Item 4. INFORMATION ON THE COMPANY
Akzo Nobel N.V. is a corporation organized under the law of the Netherlands for
an indefinite period. The principal executive offices of Akzo Nobel N.V. are
located at Velperweg 76, 6824 BM Arnhem, the Netherlands. Its telephone number
is +31 (26) 366 4433 and the fax number is +31 (26) 366 3250. The E-mail address
is ACC@akzonobel.com. The address of the Company's website is www.akzonobel.com.
Any correspondence regarding this Annual Report on Form 20-F should be directed
to the Company Secretary.
The name and address of the person authorized to receive notices and
communications from the U.S. Securities and Exchange Commission is:
M. Kennith Frank III
SVP and General Counsel Akzo Nobel Inc.
Akzo Nobel Inc.
7 Livingstone Avenue
Dobbs Ferry NY 10522-2222
+ 1 (914) 674 5181
Copies to:
A. Jan A.J. Eijsbouts and Richard C. Morrissey, Esq.
General Counsel Sullivan & Cromwell LLP
Akzo Nobel N.V. 1 New Fetter Lane, London EC4A 1AN
Velperweg 76 United Kingdom
6824 BM Arnhem + 44 (207) 959 8900
The Netherlands
+ 31 (26) 366 2730
16
OVERVIEW
Akzo Nobel is an international company that serves customers around the world
with healthcare products, coatings, and chemicals.
Headquartered in the Netherlands, Akzo Nobel had activities in more than 80
countries and employed 66,400 people during 2003. Sales in 2003 were EUR 13.1
billion, with Pharma, Coatings, and Chemicals accounting for EUR 3.6 billion,
EUR 5.2 billion, and EUR 4.4 billion, respectively.
In the pharmaceutical industry, Akzo Nobel is smaller than many of its
competitors, but it has significant positions in products for female
reproductive therapy and anesthesiology. Akzo Nobel believes that based on sales
it is the largest coatings producer in the world; its products and markets vary
widely from architectural paints in some countries to industrial coatings in
others. In the chemical products industry, Akzo Nobel is a significant
competitive factor in a number of markets, and on a global basis the Company
competes with a number of larger chemical companies.
Demand for Akzo Nobel's products, particularly its chemical and coatings
products, is generally reflective of the overall health of economies in Western
Europe, the United States, and Asia, and is, except for certain Coatings and
Chemicals activities, generally not seasonal in nature.
It is Akzo Nobel's objective to develop or acquire new and defend existing
leading positions in its markets, while maintaining structural long-term
profitability. In addition to its core business, the Company focuses on the
development of new and improved products in major growth sectors that draw on
the Company's technological and marketing know-how. The Company is pursuing
expansion in Eastern Europe, South-East Asia and Latin America.
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Akzo was created in 1969, out of the merger between AKU N.V. ("AKU") and
Koninklijke Zout-Organon N.V., and in 1994 it was renamed Akzo Nobel, after the
merger with Nobel Industries AB ("Nobel").
AKU N.V. was founded in 1911 under the name of N.V. Nederlandsche
Kunstzijdefabriek. Over the years this company grew into an international
concern with interests in the field of cellulose fibers and, following the
Second World War, synthetic textile and carpet fibers as well as industrial
fibers. At the time of the 1969 merger, AKU's principal countries of operation
were the Netherlands, Germany, the United States, the United Kingdom, Spain and
several Latin American countries, where activities were often carried out
through joint ventures with local partners.
Koninklijke Zout-Organon N.V. was set up in 1967 as a holding company in
connection with the merger between Koninklijke Zout-Ketjen N.V. and N.V.
Koninklijke Zwanenberg-Organon. Koninklijke Zout-Ketjen N.V. had interests in
companies active in salt refining, basic chemicals, specialty chemicals and
coatings. While these companies were mainly active in the Netherlands, they had
built up major export positions at the time of the merger. N.V. Koninklijke
Zwanenberg-Organon consisted of companies active in food/nonfood products and
chemical products and of pharmaceutical companies producing brand-name drugs,
nonprescription products and raw materials for the pharmaceutical industry.
Nobel was formed in 1984 through the merger of Bofors (established in 1646) and
KemaNobel, founded in 1871. At the time of the merger with Akzo in 1994, Nobel
was a leading European producer of chemicals
17
(pulp and paper chemicals and surfactants) and coatings (paints for professional
and consumer markets, industrial coatings and industrial products). Nobel had
operations in more than 30 countries.
In July 1998, Akzo Nobel acquired Courtaulds plc ("Courtaulds"), an
international chemical company with leading positions in high-tech industrial
coatings and man-made fibers. Its best known brands, International Paints,
Courtelle acrylic fibers, and Tencel (R), a new cellulosic fiber, were included
in the acquisition. Courtaulds, which was founded in 1816 as a silk weaving
company, pioneered the global man-made fiber industry at the beginning of the
20th century. In the 1960s Courtaulds acquired International Paint and Pinchin
Johnson.
In November 1999, the Company acquired Hoechst Roussel Vet ("HR Vet"), the
veterinary business of Hoechst AG. Through this acquisition, Intervet, the
veterinary medicines business of Akzo Nobel became a significant player in the
veterinary medicines business.
After the Courtaulds acquisition, the fibers operations of Akzo Nobel and
Courtaulds were combined into a separate organization, named Acordis. At
December 31, 1999, Acordis was sold to a newly established company. Akzo Nobel
retained a 21 percent stake in this company.
In September 2003, we announced our intention to sell our Catalysts, Phosphorus
Chemicals, and Coating Resins businesses to create room to maneuver and improve
the Company's balance sheet. Together, these solid and profitable businesses
represent EUR 0.8 billion in consolidated sales. On April 19, 2004, Akzo Nobel
has received an offer from Albemarle Corporation for the sale of its Catalysts
business for EUR 625 million, free of cash and debt. Closing of the transaction
is expected to be in the second quarter of 2004. In the course of 2004, we
expect divestment proceeds for the other two businesses that also reflect their
value.
Over the years, Akzo Nobel acquired and divested numerous other activities and
businesses, which all were of a much lesser size than the ones mentioned above.
For recent acquisitions and divestments reference is made to Note 2 of the Notes
to the Consolidated Financial Statements.
B. BUSINESS OVERVIEW
Akzo Nobel has a two-layer organization, with the Board of Management as the
highest executive authority. Operations are carried out in business units
clustered in three groups on the basis of affinity between activities: Pharma,
Coatings and Chemicals.
At the corporate level, key tasks are coordinated in the fields of strategy;
finance; control; human resources; technology; legal affairs and intellectual
property; communications; health, safety, and environment; information
management; and risk and insurance management.
STRATEGY
Akzo Nobel is a diversified multinational group of companies with activities in
pharma, coatings, and chemicals. Our ambition is to create above average
economic value over the business cycle. We strive to be a company which
talented, ambitious people are proud to work for. We also want to be a company
that is respected in the societies in which it operates.
Capital allocation is focused on building sustainable leading business
positions, reflected in attractive growth, returns significantly above the costs
of capital, and substantial operational cash flows. We actively
18
restructure and divest activities that do not meet these criteria. We are led by
medium to long term value creation.
We develop competitive advantages by combining the focus and entrepreneurial
spirit of a decentralized business unit organization with the scale and power of
a corporate center that provides access to global capital markets, managerial
talent, and best practice management processes.
Our deeply ingrained business principles are the expression of a strong, shared
international culture. They give us guidance in the complex, ever changing
global environment in which we operate.
We constantly evaluate the added value of the composition of our portfolio in a
pragmatic way, driven by our value creation principle. As in the past, we will
not shy away from strategic transactions, such as the acquisition of Nobel
Industries and Courtaulds, or the divestment of Acordis.
Pharma
Our human healthcare activities are experiencing a period of low growth. As a
consequence, we have lowered the cost base and will continue to scrutinize
critically the organization for further adjustments. At the same time, we will
continue to invest heavily in R&D to boost our pipeline. We will focus on
in-licensing in areas where we have strong market positions and lack sufficient
products. On the other hand, we are actively out-licensing and partnering in
areas where we have limited marketing capabilities. We are confident that we
will be able to restore growth momentum in the medium term on the basis of the
quality of our pipeline.
We are the third largest company (by sales) in animal health in the world. We
aim to remain a global leader through autonomous growth, aided by our strong
commitment to R&D-and where appropriate-acquisitions.
Diosynth is our focused niche player in the Active Pharmaceutical Ingredients
market and our main biotech activity. It will continue to benefit from the
expected growth in pharma markets.
Pharma's medium-term financial targets are a return on sales (ROS) of around
17.5 percent and a return on invested capital (ROI) of 35 percent. For the long
term we strive for a ROS of over 20 percent and a ROI of 40 percent. In 2003,
ROS and ROI were 15 percent and 22 percent, respectively.
Coatings
We believe that based on sales our coatings business is the world's largest
coatings producer. It embraces most of the markets in both consumer and
industrial applications for paints and coatings.
We are focusing on growth in the emerging markets of Asia, East and Central
Europe, and South and Central America, primarily through autonomous development.
We will also continue to grow our market presence in the mature economies
through selected acquisitions.
Our ambition is to remain market leader and participate in the consolidation of
the coatings industry, which we believe is inevitable as our supplier and
customer base strengthens globally.
We have achieved significant performance enhancement through careful
restructuring and we will continue these efforts. Our medium-term financial
target is 25 percent ROI, leading in due course to around 30 percent. In 2003,
ROI was 18 percent.
19
Chemicals
We have a wide range of activities within our chemicals portfolio with a mixture
of good leadership positions and several smaller market penetrations. The
financial returns from the various businesses also differ.
We are presently focusing our attention on improving performance through
restructuring and other measures, including selective divestments. We are also
reassessing the portfolio with the aim of focusing on fewer activities so that
we can concentrate our resources on those markets where we have leadership
positions on a regional and increasingly global scale.
We intend to continue to invest, both through organic growth and carefully
selected acquisitions in profitable and leadership positions.
Our financial target is to achieve a ROI of around 17.5 percent over the cycle.
In 2003, ROI was 9 percent.
BUSINESS UNITS
The business units and their products (as at December 31, 2003) are summarized
below:
PHARMA
Organon
- Brand-name prescription pharmaceuticals in the fields of contraceptives and
infertility treatment, hormone therapy (HT) and osteoporosis, CNS products
(antidepressants, antipsychotics), antithrombotics, and muscle relaxants.
Intervet
- Veterinary vaccines and pharmaceuticals.
Diosynth
- Complex active pharmaceutical ingredients based on chemicals and biochemical
processes.
COATINGS
Decorative Coatings
- Coatings for decoration and protection of architectural structures for
professional uses and the do-it-yourself sector.
Industrial Finishes
- Coatings for industrial applications on wood and sheet metal (coil coatings).
Powder Coatings
- Powder coatings for industrial application in architectural automotive,
domestic appliance and other industrial markets such as coatings for pipes.
Car Refinishes
- Finishes for passenger cars, commercial transportation, and automotive plastic
components.
