How we created value in 2018

Financial overview

Revenue was 4% lower, although up 1% in constant currencies, with positive price/mix partly offset by lower volumes. Adjusted operating income of €798 million (2017: €905 million) was impacted by adverse currencies, higher raw material costs and lower volumes, not yet fully offset by positive price/mix and cost savings. Operating income was €605 million (2017: €825 million) and includes the adverse impact of identified items of €193 million (mainly related to transformation costs of €130 million) and one-off non-cash pension costs (€57 million). ROS excluding unallocated costs was 10.6% (2017: 10.6%). ROS was at 8.6% (2017: 9.4%) and ROI at 12.6% (2017: 13.9%).

Revenue

Revenue was 4% lower, although up 1% in constant currencies. Volumes were 5% lower versus an exceptionally strong last year in China and driven by our value over volume strategy.

• In Decorative Paints, revenue was up 1% in constant currencies. Price/mix was 4% positive. Pricing initiatives offset lower volumes
• In Performance Coatings, revenue was up 1% in constant currencies. Price/mix effect was 7% positive, while volumes were lower

Revenue development

in % versus 2017

Revenue by destination

in %

Revenue

in € millions

Acquisitions

• The acquisitions of Xylazel in Spain and Doves Decorating Supplies in the UK were completed in September 2018
• The acquisition of Fabryo Corporation S.R.L., was completed on October 1, 2018
• The acquisition of Colourland Paints Sdn Bhd and Colourland Paints (Marketing) Sdn Bhd in Malaysia was completed in November 2018
• The acquisition of the minority interest share to obtain full ownership of the AkzoNobel Swire Paints joint venture in China was completed in December 2018

Raw material price development

Raw material prices in 2018 were higher compared with the previous year. Robust pricing initiatives continue being implemented to deal with these higher raw material costs. In the latter part of the year, inflation continued, although at a slower rate than during the start of the year.

Adjusted operating income

Adjusted operating income at €798 million (2017: €905 million), was impacted by adverse currencies, higher raw material costs and lower volumes, partly compensated by pricing initiatives. Savings from continuous improvement were €165 million, while creating a fit-for-purpose organization fully delivered on the €110 million planned for 2018.

• Decorative Paints was impacted by higher raw material costs and adverse currency effects, partly compensated by higher selling prices and cost savings. ROS was 9.4% (2017: 9.0%)
• Performance Coatings was also impacted by foreign currencies and higher raw material costs, as well as lower volumes. ROS was 11.3% (2017: 11.6%)
• Other activities/eliminations decreased by €62 million. 2017 was impacted by one-off items as well as lower pension and insurance related costs

Adjusted operating income

in € millions

Operating income

Operating income was negatively impacted by identified items totaling €193 million, mainly related to restructuring costs for the transformation of the Paints and Coatings organization (€130 million) and a one-off non-cash pension cost (€57 million) for the Guaranteed Minimum Pensions equalization regulations, based on a UK precedent set in October 2018.

Net financing income and expenses

Net financing expenses decreased by €26 million, mainly due to a one-off interest benefit on a tax settlement and a lower interest on discounted provisions driven by discount rate developments.

Income tax

The effective tax rate decreased to 20.6% (2017: 33.1%), mainly as a result of a re-recognition of certain deferred tax assets and a tax settlement. Excluding these, the 2018 effective tax rate was 28%.

Income tax paid

in € millions

Cash flows and net debt

Operating activities in 2018 resulted in an inflow of €162 million (2017: €278 million). This was mainly caused by lower profitability and related non-cash items, as well as higher working capital, partly offset by lower payments from provisions.

Investing activities resulted in an outflow of €5,668 million, mainly driven by investment of the cash proceeds from the sale of the Specialty Chemicals business in short-term investments.

At December 31, 2018, net debt was € 5,861 million negative versus €1,951 million positive at year-end 2017. The decrease was mainly driven by the receipt of the cash proceeds from the sale of the Specialty Chemicals business.

Invested capital

Invested capital of continuing operations at December 31, 2018, totaled €6.2 billion, up €0.2 billion from year-end 2017. Operating working capital as percentage of revenue increased to 12.3% at year-end 2018 (2017: 10.2%), mainly due to higher trade receivables and increased inventories, driven by higher raw material costs.

Allocation of 2018 capital expenditures of €160 million

(1.7% of revenue)

Innovation

We continue to invest in research, development and innovation to help us fulfill future customer needs and fuel our targeted growth in revenue share of eco-premium solutions with customer benefits.

Innovation investments

research and development expenses in € millions

Eco-premium solutions

We achieved 22% of total sales from eco-premium solutions with customer benefits, ahead of our 2020 target of 20%. Eco-premium solutions are a moving target as they need to exceed the sustainability performance of the constantly evolving market reference. Initial assessments indicate that another estimated 20% of sales were from eco-performers, which have clear sustainability features, and are overall on a par with mainstream alternatives. Total sales of sustainable solutions was around 42%.

