Letter from the CEO - Annual Report 2015 - DSM

Letter from the CEO

Dear reader,

Over recent years we saw a multi-speed global economy, with marked differences in tempo across developing and already developed regions and markets, accompanied by currency volatility. In 2015, this picture shifted slightly; whilst the US economy remained dynamic and some key European economies made some – long anticipated – progress, the pace of growth however slowed in a number of emerging economies. The sudden and unexpected strengthening of the Swiss franc at the beginning of 2015 impacted cost positions for products produced in Switzerland, whereas the weakening of the euro against the US dollar improved the Eurozone’s competitive position. Several other currencies also made significant moves. Prices for oil and its derivatives remained under heavy pressure. The ongoing crisis in the Middle East led to heightened social and political tensions. This fractured and uncertain picture requires companies to be increasingly agile, with the capability to identify and act on relevant developments at an early stage.

Last year was the final year of the implementation of our strategy for the 2010-2015 period, DSM in motion: driving focused growth. By consistently focusing on our four growth drivers (High Growth Economies, Innovation, Sustainability and Acquisitions & Partnerships) we have transformed DSM into a more global, more innovative and more sustainable company with a streamlined, simplified and high-value portfolio of businesses. We have built a uniquely broad, customer-focused and global Nutrition business, upgraded our Performance Materials businesses, significantly increased the share of sustainable and innovative solutions as a proportion of our sales and established new growth platforms with our Emerging Business Areas.

With the long-term megatrends that drive our company’s business – Global Shifts and Digitization, Climate and Energy, and Health and Wellness – continuing to increase in significance, DSM is uniquely positioned to create value through science-based sustainable solutions in health, nutrition and materials to help address the challenges our societies are facing.

During 2015, we took a further significant step in our strategic transformation to a more resilient and focused portfolio with the creation of the ChemicaInvest partnership with CVC Capital Partners for the Polymer Intermediates and Composite Resins businesses in which DSM holds a 35% share. This follows on the divestment of the Base Chemicals businesses in 2010 and 2011 and the establishment of partnerships for the Pharma activities in 2011 and 2014. Together with the value-contributing acquisitions we have made to strengthen our businesses during the strategy period, we are confident that DSM’s portfolio represents a good platform for profitable growth.

We are focused on translating the potential that has been created into improved financial performance. Much of our work in 2015 was on optimizing our operational performance and ensuring that in the coming strategic period we are in position to capture the full business benefits our strengthened portfolio offers. In August, we announced the adjustment of our organizational and operating model, with the aim of creating a more agile, focused and cost-efficient organization, with a stronger business and market focus and globally leveraged support functions. This included the introduction of an Executive Committee to strengthen our management structure and enable faster strategic alignment and operational execution in the day-to-day running of our company.

Creating a more agile, focused and cost-efficient organization is expected to result in structural savings of €125-150 million compared to 2014, to be fully achieved by the end of 2017. These initiatives will result in a headcount reduction of 900-1,100 FTEs, of which approximately half in the Netherlands. Decisions affecting personnel are regrettable at all times and are only taken in the best interests of the company as a whole. We strive to provide all those concerned with an appropriate level of support and assistance in finding a new position.
Besides this DSM-wide adjustment, a specific program to improve operational performance in the Nutrition cluster has also been announced, focused on productivity, growth and working capital reduction, which target a further €130-150 million in cost savings by 2018 and drive increasing growth in our Human Nutrition & Health business.
Whilst the Performance Materials cluster is already benefiting from the results of a similar program carried out in recent years, we will continue to identify and act on opportunities to implement further improvements in this cluster in the coming period.

At our annual Capital Markets Day in November, we presented our company Strategy 2018: Driving Profitable Growth. With this new strategy we aim to capture the full potential of the portfolio we have created and translate this into improved financial results, focusing on organic sales growth, reducing costs and strict capital allocation.

The Nutrition and Performance Materials businesses offer great potential for growth through sustainable innovative solutions, benefiting from opportunities the global megatrends offer. They have clear business strategies in place to drive sales and out-grow their markets. We are executing cost-reduction and efficiency programs with targeted overall savings of €250-300 million in EBITDA by the end of 2018 and we have adjusted our top structure, organizational model and way of working to support the achievement of our newly-set targets.

We have elected to set financial targets for a shorter strategic period up to 2018, reflecting our discipline and focus. We target a high single-digit annual percentage increase in EBITDA and a high double-digit annual basis point increase in Return on Capital Employed (ROCE).

