Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13 a - 16 or 15 d - 16 of
The Securities Exchange Act of 1934
Commission file number 0 - 017444
Akzo Nobel N.V.
(Translation of registrant's name into English)
76, Velperweg, 6824 BM Arnhem, the Netherlands
(Address of principal executive offices)
The following exhibit
is filed with this report
Akzo Nobel Report for the year 2003
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934 the registrant has duly caused this report to be signed on its behalf of
the undersigned, thereto duly authorized.
Akzo Nobel N.V.
Name : F.H. Hensel Name : J.J.M. Derckx
Title : Senior Vice President Title : Director Corporate Control
Finance
Dated : February 3, 2004
Report for the 4th quarter and for the year 2003
Key Figures
4th quarter Millions of euros (EUR) Full year
- ----------------- ----------------------- -------------------------
2003 2002 Ch.% 2003 2002 Ch.%
----- ----- ----- ----- ----- -----
268 176 52 Net income* 811 892 (9)
0.94 0.62 - per share, in EUR 2.84 3.12
Sales
901 1,000 (10) - Pharma 3,550 4,008 (11)
1,183 1,277 (7) - Coatings 5,233 5,521 (5)
1,056 1,132 (7) - Chemicals 4,397 4,598 (4)
(29) (26) - Other (129) (125)
- ------ ------ ------ ------
3,111 3,383 (8) Total 13,051 14,002 (7)
- ------ ------ ------ ------
Operating income* (EBIT)
285 180 58 - Pharma 692 768 (10)
86 81 6 - Coatings 431 465 (7)
85 79 8 - Chemicals 324 344 (6)
(15) (26) - Other (100) (85)
- ------ ------ ------ ------
441 314 40 Total 1,347 1,492 (10)
- ------ ------ ------ ------
14.2 9.3 Return on sales*, in % 10.3 10.7
11.6 6.8 Interest coverage* 8.1 7.3
Fourth quarter - net income* substantially up
- -Benefiting from
-receipt of initial payment for asenapine cooperation
-restructurings in all three groups
- -Currencies and pensions - negative impact
Full-year - net income* 9% lower; net borrowings down EUR 0.8 billion
- -Dividend unchanged - EUR 1.20
- -Operating income*, on balance, down EUR 145 million (-10%)
-EUR 300 million impact of higher pension charges and weaker currencies
affecting all groups
-decline of Remeron (R) revenues - loss of market exclusivity in U.S.
-restructuring programs strongly contributing
-receipt of initial payment for asenapine cooperation
- -Pharma - new strategy starting to deliver
-cooperation with Pfizer on asenapine
-Arixtra (R) - transfer to Sanofi-Synth{e'}labo for revenue arrangement
-aggressive cost cutting - surpassing the targets
- -Coatings - solid performance; strongly benefiting from restructurings
- -Chemicals - robust performance in a difficult market; forceful cost cutting
- -Net nonrecurring charges EUR 209 million - reflecting aggressive restructuring
programs
- -Financial position - significantly improved
Outlook for 2004 - net income, excluding nonrecurring items and special
benefits, below 2003
* Excluding nonrecurring items.
1
Report for the 4th quarter and for the year 2003
(R) or (TM) indicates trademarks in one or more countries.
The 2003 Annual Report (English version) will be published on February 9,
2004, as PDF file on the Akzo Nobel website (www.akzonobel.com) and in print on
February 12, 2004.
The Report for the 1st Quarter of 2004 will be published on April 20, 2004.
Note
Autonomous sales growth is defined as the change in sales attributable to
changed volumes and selling prices. It excludes currency, acquisition, and
divestment effects.
Operational performance is defined as the change in operating income excluding
currency translation effects and the impact from higher pension charges.
Nonrecurring items relate to income and expenses which because of their size or
nature are disclosed separately to enhance the insight into the underlying
result for the period. These include items such as restructurings and
impairment charges, and significant gains and losses on the disposal of
businesses. Operating income before nonrecurring items is one of the key
figures management uses to assess the performance of the Company, as it better
reflects the underlying trends in the results of the activities.
Unless indicated otherwise, discussions in this report, such as earnings
developments, exclude nonrecurring items.
Invested capital, as also used in the calculation of ratios, excludes amounts
related to the minimum pension liability.
EVA is calculated by deducting from net operating profit after taxes (NOPAT) a
capital charge representing the cost of capital calculated on the basis of an
average return investors expect. The elements of the EVA calculation cannot be
derived directly from the data given in the financial statements, as it takes
into account certain adjustments such as addition of nonrecurring items to
capital, inclusion of service costs for pensions only, and special treatment of
strategic investments and acquisitions.
2002 EVA figures have been restated for the changed WACC from 9% to 8% and
revised treatment of nonrecurring items. The latter no longer are amortized
over a period of 5 years but added to capital permanently.
Safe Harbor Statement*
This report contains statements which address such key issues as Akzo Nobel's
growth strategy, future financial results, market positions, product
development, pharmaceutical products in the pipeline, and product approvals.
Such statements, including but not limited to the "Outlook for 2004", should be
carefully considered, and it should be understood that many factors could cause
forecasted and actual results to differ from these statements. These factors
include, but are not limited to, price fluctuations, currency fluctuations,
developments in raw material and personnel costs, pensions, physical and
environmental risks, legal issues, and legislative, fiscal, and other
regulatory measures. Stated competitive positions are based on management
estimates supported by information provided by specialized external agencies.