20
Marine & Protective Coatings
- Coatings for protection and decoration of hulls, interiors, and
superstructures of ships and yachts, aerospace coatings, protective coatings,
and fire-retardant products for large plants and offshore installations.
Industrial Products
- Adhesives and resins for wood-based board, panels, furniture, floors, doors
and expandable microspheres.
CHEMICALS
Pulp and Paper Chemicals
- Pulp bleaching chemicals and chemicals for the manufacture of paper and board;
specialty resins for adhesives and polymer manufacturing; high performance
separation products for pharmaceuticals.
Functional Chemicals
- Chelates, micronutrients, flame retardants, animal feed additives, PVC
additives, and intermediates such as carbon disulfide, monochloroacetic acid,
methyl amines and ethylene amines.
Surface Chemistry
- Surfactants and fatty acids used in detergents, cleaning, and personal care,
as well as in asphalt production and the agro, oil, mining, and textile
industries; cellulosic specialties such as thickeners and additives for
coatings, building materials, pharmaceutical products, food, mining and oil.
Base Chemicals
- Chlorine and caustic soda for industrial applications.
Polymer Chemicals
- Polymerization catalysts such as organic peroxides, metal alkyls, and
custom-manufactured Ziegler-Natta systems for the polymer-producing industry;
high-purity metal organics for the electronic industry, and intermediates for
pharmaceutical products.
Resins
- Synthetic resins for coatings and printing inks.
Catalysts
- Catalysts for the oil refining and chemical industries.
Salt
- High quality salt for electrolysis, other chemical industries, food
applications, and consumer use.
Energy
- Supply of energy (cogeneration) and other utilities.
21
ACTIVITIES OF AKZO NOBEL
Industry segment information
Akzo Nobel's financial reporting and industry segment information consists of
results from the following groups: "Pharma", "Coatings" and "Chemicals". The
information presented below illustrates the relative importance of the
individual groups.
-------------------------------------------------------------------------------------------------------
Net sales Operating income
Millions of euros 2003 2002 2001 2003 2002 2001*
-------------------------------------------------------------------------------------------------------
Pharma 3,550 4,008 4,044 538 747 869
Coatings 5,233 5,521 5,591 386 446 223
Chemicals 4,397 4,598 4,604 240 248 122
Miscellaneous products, intragroup
deliveries, non-allocated items and
eliminations (129) (125) (129) (100) (79) (16)
-------------------------------------------------------------------------------------------------------
Total 13,051 14,002 14,110 1,064 1,362 1,198
=======================================================================================================
* The statement of income for 2001 has been restated. Extraordinary results on
divestments now are reported under Results on Divestments included in
Operating Income.
--------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment
Identifiable assets Expenditures Depreciation
Millions of euros 2003 2002 2001 2003 2002 2001 2003 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Pharma 3,153 3,195 3,333 210 297 317 158 152 148
Coatings 3,059 3,338 3,372 128 131 181 140 150 156
Chemicals 3,259 3,557 3,837 237 248 310 291 311 320
Miscellaneous products, nonallocated
and eliminations, including cash
and cash equivalents 2,130 2,208 1,808 6 13 14 10 9 11
--------------------------------------------------------------------------------------------------------------------------------
11,601 12,298 12,350 581 689 822 599 622 635
Nonconsolidated companies
353 491 575
--------------------------------------------------------------------------------------------------------------------------------
Total 11,954 12,789 12,925 581 689 822 599 622 635
================================================================================================================================
Percent of total net sales and total operating income
Net sales Operating income
2003 2002 2001 2003 2002 2001
Pharma 27 29 29 50 55 72
Coatings 40 39 39 36 33 19
Chemicals 34 33 33 23 18 10
Miscellaneous products
and nonallocated (1) (1) (1) (9) (6) (1)
Total 100 100 100 100 100 100
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Below a summary of the activities of each group is given. For more details on
Akzo Nobel's activities, reference is made to "Business Review and Developments
at Business Units". See Item 5 "Operating and Financial Review and Prospects"
for a discussion on factors affecting comparability between periods.
Description of Pharma's business
Akzo Nobel's healthcare activities extend around the world. It engages in
research, development, manufacturing, sales, and service in strategic areas of
human and animal healthcare. These include prescription medicines, veterinary
products, as well as complex active pharmaceutical ingredients.
Major Product Lines Key Products/Applications Competitive Position*
Prescription drugs, - Contraceptives, infertility - Among top four suppliers
veterinary products, treatment, hormone therapy of hormonal contraceptives,
and complex active (HT) and osteoporosis, CNS second largest in
pharmaceutical products (antidepressants, infertility products; among
ingredients. antipsychotics), top five players in HT;
antithrombotics, and muscle building up positions in
relaxants CNS and osteoporosis. World
leader in neuromuscular
relaxants.
- Veterinary vaccines, and - World's third-largest
pharmaceuticals supplier of veterinary
products; leading in
veterinary vaccines
- Complex active - Major supplier of
pharmaceutical ingredients steroids and synthetic
peptides, strong in
heparins, oligosaccharides,
and biopharmaceuticals
* See the cautionary statements and the remarks on how the Company determined
its competitive positions under Introduction on pages 3 and 4.
In 2003, our Pharma group faced a multitude of challenges. It had to absorb a
strong negative impact from weaker currencies and higher pension charges. On top
of that, Organon faced the loss of market exclusivity for its No. 1 drug Remeron
(R) in the United States. Therefore, a new strategy was developed with
priorities for a clear focus on leading positions, alliances to strengthen our
growth opportunities in other areas, and aggressive cost cutting.
Akzo Nobel's business unit Organon has an international reputation based on
quality products and innovative R&D. It is among a very few international
companies conducting research into contraception. Sold as Desogen (R) in the
United States, Marvelon (R) is one of the world's most prescribed contraceptive
pills. However, sales of our oral contraceptives have been adversely affected by
generic competition in the United States. NuvaRing (R), our contraceptive
vaginal ring, was launched in the United States and Europe in 2002 and over 2003
gathered sales momentum. The Company also produces fertility products and
medicines for the treatment of menopausal complaints and, as an innovator in the
field of psychiatric drugs, is marketing antidepressant Remeron (R). However,
after an unfavorable court ruling in December 2002 for Remeron (R), this product
lost its market exclusivity in the United States and has faced intense generic
competition. In 2004, Remeron (R) will also lose market exclusivity in certain
countries in Europe.
Together with Sanofi-Synthelabo, the Company developed the new antithrombotic
(pentasaccharide) Arixtra (R), which has been approved and launched in the U.S.
and Europe. Arixtra (R) is currently approved for
23
the prevention of thrombosis following hip and joint surgery. The process of
hospital formulary approval for the introduction of Arixtra in the United States
is time consuming. In June 2003, the FDA approved a supplemental new drug
application for Arixtra (R) for "Prophylaxis of deep venous thrombosis, which
may lead to pulmonary embolism, in patients undergoing hip fracture surgery,
including extended prophylaxis". Early in 2004, Organon and Sanofi-Synthelabo
concluded that a single management structure would strengthen the opportunities
for commercial success of antithrombotic Arixtra (R) in the complex U.S. market,
where 2003 sales aggregated EUR 7 million. Therefore, they agreed that Organon
will transfer to Sanofi-Synthelabo its remaining rights and development
obligations for Arixtra (R) and other oligosaccharides, such as idraparinux
(SanOrg 34006), in exchange for revenues based on future sales from jointly
developed antithrombotic products.
In the fourth quarter of 2003, the Company concluded an agreement with Pfizer,
whereby Pfizer and Organon will collaborate on the clinical development and
manufacturing of asenapine, and co-promote the product in the United States,
European Union, Japan and other markets. Asenapine is a potentially new
psychotropic medication for the treatment of a variety of disorders that is
beginning Phase III trials for schizophrenia and bipolar disorders. Pfizer made
an initial payment of USD 100 million (EUR 88 million) in December 2003. The
agreement with Pfizer also provides for additional milestone payments of up to
USD 270 million, contingent upon gaining further regulatory approvals and the
launch of asenapine in the United States, Europe and Japan, as well as the
attainment of certain agreed sales levels.
In the United States, additional data requests by the FDA regarding Variza (R)
(gepirone ER), which were submitted in December 2003, delayed its registration.
Intervet focuses on the veterinary medicine market, with vaccines for cattle,
pigs, sheep, horses, poultry, fish and pets, endocrine fertility products,
corticosteroids and antibiotics, including injectors for treating mastitis and
metritis. The acquisition of Hoechst Roussel Vet, in November 1999, complemented
the product range with specialty medical products for both pets and livestock,
and feed additives for livestock. Intervet has an international reputation and
works closely with leading research institutes, universities, and other
companies. In May 2003, a new vaccine production facility in DeSoto, Kansas, was
opened.
Diosynth is a leading manufacturer of complex active pharmaceutical ingredients,
with production facilities in several countries. The company is active in
biochemical extraction and purification, fermentation, industrial cell culture,
and organic synthesis. Diosynth's main products are heparin, insulin,
gonadotropic hormones, steroids, synthetic peptides, carbohydrates, and opiate
analogs. Through the acquisition of Covance Biotechnology Services Inc (CBSI) in
2001, the Company believes that Diosynth now has sufficient size and products to
play a leading role in the developing biopharmaceutical market segment. In the
course of 2003, Diosynth was increasingly confronted with deteriorating
conditions in third-party markets for both chemical and biotech products.
Looking ahead, it will also face lower captive demand from Organon. To address
this situation, additional restructuring programs were announced in February
2004.
In 2002, we decided to enter the human vaccine business because it is a growth
market and because we can benefit from our experience in vaccines and
biotechnology in general. Based on doses, Intervet is the largest vaccine
producer in the world and in terms of sales it is number five. The start-up
business, Nobilon, is housed in a new vaccine production facility in Boxmeer,
which was opened in December 2003. Nobilon will focus initially on human
vaccines. Sales by Nobilon from its own products, however, are not anticipated
until after 2007. In the interim, the facility will produce antigens for
veterinary vaccines.
The current research and development pipeline of Akzo Nobel Pharma is stated
below. The content of the drug development portfolio will change over time as
new compounds progress from research to
24
development and from development to market. Owing to the nature of the drug
development process, it is not unusual for some compounds, especially those in
the early stages of investigation, to be terminated as they progress through
development.
The following is the current pipeline.
Products in the pipeline (Phase II and later)
Project Description Phase
Human healthcare
Contraceptives
Org 33628 progesterone receptor modulator II
"Male pill" andogen/progestagen combination II
HT/osteoperosis
Livial (R) 1.25 mg Selective tissue estrogenic III
activity regulator (STEAR)
Fertility
FSH-CTP long-acting FSH II
Psychiatry
Variza (R) 5HT-1A partial agonist (depression) filed
Asenapine/Org 5222 DA/5HT antagonist (psychosis) III
Org 34517/34850 HPA axis modulator (depression) II
Org 24448 AMPAKINE (psychosis) II
Org 4420 NASSA (sleep) II
Anesthesia
Org 25969 muscle relaxant binding agent II
Immunology
Org 37663 anti-inflammatory steroid II
Org 39141 auto-antigen II
Veterinary products Numerous new products (vaccines and pharmaceuticals) in
various stages of development
Active Many products in various stages of development, in general
pharmaceuticals on a contract manufacturing basis in the areas of
ingredients biotechnology, synthetic peptides and steroids
Explanatory remarks
Phase II Determination of close and initial evaluation of efficacy, conducted
in a small number of patients.
