Koninklijke DSM N.V. Annual Report 2006

FY2006 Annual Report · Koninklijke DSM N.V.

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Royal DSM N.V.
Annual Report 2006

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DSM Profile

DSM is active worldwide in nutritional and pharma
ingredients, performance materials and industrial
chemicals. The company develops, produces and
sells innovative products and services that help
improve the quality of life. DSM’s products are used in
a wide range of end-markets and applications, such
as human and animal nutrition and health, personal
care, pharmaceuticals, automotive and transport,
coatings and paint, housing and electrics & electronics
(E&E). DSM’s strategy, named Vision 2010 – Building
on Strengths, focuses on accelerating profitable and
innovative growth of the company’s specialties portfolio.
The key drivers of this strategy are market-driven
growth and innovation plus an increased presence
in emerging economies. The group has annual sales
of over €8 billion and employs some 22,000 people
worldwide. DSM ranks among the global leaders in
many of its fields. The company is headquartered in
the Netherlands, with locations in Europe, Asia, Africa,
Australia and the Americas.

More information about DSM can be found at www.dsm.com.

Annual Report 2005

www.dsm.com

DSM at a glance
DSM’s activities have been grouped into business groups representing coherent
product / market combinations. The business group directors report directly to the
Managing Board.

Nutrition
€2,407m

Pharma
€916m

DSM Nutritional Products
DSM Nutritional Products is the world’s largest supplier of nutri-
tional ingredients, such as vitamins, carotenoids (anti-oxidants
and pigments), other biochemicals and fine chemicals, and
premixes.

DSM Pharmaceutical Products
DSM Pharmaceutical Products is one of the world’s leading
providers of high quality global custom manufacturing services
to the pharmaceutical, biotech and agrochemical industries.

DSM Anti-Infectives
DSM Anti-Infectives holds global leadership positions in
penicillin G, penicillin intermediates (6-APA and 7-ADCA), side
chains, semi-synthetic penicillins, semi-synthetic cefalosporins
and other active ingredients, such as potassium clavulanate
and nystatin.

- Human Nutrition and Health
Producer of functional food ingredients for the food industries
and personal care ingredients for cosmetics and skin care
product manufacturers.

- Animal Nutrition and Health
World market leader in vitamins, carotenoids and feed enzymes
for the feed industry. Products: animal performance products
(e.g. for gut flora, bone health).

DSM Food Specialties
DSM Food Specialties is a global supplier of advanced ingre-
dients for the food industry manufactured with the aid of fer-
mentation and enzyme technology, among other technologies,
based on in-depth application knowledge of the chosen market
segments.

DSM Special Products
DSM Special Products produces benzoic acid, sodium ben-
zoate, benzaldehyde and benzyl alcohol. Its products such as
Purox®S, Purox®B and VevoVitall® are widely recognized for
their purity and quality. The business group supplies to a wide
range of markets, including the markets for carbonated soft
drinks, food, animal feed, plasticizers, resins, cosmetics, per-
sonal care, flavors and fragrances, as well as a diverse range of
industrial applications.

Supplies 2006 (x (cid:37) million)
DSM Nutritional Products:
1. Animal Nutrition and Health
2. Human Nutrition and Health
3. DSM Food Specialties
4. DSM Special Products
Total

1,091
867
411
94
2,463

Supplies 2006 (x (cid:37) million)
1. DSM Pharmaceutical Products 605
362
2. DSM Anti-Infectives
967
Total

EBITDA / Net sales (as a %)

2005

2006

2005

2006

• 0

• 5

• 10

• 15

• 20

• 0

• 5

• 10

• 15

• 20

Annual Report 2005

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For reporting purposes the activities are grouped into four strategic clusters: Nutrition,
Pharma, Performance Materials and Industrial Chemicals. In addition, DSM reports on
a number of other activities, which have been grouped under Other activities.

Performance Materials
€2,753m

Industrial Chemicals
€1,872m

DSM Fibre Intermediates
DSM Fibre Intermediates produces caprolactam and
acrylonitrile, which are raw materials for synthetic fibers and
plastics. Caprolactam is the raw material for nylon 6, a versatile
material that is used in sports and leisure clothes, military
equipment, tires and carpets. It is increasingly used as a
high-performance construction material in, for example, the
electronics and automotive industries, in packaging materials
and in medical applications.

DSM Melamine
DSM Melamine produces melamine, a product used in
impregnating resins and adhesive resins for the wood-
processing industry. Applications include laminate flooring,
flame retardants, bank notes, car paints and durable plastic
tableware.

DSM Agro
DSM Agro produces ammonia and nitrogen fertilizers for
grasslands and agricultural crops, which it supplies mainly to
agricultural wholesalers.

DSM Energy
DSM Energy participates in the exploration and production of
oil and gas on the Dutch Continental Shelf.

DSM Engineering Plastics
DSM Engineering Plastics is a global player in polyamides,
polyesters, polycarbonate, Ultra-High Molecular Weight
Polyethylene and extrudable adhesive resins. These materials
are used mainly in technical components for the electrics &
electronics, automotive, engineering and packaging industries.

DSM Dyneema
Dyneema®, DSM’s high-modulus polyethylene fiber which is
the strongest fiber in the world on a weight-for-weight basis,
was invented and developed by DSM and is an important
component in ropes, cables and nets in the fishing, shipping
and offshore industries. Dyneema® is also used in safety
gloves for the metalworking industry and in fine yarns for
applications in sporting goods and the medical sector. In
addition, it is applied in bullet-resistant armor and clothing for
law enforcement personnel and the military.

DSM Resins
DSM Resins consists of four business units:
• DSM Coating Resins specializes in the development,

manufacture and marketing of resins for coating systems and
is one of the global leaders in powder coating resins used in
industrial applications.

• DSM NeoResins is a leading global supplier of innovative
waterborne resins, suited to the needs of the coatings,
adhesives and graphic arts industries.

• DSM Desotech is a leading producer of specialty UV-curable
coatings and resins and is the market leader in the supply of
coatings for optical fibers and inks and matrix resins that are
used in fiber optic cables.

• DSM Composite Resins manufactures unsaturated
polyester resins for marine, leisure, construction and
automotive applications.

DSM Elastomers
DSM Elastomers manufactures synthetic rubbers (EPDM) and
thermoplastic elastomers (TPVs) for use in cars, white goods,
various industrial products, construction materials and as
motor-oil additives.

Supplies 2006 (x (cid:37) million)
1. DSM Engineering Plastics
(incl. DSM Dyneema)
2. DSM Resins
3. DSM Elastomers
Total

1,005
1,258
496
2,759

Supplies 2006 (x (cid:37) million)
1. DSM Fibre Intermediates
2. DSM Melamine
3. DSM Agro
4. DSM Energy
Total

1,429
215
403
88
2,135

EBITDA / Net sales (as a %)

2005

2006

2005

2006

• 0

• 5

• 10

• 15

• 20

• 0

• 5

• 10

• 15

• 20

Annual Report 2005

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DSM key data for 2006

Net sales,
continuing operations
(x million)

CFROI

Workforce
(at year-end)

€8,352

8.5%

22,156

Operating profit,
continuing operations
(before exceptional items)
(x million)

Net profit,
continuing operations
(before exceptional items)
(x million)

Net profit
(x million)

€835

€551

€547

Capital expenditure

and acquisitions

(x million)

Net earnings
before exceptional items
(per ordinary share)

Dividend
(per ordinary share)

€501

€2.85

€1.00

Forward-looking statements
This annual report contains forward-looking statements. These statements are based on current expectations, estimates and
projections of DSM management and information currently available to the company. The statements involve certain risks and
uncertainties that are difficult to predict and therefore DSM does not guarantee that its expectations will be realized. Furthermore,
DSM has no obligation to update the statements contained in this annual report.

Annual Report 2006

www.dsm.com

DSM is everywhere

Annual Report 2006

www.dsm.com

On 28 September 2006, DSM organized
an Innovation Event for the international
media in Geleen, the Netherlands. During
the event, DSM showed the new products
and applications that are currently being
developed in the fields of performance
materials and nutrition. Even the lunch for
the participants had been prepared with
innovative DSM ingredients.

Annual Report 2006

www.dsm.com

Contents

5 Key financial data

74 Corporate governance, risk management and

6 Message from the Chairman

24 Report by the Managing Board
25 Highlights of 2006
26 Vision 2010 – Building on Strengths one year on
30 Marketing and branding
30 Purchasing
31 Safety, health and the environment
31 Human resources
32 Research and development (R&D)
34
34 Corporate governance
35 Macro-economic review
36 Financial results

ICT

40 Review of business
42 Nutrition
48 Pharma
52 Performance Materials
58
62 Other activities

Industrial Chemicals

64 Report by the Supervisory Board

internal control

74 Organization
74 Dutch corporate governance code
74 Governance framework
75 Risk management system
76 Financial policy
77 Risks

Information about the DSM share

81 Financial statements 2006

82 Consolidated financial statements
82 Summary of significant accounting policies
88 Consolidated overviews
93 Notes to the consolidated financial statements

of Royal DSM N.V.

125 Financial statements of Royal DSM N.V.

134 Other information
134 Auditor’s report
135 Profit appropriation
135 Special statutory rights

66 Corporate organization

136 DSM figures: five-year summary

68 Remuneration policy regarding the Managing Board

139 Explanation of some financial concepts and ratios

and the Supervisory Board

68 Remuneration policy
70 Remuneration 2006

140

Index – Financial statements

Annual Report 2006

www.dsm.com

Key financial data
(consolidated)

Throughout this annual report:

1. Operating profit (EBIT) and EBITDA do not include exceptional items.

2. Net profit before exceptional items is defined as net profit available for profit appropriation (before exceptional items).

Key figures (x € million):
Net sales, continuing operations
Operating profit plus depreciation and amortization, continuing
operations (EBITDA)
Operating profit, continuing operations (EBIT)

Net profit before exceptional items
Net result from exceptional items
Net profit

Depreciation and amortization
Cash flow (net profit plus amortization and depreciation)
Dividend
Capital expenditure (excluding acquisitions)
Acquisitions
Net debt
Shareholders’ equity
Total assets
Capital employed

Per ordinary share in €:
Basic earnings before exceptional items
Basic earnings
Dividend
Shareholders’ equity

Ratios (%):
EBIT / net sales (ROS)
EBITDA / net sales
Operating working capital / net sales
CFROI
Gearing (net debt / equity plus net debt)
Equity / total assets
Cash flow from operating activities / net sales

EBITDA / net finance costs

Workforce:
Year-average workforce
Workforce at 31 December

Annual Report 2006

www.dsm.com

2006

8,352

1,275

835

551

(4)

547

451

998

197

457

921

5,784

10,091

6,303

2.85

2.83

1.00

30.03

10.0

15.3

21.6

8.5

13.6

58.0

7.5

15.7

21,436

22,156

2005

7,816

1,278

787

563

(36)

527

567

1,094

207

401

573

832

5,501

10,114

6,221

2.87

2.68

1.00

27.59

10.1

16.4

24.1

9.1

13.1

55.3

8.9

18.7

22,839

21,820

Message from the Chairman
From transformation to value-adding growth

The DSM Managing Board (from left to right):

Feike Sijbesma, Rolf-Dieter Schwalb, Peter Elverding (chairman),

Nico Gerardu and Jan Zuidam (deputy chairman).

The year 2006 was an important and successful year for DSM.
The company’s operational results exceeded those of the year
2005, and DSM made a good start on the execution of its
ambitious Vision 2010 – Building on Strengths strategy. DSM
has successfully moved from implementing a large-scale
portfolio transformation to the next stage of capturing valuable
growth and further improving the company’s specialty profile.

Net sales growth from continuing operations in 2006 amounted
to 7%, and the operating profit from continuing operations of
€835 million was the highest DSM has ever achieved. The cash
flow return on investment (CFROI) of 8.5% exceeded the
weighted average cost of capital (WACC) by approximately
0.5%, demonstrating that DSM adhered to the overall Vision
2010 objective of value creation.

Having successfully completed our strategy Vision 2005: Focus
& Value, we are now well underway with Vision 2010 – Building
on Strengths. This new strategy focuses on growth and
expansion of the specialty content of our portfolio, accelerated
innovation, expansion in emerging economies, and continued
operational excellence. An evaluation of the first year of Vision
2010 is provided on pages 26-29; it demonstrates that we are
well on track.

In addition to the strategic progress made in 2006, DSM also
took various steps with regard to its financial objectives in the
context of Vision 2010. Towards the end of September we
announced a share buy-back program with a total value of
€750 million, which will increase the company’s gearing to
some 20%. Moreover, we launched a loyalty dividend proposal,
which is yet to be approved by the General Meeting of
Shareholders in 2007, and we also proposed a dividend
reinvestment plan.

Annual Report 2006

www.dsm.com

Message from the Chairman

The year 2006 largely evolved ahead of our plans. Market
conditions were on the whole favorable. Despite high and
volatile costs of raw materials, rising energy prices and
heightened innovation investments, 2006 was a year of clear
progress in our efforts to further pursue value-adding growth.
Without the commitment of our employees in making DSM the
better and stronger multi-specialty company it is today, this
would not have been possible. I would also very much like to
thank our customers and shareholders for their support.

The first full year of our strategy Vision 2010 – Building on
Strengths is now behind us. We look forward knowing that we
have made a good start, ready to take on the challenges on our
way to 2010 in realizing our strategic goals and further
unlocking our company’s potential.

Peter Elverding

Chairman of the Managing Board

In terms of sustainable development we achieved various
milestones, which are described in our Triple P Report for 2006.
We maintained our number one position in the chemicals
sector of the Dow Jones Sustainability World Index, for the third
year in a row. We also take pride in noting that DSM has once
again received recognition for its transparent reporting, both
financial and non-financial, both in print and via the web.

In 2006 we welcomed Mr. Nico Gerardu and Mr. Rolf-Dieter
Schwalb as members of the DSM Managing Board. Mr. Nico
Gerardu has been with DSM for many years and has been
entrusted, among other things, with the task of managing the
Performance Materials cluster. Mr. Rolf-Dieter Schwalb has
been appointed CFO and brings extensive financial experience
to the company.

I have decided, in close consultation with the Supervisory
Board, to step down after having served DSM for eight years as
chairman of the Managing Board. My successor, Mr. Feike
Sijbesma, member of the Managing Board since 2000, is ready
for the task and my retiring will render it possible to further
internationalize the Managing Board and lower its average age.

Over the last several years, DSM has managed to conduct a
profound transformation program and now is further improving
its specialty profile in the context of our Vision 2010 strategy.
I am proud of all the DSM people who are putting their
shoulders under this formidable task.

The Supervisory Board will propose to the Annual General
Meeting of Shareholders on 28 March 2007 to appoint
Mr. Stephan B. Tanda to the Managing Board of DSM with
effect from 1 May 2007 as successor to Mr. Feike Sijbesma.
Mr. Tanda will join DSM on 1 March 2007.

Annual Report 2006

www.dsm.com

Vision 2010 – Building on Strengths

2005

6 October

New strategy Vision 2010 – Building on
Strengths published.

2006

19 January

7 October

DSM appoints Rob van Leen as Chief
Innovation Officer.

8 February

18 October

26 October

DSM announces takeover of Syntech,
a Chinese coating resins producer with
annual sales of USD 30 million.

DSM and North China Pharmaceutical
Corporation (NCPC) strengthen their
partnership.

1 November

DSM invests in expansion of DSM Anti-
Infectives’ production facilities in Toansa
(India).

6 December

DSM Composite Resins announces
the construction of a new sizings plant at
the Xinghuo site in Shanghai (China).

19 December

DSM invests in another production line for
Dyneema® in Greenville, North Carolina (USA).

19 December

DSM Pharmaceutical Products continues
the restructuring of the DSM Pharma
Chemicals and DSM Biologics business
units.

20 December

Dutch biotech company Crucell and DSM
Biologics announce that they will further
strengthen and expand the development of
their Per.C6® technology licensing business.

20 March

30 March

3 April

26 April

24 May

21 June

28 June

29 June

DSM and Sociedad Química y Minera de
Chile (SQM) announce that DSM will sell its
Minera business unit (iodine) to SQM.

DSM announces the construction of
a new process flavors plant in Xinghuo,
Shanghai (China).

DSM Desotech sells its display coatings
business to JSR Corporation.

Holland Sweetener Company withdraws
from the aspartame business.

Annual General Meeting appoints Mr. Nico
Gerardu as member of the Managing Board.

DSM Venturing makes follow-on
investment in Sciona, a US-based
personalized-nutrition company.

DSM Engineering Plastics opens a new
compounding plant in Jiangyin (China).

German researcher Marcus Koch wins the
first prize in the DSM Awards for Chemistry
and Technology 2006.

DSM Venturing invests in Oxford
Performance Materials (OPM), a British
biomaterials specialist.

Crucell and DSM Biologics establish
a joint Per.C6® R&D Center in Cambridge,
Massachusetts (USA).

The acrylonitrile plant in Geleen (Netherlands)
will be debottlenecked to expand its capacity
by 24,000 tonnes per annum.

22 August

DSM Nutritional Products opens a new feed
premix plant in Liaocheng in the Chinese
province of Shandong.

Annual Report 2006

www.dsm.com

4 September

6 September

8 September

DSM Coating Resins concentrates the
production of alkyd resins in the Netherlands
and Spain and closes down the production
plant in Landskrona (Sweden).

According to the Dow Jones Sustainability
World Index, DSM is the worldwide
sustainability leader in the chemical industry
for the third year in a row.

DSM Engineering Plastics announces the
construction of two new plants at the
Chemelot site in Geleen (Netherlands): one
for Stanyl® and one for Stamylan®UH. Total
investment: €100 million.

11 September DSM Venturing invests in Sol-Gel

Technologies Ltd., an early-stage company
committed to safer and more effective
personal care products.

16 November

12 September DSM Dyneema once again expands in

Greenville, North Carolina (USA), bringing the
total number of fiber production lines to ten.

20 November

14 September DSM Engineering Plastics announces that
it will invest in a new plant for Akulon® poly-
amide 6 at the DSM site in Jiangyin (China).

20 September DSM Pharmaceutical Products sells its
pharmaceutical production site in South
Haven, Michigan (USA) to Albemarle.

26 September DSM Venturing acquires a minority stake in
Van Technologies, Inc., USA, a specialist in
environmentally responsible coating resins
technology.

27 September DSM announces a share buy-back

program with a total value of €750 million
and proposes two dividend-related
initiatives: a loyalty dividend and a dividend
reinvestment plan.

29 September DSM Food Specialties takes full ownership

of Swedish company Lipid Technologies
Provider AB (LTP), in which DSM already had
a stake.

19 October

The General Meeting of Shareholders
appoints Rolf-Dieter Schwalb as CFO and
member of the DSM Managing Board.

7 November

8 November

8 December

DSM Venturing invests in IntegraGen, a
French biotechnology company specializing
in genetic tests for rapid diagnosis and better
(personalized) treatment of complex
diseases.

DSM and Crucell open the new Percivia
Per.C6® Development Center in Cambridge
(USA).

DSM announces the construction of a new
plant for waterborne coating resins in
Meppen (Germany).

DSM takes a share of 10% in Micromuscle,
a specialist in electro-active polymers for use
in medical devices and life science product
applications.

DSM announces that Mr. Peter Elverding,
chairman of the DSM Managing Board, will
step down on 1 May 2007 and will be
succeeded by Mr. Feike Sijbesma. The
Supervisory Board proposes to appoint Mr.
Stephan B. Tanda to the Managing Board as
successor to Mr. Feike Sijbesma.

19 December

DSM opens pre-registration for novel loyalty
dividend program.

The above-mentioned announcements are available as corporate press releases on the DSM website.
See www.dsm.com (Media section). For press releases from the business groups, see the DSM homepage
and use the quick link to all DSM websites.

