Going into 2012, we knew it was going to be a challenging year. Economies were slowing down, the eurozone was full of uncertainty and raw material prices were putting a strain on margins in all our markets.

As the year progressed, conditions remained unfavorable and operating in such a testing environment proved extremely challenging. However, despite the constant headwinds, we combined the resilience of our portfolio with careful but stringent management to realize topline growth of 5 percent and an EBITDA improvement of 4 percent.

As expected, we saw a continued decline in consumer confidence and in housing markets worldwide, which had a negative impact on many of our businesses. We were faced with an additional slowdown in high growth regions, with markets that had previously been more resistant to the economic crisis also being affected. The new market reality called for a more focused business approach, so we implemented various improvements to supplement the ongoing restructuring which has been taking place. This positively impacted our results, with Performance Coatings achieving good growth and improving profitability, while Specialty Chemicals had a solid year and Decorative Paints remained essentially flat. In terms of share price development, we achieved a 33.2 percent increase by year-end, outperforming the Bloomberg Chemicals Index by 5.3 percent.

Our decision-making throughout 2012 was very much influenced by the performance improvement program we introduced the previous year. We set ourselves the ambition of delivering €200 million EBITDA in 2012 and the good news is that we are ahead of target, delivering €250 million by the end of the year. In addition, we brought forward our ambition of delivering €500 million EBITDA in 2014 by one year. We aim to achieve this by earlierimplementation of several actions and by introducing additional measures in 2013. We will continue to strengthen from within, striving for operational and functional excellence while building lasting and profitable relationships with customers all over the world. This disciplined, customer-focused approach is fundamental to our continued success and forms a cornerstone of the new strategy we have adopted (see later in this section), which is based on end-user segmentation and is designed to further improve on our leadership positions in paints, coatings and specialty chemicals.

It was a year which called for many tough decisions, one of the most significant being the divestment of our North American Decorative Paints activities to PPG Industries, Inc. The business has been significantly improved, but it was clear that further strengthening of our position would require substantial investment. Given the depressed economic climate, we decided to focus our Decorative Paints investment and priorities on key markets in Europe, and on building our strong existing positions in high growth regions. Another major decision followed a prudent review (excluding restructuring benefits) of the balance sheet, which took into account lower expected market growth rates. This resulted in a non-cash impairment charge against the Decorative Paints business’ assets, primarily in Europe.

Our major investments during the year were mainly concentrated on expanding capacity and boosting production capability, particularly in high growth regions. For example, Industrial Chemicals and Functional Chemicals both announced expansion projects in China, while Pulp and Performance Chemicals is building a new Chemical Island in Brazil and Wood Finishes and Adhesives opened a new site in Vietnam. This ability to grow organically was crucial given the depressed economic climate, which offered little encouragement for pursuing acquisitions. However, should the right opportunities come along, we are in a strong position to make the appropriate investments in line with our strategic growth ambitions.

Operational matters and the state of the global economy clearly occupied much of our time, but we were not distracted from remaining committed to other vital areas of our business. We made good progress with our innovation agenda, highlighted by the launch of Dissolvine StimWell (a stimulation technology for the oil and gas industry with low environmental impact) and the introduction of click&go, an ingenious, eco-efficient paint packaging system designed for use on sprayguns in vehicle refinish bodyshops. Both new products are prime examples of how we have fully embedded sustainability into all our activities and processes, a fact which was recognized by our first place ranking in the Chemicals supersector on the Dow Jones Sustainability Index. Recognition such as this is obviously welcome, but we will continue striving to make further improvements and step up our efforts in areas such as safety.

On a personal note, it was certainly an interesting year. Having succeeded Hans Wijers as CEO in April, there was a lot of work to do in terms of fine-tuning my vision for the company and developing the new strategy. Having to take a temporary leave of absence was unexpected, but the Executive Committee and Supervisory Board did an excellent job in keeping the company moving forward and we are all fully energized and excited about what lies ahead. There are still key issues to address – we have to improve our cash management and increase our profitability – while the economic climate is likely to remain challenging for some time. But we are confident that our new strategy will enable us to take full advantage of our market leadership positions and our global scale and we remain in a strong position to achieve our strategic ambitions.

On behalf of the Executive Committee, I would like to thank our shareholders, and all our colleagues around the world for their hard work and valued contribution during 2012. Together we have much to look forward to as we strive to make our company even stronger and continue to focus on delivering for our customers.

Signature Ton Büchner, CEO and Chairman of the Board of Management and the Executive Committee (signature)

Ton Büchner
CEO and Chairman
of the Board of Management
and the Executive Committee

Ton Büchner, CEO and Chairman of the Board of Management and the Executive Committee (photo)

Ton Büchner
CEO and Chairman
of the Board of Management
and the Executive Committee

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