1. DSM and IFRS
2004 was the last financial year on which DSM
has issued a financial report based on Dutch accounting rules. From the
financial year 2005 onwards, DSM will change over to the International
Financial Reporting Standards (IFRS), which are mandatory for all listed
companies in the European Union. This changeover has involved an adjustment of
internal accounting rules and a corresponding adjustment of systems, as well
as extensive communication with and training of financial employees. To
facilitate comparison, this annual report contains an annex in which the
balance sheet and results for 2004 (on a quarterly and annual basis) are
represented in accordance with the
IFRS. (PDF: 233 Kb)
2.1 DSM provides 2007 comparative figures in line with new structure
On 9 April 2008 Royal DSM N.V. provides the investment community with
comparative figures for 2007 that reflect the company’s new cluster structure
as of 1 January 2008. The new structure was announced in September 2007 and is
a result of the acceleration of DSM’s strategy
Vision 2010 – Building on Strengths.
As of 1 January 2008 DSM’s activities are grouped into five reporting clusters
to reflect DSM’s accelerated shift to Life Sciences and Materials Sciences:
Nutrition, Pharma, Performance Materials and Polymer Intermediates as well as
the non-core Base Chemicals and Materials cluster.
Download comparative figures (PDF: 17 kB)
2.2 Financial results Q1 2008
Net Sales
Net sales from
continuing operations in Q1 2008 increased by 10% compared with Q1 2007.
Organic growth was very strong at 14%, which was evenly spread over volumes
and prices. Volume growth was particularly strong in the nutrition and
caprolactam markets because of firm demand, expanding market shares and an
excellent manufacturing performance. Solid price increases were possible in
the nutrition and fertilizer markets because of a favorable shift in the
demand-supply balance and the differentiation strategy in Nutrition. In the
anti-infectives markets there was an improvement from the low prices at the
end of last year. A substantial part of the organic growth was offset by much
lower exchange rates versus the Euro (e.g. US dollar -13%).
Operating profit
The operating profit from continuing
operations amounted to EUR 236 million in the first quarter, which is 22%
higher than in the first quarter of 2007. This is in spite of feedstock and
energy costs being some EUR 50 million higher, while much lower average
currency exchange rates versus the Euro had an effect of some EUR 20 million
(after hedging). In addition, the phasing-out of some contracts relating to
the acquisition of Roche Vitamins had an effect of around EUR 10 million. On
top of this innovation expenditure increased further, as planned. All of this
was amply compensated for by substantially higher sales volumes and margins
across the portfolio.
Nutrition
Sales in this cluster increased by 18%. Higher sales
volumes and selling prices were partly offset by the lower exchange rate for
the US dollar.
DSM Nutritional Products saw its sales volumes strongly
increase compared to Q1 2007 due to market growth and the market-share
increase during 2007. Prices were increased due to a more balanced
supply-demand situation, especially in vitamin E and vitamin C. Carotenoid
prices were somewhat lower than last year. DSM Nutritional Products’ operating
profit strongly increased as a result of higher volumes and margins despite
the negative impact of the US dollar and the phasing-out of the Roche
contracts. DSM Food Specialties showed a decrease in net sales and operating
profit compared to the high results in Q1 2007, mainly due to lower sales in
enzymes and functional foods and the negative impact of the dollar and
feedstock costs.
Pharma
Sales were up 5% due to higher sales volumes and selling
prices and despite the weaker US dollar.
The operating profit was
equal to Q1 2007, being the balance of a lower result at DSM Pharmaceutical
Products and a higher result at DSM Anti-Infectives. The lower result at DSM
Pharmaceutical Products was caused by the final phasing-out of Roche contracts
and temporarily low sales. At DSM Anti-Infectives the drop in prices that had
been experienced at the end of last year turned around, somewhat offset by a
weaker US dollar.
Performance Materials
Higher sales volumes and higher selling
prices (in total 4%) were to a large degree offset by the lower exchange rates
for the US dollar and the pound sterling.