For a more complete discussion of the risk factors affecting our business
please refer to our Annual Report on Form 20-F filed with the United States
Securities and Exchange Commission, a copy of which can be found on the
Company's website www.akzonobel.com.
* Pursuant to the U.S. Private Securities Litigation Reform Act 1995.
2
Report for the 4th quarter and for the year 2003
CONDENSED CONSOLIDATED STATEMENT OF INCOME
4th quarter Millions of euros Full year
- -------------------- --------------------------------------------- -------------------------
2003 2002 Ch.% 2003 2002 Ch.%
----- ----- ----- ------- ------ ------
3,111 3,383 (8) Sales 13,051 14,002 (7)
(2,670) (3,069) Operating costs (11,704) (12,510)
- ------- ------ ------- ------
441 314 40 Operating income* (EBIT) 1,347 1,492 (10)
(38) (46) Financing charges (166) (204)
- ------- ------ ------- ------
403 268 Operating income* less financing charges 1,181 1,288
(130) (83) Taxes (366) (399)
- ------- ------ ------- ------
Earnings* of consolidated companies, after
273 185 48 taxes 815 889 (8)
6 - Earnings* from nonconsolidated companies 36 38
- ------- ------ ------- ------
279 185 Earnings* before minority interest 851 927
(11) (9) Minority interest (40) (35)
- ------- ------ ------- ------
268 176 52 Net income excluding nonrecurring items 811 892 (9)
(163) (74) Nonrecurring items, after taxes (209) (74)
105 102 3 Net income 602 818 (26)
- ------- ------ ------- ------
14.2 9.3 Return on sales*, in % 10.3 10.7
11.6 6.8 Interest coverage* 8.1 7.3
Net income excluding nonrecurring items per
share, in EUR
0.94 0.62 - ordinary 2.84 3.12
0.93 0.62 - diluted 2.83 3.12
Net income per share, in EUR
0.37 0.36 - ordinary 2.11 2.86
0.37 0.36 - diluted 2.10 2.86
Dividend, in EUR 1.20 1.20
EVA 520 531**
607 496 22 EBITDA 1,999 2,173 (8)
201 207 Capital expenditures 581 689
148 154 Depreciation 599 622
Number of employees*** 64,580 67,880
* Excluding nonrecurring items.
** Restated.
*** At December 31.
3
Report for the 4th quarter of 2003
Fourth-quarter net income* substantially up - benefiting from cost savings and
asenapine payment
Net income excluding nonrecurring items in the fourth quarter
was up 52% to EUR 268 million, which is EUR 0.94 per share (2002: EUR 0.62).
Earnings of all three groups increased, mainly attributable to our aggressive
restructuring programs, but continued to be impacted by the weakening of certain
key currencies and higher pension charges. Pharma's results included the initial
payment from Pfizer for the asenapine cooperation.
Including net nonrecurring losses of EUR 163 million, fourth-quarter net income
was EUR 105 million (2002: EUR 102 million).
Sales impacted by weaker key currencies
Fourth-quarter sales of EUR 3.1 billion were down 8% on the previous year.
Currency translation had a negative effect of 6%. Autonomous growth was flat,
as the contribution of 2% higher selling prices was offset by 2% lower volumes.
The net effect of divestments and acquisitions was a decrease of 2%. Sales
developed as follows:
Currency
% Total Volume Price translation Acquisitions Divestments
- --------- ------- ------- ------- ----------- ------------ -----------
Pharma (10) (5) 2 (7) - -
Coatings (7) 3 1 (6) - (5)
Chemicals (7) (4) 2 (5) 1 (1)
Akzo Nobel (8) (2) 2 (6) - (2)
Operating income* - strongly benefiting from restructurings and asenapine
payment
At EUR 441 million, operating income for the fourth quarter rose 40%.
All three groups achieved higher earnings, thanks to the substantial cost saving
programs, more than offsetting the negative effects from currency translation
and higher pension costs. Pharma's operating income included the receipt of the
initial payment for the asenapine cooperation. Return on sales was 14.2%**,
compared with 9.3% in 2002. Operating income developed as follows:
Operating Change from 4th quarter of 2002
income for 4th -------------------------------------------------------
Millions of quarter of Operational Currency Increased pension
euros 2003 Total performance translation charges
- --------------- ------------- --------- ----------- ----------- ------------------
Pharma 285 105 158 (45) (8)
Coatings 86 5 24 (11) (8)
Chemicals 85 6 15 (1) (8)
Other (15) 11 20 - (9)
------------- --------- ----------- ----------- ------------------
Akzo Nobel 441 127 217 (57) (33)
* Excluding nonrecurring items.
** Excluding the initial Pfizer payment for the asenapine cooperation,
return on sales was 11.3%.
4
Report for the 4th quarter of 2003
Pharma's operating income distinctly improved, reflecting significant cost
savings and the initial payment from Pfizer for the asenapine cooperation,
which more than offset the decline in Remeron (R) revenues in the United
States. Results of Intervet and Diosynth were under pressure from difficult
market conditions.
Coatings achieved an improved performance, mainly attributable to cost savings
and autonomous growth. Especially Marine & Protective Coatings and the
industrial activities did better. Decorative Coatings and Car Refinishes
remained under pressure from tough market conditions.
