Introduction letter
Dear reader,
The year 2019 was again a record year for DSM. The hard work and engagement of our employees delivered good results, in a not so easy economic, as well as (geo)political and societal, context. We can all be very proud of what has been achieved. We made decisive progress as a performance-driven and purpose-led company, creating brighter lives for all, and already reaching more than 2.5 billion people worldwide.
Delivering on Strategy 2021
We are pleased that we once more delivered a good financial performance for the year. Our total sales were just above € 9 billion, up 2% compared to last year and Adjusted EBITDA was almost € 1.7 billion. We delivered on our two ambitious financial targets of Strategy 2021, with a double-digit growth of Adjusted EBITDA of 10% and an Adjusted net operating free cash flow increase of 47% compared to the underlying business in 2018. Our Adjusted EBITDA margins were also in line with our strategic ambitions at 20.7% and 18.5% for Nutrition and Materials respectively, both up compared to the underlying business in 2018. Our Capex was 6.8% of sales, also on target. The operating working capital as a percentage of sales at end-of-period increased to 26.3%, mainly due to acquisitions and foreign exchange rate effects. Adjusted earnings per share (EPS) increased ahead of Adjusted EBITDA growth when corrected for the temporary vitamin effect of 2018.
Nutrition delivered above-market sales growth and high single-digit Adjusted EBITDA growth, compared to the underlying business in 2018. In Animal Nutrition & Health, sales were strong for all species and in all regions, except for sales to the swine business in China and South-East Asia which were impacted by African swine fever (ASF). This region accounts for more than half of global pork production, with culling measures introduced in response to ASF affecting 35-50% of pork production in the area. In Human Nutrition & Health, sales were up despite softer end-markets in the second half of the year. Personal Care & Aroma Ingredients and Food Specialties both delivered a strong performance. We made good progress in terms of inorganic growth in 2019. We strengthened our position in vitamin E by creating a 75:25 partnership with Nenter; we increased our shareholding in Andre Pectin, Asia's largest producer of hydrocolloids, from 29% to 75%; we further strengthened our position in personalized nutrition by acquiring the personalized nutrition platform AVA; and we acquired Royal CSK in order to better serve the world's fast-growing and attractive dairy cultures markets. In February 2020, we announced the acquisition of Glycom, the world's leading supplier of Human Milk Oligosaccharides, to accelerate growth in our early life nutrition business.
Materials reported a decline in organic growth in 2019. Lower volumes resulted from weak macroeconomic conditions and specifically in some end-markets. This weakness was mainly related to global trade issues. The lower prices fully reflect lower input costs, and we maintained our margins. Our Materials business demonstrated earning's resilience in persisting weak market conditions, with an almost stable Adjusted EBITDA. Key highlights in Materials included further strengthening our market-leading position in specialty materials in India by acquiring the engineering plastics business of SRF Ltd, launching a new production line for Arnitel®, and increasing our manufacturing capacity for Dyneema®.
Based on our confidence in the quality of our businesses, our cash generation and our strong balance sheet we announced a €1 billion share buy-back program in February 2019 and repurchased shares for a total consideration of €600 million in 2019. We intend to repurchase the remaining €400 million during the first half of 2020. On the back of the 2019 results, we will propose to the Annual General Meeting of Shareholders an increase in the dividend from €2.30 to €2.40. We made good progress with our large innovation projects, as well as in keeping up with our long-standing commitment to balancing the needs of People, Planet and Profit. We can be pleased with the significant strides we took in sustainability in 2019.
