Item 4. INFORMATION ON THE COMPANY
Akzo Nobel N.V. is a public limited liability company ("Naamloze Vennootschap")
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 its
fax number is +31 (26) 366 3250.
The company's E-mail address is ACC@akzonobel.com, and the address of its
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:
Steven J. Miller
SVP and General Counsel Akzo Nobel Inc.
Akzo Nobel Inc.
7 Livingstone Avenue
Dobbs Ferry, NY 10522-2222
+ 1 (914) 674-5181
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Copies to:
A. Jan A.J. Eijsbouts
General Counsel
Akzo Nobel N.V.
Velperweg 76
6824 BM Arnhem
The Netherlands
+ 31 (26) 366 2730
OVERVIEW
Akzo Nobel is a Global Fortune 500 company and is listed on both the Euronext
Amsterdam and NASDAQ stock exchanges. It is also included on the Dow Jones
Sustainability Indexes and the FTSE4Good Index. Based in the Netherlands, we are
a multicultural organization serving customers throughout the world with human
and animal healthcare products, coatings, and chemicals. We employ around 61,500
people and conduct our activities in four segments-human and animal health,
coatings, and chemicals-subdivided into 13 business units, with operating
subsidiaries in more than 80 countries. Consolidated revenues for 2005 totaled
EUR 13.0 billion, of which 19% was in human healthcare products, 8% in animal
healthcare products, 43% in coatings, and 30% in chemical products.
In the pharmaceutical industry, Akzo Nobel is smaller than many of its
competitors, but it has significant positions in gynecology, infertility, and
selected areas of anesthesia. Akzo Nobel believes that based on revenues 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 competitor 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.
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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 (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®, 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, substantially enlarging the product range of
Intervet, Akzo Nobel's animal health business, and leading to its establishment
as a leader in the animal health 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 stake-at present of some 20 percent-in this company, which is
gradually divesting its activities.
In 2004, the company started the restructuring of the Chemicals business by
selling the Catalysts, Phosphorus Chemicals and Coating Resins activities.
Following this, a new strategic focus for Chemicals was announced in February
2005, resulting in the streamlining of the portfolio in order to competitively
realign the business for sustainable growth, profitability, and leadership
positions in selected markets. In this new set-up, Chemicals is organized in
five growth platforms: Pulp & Paper Chemicals, Base Chemicals, Functional
Chemicals, Surfactants, and Polymer Chemicals. The realignment of the Chemicals
group also involved the planned divestment of several businesses with combined
2004 revenues of EUR 700 million. These businesses are among others Ink &
Adhesive Resins, Oleochemicals, PVC Additives, Salt Specialties, Solar Salt
Australia, and Methyl Amines/Choline Chloride. In the meantime, several of these
businesses have been divested or offers have been received. The company expects
to complete all remaining divestments resulting from the strategic realignment
of its Chemicals portfolio during 2006. Recently, it was decided to withdraw
Salt Specialties from its list of Chemicals businesses to be divested, as it
became clear that a satisfactory deal based on the company's original divestment
offer would not be forthcoming. Flexsys, the 50/50-joint venture with Solutia,
is also expected to be sold during 2006.
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.
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For a list of the company's subsidiaries see Exhibit 8 to this Report, which is
incorporated by reference herein.
B. BUSINESS OVERVIEW
Operations are organized in segments on the basis of affinity between
activities: Human Pharmaceuticals (Organon) and Animal Health
(Intervet)-together also referred to as Pharma-Coatings and Chemicals. Within
the Coatings and Chemicals segment, the activities are carried out in business
units.
The Board of Management is the highest executive authority and is entrusted with
the management of the company, which means, among other things, that it defines
the strategic direction, establishes the policies, and manages the company's
day-to-day operations. The members of the Board of Management collectively
manage the company and are responsible for its performance. They are jointly and
individually accountable for all decisions made by the Board of Management. 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, multicultural, and truly global company with
activities in Pharma, Coatings, and Chemicals. We aim to create above-average
economic value over the business cycle. We strive to attract talented, ambitious
people who are proud to work for our company. We seek to be respected in the
societies in which we operate.
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 restructure our
activities to meet our goals and divest activities where we cannot meet the
criteria.
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 management practices.
Our deeply ingrained Business Principles are the expression of a strong, shared
international culture. They guide us in the complex, ever-changing global
environment in which we operate and are enforced through training and letters of
representation. Their enforcement is monitored by our Compliance Committee.
After a comprehensive review of all the options for Akzo Nobel's businesses
going forward, we have concluded that the most appropriate solution for all
parts of the business is to separate Organon and Intervet from our Coatings and
Chemicals activities. After evaluating available options management is jointly
convinced that a sale of a minority stake, by way of an offer of its shares, of
Organon/Intervet best enhances shareholder value. Depending on the condition of
the market and the performance of our business, full separation of
Organon/Intervet is expected to be completed within 2 to 3 years after the sale
of the aforementioned minority stake.
Pharma
In recent years, our Organon human healthcare business has experienced a phase
of declining revenues. As a consequence, we have adjusted the strategy and the
organization and have lowered the cost base.
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We believe that in 2005, we saw the expected turning point. We believe the
decline in revenues has bottomed-out and looking ahead we expect further
top-line growth. To further strengthen the growth potential we have continued to
invest heavily in R&D and pre-marketing to boost our pipeline. This temporary
acceptance of a relatively low operational profit margin is in line with our
medium-term value creation philosophy.
We actively pursue alliances with third parties for the development of new
products, especially in the biotechnology sector. In addition, we expect that we
will out-license various projects in order to obtain financial benefits from
products and technologies that we have discovered in our research activities but
that are not part of our core Pharma businesses.
Intervet, our animal health business, is the world's third-largest animal health
company as measured by 2005 revenues. We aim to build upon our broad-based
market leadership in animal health through our commitment to R&D and, where
appropriate, through licensing deals and add-on acquisitions.
In 2002, we launched our Nobilon business to develop, license, and manufacture
human vaccines. Nobilon became operational in mid-2003. In our vaccine
activities we combine the expertise and know-how of Organon and Intervet, using
all their technical, regulatory, and product development capabilities.
Pharma's medium-term financial targets are an EBIT margin of around 17.5% and
ROI of 35%. For the long-term, we strive for an EBIT-margin of over 20% and ROI
of 40%.
Coatings
Our Coatings business is world leader in terms of revenues. 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, Eastern and Central
Europe, and South and Central America through autonomous development and
acquisitions. We will also continue to enhance our presence in the mature
markets through selected acquisitions.
Our ambition is to remain the biggest coatings company in the world and also a
leader in all our product markets and key geographic regions. We intend to
participate in the consolidation of the coatings industry, which we believe is
inevitable, as our supplier and customer bases strengthen globally.
Our global scale allows us to further develop our leading positions in
technology. We are progressively increasing our investments in R&D towards 3.5%
of revenues. Our increasing innovation efforts will allow better differentiation
of our activities in the highly competitive markets in which we operate. We are
also using our scale in purchasing of raw materials to secure our margins.
Our medium-term financial target is 25% ROI.
Chemicals
We have streamlined our Chemicals portfolio and are concentrating on growing
profitable businesses which we have identified within selected strategic
markets. This has resulted in our exiting non-core businesses and rationalizing
support structures around the selected core platforms.
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The leading guideline is to focus on profitable growth in those market segments
where we have a competitive advantage and can achieve sustainable, above-average
financial returns.
We have now organized our activities in five growth platforms: Pulp & Paper
Chemicals, Base Chemicals, Functional Chemicals, Surfactants, and Polymer
Chemicals. We have made significant progress in 2005 with the divestment of the
remaining non-core activities and the balance will be completed in the first
half of 2006.
Our ambition is to strengthen our leading position in selected markets by
investing in organic growth and through participating in industry consolidation.
Our financial target is to achieve ROI of around 17.5% over the cycle.
Financing Objectives
To ensure the sustained growth of our businesses, and to be able to finance
expansion, we want to maintain a solid balance sheet. We aim for a well-spread
maturity schedule of our long-term debt and a strong liquidity position.
We will defend our single A credit ratings.
ACTIVITIES OF AKZO NOBEL
Industry Segment Information
Akzo Nobel's financial reporting and industry segment information consists of
results from the following segments: Organon, Intervet, Coatings, and Chemicals.
The information presented below illustrates the relative importance of the
individual segments.
