Vision 2010

The time frame of DSM’s Vision 2010 Building on Strengths strategy has ended. In summary, this strategy built on the company’s track record of portfolio transformation and sharpened its focus on Life Sciences and Materials Sciences at an increased pace, fueled by four main societal trends: climate change, health and wellness, functionality and performance and emerging economies.

A key element of the strategy was to establish Life Sciences and Materials Sciences as business areas that offer attractive growth potential, not just individually but also in combination. The cross-fertilization potential between Life Sciences and Materials Sciences – internally referred to as the X-factor – is high. DSM is convinced that biotechnology, traditionally associated with Life Sciences, will increasingly play a role in developing new, greener and cleaner (bio)materials while at the same time performance materials will increasingly be used in medical applications in the field of Life Sciences.

The Emerging Business Areas (EBAs) create growth platforms that are based on the strengths and synergies of DSM’s positions in Life Sciences and Materials Sciences.

The main building blocks of DSM’s accelerated Vision 2010 transformation, announced in September 2007, included reshaping the portfolio at an increased pace, setting ambitious new targets, introducing measures related to DSM’s shareholders and reinforcing DSM’s Triple P focus.

Apart from clearly exceeding the Vision 2010 target of adding €1 billion in sales through innovation between 2006 and 2010, DSM has also succeeded in increasing the number of product launches.

DSM is now recognized as a technology leader in second-generation biofuels and bio-based materials.

By making a fast, strong and effective response to the changing economic conditions (by focusing on costs, cash and working capital and reducing net debt) whilst at the same time ’staying the course’ (by continuing to concentrate on customers, innovation and DSM’s core value: sustainability) DSM has emerged from the economic downturn as a stronger company, as can be seen from its results.

Reshaping the portfolio

In the past three years, DSM has transformed itself into a focused Life Sciences and Materials Sciences company by divesting non-core businesses and making selective acquisitions.

Divestments

DSM completed the sale of DSM Agro and DSM Melamine to Orascom Construction Industries. The former DSM Agro, now OCI Agro, is a producer of ammonia and high-nitrogen fertilizers for grasslands and agricultural crops and the market leader in the Netherlands. It also ranks among the market leaders in Germany, France and Belgium. The former DSM Melamine, now OCI Melamine, is the world’s largest producer of melamine. In 2009 the two business groups realized combined sales of € 489 million with 779 employees.

DSM sold Citrique Belge to Adcuram (Germany). DSM reported a book loss of around € 40 million as a result of the transaction, although the transaction represented a very reasonable multiple on profits made by the unit. Approximately 250 employees transferred to the new owner upon closing.

The sale of DSM Special Products B.V. to Emerald Performance Materials (owned by an affiliate of Sun Capital Partners) was completed. This unit is the producer of among other things Purox® B and Purox® S, ingredients used in food and feed products as well as in a range of industrial applications. It also produces VevoVitall®, a product for the animal health market that will continue to be sold by DSM Nutritional Products. DSM Special Products employed around 125 people in Rotterdam and Sittard-Geleen (Netherlands). At closing all employees transferred to the new owner.

DSM divested the business unit Thermoplastic Elastomers (Sarlink®), part of the business group DSM Elastomers, to Teknor Apex Company. DSM reported a small book profit as a result of the transaction in Q4 2010. Approximately 90 employees transferred to the new owner upon closing.

DSM also reached an agreement regarding the sale of the remaining part of DSM Elastomers to LANXESS for €310 million on a cash and debt free basis. The intended sale is expected to close in the first few months of 2011, subject to regulatory and other customary approvals and notifications. DSM expects to report a book profit of more than €100 million as a result of the transaction upon closing. Approximately 420 employees will transfer to the new owner upon closing.

The announced divestment of DSM Elastomers represents the final stage of the transformation of DSM that began with the divestment program DSM announced in September 2007 as part of its accelerated Vision 2010 program. Total divestment proceeds – including the proceeds from the intended sale of the remaining part of DSM Elastomers – are expected to be about €1.2 billion.

