How we created value in 2014

Financial overview

2014 revenue was down 2 percent, with volume up 1 percent in all Business Areas, more than offset by adverse currency effects and divestments. Operating income was up 3 percent at €987 million, due to higher operating results and lower restructuring charges, offset by higher incidental charges. Excluding incidental items, ROS was 7.5 percent (2013: 6.1 percent). ROI was 10.0 percent (2013: 9.6 percent). We are on track to deliver our 2015 targets.

Revenue

Revenue was down 2 percent, with volume up 1 percent in all Business Areas, more than offset by adverse currency effects and divestments.

• Volumes in Decorative Paints were up 1 percent. Revenue declined 6 percent compared with 2013 due to divestments, adverse currency effects and an adverse price/mix effect. The latter was mainly driven by the sale of the German stores
• Volumes in Performance Coatings were up 1 percent, mainly from growth in Marine and Protective Coatings and Powder Coatings. Revenue was flat compared with the previous year due to adverse currencies
• Volumes in Specialty Chemicals were up 1 percent. Revenue was 1 percent lower due to price pressure in caustic and unfavorable currency developments during the first half of the year, as well as some interruptions in supply chain and manufacturing.

Divestments

• On October 1, 2013, the divestment of Building Adhesives was completed, which accounts for the divestment impact in Decorative Paints. In addition, the sale of the German stores was concluded, which did not have a revenue impact in divestments but in price/mix
• The divestment of the Primary Amides and Purate businesses was completed in 2013, and accounts for the divestment impact in Specialty Chemicals
• Specialty Chemicals announced the intended sale of its Paper Chemicals portfolio for €153 million. The business is currently part of Pulp and Performance Chemicals. The transaction is expected to be completed in 2015, subject to regular consultation with employee representatives and satisfaction of closing conditions such as receipt of required regulatory clearances

Operating income

Operating income increased 3 percent to €987 million, due to higher operating results and lower restructuring charges, offset by higher incidental items (€85 million adverse items in 2014 and €61 million favorable items in 2013). The incidental charges in 2014 related to an external fraud suffered by one of our subsidiaries in the US, provisions for legacy items and project costs related to a divestment. Restructuring charges in 2014 were €253 million (2013: €348 million). The majority of the restructuring charges related to Performance Coatings.

• In Decorative Paints, operating income in 2013 included the gain of €198 million from the divestment of Building Adhesives. Excluding this effect, operating income improved. Restructuring charges were lower than the previous year. In addition, costs were down following the implementation of restructuring programs and strict cost control
• In Performance Coatings, operating income increased 4 percent compared with 2013. Improved operational effectiveness more than compensated for increased restructuring charges. A major restructuring activity was the implementation of a new organizational structure with fewer management layers and clearer accountability
• Specialty Chemicals increased profitability over the previous year, with significant savings from restructuring programs. Operating income in 2013 was affected by €121 million incidental charges

Average raw material costs were stable compared with 2013 exit prices. In some high growth markets, currency effects on imported raw materials have affected some businesses.

Cash flows and net debt

Operating activities in 2014 resulted in cash inflows of €811 million (2013: €716 million). Profit from continuing operations was lower in 2014, however, the comparative for 2013 included a non-cash gain from deferred tax of €124 million. Net debt at year-end 2014 of €1,606 million was slightly up on 2013 (€1,529 million). Cash outflows for discontinued operations of €88 million mainly related to a settlement of a case following the divestment of Organon BioSciences in 2007.

Early in 2014, a €825 million bond was repaid from existing resources. In November 2014, a €500 million bond was issued with a ten-year maturity, at a coupon of 1.75 percent. The new bond issue extends the duration of the overall bond portfolio, taking advantage of favorable market conditions and historically low interest rates. We are committed to maintaining a strong investment grade credit rating. Currently, the company has a BBB+ rating with Standard & Poor’s and a Baa1 rating with Moody’s.

Invested capital

Invested capital at year-end 2014 totaled €9.9 billion, up €0.6 billion on year-end 2013. Invested capital was primarily impacted by foreign currency effects of €0.4 billion due to the weaker euro.

