How we created value in 2019

Financial overview

Revenue was flat, with price/mix up 4% overall, mainly driven by pricing initiatives. Acquisitions contributed 1%. Volumes were 5% lower due to our value over volume strategy. Adjusted operating income was up 24% at €991 million (2018: €798 million), driven by pricing initiatives and cost-saving programs. Operating income was up 39% at €841 million and includes €150 million negative impact from identified items (2018: €605 million, including €193 million negative impact from identified items).

Revenue

Revenue was flat. Continued focus on pricing initiatives contributed to positive price/mix of 4%, while volumes were 5% lower, mainly due to our value over volume strategy. Acquisitions contributed 1% to revenues.

• In Decorative Paints, revenue was flat, and up 1% in constant currencies. Positive price/mix (4%) was more than offset by lower volumes (5%). Acquisitions contributed 2% to revenues
• In Performance Coatings, revenue was flat, and 1% lower in constant currencies. Price/mix (4%) was more than offset by lower volumes (5%), due to our value over volume strategy

Revenue development

in % versus 2018

Revenue by destination

in %

Revenue

in € millions

Acquisitions

• The acquisition of Mapaero to further strengthen our global position in the steadily growing aerospace coatings industry was completed in Q4
• The intended acquisition of Mauvilac Industries to support our position in the African decorative paints market was also announced in Q4

Raw material price development

Raw materials continued to be a headwind in the first half of 2019 and turned moderately favorable towards the end of the year. In total, raw material costs were €64 million higher than in 2018.

Adjusted operating income

Adjusted operating income was up at €991 million (2018: €798 million), driven by pricing initiatives and cost-saving programs. ROS, excluding unallocated costs, increased to 12.0% (2018: 10.6%). ROS was up 2.1% at 10.7% (2018: 8.6%) and ROI was at 14.1% (2018: 12.6%).

• Decorative Paints continued to improve. Price/mix effects and cost savings more than offset raw material inflation and lower volumes. ROS was up at 11.3% (2018: 9.4%)
• Performance Coatings improved as pricing initiatives and cost savings more than offset higher raw material costs and lower volumes. ROS was up at 12.4% (2018: 11.3%)
• Other activities/eliminations improved €62 million to €115 million (2018: €177 million), mainly due to lower costs and one-off gains on disposals

Adjusted operating income

in € millions

Operating income

Operating income was up 39% at €841 million, and includes €150 million negative impact from identified items, mainly related to transformation costs and non-cash impairments, partly offset by a gain on disposal of €54 million following asset network optimization (2018: €605 million, including €193 million negative impact from identified items). OPI margin improved to 9.1% (2018: 6.5%).

Net financing income and expenses

Net financing expenses increased by €24 million to €76 million, mainly due to an interest benefit on a tax settlement in 2018 and the inclusion in 2019 of interest on lease liabilities, following the adoption of IFRS 16 per January 1, 2019.

Income tax

The effective tax rate was 29% (2018: 21%). Excluding identified items, the effective tax rate in 2019 was 25%. The 2018 income tax expenses were positively impacted by a re-recognition of deferred tax assets and a tax settlement.

Income tax paid

in € millions

Cash flows and net debt

Operating activities in 2019 resulted in an inflow of €33 million (2018: €162 million). This was mainly caused by higher profitability, more than offset by higher pension related payments and increased working capital.

At December 31, 2019, net debt was positive €802 million versus negative €5,861 million at year-end 2018. This was mainly due to the share buyback (€2.5 billion), a capital repayment (€2.0 billion), a special cash dividend payment (€1.0 billion), pension related payment (€642 million), the final dividend 2018 (€315 million), captial expenditures (€214 million) and net cash outflow for acquisitions and divestments (€120 million).

Invested capital

Invested capital at December 31, 2019, totaled €7.0 billion, up €0.8 billion from year-end 2018, mainly due to higher operating working capital, the impact of the adoption of IFRS 16 and increased goodwill and other intangible assets due to acquisitions.

Allocation of 2019 capital expenditures of €214 million

(2.3% 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.

