ros 12% roi 25% - akzonobel report 2020

Performance Coatings

“It was a year of solid progress towards becoming more cost effective and better positioned for organic growth” Conrad Keijzer Member of the Executive Committee responsible for Performance Coatings

2015 expected outcomes

ROS 12% ROI 25%Business performance | AkzoNobel Report 201474

new R&D facility at the same site. We also launched our pioneering EvCote Water Barrier 3000 coatings technology, which makes paper cold drinks cups fully compostable and recyclable.

In Automotive and Aerospace Coatings, we began operations at our new, state-of-the-art plant in Changzhou, China, and also introduced Sikkens Autoclear 2.0. This is a more sustainable clearcoat for vehicle refinishes which brings greater efficiency to bodyshop processes, while doubling the renewable raw material content. In addition, Honda Motor Europe extended its partnership with AkzoNobel, strengthening the company’s position as one of the preferred suppliers to Honda’s dealerships and approved bodyshops in Europe. Furthermore, we have signed an agreement with Daimler AG that makes us one of the approved suppliers of vehicle refinishes to Daimler dealerships and approved bodyshops worldwide.

In Powder Coatings, an important development was the start of operations at our new plant in Dubai. The facility will significantly increase capacity for customers of Interpon and Resicoat products in the region. We also launched a two-coat, one-bake powder coating system, as well as a bright metallic powder which provides a more sustainable and cost-effective alternative to chrome plating.

During 2014, we once again demonstrated our commitment to the company’s core principles of safety, integrity and sustainability. Particularly noteworthy is our safety performance, which improved significantly, with the total rate of reportable injuries per million hours (TRR) falling to 1.8 from 2.8 in 2013.

As we move into 2015 with a new organization in place, we are well positioned to implement our strategy and deliver leading performance through operational excellence and differentiated organic growth.

It was a year of driving performance improvement and we made good progress in implementing our strategy and reducing our cost base. Our focus on performance improvement and differentiated organic growth is showing results and we are on track to deliver on our 2015 operational objectives.

Overall, we experienced slightly improved market conditions during 2014 with variations across segments and regions. Asia and North America showed continued growth, while Europe remained soft and Latin America continued to be challenging.

During the year, we also created a new organization which is far more customer focused, agile and has clearer accountability. We re-engineered our four businesses and 12 sub-business units into a more simplified structure, made up of seven customer centric Strategic Market Units. This new organization came into effect on January 1, 2015.

Significant progress was made in implementing the footprint reductions announced in 2013, resulting in the closure of eight sites. There were also several business highlights during the course of the year, including the opening of three new production sites and the launch of sustainable innovations for customers in marine, packaging, vehicle refinish and powder coatings.

In Marine and Protective Coatings, we introduced a unique methodology to reward the improved fuel efficiency of ships, together with The Gold Standard Foundation. We also launched the shipping industry’s first digital tool enabling operators to accurately assess and predict the risk of hull fouling, depending on routes being traded. Meanwhile, Protective Coatings introduced a mobile maintenance and repair service designed to reduce costs and improve safety for our passive fire protection customers.

In Industrial Coatings, we completed an investment to double the annual production capacity at our packaging coatings site in Songjiang, China, and broke ground on a

75AkzoNobel Report 2014 | Business performance

Performance Coatings strategy

Our vision is to be the leading coatings company from a performance perspective. Our expected outcomes for 2015 are to achieve a return on sales level of 12 percent and a return on investment of 25 percent. We are on track to deliver on these expectations, as evidenced by our 2014 financial results. In 2014, we introduced a simplified and leaner organizational structure. This new structure has reduced the number of global management layers, which in turn will enhance decision-making efficiency and improve our customer focus, while at the same time reducing costs. We also continue to progress in our three main action areas:

ActionsDrive overarching performance improvement initiatives• Continuously reduce external spend. Procured raw

materials make up a significant percentage of our Performance Coatings cost base, so appropriate management is fundamental. We have introduced a cross-business, cross-functional approach to maximize and capture opportunities created by common raw materials and suppliers

• Continuously improve our operations. Operations comprise a smaller percentage of our cost base, but there is still room for improvement. We continue to optimize our global manufacturing footprint to leverage our scale and respond to changes in geographic demand. During 2014, we closed eight sites, but at the same time commissioned a new vehicle refinishes plant in Changzhou, China, and a new powder coatings factory in Dubai. These state-of-the-art facilities will strengthen our ability to manufacture locally developed products, particularly for the fast-growing mid-markets. In the future, we are placing more emphasis on continuous operational improvement. In order to deliver this, we are in the process of implementing the standardized AkzoNobel Leading Performance System (ALPS). Safety, customer service, material efficiency and cost productivity are all key areas of focus for this program