Acquisitions

In December 2010 DSM and Martek Biosciences Corporation announced that they had entered into a definitive agreement under which DSM will acquire all the outstanding shares of common stock of Martek for USD 31.50 in cash per share for a total consideration of approximately USD 1,087 million. The transaction has been approved by DSM’s Supervisory Board and is recommended by Martek’s Board of Directors.

The tender offer that was the first step in this transaction was successfully completed on 18 February 2011. The transaction is expected to close at the end of February 2011.

The signing of the agreement between DSM and Martek. Front row (left to right): Hugh Welsh (President & General Counsel, DSM North America) , Steve Dubin (Chief Executive Officer, Martek) and Leendert Staal (President and Chief Executive Officer, DSM Nutritional Products).

The acquisition of Martek, a US based producer of high value products from microbial sources that promote health and wellness through nutrition, will be the first major acquisition by DSM after its successful transformation into a Life Sciences and Materials Sciences company.

This transaction is fully in line with DSM’s ‘continued value growth’ strategy for its Nutrition cluster and adds a new growth platform for healthy and natural food ingredients for infant formula and other food and beverage applications, especially focused on polyunsaturated fatty acids such as microbial Omega-3 DHA (docosahexaenoic acid) and Omega-6 ARA (arachidonic acid).

DSM announced its intention to acquire a 51% stake in AGI Corporation of Taiwan (AGI) for about € 48 million through a subscription for newly to be issued shares combined with a public tender offer, subject to AGI corporate approvals and to regulatory and other customary approvals and notifications. AGI offers a broad range of environmentally friendly UV (ultraviolet) curable resins and other products. These products are used in coatings for paper, wood, plastic and graphic arts applications.

DSM acquired full control of the polyamide 6 (PA6) polymerization facility of Nylon Polymer Company LLC (NPC) (Augusta, Georgia, United States). DSM Chemicals North America and Shaw Industries were previously joint venture partners in NPC. For DSM Engineering Plastics the acquisition of the full ownership of the PA6 polymerization facility is an important step in its strategy to increase its geographical footprint, including expansion into South America. It also gives the company full integration in the PA6 chain, including caprolactam, polymer and compounded products, in North America.

DSM Engineering Plastics completed the acquisition of Mitsubishi Chemical Corporation’s Novamid™ polyamide business in exchange for DSM’s Xantar® polycarbonate business. Both businesses have an annual net sales level of approximately € 90 million. For both companies the swap of activities provides a strong strategic fit.

DSM Biologics, a business unit of DSM Pharmaceutical Products, acquired the assets and associated business of the Rhobust™ technology from Upfront Chromatography A/S (Denmark) for pharmaceutical and other applications. As a result of the acquisition, DSM Biologics gained all rights for the commercialization of the Rhobust™ technology in various fields, including the pharma industry.

DSM Nutritional Products acquired Microbia, Inc. (Lexington, Massachusetts, United States) from Ironwood Pharmaceuticals, Inc. Microbia is a successful industrial biotechnology research and development specialist. It has developed a highly effective technology platform that enables it to produce high-quality, natural carotenoids (including betacarotene and canthaxanthin), nutritional products and other specialty materials and chemicals from renewable resources.

Partnerships

DSM reached an agreement with Sinochem Group to form a 50/50 global joint venture for its business group DSM Anti-Infectives. The transaction is subject to receipt of regulatory approvals (including approvals from regulatory authorities in China) and customary clearances from competition authorities in the European Union and elsewhere. In addition, DSM's works councils will be requested to render advice in relation to the proposed transaction. The parties anticipate closing to take place in Q2 2011. Upon closing, the transaction will have retro-active effect to 1 January 2011.

Mr. Pan Zhengyi (left), Member of the Party Committee and Vice President of Sinochem Group, and DSM's Hein Schreuder, Executive Vice President Corporate Strategy & Acquisitions, shaking hands after the signing of the DSM/Sinochem joint venture agreement

As part of the joint venture agreement, Sinochem Group will take a 50% equity interest in DSM Anti-Infectives for a total cash consideration of € 210 million on a cash and debt free basis.