Annual Report 2006

www.dsm.com

Annual Report 2006

www.dsm.com

Theme pages

Brighter
Bright ideas that work

On market-driven growth and innovation, one of the levers
DSM is using to achieve value-adding growth

Wider
Capturing opportunities

On the many initiatives DSM is taking to profit from the
strong demand growth in the emerging economies

Better
More value through higher efficiency

On the wide variety of DSM projects aimed at controlling
costs and creating value

Annual Report 2006

www.dsm.com

Annual Report 2006

www.dsm.com

Brighter

Bright ideas that work

On market-driven growth and innovation,
one of the levers DSM is using to achieve
value-adding growth

Annual Report 2006

www.dsm.com

Brighter: Bright ideas that work

On market-driven growth and innovation, one of the levers
DSM is using to achieve value-adding growth

DSM, with its rich technology base, is pulling out all the stops to achieve
market-driven growth and innovation as part of its Vision 2010 strategy.
To meet the demands and needs of modern society, for example in the
field of healthy nutrition and eco-friendly materials, it is essential to have
the capabilities to improve existing products and introduce breakthrough
innovations on an ongoing basis.

Investing in specialty materials
In 2006 DSM decided to build two new manufacturing facilities at its Chemelot site
in Geleen, the Netherlands, responding to excellent market growth for Stanyl® and
Stamylan® UH, the latter being used among other things as a raw material for Dyneema®.
The plants, each doubling existing production capacity, will come on stream in 2008. The
total investment will be around €100 million.

I Dyneema®, the world's strongest fiber™, is used among other things in the highest fishing-
line segment. Tom Bedell, Board Chairman and owner of Pure Fishing, the producer of Fireline®:
‘Our intensive collaboration in the United States has enabled us to patent and market Fireline®
on the basis of Dyneema®. DSM Dyneema and Pure Fishing support each other in the fields of
innovation, technology and marketing. Together we have made our Fireline® the number one
braided fishing line in the world. If I had to describe our relationship with DSM Dyneema with
one word I would say: magical. It is essential to keep this magic going. We fully trust each other,
share our ideas, innovations and technology, we are in fact working together as if we were a
single company. That's our strength.’

I ‘DSM’s current focus on
performance materials and life science
products means that speed and time-to-
market have become very important.
This calls for partnerships and open
innovation. DSM’s 800-hectare
Chemelot site in Sittard-Geleen
(Netherlands) offers plenty of
opportunities for exactly that. The
takeover of DSM’s petchem business in
2003 by SABIC marked the start of a
diversification wave at Chemelot.

Today – thanks to funds provided by
DSM and others – Chemelot is home to
many different companies. What they
have in common is that they operate in
related industries and are all focused on
growth and innovation.’

Jérôme Verhagen, General Manager of
LIOF, the Limburg Development
Company

I Robert Smulders (DSM Dyneema), Tom Bedell (Pure Fishing) and Rolf van Beeck

(DSM Dyneema) sign a long-term contract during the Olympic Winter games in Turin,
Italy, February 2006.

Annual Report 2006

www.dsm.com

FabulessTM
With society’s increasing focus
on health, weight management is
becoming ever more important.
DSM’s FabulessTM is an emulsion of
natural palm oil and oat oil and uses
the body’s natural appetite control
mechanism to reduce calorie intake.

I In September 2006 DSM Food Specialties
gained full ownership of the Swedish
company Lipid Technologies Provider AB
(LTP). DSM already held a minority stake in
LTP. This acquisition is in line with DSM’s
ambition to further grow in innovative health
ingredients and build leader ship in the area
of weight management.

‘This step, in combination with other
activities in this market, has laid a broad
foundation to create more innovative
products that help consumers in changing
their lifestyle towards a sustainably healthier
life,’ says Jörgen Quick, CEO of Lipid
Technologies Provider AB.

I Bas van den Berg, Campina and Rob Minnee, Business Manager Weight Management DSM

I In 2006 the dairy company Campina introduced Optimel Control (a product that contains
FabulessTM) in the Netherlands. Campina recognizes the importance of continuous product
innovation to respond to ever-changing consumer demand, a view which is shared by DSM.
‘Consumer research has shown us that consumers are highly interested in weight management
products which are convenient and effective. By incorporating DSM’s FabulessTM into Optimel
Control, we can offer a product with a unique ingredient that helps consumers manage their
calorie intake,’ says Bas van den Berg, Country Director CPE Nederland.

Green Partner
DSM Engineering Plastics’ products such as Stanyl® are compliant with Sony’s Green
Partner specifications. All materials and components suppliers to Sony are required to meet
these specifications. Sony aims to be a good corporate citizen and therefore attaches great
importance to environmentally friendly products and processes. Achieving the Green Partner
status was a valuable learning experience, enabling DSM to further develop its business and
to secure extra visibility on the Asia-Pacific markets.

Waterborne coatings
Mid 2007, a new DSM plant for waterborne resins uniquely suited to
the needs of the coating industry will come on stream. It is part of DSM’s
response to the general call – from both the public and legislators – for
green solutions that are friendly to the environment. The new plant, to be
built in Meppen, Germany, will produce top-quality waterborne resins to
meet the high market growth for these dispersions, which do not require
solvents that can be harmful for the environment or the enduser.

Annual Report 2006

www.dsm.com

Annual Report 2006

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Wider

Capturing opportunities

On the many initiatives DSM is taking
to profit from the strong demand growth
in the emerging economies

Annual Report 2006

www.dsm.com

Wider: Capturing opportunities

On the many initiatives DSM is taking to profit from the strong demand
growth in the emerging economies

An increased presence in the emerging economies is one of the three
drivers of our Vision 2010 strategy. DSM intends to capture the
opportunities offered by strong demand growth in these economies,
thereby continuing the trend of realizing a globally balanced presence
and accelerating the internationalization of its asset base and workforce.
Moreover, investing outside Europe helps DSM to diminish the impact of
the euro-dollar ratio.

I Zhang Qiu Bo, Mayor of Liaocheng City: ‘We welcome DSM's
investment in Liaocheng, Shandong Province. Shandong Province
is an important export and local production centre of the Chinese
livestock industry with a fast-growing feed premix market and
increasing demands on food safety, animal nutrition and feed quality.
DSM's new feed premix plant here will contribute to the development
of animal husbandry and of the feed industry.’

I Zhu Min Yang, Secretary to the Communist Party of Jiangyin City in
Jiangsu Province: ‘The investment project in Jiangyin by industry
leader DSM Engineering Plastics has effectively promoted the image
of Jiangyin city and helped us to attract more investments. We fully
support and will provide our best service to DSM's operations here. I
believe DSM's development will surely contribute to the development
of Jiangyin.’

Annual Report 2006

www.dsm.com

I ‘Nestlé has been using DSM’s
ingredients in several of its product lines
in China for many years, and is very
satisfied with the quality and service
provided. We appreciate DSM’s excellent
sales and technical support and look
forward to a continued close working
relationship in the years to come.’
Axel Zuckschwert, Corporate Purchasing
Manager at Nestlé (China) Ltd.

I ‘Guangzhou Bai Yun Shan has had a very good year with DSM. DSM’s high-quality anti-
infective products and services have greatly contributed to our goal of achieving a leading
position in the anti-infectives market in China. We look forward to a continued strategic win-
win partnership with DSM and our joint contribution to the local health industry.’
Chen Mao, General Manager of Guangzhou Bai Yun Shan Pharmaceuticals.

Over the past period, DSM has conducted
various studies into the emerging
economies to determine the best and
fastest way forward. DSM has already
undertaken a host of initiatives and made
a variety of sizeable investments in China,
where the company, at the end of 2006,
had more than 3,000 employees and
annual sales of USD 775 million. Activities
in India will be stepped up, the aim being
to double the 2005 sales level towards
€300 million by 2010. Studies into Russia
are expected to yield the first concrete
results in 2007.

Zhangjiakou

Shangyu

DSM Anti-Infectives

Zibo

Jiangyin

DSM Anti-Infectives

DSM Engineering Plastics

Shandong

Shanghai

DSM Nutritional Products

Kunshan

DSM Coating Resins

Wuxi

DSM Food Specialties

DSM Desotech

DSM China HQ and
R&D Center

DSM Nutritional Products

Nanjing

DSM Fibre Intermediates

DSM Composite Resins

Foshan

DSM Coating Resins

Xin Hui

DSM Fibre Intermediates

Annual Report 2006

www.dsm.com

Annual Report 2006

www.dsm.com

Better

More value through higher efficiency

On the wide variety of DSM projects
aimed at controlling costs and creating value

Annual Report 2006

www.dsm.com

Better: More value through higher efficiency

On the wide variety of DSM projects aimed at controlling costs and creating
value

We will continue to build on Operational Excellence, in order to
sustain and enhance the cost competitiveness of our businesses.
Operational Excellence encompasses a host of projects. Vision 2010
requires higher levels of investments in innovation and the expansion of
our asset base in the emerging economies. Operational Excellence will
therefore remain of significant help in maintaining cost-competitiveness
across the company.

A good example of our efforts in the field of Operational
Excellence is ‘Manufacturing Excellence’ (Manufex), a program
initiated in 2000 that focuses on continuous improvement of the
overall integrity, safety and efficiency of our manufacturing base,
consisting of some 120 factories worldwide. Another example is
ICT, where substantial cost reductions have taken place while at
the same time the use and functionality of ICT have been strongly
expanded. Operational Excellence was instrumental in 2006 in
controlling fixed out-of-pocket costs. These costs increased only
slightly during 2006 despite increased innovation investments
and expansion of the asset base.

I DSM has been the leading chemicals company on the
Dow Jones Sustainability World Index for three years in a
row. In manufacturing, this means taking the interests of
the local population living near our factories – and their
opinion of our company – very seriously indeed.
Implementing Operational Excellence in Sisseln, for
example, is accompanied by activities dedicated to
creating and ensuring a positive environment for our
operations. With this in mind, local authorities and plant
management meet regularly for a structured dialog. Site
management also strengthens its ties to the community by
leasing the green areas that form part of the plant to local
farmers, who use them to cultivate grain or sugar beet or
as grazing pasture. Marcel Weiss, the secretary of the
nearby municipality of Eiken, observes: ‘For forty years
now, the vitamin factory in Sisseln has been an important
member of our local community. We value our excellent
cooperative relationship with the management of the
plant, and have a particularly high regard for the stringent
standards observed by DSM in relation to safety, health
and the environment.’

I Marcel Weiss (l.) with Site Manager Udo Haas, on a tour of the
DSM Nutritional Products factory in Sisseln, Switzerland.

Annual Report 2006

www.dsm.com

I Ralf Kahre, Global
e-Business Coordinator at BASF:
‘Within BASF, several e-Business
applications have become part of
our daily routine. For example,
we have had fantastic experiences
with the ICT services DSM is
offering in this respect. We are
now able to manage our ordering
process with DSM much more
efficiently. We think that important
aspects of these ICT services are
user friendliness and performance.
On both criteria DSM performs
excellently. We expect DSM to
be our partner when it comes
to implementing new e-Business
services. They owe it to
their reputation.’

I Ralf Kahre, BASF (l.) and Hans Hendriks, DSM Corporate ICT

I John Smith, e-Business Implementation Manager
at Unilever Europe: ‘Through the e4US
project with DSM Corporate ICT we were able to make
a step-change improvement in supply chain alignment.
By linking the ICT systems between Unilever and DSM,
using the industry standards laid down by the Global
Upstream Supply Initiative, DSM can monitor our stock
levels and our material requirements. This way, DSM is
able to replenish our stock at the right time without our
interference. Since the supply and demand processes
are now fully aligned, we ensure maximum flexibility in
the end-to-end supply chain.’

Annual Report 2006

www.dsm.com

Report by the Managing Board

The year 2006 developed favorably for DSM
on virtually all counts. Most of the end markets
demonstrated robust growth figures.

Financial

Net sales and supplies

x € million

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities
Suplies to other clusters

Net sales

Supplies

2006

2005

2006

2005

22%

29%

21%

31%

Sales by segment from continuing operations

2,407

2,399

2,463

2,458

916

2,753

1,872

404

924

2,447

1,687

359

967

2,759

2,135

422

(394)

988

2,459

1,899

376

(364)

33%

2006

11%

31%

12%

2005

Nutrition

Pharma

Performance Materials

Industrial Chemicals

Other activities

Total, continuing operations
Discontinued operations

8,352

7,816

8,352

7,816

379

EBITDA / net sales 2005 and 2006
from continuing operations

Total DSM

8,380

8,195

8,380

8,195

2005
2006

Nutrition

Pharma

Performance
Materials

Industrial
Chemicals

Operating profit plus depreciation and
amortization (EBITDA)
x € million

2006

Operating profit (EBIT)

• 0

• 5

• 10

• 15

• 20

2005

x € million

2006

2005

Nutrition

Pharma

Performance Materials

Industrial Chemicals

Other activities

464

146

429

269

(33)

487

143

410

246

Nutrition

Pharma

Performance Materials

Industrial Chemicals

(8 )

Other activities

Total, continuing
operations

1,275

1,278

Total, continuing
operations

Discontinued operations

(1)

Discontinued operations

314

329

196

(69)

835

(1)

329

305

165

(53 )

787

Total DSM

1,274

1,311

Total DSM

834

808

Markets

End-use markets

Sales by origin from continuing operations

Sales by destination from continuing operations

15%

19%

29%

10%

15%

17%

10%

2006

14%

15%

10%

11%

13%

11%

14%

46%

45%

27%

29%

19%

21%

20%

10%

21%

2005

2006

2005

2006

Health and nutrition

Pharmaceuticals

Agriculture

Electrics / electronics

Metal / building / construction

Automotive / transport

Packaging

Other

Textiles

Netherlands

Rest of Europe

North America

China

Asia Pacific

Rest of the World

Netherlands

Germany

United Kingdom

France

Rest of Europe

North America

China

Asia Pacific

Rest of the World

Annual Report 2006

www.dsm.com

Report by the Managing Board

Highlights of 2006
Vision 2010 – Building on Strengths one year on
Marketing and branding
Purchasing
Safety, health and the environment
Human resources
Research and development (R&D)
ICT
Corporate governance
Macro-economic review
Financial results

Highlights of 2006

General
The year 2006 developed favorably for DSM on virtually all
counts. Most of our end markets demonstrated robust growth
figures, with demand growth in Asia outpacing all other regions.
The prices of energy and raw materials were high and volatile,
but DSM managed to increase sales volumes and selling prices
and saw only slightly increase fixed out-of-pocket costs
compared to the previous year, despite higher expenditure on
innovation and expansion of the asset base. Margins suffered
from high energy and raw materials prices.

DSM realized a solid autonomous volume growth of 5%,
coupled with on average higher selling prices. Net sales growth
for continuing operations amounted to 7%. This, together with
slightly increased fixed costs, provided ample compensation
for the surging costs of energy and raw materials. Exchange
rates, acquisitions and disposals on balance had a negligible
effect on sales.

Despite additional efforts and expenditure with regard to
innovation, the operating profit from continuing operations
(before exceptional items) increased by 6% to a level of €835
million. EBITDA from continuing operations (before exceptional
items) remained stable at €1,275 million. Value creation clearly
materialized, as the CFROI of 8.5% surpassed the company’s
weighted average cost of capital.

Nutrition
As the year 2006 progressed, business conditions in some of
our markets somewhat deteriorated. The costs of materials
and energy remained high and margin pressure increased in
the second half of the year for some of our products. Sales of
the Nutrition cluster remained stable. All activities in this cluster
were confronted with rising energy costs. DSM Nutritional
Products recorded good volume growth, which was partly
offset by the ongoing price pressure for some of the products in
the portfolio. DSM Food Specialties saw the planned phasing
out of the phytase tolling contract with BASF, as agreed at the
time when DSM acquired Roche Vitamins & Fine Chemicals.
The bottom-line results of the cluster were furthermore affected
by the poor results recorded by DSM Special Products in 2006,
due to the high and rapidly increasing price of toluene, its main
raw material, which could not be passed on at the same rate.

The EBITDA / net sales margin for the Nutrition cluster was
clearly above 18%, in line with the long-term target set in our
strategy Vision 2010 – Building on Strengths.

Pharma
Sales of the Pharma cluster decreased by 2%. DSM
Pharmaceutical Products has rounded off the restructuring
projects it started a few years ago. The asset base has been
reduced, the last project in 2006 was the sale of the South
Haven site in the United States to Albemarle. Projects to
enhance efficiency at the Linz site in Austria are ongoing.
Refocusing of the business combined with a good performance
of the steriles plant in Greenville (USA) led to a structurally
better performance. In total over 20 licenses were granted for

I DSM in Shandong / China

the Per.C6® cell line, yielding the first contracts for the
production of therapeutic proteins for first-phase testing. DSM
Anti-Infectives faced a difficult year. Results were significantly
better than in the period 2004-2005, but the business group
ended the year with an operating deficit. Renewed setbacks in
the course of 2006 have prompted us to review all strategic
options for this business group. Further decisions will be taken
in the second quarter of 2007. The current restructuring will
continue and we will also further pursue our efforts to realize a
joint venture with NCPC in China for the production of anti-
infectives and vitamin C.

The results of this cluster improved significantly, but did not yet
attain the desired level of profitability. The EBITDA / net sales
margin stood at 16%.

Performance Materials
Sales of the Performance Materials cluster increased by 12%.
More than two thirds of this growth was attributable to strong
autonomous volume growth, which clearly outpaced growth in
the end-markets for these products. Selling prices were clearly
higher than last year, although surging input costs could not be
fully offset. Fixed costs rose as a consequence of the expansion
of the asset base, and innovation efforts were stepped up.
DSM Engineering Plastics and DSM Dyneema were excellent
performers in this cluster, while DSM Resins, too, showed a
healthy improvement of its results. The elastomers business
faced much higher raw-material costs which could only be
passed on to the customers to a limited extent, leading to
results which were clearly lower than the excellent results
of 2005.

The EBITDA / net sales margin stood at 16%, in line with the
company’s objective.

Industrial Chemicals
The Industrial Chemicals cluster recorded strong volume
growth, and was able to pass on the higher raw-material and
energy costs to its customers. Market conditions for our fiber

Annual Report 2006

www.dsm.com

Report by the Managing Board

intermediates, by far the largest business group in this cluster,
developed favorably. Termination of the underperforming
melamine production joint venture in the United States
structurally improved the situation for DSM Melamine, although
tough conditions prevailed in this market during the year. The
operating profit recorded by DSM Agro was slightly below the
2005 level. DSM Energy’s profit was higher because of higher
prices for oil and gas.

The EBITDA / net sales margin of this cluster met the
company’s objective of 14% over the cycle.

Corporate strategy
Towards the end of 2005, DSM embarked upon a new five-year
strategy, Vision 2010 – Building on Strengths. With the previous
strategy, Vision 2005: Focus & Value, DSM had shifted its
portfolio towards a higher specialty content with strong
positions especially in nutritional ingredients and performance
materials. Building upon these strongholds, the company is set
to grow further, while enhancing the quality of our portfolio.
Further on, a detailed overview is given of the progress made
with Vision 2010. We hope that you, our customers and
shareholders, share our conclusion that the company is well
on track with our new strategy.

Financials
DSM’s financial position remained strong during 2006. Rising
costs – energy, raw materials and innovation investments –
could be largely offset by price increases and by strict cost
control programs. Fixed out-of-pocket costs, amounting to
€2.7 billion in 2006, increased only slightly compared to the
previous year.

The rating institutions maintained their Single A credit rating for
DSM. DSM aims to generate a healthy cash flow. Net debt at
year-end 2006 stood at €921 million (2005: €832 million),
leading to a gearing level of 14% (2005: 13%). DSM initiated a
€750 million share buy-back program in 2006, which will
increase its gearing to a level of around 20%. This share buy-
back program will increase earnings per share for ordinary
shareholders by approximately 10% and will leave sufficient
room for targeted acquisitions as the gearing can be raised
further by ten or more percentage points.

Capital expenditure including new-business-development
acquisitions (CAPEX) amounted to €501 million (2005: €451
million), and was above depreciation and amortization of €440
million (2005: €503 million). Vision 2010 requires investments in
further organic growth; at year-end 2006 DSM was involved in
some 20 projects. These projects are expected to yield €500
million additional sales per year upon completion. From 2007
onwards, the CAPEX level will be stepped up towards the
range of €500-575 million per year on average, including new-
business-development acquisitions.

