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 has changed 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.
2. DSM provides 2008 comparative figures and comparative figures
On 29 July 2009 Royal DSM N.V. provides the investment community with comparative quarterly figures for 2008 and Q1 2009. These comparative figures reflect the reclassification of DSM Energy and Stamicarbon from the Base Chemicals & Materials cluster to discontinued operations as well as the reclassification of DSM’s participation in Noordgastransport from Other activities to Discontinued operations. These reclassifications follow on the announced intended disposals of these businesses. Press Release
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3. Financial results Q3 2009
See page Financial Results
4. Outlook per 3 November 2009
During Q3 2009 DSM saw a continuation of the trends that were visible at the end of the second quarter with ongoing robust performance in Nutrition and a further improvement in Materials Sciences. Despite the improved performance in Q3 2009 compared to the previous quarter, demand is still fragile and the economic outlook remains uncertain. The movements in inventories in the value chain as well as the development of end-demand are difficult to separate and predict. DSM will continue to focus on cash and cost, whilst maintaining its strategic commitment to customers, innovation and sustainability.
It is expected that the current business conditions in Nutrition will remain strong with an ongoing increase in demand and sustained price levels in both the food and feed markets. The Nutrition cluster is expected to achieve full year results somewhat above the 2008 level.
Pharma results are expected to be substantially lower than last year although the results of DSM Pharmaceutical Products are expected to be strong in the last quarter of the year due to temporary additional demand related to the H1N1 flu.
In Materials Sciences and Base Chemicals and Materials business conditions have clearly improved in Q3 2009 compared to Q2 2009. At this moment there is still limited clarity on demand for the last quarter of the year, which is traditionally a weaker quarter. In addition there are signs that some re-stocking occurred in Q3 2009. Furthermore, feedstock prices remain volatile which might affect margins - positively or negatively. The operating result of Performance Materials is expected to be lower in Q4 2009 compared to Q3 2009. At Polymer Intermediates operating profit is expected to be around break-even in 2009. The Base Chemicals and Materials cluster is expected to be clearly loss-making in 2009.
The outlook for the rest of the year remains uncertain. However, the Q4 operating profit from continuing operations is currently expected to be lower than in Q3 2009, but above Q4 last year.
5. Share buy-back
DSM has decided to cancel the remaining part of EUR 250 million of the share buy-back program of EUR 750 million which was announced in 2007
5a. Cancellation Cumpref C shares
All Cumpref C shares were bought back by DSM on November 28, 2004. All 37.5 mn Cumpref C shares were cancelled on June 3, 2009.
6. DSM’s dividend policy
DSM’s dividend policy is to provide a stable and preferably rising dividend. The DSM Annual General Meeting of Shareholders on 25 March 2009 passed a resolution to declare a dividend for 2008 of EUR 1.20 per ordinary share of EUR 1.50 par value. An interim dividend of EUR 0.40 per ordinary share having been paid on 22 August 2008, the final dividend for 2008 will amount to EUR 0.80 per ordinary share.
This final dividend of EUR 0.80 will be paid out entirely in cash, after deduction of 15% dividend tax, and will be made payable from 21 April 2009. The ex-dividend date on Euronext Amsterdam will be 27 March 2009. The dividend record date is three businessdays after the AGM.
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.
7. 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.
8. DSM and Risk management
The Managing Board is responsible for risk management in the company and has designed and implemented a risk management system. The aim of the system is to ensure that the extent to which the company’s strategic and operational objectives are being achieved is understood, that the company’s reporting is reliable and that the company complies with relevant laws and regulations.
