Strategy 2018

At DSM our mission is to create brighter lives for people today and generations to come. To do this in a sustainable way, we have to consider what we call the Triple P — People, Planet and Profit — in all that we do. This approach is clearly defined in the way DSM creates value for all of our stakeholders and it forms the basis of our strategy reviews.

DSM has been transformed into a truly global company that provides innovative, sustainable solutions in health, nutrition and materials. After a period of significant portfolio changes, in late 2015 DSM launched Strategy 2018: Driving Profitable Growth focused on capturing the full potential of the business portfolio that has been created and translating this into improved financial results. In the period 2016-2018, our aim is to step up our financial performance while pursuing our ambitions in the area of sustainability and expanding our positive impact on the world around us.

A strategy designed around megatrends

People, economies and markets worldwide are being impacted by a number of fundamental societal trends. These megatrends — predominantly driven by demographic changes as populations grow (including a shift to the faster-growing countries in Asia and Africa) and as people become older, more urbanized, wealthier and more connected — are exerting increased pressure on resources and the food chain. In addition, they are leading to new patterns of consumption and impacting the environment. Moreover, there is increased attention on health and well-being. These trends present clear challenges, but also offer opportunities to profitably grow our businesses by supporting customers in developing science-based, sustainable solutions to meet current and future needs.

DSM's strategy and solutions offering addresses three crucial megatrends.

Global shifts and digital transformation
Demographic shifts and technology are driving change worldwide. The population is growing, people are living longer and living standards are increasing. Global populations are generally older, wealthier, increasingly living in urban areas and increasingly connected through technology and global supply chains. At the same time, the gap between rich and poor is becoming wider. These trends put pressure on resources and impact the environment. New technology has implications as well. The massive amount of data that people generate, and that is available to companies, academics, governments, and other parties, is changing daily life — and business — in unprecedented ways.

Climate and energy
People around the world are working together to reduce greenhouse-gas emissions and transition to a low-carbon economy. Almost 200 nations signed the Paris Agreement in 2015, acknowledging that climate change is linked to human activity and that stopping it should be an international priority. The United Nations Sustainable Development Goals also help drive climate action and the shift to a more circular and bio-based economy. The circular economy is a system in which products are renewable by design so that people can use them again and again instead of using things once and then throwing them away. The bio-based economy means using renewable resources like the sun, wind and biomass in a sustainable way rather than relying on finite fossil fuels like oil. For DSM, the circular and bio-based economy concepts are mutually reinforcing.

Health and wellness
Billions of people are living longer and more active lives thanks to better medicine, healthcare and nutrition. Still, health and wellness remain concerns, especially as people grow older. Nutrition also presents a challenge. While two billion people suffer from micronutrient and protein deficiencies, three billion are overweight or obese. Sometimes people suffer from micronutrient deficiencies and obesity at the same time. As a result, many people are not reaching their full potential. From stunted growth to non-communicable diseases like heart disease and type-2 diabetes, there is an opportunity for companies like DSM to support better nutrition, health and wellness, as well as more sustainable food systems.

Managing Board
The DSM Managing Board (from left to right): Dimitri de Vreeze, Geraldine Matchett (CFO) and Feike Sijbesma (CEO/Chairman).

With our strategy, we pursue opportunities derived from these megatrends across our entire portfolio and on a global scale. We continue to work together with customers and other partners to create sustainable, science-based solutions that help tackle some of the world's biggest challenges.

Stepping up DSM's financial performance and sustainability aspirations

Building on these trends, and combined with disciplined focus on performance, we established and implemented our three-year strategic plan for the period 2016-2018 called Strategy 2018: Driving Profitable Growth with two headline financial targets: high single-digit percentage annual Adjusted EBITDA growth and high double-digit basis point annual ROCE growth.

New Strategy

To deliver on these targets, we defined clear actions, including outpacing market growth, cost reduction and efficiency improvements, and making a continuous push for consistent improvements in capital efficiency.