Chemicals also achieved a higher operating income, reaping the benefits from
the restructuring programs, although the business climate remained weak for
most business units.
Operating income disclosed as "Other" was positively influenced by lower
additions to corporate provisions.
Financing charges decreased substantially, as a result of reduced net
borrowings, lower short-term interest rates, and the weaker U.S. dollar.
Interest coverage was 11.6 (2002: 6.8).
Earnings from nonconsolidated companies amounted to EUR 6 million (2002: nil),
mainly attributable to higher results for Acordis.
Successful focus on cost - workforce down 720 due to restructuring
During the fourth quarter the Company continued its implementation of cost
saving programs, which resulted in a workforce decrease during this quarter of
720 people, leading to a full-year headcount reduction of 4,080 due to
restructurings. Earnings of all three groups clearly benefited from these
restructuring activities.
5
Report for the year 2003
2003 - net income* 9% lower; net borrowings down EUR 0.8 billion
Akzo Nobel clearly more than delivered on its outlook for 2003, even though it
was a very challenging year. Sales were EUR 13.1 billion, operating income* EUR
1,347 million, and net income* EUR 811 million. Earnings per share* were EUR
2.84 (2002: EUR 3.12).
These results were achieved in a situation in which the Company faced a lot of
headwind. There was no or even negative growth in Europe, North America, and
Latin America, although in the United States there were signs of recovery. The
weakening of the U.S. dollar and related currencies and higher pension charges
impacted heavily on our top and bottom lines. Moreover, our traditionally most
profitable business, Organon, was confronted with the loss of market
exclusivity for its key drug Remeron (R) in the United States, which put a
strong pressure on results.
Taking into account net nonrecurring losses of EUR 209 million, net income
amounted to EUR 602 million (2002: EUR 818 million). Net income per share was
EUR 2.11 (2002: EUR 2.86).
Focus on costs - workforce reduction of 4,080
The Company was well prepared to face this multitude of challenges. Ongoing
restructuring programs were accelerated, and many new programs were started
with the appropriate sense of urgency. The continued process of pruning our
portfolio resulted in the divestment of several underperformers. Altogether,
our total workforce was reduced by 4,080 people. Since the start of our major
program in 2001, our restructuring actions have resulted in a headcount
reduction of 6,280, some 10% of the total workforce.
The strong focus on restructuring, costs, and cash did not prevent us from
investing in new growth opportunities in high growth regions. We are actively
participating in the exciting growth in Asia, particularly China.
Focus on cash - net borrowings down EUR 0.8 billion; balance sheet
substantially strengthened
During 2003, the Company continued its strict cash discipline for all
operations. Capital expenditures were cut to adjust to changed expectations for
market growth, and we kept expenditures for acquisitions clearly below proceeds
from divestments. In 2003, the Company achieved a reduction of net borrowings
by EUR 0.8 billion.
In addition, Akzo Nobel announced its intention to sell Catalysts, Coating
Resins, and Phosphorus Chemicals from its Chemicals portfolio in order to
create more room to maneuver for the Company. These businesses collectively
represent close to EUR 1 billion in sales. The divestment process is
progressing well.
Unchanged dividend of EUR 1.20
A dividend of EUR 1.20 per common share will be proposed at the General Meeting
of Shareholders of April 22, 2004. In November 2003, an interim dividend of EUR
0.30 was declared and paid. Adoption of this proposal will result in a dividend
payment of EUR 343 million, a payout ratio of 42% relative to net income*.
* Excluding nonrecurring items.
6
Report for the year 2003
Pension funding - improved in 2003
Pension charges
The poor performance of the stock markets in 2002 had a negative influence on
the investment results of Akzo Nobel's pension funds. In accordance with the
rules of SFAS 87, this resulted in an increase in 2003 pension charges of EUR
130 million compared to 2002, affecting all groups.
During 2003, stock markets restored somewhat. As a result, pension charges for
2004 will decrease by some EUR 50 million, compared to 2003.
Minimum pension liability
As a result of the positive developments on the stock markets in 2003, the
after-tax minimum pension liability charged against shareholders' equity
decreased from EUR 1.1 billion to EUR 0.8 billion at December 31, 2003,
improving shareholders' equity by EUR 0.3 billion.
Pension premiums paid
Pension premiums to be paid by the Company are based on local regulations and
arrangements with Akzo Nobel's pension funds. During 2003, no additional
payments on top of normal pension premiums were required.
Sales down 7% - due to weaker currencies
Sales in 2003 were EUR 13.1 billion, 7% down on the previous year. Autonomous
growth was flat, while currency translation had a negative impact of 8%. Sales
developed as follows:
Currency
% Total Volume Price translation Acquisitions Divestments
- --------- ------- ------- ------- ----------- ------------ -----------
Pharma (11) (3) 1 (9) - -
Coatings (5) 1 2 (7) 2 (3)
Chemicals (4) - 1 (7) 3 (1)
Akzo Nobel (7) (1) 1 (8) 2 (1)
The negative currency translation impact predominantly related to the weakening
of the U.S. dollar, the pound sterling, the Brazilian real, and various Asian
currencies.
Acquisitions mainly concerned Ferro's powder coatings business, Crompton's
Industrial Specialties, and ECI Elektro-Chemie. Divestments mainly related to
Impregnated Papers.
