Akzo Nobel reports 13% decline in 2Q net income to Euro 155 million for 2009

AMSTERDAM, The Netherlands, July 29, 2009 (Press Release) - Akzo Nobel N.V (AkzoNobel) today announced its results for the second quarter of 2009. Trading remained tough throughout all of the businesses and, as a result, the company reported a revenue decline of 10% to Euro 3,668 million, while EBITDA was Euro 527 million, 9% lower.

AkzoNobel's CEO Hans Wijers commented; "In March, we saw early indications that markets may be stabilizing and we have seen that trend continue into the second quarter. However, this gradual stabilization is at significantly lower levels than 2008. With the exception of some emerging markets, we see little significant recovery of growth. Due to the continuing economic uncertainty, forward visibility still remains limited. Therefore, management actions continue to focus on customers, costs and cash. Our Q2 results show that these actions are beginning to bear fruit."

Decorative Paints

In Europe, the professional segment continued to be weak due to low construction activity, while the retail business was more resilient. The US paint market continued to experience soft demand, but the contraction in the second quarter was less severe than during the first quarter of 2009. Integration savings and strong cost management initiatives have helped to mitigate the volume shortfall. AkzoNobel gained market share in Latin America, while markets across the Asia region were mixed. China further stabilized in the quarter. Performance in India was positive, despite pressure on revenue and margins. Overall, margins were positively impacted by price increases implemented in 2008.

Performance Coatings

Performance Coatings benefited from margin management and cost improvement programs. In our Industrial Activities businesses, the company has closed or restructured 8 production sites in mature markets and will continue to align the cost structure with lower trading levels. Marine Coatings again had a good quarter, despite lower new construction and maintenance demand. Car Refinishes experienced improved demand in tough market conditions, compared with the first quarter of 2009.

Specialty Chemicals

Market conditions remained weak, with a volume decline of 18% that was partly compensated by favorable prices (5%), currencies (1%) and acquisitions (4%). Despite the continued challenges, uncertain feedstock costs and heightened competitive pressure in the market, an unchanged EBITDA margin of 16.6% was realized. Industrial Chemicals acquisitions to a large part offset the volume decline, where sourcing actions, aggressive cost control and effective margin management resulted in a Surface Chemistry EBITDA on a par with 2008, despite a 27% volume decline.

Improved cash management

AkzoNobel has already outlined its initiatives to conserve cash and improve working capital utilization. Compared with Q1 2009 operating working capital decreased by Euro 142 million due to lower sales and focused working capital management.

Debt maturities lengthened

Following the recent completion of refinancing activity, the weighted average maturity of AkzoNobel's debt has been extended from below 2 years at June 2008 to in excess of 4 years at June 2009. In May 2009, a Euro 1 billion bond matured. In March 2009, the company refinanced through a 7.25% Euro 750 million bond, maturing in 2015. Early April 2009, AkzoNobel also issued a 8% £250 million bond, maturing in 2016. At the end of June 2009, the company issued Euro 150 million new private debt.

ICI synergies and restructuring

The company remains on track to meet 2011 savings targets of at least Euro 540 million, made up of ICI synergies (Euro 340 million) combined with further significant additional restructuring (Euro 200 million). Major restructuring and integration projects are ongoing in Decorative Paints particularly in relation to the supply chain and standardization. In Performance Coatings, significant headcount reduction programs have been implemented in Industrial Activities and Car Refinishes, particularly in mature markets. In June 2009, AkzoNobel announced the intention to reduce headquarters staff by 20% by 2010.

Financial highlights

Continuing weak global demand contributed to a 16% volume decline with revenue at Euro 3.7 billion, 10% lower than last year. EBITDA was 9% lower at Euro 527 million, supported by lower raw material costs and cost reduction programs. The EBITDA margin was 14.4% (2008: 14.1%). Operating working capital decreased to 16.3% (Q2 2008: 17.1%).