We have furthermore sharpened our sustainability approach and set more ambitious targets for our environmental performance. These include further improved greenhouse-gas efficiency (at least 45% improvement by 2025 versus 20% achieved so far), increased energy efficiency (over 10% improvement in the next 10 years) and a big step-up in the use of renewable electricity (50% by 2025), as well as continuing to drive the proportion of ECO+ and People+ solutions we provide to our customers. Moreover, we have key innovation projects in place to drive earnings growth beyond 2018.

We expect to extract significant value from the Pharma and Bulk Chemicals partnerships in the coming years, providing further financial headroom. We do not expect to engage in large acquisitions in the near future as we continue to integrate recent acquisitions, which have made a strong contribution to earnings.

DSM achieved solid financial results in 2015, broadly in line with our expectations for the year. We delivered net sales of €7.7 billion and an EBITDA (before exceptional items) of €1,075 million. Whilst currency developments showed a mixed picture, they had an overall positive effect on our results. Organic sales growth for the year was 1%, with 3% growth in volumes and a 2% decline in price-mix as a result of lower raw material prices.

Our focus on emerging economies has taken the proportion of total sales generated in these countries to 44% at the end of 2015, up from 32% in 2010. The pace of growth slowed in a number of these economies in the year. The largest, the Chinese economy, continues to grow, if at lower absolute rates than in recent years. The fundamentals driving end-use markets relevant to DSM in China remain unchanged. In 2015, higher-margin innovation sales increased to 24% of total sales, fulfilling the strategic aspiration we set in 2010, when they made up 12% of sales. Innovation is also linked with our sustainability efforts. Our ECO+ solutions, which offer customers more value with less environmental impact than mainstream alternatives, now account for 57% of sales, ahead of the targets we set ourselves five years ago, when the proportion was 34%. We apply similar lifecycle assessments to the impact products have on peoples’ lives with the People+ methodology we have developed, and use these insights in steering product innovation.

In Nutrition, we have built a unique, global and broad as well as customer-focused portfolio in nutritional ingredients and have increased our capability to offer full nutritional solutions, extending DSM’s offering over the value chain. This resilience proved its worth for the cluster as headwinds that we had previously signaled indeed materialized in 2015, in particular price pressure in vitamin E, mainly in our animal nutrition business, and the unfavorable development of the Swiss franc, which considerably reduced the overall positive effect from the strengthening of the US dollar. Despite these headwinds, Animal Nutrition & Health had a very good year. Human Nutrition & Health, which continued to be confronted with ongoing weakness in the North American markets for dietary supplements and omega-3, did not perform as well as we would have liked. We have taken action to get back on the front foot and started to see the benefit of this in the second half of the year. In 2015, organic sales growth for the cluster was strong at 6% and the EBITDA margin was lower at 16.6%, mainly caused by the appreciation of the Swiss franc and lower vitamin E pricing. EBITDA for Nutrition amounted to €822 million in 2015, down 3% on the previous year for the same reasons.

In Performance Materials, we pursue a differentiated approach to our businesses and their segments, and have created a high-quality portfolio with a higher growth and returns profile. We tailor the approach our businesses take depending on the dynamics and potential of the market and segment in question, focusing on maximized returns, growth or accelerated growth accordingly. During 2015, the cluster continued to upgrade its product portfolio towards innovative, more sustainable and higher-margin solutions. Whilst organic growth for the cluster was down as a consequence of lower input prices on steady volumes, there was a step-up in both EBITDA (at €384 million a 19% increase) and in the EBITDA margin, which was 15.2%, above the targets we had set.

Our Emerging Business Areas are promising platforms for growth outside the current scope of the business groups. The largest, DSM Biomedical, continued its development over the year and made a positive contribution to our EBITDA. In DSM Bio-based Products & Services, the start-up process for the Project LIBERTY facility to produce advanced cellulosic ethanol from crop residues, which we officially opened in the US in 2014 together with our partner POET, is progressing, although there are still some hurdles to overcome. DSM Advanced Surfaces provides solutions to boost the power solar panels produce and continued to strengthen its position in this market. When taken together, they already make a positive contribution to EBITDA, reducing the overall costs of the DSM Innovation Center.

Although business conditions in Bulk Chemicals remained tough, steps have been taken to improve the competitiveness of the ChemicaInvest businesses together with CVC.