7
Report for the year 2003
Operating income - all groups achieved improved operational performance from
cost savings
Operating income was EUR 1,347 million, on balance 10% below 2002. The
improvement in operational performance attributable to significant cost savings
did not fully offset the EUR 300 million negative effect from currency
translation and higher pension charges. Return on sales was 10.3%, compared
with 10.7% in 2002. Operating income developed as follows:
Change from 2002
Operating -------------------------------------------------------
Millions of income for Operational Currency Increased pension
euros 2003 Total performance translation charges
- --------------- ------------- --------- ----------- ----------- ------------------
Pharma 692 (76) 66 (110) (32)
Coatings 431 (34) 45 (47) (32)
Chemicals 324 (20) 25 (13) (32)
Other (100) (15) 19 - (34)
------------- --------- ----------- ----------- ------------------
Akzo Nobel 1,347 (145) 155 (170) (130)
All three groups registered a positive operational performance. At Pharma,
significant cost savings and the initial payment from Pfizer for the asenapine
cooperation of EUR 88 million, more than offset the drop in Remeron (R)
earnings in the United States. Coatings and Chemicals clearly did better than
in 2002, as a result of substantial cost savings.
R&D expenses were EUR 887 million, which is 6.8% of sales. For 2002, this was
EUR 912 million and 6.5%, respectively. Pharma's R&D expenses as a percentage
of sales were increased to 16% (2002: 15%), reflecting continuous commitment to
research and development. Organon spent 19% of its sales on research (2002:
18%). For Coatings and Chemicals this ratio remained unchanged at 3%.
Operating income disclosed as "Other" was positively influenced by lower
additions to corporate provisions and some currency gains.
Financing charges decreased from EUR 204 million in 2002 to EUR 166 million in
2003. This was the result of a substantial reduction of net borrowings and
lower short-term interest rates. Furthermore, due to the weaker U.S. dollar,
interest denominated in this currency translated into lower financing charges.
Interest coverage improved from 7.3 to 8.1. EBITDA coverage was 12.0 (2002:
10.7).
Earnings from nonconsolidated companies at EUR 36 million were slightly below
2002. Methanor, Acordis, and Brazilian catalyst joint venture FCC did better,
while earnings of Flexsys were under pressure. ECI Elektro-Chemie has been
consolidated since the fourth quarter of 2002, when the Company acquired the
remaining 50%-stake.
8
Report for the year 2003
EVA - successful focus on capital productivity
Throughout the Company, Economic Value Added (EVA) is the tool employed to
measure and guide value creation. By means of this tool operational managers
are continuously focused on capital productivity.
In 2003, EVA decreased by EUR 11 million to EUR 520 million. Even in the
difficult business environment of 2003, all groups clearly performed above the
cost of capital. Both Coatings and Chemicals improved their EVA performance,
while Pharma's EVA decreased due to the multitude of challenges it had to face.
Outlook for 2004 - net income, excluding nonrecurring items and special
benefits, below 2003
In 2003, the Company had to absorb the impact of the loss of the Remeron (R)
market exclusivity in the United States, substantial negative currency
translation effects, and increased pension charges. That all occurred in a
generally weak economic environment. Our answer was a clear focus on cost and
cash. Restructuring programs resulted in a substantial workforce reduction and
our balance sheet strengthened significantly. We also developed a new Pharma
strategy with priorities on focus, alliances, and costs. Delivering on this
strategy, we concluded a major transaction on our very promising asenapine with
Pfizer, which resulted in a special benefit of EUR 88 million at the end of
2003.
In 2004, the Company will be impacted by substantial additional sales losses
for Remeron (R). Given the present currency exchange rates, the Company will be
facing headwinds from negative currency translation effects, as almost two
thirds of our sales is generated outside the euro zone. On a more positive
note, we will benefit from our aggressive restructuring programs in all three
groups and some EUR 50 million lower pension charges. The macroeconomic
environment is also expected to improve somewhat.
On balance we expect net income, excluding nonrecurring items, to be below
2003. This outlook is based on our present portfolio of activities, and
therefore excludes effects of the planned Chemicals' divestments. In addition,
it is based on 2003 earnings excluding the special benefit from the asenapine
cooperation.
In 2004, our focus will remain on cost to protect our earnings. At the same
time, through the Chemicals' divestment program we are creating room to
maneuver for growth opportunities in attractive strategic priority areas. We
will continue to manage our funds in a highly disciplined manner and expect
capital expenditures in the order of magnitude of EUR 650 million. Furthermore,
we will continue to screen our activities and upgrade our portfolio based on
value creation.
9
Report for the year 2003
Pharma - under pressure; new strategy starting to deliver
4th quarter Millions of euros Full year
- -------------------- ------------------------------------ -------------------------
2003 2002 Ch.% 2003 2002 Ch.%
----- ----- ----- ------- ------ ------
Sales
582 651 Organon 2,273 2,593
256 264 Intervet 1,010 1,081
134 132 Diosynth 479 529
(71) (47) Intragroup sales/other (212) (195)
----- ----- ------- ------
901 1,000 (10) Total 3,550 4,008 (11)
285 180 58 Operating income* (EBIT) 692 768 (10)
31.6** 18.0 Return on sales*, in % 19.5** 19.2
133 154 (14) R&D expenses 566 600 (6)
14.8 15.4 R&D expenses as % of sales 15.9 15.0
EVA 331 367***
332 232 43 EBITDA 868 948 (8)
65 70 Capital expenditures 210 297
Invested capital**** 2,506 2,475
Return on invested capital, in % 27.8 30.5
Capital turnover 1.43 1.59
Number of employees**** 20,680 21,820
* Excluding nonrecurring items.
