DCSIMG
Strategy 2018: Driving Profitable Growth - Annual Report 2015 - DSM

Strategy 2018: Driving Profitable Growth

Today, DSM is a more global, innovative and sustainable company than at any time in its history, with a portfolio of businesses that are well positioned to fulfill their growth potential.

Over the next three years, DSM’s Strategy 2018: Driving Profitable Growth will focus on capturing the full potential of its portfolio by improving the company’s financial results through organic sales growth, reducing costs, increasing productivity and strict allocation of capital. DSM aims to step-up its financial results at the same time as pursuing its ambitions in sustainability and its beneficial impact on people’s lives, creating value in terms of People, Planet and Profit.

A number of fundamental global societal trends are affecting economies, people and markets across the world. The major driver behind these global trends is demographic change. The world population continues to grow towards an estimated nine billion in 2050. People are living longer and in the main becoming increasingly wealthy and urbanized. These trends will further increase the pressure on the planet’s resources and on the food chain, while also stimulating new patterns of consumption and impacting the environment.

DSM addresses three key societal megatrends through its strategy and solutions, and therefore benefits from the increased attention they receive on a global scale. These are categorized as: Global Shifts and Digitization; Climate and Energy; and Health and Wellness (see next page). By focusing its unique capabilities in health, nutrition and materials on the opportunities the megatrends present, DSM is better able to support its customers in developing science-based, sustainable solutions that meet current and future needs and profitably grow its business.

Megatrends more relevant than ever

Population growth and an accelerating shift of wealth, most notably in emerging economies, are creating a more urban, prosperous and connected world – as well as huge resource and cultural challenges. These changes are influencing global demand, the way people live and how they interact.
Read more >

DSM’s Strategy 2018: Driving Profitable Growth builds on the achievements of the previous strategic period. It recognizes that, following a period of important portfolio transformation, the company will focus on ensuring that the potential of the current business portfolio translates into improved financial results. Consequently, DSM does not expect to engage in large acquisitions in the near future and this focus is reflected in a shorter, three-year, strategic period with two headline financial targets: high single-digit annual EBITDA growth and high double-digit basis point annual ROCE growth, while maintaining a long-term view on further business growth.

DSM is confident that it has the right business strategies in place to meet the needs of its customers and succeed in its markets, providing innovative and sustainable solutions that will help address the challenges − and opportunities − arising from the societal megatrends.

While the current significant macro-economic uncertainties are expected to persist for the foreseeable future, DSM has developed favorable product offerings for the segments it operates in and is well positioned to outpace market growth.

During the coming three years, DSM is executing cost reduction and efficiency improvement programs with targeted overall savings of €250-300 million by 2018 (of which €25 million was achieved in 2015) and aims to enhance its financial performance through consistent improvements in capital efficiency. DSM furthermore aims to bring total working capital structurally below 20% of sales. Capital expenditure will primarily support growth areas, with approximately two-thirds being focused on the Nutrition cluster.

At the same time, DSM is stepping up its sustainability aspirations. Sustainability is a key driver for DSM’s business in terms of commercial growth opportunities, and a focus area for reducing operating costs by decreasing the company's environmental footprint.

Safety remains of paramount importance and DSM aspires to further reduce injuries and incidents over time with the ultimate aim of providing an injury and incident-free workplace.

In support of its targets, DSM is adjusting its organizational and operating model and way of working, fostering a results-driven, high-performance culture. It has furthermore strengthened its top structure with the establishment of an Executive Committee, which enables more rapid strategic alignment and operational execution across the company.

As part of its strategic transformation and its move away from more commoditized and cyclical areas, DSM has established partnerships for its Pharma activities (DSM Sinochem Pharmaceuticals (DSP) for Anti-Infectives in 2011 and Patheon for contract development and manufacturing services in 2014) and for the remaining Bulk Chemical businesses in Polymer Intermediates and Composite Resins (ChemicaInvest in 2015). These partnerships have been created with a view to ultimately exiting these businesses and DSM expects to extract significant value from these partnerships in the coming years.

Nutrition

DSM is one of the world’s leading producers of specialty nutritional ingredients. DSM’s Nutrition cluster has unrivalled capabilities, with a global presence and an unparalleled network for local solutions as well as a complete portfolio of nutritional ingredients for food and feed and an extended offering over the value chain. This ranges from the production of active ingredients through their incorporation into sophisticated forms and tailored premixes, as well as nutrition end-products such as its i-Health range of dietary supplements.

