How we created value in 2016

By bringing more value to our customers, investors, employees and society in general, we can better position ourselves for growth as we aim to achieve our strategic vision of leading market positions delivering leading performance.

  • Economic value
  • Environmental value
  • Social value

Financial overview

We structurally improved the company with record levels of profitability and cash generation. Focus on growth saw volumes up 1 percent. Revenue was down 4 percent, due to unfavorable currency and price/mix effects. was up 3 percent at €1,502 million, reflecting the positive effects of volume growth, continuous improvement and lower costs. Profitability increased, with record levels of at 10.6 percent (2015: 9.8 percent) and at 15.0 percent (2015: 14.0 percent).

Summary of financial outcomes

in € millions

2015

2016

∆%

Revenue

14,859

14,197

(4)

EBIT

1,462

1,502

3

Operating income

1,573

1,519

(3)

ROS %

9.8

10.6

 

OPI margin %

10.6

10.7

 

 

 

 

 

Average invested capital

10,475

10,045

 

Moving average ROI (in %)

14.0

15.0

 

 

 

 

 

EBITDA

2,088

2,108

1

Capital expenditures

651

634

 

Net cash from operating activities

1,136

1,297

14

Net debt

1,226

1,252

 

 

 

 

 

Net income attributable to shareholders

979

970

(1)

Earnings per share from total operations (in €)

3.95

3.87

 

Adjusted earnings per share (in €)

4.02

4.15

3

Number of employees

45,600

46,000

 

Revenue

Revenue was down 4 percent, due to unfavorable currency and price/mix effects.

  • In Decorative Paints, volumes were up 3 percent overall, with positive developments in Asia and , while volumes in Latin America were down. Positive volumes were more than offset by unfavorable currency effects and adverse price/mix. Revenue was down 4 percent
  • In Performance Coatings, volume growth in some segments was offset by adverse conditions in the marine and oil and gas industries. Demand trends differed per segment and region. Revenue was down 5 percent, driven by adverse currencies and price/mix
  • In Specialty Chemicals, volumes were up 1 percent, with positive developments mainly driven by Asia and Europe. Revenue was down 4 percent, with positive volume developments more than offset by price deflation in several markets

Revenue development
in % versus 2015

Value creation – Economic value – Revenue development (bar chart)Value creation – Economic value – Revenue development (bar chart)

Revenue by destination
in %

Value creation – Economic value – Revenue by destination (pie chart)Value creation – Economic value – Revenue by destination (pie chart)

Revenue
in € millions

Value creation – Economic value – Revenue by Business Area (bar chart)Value creation – Economic value – Revenue by Business Area (bar chart)

EBIT

EBIT increased 3 percent to €1,502 million, reflecting the positive effects of volume growth, continuous improvement and lower costs.

  • In Decorative Paints, increased 3 percent as a result of the volume growth, continuous improvement and cost discipline, partly offset by currency impacts
  • In Performance Coatings, EBIT decreased 4 percent due to adverse currencies and weakness in the marine and oil and gas industries, partly offset by continuous improvement
  • In Specialty Chemicals, EBIT increased by 9 percent, driven by improved volumes and operational efficiencies

Raw material prices were lower at the beginning of the year compared with 2015, gradually increasing during the year to become roughly flat by year-end. In most regions, foreign currency effects adversely impacted raw material costs in local currencies.

EBIT in € millions

Value creation – Economic value – EBIT (bar chart)Value creation – Economic value – EBIT (bar chart)

Operating income

Full-year operating income was net positively impacted by €17 million of incidental items, including adjustments to post-retirement provisions, asset impairments and integration-related costs, with respect to the acquisition of BASF’s Industrial Coatings business. The incidental items impacted operating income of Decorative Paints, Performance Coatings and the in other activities.

Cash flows and net debt

Operating activities in 2016 resulted in cash inflows of €1,297 million, up 14 percent (2015: €1,136 million), mainly due to lower pension top-up payments and lower cash out flow with respect to restructuring projects and interest payments.

at year-end 2016 was slightly higher at €1,252 million compared with year-end 2015 (€1,226 million), as a result of the consideration paid for BASF’s Industrial Coatings business.