As part of the annual risk management calendar, the Managing Board updated the Corporate Risk Assessment. For this assessment, last year’s list of risks was reviewed and supplemented by information from external and internal risk reports, events and other views and information obtained. These risks were ranked and responses were formulated by the Managing Board. The outcome of the assessment was checked against internal risk reports. The most important risks and responses are reported here:
The impact of the global financial crisis and economic downturn is seen as one of the most important risks for the remainder of the Vision 2010 period. Especially in the end markets for some of the Materials Sciences products an unprecedented decline has occurred, whose depth and duration is still very hard to predict. Although the emerging economies have been less affected, there growth rates have also declined below earlier expectations and prospects have larger uncertainties than before. The financial crisis is making access to cash more difficult and more expensive. The pension reserves have been diminished by the stock price developments; this is expected to have a considerable negative non-cash IFRS EBIT effect in 2009 compared to 2008. DSM's response to the financial and economic downturn covers all of the above aspects and is coordinated by a newly installed dedicated corporate team that works with the full Managing Board and the DSM Leadership Council. The responses include cost cutting measures, reduction of capital expenditure programs, as well as an extra focus on cash and credit management. Opportunities are, however, also investigated and promising innovation initiatives are preserved as much as possible in order to safeguard future growth opportunities.
9. Generic risks
Being a global company, DSM is subject to business risks associated with macroeconomic trends and events. The global financial crisis and economic downturn has become one of the most important risks for the remainder of the Vision 2010 period.
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 2010 aims at further reducing the cyclical element, but a substantial portion of its current activities is still experiencing a material impact in sales and results due to the economic downturn and competition from low cost countries. Margins may erode under the influence of commoditization, a risk that may be aggravated by low global utilization rates.
Political risks
DSM has subsidiaries in more than 45 countries. These subsidiaries can be exposed to changes in government regulations and potentially unfavorable political developments that might hamper the exploitation of certain opportunities or might impair the value of the local business.
10. 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 significantly impact on the financial results, as the company’s reporting unit is the Euro.
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 center of gravity in Europe, a large portion of DSM’s product sales are in US dollars or are based on US-dollar-denominated world-market prices. Consequently, from a currency perspective there is a mismatch between revenue and costs. In the 2008 business mix a 1 cent change in the Euro-US dollar rate and the US dollar-Swiss franc rate has on aggregate a € 6-9 million theoretical impact on gross margin level (=sales minus variable costs). However DSM experiences natural hedges and therefore the impact on gross margin is less and is estimated to be in the range of € 4-6 million.
Fluctuations in the relative values of other currencies (such as the yen) have a limited impact on DSM’s results.
DSM companies are obliged to hedge their open currency positions via the DSM In-house Bank in order to protect the operating result against effects of currency fluctuations. Only under strict conditions are DSM companies allowed to hedge firm commitments in order to protect the cash flow of the contract value against currency fluctuations. Hedging of forecast transactions is only allowed after the approval of the Managing Board.
The long term foreign currency transaction hedging strategy of DSM, adopted in 2007, follows a systematic, risk management oriented approach. Based on the optimal return-risk ratio in the last 17 years DSM decided that a risk appetite of 50% is appropriate and consequently DSM hedges 50% of the risk. DSM will follow this hedging strategy for the US dollar transaction exposure. Each year DSM will determine if currencies other than the US dollar have material impact on the result and, if so, will follow the same approach for these currencies. For 2008 and 2009 the Japanese yen was added. The US dollar and Japanese yen together determine around 93% of the total foreign currency transaction exposure of DSM. End of 2008 DSM has hedged 50% of the US dollar and Japanese yen transaction exposure in 2009.
Due to the fact that a portion of the borrowings are floating interest bearing, fluctuations in the interest rates have an impact on the net result. The impact on the DSM result is capped by the company’s policy of not allowing the floating interest position to exceed 60% of net debt.
11. Financial risk
Financial risks additional to the currency, interest and derivative risk mentioned above include commodity risk, credit risk, tax 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 single-A credit rating.
Description of risks as reported in the Annual Report 2008
12. DSM’s financial policy
As a basis for and contribution to effective risk management and to ensure that the company will be able to pursue its strategies even during periods of economic downturn, DSM retains a strong balance sheet and limits its financial risks. One of the key targets of Vision 2010 is to achieve a cash flow return on investment (CFROI) which exceeds the weighted average cost of capital (WACC) by at least 100 basis points. DSM further aims for a net debt which is between 30 and 40% of equity plus net debt in normal times (currently the objectiveis to stay below 30%) 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 single-A long-term credit rating.
