1 ANNUAL REPORT MMXI 2011 MMXII 2012
2 HCA ANNUAL REPORT MMXI 2011 MMXII 2012
3 Contents Profile Key figures An eventful year Vision, mission, strategy and objectives Progress of business in 2011/2012 Sales New products / Research & Development Results Investments Cash flow and financing Developments per Division Information systems employees corporate social responsibility Risk management Profit appropriation Outlook for 2012/2013 Corporate Governance Report of the Supervisory Board The Holland Colours share Financial Statements Other information Audit opinion by the external auditor organisation chart as at 1 April 2012 Contact 1 The Annual Report of Holland Colours is also available in Dutch on our website
4 2 PRO- FILE Holland Colours NV was incorporated in 1979 and has been listed on the NYSE Euronext Amsterdam stock exchange since It is an independent Dutch company with offices in the United States, Mexico, Europe and Asia. Since April , just over 50% of the shares are held by the investment company Holland Pigments BV, in which all 383 employees of Holland Colours participate, among others. The employees collectively hold approximately 20% of the shares in Holland Pigments BV. The core values of the company's corporate culture are entre-preneurship, respect and responsibility towards society and staff. Products Holland Colours makes products for colouring synthetic materials, the main products being Holcobatch and Holcoprill. Both these products have the advantage of being free flowing, dust-free and very easy to dose, allowing the colour to be absorbed quickly by the required material. Holland Colours' colour preparations are particularly suitable for Polyvinylchloride (PVC) and Polyethylene terephthalate (PET). Furthermore, Holland Colours makes pastes for colouring Silicones & Elastomers, PET packaging and other applications. Markets Holland Colours concentrates worldwide on three focus markets: Building & Construction (especially PVC applications); Packaging (especially PET applications); Silicones & Elastomers. More than 80% of sales are realised in these three markets. Its substantial global market share means Holland Colours is a key player in each of these markets. Holland Colours' worldwide presence means it is never far away, and is able to supply national and international companies with solutions both promptly and efficiently. Building & Construction Holland Colours has been a specialist in colouring PVC since its incorporation. Its colouring systems are used in: Pipes and fittings; Cladding/siding; Window profiles; (Foam) sheeting / roofing materials; Fencing and decking. The manufacturers of these products are Holland Colours' customers, and form part of the Building & Construction market. This market is well established, follows construction cycles and is subject to large regional variations. Packaging Holland Colours' colour preparations are well suited to PET applications. The market for PET bottles is characterised by fierce competition, and is driven by brandowners, the major soft-drink, foodstuffs and cosmetics brands. Holland Colours customers are the manufactures of these bottles and packaging materials. In addition to water and soft drinks, PET is increasingly being used to package beer, wine and milk. Holland Colours' colour preparations play a key role in these new market segments. Silicones & Elastomers The market for Silicones & Elastomers comprises a number of different segments. Sealants are used in the Building & Construction market in particular. Silicone rubber products (elastomers) are mainly used in the automobile and electronics industry, but also increasingly in the textile industry (prints on shirts). The big siliconepolymer and compound manufacturers operate across the globe and play a key role as both suppliers and customers. End users increasingly require coloured products, and Holland Colours is well-placed to meet this need. Organisation and sites Holland Colours is organised in three regional Divisions that operate as profit centres in each specific region, namely: Europe (including the Middle East, India and Africa), the Americas and Asia. The distribution of sales is as follows: Europe 55%, Americas 30% and Asia 15%. Virtually the entire production is generated by the four principal plants in the Netherlands, Hungary, the United States and Indonesia (Surabaya). Furthermore, Holland Colours has sites in Mexico, Canada, England, Indonesia (Jakarta), China and Japan. Local agents are used in many countries to ensure closer relations with customers. The functions that are centrally organised are: Procurement, Research & Technology, Business Processes & ICT, Finance and Legal Affairs.
6 KEY FIGURES Financial year as at March / / / / /08 RATIOS LINKED TO CORPORATE OBJECTIVES Sales growth from continuing operations 1 (%) (4.3) (11.4) 2.2 Return on average invested capital 6 (ROI) (%) (1.9) 8.4 Growth in earnings per share (%) (46.0) (178.3) (58.7) RESULTS ( million) Sales growth from continuing operations Operating result from continuing operations (0.6) 3.0 Net result from continuing operations (0.6) 1.4 Sales Operating result (0.6) 2.4 Net result (0.6) 0.8 CASH FLOW ( million) Cash flow Investments Depreciation BALANCE SHEET ( million) Working capital Invested capital Equity (excl. minority interest) Balance-sheet total RATIOS Total debt 4 / EBITDA Operating result / sales (%) (1.2) 5.0 Solvency 5 (%) Return on average invested capital 6 (ROI) (%) (1.9) 8.4 Return on average equity (%) (3.1) 6.5 Interest coverage ratio (0.7) 3.3 Current assets / current liabilities (current ratio) FIGURES PER SHARE ( ) Net result from continuing operations (0.72) 1.57 Total net result (0.72) 0.92 Cash flow Equity (excl. minority interest) Dividend Highest price Lowest price Closing price OTHER DATA Number of outstanding shares 860, , , , ,351 Average number of employees (FTE) ) The discontinued operations concern the activities of Holland Colours Pigment Kft, which were discontinued as of December 31, 2007, 2) Cash flow: net result + depreciation, 3) Working capital: inventory + accounts receivable -/- non-interest bearing liabilities, 4) Total debt: sum of interest-bearing liabilities, 5) Solvency: equity (incl. minority interest) / balance-sheet total, 6) Return on invested capital: operating result / (equity (incl. minority interest) + provisions + interest-bearing liabilities -/- cash), 7) Dividend proposal.
