PROTECTING PEOPLE Royal Ten Cate Annual review 2017
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PROTECTING PEOPLE
Koninklijke Ten Cate bv
Stationsstraat 11
P.O. Box 58
7600 GD Almelo
Netherlands
Telephone +31 (0)546 544 911
E-mail [email protected]
Web www.tencate.com
IN TRANSITAT WORK
IN HABITATSDURING LEISURE
PROTECTING PEOPLE
Royal Ten Cate
Annual review
2016
KTC JV2016 ENG-Omslag plano.indd 1 23-02-17 09:55
Royal Ten Cate
Annual review 2017
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Contents Profile ........................................................................................................................................ 3
Key figures 2017 ..................................................................................................................... 4
Report of the Executive Board .............................................................................................. 5
TenCate Protective Fabrics ............................................................................................. 11
TenCate Advanced Composites ..................................................................................... 13
TenCate Advanced Armor ............................................................................................... 15
TenCate Geosynthetics ................................................................................................... 17
TenCate Grass .................................................................................................................. 18
Report of the Supervisory Board ........................................................................................ 20
Executive Board and Senior Management ....................................................................... 22
Supervisory Board ................................................................................................................ 22
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Profile Royal TenCate, headquartered in Almelo, the Netherlands, has 3,796 employees and operates through five global TenCate business groups:
TenCate Protective Fabrics TenCate Advanced Composites TenCate Advanced Armor TenCate Geosynthetics TenCate Grass
Each of the business groups serves specific and diverse (niche) markets and geographies with individual demands, performance specifications and market dynamics. The business groups are active as producers and suppliers of materials and systems with the principal aim of protecting people and the environment and providing sustainable solutions by developing materials with specified characteristics.
The predominant technologies consist of fiber / textile technology and chemical technology.
The business groups have production locations predominantly in the United States of America and Europe and are also located in Asia (China, Malaysia) and Australia.
Markets
Group company Markets Products Customers TenCate Protective Fabrics* Industrial companies, such as Oil &
Gas Industry, Chemical industry, Utilities. First response market Military market
Protective fabrics for the workwear and safety wear market.
Garment manufacturers Industrial laundries Garment rental companies
TenCate Advanced Composites Aerospace, space market Automotive (high-end sports segment) Industrial and leisure markets Consumer electronics market
Engineered thermoset and thermoplastic composite materials, mainly based on carbon fiber, glass and (para)aramid fibers
Aircraft manufacturers, producers of launch vehicles and satellites. Automobile producers, parts manufacturers. F1 suppliers. Sports and leisure companies Other industrial OEMs
TenCate Advanced Armor Law enforcement market Defense market Security market
Body armor plates, shields Vehicle armor kits Aerospace armor kits Armored parts Active protection systems
OEMs in the defense industry Armor companies (system suppliers) Body armor vest manufacturers
TenCate Geosynthetics Infrastructure & construction Water & environment Agriculture
Reinforced geotextiles (wovens and non-wovens) and grids TenCate Geotube® system
Construction and road building companies Engineering companies Wholesale companies
TenCate Grass Sports and leisure market Landscaping market
Synthetic turf yarns and backing materials Synthetic turf systems Sub-base materials
Carpet manufacturers Installers and contractors FIFA and other sport institutions
*) including TenCate Outdoor Fabrics
Leisure markets, home decoration and outdoor living
Outdoor fabrics for camping and sun awnings
Tent manufacturers Sun awning system suppliers
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Key figures 2017
Business group revenues:
*EBITDA in this report means EBITDA before exceptional items
**Including TenCate Outdoor Fabrics
Key figures
For the financial year ending on 31 December, in millions of euros 2016 2017
Profit and loss account
Revenues 1,178.3 1,222.2
EBITDA * 126.7 144.2
EBITDA margin * 10.8% 11.8%
Debt
Net debt 113.9 102.4
Consolidated Cashflow:
Cash flow from operating activities 106.4 105.3
Cash flow from investing activities -21.3 -89.1
Cash flow from operating and investing activities 85.1 16.2
FTE
FTE excluding temporary staff at year-end 3,550 3,796
of which in the Netherlands 779 807
Revenue by Business Group 2016 2017Protective Fabrics ** 326.8 280.8 Composites 178.9 193.0 Armor 68.4 81.4 Geosynthetics 313.1 343.6 Grass 289.4 322.4 Other 1.7 1.0 Total 1,178.3 1,222.2
Report of the Executive Board Key developments during 2017
The continued favorable market momentum supported the positive financial developments of the various business groups. The increased level of investments in fixed assets enhanced the manufacturing footprint and efficiency. This enables the business groups to benefit from the restored growth opportunities resulting from global economic recovery.
In 2016 profit enhancement plans were scoped and initiated for each business group. Through 2017 programs were fully deployed, leading to a structural improvement of the organization in terms of financial management and control, organizational efficiency and enhancement of the human capital. A strong focus on quality performance and market orientation through a global and coordinated customer approach is providing business groups with a strengthened value proposition for end markets.
As of 1 January 2018 the Dutch pension scheme has been transferred to the Dutch textile industry sector pension fund (MITT). In connection with this TenCate made a one-time cash settlement for matters such as agreed future recovery premiums amounting to € 10 million. In addition, TenCate will pay all transfer-related costs up to an amount of € 3 million.
Consolidated results and cash flow
Revenues increased to € 1,222 million (2016: € 1,178 million; organic growth 0%). A strong revenue performance was recorded by TenCate Advanced Composites and TenCate Geosynthetics. Ten Cate Grass executed three acquisitions in order to strengthen its downstream activities.
The gross margin improvement of 1.7% to 24.2% indicates a structural improvement in the quality of revenue and earnings. EBITDA increased to € 144.2 million (2016: € 126.7 million). TenCate Advanced Armor showed a continued recovery of its results, with a good performance in Europe. Other main growth contributions came from TenCate Advanced Composites and TenCate Geosynthetics.
The net cash flow from operating and investing activities amounting to € 16.2 million (2016: € 85.1 million) was a function of strong EBITDA growth in combination with increased efficiency
and a focus on working capital management, offset by increased capital expenditures, the one-time pension contribution and acquisitions. Capital expenditures of € 43.5 million were 46% above the previous year (2016: € 29.8 million).
