AkzoNobel focus on managing margins as that keeps us healthy in long term: Thierry Vanlancker
The AkzoNobel India team is executing pretty perfectly what they have been asked to do to restrain themselves and work on the fundamentals to have a much healthier base for the future. Taking a bit of a pause in two years to get everything reset is probably not a bad thing to do. It is a healthy thing to do.
Paint companies have been relatively resilient amidst this slowdown rhetoric. How has it been for Akzo on the demand front?
We remain very positive about the outlook on India. Of course, in India, it goes hand in hand with what we do on the global level, since we are one of the largest paint and coatings companies in the world. We basically said that we will take until 2020 to get our house in order and get state-of-the-art computer systems and processes. Look at our product portfolio. The work on our manufacturing base is being implemented at full speed. We are less focussed on the top line these last two years. We wanted to create a healthy base for growth in the future. We basically see India as a very mature part of our global network. The demand is there but we probably have been constraining ourselves for good reason in the last two years to return to full growth in 2020.
For the last couple of quarters, you have underperformed your peers. Is this because of a conscious effort to focus on profits as opposed to top line?
We have realised that we were growing very fast but we did not necessarily have the systems and processes in place. Of course, in paints and coatings, if you grow very fast, the complexity starts to increase quite a lot and therefore the productivity goes down. Globally, in the fitness exercise, we said let us take two-three years and look at all the fundamentals, our pricing structures as well as the segments we are operating in. We looked at all the internal work and productivity.
In that sense, the AkzoNobel India team is executing pretty perfectly on what they have been asked to do to restrain themselves and work on the fundamentals to have a much healthier base for the future. Taking a bit of a pause in two years to get everything reset is probably not a bad thing to do. It is a healthy thing to do and AkzoNobel India has been executing that and it may show up in the difference with some of the other volume players in the market.
Market share is of course, an important indicator but the real factor to look at is how healthy is the company financially.
Would the focus now be on getting the top line and market share back?
Market share is of course, an important indicator but the real factor to look at is how healthy is the company financially. To answer your question, we want to go back to our market growth entitlements. We are pretty ambitious in that respect. In the latter part of 2020, we want to go back and reclaim our place with a much better position and much healthier. We have to make sure that we recapture our market share and actually start growing faster than the market afterwards and doing that in a healthy way.
How do you expect the topline to grow from here? Could the government attempts, especially after the tax cuts were announced, boost demand?
A couple of elements in that; first there is the normal organic growth. The team has done good work in India to analyse where to play in the markets, where we should not play; which geographical area to invest in and the different approaches. Definitely work is being done and in the last couple of days, we had some in-depth reviews on the analytics. It was pretty exciting to see the transparency and the clarity with which the Indian team has focussed on where they want to go. So that is pretty positive. It is in the context of organic growth.
The second element is innovation and new products. We have put a lot of effort on our R&D and in fact in our whole transformation we have actually beefed up our research and development spends. Also, we have basically taken the lead on open innovation which we call Paint the Future, which is working with startup universities to break out of the mould that most of the paints and coatings companies have gotten themselves into to really new offerings for the market.
We are excited about the new launches. The new bonded materials in powder coatings is just one example. That would help get the growth back. We are financially, a very healthy company. We have the option to invest where it is needed but if there is a good acquisition target, we would also consider that. India is a country that is well performing in our portfolio. It definitely has a seat at the table to look at good targets to fit our portfolio.
We are not really obsessed by size, we are obsessed by the quality of our business and about how in the long term, we can have a healthy business. The hurdle rates for those expansions is pretty high, but that is what our investors expect from AkzoNobel globally and from AkzoNobel India very specifically.
Low value products have been contributing more to the top line and the demand for mid to premium products is weak. Is that something you have witnessed as well?
Our team has a very mature way of keeping the discipline on looking where they can create value. Of course, you cannot deny that another part of the market needs lower priced or lower cost offerings. We are working on that but what we indeed see is that in a disciplined way, we have focused on the quality of the business and not overcomplicating things by selling enormous truckloads of material that really does not bring much value either short term or long term.
What is the change in your margins and pricing in response to changing commodity costs?
There are two things; one, we have been very vocal on a global level to our shareholders and to the business analysts that our intent was definitely to recapture our raw material costs. It was just too high. As I said, I have been extremely proud of our themes around the globe and also in India to recapture the costs. As you can imagine, there have been very tough discussions with customers to recapture and increase costs. We had to offset that so it has been a very positive exercise.
Secondly, globally and also in India, the company had different businesses that were not necessarily sharing information or best practices. Around the globe, we are now a paints and coatings company. We see people working together to make sure that they align raw material ingredients so that we have bigger volumes for a specific rate and therefore can get better pricing. They look at best practices for productivity, in fact, in the site visits I have done this week, the recurring theme is how people look at low energy consumption, lower waste production etc. That is not only good for the bottom line but also very good for sustainability which is extremely important for us.
People, planet, paint are the three elements where we focus on as a company. It has been about making sure that our pricing is in line with commodities prices and managing our margins because that keeps us healthy for the long term. Then we have looked at every corner to see how we can optimise and keep our costs under control. For 2020, that game will be exactly the same and probably also in the years beyond that .