• Drive commercial excellence. Our focus is on embedding common commercial processes to deliver both organic growth and commercial efficiency. To support this, we have a dedicated center of expertise which is driving consistency and best practice

Pursue differentiated growth strategiesThe outlook differs for each of our end-user segments.We also face different competitive situations. To achieve our vision, we must continue to grow our business while improving performance levels. Thus, we need to focus and prioritize our growth activities and we are doing this by pursuing differentiated growth strategies. In roughly half of our businesses, our strategy is to outgrow the market organically in attractive markets where we are best able to win. In other parts of our Performance Coatings portfolio – where our position is often strong but the headroom for growth more limited – we want to grow with the market while driving operational excellence and controlling costs.

Examples are:• In Protective Coatings, we have a leadership position

based on strong technologies, brands and reputation. We will continue to invest in generating higher levels of growth. We will also expand our market presence in high growth regions based on appropriate value propositions, such as second tier ranges, to compete in the domestic marketplace

• In the high growth information technology sector of our Specialty Finishes business, we are investing to support key original equipment manufacturers (OEMs) and original design manufacturers (ODMs) to grow our positions

• In Coil Coatings, we have a strong position and a good reputation in high performance architectural applications, and in innovations in chrome-free technologies and heat-reflective coatings. We are optimizing our footprint in Europe, reducing complexity in our formulations and pursuing opportunities to improve resin costs

Business performance | AkzoNobel Report 201476

• Our Yacht Coatings business is already well positioned. In this sector, we are leveraging the recently launched Nautical range aimed at the mid-tier, and reducing costs through manufacturing consolidation

• Our Wood Finishes and Adhesives business serves some parts of the Buildings and Infrastructure and Consumer Goods end-user segments which have a lower growth profile. We are focusing on the most profitable areas and brands and improving our supply chain to drive operational efficiency

Deliver business-specific plansContinued success in Performance Coatings is fundamentally based on our ability to innovate in products and services. There are, of course, some areas of overlap in terms of innovation requirements across our businesses, such as the constant need for lower solvent or more waterborne solutions. For the most part, though, the focus for innovation differs by business. Therefore, the third key strategic activity area is based on investing in appropriate, specific innovation requirements for each of our businesses.

Examples are: • Our Powder Coatings business offers a customer solution

that is high yield and free of volatile organic compounds (VOCs), so sustainability is a major element of the value proposition. We also pursue improved finish effects, and in 2014, we took a significant step forward with the introduction of Interpon Cr, a bright metallic powder coating for furniture, lighting and other interior fixtures which provides a more sustainable and cost-effective alternative to chrome plating

• In our Vehicle Refinish business, color matching is everything. We continued to demonstrate leadership in this area through the 2014 launch of Color Universe – a new color documentation system which organizes color the way humans see it chromatically. Color Universe is an important addition to the array of tools that we provide to vehicle repair professionals to get color right the first time, every time

• In our Marine Coatings business, leadership in fouling control that supports our customers in reducing their fuel requirements is fundamental. We are very proud that in 2014, we received approval for carbon credits for our industry-leading Intersleek foul release coatings. In addition, we launched Intersmooth 7570 SPC, a high performance coastal fouling control solution for the severe fouling challenges of vessels trading in tropical coastal waters. This product contains patented copolymer technology, providing energy savings and an extended operating life

• Finally, in our Packaging Coatings business, we continue to commercially introduce and further innovate in terms of high performance packaging coatings that move away from the use of bisphenol A-based epoxies, addressing a key consumer and customer demand


TransportationTransportation is the largest end-user segment for Performance Coatings, with just over a third of our revenue. Around two-thirds of this revenue comes from our two automotive sub-segments – Automotive OEM, parts and assembly and Automotive repair. The growth outlook for the former is the most certain, particularly if oil prices remain low. The Automotive repair sub-segment is much more important for AkzoNobel and is expected to continue growing at stable rates, at or slightly below GDP growth levels. Growth rates will be higher in the high growth countries than the mature markets as the car park and rate of insurance coverage continue to grow.

