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Chairman's statement

Dear Stakeholder,

There can be no doubt that for AkzoNobel, 2008 was an historic yet challenging year. It began and ended in such stark contrast – the completion of the acquisition of ICI in January being followed by the acceleration of a global recession in the fourth quarter. During the months in between, we remained ahead of schedule with the major integration process, continued to launch innovative products, announced our new strategic targets, made further investments in our businesses and launched our new corporate identity.

So while the downturn had to be addressed – by taking measures such as reducing our cost base and tackling escalating margin pressure – we never lost focus and were able to demonstrate the strong fundamentals of our organization.

Significantly, the confidence we have in the enlarged AkzoNobel never wavered. Having welcomed 20,000 new colleagues from the former ICI, we quickly began the complex job of integrating the two companies and the process remains ahead of schedule. We have clearly benefited from the strength of both organizations. In terms of synergies, we were able to upgrade our annual target to €340 million a year (from €280 million) within four months of the acquisition. We then committed to delivering these synergies faster than originally planned, with 100 percent to be realized by 2010. There were also many other aspects of the transaction which had to be finalized, such as the on-sale to Henkel of the former ICI’s Adhesives and Electronic Materials businesses, and the divestment of several decorative paints brands resulting from various commitment packages.

Inevitably, an integration on this scale involves a huge amount of work, most of which is being handled behind the scenes by a truly dedicated team of people who deserve enormous credit for their ongoing efforts. Everything has been carried out quickly and efficiently, which in turn has enabled us to concentrate on our operational performance.

While the conclusion of the ICI deal was obviously one of the year’s major events, we also completed several other important bolt-on acquisitions. Other notable milestones included the launch of innovative products such as our Ecosure decorative paint range and the Compozil Fx system developed by our Pulp and Paper Chemicals business. The receipt of all relevant approvals for the first facilities being built at our Ningbo multi-site in China was also an important landmark as we continue to increase our presence in emerging markets. This was emphasized by the opening in August of a new €23 million facility in Suzhou, China, for the manufacture and sale of protective coatings, and the November groundbreaking for a new AkzoNobel Industrial Finishes plant in India.

Clearly, the volatile economy has had an impact. The early months of 2008 were dominated by a combination of volume declines in US markets and unprecedented global increases in raw material prices. In addition, we experienced volatility in many key currencies. As the effects of the credit crunch started to have a stronger impact on the real economy, we experienced volume pressure in an increasing number of markets across the world. Operating in such difficult circumstances proved challenging, but we benefited from the stronger coordination we have between our businesses, notably with regard to the procurement of raw materials.

My colleagues on the Our Board of Management and I are therefore pleased that we were able to deliver full-year results in line with our guidance, despite a particularly difficult fourth quarter. The significant level of restructuring charges we have reported clearly indicate that we are taking forceful action to mitigate the effects of the downturn and quickly deliver the synergies of the ICI integration. This was underlined in September, when we announced actions to accelerate the synergies of the enlarged company and improve operational effectiveness, leading to additional cost savings of at least €100 million.

In response to reduced demand in Q4 and poor visibility, we also undertook further action to reduce costs and protect margins, with a particular focus on Decorative Paints in Continental Europe. This has led to incidental charges of €205 million, bringing the 2008 total to €275 million. At year-end, the ongoing businesses employed approximately 1,660 employees less than last year and the cost measures we have taken so far include reducing third party spend, as well as a 2009 salary freeze for the Board of Management, more than 500 executives and, where possible, for most other employees.

It is now clear that most of our markets are being significantly impacted by the economic crisis. In light of these market conditions and the continuing lack of visibility regarding future global demand, the company assessed the fair value of its assets against lower growth rates, which resulted in a non-cash impairment charge of €1.2 billion after tax in Q4, adjusting the value of ICI intangibles related to the Decorative Paints businesses and of National Starch.

As you read through this report, it will become apparent that we have, for the first time, combined the Annual Report and the Sustainability Report into one single publication. With sustainability very much embedded in our organization – and an inherent part of the way we operate and develop our growing portfolio of eco-premium products – it seemed only natural to report on our sustainability performance and on our financial performance in an integrated way. Combining the two reports into one publication also underlines how seriously we take our commitment to sustainable operations, highlighted by the company again being ranked as one of the leading performers on the Dow Jones Sustainability Indexes for 2008.

Remaining in the top three of this influential ranking is another one of our strategic targets, as is realizing a step change in people development. Developing and retaining a diverse talent pool is critical to our ongoing success, and although financial discipline demanded much of our attention during 2008, we were not distracted from continuing to nurture and inspire the new leaders who will guide our company in the years to come.

The vital contribution our employees make to the success of the organization has rarely been more evident than in 2008. The unprecedented volatility of the economy made huge demands on our workforce across the world. Everybody involved should be complimented for the dedication and hard work they put into delivering for our customers and maintaining our operational performance.

We are acutely aware that global market conditions and lack of visibility do not allow for any certainty as we look ahead. The harsh trading conditions experienced towards the end of 2008 continued beyond the fourth quarter and, as a result, we expect 2009 to develop into a very challenging year.

Nevertheless, we remain focused on working towards our medium-term target of an EBITDA margin of 14 percent by the end of 2011, on continuing to deliver the €340 million ICI synergies, on driving margin management programs across the company and on rigorous cost management. The fact that we have strong positions in diverse, highly attractive sectors, with a wide geographical spread – combined with the actions we are taking – mean that our company is positioned to meet the challenges we face and, as a result, will be in good shape for the long term.

Hans Wijers
CEO and Chairman of the Board of Management


Hans Wijers, Chief Executive Officer and Chairman of the Board of Management (photo)

Hans Wijers
Chief Executive Officer and Chairman of the Board of Management

“Our company is   positioned to meet   the challenges we   face and, as a   result, will be in   good shape for 
  the long term”

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