In order to reward long-term shareholders and to further
strengthen communication with these shareholders, DSM has
proposed a novel instrument: a loyalty dividend bonus for
shareholders who have their DSM holdings registered. The
registration of shares enables DSM to intensify communication

with these shareholders. Shares held by the same shareholder
in excess of a three-year period will be entitled to a 30% loyalty
dividend over the average dividend in the preceding three-year
period and 10% per year thereafter. DSM will formulate
proposals on the implementation of this instrument for the
Annual General Meeting of Shareholders of 28 March 2007.

Vision 2010 – Building on Strengths
one year on

With the largely successful completion of its previous strategy
Vision 2005: Focus & Value, DSM laid a solid foundation to
further build on. Our new strategy program, Vision 2010 –
Building on Strengths, presented in October 2005, has been
running for more than a year now. This new strategy focuses on
accelerating the profitable and innovative growth of DSM’s
specialties portfolio. The overall objective of Vision 2010 is
strong value creation, to be accomplished via three main levers:
market-driven growth and innovation, increasing presence in
emerging economies and operational excellence. Below, an
overview is presented of the progress made in the year under
review. Looking back on this first year, DSM’s conclusion is that
the company is on track to attaining its various strategic targets
as it has exceeded its targets for 2006.

Objectives Vision 2010 – Building on Strengths

Quality

Enhance the quality of business and portfolio
• % Specialty leadership to 50-60%
• Increase presence in emerging economies

- Doubling our sales in China to USD 1 billion
- Reduce gap between origin and destination of sales

Growth

Achieve an underlying sales growth of 3-5% per year
• Approx. 1 billion in additional sales from innovation in 2010

Profitability

CFROI above WACC by 50 base points
• Increased margins (compared with 2001-2004)
• EBITDA / net sales targets per cluster
• Operational Excellence

Sustainability

• Retain top position rankings SHE and Sustainability
• Leader in Industrial White Biotech
• Continuous improvement eco-footprint
• More diverse, international workforce

Leading to a total shareholder return above the average
of the peer group1)

1) DSM’s peer group: Akzo Nobel, BASF, CIBA, Clariant, Danisco / Genencor,

Degussa, EMS Chemie, ICI, Lanxess, Lonza, Novozymes, Rhodia and Solvay.

Annual Report 2006

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Report by the Managing Board

1. Market-driven growth and innovation
DSM aims at sales growth based on existing leadership
positions, accelerated by innovation in targeted markets and
‘innovation hot-spots’ and reinforced by selective acquisitions.
Under the new definition of specialties – businesses that have a
leadership position in a product or application or in custom
manufacturing – the current specialty leadership portfolio
represents 40% of DSM’s total sales. By 2010 DSM aims to
have grown its specialties portfolio to 50-60% of sales. Profitable
growth via specialty leadership, innovation and geographic
growth should lead to an underlying sales growth rate of 3-5%
per year. Sales growth in 2006 amounted to 7%. Organic growth
will be complemented with selective acquisitions, predominantly
in the field of nutrition and performance materials.

Innovation boost
To steer and monitor all developments in the innovation field,
DSM has appointed a Chief Innovation Officer and established
the DSM Innovation Center, which commenced operations in
the second quarter of 2006. The DSM Innovation Center
comprises several units: an Innovation Office, Corporate
Technology, Intellectual Property, Licensing and Venturing, the
Business Incubator, four Emerging Business Areas and Base-
of-the-Pyramid activities. The Innovation Center supports the
achievement of the targets in the innovation arena, including
those relating to the overall sales objective, an extended
technology base, an improved innovation process, an
innovation-oriented culture and the establishment of long-term
growth platforms.

To boost innovation, significant additional resources were made
available in 2006. Also, significant efforts were undertaken to
improve the efficiency and effectiveness of the innovation
process. The additional spend on innovation in 2006 amounted
to more than €25 million. During the year under review some
9% of capital expenditure was allocated to new business
development and venturing. The research centers were
integrated into the various businesses. All these investments
are fully in line with the planned investment levels as
communicated at the outset of Vision 2010, although we
expect to step up our activities relating to new business
development.

In 2006 various milestones were achieved. A considerable
number of new products and new applications for existing
products were introduced in the market, in human nutrition,
animal feed, pharma and performance materials. A description
of these products and new applications is provided in the
chapters on the various clusters.

To accelerate its innovation drive, DSM is supplementing the
internal innovation pipeline by means of open innovation and
new-business-development acquisitions. An example in 2006
was the acquisition of CRINA from Intervet International, a
business unit of Akzo Nobel. CRINA is a pioneering company
in plant extracts used as feed additives and specializes in
digestibility modulators based on blends of essential oils.
Furthermore, DSM obtained full control of Lipid Technologies
Provider AB (LTP), a Swedish company with a technology
platform based on formulated lipids. LTP develops lipid delivery
systems for functional foods (including dietary supplements)
and pharmaceuticals, using lipids extracted from natural
resources such as oat oil. In 2003 DSM had taken a 23% share
in LTP and over time had extended its participation to 27%.
Since 2005 DSM Food Specialties had cooperated with LTP
under a global marketing and sales agreement that gave DSM
the exclusive right to market a specific weight management
ingredient – branded Fabuless™ by DSM – in the dairy
foods market.

During the first year of Vision 2010, a number of important
preconditions for a successful innovation boost were fulfilled
with regard to resources, organizational alignment of R&D and
new business development and the effectiveness of the
innovation processes. On the basis of the current insight, DSM

At the DSM Innovation Center, a small staff makes sure that
the full change program towards an intrinsically innovative
organization is organized and communicated throughout DSM.
This includes developing metrics, setting up an innovation
reporting structure, rolling out an innovation diagnostic for
each business group, gathering innovation best practices and
putting in place improvement processes. Furthermore, training
programs are being developed and an awards program for the
recognition of science and/or innovation related achievements
has been set up.

Licensing portfolio expanded
DSM’s licensing activities – so far amounting to over
1000 licenses in more than 80 countries worldwide – in 2006
included various state-of-the-art technologies relating to for
example urea, unsaturated polyester resins, melamine barrier
film (specialized packaging application), secondary fuel pellets
(renewable energy source from waste recycling) and other
technologies. DSM maintained its leading market position in
urea, with almost 70% market share. Besides licensing-out,
DSM also explores opportunities for licensing-in suitable
technologies to accelerate its innovation process.

Venturing stepped up
DSM explores new markets and technologies to strengthen its
activities and product portfolio. Venturing plays an important
part in our open innovation policy, exemplified by investments
in activities that are of immediate or potential relevance to
DSM’s business groups and Emerging Business Areas. In 2006
DSM stepped up its venturing activities with a total of five
investments. These include participations in Sol-Gel (safer and
more effective personal care products), IntegraGen (personalized
healthcare products) and Van Technologies (environmentally-
friendly coatings). DSM also invested in Oxford Performance
Materials (biocompatible high-performance polymers for use
in medical devices) and Micromuscle (electro-active polymers
which help control the movement and properties of medical
devices) and made a follow-on investment in Sciona
(personalized healthcare). These last investments link to
DSM’s innovation ambitions in the Biomedical Emerging
Business Area. DSM is also involved in a number of venture
capital funds.

Annual Report 2006

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Report by the Managing Board

is confident that the overall target of €1 billion in innovation-
related sales will be achieved by 2010.

An overview of DSM’s venturing portfolio, year-end 2006

2. Increased presence in emerging economies
DSM is growing its business in the emerging economies and
continuing the trend of improving its globally balanced
presence by accelerating the internationalization of its asset
base and workforce.

DSM’s total sales in emerging economies amounted to €1.1
billion in 2006, an increase of 23% compared to the previous
year. In China and India a considerable number of investments
were made in new production facilities, expansion or
debottlenecking of existing plants and cooperation with
industrial or scientific partners. These projects relate to human
and animal nutrition, antibiotics, performance materials and
industrial chemicals. DSM Engineering Plastics, DSM Resins,
DSM Food Specialties, DSM Nutritional Products and
DSM Fibre Intermediates are front-runners in this respect.
DSM strengthened its position in the production and sale of
liquid coating resins via the acquisition of the Chinese company
Syntech, acquired at the end of 2005. DSM is now also
investing in creating an integrated nylon 6 value chain. Earlier
agreements between DSM and NCPC to create joint ventures
for the production of anti-infectives and basic vitamins, concluded
in the last quarter of 2005, are awaiting approval by the
Chinese authorities.

DSM expects to double its total sales in China to more
than USD 1 billion per year by 2010. Sales in 2006 already
amounted to almost USD 775 million, an increase of 25%
compared to the previous year. Total capital expenditure related
to projects that have been realized or were initiated in China
during the year amounted to approximately USD 120 million.
The total of projects that were in progress at the end of 2006
are expected to generate over USD 200 million in additional
annual sales, on top of the growth in the existing activities. India
offers the potential to double DSM’s current sales to a level of
some €300 million. DSM maintains its commitment to both
countries, with various new projects in the pipeline.

After China and India, DSM also started investigating
possibilities in Russia. The outcome of the study will be
available in early 2007.

More than 300 new patent applications in 2006
The focus on specialties and innovation in Vision 2010
will further increase the role of intellectual property (IP) in
sustainable value creation. In 2006, 327 new patent
applications were filed. DSM belongs to the top patent filers
in Europe and is in the top 100 of patent filers worldwide.
DSM also took further IP positions in the Emerging Business
Areas. Furthermore, a new Global Trademarks Center was set
up in 2006. DSM continues to strengthen its IP position in the
emerging economies. More than 90% of DSM’s patents filed
in 2006 have now also been filed in China.

Corporate Technology
Corporate Technology coordinates all company R&D activities
within the framework of a Global Virtual Lab and provides
various forms of innovation support. In 2006, the roll-out of
our in-house developed, dedicated project management tool
Project Plaza continued; the tool has now been implemented
in most of our business groups.

Business Incubator; maximizing value
DSM’s Business Incubator, established in 2006, serves to
maximize the value of emerging businesses such as Micabs®
(laser marking), Hybrane® (highly branched polyester amides,
used in for example oil field chemicals and cosmetics),
Solupor® (ultra thin but very strong membrane for filtration) and
functional coatings including anti-reflective properties for
picture framing applications. The Business Incubator also
builds new Emerging Business Areas and supports the existing
Emerging Business Areas with market and business
intelligence services.

3. Operational Excellence
DSM continues to build on its strong Operational Excellence
capabilities to sustain and enhance the cost competitiveness of
its businesses.

In 2006, the focus was mainly on standardization of business
processes in manufacturing, order fulfillment, finance and ICT
infrastructure. In addition, new initiatives were taken in
purchasing and prospect-to-order / pricing excellence
processes. The chapter on marketing and branding and
purchasing (see page 30) provides more in-depth information
on these subjects.

Operational Excellence will remain a key success factor as cost
efficiency continues to play an important role across many of
our businesses. Manufacturing Excellence (‘Manufex’) is a
program initiated in 2000 that focuses on continuous
improvement of the overall efficiency of our production base
while maintaining the safety and integrity of the installations.
DSM’s production base consists of some 120 factories
worldwide. Manufex has brought considerable savings in for
example the area of maintenance, with a cost reduction of €75
million in 2006. For the coming years, greater focus will be
placed on predictive and preventive maintenance policies and
further reduction of energy costs.

Annual Report 2006

www.dsm.com

Report by the Managing Board

Emerging Business Areas (EBAs): value for the longer term
DSM is devoting specific resources to the development of
so-called Emerging Business Areas, or EBAs. DSM has
selected four EBAs where a good match is evident between
long-term societal and technological trends and DSM’s
capabilities and market strongholds.

In the Biomedical EBA, DSM’s prime focus is on medical
coatings that are used on various devices to provide
functionalities such as lubricity or anti-microbial action. DSM is
on the verge of commercializing the first applications in this
area. DSM is also active in extensive R&D that is expected to
generate the innovations of the future, such as systems for the
controlled release of medicines in the body and the use of
polymers to support human tissue growth.

The aim of the White Biotechnology EBA is to explore the
possibilities of applying nature’s toolset to the production of
chemicals, enzymes, materials and fuels from renewable
resources. Current annual sales relating to white biotechnology
amount to approximately €1.5 billion.

The Personalized Nutrition EBA aims to develop products
that promote health, well-being and performance and
potentially reduce the risk of health problems. DSM’s activities
in this field are targeted at the opportunities offered by
advances in the world’s understanding of the relationship
between an individual’s lifestyle, nutritional status and/or
genetic make-up.

The Specialty Packaging EBA aims to develop innovative
packaging solutions for food products and beverages with
innovative barrier properties, ensuring quality, freshness,
authenticity and food safety.

While the commercialization of these EBAs will take several
years, DSM is already creating value in the initial phases,
especially by building strong intellectual property positions, as
these lay the groundwork for fully capturing value later on. In
2006, the four selected EBAs were staffed and their scope was
defined, narrowing down the collection of innovation-related
ideas to a compact portfolio of projects and a proper,
actionable pipeline strategy. Furthermore, acquisitions and
venturing opportunities were actively explored.

In connection with the Biomedical EBA, DSM is involved in a
public-private partnership called the BioMedical Materials
Program (BMM). A consortium of Dutch industrial companies,
knowledge institutes and public organizations have partnered
up in BMM with the objective of giving the Netherlands an
internationally leading position in biomedical materials by
developing successful medical applications and securing
intellectual property rights. DSM is leading the project together
with the University of Maastricht.

Another example demonstrating the effectiveness of Operational
Excellence is ICT. Over the past few years, DSM has succeeded
in reducing its total annual ICT costs by €100 million per year to
€150 million per year, while at the same time the use and
functionalities of its ICT resources have expanded significantly.

Operational Excellence was instrumental in 2006 in controlling
fixed out-of-pocket costs. These costs increased only slightly in
2006 despite clearly increased innovation investments and
expansion of the asset base.

In some cases, specific restructuring is required, as was for
example the case at DSM Pharmaceutical Products, DSM Anti-
Infectives and DSM Nutritional Products. The total savings from
restructuring projects to be completed in 2007 will amount to
€125-175 million compared to the 2005 cost levels.

As the execution of Vision 2010 requires higher levels of
investments compared to previous years, for example with
regard to innovation and the expansion of DSM’s presence in
the emerging economies, Operational Excellence will remain of
significant help in maintaining cost-competitiveness across the
company. The program served its purpose well in 2006 and will
be pursued with great vigor in the years to come.

Value creation
In the first full year of Vision 2010 – Building on Strengths, DSM
created value. The CFROI (Cash Flow Return on Investment)
amounted to 8.5%, which means that DSM met its target of
achieving a CFROI that exceeds the annual weighted average
cost of capital (WACC) by more than 50 basis points, or 0.5%.

The various EBITDA / net sales margin targets set per cluster
were met, except for the Pharma cluster.

Nutrition
Pharma
Performance Materials
Industrial Chemicals

Target

Actual

>> 18%

16%

14%
(on average over the cycle)

19%

16%

14%

By realizing these targets, DSM intends to achieve a total share-
holder return that exceeds the average of DSM’s peer group.

Organizational alignment
DSM’s organizational model has been aligned with the Vision
2010 strategy. DSM Anti-Infectives and DSM Pharmaceutical
Products have been grouped into the new Pharma cluster. The
activities of DSM Nutritional Products, DSM Food Specialties
and the nutritional unit of the former DSM Fine Chemicals
business group have been combined into a new Nutrition
cluster. The Performance Materials and Industrial Chemicals
clusters have remained unchanged. A number of services have
been combined into shared service centers. Moreover, a new
Marketing Office has been established to steer and support the
company’s increasing marketing efforts and sharpen the overall
external orientation.

Annual Report 2006

www.dsm.com

Report by the Managing Board

e-Business
DSM’s investments in an advanced and robust e-business
architecture and infrastructure increasingly enable the company
to conduct business with key customers and suppliers in a
smooth way. DSM is reaping the benefits of this infrastructure in
terms of direct system-to-system connectivity, a web shop
available for customers 24/7, e-logistics, e-sourcing, electronic
invoicing and electronic payment.

DSM is connected to more than 450 business partners with
ERP connections. Over 5,000 customers placed orders via the
web shop, with an accumulated total of approximately 40,000
orders last year. Further growth in e-logistics has been realized
in Europe, and more than 56,000 messages are shared with
logistic providers on an annual basis. An increase in the use of
this capability is foreseen. e-Logistics possibilities in the United
States and Asia are being explored.

For the coming years the objective is to further professionalize
the prospect-to-order process with the aid of e-business tools.
DSM has started a globally standardized program, which
enables prospects and customers to download product and
product-related information in a controlled way. DSM is also in
the process of developing global e-marketing tools and
customer information management programs. We are thus
combining our increased marketing efforts with the latest
e-business possibilities.

Purchasing

In 2006 the new DSM purchasing organization was implemented,
the aim being to leverage DSM’s buying power and to realize a
better total cost of ownership and a corresponding competitive
advantage. The targets set for 2006 were realized, amounting
to €100 million in purchasing savings.

The execution of the DSM purchasing strategy is being
supported with standard processes and systems.
A performance management system was designed and
implemented in 2006 in order to align the purchasing
organization with the business groups based on joint targets,
mutual performance measurement and cross-functional
collaboration. In order to secure the exchange of knowledge,
cross-functional networks were built for all spend areas.
A training curriculum was developed and implemented for all
members of the DSM purchasing community.

Code of conduct
DSM Purchasing has developed a code of conduct for
suppliers. This code will help suppliers to comply with DSM’s
high standards. The principles set out in this document are
our minimum requirements regarding social and working
conditions and safety and environmental aspects. This code
of conduct is the first step in a comprehensive program that
is being developed in order to embed sustainable performance
in all our supply base processes and procedures. At year-end
2006, more than 250 key suppliers had been approached and
some 150 suppliers had already signed the code. The second
phase in the code of conduct project has been initiated in

I DSM in Kaiseraugst / Switzerland

Marketing and branding

Marketing and brand management are becoming ever more
important to DSM in the context of the company’s heightened
focus on market-driven growth and innovation and its aim of
increasing the specialty portion of its portfolio. Therefore, in
early 2006 DSM established a Marketing Office in order to help
build a stronger market-driven and innovation-driven culture,
in close cooperation with the Innovation Center, to develop and
disseminate best practices and to further professionalize the
marketing and sales function across the company. In 2007
a great deal of attention will be given to value-based pricing
(the so-called ‘Excellerate’ program), the commercialization
of innovation in combination with enhanced product launch
management, and increasing e-business activities with regard
to our current customer base and prospects. These three
aspects are discussed separately below.

Value-based pricing: Excellerate
DSM’s Excellerate program was launched in 2005 to support
the business groups in improving their marketing and sales
capabilities with a focus on value-based pricing and a stronger,
differentiated market orientation. Prices should reflect the value
that DSM creates for its customers and end-users. Excellerate
has so far supported ten business units that represent some
30% of DSM’s group sales. The program has helped these
businesses in introducing better processes and practices.

Commercialization, innovation and product launch
Commercialization, innovation and product launch optimization
is a new initiative, started at the end of 2006 in the context of
DSM’s ambitions of market-driven growth and innovation. The
scope of this initiative is to strengthen the overall system for
launching new products. The marketing, communications and
innovation disciplines have thus been brought together. The
various tasks include optimizing and speeding up the product
launch process and developing strategies to shorten time-to-
market, among other things.

Annual Report 2006

www.dsm.com

order to cover the majority of our spend and to implement
auditing procedures.

Safety, health and the environment

Safety
In 2005 DSM set itself the target of reducing the number of
recordable accidents by 50% between 2005 and 2010. The
Frequency Index (number of recordable accidents per 100
employees per year) for DSM personnel and contractor
personnel is used as an indicator of the progress made on this
front. At the end of 2006 this Frequency Index was 0.89
compared to 0.95 at year-end 2005.

We are convinced that our current programs – especially
compliance-related programs and new initiatives such as
behavior-based safety, training and learning from incidents –
need to be continued vigorously. Programs of this kind are
geared to the long term. We see no need to doubt the feasibility
of the targets for 2010.

Health
In 2006, 15 cases of work-related illness were reported,
compared to 16 in the previous year. DSM has expanded its
regular risk analyses to include health aspects. Besides unsafe
situations and exposure to substances, workplace ergonomics
and job stress are also included in the analysis of health effects.
In 2006, DSM developed an approach for global health
management, which includes practical tools for employees and
management and several other forms of professional support.

