CEO Forum

Ton Büchner: 2014 was challenging, evidenced by negative currency effects for companies consolidating in Euros, a continued lack of growth in Europe and a slowdown in some of the Asian and Latin American economies. Despite this, volumes were up one percent for all business areas.  Within our Decorative Paints business we successfully implemented a new operating model in Europe, while our Performance Coatings business introduced a new organizational structure with fewer management layers. During 2014, we built a solid foundation for further growth in 2015.

Charles Bunch: This past year (2014) was another excellent year for the coatings industry. The industry continued to grow, and our customers have placed continuing emphasis on the true value that coatings bring to them and their products in the form of asset protection and decoration.

Shuchao Cao: For a couple of years people have been talking about turning point, meaning that the market would slow down or stop growing. In 2014, we were probably very close to such a point. Natural organic growth with traditional coating businesses was much more challenging than new innovative businesses. High growth time may have gone. We probably entered into a so called “new normal” time.  

Pierre-Yves Jullien: 2014 saw a low growth at the beginning of the year, while in general the market showed sound growth in the second half of the year. The global coatings industry is expected to grow twice as much as GDP, primarily driven by the protective and decorative coatings industries. Both these industries were boosted by high government investment in infrastructure and housing projects, especially in the Middle East and Asia where government investment compensated for a drop in investment in the oil & gas industry towards the end of the year.

The marine market is coming through a poor period, although this did not have a dramatic impact on global business in 2014.

Due to the continued squeeze on freight rates, marine customers have focused on investments that deliver fuel savings or drive overall fleet efficiency – hence the excellent performance of our ground-breaking fouling defence coating HEMPAGUARDin 2014– and marine maintenance grew in Europe.

Abhijit Roy: The market for paints and coatings did reasonably well in 2014 though the growth rate slowed down a bit in India due to the slowing economy.

Charles Shaver: Last year presented both opportunities and challenges for coatings that tracked the overall economy in key markets. The continued economic improvement in the U.S. provided our industry with growth in many of the end-use markets we serve. Asia Pacific was also relatively strong, led by China’s continued growth in the personal and commercial vehicle markets and due to its expanding infrastructure. Europe’s economy was less robust. The instability in Russia and the Ukraine, along with the weakening of the Euro, affected growth and foreign exchange based revenue. Latin America also presented uncertainties, particularly with the slowdown of the Brazilian economy. One of the strengths of Axalta, however, is that our global footprint and offerings in so many coating end-use categories helps us offset these fluctuations, finding growth opportunities in one geography even if another is slowing.

CW: Did your company see an increase in revenue in 2014?

Büchner: For AkzoNobel as a whole, 2014 annual revenue totaled €14.3 billion (17.4 US$* principal exchange rate against the euro of 1.216 based on 12/31/14), down two percent in Euro on 2013 as a consequence of currency effects and divestments. Our Performance Coatings Revenue was flat compared with the previous year, while Decorative Paints was down because of divestments and currencies. Revenue is not our only objective as our strategic targets include profitability through organic growth and operational efficiency.

Bunch: PPG’s business also performed well in 2014, reflecting these positive industry trends, and the benefits from some company-specific initiatives. For 2014, PPG’s sales were $15.4 billion, up eight percent over 2013 due to higher sales volumes and acquisitions. Our full year sales volumes grew more than four percent in the U.S. and Canada, between 3.5 –and- 4.0 percent in Asia and Latin America, and about 2.5 percent in Europe. I was pleased with our strong financial performance and overall operational execution in what was a modest growth year from a global economic perspective. Our earnings improved in each major region by at least 14 percent. This includes an improvement of more than $100 million, or 21 percent, in Europe, despite muted regional economic activity and currency headwinds late in the year in that region. Most of our businesses continued to execute very well and in several cases we outperformed respective global industry growth rates. Strategically, 2014 was another very eventful and successful year as we continued to enhance our business portfolio. This includes the first quarter sale of our ownership interest in the Transitions Optical joint venture for cash of $1.7 billion on a pre-tax basis, or $1.5 billion after-tax. Also the Comex acquisition completed in the fourth quarter was the second largest in our company’s history. We are very pleased to now have this high quality business as part of PPG.