The joint venture will be headquartered in Asia. Current DSM Anti-Infectives employees, in total around 2,000 people globally, will be part of the new entity. The joint venture will include all of the current DSM Anti-Infectives activities across the world.

DSM and Roquette Frères, the global starch and starch-derivatives company, signed a joint venture agreement for the production, commercialization and market development of bio-based succinic acid, subject to regulatory approvals and notifications. The formation of the joint venture is a new step following the successful cooperation between DSM and Roquette pursuant to a joint development agreement.

Since early 2008 the two companies have been working together to develop fermentative technology to produce bio-based succinic acid. The first testing volumes of this renewable and versatile chemical building block – used in the manufacture of polymers, resins and many other products – have already been produced in a demonstration plant in Lestrem (France) that was built in 2009. The positive results from this cooperation have led to the establishment of the joint venture.

DSM and Dutch biopharmaceutical company Crucell N.V., currently in the process of being taken over by Johnson & Johnson, announced an expansion of the activities in their existing joint venture, the PERCIVIA PER.C6® Development Center (Cambridge, Massachusetts, United States), to transform the company from a development center into a full biopharmaceutical company for the development of PER.C6®-based bio-better proteins and monoclonal antibodies as well as global licensing of the PER.C6® human cell line for the production of third party monoclonal antibodies and other proteins. The joint venture, in which DSM and Crucell each hold an equal equity share, will be known as PERCIVIA LLC.

DSM Biologics signed preliminary agreements to enter into a partnership with the Australian Governments (Queensland State Government and the Commonwealth of Australia) to design, build and operate the first major Australia-based mammalian biopharmaceutical manufacturing facility, which will be located in Brisbane. The over 70,000 square foot facility will offer mammalian process development and cGMP (current Good Manufacturing Practices) clinical and commercial manufacturing services. The Australian Governments will provide the full financial funding for the facility, which is part of the Queensland 10 year Biotechnology Strategic Plan. DSM will provide no capital but will provide technological expertise to design and set up the facilities and will employ its proprietary technologies in its operation.

DSM and DuPont announced an agreement to form a joint venture to develop, manufacture and market advanced surgical biomedical materials, pending European Union regulatory approval. The joint venture will be named Actamax Surgical Materials LLC. Under the joint venture agreement, DSM and DuPont will each have a 50 percent share.

The joint venture will address the market for surgical sealants, adhesion barriers and tissue adhesives. This is a large and underserved market of over 100 million annual surgical procedures worldwide. The outcome of many surgical procedures could be positively impacted using next-generation materials under development by the joint venture.

Measuring performance

In the period 2006-2010 DSM gave its portfolio a greater and clearer focus. At the same time, it successfully completed its Vision 2010 strategy, despite the most severe economic downturn of the last 70 years.

The targets in the accelerated Vision 2010 strategy were set assuming that there would be no adverse general economic and trading conditions affecting DSM specifically.

DSM has achieved most, though not all, of the targets as set out in Accelerated Vision 2010, including the target for sales in China, sales from innovation, the profitability margin for Nutrition and the sustainability targets. A target that DSM did not achieve, however, is the profitability margin target for the Pharma cluster, which has faced considerable challenges and a changing marketplace over the last few years. The profitability margins for the Performance Materials and Polymer Intermediates clusters increased in 2010 but the targets were not fully achieved although the EBITDA margin of Polymer Intermediates in 2010 was above the target set for the whole Vision 2010 period.

The following table shows the Vision 2010 targets and progress against these targets in 2010.

