Purpose sets scope for further growth and evolution
With Strategy 2021: Growth & Value - Purpose led, Performance driven, we will evolve further toward being a purpose-led, science-based company operating in the fields of Nutrition, Health and Sustainable Living. Our strong growth platform, centered on developing innovative solutions addressing Nutrition & Health, Climate & Energy and Resources & Circularity, together with increased customer-centricity and our large innovation projects, will drive above-market growth. At the same time, we will remain focused on cost control and operational excellence, allowing us to accelerate profit growth and cash generation. Organic growth will be complemented by acquisitions, predominantly in Nutrition.
Our Nutrition business will focus on human nutrition (ingredients and solutions for food & beverages, as well as specialty nutrition, nutritional ingredients, consumer-branded products and personalized nutrition), animal nutrition (with premix and specialty solutions), and personal care and aroma ingredients.
Our Materials business will further develop as a high-growth, higher-margin specialty business, and will focus on the categories Improved Health & Living, Green Products & Applications, and New Mobility & Connectivity.
By improving the impact of our own operations, enabling sustainable solutions for our customers, and advocating sustainable business, we can grow faster and reduce our cost and risk profile. We will further step up our ambitions regarding the reduction of greenhouse gas emissions (in line with the Paris Agreement), our energy efficiency and our use of renewable energy.
Performance to deliver growth and value
We have set two ambitious targets for profit growth and cash generation to drive value creation for the period 2019–2021:
A high single-digit percentage annual increase in Adjusted EBITDA
An average annual increase of about 10% in Adjusted net operating free cash flow
We are committed to top-line growth ahead of market, which will be supported by expanded solution offerings that place the customer even more firmly in the center of our activities, as well as by harnessing digital capabilities to increase customer intimacy, improve productivity and efficiency, and support new business models. Approximately 45% of sales will come from high-growth economies.
Greater efficiencies and a yet sharper focus on higher-margin specialty solutions will enable new Adjusted EBITDA margin ambitions by 2021 for Nutrition (above 20%) and Materials (18–20%). Organic top-line growth combined with these enhanced margins will drive high single-digit Adjusted EBITDA growth.
We aim to accelerate growth in Adjusted net operating free cash flow, generating an average annual increase of approximately 10%. This results from the ambition to:
Reduce working capital levels by around 50 basis points annually
Take a disciplined approach to capital expenditure, with an overall level of spend of approximately 6.5% of sales
Drive improvements in organic Return on Capital Employed (ROCE) of around 1% annually
Our overall deployment of capital is expected to drive Adjusted Earnings Per Share (EPS) growth ahead of Adjusted EBITDA growth. Our cash allocation policy remains unchanged and has a clear order of priority for cash deployment:
Disciplined capital expenditure for organic growth: about 6.5% of annual sales
A stable, preferably rising dividend
Disciplined M&A, predominantly in Nutrition
In the absence of value-creating M&A, capital to be returned to shareholders
We remain committed to maintaining a strong, investment-grade credit rating.
In line with our dividend policy of a stable, preferably rising dividend, we increased the dividend over 2019 from €2.30 to €2.40 (+4.3%) per ordinary share, reflecting our confidence in future earnings growth.In line with the targets set for the period 2019–2021, our performance is expected to result in further dividend growth, which could lead to an expected average payout of 40–50% of adjusted earnings.
We will target M&A predominantly in Nutrition, given this business' unique growth potential, resilience, strong leadership position and potential for value creation.
We have built a unique, highly integrated, global and broad nutritional and other specialty ingredient solutions business in food & beverages, specialty nutrition, animal feed and personal care, meeting differentiated local needs through our unparalleled network. We possess a diverse and significant premix footprint, with superior formulations and delivery systems, helping to drive sustainable nutritional and health solutions. This infrastructure is fueled by our complete portfolio of nutritional ingredients, which includes vitamins, nutritional lipids, carotenoids, minerals, eubiotics, enzymes and yeasts, as well as texturants, flavors and cultures. This diversity and level of integration creates a resilient portfolio with limited exposure to single products or customers, while benefiting from the opportunities provided by global megatrends.
Focused on Nutrition & Health, we will continue to aim for above-market growth and an Adjusted EBITDA margin greater than 20% by 2021. We will complement organic growth with inorganic opportunities that broaden our portfolio and enhance our ability to provide customized solutions. At the same time, we will further build on the successful initiatives of Strategy 2018, increasingly placing the customer at the center of everything we do, while delivering large, sustainability-driven innovation projects.