Exceptional items
Exceptional items totaling € 23 million were (among other items) mainly the result of consulting costs, exceptional projects, Dutch pensions settlement (net impact) and organizational, legal and tax restructurings.
Finance
Two refinancing operations of TenCate’s parent company Tennessee Acquisition B.V. occurred during 2017, resulting in a decrease in financings costs. The refinancing operation by TenCate’s parent company Tennessee Acquisition B.V. during the fourth quarter of 2017 resulted in an increase in the euro-denominated Term Loan of € 125 million. At year end the net debt / EBITDA ratio amounted to 4.0 for Tennessee Acquisition.
TenCate’s parent company Tennessee Acquisition B.V. provided intercompany loans to TenCate of € 18.3 million (2016: € 21.2 million) and US$ 124.9 million (2016: US$ 187.0 million) at year end. Furthermore, TenCate has direct access to Tennessee Acquisition’s € 75 million Revolving Credit Facility under the Senior Facilities Agreement. TenCate’s net debt at the end of the year amounted to € 102.4 million (2016: € 113.9 million).
Organization and governance
During 2017 a decentralized structure was further developed whereby the business groups operate under global group management with business group holding companies established under Dutch law. TenCate is in the process of transferring previously centralized holding functions, such as corporate control & reporting, tax, credit management and treasury, to the business groups. The TenCate group holding will gradually be downsized and perform a more coordinating role. Critical positions in the business groups have been strengthened and much emphasis has been placed on enhancement of the management capabilities and the quality of the workforce. This new structure creates a higher degree of entrepreneurship and market focus in the various businesses and the business groups
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will be better equipped to respond effectively to market trends and customer demands.
Other information
At the beginning of 2017 TenCate started the transition from a centralized IT operating model to a decentralized model. This program is expected to be completed by the end of 2018, at which time IT responsibilities will be handed over to the individual business groups. Much emphasis is placed during the transition process on stability, security and integrity of the IT systems at a decentralized level. Investments are and will be made in further strengthening the resilience and security of the IT systems. TenCate Grass and TenCate Protective Fabrics have implemented new ERP-systems during 2017, enhancing functionality of the system with mitigated operational risk.
With a decentralized business approach all TenCate groups have strengthened their sales and marketing organizations. In this respect the corporate website is no longer the dominant portal for commercial purposes and the groups have created their own e-commerce environment with a strengthened individual business profile and corporate identity and appropriate communication tools.
Outlook
All TenCate business groups have been enhanced in terms of organization, manufacturing performance, efficiency and market focus. This will support future performance. TenCate business groups expect to benefit further from favorable underlying macro-economic trends as well as increased infrastructure and defense-related spending. The emphasis on enhanced personal safety, environmental care and other mega-trends such as global warming will have a positive effect on demand for engineered materials. The demand for lightweight composite materials in the aerospace industry in combination with lower handling and processing costs is at a turning point. TenCate operates at the forefront of this development. A broader acceptance and adoption of these materials will create a positive momentum for further growth.
The number of employees has increased during 2017 mainly as a result of the enhancement of the TenCate business groups and acquisitions. Growth of the employment during 2018 will also take place as a result of the anticipated organic growth.
Capital expenditures are expected to increase in 2018 compared to 2017 as a result of modernization of the production (new / innovative equipment), quality improvement projects and efficiency enhancement.
Research and development cost will be at a similar level as in previous years.
All TenCate groups have put an increased emphasis on improving the added value for customers in order to create a meaningful contribution to satisfy customer needs. This will contribute to an increased quality of earnings. In addition, as a result on the continuous attention for efficiency improvements, working capital management and profit enhancement profitability of the TenCate business groups is expected to increase further during 2018.
The use of advanced composite materials in aerospace and space applications has increased significantly in recent years. As a result, the advanced composites market is becoming more mature and entering a new phase. For customers of the TenCate Advanced Composites group, economies of scale, the capability to invest in production and R&D are key factors in connection with selecting strategic suppliers. This will have an effect on the entire value chain and vertical integration is becoming increasingly important.
In order to optimally position TenCate Advanced Composites for continued sustainable growth, the management of the group expressed the desire to review the options to potentially form a combination with a strategic partner who, among other aspects, could provide the group with the right scale. As a result of the progress of this review after 31 December 2017, the Executive Board holds the view that TenCate Advanced Composites qualifies as a held-for-sale group as at the date of this report. On 14 March 2018 TenCate issued a press release following the announcement of Toray Industries (“Toray”) regarding the acquisition of TenCate Advanced Composites. Toray is committed to further accelerate the growth of TenCate Advanced Composites in the coming years, fully supporting the group’s management strategy and investment plans.
Toray and TenCate have agreed to jointly develop an integration plan to support the envisaged growth plans. Toray will acquire TenCate Advanced Composites for an enterprise value of € 930 million. The completion of the envisaged transaction is
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expected in the second half of 2018 and is subject to customary approvals by regulatory authorities. The agreement is also subject to completion of the consultation process with TenCate’s workers council.
Corporate Social Responsibility
TenCate is well rooted in society in the Netherlands with a history dating back before 1704. As such TenCate is proven to be a stable and sustainable company, which plays an important role in local communities. TenCate also has a long-standing history outside the Netherlands and plays an important part in local communities in which it seeks to be a reliable employer.
TenCate develops and produces technical textile materials, which contribute positively to the security and safety of people and their living environment. In this context TenCate companies formulated their policy to minimize their impact on the environment and minimize the use of resources such as water and energy. This policy includes waste reduction, the recycling of raw materials and the development of end products which can be recycled in any form.
Sustainability is part of the TenCate value proposition. All TenCate products and systems contribute specifically to sustainability and have intrinsic advantages over traditional products due to weight savings, CO2 footprint reduction, fuel savings and increased safety and protection.
Sustainability is also a key element in the production processes of TenCate materials. A growing part of TenCate’s offering includes aspects of a circular economy. As an example, TenCate Grass was the first company in the industry to introduce fully recyclable synthetic turf sports fields and biodegradable products. Reducing energy use and water consumption is a key element of saving costs, as well as reducing the environmental footprint.
Many TenCate businesses are ISO 14001 certified. This also provides an accepted standard for environmental and safety control of key processes. Processes are monitored constantly as part of operational risk management within all TenCate market groups.