Revenues Operating income
Millions of euros 2005 2004 2005 2004
Organon 2,425 2,344 415 275
Intervet 1,094 1,027 238 184
Coatings 5,555 5,237 384 406
Chemicals 3,890 4,317 312 869
Miscellaneous products, intragroup
deliveries, non-allocated items and 36 (92 ) 137 (207 )
eliminations
Total 13,000 12,833 1,486 1,527
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Property, plant and equipment
Identifiable assets Expenditures Depreciation
Millions of 2005 2004 2005 2004 2005 2004
euros
Organon 2,262 2,075 95 103 118 113
Intervet 1,082 968 54 54 40 38
Coatings 3,328 3,094 112 122 126 119
Chemicals 2,946 2,773 252 269 233 260
Miscellaneous
products,
nonallocated
items and
eliminations,
including
cash and cash
equivalents 2,506 2,723 1 3 11 10
12,124 11,633 514 551 528 540
Nonconsolidated
companies 301 318
Total 12,425 11,951 514 551 528 540
Percent of total revenues and total operating income
Revenues Operating income
2005 2004 2005 2004
Organon 19 18 28 18
Intervet 8 8 16 12
Coatings 43 41 26 27
Chemicals 30 34 21 57
Miscellaneous products and - (1 ) 9 (14 )
nonallocated items
Total 100 100 100 100
A summary of the activities of each segment is given below. 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
Within the Pharma segment, the business is carried out in business units. The
business units and their products (as at December 31, 2005) are summarized
below:
PHARMA
Organon
· Brand-name prescription pharmaceuticals in the fields gynecology, including
both contraceptives and hormone therapy, fertility, neuroscience ("CNS"), and
anesthesia, as well as complex active pharmaceutical ingredients based on
chemical and biochemical processes.
Intervet
· Veterinary vaccines and animal pharmaceuticals.
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Akzo Nobel's healthcare activities extend around the world. It engages in
research, development, manufacturing, and marketing in selected areas of human
pharmaceuticals and animal health. These include prescription medicines,
veterinary products, as well as complex active pharmaceutical ingredients.
Major Product Key Products/Applications Competitive Position*
Lines
Prescription · Contraceptives, infertility · Among top four suppliers of
drugs,
complex active treatments, hormone therapy hormonal contraceptives, second
pharmaceutical ("HT") and osteoporosis, CNS largest in infertility products; among
ingredients, products (antidepressants, top five players in HT; investing for
and animal
products antipsychotics), and muscle growth in CNS; world leader in
relaxants neuromuscular relaxants
Complex active pharmaceutical Leading supplier of steroids and
ingredients synthetic peptides, strong in
heparins and insulin recombinant
proteins
· Animal vaccines and · World's third-largest supplier of
pharmaceuticals animal health products, leading
producer of animal health vaccines
* See the cautionary statements and the remarks on how the company determined
its competitive positions under Introduction on pages 3 and 4.
In recent years, our Organon human healthcare business has experienced a phase
of declining revenues. As a consequence, we have adjusted the strategy and the
organization and have lowered the cost base.
We believe that in 2005, we saw the expected turning point. We believe the
decline in revenues has bottomed-out and looking ahead we expect further
top-line growth. To further strengthen the growth potential we have continued to
invest heavily in R&D and pre-marketing to boost our pipeline. This temporary
acceptance of a relatively low operational profit margin is in line with our
medium-term value creation philosophy.
Akzo Nobel's human healthcare business, Organon, has an international reputation
based on quality products and innovative R&D. Through unprecedented commitment
to women's health over many years, Organon has contributed significantly to
three clinical areas of great importance in gynecology: contraception, fertility
and hormone therapy. In addition, significant product candidates in the areas of
psychiatric disorders and anesthesiology have been produced.
Organon is among a few international companies conducting research into
contraception. Sold as Desogen® in the United States, Marvelon® 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®, our contraceptive vaginal ring, has now been introduced in
more than 25 countries and is steadily increasing sales in many markets.
Puregon®/Follistim®, the biotech fertility product of Organon, has become one of
our biggest selling products. Performance was particularly boosted by strong
U.S. sales resulting from a successful launch of the Follistim Pen® and relevant
product line extensions. In 2005, Puregon®/Follistim® was also introduced in
Japan and China.
Organon's main pipeline drug in the CNS area is asenapine, developed in-house
and currently in phase III development in collaboration with Pfizer. Asenapine
is a novel psychopharmacologic agent that is currently
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being developed for the treatment of schizophrenia and acute mania in bipolar
disorder. The unique profile of asenapine may help patients through control of
positive and negative symptoms with a tolerability and safety profile that we
believe to be superior to other products on the market. The phase III clinical
development program for asenapine is expected to be finalized by the end of
2006. See "Risk Factors" for risks associated with the regulatory approval of
pharmaceuticals under development.
Organon focused strongly on collaborations during 2005, with new alliances being
established and some promising partnerships being prolonged.
Organon is also a leading manufacturer of complex active pharmaceutical
ingredients, with production facilities in several countries. Organon provides
market-driven and technology-based manufacturing of chemical and biochemical
APIs as well as biotechnological compounds. Our expertise lies in complex
organic chemistry and extractions for API manufacturing as well as in cell
culture, fermentation, and chromatographic purification for biotechnology. We
use these technologies to manufacture steroids, synthetic peptides, opiate
analogues, carbohydrates, heparins, and human gonadotrophins in API
manufacturing and insulin recombinant proteins as well as proprietary innovative
products in biotechnology manufacturing. This expertise provides us with an
improved foundation for integral product and process development regarding
biotechnology. This focus on biotechnology also led to our entering into various
R&D agreements with third parties during 2005.
Intervet, our animal health business, develops, manufactures, and markets a
variety of innovative high-quality products intended for use in animals.
Intervet's diverse portfolio of marketed products covers species in livestock,
such as poultry, cattle, sheep, pigs, and fish, and companion animals, such as
cats, dogs, and horses, and includes both vaccines and animal pharmaceuticals
(mainly anti-parasitic, anti-infective, and specialty pharmaceuticals such as
endocrine fertility products and injectors for treating mastitis and metritis).
Intervet has an international reputation and works closely with leading research
institutes, universities, and other companies.
During 2005, large parts of the feed additive business were divested. These
activities no longer fitted into the core business operations and had become
distanced from Intervet's strategic focus.
In 2002, we launched the Nobilon business, to develop, license, and manufacture
human vaccines, with particular emphasis on influenza. Nobilon became
operational in mid-2003. We believe, this is a growing market where we can
benefit from our experience in vaccines and biotechnology in general. The
expertise and know-how of Organon and Intervet are combined in this area,
utilizing their technical, regulatory, and product development capabilities. In
addition to vaccines, we also intend to continue to pursue productive areas of
cooperation in the research and development function, shared compound libraries,
and formulation and process development.
The products in our drug development pipeline will change over time as new
compounds progress from research to 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.
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The following table shows our late-stage product candidates:
Project and Description - main indications Clinical Development Phase
compound
Gynecology
Approvable in the United States
Implanon® Progestogen implant (approved outside the United
States)
Org 50081 Serotonin -2-Blocker (hot III
flashes)
NOMAC/E2 Oral contraceptive in-licensed III
from
Théramex (Merck KGaA)
Fertility
Org 36286 Sustained Follicle Stimulant III *
Neuroscience
asenapine dopamine/serotonin antagonist III
Org 50081 Serotonin-2-Blocker (insomnia) II (scheduled to move to Phase
III in 2006)
Anesthesia
sugammadex Selective muscle relaxant III
binding agent
Veterinary Numerous new products (vaccines and pharmaceuticals) in various
products stages of development
Explanatory remarks
Phase II Determination of initial evaluation of efficacy and identification
of possible adverse effects, conducted in a small number of
patients.
Phase III Large comparative study (compound versus placebo and/or established
treatment) in patients to further evaluate dosage, efficacy, and
safety.
Filed Marketing authorization application (Europe) or new drug application
(United States) filed with relevant regulatory authorities.
Approvable The FDA in principle has a positive opinion on the product but has
some additional questions, which may or may not require additional
clinical studies. Also the labeling might still be under discussion.
* Phase II clinical trials completed. Planning and implementation of
Phase III commenced. Approval by the FDA for the commencement of
Phase III clinical trials on patients is expected during the second
half of 2006.
Description of Coatings' Business
Within the Coatings segment, the business is carried out in business units. The
business units and their products (as at December 31, 2005) are summarized
below:
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).
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Powder Coatings
· Powder coatings for industrial application in architectural, automotive,
domestic appliance, and other industrial markets such as coatings for pipes.
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.
Car Refinishes
· Finishes for passenger cars, commercial transportation, and automotive plastic
components.
Akzo Nobel is a leading producer of paints, finishes, stains, and synthetic
resins for industrial applications, professional painters, and of products for
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 Key Products/Applications Competitive Position*
Product
Lines
Coatings · Coatings for decoration and · Market leader in Europe
and
related
products protection of architectural structures
· Powder coatings, coatings for wood, · World leader in selected markets
metal, coil and plastics, and non-
stick coatings
· 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
· Finishes for passenger cars, · Among top three global suppliers
commercial transportation and
automotive plastic components
* 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.