The remaining revenue comes from the Marine and air transport sub-segment, into which we sell both marine and aerospace coatings. The long-term outlook for marine remains strong, as wealth and international trade continue to increase. However, in the shorter term, the marine new building market has yet to return to stable growth. While analysts expect this to happen in the near future, this has been the expectation for some time now, but we have still not seen significant concrete evidence of this. The maintenance market continues to grow at a moderate rate, but freight rates have still not recovered significantly, dampening demand for maintenance activities. The recent oil price developments may have a positive effect on this segment going forward, though. Aerospace is a much smaller market for AkzoNobel than marine, but we do expect continued reasonable growth.

Of course, demand in the Transportation end-user segment is dependant on sustainability as well as demand. Thus, products sold into the Transportation end-user segment that help in utilizing less energy and other resources will grow disproportionately.

Our Performance Coatings Business Area serves all four end-user segments. Although there are relevant end-user segment trends that remain positive, we are taking a more cautious outlook than we have in the recent past. For example, we see continued evidence of moderating growth in all four end-user segments in China, with particular emphasis on Buildings and Infrastructure. The oil and gas segment has come under pressure due to lower oil prices, which has resulted in delays of new projects. Elsewhere, we have still not seen an upturn of the cycle in marine new building, and although analysts are predicting a recovery in Buildings and Infrastructure in Europe, evidence for this in practice is relatively weak.

Performance Coatings end-user segment outlook

Consumer GoodsWe sell powder coatings, wood finishes and adhesives and specialty finishes into the Consumer durables end-user sub-segment, as a part of furniture, domestic appliance and consumer electronics manufacture. We expect continued reasonable growth overall in the more technology-driven aspects of this sub-segment, such as in domestic appliances and mobile phones, but it is important to note that trends differ significantly by type of product. So, for example, in consumer electronics, double digit growth is expected in tablets and above global GDP growth is expected in smartphones and laptops.

In less technology-oriented parts of Consumer durables, such as furniture, global growth is expected to be at lower levels but reasonably steady, even though we have yet to see a full market recovery in furniture to pre-recession levels. Similar growth rates are expected in the other sub-segment, Consumer packaged goods, into which we sell packaging coatings for use in food and beverage packaging. In both cases, we expect growth slightly below regional GDP growth rates in both high growth and mature geographies.

The Consumer Goods end-user segment is particularly affected by growth in population and wealth, but also by other factors such as consumer trends and fads. Sustainability also plays a role as consumers around the world are increasingly concerned about this issue.


Buildings and InfrastructureAs indicated in the Decorative Paints section of this Report 2014, the Buildings and Infrastructure end-user segment is undergoing considerable change. Growth rates are dropping considerably in China, while growth is expected to accelerate in more mature geographies, particularly Europe. Although analysts are expecting market recovery level growth rates in Europe, we are not yet seeing strong evidence of this in the market and, therefore, our internal predictions are much more conservative.

IndustrialThe Industrial end-user segment is the smallest for Performance Coatings. We sell protective and powder coatings for industrial uses, primarily in the Natural resource and energy industries sub-segment. With the recent oil price develoment, there are question marks around the growth outlook for the oil and gas end-user markets. However, in the short term, our business should not be significantly impacted as most of the projects that we sell into are long-term, multi-year projects that are likely to continue, even if oil prices remain lower than they have been.

The marketAccording to figures recently published by Orr & Boss, in a report commissioned by the International Paints and Printing Inks Council (IPPIC), the global market for performance coatings is just over 55 percent of the roughly €100 billion global paints and coatings market. Growth over the past few years has been higher in performance coatings than it has been in decorative paints. This is due in part to disproportionate growth in high growth geographies, where the share of performance coatings is higher, and also to continued issues in terms of Buildings and Infrastructure growth, particularly in Europe.

AkzoNobel market positions

1st Coil coatings

Wood finishes and adhesives

2nd Packaging coatings

Automotive and Aerospace Coatings

1st Specialty finishes

2nd Aerospace coatings

3rd Vehicle refinish

Powder Coatings

1st Powder coatings

Marine and Protective Coatings

1st Protective coatings

Yacht coatings

2nd Marine coatings

Industrial Coatings


€5.6 billion revenue

€545 million operating income

€2.5 billion invested capital

Environmental value: Input

Social value: Organization

Organization

4.6 million tonsupstream CO2(e) emissions

Employee safety is a key priority and we are actively driving towards a reduction in the number of incidents

1.8 total reportable rate of injuries

€143 million capital expenditures

During 2014, we completed the construction of two new production facilities which will increase our production capacity for vehicle refinishes in China and powder coatings in the Middle East

We continue to improve efficiency by reducing our energy use per ton of production, and are working towards improving our share of renewable energy. We continue to improve the environmental footprint of our operations by focusing on operational eco-efficiency

4,600 TJenergy use

Our Performance Coatings businesses are focused on all four of our end-user segments. Supplying high performance products and cutting-edge technologies primarily to business-to-business customers, we are increasingly incorporating low energy processes and working to reduce our carbon footprint across the value chain. Innovation is also key to our product development, which is often highly technical in order to meet strict customer specifications.