Cao: Carpoly Group’s overall growth was slightly above ten percent in 2014. We would say it was a satisfactory result given the current economic situation and the internal restructuring work achieved so far. However, industrial wood coating and decorative coating retail have been struggling for single digit growth, while decorative coating project segment and some newly established business units enjoyed high growth (above 30 percent).

Jullien: Our sales growth followed a similar pattern as the overall markets, with a slower start at the beginning of the year but ending with a decent growth in the second half and we saw organic growth of around five percent for the full year. This was driven by our Protective segment in China and in South East Asia, and by our Decorative segment in UK and China.  

A number of sub-segments also performed strongly in certain countries and regions. The rail car segment in the U.S. was particularly strong, for example, while power generation saw good growth in South East Asia, wind energy saw good growth India and infrastructure performed well in the Middle East.

Roy: Berger registered a growth in excess of 13 percent by value in 2014. The growth rate registered was slightly lower than what we have been registering in the past few years but we expect a bounce back in 2015 due to improving business sentiments in India.

Shaver: We reported our first full year earnings now that we are a publicly traded company following our IPO in November 2014. Our net sales for 2014 were $4.4 billion, an increase of 4.0 percent excluding negative foreign currency impacts compared to prior year Pro Forma results.  Our adjusted EBITDA was $841 million, an increase of 14.0 percent over prior year Pro Forma results. We were pleased with the results that we achieved in the fourth quarter and for the full year. While we experienced significant currency headwinds in the fourth quarter, net sales increased as a result of growth in volume and price.  

Contributing to these results, we won new business in key end use markets. We expanded our business in a number of respects, especially with a view to consolidating and globalizing existing franchises. For example, in an offering that serves both our vehicle OEM and industrial customers, we rebranded our entire E-Coat product line under a new brand name – AquaEC™ – to provide a consistent global identity. In China, we introduced Voltatex electrical insulation products and launched and renewed our Axalta-Huajia joint venture.

CW: What areas of the paint and coatings market represent the most growth opportunities for your company?

Büchner: If you look at the Purchasing Managers Index for January the majority of global manufacturing output is still anticipating expansion in the industrial sectors. Overall the global picture is one of uncertainty with a mixed outlook. U.S. growth remained positive, while China remained neutral.  Europe saw a slight improvement in the rate of expansion.

Due to the expected contraction in Russia, the reduced growth expectations for China, and the slowdown in Latin America, which was already obvious in 2014, we do not expect significant positive changes in the markets during 2015.

We don’t count on positive tailwinds from the market; our strategy is based on organic growth and operational excellence with sustainability at the heart of what we do. Our long-term growth potential is on the basis of end-user segment growth through strong brands and innovative products, both in consumer and industrial markets.

Bunch: We see growth potential across much of PPG’s portfolio. Much of this is due to our broad geographic reach and expansive coatings product portfolio, which allows us to tap into middle class growth in emerging regions and growing global demand for new coatings technologies. For example, the market for architectural coatings is expected to grow at five percent compound annual growth rate (CAGR), driven primarily by a growing middle class in emerging regions. Asia Pacific and Latin America could lead this growth – with projected growth of six to seven percent – while the U.S. and Canada are expected to increase by about four percent and Europe by three percent per year. Orr and Boss forecasts that general industrial will be the fastest growing end use, increasing at seven percent through 2018. Globally, industrial production is projected to grow at a 3.6 percent CAGR. Also projected to grow at seven percent is maintenance and protective due to infrastructure investments in emerging regions, as well as to energy investments in the U.S. Automotive OEM coatings is expected to grow at almost five percent, led by build growth in Latin America and Asia. We expect a continued focus on fuel efficiency to drive continued innovations for weight reduction. Given our position globally, we have access to these varying growth areas.