The company supports the international initiative of Coatings Care®-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® (United Kingdom) and Flexa® (the
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Netherlands)), multinational markets (e.g. Nordsjö® and Trimetal®), and truly
international markets (e.g. Sikkens®, Levis®, and Sadolin®). 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®, 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 the company to continually develop new
technologies and products of the highest quality. 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® 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 and thereby saving fuel
costs for owners. The company also provides paints for ships' superstructures,
such as Interfine®, 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.
Description of Chemicals' Business
Within the Chemicals segment, the business is carried out in business units. The
business units and their products (as at December 31, 2005) are summarized
below:
CHEMICALS
Pulp and Paper Chemicals
· Pulp bleaching chemicals and chemicals for the manufacture of paper and
board, specialty resins for adhesives and polymer manufacturing, and high
performance separation products for pharmaceuticals.
Base Chemicals
· Chlorine and caustic soda for industrial applications, high quality salt for
electrolysis and other chemical industries, and supply of energy
(cogeneration) and other utilities.
Functional Chemicals
· Chelates, micronutrients, flame retardants, animal feed additives, PVC
additives, and intermediates such as carbon disulfide, monochloroacetic acid,
methyl amines, and ethylene amines.
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Surfactants
· Surfactants and fatty acids used in detergents, cleaning, and personal care,
as well as in asphalt production and the agriculture, oil, mining, and textile
industries; cellulosic specialties such as thickeners and additives for
coatings, building materials, pharmaceutical products, food, mining and oil.
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.
Divestment unit
· Following the portfolio realignment of Chemicals, the company intends to
divest several businesses that do not fit the new strategy. These activities
became part of the divestment unit. Included in this unit are Ink & Adhesive
Resins, Oleochemicals, PVC Additives, Salt Specialties, Solar Salt Australia,
and Methyl Amines/Choline Chloride.
The portfolio of Akzo Nobel Chemicals is a mix of specialty, functional, and
commodity chemicals based upon leading positions in selected areas of the
chemical industry.
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Major Product Lines Key Products/Applications Competitive Position*
Specification, · Pulp bleaching chemicals and · World leader in pulp bleaching
functional, and chemicals for the manufacture of chemicals and strong worldwide
specialty chemicals paper and board, specialty resins for position in paper chemicals
printing ink, adhesives and polymer
manufacturing, and high
performance separation products for
pharmaceuticals
· Chlorine and caustic soda for · Leading positions in Northwest
industrial applications Europe
· Salt for electrolysis, other chemical · Leading position in Northwest
industries, food applications, and Europe and global leader in
consumer use vacuum salt
· Functional chemicals such as · Leading or strong worldwide
chelates, micronutrients, animal feed positions
additives, PVC additives, and
intermediates such as carbon
disulfide, monochloroacetic acid,
methyl amines, and ethylene amines
· Surfactants and fatty acids used in · Leading or strong worldwide
detergents, cleaning, and personal positions
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, and
expandable microspheres
· Polymerization catalysts such as · Leading or strong worldwide
organic peroxides, metal alkyls, and positions
custom manufactured Ziegler-Natta
systems for the polymer-producing
industry; high-purity metal organics
for the electronic industry, and
intermediates for pharmaceutical
products
* See the cautionary statements and the remarks on how the company determined
its competitive positions under Introduction on pages 3 and 4.
In 2005, Akzo Nobel Chemicals made good progress, as it successfully implemented
a strategy to streamline its portfolio in order to competitively realign the
business for sustainable growth, profitability, and leadership positions in
selected markets. The result is a smaller portfolio that is stronger, creates
more value, and is better structured to meet our financial expectations. The
Chemicals activities are now concentrated in five business units: Pulp & Paper
Chemicals, Polymer Chemicals, Surfactants, Functional Chemicals, and Base
Chemicals (the latter will comprise the Chlor-Alkali, Electrolysis Salt, and
Energy businesses).
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30
The realignment of the Chemicals group also involved the planned divestment of a
number of businesses with combined 2004 revenues of EUR 700 million. These
businesses are among others Ink & Adhesive Resins, Oleochemicals, PVC Additives,
Salt Specialties, Solar Salt Australia, and Methyl Amines/Choline Chloride. In
the meantime, several of these businesses have been divested or offers have been
received. The company expects to complete all remaining divestments resulting
from the strategic realignment of its Chemicals portfolio during 2006. Recently,
it was decided to withdraw Salt Specialties from its list of Chemicals
businesses to be divested, as it became clear that a satisfactory deal based on
the company's original divestment offer would not be forthcoming. Flexsys, the
50/50-joint venture with Solutia, is also expected to be sold during 2006.
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.
In Northwest Europe, the company has leading positions in the production of
chlorine and caustic soda for industrial applications.
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®. Both the production and electrolysis of salt 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 generation
(cogeneration, an energy efficient process during which both steam and
electricity are generated at the same plant). The company has been active in
cogeneration since the 1930s.
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 animal 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.
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.
In addition, the company has established a strong presence, both globally and
regionally, through joint ventures. Joint ventures include Flexsys, Delamine,
and Eka Polymer Latex.
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31
GEOGRAPHIC DATA
Below, geographic information for Akzo Nobel is presented for revenues,
operating income, identifiable assets, and expenditures for property, plant and
equipment.
Revenues Revenues Operating income
by region of destination by region of origin
Millions of 2005 2004 2005 2004 2005 2004
euros
The 862 844 2,459 2,748 474 446
Netherlands
Germany 1,238 1,165 1,152 1,050 144 159
Sweden 516 509 1,237 1,155 137 33
United 809 833 754 848 (59 ) (57 )
Kingdom
Other
European 4,075 4,122 3,069 2,921 527 532
countries
USA and 2,400 2,445 2,116 2,221 (67 ) 60
Canada
Latin 830 729 626 493 85 133
America
Asia 1,590 1,536 1,231 1,087 192 175
Other 680 650 356 310 53 46
regions
Total 13,000 12,833 13,000 12,833 1,486 1,527
Expenditures for
property,
Identifiable assets plant and
equipment
Millions of euros 2005 2004 2005 2004
The Netherlands 3,061 2,959 179 189
Germany 750 828 25 23
Sweden 863 847 65 60
United Kingdom 690 582 31 29
Other European countries 2,112 2,163 81 81
USA and Canada 1,959 1,794 51 52
Latin America 619 454 42 61
Asia 1,017 834 32 47
Other regions 329 295 8 9
11,400 10,756 514 551
Eliminations and cash and cash 724 877
equivalents
Nonconsolidated companies 301 318
Total 12,425 11,951 514 551
See Item 5 "Operating and Financial Review and Prospects" for a discussion on
factors affecting comparability between periods.
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
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32
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 2005 in general, the exposure
retained in the captive insurance arrangements is limited to EUR 12 million per
occurrence with an annual aggregate of EUR 30 million. When losses exceed this
annual aggregate, external insurers will provide coverage from a deductible
level of EUR 0.5 million. Damages from acts of terrorism are excluded from
insurance coverage. For damages from natural disasters Akzo Nobel retains 5
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 (including Diosynth), in 2005 the exposure retained
in the captive insurance arrangements is limited to EUR 10 million per claim
with an annual aggregate of EUR 20 million. When losses exceed this annual
aggregate, external insurers will provide coverage from a deductible level of
EUR 0.5 million. For product liability of Organon (including Diosynth), in 2005
the exposure retained in the captive insurance arrangements is limited to EUR 25
million (EUR 40 million for HRT-products) per claim without any annual
aggregate. 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 450 million plus in excess thereof USD 150
million.
HUMAN RESOURCES
Akzo Nobel's decentralized 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.
In 2005, Akzo Nobel began to establish consistent company-wide human resources
programs with the objective of bringing best-in-class solutions to all
businesses and to foster high quality management of our human resources. We
believe that this is a significant step towards a stronger talent focus
throughout the company and that it will create synergies between all businesses
by providing a common agenda, processes, and tools for all employees and
managers.
A common performance appraisal program, the Performance & Development Dialog
(P&D Dialog), was launched in January 2005. In the first year alone, more than
80% of all employees took part in this process, with the remainder due to
participate from 2006 onwards. We believe that the success of each of Akzo
Nobel's businesses depends on the quality of our people-their continued growth
and development. We therefore need strong people management and strong human
resources programs in all our businesses.