Our core competence: bright science and innovation
We continue to leverage our unique technology capabilities to develop innovative, sustainable solutions that address some of the biggest challenges facing society and the planet today, as anchored in the Sustainable Developments Goals (SDGs) of the United Nations (UN), such as climate change, malnutrition and resource scarcity. In 2019, we invested approximately 5% of sales in R&D and continued to build a strong and focused innovation pipeline to drive long-term growth. Consequently, 21% of our sales in 2019 came from innovations introduced in the past five years, achieving our aspiration. The year 2019 was a milestone in the history of our company, as we celebrated 150 years of innovation in fermentation and biotechnology at our Delft site (Netherlands). Building on the solid foundations of our heritage, we currently rank among the world's top three companies in industrial biotechnology, and these activities account for 20% of our total sales. We made good progress on our large innovation projects. To name a few: our Veramaris joint venture with Evonik started commercial production of its algae-based omega-3 fatty acids for aquaculture and is currently supplying three of the world's largest salmon feed producers. Project Clean Cow, our innovative feed solution that reduces the emissions of the greenhouse gas (GHG) methane from cattle by at least 30%, reached a key milestone, filing for European registration to commercialize the product by late 2020 or early 2021. Avansya, our partnership with Cargill to bring zero-calorie, cost-effective sweeteners to market faster, started commercial production.
Our sustainability leadership
At DSM, sustainability is our core value and a key responsibility. It is also an important business driver that is fully engrained in our strategy, business and operations. Our approach for bringing about positive change is to improve, enable and advocate.
Improve is all about reducing the environmental impact of our own operations. We are very well on track this year with respect to our greenhouse gas (GHG) reduction, energy efficiency and purchased renewable electricity targets. The underlying cumulative structural improvement in absolute GHG reduction compared to the 2016 baseline was approximately 17%. Energy efficiency improved by 2.3% compared to 2018 versus an average annual ambition of more than 1%, and 50% of purchased electricity came from renewable resources compared with 41% in 2018. We continued to apply an internal carbon price of €50 per ton of CO2eq. In addition, starting from 2019, business growth projects must either be GHG-neutral or else be compensated for. We are pleased that we were the first company in our sector to set new science-based targets for GHG emission reduction, reviewed and approved by the Science Based Targets initiative and aligned with the Paris Climate Agreement. We committed to a long-term pathway to work toward net-zero GHG emissions across our operations and value chains by 2050. We are proud that we are one of the first companies to do so. We also continued making steps in financial transparency on climate risks and opportunities by further disclosing against the TCFD (Taskforce Climate-related Financial Disclosures) recommendations.
We also enable our customers in their sustainability endeavors with our innovative solutions. We see continued growth of demand for solutions that address sustainability challenges. In 2019, 63% of our sales came from products that have a better environmental (ECO+) and/or social (People+) impact than mainstream solutions. We call these our Brighter Living Solutions. Our innovation pipeline is focused on three strategic domains: Nutrition & Health, Climate & Energy and Resources & Circularity, and includes for example our Project Clean Cow, Veramaris®, Avansya, Balancius®, Niaga® and Akulon® RePurposed. Furthermore, in 2019 our materials businesses initiated additional sustainability ambitions and programs to offer recycled and/or bio-based alternatives. We took further steps to address malnutrition in 2019. The UN World Food Programme (WFP) reaches 35 million beneficiaries annually with food that has been improved by the DSM-WFP partnership. Through our Africa Improved Foods (AIF) joint venture in Rwanda, we are working hard to tackle the issue of malnutrition and stunting, while using local sourcing and production in-country helps to develop the local economy and to create self-sufficiency. Together with UNICEF, we announced a partnership for Generation Unlimited to embed a longer-term vision for sustainable food systems in Africa.
We continue to advocate on (mal)nutrition, climate change and circularity and the role of business in society. These are issues that define our times and can be addressed by our competences. We continued in 2019 to help address malnutrition globally via the UN, WFP, UNICEF and the Scaling Up Nutrition (SUN) Global Business Network. We were equally active on the Climate front, with Feike Sijbesma being appointed Co-chair of the High-Level Commission on Carbon Pricing and Competitiveness of the World Bank Group. Feike was also one of the commissioners of the Global Commission on Adaptation, which published its flagship report in September 2019. We continued our support for the UN Global Compact in 2019 and remain committed to reporting our progress within the framework of this initiative. We are proud to be recognized as a constructive contributor to a changing world, achieving this by working together with governments, industry bodies and peers. We received, for instance, the highest rankings in important ESG (Environmental, Social & Governance) indices such as MSCI and Sustainalytics (ranked number one within our sector). In addition, we are proud that our company is part of Forbes' best employer list globally and that Feike Sijbesma was ranked 42 on the Harvard Business Review Top 100 best performing global CEOs in 2019.