Environment
In 2005 DSM set itself environmental targets for 2010, on the
basis of the principle that all our plants, wherever they are in
the world, should at least meet the same environmental
standards as in the European Union or the United States. In
addition, DSM aims to reduce its energy consumption by 5%
during this period – which will result in a corresponding
reduction in CO2 emissions – and to achieve a 5% cut in its
overall waste volume. DSM aims to eliminate the landfilling of
hazardous waste altogether.

In 2006 DSM took the first steps toward the realization of
these environmental targets by installing a desulfurization unit
in the citric acid plant in Wuxi (DSM Nutritional Products) and
by strongly reducing dust emissions in the caprolactam plant
in Nanjing (DSM Fibre Intermediates), both in China.

Report by the Managing Board

I DSM in Shanghai / China

Human resources

DSM workforce at year-end in:

Europe
- the Netherlands
- rest of Europe

Asia
- China
- rest of Asia

North and South America
rest of the world

Total DSM
of which:
- discontinued operations
- continuing operations

2006

2005

14,037

14,206

7,061

6,976

4,145

3,031

1,114

3,690

284

7,258

6,948

3,666

2,581

1,085

3,667

281

22,156

21,820

158

22,150

21,662

A new HR strategy
In 2006, a new HR strategy ‘Passion for People’ was finalized
and approved to support the realization of Vision 2010.

Vision 2010 will pose some significant challenges. The
demands made upon DSM to maximize the potential and
productivity of the workforce have never been greater and
DSM’s international economic competitiveness will be a result
of the optimum performance of our people. At the same time,
we want to continue to live up to our principles and values in
everything we do.

Annual Report 2006

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Report by the Managing Board

HR priorities for 2007
The HR strategy will focus on four key themes: resourcing,
development, recognition & rewarding and management
& organization. The following priorities for 2007 have
been identified:
• Launch / strengthen the global DSM employer image

(focusing on labor markets in the United States, China
and Switzerland)

• Strengthen our talent pipeline through intensified talent

scouting and recruitment of new academics and revitalized
development and assessment tools. This will result in a
regional infrastructure for talent scouting in China, the
United States and the European Union.

• Further strengthen and implement improved succession

planning on an annual basis in all business groups

• Develop differentiated and flexible remuneration policies

in specific business areas (for example innovation)
• Include performance coaching in the performance

appraisal cycle

• Include the desired leadership style in our nomination and

appointment policy

In 2006 a number of HR priorities were already implemented in
line with the new HR strategy. Key performance indicators and
actions will be further detailed in 2007.

Some of the challenges addressed in the HR strategy are
listed below:
• Strengthen DSM’s position as an employer of choice to be

able to win the war for talent

• Attract new, international, talented people in the right balance

between experienced hires and new university graduates

• Identify existing talent and give them the opportunity to

further develop themselves

• Further shape DSM's management leadership style to drive

and utilize increased diversity

Diversity
DSM’s increasing international spread, significant business
expansion, the drive for innovation and the ongoing ‘war for
talent’ are elements underscoring the need to further increase
diversity. DSM will attract a broader and more globally oriented
workforce and foster a leadership style that inspires employees
with different nationalities, cultural backgrounds and
expectations, both men and women. The current resourcing
need arising from our growth strategy gives DSM the opportunity
to realize a diversity boost. In 2006, the inflow of executives,
female managers and experienced and new academic hires
more than doubled in comparison to the period 2002-2005.
About 60% of them are non-Dutch, and 30% are female.

DSM Business Support
The new HR strategy also requires a redesign of the HR function.
In this context, transactional HR activities (such as payroll
processing) will be allocated to regional HR shared service
centers, as part of a new DSM Business Support (DBS)
organization. This will lead to high quality HR support to the

businesses, whilst allowing the HR managers in the business
groups and business units to focus more on strategic HR
activities (as ’HR business partners’). Transactional HR activities
will be supported by the worldwide introduction of SAP-HR,
a dedicated IT tool.

HR effectiveness
At the end of 2007 a new working climate analysis will be
conducted to measure the effectiveness of our HR policies.
It will provide us with a better insight into the need for
corrective action.

Research and development (R&D)

Our R&D is an integral part of our business processes. While
90% of our total annual R&D expenditure is directed towards
business-focused R&D programs, we also have a Corporate
Research Program in place to build and strengthen the
technological competences we need to support our strategy.

Scientific Advisory Board
In line with our open innovation policy, we made a start on
the creation of an external Scientific Advisory Board with the
appointment of Professor Bert Meijer, of the Eindhoven University
of Technology (Netherlands), as chairman. The advisory body
will enable us to more effectively draw on important
developments in the external knowledge infrastructure and thus
support the further development of our core competences.

R&D expenditure
Expenditure on R&D in 2006 amounted to €327 million
(3.9% of net sales), a 13% rise compared to the €290 million
(3.5% of net sales) in 2005. R&D expenditure in the Nutrition
cluster amounted to €134 million, compared to €115 million in
the previous year. R&D expenditure in the Pharma cluster was
at a level of €57 million (the same as in 2005). In Performance
Materials, R&D expenditures were €107 million (2005:
€94 million) and in Industrial Chemicals €18 million (2005:
€14 million). At 31 December 2006, a total of 1990 staff
were employed on R&D activities, representing some 9%
of the total workforce.

R&D in Nutrition and Pharma
As part of the Corporate Research activities in this cluster in
2006, we further enhanced our capabilities in high content
screening, which enables more efficient new product develop–
ment. We also succeeded in further extending our gut microflora
library, which is paving the way for a strong platform for eubiotic
concepts for our Animal Nutrition & Health business. Work in
advanced synthetic methods includes the development of new
methods and technologies for the synthesis of natural products
with chiral centers and stereochemical requirements. In systems
biology the focus is on new technologies for speeding up the
development and optimization of micro organisms for the over-
expression of vitamins, carotenoids and nutraceuticals.

In Pharma, the proprietary MonoPhos® ligand library for
asymmetric hydrogenation which we built up in collaboration
with the University of Groningen (Netherlands) was further
developed for use in large-scale production.

Annual Report 2006

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Report by the Managing Board

In 2006 Nutrition R&D recorded a number of successes.
One of these was Rovimix® Hy-D®, an innovative and essential
feed additive (see text box). A breakthrough technology was
developed for the production of vitamin C via direct fermentation.
It combines classic and rational approaches to strain
improvement for the bacterial enzymes needed for biological
conversion. Successful further advances were made in the
development of resveratrol, an innovative nutraceutical
primarily targeting anti-aging effects.

DSM Innovation Award for the Rovimix® Hy-D® team
In 2006, DSM launched a new internal award: the DSM
Innovation Award. This all-round award, carrying a cash
prize of €50,000, is our top award for exceptional innovative
achievements that generate new business for DSM through
multidisciplinary teamwork. The award recognizes and
celebrates past performance and inspires new efforts by our
people. The 2006 Award was granted to the DSM Nutritional
Products project team for Rovimix® Hy-D®, an innovative and
essential feed additive for improving animal performance
and welfare.

Food Specialties R&D successfully developed an enzyme
(PreventaseTM) as a processing aid that prevents the formation
of the toxic compound acrylamide during baking or frying of
asparagine-containing foodstuffs such as French fries, breakfast
cereals, potato chips and bread. Another new enzyme
(AccellerzymeTM) was recently introduced in the dairy industry.
Part of the cost price of hard cheese, such as Cheddar, is
determined by the time needed for the maturation of the cheese.
AccellerzymeTM considerably reduces this time, while providing
the same taste and texture characteristics as in older cheese,
and simultaneously reducing the manufacturing cost.

Anti-Infectives R&D continued to focus on transforming its
portfolio through process breakthroughs that will enable us to
develop innovations for the generic pharma products market.
In 2006 significant improvements were achieved in terms of
quality and eco-friendliness of our enzymatic and fermentation
based processes such as those for clavulanic acid and the
semi-synthetic antibiotics product lines.

R&D in Performance Materials
As part of the Corporate Research Program, our Materials
Science group worked together with DSM Desotech on the
development of a new generation of high-softness optical
fiber coatings with high cavitation strength and with DSM
Engineering Plastics on new grades of our Stanyl® polyamide
for LED applications.

Engineering Plastics R&D developed special Akulon®
(polyamide 6) grades to replace metal in automotive airbag
housings. These Akulon® grades are gaining a strong foothold
in safety-related applications in the automotive industry in
Europe, the United States and Asia. New grades of our Arnite®
PBT material were developed for use in high-temperature bezel
applications for the automotive industry.

I DSM in Zwolle / the Netherlands

In the field of elastomers, the technologies developed by
Sarlink® for the application of TPVs (thermoplastic vulcanizates)
in automotive sealing systems continued to spur the growth of
the Sarlink® business.

Our Resins R&D activities span a wide range of research
areas. In structural resins, new projects were started for various
markets such as automotive, aerospace and metal and machine
building, making use of the combined hybrid resin technology
in which advanced composites will provide solutions for
demanding applications. Development work was undertaken
for eco-friendly solutions limiting the use of toxic monomers
and additives and for eco-friendly applications such as wind
turbine blades.

In 2006, we launched new types of powder coating resins.
These resins allow the use of more pigment in paint formulations.
The increased hiding power enables application in thinner
layers, reducing total cost per square meter of coated surface.
We also launched a new type of high solids acrylic resins that
enable producers of car repair paints to formulate products that
are compliant with new European legislation.

In waterborne coatings, a new product family for flooring
coating applications was introduced which makes use of
a new patented concept that allows for the combination of
substantially reduced volatile organic compounds, with
excellent resistance to solvents, stains, abrasion and
scratching. Also, a new concept for waterborne acrylic
polymers was developed for decorative or architectural paints.

R&D in Industrial Chemicals
R&D is mainly directed at process improvement for existing
businesses, development of new processes for existing
products and increasing efficiency and sustainability. Industrial
Chemicals vigorously continues to maintain its technology
leadership based on proprietary IP positions. The Corporate
Research Program for Industrial Chemicals makes sure that
DSM develops the necessary technological competences.

Annual Report 2006

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Report by the Managing Board

ICT

Technical infrastructure
As part of the Aurora 2006 Program, the upgrade of the
global network was completed. With the new internet-based
technology, it is possible to prioritize data traffic generated by
business critical applications. The network is also ready for
voice applications. Furthermore, DSM’s e-mail facilities (software
and equipment) have been upgraded to the latest proven
technology. This technology offers opportunities such as e-mail
on mobile devices. Regarding office automation a substantial
proportion of the workstations and servers was replaced; the
rest of the workstations and servers will follow in 2007. Further-
more, managed services were sublet to one service provider.
The program will result in state-of-the-art functionality and a
reduction of total cost of ownership.

Business process standardization
In 2006, the Apollo Program continued its roll-out of standardized
best practice business processes to DSM units, notably DSM
Melamine and DSM Resins. Furthermore, DSM Anti-Infectives
and DSM Nutritional Products prepared for the start of the
implementation projects in 2007.

The Operational Excellence design for standardized processes
in the field of human resource management was implemented
at DSM Nutritional Products (USA), following implementations
at the DSM Delft units (Netherlands) and DSM Nutritional
Products in Switzerland in 2005. Preparations have started for
implementation at other organizational entities in the Netherlands.

Organization
To maintain and support the ICT systems and infrastructure,
Corporate ICT’s affiliates in Switzerland, the United States,
Brazil, Singapore and China were transformed into a global
organization. This involved the introduction of standardized
work processes and tools, as well as the relocation of activities.
A number of ICT services can now be delivered around
the clock.

Corporate governance

The general characteristics of DSM’s governance system
are described in the section entitled Corporate governance,
risk management and internal control on page 74. The main
events and developments at DSM in this field in 2006 are
summarized below.

Two General Meetings of Shareholders were held. The agenda
for the Annual General Meeting in March was to a large extent
similar to that of previous years. All proposed resolutions were
passed, including the appointment of Mr. Tom de Swaan as
new Supervisory Board member, the re-appointment of
Supervisory Board member Mr. Cees van Woudenberg and the
appointment of Mr. Nico Gerardu as new Managing Board
member. The meeting was informed about the way DSM is
applying the Dutch corporate governance code. A special item
on the agenda was the amendment of the Articles of
Association, which concerned the dematerialization of shares

and the introduction of an indemnity for members of the
Managing Board and the Supervisory Board.

Another General Meeting of Shareholders was organized in
October 2006 to appoint Mr. Rolf-Dieter Schwalb as new
Managing Board member and Chief Financial Officer.

In 2006 DSM analyzed and screened its systems and steering
procedures against the background of the Vision 2010
strategy. This led to various changes in DSM’s internal
organization and in the way the company operates.
The role and responsibility of the Managing Board were also
reviewed. The Managing Board continues to be a collegial
Board with collective responsibility for DSM’s overall performance.
In addition a more focused CFO role and individual Managing
Board responsibilities were defined for the four business
clusters and the various functions and geographies.

Three Board members (not the chairman or CFO) will be
responsible for one or two of the four business clusters.

For the latest information on the various aspects of DSM’s
corporate governance, see www.dsm.com (Governance section).

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 strategic and operational objectives of
the company are being achieved is understood, that the
company’s reporting is reliable and that the company complies
with relevant laws and regulations.

The most important risks identified, as well as the structure of
the aforesaid risk management system and aspects of its
further development are discussed below and in the section on
risk management that begins on page 75 of this Annual Report.

Internal letters of representation received from management,
regular management reviews, reviews of the design and
implementation of the company’s risk management system and
reviews in audit committees are integral parts of the company’s
risk management approach. On the basis of these, the
Managing Board confirms that internal controls over financial
reporting provide a reasonable level of assurance that the
financial reporting does not contain any material inaccuracies,
and confirms that these controls functioned properly in the year
under review and that there are no indications that they will not
continue to do so. The financial statements fairly represent the
financial condition and the results of the company’s operations
and provide the required disclosures.

It should be noted that the above does not imply that these
systems and procedures provide absolute assurance as to the
realization of operational and strategic business objectives, nor
that they can prevent all misstatements, inaccuracies, errors,
fraud and non-compliances with legislation, rules and regulations.

In view of all of the above, the Managing Board is of the opinion
that it is in compliance with recommendation II.1.4. of the

Annual Report 2006

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Report by the Managing Board

I DSM in Jiangyin / China

pharma grew at trend rate, while generic competition and
pressure on medicine prices remained challenging.

Raw material prices were volatile with a remarkable fall in
crude oil prices in August and September. It could be explained
by various structural factors as well as more temporary factors
such as a sharp reduction in net long trade positions. On the
demand side, we saw historically high levels of crude and
products stock and also a slight lowering of economic growth
in the United States which had an immediate limiting effect on
the global demand for oil. Despite these factors, the 2006
crude oil price was on average USD 65 per barrel, which
represents a 20% growth over the 2005 average price. Many of
our business groups had to work hard to pass on raw-material
price increases accordingly.

Outlook 2007
Growth in Asia might offset any slowdown in US economic
growth, but global growth is expected to be somewhat softer
than in 2006. Since global GDP and industrial demand will slow
down, the demand for chemicals may be lower in 2007, but
still on a relatively good level. In the European Union, chemical
output is forecast to grow at a rate of 3.0%.

Dutch corporate governance code, taking into account the
recommendation of the Corporate Governance Code
Monitoring Committee on the application thereof.

All risks that were identified during the strategy development
and implementation planning phases were addressed in 2006,
and a renewed risk assessment was performed at corporate
level. The possible erosion of the profitability of existing
businesses as a result of intense global competition was seen
as the main risk that needs to be given due attention in the
strategy implementation process. For risks that were identified
at the operational level, see the risk management section of this
report on page 75.

During the year under review, the implementation of the
Corporate Requirements as a basis for risk management in the
operating units was continued. The focus of this so-called True
Blue project was on the Requirements that relate to the flows of
goods and money. In 2006 the focus was on China and on
service and staff units in the Netherlands. The True Blue project
was completed at the end of the year. The risk management
framework for the total company will be maintained by a newly
created Corporate Risk Management function on behalf of the
Managing Board.

Macro-economic review

The year 2006 showed robust world economic output growth
(approximately 3.5%). However, towards the end of the year
some dampening occurred, especially in the United States. An
important driver of the strong overall growth was strong
investment, with liquidity abundantly available and long-term
interest rates still low. A second driver was strong global
household expenditure, not only in the United States but also in
Western Europe (which, at 2.6%, showed the best GDP growth
performance since 2000) and even Japan repeated the strong
economic expansion of 2005. Thirdly, emerging Asia continued
to grow very fast.

The US economy slowed down in the second half of 2006.
Overall, the US economy still grew by more than 3%, but the
decline in housing sales and the related effect on US consumer
spending affected other sectors. Consumers postponed big-
ticket purchases such as new cars. However, with oil prices
falling, equity markets performing well and business investment
being on a high level, overall GDP growth will most likely see a
soft landing next year, to about 2.5% in 2007.

The business climate in 2006 was particularly strong. In the
industrialized countries, industrial production grew by 3.4% on
average. Since this growth is a major driver of chemical
demand, many DSM businesses profited from this favorable
environment. The food and beverages sector benefited from an
increasing and continued awareness of food quality and health
consciousness. The automotive sector on the other hand grew
below par in the United States and Western Europe. The rise of
new low-cost production zones dampened production output.
All in all, structural challenges remain, such as import pressure
and the shift of customer base to low-cost countries. In 2006,

Annual Report 2006

www.dsm.com

Report by the Managing Board
Financial results

Statement of income

x € million

Continuing operations:
Net sales
Other operating income

Total operating income
Total operating costs

Operating profit before exceptional items
Net finance costs

Share of the profit of associates
Income tax expense
Profit attributable to minority interests

Net profit before exceptional items
Net result from discontinued operations
Net result from exceptional items

Net profit attributable to equity holders
of Royal DSM N.V.

2006

2005

8,352

210

8,562

(7,727)

835

(81)

(199)

(5)

551

(4)

547

7,816

222

8,038

(7,251)

787

(70)

(2)

(168)

554

(36)

527

Net sales
At €8.4 billion net sales from continuing
operations in 2006 were almost 7%
higher than in the previous year. Organic
volume growth accounted for a 5%
increase in net sales. Selling prices were
on average 2% higher than in 2005.
Exchange rates, acquisitions and
disposals on balance had a negligible
effect on sales.

Operating costs
Operating costs rose compared to 2005,
closing the year at €7.7 billion. The main
component of these costs, the cost of
raw materials and consumables for
goods sold, corrected for acquisitions
and divestments, rose by approximately
€300 million. Total autonomous fixed
costs increased slightly.

Operating profit
The operating profit from continuing
operations before exceptional items rose
by €48 million (6%), from €787 million in
2005 to €835 million in 2006, mainly as a
result of higher sales volumes. The
EBITDA margin (operating profit before
depreciation and amortization as a

percentage of net sales) declined from
16.4% in 2005 to 15.3% in 2006.

With selling prices increasing less than
raw-material prices, the average margin
(the selling price per unit of product less
variable costs) was below the 2005 level.

Net profit
Net profit rose from €527 million in 2005
to €547 million in 2006. Expressed as
earnings per ordinary share, net profit
rose from €2.68 in 2005 to €2.83 in
2006.

Net finance costs, before exceptional
items, stood at €81 million in 2006,
compared with €70 million in 2005. The
increase was the net effect of a number
of factors, the most important being
higher average interest rates and
impairments of other securities. Average
net debt was lower, however.

At 26%, the effective tax rate in 2006 was
higher than in 2005 (23%). The increase
of 3 percentage points was due to a
decrease in the proportion of income
elements taxed at a low rate. In addition,

Annual Report 2006

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all outstanding Dutch corporate income
tax returns (covering the years from 1999
until 2005) were settled in 2006.

The net profit from continuing operations
before exceptional items decreased by
€3 million to €551 million.

In 2006, gains were made on the disposal
of DSM Minera (Chile), the disposal of the
South Haven site (USA), the disposal of
the display coatings business (USA /
Japan), the release of a provision for
South Haven and the disposal of
Methanor (Netherlands). Provisions were
created for the costs of the termination of
the aspartame business, costs related to
the closure of the production facility in
Landskrona (Sweden), restructuring
activities at DSM Pharmaceutical
Products and an onerous contract at
DSM Nutritional Products.
Furthermore, DSM recorded a loss on the
termination of the AMEL joint venture in
the United States and made a deferred
pension settlement.