We need to continue to drive for a high performance culture, which is in
alignment with our Business Principles. The P&D Dialog embraces all these
elements and gives all of our global businesses a common process and vocabulary
for setting and appraising performance objectives. It also enables and supports
an ongoing dialog and feedback discussion between employee and manager in all
phases of the annual process, from objective setting through to mid-year review,
year-end assessment, rating, and feedback discussions.
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33
In order to compete in the marketplace both now and in the future, we believe
that there are key qualities and critical capabilities that will help us to
remain a successful company. The P&D Dialog, therefore, also enables performance
differentiation based on globally consistent competencies:
- ongoing customer focus;
- clear commitment to quality;
- relentless focus on results;
- drive for innovation;
- teamwork at all levels; and
- unwavering commitment to our values.
We also stress the importance of high quality people management by clearly
expressing the need for managers to emphasize important factors such as the
continuous management of performance, an ongoing focus on developing others, and
the stimulation of an open climate in all teams. As part of the P&D Dialog, the
year-end assessment also includes an assessment and dialog on these competencies
and capabilities. They will also form part of short and long-term development
discussions, which will be introduced as part of a planned extension of the P&D
Dialog in 2006.
The development of the future leadership of Akzo Nobel is a key responsibility
of the company's current leadership. In order to complement the existing
leadership talent focus and to facilitate a more structured and global approach,
we established a company-wide program in 2005 for the identification and review
of leadership talent.
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 2005, R&D expenditures amounted to EUR 834 million, up 2 percent on
2004. The main driver continued to be Organon, which accounted for 52 percent of
Akzo Nobel's total R&D expenditures. Total R&D staff decreased from 6,700 at
year-end 2004, to 6,600 at year-end 2005. Organon's R&D expenses were 18 percent
of revenues, reflecting its continuous commitment to research and development.
R&D expenditures as incurred by each of the groups are as follows:
Millions of euros percent of revenues
2005 2004 2005 2004
Organon 433 395 18 17
Intervet 113 118 10 12
Coatings 176 169 3 3
Chemicals 102 125 3 3
Organon
In 2004, Organon radically changed its R&D policy and structure. The
organizational structure now covers the entire R&D process from the early
exploratory stage up to demonstration of Proof of Concept. This new policy
focuses even more on the elaboration of new creative ideas, but always against
the backdrop of sufficient output generation. Over time, we hope this approach
will contribute to the development of innovative drug candidates.
In terms of Research & Development, Organon spent about 18% of its 2005 revenues
on R&D, focusing mainly on promising compounds within phases II and III. This
trend is expected to continue.
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34
Organon's main pipeline drug in the CNS area is asenapine, developed in-house
and currently in phase III development in collaboration with Pfizer. Asenapine
is a novel psychopharmacologic agent that is currently being developed for the
treatment of schizophrenia and acute mania in bipolar disorder. The unique
profile of asenapine may help patients through control of positive and negative
symptoms with a tolerability and safety profile that we believe to be superior
to other products on the market. The phase III clinical development program for
asenapine is expected to be finalized by the end of 2006. See "Risk Factors" for
risks associated with the regulatory approval of pharmaceuticals under
development.
Sugammadex is another promising compound currently in phase III.
For Livial® in the United States, additional data was submitted to the FDA in
December. In June 2006, however, the FDA determined that the NDA submitted for
this product was "not approvable".
We also received an action letter from the FDA in June 2005 for our
contraceptive implant Implanon® (etonogestrel) which maintained the "approvable"
status of this New Drug Application (NDA). and requested additional information;
in January 2006, we submitted additional information to the FDA in response to
its request. We hope to be in a position to launch Implanon® in the United
States in the second half of 2006. See "Risk Factors" for risks associated with
the regulatory approval of pharmaceuticals under development.
In order to expand our biotechnology capabilities into new therapeutic areas, we
established a new biotechnology research facility in Cambridge, Massachusetts,
in June 2005, which focuses on monoclonal antibody research in immunology and
certain areas of oncology. Together with our operations in Oss, the Netherlands,
this facility is expected to be central to the expansion of our research into
New Biological Entities ("NBEs").
Our focus on biotechnology also led to R&D agreements with various third parties
during 2005. A collaborative agreement was signed with Lexicon Genetics, with
the intention to jointly discover, develop, and commercialize novel
biotherapeutics. Agreements were also signed in the United States with Cypress
to codevelop and commercialize a novel pharmacological treatment for Obstructive
Sleep Apnea.
A development and marketing agreement was also signed with Théramex SA in France
(a subsidiary of Merck KGaA) to in-license their contraceptive NOMAC/E2 and to
commence Phase III trials and co-market the final developed oral contraceptive.
Furthermore, Organon entered into several other partnerships, most recently with
French-based Sanofi-Aventis for the sale and distribution of the postoperative
nausea and vomiting treatment Anzemet® (a trademark of Merrell Pharmaceuticals
Inc.) in the United States.
Intervet
Intervet will continue to focus on major food and companion animal markets, and
we hope to see positive trends beyond 2005, when the introduction of new
products resulting from our extensive research and development programs should
enhance our existing portfolio. The acquisition of AgVax Developments Ltd
enables Intervet to benefit from AgVax's close collaboration with its former
parent company, AgResearch, New Zealand's largest Crown Research Institute.
Nobilon
In 2002, Akzo Nobel launched its Nobilon business to develop, license and
manufacture human vaccines on a global scale, with particular emphasis on
influenza. Nobilon is working on the development of vaccines used for annual
revaccination of humans against influenza, and on vaccines that will be used to
control the impact of a human influenza pandemic. Working from a dedicated,
fully licensed facility in the Netherlands,
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35
Nobilon produces antigens for our business and uses cell culture technology in
the research and development of its vaccines. The advantages of cell culture
technology include not having to use eggs, which may become scarce during an
influenza outbreak. Tissue culture processes also allow for better technical
control during production compared with traditional methods using eggs.
We are also working on a vaccine for use in the event of an avian influenza
pandemic. Licensing of this product depends on developments in the field and on
the emergency procedures that would be issued by the regulatory bodies should
the threat of a pandemic necessitate such procedures.
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; and
- 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. Examples of
achievements during 2005 are:
- Decorative Coatings introduced Alpha® Tacto®, the world's first decorative
paint product with the ability to reproduce the look and feel of suede,
leather or woven fabric, depending on how it is applied to the wall. Other
recent coatings innovations include Crown® Easyclean-a washable matt paint-and
the 'Color Wall' an innovative concept for a store color display allowing
customers to take large sample sheets home with them to help make decisions
about color schemes.
- Marine & Protective Coatings' level of R&D spending was at a record level.
- R&D within Car Refinishes continues to focus on the overhaul and maintenance
of major product lines in line with European legislation being introduced in
2007. This legislation will enforce the use of waterborne systems and ban
solvent-borne systems. Preparations for this switch started a number of years
ago and we are on track with the delivery of compliant products.
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 place in all major markets.
To ensure access to developments in the scientific world and to be able to
explore and exploit the latest technologies, business units also collaborate on
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;
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36
- 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; and
- shortening time to market and/or time to production by high throughput
experimentation.
With the aim to start up and significantly grow (new) businesses, an integrated
team of business and R&D professionals-called The Innovations Unit-exploits
ideas, internal competencies, and portfolio synergies. This approach has already
led to promising results. R&D successes were particularly achieved in the area
of process yield improvements at several production units of Polymer Chemicals,
promising new developments in the areas of product quality and costs, both for
vacuum and solar salt operations, improvement of energy efficiency in Akzo
Nobel's processes, and improvement in the efficiency of energy production by our
joint ventures through combined heat and power generation.
CORPORATE SOCIAL RESPONSIBILITY
Corporate Social Responsibility ("CSR") is a fundamental component of our
business strategy and key to the long-term success of Akzo Nobel. We are
convinced that sustained growth requires simultaneous success in developing our
employees, caring for the environment, and contributing to the societies in
which we operate. We want to be known as a responsible company and to be open
and accountable to our stakeholders.
Legitimate concerns in society have led to greater transparency, as well as to a
fostering of better relations with all stakeholders. For Akzo Nobel, the key
challenge has been to continue the process of anchoring CSR systematically in
organizational structures and processes. All the company's businesses are
expected to monitor progress and set ambitious CSR targets during the strategic
planning processes.
In 2005, for the first time, Akzo Nobel was included on the Dow Jones
Sustainability Indexes, a series of global sustainability benchmarks first
launched in September 1999. This followed our decision to use the SAM
(Sustainable Asset Management) Group's review process to measure our CSR
performance. This will enable us to target key areas for improvement with
respect to the economic, environmental, and social aspects of our operations,
and to benchmark our performance against our peers.