Technological innovations and R&D
TenCate’s technological innovations cater for today’s needs for safe and sustainable solutions. “Protecting people” is TenCate’s promise. Materials, modules and systems from TenCate make a difference and are the means of fulfilling social, ecological and economic needs and expectations. The production of innovative materials which are lightweight, increase safety, offer more comfort, comply with new rules and regulations gives TenCate an “expert” profile in its market niches. The innovative competences and flexibility of TenCate will be used to provide solutions which deliver a positive contribution to the demands of end markets in connection with environmental aspects, sustainability and safety.
Total research and development expenses including capitalized development costs were € 22.3 million in 2017 (2016: € 24.6 million). In 2017 TenCate received € 0.6 million (2016: € 0.7 million) in development grants. These relate mainly to European, national and regional development grants.
Personnel
At the end of 2017, TenCate employed 3,796 people (FTE excluding temporary staff, 2016: 3,550). Of the total number of employees in 2017, 76% were male and 24% female.
Human Resource Management was fully decentralized during 2017, with the TenCate business groups being fully responsible for their own HR-related tasks, although in the Netherlands the groups cooperate with each other in connection with collective labor agreements in the textile sector, educational programs etc. A combined works council is also still in place in the Netherlands, monitoring social and employment matters and related topics.
During 2017 a decision was taken by TenCate’s pension fund to liquidate the fund and transfer all pension rights to the Dutch textile industry sector pension fund (MITT). In consultation with all stakeholders a new pension scheme has been adopted, which is at least equal to the existing pension scheme of TenCate. Some of the conditions of the “standard” pension scheme as applied by MITT were improved and/or amended in order to comply with the requirements of the transition. The central works council gave its consent to
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the transition of the pension rights to MITT and to the new pension scheme which will be effective from 1 January 2018. TenCate made a one-time cash settlement for, amongst other matters, agreed future recovery premiums amounting to € 10 million. In addition, TenCate will pay all transfer-related costs up to an amount of € 3 million.
Energy
Total energy consumption amounted to approximately 1,649 terajoules (2016: 1,697). Among TenCate’s production processes, fabric production and synthetic fiber extrusion are the most energy-intensive.
Biogas is produced in the company’s own wastewater treatment plant and is used to produce steam for processes. The table below shows the percentage breakdown of energy consumption based on the main energy sources for 2014 to 2017.
TenCate’s Dutch production sites have an energy efficiency improvement target of approximately 2% per year, in line with the Multi-year Energy Efficiency Agreement of the Ministry of Economic Affairs and the Modint industry organization in the Netherlands.
In 2017 TenCate’s global CO2 emissions were 145 kilotonnes (2016: 149 kilotonnes). The data show that 76% of TenCate’s CO2 footprint is due to electricity consumption. Of the electricity consumed, 25% is sourced sustainably, such as from wind power, hydroelectricity or solar energy, and is therefore CO2-neutral. The CO2 emissions are mainly attributable to the energy-intensive divisions TenCate Geosynthetics and TenCate Grass.
Water
Total water consumption in 2017 was approximately 3.0 million cubic meters (2016: 3.3 million cubic meters). The dominant consumers of water are TenCate Geosynthetics, TenCate Grass and TenCate Protective Fabrics. The total volume of wastewater was 2.9 million cubic meters in 2017 (2016: 3.1 million cubic meters).
Waste
Over 13 kilotonnes of waste were released in TenCate’s production processes in 2017 (similar to 2016). Almost 4.2 kilotonnes were recycled internally during the reporting year (2016: 4.5 kilotonnes) and almost 6.1 kilotonnes were processed externally, with an additional 0.9 kilotonnes of waste being incinerated by the waste processor and the remainder being sent to landfill.
Risk management
Risks are an inherent part of entrepreneurship. TenCate aims to identify and control these risks at the earliest stage possible. Risk control models have been developed for that purpose, which are regularly updated by and discussed with business group management. TenCate’s risk appetite, the main risks and the applicable risk control models for each category are briefly described below.
Insights into TenCate’s risk appetite and the associated limits are discussed with the management. Limits are determined by the strategy, code of conduct, business values, authorization schedules, procedures and management regulations. The risk appetite differs in each risk category.
Risk management is covered in the consultation with the Supervisory Board.
To a lesser extent risk management is monitored at holding level, governed by centralized risk policies and guidelines. Due to the separation of the individual business groups, each group is adopting individual risk management policies which are tailor-made for the individual business. However, the Executive Board continues to monitor the risks of each of the individual business groups, in particular while financing is carried out at the holding level. Decentralization of responsibilities will not have a material impact on the overall risk profile of TenCate towards the major stakeholders.
Strategic and market risks
Identified strategic risks for the individual business groups remain the same as before and relate to:
Limits on government expenditure Deteriorating economic and political
conditions Technological developments
ENERGY CONSUMPTION BY ENERGY SOURCE 2014 2015 2016 2017Renewable electricity 14.8% 15.5% 15.9% 15.9%Non-renewable electricity 47.6% 47.6% 48.3% 47.8%Biogas 0.1% 0.1% 0.1% 0.1%Natural gas 24.3% 23.4% 22.4% 24.0%Steam 12.5% 12.7% 12.7% 11.6%Other sources 0.7% 0.7% 0.6% 0.6%Total 100.0% 100.0% 100.0% 100.0%
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Availability and price fluctuations of raw materials.
The major risk factor in demand for TenCate products is the level of government expenditure. The number of customers may be limited, even in the industrial market. In some market groups, products are developed for adjacent markets, reducing the dependence on government budgets and dominant customers. By building flexibility into cost structures, it is possible to offset the consequences of a drop in demand to a certain extent.
A limited number of raw materials account for a large proportion of the materials consumed by the market groups within TenCate. Prices in commodity markets are liable to fluctuate widely. Price rises cannot always be passed on, or can only be passed on after a time lag. In the case of some materials, shortages may occur or a dependence on a single supplier may develop. Such cases give rise to availability risks or disproportionate price rises. TenCate endeavors to reduce this dependence by using alternatives.
Operational risks
With respect to operational risks, TenCate has a very low risk appetite. The objective of TenCate is to minimize the impact of unexpected operational problems. Identified operational risks relate to:
Continuity of production Product liability Retention of knowledge and skills License to operate IT reliability and continuity.
It is vital that TenCate has safe production sites. This guarantees business continuity and can prevent any loss of production capacity. At the same time, TenCate can safeguard its position as a dependable supplier and customer.