We initiated extensive cost-reduction and improvement programs to deliver €250-300 million in cost savings versus the 2014 baseline. All of these well-identified programs progressed as planned and are on track to deliver the targeted benefits.

timing cumulative cost savings

In support of our targets, we also adjusted our global organizational and operating model to create a more agile, commercially focused and cost-efficient company. During this strategic period we refrain from large acquisitions and are instead focusing on delivering value from the current portfolio and extracting value from the monetization of our joint venture partnerships.

Another key part of the strategy, besides the financial outcome, is to continue to strengthen our commitment to sustainability by:

  • reducing our own environmental footprint;
  • enabling other stakeholders, especially our customers, to be more sustainable; and
  • advocating on key areas of competence by actively raising awareness and sharing knowledge.

By doing so, we help achieve progress on the Sustainable Development Goals, especially SDG 2 (Zero Hunger), SDG 3 (Good Health and Well-being), SDG 7 (Affordable and Clean Energy), SDG 12 (Responsible Production and Consumption) and SDG 13 (Climate Action). See DSM and the Sustainable Development Goals and throughout this Report.

Of course, our people are the ones who have made and continue to make the strategy work. DSM's People Strategy 2018 was at the heart of our success in recent years. We continue to hire and develop thousands of talented people who are encouraged to challenge the status quo and help us grow.

While driving profitable growth throughout the company via the execution of our Strategy 2018, we continually monitor, assess and strive to respond appropriately to societal, macroeconomic and segment-specific developments as they occur. Our approach to managing both opportunities and risks in DSM's businesses is embedded in our operating and governance model and risk management approach. For more information see Corporate governance and risk management and Risk management.

Sustainability is what our business is all about. This is what we do. The world is looking for sustainable solutions and that is why we are growing.

Philip Eykerman, DSM Executive Committee

Progress in 2017

Total DSM financial results

DSM delivered excellent financial results in 2017. Adjusted EBITDA grew by 15% to €1,445 million, far ahead of the high single-digit growth target we originally set with Strategy 2018. Overall Adjusted EBITDA margin (Adjusted operating profit before depreciation and amortization as a percentage of net sales) was 16.7%, an increase of 80 basis points versus the 15.9% of 2016. In the first two years of Strategy 2018, we have increased our Adjusted EBITDA by €370 million or 34%.

Return on Capital Employed (ROCE) was also well ahead of target, up 190 basis points to 12.3% in 2017 versus 10.4% in 2016. Since we kicked off our successful Strategy 2018, ROCE is up 470 basis points versus the end of 2015.

DSM reported net sales of €8,632 million, an increase of 9% versus 2016. Group organic sales growth was 9%, mainly driven by strong 7% volume growth, clearly above market. All businesses, both in Nutrition and Materials, contributed well to this growth. Prices were overall slightly up, partly offset by somewhat weaker currencies.

Financial targets 2016-2018
Realization
 
2017
2016
   
High single-digit percentage annual adjusted EBITDA growth
15%
17%
High double-digit bps annual ROCE growth
190 bps
280 bps

For all detailed information on DSM's group financial results in 2017, see Profit.

Nutrition financial results

Our Nutrition business performed very strongly, with 8% organic growth in 2017, clearly outpacing market growth. Volumes were up 7% and prices were up 1%. The successful implementation of the growth initiatives continued to drive organic growth, both in Animal Nutrition & Health and Human Nutrition & Health.

Animal Nutrition & Health delivered an exceptionally strong 11% organic growth in 2017, of which 9% was volume growth, albeit against an easy comparative base. Our animal nutrition business continued to benefit from the ability to address a wide range of species, as well as from a diversified geographical presence covering all major growth areas. The business also continued to benefit from a strong forward-integrated premix position. Markets in animal feed were favorable and supportive in 2017. Prices were on average slightly above 2016.