Other milestones during 2005 included the launch of our first CSR Report-the
second was published in April 2006 - prior to the Annual General Meeting of
Shareholders. We embraced Responsible Care® (a trademark of the European
Chemical Industry Council) and Coatings Care® further by formally implementing
the Responsible Care® Global Charter. We also introduced a Privacy Code of
Conduct aimed at protecting all privacy data relating to employees, suppliers,
customers and others, and provided financial and physical support to communities
affected by natural disasters in Southeast Asia, Romania, India, and the United
States. We also focused on improving our product stewardship lifecycle efforts
in all our operations, and on maintaining a good safety record.
In the first quarter of 2006, Akzo Nobel's strong commitment to CSR has received
further recognition with an inclusion on the FTSE Group's prestigious FTSE4Good
Index. The European equivalent of the Dow Jones Sustainability Indexes in the
United States (on which Akzo Nobel was included last year), the FTSE4Good
indexes-which are used extensively by investors worldwide-measure the
performance of companies that meet globally recognized CSR standards.
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37
Community Program
In June 2005, the Akzo Nobel Community Program was launched. This is a unique,
worldwide initiative designed to encourage employees to become actively involved
in the local communities in which they live and work. The program makes funding
available to people at all our sites, giving them the opportunity to become
engaged in worthwhile projects in their own communities. It was launched in
tandem with a partnership between Akzo Nobel and the Red Cross which will focus
on projects in China and Indonesia and will also give employees the chance to
get involved.
We regard the Akzo Nobel Community Program as a clear expression of the
company's commitment to being socially responsible, a core value which is
embedded in our Company Statement. The Board of Management will therefore
annually review the funding based on the success of the Community Program and
our company's financial performance.
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.
ORGANON - Prescription Drugs
Business Review
Revenues 2005: EUR 2,425 million; 2004: EUR 2,344 million
Organon's revenues in 2005 (EUR 2,425 million, up 3%) started growing again
following several years of declining revenues since Remeron® lost its exclusive
rights in the United States. The lack of new product introductions in the main
markets has also had an impact in recent years. But the strong performances of
Puregon® and NuvaRing® were instrumental in contributing to this return to
growth in 2005.
Organon's main products developed as follows:
Millions of euros 2005 Total Autonomous
revenues change % growth %1
Contraceptives 564 8 7
- of which NuvaRing® 127 57 58
Puregon® /Follistim® 355 20 24
Remeron® 283 (22 ) (22 )
Livial® 154 (4 ) (6 )
Pharmaceutical ingredients 228 8 8
1 Autonomous sales growth is defined as the change in revenues attributable to
changed volumes and selling prices. In this case it only excludes the change
in revenues attributable to currency translation effects. Acquisitions and
divestments were not applicable. Reference is made to the remarks under
Introduction on page 4.
Operating income showed a strong growth compared with the previous year (EUR 415
million, up 51%) despite rising R&D expenses, the settlement of the final
lawsuit for Remeron® in the United States, and an impairment charge of EUR 67
million in the pharmaceutical ingredients unit. Organon received significant
cash amounts from Johnson & Johnson for terminating the copromotion contract for
Risperdal® and from Duramed/Barr for the patent litigation settlement involving
our oral contraceptive Mircette®.
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For Organon, the process of integrating Diosynth into its business operations
was one of its main focuses for 2005. This strategic amalgamation mainly
involved activities based in the Netherlands, and all necessary procedures were
recently completed. The key ongoing aim is to improve control of our logistic
processes and create a platform for further development of biotechnology within
the company.
The first positive results from the alignment of processes are beginning to
filter through. Improvements in our supply chain management enabled us to reduce
working capital and improve the reliability of deliveries. We also identified
overcapacity in certain manufacturing resources. The biotechnology platform
which has been created helps us to focus more on research, especially in the
fields of immunology and specific areas of oncology. Here, Organon is actively
looking to team up with third parties where appropriate. In fact, Organon
focused strongly on collaborations during 2005, with new alliances being
established and some promising partnerships being prolonged. One long-lasting
copromotion agreement was ended (the Risperdal® copromotion with Johnson &
Johnson), although the royalties arrangement remained intact.
One of the main reasons for integrating Organon and Diosynth was to improve our
foundation for integral product and process development regarding biotechnology.
In order to expand our biotechnology capabilities into new therapeutic areas we
established a new biotechnology research facility in Cambridge, Massachusetts,
in June 2005, which focuses on monoclonal antibody research in immunology and
certain areas of oncology. Together with our operations in Oss, the Netherlands,
this facility is expected to be central to the expansion of our research into
New Biological Entities ("NBEs").
Our dedicated focus on biotechnology also led to R&D agreements with various
third parties during 2005. A collaborative agreement was signed with Lexicon,
with the intention to jointly discover, develop, and commercialize novel
biotherapeutics. Agreements were signed in the United States with Cypress to
codevelop and commercialize a novel pharmacological treatment for Obstructive
Sleep Apnea.
A development and marketing agreement was also signed with Théramex SA in France
(a subsidiary of Merck KGaA) to in-license their contraceptive NOMAC/E2 and to
commence Phase III trials and co-market the final developed oral contraceptive.
Furthermore, Organon entered into several other partnerships, most recently with
French-based Sanofi-Aventis for the sale and distribution of the postoperative
nausea and vomiting treatment for Anzemet® (a trademark of Merrell
Pharmaceuticals Inc.) in the United States.
In terms of Research & Development, Organon spent more than 18% of its 2005
revenues on R&D, focusing mainly on promising compounds within phases II and
III. This trend is expected to continue.
Organon's main pipeline drug in the CNS area is asenapine, developed in-house
and currently in phase III development in collaboration with Pfizer. Asenapine
is a novel psychopharmacologic agent that is currently being developed for the
treatment of schizophrenia and acute mania in bipolar disorder. The unique
profile of asenapine may help patients through control of positive and negative
symptoms with a tolerability and safety profile that we believe to be superior
to other products on the market. The phase III clinical development program for
asenapine is expected to be finalized by the end of 2006. See "Risk Factors" for
risks associated with the regulatory approval of pharmaceuticals under
development.
Sugammadex is another promising compound currently in phase III.
For Livial® in the United States, additional data was submitted to the FDA in
December. In June 2006, however, the FDA determined that the NDA submitted for
this product was "not approvable".
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39
We also received an action letter from the FDA in June 2005 for our
contraceptive implant Implanon® (etonogestrel) which maintained the "approvable"
status of this New Drug Application (NDA) and requested additional information;
in January 2006, we submitted additional information to the FDA in response to
its request. We hope to be in a position to launch Implanon® in the United
States in the second half of 2006. See "Risk Factors" for risks associated with
the regulatory approval of pharmaceuticals under development.
Puregon®/Follistim®, the biotech fertility product of Organon, has become one of
our biggest selling products. Performance was particularly boosted by strong
U.S. sales resulting from a successful launch of the Follistim Pen® and relevant
product line extensions. In 2005, Puregon®/Follistim® was also introduced in
Japan and China.
NuvaRing®, the contraceptive vaginal ring of Organon-which has now been
introduced in more than 25 countries-is also continuing to enjoy steadily
increasing sales in many markets. In fact, we achieved a milestone in November
when, for the first time, more than one million rings were sold within the space
of a month to women around the world. Another important development took place
in November. After a successful pilot in three states, we launched a
direct-to-consumer advertising campaign to promote NuvaRing® throughout the
United States, mainly consisting of television commercials.
Evidence of the synergy that could be exploited between Organon and Intervet
also became clear in 2005 with the collaboration together with human vaccine
business Nobilon. By tapping into existing expertise available in both the
Organon and Intervet businesses, Nobilon has been able to make great progress in
developing a flu vaccine for humans, based on cell tissue culture technology.
Streamlining efforts at Organon, including the newly-integrated Diosynth
operations, focused mainly on overcapacities in manufacturing resources caused
by the continued slow market for pharmaceutical ingredients. Meanwhile, low
volume growth, destocking by big pharma companies and delays in product
introductions are maintaining the overcapacity in the fine chemicals segment. We
are currently in the process of implementing measures to address this
overcapacity, as well as restructuring our IT organization to establish a more
centralized approach, improving our logistic performance.
Looking ahead, we are positive about the future. We will be finalizing several
phase III projects, while we expect a number of partnerships that have been
established over the last few years to start bearing fruit.
Nobilon
It is becoming increasingly clear that infectious diseases do not limit
themselves to geographical borders. An additional challenge is that the impact
caused by these diseases is often not restricted to a single species. Concern is
therefore rising about the spread of avian influenza from birds to humans and
the possible outbreak of a pandemic which could have serious consequences for
human health.
