Chairman’s statement

Leading market positions delivering leading performance          

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

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

“We continued to make progress on our strategy and 2015 targets”

Dear stakeholder

2013 was a year of initiating a process of change. We launched a new organic growth and operational excellence strategy with a new vision, new financial targets and clearly defined targets for sustainability.

Our new executive team also established itself, and we adapted the short and long-term incentives for an extended group of executives in order to align them with our new strategy. The original targets for our performance improvement program were delivered a year early, and we moved into a more continuous improvement mode going forward. It was also a year when we launched new values to drive a performance culture, while a commercial excellence program has been established to drive growth.

Coming into 2013, there was little indication that economic conditions were going to rebound, and while some indicators slowly began to suggest that the tide was turning, we saw little evidence in our businesses. Against this uncertain backdrop, we continued to make progress on our strategy and 2015 targets. Our commitment to improving our profitability, even in a testing economic environment, was exemplified by the fact that our performance improvement program delivered more than the targeted €500 million EBITDA a year early. We have now transitioned into a period of continuous improvement, with cost savings coming through and increased traction in several important programs at corporate and Business Area levels.

Despite the market headwinds, we improved our return on sales in the third and fourth quarters and remain on track to deliver our 2015 targets. Key profitability ratios and cash flow also improved, while the receipt of funds from the divestments of our Decorative Paints North America and Building Adhesives businesses meant that we did not need to refinance borrowings, which helped us to improve our net debt position at year-end. Capital expenditures were reduced, reflecting the completion of many of our longer term strategic investment programs, while operating working capital further declined.

Having sold our North American Decorative Paints activities, we continued to take decisive action to reorganize the business and make it more competitive. This included the strategic divestments of Building Adhesives and our German decorative paints stores, as well as continuing our efforts to streamline the product range and further reduce complexity. We also continued to invest, opening a new plant in India and announcing the construction of two new facilities in China, while our new decorative paints site in the UK will commence full operations in 2015.

Growing demand

Performance Coatings made steady progress, with Marine and Protective Coatings and Aerospace Coatings securing several major contracts, while Specialty Finishes had a strong year on the back of growing demand for coatings for mobile devices. Our Specialty Chemicals businesses, on the other hand, were negatively affected by a fairly weak year for the industry as a whole. A major restructuring program is currently underway which will not only adjust our manufacturing footprint and drive efficiency, but will also enable us to capitalize on the investments that we have made in the world’s high growth regions. A strategic portfolio review resulted in the divestment of our Primary Amides and Purate activities, while on the investment side, our Industrial Chemicals plant in Frankfurt is due to become operational in 2014.

Despite the difficult economic environment, we continued to introduce a wide range of new products and technologies to the market. This included a number of eco-premium products, such as a heat-reflective range of powder coatings and a highly efficient biocidal antifouling for ships which offers a controlled release over time. Our continued focus on innovation underlines the fact that even though the business environment remains challenging, we are committed to investing in both product and process innovation and remain fully focused on increasing our share of revenue from products that offer a sustainability advantage for customers. In order to accelerate our efforts in this area, in 2013, we also launched our Planet Possible concept. Essentially a commitment to doing more with less, it will help to build on our long-standing reputation as a leader in the field of sustainability, evidenced by being ranked first in the broad Materials industry group on the Dow Jones Sustainability Index, which includes the chemicals, mining and materials sectors.

Another key development was the launch of our new values and behaviors, which are fully aligned with our new strategy. I’m a firm believer that people make an organization and by energizing the company around a new set of values we will ensure everyone is playing a role in helping us to meet our strategic goals and deliver leading performance. We have established three core principles - Safety, Integrity and Sustainability – and four values – Customer focused, Deliver on commitments, Passion for excellence, Winning together. To help all our employees become familiar with them and understand their importance, an extensive global roll-out has been taking place which has included more than 200 town hall sessions hosted by various senior leaders, including members of the Executive Committee. I participated in many of these myself and was very encouraged by the enthusiasm our people showed and their eagerness to define which behavioral changes will make the greatest impact on their business results.

Energized leadership

Fostering this winning culture is one of the key responsibilities of Marten Booisma, the most recent addition to our Executive Committee. Marten is our Chief Human Resource Officer and his significant international experience will be invaluable as we look to deliver the change in culture that’s needed. He is part of an Executive Committee which has seen a number of changes in the last 18 months, including the appointments of Conrad Keijzer (responsible for Performance Coatings) and Ruud Joosten (Decorative Paints). They joined Werner Fuhrmann (Specialty Chemicals) and Sven Dumoulin (General Counsel), to complete an Executive Committee with extensive experience and expertise. Another key appointment in 2013 was that of David Allen as our new Head of Supply Chain, Research and Development. We now have a very strong and energized leadership team in place made up of people who really understand their business, who are hands-on and not only have a strategic mindset, but also know what it takes to lead an organization. One of our immediate tasks will be to find a successor for CFO Keith Nichols, who announced that he will be leaving the company at the end of June 2014. Keith has played a vital role in helping to transform the company over the last eight years and I would like to personally thank him for his outstanding contribution.

It is difficult to look ahead with any certainty, but what is clear is that we are in a strong financial position, have a focused strategy in place and have already made progress in starting to deliver on our strategic targets. There is also clarity in where we want to go and what we want to do. We have set realistic targets and have mapped out a journey to drive value creation which has already begun. There are still many issues to address, including safety, a more rigorous approach to talent development and transitioning our culture and behaviors based on a continuous improvement mindset. I’m confident, however, that we are driving forward in the right direction and that our focus on organic growth and operational excellence will result in the leading performance that we have set out to achieve.

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 2013.

Ton Büchner (handwriting)

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