Cao: The industrial wood paint market will focus on environmentally friendly products, definitely. We think the fight against smog and implementation of new laws on environment protection will most favor those products such as water-based wood paint, low TDI hardener, high solid wood paint, etc. Regarding decorative paint retail or project, decorative paints will represent important growth opportunities.

Jullien: The biggest growth opportunities are in Asia and the Americas. However, in both regions growth will be led by certain segments and sub-segments. There is a great deal of ongoing investment in the energy industry in South East Asia at the moment, for example, as governments push to meet the energy demands of a growing population and economy.

Hempel is a world-leading supplier of coatings to the decorative, protective, marine, container and yacht markets. In all these segments, we offer a broad product portfolio and a range specialist coatings for specific sub-segments, corrosive conditions and applications.

In line with our One Hempel – One Ambition strategy, our growth efforts are focused on three key areas: Decorative, Protective (our fastest-growing segment) and Marine, and all these segments show good growth potential.

Roy: We see growth opportunity in both Decorative and Industrial sectors in the Indian market. In the Decorative sector, we see good growth opportunities in water based emulsion paint both at economy end and at premium end. On the Industrial side, we should see a significant increase in demand for protective coatings on the back of increase on spend by the Government on infrastructure developments.

Shaver: We see opportunities across most of our end-use markets. In mature regions, we hope to continue to win new business despite strong customer loyalties to competitor brands. Emerging markets provide a second focus area as economic growth fuels the car parc and, consequently, the aftermarket. Emerging market growth also presents opportunities for our industrial business. Our Nap-Gard FBE coatings for oil and gas pipelines can take advantage of oil exploration, economic development translates into the need for heavy duty trucks and construction equipment, and our
Alesta architectural coatings can leverage building construction. The need for new coating technologies that keep pace with new substrates will be another opportunity we are following.

CW: What is your business strategy for growth in 2015 and beyond?

Büchner: In 2015, we will continue to improve our ability to leverage our strong brands and leading market positions as we further adapt our business, reduce our costs and drive organic growth. We are embedding continuous improvement in our businesses and drive commercial excellence and customer focus through innovation, service and top products.

Bunch: Our two primary strategic objectives relative to coatings remain intact. That is to develop leading or break-through technologies that are measurable and desirable by our customers, and to continue with the overall consolidation of the coatings space. Naturally, we need to accomplish these in a manner that creates shareholder value. From an economic perspective, we spend about $500 million per year on R&D, and we anticipate deploying an additional $1.5 –to- $2.5 billion of cash on acquisitions and buybacks, in years 2015 and 2016 combined, with a focus on creating shareholder value. Tactically we have a variety of other initiatives focused on maintaining operational excellence across our businesses.

Cao: In 2015, we will continue to improve our branding as a leading coating supplier in China. Firstly, we’ll upgrade our current brand stores to round out product offerings and enhance in-store services. Secondly, we’ll work with our distributors on advertising, road show, and other marketing activities so as to increase exposure to end consumers. Communication efforts to furniture factories on environment friendly products such as water-based wood paint and UV paint will be an important action to gain market share. M&A is an area that is of great interest in the coming years. We are well prepared to acquire small-to-medium-sized companies with competitive technologies in green products or outstanding functionality.

Jullien: In general, we want to focus on growing organically. Of course, we are also open to grow externally if the right opportunity arises – as happened when we acquired Schaepman, a leading Dutch coatings supplier, at the end of 2014. In 2015, we will keep building on the growth momentum created in late 2014. Organic growth is the key to our success and we have launched several initiatives and new products that should help us grow faster than the market in all our key segments.