Innovation investments

research and development expenses in € millions

Eco-premium solutions

We achieved 22% of our sales from eco-premium solutions for the second year in a row, well ahead of our 2020 target of 20%. These solutions deliver clear benefits for our customers in terms of economic, environmental and social performance, as well as keeping us ahead of the competition.

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 2019, an interim dividend of €0.41 per common share (2018: €0.37) was paid. We propose a 2019 final dividend of €1.49 (2018: €1.43) per common share, which would equal a total 2019 dividend of €1.90 (2018: €1.80).

In line with our announcement on April 19, 2017, we returned 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 distributed €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 was due to be completed at the end of 2019, acquiring 31.2 million common shares. On October 23, 2019, a new €500 million share buyback was announced, for which 0.4 million common shares were acquired in 2019.

Dividend

in €

Earnings per share total operations

in €

Adjusted earnings per share from continuing operations

in €

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 ambition.

Demand trends differ per region and segment in an uncertain macro-economic environment. Raw material costs are expected to have a moderately favorable impact for the first half of 2020. Continued margin management and cost-saving programs are in place to address the current challenges. We continue executing our transformation, incurring one-off costs, to deliver the previously announced €200 million cost savings. We target a leverage ratio of 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 supply chain operations through our multi-year resource productivity program. We mainly focus on waste, energy, water and VOC emissions.

Waste

Effective raw material management and process efficiency in manufacturing contributes to reducing generated waste, reducing both our environmental footprint and costs. Since 2011, our waste per ton of product has reduced by more than 40%. As well as reducing waste, we also aim to increase the share of reusable waste. In 2019, over half our waste was reusable, contributing to a circular economy.

We also aim to achieve zero waste to landfill by the end of 2020. The first priority is to eliminate hazardous waste to landfill. At the end of 2019, 117 sites had no hazardous waste to landfill and have plans in place for 2020 to further drive to zero, taking into account legal and technical limitations.

Energy and greenhouse gas emissions

In 2019, energy per ton of product was reduced by 2% compared with the previous year. The energy reduction was negatively impacted by product mix and our value over volume strategy. Our share of renewable energy was 31% in 2019, with 33 locations using 100% renewable electricity. We have also increased the number of locations with on-site solar energy production to 14 in total. We expect this number to grow significantly in the future.

Electricity consumption and fuel for heating are the main drivers for greenhouse gas (GHG) emissions from our facilities. GHG emissions per ton of product and the total GHG emission decreased by 16% compared with the previous year. For more details, see Note 4 of the Sustainability statements.

VOC emissions

Air emissions generated from our own operations are primarily volatile organic compounds (VOCs). We aim to reduce emissions through product design, good management practices and environmental controls at our sites. In 2019, VOC emissions per ton of product and our total VOC emissions both decreased by 24%, exceeding our target of 10%.

Cradle-to-grave carbon footprint

More than 98% of our value chain carbon footprint comes from our suppliers and the use of our products by customers. Applying circular economy principles across the value chain will be our biggest contributor to the Paris climate agreement.

As well as our internal initiatives on the circular economy, we continue to work with suppliers to 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 them reduce their own emissions and material use. Our 2019 value chain emissions were 14.6 million tons of CO₂(e) in 2019, 3% lower than the previous year. For more details, see the Planet section 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 2019, our organizational health score was 61. The outcomes of the survey are reflected in action plans. We aim to be in the top quartile in 2020 (currently 74).

At year-end 2019, the number of employees decreased by 2% to 33,800 people (year-end 2018: 34,500 people). For more details, see Note 6 of the Consolidated financial statements.

Employees

Employees by segment

in % at December 31, 2019

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.

Although the number of reportable injuries was slightly higher in 2019 compared with the previous year, the severity of injuries decreased and we are still on track to reach the injury rate target level set for 2020 (0.20 per 200,000 hours worked).

Organizational Health Index score

For more details, see Note 6 of the Sustainability statements.

Programs

During 2019, we carried out 140 Community Program projects and 83 “Let’s Colour” projects.

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