Change

External Strategic – Top five risk

International operations

We are a global business with operations in more than 80 countries. Therefore, we are exposed to a variety of risks, many of them beyond our control. Unfavorable political, social or economic developments and developments in laws, regulations and standards could adversely affect our business and results of operations. Our aspirations to fuel growth in high growth markets will further expose us to these risks.

Risk corrective actions

We spread our activities geographically and serve many sectors to benefit from opportunities and reduce the risk of instability. Political, economic and legislative conditions are carefully monitored. The Executive Committee decides on all significant investments and the countries and industry segments in which AkzoNobel conducts its business. We have also set up a dedicated Middle East organization responsible for all AkzoNobel business in the countries belonging to the region.

External Strategic – Top five risk

Worsening of economic conditions

One of the principal uncertainties continues to be the development of the global economy. The global economic conditions remain fragile and it is difficult to predict customer demand and raw material costs. Construction and housing markets are expected to remain soft in mature markets and our Decorative Paints business in particular has been affected by the market downturn. The likelihood of a European sovereign crisis may have decreased but the chronic fiscal imbalances may further adversely impact the global, regional or national economies in markets where we operate. Failure to adapt adequately and in time can be harmful to our business and results.

Risk corrective actions

The Executive Committee has defined a comprehensive performance improvement program to deliver €500 million EBITDA, based on functional and operational excellence. Around 40 percent of the anticipated benefits will come from programs to decrease complexity and to optimize the supply chain, and a further 50 percent from margin management, research and development initiatives and business restructuring programs. These benefits will accrue across our Business Areas. We continue to apply various scenarios for planning and budgeting to be best prepared for further changes in economic conditions.

External Strategic

Ensuring stakeholder support

Failure to maintain the support of our stakeholders for our strategy and its execution could adversely affect our company and its businesses.

Risk corrective actions

We endeavor to define and implement a clear strategy and continuously seek dialog with stakeholders. As an organization, we are committed to helping our customers make their business a success, enhancing relationships with our suppliers, providing competitive returns to our investors by paying a stable to rising dividend, creating an attractive working environment for our people and conducting all our activities in the most socially responsible manner. Across the organization we encourage our employees to participate in one of many ongoing Community Programs, thereby supporting local societies.

External Operational

Energy pricing and emission trading rights

Our Specialty Chemicals business operates two energy-intensive businesses, Pulp and Performance Chemicals and Industrial Chemicals. The latter conducts its business primarily in Europe. A non-level playing field for energy on a global level (e.g. shale gas, national policies, subsidies) and emission trading rights can affect the competitive position of these businesses and the competitive position of our customers.

Risk corrective actions

We will continue to analyze and review our competitive positions and we are proactively managing energy usage and costs. We operate several cogeneration units which enable us to make efficient use of combined heat and power. We are implementing our Carbon Policy, working on energy efficiency programs and investing in energy from waste and biomass. Carbon management plans are closely monitored and strategically managed. We have policies for energy contracts and have long-term purchase contracts in place (see Note 22 in the Financial statements).

External Operational

Sourcing of raw materials

We use significant amounts of various raw materials in manufacturing our products. Prices for some key raw materials can be volatile and are affected by economic conditions. The table to the right shows our relative spend on these key raw materials, excluding energy. We are, to some extent, able to pass on higher input prices to our customers, but this is, to a large extent, dependent on market conditions. We may also be impacted by inability to access sufficient raw materials, business interruption or product discontinuation at some of our key suppliers. Inability to access sufficient raw materials, increases in cost and expenses for raw materials and energy, and changes in product mix may adversely affect future results and growth.

Risk corrective actions

Our strengthened global sourcing strategy enables us to bundle the purchasing power, both in product related and non-product related requirements. We use our purchasing power and our long-term relationships with suppliers to acquire raw materials and safeguard their constant delivery in a sustainable manner, to secure volumes and to cooperate on innovation and sustainability. We have made an inventory of single and sole sourced raw materials and are actively pursuing plans to improve this situation. We continuously monitor the markets in which we operate for developments and opportunities and adapt our purchasing strategy accordingly.

 

Breakdown of total raw material spend
in %

Breakdown of total raw material spend in % (line chart)

*   Chemicals and intermediates include caustic soda, acetic acid, tallow, ethylene, ethylene oxide, sulfur, amines etc.

**   Other raw materials include cardolits, hylar etc.

External Operational

Product liability

Product liability claims could adversely affect our company’s business and results of operations. Unlikely long-term implications with a high impact for our organization could follow from usage of new technologies and compounds.