In 2016, a €500 million bond was launched with a ten-year maturity, at a coupon of 1.125 percent, and a £250 million bond with 8 percent coupon was repaid from existing resources.

Invested capital

at year-end 2016 totaled €10.3 billion, up on year-end 2015. The acquisition of BASF’s Industrial Coatings business impacted invested capital by €0.4 billion.

In 2016, we invested €634 million in property, plant and equipment.

Allocation of 2016 capital expenditures of €634 million
in % (4.5 percent of revenue)

Value creation – Economic value – Capital expenditures 2016 (pie chart)Value creation – Economic value – Capital expenditures 2016 (pie chart)

Innovation

We continue to invest in research, development and innovation to help us fulfil future customer needs and fuel our targeted growth in revenue share of eco-premium solutions with customer benefits.

Innovation investments
research and development expenses in € millions

Value creation – Economic value – Innovation investments (bar chart)Value creation – Economic value – Innovation investments (bar chart)

Eco-premium solutions

The percentage of revenue from increased from 19 percent in 2015 to 20 percent in 2016. The increase resulted from sales growth of new and existing eco-premium solutions in all Business Areas. This was offset by “mainstreaming” of a few of our coatings products and revenue growth from products which are not eco-premium. We may appear to have realized our 2020 target, however, we measure our performance across the whole value chain and against solutions available in the marketplace, making it a moving target.

We use the strictest definition for our eco-premium solutions by excluding solutions that have sustainability benefits, but do not lead in the market. We have estimated, for example, that about half our sales are covered by the main drivers for reduction. In addition, our product development processes are designed to drive continuous sustainability improvement in the overall portfolio as products are updated or replaced.

We maintain our intention to lead by example by improving the environmental/social performance of our products and processes, which we measure through our development of eco-premium solutions. They are a fundamental driver of our Planet Possible agenda for creating more value from fewer resources, of the products we sell and the processes we use to manufacture them. For more details, see Note 4 of the Sustainability statements.

Eco-premium solutions with customer benefits
in % of revenue

Value creation – Economic value – Eco-premium solutions with customer benefits (bar chart)Value creation – Economic value – Eco-premium solutions with customer benefits (bar chart)

Dividend

Our dividend policy is to pay a stable to rising dividend. We will propose a 2016 final dividend of €1.28 per share, which would make a total 2016 dividend of €1.65 (2015: €1.55) per share, up 6.5 percent. There will be a stock dividend option with cash dividend as default.

Dividend
in €

Value creation – Economic value – Dividend (bar chart)Value creation – Economic value – Dividend (bar chart)

Earnings per share total operations
in €

Value creation – Economic value – Earnings per share total operations (bar chart)Value creation – Economic value – Earnings per share total operations (bar chart)

Adjusted earnings per share
in €

Value creation – Economic value – Adjusted earnings per share (bar chart)Value creation – Economic value – Adjusted earnings per share (bar chart)

Net financing income and expenses

For the full-year, the net financing income and expenses were in line with the previous year as reduced external interest expenses were offset by the effect of lower discount rates of provisions.

Income tax

The full-year effective tax rate was 27 percent (2015: 28 percent), impacted by non-taxable gains, adjustments to previous years and geographical mix.

Income tax paid
in € millions

Value creation – Economic value – Income tax paid (bar chart)Value creation – Economic value – Income tax paid (bar chart)

Outlook

In 2017, AkzoNobel anticipates positive developments for EMEA, North America and Asia, improving during the year, while Latin America is expected to stabilize. Some economic and political uncertainty is expected to continue. Market trends experienced in the second part of 2016, including for the marine and oil and gas industries, are expected to continue in the first half 2017.

The company has structurally improved its ability to respond to developments in its markets and is taking measures to deal with higher raw material prices in an inflationary environment. This stronger operational and financial foundation means AkzoNobel is more agile and better able to seize growth opportunities, including acquisitions. The company maintains its financial guidance for 2016-2018.

