Ton Büchner speaking at an all employee town hall meeting in China.
In a year of record profitability in terms of return on sales and return on investment, our purpose of creating everyday essentials to make people’s lives more liveable and inspiring was brought to life. We continued to build on our solid foundation of operational excellence to drive growth and sharpened our focus on delivering more value for our people, our customers and our shareholders.
As well as introducing a series of innovative new products, we began to advance our digital agenda and made important steps with regard to sustainability, setting us up to accelerate organic growth. Our expanding Human Cities initiative – everything we do for and with society – also continued to impact millions of people around the world.
“We are better placed to accelerate growth”
CEO and Chairman of the Board of Management and Executive Committee
Strategy and performance
Our commitment to delivering essential ingredients, essential protection and essential color ensured we made progress towards our vision of leading market positions delivering leading performance. Our track record of performance improvement continued – 2016 was again a record year for us in terms of return on investment and return on sales – driven by our focus on growth, operational excellence and continuous improvement.
We now have a stronger operational and financial foundation for adapting to market challenges and seizing growth opportunities, evidenced by our €425 million acquisition (after closing adjustments and working capital requirements) of BASF’s Industrial Coatings business. The transaction included relevant technologies, patents and trademarks, as well as two manufacturing plants in the UK and South Africa and around 350 employees (see Acquisition of BASF’s Industrial Coatings business). It’s an acquisition with many positive synergies and I would like to extend a warm welcome to all our new colleagues.
To support our drive for growth, we strengthened our position in the North American hydrogen peroxide market by fully acquiring the shares of our joint venture partner OCI Peroxy LLC. We also started a new cooperation in Spain to convert a salt-based waste stream into high quality vacuum salt. In addition, we made continued investments to upgrade and expand existing sites and build and open new facilities to drive organic growth. This included new plants for powder coatings (near Mumbai in India and in Chengdu, China), and two new Specialty Chemicals facilities in Ningbo and Tianjin in China. We also invested in existing sites in Los Reyes, Mexico, and in Battleground and Pasadena in the US, as well as forming a joint arrangement with Atul to build a world scale MCA plant in Gujarat, India.
As expected, market conditions remained challenging and we continued to face an uncertain and volatile economic environment. However, our agility enabled us to adapt and respond. As well as delivering a record year financially for our return on sales and return on investment, we delivered performance records in terms of EBIT and operational cash flow. A further increase in our dividend – and the launch of a share buyback program to neutralize the 2016 stock dividends paid – indicate confidence in our cash flow generation. We are better placed to accelerate growth and deal with challenges in our markets.
Our organization has evolved significantly over the last few years and we have been working hard to embed a culture of continuous improvement through our AkzoNobel Leading Performance System (ALPS). It’s an effective way for us to empower our people to improve the business and has now been implemented at more than 75 percent of our sites. Meanwhile, our Global Business Services model – which simplifies various support functions by identifying common ways of working – is freeing up time for the businesses to focus more on customers, innovation and growth. Productivity improvements and efficiency programs have also been delivered within the support functions.
These actions have been instrumental in improving our performance and driving cost savings of over €200 million. They have also helped us create a more engaged workforce, underlined by our engagement levels improving for the sixth year in a row. Our people are fundamental to the success our company, so we intend to raise the engagement level even higher as we continue to make AkzoNobel a great place to work. Safety plays an essential role in this. As one of our core principles, it’s embedded in everything we do and it was pleasing to see us make good progress towards our 2020 target. Our aim continues to be zero incidents.
One of the most inspiring aspects of 2016 was seeing examples of our purpose being brought to life. Our Human Cities initiative played a major role in this, underlining how we welcome our responsibility to play an important role in the communities where we operate. During 2016, more than 300 projects were launched around the world – impacting over nine million people – highlighting our contribution to the United Nations Sustainable Development Goals (SDGs).
In Ecuador, for example, an area of Quito was transformed ahead of the UN Habitat III Conference on Housing and Sustainable Urban Development. Working with several partners, we created a vertical garden which uses our micro-nutrients, as well as adding essential color to roads and buildings to create the “Ruta de la Experiencia”, a people-friendly route for visitors and local residents (see Case studies).