Following the creation of the Pharma partnerships and therewith the completion of DSM’s Pharma strategy, Stefan Doboczky left the company at the beginning of June. We would like to thank him for his contribution to DSM and wish him every success as CEO of Lenzing Group.

Safety and Health is of paramount importance to all of us at DSM and we have set ourselves the ambition of having an injury and incident-free working environment. While we made progress in improving occupational safety in 2015, with a reduction in the Frequency Index of Recordable Injuries from 0.47 in 2014 to 0.41 last year, more incidents still occur than we would like, regrettably. Our focus on safety is unwavering and we strive to bring this number down further. For more information on these and other incidents, see ‘What still went wrong’ on What still went wrong in 2015.

Successfully assimilating a high-performance culture will be crucial to realizing the full potential of our new operating model and our portfolio and to achieving our targets. During the year, we continued to implement the ONE DSM Culture Agenda in conjunction with our Leadership Model. We look to achieve a representative balance in gender and also in nationality in DSM’s leadership group, in line with the geographical distribution of our business. The number of women in executive positions showed a pleasing development, up three percentage points to 15% at the end of the year, with a significant increase in representation at all top levels across the organization. We did not make the same level of progress in increasing the proportion of non-European executives, however, and this has our attention. Overall, the company-wide Inclusion Index increased from 70% to 72% at the end of the year, reflecting our efforts in this regard.

We held an Employee Engagement Pulse Survey last year, which 78% of the employees completed. The overall Employee Engagement Index was 69% in 2015, down very slightly from 70% a year earlier. This is understandable given that the survey was held after the announcement of the organizational adjustments and before the presentation of our updated strategy. Our resolve to see this rating improve is undiminished.

It was a significant year for the worldwide societal and sustainability agenda. The UN General Assembly agreed upon 17 Global Goals to be achieved by 2030 (the so-called Sustainable Development Goals), including eradicating hunger and addressing climate change. Leaders from government, civil society and business also came together at the COP21 summit in Paris. Although there is still much to be gained, the agreements and measures to tackle climate change on a global level established there were unprecedented. The sense of urgency to develop and implement newer, more sustainable and impactful solutions at scale has never been more manifest. There is a crucial – and rewarding – contribution for businesses to make in helping to achieve this, which we at DSM champion.

In December, we signed an extension to our strategic partnership with the United Nations’ World Food Programme (WFP) for another three years. It is a humbling and at the same time empowering feeling to realize that through this partnership, DSM now reaches over 25 million WFP beneficiaries annually with improved nutrition. DSM was also invited by the Government of Rwanda to participate in the Africa Improved Foods Ltd. joint venture to improve the nutritional status of the country’s population and help address malnutrition.

We are pleased to report that we made further progress in our efforts to reduce the company's environmental footprint, among other things by improving our energy efficiency and greenhouse-gas efficiency by around 20%, as well as by reducing our absolute greenhouse-gas emissions (down by 75% versus 2008, with a big impact from the (partial) divestment of Polymer Intermediates). The new, sharpened targets we have set for the coming period will build on these achievements and continue to stretch the organization. We are proud to once again be named among the leaders in the Dow Jones Sustainability World Index. We also take pride in the external recognition, including awards, that our achievements in our integrated sustainability approach continue to receive. Our integrated reporting continues to develop; besides implementing G4, the fourth generation of sustainability reporting guidelines from the Global Reporting Initiative, this report also follows the <Integrated Reporting> framework of the International Integrated Reporting Council. We remain committed to aligning our strategy and operations with the principles of the United Nations Global Compact, as well as contributing to the realization of the Global Goals for Sustainable Development through our businesses and competences.

We have many reasons to be confident about our future at DSM thanks above all to the tremendous efforts of many people; our employees, customers, shareholders, and suppliers and other partners, as well as civil society and the communities we engage with. We extend our most sincere thanks and appreciation to all those who have contributed to DSM’s success.

At the start of an exciting and inspiring new period for DSM, we can be very proud that together we have made DSM a global company with a portfolio of high-quality businesses, well-positioned for growth. We apply our sustainable innovation to continually develop and bring to market improved products and solutions in health, nutrition and materials. Our focus for the coming period is on improving financial returns while building for further growth in the future. Our ability to leverage unique opportunities in our businesses for the benefit of People, Planet and Profit enables us to deliver on our mission of creating brighter lives for people today and for generations to come.

Feike Sijbesma
CEO/Chairman Managing Board Royal DSM