8 6 Facts of the CEO Rob Harmsen. Economist. Synthetic Resins Akzo Nobel. Chief Operating Officer Nuplex Resins. Five years in Sydney. Wonderful city: climate, people, multicultural. Fly. Fly. Fly. America. Europe. Asia. Yes Asia. China. Indonesia. Vietnam. Thailand. Malaysia. factories. Joint Ventures. Growth. Great. Reliving youth. Proud of results. Together with team. Customers. Building relationships. Valuable. Open mind. Show respect. Give way. Know the history. Cultural differences. Understanding cultures. Challenge. Know the Do s. Avoid the Don'ts. Be open. Feel at home. Look at things differently. See things from the customer's point of view. Broad vision. Bring things together. Listen. From both sides. Market focus. Innovation. Market launches. Holland Colours. Great business. Committed employees. Continuity. Growth. International. Still Dutch. Common sense. Rob Harmsen Rob Harmsen (1957), CEO since January 2012
9 An eventful year LOWER MARGIN 2011/2012 was an eventful year for Holland Colours, both commercially and administratively. In May 2011 three supervisory directors - Messrs Gerardu, Van der Lof and Zegger - announced they wished to step down which actually happened at the shareholders' meeting on July 11, Holland Colours is grateful to them for their efforts and their contribution to the company. Since then, the Supervisory Board has consisted of Messrs Van Luijk, Kleyn, Kemper and Mr De Heer, who did not step down. In October 2011 Bernard van Schaik announced he would be leaving the company as of November I would like to express my thanks to Bernard from here for the valuable contribution and commitment he devoted to the company during the five years in which he served as CEO. The uncertain economic outlook and the sharp rise in raw materials prices affected the result achieved by Holland Colours. Although sales grew slightly by 1% and costs remained under control, the operating result was more than 42% down compared to the previous year. As a result of the economic conditions in America and especially in Europe, it was difficult to pass on higher raw materials prices to customers in full and without delay, particularly in the Building & Construction market. The business development varied for each Division. After the first quarter there was a clear deterioration in Europe as a result of the euro crisis. This was especially evident in the third quarter of the financial year, when tension concerning the situation in Greece increased. The combination of higher raw materials prices and the worsened starting position led to a slight negative operating result in Europe. Unlike Europe, the year in the Americas began weakly, followed by a slight recovery in Building & Construction. A decline in margin also led to a lower result here. In percentage terms, the decline in the operating result was in line with the company average. The Asia Division, and especially Indonesia, saw a pleasing growth in sales which led to a higher operating result, with especially strong growth by our new masterbatch business Holcomaster. It was pleasing to note that our worldwide sales of innovative products (new products introduced during the last five years) more than doubled compared to the previous financial year. This was mainly due to growth by Holcomer (for UHT milk packaging) and Holcomaster. Regarding sustainability, further progress was made with measures to reduce energy usage. The Apeldoorn facility has now been admitted to the "Meerjarenafspraak 3" (MJA3) covenant, which involves among other things a commitment to the best of our ability to reduce energy usage by 2% per year. An investment project has also been implemented in Richmond, our facility in the United States, to reduce energy use. A Life Cycle Analysis was conducted for several products this year. The conclusion was the same as before: our products score well because they are based on vegetable and renewable materials. sustainable We expect the uncertain economic conditions and volatility in the raw materials markets to continue in 2012/2013. Our focus will be on achieving a permanent improvement to profitability in Europe, increasing our innovative strength, and further growth of our position in Asia. With our highly motivated staff, we are fully committed to moving the company forward. 7 innovative products R. Harmsen Chief Executive Officer Holland Colours
10 Vision, mission, strategy and objectives 8 The success of Holland Colours is based on its unique products for colouring PVC. As these products are free flowing, dustfree, and very easy to dose, they offer customers big advantages. The products were already launched worldwide at an early stage. Vision Technology has a major impact on the business of Holland Colours, whether this relates to the knowledge or processing of pigments, chemical technology or materials. Our customer-specific products have to comply with all the relevant functional, aesthetic and processing requirements. These requirements are continuously changing, and are influenced by social themes such as recycling, fashion trends and product and production innovation at our customers. This demands close contact with the market, from supplier to customer and from regulator to brand owner, in combination with the internal resources to reflect all developments in Holland Colour's products and processes quickly and adequately. Mission The mission of Holland Colours is to be the preferred supplier in its focus markets around the world. This requires an internal culture based on entrepreneurship, respect and commitment. Employee share ownership is an important binding element. Strategy The strategy of Holland Colours to achieve this mission is based on five elements: 1. Concentration on three focus markets; 2. International presence; 3. Innovation