Safety aspects particularly concern the risk of fire, explosion and natural disasters, such as floods, earthquakes or storms. In cooperation with the insurer FM Global, corporate risk management conducts regular annual inspections of production sites of all market groups worldwide.
Corporate risk management also deals with numerous matters relating to the company’s liabilities, including product liabilities and insurance cover.
TenCate has various small- to medium-scale production processes. Incidents in production can never be ruled out. These may lead to a loss of quality in the end-products, claims from customers or even a temporary halt in the production process. TenCate carries out preventive inspections of its products and almost all plants are ISO-certified. Control of production processes and quality management are important priorities in order to prevent product claims.
The development of technical and management competences plays an important role in the personnel policy of TenCate. This enables the company to monitor the quality of products and the continuity of the production processes.
The TenCate businesses’ license to operate depends on close adherence to local regulations and operation within locally specified standards of good entrepreneurship.
Any disruptions to IT systems can impede the operating processes. The risks are limited as much as possible by means of information security and fallback procedures. The operation of these facilities is regularly tested, both internally and externally.
Compliance risks
TenCate has a zero-tolerance policy regarding compliance risks. Identified compliance risks relate to:
Business ethics Laws and regulations Intellectual property Export controls
The standards and values of TenCate are set out in the code of conduct. A whistleblower scheme enables employees to inform the company management of any undesirable situations. A central compliance officer has been appointed.
All managers and controllers sign an annual letter of representation declaring their compliance with financial reporting and internal control requirements.
TenCate is involved in a number of legal proceedings resulting from normal business operations. The results of these proceedings are by their nature uncertain. The progress of these proceedings is monitored continuously. A summary is discussed twice a year within the Supervisory Board.
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Development of new products entails a risk of IP rights violations. Important patents and innovations are recorded as much as possible in order to mitigate risks of violations. Possible violations are investigated.
Financial risks
With regard to financial risks, TenCate has a low risk appetite. Identified financial risks relate to:
Availability of credit facilities Interest and exchange rate fluctuations Tax Impairment Counterparty credit risk, including
customers.
The financing of the company is centralized through the corporate treasury department. The corporate treasury department is also responsible for the monitoring and hedging of interest rate and currency rate risks. A treasury policy is in place, which is validated with the Boards (Executive and Supervisory Board) from time to time.
TenCate has had direct access to the unused part (Revolving Credit Facility) of the external credit facility of Tennessee Acquisition B.V.
Although TenCate’s external financing is arranged at the level of Tennessee Acquisition B.V., the main financial risk still relates to the availability of credit facilities, which is partly dependent on the performance of the business groups of TenCate. The conditions of the external financing are in line with market practice for companies of a similar size and credit rating.
TenCate has a central tax management department. Tax risks can result in a substantial financial and operational risk. The trend of growing awareness among national governments and tax authorities regarding international flows of goods and services and rights, within and outside groups, leads to an increased risk profile and risk awareness with respect to local taxes, possible import duties, value added tax, withholding tax and other taxes. For this reason, substantial time and resources are continuously devoted to tax compliance.
An impairment test is carried out at least once a year. This test is discussed with the Supervisory Board and the external auditor.
The credit risk relating to individual customers is monitored and partly insured.
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TENCATE PROTECTIVE FABRICS
Profile and strategy
TenCate Protective Fabrics is a leading technical fabrics producer for protective clothing applications. It has a solid reputation and is renowned for its innovative blends. TenCate Protective Fabrics designs, develops, manufactures, sources and sells fabrics used for protective clothing. The product range is aimed at protecting people in working and hazardous environments. The protection of fabrics is achieved through the application of strong know-how in blending fibers and using finishing technologies to optimize value and performance characteristics of the material for end users. TenCate Protective Fabrics focuses on four market segments of the personal safety market: industrial safety, emergency response, military & police and workwear. Direct customers are predominantly professional garment and uniform manufacturers, laundry companies and other service providers.
With the broadest product portfolio in the marketplace covering the entire spectrum of the protective fabrics market, TenCate Protective Fabrics is fully dedicated to offering end users an optimal range of personal protection.
The strategy is built on the combination of treated FR (flame-retardant) cotton products and inherent FR fabrics, all marketed under strongly positioned TenCate brands. The blending strategy combines different fibers to offer the specific protection under optimal wearing conditions, enabling TenCate Protective Fabrics to always offer the best protection, optimal comfort and most economical solution for companies facing multiple risks in their particular working environment.
Organization
The business group of TenCate Protective Fabrics is a global organization with sales offices around the world, covering a full scope of safety fabrics, with both inherent (yarn blends) and finished functionalities. The group’s production sites are located in the USA (Georgia) and Europe (the Netherlands). Whereas production in the Netherlands is predominantly set up as a finishing plant for FR products and workwear, the USA operation is more vertically organized with yarn spinning, weaving, dyeing and finishing. The USA
production of high-volume military applications is outsourced to a large extent in order to achieve the required flexibility.
Much emphasis has been placed on strengthening the production organization both in the USA and in the Netherlands. In order to create a stronger market orientation in Europe with a quality-driven customer focus, the personnel organization has been strengthened significantly. TenCate Protective Fabrics employs 742 FTE.
The organization of TenCate Outdoor Fabrics (fabrics for the tent and sun awning market) has been operationally separated from the TenCate Protective Fabrics group. The production layout has been modified in order to enhance efficiency and output. TenCate Outdoor Fabrics occupies a separate office space and manufacturing site in Nijverdal, the Netherlands.
Main product/market combinations and value proposition
The key market segments for TenCate Protective Fabrics are:
Industrial safety wear – (multi) risk / safety wear
Service / industries laundry – workwear segment (non-flame resistant)
Emergency response Military & police (law enforcement)
The materials of TenCate Protective Fabrics provide protection against threats such as flames, heat, molten metal splashes, electrical arcs and chemicals. Each market segment has its specific requirements. This results in a dedicated product portfolio with an optimal combination of protection and wear comfort, aimed at specific end-user requirements and qualifications. TenCate Protective Fabrics uses a brand portfolio of products which are well recognized in each of their specific market segments.
The value proposition is built around TenCate Protective Fabrics’ broad technology base and technological expertise as well as its independent position in terms of fiber blends in order to provide end users with the best possible solution for personal safety. TenCate Protective Fabrics stands for state of the art quality and protection, and the most economical solution during the lifetime of the garment.