Report by the Managing Board

Capital expenditure and cash flow
Capital expenditure on intangible assets and property, plant
and equipment amounted to €457 million in 2006 and was
almost at the same level as amortization and depreciation.
In 2007 the level of capital expenditure, including small and
new-business-development-type acquisitions, is expected
to be above the level of amortization and depreciation.
At €630 million, net cash provided by operating activities
was about 7.5% of net sales.

Statement of cash flows

x € million

Cash and cash equivalents at 1 January

Operating activities:
- Net profit plus amortization and depreciation
- Changes in operating working capital
- Other changes

Cash flow provided by operating activities

Investing activities:
- Capital expenditure
- Acquisitions of subsidiaries
- Disposal of subsidiaries and businesses
- Other disposals
- Other changes

Net cash used in investing activities

Dividend paid
Net cash used in financing activities

Effects of changes in the consolidation scope
and exchange differences

Cash and cash equivalents at 31 December

I DSM in Sisseln / Switzerland

998

(4)

(364)

(458)

(44)

135

(8)

2006

902

2005

1,261

1,094

(119)

(282)

630

693

(393)

(559)

192

(115)

(845)

(183)

(37)

902

(345)

(213)

(407)

(15)

552

Annual Report 2006

www.dsm.com

Report by the Managing Board

Net debt stood at 14% of equity plus net debt at the end of 2006.

Balance sheet profile

As %

Intangible assets
Property, plant and equipment
Other non-current assets
Cash and cash equivalents
Other current assets

2006

2005

Total assets

100

Equity
Provisions
Non-current liabilities
Current liabilities

Total liabilities

100

The balance sheet total (total assets) remained stable in 2006
and amounted to €10.1 billion at year-end (2005: €10.1 billion).
Equity increased by €287 million compared with the position at
the end of 2005; this was due mainly to result development and
actuarial gains, partly offset by the repurchase of own shares,
dividend payment and exchange rate differences. Equity as a
percentage of total assets increased from 55% at the end of
2005 to 58% at the end of 2006. The current ratio (current
assets divided by current liabilities) decreased from 1.76 in
2005 to 1.61 in 2006.

The operating working capital was €86 million lower than in
2005. Cash and cash equivalents decreased and amounted to
€552 million.

Dividend
DSM aims to provide a stable and preferably rising dividend.
The dividend is based on a percentage of the cash flow. Barring
unforeseen circumstances, this percentage lies within a range
of 16 to 20% of the net profit plus depreciation and
amortization, both before exceptional items, minus the dividend
payable to holders of cumulative preference shares.

The dividend on ordinary shares proposed for the year 2006
amounts to €1.00 per share, the same as in the previous year.
This corresponds to 19% of the cash flow (net profit excluding
exceptional items (€551 million) plus depreciation and
amortization (€440 million) minus the dividend (€10 million)
payable to holders of cumulative preference shares). An interim
dividend of €0.33 per ordinary share having been paid in
August 2006, the final dividend will amount to €0.67 per
ordinary share.

The ex dividend date is 30 March 2007.

DSM outlook for 2007
Economic growth in Europe and North America is expected to
slow down somewhat in 2007. For the emerging economies
growth expectations remain buoyant, especially for Asia. The
US dollar started the year at a clearly lower exchange rate
versus the euro than the 2006 average, while raw-material and
energy prices eased somewhat although they are still at a very
high level and are expected to stay volatile. Especially the
natural-gas price in the Netherlands is a reason for concern.

This year DSM will be facing some specific business issues:
some attractive contracts related to the acquisition of Roche
Vitamins (now DSM Nutritional Products) will come to an end,
we are seeing intensified competition in some of the more
mature parts of the Nutrition business and, since we want to
defend and further strengthen our market position, margins
may erode more quickly than the pace at which new products
and formulations make their positive impact felt. However,
DSM remains committed to further increasing its innovation
efforts and the associated expenditure.

DSM expects that 2007 will be another year of solid sales-
volume growth. However, because of the exchange-rate
sensitivities, the high natural-gas price in the Netherlands
and the specific business issues referred to above, DSM
expects that the operating profit in 2007 will be lower than in
the record year 2006, although it will be on track with the
Vision 2010 objectives.

Annual Report 2006

www.dsm.com

Report by the Managing Board

Equity
as a % of balance sheet total

2002

2003

2004

2005

2006

58%

53%

49%

• 0

• 10

• 20

• 30

• 40

• 50

55%

58%
• 60

Capital employed by segment at
31 December 2006
x (cid:96) billion

Nutrition

Pharma

Performance Materials

Industrial Chemicals

Other activities

• 0

• 0.5 • 1.0 • 1.5 • 2.0 • 2.5

Operating profit 2006 by segment
from continuing operations
x (cid:96) million

Nutrition

Pharma

Performance Materials

Industrial Chemicals

Other activities

-50 •

• 0

• 100 • 200 • 300

R&D expenditure 2005 and 2006
incl. discontinued activities
x (cid:96) million
2005
2006

Nutrition

Pharma

Performance
Materials

Industrial
Chemicals

Other
activities

• 0

• 50

• 100

• 150

Annual Report 2006

www.dsm.com

Review of business

To provide the best possible structure for the
execution of Vision 2010 – Building on Strengths,
DSM’s activities have been regrouped into
four clusters: Nutrition, Pharma, Performance
Materials and Industrial Chemicals.

Net sales and supplies

x € million

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

2006

2,407

916

2,753

1,872

404

net sales

2005

2,399

924

2,447

1,687

359

2006

2,463

967

2,759

2,135

422

supplies

2005

2,458

988

2,459

1,899

376

Intra-group supplies

(394)

(364)

Total, continuing operations
Discontinued operations

8,352

7,816

379

8,352

7,816

379

Total DSM

8,380

8,195

8,380

8,195

EBITDA / net sales

in %

2006

2005

Nutrition
Pharma
Performance
Materials
Industrial
Chemicals

19,3

15,9

20,3

15,5

15,6

16,8

14,4

14,6

Annual Report 2006
Annual Report 2006

www.dsm.com
www.dsm.com

40
40

Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

Operating profit plus depreciation and amortization
(EBITDA)

x € million

2006

2005

Capital employed at 31 December

x € million

2006

2005

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

Total, continuing operations
Discontinued operations

Total DSM

464

146

429

269

(33)

487

143

410

246

(8)

1,275

1,278

(1)

1,274

1,311

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

Total, continuing operations
Discontinued operations

Total DSM

2,159

1,302

1,697

745

407

2,188

1,356

1,707

728

242

6,310

6,221

(7)

6,303

6,221

Operating profit (EBIT)

x € million

R&D expenditure

2006

2005

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

Total, continuing operations
Discontinued operations

314

329

196

(69)

835

(1)

329

305

165

(53)

787

Total DSM

834

808

Nutrition
Pharma
Performance
Materials
Industrial
Chemicals
Other activities

Total, continuing
operations
Discontinued
operations

x € million

as % of net sales

2006

2005

2006

2005

134

107

115

5.6

6.2

3.9

1.0

2.7

4.8

6.2

3.8

0.8

2.2

327

288

3.9

3.7

Total DSM

327

290

Capital expenditure and acquisitions

Workforce (year-end)

x € million

2006

2005

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

Total, continuing operations
Discontinued operations

Total DSM

113

146

126

501

122

667

972

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

Total, continuing operations
Discontinued operations

974

Total DSM

Annual Report 2006

www.dsm.com

2006

2005

7,844

4,731

4,664

2,183

2,728

7,568

4,500

4,441

2,234

2,919

22,150

21,662

158

22,156

21,820

Review of business
Nutrition

The Nutrition cluster comprises DSM Nutritional
Products, DSM Food Specialties and DSM
Special Products, the benzoates (benzoic acid
derivatives) business unit of the former DSM Fine
Chemicals business group.

x € million

2006

2005

Net sales*:
- DSM Nutritional Products:
Animal Nutrition and Health
Human Nutrition and Health

- DSM Food Specialties
- DSM Special Products

Total

Operating profit
Operating profit plus amortization and
depreciation
Capital expenditure and acquisitions
Capital employed at 31 December
Operating profit as % of average capital
employed
EBITDA as % of net sales
Research and development

Workforce at 31 December

* before elimination of intra-group supplies to other clusters

1,091

867

1,049

873

1,958

411

2,463

314

464

113

2,159

14.4

19.3

134

7,844

1,922

438

2,458

329

487

122

2,188

15.6

20.3

115

7,568

The main customers are food, beverages,
feed and flavor/fragrance companies
across the world. The activities in this
cluster are to a large extent based on
DSM’s in-depth knowledge of biotech-
nology (including fermentation, genomics
and biocatalysis), organic chemistry and
formulation technologies and on the
company’s broad application knowledge.
DSM holds leading positions in the
markets for ingredients for human and
animal nutrition and health and personal
care. The groups in this cluster work
closely together in marketing and sales,
R&D and production facilities among
other things.

Supplies of Nutrition
x (cid:96) million

2005

2006

Operating profit of Nutrition
x (cid:96) million

2005

2006

• 0

• 500

• 1,000 • 1,500 • 2,000 • 2,500

• 0

• 100

• 200 • 300 • 400 • 500

Annual Report 2006

www.dsm.com

Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

DSM Nutritional Products
Dual track strategy launched

• Global leadership secured
• Various new products and product forms introduced
• Competitive intensity in established business continued

DSM Nutritional Products is the world’s largest supplier of
nutritional ingredients, such as vitamins, carotenoids (anti-
oxidants and pigments), other biochemicals and fine chemicals,
and premixes. The company covers an unmatched breadth of
applications in the area of ingredients, addressing the animal
and human nutrition and health as well as personal care
industries. It has 11 large production sites in 7 countries. It also
runs 35 premix plants for Animal Nutrition and Health and
11 premix plants for Human Nutrition and Health, where
product combinations are custom made to serve specific
customer needs. R&D facilities are concentrated in the region
of Basel, Switzerland, and are strongly integrated in an
innovation network with other nutrition-related DSM R&D
campuses in Delft and Geleen (Netherlands). Additionally, R&D
satellites are managed in France and China. DSM Nutritional
Products has some 40 sales offices that are active in over 100
countries. It employs approximately 6,200 people.

Compared to 2005, both Animal Nutrition & Health and Human
Nutrition & Health in DSM Nutritional Products achieved solid
volume growth at lower prices. DSM Nutritional Products’
operating profit decreased slightly because higher volumes did
not fully compensate for higher innovation expenditure and
negative price effects.

Strategy
The year 2006 witnessed the successful conclusion of the
VITAL integration and transformation project and the start of the
implementation of a new strategy, including the setting-up of a
new organization. DSM Nutritional Products is capitalizing on
opportunities in the market to strengthen its new product
portfolio via internal developments as well as on acquisitions
and licensing agreements. Demand for innovation in all sectors
of nutrition and health was reflected in good market uptake of
new products.

On 2 January 2006, DSM Nutritional Products made a start on
the execution of its new Dual Track Strategy – the new watch-
word following the successful conclusion of the VITAL project.
Closely aligned with DSM’s corporate strategy Vision 2010 –
Building on Strengths, the Dual Track Strategy on the one hand
recognizes the need to sustain the profitability of established
products by reinforcing market share and product margins by
reducing costs as much as possible and placing special
emphasis on product differentiation, and on the other hand
aims to boost the full growth of new business by developing a
vital portfolio of innovative new products and launching them
successfully into the markets.

Anchoring the improvements achieved by the VITAL project
also required a realignment of organizational structures to the
strategy. Whereas the traditional alignment between the two
business groups Human Nutrition & Health (HNH) and

I DSM in Shanghai / China

Animal Nutrition & Health (ANH) was strengthened so as to
ensure greater customer focus, a fully dedicated New Business
Development (NBD) organization was created to support growth
and innovation, specifically fostering new products for each of
these business groups. This will ensure that both the already
established and the new products in the portfolio receive the
attention they require to perform successfully.

Along with the new strategy and organization, the way of
working together also experienced significant change. The
overall framework for thorough implementation was set by a
Business Process Navigator, which elucidated the consequences
of the new structures for internal workflows, and by a dedicated
training program. Key account management together with new
tools introduced at the frontline helped to increase customer
intimacy and identify new opportunities for further adding value
to the business through product differentiation and superior
performance of the new products.

Cross-functionality is key in all new processes, especially in
product management, which is the function in charge of the
development of product-related strategies, the Annual Strategic
Review for all products, the production strategy, process
innovation and product supply optimization. Consequently, the
implementation of the new strategy is fully aligned with and
supported by the businesses in both industry segments.

Business review Human Nutrition and Health (HNH)
Despite continued price pressure, mainly from Chinese
suppliers, HNH sales overall remained relatively robust. This
was helped in part by a continued focus on the more dynamic
segments such as functional foods and beverages and by an
increased emphasis on those products where product form
differentiation plays an important role. Examples of recently
introduced product forms include Betatab 20% S,
Apocarotenal 1% CWS/M and Betacarotene 3% CWS/M. All of
these forms provide excellent performance and stability whilst
also being animal-free and allergen-free (which is something
customers increasingly require).

Annual Report 2006

www.dsm.com

Review of business

products in the dairy and cereal bar category are using the
patented product.

Citric Acid sales grew in line with the overall market growth
rate. The development in this area is mainly driven by the major
beverage producers. Production costs were negatively affected
by increases in raw-material costs and energy prices. Availability
of raw materials has also been influenced by a new sugar
regulation in the European Union and the increase in bioethanol
production. On the customer side, prices remained the dominant
key buying parameter, followed by quality and value-based
services areas in which DSM Nutritional Products has a strong
position. The pressure on the operating profit for the Citric Acid
unit was to a large extent countered by restructuring measures,
technology improvements and a differentiated program of price
increases offsetting some of the rises in raw material and
energy costs.

Personal Care enjoyed a good year due to the strong demand
in UV filters and panthenol. This was partly triggered by a hot
summer in Europe and the United States. The generally higher
awareness with regard to UV-A protection is fueling growth for
Parsol® 1789. Also, the demand for anti-aging actives and
vitamins is still growing. In order to capture the benefits of this
trend, DSM Nutritional Products launched All-Q® Plus, an oil-
soluble blend of CoQ10 and vitamin E. The newly introduced
UV-B filter Parsol® TX, a coated form of titanium dioxide, enjoys
excellent customer feedback. Overall, the Personal Care unit
was able to keep or slightly expand its market share for the key
products, and recently launched UV filters enjoyed a good
growth at key accounts. On the customer side, an ever faster
trend for reformulations in the sun care segment has
been observed.

Business review Animal Nutrition and Health (ANH)
The ANH market continued to show healthy growth in 2006,
although part of DSM Nutritional Products’ offering came under
some pressure due to competitive activity. The newly set up
business management structure, supported by selective key
account management activities, strengthened the overall
performance, resulting in above-market growth in carotenoids
and vitamins. This helped to offset price erosion and contributed
to a slightly improved supply-demand balance for ANH’s
leading products. Price pressure on carotenoids was countered
by a healthy increase in demand for feed products from the
growing salmon industry. During the year, the business
successfully started to further implement its premix strategy
by streamlining its operations and expanding in the emerging
areas. August 2006 saw the opening of a new feed premix
plant in Shandong province (China). The facility provides
advanced-formula vitamin and mineral premixes to feed
customers in North and Northeast China. In line with DSM’s
Vision 2010 – Building on Strengths strategy, it serves two key
strategic targets: growing our specialty portfolio in nutritional
products and expanding our presence in the Chinese market.

The impact of the avian flu epidemic declined gradually over
2006, although some local outbreaks were still reported (for
example in Thailand and Indonesia). Sales of products for the
poultry market (specifically feed enzymes and Hy-D®) showed

I DSM in Delft / the Netherlands

Thanks to its unique global sales network and its status as
the world’s leading supplier of nutritional premixes, DSM
Nutritional Products is the number one player in nutritional
ingredients for human applications. The renewed focus on key
account management allowed HNH to further strengthen its
position with key global and regional customers. In addition, an
increased focus on dietary supplements and certain food
segments using tailored concepts and specific value marketing
and selling approaches ensured that customer and consumer
needs were met.

The major trends in the markets for food ingredients (including
beverages) and dietary supplements are the key drivers for the
development of new products and concepts. Boosted health
awareness, changing lifestyles and an aging population will
further increase the demand for health-enhancing nutritional
ingredients. In view of this, HNH’s food innovation programs
focus on fitness and wellness, metabolic syndrome and
cognitive function.

The year 2006 saw the launch of BonisteinTM a dietary
supplement ingredient that combats osteoporosis by
increasing bone formation and bone mineral density, offering
health benefits especially to post-menopausal women. Also in
2006, DSM Nutritional Products entered into an exclusive
global agreement with CreAgri, Inc. of California (USA) to
market Hidrox®, a concentrate of olive polyphenols with
antioxidant and anti-inflammatory properties. Applications
include breads, biscuits and juices. An exclusive distribution
agreement was also signed with Hyben Vital for the
commercialization of the company’s rosehip powder outside
Europe. This product, which will be available to consumers in
the first quarter of 2007, is expected to make major inroads in
the joint health and osteoarthritis market, which today is mainly
served by products based on glucosamine. The highly purified
green tea extract Teavigo® showed very strong growth in 2006,
almost doubling the previous year’s performance. Many end-
consumer products containing Teavigo® were launched in the
area of healthy lifestyle beverages, while more and more

Annual Report 2006

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Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

concomitant signs of recovery. The negative impact of the avian
flu was countered by higher volume sales – fostered by securing
orders from large accounts combined with a partial lowering of
prices in selected products – as well as by continued efficiency
measures in operations.

Innovations in nutritional additives are driving new application
concepts for pets and farm animals as well as broadening the
application field for young products. As a consequence,
ANH’s innovation strategy aims at developing and successfully
launching innovative niche products. For instance, continuous
pressure on the use of antibiotic growth promoters even outside
Europe is ensuring the further development of alternative
concepts such as eubiotics. The segment of zootechnical
additives will be further strengthened through innovations in
probiotics and eubiotics and through the screening for new
enzymes. Increased penetration of existing applications such
as VevoVitall® and Hy-D® (for the swine and poultry segments,
respectively), together with new applications and products,
allowed further enhancement of ANH’s leadership position not
only in eubiotics but also in nutritional additives and enzymes.
The portfolio was further strengthened by the acquisition of
CRINA, a pioneer in the development of plant extracts for use
as feed additives, from Intervet International. The increased
cost and limited availability of raw materials further supported
the use of the performance-enhancing enzymes Ronozyme®
and Roxazyme®, both within and beyond Europe. Form
development is key to growth in the sensory additive segment.
It provides solutions to improve the appearance of meat
products, for instance, or to reduce the environmental impact
of livestock farming.

The production site in Dalry (Scotland) has successfully
introduced a new Central Control Room (CCR). Where previously
18 control rooms had been required, now the powerhouse,
the waste water treatment plant and the entire vitamin C and
Rovimix® Calpan production are controlled from a single control
room. The CCR concept is part of the platform that will complete
savings targeted by VITAL and support the new organization
based on Manufacturing Excellence processes in Dalry.

Projects
The year 2006 brought the strategic repositioning of DSM’s
humanitarian initiative SIGHT AND LIFE, which was founded in
1986 to assist in combating vitamin A deficiency in developing
countries. DSM has continued to foster SIGHT AND LIFE in its
fight against pressing health issues related to micronutrient
deficiency in the developing world. The initiative’s focus has
shifted from eye health (vitamin A) to ‘the double burden of
malnutrition’ (paradox of concurrent micronutrient deficiency
and obesity) and nutritional anemia, the latter affecting
approximately two billion people worldwide. In the autumn
of 2006, SIGHT AND LIFE hosted a workshop with nutrition
experts from leading academic institutions and global
organizations, including WHO, UNICEF, the World Bank and
the World Food Programme, to develop solutions in the fight
against the public health scourge of nutritional anemia.