based on core competence; 4. Providing a good service; 5. Working efficiently. Concentrating on three focus markets Holland Colours focuses mainly on three selected plastics markets: Building & Construction (especially PVC applications), Packaging (especially PET applications) and Silicones & Elastomers. The company is striving to achieve market leadership in these markets. International presence Holland Colours has a number of large multinational customers that are serviced worldwide. An international network has been constructed that consists of four components: principal production locations (the Netherlands, Hungary, the USA and Indonesia (Surabaya)), small production locations (Japan and China), sales offices (United Kingdom, Canada, Mexico and Indonesia (Jakarta)), and agents and distributors in many countries. Innovation based on core competence Our knowledge, often in open partnership with suppliers and customers, is focused on dispersion technology, pigments, colouring systems, carrier materials and customers' processing technology. This combination of knowledge areas and collaboration in the chain guarantees a continuous flow of new products and solutions. The core competence of Holland Colours is packing dusty materials, as a result of which the customers can easily and safely process them in synthetic materials. Innovation is aimed at using this core competence, even though the results thereof may go beyond the three focus markets. Providing a good service Customers are a key element at Holland Colours. Most of our sales concern customer-specific products that in many cases are developed in cooperation with the customer. Prompt delivery of the right products is a vital part of the company's policy. Furthermore, our products can make a considerable contribution to reducing the ecological footprint of our customers. Working efficiently Making and selling customer-specific products that are also often still subject to change makes a special demand on the ability to be efficient in terms of reliability of supply, cost control and working capital. Holland Colours has initiated various projects, including the Lean project, to achieve continuous improvements in this area.
11 We are well positioned to meet the increasing demand for functionality of colours due to our experience of light barriers and oxygen scavengers in PET packaging and the application of these products in coloured beer, wine and milk bottles. We have developed Holcomer UHT White specially for the packaging of long-life milk and flavoured milk in monolayer PET bottles. This is a very opaque white colouring that protects milk against light while retaining taste and nutrients. A number of leading dairy companies have now adopted this concept, and the list of successful market launches is continually growing. PET packaging looks good and performs well and offers many marketing benefits, in terms of design, user-friendliness, mechanical strength, recyclability and cost. 9
12 corporate objectives The mission and strategy of Holland Colours are focused on achieving the following objectives: Sales growth of 8-12% per year; ROI growth to a level of at least 15%; Growth of earnings per share, more than in proportion to the growth in sales. SWOT analysis Strengths of Holland Colours Strong focus and good positions in the three focus markets Global presence with own locations in nine countries, plus agents and distributors Unique technology and customer-specific products Customer-oriented corporate culture A naturally sustainable company in many different fields Points for improvement Reducing the time-to-market for innovations Extending the applicability of products beyond the current synthetic materials market combinations Further improving efficiency and cost control 10 Opportunities Growth through innovation on the basis of existing core competence (e.g. additive dispersions) Growth of the markets for PET packaging and Silicones Emerging markets such as Eastern Europe, South America, India, China and Southeast Asia Growth through new products Optimising and capitalising on the standard ERP system threats The cyclical nature of the Building & Construction market Higher prices for raw materials The nature of the tender process in certain markets Liquid and masterbatch alternatives to Holland Colours products Challenges facing Holland Colours Profitable innovation programme Taking advantage of innovations in the focus markets quickly and promptly with the right partners is the foundation for the future of Holland Colours. This is an important element for a profitable growth of the company. passing on higher raw materials prices The limited global supply of titanium oxide in particular and the higher prices as a result, as well as the exposure to variation in harvests of other commodities, also constitute a challenge for Holland Colours. It is vital that the effects of this are absorbed by good relationships with suppliers and customers. Efficient business operation Continuing the improvement processes in the fields of reliability of supply, working capital and cost management remains important to Holland Colours. The challenge is to make this happen while retaining our current customer orientation. Making the most efficient use of the possibilities offered by the standard ERP system play an important role therein. Management of the organisation Holland Colours operates with relatively small offices in a global market with a clear growth objective. An effective degree of autonomy of the operating companies, an efficient central management and actively looking for mutual collaboration are vital elements in the realisation of our objectives. Having or retaining the right person in the right position in the organisation is therefore essential for Holland Colours.