Phase III Large comparative study (compound versus placebo and/or established
treatment) in patients to establish clinical benefit and safety.
Filed Marketing authorization application (Europe) or new drug application
(United States) filed with regulatory authorities.
25
Description of Coatings' business
Akzo Nobel is a leading producer of paints, finishes, stains, and synthetic
resins for industrial applications, professional painters, and the
do-it-yourself sector. Product areas are decorative/architectural paint, car
refinishes, liquid and powder coatings for industrial use (on wood, plastics and
metal), marine and yacht coatings, protective coatings, aerospace coatings, and
industrial and consumer adhesives.
Major Product Lines Key Products/Applications Competitive Position*
Coatings and related - Coatings for decoration and - Market leader in Europe
products protection of architectural
structures
- Powder coatings, coatings - World leader in selected
for wood, metal, coil, and markets
plastics, and non-stick
coatings
- Finishes for passenger - Among top three global
cars, commercial suppliers
transportation and automotive
plastic components
- Coatings for protection and - World leader
decoration of hulls,
interiors, and
superstructures for ships and
yachts; aerospace coatings;
protective coatings and
fire-retardant products for
large plants and offshore
installations
- Adhesives and resins for - Leader in selected market
wood-based board, panels, niches
furniture, floors, doors and
expandable microspheres
* See the cautionary statements and the remarks on how the Company determined
its competitive positions under Introduction on pages 3 and 4.
Akzo Nobel's global strategy for its coatings business is to extend leading
positions in clearly defined product areas and specialist niche markets, which
demand high levels of technical expertise and customer service. Major
acquisitions in the last few years, combined with organic growth, lifted
Coatings to the world's number one position based on sales. We aim to strengthen
this position through further organic growth and bolt-on acquisitions. Growth in
mature markets is expected to remain in line with GDP. Opportunities exist in
emerging markets and in technology switches often driven by environmental
considerations. In the fragmented worldwide coatings market, we, as the world
leader, only represent 8 percent. This market is in a process of consolidation,
and we believe that our global positions in many fields will enable us to play a
leading role.
The Company supports the international initiative of Coatings Care (R)-a program
for continuous improvement in Safety, Health, and the Environment-and is
constantly seeking optimal ways to match the principles of eco-efficiency with
those of high performance.
Within the field of decorative coatings, Akzo Nobel has a number of top-quality
professional and do-it-yourself brands, which target national markets (e.g.
Crown (R) (United Kingdom) and Flexa (R) (the Netherlands)), multinational
markets (e.g. Nordsjo (R) and Trimetal (R)) and truly international markets
26
(e.g. Sikkens (R), Levis (R), and Sadolin (R)). The strength of these brands
reflects the Company's color know-how and customer orientation, as well as the
excellent performance and high environmental profile of its waterborne and
high-solids paints.
Another prominent area is industrial coatings, especially volatile organic
compounds ("VOC")-compliant waterborne paints, high solids, and powder coatings,
which are used to beautify and protect metal, plastic, and wooden substrates.
Applications range from home appliances to wooden furniture and heavy-duty goods
vehicles. The Company is the market leader in powder coatings and is strong in
industrial wood finishes, coil coatings, and plastic coatings.
The Car Refinishes business includes the car repair and commercial vehicles
sector. With Sikkens (R), Akzo Nobel Coatings has been a major player for years,
ensuring a fast, efficient, and top-quality result for every type of repair.
Combined worldwide expertise enables it to develop new technologies and products
of the highest quality continually. The Company also offers the equipment and
expertise to go with these products, such as the revolutionary Automatchic
system, which permits bodyshops to measure and match colors on the spot, or the
CarInfo II system, which automates administrative processes in the bodyshop and
produces a wealth of management information that can greatly improve bodyshop
profitability.
The Company is an international market leader in marine, yacht, and protective
coatings for heavy-duty applications, such as oil rigs. The Company's tradename
International (R) is well known all over the world. The Company supplies
antifouling coatings that keep ships' and yachts' hulls free of barnacles,
making it easier for them to travel through the water thereby saving fuel costs
for owners. The Company also provides paints for ships' superstructures, such as
Interfine (R), which transforms rust stains into colorless deposits.
The Company offers a wide range of VOC-compliant coatings and other products
qualified by the world's major aircraft manufacturers and used for aircraft
maintenance.
The Company supplies adhesives and resins to the woodworking industry (for
furniture, parquet flooring, and laminated beams).
We also supply world markets with Expancel (R) microspheres, additives that
reduce the weight and improve the properties of printing inks, nonwoven fabrics,
paper, polyester, and underbody coating. Effective January 1, 2004, the Expancel
(R) activities were transferred to Akzo Nobel's Chemicals group, to business
unit Surface Chemistry.
27
Description of Chemicals' business
The portfolio of Akzo Nobel Chemicals is a mix of specialty, functional, and
commodity chemicals based upon leading positions in selected segments of the
chemical industry.
Major Product Lines Key Products/Applications Competitive Position*
Specification, - Pulp bleaching chemicals - World leader in pulp
functional, and and chemicals for the bleaching chemicals, and
specialty chemicals manufacture of paper and strong worldwide position
board; specialty resins for in paper chemicals
adhesives and polymer
manufacturing; high
performance separation
products for pharmaceuticals
- Functional chemicals such - Leading or strong
as chelates, micronutrients, worldwide positions
flame retardants, animal feed
additives, PVC additives, and
intermediates such as carbon
disulfide, monochloroacetic
acid, methyl amines and
ethylene amines
- Surfactants and fatty acids - Leading or strong
used in detergents, cleaning, worldwide positions
and personal care, as well as
in asphalt production and the
agro, oil, mining, and
textile industries;
cellulosic specialties as
thickeners and additives for
coatings, building materials,
pharmaceutical products,
food, mining and oil
- Chlorine and caustic soda
for industrial applications
- Polymerization catalysts - Leading positions in
such as organic peroxides, Northwest Europe
metal alkyls and custom - Leading or strong
manufactured Ziegler-Natta worldwide positions
systems for the
polymer-producing industry;
high-purity metal organics
for the electronic industry,
and intermediates for
pharmaceutical products
- Resins for coatings and
printing inks
- Catalysts for the oil
refining and chemical
industries - Leading in selected
market niches
- Leading global supplier
of the most extensive range
- Salt for electrolysis, of refinery catalysts
other chemical industries, - Leading position in
food applications and Northwest Europe, and
consumer use global leader in vacuum
salt
* See the cautionary statements and the remarks on how the Company determined
its competitive positions under Introduction on pages 3 and 4.
28
Akzo Nobel is a leader in environmentally compatible pulp bleaching chemicals,
notably with sodium chlorate worldwide, and is strong in hydrogen peroxide. The
Company is also a prominent producer of chemicals for the wet-end manufacture of
paper and board, notably retention and drainage agents, wet-strength resins, and
sizing agents.
Akzo Nobel is strong in functional chemicals. It is the world's principal
producer of chelates, which deliver micronutrients to plants, and make
organophosphorus-based fire retardants for plastics and hydraulic fluids. In
addition, Akzo Nobel is a leading global producer of ethylene amines. Other key
products include monochloroacetic acid, in which the Company leads the worldwide
market, as well as carboxymethyl cellulose, which serve as water-soluble
thickening agents, and choline chloride, a food and feed additive.
In surfactants, Akzo Nobel is the market leader in cationic (fatty amine-based)
surfactants in Europe and a major producer of non-ionic ethylene oxide-based
surfactants. The Company also makes specialty cellulose-based rheology additives
for paint and building applications.
In Northwest Europe, the Company has leading positions in the production of
chlorine and caustic soda for industrial applications.
The Company is the market leader in polymerization catalysts and additives for
the processing and manufacturing of plastics worldwide. It produces organic
peroxides for thermosetting and cross-linking applications, UV Cure Chemicals
for the Graphic Arts, coatings and other industries, and polysulphide chemicals
for the aerospace, marine and construction industries.
Akzo Nobel produces and markets specialty resins for the coatings and printing
ink industries, including a broad range of alkyds, polyesters, melamines,
acrylics, and waterborne products. End uses range from automotive coatings to
industrial coatings for plastics, wood, and metal. The resins are used
internally and are also sold outside the Company.
The Company produces catalysts which are used in petroleum refining and
petrochemical processes. In hydroprocessing and fluid cracking catalysts, Akzo
Nobel ranks among the top three suppliers of these products in the world.
Akzo Nobel is the largest producer of salt for electrolysis in Northwest Europe,
and manufactures high-quality evaporated salt with strong consumer brands such
as JOZO (R). The production and electrolysis of salt both require a great deal
of energy. By operating in joint ventures with Dutch electricity distribution
companies, the Company is able to make use of combined heat and power
(cogeneration). The Company has been active in cogeneration since the 1930s.
In addition, the Company has established a strong presence, both globally and
regionally, through joint ventures. Joint ventures include Flexsys, with Solutia
(number one worldwide in the production of rubber processing chemicals).
In September we announced our intention to sell our Catalysts, Phosphorus
Chemicals, and Coating Resins businesses to create room to maneuver and improve
the Company's balance sheet. Together, these solid and profitable businesses
represent EUR 0.8 billion in consolidated sales. On April 19, 2004, Akzo Nobel
has received an offer from Albemarle Corporation for the sale of its Catalysts
business for EUR 625 million, free of cash and debt. Closing of the transaction
is expected to be in the second quarter of 2004. In the course of 2004, we
expect divestment proceeds for the other two businesses that also reflect their
value.
29
GEOGRAPHIC DATA
Below, geographic information for Akzo Nobel is presented for net sales,
operating income, identifiable assets and expenditures for property, plant and
equipment.
---------------------------------------------------------------------------------------------------------------
Net sales Net sales Operating income
by region of destination by region of origin
Millions of euros 2003 2002 2001 2003 2002 2001 2003 2002 2001*
---------------------------------------------------------------------------------------------------------------
The Netherlands 825 816 720 2,546 2,662 2,533 171 179 102
Germany 1,147 1,084 1,052 1,088 1,051 1,070 73 34 12
Sweden 510 517 512 1,102 1,184 1,088 66 95 72
United Kingdom 840 963 1,036 798 911 924 (118) (16) (47)
Other European
countries 3,963 3,951 3,964 3,100 3,016 3,266 509 591 641
USA and Canada 2,944 3,723 3,802 2,604 3,318 3,263 94 100 130
Latin America 704 767 917 470 506 660 60 96 78
Asia 1,453 1,513 1,429 1,022 1,064 1,039 125 140 66
Other regions 665 668 678 321 290 267 59 52 42
Result on divestments 25 91 102
---------------------------------------------------------------------------------------------------------------
Total 13,051 14,002 14,110 13,051 14,002 14,110 1,064 1,362 1,198
===============================================================================================================
* The statement of income for 2001 has been restated. Extraordinary results on
divestments now are reported under Results on Divestments included in
Operating Income.