The operating profit for the
cluster was up 7%. Higher sales volumes and higher margins were partially
offset by expansion-related higher fixed costs. DSM Engineering Plastics
posted a higher profit because of improved margins due to the fact that
selling prices increased and raw-material prices decreased. DSM Dyneema’s
operating profit increased further due to higher sales enabled by the expanded
production capacity. The operating profit of DSM Resins remained at the Q1
2007 level.
Polymer Intermediates
Sales increased by 9%. Higher sales
volumes and slightly higher selling prices were partly offset by the weaker US
dollar.
Higher sales volumes and margins contributed to the strong
increase in Polymer Intermediates’ operating profit. The higher sales volumes
are based on the excellent production performance of the caprolactam plants,
the expanded production capacity for acrylonitrile and solid demand. Due to
the tight supply-demand situation, prices were increased further in all
markets.
Base Chemicals and Materials
Sales for this cluster were up
16% from Q1 2007, mainly due to higher sales volumes and higher prices and
despite the weaker US dollar.
Most businesses in this cluster posted
a higher operating profit. DSM Agro sold slightly higher volumes at much
higher prices. DSM Melamine improved its margins as selling prices increased
more than feedstock costs. The operating profit of DSM Energy increased
because of the higher production output and higher prices for oil and natural
gas. DSM Elastomers’ operating profit decreased as higher sales volumes could
not completely compensate for the lower margins caused by higher feedstock
costs and the lower US dollar.
Other activities
The operating profit for Other activities was
lower than in Q1 2007. The main reasons were much higher costs for share-based
payments (because of the share-price development) and higher innovation
expenditure.
3.1 DSM announces good start to the year and raises expectations for full
year 2008
At the Annual General Meeting being held on 26 March 2008, DSM provided a
trading update for 2008.
The firm demand and pricing strength seen in most of DSM's markets in the
fourth quarter of 2007 has been sustained into 2008. DSM's strong market
positions have enabled it to increase prices, particularly in the nutrition
business which is benefiting both from DSM's differentiation strategies as
well as higher market prices in general.
Strong business trends were
also seen across other parts of DSM, particularly in Performance Materials,
Fibre Intermediates and Agro. On top of this, profitability has benefited from
a very good manufacturing and operational performance.
Based on the currently available information, DSM expects that the Q1
operating profit before exceptional items will be approximately 20% higher
than in Q1 2007 (EUR 192 million). Barring unforeseen economic circumstances,
for the full year 2008 DSM now expects the operating profit before exceptional
items to most likely exceed the level achieved in 2007, despite the current
significantly weaker US dollar and increased raw material prices.
Feike Sijbesma, Chairman of the DSM Managing Board, commented:
"The
current year has started strongly with firm demand being seen across most of
our markets. DSM's performance is a clear indication of the higher quality
earnings now being achieved as a result of the changes made to the profile and
portfolio of the Company."
3.2 DSM's outlook as per 29 April 2008
DSM experienced strong
demand and pricing strength in most of its markets during the first quarter.
DSM sees the following trends in its clusters:
-
In Nutrition higher sales volumes are expected to be sustained, but growth
rates will gradually come down approaching market growth, since market share
increased already in the course of 2007. Continued good pricing strength is
expected as a result of our successful differentiation activities, higher
costs at our competitors and tight supply in several key products.
-
In Pharma, the result of DSM Pharmaceutical Products is expected to recover
from the weak first quarter. Anti-Infectives’ pricing is currently in an
upward trend, but is expected to remain on average below last year’s level.
-
The Performance Materials cluster is developing at a steady positive pace and
will benefit from the start-up of several new plants later this year.
-
In Polymer Intermediates (also supplying to Performance Materials) there is a
tight market, facilitated by a very strong demand, especially in China. DSM
does not foresee a short-term shift in these conditions.
-
The dominant driver in Base Chemicals and Materials is fertilizers. The
prolonged restructuring of the fertilizer industry and currently strong
agricultural markets have resulted in a shift in the demand-supply balance,
resulting in clearly higher prices.
The current macro-economic outlook is very uncertain. The positive business
conditions could be affected by a global negative macro-economic trend.