Human Nutrition & Health continued to deliver good volume growth, despite ongoing softness in some of its end markets. The 7% organic sales growth in 2017 was driven mainly by 6% higher volumes, outperforming its markets. Food & beverage markets are being addressed successfully through tailored premixes. Sales excellence programs as well as the introduction of new solutions resulted in above-market growth for both multi-vitamins and omega-3 solutions. The i-Health business continued its double-digit growth while early life nutrition remained a strong performer.

Personal Care & Aroma Ingredients as well as Food Specialties continued to perform well in 2017, although growth in Food Specialties was hampered by some capacity constraints in enzymes.

Adjusted EBITDA for Nutrition was €1,053 million, up 13% driven by the successful execution of our sales growth programs in combination with the impact of the cost-saving and efficiency improvement programs. This increase in Adjusted EBITDA equals the very strong growth in 2016, when Adjusted EBITDA also grew by 13%. Adjusted EBITDA margin further improved in 2017 and was 18.9%, compared with 18.0% in 2016, well within our aspired range of 18-20%. See Nutrition for more on the Nutrition cluster's performance.

Materials financial results

Our Materials cluster also had strong financial performance in 2017. Volumes were up 7% and prices were up 6%, fully reflecting higher input costs. Strong growth in specialties was the main driver behind above-market growth. All three businesses in Materials — Engineering Plastics, Resins & Functional Materials and Dyneema — contributed to the 13% organic growth in 2017 by each posting double-digit organic growth.

Total Adjusted EBITDA of our Materials cluster increased by 12% in 2017, driven by strong volume growth in higher-margin specialties. The Adjusted EBITDA margin of Materials was stable at 17.3%, as pricing and group-wide cost-saving and efficiency improvement programs offset higher input costs and negative currency effects. This robust financial performance demonstrates the improvements achieved in the quality of returns in Materials over the years. See Materials for more on the Materials cluster.

Innovation results

The DSM Innovation Center has multiple functions within DSM, including accelerating the innovation power of our core businesses and extracting value from our Emerging Business Areas (EBAs). At DSM, we want at least 20% of our sales to come from innovation sales, which we define as sales from products and solutions introduced in the last five years.

In 2017, we made good progress with our focused innovation programs. With 21% innovation sales we continued to deliver on our ambition. The DSM Innovation Center reported €9 million in Adjusted EBITDA in 2017, compared to €1 million in 2016. Our three EBAs — DSM Biomedical, DSM Bio-based Products & Services and DSM Advanced Solar — continued to progress well, delivering €17 million in Adjusted EBITDA in 2017 versus €16 million in 2016. For more information on innovation and R&D, see Innovation Center.

 
2017
2016
   
Innovation sales
21%
22%
High-growth economies
44%
44%

Balanced global footprint

Sales growth was strong among all regions, with favorable high single-digit growth in Western Europe as well as in North and Latin America. We performed well in Brazil, despite the disruption caused by the meat scandal that impacted the market for beef and poultry exports, and against a backdrop of economic uncertainty. Double-digit sales growth was achieved in China, India as well as in Eastern Europe.

All high-growth economies together currently represent 44% of DSM's sales (45% when Africa is included), in line with 2016. The share of sales in these economies as a proportion of DSM's total sales gives us a well-balanced global geographical spread of our sales.

Sustainability results

Sustainability is our core value. We continue to further embed sustainability across all of our business activities, both in recognition of our responsibility to reduce our environmental footprint and to help our supply chain, customers and partners do the same. We especially focus on the areas of nutrition, climate and energy, and the circular and bio-based economy. In 2017, our Brighter Living Solutions were 62% of total sales, on track towards our ambitious aspiration of 65%.