Wherever we work, the key to growth is to offer products that add value to a customer’s business, whether it is through long-term maintenance savings, fuel savings or some other benefit. In 2014, we launched a number of products and technologies that achieve this, such as HEMPAGUARD or AvantGuard, a new zinc technology that increases anti-corrosive performance without increasing zinc content, and so ensures lower long-term maintenance costs and higher application productivity. All these products and technologies will always be coupled with expert technical service.

Roy:   For the Decorative business, we would like to expand our distribution network especially in South and West of India and also focus on brand building. Focus on innovative products and services for growing and gaining market share in 2015 and beyond will be a key strategy for Decorative Business line. On the Industrial side our focus will be on building up a stronger R&D team and developing products and services which add significant value to our customers.

Shaver: We will be addressing strategic opportunities on a number of business fronts. For example, in North America we are focusing on the growing strength of MSOs and the collision repair market in general. We plan to continue to build out our OEM capabilities and to continue to win business with these global customers by leveraging our broad range of VOC-compliant coatings and proprietary manufacturing processes for paint shops. We will continue rollout of our waterborne coatings. These are not only looked upon by customers as a more sustainable solution but can also offer added productivity to their operations. We are advancing into more mainstream markets where price/value is more critical and we believe we have the right offerings.

We’ll leverage last year’s launches of a number of products that were previously more regional offerings, like Voltatex electrical insulation products and the Alesta Global Color Collection of powder coatings and Alesta ZeroZinc powder coatings. Regionally, emerging markets are an important focus. Increased vehicle production, for example in China, and the resulting growth of the car parc present opportunities for both OEM and, over the longer term, Refinish. We will also begin to take advantage of the investments we announced last year that will see the start-up of additional manufacturing capacity in China – which had its grand opening March 3 – Brazil and Mexico as well as in production in Germany which supplies both eastern and central Europe.

CW: In what areas are you focusing your R&D efforts?

Büchner: Our innovation in particular is focused on the sustainable benefits we can provide for our customers. Highlights during 2014 included the launch of a new barrier coating which made it possible to create the world’s first fully compostable and recyclable paper cup for cold drinks. Another exciting innovation was launched by our Decorative Paints business. The award-winning Visualizer app enables users to see in real time what a room will look like in a wide range of different colors – before any paint is applied to the wall – making it more fun to interact with the way you decorate your home.

In 2014 we invested €363 million in research and development. Our RD&I investments have resulted in 19 percent of revenue derived from eco-premium solutions with customer benefits.

Bunch: We see a variety of high-level trends that are driving growth across each segment, and where we are focusing our research investments. One example is the demand for color. In 1909, Henry Ford famously said that a customer could have any color of Model T car he wanted, as long as that color was black. Today, there are thousands of colors on the road. Color science has come a long way since then, and coatings offers customers a way to differentiate themselves in a meaningful way.

Another key driver for research and development investment is energy. Changes in energy are driving a revolution in the materials and processes used to manufacture products in a number of industries served by the coatings and specialty materials sector. Coatings will serve a key role in meeting the demand for more efficient operations for buildings, lighter and more efficient modes of transportation, and lower-cost manufacturing processes. For example, PPG’s coatings technologies help automakers lower energy use by eliminating steps in the manufacturing process.

In 2014, nearly a quarter of PPG product sales came from coatings and materials that addressed our customers’ most pressing challenges, such as energy and asset protection. PPG is integral in helping our customers create more sustainable products - from coatings that contribute to lighter, more fuel-efficient vehicles to paint systems that assist our customers in reducing water use and waste production during their manufacturing processes. Across markets, PPG technologies such as waterborne liquid, chromate-free, powder, low-VOC and high-solids coatings formulations are helping our customers exceed environmental guidelines and manage sustainability.

Cao: Our R&D is aligning with market trends in sustainability. In the wood coatings field our focus has been to develop new products that reduce pollution. Those products are already commercialized and have seen great success. In decorative paints, we are stepping up in artistic coatings with considerable investment. Our R&D goes beyond paint. We work with our clients and deal with their concerns.