-------------------------------------------------------------------------------------
Expenditures for property,
Identifiable assets plant and equipment
Millions of euros 2003 2002 2001 2003 2002 2001
-------------------------------------------------------------------------------------
The Netherlands 2,942 2,618 2,595 173 197 235
Germany 798 819 931 27 36 52
Sweden 773 798 831 55 36 71
United Kingdom 913 1,134 1,365 26 25 36
Other European countries 2,074 2,210 1,842 110 136 104
USA and Canada 2,014 2,772 3,090 81 177 220
Latin America 400 424 589 18 31 33
Asia 848 838 859 81 41 54
Other regions 302 306 345 10 10 17
-------------------------------------------------------------------------------------
11,064 11,919 12,447 581 689 822
Eliminations and cash
and cash equivalents 537 379 (97)
Nonconsolidated companies 353 491 575
-------------------------------------------------------------------------------------
Total 11,954 12,789 12,925 581 689 822
=====================================================================================
See Item 5 "Operating and Financial Review and Prospects" for a discussion on
factors affecting comparability between periods.
30
INSURANCE
Akzo Nobel's insurance policy is part of a general risk management philosophy
emphasizing the importance of creation of risk awareness throughout the entire
organization and promotion of loss control efforts. Risk finance, normally in
the form of insurance, is seen as a last resort to provide financial coverage
for mainly catastrophe-like events. Events of frequent nature with limited
financial effect are self-insured with the use of 100-percent-owned captive
insurance companies. The limits of insurance are based on loss scenarios as well
as normal practice in Akzo Nobel's type of industry.
For property damage/business interruption, for 2004 in general, the exposure
retained in the captive insurance arrangements is limited to EUR 12 million per
occurrence with an annual aggregate of EUR 25 million. When losses exceed these
retentions, external insurers will provide coverage from a deductible level of
EUR 1 million. Damages from acts of terrorism are excluded from insurance
coverage. For damages from natural disasters Akzo Nobel retains 10 percent of
these damages. The maximum amount of loss covered by external insurers for
property damage/business interruption is EUR 250 million.
For general and product liability of Coatings, Chemicals, and Intervet and for
general liability of Organon and Diosynth, in 2004 the exposure retained in the
captive insurance arrangements is limited to EUR 10 million per claim with an
annual aggregate of EUR 20 million. For product liability of Organon and
Diosynth, in 2004 the exposure retained in the captive insurance arrangements is
limited to EUR 25 million per claim without any annual aggregate. When losses
exceed these retentions, external insurers will provide coverage from a
deductible level of EUR 0.5 million. Liabilities as a result of acts of
terrorism are excluded from insurance coverage. The maximum amount of loss
covered by external insurers for general product liability is EUR 390 million
plus in excess thereof USD 290 million.
HUMAN RESOURCES
Akzo Nobel's decentralized two-layer organizational structure supports its
ambitions and offers the Company's employees broad scope and responsibility in
various disciplines, permitting them to develop their talents at an early stage
of their careers. Akzo Nobel provides opportunities and resources; employees can
use these to develop their skills and to be ready for change even before it
becomes a necessity.
Some recent developments in this area are described below.
The continual growth of talent is a crucial process for the long-term future of
the Company. To improve in this area we are working on a more consistent
approach to Performance Management to improve the regularity of development
dialogue (performance appraisals, personal development, etc.) between employees
and managers. There will also be a more action-oriented management focus on top
and low performers at all levels. In addition, we will expand our efforts to
improve development opportunities for talents by means of mentor programs
throughout the Company. The benefits are cross-border sharing of experiences and
further development of both mentee and mentor.
Employees can find a new challenge within Akzo Nobel, by using the "open market"
provided by the internal vacancy bank on our Intranet. The site has become
popular and enjoys a lot of hits. It has led to an increasing number of
successful internal transfers, which stimulates further interest in this
concept.
The process of implementing a more flexible remuneration system, more adaptable
to individual needs, continues. As part of this project, every employee in the
United States has received a total remuneration statement covering all
compensation elements, such as base salary, variable pay, and pension benefits.
31
Project teams are also working on this in the Netherlands and Sweden, and a UK
team is expected to join in shortly.
RESEARCH AND DEVELOPMENT
Through strong customer and market orientation, our R&D activities provide an
excellent platform for sustainable business development. We are focusing on
innovative approaches and technologies that ensure continuity and profitable
growth. In 2003, R&D expenditures amounted to EUR 887 million, down 3 percent
from 2002. The main driver continued to be Pharma, which accounted for 64
percent of Akzo Nobel's total R&D expenditures. Total R&D staff decreased from
7,200 at year-end 2002, to 7,000 at year-end 2003. R&D expenditures as incurred
by each of the groups are as follows:
Millions of euros percent of sales
2003 2002 2003 2002
Pharma 566 600 16 15
Coatings 166 166 3 3
Chemicals 130 135 3 3
Pharma
Organon
In 2000, human genome sequencing and elucidation of the genes encoding all human
proteins revolutionized the drug discovery and development process. The impact
was very significant for the phase focusing on the identification and validation
of drug targets. Genomics technologies supported by bio-informatics have been
implemented by the worldwide pharmaceutical industry, but the cost has been
high.
Thus far the output has been limited to many novel protein targets that are used
for screening compound libraries. The major hurdle in this new process proves to
be the validation of previously unknown protein targets in the molecular
etiology of disease. Therefore, it is not surprising that the worldwide
pharmaceutical industry has made a huge effort to improve the validation process
by developing novel physiological models, both in vitro and in vivo.
Organon's experience in this field mirrors that of the global pharmaceutical
industry. Its response, with a focus on gynecology, psychiatry, cardiovascular
diseases, immunology, and analgesia, has been to redesign the R&D process and
organization by concentrating on (preclinical) pharmacological validation within
newly formed academic networks. Additionally, the scope of the first phases of
drug discovery has been broadened to show proof-of-concept of novel therapeutic
approaches in the clinical setting.
Intervet
For many years R&D at Intervet has focused on a wide range of veterinary
vaccines and pharmaceutical products for companion animals and livestock. One of
the major drivers of Intervet's success has been the approach of developing
complete product packages of vaccines and pharmaceuticals for all important
species. Future R&D efforts will be directed at maintaining and adapting current
product registrations and, simultaneously, at developing promising new products.
R&D efforts in 2003 resulted in key registrations in major countries for canine,
equine, poultry, swine, and fish vaccines. In addition, four diagnostic tests
were licensed.
32
Diosynth
Following the acquisition of a biotechnology foothold in the United States
(CBSI), Diosynth completed the integration of its R&D infrastructure. A large
scale fermentation and cell culture facility has been constructed, which will be
validated in 2004. In addition, a novel peptide synthesis process (DioRaSPP) has
been taken into operation. This system makes it possible to miniaturize and
automate peptide synthesis; an important step forward to remain competitive in
this area.
Nobilon
Nobilon offers Akzo Nobel a platform from which to explore the human vaccines
market and create opportunities to harness synergies. A business strategy has
been formulated to develop human influenza vaccines and vaccines against certain
forms of travelers' diarrhea.
Coatings
In the customer-driven, technology-based organization of the Coatings business
units the main driver for R&D is defining customer specific solutions. The
framework for the carefully balanced portfolio of both short-term and long-term
innovation projects is set by three main prerequisites:
- meeting environmental regulations
- improving the performance of products also in color aspects
- defining and applying novel product and process technologies.
These projects are executed by the various business units in geographically
spread locations, always in the vicinity of the markets they serve. Typical
examples of achievements during 2003 are:
- Industrial Finishes developed a line of photopolymerizable coatings for
cosmetics packaging and sports equipment, which offer exceptional esthetics
and performance attributes and cure in fractions of a second, while meeting
current and currently anticipated future environmental regulations.
- Decorative Coatings introduced a very successful new range of waterborne
paints with better hiding and filling properties, based on a patented
technology. Successful developments also included coatings having a drying
system initiated by light.
- Car Refinishes made great progress in the characterization and prediction of
special effect colors.
- Marine & Protective further developed a novel technology in the critical area
of antifouling coatings and filed patents in the area of waterborne
anticorrosive primer coatings.
- Industrial Products introduced a new fast, low temperature, curing adhesive
system for the wood working industry.
- Powder Coatings developed a new generation of hyper durable powder coatings
finishes and novel patented active anticorrosive primers.
The focus of our long-term-innovative R&D programs is gradually shifting toward
new generation polymer engineering, applying new academic science, and
creatively utilizing the potential of nanotechnology.
Chemicals
Continuous upgrading of core technologies is a key issue for all Chemicals
business units in order to achieve and secure competitive market advantages.
Therefore, R&D programs are customer-oriented, maintaining an adequate balance
between short-term and long-term innovation goals. Sustainability is a major
driver in the R&D efforts for both current and future operations and products.
These programs are executed through R&D resources embedded in the individual
business centers, with R&D units in all major markets.
33
To ensure access to developments in the scientific world and to be able to
explore and exploit the latest technologies, business units also work together
in technology programs, often including university partners. These efforts are
supported by centers of excellence. These programs include:
- reduction of energy and raw material consumption by applying front end
separation technology
- waste and energy reduction using modern solid catalysts
- closed loop production through process intensification
- low energy routes to high quality emulsions
- more stable and safer processes by application of control room simulation
- prospects of nanochemistry
- shortening time to market and/or time to production by high throughput
experimentation.
HEALTH, SAFETY, AND ENVIRONMENT
Commitment to HSE is an integral part of our company culture. The progress made
in this area is the result of our long-term investments in learning and
implementation. We intend to make this progress explicit, measurable, and
reportable. The HSE report for 2003 will be made available on Akzo Nobel's
internet website in April 2004.
Within Akzo Nobel, five key HSE parameters have been translated into specific
targets for the operational plans:
2002 2003 2005 Targets
Frequency Rate Lost Time Injuries (LTI)
per 1 million hours worked 3.0 2.8 2.5
Total Illness Absence Rate (TIAR) in
percent 2.6 2.5 3.5
Chemical Oxygen Demand of discharge to
surface water, in tons 3,600 3,200 3,000
Volatile Organic Compounds (VOC) emission
to air, in tons 5,700 5,800 4,000
Nonreusable waste, in tons 97,000 95,000 115,000
Safety performance (LTI) has improved slightly compared to the previous year,
thus moving the Company's LTI figure closer to its target of 2.5 in 2005.
Unfortunately, in 2003 three employees lost their lives: two of the fatalities
occurred in an incident in India and one employee lost his life in a traffic
accident in Turkey.
The total illness absence rate (TIAR) is considered an important measure of
employee health. In 2003, TIAR further improved to 2.5 percent. We continue to
focus our attention on those sites where TIAR is above 3.5 percent.