13 Progress of business in 2011/2012 Sales DIFFICULT year ( million) 2011/ / / / /2008 Focus markets Specialties Sales from continuing operations Pigments /2012 was a difficult year, as a result of the weakening economy and rising prices for raw materials. Sales rose by 1% to 61.2 million (2010/2011: 60.5 million). Volume growth was 2%. Currency effects had a negative impact of approximately 2%, mainly due to the lower US dollar in the first six months. After remaining steady during the first half of the year, sales rose in the second half to a higher level than in the same period a year previously due to positive developments in the last quarter. After falling 3% in the third quarter, sales rose 7% in the fourth quarter in comparison to the fourth quarter of 2010/2011. The only increase in sales in euros was in Asia ( million) 2011/ / / / /2008 Europe Americas Asia Sales from continuing operations The development of the business varied in each region. Sales increased in Europe in the first months of the financial year, but declined after the summer due to the deteriorating economy. Sales also fell in the Americas (by 2%), but this was due to a difficult start to the year and also to currency effects. Excluding currency effects, sales rose in this region by 2%. Asia was the only region to generate an increase in sales in euro terms compared to the previous financial year. The proportion of the sales of Holland Colours realised in Asia increased further to 15%. The increase in sales in this region this year amounted to 18% after currency effects. Without currency effects the increase was actually 24%. The markets developed differently Increase in sales 2011/ / / / /2008 Building & Construction -3% +18% -5% -13% 0% Packaging -2% +16% -3% -10% 0% Silicones & Elastomers +12% +18% +1% -6% +9% Total focus markets -1% +17% -4% -11% +1% Specialties +10% +26% -7% -12% +8% Currency effect -2% +4% -1% -2% -3% Total sales +1% +19% -4% -11% +2% Sales in the Building & Construction market fell 3% as a result of the decline in demand in Europe since the summer of This was partly offset by positive developments in North America, where sales managed to rise slightly despite the lower US dollar. The fall in sales was less than the fall in volume due to higher sale prices.
14 In the Packaging market, Holland Colours achieved lower sales on higher volume compared to the previous year. Although this market is less exposed to cyclical changes, it has become more competitive as a result of lower demand in other markets. Growth in the Europe and Asia divisions was cancelled out by a fall in sales in the Americas division. Sales in Silicones & Elastomers were up 12% compared to last year. Sales rose in all Divisions, with the highest growth being realised in the Americas. Sales in Specialties increased by 10%. This was achieved mainly in Asia, and in Europe to a lesser extent. In Europe the increase was partly due to innovative products sold outside our focus markets. In Asia, this mostly concerned sales of Holland Colours new masterbatch product Holcomaster and additional realised trade sales. New products / Research & Development Previously developed products made a good contribution to sales in 2011/2012. Sales of Holcomer UHT rose strongly in Europe in comparison to the previous financial year. This product protects long-life milk against the damaging effects of light on PET packages. A cladding product was introduced for the Building & Construction market in North America with a coloured acrylic copolymer top layer that enables customers to significantly reduce their colouring costs. The launch of the colour polymer concentrate Holcomaster in Asia is proving to be successful. New additive and colour concentrates for oxygen scavenger applications that provide additional protection and functionality have been successfully tested with customers. The first sales for these products are expected to occur in the coming financial year. A coloured product has been developed in collaboration with an auto manufacturer in Asia as a replacement for the normal roof or ceiling covering. A number of new applications were developed for the focus market Silicones & Elastomers, including colours for electrical and energy cabling and silicone coatings for use in demanding weather or chemical environments. Results Sharp decline in net profit Net profit fell from 3.2 million to 1.7 million in 2011/2012, despite a 1% rise in sales. The operating result declined from 5.4 million to 3.2 million. Higher raw material prices were the main cause of the lower result. As a result of the difficult economic climate, especially in Europe, higher raw material prices could in many cases only be passed on to customers partly and with a delay. This led to a fall in the gross margin, in both absolute and relative terms. Operating expenses remained below the level in the previous financial year. As usual, sales in the second six months were lower than in the first, due to seasonal fluctuations. After net profit of 1.5 million in the first half (2010/2011: 2.3 million), the second half of the year closed with a net profit of 0.2 million (2010/2011: 0.9 million). Return on investment declined over the year as a whole to 10.0% (2010/2011: 17.7%). Lower gross margin due to higher raw materials prices and product mix changes 12 Patent applications were converted into patents in various countries during the financial year. Two new patents were also applied for in relation to Holland Colours carrier technology and additive concentrates. New products were also launched in the field of additive concentrates and sustainable raw materials. The product that can give PET bottles a frosted glass appearance is now also available for packaging in the personal care products market, and for the alcoholic spirits segment. Colours based on natural materials are available for various types of biopolymers, including the recent addition of biopolymers based on potato starch. Additive concentrates for polypropylene are moreover being developed. The Stage Gate process introduced last year has led to increased flow of ideas and projects. Next year we will work on optimising the process in order to reduce project processing time and increase the likelihood of success. Further implementation of the Lean improvement programme has led to significant process improvements in all Divisions. Examples of this are the quantity of finished product per batch of Holcobatch and a sharp reduction in production losses for Holcoprill. The ratio between the gross operating result and revenue was 44.0% in 2011/2012, much lower than in the previous year (48.8%). The gross margin was pressured by higher raw materials prices throughout the financial year. In the first six months, a relative gross margin of 44.6% (2010/2011: 49.1%) was achieved. In the second half year, this was 43.3% (2010/2011: 48.5%). As far as possible, higher raw materials prices were reflected in the end product sale prices, albeit with a delay. Especially in the Building & Construction market in Europe, which is suffering from continuing weak economic conditions, it will take a long time to realise higher sale prices. Changes in the product mix are another important constituent of the lower relative gross margin, and were due mainly to the increase in Specialties sales in Asia and the decline of the share of Packaging in overall sales.