Risk corrective actions

Currently, we are involved in a number of product liability cases. However, we believe that any unexpected costs and liabilities will not have a material adverse effect on our consolidated financial position. Product stewardship has been incorporated into the company’s HSE and operational eco-efficiency agenda. Product stewardship is also integrated into product slate decisions in the operational excellence program. We have a central policy to optimize insurance coverage which relates to specific insurance programs covering product liability. We have established an initiative to assess all priority substances used by AkzoNobel throughout their lifecycle by 2015.

External Operational

Environmental liabilities

We use, and have used in the past, hazardous materials and biological compounds in several product development programs and manufacturing processes, including waste thereof. We have been, and can be, exposed to risks of accidental contamination or past practices that give rise to current liabilities. We could be exposed to events of non-compliance with environmental laws, regulatory enforcement, property damage, possible personal injury and any resulting claims for damage. Regulations and standards are becoming increasingly stringent.

Risk corrective actions

We are committed to conducting all our activities in the safest and most responsible manner. We have a specialist group managing these issues. Contingency plans and assignment arrangements are in place to mitigate known risks and regular reviews are conducted to monitor progress and assess financial and reputational exposure. Our policy is to accrue and charge against earnings environmental clean-up costs, damages or indemnifications when it is probable that a liability has materialized and an amount can be estimated (see Note 19 in the Financial statements section).

External Financial – Top five risk

Cash flow

The potential for further deterioration of economic conditions may have an impact on the free cash flow generation of our businesses. Furthermore, we are potentially exposed to funding of pension schemes. This may lead to insufficient free cash flow generation to support funding for the implementation of our strategic agenda.

Risk corrective actions

Our balance sheet and debt profile are strong. We continue to deliver on our comprehensive performance improvement program to achieve €500 million EBITDA and we will engage in restructuring of underperforming parts of our portfolio if deemed strategically appropriate. We have a prudent financing strategy and a strict cash management policy, which are managed by our centralized treasury function (see Note 22 in the Financial statements).

External Financial

Contributions to pension funds

Economic, regulatory and political developments may increase our defined benefit pension liabilities and/or reduce the value of assets held to fund those obligations, causing higher post-retirement charges and pension premiums payable. We are at risk from potential shortfalls in the funding of defined benefit pension schemes.

Risk corrective actions

We practice pro-active pension risk management. Our pension policy is to offer defined contribution schemes to new employees and, where appropriate, to existing employees. Our largest defined benefit schemes have been closed to new entrants since 2001 for ICI, and 2004 for AkzoNobel. We measure and monitor our pension risks frequently and adopt investment strategies designed to reduce financial risks. In 2012, the Courtaulds Pension Scheme in the UK entered into an insurance contract with Swiss Re which covers the longevity risks of almost 17,000 current pensioners and their dependants. We are committed to further de-risking over time. Pension activities are overseen by the Board Committee Pensions (see Note 14 and Note 20 in the Financial statements section).

External Financial

Decline of asset values

Impairments and book losses could adversely affect our financial results. In view of the current financial market conditions, asset value decline offers both opportunities and threats to our company.

Risk corrective actions

In Q3 of 2012, we reported a non-cash impairment charge related to Decorative Paints intangible assets (€1.9 billion in Europe, €0.4 billion in North America and €0.2 billion in Latin America), reflecting deteriorating market conditions in these regions. The Executive Committee continuously monitors acquisition and divestment opportunities and the management of assets held for sale. We do impairment tests for intangibles with indefinite lives (goodwill, some brands) every year and whenever an impairment trigger exists. For tangibles and other fixed assets, we do impairment tests whenever an impairment trigger exists (see Note 1 in the Financial statements).

External Financial

Fluctuations in exchange rates

Exchange rate fluctuations can have a harmful impact on our financial results. We have operations in more than 80 countries and report in euros. We are particularly sensitive to the relation between the euro and US dollar, pound sterling, Swedish krona and Latin American and Asian currencies.

Risk corrective actions

We have centralized treasury and a hedging policy is in place for certain currency exchange rate risks (see Note 22 in the Financial statements). At a more operational level, risks are reduced by the prevalence of local-for-local production, which is the norm in many of our businesses.

External Compliance

Complying with laws and regulations

We may be held responsible for any liabilities arising out of non-compliance with laws and regulations. For example, we are involved in court proceedings and civil litigation resulting from (alleged) involvement in anti-competitive behavior in the past (see Note 19 in the Financial statements section).

Risk corrective actions

We are monitoring and adapting to significant and rapid changes in the legal systems, regulatory controls, customs and practices in the countries in which we operate. These affect a wide range of areas. We are dedicated to minimizing such risks with special emphasis on the application of our Code of Conduct. We operate under a comprehensive competition law compliance program including training, monitoring and assessment. We advertise the use of our company-wide complaints procedure called SpeakUp!, which enables all our employees to report irregularities in relation to our Code of Conduct (see the Governance and compliance section).

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