Akzo Nobel N : Q2 2022 Quarterly Report

REPORT

Q2

22

Rising to the challenge

The world's biggest offshore wind farm is being protected from the ravages of the North Sea by our International coatings. Hornsea 2 is located off the east coast of England and is capable of powering more than 1.3 million homes. All 165 of its towering 8MW turbines feature Interzone 954, a high-performance coating which has now protected over 2,000 offshore wind assets worldwide.

AkzoNobel	Report for the second quarter and half-year 2022	2

Our results at a glance

Highlights Grow & Deliver (compared with Q2 2021)

• Revenue up 14% and 10% higher in constant currencies, pricing up 16%
• ROS at 8.7% (2021: 13.3%), resulting from lower volumes and continued raw material and freight costs inflation
• Adjusted EBITDA at €337 million (2021: €419 million)
• Acquisition of Grupo Orbis completed in April 2022. Intended acquisition of Kansai Paint's business in Africa announced in June 2022. Intended acquisition of the liquid wheel coatings business of Germany-based Lankwitzer Lackfabrik GmbH announced in July 2022

Highlights Q2 2022 (compared with Q2 2021)

• Pricing up 16%; offsetting the increase of raw material and other variable costs. Volumes 9% lower
• Operating income at €205 million (2021: €384 million), includes €44 million negative impact from
  Identified items (2021: €49 million net positive impact). OPI margin 7.2% (2021: 15.3%)
• Adjusted operating income at €249 million (2021: €335 million)
• Net cash from operating activities decreased to negative €52 million (2021: positive €168 million)
• Net income attributable to shareholders at €106 million (2021: €261 million)
• EPS from total operations at €0.60 (2021: €1.40); adjusted EPS from continuing operations at €0.84
  (2021: €1.20)

Highlights half-year (compared with half-year 2021)

• Revenue up 13% and 10% higher in constant currencies, pricing up 16%
• Operating income at €437 million (2021: €687 million), includes €42 million negative impact from
  Identified items (2021: €45 million net positive impact). OPI margin 8.1% (2021: 14.4%)
• Adjusted operating income at €479 million (2021: €642 million)
• Net cash from operating activities decreased to negative €154 million (2021: positive €137 million)
• Net income attributable to shareholders at €260 million (2021: €478 million)

Outlook

AkzoNobel targets to grow at or above its relevant markets, in line with the company's Grow & Deliver strategy. Trends differ per region and segment, with raw material and other variable cost inflation (including freight) expected to gradually ease towards the end of 2022. AkzoNobel aims to continue to offset raw material and other variable cost inflation (including freight) through pricing initiatives. Macroeconomic uncertainties have increased due to geopolitical tension, the resurgence of COVID-19 and inflation. Assuming there are no further significant market disruptions, AkzoNobel aims to deliver the €2 billion adjusted EBITDA target for 2023, and an average annual 50 basis points increase in return on sales over the period 2021-2023*. AkzoNobel targets a leverage ratio of 1-2 times net debt/EBITDA and is committed to retaining a strong investment grade credit rating.

Summary of financial results

Second quarter								January-June
2021	2022		∆%		in € millions / %	2021	2022		∆%
2,511	2,853	14%		Revenue	4,774	5,378	13%
469	292	(38%)		EBITDA*	857	613	(28%)
419	337	(20%)		Adjusted EBITDA*	810	654	(19%)
384	205	(47%)		Operating income	687	437	(36%)
49	(44)				Identified items*	45	(42)
335	249	(26%)		Adjusted operating income*	642	479	(25%)
15.3	7.2				OPI margin (%)*	14.4	8.1
13.3	8.7				ROS (%)*	13.4	8.9
						Average invested capital*	6,673	7,332	10%
						ROI (%)*	19.3	12.7
62	67				Capital expenditures	119	124
						Net debt	1,857	3,865
						Leverage ratio (net debt/EBITDA)*	1.2	3.2
						Number of employees	32,800	36,100
168	(52)				Net cash from operating activities	137	(154)
261	106				Net income attributable to shareholders	478	260
187.0	175.9				Weighted average number of shares (in millions)	187.9	176.8
1.40	0.60				Earnings per share from total operations (in €)	2.54	1.47
1.20	0.84				Adjusted earnings per share from continuing operations (in €)*	2.38	1.70

* Alternative performance measures; please refer to reconciliation to the most directly comparable IFRS measures on pages 17 and 18.

Alternative performance measures (APM)

AkzoNobel uses APM adjustments to IFRS measures to provide supplementary information on the reporting of the underlying developments of the business. A reconciliation of the alternative performance measures to the most directly comparable IFRS measures can be found in the tables on pages 17 and 18.

* Please refer to the glossary on page 22 for underlying assumptions

AkzoNobel	Report for the second quarter and half-year 2022	3

Financial highlights

Q2 2022

Revenue

Pricing up 16%. Revenue was 14% higher, and 10% higher in constant currencies. Volumes were 9% lower, mainly as a result of destocking in the DIY channel in Europe and continued COVID-19 restrictions in China for both Performance Coatings and Decorative Paints. Furthermore, volumes were negatively impacted by supply constraints, especially in North America. Acquisitions added 3%.