In 2003 the values for two environmental parameters decreased. Compared to the
previous year, the amount of Nonreusable Waste and the Chemical Oxygen Demand
(the parameter for discharge to surface water) improved. The emission of
Volatile Organic Compounds to air did not improve.
34
BUSINESS REVIEW AND DEVELOPMENTS AT BUSINESS UNITS
For financial details on acquisitions or divestments, reference is made to Note
2 of the Notes to the Consolidated Financial Statements.
PHARMA
Business review
Challenging is the one word to describe 2003. For Organon the challenges came
from the commercial and regulatory fields and the weak U.S. dollar. Organon's
leading product, Remeron (R) antidepressant, lost its exclusivity in the U.S.
market and had to face stiff generic competition. Organon partially offset this
setback through growth of Remeron (R) sales in other countries and promotion of
Remeron (R) SolTab (R).
On the R&D front, Organon moved asenapine antipsychotic into phase III. It
identified a suitable strategic partner in Pfizer and negotiated a satisfactory
relationship, thus underlining its commitment to pharmaceutical research and
development. In the regulatory area, Organon received a warning letter from the
FDA following inspection of an important facility in West Orange, New Jersey.
Organon promptly responded to the FDA's concerns. Toward the end of the year the
FDA issued an approvable letter for Follistim (R)-AQ (TM) cartridge, for which
in March 2004, an approval letter was received.
The challenges facing Intervet included the dramatic slide of the U.S. dollar
versus the euro. Combined with the temporary supply problems for several
important vaccine products, this prevented the U.S. Intervet organization from
reaching its goals. In Europe, Intervet performed much better but not enough to
offset the currency losses and the loss of certain products in the United
States.
Delays in approval of several biotechnology products and lower than expected
demand for some already registered products impacted the entire biotech
industry. A key participant and supplier in this field, Diosynth was also
affected by this trend. As the major supplier to Organon, Diosynth also had to
adjust to lower captive demand. The Nobilon human vaccine facility was
officially opened in December. Initially, the facility will produce antigens for
veterinary vaccines in the next few years.
Overall, Pharma's sales and operating income were 11 percent and 28 percent
below the previous year's levels.
Developments in the Pharma business units
Organon - Prescription drugs
Sales 2003: EUR 2,273 million; 2002: EUR 2,593 million
Organon experienced a challenging year in 2003 with a downturn in sales of 12
percent compared to 2002, resulting in a program designed to bolster future
financial performance. The decrease in sales was due largely to a global
negative currency effect against the euro, causing a sales decrease of 9
percent, which was mainly attributable to the weaker U.S. dollar. The economic
malaise in a number of countries, coupled with an increase in generic
competition, caused pressure on 2003 operating income. U.S. sales volume in
particular was hard hit (down 26 percent) by generic competition for our main
product Remeron (R). As a result, global sales volume declined 5 percent.
35
Hormone Therapy and Cardiovascular products showed volume growth compared to
2002. Other product groups registered lower sales, mainly related to currency
effects.
Organon's main products developed as follows:
Millions of euros Total Autonomous
2003 sales change % growth*
Remeron (R) (in the U.S.) 208 (54) (45)
Remeron (R) (in rest of the world) 316 20 26
Contraceptives 517 (1) 7
Puregon (R) 331 (7) (1)
Livial (R) 197 (5) (1)
To safeguard margins and further healthy development, we instituted a cost
reduction program as well as a restructuring of marketing and global
manufacturing. The cost reduction program resulted in savings of EUR 140 million
and a headcount reduction of 940 compared to year-end 2002. This was achieved
without reducing R&D efforts.
The contraceptives business started to benefit from increasing sales of NuvaRing
(R), which has been launched in a number of countries after its introduction in
the United States in 2002.
We also made changes to both our business structure and global processes to
cultivate teamwork across geographic and departmental borders and to operate
closer to our business and customers. We slimmed our central sales and marketing
operations in favor of regional support activities in Asia and Latin America.
Additional charges were taken to restructure our global manufacturing
operations.
We thoroughly reviewed our operations and reorganized key parts in 2003. The
principal steps taken were the separation of "R" from "D" in the R&D process and
the establishment of Global Venture Teams (GVT) to bring key potential products
to market. GVTs will optimize the development efforts for key products. The
teams will ensure an optimal balance between development time and product
labeling to maximize product launches. Research will be solely responsible for
exploratory development of a compound until its "proof of concept" is achieved
(clear output with commercial utility). Full development projects will be used
to determine the ultimate disposition of a compound: to develop the compound
internally or with an external partner, to outlicense, or to cancel it.
An independent analysis of our pipeline yielded the assessment that Organon has
high promise for a medium-sized pharmaceutical company. One such example is Org
25969, a fast-acting binding agent being developed to reverse "deep block"
muscle relaxants used in surgery. Org 25969 could help anesthesiology by
offering physicians better control and patients faster recovery time with a
positive side effect profile.
We are committed to a strategy that maintains a high level of investment in R&D
in order to exploit the full potential of our product pipeline. We also are
retaining the flexibility to partner with companies in areas in which
optimization of late-stage development and/or marketing and sales performance is
needed. This is
* Autonomous sales growth is defined as the change in sales attributable to
changed volumes and selling prices. In this case it excludes the change in sales
attributable to currency translation effects as acquisition
and divestment effects are not applicable. Reference is made to the remarks on
page 4.
36
best illustrated by an in-licensing agreement made in 2003 with Ligand
Pharmaceuticals to copromote Avinza (R) in the United States and a global
agreement with Pfizer to codevelop and copromote our phase III antipsychotic
asenapine.
A Global Business Development group has been created, which is responsible for
increasing and maximizing business development opportunities.
Early in 2004, conclusion was reached on the renegotiation of our thrombosis
alliance with Sanofi-Synthelabo to revise the terms of the collaboration on the
antithrombotic Arixtra (R) and certain oligosaccharides such as idraparinux
(sanOrg 34006). Pursuant to this deal Organon will transfer to Sanofi-Synthelabo
its remaining rights for Arixtra (R) and development obligations for Arixtra (R)
and other oligosaccharides in exchange for revenues based on sales. This deal
safeguards long-term financial interests and limits the short-term financial
burdens, enabling Organon to maintain cost control where executing extensive
phase III development program.
Intervet - Veterinary products
Sales 2003: EUR 1,010 million; 2002: EUR 1,081 million
Following several key acquisitions in recent years, Intervet has consolidated
its position as a major player in the global animal health market and is now
lining up for a selective strategy to expand its presence in promising segments.
Intervet is well positioned to maintain its global No. 3 position in the sector,
despite the economic headwinds that have also hit the global animal health
market.
In 2003, Intervet maintained its position as the leading animal healthcare
company in Europe. Business performance in Northern Europe was adversely
affected by a flat aquaculture market, mainly in Norway, and the outbreak of
Avian Influenza, which temporarily decimated poultry stocks in the Netherlands.
In Southern Europe, Intervet performed better than the European industry average
in its sector. In other regions, particularly North America, results were
impacted by currency effects. Markets in Latin America showed encouraging
improvement, especially in the second half of 2003, while in Asia the picture
was mixed, generally reflecting developments in national agricultural markets.
Under these conditions, Intervet's operating income trailed that of 2002.
Intervet's R&D strategy continues to focus on product-based innovation. In 2003,
dedicated teams again brought numerous new products to the livestock and
companion animal health market. In April we launched a new vaccine with proven
protection against agents involved in feline respiratory disease and started
other pan-European marketing campaigns. Another milestone was the introduction
of a vaccine targeting Salmonella as a major advancement in efforts to make
poultry meat and eggs safer for human consumption.
After a major outbreak of Foot and Mouth Disease a few years ago, in 2003 Europe
was again plagued by a serious outbreak of an infectious disease, this time
Avian Influenza. These outbreaks led to a comprehensive approach to combating
infectious livestock diseases, with the availability of marker systems and
emergency vaccination as key elements of a disease control strategy. These
efforts will be aided by our cooperation with a Dutch agricultural institution,
which has resulted in a solid basis for the production of effective antigens and
marker vaccines against Foot and Mouth Disease. An EU Commission Decision was
made in late 2003 to approve the positive evaluation of Intervet's
discriminatory test for Classical Swine Fever (CSF). The test, in combination
with corresponding marker vaccines, is an essential tool for any vaccination
campaign undertaken to contain outbreaks of CSF in Europe.
37
In May 2003 we opened our new life science center in DeSoto, Kansas. This center
now serves as a major research facility for livestock vaccines and a production
facility for swine and cattle vaccines. It is our largest distribution center
and "Center of Excellence" for the clinical development of livestock and equine
pharmaceuticals in the United States.
In 2003 we embarked on a major investment program in Boxmeer, the Netherlands,
aimed at modernizing our multifunctional headquarters site and enlarging our
production capacity for biological products. Ongoing investments in global
activities are reflected in the commissioning of new production facilities at
our German site in Unterschleissheim, near Munich. This center produces
pharmaceuticals for livestock and companion animals to serve our needs
worldwide.
In line with the restructuring program for our operations in India, early in
2004, one of the two production units in India was closed.
Following a logistics and manufacturing initiative that began in 2002, we have
made significant progress in harmonizing our business processes and in
developing and evaluating related information templates. This preparatory design
phase, scheduled to be completed by mid-2004, will be followed by a rollout in
several of our larger subsidiaries.
Diosynth - Complex active pharmaceutical ingredients
Sales 2003: EUR 479 million; 2002: EUR 529 million
The pharmaceutical industry is in a stage of transition. The innovative
pharmaceutical industry in general faces major challenges as a result of
imminent loss of patent protection for major products, reduced approval rates,
too high expectations for new products, and increasing pressure on pricing. As a
consequence, active pharmaceutical ingredient manufacturers like Diosynth are
adversely impacted by soft demand, a developing overcapacity situation, and a
decline of the U.S. dollar compared to the euro in the last two years. In 2003,
Diosynth's sales were 9 percent down, while operating income also fell in
comparison with 2002.
Because of its excellent reputation as a reliable producer and its relatively
protected position in niche oriented markets, Diosynth had anticipated only
limited consequences for 2003. In reality, the impact was greater than expected.
In the chemical sector the situation was bearish. Focusing on the compound
classes Diosynth specializes in, we see that the crisis in the hormone
replacement therapy market might indicate that the long-term use of steroids is
under increasing pressure. For peptides and alkaloids the growth in market
demand was disappointing due to delays in registration of our customers'
products.
In the traditional biochemical market (mainly extraction products), Diosynth
managed to maintain its position volume wise.
In the biotechnology sector we are being confronted with generally decreasing
funds available to our customers, a limited number of new products, and delays
or failures following recent clinical trials. These factors caused
underutilization of existing capacity. Despite our intensified cost saving
programs, volumes and profitability of this business were strongly impacted.
Looking ahead, Diosynth will also face lower captive demand from Organon.