In 2002, Akzo Nobel launched its Nobilon business to develop, license, and
manufacture human vaccines on a global scale, with particular emphasis on
influenza. Nobilon became operational in mid-2003. Nobilon also combines the
expertise and know-how of the company's Organon and Intervet businesses,
utilizing their technical, regulatory, and product development capabilities.
Nobilon is working on the development of vaccines used for annual revaccination
of humans against influenza and on vaccines that will be used to control the
impact of a human influenza pandemic.
Working from a dedicated, fully licensed facility in the Netherlands, Nobilon
produces antigens for our business and uses cell culture technology in the
research and development of its vaccines. The use of cell
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40
culture technology displays significant advantages, such as reduced dependence
on eggs in times of shortage, fewer logistical issues, and more consistent
quality.
We are also working on a vaccine for use in the event of an avian influenza
pandemic. Licensing of this product depends on developments in the field, and on
the emergency procedures that would be issued by the regulatory bodies should
the threat of a pandemic necessitate such procedures.
INTERVET - Veterinary Products
Business Review
Revenues 2005: EUR 1,094 million; 2004: EUR 1,027 million
Intervet produced consistently strong results in 2005 as the strategic
initiatives introduced in recent years began to pay off. Revenues increased by
7% to EUR 1,094 million, with volume growth being the main contributor. These
increased volumes and the resulting boost in earnings were favorably impacted by
efficiency improvements in manufacturing, supply chain and marketing, and the
result of the divestment of the feed additives business. Intervet was therefore
able to deliver an operating income of EUR 238 million-up 29% from 2004 and
equivalent to an operating margin of 21.8%.
We further expanded our strong market position in Europe-where the business
generates more than 50% of its revenues-and our development in North America was
characterized by growth in key segments, while revenues in Latin America were
boosted by substantial growth in Brazil and Chile. The acquisition of AgVax
Developments Ltd in New Zealand also is expected to bolster our expansion in
Oceania. This strong growth was achieved even though Intervet divested interests
in non-core areas such as the diagnostic and feed additive segments.
Intervet will continue to focus on major food and companion animal markets, and
we hope to see similarly positive trends beyond 2005, when new products
resulting from our extensive research and development programs should enhance
our existing portfolio.
Looking at 2005 in more detail, market gains in Europe were largely attributed
to improved supplies and the strong sales growth of Cobactan®, our innovative
range of anti-infective formulations based on the proprietary molecule
cefquinome. In North America, revenues were buoyed by new product introductions
in the companion animal sector and Continuum® (a combination vaccine with
long-lasting immunity). The recently launched cattle bioline Vista® also
received a very positive response. Latin American performance was boosted by
major growth in Brazil (in various markets) and in Chile, where the main driver
was increased sales of fish vaccines. In Asia, where large areas have been
severely affected by outbreaks of avian influenza, business is growing.
The acquisition of AgVax Developments Ltd enables Intervet to benefit from
AgVax's close collaboration with its former parent company, AgResearch, New
Zealand's largest Crown Research Institute. AgVax is an animal health company
that focuses on the development of vaccines to increase the productivity of the
sheep sector.
During 2005, we divested large parts of our feed additive business. These
activities no longer fitted into our core business operations and had become
distanced from Intervet's strategic focus.
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The year's other main highlights included Intervet signing a contract with the
Ministry of Agriculture in the Netherlands to set up the country's first vaccine
bank of Porcilis® Pesti®, Intervet's marker vaccine against Classical Swine
Fever. The agreement covers a reserve of 500,000 doses of the vaccine for
emergency vaccination in the event of a Dutch outbreak of the disease. The
contract is significant because it indicates that vaccine banks can play a
crucial role in a country's contingency plans against possible outbreaks of
highly infectious diseases. We also officially re-opened our refurbished foot
and mouth disease ("FMD") vaccine production unit in Pune, India, which was
initially opened in 2003. FMD is a major problem in India and is responsible for
substantial shortfalls in dairy production.
In 2005, India was also a major focus of Intervet's continued commitment to
creating social, environmental and economic benefits for the communities in
which we operate. In June, for example, Intervet India was honored for the depth
and scale of its involvement in the local community and for the strong
relationships it has established with all its stakeholders.
From an operational perspective, Intervet benefited from various efficiency
improvements in manufacturing during 2005. We continued our major investment
program in Boxmeer, the Netherlands, aimed at modernizing our multifunctional
headquarters site and expanding our production capacity and packaging
facilities. In addition, we decided to further expand production capacity for
bacterial vaccines at our U.K. site in Milton Keynes. As a result, part of the
production of key bacterial fish and swine vaccines can now take place in the
United Kingdom, while capacity in Boxmeer can be used to accommodate new product
introductions. The successful finalization of our logistics and manufacturing
initiative launched in 2003 to implement SAP was an important step to developing
further into a global organization.
In 2005, Intervet introduced the Dieter Lütticken Award, which was presented to
a scientist from the University of Bern in Switzerland. Set up last year, the
reward honors scientists working in research areas that comply with the 3Rs
concept (Reduce, Refine, Replace) in veterinary product development and
production, where finding alternatives to using animals in testing is a top
priority.
COATINGS
Business Review
Coatings experienced a tough year due to steeply rising raw material costs and
difficult economic conditions in mature markets, especially in Western Europe.
Our businesses addressed these issues by focusing on tight cost control and by
pushing through price increases. Coatings managed to keep profits at an
acceptable level, although the ROI excluding incidentals slipped to just below
20%. Including incidentals, ROI was 17.8%.
Revenues grew autonomously by 4%, mainly fueled by growth in the emerging
markets of Asia Pacific, Eastern Europe, and the Middle East. During the year,
we opened two new Powder Coatings facilities and two Decorative Coatings plants
in China and Vietnam. We also announced the intention to acquire the Chinese
decorative coatings company Guangzhou Toide Paint Manufacturing Co. (which was
completed in the first quarter of 2006), established a Powder Coatings joint
venture in Egypt, and invested in the construction of a new Powder Coatings
plant in Russia. At the end of 2005, the emerging markets represented 34% of our
worldwide revenues.
The industrial activities put in a strong performance, especially in the second
half of 2005. Successful marketing initiatives expanded the business base and
the average pricing in all markets improved. Marine &
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Protective Coatings had another good year. Higher sales of added-value products
are offering clear operational and financial benefits to our customers, while
the growth in target developing markets continues. Car Refinishes results
remained under pressure and restructuring programs are being carried out to
address this situation. The performance of Decorative Coatings showed a mixed
picture. In some of the large western European countries results were under
pressure, while in the emerging markets earnings improved.
In mature markets, we continued to improve our portfolio through selective
acquisitions. During 2005, we agreed to acquire Swiss Lack, the leading supplier
of decorative coatings in Switzerland, and ICI's German industrial wood finishes
business Zweihorn GmbH. In addition, we continued to further expand the
commercial distribution network of our European Decorative Coatings business by
acquiring a number of wholesalers in Germany, the largest market for
architectural paints in Europe.
Securing our margins against a backdrop of increasing raw material prices will
be a challenge for the future, particularly in mature markets. We will address
this challenge not only by means of aggressive cost management, but also by
increasing our innovation efforts. This will allow better differentiation of our
products and services to counteract continuous price erosion in the highly
competitive markets in which we operate.
Developments in the Coatings Business Units
Decorative Coatings
Revenues 2005: EUR 2,038 million; 2004: EUR 1,929 million
Akzo Nobel's Decorative Coatings unit is made up of the Decorative Coatings
Europe and Decorative Coatings International businesses. In the course of 2006
we have the intention to merge these two units into one global business unit.
Decorative Coatings Europe and Decorative Coatings International serve the
professional and do-it-yourself markets. The company's major brands include
Sikkens®, Sadolin®, Crown®, Astral®, Marshall®, Trimetal®, Nordsjö®, Levis®,
Herbol®, Vivechrom®, and Flexa®. The company's leading building adhesive brand
is Schönox®.
Decorative Coatings Europe
Decorative Coatings Europe had a difficult 2005. With the economic recovery
occurring later than predicted, consumer confidence deteriorated and spending
was low in most countries, especially in the major European countries. The
exception was the Nordic area. Margins were also under pressure because of
aggressive price hikes imposed on our industry by raw material and packaging
suppliers. Both distributors and competitors have fought aggressively for volume
in this weak market, although by the end of the year, the situation improved
slightly, especially in Southern Europe.
We acquired a number of commercial distributors in 2005-mainly in Germany,
France and the Netherlands-reflecting our strategy to secure sustainable
availability of our brands at local level for our professional customers. We
also acquired the ICI Group's German industrial interior wood business,
Zweihorn, while the purchase of Switzerland's leading paint company, Swiss Lack,
was completed on January 1, 2006.