Cost of sales

Raw material and other variable costs (including freight), adjusted for the impact of lower volumes, increased €321 million compared with the second quarter of 2021.

Half-year 2022

Revenue

Pricing up 16%. Revenue was 13% higher, and 10% higher in constant currencies, mainly resulting from significant pricing initiatives. Volumes were 8% lower, mainly as a result of destocking in the DIY channel in Europe and continued COVID-19 restrictions in China for both Performance Coatings and Decorative Paints. Furthermore, volumes were negatively impacted by supply constraints, especially in North America. Acquisitions added 2%.

Acquisitions

Grupo Orbis

In April 2022, the acquisition of Colombia-based paints and coatings company Grupo Orbis was completed. A provisional purchase price allocation is included in the figures and will be further updated and disclosed as work progresses.

Grupo Orbis results are included in business unit Decorative Paints Latin America and business unit Other for Performance Coatings. The allocation of revenues to the Decorative Paints and Performance Coatings segments is based on the nature and products of the underlying activities. Further allocation of

revenues to business unit level within the Performance Coatings segment is expected to be available as from the start of 2023.

The contribution of Grupo Orbis to operating income for the quarter is virtually nil, mainly as a result of additional depreciation, amortization and cost of sales resulting from the provisional purchase price allocation.

Other acquisitions

On June 1, 2022, the intention to acquire Kansai Paint's activities in Africa was announced. The acquisition is expected to be completed in the course of 2023. Further, on July 6, the intended acquisition of the liquid wheel coatings business of Germany- based Lankwitzer Lackfabrik GmbH was announced, which is expected to be completed before the end of 2022.

Revenue development Q2 2022
■ Increase	■ Decrease
15				4%	14%
		3%	10%

1016%

5

0

-5
-10	-9%
-15
	Volume	Price/	Acq./	Total	Exch.	Total
		mix	div.	in CC	rates

Revenue development half-year 2022
■ Increase	■ Decrease
15						2%	10%	3%	13%
10				16%
5
0
-5
-10			-8%
-15
		Volume		Price/		Acq./		Total		Exch.		Total
					mix		div.		in CC		rates

Revenue

Second quarter																						January-June
						∆%		in € millions																∆%
2021		2022		∆%		CC*					2021		2022		∆%		CC*
1,086	1,182		9%		6%		Decorative Paints				2,016	2,188	9%	6%
1,423	1,670		17%		13% Performance				2,755	3,188	16%	12%
										Coatings
2	1								Other activities				3			2
2,511		2,853		14%		10%		Total								4,774		5,378		13%		10%
* Change excluding currency impact.
in % versus Q2 2021								Price/				Acq./			Exch.
		Volume		mix					div			rates			Total
Decorative Paints						(8)		11				3					3				9
Performance Coatings				(9)	19				3					4				17
Total									(9)		16				3					4				14
in % versus year-to-date								Price/				Acq./			Exch.
2021								Volume		mix					div			rates			Total
Decorative Paints						(7)		11				2					3				9
Performance Coatings				(8)	19				1					4				16
Total									(8)		16				2					3				13
Volume development per
quarter (year-on-year) in %					Q2 21	Q3 21		Q4 21		Q1 22	Q2 22
Decorative Paints									22			(11)			(8)			(7)		(8)
Performance Coatings							30			(2)			(5)			(7)		(9)
Total												26			(6)			(6)			(7)		(9)
Price/mix development per
quarter (year-on-year) in %					Q2 21	Q3 21		Q4 21		Q1 22	Q2 22
Decorative Paints									(2)			10			10			12		11
Performance Coatings							4			11			14			19		19
Total												1			11			12			16		16
Currency development per
quarter (year-on-year) in %					Q2 21	Q3 21		Q4 21		Q1 22	Q2 22
Decorative Paints									(2)				-			1			2		3
Performance Coatings							(4)			1			2			2		4

Total

(3)

-

2

2

4

AkzoNobel	Report for the second quarter and half-year 2022	4

Financial highlights

Q2 2022

Operating income

Operating income at €205 million (2021: €384 million), despite pricing initiatives more than compensating for the continued significant impact from raw material and freight costs inflation. Lower volumes in both Decorative Paints and Performance Coatings, mainly due to destocking in the DIY channel in Europe, the impact of COVID-19 restrictions in China and supply constraints for all Performance Coatings businesses, especially in North America. Operating expenses increased as a result of increased manufacturing, supply chain and IT costs.

Operating income includes negative Identified items of €44 million, mainly related to transformation initiatives (2021: €49 million positive Identified items mainly relating to one-off gains from the Brazil ICMS case and UK pensions curtailment). OPI margin at 7.2% (2021: 15.3%).

Other activities decreased €7 million to €35 million negative (2021: €28 million negative), mainly due to higher costs for acquisitions in Q2 2022 and insurance gains in Q2 2021.

