Letter from the CEO
Toward the end of 2015 we presented Royal DSM's strategic plan for the period up to and including 2018. We designed Strategy 2018: Driving Profitable Growth to capture the full potential of the portfolio of business activities we have carefully created over the years, by increasing organic growth, reducing costs, and improving our performance by strict capital allocation and a stronger organizational agility. For the time being we are not focused on major acquisitions. In the coming years we intend to monetize our three large joint ventures.
We set two mid-term headline financial targets for the strategic period, namely a high single-digit percentage annual Adjusted EBITDA growth and a high double-digit basis point improvement in return on capital employed (ROCE). This reflects our commitment to delivering a step-up in financial performance.
We also set out stretching aspirations in the area of sustainability relating to our own operations, our customer solutions, and our impact on the world. At the same time, we aim to further develop our talent pool to ensure that we can sustainably address the challenges and demands placed upon us.
We are intent on ‘future-proofing’ DSM, delivering higher value to all our stakeholders.
DSM is making very good progress toward these targets. Starting already in 2015, we have taken demonstrable steps each quarter and posted 2016 results well ahead of our mid-term targets, improving both profit (Adjusted EBITDA up 17% from €1,075 million to €1,262 million) and returns (ROCE up 280 bps from 7.6% to 10.4%). We also succeeded in making our own operations more sustainable while at the same time increasing the proportion of Brighter Living Solutions our customers buy from us.
Our performance in 2016
Our strong operational and financial progress in 2016 has been driven by both Nutrition and Materials, supported by our growth initiatives, ambitious improvement and cost-saving actions, and strict capital allocation. This has enabled us to translate our top-line growth into a significant step-up in (financial) returns in 2016. Capital expenditure in support of DSM’s future growth amounted to just below €0.5 billion. We furthermore undertook numerous actions to manage working capital; total working capital to sales stood at 18.4% at the end of the year, which is better than the 20% we aspire to stay below.
The Nutrition cluster posted strong organic growth figures for 2016, with both the animal and human nutrition businesses contributing. Animal Nutrition & Health maintained momentum from 2015 and had a strong year. We are also pleased with our performance in Human Nutrition & Health, where we clearly saw the benefits of our improvement actions. One of the highlights of the year was the continued rapid pace of growth for our i-Health consumer range of dietary supplements. Having proved its popularity in the US, it is now also available in a number of other countries. Our Food Specialties and Hydrocolloids texturing businesses also showed good results.
Our Materials businesses enjoyed a particularly successful 2016. We recorded strong growth in volumes, above all in specialty materials – a clear indication that our product portfolio upgrade toward specialties and our application expertise resonate well with our customers in higher-growth and higher-value market segments. Furthermore, we worked hard to manage margins in a low-input cost environment. We again recorded a step-up in returns in Materials in 2016, clearly well above the level of previous years.
At the same time as vigorously driving business growth, we are transforming our organization. We are implementing a number of major programs, which are not just aimed at lowering our cost base, but also intend to make our company more agile, resilient and market- and performance-focused, enabling DSM to fulfill its growth ambitions.
The improvement programs target €250-300 million in cost savings versus the 2014 baseline by the end of 2018. All these initiatives are fully on track and the effects are already visible in DSM’s financial and operational progress. We are committed to maintaining our focus and fully executing these programs. The adverse consequence of this is a reduction of around 1,000 FTEs between 2015 and 2017 – a decision that was not taken lightly. I continue to be humbled by the constructive and professional attitude shown by those who have been affected by these changes.
Science and innovation drives our growth
As a science-based company, one of the pillars supporting DSM’s success in the marketplace is our ability to develop new, more sustainable solutions. Every day, our scientists strive to provide answers to global challenges, going to great lengths in doing so. In fact, scientists across the world are the unsung heroes of our time, often working in relative anonymity. Yet they inspire us by making a positive difference and a real societal impact. Our ‘Science Can Change The World’ campaign celebrates this crucial contribution and entered a new phase in 2016 with the Bright Minds Challenge, looking to fast-forward renewable energy solutions.
We introduced a number of innovations in 2016, including specialty materials that help the automotive industry in its quest to make vehicles lighter and safer, and a new technology enabling the production of highly concentrated omega-3 fish oil. We also continued work on programs for the future, many of which are directly linked to environmental or public health challenges. These include our fermentative stevia sweetener platform in Nutrition to help reduce the sugar in our diets, Clean Cow, aimed at cutting methane emissions from cattle, and our Green Ocean partnership to make fish farming more sustainable.
The concept of the circular economy is becoming reality, and the DSM-Niaga joint venture took an important step, announcing that its technology is ready for commercial-scale production. This 100%-recyclable carpet is proof that products can be re-designed along circular economy principles of use and multiple re-use.
Looking to our Emerging Business Areas, we have experienced a delay in the start-up of the advanced biofuels facility in the US together with our partner POET. Efforts to address this took effect toward the end of the year. DSM Biomedical made steady progress, with higher volumes, especially in high-growth segments of the medical device market including cardiology, ophthalmics and orthopedics. We continued to see good growth in solar energy materials with DSM Advanced Solar. The Innovation Center reached Adjusted EBITDA break-even in 2016, as planned.