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The key market segments for TenCate Outdoor Fabrics are the tent fabrics and sun awnings markets and related outdoor applications such as the events market and the leisure market. TenCate Outdoor Fabrics concentrates on market niches such as tent rental companies, trailer tents and family tents, with an emphasis on “safe and sustainable outdoor experience”. The group has introduced digitally printed fabrics in order to be able to offer customer-specific products with an innovative design in its business to business market approach.
Performance in 2017
Consolidated revenues decreased to € 281 million in 2017 (2016: € 327 million). The main reason for this decline is that defense-related sales in the protective fabrics market can fluctuate year over year due to the size of some individual contracts and availability of government budgets. The group remains strongly positioned in this market segment. Sales to North American industrial markets increased significantly in 2017. The improved manufacturing performance in the USA enhanced the results of TenCate Protective Fabrics.
TenCate Outdoor Fabrics realized higher sales, also reflecting growth of market share. The company was successful in the “Glamping” market, the luxury segment of the rental companies. The introduction of digitally printed outdoor fabrics is creating momentum with opportunities in related market segments.
Outlook
Revenues in defense markets can vary on an annual basis due to the volume of large delivery contracts, especially in the USA and the Middle East. Initiatives are ongoing in order to present TenCate Protective Fabrics as a global supplier of choice for a full range of safety fabrics to international garment manufacturers and the garment service / rental industry.
The changes in the organization of TenCate Outdoor Fabrics and enhanced manufacturing performance will be the foundation for growth in market share in an overall stable to slightly growing market.
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TENCATE ADVANCED COMPOSITES
Profile and Strategy
TenCate Advanced Composites is a global leader in the development, supply and production of a wide range of advanced composite materials (thermoplastics and thermoset) serving the aerospace, satellite/communications, industrial (including automotive), footwear, consumer electronics and medical markets. TenCate Advanced Composites’ customers include leading OEMs, such as Airbus Industries and Boeing, in each of its key market sectors.
TenCate Advanced Composites owns a unique material technology portfolio and is a leading supplier of thermoplastic composite materials primarily for high-end structural applications in the commercial aviation industry. In thermoset composite applications, the group puts its focus on high-performance materials mainly for space applications, radomes and high-end industrial applications.
The strategy of TenCate Advanced Composites is aimed at expanding thermoplastic applications for aviation on the back of continuing trends of weight reduction, cost savings and simplifying the production process. In the selected thermoset composite markets, TenCate Advanced Composites is consolidating its already strong market position in the USA (space and radome applications) while strengthening its European footprint, especially for selected high-performance niche markets with significant volume upside potential.
Organization
TenCate Advanced Composites operates four production facilities in North America, two in Europe, and one in China, employing 599 FTE worldwide. The aerospace-focused products are developed and produced in facilities located in: Morgan Hill and Fairfield (CA), Nijverdal (NL) and Langley Mill (UK). Each of these facilities offers aerospace-certified production and quality systems. Additionally, TenCate Advanced Composites operates dedicated “carbon-free” production facilities for high-purity materials for satellite and radome applications in the aerospace sector. TenCate Advanced Composites supports the footwear, medical orthotic, sporting goods and consumer electronics industries out of its facilities located in Camarillo (CA), Burlington (Ontario, Canada)
and Guangzhou (China). During 2017 it was decided to relocate the Canadian production location to the USA.
Main product/market positions and value proposition
Aerospace-grade thermoplastic materials include a range of fiber and resin combinations to support high-performance aerospace and industrial applications. Primary resin system offerings are composed of high-temperature, engineered thermoplastic resins. These are produced in unidirectional tapes, prepregs and reinforced thermoplastic laminate (RTL) forms to enable each customer to process structural components in a manner that best fits its requirements.
High-performance thermoset materials include a wide range of continuous fiber-reinforced epoxy, cyanate ester, and BMI resin systems. These materials are focused on meeting the needs of “volume niche” applications within the broad high-performance, engineered materials segment, primarily focused on military aircraft, radomes, unmanned vehicles, general aviation/private aircraft, niche aircraft interior applications, satellite structural materials, launch vehicles and high-performance automotive applications.
Performance composite thermoplastic materials offer a combination of composite raw materials and parts that are designed for high-end industrial applications such as footwear, medical/orthotic, oil and gas, automotive and other high-performance applications. Primary resin system offerings comprise lower temperature, rapid processing and highly cosmetic materials, produced in unidirectional tapes, woven prepregs and structural RTL to meet each of our customer’s/market’s unique processing and performance requirements.
TenCate Advanced Composites’ unique value proposition is based on “knowledge intensive” capabilities to combine materials (e.g. fibers and resin systems) with related processes into a broad product portfolio. The extensive knowledge of composite aerospace materials formed over more than 25 years of materials development can be used for expansion into other markets demanding high-performance lightweight solutions, in order to create further upside potential.
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Performance in 2017
Group revenues increased to € 193 million in 2017 (2016: € 179 million). Besides the good performance in the USA aerospace, space and satellite markets, strong growth was also recorded in industrial applications. The aerospace sales in the EU started hesitantly, but improved towards the end of the year. Commercial activities in consumer electronics applications are increasing.
During 2017 TenCate Advanced Composites completed important new qualifications for thermoplastic composite materials for current and future aircraft programs with major OEMs. This will create new future growth opportunities and enhances the group’s position as a leading supplier for the aerospace industry.
Outlook
As also stated in past years, aerospace structures and related markets will remain one of the largest growth drivers in the future. The group also expects further growth in the other selected markets for TenCate Advanced Composites. Recent new qualifications are creating a solid basis for long-term growth.
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TENCATE ADVANCED ARMOR
Profile and strategy
TenCate Advanced Armor is the global strategic partner for survivability solutions. The company is among the globally leading companies in the market for lightweight composite (passive) armor systems. The company is well positioned and structured to meet the requirements from demanding OEM customers with regard to engineering capability, technology, product range, documentation and project management from design and qualification, production, delivery and after-sales service. Besides a portfolio of passive armor solutions, the group is in the final phase of development for the market introduction of an active armor system, Active Blast Defense System® (ABDS). Future survivability solutions for platforms will combine both passive and active armor systems.