I DSM in Shanghai / China

DSM Nutritional Products also helps in the battle against
malnutrition by means of its Nutrition Improvement Program.
The Nutrition Improvement Program is one of DSM’s
contributions to achieving the Millennium Development
Goals that were declared by the heads of state and heads
of government of all 191 United Nations member states at
the United Nations General Assembly in September 2000.
The Millennium Development Goals are the world's time-bound
and quantified targets for addressing extreme poverty in its
many dimensions while promoting gender equality, education,
and environmental sustainability. These are also basic human
rights. Within this context, the Nutrition Improvement Program
provides technical and scientific support for supplementation
programs and for the fortification of staple foods with vitamins
and minerals in developing countries.

DSM Food Specialties
Targeting promising markets

• Successful launch of a number of new, innovative products
• Growth in all business segments, but also price pressure
• Progress in Operational Excellence

DSM Food Specialties is a global supplier of advanced ingredients
for the food industry manufactured with the aid of fermentation
and enzyme technology, among other technologies, based on
in-depth application knowledge of the chosen market
segments. The group comprises five business units. DSM Dairy
Ingredients supplies enzymes (such as rennets), starter cultures
and preservation systems for cheese and yogurt, and tests for
the detection of residues of antibiotics. DSM is one of the
biggest suppliers of dairy ingredients in the world. DSM Savoury
Ingredients is a major supplier of ingredients for flavorings and
flavor enhancers (such as yeast extracts) used in products such
as soups, instant meals, sauces and savory snacks. DSM
Enzymes produces a wide range of food enzymes for
applications such as baking, fruit processing, beer brewing and
the manufacture of other alcoholic beverages. DSM Functional

Annual Report 2006

www.dsm.com

Review of business

sales volumes of preservation systems and coatings increased.
Prices were somewhat under pressure in the latter segment.

DSM Savoury Ingredients recorded strong sales volume
growth, in particular in the specialty-yeast extracts segment,
which includes the newly launched product Maxarome® Select.
The construction of a dedicated factory for processed flavors in
Shanghai (China) proceeded according to schedule. The plant
is expected to come on stream at the beginning of 2007.

DSM Food Enzymes’ sales were up on 2005 with volume
growth in fruit-processing enzymes and a good performance in
newly introduced pectinase enzymes under the brand names
Rapidase® Smart Clear and Rapidase® Intense. Sales volumes
of brewing enzymes and baking enzymes grew, supported by
the successful market feedback on the new enzyme Brewers
Clarex™, an enzyme that helps brewers to prevent turbidity in
beer. The Brewers Clarex™ enzyme, the first beer innovation
in about three decades, is now used on a commercial scale in
brewing in Europe, Asia and the Americas. Regulatory approval
has been obtained in China. A new enzyme for improved
emulsification properties in mayonnaise, sauces and bakery
products was launched under the brand name Maxapal®.

DSM Functional Food Ingredients saw its sales increase
sharply as more and more baby food manufacturers in the
world were launching new product lines for infant formula
enriched with arachidonic acid. The remaining shares of the
Swedish ingredients firm Lipid Technologies Provider (LTP)
were acquired for €18 million. LTP’s technology platform is
based on formulated lipids from natural sources such as oat oil,
and is used to develop delivery systems for functional foods,
dietary supplements and pharmaceuticals. DSM Food
Specialties was already LTP’s marketing partner in dairy
applications for the successful satiety ingredient Fabuless™.
The product contains a special emulsion of natural, fractionated
palm oil and oat oil and uses the body’s natural appetite control
mechanism. The product concept recorded strong sales
growth in the dairy and supplements markets in Italy, Portugal,
the United Kingdom, the Netherlands and the United States.

Sales of the patented peptide PeptoPro® increased in Europe
and the United States. A growing number of producers of sport
and energy drinks have now included PeptoPro® in their new
line of products targeted at fast recovery after exercise or
endurance during exercise. It has been proven, however, that
in some cases the time-to-market is somewhat longer than
expected, in particular when it depends on the speed with
which food customers launch new foodstuffs with innovative
health claims.

DSM Ingredients Development continued the development of
radically new ingredients for the functional-foods industry. The
project announced last year regarding the product concept
aimed at including the nutritional value of milk into a beverage
without the limitations of color and taste of milk has been
terminated, predominantly for cost reasons. However, DSM
Ingredients Development has a well-filled pipeline of new
ingredients.

I DSM in Kaiseraugst / Switzerland

Food Ingredients produces ingredients for baby food, food
supplements and functional foods such as arachidonic acid,
probiotics and peptides. DSM Ingredients Development
develops and pre-launches innovative ingredients for the
food industry.

The main production sites are in Seclin (France, enzyme
production), Capua (Italy, arachidonic acid), Delft (Netherlands,
yeast extracts, natamycin and tests), Belvidere (USA, arachidonic
acid) and Moorebank (Australia, cultures). The main R&D center
is in Delft.

Strategy
DSM Food Specialties targets market segments characterized
by fast growth and seeks to respond to the major trends in the
food industry toward health, convenience and natural products.
Under the supervision of a Monitoring Trustee appointed by the
European Commission, DSM Food Specialties continued to
produce and supply feed enzymes to BASF as part of the
dissolution arrangement for the former alliance with BASF. As
a consequence of the arrangements made, production was
phased out in 2006.

Business review
The global food ingredients market grew by about 4% in 2006.
DSM Food Specialties saw its sales decline by 6% due to the
termination of the supply of feed enzymes to BASF in the
course of the year, as agreed in 2003 with the acquisition of
Roche Vitamins & Fine Chemicals. DSM Dairy Ingredients’
sales were slightly up on 2005. Sales volumes of the starter
cultures range showed a significant increase. Under the brand
name Delvo-Add® a new culture was launched which is
designed to improve texture, mouth feel and moisture content
in a range of cheeses. Sales volumes of rennets produced by
means of fermentation were also higher than in 2005. Under
the brand name Accelerzyme® a new cheese ripening enzyme
was introduced which accelerates flavor development while
also eliminating the bitter off-taste formed during cheese
maturation. Sales volumes of antibiotic tests were stable, while

Annual Report 2006

www.dsm.com

Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

I DSM in Shandong / China

to find alternatives for their phthalic-acid-based plasticizers,
which have come under increasing regulatory scrutiny. DSP’s
benzoic acid can in many cases be an environmentally friendly
and effective alternative.

DSP’s site in Rotterdam (Netherlands) will continue its efforts
to improve its efficiency in the utilization of raw materials
and energy.

Due to lower sales DSM Food Specialties’ operating profit was
clearly lower than in 2005.

Projects
Various efforts were made to facilitate sales growth and
increase operational efficiency. ISO 9001 certificate renewals
took place at several locations. The production site in Seclin
(France) has completed the restructuring program initiated in
2004 aimed at providing a competitive future manufacturing
base for the enzyme business. Various steps were taken to
further improve demand and supply chain management, the
sharing of sales offices with other DSM business groups and
value-based pricing. In emerging economies such as China,
India and Russia, the organization was strengthened to capture
the growing demand for food ingredients. In China a new food
application lab was opened near Shanghai.

DSM Special Products
Among the global market leaders

• Consistent above-market growth
• Encouraging growth in VevoVitall®
• Financial results under pressure

DSM Special Products (DSP) produces benzoic acid, sodium
benzoate, benzaldehyde and benzyl alcohol. Its products such
as Purox®S, Purox®B and VevoVitall® are widely recognized for
their purity and quality. The business group supplies to a wide
range of markets, including the markets for carbonated soft
drinks, food, animal feed, plasticizers, resins, cosmetics,
personal care, flavors and fragrances, as well as a diverse
range of industrial applications. The production facilities are
located in Rotterdam (Netherlands).

Strategy
DSM Special Products is the global market leader in most of
the products it supplies. DSM Special Products will build upon
these leadership positions by creating market growth through
innovation. It will continue to set the benchmark in the industry
through the quality of its products.

Business Review
In 2006, as in previous years, DSM Special Products (DSP)
outgrew the market in a number of core products. Growth in
VevoVitall®, our feed additive that helps pig farmers to
significantly reduce ammonia emissions, has been particularly
encouraging. However, the price of the key raw material toluene
saw exceptional volatility, peaking at unprecedented levels.
DSP was not able to pass on the full increase of this raw-material
price to its customers, leading to a negative operating result.

Projects
At the end of 2006, DSP obtained registration by the European
authorities for the consumption of VevoVitall® by piglets. This
offers piglet farmers the opportunity to profit from the benefits
of VevoVitall® regarding the environment (ammonia reduction)
as well as productivity. For DSP, this opens up a new market
segment that will further sustain VevoVitall® growth figures.
DSP is working closely with selected producers of plasticizers

Annual Report 2006

www.dsm.com

Review of Business
Pharma

The Pharma cluster comprises the business
groups DSM Pharmaceutical Products and DSM
Anti-Infectives. Parts of the former DSM Fine
Chemicals business group have been integrated
into DSM Pharmaceutical Products.

x € million

2006

2005

Net sales*:
- DSM Pharmaceutical Products
- DSM Anti-Infectives

Total

Workforce at 31 December

* before elimination of intra-group supplies to other clusters

605

362

967

146

1,302

4.9

15.9

4,731

650

338

988

143

1,356

3.1

15.5

4,500

DSM is one of the world’s leading
independent suppliers to the
pharmaceutical industry, with some 40%
of today’s top-selling medicines in the
world containing ingredients developed
and produced by DSM.

Supplies of Pharma
x (cid:96) million

2005

2006

Operating profit of Pharma
x (cid:96) million

2005

2006

• 0

• 200

• 400 • 600 • 800 • 1,000

• 0

• 20

• 40

• 60

• 80

• 100

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Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

DSM Pharmaceutical Products
High-quality global services to the life science industry

• Good pipeline development in Pharma Chemicals
• Solid growth and performance of finished-dose

manufacturing business

• Percivia Per.C6® Development Center established

DSM Pharmaceutical Products is one of the world’s leading
providers of high quality global custom manufacturing services
to the pharmaceutical, biotech and agrochemical industries.
Customers around the world are serviced from five manufacturing
sites in North America and Europe. Customers include seventeen
of the top twenty pharmaceutical companies and the top three
agrochemical companies as well as a large number of biotech,
specialty and virtual companies across the globe. The business
group comprises four business areas.

DSM Pharma Chemicals is a provider of custom chemical
manufacturing services for complex registered intermediates
and active ingredients for pharmaceuticals. Using a large
technology toolbox, it provides manufacturing services from
three European-based facilities located in Austria, the
Netherlands and Italy.

DSM Biologics is a leading provider of manufacturing
technology and services for the biopharmaceutical Industry.
DSM Biologics and Crucell N.V. have co-exclusive rights to
license the high-producing Per.C6® human cell line to the
biopharmaceutical industry as a production platform for
recombinant proteins and monoclonal antibodies. DSM Biologics
operates an FDA-approved manufacturing facility in Groningen,
the Netherlands.

DSM Pharmaceuticals, Inc. is a provider of high-quality
finished-dose manufacturing services to the pharmaceutical
and biotech industries. Operating from Greenville, North
Carolina (USA), the company manufactures sterile injectables
(liquid and freeze-dried), solid-dose (tablets, capsules), semi-
solid (creams, ointments) and liquid products for companies
around the world.

DSM Exclusive Synthesis / Intermediates, formerly part of the
now-dissolved DSM Fine Chemicals business group, is a global
player in custom manufacturing services for the agrochemical
industry and a provider of organic intermediates to the fine
chemicals industry. Customers are served from two production
sites in Europe (in Austria and the Netherlands).

Strategy
DSM Pharmaceutical Products provides solutions to the
development and manufacturing needs of the pharmaceutical
and agrochemical industries. The business group derives
sustainable success from the application of a wide range of
technical and regulatory capabilities to deliver services in a
compliant, timely and cost-effective manner.

Business review
The business group’s performance was helped by a significant
increase in the overall performance of DSM Pharma Chemicals.

I DSM in Zhangjiakou / China

DSM Pharma Chemicals exhibited a strong financial perfor-
mance due to continued new business uptake and the growth
of existing development projects and commercial products.
Through the disposal of the manufacturing site at South Haven,
Michigan (USA), the business unit’s involvement in lower-
margin generic active ingredients was reduced. The pharma-
ceutical activities in Linz (Austria) benefited from new business
intake and from cost reduction measures.

DSM’s ResCom® facility, a specialized unit within DSM Pharma
Chemicals, delivers industry-leading performance in the supply
of intermediates and active pharmaceutical ingredients for
compounds that are in early-phase clinical development. In
order to continue to expand the business group’s project pipeline,
investments were made at DSM’s manufacturing facility in Linz
(Austria) to increase capacity for later-stage development
projects, providing a smooth project flow from ResCom®.

DSM Pharmaceuticals, Inc. showed an increase in operating
profit compared with 2005, primarily due to a stronger product
portfolio and the implementation of operational efficiencies in
solid-dose manufacturing services. In particular, the demand
for existing solid-dose products increased as a number of new
projects were added from existing customers. Sterile manu-
facturing services continued to benefit from the demand for
existing biologic products and the addition of new projects with
many new product launches scheduled for 2007. Eleven new
products were launched from the Greenville (USA) facility in
2006, including two sterile biologics for which the pre-approval
inspections were waived by the FDA (the American Food and
Drug Administration). New business inquiries continued to
exceed the already high level attained in 2005, primarily due
to the launch of web-based marketing programs.

Expansion in the sterile-manufacturing area continued on
schedule as the clinical trial materials (CTM) manufacturing site
was completed and qualified for operation in the fourth quarter
and construction of the cytotoxic manufacturing suite is on
schedule for completion in 2007. These additions will allow

Annual Report 2006

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Review of Business
Pharma

I DSM in Shanghai / China

DSM Pharmaceuticals, Inc. to satisfy the expected demand for
sterile-manufacturing services resulting from the large number
of biologic products in the development pipeline.

DSM Biologics’ activities were centered on providing
manufacturing services for new and existing customers from
the facility in Groningen (Netherlands) and establishing the
Percivia Per.C6® Development Center with joint venture partner
Crucell N.V. Sales declined compared with 2005, primarily due
to the capacity reduction resulting from the closure of the
Montreal site (Canada), but losses were minimized because of
lower fixed costs. The number of new manufacturing projects
increased compared with 2005, which should have a positive
impact on 2007 financial performance.

Projects
An Operational Excellence project implemented in solid-dose
manufacturing resulted in a significant increase in contribution
margin in line with the business group’s strategy of reforming
its activities and improving its profitability. The manufacturing
facility for active pharmaceutical ingredients in South Haven,
Michigan (USA) was successfully sold to Albemarle. The closure
of the Biologics facility in Montreal was realized.

The sales agreement between DSM and Roche dating from
2003, which pertained to DSM’s position as a preferred
pharma supplier to Roche and provided DSM with additional
sales of over €100 million over a period of four years, will expire
in 2007.

DSM Anti-Infectives
Substantial cost reductions carried out

• Oversupply persists
• New amoxycillin production facility in India
• Strategy review commenced

DSM Anti-Infectives (DAI) holds global leadership positions in
penicillin G, penicillin intermediates (6-APA and 7-ADCA), side
chains, semi-synthetic penicillins, semi-synthetic cefalosporins
and other active ingredients, such as potassium clavulanate
and nystatin.

Strategy
DAI strives to maintain its global leadership positions via
technological innovation, customer intimacy and operational
excellence, and to improve its overall profitability. The business
group is a large player in penicillin G, intermediates, side chains
and the related active ingredients. These products are used to
combat bacterial or fungal infections. DAI has production
facilities in Egypt, China, India, Mexico, Sweden, Spain, Italy
and the Netherlands.

Business review
Global market demand for penicillin equivalents grew about
4% in 2006. Despite the fact that a number of small producers
dropped out or converted their capacity to other products, the
oversupply situation persisted. In some specific product-
market areas this oversupply caused selling prices to reach an
all-time low, while prices recovered in other areas. During 2006,
the weak dollar translated into pressure on top-line results,
while rising energy and raw-material prices could not be fully
passed on in the value chain.

The drastic measures announced in 2004 to improve the
bottom-line result proved to be effective, leading to a
substantial improvement in financial performance in 2006.
Unfortunately, because of the margin squeeze (caused by
higher energy costs and lower prices in some markets and by
the continuing weak dollar compared to the euro), DAI’s
operating result was still negative.

Projects
DAI announced the start-up of a new amoxycillin production
facility in India, based on proprietary enzymatic technology. The
start-up went well and design capacities were reached as early
as December 2006. DSM is awaiting approval by the Chinese
authorities for the envisaged joint venture with NCPC regarding
anti-infectives and basic vitamins.

In 2006, clavulanic acid was again a significant profit contributor,
although less so than in previous years. Substantial cost-price
improvements were realized in the plant in Sweden. In all
product-market combinations the focus continued to be on
value-based pricing initiatives supporting the superior – high-
purity – quality of the PureActives™ range and the associated
advantages for DAI’s customers. The focus of R&D activities is
on cost reduction of core products and value extraction from
DAI’s technology. R&D activities in 2006 also contributed to
identifying and developing new generic products.

Annual Report 2006

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Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

This program – named Growth Options – will in the longer-term
generate new off-patent products based on DAI’s core
technology competences and its cGMP-certified asset base
around the world (current Good Manufacturing Practices).
These new products are developed in close cooperation, and
based on discussions with DAI’s present customer base in the
generic industry. The strong fermentation capabilities within DAI
are recognized by our customers. DAI has integrated strain
construction and improvement, fermentation development,
bioconversion and product recovery competences, which will
lead to the sustainable variable cost price advantage that is
necessary to be a partner for its generic customers.

With a view on the aforementioned adverse developments –
higher energy costs, lower prices and a continuing weak
US dollar, DAI will continue to vigorously reduce cost levels
via the ongoing restructuring project. DSM has also decided
to thoroughly evaluate all strategic options for this business
group. In order to get strategic room to manoeuvre, DAI acquired
full control in the Fersinsa joint venture in Mexico and in some
smaller joint ventures in China.

I DSM in Zhangjiakou / China

Annual Report 2006

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Review of Business
Performance Materials

The Performance Materials cluster comprises
the business groups DSM Engineering Plastics
(including the Dyneema business unit), DSM
Resins and DSM Elastomers.

x € million

2006

2005

Net sales*:
- DSM Engineering Plastics (including DSM

Dyneema)
- DSM Resins
- DSM Elastomers

Total

Workforce at 31 December

* before elimination of intra-group supplies to other clusters

1,005

1,258

496

2,759

329

429

126

1,697

19.3

15.6

107

4,664

881

1,108

470

2,459

305

410

667

1,707

19.1

16.8

4,441

All of these specialize in the manufacture
of technologically sophisticated, high-
quality products that are tailored to meet
customers’ performance criteria. The
products are used in a wide variety of
end-use markets: the automotive
industry, the aviation industry, the
electrics & electronics industry, the sports
and leisure industries, the coatings
industry and the construction industry.

Supplies of Performance Materials
x (cid:96) million

Operating profit of Performance Materials
x (cid:96) million

2002

2003

2004

2005

2006

• 0

• 500

• 1,000 • 1,500• 2,000• 2,500• 3,000

2005

2006

• 0

• 100

• 200 • 300 • 400 • 500

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Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

DSM Engineering Plastics
Leadership further strengthened

• Strong volume growth
• Various new investments announced
• Favorable cost position maintained

DSM Engineering Plastics is a global player in polyamides
(polyamide 6, polyamide 66 and polyamide 46), polyesters
(PBT, PET and TPE-E), polycarbonate (PC and PC blends),
Ultra-High Molecular Weight Polyethylene (UHMWPE) and
extrudable adhesive resins. These materials are used mainly in
technical components for the electrics & electronics,
automotive, engineering and packaging industries. With a
market share of about 5%, DSM is one of the world leaders.
DSM is the global market leader in high-heat polyamide. DSM
Engineering Plastics has production sites in Emmen and
Geleen (Netherlands), Genk (Belgium), Evansville (USA),
Jiangyin (China) and Pune (India).

Strategy
DSM Engineering Plastics wants to further strengthen its
leadership position with a strong focus on performance
materials and specialties. All of its activities are centered on
creating value for the business group’s customers and for
DSM. Thanks to its outstanding knowledge of products and
applications, combined with excellent service levels, the
business group is increasingly able to position itself as a
valuable, solutions-oriented business partner.

