Akzo Nobel has warned that falling consumer confidence triggered by the crisis in China’s real estate market is adding to economic headwinds, as Europe’s biggest paint maker suspended its profit guidance for 2023.
The Dutch group, which owns the Dulux brand of paints, warned on Thursday that although it had been able to offset the impact of raw material and freight cost inflation with price increases, it expected the “macroeconomic turbulence” to continue “well into next year”.
The company had previously forecast to reach earnings before interest, tax, depreciation and amortisation of €2bn in 2023. Analysts’ average consensus estimates stand at between €1.22bn and €1.53bn for 2023.
The frequent lockdowns in China as a result of Beijing’s zero-Covid policy have continued to hamper operations in what is one of Akzo’s key markets. At the same time, the crisis in the country’s real estate sector has driven down consumer confidence and weakened demand, according to Maarten de Vries, chief financial officer at Akzo.
“We’ve seen a massive decline in the whole real estate and property development market which is driving down consumer confidence,” he said.
The drop in confidence had hit demand mostly in the larger cities where the company has a strong deluxe retail brand. Akzo had, however, been able to offset some of the loss through a geographic expansion programme in the smaller cities, de Vries added.
The crisis in China’s real estate sector has been gaining momentum since Evergrande, one of the country’s largest property developers that is heavily indebted, failed to make bond payments last year.
De Vries stressed that Akzo had “limited exposure” to new projects such as the ones pursued by national companies like Evergrande and dealt with local and provincial property developers who “paid on time”.
“There are still a lot of growth prospects in China but in the short-term there are some challenges,” he added.
Softening demand and destocking were also challenges for Akzo’s businesses in Europe. The company, has, however, been able to pass on costs to customers, increasing its prices 22 per cent in two years.
De Vries said given the uncertainties around the level of demand, it was “logical” for Akzo to suspend its profit guidance for 2023, adding that the company still expected margins to expand next year.
The company reported a 19 per cent increase in revenues to €2.8bn for the third quarter and adjusted ebitda of €283mn, compared with €325mn in the same period last year. Akzo said it expected adjusted operating income in the fourth quarter to be below €150mn.