38
Therefore, in February 2004, Diosynth announced a restructuring of its chemical
synthesis operations across the globe. In the face of the aforementioned
declining demand, worldwide chemical synthesis capacity will be reduced by
closing its production site in Mexico and scaling back facilities in the
Netherlands. In January, a start was already made with a reduction of production
capacity at Diosynth's Buckhaven (Scotland) site, which was already impaired in
2003. Workforce reductions will directly affect a combined total of
approximately 350 employees.
COATINGS
Business review
In 2003 we realized 3 percent autonomous (sales price and volume) growth* and,
excluding the effect of restructuring and impairment charges, maintained our
return on investment at the 20 percent threshold, despite difficult economic
circumstances, negative currency influences, and further increased pension
costs. Including such restructuring and impairment charges, ROI was 18 percent.
This was achieved through improvement of the business mix by divesting
Impregnated Papers and 20 smaller noncore businesses, selling idle assets and
limiting acquisitions. We also stepped up our restructuring programs in mature
markets. These measures offset headcount increases in emerging markets,
resulting in a net decrease to 28,700. Restriction of capital expenditures to 90
percent of depreciation and further reduction of working capital (moving
average) from 23.0 percent to 22.3 percent of sales contributed to maintaining
our ROI level.
Conditions for decorative coatings in Europe were tough, especially in the
retail sector. The decorative coatings business in emerging markets continued to
expand. The industrial part of our portfolio held up reasonably well, not only
our star performers Marine & Protective Coatings and Industrial Finishes but
also Powder Coatings. Market conditions for Car Refinishes remained very
competitive, and pressure on volumes continued.
We continued to grow in Asia Pacific, which now represents 14 percent of
worldwide sales. In 2003, we opened a powder coatings facility in Vietnam and a
nonstick coatings facility in Dongguan City, China, and announced the investment
in a decorative coatings facility in Suzhou, China. Furthermore, we acquired
full ownership of our powder coatings activities in South Korea and decided to
set up our own marketing and sales company for marine and protective coatings in
Japan.
In total, sales were down 5 percent in 2003 and operating income 13 percent.
In the coming years our main challenge will be a balancing act between continued
restructuring in mature markets and accelerated growth in emerging markets.
A portion of the Coatings business is seasonal, with sales and earnings being
relatively higher during the outdoor season and lower during the indoor season.
The operating results may be harmed if bad weather delays the outdoor season in
the major markets in which the Company operates and the Company is not able to
offset during the corresponding financial year the lag in earnings resulting
from such delay.
* Reference is made to the sales analysis table on page 54.
39
Developments in the Coatings business units
Decorative Coatings
Sales 2003: EUR 1,842 million; 2002: EUR 1,915 million
Decorative Coatings Europe and Decorative Coatings International serve the
professional and do-it-yourself markets. The Company's major brands include
Sikkens (R), Sadolin (R), Crown (R), Astral (R), Marshall (R), Trimetal (R),
Nordsjo (R), Levis (R), Herbol (R), Vivechrom (R), and Flexa (R). The Company's
leading building adhesive brand is Schonox (R).
Decorative Coatings Europe
In general, 2003 was a weak year for the decorative coatings industry in Europe,
except for the southernmost regions. Volumes showed an overall decline. The
uncertainty in the world fueled by the war in Iraq, the downturn in construction
of new houses, and slowing economic growth in several countries had an adverse
effect on the market.
Decorative Coatings Europe was not able to match the previous year's operating
income in a falling market with aggressive competition for volume, despite
extensive cost cutting programs. The results of Trade and Specialties were
satisfactory and virtually on a par with the previous year, but we had
difficulty in keeping up successful growth in the Retail business. During the
year we acquired a selected number of distributors in an effort to safeguard and
strengthen the availability of our strong brands to the professional painters.
We also continued strengthening core brands like Sikkens (R), which is now
distributed as top of the market trade brand in nine countries. Retail has used
2003 to prepare a coordinated relaunch of our strong local retail brands within
a pan-European positioning and to step up the transfer of proven successful
product concepts to more countries.
At the end of the year we announced a major headcount reduction across countries
and functions in response to weaker markets and the need for a structural
reduction of cost levels.
As the deadline for compliance with the EU directive on volatile organic
compounds (VOC) is coming closer, the business unit has decided to take a
proactive approach. Rephrasing recipes and formulations will involve a major
research effort to comply with the regulations. However, this apparent threat
can also be viewed as an opportunity for more innovation. During the year we
have already seen some product introductions that can be linked directly to the
VOC regulation. Early in 2003, we successfully launched TINOVA VX, a quick
drying high solids paint. Another directly related success was the improvement
in gloss and color of waterborne lacquers. The introduction of our new and
advanced tinting machine concept is well under way, which should also help us to
comply with future regulations.
In the United Kingdom, Retail successfully introduced the innovative new product
Indicoat (R): a paint that is pink when wet but turns white when dry, thus
easing the difficulties associated with white on white painting. The technology
will be introduced in more European markets in the coming year.
Decorative Coatings International
Decorative Coatings International registered only a slight decrease in operating
income, aided by a small volume gain and somewhat higher margins. Costs were
very much under control and "sales and marketing"-our largest cost category-was
down relative to sales and in absolute figures. As capital turnover (defined as
sales divided by average invested capital) also improved, return on investment
was substantially up from the previous year.
40
The Eastern European business was further consolidated, with growing production
volumes in our Russian factory. A restructuring program was implemented in
Hungary and Poland, which involved major divestments of activities and assets in
the Hungarian distribution company. Headcount in both countries was reduced
significantly, and the platform for profitable future growth is now in place.
With the Olympics approaching, Greece registered a rising demand. In Turkey the
second half of the year looked promising, giving rise to some optimism for 2004.
However, there is still a substantial degree of uncertainty regarding the
developments in this country.
Following the Sadvel acquisition, we finalized the restructuring project in
Morocco, including divestment of the idle assets involved. Volume growth
exceeded total market development.
Asia Pacific (China, Indonesia, Vietnam, and Papua New Guinea) continues to show
a double digit volume increase. Our Indonesian company registered a strong
performance, reflecting the success of the concept with mixing machines for the
mid-tier segment of the market, where we are the first player. A new factory to
be built in China should be operational in early 2005. In addition, a factory is
also planned for Vietnam.
Our niche strategy for wood care products in North America and Argentina has
proven once again that reliability generates good returns.
Building Adhesives registered growing volumes despite the depressed German
building industry, a key market for this activity. A new sales organization will
further penetrate in the Eastern European territories.
The efforts aimed at developing low-priced product formulations for low-cost
markets have been intensified.
Industrial activities
Sales 2003 EUR 1,336 million; 2002: EUR 1,310 million
In 2002, Akzo Nobel's industrial coatings activities included three global
business units: Industrial Coatings, Industrial Finishes, and Powder Coatings.
In order to achieve the best possible synergies it was decided to dissolve
Industrial Coatings with effect from January 1, 2003, and to transfer the
activities to the other Coatings business units.
Industrial Finishes
Bolstered by a strong fourth quarter in 2002, Industrial Finishes entered 2003
with optimism and a clear focus on accelerating business development.
Unfortunately, industrial sectors were flat in Europe. High interest rates,
unemployment, and inflation in the South American economies hindered investment
and economic growth. North American consumption began slowly, but during the
year the economy improved as world tensions eased and confidence returned.
Remarkably, demand from China remained strong and consistent. Overall operating
income was slightly above the previous year's level.
Against this global economic backdrop, Industrial Finishes continued to invest
and seize growth opportunities in frontier markets. Also, we restructured
existing capacity and maintained market share in the low growth European and
North American markets. As a result of these actions, we emerged from 2003 a
stronger international industrial coatings supplier.
Our ongoing R&D activities continued to provide our customers with a stream of
products that helped them become more efficient and better able to differentiate
their products in this increasingly competitive global economy. At the same
time, our products met high health, safety, and environmental standards.
Combining
41
an intense customer focus with a decentralized organizational structure and Akzo
Nobel's expansive technology base, Industrial Finishes remains uniquely
competitive in the markets in which it operates.
In October 2003, Industrial Finishes acquired the specialty coatings business of
Belgium-based Techni-Coat International N.V. This business excels in
lifestyle-driven plastic coatings for consumer electronics, cosmetics packaging,
and sports and leisure goods. This strategic addition of talent and technology
will significantly enhance our ability to bring exciting, leading-edge
technology to our global customers in this fast-growing market segment.
Powder Coatings
Tough market conditions in Europe and the Americas prompted us to focus hard on
cost cutting measures throughout 2003. Considerable restructurings in Europe and
a drive to put in place improved manufacturing and operational efficiencies paid
off in reduced costs and increased profitability. Operating income was
considerably in excess of the previous year.
Post-acquisition integration and restructuring moves in the United States,
following the acquisition of Ferro in 2002, were completed ahead of plan.
While markets in the northern and western parts of Europe remained flat
throughout 2003, opportunities for growth occurred in the southern and eastern
regions. We expanded capacity in our Turkish factory and strengthened our sales,
marketing, and distribution network in Eastern and Central Europe.
We had a year of outstanding growth in Asia Pacific. Our new factory in Vietnam,
opened at year-end 2002, is already profitable. We acquired the remaining 50
percent stake in Interpon Powder Coatings Korea held by DPI, assuming full
ownership in the important Korean market. We purchased new land in Guangdong
Province, which will enable further expansion of our South China business.
We maintained the flows of unique Interpon (R) powder technologies into our
global businesses. Product launches in 2003 included a new generation of
hyper-durable architectural coatings, a range of patented active anticorrosion
primers, and an antibacteriological coating. We also started to launch in our
Asian markets the automotive components technologies acquired in the Ferro deal.
Our Nonstick Coatings business had a successful year of profitable growth,
including the opening in October of a new factory at Dongguan City in South
China.
Our Cromadex (R) distribution business also had another satisfactory year.
Marine & Protective Coatings
Sales 2003: EUR 832 million; 2002: EUR 830 million
2003 was another year of excellent performance with growth in sales and
operating income in all markets and regions, partly offset by negative currency
translation effects.
International (R) Marine Coatings benefited from the continued high level of
newbuilding of ships, in particular in Korea and China. Following the IMO's
(International Maritime Organization) ban on tin-containing antifoulings from
January 1, 2003, the business has undergone a successful conversion to tin-free
antifouling and the Intersleek (R) biocide-free foul-release technologies.
42
International (R) Protective Coatings achieved unprecedented growth in the year,
spurred by organic expansion in China and Central/Eastern Europe. The launch of
Interfine (R) 979 polysiloxane patented technology was successful, and our
Chartek (R) fire proofing material achieved impressive sales growth.
The Yacht Coatings business continued to improve its performance in the key
markets of Europe and the United States with the strong International
(R)/Interlux (R) brands. The integration of the Awlgrip (R) professional topside
coatings business acquired in 2002 was very successful, with particularly good
performance in Europe.
In Aerospace Coatings, Akzo Nobel challenged the general decline in the airline
industry with increased sales in Europe of Aviox (R) coatings to Airbus and by
successfully securing coatings contracts for a number of major airline livery
changes.