Business review
The markets for engineering plastics showed continued growth
in 2006. Sales increased in all regions, for all major product
lines and in all relevant markets. Raw-material prices continued
to increase and towards the end of the year it became difficult
to increase selling prices to safeguard margins. The business
group was able to maintain the favorable cost position it had
built up in previous years. Sales of innovative products
developed favorably, as did sales of existing products in
new applications. Strong volume growth and continued cost
control were the main reasons for the substantially improved
operating profit.

Projects
The expanded compounding plant in Jiangyin (China) was
inaugurated in 2006. Further expansions are being prepared
to keep pace with the high growth. Polyester production
capacity in Emmen (Netherlands) was increased. Furthermore,
three new investment decisions were taken. A new Akulon®
polyamide 6 plant in Jiangyin (China) will support further
growth in the Asian market for flexible packaging. The second
plant for Stanyl® polyamide 46 polymer in Geleen (Netherlands)
will allow the business group to keep pace with strong demand
growth. The second plant for Stamylan® UH in Geleen
will support the strong growth of Dyneema® fibers and will
enable the business group to maintain its position in other
markets. The responsibility for managing the Stamylan® UH
business has been entrusted to the DSM Dyneema
organization. All three new plants are due to come on
stream in the first half of 2008. A start was made on the

I DSM in Geleen / the Netherlands

engineering work for a new compounding site in India to
increase capacity.

DSM Dyneema
Expanding in high-margin markets

• Continued strong growth
• Further expansion of manufacturing capacity
• Several new market introductions

Dyneema®, DSM’s high modulus polyethylene fiber which is the
strongest fiber in the world on a weight-for-weight basis, was
invented and developed by DSM and is an important component
in ropes, cables and nets in the fishing, shipping and offshore
industries. Dyneema® is also used in safety gloves for the
metalworking industry and in fine yarns for applications in
sporting goods and the medical sector. In addition, it is applied
in bullet-resistant armor and clothing for law enforcement
personnel and the military. Dyneema® is produced in Heerlen
(Netherlands) and in Greenville, North Carolina (USA). DSM
Dyneema is also a partner in a high modulus polyethylene
(HMPE) manufacturing joint venture in Japan.

Between 1998 and 2006 the sales volume for Dyneema®
quadrupled, and the business clearly outgrew all direct
competitors. Demand for light but strong, convenient-to-use
material continues to show steady and rapid growth, driven by
a range of social and economic factors such as the general
increase in safety awareness, the increasing level of violence on
the streets, the growing demand for readily manageable
materials in the marine industry and the increase in leisure time
and prosperity.

Strategy
DSM Dyneema is expanding around the world in selected,
high-margin markets offering high profitability. The unit will
continue to focus on the further development of ultra-strong
polyethylene fiber and UD (unidirectional sheet) technology.

Annual Report 2006

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Review of Business
Performance Materials

The new Dyneema® SB61 presents the strongest ballistic
material for soft body armor. Dyneema® SB61 offers ultra-high
energy absorption to provide significantly increased stopping
power and allows vest manufacturers to achieve higher levels
of ballistic performance and at the same time lower the weight
of body armor.

DSM Resins
Focus on value-adding, environmentally friendly coatings

• Innovation programs in full swing
• Disposal of display coatings business
• Closure of Landskrona (Sweden) site announced

DSM Resins consists of four business units: DSM Coating Resins,
DSM NeoResins, DSM Desotech and DSM Composite Resins.

DSM Coating Resins
The DSM Coating Resins business unit specializes in the
development, manufacture and marketing of resins for coating
systems. The unit is one of the global leaders in powder coating
resins, with a market share of about 25%. These resins are
used in industrial applications for the coating of for example
washing machines, radiators, façades, car parts and bicycles.
In Europe DSM Coating Resins is a leading supplier of liquid
coating resins. These products are mainly used in decorative
and industrial coatings.

Strategy
DSM Coating Resins aims to strengthen its position as one of the
market leaders with a focus on innovative, value-added systems
as well as environmentally friendly coating resins systems. In
addition, DSM Coating Resins is forecasting increasing growth
in emerging countries, notably in China and Russia.

Business review
The market showed high growth rates in all regions. Increasing
feedstock prices resulted in short-term pressure on margins.
Structural overcapacity in the European liquid coating resins
area kept business results under pressure. In order to revitalize
this part of the business, DSM Coating Resins announced the
closure of its Landskrona (Sweden) production facility.

Good progress was made with the development and market
introduction of an improved generation of waterborne alkyd
resins. To an increasing degree, the decorative and industrial
markets require waterborne paint with the same qualities as
systems based on organic solvents. The liquid coating resins
site in Hoek van Holland (Netherlands) went through a major,
successful restructuring program.

With regard to Asia, DSM Coating Resins has created a
successful platform for growth in China through the acquisition
of Syntech in 2005.

The DSM Coating Resins business unit’s overall operating profit
showed a clear increase compared with 2005.

I DSM in Jiangyin / China

Business review
The year 2006 was another good year. All markets for Dyneema®
products showed growth, and sales increased in all geographic
regions. Sales growth was particularly strong in North America
and Asia. DSM Dyneema’s operating profit was substantially up
from 2005.

Projects
Two lines for fiber manufacturing in Greenville (USA) were
brought on stream in 2006, and in September 2006 DSM
announced that production capacity for Dyneema® in the
United States would once again be expanded in response to
continued high demand. The investment amounted to several
tens of millions of US dollars and will bring the total number of
fiber units for the company to ten, with five production lines
being located at the Greenville facility. All projects are running
according to schedule; the announced unit is expected to
come on stream early 2008.

During the 2005-2006 round-the-world Volvo Ocean Race,
new Dyneema® SK78 fiber proved its superior performance
under extreme conditions. The new grade of ultra-strong
polyethylene was used in the running rigging of the two world-
class yachts – ABN AMRO ONE and Pirates of the Caribbean –
that finished first and second, respectively.

For deep-sea hardware projects an alternative to traditional
steel wire rope has been tested that offers a significantly longer
life span, lighter weight and greater safety. Rope made from
Dyneema® has been shown to outperform steel wire rope when
used to place heavy equipment at extreme ocean depths
greater than 3000 m.

In 2006 DSM Dyneema introduced two new grades in ballistic
protection. For the protection of military and civilian vehicles
against today's threats – including improvised explosive
devices and assault rifles – DSM Dyneema developed the new
hard ballistic composite Dyneema® HB26.

Annual Report 2006

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Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

DSM NeoResins
This business unit is a leading global supplier of innovative
waterborne resins, suited to the needs of the coatings,
adhesives and graphic arts industries. The unit focuses on
strong customer relations to develop new products and
technologies with specific performance goals.

Strategy
The main focus for the business is on innovation and capturing
growth opportunities in waterborne systems and geographic
growth in North America and Asia. The upcoming VOC (volatile
organic compounds) legislation in 2007 and 2010 will positively
impact on developments in the next few years. In order to
provide capacity for the growing market, capacity expansion is
planned in Europe.

Business review
In 2006 volume growth was strong in all regions, driven by
continued demand in decorative coatings and the recovery
of the industrial coatings segments from the weak demand in
Europe and North America in 2005. The graphic arts segment
also experienced strong growth in all regions, the main drivers
being the recovery of demand for inks and continued growth
in imaging. Margins were under pressure due to raw-material
price increases and price pressure in some parts of
the business.

The business performed strongly better than in 2005 in terms of
sales growth and profitability.

DSM Desotech
The DSM Desotech business unit is a leading producer of
specialty UV-curable coatings and resins. DSM Desotech is the
market leader in the supply of coatings for optical fibers and
inks and matrix resins that are used in fiber optic cables. The
business unit is a co-market leader in the supply of stereolitho-
graphic resins that are cured by laser technology for the
production of rapid prototypes for a wide variety of industries.

Strategy
DSM Desotech’s strategy is to maintain its leading market
share in fiber optics. Moreover, DSM Desotech will grow its
overall revenue and profit by using its technology base in
stereolithography as well as leveraging its UV-formulation
expertise to target new applications.

Business review
The global fiber optic market grew by more than 40% in 2006.
However, price pressures throughout the chain dampened
value increases in the overall business. The bulk of the growth
was in the United States. Activities in Japan grew due to an
increase in demand from NTT’s (Nippon Telegraph and
Telephone Corporation) Fiber-to-the-Home project. Activities
in China saw some growth due to further investments in the
telecom sector. Sales of stereolithographic resins grew by more
than 7% in 2006. Significant gains were achieved in advancing
the use of composite stereolithographic materials, especially in
the Formula 1 market.

I DSM in Greenville / USA

The profit of DSM Desotech in 2006 improved strongly
compared with 2005, primarily as the result of strong volumes
in the fiber optic market.

DSM Composite Resins
The DSM Composite Resins business unit is the European
market leader in unsaturated polyesters (UPE) and has its own
pan-European distributor (Euroresins). UPE are used for the
production of fiber-reinforced plastics or non-reinforced filled
products in end-use applications such as marine, leisure,
building & construction, automotive and wind turbine blades.
DSM Composite Resins is the global market leader in sizings
and binders, which are vital functional components that
facilitate the production of glass fiber reinforcements and
enhance their performance.

Strategy
The business unit aims to strengthen its European leadership
by playing a front-runner role in the composite resins industry to
compete with aluminum and steel composites. The group
focuses on cost efficiency and innovation and at the same time
is expanding globally, especially in China, targeting high-
added-value segments. The Sizings and Binders unit is the
global expert and portfolio player in this segment, dedicated to
the glass fiber industry.

Business review
Markets were strong in 2006, especially relining and marine.
Raw-material prices remained volatile with a strong upward
trend, putting pressure on margins. For the most part the
business unit was able to pass on these higher costs to the
market immediately. Sizings and Binders saw a reduced growth
in the first half of 2006, but returned to normal growth levels in
the second half of 2006. DSM Composite Resins’ operating
profit for 2006 stabilized compared with the record year 2005.

Annual Report 2006

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Review of Business
Performance Materials

I DSM in Jiangyin / China

Projects
In 2006 DSM Composite Resins continued its substantial
investments in its production sites to proactively meet the
stricter regulations in the fields of safety and the environment.
The business unit intends to continue its leadership by investing
in sustainability. For Sizings and Binders a new production site
in China will start in 2007, entailing proximity to DSM Composite
Resins’ biggest and fastest-growing customers. The business
unit will further invest in innovation and in expansion in both
capacity and geographical presence, including further
strengthening of its own pan-European distributor.

Overall DSM Resins
In the second half of 2006, DSM Resins finalized its new
strategy named Flag 2010. This strategy aims to strengthen
DSM Resins’ innovation excellence, speed up its geographical
expansion and improve customer dedication. As a
consequence, the coating activities of DSM Coating Resins
and DSM NeoResins will be integrated into a new business
unit. The powder coating activities will also be grouped into a
new business unit. Six innovation platforms were launched in
2006, each focusing on providing breakthrough solutions for
the customers.

DSM Elastomers
Margins under strong pressure

• Weaker supply / demand balance
• Anti-trust investigations: no charges
• Various new applications under development

DSM Elastomers manufactures synthetic rubbers (EPDM) and
thermoplastic elastomers (TPVs) for use in cars, white goods,
various industrial products, construction materials and as
motor-oil additives. The group is one of the global market
leaders in EPDM rubber with a production capacity of 200,000
tpa and a market share of 20%, and is the world’s second
supplier of thermoplastic rubber. DSM Elastomers has

production plants in Geleen (Netherlands), Genk (Belgium),
Leominster (USA) and Triunfo (Brazil).

Strategy
DSM Elastomers works to maintain its position as the global
development leader in the EPDM market by constantly
renewing its product range and maintaining the low cost
position of its plants in Geleen and Triunfo. With respect to
TPVs, the business group is expanding its production in the
field of consumer products.

Business review
The global EPDM supply and demand balance weakened in
2006. Demand was strong in Europe, China and Japan, but
weaker in the rest of Asia and in North America. Raw-material
prices increased substantially for the third consecutive year.
To a limited extent, DSM Elastomers was able to pass on these
raw-material price rises to its customers. As a consequence,
margins decreased. The business group’s operating profit
showed lower results, because of unfavorable exchange rates
and lower margins due to higher raw-material costs.

The investigations into possible restrictive and/or concerted
practices involving a number of EPDM producers, including
DSM, which had been launched at the end of 2002 by the
European Commission, the United States Department of
Justice and the Canadian Competition Bureau were closed mid
2006 without charges of any kind being brought against DSM
or its affiliates. Several civil actions in the United States and
Canada are still ongoing.

Projects
There is a growing interest in the development of artificial turf
stadium fields. These provide all-season constant playing
characteristics and allow multiple uses of stadiums, for
instance for professional soccer as well as for rock concerts.
DSM has been pioneering developments in this new application
field, which has led to the introduction of materials for the first
professional artificial soccer pitches.

DSM Elastomers further expanded the market targeted by
Sarlink® thermoplastic rubber and its derivatives, which are
used in sealing profiles for cars and in a range of consumer
products. For the oil additives market, a new product line was
commercialized successfully. These materials are used in oil-
additive packages that excel in soot dispersion properties in,
for example, diesel-fueled trucks and passenger cars.

Annual Report 2006

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Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

Annual Report 2006

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Review of Business
Industrial Chemicals

The Industrial Chemicals cluster consists of
DSM Fibre Intermediates, DSM Melamine, DSM
Agro and DSM Energy.

x € million

2006

2005

Net sales*:
- DSM Fibre Intermediates (including DSM

Acrylonitrile)
- DSM Melamine
- DSM Agro
- DSM Energy

Total

1,429

215

403

2,135

196

269

745

26.6

14.4

1,243

212

370

1,899

165

246

728

23.5

14.6

Workforce at 31 December

2,183

2,234

* before elimination of intra-group supplies to other clusters

DSM Fibre Intermediates, DSM Melamine
and DSM Agro produce chemicals in
large-scale, capital-intensive production
facilities. Essential features of these
businesses, which operate plants in the
Netherlands, Asia and the United States
and are thus global in scope, are strong
customer relations (often geared to the
long term), keen cost awareness and
careful planning of any capacity
expansions.

Our caprolactam and melamine
businesses are among the global leaders
in terms of sales and technology. Our
acrylonitrile business is a major player in
Europe. DSM Agro, our fertilizer
company, is active in Northwestern
Europe. DSM Energy has small but
profitable stakes in various oil and gas
fields in the Dutch part of the Continental
Shelf.

Supplies of Industrial Chemicals
x (cid:96) million

Operating profit of Industrial Chemicals
x (cid:96) million

2002

2003

2004

2005

2006

• 0

• 500

• 1,000 • 1,500 • 2,000 • 2,500

2005

2006

• 0

• 50

• 100 • 150 • 200 • 250

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58

Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

DSM Fibre Intermediates
Exploiting global cost and technology leadership

• Strong demand for caprolactam
• DSM now leading supplier in China
• Debottlenecking of acrylonitrile plant to be finalized in 2007

DSM Fibre Intermediates (DFI) produces caprolactam and
acrylonitrile, which are raw materials for synthetic fibers and
plastics. Caprolactam is the raw material for nylon 6 (also
called polyamide 6), a versatile material that is used in sports
and leisure clothes, military equipment, tires and carpets. It is
increasingly used as a high-performance construction material
in, for example, the electronics and automotive industries, in
packaging materials and in medical applications. Nylon 6 has
reached the mature phase of its life cycle and is facing
competition from other materials such as nylon 66, polyester
and polypropylene. DFI has caprolactam plants in the
Netherlands, the United States and China, with a total capacity
of more than 600,000 tpa. This makes DFI the largest merchant
caprolactam producer in the world, with a market share of
20%. In addition, the business group produces about 1.2
million tpa of fertilizer (ammonium sulfate) as a co-product.

Acrylonitrile is a raw material used in textile fibers, ABS plastics,
latex rubber and water purification products. DFI’s acrylonitrile
production capacity is 235,000 tpa. DSM also produces about
25,000 tpa of sodium cyanide, used in detergents and in the
synthesis of vitamins. With a market share of 25%, DSM is a
major player in the merchant market in Europe.

Strategy
DSM Fibre Intermediates’ characteristics are its process
technology, reliability and service. The business group aims
to exploit its global cost and technology leadership position
in caprolactam while growing its position in China parallel to a
further strengthening in Europe and North America. This is
also in line with the development of DSM Engineering Plastics,
where increased captive use of caprolactam will further
enhance DSM’s competitiveness in the nylon 6 value chain.
For acrylonitrile the aim is to strengthen the business group’s
manufacturing base in Geleen (Netherlands).

Business review
Compared to 2005, global demand for caprolactam grew
substantially. Margins were on average at the same level as in
2005 as a strong demand enabled DSM to fully pass on high
raw-material prices. The prices of energy-related raw materials
such as ammonia remained volatile and high relative to
historical norms. The monthly export quota imposed by the
Chinese government had a stabilizing effect on the textile
business and the overall nylon and caprolactam business.
Demand for acrylonitrile was comparable to 2005. The steady
rise in raw-material prices, especially for propylene, could be
recouped with higher selling prices.

The business group was able to close the year 2006 with a
strongly higher profit than the previous year.

I DSM in Nanjing / China

Projects
By expanding the caprolactam plant in Nanjing (China) to a
total of 140,000 tpa on the basis of DSM’s HPOPlus ® technology,
DSM has become a leading supplier in the rapidly growing
Chinese market. An additional expansion to support this market
growth is being planned. The expansion of the acrylonitrile plant
in Geleen (Netherlands) by 24,000 tpa will be completed in the
course of 2007.

DSM Melamine
Results under pressure

• New plant in Geleen (Netherlands) produced at design capacity
• Early release from the AMEL joint venture obligations
• Margins under pressure due to overcapacity and higher

raw-material costs

Melamine is used in impregnating resins and adhesive resins for
the wood-processing industry. It boosts the scratch, moisture
and heat resistance of wood products. Melamine can be
combined with softwood from rapidly growing trees to obtain
high-quality panels that can replace hardwood. Laminate
flooring is one of the fastest-growing applications, most notably
in China. Melamine is also used in car paints, durable plastic
tableware and flame retardants. With a market share of 20%,
DSM Melamine is the global market leader. It has sophisticated
technical service and logistical infrastructure in place for serving
customers on a global basis.

Strategy
DSM Melamine’s objective is to consolidate its leading position
and improve profitability. The market is growing at a rate of
5-6% per annum on average, driven by the growing scarcity
of hardwood. However, the market is facing serious over-
investment and structurally higher raw-material costs.
Restructuring of the industry is inevitable. DSM will continue
its innovative efforts together with customers to grow the
market. With its proprietary SLP (Shortened Liquid Phase)

Annual Report 2006

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Review of Business
Industrial Chemicals

I DSM in Nanjing / China

technology DSM has created the potential to realize the
lowest-cost plant in the world.

Business review
In 2006 the global market grew by 5%. This growth was
concentrated in China. Asset utilization in the industry was
however low as a result of overinvestment in China. The
increase in the cost of raw materials and utilities could not yet
be passed on to the next stages in the value chain. The major
negative factor for DSM Melamine was the availability and
pricing of natural gas. In Indonesia the business group
temporarily suffered from curtailment of gas supply, and in the
Netherlands a steep price increase was the dominant factor.
The plant in Indonesia achieved a new production record,
while the new SLP plant in the Netherlands produced at design
capacity. From August 2006 onwards, DSM Melamine no
longer carried its share in the fixed costs of the AMEL production
joint venture in the United States. In spite of this substantial
improvement for the remainder of the year, the full-year results
of DSM Melamine represented a loss-making situation. DSM
and its intended partner decided in 2006 to postpone the
project for a new world-scale plant in China.

Projects
DSM supported the introduction of new, melamine-based resins
in OSB (oriented strand board) panels in the United States. The
first sales of SLP-based products as flame retardants took
place in 2006, making use of specific product characteristics.

DSM Agro
Among the market leaders in Europe

• Tight market situation
• Good performance
• Carve-out study completed

DSM Agro produces ammonia and nitrogen fertilizers for
grasslands and agricultural crops, which it supplies mainly
to agricultural wholesalers. DSM Agro, being the number two
supplier of calcium ammonium nitrate (CAN) and ammonium
sulfate (AS) in Western Europe, is the market leader in the
Netherlands and ranks among the market leaders in Germany,
France and Belgium. Its fertilizer production facilities are
located in Geleen and IJmuiden (both in the Netherlands).
DSM Agro operates world-scale ammonia plants in Geleen.