** Excluding the initial Pfizer payment for the asenapine cooperation,
return on sales for the fourth-quarter and the full-year was 21.9% and
17.0%, respectively.
*** Restated.
**** At December 31.
- -New strategy starting to deliver - focus, alliances, and cost
- -Organon
-asenapine - cooperation with Pfizer; special benefit of EUR 88 million
-Arixtra (R) - transfer to Sanofi-Synthelabo for revenue agreement
-cost savings - surpassing targets
-Remeron (R) - rapid decline in U.S.; growth in the rest of the world
-NuvaRing (R) - gathering momentum
- -Intervet - under pressure in Americas; Europe improved
- -Diosynth - impacted by deteriorating market conditions
- -Negative currency impact of 9% on sales
10
Report for the year 2003
In 2003, our Pharma group faced a multitude of challenges. It had to absorb a
strong negative impact from weaker currencies and higher pension charges. On
top of that, our human healthcare unit Organon faced the loss of market
exclusivity for its No. 1 drug Remeron (R) in the United States. Therefore, a
new strategy was developed with priorities for a clear focus on leading
positions, alliances to strengthen our growth opportunities in other areas, and
aggressive cost cutting. This strategy was vigorously implemented, as was
reflected by the conclusion of a major cooperation with Pfizer for asenapine-a
very promising phase III drug for schizophrenia and bipolar disorders-, a
revised agreement with Sanofi-Synthelabo on Arixtra (R), and a very sizeable
cost reduction program. Under the circumstances, Organon turned in a very
satisfactory performance. Diosynth faced headwinds in third-party markets and,
looking ahead, will also be impacted by the downturn at Organon. Finally,
Intervet was affected by difficult market conditions, especially in the
Americas.
Due to these adverse conditions, sales were down 11% to EUR 3.6 billion,
predominantly caused by a negative currency translation impact of 9%. Pharma's
operating income decreased 10% to EUR 692 million, which translates into a
return on sales of 19.5% (2002: 19.2%). Earnings benefited from substantial
cost savings and were favored by the special benefit of EUR 88 million from
Pfizer payment for the conclusion of the asenapine cooperation.
Sales of Organon's main products developed as follows:
Autonomous Autonomous
4th quarter 2003 growth, % Millions of euros or % Full year 2003 growth, %
- ---------------- ---------- ----------------------------- -------------- ----------
34 (63) Remeron (R) in U.S. 208 (45)
89 23 Remeron (R) in rest of world 316 26
139 15 Contraceptives 517 7
88 2 Puregon (R) 331 (1)
48 (5) Livial (R) 197 (1)
Sales for NuvaRing (R) are gathering momentum, aggregating EUR 40 million for
2003.
Toward the end of the year, the FDA issued an approvable letter for Follistim
(R)-AQ (TM) cartridge, while the Company submitted additional information for
Variza (TM) to the FDA.
Early in 2004, Organon and Sanofi-Synthelabo concluded that a single
management structure would strengthen the opportunities for commercial success
of antithrombotic Arixtra (R) in the complex U.S. market, where 2003 sales
aggregated EUR 7 million. Therefore, they agreed that Organon will transfer to
Sanofi-Synthelabo its remaining rights and development obligations for
Arixtra (R) and other oligosaccharides, such as idraparinux (SanOrg 34006), in
exchange for revenues based on future sales from jointly developed
antithrombotic products.
Intervet felt the impact of the weaker U.S. dollar and difficult market
conditions in the Americas. Performance in Europe was better.
Earnings of Diosynth are impacted by deteriorating conditions in third-party
markets for both chemical and biotech products. Looking ahead, it will also
face lower captive demand from Organon. To address this situation, additional
restructuring programs are in preparation.
11
Report for the year 2003
Coatings - solid performance; strongly benefiting from restructurings
4th quarter Millions of euros Full year
- -------------------- ------------------------------------ -------------------------
2003 2002 Ch.% 2003 2002 Ch.%
- ------ ------ ------ ------- ------ ------
Sales
374 396 Decorative Coatings 1,842 1,915
337 333 Industrial activities 1,336 1,310
211 224 Car Refinishes 880 937
205 206 Marine & Protective Coatings 832 830
65 125 Industrial Products** 391 532
(9) (7) Intragroup sales/other (48) (3)
- ------ ------ ------- ------
1,183 1,277 (7) Total 5,233 5,521 (5)
86 81 6 Operating income*** (EBIT) 431 465 (7)
7.3 6.3 Return on sales***, in % 8.2 8.4
EVA 161 153****
124 119 4 EBITDA 582 623 (7)
52 57 Capital expenditures 128 131
Invested capital***** 2,087 2,264
Return on invested capital, in % 19.8 20.0
Capital turnover 2.41 2.37
Number of employees***** 28,740 29,790
* 2002 sales figures per business unit have been adjusted for a slight
regrouping of activities.
** Included the Impregnated Papers activities, which were divested
effective June 30, 2003.