For more details, see Note 1 of the Sustainability statements.

Dividend

Our dividend policy is to pay a stable to rising dividend. In 2018, an interim dividend of €0.37 per share (2017: €0.56) was paid.

Dividend

in €

Earnings per share total operations

in €

Adjusted earnings per share

in €

In line with our announcement on April 19, 2017, we intend to return the vast majority of net proceeds from the sale of Specialty Chemicals to our shareholders.

The Extraordinary General Meeting of November 13, 2018, approved the return of €2.0 billion to shareholders by means of a capital repayment and share consolidation, which was executed in January 2019. A share consolidation ratio of 9:8 was applied.

We will distribute €1.0 billion by means of a special cash dividend of €4.50 per common share (post consolidation) on February 25, 2019.

A share buyback program to repurchase common shares up to the value of €2.5 billion is due to be completed at the end of 2019. We intend to cancel these shares after repurchase.

We propose a 2018 final dividend of €1.43 per share (post consolidation), which would equal a total 2018 dividend of €1.80 (2017: €2.50, including €0.85 related to the Specialty Chemicals business) per share.

Outlook

We are delivering towards our Winning together: 15 by 20 strategy and continue creating a fit-for-purpose organization for a focused paints and coatings company, contributing to the achievement of our 2020 guidance.

Demand trends differ per region and segment in an uncertain macro-economic environment. Raw material inflation is projected to continue during the first half of 2019, although at a lower rate than 2018. Robust pricing initiatives and cost-saving programs are in place to address the current challenges.

We are continuing with our transformation to deliver the next €200 million cost savings by 2020, incurring one-off costs in 2019 and 2020.

We target a leverage ratio of between 1.0-2.0 times net debt/EBITDA by the end of 2020 and commit to retain a strong investment grade credit rating.

We manage the environmental impact of our sites through our Resource Productivity program. We focus on three key indicators – waste, energy and VOC emissions – for which targets are in place.

Waste

Effective raw material management helps to eliminate waste in our manufacturing operations, while reducing both our environmental footprint and costs. Our target is to drive towards “zero waste to landfill”, with our first priority being to eliminate hazardous waste to landfill.

Total waste volume and waste per ton of production generated were down by 12% and 8% respectively in 2018, which meets the reduction target of 5% per ton of production from 2017. Hazardous waste per ton of production decreased by 6%.

For more details, see Note 3 of the Sustainability statements.

Energy and greenhouse gas emissions

In 2018, energy use per ton of production remained flat, while absolute energy consumption was down 3% compared with last year. Our total share of renewable energy was 31%.

Electricity consumption and fuel for heating are the main drivers for greenhouse gas (GHG) emissions from our facilities. GHG emissions per ton of product increased 1%, with absolute emissions decreasing 4%.

For more details, see Note 3 of the Sustainability statements.

VOC emissions

Most of the air emissions generated from our operations are volatile organic compounds (VOC). We aim to reduce emissions through product design, good management practices, and environmental controls at our sites.

VOC emissions per ton of product and our total VOC emissions decreased by 4% and 8% respectively.

For more details, see Note 3 of the Sustainability statements.

Cradle-to-grave carbon footprint

As a focused paints and coatings company, more than 98% of our emissions come from our suppliers and customers. Applying the principles of circular economy across the value chain will be our biggest contributor to the Paris climate agreement. We continue to work with suppliers so we can source material with a low carbon footprint, such as renewable raw materials or materials generated with renewable energy. We also continue to offer our customers technologies and solutions to help reduce their emissions and material use.

Our value chain emissions were 5% lower than in 2017.

For more details, see Note 5 of the Sustainability statements.

Employees

We use a quarterly company-wide employee survey, which goes beyond only measuring people engagement and focuses on measuring our wider organizational health. In 2018, our organizational health score was 58. The outcomes of the survey are reflected in action plans. We aim to be in the top quartile in 2020 (currently 77).

At year-end 2018, the number of employees decreased by 3% to 34,500 people (year-end 2017: 35,700 people).

For more details, see Note 6 of the Consolidated financial statements.

Employees

Employees by segment

in % at December 31, 2018

Safety

AkzoNobel strives to deliver leading performance in health, safety, environment and security (HSE&S) with a vision to deliver zero injuries, waste and harm through operational excellence.

The number of reportable injuries reduced by 5% compared with last year, while the injury rate is already at the target level set for 2020 (0.20 per 200,000 hours worked).

For more details, see Note 7 of the Sustainability statements.

Programs

During 2018, we carried out 49 Community Program projects and 65 “Let’s Colour” projects.

For more details, see Note 9 of the Sustainability statements.