Our consolidation efforts also continued with the closure of sites in France and
Denmark and we achieved considerable cost improvements in production and
logistics, which will have an ongoing positive impact
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during the next few years. As the year progressed, a number of cost efficiencies
and restructuring projects were initiated aimed at creating a stronger platform
for growth in 2006 and beyond.
A closer look at our 2005 performance reveals that within our Trade
activities-where overall results were weaker than in the previous year-business
in the United Kingdom, Germany, and France was affected by difficult market
conditions. But considerable improvements were posted in other countries on the
back of organic growth, price increases and, most importantly, the acquisition
of a number of distributors. Increased raw material costs and changes in the
business depressed margins.
Our Retail activities were hampered by a lack of consumer confidence in most
Western European countries. After many years of uninterrupted growth, the U.K.
market contracted. Key markets were characterized by major changes in customer
and product mix, in addition to fierce competition for volumes, resulting in
more competitive pricing. All this led to heightened pressure on margins, as
well as higher costs for raw materials. As a consequence, Retail's results were
considerably lower than in 2004, mainly due to weak performance in France and
the United Kingdom. Growth was posted in the difficult German market. We also
acquired new customers in the large-scale outlet sector.
Our Joinery business had another good year in spite of a decline in the
important German market. Sales improved in Central and Southern Europe, while
progress was made regarding the integration of BASF's joinery business, which
was acquired in 2004.
A number of successful product launches took place during 2005, notably that of
the Sikkens® brand's Alpha® Tacto®, the world's first decorative paint product
with the ability to reproduce the look and feel of suede, leather, or woven
fabric, depending on how it is applied to the wall.
Decorative Coatings International
Decorative Coatings International's performance in 2005 came under severe
pressure from dramatic price rises for raw materials and packaging. This
negative effect was offset, however, by increasing prices and changing the
product mix, which made it possible to achieve a slightly improved contribution
margin.
In terms of our performance at country level, Russia and China-the two major
growth areas for 2005-both posted double-digit growth. New capacity at our
Moscow facility enabled us to make additional investments at the site earlier
than expected. Our Building Adhesives businesses also produced pleasing results,
despite difficult conditions in some markets. Elsewhere, further inroads were
made in some of the Central European and Eastern European markets, with good
volume growth, while the French business emerged in better shape following a
cost reduction program.
In the Americas, our wood care activities again proved highly successful, with
growth in both volumes and profits. Next Wave Technology™-our more
environmentally friendly low VOC range-was well received in North America, while
the Brazilian operation managed to improve profitability in a subdued market. In
Turkey, our performance improved with restored margins and stronger
profitability, while in North Africa-and Morocco in particular-difficult market
conditions negatively affected our performance.
In 2005, we signed a letter of intent to acquire the coatings activities of
Guangzhou Toide Manufacturing Co., the biggest private Chinese manufacturer of
emulsion paint. This deal was closed during the first quarter of 2006. We also
officially opened two new plants, one near Ho Chi Minh City in Vietnam, the
other in Suzhou near Shanghai, China.
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Industrial Activities
Revenues 2005: EUR 1,740 million; 2004: EUR 1,592 million
Akzo Nobel's industrial activities are made up of the Industrial Finishes and
Powder Coatings businesses.
Industrial Finishes
Industrial Finishes delivered notable growth in 2005 as a result of geographic
expansion and successful marketing initiatives. Operations in the frontier
markets of China, India, Brazil, and Eastern Europe sustained top-line growth in
a difficult global industrial market. Overall returns, however, were negatively
affected by the significant increase in the cost of petrochemical derivatives.
In addition, 2005 proved particularly problematic for our European-based
businesses, with demand being consistently weak in the major industrial
economies in the West. In spite of all these challenges we were able to deliver
solid results.
Conditions in the global Coil Coatings business were particularly unfavorable
due to volatile steel prices and a hesitant commercial construction industry.
Wood Coatings benefited from a healthy residential construction industry, which
kept demand for coatings for flooring, kitchen cabinetry, and building products
at a strong level throughout 2005. Wood Coatings also capitalized on the shift
of the household furniture industry to Asia, successfully replacing volume lost
in North America. Consumer electronics and related markets-key sectors for our
Specialty Plastics business-significantly improved during the year after a slow
start, resulting in a solid overall performance. The Adhesives business, which
is predominantly European-based, offset weak demand in Western Europe by
successfully growing in Austria, Russia, and Eastern Europe.
Strategic investments continued to bolster our production and logistics
capabilities throughout the year, further improving not only quality, but also
responsiveness to our customers in this increasingly demanding global economy.
To complement current growth, we also invested in our ongoing, value-driven R&D
activities and devoted extensive resources to the governance efforts and human
resources development system within Akzo Nobel.
Looking ahead, as the demands of the marketplace change rapidly, so too will the
structure, products, and global delivery sources of our business. Compressing
margins, along with low growth in mature markets, are clear challenges. Value
engineering, prudent margin recovery, additional investment in Eastern Europe
and Asia, and the streamlining of resources in mature markets will be the key
success factors for 2006 and beyond. Whatever the prevailing market conditions,
the focus will always remain on our customers and a successful value exchange,
which will yield sustained organic growth and improved financial performance.
By combining our dedicated customer focus, decentralized organizational
structure, global reach, and Akzo Nobel's extensive technology base, we believe
that Industrial Finishes will remain very competitive in the markets in which we
operate.
Powder Coatings
Powder Coatings posted growth in revenues in line with 2004, which was a good
result given the turbulent conditions encountered during the first few months of
the year. Despite rising raw material prices, we sought to protect and preserve
our margins while maintaining our focus on servicing our customers' needs. At
the same time, we achieved a further strengthening and broadening of our global
spread.
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Consolidation of our world leadership position received significant attention
during the year as we completed our expansion projects in China on schedule. We
opened a second facility at Baoan in the south of the country, while in the
north, we relocated from Beijing to a new site in Langfang, which is well
positioned to exploit new opportunities in that region. Also in Asia Pacific, we
completed a further purchase of shares of Akzo Nobel Chang Cheng.
We achieved good revenue growth in the newly developing powder markets of
Central and Eastern Europe, and there is now a clear need for manufacturing in
the region. We therefore started construction work on a new powder coatings
plant in Russia. Located at Orekhovo-Zuevo, 100 kilometers east of Moscow, the
facility will supply markets throughout Russia, Ukraine, Belarus, and other CIS
countries.
We also invested in the Middle East with the acquisition of a controlling 60%
share in Egyptian market leader Coatech. The joint venture company, now known as
Akzo Nobel Powder Coatings SAE, operates from the company's existing modern
manufacturing facility near Cairo. In the United States, the construction of a
new warehouse in Nashville represents Phase 1 of a major site
improvement/development plan, which will continue during 2006.
Looking more closely at our business activities, we launched a new sub-business
unit at the beginning of 2005-SBU Functional Coatings. The unit was set up to
accelerate the globalization of this high margin business, and we are greatly
encouraged by the outstanding results the unit has achieved in its first year.
We also made major progress in transferring our acrylics powder know-how from
the United States to Europe and Asia Pacific, which is particularly important
for the fast-growing automotive alloy wheels market. Further globalization is
supported by the commissioning of acrylic powder manufacturing units at our
sites in Bensheim, Germany, and Ningbo, China.
The Architectural business was also highly active during 2005. As this is a key
global market for us-and one in which we have a leadership position in Europe
and Asia Pacific-we decided to launch a new marketing initiative in the United
States based on a full product range, including the unique fluorocarbon-based
hyper-durable product Interpon® D3000.
Our Cromadex coatings organization in Europe delivered excellent results and
increased its geographic coverage with the establishment of a start-up activity
in Spain. We will continue to expand this supply concept further in 2006. The
Non-Stick Coatings business had a difficult 2005, and we recruited to rebuild
and strengthen the management team.
Looking ahead, there should be opportunities for growth in Asia Pacific, Eastern
and Central Europe, and Mexico. Efforts to improve our structural production
cost levels will also remain a priority.
Marine & Protective Coatings
Revenues 2005: EUR 975 million; 2004: EUR 879 million
Our 2005 business performance was strong and met expectations. In the first half
of the year rising raw materials costs squeezed margins, particularly in the
Marine and Heavy Industrial sectors. The U.S. dollar was also weak compared with
previous years and this had a further negative impact on the business,
especially in Marine newbuilding, where contracts were agreed two to three years
ago.
To respond to the adverse conditions prevailing throughout the year, it was
necessary to raise prices for a number of products. However, this proved
insufficient to restore margins, and additional measures were required to
generate a satisfactory performance. Revenues from added-value products,
offering clear
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46
operational and financial benefits to our customers, were up. In our more mature
markets, productivity improvements were required to protect our competitiveness,
while we achieved good levels of growth in our target developing markets.
