Organon BioSciences treated as discontinued operation
On March 12, 2007, the company announced its intention to divest Organon BioSciences (OBS) to Schering-Plough, following their EUR 11 billion binding cash offer. As a consequence, in accordance with IFRS 5, the OBS activities qualify as so-called discontinued operation. As a result, going forward no depreciation or amortization is recognized anymore for the OBS activities, which increased pre-tax results by EUR 5 million.

The continuing operations consist of the Coatings and Chemicals activities.

Revenues – 6% autonomous growth
Revenues of EUR 2.5 billion were up 1% on last year. Autonomous growth was 6%. Volumes increased 3%, with Coatings as the main contributor. Average selling prices were 3% higher at both Coatings and Chemicals. Currency translation had a 3% negative effect in the quarter, mainly attributable to the weaker U.S. dollar and the Asian currencies. Acquisitions and divestments on balance had a 2% negative impact. Sico formed the main acquisition at Coatings. Divestments mainly related to the Chemicals divestment program. Total revenues of Akzo Nobel developed as follows:

predominantly the sale of a Coatings plant near Barcelona, Spain. For further details see the table on page 12.

Net financing charges decreased from EUR 34 million to EUR 27 million, mainly due to higher cash and cash equivalents and lower short-term borrowings. Interest coverage in the first quarter was 7.9 (2006: 6.8).

The share in profit of associates decreased from EUR 20 million to EUR 12 million in 2007. The 2006 number included incidental gains of EUR 6 million related to Acordis. Operational results of Flexsys were somewhat lower in the quarter.

The income tax charge in the first quarter of 2007 was 28%, compared with 29% in 2006, due to lower tax rates in certain countries, including the Netherlands.

Net income virtually unchanged
The combination of improved operational earnings and lower incidentals resulted in 1% lower net income of EUR 246 million, which include both continuing and discontinued operations. Earnings per share were EUR 0.86 (2006: EUR 0.87).

EBITDA improved 10%
EBITDA before incidentals in the first quarter amounted to EUR 307 million, up 10% on the EUR 279 million of 2006. Coatings was the main contributor to this increase. This translated into an EBITDA margin of 12.3% (2006: 11.3%). At Chemicals, the EBITDA margin was maintained at 17.9%.

Operational earnings boost of 18%
Before incidentals, operating income rose 18% from EUR 185 million to EUR 219 million. The EBIT margin was 8.8%, against 7.5% in the first quarter of 2006. Both Coatings and Chemicals realized strong autonomous growth and cost savings. Almost all activities did better than last year. Substantial further growth was achieved in the emerging markets, while most businesses in Europe also improved their performance.

The improvement in EBIT reported as “Other” was caused by favorable IAS 39 fair value adjustments and better results of the captive insurance companies due to lower damages. Including incidentals, operating income decreased 9% to EUR 212 million, with an EBIT margin of 8.5% (2006: 9.4%). Incidentals in 2007 were a net loss of EUR 7 million, compared with a gain of EUR 47 million in the first quarter of 2006. The 2006 figure was positive due to sizable gains on divestments in that quarter,

Before incidentals, net income rose 13% from EUR 215 million to
EUR 244 million. Net income breaks down as follows:

Workforce
Akzo Nobel’s workforce at Coatings and Chemicals consisted of 42,880 employees, up compared with the 42,690 employees at year-end 2006. The number of employees at Organon BioSciences was 19,140.

Trading conditions in 2007
Akzo Nobel is well positioned for profitable growth. Assuming that no significant changes in the major economies of the world occur, Akzo Nobel believes that it is well placed to outgrow its markets and further improve the financial returns in Coatings and Chemicals.

Results
Coatings achieved a strong quarter with revenues growth of 8% on last year. Autonomous growth was 8%, thanks to 5% higher volumes and 3% price increases. Acquisitions added 4%, while the currency impact was 4% negative.

EBITDA before incidentals grew 11% to EUR 153 million, with the EBITDA margin improving from 9.6% to 9.8%.

Before incidentals, operating income grew 13% to EUR 117 million, with an increased EBIT margin of 7.5%. Various restructuring measures implemented in recent years improved our cost competitiveness in mature markets, while price increases across the board are starting to restore margins that were affected by the raw materials price hike that began in 2005.

Decorative Coatings
Decorative Coatings had a promising start to the year. Double-digit revenues growth was driven by acquisitions and higher volumes. Sales in Europe were strong due to the overall improved economic climate and the mild winter conditions. Sales volumes at Building Adhesives were up 8%, with growth in all regions. There is increased management focus on the turnaround of underperforming activities. Earnings of Sico (acquired in May 2006) are developing favorably.

Industrial activities
The industrial activities continued to deliver a healthy performance, although the slowdown in the U.S. housing industry affected parts of the business, including our supply to Asia’s export industries. Western European-based businesses all had a good start to 2007, while in Asia and Eastern Europe high growth rates continued, driven by strong demand in commercial construction. The Plastic Coatings activity is growing rapidly due to the further penetration in the electronics markets. Powder Coatings improved top-line and bottom-line results compared to the first quarter of last year on strong demand and cost reduction programs. Business was particularly good in Western Europe, where double-digit growth was realized in the mature markets due to increased industry demand. Sales were also strong in Asia Pacific. New plants in Russia and China were started up to serve local customers.