The strategy of TenCate Advanced Armor is aimed at being a global partner for survivability solutions. For vehicle protection, TenCate Advanced Armor has unique design and manufacturing capabilities to provide state of the art protection systems. Optimizing production is a key element of the strategy in order to allow efficient production for the several anticipated large vehicle programs. The ABDS technology enhances the future survivability of ground vehicles, which strengthens the group’s design capabilities to offer vehicle-specific active and passive armoring solutions in both Europe and the USA.
Organization
TenCate Advanced Armor operates four production facilities worldwide. The passive armor production in North America is located in Hebron, Ohio, and the active armor production is located in Goleta, California. In Europe, the passive armor production sites are located in Primarette, France and Vissenbjerg, Denmark.
Sales Offices outside the USA and France / Denmark are located in Singapore for the APAC market and Bristol, specifically for the UK market. The group employs 276 FTE.
Main product/market combinations and value proposition
The group is active in vehicle protection, aircraft protection, naval protection and personal protection. In all segments the key driver is defense and security spending in
response to unrest and/or emerging threats. Markets are tender-driven and marketing efforts are concentrated on prime contractors in the industry. TenCate Advanced Armor positions itself in these market segments as a reliable and low risk partner.
In the personal protection segment, TenCate Advanced Armor supplies hard body armor plates for military and law enforcement users. Furthermore, the company is a key player in the niche market for shields used by police forces and elite counter-terrorism units.
For end-users, the survivability products and solutions of TenCate Advanced Armor will reduce fatalities when operating in hostile environments and exposed to 21st century threats, such as IEDs and ballistic threats. The low weight of the protection solutions also ensures better mobility, increased operational efficiency and lower lifecycle cost.
For OEMs, the engineering capabilities and ability to customize cutting-edge materials to become survivability solutions enable customers to be successful in qualifying and supplying platforms to armed forces and law enforcement units. Forming strategic partnerships with customers and suppliers on a project by project basis, TenCate Advanced Armor provides cost-effective, high-performance survivability solutions, customized to fit individual customer and end-user requirements.
Performance in 2017
After years of declining defense and security spending in key markets such as the USA and Western Europe, the renewed focus on re-building conventional forces and equipping and expanding police and security forces is having a positive effect on the business of TenCate Advanced Armor. Total group revenues increased by 19% to € 81 million (2016: € 68 million). In Europe in particular a good performance was recorded, with several vehicle programs ramping up production and strong demand from the law enforcement markets. The USA activities reached a turning point in the last quarter. Deliveries in the law enforcement market picked up. By the end of 2017 production for vehicle programs in the USA started, with sales continuing during 2018. The ABDS-related revenues are still concentrated around R&D-related programs and survivability engineering-related assignments for external parties.
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Outlook
Expectations are that the market in all segments will continue to develop positively. The need for higher protection levels for law enforcement, the increased expected military spending in NATO countries, and the start of replacement and retrofit programs for vehicles will drive this trend.
The future for TenCate Advanced Armor is built on strong operational companies carrying out the global segment strategy. The focus will be on higher engineering content, as a full survivability solution for a person, an aircraft or a vehicle will be offered to customers.
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TENCATE GEOSYNTHETICS
Profile and strategy
TenCate Geosynthetics is a global leading provider of geosynthetic products (nonwovens, wovens, grids and fabricated geosynthetic products) and solutions that enhance the infrastructure, protect the environment and conserve natural resources. Across all major regions of the world, the group actively develops, prescribes, produces, delivers and supports products and systems mainly for civil works and infrastructure projects, and for niche applications related to agricultural and recreational activities.
Geosynthetic products are used, among other functions, for separation of dissimilar soils, enhancement of soil drainage and filtration characteristics, reinforcement of weak soils, dewatering of sludge, erosion control and shoreline protection. Solutions which benefit from the use of geosynthetics include highways, railways, retaining walls, steepened slopes, drainage & filtration systems, marine structures, and waste containment structures such as landfills.
The focus of the strategic initiatives of the group is on organic expansion by taking current capabilities into nascent geographies, industries and applications. Technical support is a key aspect of the strategy in order to create the best technical, environmental or economic solution in the field.
The geographic focus for growth is on Asia supported by a substantial investment program to strengthen market presence.
Organization
TenCate Geosynthetics is organized with key attention devoted to local and regional customers, markets, and stakeholders, supported by local and regional production. As a global market leader TCG also acts globally where it is valuable to do so, for example in business support services, operational best practices, and strategic product & business developments. Key operational locations are the United States of America, the Netherlands, France, Austria, Malaysia and China, further extended by a significant network of engineering and sales employees. Geosynthetic products are in general engineered materials which need a technical sales approach. TenCate Geosynthetics employs 1,161 FTE.
Main product/market combinations and value proposition
TCG focuses on civil and geotechnical value propositions in infrastructure developments for transportation, building sites, natural resources & energy, water, and environmental installations.
The TCG value propositions:
may enable the development of projects that otherwise might not be possible
often reduce total project costs when compared to more traditional materials
frequently support a reduced environmental impact of CO2
Performance in 2017
Group revenues amounted to € 344 million (2016: € 313 million). Most markets in which TenCate Geosynthetics is active were relatively favorable in 2017. In addition to moderate government spending, privately funded projects provided good opportunities and TCG found success in supplying increased volumes for applications that especially benefit from its more unique and valuable solutions. Factory utilization and other internal optimization initiatives have contributed to improved margins, further leveraged through significantly higher revenues in most regions and application markets.
Outlook
It is expected that supportive economies and market conditions, in combination with the group’s breadth of products, applications and access to various geographies, will combine well with further focused improvement initiatives to continue the positive trend in sales and results.
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TENCATE GRASS
Profile and strategy
TenCate Grass develops and manufactures synthetic grass components (yarn and backing, referred to as “Upstream”) and systems (turf and installation, referred to as “Downstream”) for application in sports fields (soccer, American football, hockey, rugby, etc.) and landscaping. The group is active globally with a strong presence in Europe, the United States and the Asia-Pacific region. Customers are typically turf carpet tufting companies.
The Upstream market has historically been very consolidated with a few suppliers representing the bulk of the output. By contrast, the Downstream market has been very fragmented with many suppliers either manufacturing turf carpet or installing. In the Upstream segment, competition from Chinese manufacturers has increased strongly, driven by lower manufacturing costs and fast product development. In the Downstream segment, a consolidation phase has begun in which TenCate Grass is fully participating.