Adjusted operating income

Adjusted operating income at €249 million (2021: €335 million).

ROS at 8.7% (2021: 13.3%).

Half-year 2022

Operating income

Operating income at €437 million (2021: €687 million), despite pricing initiatives more than compensating for the continued significant impact from raw material and freight costs inflation. Lower volumes in both Decorative Paints and Performance Coatings, mainly due to destocking in the DIY channel in Europe, the impact of COVID-19 restrictions in China and supply constraints for all Performance Coatings businesses, especially in North America. Operating expenses increased as a result of increased manufacturing, supply chain and IT costs.

gains from the Brazil ICMS case and UK pensions curtailment). OPI margin at 8.1% (2021: 14.4%).

Other activities decreased €13 million to €66 million negative (2021: €53 million negative), mainly due to transformation initiatives and costs from acquisitions.

Adjusted operating income

Adjusted operating income at €479 million (2021: €642 million).

ROS at 8.9% (2021: 13.4%).

Impact from the conflict in Ukraine and sanctions on Russia

Our business in Ukraine and Russia combined represented about 2% of our revenue prior to the start of the conflict, of which the vast majority concerns Russia.

In Q1, activities in Ukraine came to a halt. In Russia, our Aerospace Coatings activities and new investments and marketing activities had been suspended.

In Q2, following the EU sanctions, the majority of our coatings business in Russia was suspended and the residual Russian business will be locally operated. More of the remaining business in Russia could decline in the next months, especially due to limited availability of raw materials in Russia.

In Q2, the direct financial impact from impairment of accounts receivable and inventories was immaterial.

Operating income

Second quarter								January-June
2021*		2022		∆%		in € millions		2021*		2022		∆%
234	128	(45%)		Decorative Paints	377	241		(36%)
178	112	(37%)		Performance Coatings	363	262		(28%)
(28)	(35)				Other activities	(53)	(66)
384		205		(47%)		Total		687		437		(36%)

• Operating income per segment for 2021 has been updated to reflect changes in the financial reporting structure related to a narrower definition of corporate activities and corporate costs in 'Other activities'. More information is available on our website.

Adjusted operating income

Second quarter								January-June
2021*	2022		∆%		in € millions	2021*	2022		∆%
187	133	(29%)		Decorative Paints	331	238		(28%)
171	143	(16%)		Performance Coatings	359	292		(19%)
(23)	(27)				Other activities	(48)	(51)
335		249		(26%)		Total		642		479		(25%)

• Adjusted operating income per segment for 2021 has been updated to reflect changes in the financial reporting structure related to a narrower definition of corporate activities and corporate costs in 'Other activities'. More information is available on our website.

AkzoNobel around the world

Revenue by destination

			E	A
		%	D
A	North Asia	18		B
B	South Asia Pacific	12
C	EMEA	50
D	North America	12	C
E	South America	8
		100

(Based on the full-year 2021)

Operating income includes negative Identified items of €42 million, mainly related to transformation initiatives (2021: €45 million net positive Identified items, mainly relating to one-off

AkzoNobel	Report for the second quarter and half-year 2022	5

Financial highlights

Half-year 2022

Financing income and expenses

Financing income and expenses increased by €28 million to €40 million. Interest on net debt increased by €13 million, mainly as a result of the bonds issued in March 2022 and financing related to the Grupo Orbis acquisition. Other interest includes €11 million expenses from Argentina and Türkiye hyperinflation accounting and €10 million interest income related to the UK ACT case, the latter booked as Identified item. The finance income and expenses in Q2 2021 included a gain of €20 million from one-off interest income related to the Brazil ICMS case.

Income tax

The effective tax rate was 31.5% (2021: 28.4%). The increase compared with the previous year is mainly related to a €14 million true-up of the tax charge related to the UK ACT case, booked as Identified item. Excluding Identified items, the effective tax rate was 28.5% (2021: 25.1%).

Net income

Net income attributable to shareholders was €260 million (2021: €478 million). Earnings per share from total operations decreased to €1.47 (2021: €2.54), including the impact of share buyback programs.

Operating income to net income

Second quarter			January-June
2021		2022		in € millions		2021		2022
384	205		Operating income	687		437
(4)	(28)		Financing income and expenses	(12)		(40)
8	5		Results from associates and joint ventures	15		13
388	182		Profit before tax	690		410
(123)	(67)		Income tax	(196)		(129)
265	115		Profit from continuing operations	494		281
7	(6)		Profit from discontinued operations	5		(6)
272	109		Profit for the period	499		275
(11)	(3)		Non-controlling interests	(21)		(15)
261		106		Net income		478		260

New solar project boosts ESG performance

A major solar energy project was completed at our Izmir powder coatings facility in Türkiye. More than 2,300 panels have been installed, making AkzoNobel the first company to invest in solar energy in the Aegean Free Trade Zone. It's another step towards realizing our ambition of 100% renewable electricity by 2030. This drive to reduce carbon emissions was also recognized with AkzoNobel featuring in the top 25 companies on Euronext Amsterdam's new AEX® ESG Index.