Revenue

Volumes were 16% lower than last year, mitigated by 5% price increases which were secured in the second half of 2008. Demand in Decorative Paints picked up after a slow start to the year, resulting in 5% lower revenue than the previous year. The first quarter of 2009 was 11% lower than 2008. Revenue in Performance Coatings was 14% lower, mainly as a result of lower demand in Industrial Activities and Car Refinishes. Specialty Chemicals experienced lower demand across all businesses.

Acquisitions and divestments

Revenue increased by 1% due to acquisitions and divestments, mainly in previous periods. In Decorative Paints, we acquired a German and a French distributor in Q1, 2009. In Performance Coatings, the effect of acquisitions is due to the acquisitions of Enviroline and Soliant in Q4, 2008. In Specialty Chemicals, we acquired LII Europe and additional interests in joint ventures in Q1, 2009. During 2008, we divested several businesses which still contributed to revenue in Q2, 2008. These businesses were reported in the "other" category.

EBITDA

EBITDA totaled Euro 527 million, 9% lower than 2008. Margin management and the results from ongoing cost reduction programs delivered an EBITDA margin of 14.4% (2008: 14.1%). In Decorative Paints, EBITDA in the US was impacted by the investment in the relaunch of the Glidden brand in nearly 2,000 customer stores. With demand down in the mature markets, margin management, cost reduction and operational efficiency remain priorities. EBITDA margins remained strong, particularly in Latin America and Asia. In Performance Coatings, both the Marine and Protective Coatings and the Packaging Coatings businesses delivered EBITDA growth, while EBITDA in Car Refinishes and Industrial Activities remained under pressure. Performance Coatings' EBITDA margin increased to 15.8% (2008: 14.0%), reflecting significant progress in reducing costs. The businesses in Specialty Chemicals kept the overall EBITDA margin at 16.6%.

Restructuring costs

Major restructuring projects in Decorative Paints were related to supply chain and other ICI integration projects in the production and logistics area. In Performance Coatings we incurred costs for headcount reduction programs in Industrial Activities and Car Refinishes, in mature markets. In June 2009, we announced an intended 20% reduction of staff working at the headquarters, recognizing a provision of Euro 11 million on our balance sheet. In addition, we are relocating and consolidating our R&D facilities in the UK and the Netherlands.

Other incidental items

Other incidental items include Euro 17 million currency translation gains (non-cash), reported on the lines results from major legal, antitrust and environmental cases and other income/ (expenses).
In Specialty Chemicals, we sold redundant land. The gain of Euro 4 million is reflected in results on acquisitions and divestments.

Interest

The net financing charges increased from Euro 38 million to Euro 89 million:

• Financing income decreased to Euro 13 million (2008: Euro 53 million) as cash has been utilized in the share buyback program in 2008.
• Financing expenses on pensions increased to Euro 45 million (2008: Euro 12 million), due to lower expected returns on plan assets.
• Other financing expenses were Euro 57 million (2008: Euro 79 million). In 2009, favorable noncash currency translation effects and fair value changes of derivatives (Euro 19 million) more than offset higher interest payable on refinanced bonds. Furthermore, an incidental interest charge related to ICI (Euro 7 million) was booked in 2008.

Tax

The year-to-date tax rate is 30% (2008: 29%), due to a net increase in tax contingencies and specific geographic items. The cash tax out is higher than the profit and loss charge due to payments related to tax breakup costs, withholding tax and liabilities in respect of prior years.

The "other" category

In the "other" category, we report activities which are not allocated to a particular business. Corporate costs (the unallocated costs of our head office and shared services center in the Netherlands) continue to decline compared with the previous year due to cost savings programs.

Other costs include, among others, sharebased payments and the results from some small businesses and holding companies.