Taking the above into account, the TenCate Grass group strategy is based on three pillars:
increase in the competitiveness of the Upstream operations;
increase in the speed of product development to meet fast-changing market requirements;
increase in the Downstream presence with a combination of organic growth and strategic M&A.
Increase in the competitiveness of the Upstream operations
In 2017 TenCate Grass launched a program called Grass.exe. It has the objective of (1) substantially reducing inventory, (2) decreasing the unit price through a mix of operational excellence initiatives and (3) generating procurement savings. The program is still in progress. Several intermediate objectives have been attained with the goal of reaching all of them by the end of 2018.
Increase in the speed of product development to meet fast-changing market requirements
TenCate Grass has revitalized the innovativeness and increased the time to market for new products in order to keep the product portfolio up to date and ahead of the competition. This initiative enabled the
company to bring several new developments to the market in the third and fourth quarters of 2017, thereby regaining lost market share. One of the key enablers was combining all R&D activities, whereas these were previously executed separately across three manufacturing plants. New developments were also supported by revamped marketing collateral.
Increase in the Downstream presence with a combination of organic growth and acquisitions / partnerships
During 2017, three acquisitions were completed:
CSC, a Dutch sports pitch contractor and longstanding partner of Greenfields, was acquired in February. This allows CSC and Greenfields to operate as a turnkey sports pitch supplier and creates a market- leading presence;
SGW, an American landscaping turf distributor and longstanding partner of TenCate Grass in the USA, was acquired in March. SGW is the market leader in the USA in landscaping turf. It allows TenCate Grass to benefit from the future growth outlook of the market and to profit from SGW’s unique, e-commerce-based market proposition;
Opsa, a Spanish sports pitch contractor and a longstanding partner of Greenfields, was acquired in September. The Spanish market is buoyant, sports-driven, but also prone to water shortages, making this an ideal acquisition.
Organization
TenCate Grass is structured as an Upstream and a Downstream organization, each with its own management. From a technology and volume perspective, TenCate Grass is the world’s leading manufacturer of yarn, with manufacturing facilities in the Netherlands (Nijverdal), the USA (Dayton, Tennessee) and the United Arab Emirates (Dubai).
TenCate Grass is also in the process of growing its Downstream presence. It was already established with its Greenfields (Europe and USA) and TigerTurf (UK, Australia, New Zealand) companies and brands. During the course of 2017 it expanded its presence with the acquisition of two sports field contractors in Europe and a landscaping turf distributor in the US. This safeguards Downstream consumption of Upstream output but, just as importantly, it gives TenCate Grass
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exposure to end markets, thereby providing a much better understanding of customer needs and wishes.
At the end of 2017, TenCate Grass employed 979 FTE (2016: 912 FTE).
Main product/market combinations and value proposition
Yarn is the leading product of TenCate Grass. TenCate produces other components such as carpet backing and sub-base elements that complement its yarns to build quality turf systems.
The synthetic turf market can be divided into a sport segment and a landscaping segment. Each application demands specific yarn qualities to comply with required system qualifications and certifications, especially in the sports market. Soccer, field hockey and American football are the main applications in the sport segment. Landscaping has been a fast-growing segment of the synthetic turf market. The most important selling factor in this segment is the natural appearance and durability of the product, most often realized through a combination of yarn types.
The value proposition of TenCate Grass as a supplier of turf components is based on partnerships along the value chain and operating in close proximity with its end market and customer requirements. A reliable supply is crucial for the efficient industrial process of grass carpet manufacturing. A consistent product quality, meeting the required specifications, is crucial for integrators and installers who have to comply with strict end-product standards.
Performance
Overall revenues increased to € 322 million in 2017 (2016: € 289 million). Organic sales were under pressure due to amongst others significant destocking by several large customers and weak market conditions in China and California. China was impacted by a non-artificial turf related toxic scandal which initiated the development of a completely new standard by the government, effectively delaying new investments. California was impacted by an unusually wet winter which impacted sales in general but also delayed installations of new artificial grass. The strengthening of the entire organization with crucial management changes has had a positive effect on performance. The Product
Strategy has been revamped, leading to much faster and focused product development and fine tuning of the product portfolio. Procurement has been centralized, with the benefits starting to come through in the latter half of 2017. Management of Upstream and Downstream EMEA has been separated to allow a much more focused approach. The visibility of senior and commercial management among the top 30 customers has increased significantly. Finally, customer responsiveness is receiving the highest attention. These changes in corporate culture have been perceived positively in all end markets.
Outlook
The artificial turf market continues to have attractive growth drivers. Sport has now reached a mature stage in the product life cycle. The installed base of sports fields is substantial, implying strong, recurring replacement demand. In addition to replacement, newbuild growth is in the mid-single digit range. Usability (number of hours of use per time unit, which is much higher than for natural turf) is a key driver, along with low maintenance cost and low to no water usage. Landscaping is enjoying double digit growth, albeit that a large part of the market is for low priced commodities. Growth drivers are water shortage (e.g. in the south-west of the USA and the Middle East), ease (consumers wanting to spend less time on gardening) and esthetics, with recent product development resulting in products that are indistinguishable from natural grass and of even better appearance.
Almelo, 5 April 2018
Executive Board
J.H.L. Albers, president and CEO
F.R. Spaan, member of the executive board and CFO
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Report of the Supervisory Board
We hereby present you with the 2017 annual report, prepared by the Executive Board and containing the financial statements. These financial statements were audited by KPMG Accountants N.V. and discussed with the Executive Board on 5 March 2018 in the presence of the auditor.
The unqualified audit report has been included in this annual report. We believe that the annual report satisfies the requirements of transparency and that it constitutes a good basis for the Supervisory Board’s accountability on the supervision exercised. We recommend that the financial statements be adopted and that the Executive Board be discharged for the management conducted and the Supervisory Board for the supervision exercised.
COMPOSITION
The current members of the supervisory board are Messrs Boudewijn Molenaar, Jan Hovers, Erik Westerink and Fred van Houten. On December 15, 2017, Loek de Vries resigned as a member of the Supervisory Board. This enables him to advice on operational matters, without the responsibilities and limitations attached to the membership of the Supervisory Board of TenCate. The Supervisory Board thanks him for his value contribution to TenCate.