Car Refinishes
Sales 2003: EUR 880 million; 2002: EUR 937 million
In 2003, Car Refinishes integrated three market segments with considerable
synergies in people, products, and technologies: car refinishes, commercial
vehicles, and automotive plastic coatings.
We relaunched our approach in the commercial vehicles segment with a dedicated
global organization, a dedicated sub-brand Sikkens (R) Autocoat (R) BT (R), and
an optimal, renewed product assortment.
In recent years, the business unit made a number of strategic investments to
stimulate organic growth for its mid-term and long-term future.
The doubling of our total R&D effort paid off with a number of innovations
reaching the market in Europe. Examples are Sikkens (R) Autoclear (R) WB, the
first workable waterborne clearcoat in the collision repair industry, and
Sikkens (R) Autoclear (R) III, our fastest growing two pack urethane clearcoat.
A large part of our current product assortment, including all of our basecoats,
are now younger than five years. Our strategy of creating super dispersions
(SUPDIs) made us both faster and more flexible in bringing new topcoat products
to market.
Following the opening of our own offices in Dubai, Saudi Arabia, and Pinetown,
South Africa, we now have strong regional organizations in all parts of the
world, driving our multisegment approach (high, mid, and low) within the
collision repair industry.
Nobilas, a service company for claims and fleet solutions, saw its market
launch. This company is currently building its customer base and setting up its
organization.
Our sales suffered from the weakening of the U.S. dollar versus the euro as well
as from economic circumstances. The business unit made substantial cutbacks in
personnel, especially in its mature markets, to structurally reduce costs.
However, these measures failed to prevent a substantial decline in operating
income, compared to the 2002 level.
An investment of USD 30 million for a new laboratory and plant extension in
Pontiac, Michigan, has been approved. This is the single largest R&D investment
ever in the Coatings business.
43
Industrial Products
Sales 2003: EUR 391 million; 2002: EUR 532 million
The economic climate remained weak and markets failed to recover. Volumes stayed
on the same level as in the previous year, and margins were under strong
pressure. These factors were reinforced by negative currency developments.
Working capital was kept under control and expenditures were low.
In mid-2003, the impregnated paper activities were divested. Some adhesives
activities not related to the wood working industry were also divested or are in
the process of being divested. A restructuring program for the Swedish
industrial resins activities is in progress, and one production plant will be
closed down. An investigation into the future of the industrial resins
activities in France was initiated.
Successful R&D has resulted in important inroads for wood adhesives into the
U.S. and Japanese markets. Also, new Expancel (R) microspheres were launched and
new applications found. To meet increasing demand for microspheres a major
program for capacity increase was initiated. Effective January 1, 2004, the
Expancel (R) activities were transferred to Akzo Nobel's Chemicals group.
CHEMICALS
Business review
The Chemical Industry had one of its worst years in 2003, but modest improvement
is expected for 2004. Akzo Nobel Chemicals performed satisfactorily, thanks to
several top of the line products and a combined efficiency and restructuring
drive throughout the entire group. The workforce has been reduced by 1,100
people, and several of the programs continue into 2004.
2003 saw one selective acquisition, CIRS SpA (Italy), an antifouling/suspending
agent producer for the polymer industry.
On January 1, 2004, the Casco Polymers business (Expancel (R)) was transferred
from Coatings to Chemicals.
In September we announced our intention to sell our Catalysts, Phosphorus
Chemicals, and Coating Resins businesses to create room to maneuver and improve
the Company's balance sheet. Together, these solid and profitable businesses
represent EUR 0.8 billion in consolidated sales. On April 19, 2004, Akzo Nobel
has received an offer from Albemarle Corporation for the sale of its Catalysts
business for EUR 625 million, free of cash and debt. Closing of the transaction
is expected to be in the second quarter of 2004. In the course of 2004, we
expect divestment proceeds for the other two businesses that also reflect their
value.
Three significant projects came into operation: a major expansion of our
chlor-alkali plant in Rotterdam, expansion of ethylene amines production in
Sweden, and a grass-root quat plant in Singapore. To meet growing demand from
the rapidly expanding South American pulp and paper industry, an investment in a
"Chemical Island" at the new Veracel pulp mill in Brazil was approved.
Additionally, further chlor-alkali expansion in Rotterdam and an increase in
salt capacity in Hengelo, the Netherlands, will go ahead.
Overall, sales and operating income were, respectively, 4 percent and 3 percent
lower than in 2002.
We will create value for our customers and the Company by driving innovation,
growing our people, and concentrating on selected growth areas and cost
leadership.
44
Developments in the Chemicals business units
Pulp and Paper Chemicals
Sales 2003: EUR 896 million; 2002: EUR 969 million
Pulp & Paper Chemicals (Eka Chemicals) managed to considerably increase its
operating income during the year, despite continued weak markets in several
areas and the negative impact of the lower dollar. The improvement was driven
primarily by lower costs as restructuring programs initiated in recent years
delivered the expected results.
In Europe a tighter market for bleaching chemicals raised prices, and production
plants were working at high utilization rates. Energy costs, which are of
crucial importance in chlorate production, rose substantially and are likely to
show a further increase in 2004.
The chlorine dioxide concept, which involves on-site production at the
customers' plants, has proven to be very successful and continues to grow.
Several new units have been established, resulting in closer cooperation with
customer mills in Europe and South America. At the end of the year we concluded
an agreement on the first unit for a North American mill.
A chlorine dioxide process unit and a chlorate factory form the major part of a
EUR 50 million investment in a "Chemical Island" at the new Veracel pulp mill in
Brazil. The commencement of construction is the latest step in a series of
actions taken in South America to meet growing demand from the rapidly expanding
pulp and paper industry.
The Paper Chemicals market in North America, while strained, showed some
improvement in various segments. The improvement for the region in 2003 is
entirely related to lower costs. The amalgamation of the bleaching chemicals and
paper chemicals organizations in North America and the other regions resulted in
a reduction of the administrative workforce. These restructurings will be
followed in 2004 by a concentration of paper chemicals production in fewer, more
comprehensive plants close to customer locations.
Pulp and paper production in Asia is growing rapidly, resulting in increased
demand for our chemicals. In the face of fierce competition, Pulp & Paper
Chemicals has established a solid base for expansion in Asia; the region
accounts for a growing part of our global business.
The Purate (R) water purification system, an activity of Specialty Products,
showed growth and improved performance.
Functional Chemicals
Sales 2003: EUR 789 million; 2002: EUR 831 million
Functional Chemicals experienced a tough year with stagnant sales in most of its
businesses, exacerbated by weakening currencies. Restructuring efforts
significantly offset the effect of higher raw material prices, resulting in a
slightly lower operating income.
Although higher raw material costs and a scheduled production stop caused
Ethylene Amines to fall short of its 2002 performance, additional production
capacity was brought on stream to significantly improve future business,
consistent with our leadership position in a tight market. Rising sales revenues
of
45
monochloroacetic acid, mainly in China, were offset by higher raw material
costs, resulting in reduced margins. However, the outlook for our Chinese
business is rapidly improving.
Phosphorus Chemicals successfully weathered major currency effects and higher
costs to post a slightly lower result. The unit initiated a comprehensive
restructuring of its U.S. operations to significantly improve performance. In
September 2003, Akzo Nobel announced its intention to divest this business.
Despite sluggish market conditions and higher raw material prices, the Chelates
business showed strong improvement, benefiting from structurally lower costs and
improved logistics. Additional steps to boost earnings were taken by creating a
production joint venture with BASF in the United States, starting from February
2004. Major restructuring efforts at the production sites helped overcome record
raw materials price hikes, enabling Sulfur Products to post a favorable result.
Price erosion and excess capacity lowered the results of our PVC additives
business, while adverse market conditions led to aggressive restructuring of the
methylamines and choline chloride businesses.
An investment to set up a pilot plant for a promising break-through wood
preservative was approved in the final quarter.
Surface Chemistry
Sales 2003: EUR 784 million; 2002: EUR 836 million
The downward trend in many of our market segments that started in the second
quarter of 2002 continued in 2003, as is evidenced by weak volume and price
developments across the board. The ongoing slide of the U.S. dollar impacted
sales and results in all three of Surface Chemistry's business areas. Operating
income fell from the 2002 level.
Our Surfactants business, in particular in the Americas, suffered from weak
demand for such products as agro-surfactants and asphalt additives, and for our
petroleum additives and oilfield business, while higher energy and raw material
prices could not be fully passed on. A cost efficiency program was initiated to
restore Surfactants' profitability. Industrial Specialties, acquired in June of
2002, contributed positively to the 2003 results.
Oleochemicals reported lower results than in the previous year, as Southeast
Asian competitors added substantial capacity while demand remained weak in the
traditional markets of Europe and North America.
Cellulosic Specialties (a combination of the former Rheology Additives and CMC
businesses) suffered from a slowdown in operations like flotation, drilling, and
pelletizing. Sales of Bermocoll (R) thickeners for water-based paint and
building applications continued on a steady growth path at above GDP rates.
Polymer Chemicals
Sales 2003: EUR 492 million; 2002: EUR 560 million
Sales and operating income were below the 2002 level due to continued weaker
than expected economic conditions that had a direct effect on the polymer
markets, and to the weak U.S. dollar and pricing pressure from both global and
regional competitors.
In the course of 2003 we embarked on an aggressive restructuring program that is
being implemented on a global basis. Three older organic peroxide plant
facilities were closed during the year, one in each of our
46
main geographic regions: Europe, the United States, and Asia. The capacity
reduction was offset by expansions in other facilities.
In March, we acquired full ownership of CIRS SpA of Italy. This acquisition
expanded our product offering to include antifouling agents and suspending
agents. These products are mainly used for PVC production but are finding use in
other polymer fields as well.
We continued our expansion activities in the fast growing Asia Pacific market,
especially China. We acquired 95.5 percent of the shares in CANP, our
crosslinking peroxide business and expanded the facility in Ningbo, China. We
also started construction of a grassroots ketone peroxide and dimethyl phthalate
plant in Tianjin, China, to serve the thermoset market in Asia through majority
owned joint venture KANP.
Promising sales gains were shown by our newly created "New Business Development"
unit, which includes high purity metal organics, safety services, and continuous
dosing technology for PVC.
Base Chemicals
Sales 2003: EUR 544 million; 2002: EUR 464 million
Despite low prices, Base Chemicals' operating income rose strongly, mainly as a
result of high volumes, ongoing cost reductions, and the acquisition of full
ownership of ECI Elektro-Chemie GmbH, Ibbenburen, Germany in the fourth quarter
of 2002.
In 2003, the workforce was reduced, and further reductions are anticipated for
the coming three years.
In November we commissioned the second capacity expansion of our Rotterdam
Chlorine plant to 470,000 tons per annum. The added capacity will enable us to
meet increased demand from our customers.