Animal Nutrition & Health
Building on the results of our programs as part of Strategy 2018, we will continue to seek to deliver above-market sales growth through:
Marketing & Sales excellence, especially building specialist capabilities to address wider species opportunities and pursue new health solutions
Customer-centricity & agility, to place the customer at the heart of everything we do, by improving the end-to-end experience for the customer
Further investing in our direct business-to-farmer (for instance in China) and overall go-to-market capabilities
In addition, we pursue radical innovation for core sustainability topics, all of which seek to deliver long-term solutions for the industry with the potential to create significant value for our company and our customers. With examples such as algal-based omega-3 for fish feed (Veramaris®) and methane-reducing feed additives for cows (Project Clean Cow), we position ourselves at the forefront to benefit from global megatrends.
Human Nutrition & Health
Building on the success of the first two parts of the LiftOff! Program as part of Strategy 2018, we will step up further in Strategy 2021 with increased focus on customer-centricity and commercial excellence to drive above-market organic growth through:
Seeking to move closer to the customer by strengthening the value propositions of our products and services, improving end-to-end customer experiences, and enhanced innovation and application capabilities
Continuing to invest in business-to-consumer to ensure the growth of i-Health beyond the US, as well as further development and building on our personalized nutrition platform
In addition, we will continue to pursue inorganic opportunities in specialty nutrition and food & beverages, to enhance and complement our already strong market positions.
Our business is well positioned to benefit from strong trends, as evidenced by the disruptive value chain shifts we are witnessing, which are leading to new opportunities in Human Nutrition & Health.
In food & beverages, we see an increasing number of local players entering the market in answer to the growing demand for local, healthy products of natural origin with reduced sugar, salt and fat. These new players have generally limited development and production assets and market their products through social media. Global players are facing the challenge of having to reduce costs in order to remain competitive while innovating their products. This scenario represents a unique opportunity for us. We offer tailored nutritional solutions to local players through our global presence and our R&D competences. At the same time, we help global players reduce their manufacturing and R&D costs with our premix capabilities, but also provide innovative solutions to replace sugar, salt and fat. As an example, our partnership with Cargill (Avansya) to bring zero-calorie, cost-effective, non-artificial sweeteners to market faster is well positioned to help food & beverage producers deliver the products and brands consumers prefer, with significantly reduced calories.
In specialty nutrition (especially dietary supplements), more health-conscious and educated consumers are increasingly seeking more personalized products based on their lifestyle, diet and genetic make-up, leading to a demand for more individualized advice, delivery systems and diagnostic tools. This requires a more integrated offering beyond the supply of nutritional ingredients alone, one that involves turning scientific know-how into expert advice for the consumer. To help us meet these needs, we are building on our existing business-to-business and business-to-consumer strengths, while also acquiring business-to-me capabilities from leading start-ups such as Mixfit, Tespo and Biomarker.
We are further future-proofing our Materials business by aligning it toward Sustainable Living, in line with our key focus domains of Climate & Energy and Resources & Circularity. This will further develop Materials into a high-growth, higher-margin specialty business, delivering above-market organic growth, focused on Improved Health & Living, Green Products & Applications and New Mobility & Connectivity.
In Improved Health & Living, we are focusing on the increasing demand for advanced healthcare applications. In addition, we offer solutions that enhance end-user safety and health conditions.
In Green Products & Applications, we are providing solutions that enable customers to cut emissions by using materials that are lighter, stronger, more efficient and more sustainable. We are also increasingly focusing on bio-based, recycled, and fully recyclable solutions.
In New Mobility & Connectivity, we are targeting materials that support the transition from fossil fuel to electric automotive power. We are also addressing the growing need for increased connectivity between products, devices and applications.
Innovation is what transforms our 'Bright Science' into 'Brighter Living'. We can leverage our unique technology capabilities for developing innovative sustainable solutions through possessing a profound understanding of:
The science behind nutrition, and the capability to develop new nutritional ingredients with proven health benefits, supported by our state-of-the-art Biotechnology Center, providing sustainable alternatives for chemical synthesis, as well as plant/animal-derived ingredients
Material synthesis and characterization, and the capability to convert this into Sustainable Living applications, supported by our state-of-the-art Materials Science Center
Our sales growth is driven by our ability to continually deliver innovative and improved products and solutions to meet our customers' needs. Our innovations reflect our commitment to healthier and more sustainable outcomes and so help drive the performance of our Brighter Living Solutions portfolio. Innovation sales have also improved our profitability, delivering higher margins than the average of our running business. Our innovation sales are defined as products and applications that have been introduced over the past five years. We aspire to maintain a level of around 20% during the strategy 2019–2021 period, which we consider to be a healthy proportion in view of the overall balance of our product portfolio and product life cycles. We will continue to invest in differentiating science and technology, allocating approximately 5% of sales to R&D.