Particular emphasis is placed on supplying products that offer environmental and social benefits for our customers. These initiatives will help us to create economic, social and environmental value. Social value is also increased by our continued focus on safety, as well as our talent development programs and our contribution to various community activities.

All these initiatives will contribute to our financial performance and ultimately lead to more economic value for our investors.

Economic value: Organization

TotalExchangerates

Acquisitions/divestments

Price/mixVolume

1% 0% 0%-2%1%2

0

-2

-4

4

Revenue development in % versus 2013 Increase Decrease

2014201320122011

2.82.8 2.6

1.8

Total reportable rate of injuries per million hours

Performance Coatings value creation summary 2014


8.7 million tonsdownstream CO2(e) emissions

13.6 million tonsCO2(e) emissions cradle-to-grave

Outcomes

Outcomes

Outcomes

0.3 million tonsCO2(e) emissions own operations

55 kilotons total waste

15%of revenue from eco-premium solutions

9.8% ROS 22.0% ROI

€1.2 billionemployee benefits

3.89employee engagement score

We highly value, and actively work on improving, employee engagement. We’re investing in training and development and continue to work on a more diverse workforce

20,500 employees at year-end 2014

We participate in community programs and local sponsorships

RD&I investments have resulted in 15 percent of revenue derived from eco- premium solutions with customer benefits

2% increase CO2(e) per ton of sales from 2012cradle-to-grave carbon footprint

A

B

C

D

A Buildings and Infrastructure 21

B Transportation 37

C Consumer Goods 28

D Industrial 14

Revenue breakdown by end-user segment in %

A Marine and Protective Coatings 27

B Automotive and Aerospace Coatings 24

C Industrial Coatings 31

D Powder Coatings 18

A

BC

D

Revenue breakdown by business unit in %

201420132012

131315

Eco-premium solutions with customer benefits % of revenue


A

B

C

Geo-mix revenue by destination in %

Revenue in € millions

A EMEA 31

B Americas 23

C Asia Pacific 46

201420132012

1,4951,577 1,528

A

B

C

Automotive and Aerospace Coatings• Revenue was flat compared with 2013, as declines in volume and adverse currencies were

offset by price/mix• Volumes in the vehicle refinishes market contracted in Europe, Latin America and

South East Asia, while North America and China continued to grow• A state-of-the-art production facility for vehicle refinishes was opened in Changzhou,

China, for our Sikkens, Lesonal and Prime products• Sikkens Autoclear 2.0 was launched in the vehicle refinish segment, featuring patented

binder technology which doubles the percentage of renewable raw materials it uses• Strong customer demand was experienced in aerospace markets, driven by continued

innovation and technology leadership• Our Aerospace Coatings business received Boeing qualification for its Aerodur 3001/3002

Base Coat/Clear Coat system. We also received AMS 3095A qualification for 100 percent chrome-free paint systems for commercial fleet maintenance

Marine and Protective Coatings• Revenue was up 2 percent due to higher volumes in all businesses• Protective Coatings’ strong project portfolio and outstanding technical support led to

continued growth in the area of oil and gas and heavy duty coatings• Marine Coatings increased its business in the deep sea maintenance and repair market,

offsetting the global decline in new build• We achieved significant sales for our next generation fouling control products and also

received approval of carbon credits related to use of our Intersleek foul release coatings, providing a cash income for customers

• Our premier yacht coatings brand AWLGRIP launched a new clear coat system, Awlwood, for exterior wood above the waterline

• Our Nautical yacht coatings brand for do-it-yourself boat painters launched a new product range, including antifoulings, finishes and primers