Marine & Protective Coatings
Marine & Protective Coatings again achieved double-digit revenues growth, as a result of the strong expansion in the Asia Pacific region (in particular China, India, and Singapore). Marine’s profits are still suffering from raw material price pressure. Demand for protective coatings was strong, both in the onshore and offshore markets in Asia Pacific. The promising Intersleek^® 900 product for protective applications was launched in February. First orders have been placed, and deliveries will start in the course of 2007. At Aerospace Coatings, there was solid demand from the large manufacturers and a move into new territories by other manufacturers.

Car Refinishes
Car Refinishes improved EBIT margins as a result of the cost saving measures of recent years and positive volume developments. The flat top-line is the result of unfavorable U.S. dollar-related currencies. Strong focus on sales to major customers in Europe resulted in volume gains, while the changeover to waterborne basecoats continued. The North American commercial vehicle business was strong, while volume growth in China and India was above market rates. Our Sign Coatings activity is expanding into Asia.

Case study
Akzo Nobel’s Sikkens coatings brand has introduced Rubbol^® XD, an innovative high gloss finish, which offers unprecedented outdoor durability.

Based on a unique and patented binder technology, Rubbol XD is several years ahead of European legislation which will limit the use of solvents from 2010 onward. Rubbol XD stands for eXtremely Durable. Although application and flow characteristics are comparable to Sikkens’ current top product—Rubbol SB—its aesthetic and durability characteristics are considerably better.

The technical recoatability time of eight to ten years offers major benefits for both the painter and the customer. Buildings need to be recoated less frequently and look exceptional in the meantime.

Results
Revenues increased by 1% to EUR 917 million. Volume growth of 1% and 3% price increases were partially offset by a negative currency impact of 2% (primarily the U.S. dollar) and a 1% divestment effect.

EBITDA was virtually unchanged at EUR 164 million and the EBITDA margin was maintained at 17.9%.

Operating income before incidentals amounted to EUR 115 mln, 6% better than in the previous year. The EBIT margin improved to 12.5%, as a result of the focused margin management programs at all units. The moving average ROI improved from 17.9% to 18.3%.

Pulp & Paper Chemicals
In Pulp & Paper Chemicals, autonomous growth of 1% from higher selling prices was offset by negative currency translation effects and the transfer of the U.S. hydrogen peroxides businesses to the OCI joint venture. Bleaching Chemicals margins are improving as selling price increases are being implemented, in particular in Europe and the Americas. Paper Chemicals achieved good volume growth in Asia. The favorable product mix and cost saving programs were the main contributors to the substantially improved operational performance in the first quarter of 2007.

Base Chemicals
Base Chemicals turned in a strong EBIT(DA) increase, mainly driven by Chlor Alkali (strong demand for chlorine and caustic) and Energy. Revenues were negatively affected (6%) by the outsourcing of technical services in Rotterdam and Delfzijl, the Netherlands. High production levels were achieved at both sites, with a record volume for Rotterdam in March. In Delfzijl, the new MCA plant is now fully operational. Road Salt’s earnings were lower than in the previous year, due to the very mild winter in Europe.

Functional Chemicals
Functional Chemicals had a good first quarter of 2007, with revenues growth of 5%. Margins were sustained with a good performance, particularly of Ethylene Amines and Salt Specialties, despite ongoing raw material price pressure. The 2006 production problems at Ethylene Amines were resolved. Chelates, Sulfur Products, and Cellulosic Specialties achieved increased margins on higher volumes and prices.

Surfactants
Revenues of Surfactants were 1% higher than the previous year, despite a negative currency impact of 4%. A clear volume increase in China, the launch of our Feixiang Chemicals joint venture, and higher sales in agro and industrial applications (asphalt and mining) all contributed to growth. Our plants are running at high capacity utilization levels. Operating income was ahead of the first quarter of 2006 in spite of high raw material prices.

Polymer Chemicals
Polymer Chemicals revenues were unchanged compared to the same period in the previous year. Autonomous growth of 4% was fully offset by the negative currency impact. Sales volumes improved on last year despite lower demand in the U.S. PVC market, driven by a weakening of the U.S. housing industry. Operating income was ahead of 2006 due to cost savings and margin management.

Divestment program
The divestment program started in 2005 has been completed after the recent announcements of the sale of the Akcros Chemicals PVC Additives business and of the European-based Methyl Amines and Chlorine Chloride (MACC) activities. The sale of Akzo Nobel’s 50%-stake in the Flexsys joint venture is expected to be concluded in the second quarter of 2007.

Case study
Akzo Nobel has invested nearly EUR 7 million to install a woodchip-fired boiler at its salt facility in Mariager, Denmark. The boiler will be able to supply around half of the facility’s demand for steam, which is needed to produce the salt.

The boiler creates flexibility for the company in relation to the choice of fuel, making us less dependent on natural gas, which is sold for very high prices at the moment.

Woodchips are a cheaper and more sustainable fuel. Woodchips are CO₂-neutral as the emitted CO₂ is balanced with the growth of forests. Moreover the woodchips are produced through the process of forest maintenance; they are not won at the expense of the environment.

Note: Cash and cash equivalents reported for Organon BioSciences are not included in assets held for sale as these will be settled with the purchase price at the closing of the deal.