Cradle-to-grave carbon footprint

Cradle-to-grave is our prime measure of resource efficiency. Carbon footprint per ton of sold product has improved 6 percent since 2012. Absolute footprint is down 14 percent across our total value chain. Emissions from our own production were 21 percent lower than 2012. We achieved solid improvements due to lower footprint energy and raw material sources (including renewables), efficiency gains at energy intensive sites, and increased sales of lower footprint coatings. Since 2012, our upstream emissions have improved around 14 percent, and downstream by around 13 percent.

Our 2020 target – to reduce cradle-to-grave by 25-30 percent per ton of sales between 2012 and 2020 – remains a challenge. We are focused on working with suppliers and customers to deliver improvements across the value chain. For more details, see Note 8 of the Sustainability statements.

Cradle-to-grave carbon footprint
% reduction CO2(e) per ton of sales from 2012

Value creation – Environmental value – Cradle-to-grave carbon footprint (bar chart)Value creation – Environmental value – Cradle-to-grave carbon footprint (bar chart)

Energy

The energy we use at our sites contributes about 15 percent to our cradle-to-grave carbon footprint. Renewable energy is an important aspect of the improvements required to achieve our 2020 strategic carbon footprint target. The proportion of renewable energy in our operations increased to 40 percent (2015: 38 percent).

Our renewable energy supply strategy has three focus areas: protecting our current renewable share, participating in cost-effective, large energy ventures, and exploring commercially feasible on-site renewable energy generation.

In 2016, this included a number of significant programs in the Netherlands:

  • A unique consortium with other corporations to source power from renewable energy projects, the first agreement being with the Krammer wind park
  • The start of our renewable steam contract with Dutch energy supplier Eneco
  • Additional solar panels installed at our main office and research locations in the Netherlands
  • In addition, our power contract in the Nordics was extended to 60 percent renewable energy

For more details, see Note 8 of the Sustainability statements.

Total energy
in % by source

Value creation – Environmental value – Total energy by source (pie chart)Value creation – Environmental value – Total energy by source (pie chart)

Raw materials

Bio-based (renewable) materials also contribute to our sustainability agenda. A considerable proportion of our environmental footprint results from the raw materials we buy, with most of the bio-based materials exhibiting lower footprints.

In 2016, 12 percent of all our organic raw materials came from bio-based (renewable) sources (2015: 11 percent). This is 6 percent (2015: 5 percent) of the total volume of raw materials purchased, including other raw materials such as salt, minerals and clays.

We made progress with our existing partnerships to tap into the alternative feedstock sources that are becoming available. We also announced additional collaborations involving a number of our key raw materials, and partnerships to produce chemicals from waste. For more details see Note 8 of the Sustainability statements.

Total volume of raw materials
in % per source

Value creation – Environmental value – Total volume of raw materials (pie chart)Value creation – Environmental value – Total volume of raw materials (pie chart)

Operational eco-efficiency program

The focus of the (OEE) agenda is to increase raw material efficiency, reduce consumption of energy and decrease emissions and production of waste in our own operations. OEE is an important way to drive out cost. Our company indicator combines energy, water, waste and air emissions, as well as cost elements.

In 2016, we achieved a footprint measure improvement of 28 percent (since 2009). Many of our businesses achieved eco-efficiency footprint improvements, including many small site contributions, upgrading of existing processes, rationalization of the manufacturing footprint and application of best available technology for new investments.

In order to focus even more attention on this program and accelerate progress towards our 40 percent ambition, projects are now being integrated into the main supply chain improvement monitoring tool to quantify all site improvement activities. For more details, see Notes 8 and 9 of the Sustainability statements.

OEE footprint improvement
% reduction from 2009

Value creation – Environmental value – OEE footprint improvement (bar chart)Value creation – Environmental value – OEE footprint improvement (bar chart)

The OEE footprint is calculated from the weighted average of nine footprint parameters and production volume.

Waste

Effective waste management helps to increase raw material efficiency in our manufacturing operations, while reducing both our environmental footprint and costs. Our target is to drive towards “zero waste to landfill” and a program is being developed to achieve this with specific projects.

Total waste per ton of production generated and leaving our sites was down by 10 percent to 8.1 kg/ton (2015: 9 kg/ton). The total waste volume was down to 143 kilotons, a decrease of 8 percent. The focus on waste over recent years has resulted in a reduction in waste at the majority of our sites. For more details, see Note 9 of the Sustainability statements.

