price versus raw materials did in Q2? And then how do you see that developing in Q3 H2 rather going into 2027? Because I suppose quite a few of your peers have commented that Q3 is probably going to be the most sort of painful price versus raw materials. So we'll be very curious to know what's happening there. And then the second question sort of zooms in again around decorative coatings.

20:53 Greg, could you give us some color of like once the industrial optimization program is over, how many large sites would you be left with in deco? And what sort of margin uplift are you sort of expecting? I guess, in other words, I'm trying to understand, Nippon is trying to pay you roughly 10 times EBITDA for the current earnings. So obviously, you see higher potential here and therefore, you're reluctant. So what sort of increase in expectation on the earnings or the multiple could we expect if this deal was to happen? Thank you. Hey, Jordi. I'll take the DECO question and Martin will take the price versus raw math question.

21:41 As you said, 10 times current earnings for DECO, that 7,500,000,000 Euro number, it's more an intelligence test than it is an offer. I mean, I don't know who would transact at those levels, especially given the fact that we're taking industrially, we're taking EUR 90,000,000 of cost out this year, and there's still EUR 110,000,000 to come next year, which is not from new actions, but just the full impact of actions that have been taken last year and this year. So that's in two years, that's 200,000,000 in industrial cost. And actually quite a bit of that goes to the deco businesses because of the roughly 20 factories that will have closed, there's the lion's shares in deco.

22:32 So you're looking at deco businesses, which, you know, over time you still have I don't want to start guiding on deco specifically, but you have a few 100 basis points of profitability uplift still to come in these businesses. So the reason why we're not the many reasons why we're not entertaining discussions on deco is that one, our strategy is to focus on deco countries where we have a leadership and the only exception to that is Southeast Asia, where we're evaluating our options currently. Two, we're under a merger agreement where anything that's any offer that's for less than 50% of the asset base of Akzo cannot be considered unless Axalta is willing to go along with it.

23:29 And frankly, it's not a debate worth having because of the third point, which is that the value that we're being that's being talked about is in no way, shape or form representative of the value of the business today, because, you know, buying current earnings at 10 or 11 times is not a good offer for Adecco business by any comparative basis. You just look at transactions in general and the cash generative aspects of these businesses. And that goes with that's even without the longer term potential, the midterm potential that you live to. So hopefully that's the last question today on the Nippon and Deco because I think at some point before going around in circles, but good businesses, they're going to be even better, a few 100 basis points of profitability to come. And we like those businesses very much as long as we're a leader.

24:25 Martin, price and raw net? So when we had the Q2 or the Q1 call, sorry, we have been talking about second half mid teens impact from raw material. Currently, we see for the second half raw material impact in the teens. What happened is that specifically in Asia, raw material has been moderating. Obviously, the situation is still pretty volatile. Let's also be clear, given the events in the last week. In Q2, we have been ramping up our pricing actions with overall pricing of 3% and pricing and we've been able to offset raw material in the second quarter.

25:19 That's all the actions implemented and we see further ramp up of pricing. So overall, you should see kind of a mid single digit pricing coming through in the second half to offset the raw material increase in the second half. But again, situation remains volatile and if further actions need to be taken, we will take them to make sure that we create that offset. I hope that clarifies the what we're doing and the underlying assumptions. Just one small follow-up. You are not seeing any signs of a demand disruption, at least at this point with regards to such sort of aggressive pricing?

26:05 No, we've not seen we've not been seeing this. Volumes are resilient as you see also in our numbers. The only thing we've seen and we've also commented on that is that we saw some pre buy at the end of April, but also the negative effect in May. But overall, throughout the quarter, volumes have been resilient and you see it coming back in the numbers. Okay. Thank you so much. Thanks, Rory. Our next question comes from Laurent Farr from BNP Paribas. Your line is open. Please go ahead. Good morning. Actually following up on this point of, let's say, pre buy and then normalization in the second part of Q2. And I'm just wondering, where do you feel we are starting in Q3 in terms of volumes versus underlying demand? Do think that's a bit ahead, bit below or in line?

27:06 And is there any wide difference by units? That's the first question. And then the second one on CapEx. If I'm not mistaken, I can't from on the guidance on full year from $350,000,000 to €300,000,000 Is it a delay of spending? Or is that underlying cash? And can you talk about whether or not it's related to the merger, for instance? No. On the CapEx, we are clearly very, very stringent and tight on our CapEx outlay, but we reprioritize, of course, our Industrial Excellence program, which is the focus to be able to end the program by the end of this year. So we are just a little bit lower. And I would say it's more in line with what's also the spend of last year.

27:51 On the volume question, we don't see any change in trajectory in to your question on what we see in July versus what we've seen, how we ended the quarter in Q2. So nothing to comment at this stage. Great. Thank you. Thanks a Thank you. Our next question comes from Tony Jones from Rothschild. Your line is open. Please go ahead. Good morning. Thanks for taking my questions. I've just got two left. Firstly, on Deco, you talked about Southeast Asia, but for Europe or EMEA, there are some market positions where you don't have market leadership either.

28:40 What's the plan there, please? And then can you provide any update on what you expect the regulatory clearances beyond the AGM for AGZO? Thank you. Thanks, Tony. Your question on deco, you're right that we don't lead in all the European markets. We lead in most of the European markets that we're in, certainly not all of them. But Europe is really being run like pretty much like one country. You know, the reason why relative market share is important in deco is that you win in deco based on brand impact and distribution. And you also have to be cost competitive. And the wonderful thing about our business in Europe is that we do all the production as one region, and we optimize our assets and the products can move around because the products are allowed to move around in Europe. So I guess Europe is the exception to the rule in the sense that even with low relative market share in a country, as long as you've got the scale of the region, industrially, you can still do really well.

