Coatings World - December 2012

Coatings Companies Adjust Financial Strategies
to Deal with Continued EU Recession

European coatings companies are becoming more cautious about their short-to-medium term financial outlook in the light of gloomy predictions of, at best, low-growth in much of Europe.

by Sean Milmo European Correspondent milmocw@rodpub.com

European coatings companies must deal with the widening gap between mature domestic markets and buoyant emerging economies.

European coatings companies are becoming more cautious about their short–to-medium term financial outlook in the light of gloomy predictions of, at best, low-growth in much of Europe.

Those producers with international operations are hoping that faster expanding markets in Eastern Europe and in Asia will enable them to boost profitability or at least maintain present overall margins.

Mature Domestic Markets in
Europe Present Challenges

Nonetheless, the poor prospects for major parts of Europe underline the challenges for its leading coatings producers on how to deal with the widening gap in potential between their mature domestic market and that of the buoyant emerging economies, particularly in Asia.

In its latest economic outlook issued in November, the European Commission, the European Union’s Brussels-based executive body, expects the recession this year in the EU will continue into the early part of 2013.

In 2012 GDP in real terms will go down by 0.4 percent in the 17-country eurozone and by 0.3 percent in the EU as a whole, according to the Commission. Then, after a weak recovery later in the second half of 2013, the euro area will return to marginal growth of 0.1 percent during the year while the whole EU economy will increase by 0.4 percent. In 2014 GDP growth will quicken to 1.4 percent in the eurozone and 1.6 percent in the EU.

Meanwhile the U.S. economy will be expanding at a much faster rate of 2 percent next year and 2.8 percent in 2014, according to the latest forecast by the Paris-based Organization for Economic Co-operation and Development (OECD), representing the world’s richer

countries.

It reckons that on the European periphery, Russia will be growing by an average of just under 4 percent annually over the next two years and Turkey by more than 4. 5 percent. India’s GDP will be expanding by an annual average close to 7 percent in 2013-14 and China’s nearly 9 percent.

Tikkurila of Finland is now expecting to raise its sales by more than half to €1 billion ($1.3 billion) by 2018, according to the company’s recently announced new financial target. A lot of this growth is likely to come from increased revenue from Russia and other former Soviet Union countries, which accounted for 36 percent of the company’s sales of €550 million in the first nine months of this year.

“The rise will be achieved by strong organic growth, mainly driven by Russia where 5-per- cent annual organic growth is possible,” said Erkki Jaervinen, Tikkurila’s president and chief executive.

However, with respect to profitability and gearing, the company is being conservative with its new targets, most of which, with the exception of revenue, its latest financial result show it has already reached.

Over the next five years it wants to have an operating margin of 12 percent while in the first nine months of 2012 it was close to 13 percent. With return on capital employed (ROCE), the objective is 20 percent while the company is already hitting nearly 21 percent while with gearing the target is below 70 percent while currently it is 42 percent.

“(We’ve set these new targets) because acquisitions might change the picture and pose challenges to these targets,” said Jaervinen.

In addition to having a large proportion of its sales in the emerging growth areas of Russia, Poland and the Baltic States, Tikkurila has a portfolio heavily orientated to industrial coatings.