Letter from the CEO
In almost all aspects 2017 has been a very rewarding year for our company.
Strategy and purpose
We are well ahead with the implementation of our three-year strategy we set in 2015 for the period till end 2018. This strategy, 'Driving Profitable Growth', followed the significant transformation of DSM and adjustments to our portfolio of business activities in the period 2005/2010 to 2015. In 2015, we deliberately entered a next phase in which we decided to hold further portfolio transformation and larger acquisitions and/or divestments and to focus strongly on (organic) growth, operational and financial performance, demonstrating the full potential of our promising future-oriented portfolio previously developed.
We are very pleased that in terms of growth and financial performance we already achieved the targets set for 2018 in 2017 and completed the divestment of our non-core participation in Patheon ahead of schedule and at an attractive value. We also plan to monetize the two remaining non-core participations (DSM Sinochem Pharmaceuticals and ChemicaInvest).
With an integral stakeholder approach including our customers, our employees, our shareholders, and society at large, we have built strong businesses. Our growth platforms are addressing the main important societal trends and have especially a strong alignment with five of the 17 United Nations Sustainable Development Goals (SDGs also referred to as global goals), which set out the strategy for the world. In this way, we ensure that the growth and success of DSM benefits all stakeholders.
It is rewarding to see that the portfolio we created over the years has so much growth potential. To ensure this continues, we further focused our innovation program on a smaller number of bigger projects (such as Clean Cow, Green Ocean, Niaga®, Solar), providing interesting opportunities from 2019/20 and onwards. In this Integrated Annual Report, you will find information about these and other innovation projects.
Our focus on aligning our strategy and innovation programs with global societal trends is increasingly recognized. In 2017 Fortune, the world-renowned business magazine, named DSM among the top three companies that are "Changing the World". This was both encouraging and humbling for our company. Founded as a Dutch coal mining company more than 115 years ago, transformed into a (bulk) chemical company and then once more into a science-based global leader in health, nutrition, and materials, we are now recognized as an important contributor to improving the world. This is important to all our employees worldwide, who are proudly engaged and fiercely passionate about making the planet a better place for all and this is appreciated by our thousands of customers who appreciate the value we provide via sustainable solutions. Additionally, we are grateful to our dozens of partners across the public and private sector, together with whom we can make this happen.
At the heart of this lies our purpose and core value, sustainability. Together with many stakeholders, especially with our customers, DSM creates brighter lives for people today and generations to come. We are working hard to make a real difference in health & nutrition, climate & energy, and the circular and bio-based economy. We understand the inter-related nature of these three domains, and this is where our business portfolio and competences align particularly well with our sustainability focus. Not only does our science and innovation deliver value for society, it delivers value for our customers and our shareholders at the same time. That is why we are proud of our Triple P approach — creating value on three dimensions simultaneously: People, Planet and Profit. We see that this approach has also led to increased employee motivation, engagement, and pride, as well as a better position in the labor market.
Delivery and growth
Our performance in 2017 yet again exceeded expectations. As in 2016, we over delivered on our two main financial targets, achieving 15% annual Adjusted EBITDA growth — versus a high single-digit percentage target — and achieving a 190 basis point improvement in Return On Capital Employed (ROCE) — versus a high double-digit basis point target. Our total sales increased by 9% to €8.6 billion, mainly through an organic growth of 9%, ahead of plan and outpacing market growth in all our businesses.
We achieved an Adjusted EBITDA of €1,445 million (versus €1,262 million in 2016) and a total net profit of €1,781 million, the latter enhanced by the divestment of Patheon, which created a gain on disposal of €1,250 million in 2017 and over €2 billion in total proceeds over the years (€1.5 billion in 2017).
Both our Nutrition and Materials businesses contributed to this successful step-up in financial performance, and the new operating model that was introduced in 2015, enabled cost and profit improvements that supported our results, achieving total savings with a run rate of about €195 million at the end of 2017 compared to the 2014 baseline.
As a global company, we are well-represented in all major growth areas in the world: 44% of our total sales are from emerging economies, in line with our stated balanced ambition. At the same time, we continue to build our innovation pipeline with specific projects that resulted in 21% of our sales coming from (recent) innovations, above our target of 20%. We feature many examples of growth, delivery and innovation areas throughout this report, as well as more information on the full financial performance in Profit.
Sustainability and business
Sustainability is fully integrated in our strategy, business and operations, and we ensure that our solutions are better for people and/or planet. In 2017, 62% of our current sales came from products which have a better environmental (ECO+) and/or social (People+) impact compared to mainstream solutions — our Brighter Living Solutions (see Planet and Review of business of this Report). Our target is 65% of sales by 2020. Meanwhile, our innovation pipeline is very strong, with over 80% classified as Brighter Living Solutions and therefore we remain firmly on track. The growth and margins of these products are above average, confirming that the market embraces these sustainable solutions, proof that societal gain and business gain can go hand in hand.
At the same time, we've succeeded in taking a more sustainable approach to our own operations. For example, we use an internal carbon price of €50 per ton of CO2 to help guide our investments and operational decisions, and we are making progress toward our target of 50% purchased electricity from renewable sources by 2025. In 2017, we reached already 21% by among others several agreements with wind parks in Europe and in the US and the installation of solar panels at our sites are supporting this progress.
Not only do we reduce our own environmental footprint and enable our customers to do the same with our innovative solutions, we also advocate on the issues that define our times. DSM continues to be a positive voice, shaping discussions with organizations like the CEO Climate Ambassadors of the World Economic Forum, the Carbon Pricing Leadership Coalition (CPLC, convened by the World Bank, supported by the UN, IMF and OECD) and We Mean Business.