Jullien: At Hempel, we are constantly working to develop new products and formulations that help customers achieve additional benefits, from saving energy and reducing fuel consumption to increasing line speeds or reducing the build up of bacteria on surfaces in hospitals and schools.

A consideration for health, safety and the environment is also a natural part of our work and we develop products that meet or exceed both technical specifications and environmental legislation. We are committed to phasing out lead, for example. Our decorative assortment is already lead free worldwide and we are implementing a new lead-free tinting system for industrial and marine products, which will be introduced in the second quarter of 2015.

We also launched new initiatives in 2014 that commit us to not just follow regulations for green building, but leading the industry in this area. These initiatives include a commitment to develop low-solvent decorative products, such as Topaz Zero, a recently launched range of interior paints that contain no hazardous chemical compounds.

In 2015, we will keep investing in R&D to improve our assortment, taking into account the environment without compromising the performance of our coatings. Our success is based on high performance, environmentally friendly and efficient coatings.

Roy:   Our R&D efforts are focused on developing innovative yet cost effective solution for our customers.

Shaver: Our goal is to build on our nearly 150-year strong legacy of innovation. This objective will be driven by Barry Snyder, our new head of global R&D and technology function, who brings enormous experience to Axalta. Barry will be able to take our current portfolio of innovative products such as our VOC-compliant Cromax Mosaic product for body shops and our light vehicle OEM offerings such as our 2-Wet Monocoat, 3-Wet and Eco-Concept systems to the next level. We will continue to introduce more advanced protective properties in our coatings which we see as a value add for our markets. Superior temperature performance, additional durability, longer wear are just examples. We will also continue to add more complex color offerings in our coatings. Keeping ahead of the new composites and plastics used to lightweight vehicles will also be important as part of our strong pipeline of new products.

CW: What are your company’s long-term plans?

Büchner: In February 2013 we unfolded a clear longer term vision: to deliver leading performance from our many leading market positions. Our core principles and values define the culture and behaviors that we are committed to embedding throughout AkzoNobel. We have three core principles – safety, integrity and sustainability. These work in harmony with our values –
Customer focused, Deliver on commitments, Passion for excellence and Winning together. With these core principles and focus areas we will generate organic growth and achieve operational excellence to deliver our short term goals (2015 targets) and drive towards our long term vision.

Bunch: We think that the best days for PPG and the coatings industry are ahead of us. For PPG, our focus will be on consistently delivering high-quality, innovative and sustainable solutions. Our customers will continue to rely on PPG to protect and beautify their products and surroundings. We believe that by maintaining our role as a leading coatings company, shareholders will benefit from growing industry trends, strong PPG operating cash flows, and disciplined capital allocation that have become hallmarks for us and coatings industry overall.

Cao: We are now one of the leading players in China in industrial wood paint and decorative paint. Our long term plan is firstly, of course, to strengthen our position in our current markets. This will be achieved by bringing innovative value to our customers. Secondly, we would be interested in other segments such as industrial protective coating and EIFS. Thirdly, we would be interested in external growth through M&A.

Jullien: One Hempel – One Ambition strategy draws to a close at the end of 2015. We’re currently working on our 2020 strategy, which will define our goals for the future and how we will reach them. However, our focus will remain in growing our core segments: Decorative, Protective and Marine.

Roy: Our long term plan is to grow aggressively in the critical market of the Indian sub-continent including India, Bangladesh amd Nepal and also build up our presence in Russia & Poland. Ultimately we would like to position ourselves within the top 10 paint companies of the world both in terms of revenue and profitability.

Shaver: Our long term plans are to continue to be a leader in industrial and transportation coatings. We will grow not only organically but also by acquisition where needed. With our strong presence in both developed and emerging markets we believe we are well positioned to grow in most regions of the world. We’ve got an exceptional team of people around the world at all levels of our organization who are poised to deliver on our expectations. When we arm them with our strong product mix and customer support tools, I see an Axalta that is built for performance.