29:51 So we're not looking at we're not looking at selling anything in Europe, we would always consider adding to round out some of those positions, because once again, higher relative market share is beneficial. But we're not intending to sell anything in Europe. And Southeast Asia, I think we've addressed earlier in the conversation. Regulatory, Martin? Yes. So, course, the first step is the EGM on the August 5 and then the other step is regulatory antitrust. We are in discussions obviously, it's U. S, EU and The UK, but the specific focus is on EU and The U. S. So far discussions are progressing and we have constructive discussions, but there's not so much to say at this stage.

30:45 More clarity will be post the summer, which direction this will take. So not so much to update at this stage. Thank you very much, gentlemen. Thank you. Thanks, Tony. Thank you. The next question comes from Sebastian Bray from Berenberg. Your line is open. Please go ahead. Hello. Good morning, and thank you for taking my questions. I have two, please. The first is on the full year EBIT Sebastian? Operator? It appears we've just lost connection with Sebastian. Sebastian, if you would like to re prompt your question, please just press star followed by 1.

31:33 Just as a reminder, if anyone would like to ask a question, it is star followed by one on your telephone keypad now. I'd like to make it clear, this isn't censorship of Sebastian. Yeah. We had no idea what question he was going to ask, but if he types it, we're more than ready to answer. Back in the queue. Yeah, he's back in the queue. We now have Sebastian. Please go ahead and re ask your question, Sebastian. Hello. Good morning. Can you hear me? Yep. Yep. Yep. Good morning. Thank you. I I have two questions. Moderator? We have just lost connection with Sebastian again. We'll back to afterwards. Let's keep this moving. Thank you. Our next question comes from Renalph Orr from Citigroup.

32:20 Please go ahead and ask a question. Your line is open. Hi. Good morning. Thanks for taking two questions, please. First one is just on cash flow. A bit below consensus and down year on year in Q2. How should we think about free cash flow in the second half, please? Any identified cash outs, working capital views would be super helpful. And then secondly, just as you've had some changes to your Russian asset base, just kind of curious to better understand what is happening there, please, and whether you think you will retain those long term? Thank you.

33:09 Yes, maybe to start with Russia. As you've seen per the decree, our Russia entities have been temporary put under the state administration. We have also said, as you've seen, that we will deconsolidate our risk activities for the July 13. And we have stated that our net assets are EUR $214,000,000 in Russia as well as we have an FX on our balance sheet of €449,000,000 This situation is pretty recent. So we it's an evolving situation.

33:55 So we are assessing how this will evolve. And there's not so much further to comment at this stage. And when we have more certainty where this will go, we will inform you. So that's all. Maybe what we can address also is that it's not material to our full year results. You know, it's that business is less than 2% of sales. Hence the fact that we don't feel any need to change our guidance. And then the other question is on free cash flow. In fact, I'm pretty pleased specifically how working capital is evolving during the year.

34:44 So for the full year, there are in fact no changes in our assumptions. Working capital for the end of the year is 14.5%. CapEx is lower as we have indicated roughly 300,000,000. We have also included in our guidance that the cash out from identified items will be higher because it includes merger costs. So we talk about EUR $250,000,000 roughly. And then of course, the adjusted EBITDA as we've guided. So for the full year, no change in our free cash flow trajectory. Great. Thank you.

35:31 Thank you. Our next question is from Sebastian Bray from Berenberg. Sebastian, please go ahead. Your line is now open. Hello. Good morning. Can you hear me? Yes. Yep. Thank you. I I have a follow-up on Russia and one on the the excess litigation. So just on the topic of Russia, this business had over 200,000,000 of of assets associated with it. Was it really basically making no money, which is why there's no impact on guidance? Because I suppose that the margins, one could say that the price cost recovery may have been a bit better than expected, so Russia matters less than if these assets have been taken away, let's say, two or three months ago. And my second question is on the AKZOF arbitration.

36:17 Is this going to go ahead in '27? Or and if so, could you give an indication if it's likely to be the first or second half of the year? Or if there might be another delay that takes about to 2028? Any update on that is welcome. Thank you. Johri, this question restated that there will not be any judgment before the end of this year. So it will be in 2027. It's at this stage not clear when it will be during 2027. So no, I cannot answer your question on that point. On Russia, we've indicated, as Greg just said, that the overall revenue is less than 2% for the group.

37:04 It's not material. It's the profitability is more or less in line with the average of the group. So again, on a total group level, this is not material for us. That's helpful. Thank you. And sorry for the difficulty signing, Henry. The third time is lucky, so all good. Any other questions? Thank you. We currently have no further questions waiting in the queue. I'd now like to pass back to Greg for any closing remarks. No, okay. Thank you very much. We'll wrap up. Look, this was a solid quarter for us. Organic sales up 2%, pricing up 3%, margin expansion and growth margin 70 basis points and an EBITDA percentage 40 basis points and robust cash flow. So it's in an order where there was a quite a bit of uncertainty, I think we're able to answer a lot of these questions and it bodes well for the rest of the year because although you're seeing 3% in pricing, these price increases have gone through and they'll continue to be invoiced and therefore to ramp up just as the raw material impacts are ramping up and probably peaking in Q3. So we feel confident about the rest of the year and we also feel optimistic about the shareholder votes in the Axalta merger coming up soon and good shareholder support and good interaction.

38:35 And we believe that so that merger will create a lot of value and we're excited about it. So lots to look forward to and we thank you for your time and for your attention and we look forward to talking to you soon. Thank you. Thank you. This now concludes today's call. I would like to thank everyone for joining and you may now disconnect your lines.