Our organic growth will be supported by a number of focused, large innovation projects — for example, Project Clean Cow, Veramaris®, fermentative Stevia, enzymes and yeasts for 1.5th- and 2nd-generation bio-ethanol, Niaga®, Additive Manufacturing, plant-based proteins, and bio-agriculture. These solutions are expected to be introduced to the market in the 2019–2025 timeframe. All these innovations seek to meet significant, global sustainability challenges in Nutrition & Health, Climate & Energy and Resources & Circularity. Altogether, we expect these to generate around €350 million in sales and €100 million in Adjusted EBITDA from 2021 to around €1 billion and €400 million, respectively, from 2025 onward.
As well as supporting innovation in our core businesses, the DSM Innovation Center also aims to develop its Emerging Business Areas (EBAs). These are promising growth platforms outside the scope of our business groups. They comprise DSM Biomedical, which focuses on innovative materials for medical devices; DSM Bio-based Products & Services, which focuses on clean energy from crop residues as well as bio-chemicals with enzymes and yeasts for biomass conversion; and DSM Advanced Solar, which offers yield-boosting solutions for solar energy.
Enabling programs for accelerated growth
Our enabling programs will underpin and facilitate our ambitions by focusing on key areas such as performance-driven organization, leadership and people, culture, digitalization and sustainability leadership across DSM.
Organization, leadership and people, and culture
We continue to develop our organization, leadership and people, and culture to enable continued performance. In terms of organization, we are maintaining our focus on cost discipline and customer-centricity as we optimize our set-up and align our activities and organization with specific market and customer segments.
Regarding leadership and people, we are accelerating leadership development for both people and teams, as well as for effectiveness in growing our businesses. We are also embedding a global mindset through further internationalization.
In terms of culture, we introduced The DSM Ways of Working, which describe a daily mindset that enables everyone in our company to make a difference. These are described in more detail in 'People and organization strategy'.
Digitization and digitalization
Digitization and digitalization drive our growth and improve our efficiency on three levels:
Customer intimacy: improving top-line results by, for example, customer data analytics, omnichannel apps providing 24/7 customer experiences, and digital collaboration tools
Operational performance: reducing costs by means of automation and data analytics to increase productivity in support functions and manufacturing, optimize operational processes, and improve safety, quality and plant reliability
New business models: supporting entrepreneurship and artificial intelligence. Examples are our partnerships for digital value propositions and our pilots in the areas of personalized nutrition and animal feed
Sustainability is not only our core value and a key responsibility, it is increasingly an important business growth driver at DSM that is fully engrained in our strategy. We are stepping up our sustainability aspirations. By improving the impact of our own operations, enabling sustainable solutions for our customers and advocating sustainable business, we can grow faster and reduce our cost and risk profile. This is integral to our strategy and is detailed in the 'Brighter Living Agenda' in 'Purpose'. For more details, see 'People' and 'Planet'.
Strategy 2021: report on progress
Total DSM financial results
During the first nine months of 2018, the industry experienced an exceptional supply disruption. This event provided additional sales for €415 million and a corresponding Adjusted EBITDA of €290 million in the first nine months of 2018, as estimated and reported last year in Nutrition. 'Underlying business' is defined as the sales and Adjusted EBITDA in Nutrition, corrected for this temporary vitamin effect.
As of January 2019, we adopted IFRS 16 on 'Leases' using the modified retrospective approach: the financial results of 2019 are reported including and excluding this impact, where applicable.
In 2019, we delivered on our key financial targets with double-digit growth in Adjusted EBITDA of 10% to €1,684 million, including 3% from IFRS 16. The strong Adjusted EBITDA growth in the businesses was also supported by our continued focus on cost reduction and operational efficiency. The Adjusted EBITDA margin was 18.7%, compared to 17.3% in the underlying business in 2018. Adjusted net operating free cash flow increased by 47% to €801 million compared to the underlying business in 2018, including 10% from IFRS 16.
Nutrition delivered above-market sales growth and high-single digit Adjusted EBITDA growth, despite challenging market conditions in some of its end-markets. Materials demonstrated earnings resilience in persisting weak market conditions with an almost stable Adjusted EBITDA.
Our Return On Capital Employed (ROCE) from underlying business was down 130 basis points to 12.0% (including 30 basis points from IFRS 16), mainly driven by the impact of acquisitions and the implementation of IFRS 16.
One of our key focus areas remains the improvement in our working capital as percentage of total sales. At the end of 2019, total working capital was €1,852 million, compared to €1,674 million in 2018, fully driven by the consolidation of acquisitions and foreign exchange rate effects. The average total working capital as a percentage of sales was 21.2%, compared to 18.7% in 2018.