Decorative Paints

• Revenue was down 5% (Q1 2009: 11%)

• Synergy programs and restructuring ahead of plan, net workforce reduced by more than 2,100 employees (8%) compared with 2008

• EBITDA margin at 13.1% (2008: 14.1%) remained strong due to margin management and stable raw material costs

• Marketing initiatives focusing on innovation and sustainability

Revenue was 5% down due to volumes being down 10% (Q1 2009: 16% down). Projects focusing on the simplification of the supply chain and harmonization and optimization of our product offerings had highest priority. Synergies and restructuring benefits continued to deliver ahead of plan. The EBITDA margin was 13.1% (2008: 14.1%). Working capital improvement actions are ongoing.

Europe

The professional segment continued to be weak in Europe due to low construction activity, while the retail business, in general, was more resilient. Market development varied significantly by country from low growth in Poland to double-digit declines in Greece, Turkey, the Baltic countries and Russia. The Benelux remained the strongest market and in the UK, the retail market dynamics continued to be driven by third party promotional activity, limiting the market decline. On average for Europe, half of the volume drop in the quarter was offset by positive price development. We gained market share in the higher-value segments of the market in particular. We have not seen evidence of a move to private label paints. Two integrated stores have been acquired in the Paris area while a part of the store business in Germany has been divested.

Major restructuring of the supply chain resulted in site closures being announced in Germany and France and implemented in Eastern Europe. Volumes have been transferred to other sites to optimize the utilization of the current and future capacity.

Marketing initiatives in the second quarter focused on consumer innovations designed to make painting easier. The self-cleaning facility of the Dulux Paint Pod saves up to 10 times the volume of water used to clean traditional rollers. We launched the Weathershield BackPack roller system which makes exterior decoration easier, faster and safer. In May, we launched the Cuprinol PowerPad for Decking - a battery-powered applicator which saves time and makes painting decking easier without compromising on a great finish.

Americas

Revenue and volumes were down compared with 2008 due to the ongoing impact of the recession. The US paint market continued to experience soft demand, but the contraction in the second quarter was less severe than during the first quarter of 2009. There is some improvement in the do-it-yourself (DIY) market as the rate of contraction is slowing and key retailers are seeing a shift from trade to DIY. Trade continued to contract as weakness spread to commercial segments. The impact of lower volumes was compensated by the translation effect from the US dollar into euros. Integration savings and strong cost management initiatives have helped to mitigate the volume shortfall. EBITDA was impacted by costs from the national "Glidden Gets You Going" media campaign which began in June resulting in strong media exposure. Integration and restructuring plans, involving a site closure in Hudson, closure of a number of non- profitable stores and various distribution projects were completed as planned.

In May 2009, our Ralph Lauren Paints ranked highest in the Interior Paint Satisfaction Study^TM.

The pace of the contraction of the Canadian economy appears to be diminishing. In constant currency, revenue in the quarter was up on last year, with lower volumes being offset by higher prices. The weakness of the Canadian dollar compared with the US dollar made imported raw materials more expensive. This was mitigated by cost reduction measures. The new Montreal distribution centre was officially opened on June 11.

In Latin America, revenue in constant currencies was at the same level as in 2008 (adverse currency translation effect was 5%). In both Brazil and Argentina, we gained market share. Our primary focus is on increasing volumes of higher margin products, like Sparlack, Coralmur and Decora and strengthening our distributor relationships. In Brazil, the Raposo Tavares site will be closed and production will be transferred to Maua. Decreased operating cost helped EBITDA improve.

Asia

Markets across the Asia region were mixed. Revenue, in constant currencies, was below 2008 (overall favorable currency translation effect was 7%). China further stabilized in the quarter. Performance in India was positive, despite pressure on revenue and margins. The situation in South East Asia varied by country, with tougher conditions in Singapore and Malaysia and positive signs in Vietnam and Indonesia. Margins remained strong on the back of price increases implemented in 2008. We experienced lower raw material prices within the region, especially in China. Cost saving measures and synergies have resulted in an improved EBITDA. Given the economic climate, we have focused on prioritizing investment to maintain customer relationships and sustaining demand generating activities. Two of our key focus areas have been enhanced point of sale tinting stores in China and bringing sustainable products to our customers in South East Asia, ahead of competition.