Monetizing our partnerships
Over recent years, we have carved out non-core areas of the portfolio in pharma and bulk chemicals and transferred these into partnerships. We will exit these over time, monetizing our holdings. In 2016, we took a first step through our participation in the very successful IPO of Patheon, resulting in a significant first financial gain and creating the opportunity to monetize further in the coming years. DSM Sinochem Pharmaceuticals progressed well, and we will continue to review the best options for divesting this business. Finally, for the third main partnership, ChemicaInvest with controlling partner CVC, 2016 was the first full year of operation and the focus was on improving results. In all these cases we will choose an appropriate moment to exit. Proceeds will initially be used for de-leveraging our balance sheet and to support organic growth, while unlocking the potential for acquisitions over time.
Sustainability, our core value
For DSM, sustainability is our core value and a key responsibility, as well as an important business driver. We focus on delivering science-based, sustainable and scalable solutions that address the challenges of today’s world in our main areas of competence. Not only do these products and solutions offer higher growth rates and better margins; our continuous endeavor for sustainability also makes us focus on reducing operating costs by decreasing our environmental footprint.
In 2016, over 60% of DSM’s sales were products offering measurably better environmental performance and/or societal benefits than mainstream alternatives in areas such as working conditions and health. With these Brighter Living Solutions, we help our customers make their own businesses more sustainable.
We have identified three sustainable growth platforms – areas where our core competences intersect with urgent societal challenges. These are: nutrition; climate & energy; and circular & bio-based economy. We will grow these platforms through partnering, advocacy and engagement, and through our proprietary solutions, increasing our positive impact and doing good business at the same time. Africa Improved Foods, the outcome of a multi-stakeholder approach to support the government of Rwanda in tackling stunting and stimulating economic development, is just one example.
Our corporate strategy and our growth platforms are well aligned with the United Nations' Global Goals for Sustainable Development. These goals – often referred to as the ‘SDGs’ – are increasingly moving into implementation mode, underscoring the need for effective solutions at scale to which businesses like DSM can make an influential contribution. We are particularly proud of our strategic partnership with the UN World Food Programme, which contributes directly to Goal 2 (Zero Hunger). Among others, DSM’s activities also strongly address Goal 13 (Climate Action). Achieving the SDGs will help build societal and economic resilience worldwide. You can read more about how our company supports the SDGs throughout this Report.
The global economy presented a mixed picture in 2016, with growth remaining patchy. This was reflected in our businesses, where conditions in some territories such as in Latin America were difficult, while in others we grew well – for example, in India, China, the US and Europe. Social inequalities and economic imbalances also led to political turbulence in some parts of the world, which influenced the wider global economy. In the face of these continuing uncertainties, the SDGs remind us of the importance of taking a long-term view.
Our social and environmental performance
In 2016, we further improved the social and environmental performance of our operations. The safety and health of our workforce is our most immediate concern and I am happy to report that there was a reduction in the number of recordable injuries during the year. We remain committed to reducing this number still further. For more information on safety and health and on these and other incidents, see People in 2016 and What still went wrong in 2016.
Our Employee Engagement Survey showed a clear improvement versus last year, demonstrating that we are on the right track. We also continued to strive for a representative balance across our organization in terms of gender and nationality, addressing our Inclusion & Diversity beliefs and goals. We are pleased with the improvement in the number of women in executive and senior leadership positions in recent years, yet we realize we must increase this momentum still further. Our ability to hire, develop, evaluate and manage our talented people is a fundamental enabler for DSM’s continued success. Last year, we rolled out a revamped global talent management approach across the company and further embedded the DSM leadership model.
We made pleasing progress in 2016 toward our multi-year targets for reducing our own environmental footprint, including further improving our greenhouse-gas efficiency and energy efficiency, as well as taking important steps toward our renewable electricity targets. DSM is among a growing number of companies to have implemented an internal carbon price (in our case of €50/ton CO2 equivalents) to help guide investment decisions toward low fossil-carbon choices. We support carbon pricing as an instrument to address climate change, and I am honored to co-chair, together with Minister Ségolène Royal of France, the Carbon Pricing Leadership Coalition, an initiative launched by the World Bank, the UN and the International Monetary Fund.
All of us at DSM take pride when our efforts receive external recognition. Among numerous other things, we were very pleased to be named the global industry leader in the Dow Jones Sustainability World Index in 2016. We were also delighted to be mentioned in Fortune Magazine’s ‘Change the World List’ of companies that are “doing well by doing good.” This resonates well with how we view our purpose as a company.
We continually aim to improve our integrated reporting, and this Report follows the GRI Standards from the Global Reporting Initiative as well as the <IR> framework of the International Integrated Reporting Council. We remain committed to aligning our strategy and operations with the principles of the UN Global Compact, as well as contributing to the realization of the UN Global Goals.
Our thanks to all who contribute
In conclusion, 2016 was a good year for DSM. We are pleased with our progress and have many reasons to be confident. On behalf of my colleagues, I would like to extend our thanks to everyone who has contributed to this success: our employees, customers, suppliers and other business partners. We are grateful for the trust of our shareholders and will continue to serve the interests of all our stakeholders as well as we can. We also express our gratitude to Stephan Tanda, who has been instrumental on DSM’s Managing Board in creating our unique, broad and global Nutrition business, and has moved on to become CEO of the AptarGroup, Inc. We wish him well after nine years of work for DSM. Also many thanks to Ewald Kist, whose final term as a Member of DSM’s Supervisory Board came to an end in 2016 after 12 years of service. We highly value his balanced, long-term thinking.
I would like to finish by once again thanking all who contributed to this successful year 2016 and the achievements of the DSM we have built together: we do this all to create brighter lives for people today and generations to come.
CEO/Chairman Managing Board Royal DSM