Our people, leadership and digitization
We worked on further improving our safety performance in 2019. We can be proud that we substantially improved our Safety Frequency Recordable Index from 0.33 to 0.28, in line with our goals and values. Safety remains our highest priority and we strive to be incident- and injury-free. We aim to deliver this by creating a culture in which everyone working for DSM, whether as an employee or a contractor, is engaged in maintaining high safety standards.
We continued to develop our organization, leadership, people, and culture to enable continued high performance and engagement. We accelerated leadership development for both people and teams. The results of these initiatives are reflected in our annual Employee Engagement Index rating of 74%, with a response rate of 92% and over 40,000 comments received. This indicates that our people feel engaged and committed. Additionally, we boosted our digitization efforts to drive our growth and improve our efficiency through digital collaboration tools with customers and data analytics to increase our productivity and digital value propositions in personalized nutrition.
We continued to focus on internationalization and diversity in 2019. We are pleased with the progress to date. Our executive base became more international and we already achieved our 2020 target on nationality mix last year. Nowadays 62% of our executives are non-Dutch, and our focus shifted to expanding our non-European population. Today, there is a better gender balance both at management and executive levels. As of 15 February 2020, the percentage of women in our Executive Committee, Managing Board and Supervisory Board is 50% in each. With these percentages we are clearly achieving our aim of having at least 30% male and at least 30% female members in each one. We are delighted at the appointment of Erica Mann and the re-appointment of Pauline van der Meer Mohr as members of DSM's Supervisory Board.
It is with great sadness that in 2019 we had to say a final farewell to our former Managing Board Chairman, Simon de Bree. Under his leadership, the first steps were taken to transform from a bulk-chemicals company into one focused on biochemistry and fine chemicals, laying the foundations for the company we are today.
Leadership change
Feike Sijbesma: "At the end of 2019, after 20 years on the Managing Board and almost 13 years as CEO, I decided to step down as CEO and hand over the leadership of DSM. Our Supervisory Board appointed Geraldine Matchett and Dimitri de Vreeze as Co-CEOs. I am honored and humbled: for having served DSM and society for such a long time and for being able to hand over to my valued Managing Board colleagues Geraldine and Dimitri. We have driven the transformation and successes of the business together, making their dual leadership structure rooted in a long history of collaboration."
Geraldine Matchett and Dimitri de Vreeze: "Under the leadership of Feike, we have gone through a significant transformation, from a bulk-chemicals company into one which focuses on Nutrition, Health and Sustainable Living, generating Total Shareholder Return of about 400%. For more than a decade we have significantly expanded our nutrition business, divested our non-core bulk chemical activities, and upgraded the materials portfolio. In addition to focusing on business performance and financial discipline, we have repositioned ourselves into the successful science-based company that DSM is today: Purpose-led and performance-driven, putting innovation and sustainability at the heart of our company and our strategy.
Today, we are a truly global company with a diverse and engaged employee and leadership base, creating value for all our stakeholders. With Feike handing over formally with effect from 15 February, 2020, we too will maintain the focus on business performance, financial discipline, innovation, sustainability, and people, as DSM continues its journey. We are pleased that Feike will help ensure a smooth handover until 1 May and that he will continue to be an ambassador for DSM in his new capacity as Honorary Chairman of the Company.”
Thank you
A warm thank-you to everyone who helped make 2019 a good year for DSM, in challenging circumstances. We are deeply grateful to our Supervisory Board, our colleagues in the Executive Committee, all DSM colleagues and business partners for working closely together and for their enormous commitment and contribution. We also thank our customers and shareholders for their trust and loyalty. Last, but not least, we are humbled for having been given the opportunity to work together to serve society by creating value on three dimensions simultaneously: People, Planet and Profit.
Feike Sijbesma, CEO/Chairman Managing Board Royal DSM (until 15 February 2020)1
Geraldine Matchett and Dimitri de Vreeze, Co-CEOs Royal DSM (as of 15 February 2020)1
DSM Managing Board (from left to right): Geraldine Matchett, Feike Sijbesma and Dimitri de Vreeze.