15 Operating expenses under control The total operating expenses fell from 24.1 million to 23.8 million. Currency effects had a positive effect of approximately 0.2 million compared to the previous year. Contrary to the previous financial year, the employee expenses do not include a payment under the profit-sharing plan that applies to all Holland Colours staff (2010/2011: 1.0 million). Despite a slightly higher level of activity, the average number of employees remained more or less unchanged at 382 (FTE) compared to the previous year (2010/2011: 383). Depreciation fell by 0.1 million compared to the previous financial year, mainly because investment has remained well below the level of depreciation in recent years. Other operating expenses rose 0.3 million. Lower expenses for external consultants and energy were offset by an increase in other employee expenses, higher local taxation and additions to the provision for defaulting debtors. The change in management led to additional expenses of approximately 0.4 million. Lower financing costs Net financing costs fell from 0.7 million to 0.5 million. A number of the interest rates payable are related to the ratio between the interest-bearing debt and the operating result before interest, tax, depreciation and amortisation (Total Debt / EBIT- DA ratio). Partly due to a decline in the Total Debt / EBITDA ratio compared to the previous financial year, interest expense was considerably lower than in 2010/2011. Higher tax burden The effective tax burden rose from 33.2% in 2010/2011 to 34.6% in 2011/2012. Compared to the previous financial year, a larger part of the result was realised in countries with higher tax rates. The tax burden also increased due to the withholding tax due on dividend payments from foreign operating companies. The Dutch part of the company was moreover not profitable in 2011/2012. A deferred tax receivable has been included for the losses that can be deducted from future profits. Based on the forecast of the results for the Dutch part of the company in future years, we expect the losses eligible for deduction to be applied well before the carry-over period expires. The first deductible losses expire after the 2015/2016 financial year. Holland Colours signed an agreement with the Dutch Tax & Customs Administration in relation to Horizontal Supervision in January 2012 whereby both parties have confirmed their willingness to cooperate constructively to resolve tax issues. Investments Holland Colours has production facilities which are generally adequate to meet market demand. This made it possible to keep capital expenditure limited to 0.7 million during the past year (2010/2011: 1.0 million). As was the case in the previous year, this was well below the depreciation level of 2.2 million (2010/2011: 2.4 million). The investments made relate to regular replacement of production equipment, investments in safety precautions and energy saving, as well as a number of minor expansions to production. All of the investments were entirely funded from the cash flow from operating activities. Cash flow and financing Cash flow from operating activities fell from 3.0 million in 2010/2011 to 1.6 million in 2011/2012. The decline in the net result is the main reason for this. At the end of March 2012 the working capital amounted to 14.8 million, considerably higher than at the end of March 2011 ( 12.6 million). The increase in working capital was due to an increase in the operational working capital of 1.2 million (inventory was up 0.9 million, and trade receivables rose 0.3 million, while trade payables were unchanged), an increase in other receivables of 0.4 million and a decline in other liabilities of 0.8 million (unlike the previous year, there was no reserve for profit-sharing this year). The increase in inventory was due to the increase in inventory of raw materials in an amount of 1.2 million. This mainly concerned an increase in value as a result of the rise in raw materials prices. Additional inventory was also acquired, partly due to the announcement of a price increase for titanium dioxide. The inventory of finished product declined by 0.3 million. The increase in trade receivables was due to the higher activity level in the last quarter. Compared to sales, there was a small rise in trade receivables from 61.3 to 62.4 days, mostly due to the higher sales in Asia, where payment terms usually are longer. The positive cash flow from operational and investment activities of 0.9 million (2010/2011: 2.1 million) was not sufficient to compensate for repayments and dividend payments, and therefore the net cash flow was a negative 2.2 million (2010/2011: 1.8 million positive). The total interest-bearing debt rose from 9.1 million at end March 2011 to 9.6 million at the end of March The most important banking ratio (Total Debt / EBITDA) rose from 1.2 to 1.8, but remains comfortably below that level agreed with the bank of 3.0. The existing financing agreements were not changed in 2011/2012. The bank covenants and the collateral provided to secure the loans also remained the same. During the financial year, Holland Colours met all covenants agreed with the bank. The financial lease agreement regarding the head office expired in November 2011, and Holland Colours exercised the purchase option in the agreement for a sum of 0.5 million. No refinancing will be required during the forthcoming year. The company s solvency ratio increased to 55.3% compared to 54.9% at the beginning of the financial year. The increase in equity as a result of the positive net result and positive translation results was offset by a decline due to the dividend payment in July The positive translation results of 0.8 million (2010/2011: 0.6 million negative) were mainly due to the higher level of the US dollar at the end of the financial year compared to its level at the end of March The translation results are a result of equity holdings in subsidiary companies which report in foreign currencies. 13