However, in its transformation process to a Life Sciences and Materials
Sciences company, DSM has developed a much higher resilience to the business
cycle, which is now becoming visible in Nutrition, Performance Materials and
Pharma.
As a result DSM remains positive about the remainder of the year, in spite of
a weakening US dollar and high feedstock and energy prices.
Based on the currently available information and barring unforeseen
circumstances, DSM expects that the operating profit from continuing
operations and before exceptional items in 2008 will be EUR 870 million, plus
or minus 5%.
4. DSM’s dividend policy
As part of the acceleration of
the
Vision 2010 – Building on Strengths strategy, DSM announced a
new dividend policy. This policy
reflects the transformation of DSM’s portfolio and consequently the increased
profit stability. DSM aims to provide a stable and preferably rising dividend.
The DSM Annual General Meeting of Shareholders on 26 March 2008 passed a
resolution to declare a dividend for 2007 of EUR 1.20 per ordinary share of
EUR 1.50 par value. An interim dividend of EUR 0.33 per ordinary share having
been paid on 22 August 2007, the final dividend for 2007 will amount to EUR
0.87 per ordinary share. Dividends are paid entirely in cash.
The Annual General Meeting of shareholders decides on the final dividend. The
Ex-dividend date is second businessdays after the AGM. The dividend record
date is three businessdays after the AGM. This final dividend of EUR 0.87 will
be paid out entirely in cash, after deduction of 15% dividend tax, and will be
made payable from 24 April 2008.
Barring unforeseen circumstances DSM pays an interim dividend to holders of
ordinary shares after the results of the first half year have been published.
This interim dividend is set at one third of the total dividend over the
previous year and gives no indication for the total dividend to be paid over
the running year. The ex-dividend date is the day after publication of the H1
results. The dividend record date is three businessdays after the day of the
publication of the H1 results.
5. DSM and the Dutch corporate governance code
The publication
of the Dutch
corporate governance code (Tabaksblat code) represents an important
milestone in the evolution of corporate governance in the Netherlands. DSM
took advantage of the opportunity to comment on the draft version of the code
of practice, pointing out that it should not diverge too much from the rules
and views prevailing in other relevant countries, such as the USA and the UK,
and should not contain overly detailed regulations. A large proportion of
DSM’s suggestions were incorporated in the final version of the code of
practice published at the end of 2003.
We used the time available to us in 2004 to further analyze the code’s
practical implications for DSM, and to make and implement plans for complying
with its provisions. In fact, many of the Code’s Principles and Best-Practice
provisions were already common practice at DSM. For example, our annual report
already contained a description of our principles on corporate governance, we
had for some time exercised a great deal of transparency regarding the
publication of information on the remuneration of the members of the Managing
Board, we had already adopted a set of regulations and a profile for the
members of the Supervisory Board, and the annual report already included a
report compiled entirely independently by the Supervisory Board on its
activities during the past year.
Also, we had already asked our shareholders to authorize us to introduce a
registration date system for shareholders wishing to attend the annual general
meetings of shareholders. We used this system for the first time in 2004.
Assessing and managing business risks was already an issue to which we
attached high priority. In 2004, we focused on further structuring our efforts
in this field, mainly by formulating requirements, procedures and internal
control mechanisms, and of course by analyzing company-specific risks and
taking measures to avoid these risks or minimize any adverse consequences they
might have.
The annual report contains a detailed description of our business risks and
the way in which we manage and control these risks. This extensive reporting
is one of the consequences of the way in which we have chosen to implement the
Tabaksblat code.
6. DSM and Risk management
The Managing Board of Royal DSM N.V.
is responsible for the design and effectiveness of the company’s internal risk
management and control systems. The purpose of these systems is to identify
any significant risks to which the company is exposed and enable the effective
management of these risks. However, these systems can never provide absolute
assurance regarding the achievement of corporate objectives and can never
entirely prevent the occurrence of material errors, losses, cases of fraud or
the violation of laws or regulations.