Vision 2010 targets
 
Actual 2010
Target 2010
     
Organic sales growth
19%1
> 5% per year
on average
EBITDA / net sales margin per cluster:
- Nutrition
23.4%
> 18%
- Pharma
8.8%
> 19%
- Performance Materials
11.9%
> 17%
- Polymer Intermediates2
16.4%
> 13%
Growth from innovation
€1.3 billon
€1 billion
Sales in China
USD 1.6 billion
USD 1.5 billion
CFROI4
9.2%
WACC (7.5%) + 100 basis points
Sustainability
all achieved
 
- Retaining top position in important sustainability rankings
- Achieving leadership in industrial (white) biotechnology
- Continuously improving eco-footprint
- Increasing diversity of workforce
- Reducing energy usage per unit of product by 8% over the period 2005-2010
   
Total shareholder return
130% vs. 146% for peer group3
Above peer group average
1 Average over the period 2006-2010: 5%
2 On average over the cycle 2006-2010: 9.2%
3 Total shareholder return 2006-2010 DSM: 131%, peer group: 151%. The peer group consists of AkzoNobel, BASF, Clariant, Danisco, DuPont, EMS Chemie Holding, Kerry, LANXESS, Lonza Group, Novozymes, Rhodia and Solvay
4 Achieved in four out of five years during the Vision 2010 period
Shareholder returns

An overview of the development of the DSM share in 2010 can be found in Information about the DSM share.

The company proposes to the Annual General Meeting of Shareholders to declare an increased dividend per ordinary share of €1.35, of which €0.40 has already been paid as an interim dividend. This is 12.5% more than the dividend for 2009. More information about DSM's dividend can be found in Profit in 2010 and in Information about the DSM share.

Market-driven growth and innovation

Market-driven growth and innovation was a key driver of DSM’s Vision 2010 strategy and contributed significantly to growth. Organic sales growth from continuing operations in 2010 amounted to 19%, of which 13% as a result of higher volumes and 6% due to higher prices. Over the period 2006-2010, average organic sales growth amounted to 5%.

DSM is proud to have clearly exceeded its Vision 2010 target of generating an additional €1 billion in sales from innovation by 2010 compared to 2005. In 2010 innovation-driven sales were about €1,280 million compared to about €810 million in 2009.

An additional objective was that DSM should become an intrinsically innovative company, with excellent innovation practices and an above-average return on innovation investments and with employees to whom innovation comes naturally. More information on DSM’s progress in Innovation.

Increased presence in emerging economies

DSM continued its growth in emerging economies. As a percentage of total revenues, sales in emerging economies (Central and Eastern Europe, Latin America, China and Emerging Asia Pacific) increased from 32% in 2009 to 36% in 2010. In 2005 this percentage was 20%. As part of its new corporate strategy, DSM will report on high growth economies as of 2011. High growth economies are here understood to be high-GDP-growth economies.

Although there are clearly differences between the various high growth economies, DSM’s increased focus on these countries has been paying off.

Night view of the Pudong district of Shanghai (China)

In China, DSM has had a significant presence for a number of years. China is changing very rapidly, transforming from the world’s manufacturing base into one of the world’s leading economies with the highest growth rates and with innovation playing an increasing role. China has become one of the largest markets in the world, accompanied by an increasing demand for Life Sciences and Materials Sciences products.

Economic prosperity and strong domestic demand, driven by a fast-rising income level, are expected to fuel economic growth for the coming decades. In 1998, DSM reported less than USD 100 million in sales in China. In 2005 sales had increased more than sixfold to over USD 600 million.

Over the last few years DSM has been experiencing growth rates in China of around 20% per year on average. Sales in China in 2010 amounted to USD 1,631 million, 37% more than in 2009 and a new record for the company. DSM is proud that it exceeded the sales target of USD 1.5 billion that it had set for 2010. The target was increased from USD 1.0 billion in 2007. The company intends to further increase its sales in China by 2015 to over USD 3.0 billion.

Sales in China

DSM continued to invest in China in 2010. DSM Nutritional Products inaugurated its fourth premix plant in Changchun city, Jilin province. This new plant in North East China extends DSM’s previous premix manufacturing reach of East China (Shanghai), North China (Shandong) and South China (Hunan).

DSM also signed a framework agreement with Chengdu Modern Industry Park for investment in their next and fifth premix plant in Pixian County, Sichuan. Construction of this plant began in the third quarter of 2010. The plant is anticipated to be operational in the third quarter of 2011.