16 Developments per Division 14 Europe Key figures 11/12 10/11 ( million) Sales % Operating result Investments % Depreciation % No. of employees (FTE) % Rising raw materials prices and a decline in sales in Building & Construction were the main reasons for the negative operating result of 0.2 million for the Division Europe (2010/2011: 1.2 million positive). The effects of the euro crisis became visible in the development of sales after the summer. The third quarter was particularly difficult, but this was followed by a mild recovery in the fourth quarter. Difficult year for Building & Construction After a recovery in 2010/2011, the market for Building & Construction in Europe worsened again after the summer due to the continuing poor state of the housing market in various European countries, in combination with and as a result of the euro crisis. The drop in sales was limited. The decline in sales was partly compensated by the successful introduction of a number of innovative products. One example is a product whereby PVC pipe are given a higher gloss. Given the difficult market conditions, higher raw materials prices could not be fully passed on to customers, and in any case only with a delay. Things improved in the fourth quarter, partly due to restocking by customers and also due to the mild winter in some European regions. Number of newly built houses in the Netherlands Source: Bouwend Nederland Number of newly built houses in the UK Source: UK Statistics Authority Limited growth in Packaging Sales in Packaging showed a limited growth compared to the previous year. This was almost entirely due to Holcomer, a product launched in the market several years ago (see also the section on New products / Research & Development). The market conditions are still precarious. For PET packaging manufacturers, the economic crisis was a reason to save costs where possible. A reduced use of colours was one of the consequences. The PET packaging market, which is less sensitive to economic fluctuations, has moreover attracted suppliers from other markets, as a result of which competition has increased. Marginal increase in sales of Silicones & Elastomers The difficult economic conditions also affected the market for Silicones & Elastomers. Realised sales were marginally up on the previous year, although the growth was less than expected. Sales fell in the traditional market for colouring products for sealants related to Building & Construction. On the other hand, sales of high-value Liquid Silicone Rubber (LSR) products rose, as did sales of the product Holcosil HTV. New products and applications in the pipeline Although we were already devoting a high level of attention to the development of new products and new applications for existing products, we further increased our efforts in this area. This led to various new projects, usually in collaboration with potential customers. Continuing efforts to improve efficiency The Lean improvement programme initiated several years ago continues to deliver results. During the last financial year, much attention was paid to increasing the productivity of the production lines for Holcoprill. A project team consisting of those directly involved has formulated and implemented proposals for improvements. The productivity of these production lines has been significantly increased due to technical applications and changed working procedures. Americas Key figures 11/12 10/11 ( million) Sales % Operating result % Investments % Depreciation % No. of employees (FTE) % Sales in the Americas Division rose by 2%, from USD 25.1 million to USD 25.7 million. In euro terms however, sales fell by 2% due to currency effects. Positive developments, including increased sales in Building & Construction and Silicones & Elastomers, were overshadowed by a decline in sales in Packaging and the effects of higher raw materials prices. The operating result therefore fell from 2.5 million in 2010/2011 to 1.6 million in 2011/2012. Modest growth in Building & Construction Although the economy showed signs of slight improvement during the financial year, there was still no lasting recovery in the housing market in the United States in 2011/2012. The number of new-build homes rose, but remained at a low level. As a result of people staying longer in their home, there was growth in the renovation market. Holland Colours was able to benefit from this and to increase its sales in the Building & Construction market. Both existing and new customers contributed to this rise in sales. Holland Colours moreover continued to devote much attention to innovation, for instance by developing products for the colouring of ASA, a thermoplastic material with excellent weatherresistant qualities.
17 Number of newly built houses in the US (x1000) 01/02 01/04 01/06 01/08 01/10 01/12 Source: Forecastchart.com Marked decline in sales in Packaging Sales fell in the market for Packaging. As in Europe, this market is experiencing strong competition and cutbacks on the use of colours in PET packaging. Furthermore, the number of customers is declining as a result of consolidation, especially in North America. Holland Colours is responding to this with an active programme designed to improve its relationships with brandowners, among other things. Positive developments in Silicones & Elastomers Silicones & Elastomers achieved a good increase in sales compared to the previous year, almost entirely due to products for the colouring of silicone sealants. However Silicones & Elastomers represents a relatively small proportion of the total sales of this Division. Lower gross margin despite efficiency improvements in the United States The rise in raw materials prices also clearly affected the Americas Division. This put the relative gross margin under pressure, particularly since the summer of As in Europe, passing on the higher prices to customers was difficult and time-consuming. Product mix changes, such as a reduction in the proportion of Packaging in sales, also had a negative effect on the relative gross margin. The gross margin was therefore well below that seen in the previous financial year, in both relative and absolute terms. Efficiency improvements, including increased production per man-hour as a result of the Lean improvement programme, were not able to compensate for this. Asia Key figures 11/12 10/11 ( million) Sales % Operating result % Investments % Depreciation % No. of employees (FTE) % The Asia Division once again performed well this year. Sales rose 24%, from USD 10.2 million to USD 12.6 million. The increase was lower in euro terms due to currency effects, coming to 18%. The rising sales of existing Holland Colours products were supplemented by substantial additional sales of the masterbatch product Holcomaster. Trade sales also rose strongly. The shift in product mix and the higher raw materials prices led to a decline in the relative gross margin. As a result of the lower relative gross margin and higher operating expenses, the increase in the operating result failed to match the increase in sales. Sales increase in all segments Sales rose in both the focus markets and Specialties. As usual in Asia, the Specialties segment accounts for a high proportion of sales. This mainly concerns pastes, masterbatch and trade sales. Sales in the Building & Construction market have traditionally been at a low level, although