Every year the Managing Board undertakes a Corporate Risk Assessment (CRA). In
2004 it performed a CRA in which three major risk areas were identified: (1)
the entry of Chinese low cost competitors into DSM markets, (2) the company’s
capacity for organic growth via innovation and (3) the availability of
sufficient high-calibre managers and professionals to safeguard the future
development of DSM. It was decided to further investigate these three topics.
The review results will be important input for the new Corporate Strategy
Dialogue (CSD) that took place in 2005.
In 2004 we carried out an independent and systematic analysis and review of
the control environment and relevant risks to which the DSM organization might
be exposed. We also reviewed the effectiveness of the risk management and
control systems that are being used by the various units. The managements of
the relevant units carried out similar evaluations and reported the results.
We regularly discussed these results with the respective units. We discussed a
summary of all risks and the associated risk management and control activities
with the Audit Committee and the Supervisory Board.
Based on the activities reported in the risk management section we believe, to
the best of our knowledge, that we can assert with reasonable assurance that
the internal risk management and control system of Royal DSM N.V. was
effective during the 2004 financial year.
7. Generic risks
Being a global company, DSM is subject to the
usual business risks associated with macroeconomic trends, the emergence of
new competition, exchange rate fluctuations, raw material price changes,
fluctuations in supply and demand, and the speed with which new technologies
and products are introduced and accepted.
DSM operates in many different business segments with contingent risk profiles
reflecting the different business environments, the diverse nature of the
businesses and the distinctive competitive positions those businesses target
for. DSM’s Vision 2005 strategy has reduced the cyclical element, but a
substantial portion of its activities – typically the Industrial Chemicals
cluster but also some businesses in the other clusters, together representing
approximately 40% of total revenue – may experience material fluctuation in
sales and results due to changes in general market conditions, supply-driven
overcapacity, economic conditions, currency exchange rate fluctuations or
other factors.
The entry of foreign low cost competitors (typically Chinese and Indian) into
DSM’s core markets may challenge the company’s position.
DSM has subsidiaries in more than 35 countries. These subsidiaries can be
exposed to changes in government regulations and potentially unfavourable
political developments that may hamper the exploitation of certain
opportunities or may impair the value of the local business.
8. Currency risk
All DSM sales that are priced in currencies
other than the euro are subject to economic transaction and/or translation
risks that may strongly impact the financial results, as the company’s
reporting unit is the euro.
DSM’s aim is to mitigate its currency exposure by developing sales in certain
regions, through product mix improvements, by relocating manufacturing
activities and by increased dollar-based purchasing. However, these ‘natural
hedges’ never work perfectly. The volatility of the US dollar in relation to
the euro and the Swiss Franc can have a significant impact on the company’s
results. Although the production base still has its centre of gravity in
Europe, a large portion of DSM’s product sales is in US dollars or is based on
US dollar priced world markets. Consequently, from a currency perspective
there is a mismatch between revenue and costs. In the 2004 business mix a 1%
change in the euro-dollar rate has a € 5-8 million impact on gross margin
level (=sales minus variable costs), whereas a 1% change in the Swiss franc-US
dollar rate has an annual effect of 3 to 5 million Swiss francs. Fluctuations
in the relative values of other currencies (such as the Yen or the pound
sterling) have a limited impact on DSM results.
9. Financial risk
Additional financial risks include commodity
risk, credit risk, tax risk, pension risk and country risk. The major credit
rating agencies may change their assessments on DSM creditworthiness, thereby
affecting the company’s borrowing capacity and/or the conditions under which
it can borrow money and causing fluctuations in the cost of finance. The
company aims to keep its ‘A’ credit rating.
10. DSM’s financial policy
Given the dynamic nature of
DSM’s markets, it has always been important for the company to have a strong
financial position. This gives DSM the financial resilience to continue
pursuing its strategic goals even during economic downturns. DSM aims for a
net debt that is less than 40% of group equity plus net debt and an operating
profit before amortization and depreciation (EBITDA), which is at least 8.5
times the balance of financial income and expense. This underlines the
company’s aim of maintaining its ’A’ long-term credit rating. DSM aims to
achieve a cash flow return on investment (CFROI) which is higher than the
weighted average cost of capital (WACC).