As regards individual business performance, International® Marine Coatings
continued to benefit from record levels of ship newbuilding, although margins
were depressed by steep raw material price increases. We sold record levels of
Intershield® for newbuilding, but dry-docking activity was lower as ship owners
and ship managers maximized time at sea, while freight rates remained
attractive. During 2005, we coated our 100th vessel with Intersleek®, an
environmentally friendly "foul-release" antifouling which has been endorsed by
the World Wildlife Fund. The product delivers significant operational savings to
our customers. Performance at the unit's new business venture in Japan-which
commenced in November 2004-also met expectations.
International® Protective Coatings felt the squeeze on margins more than other
market areas, particularly in the United States. Solid growth was posted in
China, Central and Eastern Europe, and Asia Pacific. Our financial performance
also continued its upward momentum in these growth areas. On the product front,
Interchar®, a new member of the Chartek® family of fire protection products, was
launched in 2005. Based on technology created for NASA, Interchar® offers the
construction industry significant benefits in terms of keeping buildings-and
their occupants-safer by offering flame retardant coatings which delay the
effects of fire on steel constructions.
Yacht Coatings fell back from its 2004 peak due to weaker demand in the U.S.
market. Performance in Europe was solid and growth continued in the Asia Pacific
region. The Awlgrip® business improved further and benefited from a dedicated
management team.
Our Aerospace Coatings operation continued to benefit from higher build rates of
new aircraft and livery changes on existing ones. The airline operators,
particularly in the United States, have suffered from substantially higher fuel
costs, and this has led to some downturn in business on specific accounts.
Overall, however, Aerospace Coatings delivered its best ever results.
In 2005, we continued to invest in growth markets with satisfactory results. We
plan to continue building on our solid platform in 2006 and beyond, although our
commitment to our Business Principles has limited our growth capability in some
parts of the world. Our level of spending on R&D has never been higher. We are
committed to a plan for increasing the rate of organic growth, and these
investments will be of significant importance to our continued success.
Car Refinishes
Revenues 2005: EUR 886 million; 2004: EUR 893 million
The year was dominated by harsh market conditions and higher raw material
prices, but Car Refinishes successfully reversed the downward trend. Revenues
were only slightly down on 2004. Results remained under pressure and
restructuring programs are being carried out. Stagnating growth in the
refinishes market in the United States and Western Europe during 2005 was partly
offset by market growth outside these territories, notably in Eastern Europe and
Asia.
We were active in growing markets in Eastern Europe, Asia, and South America,
and posted volume growth in North America, aided by focused sales programs. The
pressure on volumes and results in Western Europe continued in 2005, however,
with our coatings activities for plastic components in the automotive industry
suffering from a depressed market in both Europe and the United States.
Developments in our
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Commercial Vehicles activities were above expectations, and a more focused
approach in this market is generating good results.
We strengthened our distribution activities with the purchase of a distributor
in the Netherlands and an importer in Switzerland.
In response to lower market growth in Europe and the United States, a
restructuring of Car Refinishes was announced in mid-2004, which is still
ongoing. In addition to a better cost structure, the program will also result in
growth in the mainstream part and the trade part of the refinishes market.
Furthermore, we also placed a strong focus on fine-tuning of our marketing,
distribution, and branding policies.
To achieve continued success, we consider operational excellence to be a
prerequisite for all our activities. Significant progress has already been made
in this area, but we see scope for further improvement. Major programs to
enhance our reputation in color matching and color accuracy have also been
started. In R&D, we continue to focus on the overhaul and maintenance of our
major product lines in line with European legislation being introduced in 2007,
which will enforce the use of waterborne systems and ban solvent-borne systems.
Preparations for this switch started a number of years ago, and we are on track
with the delivery of compliant products.
CHEMICALS
Business Review
Akzo Nobel Chemicals made good progress in 2005, as it successfully implemented
a strategy to streamline its portfolio in order to competitively realign the
business for sustainable growth, profitability, and leadership positions in
selected markets.
Total Chemicals revenues and operating income decreased, largely due to
divestment effects. For the ongoing businesses however, revenues and operating
income improved compared with 2004. ROI excluding incidentals was more than 16%,
which underlines the progress which has been made toward meeting our medium-term
target of 17.5%. Overall performance improved across the board against a
backdrop of raw material price increases and rising energy costs. Including
incidentals, ROI was 14.4%.
Now organized in five growth platforms-Pulp & Paper Chemicals, Base Chemicals,
Functional Chemicals, Surfactants, and Polymer Chemicals-the Chemicals group is
starting to reap the benefits of an improved structure and a more focused
approach as a result of the strategic revision which began in 2004.
Despite significantly higher energy costs, Base Chemicals turned in an excellent
performance in 2005, driven by higher volumes and continuing cost reduction and
restructuring programs. Functional Chemicals performed robustly as market demand
remained high, while Polymer Chemicals' results were slightly lower compared
with 2004. Pulp & Paper Chemicals had a mixed year due to margin pressure,
experiencing particularly adverse conditions in Europe, but profitable growth in
South America and Asia. Profits improved at the newly formed Surfactants
business on the back of its revised focus and efficiency measures.
The realignment of the Chemicals group also involved the planned divestment of a
number of businesses with combined 2004 revenues of EUR 700 million. These
businesses are among others Ink & Adhesive Resins, Oleochemicals, PVC Additives,
Salt Specialties, Solar Salt Australia, and Methyl Amines/Choline Chloride. In
the meantime, several of these businesses have been divested or offers have been
received. The company expects to complete all remaining divestments resulting
from the strategic realignment of its
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Chemicals portfolio during 2006. Recently, it was decided to withdraw Salt
Specialties from its list of Chemicals businesses to be divested, as it became
clear that a satisfactory deal based on the company's original divestment offer
would not be forthcoming. Flexsys, the 50/50-joint venture with Solutia, is also
expected to be sold during 2006.
Key milestones in 2005 included a EUR 26 million investment in two chemicals
businesses in Sweden-a further capacity increase at the ethylene amines facility
in Stenungsund and the construction of a new plant in Skoghall to manufacture
water treatment chemicals. We also invested EUR 24 million to increase capacity
at our primary cellulose derivatives manufacturing plant in Sweden and expanded
our chlorine operations in Rotterdam, the Netherlands.
Investments totaling EUR 15 million were announced in China-the construction of
a new polysulfides plant in Taixing and a new paper chemicals site in Guangzhou.
China also featured strongly as we continued with our ambition to pursue growth
based on innovation and geographic focus, particularly in emerging markets,
where the potential for expansion remains significant. Several businesses are
already running into production capacity constraints in other parts of the world
and we will be looking to establish new footholds in China in the near future.
With the five growth platforms now firmly established, our streamlined
businesses are ready to fully implement the strategic plans for the future and
expand both operations and profitability.
Developments in the Chemicals Business Units
Pulp & Paper Chemicals
Revenues 2005: EUR 893 million; 2004: EUR 854 million
The Pulp & Paper Chemicals business (which trades under the name Eka Chemicals)
had a mixed worldwide performance in 2005. Conditions in our main market,
Europe, were difficult due to several onetime effects, while a labor conflict in
the Finnish pulp and paper industry during the first half of the year also had a
major impact. Although revenues picked up after the resolution of the dispute,
this still had a negative impact on our 2005 result. Our Bleaching Chemicals
performance was also impacted by high and rising energy costs.
Rationalization and currency effects from 2004 kept North American pulp and
paper production stable during the year. But here-and in Europe-higher
productivity and increased efficiency will only be possible through
rationalization and the continued phasing out of unprofitable mills. High energy
costs are also affecting the North American industry, although Eka Chemicals has
been able to effectively manage its energy supply. Growing demand in Eastern
Europe, with its low labor cost and large forest assets, has the potential to
prompt the development of an expanding pulp and paper industry in the region.
The continuing expansion of the Asian economies-led by China and India-is
fueling rapid growth, notably in the Chinese paper industry, with the country's
economic boom leading to increased demand for paper and packaging board in
particular. We have already responded to this development, and at the end of
2005, the construction of our second paper chemicals plant began in Guangzhou in
Southern China-a highly important paper production region.
Both Asia Pacific and South America showed a clear growth profile during 2005,
with substantial new capacity coming on stream. Not only did Eka Chemicals
strengthen its position in South America with the successful start-up of a
bleaching chemicals plant at Veracel-our new pulp mill complex in Bahia,
Brazil-but
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we also inaugurated a plant for colloidal silica production for paper chemicals
in Rio de Janeiro. The fall in imports due to increased domestic production in
Brazil will further improve our competitiveness.
Looking at Brazil in