DSM Composite Resins boosted its innovation capabilities in China by opening a new Research & Development Center at the DSM Campus facility in Shanghai. The new Shanghai center officially opened in November 2010 and follows a previous expansion of DSM Composite Resins’ existing technical services facility in Nanjing.

The new Shanghai Composite Resins R&D center has full research capabilities ranging from resin formulation to composite application developments with highly qualified technical staff. Moreover, it will be the global center of excellence for pultrusion and FST (Flammability, Smoke generation, and Toxicity performance) developments.

Developments in India and Brazil were positive and the various DSM businesses active in these countries showed a good performance. Russia, too, showed positive signs throughout the year.

In January 2011 DSM and KuibyshevAzot OJSC (KA) announced a strategic cooperation. As a result of this strategic cooperation, DSM Engineering Plastics will enter into two joint ventures with KA. In both joint ventures DSM Engineering Plastics will hold a majority share. In addition, KA will be granted a license under DSM Fibre Intermediates’ technology for the production of cyclohexanone.

The two joint ventures of DSM Engineering Plastics and KA relate to marketing and sales of engineering plastics in Russia and other members of the Commonwealth of Independent States (CIS) and secondly to the production of engineering plastics compounds in a plant located in Togliatti (Russia). The strategic cooperation between DSM and KA will also result in a license grant under DSM’s proprietary cyclohexanone technology to be applied at KA’s Togliatti caprolactam plant, resulting in a further increase of its capacity to meet the growing demand for this polyamide 6 intermediate.

DSM Nutritional Products signed a joint venture agreement with Tatenergo JSC (Republic of Tatarstan) for the construction of an Animal Nutrition & Health premix plant in the Republic of Tatarstan. This is another step confirming DSM’s commitment to expanding its worldwide presence in micronutrient premixes and business development in the Russian Federation.

DSM Engineering Plastics and the Automotive Research Association of India announced their alliance to synergize their strengths in supporting the automotive industry in India. This alliance will provide sustainable solutions for the automotive industry through the shared knowledge of both companies in understanding industry requirements and their interaction with applications and materials.

DSM Composite Resins and Kemrock Industries & Exports signed a Memorandum of Understanding to form a joint venture for manufacturing unsaturated polyester and vinyl ester specialty resins in India. Through the alliance with DSM, Kemrock will be able to fortify its expertise in composite manufacturing and align it to global standards. DSM will strengthen its presence in India and leverage its depth of technological knowledge and global customer relationships.

DSM acquired the unsaturated polyester resins business of Dyo Boya Fabrikalari Sanayi ve Tic. A.S. (DYO) in Turkey. In addition both parties have signed a long term tolling agreement to support local manufacturing of the DSM specialty unsaturated polyester resins portfolio for the Turkish markets.

Operational excellence

Operational excellence is an important focus area in the pursuit of sustainable value creation. DSM has a strong track record in establishing efficiency enhancements that represent major changes in performance and add to the bottom line. Several initiatives and programs are in place to help the businesses focus on cash and to improve cost efficiencies as well as margins.

Some examples of initiatives and programs are those dedicated to:

  • pricing excellence and customer segmentation;
  • generating cash by compressing the cash conversion cycle;
  • asset utilization and operational efficiency;
  • increasing purchasing performance and spend control in indirect spend (technical goods and services, facility goods and services, ICT and logistics).

In addition, functional excellence initiatives will also be deployed to support the growth drivers. The Functional Excellence groups will ensure that DSM operates on or above par with peers, and that the knowledge available in the company is leveraged. These programs are yielding benefits not only individually, but also in synergy. Reliable plant performance for instance will reduce the required level of safety stock.

In response to the economic downturn in 2009, DSM implemented tough measures to manage cash and working capital and to reduce costs. This involved the reduction of the global workforce by approximately 1,200 positions and cost savings of more than €200 million per year.

In 2010 DSM’s operating working capital (continuing operations) increased in absolute terms to €1,487 million, but decreased as a percentage of net sales to 17.9%, from 18.6% in 2009. DSM aspires to keep operating working capital as a percentage of net sales below 19%. Cash provided by operating activities amounted to €1,103 million in 2010.