*** Excluding nonrecurring items.
**** Restated.
***** At December 31.
- -Autonomous growth 3% - negative currency impact 7%
- -Investing in growth opportunities in Asia Pacific
- -Returns - aggressively protected
-cost savings - workforce down 1,890
-strict asset management
- -Marine & Protective - star performer
- -Powder Coatings and Industrial Finishes - strong performance
- -Decorative Coatings and Car Refinishes - tough business conditions
- -Impregnated Papers - divested
12
Report for the year 2003
Coatings maintained its return on invested capital within the 20% ballpark,
despite difficult economic circumstances, negative currency influences, and
further increased pension costs. This was achieved through improvement of the
business mix by divesting Impregnated Papers and some smaller noncore
businesses and idle assets. We also stepped up our restructuring programs in
mature markets. In total, restructurings and divestments resulted in a
workforce reduction of 1,890 people, which was partially offset by headcount
increases in Asia Pacific. Restriction of capital expenditures to some 90% of
depreciation and further reduction of working capital contributed to
maintaining our ROI level.
Sales of EUR 5.2 billion were 5% lower than in 2002. Autonomous growth of 3%
was offset by a negative currency translation effect of 7%, with divestments
and acquisitions, on balance leading to a 1% decrease, which mainly related to
the divestment of Impregnated Papers.
Coatings' operating income of EUR 431 million was down 7% from 2002. Return on
sales decreased slightly to 8.2%. The benefits from the aggressive
restructuring programs did not offset the negative impact from weaker key
currencies and higher pension charges.
Conditions for decorative coatings in Europe were tough, especially in the
retail sector. The decorative coatings business in emerging markets continued
to expand. The industrial part of our portfolio held up reasonably well, not
only our star performer Marine & Protective Coatings but also the wood and coil
coatings activities of Industrial Finishes, and Powder Coatings. Market
conditions for Car Refinishes remained very competitive and pressure on volumes
continued.
We continue to grow in Asia Pacific, which now represents 14% of worldwide
Coatings sales. In 2003, we opened a powder coatings facility in Vietnam and a
nonstick coatings facility in Dongguan City, China, and announced the
investment in a decorative coatings facility in Suzhou, China. In addition, two
wood coatings facilities will come on stream in the first half of 2004.
Furthermore, we acquired full ownership of our powder coatings activities in
South Korea and decided to set up our own marketing and sales company for
marine and protective coatings in Japan.
In the coming years our main challenge will be a balancing act between
continued restructuring in mature markets and accelerated growth in emerging
markets.
13
Report for the year 2003
Chemicals - robust performance in a difficult market; forceful cost cutting
4th quarter Millions of euros Full year
- -------------------- ------------------------------------ -------------------------
2003 2002 Ch.% 2003 2002 Ch.%
- ------ ------ ------ ------- ------ ------
Sales
217 242 Pulp & Paper Chemicals 896 969
190 200 Functional Chemicals 789 831
175 206 Surface Chemistry 784 836
133 127 Base Chemicals 544 464
121 134 Polymer Chemicals 492 560
96 99 Resins 394 414
80 87 Catalysts 349 375
67 72 Salt 267 269
44 39 Energy 171 158
(67) (74) Intragroup sales/other (289) (278)
- ------ ------ ------- ------
1,056 1,132 (7) Total 4,397 4,598 (4)
85 79 8 Operating income** (EBIT) 324 344 (6)
8.0 7.0 Return on sales**, in % 7.4 7.5
EVA 56 32***
162 162 - EBITDA 638 672 (5)
87 75 Capital expenditures 237 248
Invested capital**** 2,560 2,850
Return on invested capital, in % 12.0 11.5
Capital turnover 1.63 1.54
Number of employees**** 14,010 15,050
* 2002 sales figures per business unit have been adjusted for a slight
regrouping of activities.
** Excluding nonrecurring items.
*** Restated.
**** At December 31.
- -Volumes and prices successfully protected in no-growth environment
- -Negative currency impact of 7% on sales
- -Cost saving programs paying off - workforce down 1,000
- -Divestment program - on schedule
- -Base Chemicals and Catalysts - strong performance
- -Pulp & Paper Chemicals - reaping benefits from cost savings
- -Polymer Chemicals and Surface Chemistry - under pressure; restructuring
intensified
- -Strict asset management - improved ROI and capital turnover
14
Report for the year 2003
Despite very difficult market conditions in the chemical industry, Akzo Nobel
Chemicals was able to turn in a satisfactory performance, as a result of its
forceful restructuring programs throughout the group. In 2003, the workforce
was reduced by 1,000 people, and several of the programs continue into 2004.
Overall, Chemicals' sales of EUR 4.4 billion were down 4% from 2002. Autonomous
growth was 1%, while currency translation had a negative impact of 7%.
Acquisitions and divestments, on balance, added 2%.
Operating income decreased 6% to EUR 324 million, which is 7.4% of sales (2002:
7.5%). Benefits from the restructuring programs and autonomous growth did not
offset the impact of lower exchange rates for key currencies, weak economic
conditions, higher pension costs, and somewhat higher raw material and energy
prices. Return on investment improved to 12.0% (2002: 11.5%) as a result of
Chemicals' tight capital management through control over working capital and
lower capital expenditures.
Catalysts again achieved a strong performance, while Base Chemicals benefited
from the acquisition of ECI Elektro-Chemie. Pulp & Paper Chemicals did better
as a result of cost-saving measures. Polymer Chemicals and Surface Chemistry
remained under pressure from soft market conditions.