We are increasingly recognized for our leadership in this area. In 2017, the Dow Jones Sustainability World Index named DSM among the leaders in its industry for the fourteenth consecutive year. This ranking means we will continue to have RobecoSAM Gold Class status in 2018. DSM was one of only 28 companies globally to score an A-rating for both climate and water by CDP, the non-profit global environmental disclosure platform, which is strong recognition for the way we manage environmental risks, reduce emissions and enhance water stewardship. We were also assessed as an ESG (Environmental, Social and Governance) leader within the chemicals industry by Sustainalytics, ranking number one out of 130 companies.

Sustainability aspirations 2020
Realization 2017
  
Dow Jones Sustainability World Index
 
Top ranking (RobecoSAM Gold Class)
Gold class
Brighter Living Solutions
 
65% ECO+/People+ (running business)
62%
GHG Efficiency Improvement
 
40-45% (2008-2025)
26%
Energy efficiency improvement
 
>10% (2015-2020)
3%
Purchased electricity from renewables
 
50% by 2025
21%
Employee Engagement Index
 
Toward 75% favorable
75%
Safety
 
0.25 Frequency Index of Recordable Injuries
0.36
Diversity
 
25% Female executives
17%
60% Executives from under-represented nationalities
56%

To read more about our environmental performance, see Planet. More information on our Brighter Living Solutions is available throughout this Report, particularly in Review of business.

Organization and culture

We are well on track with the adjustments to our global organizational and operating model to support DSM's growth. To achieve our strategy, we set targets around employee safety, engagement and diversity.

Employee engagement jumped from 71% to 75% according to the Employee Engagement Index, which indicates how our employees feel in terms of commitment, pride, advocacy and satisfaction. With this boost we have already met our mid-term goal of 75% engagement, which we had aimed to reach by 2020.

DSM has also made progress on inclusion and diversity, areas that will remain a focus in the years to come. In 2017, the percentage of female executives increased from 15% to 17% on our way to 25% by 2020. For more information, see People.

In 2017, safety performance was a concern. The Frequency Index of all DSM Recordable Injuries deteriorated from 0.33 to 0.36 bringing us further away of our 0.25 target in 2020. There were serious incidents, including a tragic fatal accident at our plant in Augusta (Georgia, USA) on 27 September 2017. The root causes of this incident, as well as the lack of further improvement versus last year's performance, have been thoroughly investigated. Lessons learned and improvement actions are being implemented. For more information, see What still went wrong in 2017.

Extracting value from our partnerships

In the years preceding Strategy 2018, DSM established joint venture partnerships for our former pharma activities (DSM Sinochem Pharmaceuticals and Patheon) and for the remaining bulk chemical businesses (ChemicaInvest) in order to complete the transformation of our portfolio. These partnerships were created with a view to ultimately exit and monetize these businesses.

In 2017, DSM extracted significant value with the sale of the remaining stake in Patheon to Thermo Fisher Scientific Inc., bringing the total cash proceeds from the exit from our former pharma custom manufacturing activities to approximately €2 billion over the years. The remaining two partnerships, DSM Sinochem Pharmaceuticals and ChemicaInvest, both showed solid results in 2017. For more information, see Partnerships.

Regular strategy review process for the period beyond 2018

In 2017, we delivered for the second year in a row well ahead of our original ambitions, set for the three-year strategic period 2016-2018, having achieved EBITDA growth rates and improvements in return on capital double the original targets set. All businesses delivered on their ambitious growth initiatives and are making good progress with their focused innovation programs. We are also well on track with our cost reduction and efficiency improvement programs. Furthermore, we have successfully divested Patheon ahead of schedule, realizing total proceeds of approximately €2 billion over recent years.

With all of these developments ahead of plan, we brought forward our regular strategy review process for the period beyond 2018.

Exco
The members of the Executive Committee (from left to right): Philip Eykerman (Strategy and M&A), Judith Wiese (People & Organization), Chris Goppelsroeder (Nutritional Products), Feike Sijbesma (CEO/Chairman), Geraldine Matchett (CFO), Dimitri de Vreeze (Materials) and Rob van Leen (R&D and Innovation).