The Nutrition cluster has clear strategies in place to drive both top and bottom-line growth across its businesses. Taken together, they can be summarized as:

  1. expanding proven and successful core competences, bringing them to more of the markets and territories it serves and maximizing their value;
  2. adding new products and solutions to its offerings, making full use of DSM's capabilities in sustainable innovation;
  3. growing in underpenetrated categories and regions and accessing new segments; and
  4. developing new business models to complement its positions across its value chains.

The Animal Nutrition & Health business will further expand its unique global premix footprint. In addition, the business aims to grow through new solutions in feed enzymes and eubiotics that are tailored to meet the specific local needs of animal protein producers in the territories it serves. It will drive growth in underpenetrated species such as ruminants, aqua and pets as well as enter new customer segments with new channels.

After the recent slowdown in some of its end-markets, Human Nutrition & Health aspires to return to more vigorous growth through new initiatives focused on the expansion of its premix activities and new products and solutions, for example in dietary supplements. DSM is paying particular attention to its Human Nutrition & Health operations in North America, where, following a recent reshuffle, it is resolved to deliver growth with disciplined sales and marketing execution.

DSM Food Specialties aims to leverage its leading cultures and enzymes platform to drive further growth in attractive markets and segments, as well as through new products and solutions. The business aims to further develop the positions it has built in savory ingredients.

These growth initiatives will be underpinned by reducing costs and increasing productivity across the cluster, driving cash generation and increasing capital efficiency. As part of the overall cost savings, a Nutrition-specific performance improvement program is being executed aimed at delivering cost savings of €130-150 million by 2018. The program focuses on productivity, growth and working capital. Key contributions will come from purchasing savings, reduced manufacturing costs and boosting production efficiencies. The program also includes specific streams aimed at further stimulating sales by creating a more efficient and effective sales organization, especially in Human Nutrition & Health.

The Nutrition cluster aspires to a high single-digit EBITDA growth and high double-digit basis point growth in ROCE in line with the overall targets for DSM, while aiming to achieve sales growth above market average with EBITDA margins of 18-20% over the period.

Materials

Over recent years, DSM has built an attractive portfolio with high-quality earnings within its Materials cluster. Its businesses are well positioned to capitalize on the dynamics within their respective end-use markets. DSM will continue its strategy of differentiation and tailored business approaches in the Materials cluster in the coming period. It will focus resources primarily on well-defined, higher-growth specialty segments, while leveraging existing assets to maximize returns in PA6 Polymers and Powder Coating Resins.

One of the key trends fuelling the cluster's above-market growth ambitions is substitution. Customers are increasingly looking to replace existing parts and materials with newer, more sustainable alternatives, for example replacing metals with lighter, high-performance plastics to reduce the weight of vehicles or replacing solvent-based paints with those made using waterborne resins. Moreover, legislative bodies around the world are setting increasingly strict standards. These include curbs on the use of hazardous materials and more rigorous norms for vehicle emissions. This sharpening is by no means confined to the developed world; emerging economies are in some cases raising the bar faster than their western counterparts. The combination of market pull and legislative push will be a powerful driver for substitution. By continuing to focus on developing and delivering innovative and more sustainable solutions, DSM is well positioned to capture above-market growth in its Materials cluster.

Materials will complement its top-line growth with further cost and capital discipline to ensure that this is also translated into its bottom-line results. Besides its contribution to the DSM-wide savings program in support functions and services, the cluster will build upon the successful profit improvement programs it has carried out and look for further savings and optimizations.

In aspiring to a high single-digit EBITDA growth and high double-digit basis point growth in ROCE, the Materials cluster is in line with the new group targets, while aiming to achieve above-market average sales growth with EBITDA margins of >15% over the period.

Innovation

Innovation is what turns DSM’s ‘Bright Science’ into ‘Brighter Living’. It is about discovering and integrating the best, the most sustainable and commercially viable solutions to meet market needs and to drive profitable growth. Continually providing innovative and improved products and solutions does not just drive top-line sales growth. Innovation sales have also contributed to DSM’s EBITDA growth, providing higher margins than the average of its running business.

DSM has successfully increased the proportion of innovative products and services it provides to customers. Innovation sales, defined as products and applications that have been introduced over the last five years, accounted for 24% of total sales in 2015. DSM aspires to maintain a level of around 20% going forward. DSM considers this to be a healthy proportion with a view to the overall balance of its product portfolio and product life cycles. Since this is a rolling target, maintaining this level will by definition be stretching.

Besides supporting innovation in the company’s core businesses, the DSM Innovation Center also aims to develop its Emerging Business Areas (EBAs) established over the last five years. These are new and promising growth platforms outside the scope of the company’s business groups. They comprise DSM Biomedical, focused on innovative materials for medical devices; DSM Bio-based Products & Services, which focuses on clean energy from crop residues as well as bio-chemicals with enzymes and yeasts for biomass conversion; and DSM Advanced Surfaces, which offers yield-boosting solutions for solar energy.

