For everyone at AkzoNobel, 2018 proved to be a landmark year in our long and proud history. Successfully completing the sale of the Specialty Chemicals business was a significant milestone in our ever-evolving journey to become a focused paints and coatings company. It was great to see all my colleagues around the world rise to the occasion as we continued to build the company into an industry leader, both in terms of size and performance.
This determination to be the best is nothing new to AkzoNobel – our passion for paint has been driving our progress since 1792. We already had the global scale, the leading market positions and the world class brands. In 2018, we took our journey to another level. We stepped on the accelerator and channeled all that experience and expertise into getting us to where we rightfully belong – being recognized as the reference in the paints and coatings industry.
“We continued to build the company into an industry leader, both in terms of size and performance”
The successful separation of Specialty Chemicals was a major first step towards achieving that vision. I’m extremely proud of how everyone pulled together to complete such a complex transaction on time and in full, to the benefit of both sides and all our stakeholders. We promised we would return the vast majority of the proceeds to our shareholders and that’s exactly what we’re doing. Our progress as a focused paints and coatings company is being driven by a clear Winning together: 15 by 20 strategy to step up our profitability and deliver 15% return on sales (excluding unallocated corporate center costs) by 2020.
Early on in the year, we established laser sharp alignment within the Executive Committee and our Supervisory Board on the strategic mandates of our various business segments and sub-segments. These clear mandates are now the basis for all our decisions on resource allocation, as well as mergers and acquisitions. Given the significant raw material cost headwinds our industry has been experiencing since early 2017, we have made a disciplined shift to focus on value over volume, which powered our performance versus our peers during the second part of the year.
Our Winning together: 15 by 20 strategy also means we need to change a lot internally to move from a collection of businesses operating in parallel, to one integrated company. Virtually every process is being redesigned to deliver a more standard, simplified and precise approach. We’re significantly resetting our spending behavior and have carried out the first phase of our transformation into a fit-for-purpose organization, while also announcing the next step, which will be implemented during 2019 and 2020.
What didn’t change was our core principles and values. They remain as rock solid as ever and embedded throughout the company. Safety, integrity and sustainability are the foundation upon which our success continues to be built. As we showed again in 2018, we’re best-in-class for safety in our industry, having repeated last year’s record safety performance. Meanwhile, we achieved our 13th consecutive top ten ranking in the 2018 Dow Jones Sustainability Index. Our continued commitment to sustainability and the recognition it brings is something our people are deservedly proud of. It comes from a deep sense of care for the communities and stakeholders we engage and work with. It’s becoming an increasingly essential part of why customers choose our offering over that of our competitors.
Another source of great pride in 2018 was our ability to expand our business by completing some excellent bolt-on acquisitions, as well as investing in our own production assets in order to grow and improve our market positions. The deals we finalized helped to accelerate our momentum towards building something very special. We acquired Fabryo to become the number one decorative paints company in Romania, and purchased Xylazel in Spain. We also acquired Colourland Paints in Malaysia to further build our strong decorative paints position in South East Asia. Towards the end of the year, we acquired the minority interest share to obtain full ownership of the AkzoNobel Swire Paints joint venture in China. As a result, we now have greater control over our future growth and direction in the Chinese market. Also in China, we’re proud to have opened our new powder coatings plant in Changzhou, which is one of the biggest facilities of its kind in the world.
In terms of our actual 2018 performance, despite unprecedented raw material cost inflation, our fit-for-purpose transformation – as well as our value over volume approach – allowed for a strong ROS% comeback in the second half of the year. Q4 revenue increased 4% in constant currencies and business ROS% (excluding unallocated corporate center costs) increased to 9%. Overall, 2018 revenue was up 1% in constant currencies as we introduced structured pricing initiatives and demonstrated excellent cost discipline. This enabled us to turn the tide and start pushing up our profitability.
All this progress and rebuilding work wasn’t without its challenges – the difficult operating environment made sure of that. However, despite the unfavorable business climate, we came out stronger than most of our competitors. We had to be bold and took decisive action on pricing and cost containment while being more agile and responsive to the market. We also focused on making ourselves more efficient: day to day through continuous improvement and by structurally changing the way we operate (for example in our supply chain and various functions). We stepped up to the plate and dealt with the challenges as and when they arose, which helped to restore investor confidence.
Our various activities prove that our Winning together: 15 by 20 strategy is about much more than simply achieving a profitability target. It’s a mantra for creating the right mindset and processes to transform AkzoNobel into a long-term global leader for way beyond 2020. It has kick-started a revolution internally as we propel ourselves to where we want to be in the future. Our goal is clear – to be recognized as the reference in our industry. Many of our businesses are already there, but 2018 saw us take a big step towards making it the benchmark for everything we do.
Our long-term ambition is further evidenced in the way we are embracing open innovation. New ways of doing things often require new ways of thinking. So we were incredibly excited to launch our Paint the Future startup challenge towards the end of the year. Even though we’ve been successfully innovating for centuries, our industries and applications are advancing so fast we can’t just keep doing things all by ourselves. As an industry leader, we need to be part of a broad and open network of innovators to deliver new and exciting solutions to our customers even faster. With Paint the Future, we’re looking to combine our own global scale, know-how and technology expertise with the ingenious solutions of a whole universe of startups and scale-ups (see Case studies).
In many ways, 2018 was all about sharing – and showing – our passion for paint to all stakeholders. Demonstrating how our proud people and precise processes help to deliver powerful performance. There were many examples of this during the year – from the dazzling animal designs applied to Embraer’s new jets using our aerospace coatings (see Case studies), to the stunning transformation of an entire neighborhood in Turkey through our global “Let’s Colour” program (see Case studies). We’re proud to have once again brought our expertise to so many exciting projects across the globe.
At the heart of all we’ve achieved so far on our Winning together: 15 by 20 journey is a dedicated and diverse team of great colleagues across the globe. There was a mountain of work to do in 2018, and as with any transformation, it brought with it a series of challenges and wide-ranging emotions. I speak for the entire leadership team when I say we deeply respect and appreciate how everyone rolled up their sleeves and focused on getting the job done. Our people deserve all the thanks and credit. As for me, the Executive Committee and the Supervisory Board, it continues to be a true privilege to be on this journey with them.
Thierry Vanlancker, CEO and Chairman of the Board of Management and Executive Committee
This is a key profitability measure and is calculated as adjusted operating income as a percentage of revenue.
Calculations excluding the impact of changes in foreign exchange rates.