Total waste
in kilotons

Value creation – Environmental value – Total waste (bar chart)Value creation – Environmental value – Total waste (bar chart)

Waste means any substance or object arising from our routine operations which we discard or intend to discard, or we are required to discard. Reusable waste is waste which is used, for example, for resource recovery, recycling, reclamation, direct re-use or alternative uses (e.g. composting). All other waste is non-reusable waste.

At year-end 2016, we employed a total of 46,000 people (year-end 2015: 45,600 employees). The increase was mainly due to new hires in emerging regions and people joining from the acquired BASF Industrial Coatings business. For more details, see Note 4 to the Consolidated financial statements.

Employees

46,000 at year-end 2016

Employees by Business Area
in %

Value creation – Social value – Employees by Business Area (pie chart)Value creation – Social value – Employees by Business Area (pie chart)

Employee engagement

One of our key measures of progress in the area of culture is employee engagement, which we measure through an annual engagement survey. We’ve seen an increase in engagement score every year since we started the survey in 2010.

In 2016, our score was 4.17, an increase from 2015, with a positive trajectory at all levels of the company, indicating that we are continuing to transform the daily experience of working at AkzoNobel. For more details, see Note 11 of the Sustainability statements.

Employee engagement score

Value creation – Social value – Employee engagement score (bar chart)Value creation – Social value – Employee engagement score (bar chart)

Safety

The overall total reportable rate (TTR) for employees and supervised contractors decreased to 1.4 (2015: 1.6). Seventy-eight percent of our sites have been recordable-free for more than a year. This reduction in the number of injuries also extends to independent contractors and coincides with continued implementation of our people safety programs. For more details, see Note 12 of the Sustainability statements.

Employee and supervised contractors total reportable injuries
frequency rate

Value creation – Social value – Employee and supervised contractors total reportable injuries (bar chart)Value creation – Social value – Employee and supervised contractors total reportable injuries (bar chart)

Human Cities

Everything we do for and with society is channeled through our global initiative. It’s an active expression of our purpose, which enables us to combine our expertise in sustainable innovation with our passion for working closely with local communities. It includes all the work we do through our Community Program and “Let’s Colour” initiative. In 2016, this involved a total of more than 300 projects, impacting over nine million people. For more details, see Note 17 of the Sustainability statements.

Cumulative Community Program involvement
cumulative since 2005

Value creation – Social value – Cumulative Community Program involvement (bar chart)Value creation – Social value – Cumulative Community Program involvement (bar chart)
EBIT

EBIT is operating income excluding incidentals.

ROS (return on sales)

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

ROI (return on investment)

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

EMEA

Europe, Middle East and Africa.

EBIT

EBIT is operating income excluding incidentals.

Operating income

Operating income is defined in accordance with IFRS and includes the relevant incidentals.

Net debt

Defined as long-term borrowings plus short-term borrowings less cash and cash equivalents.

Invested capital

Total assets (excluding cash and cash equivalents, investments in ­associates, the receivable from pension funds in an asset position, assets held for sale) less current ­income tax payable, deferred tax liabilities and trade and other payables.

Eco-premium solutions with downstream benefits

A measure of the eco-efficiency of our products. An eco-premium solution is significantly better than competing offers in the market in at least one eco-efficiency criterion (toxicity, energy use, use of natural resources/raw materials, emissions and waste, land use, risks, health and well-being), and not significantly worse in any other criteria. Downstream benefits include a tangible sustainability benefit for our customers.

Carbon footprint

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

Carbon footprint

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

Carbon footprint

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

Operational eco-efficiency

Refers to the eco-efficiency of our manufacturing operations. Our aim is to improve operational eco-efficiency by reducing the resources used and emissions/waste from our sites during the manufacture of our products.

Human Cities

Everything we do for and with society is channeled through our Human Cities initiative. This incorporates AkzoNobel’s Community Program, which encourages and gives financial support for employees to get involved, hands-on, in their local communities; and our “Let’s Colour” program, which uses the power of color to improve people’s lives.