• Two plants were consolidated into other facilities



201420132012

1,3211,299 1,320

Key brands Key brands

• Pigments• Acrylic resins

• Acrylic dispersions• Epoxy resins and organic solvents

• Copper/zinc• Curing agents

• Oil feedstock chain• Metals, base chemicals prices

• Metals, base chemicals prices• Oil, energy prices

Key cost drivers Key cost drivers

Top raw materialsTop raw materials

• Airbus• Amazon• Boeing• Dell• Etihad Airways• Geely

• General Motors• HP• Hyundai• Samsung• Toyota• Volkswagen

• Brunswick• Carnival Cruise• ExxonMobil• Hapag Lloyd

• Hyundai Heavy Industries• Qatar Gas• Shell• West Marine

Some of our customersSome of our customers

Key business unit developments

A EMEA 41

B Americas 29

C Asia Pacific 30


• Arcelor Mittal• Ball • Blue Scope Steel• Crown

• IKEA• Rexam• TATA

• Bosch• Mercedes-Benz• Philips

• TATA• Whirlpool

Some of our customers Some of our customers

Industrial Coatings• Revenue declined 3 percent, due to adverse currencies • Operating costs declined across all businesses due to restructuring and

cost control measures• We continued to achieve growth in our high growth markets, with Coil Coatings and

Packaging Coatings benefiting in Asia in particular• Capacity for Packaging Coatings was added in India, as well as a new resin reactor in

Songjiang, China, where we also established a new Industrial Coatings RD&I center• We were the first to introduce an ultra-low formaldehyde emitting adhesive for the parquet

flooring market in Europe • We have commercial success and are well positioned for the continued BPA-free

conversion occurring in France • Streamlining of our Coil Coatings manufacturing footprint in Europe is nearly completed• In Wood Coatings, we are moving capacity to sites in High Point, Roanoke and Port Hope• We moved our Coil and Wood Coatings capacity in Brazil to a multi-site in Santo Andre

Powder Coatings• Revenue increased 4 percent compared with 2013, with volume and price/mix increases

offsetting adverse currencies• Volume growth occurred in Europe, North America and Asia, resulting in a strong year for

the business• We improved our leading positions across a wide range of segments, with a particular

focus on automotive, resulting in improved volumes and revenues• A new powder coatings manufacturing facility was inaugurated in Dubai to capture

growing demand in the Middle East• Production in South East Asia was consolidated at the Powder Coatings site in Vietnam• We launched a bright metallic powder coating, Interpon Cr, for furniture, lighting and other

interior fixtures, which provides a more sustainable and cost-effective alternative to chrome plating

• We launched an innovative two-coat, one-bake powder coating system (Interpon Align) which offers customers significant productivity and energy efficiency improvements

• We also opened a new European Powder Technical Center in Como, Italy

Key brands Key brands



A

B

C

201420132012

1,7991,856 1,751

A

B

C



201420132012

982997 1,019

• Polyester and epoxy resins• Glycol, ether and aromatic solvents• Titanium dioxide

• Polyester and epoxy resins • Titanium dioxide

• Basic feedstock prices• Oil/gasoline/naphtha/natural gas prices

• Gasoline/naphtha prices

Key cost drivers Key cost drivers

Top raw materials Top raw materials

A EMEA 46

B Americas 34

C Asia Pacific 20

A EMEA 48

B Americas 21

C Asia Pacific 31


Take the cold drinks paper cup, for example. Around 200 billion are used around the world every year, although currently, none can be recycled without incurring prohibitive costs or greatly reducing the quality of the paper fiber. In 2014, our Performance Coatings business introduced pioneering coatings technology which could have an industry-changing impact.

The breakthrough was achieved thanks to EvCote WaterBarrier 3000. When applied to paperboard used for the production of cold cup stock, it makes the world’s first fully compostable and recyclable cold paper cup a reality. In addition, paper mills and cup makers can potentially recapture 100 percent of the paper waste from the production process currently sent to landfill – resulting in major cost savings.

What makes EvCote WaterBarrier 3000 remarkable is that it contains up to 95 percent sustainable or renewable content and is made from plant-based oils and recycled PET bottles. The PET is “digested” into the resulting polyester resin, which means the PET in the final product is weakened and breaks up faster when composted or sent for recycling. When paper coated with the product is recycled, the quality of the paper fiber remains intact – which means it can be reused in the production of other, high quality paper products, such as new food contact packaging.

A great example of AkzoNobel’s Planet Possible approach to sustainability, the new technology also provides our Paper Coatings business with options to completely disconnect from the fossil-based supply chain, because it can offer customers a replacement for petroleum-based polyethylene films.

Changing the world with pioneering technologyCutting back on waste and doing more with less resources is a major area of attention for many companies. This need to become more sustainable has prompted an upsurge in innovation, due to the fact that devising creative solutions can be the best way to rise to the challenge. Quite often, it can also be the simplest ideas that have the biggest impact.


Scan and explore

200 billionThe world uses 200 billion paper cups every year

100%Recapture of paper currently sent to landfill

Our pioneering coatings technology makes this a fully compostable, recyclable cold drinks cup


ros 12% roi 25% - akzonobel report 2020

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