Performance Coatings

• Revenue decreased by 14%; a similar trend to previous quarter
• EBITDA margin improved to 15.8% (2008: 14.0%)
• Margin management initiatives delivered value
• Cost levels decreased as restructuring programs gathered pace
• Strong performance in Marine and Protective Coatings and Packaging Coatings

Revenue declined by 14%, with price increases of 5% partly offsetting a 19% volume decline. Compared with last year, the decline in volume is stabilizing for all businesses, with the exception of Marine and Protective Coatings where the slowdown is more visible than before. All units clearly benefited from margin management and cost reduction programs, leading to an EBITDA of Euro 164 million, 2% lower than in 2008. The EBITDA margin was 15.8%, 1.8% ahead of the previous year. There is an ongoing focus on managing working capital and capital expenditures.

Industrial Activities

In our Industrial Activities businesses, revenue has improved steadily, due mainly to customer re-stocking in our coil activities in the Americas and in Specialty Plastics' consumer electronics business in Asia Pacific. Wood coatings continue to experience lower demand across all regions, driven by lower construction activity. We have lowered our cost base due to restructuring and cost reduction initiatives. Continued benefits are expected for the remainder of the year. Since the beginning of 2008, we have closed or restructured 8 production sites in mature markets. We will continue to align our cost structure with lower trading levels. In Powder Coatings, recovery in demand has been limited, although activity levels have stabilized. Development activities continue to focus on Eastern Europe and Asia, for example further investment in Turkey and the opening of a new technology center in Ningbo, China, while in Western Europe and the US, we continue to adjust to the lower level of activity.

Marine and Protective Coatings

It was a strong second quarter, although slowdown in volume was more visible (8% decline). Revenue and margins remained strong and the cost control plans delivered value. Marine had a good quarter, despite lower new construction and maintenance demand. In Protective Coatings, revenue for the quarter improved compared with 2008. We have completed the integration of the Ceilcote business into the North American sales operation. Yacht also improved over last year, with cost savings being a significant contributor. The European superyacht market remains strong, while demand in the European distribution business and for new pleasure craft in the Americas is down. In Aerospace, a slowdown in off-take from both the original equipment manufacturer and maintenance sectors was visible. However, demand for livery changes has been strong.

Car Refinishes

Although market conditions remain tough, all regions experienced improved demand compared with the first quarter of 2009. Increased demand was especially noticeable in Western Europe and North America's Vehicle Refinishes Business. Total revenue was down 14% on the previous year. Our Automotive Plastic Coatings (APC) business has been hit hardest by the unfavorable economic climate but is slowly improving.

Margin management and a favorable product mix have mitigated the impact of the lower volumes and weakening currencies. Further compensation was achieved via the restructuring and cost avoidance programs that are being implemented as of the end of last year and have already resulted in considerable cost savings versus 2008 on a comparable basis (eliminating currency and acquisition impact).

On the innovation side, Car Refinishes introduced a new do-it-yourself (DIY) scratch repair and protection solution, called StickerFix, which makes life easier for car owners. The business has also launched an automotive spray gun which can paint and cure simultaneously, saving energy and time.

Packaging Coatings

Packaging Coatings had a good quarter, driven by margin management, cost control and some of the business towards the end of the second quarter. Compared with the previous year, we experienced volume declines in all geographical regions, notably Europe and North America. Shortfalls in the beverage can segment have reduced in the second quarter, while other segments continued to suffer. We have offse recovery t lower volumes through a stronger focus on margin management and cost control. After the slowdown at the beginning of 2009, demand in Asia picked up in May and June for all segments. One of our new products is Aqualure 915, an ultra pliable lacquer which flexes with the new lightweight steel cans while maintaining a perfect barrier to protect the liquid inside.