there was a substantial increase here. Despite unfavourable developments in the fourth quarter of the financial year, sales in Packaging were also higher than in the previous year. Silicones & Elastomers had a good year. Sales grew strongly, as a result of good sales of products for colouring silicone sealants in Thailand and higher sales of Liquid Silicone Rubber (LSR) products in China and Indonesia. Successful launch of masterbatch in Indonesia In the summer of 2010, the production capacity of the branch in Surabaya, Indonesia, was expanded with a number of production lines enabling the production of highquality masterbatches. An important part of the increase in sales in the past financial year was due to the successful launch of this technology, a new development for Holland Colours. This activity is expected to grow further in the coming year. Holcomer production in Indonesia A project was started in 2011/2012 designed to produce Holcomer in Indonesia, mainly for the Asian market. Holcomer was introduced to the European and American markets several years ago for the colouration of PET milk bottles and to provide protection against the damaging effects of light, meaning that milk and other dairy products will remain fresh for longer. The demand for milk in Asia is expected to rise strongly as a result of the growing middle class in the region. By setting up a production line for Holcomer, Holland Colours is positioning itself to take advantage of this trend. The project will be supported by a grant from the Dutch government. Growth of the production facility in China stalls The production facility in China opened in 2007 faced stagnating sales in 2011/2012, partly due to internal staff turnover. Nonetheless, work is continuing on expanding the local production and laboratory facilities so that demand from the market can be met more promptly. The sales team too was expanded further, enabling better market reach. Stalling sales, a slight decline in the relative margin and higher operating expenses led to only a small positive operating result for the facility. 15
18 16 Information systems During the 2011/2012 financial year, important steps were taken towards the further standardisation of the information systems used by Holland Colours. Standard reporting and consolidation software was taken into operation at all facilities at the beginning of the year. This software is directly linked to the standard ERP system used by the Group. Both systems are maintained centrally from Apeldoorn. The standard ERP system was taken into operation at the facility in Indonesia on February , finally making group-wide implementation of this system a reality. Standardisation and linking information systems will ensure clear and efficient working processes within the Group, will ensure the reliability of information and enable optimal realisation of synergy between the various businesses. employees Organisation At the end of the financial year, Holland Colours employed 383 members of staff (FTE) compared to 389 members of staff (FTE) a year ago. The average number of employees this financial year was 382 (FTE) and was thus more or less unchanged from the previous year (2010/2011: 383 (FTE)). Further improvements to efficiency, including by means of the Lean improvement programme, remain an important priority. The geographical distribution of the company's personnel is as follows: Own employees year-end 11/12 year-end 10/11 The Netherlands Hungary United Kingdom 6 6 United States Canada 4 4 Mexico 7 7 Indonesia China Total corporate social responsibility Sustainable business practice, sometimes also referred to as Corporate Social Responsibility (CSR), is a business practice in which the economic, social and environmental interests are carefully balanced. Ever since the foundation of Holland Colours in 1979, 'sustainability' has played an important role in the organisation. The vast majority of the products of Holland Colours are based on natural raw materials. Furthermore, all members of staff participate in Holland Pigments BV, the investment company that has held 50.03% of the shares of Holland Colours NV since April In addition, Holland Colours accepts its social responsibility, when and where possible. Holland Colours is continuously looking for a healthy balance between the three Ps: People, Planet and Profit, the three key areas in corporate social responsibility.
19 For People: sustainable deployability Terms of employment and training Employees play an important role in the successful execution of the company's strategy. The HR policy is aimed at developing talent and retaining critical knowledge and skills. The policy framework is based on offering specific training, and formulating and teaching work instructions. Holland Colours operates in various countries, each with their own laws and cultures. For that reason, the operating companies pursue their own HR policy that is geared to the local situation. The terms of employment are complete and competitive. All employees participate in a profit share scheme which depends on the Group's result as well as the result of the particular Division the employee is based at. On the basis of the results achieved in the 2011/2012 financial year, no profit-sharing payment was made to the employees. Employee share ownership All the employees of Holland Colours participate in Holland Pigments BV, the investment company that has held 50.03% of the shares of Holland Colours NV since April The employees are able to buy or sell shares in Holland Pigments shortly after the publication of the annual and semi-annual figures of Holland Colours NV. Insofar as profit can be distributed, part of it is paid out in Holland Pigments BV shares. At the moment, employees hold approximately 20% of the shares in Holland Pigments BV. Composition of the workforce A balanced composition of the workforce makes a positive contribution to the performance of the organisation. For many years, women have held managerial positions at all levels in the organisation and in all countries where Holland Colours is represented. Men/women Women Men breakdown Managerial 6 18 employees Other employees The average age of staff has risen in the past years. In 2011/2012, the average age rose from 40.3 to Health and safety Holland Colours staff around the world are professionals with a result-oriented entrepreneurial spirit, who are actually prepared to take on challenges. A safe and high-quality working environment is vital in that respect and has great priority. Holland Colours' policy is aimed at executing or structuring all work and processes in such a way that any form of personal injury and harm to a