In September, we announced our intention to sell our Catalysts, Phosphorus
Chemicals, and Coating Resins businesses in order to create room to maneuver
and further improve the Company's balance sheet. We are reassessing the
portfolio with the aim of focusing on fewer activities so that we can
concentrate our resources on those markets where we have leadership positions
on a regional and increasingly global scale. The aforementioned three
businesses are solid and profitable, together representing some EUR 1 billion
in sales. In the course of 2004, we expect divestment proceeds that reflect
their value.
We will continue to invest, both through organic growth and carefully selected
acquisitions, in profitable and leadership positions. Three significant
projects came on stream: a major expansion of our chlor-alkali plant in
Rotterdam, expansion of ethylene amines production in Sweden, and a grass-root
quat plant in Singapore. To meet growing demand from the rapidly expanding
South American pulp and paper industry, an investment in a "Chemical Island" at
the new Veracel pulp mill in Brazil was approved. Additionally, further chlor-
alkali expansion in Rotterdam and an increase in salt capacity in Hengelo, the
Netherlands, will go ahead.
2003 saw one selective acquisition, CIRS SpA (Italy), an antifouling/suspending
agent producer for the polymer industry.
15
Report for the year 2003
Nonrecurring items - reflecting substantial restructuring programs
In 2003, the Company recognized the following nonrecurring items:
Restructuring
Millions of euros Impairments charges Total
- ------------------------------------------ ----------- ------------- ----------
- Pharma (114) (40) (154)
- Coatings (5) (40) (45)
- Chemicals (19) (90) (109)
---------- ------------- ----------
Total restructuring and impairment charges (138) (170) (308)
---------- -------------
Gain on divestments 25
----------
Gross nonrecurring items (283)
Taxes 112
Minority interest (9)
----------
Nonrecurring items consolidated companies (180)
Nonrecurring items nonconsolidated companies (29)
----------
Net nonrecurring items (209)
Impairment charges at Pharma were made in the context of the reassessment and
redefinition of its global strategy. The writedowns concern facilities in the
United States, Japan, United Kingdom, and some other countries.
The restructuring charges consist of provisions for severance payments and
other restructuring costs. At Pharma, these predominantly concern the worldwide
restructurings at Organon. Coatings' charges relate to the restructuring of
Transportation Coatings and cost saving measures at various other activities.
At Chemicals, restructuring costs were incurred for especially Polymer
Chemicals, Surface Chemistry, Base Chemicals, and Chelates.
The nonrecurring gain on divestments mainly concerns the divestment of
Chemicals' property in the United Kingdom.
Nonrecurring items at nonconsolidated companies principally relate to
restructuring and anti-trust charges for Flexsys.
16
Report for the year 2003
Successful focus on cost - workforce down 4,080 due to restructurings
The number of employees developed as follows:
Restructuring/
December 31, divestment of Other December 31,
2003 underperformers changes 2002
- ---------------- ----------- --------------- ------- ------------
Pharma 20,680 (1,120) (20) 21,820
Coatings 28,740 (1,890) 840 29,790
Chemicals 14,010 (1,000) (40) 15,050
Others 1,150 (70) 1,220
----------- --------------- ------- ------------
Akzo Nobel 64,580 (4,080) 780 67,880
To date, the major restructuring programs initiated in 2001 and expanded
during 2002 and 2003, have resulted in a total workforce reduction by 6,280,
some 10% of the Company's workforce.
Especially in Coatings, the Company expanded its workforce in those
activities and regions where it is growing, such as China.
17
Report for the year 2003
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Millions of euros 2003 2002
- ------------------------------------------------ ----------- -------------
Earnings before minority interest 651 853
Depreciation and amortization 652 681
------ ------
Cash flow 1,303 1,534
Gain on divestments (30) (94)
Impairments 138 110
Changes in provisions, deferred tax assets, and
accrued prepaid pension costs 116 (172)
Retained income nonconsolidated companies 3 42
Changes in working capital (119) 117
Other items (14) 11
------ ------
Net cash provided by operations 1,397 1,548
Capital expenditures (581) (689)
Expenditures for intangible assets (27) (19)
Acquisitions (101) (257)
Proceeds from divestments 203 208
Net repayments nonconsolidated companies 78 (11)
Other changes (23) (11)
------ ------
Net cash used for investing activities (451) (779)
Dividends paid (370) (363)
------ ------
Funds balance 576 406
Net cash generated used for financing activities (342) (292)
Effect of exchange rate changes on cash and cash
equivalents (27) (49)
------ ------
Change in cash and cash equivalents 207 65
------ ------
18
Report for the year 2003
Strong funds balance of EUR 0.6 billion
The funds balance increased from EUR 0.4 billion to EUR 0.6 billion. Lower cash
flow from operations was more than compensated by lower cash used for investing
activities.
Cash flow from operations decreased from EUR 1.5 billion to EUR 1.4 billion in
2003, mainly due to the increase in working capital, which was caused by
inventory build-up at Pharma.
Focus on cash - strict control over capital expenditures and acquisitions
As a result of the Company's focus on cash, capital expenditures and
acquisitions were strictly controlled and made in line with the Company's
priorities.
Pharma's investments were substantially lower than in the previous year but
still significantly higher than depreciation. Coatings and Chemicals reduced
their investments to well below depreciation. Investments were targeted at
priority businesses and regions, particularly China and Central and Eastern
Europe. In these areas, growth continued at high rates and we opened several
new factories to participate in this development.