Other notable projects included the renovation of four historic locations in Shanghai’s Jing’an District in China and restoring the old town of Jakarta in Indonesia. In Brazil, a favela in Rio de Janeiro was transformed using paint and a bit of imagination to create Unexpected Courts for children to try different sports. The launch of the Dulux Academy at our Slough site in the UK was another highlight. The center will give over 4,000 decorators and apprentices every year the chance to expand their capabilities, while addressing skill gaps in the industry.
Our strategic focus on driving innovation to support organic growth gathered momentum. We launched a series of products, many offering major benefits in terms of their sustainability profile. For example, we introduced an ingredient for detergent makers which enables them to meet strict environmental regulations, while one of our Expancel products – which is used in corks to keep wine fresh – was approved by the US Food and Drug Administration. Our Dulux Forest Breath range – interior paints which improve indoor air quality – was also launched for the Chinese market (see Case studies).
Digital innovation is a major area of attention and is playing an important role in product development and how we work with customers. A recent introduction making good progress is Intertrac Vision, which is helping the shipping industry become more sustainable (see Case studies). We also opened a new virtual reality center for our decorative paints customers in the UK which allows visitors to explore different store environments. Meanwhile, our Visualizer decorating app was upgraded and has been downloaded over 13 million times.
Our sustainability agenda was brought into sharper focus as we stepped up our activities in all areas. We firmly believe sustainability is business, and business is sustainability, and are continuing to identify areas of opportunity. As well as conducting a company-wide review of operational eco-efficiency, we compiled a detailed assessment of our contribution to the UN SDGs. This will help us accelerate progress towards our strategic sustainability ambitions (see Case studies). We also continue to take a pioneering approach to integrated reporting, evidenced by the further development of our materiality assessment and innovative 3D profit and loss model (see Integrated Materiality Analysis and Creating shared value across three dimensions and Notes 2 and 3 of the Sustainability statements).
Notable developments during the year included taking the lead in a major partnership with Google, Philips and DSM to source power from a new wind park in the Netherlands. Together, we have agreed to source a total of 350 million kWh a year from the Krammer wind park once it becomes operational in 2019. The consortium also agreed to a second Dutch project (announced in early 2017) to purchase energy from the Bouwdokken wind park. Together, the two sites will have a total capacity of 140 MW, enough to power around 140,000 households for a year. The proportion of renewable energy used in our own operations is now 40 percent and we aim to increase this figure over the next few years.
At the end of 2016, we announced the retirement of Werner Fuhrmann after 37 years of service. As Executive Committee member responsible for Specialty Chemicals, he has been instrumental in transforming the business and leading it to record levels of performance. I would like to express the gratitude of the entire company and wish Werner a very happy retirement. As of February 1, 2017, his successor is highly experienced chemical industry professional Thierry Vanlancker, whom we are delighted to welcome to AkzoNobel.
All our achievements were made possible by our dedicated teams around the world. The progress we’ve made, the improvements we’ve introduced and the innovation we’ve delivered, are all important in terms of accelerating growth. We are now a stronger, more agile company, with excellent brands, a growing global presence and a solid operational and financial foundation. On behalf of the Executive Committee, I thank everyone for their passion and hard work. Together, we will continue to supply essential ingredients, essential protection and essential color while creating tangible value for our people, customers and shareholders.
CEO and Chairman of the Board of Management and Executive Committee
This is a key profitability measure and is calculated as EBIT as a percentage of revenue.
This is a key profitability measure and is calculated as EBIT as a percentage of average invested capital.
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.
EBIT is operating income excluding incidentals.
We use operational cash flow to monitor cash generation. It is defined as operating income excluding depreciation and amortization, adjusted for the change in operating working capital and capital expenditures.
AkzoNobel Leading Performance System.
Global Business Services, which covers functional support activities such as Human Resources, Finance and Information Management, as well as non-product related Procurement.
Eco-efficiency means doing more with less; creating goods and services while using fewer resources and creating less waste and pollution.