Specialty Chemicals strategy

We have met our 2015 financial expectations, with of 12.2 percent (expected outcome 12 percent) and of 17.2 percent (expected outcome 15 percent). As a result, we are closer to our vision of delivering leading performance, based on strong chemical platforms driving profitable growth in selected markets. We will continue working towards this vision until we are satisfied that it has been fully achieved.

Our 2015 return on sales level is within our future performance range (11.5 to 13 percent). However, we
expect continued improvement in return on investment at a minimum of 16 percent going forward. We are also including financial guidance on our growth rate. Specifically, we have a clear aim to build on the foundations we have created and grow in line with, or faster than, our relevant market segments. We will deliver on these financial expectations by continuing with our five strategic actions.

Specialty Chemicals – Strategic performance – Actions (graphic)Specialty Chemicals – Strategic performance – Actions (graphic)
Actions

Build on our strong chemical platforms to deliver profitable growth in selected markets

To ensure that we maintain our current return on sales and investment levels, we will prioritize resources and investment capital against the most attractive opportunity areas.

There are two main platforms where we have strong competitive positions in growing markets – the Bleaching Chemicals and Surfactants platforms. In these businesses, we are investing to outgrow the market.

  • Our Bleaching Chemicals platform is expected to benefit from continued growth in chemically bleached pulp in South America. Although there are challenges in many sectors of the Brazilian economy, growth of chemically-bleached pulp production in Brazil is expected to continue. Given our Chemical Island business model, we have a strong position in this business from both a cost and sustainability perspective. In Europe (where growth is also expected) and North America (where the market is contracting), we will defend and protect our solid market positions
  • We are also investing selectively in growth in the Surfactants platform. In 2015, low oil prices led to a sharp decline in the oil and gas drilling sector. However, we remain convinced of the long-term growth potential in this sector. There are also other sectors where growth continues to be robust. We have a strong position in specialty surfactants and, in particular, in nitrogen derivatives. Because our surfactants are centered on a few key technology platforms, we can effectively and efficiently leverage our production capacity for use across all segments as we focus on growth

In our other three main platforms, our focus is on growing with the market from a volume perspective while improving bottom line performance through enhanced operational excellence.

  • As market growth is limited in the North Western Europe Salt-Chlorine chain and our competitive position is strong, our main strategic focus is on efficient capital expenditure, successful plant utilization and operational excellence. We are also taking action where opportunities exist to reinforce our position, particularly where we can utilize our process technology know-how while conserving our capital. A recent example is a cooperation with ICL for salt, which has allowed us to maintain our leadership position in chemical transformation salt, while also offering specialty salt growth opportunities. The deal has an excellent sustainability profile, as it draws on salt-based waste streams. The second example is a 50/50 joint venture we formed with Evonik Industries to convert our Ibbenbüren plant in Gemany from mercury to membrane technology for the production of potassium hydroxide, chlorine and hydrogen
  • We also have a strong position in our Polymer Chemistry platform. Given our strong share in this market, our plan is to grow with the market, improving our performance by focusing on specific niches and leveraging our global reputation for safety. For example, we are continuing to gain traction in the market with our Continuous Initiator Dosing (CiD) technology. Designed to reduce energy use and deliver higher PVC quality, it also helps to increase the capital productivity of our customers by up to 30 percent while improving safety levels. To maintain our position, we are investing in a large dicumyl peroxide (DCP) site (which we operate in Ningbo, China) which supplies the global market for chemicals that cross-link plastics and rubbers
  • In the Ethylene Oxide Network, our emphasis is primarily on increasing the operational leverage of our existing assets to further improve our performance levels. We are also investing in growth in specific applications, such as specialty chelates and certain cellulosic products

Drive functional excellence

In order to further improve our and our return on investment, we will continually improve our productivity levels, both in terms of supply chain and operations and commercial excellence. A strong talent management approach utilizing our AkzoNobel process will help us to achieve this productivity improvement.

  • Supply chain and operations. Specialty Chemicals continues to implement the AkzoNobel Leading Performance System (). This operational excellence program continues to drive targeted improvements in financial performance, customer satisfaction and safety
  • Commercial excellence. Our commercial excellence program supports our enhanced organic growth focus. We have four main objectives – increase customer retention, win with key accounts, invest in higher growth regions and sectors and open channels to (new) customers
  • Talent management. Having built a flatter organization, we are improving the levels of professionalism and diversity. We are focusing on recruitment and engagement of high quality individuals; continued development of a strong and diverse pipeline; creation of appropriate learning and development programs and performance management

Reduce organizational complexity

On a portfolio level, in 2015 we divested our Paper Chemicals business to Kemira. On a more operational level, our performance improvement was the result of various actions, such as rationalizing our manufacturing footprint, standardizing work processes in all functions and ERP consolidation across the whole Business Area. Going forward, a key area of focus will be the reduction of raw material and product complexity.

Strengthen product and process innovation

We have identified a number of end-user requirements/trends that will drive our product and process innovation agenda. These include resource preservation, increasing end-use demands, accelerated technology development and changing demographics and spending patterns.

Our innovation agenda is robust. We have overarching technology programs around process technology, shared applications and bio-based chemicals, as well as specific development programs supporting our platforms as appropriate. This approach has a major sustainability focus, in line with our Planet Possible agenda.

  • Product innovation. In our Surfactants platform, examples of successful recent innovations include improved agricultural adjuvants that enhance the effectiveness of crop protection, delivering customer value by reducing the amounts required and offering improved eco-profiles
  • Process innovation. In our Salt-Chlorine chain platform, an example of process improvements we are pursuing can be seen in our MCA business, where we have carried out significant de-bottlenecking. This resulted in better product quality and reduced energy consumption as well as capacity expansion

Capitalize on industry changes

We continue to adjust our strategy and footprint to respond to industry changes including:

  • Reduction in oil prices. On a macro-economic level, oil price reduction is creating more disposable income for consumers, driving GDP growth. On a regional level, the oil price reduction is providing temporary relief for China and Europe in terms of raw material input costs. However, in some sectors – such as surfactants for oilfield applications – the downturn has had a negative impact on demand
  • Reduced chemicals growth rates in China. Although growth rates are lower than they have been, China is still growing at levels higher than global GDP growth. We are responding to changes in growth rates by focusing on serving local markets, leveraging our existing local production capacity
  • Growth in pulp production in Brazil. We are continuing to respond to this by constructing closed loop, highly sustainable, local production capacity
  • Requirement to reduce , consistent with our Planet Possible sustainability agenda. We continue to make progress on reducing carbon emissions through a combination of improved energy efficiency, higher use of renewable energy and higher use of bio-based raw materials. As an example of the type of improvements we are making, we have increased renewable energy use by nearly 20 percent since 2013
  • Human Cities. Chemicals make an important contribution to society, helping to make cities more liveable and inspiring. Engaging with stakeholders on this topic provides us with additional impetus for organic growth

ROS (return on sales)

This is a key profitability measure and is calculated as operating income as a percentage of revenue.

ROI (return on investment)

This is a key profitability measure and is calculated as operating income as a percentage of average invested capital.

ROS (return on sales)

This is a key profitability measure and is calculated as operating income as a percentage of revenue.

ALPS

AkzoNobel Leading Performance System.

Carbon footprint

The carbon footprint of a product or organization is the total amount of greenhouse gas (GHG) emissions caused during a defined period, or across the total or part of a product lifecycle. It is expressed in terms of the amount of carbon dioxide equivalents CO2(e) emitted.