Good progress is made with the preparations for the third expansion to the
Rotterdam Chlorine plant and the relocation of the Chlorine and MCA plants from
Hengelo to Delfzijl to comply with the covenant concluded with the Dutch
authorities to stop chlorine transportation in the Netherlands. Realization of
these projects is contingent on EU approval of the financial compensation agreed
upon with the Dutch government. The earlier announced closure of the Delfzijl
Chlorine plant will be postponed and aligned with these projects.
The Delfzijl Chloromethane plant was closed as planned at the end of 2003.
The 30 percent joint venture Methanor registered excellent results, reflecting
strong demand.
Resins
Sales 2003: EUR 394 million; 2002: EUR 414 million
Operating income was down from 2002. Coating Resins' volumes were in line with
the previous year, whereas UV Resins' volumes were up. Margins for Coating
Resins, including UV, were under pressure due to the combined effects of high
raw material costs, unfavorable currency developments, and sluggish economies.
In 2003, we started up "Emergo," a series of projects to implement a profitable
growth strategy for Coating Resins, as defined in 2002. Coating Resins sold its
Unsaturated Polyester (UPE) business and announced the closure of the site in
Dunston, United Kingdom.
47
The construction of the new resins plant in Suzhou, China, to serve the growing
coatings market, is well underway.
In 2003, Printing Ink Resins continued to improve its results. Raw material
prices helped to offset weaker market demand and price pressure.
The second half of 2003 was dominated by the announced intention of Akzo Nobel
to divest Coating Resins, including UV, and to merge Printing Ink Resins into
the Pine Specialties business of Pulp & Paper Chemicals in order to improve
operational effectiveness and efficiency. This is expected to result in a firm
global position in Ink & Adhesive Resins.
During the year we continued to invest in R&D technologies and in personnel
development.
Catalysts
Sales 2003: EUR 349 million; 2002: EUR 375 million
Catalysts maintained a leadership position in refinery catalysts with innovative
products for the fuel industry. Many of the novel products introduced help our
customers meet new and future environmental regulations, particularly in the
areas of emission control and low sulfur fuels.
Operating income continued its strong showing in 2003, following the record
2002, although sales declined slightly, mainly due to currency effects. In 2003,
operating income gains came from our strengthened positions in the performance
segments of the HPC market and in the FCC additives market. In FCC catalysts we
maintain a strong and stable position supported by our improved cost base
resulting from the consolidation of our North American business.
Growth in HPC continues to be aided by new transportation fuel specifications.
In this key growth area we were able to provide catalytic solutions for
difficult challenges our customers were facing in their businesses. During the
year, an expansion of the American HPC manufacturing capacity was completed to
supply the growing North American market more effectively.
The Nippon Ketjen joint venture in Japan had an off year following the record
2002. FCC-S.A. results improved in part due to the strengthening Brazilian
economy. Our Eurecat joint venture completed an investment in Italy for catalyst
regeneration, further strengthening the Total Catalyst Management businesses.
In the course of the year 2003, the Company announced its intention to sell the
Catalysts business. On April 19, 2004, Akzo Nobel has received an offer from
Albemarle Corporation for the sale of its Catalysts business for EUR 625
million, free of cash and debt. Closing of the transaction is expected to be in
the second quarter of 2004.
We continued to invest in R&D during 2003. Innovations derived from R&D remain a
key part of the success of the Catalysts business.
48
Salt
Sales 2003: EUR 267 million; 2002: EUR 269 million
Salt registered a solid performance in 2003. Sales and operating income were in
line with 2002 and costs were kept under tight control. This performance was
characterized by continued high sales to the chemical industry throughout the
year. The business unit continues to invest in technology in order to strengthen
its position as global leader in vacuum salt and solution mining. Expansion of
the Hengelo plant (the Netherlands) to a capacity of 2.5 million tons per year
makes it the world's largest vacuum salt plant, surpassing our Delfzijl plant
(the Netherlands).
The specialty salt business strengthened its position in a competitive market.
We completed the restructuring program, consisting of the closure of the Stade,
Germany production site, relocation of production, reduction of the headcount in
the Hengelo location, and upgrading of the product portfolio. The introduction
of the premium Jozo (R) salt line symbolizes our renewed customer focus.
In its second operational year, the solar salt facility in Onslow, Western
Australia, performed in line with expectations.
Energy
Sales 2003: EUR 171 million; 2002: EUR 158 million
Operating income from our gas, electricity, and steam supply activities was
substantially better than in the previous year, despite volatile oil and gas
markets throughout 2003. Our cogeneration joint ventures operated reliably. In
Europe, politicians appreciate cogeneration as preferred technology and are
willing to support this technology long term via Council Directives, including
carbon dioxide emission trading and security of supply.
Other nonconsolidated companies
Flexsys
Weak economic conditions continued during 2003, resulting in a flat sales level
and lower results compared to the previous year for this 50 percent rubber
chemicals joint venture. The implementation of the cost savings and production
restructuring program continued. A decision was made to close down the Primary
Accelerators plant in Nitro, West Virginia, by the end of the first quarter
2004.
Delamine
Sales volumes for this 50 percent ethylene amines joint venture were higher than
in the previous year with a quite stable price level. The sales gains combined
with lower raw material costs resulted in higher earnings compared to 2002.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Raw materials essential to our business are purchased in the normal course of
business from numerous suppliers worldwide. In principal, these materials are
widely available from multiple sources. No serious shortages or delays were
encountered in 2003 and none are expected in 2004.
49
MARKETING AND DISTRIBUTION
The Company sells its products in more than 130 countries. The sales, marketing
and distribution functions are decentralized within the Company. Each business
unit has its own sales, marketing and distribution network for its products. The
organization of these functions varies from business unit to business unit.
For the geographical distribution of sales, see Item 5 "Operating and Financial
Review and Prospects".
Pharma
The Company sells its human-healthcare prescription medicines primarily through
medical representatives to wholesale drug distributors, independent and chain
pharmacies, hospitals, government entities and other institutions. The products
are dispensed to the public through prescriptions written by physicians. Similar
procedures generally apply for the animal-healthcare products, whereby
representatives of the Company visit veterinarians or farmers.
The Company deploys sales forces of representatives and supporting medical staff
to visit medical prescribers and healthcare purchasers or veterinarians to
promote the Company's (prescription) products.
However, the traditional relationship between the Company and its ultimate
customers is changing as a result of the Internet. Patients are better informed
and want to have more of a say in their treatment. The Internet is a unique tool
for establishing contacts between the Company, the prescribers of its products,
and the end users.
For Diosynth, the producer of active ingredients for the pharmaceutical
industry, 80 percent of the sales are to innovators in the United States and the
European Union.
Coatings
Coatings are sold through a range of distribution channels. The operations in
the Decorative sector are serving the Retail (Do-it-yourself), Trade
(Professionals) and Specialties markets. Due to concentration of retailers,
their purchasing power is increasing. The products of the other coatings
activities are mainly sold through a direct sales force.
Chemicals
Chemical products are sold in a wide range of industries. These products are
either marketed directly or through independent merchants, wholesalers and
distributors who resell them to smaller users. Commodity products are sold
through a direct sales force, or through distributors primarily to other
operators in the chemical industry.
INTELLECTUAL PROPERTY
The Company's intellectual property portfolio includes numerous patent
applications and patents, trademark applications and registrations, domain name
registrations and trade secrets, which all help to protect its products,
processes, goodwill, and know-how. Where appropriate, the Company seeks
intellectual property rights in relevant regional markets. The protection
provided by intellectual property rights varies from country to country
depending on their laws and the various granting, registration and enforcement
systems. In most industrialized countries, patent protection exists for
inventions in all areas of technology in which the Company is active. Patents
last for periods depending, predominantly, on the date on which the application
was filed, the payment of maintenance fees, and the legal lifetime of patents in
various countries being typically 20 years after filing, plus (if applicable)
patent term extension for pharmaceutical products. The
50
Company monitors its competitors, enforces its own intellectual property rights
whenever and wherever advisable and challenges third party intellectual property
rights and claims, whenever appropriate. Intellectual property agreements are in
force with many of the Company's employees, and there are a numerous
confidentiality agreements in force with customers and suppliers to protect the
Company's know-how.
GOVERNMENT REGULATION
Akzo Nobel's businesses are subject to the normal regulatory framework
applicable to a pharmaceutical and chemical company, notably various health,
safety and environmental rules both at national and local levels. The Company
also voluntarily conforms to international and national codes of best practice
appropriate to its business.
Besides the normal regulatory framework for chemical companies, the Company is
subject to more extensive regulations for the veterinary and human
pharmaceutical industry*. The international pharmaceutical industry is highly
regulated. National and supranational regulatory authorities administer numerous
laws and regulations regarding the testing, approval, manufacturing, importing,
labeling and marketing of drugs, and also review the safety and effectiveness of
pharmaceutical products. Further controls exist on the non-clinical and clinical
development of pharmaceutical products in particular. These regulatory
requirements are a major factor in determining whether a substance can be
developed into a marketable product and the amount of time and expense
associated with such development.
The introduction of new pharmaceutical products generally entails a lengthy
approval process. Of particular importance is the requirement in all major
countries that products be authorized or registered prior to marketing and that
such authorization or registration is maintained subsequently. The regulatory
process requires increased testing and documentation for clearance of new drugs,
and a corresponding increase in the expense of product development. To register
a pharmaceutical product, a registration file containing evidence establishing
the quality, safety and efficacy of the product must be submitted to regulatory
authorities. The registration process may take one to several years, depending
on the jurisdiction, the quality of the data submitted, the efficiency of the
registration authority's procedures and the nature of the product.
In the United States, applications for drug registration are submitted to and
reviewed by the United States Food and Drug Administration ("FDA").
Registrations of veterinary vaccines are reviewed by the US Department of
Agriculture ("USDA") in a slightly different procedure. The FDA regulates the
testing, approval, manufacturing and labeling of pharmaceutical products
intended for commercialization in the United States, as well as the monitoring
of all pharmaceutical products currently on the U.S. market. The pharmaceutical
development and registration process is typically intensive, lengthy and
rigorous. A new drug application is filed with the FDA if the data demonstrate
sufficient quality, safety and efficacy. The new drug application must contain
all the specific information that has been gathered and typically covers all
subjects tested in clinical trials. Very similar requirements apply to field
trials for veterinary drugs and to vaccine registrations with the USDA.
If the FDA or the USDA, as the case may be, approves a new drug application, the
new pharmaceutical becomes available for physicians or veterinarians to
prescribe.
* In this section, the term "pharmaceutical industry" encompasses both human and
animal healthcare, unless specifically indicated.
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Thereafter for human drugs, the drug owner must submit periodic reports to the
FDA, including any cases of adverse reactions. For some medications, the FDA
requires additional studies to evaluate long-term effects or to gather
information on the use of the product under special conditions. The FDA also
requires compliance with standards relating to laboratory, clinical and
manufacturing practices.
In the European Union ("EU"), there are two main procedures for application for
marketing authorization, namely the Centralized Procedure and the Mutual
Recognition Procedure. In the Centralized Procedure, applications are made to
the European Medicines Evaluation Agency for review a