Including the estimated temporary vitamin effect of €415 million on sales driven by the exceptional supply disruption in the industry in 2018, our total sales were down 3% to €9,010 million (compared to €9,267 million in 2018). The total Adjusted EBITDA declined 8% to €1,684 million when considering the total estimated €290 million temporary vitamin effect of 2018. Our Total ROCE was 12.0% (including 30 basis points from IFRS 16), a reduction of 480 basis points from 16.8%.
In 2019, we delivered a good financial performance, despite an increasingly challenging macroeconomic environment. Nutrition's broad, global portfolio in food and feed ingredients, as well as its expanded portfolio of solutions, drove solid growth. Meanwhile, Materials demonstrated its relative earnings resilience as it continued its ongoing transformation into a high-growth, higher-margin specialty business, focused on Improved Health & Living, Green Products & Applications and New Mobility & Connectivity.
Nutrition financial results
Our Nutrition business delivered a good result, with a solid performance in Animal Nutrition & Health, a softer one in Human Nutrition & Health, and a strong one in Personal Care & Aroma Ingredients and Food Specialties. Sales in the underlying business were up 5% to €6,028 million compared to the underlying business in 2018. The organic sales growth in the underlying business was 2%, driven by volumes, which were up by 2%.
Animal Nutrition & Health reported 4% organic growth, against a strong 8% last year and despite the negative effect of African swine fever (ASF). This demonstrates the resilience of the integrated and diversified business model and our ability to address a wide range of species as well as our diversified geographical presence.
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 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. The rapid spread of this disease disrupted the global equilibrium of animal protein in the short term. As a result, in the second half of 2019, we were unable to fully offset the impact of the decline in pork production in the region with increases in production from other regions and species. Overall, volumes and prices were both up 2%. The price increase was due to positive sales mix effects, as well as price increases earlier in the year for some ingredients to compensate for higher costs.
Human Nutrition & Health delivered 3% sales growth driven by foreign exchange effects, which were largely US-dollar-related. Organic growth was minus 1%, against a tough comparison of 7% organic growth in 2018, in increasingly challenging end-markets. Volumes were up 2% and prices were down 3%.
After a strong start to the year, softer macroeconomic conditions increasingly weighed on the Food & Beverage segment, especially in North America. The softness was most pronounced in the case of larger customers. Smaller customers were less impacted. Medical Nutrition and Dietary Supplements (driven by the double-digit growth in the i-Health segment, our business-to-consumer business) performed well over the year. Early Life Nutrition showed a strong performance in the first three quarters of the year, with a softer fourth quarter. Lower prices for vitamin C and negative mix effects resulted in 3% lower prices.
In Food Specialties, sales were 17% higher versus the prior year, resulting from 4% organic growth, 12% from the consolidation of Andre Pectin following the increase in DSM's shareholding from 29% to 75%, and 1% from exchange rate effects. All major business lines performed well over the year, with especially a good sales growth in cultures and food enzymes in dairy and baking. Andre Pectin performed well.
In Personal Care & Aroma Ingredients, sales were up 11%, with very strong organic growth of 9% and a 2% contribution from foreign exchange rate effects. All Personal Care product lines, including sun, skin and hair care delivered good above-market growth, with Aroma Ingredients also performing well in 2019. Successful commercialization of the innovation pipeline further contributed to a very good year for the business.
For Nutrition, the Adjusted EBITDA growth in the underlying business was up 12% to €1,250 million compared to the previous year, including a 3% contribution from IFRS 16. This was driven by volume growth, lower costs, and a small contribution from positive foreign exchange rate effects. The Adjusted EBITDA margin in the underlying business was 20.7% (including 0.5% from IFRS 16) compared to 19.5% in 2018.
We made good progress on the inorganic growth front. In 2019, we increased our shareholding in Andre Pectin (China) from 29% to 75%. We also acquired Royal CSK (Netherlands), combining complementary strengths to better serve DSM's largest food & beverage segment and we created the 75:25 partnership, Yimante (China), with Nenter in 2019. Through this partnership, we strengthened our vitamin E position for animal nutrition premix solutions.
Materials financial results
In 2019, our Materials business was confronted with weak macroeconomic conditions in China and in some of its end-markets. Materials reported organic growth down by 8%, driven by lower volumes (-5%) and prices reduced by 3%, with a relative resilience due to lower input costs.
DSM Engineering Plastics saw persistent softness in China and in the global automotive segment, resulting in a minus 10% organic growth. Electrical & electronics saw some signs of improvement in the second half of the year. Business conditions in other end-segments were solid.