Taken together, these EBAs were already EBITDA positive in 2015 and DSM aspires to further grow the annual contribution they make to the company’s profit to €30-40 million by 2018. With the annual cost of innovation support running at around €15-20 million, DSM’s Innovation Center is expected to show EBITDA break-even in 2016.

Stepping up sustainability aspirations

Sustainability has become a key differentiator and business driver in DSM’s markets and helps guide the activities of the business groups as well as the company’s operations, strategic actions and decisions. By continuously developing innovative science-based products and solutions that make a real contribution to a brighter future for people around the world, DSM is also creating a more sustainable and profitable future for itself.

DSM has successfully embedded sustainability into its business activities. ECO+ products now account for 57% of sales (see Explanation of some concepts and ratios for a full definition of ECO+) and 91% of the innovation pipeline. With People+, the company has established a similar methodology supported by Life Cycle Assessments to measure and quantifiably improve the social impact of its products (see Explanation of some concepts and ratios for a full definition of People+). From 2016, DSM will collectively refer to its ECO+ and People+ products as Brighter Living Solutions.

For the coming period, DSM is stepping up its aspirations once again. DSM will increase the proportion of Brighter Living Solutions to 65% of sales by 2020 (2015: 60%). It will improve its greenhouse-gas efficiency − in other words, reduce its relative emissions − by 45% by 2025, compared to the reference year 2008 (2015: 20%). This will be supported by energy efficiency improvements of >1% per year and by sourcing at least 50% of its electricity from renewable sources by 2025. Increasing greenhouse-gas efficiency will also drive down costs. To support this targeted improvement and foster an appropriate sense of urgency to achieve these changes, DSM will apply an internal carbon price of €50 per ton CO2-equivalent to large investment decisions. In addition, the company works with suppliers and customers to improve the overall footprint of the value chains in which it operates.

There is a strong link between DSM’s competences and business plans with key items on the global sustainable development agenda, namely malnutrition, and climate change and energy. DSM is in a position to be able to make a contribution to addressing these topics through its businesses. By developing innovative business solutions and engaging its value chains, networks and partnerships, DSM is driving sustainable markets that can have a beneficial impact at scale for all participants. At the end of 2015, DSM reaffirmed its strategic partnership with the UN World Food Programme, which currently reaches more than 25 million beneficiaries per year with improved nutrition, extending the partnership to 2018.

Organization and culture

DSM is adjusting its organizational and operating model to support the company's growth, creating a more agile, focused and cost-efficient organization, with a stronger business and market focus and globally leveraged support functions. The organizational adjustments DSM is implementing are intended to achieve far more than cost savings alone. DSM has strengthened its management structure by establishing an Executive Committee, which enables faster alignment and operational execution on finance, business, innovation, strategy and people.

The members of the Executive Committee are the Managing Board members Feike Sijbesma (CEO/Chairman), Geraldine Matchett (CFO), Stephan Tanda (Nutrition) and Dimitri de Vreeze (Materials), as well as Chris Goppelsroeder (Nutritional Products), Philip Eykerman (Strategy and M&A), Peter Vrijsen (People & Organization) and Rob van Leen (R&D and Innovation)

Furthermore, the company is establishing a new way of working, driving a change in mindset and culture aimed at establishing DSM as a results-driven, high-performance organization, both in terms of top-line and bottom-line growth and talent development.

DSM began adjusting its organizational and operating model in 2015 and is optimizing cross-company supporting functions in areas including HR, Indirect Sourcing, Communications, Finance, Legal and ICT, thus freeing up capacity at its business groups to focus on their primary functions: Innovation and R&D, Direct Sourcing, Manufacturing & Operations and Marketing & Sales. By globally leveraging its support functions and shared services organization as well as improving the ability of functional excellence departments to support the business groups, DSM aims to achieve structural cost savings of €125-150 million versus 2014. These savings are targeted to be achieved by the end of 2017.

Building for earnings growth beyond 2018

DSM has set itself strategic targets for the period to 2018. This shorter three-year period is intended to channel the organization’s focus and forcefully drive achievement of the step-up in financial performance at which the company aims. At the same time, DSM is also preparing for longer-term growth; its business cycles are typically longer than the three-year period to 2018. The company has a range of key business and innovation projects across the clusters that will drive earnings growth beyond 2018 and will continue to develop more initiatives in light of market dynamics.