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Principal risks and uncertainties


In our 2010 Report we have extensively described our risk management framework and our major risk factors which may prevent full achievement of our objectives within the forthcoming five years. In respect of the principal risks for the second half of 2011, we consider that these top 5 risks are still valid. Concerning the sourcing of raw materials, actions to mitigate the price inflation are ongoing and initiatives to secure future supplies are being executed.

Risk

 

Risk description

 

Risk corrective actions

Adapt to economic conditions

 

Failure to adapt adequately and in time to economic conditions can have a harmful impact on our business and results of operations.

 

One of the principal uncertainties facing our company is the development of the global economy. Economic recovery remains fragile and it continues to be difficult to predict customer demand. Construction and housing markets might remain soft in mature markets, while in high-growth markets there is potential for bubble formation. On the positive side, we have seen evidence of sustained industrial demand beyond re-stocking in 2010. For planning and budgeting we apply various scenarios to be best prepared for further changes in economic conditions. We have a strong balance sheet to fund growth. To help drive our growth agenda, we are focusing on EVA and cash, delivering further operating working capital improvement, disciplined capital allocation for organic growth, selective acquisitions, building capabilities and processes to support our “leading” ambition and a prudent financing policy in still challenging capital markets.

 

 

 

 

 

International operations

 

Because AkzoNobel conducts international operations, we are exposed to a variety of risks, many of them beyond our control, which could adversely affect our business.

 

We spread our activities geographically and serve many sectors to benefit from opportunities and reduce the risk of instability. Our aspirations to fuel growth in high-growth markets – double revenue in China, create a significant footprint in India, outgrow competition in Brazil and expand in the Middle East and sub-Saharan Africa – will further expose us to this risk. Unfavorable political, social or economic developments and developments in laws, regulations and standards could adversely affect our businesses and results of operations. Political, economic and legislative conditions are carefully monitored. The Executive Committee decides on all significant investments, the countries and industry segments in which AkzoNobel conducts its business.

 

 

 

 

 

Attraction and retention of talent

 

Our ambitious growth plans may not be achieved if we fail to attract and retain the right people.

 

Growing our business calls for the need to grow our people. Therefore, AkzoNobel – in the context of the company’s Talent Factory initiative – puts emphasis on attracting, retaining, motivating and educating staff. These efforts are supported by a strong Human Resources function and HR instruments such as performance appraisals, the employee survey and leadership identification and review, as well as leadership development to optimize support to our business. We provide clarity in the working environment through information and communication programs. Special focus is dedicated to high-growth markets. Remuneration packages may include long and short-term incentives. However, the Executive Committee, ensures that employees are not incited to act in their own interest and take risks that are not in keeping with the company’s strategy and risk appetite.

 

 

 

 

 

Sourcing of raw materials

 

Inability to access sufficient raw materials, growth in cost and expenses for raw materials, energy and changes in product mix may adversely influence the future results and growth of our company.

 

We are sensitive to price movements that can lead to erosion of margins and allow product substitution. Our company may also be impacted by business interruption or product discontinuation at some of our key suppliers. We aim to use our purchasing power and 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 inventoried single and sole sourced raw materials and are actively pursuing plans to improve this situation. We have diversified contract length and supplier base. Our strengthened global sourcing strategy enables us to bundle the purchasing power both in product related and non-product related requirements. We continuously monitor the markets in which we operate for developments and opportunities and adapt our purchasing strategy accordingly.

 

 

 

 

 

Access to funding

 

Inability to have access, control and visibility of liquidity by AkzoNobel and/or its partners in the value chain may limit our growth rate and may have an adverse effect on our business and results.

 

Our balance sheet and debt profile are strong. We are monitoring financial markets, critical suppliers and customers closely. We have a prudent financing strategy and a strict cash management policy, which are managed by our centralized treasury function, see note 24 in the Financial statements on page 124 of our 2010 Report. We are committed to maintaining strong investment grade credit ratings. Ratings at year-end were Standard & Poor’s BBB+ (stable outlook) and Moody’s Baa1 (stable outlook).

Copyright © 2011 Akzo Nobel N.V.