We are prioritizing our investments given our focus on cash and return on investment. During 2014, we invested an amount of €588 million (2013: €666 million), or 4.1 percent of revenue (2013: 4.6 percent). We intend to align our future capital expenditures with depreciation, and to invest 40-50 percent in growth.

Innovation

We continue to invest in Research, Development and Innovation to fulfill future customer needs and fuel our targeted growth in revenue share of eco-premium solutions with customer benefits.

Eco-premium solutions

We maintain our intention to lead by example in the area of improving the sustainability and environmental 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 and minimizing the environmental impact/footprint of the products we sell and the processes we use to manufacture them.

Dividend

Our dividend policy is to pay a stable to rising dividend. We will propose a 2014 final dividend of €1.12 per share, which would make a total 2014 dividend of €1.45 (2013: €1.45) per share. There will be a stock dividend option with cash dividend as default.

Interest

Net financing expenses decreased, mainly due to lower interest expenses on net debt as a result of repayment of high interest bonds. This positive effect is partly offset by (non-cash) higher interest on provisions. For the full-year, net financing expenses decreased by €44 million to €156 million.

Income tax

The full-year effective tax rate was 30 percent (2013: 30 percent adjusted for an incidental non-cash tax gain of €124 million and several non-taxable items).

Outlook

We anticipate that significant developments in raw material prices, combined with relevant exchange rate movements and lower growth rates in high growth economies, will principally determine the dynamics of 2015. The preparations, made in 2013 and 2014 will form a sound basis for further improvements in 2015. The company remains on track to deliver its targets for 2015.

Cradle-to-grave carbon footprint

Our ambition is to reduce our cradle-to-grave carbon footprint by 25-30 percent per ton of sales between 2012 and 2020. We have made some good improvements. New power contracts in, for example, Moses Lake and Columbus, US, and increased production in our Chemical Islands (using renewable power) have reduced the footprint significantly. Energy efficiency has been improved at several production sites, such as Ningbo in China and Columbus in the US. However, these improvements have been outweighed by changes in product mix, a deterioration of power mix in Germany and lower utilization of our Combined Heat and Power (CHP) unit in the Netherlands, leading to the use of more power from the Dutch grid.

Energy

Renewable energy is an important aspect of the improvements required to achieve our 2020 strategic carbon footprint target. 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.

Raw materials

Bio-based raw materials are an important contributor to our sustainability agenda; a considerable share of AkzoNobel’s environmental footprint is embodied in the raw materials we buy, and most bio-based materials exhibit lower footprints. While many of our materials are already bio-based, we are also seeing the construction and commissioning of the first commercial scale production facilities for several new additional bio-based raw materials. In order to lead the deployment of these materials in our markets, we have been setting up partnerships across our supply chain.

Operational eco-efficiency program

The focus of the Operational eco-efficiency (OEE) agenda is to increase raw material efficiency, reduce consumption of energy, decrease emissions and production of waste. Improvements include many small site contributions, upgrading existing processes, rationalization of the manufacturing footprint and application of best available technology for new investments.

Waste

Effective waste management helps to increase raw material efficiency in our manufacturing operations, while reducing both our environmental footprint and costs. We have moved our focus from managing/reducing total waste to eliminating waste by increasing material efficiency. The focus on waste over past years resulted in a reduction in waste at the majority of our sites.

At year-end 2014, the workforce amounted to 47,200 employees (year-end 2013: 49,600 employees). The decrease was mainly due to:

• A decrease of 400 employees due to divestments
• A decrease of 2,000 employees due to ongoing restructuring

We continued restructuring activities during 2014 in all Business Areas. We will continue to centralize and outsource back office activities throughout the world.

Employee engagement

One of our key measures of progress in the area of culture is employee engagement which we measure through an employee engagement survey. Compared with last year’s results, we’ve seen an increase in engagement. In the context of our ongoing change and restructuring, this is a positive signal. Engagement has increased every year since we started the survey in 2010.

Safety

Overall performance indicators for people safety show that we have achieved our 2015 target a year early. Implementation of the people safety programs coincides with a continued decrease in the number of injuries to employees and supervised and independent contractors.

Community involvement

Our Community Program encourages sites and individuals to take part in projects where our products/resources and the skills and knowledge of employees can benefit the wider community on a sustainable basis. In the past nine years, the program has become firmly embedded in our worldwide organization.