Acquisition expenditures mainly related to payments for CIRS and the final
settlement for the acquisitions of ECI Elektro-Chemie and Crompton's Industrial
Specialties, made in 2002. Proceeds from divestments principally related to the
sale of Impregnated Papers and idle properties.
EUR 750 million public bond and EUR 1.5 billion credit facility successfully
arranged
Net cash generated by financing activities predominantly concerned the proceeds
of the EUR 750 million bond sold in June 2003, more than offset by the
redemption of borrowings. Of this bond, EUR 650 million was swapped into
floating EURIBOR-related interest liabilities.
After the placement of this bond, the Company only made limited use of the
money market, including the Euro and U.S. commercial paper markets for short-
term funding requirements.
In November 2003, the Company entered into a five-year revolving committed
credit facility with a syndicate of relationship banks for an amount of EUR 1.5
billion. This facility can be used for general corporate financing purpose and
supports our Commercial Paper programs in the euro-market and in the United
States. It replaced the USD 1.0 billion credit facilities and EUR 1.0 billion
backup facility, which expired in the fourth quarter of 2003.
19
Report for the year 2003
CONDENSED CONSOLIDATED BALANCE SHEET
Millions of euros December 31, 2003 December 31, 2002
- ------------------------------------------------ ----------------- -----------------
Intangible assets* 590 629
Property, plant and equipment 3,967 4,402
Deferred tax assets 429 405
Deferred tax asset for minimum pension liability 361 503
Other financial noncurrent assets 1,076 1,309
Inventories 2,133 2,206
Receivables 2,671 2,815
Cash and cash equivalents 727 520
----------------- -----------------
Total 11,954 12,789
----------------- -----------------
Capital and reserves 3,326 3,216
Minimum pension liability (824) (1,118)
----------------- -----------------
Akzo Nobel N.V. shareholders' equity 2,502 2,098
Minority interest 140 137
----------------- -----------------
Equity 2,642 2,235
Provisions 2,581 2,574
Provision for minimum pension liability 1,342 1,794
Long-term borrowings 2,717 2,797
Short-term borrowings 441 979
Current liabilities 2,231 2,410
----------------- -----------------
Total 11,954 12,789
----------------- -----------------
Gearing 0.92 1.46
Invested capital 8,117 8,692
Return on investment, % 16.0 16.5
Capital turnover 1.55 1.55
Shareholders' equity per share, in EUR 8.76 7.34
Number of shares outstanding, in millions 285.7 285.7
* Intangible assets include capitalized prior service costs related to
the minimum pension liability of EUR 165 million at December 31, 2003,
and of EUR 173 million at December 31, 2002.
20
Report for the year 2003
CHANGES IN EQUITY
Capital Minimum Share-
and pension holders' Minority
Millions of euros reserves liability equity interest Equity
- ------------------------------ --------- --------- -------- --------- ------
Balance at December 31, 2002 3,216 (1,118) 2,098 137 2,235
Income 602 602 49 651
Dividends (343) (343) (27) (370)
Changes in exchange rates (149) (149) (10) (159)
Change related to minimum
pension liability 294 294 294
Changes in minority interest
in subsidiaries (9) (9)
--------- --------- -------- --------- ------
Balance at December 31, 2003 3,326 (824) 2,502 140 2,642
--------- --------- -------- --------- ------
Net borrowings down EUR 0.8 billion - balance sheet further strengthened
Invested capital at December 31, 2003, amounted to EUR 8.1 billion, down EUR
0.6 billion on year-end 2002, mainly due to negative currency translation
effects and asset management.
As a consequence of our debt reduction programs, net interest-bearing
borrowings were down EUR 0.8 billion to EUR 2.4 billion.
Equity increased EUR 0.4 billion, reflecting the EUR 0.3 billion after-tax
decrease of the minimum pension liability and 2003 income, partially offset by
dividends paid and negative currency translation effects.
Year-end gearing improved to 0.92 (December 31, 2002: 1.46).
Arnhem, February 2, 2004 The Board of Management
21
Report for the year 2003
Auditors' Report
We have audited the full-year condensed consolidated statement of income, the
condensed consolidated statement of cash flows, the condensed consolidated
balance sheet as well as the statement of changes in equity, included on pages
3, 18, 20, and 21, respectively, which have been derived from the 2003
financial statements of Akzo Nobel N.V. as audited by us. We issued an
unqualified auditors' report on these financial statements on February 2, 2004.
The statements and balance sheet referred to before are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
statements and balance sheet based on our audit.
In our opinion, these statements and balance sheet are consistent in all
material respects with the financial statements from which they have been
derived.
For a better understanding of the financial position and results of the Company
and the scope of our audit, these statements and balance sheet should be read
in conjunction with the complete financial statements from which they have been
derived and the auditors' report we issued thereon.
Arnhem, February 2, 2004 KPMG Accountants N.V.
22
Report for the year 2003
Additional Information Akzo Nobel N.V.
The explanatory sheets used by the CEO during Velperweg 76
the press conference can be viewed on Akzo P.O. Box 9300
Nobel's Internet site at: 6800 SB Arnhem
www.akzonobel.com/news/presentations.asp The Netherlands
Tel. + 31 26 366 4433
Fax + 31 26 366 3250
E-mail ACC@akzonobel.com
Internetwww.akzonobel.com
23