Beyond climate and energy, DSM also contributes to the circular and bio-based economy. Prime examples are improvements to solar energy yields via our proprietary solar panel coatings, our bio-based solutions and fuels and the circular, fully recyclable carpets based on DSM-Niaga technology.
Improved nutrition is another focus area for DSM. We work hard to help reduce levels of sugar, salt and fat in food and make it healthier. In 2017, we also took another step in providing access to nutritious food for malnourished mothers and children while stimulating the local economy in Africa. After ten years of our successful partnership with the UN World Food Programme, supporting over 30 million people worldwide with essential nutrients, we expanded our approach with our Africa Improved Foods (AIF) project, which opened its first factory in Rwanda. The factory sources corn and soy from almost 10,000 mostly female smallholders and produces locally nutritious, healthy food for the local market. The Government of Rwanda has entered into a joint venture with AIF to improve the nutritional status of its population and make Rwanda (and other African countries later on) more self-supporting. We work on expanding this model further in the region together with, among others, the United Nations Scaling Up Nutrition (SUN) movement and other partners.
Many of the above-mentioned achievements are being recognized externally as well, resulting in leading positions in, among others, CDP, the non-profit global environmental disclosure platform, the Dow Jones Sustainability Index (DJSI) and Sustainalytics.
Science and innovation
At DSM, we believe science can change the world. In fact, we are the living proof. As a science-based company, one of the pillars supporting our success is our ability to develop new, more sustainable solutions. As well as our own innovations, we salute scientists, the unsung heroes who work tirelessly, often anonymously, on breakthroughs that make life better for billions of people. This year, DSM and partners invited researchers, changemakers and innovators from all over the world to take center stage in our Bright Minds Challenge, a competition for projects that can help mitigate climate change by accelerating the transition to 100% renewable energy. Professor Ernesto Calvo from Argentina accepted the grand prize during the final in Amsterdam. Recognizing that lithium-ion batteries are critical for renewable energy storage, he led a team of researchers who designed a quicker, cleaner lithium extraction technique that is powered by the sun. Now, with DSM's support, his team is scaling up their efforts in Latin America.
Further evidence of our commitment to science, technology and innovation was the opening of DSM's new state-of-the-art biotechnology center in Delft (Netherlands). Building on a solid history of fermentation and biotechnology innovation in the region, our scientists in Delft create solutions for societal challenges including the need to provide all people with healthy, nutritious food. Early in 2017, we opened a new state of the art Materials Science Center in Sittard-Geleen (Netherlands).
Our people and leadership
All this happens because of the brain power, will power and passion of our employees, who say with pride that working at DSM is about Doing Something Meaningful. Our people feel more inspired and committed than ever. The results of our annual employee engagement index jumped from 71% to an exciting level of 75% in 2017, despite the significant operational transformation and focus on operational efficiency across the company these past two years.
To support our growth ambitions, we trained all our executives in our Lead & Grow program on how to navigate this Volatile, Uncertain, Complex and Ambiguous (VUCA) world, on how to deal with dilemmas and find creative solutions to everyday problems, while working even more closely together with our customers.
We also continued to focus on improving on inclusion and diversity. Today, more nationalities are represented across DSM and there is a better gender balance in management and executive positions.
At leadership level, the composition of our Supervisory Board also reflects our desire to be more gender balanced, international, inclusive and diverse. Special thanks to the Supervisory Board for their support in 2017, their advice and challenges, supporting us to set the correct path to deliver on our strategic, financial and societal promises. We thank Pierre Hochuli very much for his great contribution over so many years and we welcome our new members, Frits van Paasschen and John Ramsay.
Last year, we also had to say a final farewell to our friend and former colleague, Peter Elverding. Peter devoted more than 20 years of his illustrious career to DSM, and led our company as CEO and Chairman of the Managing Board from 1999 to 2007. His vision, leadership, warmth, and humility, as well as appreciation of the importance of a long-term view were instrumental in the transformation DSM underwent in those years, thus preparing the ground for DSM to become the company it is today.
We worked on further improving our safety performance in 2017 and thousands of people dedicated their time and talent to make DSM a safer place to work, every single day. However, it has not yet always been as successful as we want it to be. We report with deep sadness, that in September one of our contractors, Steven Gonsalves lost his life in a tragic incident at our site in Augusta (Georgia, USA). Two other workers were also injured. We very much realize we can never let our attention slip and must further improve safety at DSM. Even though there are fewer incidents today than there were 10 years ago, there is no question — we need to give even more attention to our own safety and that of our colleagues, and we will. For more on this, please see What still went wrong in 2017.
Looking to the future
As we look to 2018 and beyond, one thing that's certain is change. Just as Darwin taught us, adaption is a prerequisite for success. We have to shape our own destiny by future-proofing our company and businesses. We must continue to improve the performance and sustainability of our company and help others do the same as nobody can be successful or even claim to be successful in a world that fails. Our next step will be to update our strategy so that we can continue to create brighter lives for people today and generations to come. And not just for a privileged few, but for all. In the meantime, thank you to everyone who contributed to a great year. I am thankful for the loyalty of our customers, the trust of our shareholders and the passion of our people. I also thank my colleagues of the Executive Committee and we all look forward to building on this momentum in 2018.
CEO/Chairman Managing Board Royal DSM