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 was to achieve a cash flow return on investment (CFROI) which exceeded the weighted average cost of capital (WACC) by at least 100 basis points in normal times. This target was achieved in 4 out of 5 years of the strategy period. The financial crisis and the subsequent economic downturn necessitated tough measures to manage cash, working capital and costs. Strict management of operating working capital, especially during the downturn in 2009, together with the divestments, resulted in record cash generation over the Vision 2010 period.
For the next strategic period ambitious return targets have been set. For 2013 an increase in EBITDA to a level of €1.4 to €1.6 billion and an increase in the Return on Capital Employed to more than 15% are aimed at.
DSM targets a gearing which is below 30% of 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. Furthermore, funds from operations needs to be at least 30% of net debt in accordance with the definitions of the major credit rating agencies. This underlines the company's aim of maintaining its Single A long-term credit rating. Under certain circumstances the gearing could be raised to a level of between 30% and 40%, provided that the boundaries at the desired Single A credit rating remain attainable.
Most of DSM's external funding needs are financed through long-term debt. Debt covenants are not included in the terms and conditions of outstanding bonds and financing arrangements. DSM aims to spread the maturity profile of outstanding bonds in order to have adequate financial flexibility. DSM has a commercial paper program of €1,500 million and two committed credit facilities of in total €900 million, consisting of €500 million (until October 2012) and €400 million (until April 2013).
An important element of DSM’s financial strategy is the allocation of cash flow. DSM primarily allocates cash flow to investments aimed at strengthening its business positions and to dividend payments to its shareholders. The cash flow is further used for acquisitions and partnerships to strengthen DSM's competencies and market positions in Life Sciences and Materials Sciences supported by the other three strategic growth drivers: High Growth Economies, Innovation and Sustainability. As the occasion arises, the company may choose to return cash to shareholders if excess cash is available over a longer period to such an extent that the above cash flow priorities can be satisfied without a reduction in gearing towards a level of 30%.
DSM aims to provide a stable and preferably rising dividend. In order to avoid dilution of earnings per share as a result of the exercise of management and employee options, DSM buys back shares insofar as this is desirable and feasible.
It is DSM’s policy to hedge 100% of the currency risks resulting from sales and purchases at the moment of recognition of the trade receivables and trade payables. In addition, operating companies may – under strict conditions – opt for hedging currency risks from firm commitments and forecasted transactions. The currencies giving rise to these risks are primarily USD and JPY. The risks arising from currency exposures are regularly reviewed and hedged when appropriate.
Important acquisition criteria are strategic fit and financial condition. A business or partner should add value to DSM in terms of technological and/or market competencies. Acquired companies are in principle required to contribute to DSM's cash earnings per share from the very beginning and to meet the company's profitability, sustainability and growth requirements. There are however exceptions to this rule; the requirement may for instance not be appropriate in the case of small innovative growth acquisitions.
DSM's policy in the various sub-disciplines of the finance function is strongly oriented towards solidity, reliability and optimum protection of cash flows. The finance function plays an important role in business steering.