Specialty Chemicals

• Revenue declined by 8%
• Cost and cash savings initiatives contributed in all businesses
• EBITDA margin maintained at 16.6%
• Surface Chemistry and Polymer Chemicals markets remain under pressure
• Strong performance in Pulp and Paper and Functional Chemicals

Market conditions in Specialty Chemicals businesses remained weak, particularly in the European region. Volumes during the quarter were 18% below last year (Q1 2009: 16%). However, the volume shortfall was partially compensated by favorable prices (5%), currencies (1%) and acquisitions (4%). As a result, revenue was 8% below the second quarter of 2008.

The focus on customers, cost and cash is paying off as many initiatives favorably impacted our cost base in the quarter. Consequentially, EBITDA amounted to Euro 219 million, 8% below 2008. The EBITDA margin was unchanged at 16.6%, despite the continued challenges created by weak demand, uncertain feedstock costs and heightened competitive pressure in the market. Working capital improvement actions are underway.

Functional Chemicals

Functional Chemicals volumes remained under pressure, although there was some seasonal uplift in Elotex and Bermocoll. However, the overall volume remained 19% below last year as consequence of the impact of reduced demand in the construction, mining and oil and micronutrients industries.

We continued to compensate the lower sales volume with margin management initiatives, procurement efforts and fixed cost reductions. Restructurings have been started in several units, such as Argentina, Elotex, Polysulphides and Cellulosic Specialites. As a consequence, operational performance in Q2 was well above the previous year. The growth initiatives in China and the construction activities in Ningbo are progressing well.

Industrial Chemicals

Market conditions remain difficult in our Industrial Chemicals businesses due to weak demand and increased market pressure on pricing. However, the contribution of the LII Europe and Salinco acquisitions almost completely offset the 22% decline in volume in the quarter. EBITDA was buoyed by significant cost savings and new sources of income, such as the secondary use of the salt caverns. The integration of LII Europe is progressing well.

Pulp and Paper Chemicals

The performance of our Pulp and Paper Chemicals business held up despite a 20% drop in volume in the quarter. The volume decline was mostly offset by margin management actions, favorable currency developments and cost reduction efforts. Our business in Europe continues to struggle as customers have curtailed production, while the volume development in Asia and South America showed some positive signs. Early in the second quarter, new production capacity was opened in Brazil at Jundiai and Tres Lagoas.

National Starch

National Starch volumes were down 8%, driven by weak industrial and food demand in North America and Asia Pacific. The volume decline was more pronounced in the industrial segment as demand in paper making in North America remains depressed. Despite the pressure on volumes, revenue was stable as a result of favorable currency, mix and price effects. Margins remain under pressure from high net corn costs, though some improvement is apparent versus the first quarter of the year. In addition, we are implementing comprehensive cash and cost protecting measures across all regions.

Surface Chemistry

The Surface Chemistry business was impacted by the pronounced weakness in the industrial markets, particularly mining and fertilizer. Demand in the consumer sectors (personal care and fabric and cleaning) has stabilized, although it remains somewhat below pre-recession levels. Revenue declined by 21% for the business unit as a whole as price, mix and currency effects were insufficient to counter the 27% contraction in volume. However, sourcing actions, effective margin management and agressive cost control measures resulted in an EBITDA result that was equal to last year.

Polymer Chemicals

Polymer Chemicals activities continued to be impacted by the unfavorable macro economic conditions in key markets such as housing, automotive and durable goods. From a regional perspective, the Americas showed signs that decline is levelling off, European markets remained challenging, while Asia Pacific realized positive growth. Overall volumes fell 16% but were largely compensated by the acquisition of KAC and a favorable currency effect.

We are undertaking a series of business improvement programs to lower cost in the short term and redesign the business model. This is expected to deliver a more efficient cost structure and allow us to better serve our customers' needs.

Chemicals Pakistan

Our activities in Pakistan performed well in the quarter as the operational result was only slightly below the very good level of the previous year. Life sciences activities experienced excellent growth in all segments. However, this was offset by weak downstream demand and consequently, lower revenue, in the Soda Ash and Polyester chemicals businesses.

During Q2, we agreed to divest our 75% stake in the Pure Terephthalic Acid (PTA) activities to the Korean company KP Chemical Corporation (KPC).