The company acknowledges the importance of a well-balanced composition of both the executive board and supervisory board (at least 30% of the seats are occupied by women and at least 30% of the seats are occupied by men). As a result from the arrangements made at the occasion of the public offer for all TenCate shares effected in 2016, the composition of the executive board and the supervisory board of TenCate was changed and presently the seats of both boards are occupied by men. The company aims to achieve a well-balanced distribution of seats and the company will endeavor to select female candidates when future vacancies arise. However in view of the industry in which the company operates, it will remain difficult to find suitable candidates who also sufficiently fulfill the other required profile.
SUPERVISION IN 2017
In 2017, the Supervisory Board met with the Executive Board in a plenary meeting on five occasions in the exercise of its regular duties. Except in the case of one member of the Supervisory Board, who was absent during three meetings, all members of the Supervisory Board attended the plenary meetings held. At two meetings, a member of the Supervisory Board attended by telephone.
Both the composition and functioning of the Executive Board and the performance of individual directors were discussed outside the presence of the Executive Board.
In 2017 attention was devoted to the five business groups of TenCate, which will gain more independence, the strengthening of the business group management and the optimization of the legal and finance structure. The Supervisory Board fully supported the actions taken by the Executive Board in these areas.
In January and February 2017 respectively, the Supervisory Board approved the acquisition by TenCate Grass of Ceelen Sport Constructies, (the Netherlands) and Synthetic Grass Warehouse (“SGW”) (California, USA). In September it endorsed the acquisition of Obras Y Pavimentos Especiales, S.A. (“OPSA”) (Spain).
The Supervisory Board endorsed the refinancing of the TenCate Group in January 2017, which resulted in a decrease in interest costs, and it approved the further amendment of the Senior Facilities Agreement in December 2017, resulting in improved interest conditions.
On 14 September 2017 the Stichting Pensioenfonds Koninklijke Ten Cate decided to terminate its activities and is currently being wound up. The Supervisory Board approved the transfer of the pension scheme of all Dutch employees to the industry-wide pension fund for the fashion, interior decorating, tapestry and textile sector (“MITT pension fund") as from 1 January 2018, including the associated costs.
In addition to the topics mentioned above, the Supervisory Board’s supervision was especially focused on:
Evaluation of the strategic developments,
major risks and general course of business at TenCate;
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Financial reports, with the annual figures also being discussed with the external auditor;
The approval of the budget and the audit plan;
Risk management; Investments at TenCate.
Representatives from the Supervisory Board also attended three consultative meetings of the central works council.
As in previous years, the self-evaluation of the members of the Supervisory Board took place in the course of the work, whereby each member’s own performance was evaluated.
CORPORATE GOVERNANCE
The Supervisory Board and the Executive Board mainly endorse the principles of the Dutch Corporate Governance Code. However, in view of the company’s delisting, this code is no longer applied in full and the company has ceased to report on any deviations from the code. In the future composition of the Supervisory Board, two members will be independent in accordance with the Dutch Corporate Governance Code provisions, at least in the position of continuing members.
Presently, Jan Hovers and Fred van Houten hold this position. A separate audit committee and appointment and remuneration committee were no longer active during the year under review. The topics relevant in those contexts were discussed in the plenary meeting of the Supervisory Board. For the remuneration of the current [and former] members of the Executive Board, we refer to note 50.1 of this report.
Advisory Boards have been established for each division, with the aim of supporting the operating management with advice and assistance in the further development of the company. Advisory Boards are composed of representatives from the Executive Board of TenCate, its shareholders and outside industry experts. Advisory Boards meet approximately four times per year.
The Supervisory Board thanks the management and employees of TenCate for their commitment and performance during 2017.
Almelo, 5 April 2018
Supervisory Board
B.T. Molenaar, chairman
J.C.M. Hovers
E.J. Westerink
F.J.A.M. van Houten
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Executive Board and Senior Management
Jan H.L. Albers (1952), chairman of the Executive Board and Chief Executive Officer Jan Albers has been a member and chairman of the Executive Board since August 2016.
Frank R. Spaan (1955), member of the Executive Board and Chief Financial Officer Frank Spaan has been a member of the Executive Board since October 2016.
TenCate Protective Fabrics Don M. Olsen (1954), CEO Mark D. Christman (1971), CFO TenCate Outdoor Fabrics Rob Verver (1959), General Manager Jan Getkate (1964), Finance Director
Other activities: Chairman, supervisory board, PSV N.V. Member, supervisory board, Nederlandse Loterij
Other activities: Member and vice-chairman, supervisory board, Rabobank Twente Oost
TenCate Advanced Composites Stephen L. Littauer (1956), CFO Frank Meurs (1967), COO Scott Unger (1962), CTO Steve Mead (1971), CCO
TenCate Advanced Armor Steen Tanderup (1970), CEO Wilfred Sluyter (1972), CFO
TenCate Geosynthetics Wally Moore (1963), CEO
TenCate Grass Michael R. Vogel (1964), CEO Jan A. Teekens (1971), CFO
Supervisory Board
Boudewijn T. Molenaar (1953), chairman Commenced in office: 2016 End of current term: 2020 Partner and managing director, Gilde Buy Out Partners B.V. Member, supervisory board, Teleplan International N.V. Member, supervisory board, Royal Reesink N.V.
Erik J. Westerink (1961) Commenced in office: 2016 End of current term: 2020 Partner, Parcom Capital Management B.V. Chairman, supervisory board, RH Marine Group Chairman, supervisory board, Frames Group Member, supervisory board, Hartstichting Board member, Stichting Vrienden Teylers Museum
Fred J.A.M. van Houten (1951) Commenced in office: 2016 End of current term: 2020 Emeritus Professor of Design Engineering, University of Twente Member, supervisory board, Apollo Vredestein B.V. Member, Smart Industry Forum Member of the Royal Flemish Academy of Belgium for Sciences and the Arts Member of the German Academy of Science and Engineering
Jan C.M. Hovers (1943) Commenced in office: 2008 End of current term: 2020 Member, supervisory board, Randstad Groep Nederland B.V. Former Chief Executive Officer, Stork NV and OCE NV
All members of the Supervisory Board have the Dutch nationality.
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Koninklijke Ten Cate B.V. / Royal TenCate Stationsstraat 11 Postbus 58 7600 GD Almelo The Netherlands
Telephone +31 (0)546544911 E-mail: [email protected]: www.tencate.com
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