DSM Resins & Functional Materials reported a minus 6% organic growth. Business conditions in Coating Resins stabilized versus previous year: while the European end-markets remained weak, the business experienced a small uptick in the Chinese building & construction sector. Functional Materials saw its sales of specialty coatings for glass fiber optic cables decline in the second half of the year. The 4G network investments started to tail off in anticipation of the upcoming infrastructure investments for the 5G networks, which led to temporarily lower sales.
DSM Dyneema reported a minus 4% organic growth. The focus on strong growth in the high-margin personal protection business resulted in lower volumes in other segments. The shift had a strong positive effect on the margins. New production capacity was started up by the end of the year in the Netherlands and in the US, which will allow the business to continue its growth.
Total Adjusted EBITDA was €509 million, 1% lower compared to the previous year and including 1% from IFRS 16. Our specialty portfolio demonstrated its relative earnings resilience in current market circumstances. Due to the strong performance of the higher-margin businesses (especially in DSM Dyneema), good margin management, cost control and some benefits from exchange rate effects, Materials reported almost flat earnings in 2019. The Adjusted EBITDA margin was 18.5% (including 0.2% from IFRS 16) compared to 17.6% achieved in the previous year.
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 2019, innovation sales amounted to 21%. For more information on innovation and R&D, see 'Innovation'.
DSM Innovation Center sales were up 13%, with 9% organic growth and a 4% contribution from foreign exchange rate effects. DSM Biomedical reported strong sales growth over the year. DSM Bio-based Products & Services continued to benefit from the license income for yeast technologies used for bio-based fuels. DSM Advanced Solar was soft due to the challenging Chinese market.
The Adjusted EBITDA increased to €22 million, benefiting from a strong increase in license income at DSM Bio-based Products & Services as well as a good performance of DSM Biomedical and a positive contribution from exchange rate effects.
Balanced global footprint
Sales growth was solid among all regions, with favorable growth in Latin America. We experienced increasing challenging market conditions in China in Materials (automotive and industrial) and in Animal Nutrition & Health (due to African swine fever). All high-growth economies together currently represent 43% of our sales, in line with 2018. The share of sales in these economies as a proportion of our total sales gives us a well-balanced global footprint.
At DSM, sustainability is not only our core value and a key responsibility it is also increasingly an important business driver that is fully engrained in our purpose, strategy, business and operations. Our approach for bringing about positive change is to improve, enable and advocate. We further improved the environmental impact of our own operations. We are well on track with respect to our greenhouse gas reduction, energy efficiency improvement and purchased renewable electricity targets.
The underlying cumulative structural improvement in absolute greenhouse gas reduction in 2019 compared to the 2016 baseline was ~17%
Energy efficiency improved by 2.3% compared to 2018 versus an average annual ambition of more than 1%
50% of purchased electricity came from renewable resources compared with 41% in 2018
We enabled our customers to deliver more sustainable solutions to their (end) consumers focusing on the domains of Nutrition & Health, Climate & Energy, and Resources & Circularity. We made good progress in our large innovation projects such as Veramaris, Avansya®, Project Clean Cow, Balancius® and Niaga®. All our materials businesses initiated additional sustainability ambitions to reduce the environmental impact of their operations and to increase the sustainability value they deliver. In 2019, our Brighter Living Solutions accounted for 63% of sales.
We are proud to be globally recognized for our leadership in this area. Our climate change strategy received an A- rating from CDP, the non-profit global environmental disclosure platform. We further improved our rankings in key ESG (Environmental, Social & Governance) indices, achieving leading positions in four important ESG indices for investors: we are #1 out of 120 in our industry in Sustainalytics, we have an AAA rating in MSCI, we have a Prime rating in ISS-Oekom, and we have a leading position in Vigeo.
To read more about our environmental performance, see 'Planet'.
Organization, leadership, people and culture
We worked on further improving our safety performance in 2019. We are 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 also further shaped a customer-centric organization aligned with market or customer segments. 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.
We continued to focus on internationalization and diversity in 2019. 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 has 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. For more information, see 'People'.
Digitization & Digitalization
We boosted our digitization efforts to drive our growth and improve our efficiency through digital collaboration tools with customers, data analytics to increase our productivity, and digital value propositions in personalized nutrition. A Chief Digital Officer was appointed to oversee our digital transformation and ensure that we will thrive in an increasingly digital world. In 2019, we continued to strengthen our cybersecurity. Following risk assessments, a multi-year program is being rolled out focusing on improving cybersecurity capabilities in three areas: information technology, operations technology and R&D laboratory systems.