Shareholders' equity

Shareholders' equity as at June 30, 2009, increased to an amount of Euro 7.7 billion, mainly due to net income of Euro 148 million. The dividend payments of Euro 325 million offset the change of cumulative translation reserves, which increased mainly due to the stronger pound sterling.

Dividend policy

Our dividend policy is based on an annual payout ratio of at least 45% of net income before incidentals and fair value adjustments for the ICI acquisition. The final dividend will be proposed to the Annual General Meeting on April 28, 2010.

Invested capital

Invested capital at June 30, 2009, totaled Euro 14.3 billion, which was Euro 0.8 billion higher than year-end 2008. This is mainly caused by foreign currency effects on intangibles and property, plant and equipment, as the pound sterling strengthened.

Furthermore, our long-term receivables increased due to additional payments of Euro 0.2 billion to pension funds in the UK. Acquisitions resulted in a Euro 0.1 billion increase of invested capital.

Despite seasonal influences in Decorative Paints, operating working capital remained at the same level as at the beginning of the year. Compared with Q1 2009 operating working capital decreased by Euro 142 million due to working capital management. Expressed as a%age of revenue, operating working capital was 16.3% (Q1 2009: 19.4%; Q2 2008: 17.1%).

Working capital items outside the businesses increased by Euro 0.3 billion as a consequence of higher values for hedging instruments and higher prepaid expenses.

Cash and debt management

Operating activities in the first half year resulted in a cash outflow of Euro 5 million (2008: Euro 214 million cash outflow). The change compared with 2008 is mainly due to lower operating working capital in the first half year. Year-todate changes in provisions mainly related to additional payments for pensions in the first quarter of both 2008 and 2009.

In May 2009, a Euro 1 billion bond matured. We refinanced through a 7.25% Euro 750 million bond in March 2009, maturing in 2015. Early April 2009, we also issued a 8% £250 million bond, maturing in 2016. At the end of June 2009, we issued Euro 150 million new private debt.

During the first half year our credit rating was downgraded. Current ratings are Standard & Poor's BBB+ (negative outlook) and Moody's Baa1 (negative outlook). We continue to aim to maintain a strong investment grade credit profile.

Pensions

The funded status of the pension plans at June 30, 2009, was estimated to be a deficit of Euro 1.5 billion compared with Q1 2009: Euro 1.4 billion (year-end 2008: Euro 1.0 billion). The movement since Q1 2009 is due to lower discount rates and higher inflation expectations, partially offset by increased asset values.

Workforce

At year-end 2008, our workforce amounted to 60,040 employees (June 30, 2008: 62,300 employees). At June 30, 2009, our workforce had decreased to 58,810 employees. Acquisitions resulted in an increase of 890 employees, while 2,120 employees left, mainly due to continued restructuring and realized synergies.

Related party transactions

Reference is made to note 23 of our Financial Statements for 2008. In the first half of 2009, a significant related party transaction was a Euro 115 million gas supply by the company to Delesto, a 50% joint venture of AkzoNobel and Essent. Delesto transforms gas into steam and electricity. The steam and part of the electricity is used in our production processes. The excess electricity is sold to the national grid.

Contingent liabilities

Reference is made to note 22 of our Financial Statements for 2008.

Subsequent events

A payment of approximately Euro 75 million will be received during Q3 on a contingent basis as part of ongoing tax litigation. The relevant items will be accounted for in our 3rd quarter report.

Outlook and medium-term targets

AkzoNobel has strong market positions in a number of highly attractive sectors with a wide geographical spread. Continuous focus is being given to margin management, cost reduction, and cash generating actions so that the company is well positioned to meet the current challenges and, as a result, will be in good shape to take advantage of the recovery when it comes. The economic outlook remains uncertain which makes it difficult to predict with any confidence. The company remains committed to achieve its medium-term target of an EBITDA margin of 14% by the end of 2011, deliver the combined Euro 540 million synergies and restructuring initiatives, drive margin management programs and rigorous cost and cash control across the company.