person's health can be prevented. This ambition forms the basic principle for the health and safety policy that is implemented at all companies. Thanks to and despite the extensive attention to safe working methods, the number of accidents at work was two, compared to four in the previous year. The incidents concerned a broken knee and bruising, and the loss of skin on fingers. Appropriate measures have been taken to prevent similar accidents in the future. These incidents led to 31 days lost (2010/2011: 13). Holland Colours uses the Lost Time Injury Rate (LTIR) method to measure its safety performance. This internationally utilised method gives the ratio between the number of accidents and the number of hours worked. The LTIR for 2011/2012 was three (outstanding) compared with five (good/ outstanding) last year. The table provides the interpretation of these data. LITR Result Action required 0-5 Outstanding No 5-10 Good No Fair Yes > 15 Poor Yes In the Netherlands, Holland Colours offers its staff preventive medical testing once every four years. The test consists of a questionnaire and a medical examination. Take-up has been generally high, and the recommendations arising from the examinations have been actively followed up. In addition, other specific measures are taken in order to secure proper working conditions. The other operating companies in the Group also focus on working conditions and the well-being of staff. Sick leave fell from 2.7% in 2010/2011 to 1.9% in 2011/2012. Social involvement Holland Colours is a responsible member of society. Local initiatives are developed to support less fortunate people. In those countries where Holland Colours is represented, projects supporting the local community are participated in. Holland Colours in Richmond USA contributes to supporting underprivileged children and various educational projects for local youngsters. On the occasion of the 25th anniversary of the establishment of the business in Richmond, Holland Colours made a donation to a museum enabling the restoration of a historic flag. In Indonesia, the company provides the children at a primary school in a poor district of Surabaya with a good hot meal twice a week. 17
20 For Planet: environmental results For Profit: economic results Sustainable products Corporate objectives 18 Ever since its formation, Holland Colours has been manufacturing sustainable products by using natural raw materials. A recently conducted Life Cycle Analysis (LCA), a method used to establish the impact products have on their surroundings during their lifecycle, demonstrates that the products of Holland Colours score well compared to those of its competitors. The introduction of products for colouring sustainable biopolymers demonstrates that Holland Colours is continuing in this direction. Green investments Holland Colours invests in solutions aimed at reducing the use of raw materials, energy and water. Examples include the replacement of existing factory lighting with new energy-efficient lighting, the replacement of propane powered fork-lift trucks with energy-efficient electrical trucks, automatic systems for switching off various equipment, and the deployment of a compressed air leak detection programme in the Netherlands. The company is working on energy-saving programmes at its large production facilities. Since last year, Holland Colours in the Netherlands is a participant through the industry organisation VNCI in the covenant known as 'Multi-Year Agreements 3. This imposes a best-effort obligation of saving 2% energy per year, having the company's energy consumption subjected to annual monitoring and implementing an energy care system within three years. The Municipality of Apeldoorn showed its appreciation to the participants in this initiative with a celebratory meeting. Holland Colours made a start on clearly measuring and consolidating its energy usage during the last financial year. The figure below gives an overview of our worldwide energy consumption in megajoules per kilogram of successfully produced product. The figure does not include adjustments for weather effects. Energy consumption in MJ per kg product The company's financial objectives are designed to contribute to a sustainable development of our business. A financially sound company generally has more scope to invest in sustainable innovation and energy-efficient production processes and buildings. Innovation Sustainability and innovation are closely connected at Holland Colours. First of all, one of the priorities in our innovation programme is to develop products specifically for sustainable applications, e.g. colour concentrates for biopolymers. In addition, sustainability is an important element in the choice of innovation projects, process routes and raw materials. From the earliest stages of product development, priority is given to products or solutions that contribute to saving energy, reducing waste, recyclability, use of renewable raw materials and longer life cycles for end products. Transparency and targets Care for the environment Holland Colours continuously strives to minimise the detrimental effects of production processes on the environment. Treating raw materials in a responsible manner, reducing breakdowns and reducing and recycling waste contribute to that. The production sites pay a lot of attention to managing and reducing waste streams. Apart from consistent separation of waste, a mass balance is maintained. Where possible and responsible to do so, Holland Colours will not limit its environmental care to the bare legal norms. Quality, Health & Safety and Environmental (QSHE) managers operate at the large production sites. They monitor the course of events at these sites and continuously work on improvements mrt-09 mei-09 jul-09 sep-09 nov-09 jan-10 mrt-10 mei-10 jul-10 sep-10 nov-10 jan-11 mrt-11 mei-11 jul-11 sep-11 nov-11 jan-12 mrt-12 A significant decrease in energy use has been achieved in recent years. The intention is to realise a further reduction with the measures already in place and the measures yet to be introduced. An audit was conducted at the facility in Hungary in June 2011 for ISO accreditation, the internationally acknowledged standard for good environmental management. All European facilities are therefore now operating in accordance with this standard. The facility in Indonesia is also ISO certified. Holland Colours aims to be transparent with regard to its environmental targets and the results attained in this field. However, this requires an expansion in internal reporting. Where possible, Holland Colours intends to bring environmental reporting in line with the Global Reporting Initiative (GRI) guidelines.