Strategy
DSM Agro’s strategy is to generate cash and maintain a
profitable position in Western Europe. On top of this DSM Agro
makes an additional contribution to DSM’s Industrial Chemicals
businesses by providing their production facilities at the Geleen
site with a secure supply of raw materials and consumables at
the lowest possible cost. DSM Agro also supplies these raw
materials (such as ammonia, nitric acid and carbon dioxide) to
third parties in Europe.

Business review
The year 2005 had been characterized by a relatively tight
market with very good returns. In 2006 the fertilizer market
had a hesitant start due to cold weather in the first quarter.
Poor farming conditions led to weak demand in Western
Europe, while competitors had to temporarily shut down
ammonia plants in the first quarter due to high gas prices.
Demand strengthened in the second quarter thanks to
improving weather conditions. Due to high gas prices and
a favorable supply-demand balance, healthy fertilizer prices
were recorded at the end of the first half of 2006. This situation
continued in the third quarter, when the season started with
relatively high prices. In the second half of 2006 the market
eased early as another period of poor farming conditions,
combined with high grain prices, led to delayed demand.
DSM Agro’s overall performance was good, although the
business group could not fully match the 2005 results.

Projects
DSM aims to divest the agro business. To prepare for this,
the activities were ‘carved out’ in the course of 2006.

DSM Energy
Another year of successful exploration

DSM Energy participates in the exploration and production
of oil and gas on the Dutch Continental Shelf. The business
group is also involved in the transportation of oil and gas
through its ownership of pipelines on the Shelf. DSM usually
participates as non-operator with a stake of up to 25% in the
oil and gas joint ventures. At year-end, the business group
had a share in 19 producing oil and gas fields and participated

Annual Report 2006

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Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

in two gas field developments. All fields are located in
15 production licenses.

Strategy
DSM Energy’s strategic mission is to maximize cash flow by
minimizing cost and maximizing production in the existing
licenses.

Business review
The group’s total production of 2.0 million barrels of oil equivalent
in 2006 was at the same level as in 2005. The production
decline expected in later years is due to the fact that most fields
in the portfolio are mature and their production capacity is
decreasing as a result of pressure decline and increasing water-
cut. The Q1-B field, started up in 2003, contributed some 50%
to the group’s overall production. The remaining reserves at the
end of the year were about 10 million barrels of oil equivalent,
of which 7 million in the producing fields.

In 2006 an exploration well was drilled in offshore block G14
as a follow-up to the recent gas discoveries. Unfortunately, the
well was dry. The drilling of a second exploration well in block
Q1 was approved. Two development projects are ongoing, one
in the A/B blocks production license and one in block G14.
Both are expecting first gas at the end of 2007 or the beginning
of 2008.

Due to the sustained production level and the high oil price
the business group’s operating profit exceeded the 2005 results.
The average Brent price in 2006 was USD 65 per barrel,
compared to USD 54 per barrel in 2005.

I DSM in Nanjing / China

Annual Report 2006

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Review of Business
Other activities

‘Other activities’ comprises various activities
and businesses that do not belong to any of
the four operating clusters.

x € million

Net sales*

Operating profit
Operating profit plus amortization and
depreciation
Capital expenditure and acquisitions

2006

422

(69)

(33)

2005

376

(53)

(8)

Workforce at 31 December

2,728

2,919

* before elimination of intra-group supplies to other clusters

It consists of both operating and service
activities and also includes a number of
cost centers that cannot be logically
allocated to the clusters. It includes the
DSM Innovation Center, DSM Venturing,
Noordgastransport and a number of other
activities such as DSM Industrial Services,
DSM Insurances and part of the costs
of corporate activities and non-core
activities that are to be disposed of or
reduced in the future. Due to their very
nature, these activities can be subject
to business fluctuations and will normally
have a negative operating result.

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62

Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

DSM Innovation Center
The DSM Innovation Center has been set up to facilitate the
Vision 2010 change program towards an intrinsically innovative
organization. To the extent that costs of the DSM Innovation
Center can not be directly allocated to clusters they are reported
in Other activities. A comprehensive description of the activities
of the DSM Innovation Center is provided in the section on the
strategy Vision 2010 – Building on Strengths on page 26. As
a result of the structural increase in innovation efforts in the
Emerging Business Areas the costs of the Innovation Center
increased by €18 million, which had a negative impact on the
result of Other activities.

DSM Industrial Services
DSM Industrial Services consists of various units. Some
services are provided for the Geleen site (Netherlands), others
are targeted at DSM organizations all over the world. These
services include technological consultancy, expertise in energy
and auxiliary materials, the supply of utilities, human resources
and the management of the Chemelot site in Geleen. The
Copernicus project, aimed at making the site in Geleen much
more cost competitive via cost reduction, economizing
manufacturing processes and outsourcing, was completed in
2006 and the savings objective, €50 million on an annual basis,
was achieved.

DSM Venturing
DSM Venturing participates in external start-up companies and
is constantly on the lookout for investment opportunities in
innovative businesses or technologies in the fields of nutrition
and performance materials. For more information please refer
to page 27.

EdeA
EdeA VoF owns, operates and maintains most of the production
and distribution facilities for utilities (for example steam, power
and water) at the Chemelot site in Geleen (Netherlands). EdeA
VoF is a joint venture with Essent, an energy production and
distribution company. DSM’s stake is 50%.

DSM Licensing Center
DSM Licensing Center (DLC, formerly Stamicarbon) uses its
longstanding experience and licensing best practices to
generate added value from DSM's intellectual property (IP).
See also page 27.

Noordgastransport
Noordgastransport (NGT) transports gas produced offshore
through a system of pipelines from gas fields in the North Sea
to a processing plant in Uithuizen in the north of the Netherlands.
Here, the gas is treated so that it matches customers’
specifications, before being delivered to these customers.

Corporate activities
Various holding companies and corporate overheads are
reported in Other activities. The most important cost elements
in this respect are related to defined benefit pension plans and
share-based payments for the group. The captive insurance
company posted €15 million lower results in 2006 as a result of
a number of damages.

Associates

Methanor VoF (30% DSM), a producer of methanol, was
phased out in 2005 and 2006 as skyrocketing oil and gas
prices could not be translated into increased global methanol
prices. A first line of business was taken out of operation in
2005, the second one in 2006. DSM’s interest in the venture
was subsequently sold.

Heerlen, 12 February 2007

The Managing Board

Peter Elverding, chairman
Jan Zuidam, deputy chairman
Rolf-Dieter Schwalb, CFO
Feike Sijbesma
Nico Gerardu

Annual Report 2006

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Report by the Supervisory Board

The composition of the Supervisory Board and the Managing
Board changed during the year under review. The Annual
General Meeting of Shareholders held on 29 March 2006
appointed Mr. Tom de Swaan as a member of the Supervisory
Board with effect from the same date. According to the rotation
scheme Mr. Cees van Woudenberg’s term came to an end.
He was reappointed by the Annual General Meeting of
29 March 2006.

On 1 April 2006 Mr. Henk van Dalen stepped down as a member
of the Managing Board and CFO. The resulting vacancy was
filled by the appointment by the General Meeting of Shareholders
on 19 October 2006 of Mr. Rolf-Dieter Schwalb as a member
of the Managing Board for a period of four years with effect
from the same date. During the period from 1 April 2006 until
19 October 2006 Mr. Arnold Gratama van Andel fulfilled the
role of CFO. The Supervisory Board would like to express its
appreciation for Mr. Gratama van Andel’s willingness to
postpone his retirement and fulfill the CFO role during this
interim period.

On 1 April 2006 Mr. Chris Goppelsroeder stepped down as
a member of the Managing Board for personal reasons. The
resulting vacancy on the Managing board was filled by the
appointment by the Annual General Meeting of Shareholders
(29 March 2006) of Mr. Nico Gerardu for a period of four years
with effect from 1 April 2006.

The Supervisory Board approved Mr. Peter Elverding’s
decision to step down as of 1 May 2007 and appointed
Mr. Feike Sijbesma as his successor as Chairman of the
Managing Board. On this occasion the Supervisory Board
already wishes to express its sincere appreciation for all that
Mr. Peter Elverding has done for the company during the many
years he has worked for DSM. To provide for the succession
of Mr. Feike Sijbesma as Managing Board member, the Board
decided to propose to the 28 March 2007 Annual General
Meeting of Shareholders to appoint Mr. Stephan Tanda.

The Supervisory Board approved the distribution of Managing
Board responsibilities as of 1 April 2006, including the
temporary redistribution of Mr. Henk van Dalen’s tasks.

The Supervisory Board held six meetings in the presence of
the Managing Board during the year under review. Each of
these meetings was preceded by a Supervisory Board meeting
without the Managing Board being present. The Supervisory
Board also devoted a separate meeting to its profile,
composition and functioning. At the same meeting the
Managing Board’s composition and performance and the
performance of its individual members were also discussed.
The meeting concluded that all members of the Supervisory
Board were independent, as defined by the Dutch corporate
governance code, and that the competences of its individual
members in aggregate were in line with the Board’s profile. The
Supervisory Board meetings in 2006 were attended by virtually
all of the Board’s members. One of the meetings was held in
Waalwijk, the Netherlands; on this occasion the Supervisory
Board visited the local DSM NeoResins site.

The composition of the Audit Committee did not change in
2006. The Audit Committee, consisting of Messrs Henk Bodt
(chairman), Okko Müller and Cor Herkströter, met three times
in 2006. The external auditor was in attendance at these
meetings, and at all meetings the internal – operational –
auditor was present as well.

The main topics of discussion during the Audit Committee
meeting held in February were the adoption of the group’s
financial statements, the external auditor’s comments and their
assessment of DSM’s systems such as Internal Control and ICT.

At the June Audit Committee meeting the performance of
the external auditor during the years 2003 through 2005 was
reviewed. The Committee decided to continue with Ernst &
Young Accountants as external auditor and approved a new
engagement. The Committee furthermore discussed the work
of the Corporate Operational Audit department and approved
its audit plan. The system and status of the Letters of
Representation issued by the managers directly reporting to the
Managing Board were evaluated. The committee discussed
issues related to a share buy-back program, an extra reward for
long-term shareholders and a dividend reinvestment plan. The
main topics discussed during the meeting held in December
were the potential provisions and impairments for 2006, an
interim report by the external auditor and the Corporate
Operational Audit plan for 2007. The Committee requested the
external auditor to annually review the calculation of the
bonuses for the Managing Board such to certify that this
calculation is in accordance with the set procedures.

The composition of the Nomination and Remuneration
Committee did not change in 2006. The Committee, consisting
of Messrs Cor Herkströter (chairman), Cees van Woudenberg
and Ewald Kist, met five times in 2006. The committee made a
recommendation concerning the remuneration of members of
the Managing Board. This recommendation was adopted by
the Supervisory Board. Information on the group’s remuneration
policy is to be found on page 68 of this annual report.

The committee extensively discussed the search for a new
CFO and was personally involved in the selection process.
The committee also discussed Mr. Peter Elverding’s
succession, as well as the ensuing succession of Mr. Feike
Sijbesma, and participated in the selection process leading to
the proposal to nominate Mr. Stephan Tanda as Managing
Board member. In all these nomination cases the committee
formulated a proposal to the full Supervisory Board.

The Supervisory Board and the Managing Board discussed
company matters on a regular basis during the year under
review. One of the issues discussed was the succession
planning for the Managing Board and the top executives within
the company. This review included an overview of the
Management Development process within DSM. The financial
results recorded by the various company units and
developments at these units were discussed at every meeting.
The Supervisory Board discussed and monitored various
aspects concerning the progress of the implementation of the
Vision 2010 – Building on Strengths strategy program adopted

Annual Report 2006

www.dsm.com

Report by the Supervisory Board

departments to its meetings, to present relevant developments
in their units in person.

Discussions were held with the external auditor, Ernst & Young
Accountants, about the financial report for 2006. The Report by
the Managing Board and the financial statements for 2006
were submitted to the Supervisory Board by the Managing
Board, in accordance with the provisions of Article 30 of the
Articles of Association, and subsequently approved by the
Supervisory Board in its meeting on 13 February 2007. The
financial statements were audited by Ernst & Young Accountants,
who issued an unqualified opinion (see page 134 of this report).
The Supervisory Board concluded that the external auditor was
independent of DSM.

We submit the financial statements to the Annual General
Meeting of Shareholders, and propose that the shareholders
adopt them and discharge the Managing Board from all liability
in respect of its managerial activities and the Supervisory Board
from all liability in respect of its supervision of the Managing
Board. The profit appropriation as approved by the Supervisory
Board is presented on page 135 of this report.

The Supervisory Board is pleased with the good results
achieved and wishes to express its respect and appreciation
for all the good work performed by the group’s staff and the
Managing Board. The Board is grateful to them for their efforts.

Heerlen, 13 February 2007

The Supervisory Board

Cor Herkströter, chairman
Henk Bodt, deputy chairman
Pierre Hochuli
Ewald Kist
Okko Müller
Claudio Sonder
Tom de Swaan
Cees van Woudenberg

in 2005, which focuses on accelerating profitable and innovative
growth of DSM’s specialties portfolio. The Board discussed the
Annual Strategic Review, which had been used primarily for
implementing the Vision 2010 program in order to ensure that
the targets set were anchored within the organization.
The Annual Strategic Review included an overview and an
assessment by the Managing Board of the main risks of the
company. The Supervisory Board also discussed the
organizational alignment with Vision 2010 including the
organization and management of innovation. The Supervisory
Board held discussions with the Managing Board on the
company’s strategy and possible future acquisitions that
would fit in with the strategy, one of the aims being to
strengthen the clusters Performance Materials and Nutrition.
The Board approved the discontinuation of the Holland
Sweetener Company business and hence the termination of
aspartame production.

The Supervisory Board discussed and approved the Capital
Expenditure and Financing Plan for 2006. The Supervisory
Board separately gave its approval for some large investments.
These large investments concerned the building of a second
Stanyl® plant and a second plant for Ultra High Molecular
Weight Polyethylene (the raw material for Dyneema® products)
at the Geleen (Netherlands) site, the building of additional
capacity for the production of Dyneema® fibers at the Greenville
(North Carolina, USA) site and the building of a green-field
polyamide 6 Akulon® polymerization plant in Jiangyin (China).
The Supervisory Board agreed with the execution of the
debottlenecking project for the acrylonitrile plant at the Geleen
site (Netherlands).

The Board approved the replacement of the existing
€400 million stand-by credit facility maturing in 2008.

The Supervisory Board agreed with a proposal that was
subsequently presented to the Annual General Meeting
of Shareholders (March 2006) for amending the Articles of
Association. The proposal related to the dematerialization
of shares, the approval of important Board decisions by the
General Meeting of Shareholders, an indemnity for members
of the Managing Board and the Supervisory Board and a few
minor technical changes.

The Supervisory Board approved the interim dividend to be
paid for 2006 and the proposal subsequently made to the
Annual General Meeting of Shareholders regarding the final
dividend to be paid out for 2006.

The Board agreed to announce the loyalty dividend concept to
the market and to submit it for approval to the Annual General
Meeting of Shareholders to be held on 28 March 2007.
Furthermore, the Supervisory Board agreed to offer a dividend
reinvestment plan (DRIP) to the shareholders.

The Supervisory Board approved a share buy-back program
worth €750 million, to be executed in 2006 and 2007.

As in previous years, the Supervisory Board invited managers
from a number of DSM business groups and corporate staff

Annual Report 2006

www.dsm.com

Corporate organization

Supervisory Board

Cor Herkströter (1937, m), chairman
First appointed: 2000. End of current term: 2008.
Position: retired; last position held: President of Koninklijke
Nederlandsche Petroleum Maatschappij N.V. and chairman of
the Committee of Managing Directors of Royal Dutch/
Shell Group.
Nationality: Dutch.
Supervisory directorships and other positions held: chairman of
the Supervisory Board of the ING Group, chairman of the Social
Advisory Council of the Tinbergen Institute, chairman of the
Advisory Committee of Royal NIVRA, member of the Advisory
Council of Robert Bosch, member of the Capital Market
Committee (Netherlands Authority for the Financial Markets),
Emeritus Professor International Management at the University
of Amsterdam.

Henk Bodt (1938, m), deputy chairman
First appointed: 1996. End of current term: 2008.
Position: retired; last position held: Executive Vice President of
Philips Electronics N.V.
Nationality: Dutch.
Supervisory directorships and other positions held: member of
the Supervisory Boards of ASM Lithography N.V., Neopost SA
and Delft Instruments N.V.

Pierre Hochuli (1947, m)
First appointed: 2005. End of current term: 2009.
Position: Chairman of the Board of Directors of Devgen N.V.,
chairman of the Executive Committee and member of the
Board of Directors of Unibioscreen S.A. and member of the
Board of Directors of Oncomethylome S.A.
Nationality: Swiss.
Supervisory directorships and other positions held: Venture
Partner of Polytechnos Venture-Partners GmbH.

Ewald Kist (1944, m)
First appointed: 2004. End of current term: 2008.
Position: retired; last position held: chairman of the Managing
Board of the ING Group.
Nationality: Dutch.
Supervisory directorships and other positions held: member of
the Supervisory Boards of De Nederlandsche Bank N.V., Philips
Electronics N.V. and Moody’s Investor Services, member of the
Board of Governors of the Peace Palace in The Hague
(Netherlands).

Okko Müller (1936, m)
First appointed: 1994. End of current term: 2007.
Position: retired; last position held: member of the Managing
Boards of Unilever N.V. and Unilever PLC.
Nationality: German.
Supervisory directorships and other positions held: None.

Claudio Sonder (1942, m)
First appointed: 2005. End of current term: 2009.
Position: retired; last position held: chairman of the Managing
Board of Celanese.
Nationality: Brazilian and German.
Supervisory directorships and other positions held: member of
the Supervisory Boards of Companhia Suzano de Papel e
Celulose S.A. (Brazil), Suzano Petroquimica S.A. (Brazil), RBS-
Media Group (Brazil), Cyrela Brazil Reatty S.A. (Brazil), Hospital
Albert Einstein (Brazil) and member of the Board of the Ibero-
America Association, Hamburg (Germany).

Cees van Woudenberg (1948, m)
First appointed: 1998. End of current term: 2010.
Position: member of the Executive Committee of Air France.
Nationality: Dutch.
Supervisory directorships and other positions held: member of
the Supervisory Boards of Transavia CV, Royal Grolsch N.V.,
Mercurius Group Wormerveer B.V. and Coöperatieve
Vereniging Verenigde Bloemenveiling Aalsmeer B.A., member
of the management committee of the Confederation of
Netherlands Industry and Employers (VNO-NCW); chairman of
the Dutch employers’ association AWVN.

Tom de Swaan (1946, m)
First appointed: 2006. End of current term: 2010.
Position: retired; last position held: member of the Managing
Board and Chief Financial Officer / Chief Risk Officer ABN
AMRO.
Nationality: Dutch.
Supervisory directorships and other positions held: non-
executive director of the Board of GlaxoSmithKline Plc,
member of the Board of Directors of Zurich Financial Services
and Zurich Insurance Company, member of the Supervisory
Board of Buhrmann N.V., nominated as member of the
Supervisory Board of Royal Ahold N.V.

Annual Report 2006

www.dsm.com

Corporate organization

Other corporate officers
(as at 31 December 2006)

Directors of business groups

Alexander Wessels

Jos Schneiders

Mauricio Adade

DSM Nutritional Products
Human Nutrition and Health
DSM Nutritional Products
Animal Nutrition and Health
DSM Food Specialties
DSM Pharmaceutical Products Leendert Staal
DSM Anti-Infectives
DSM Engineering Plastics
DSM Resins
DSM Elastomers
DSM Fibre Intermediates
DSM Melamine
DSM Agro
DSM Energy
DSM Other Businesses

Gerard de Reuver
Jos Goessens
Ben van Kooten
Bob Hartmayer
Edward Sheu
Anton Robek
Renso Zwiers
Frank Choufoer
Henk Numan

Directors of corporate staff departments and services

Corporate Secretariat
Control & Accounting
Human Resources
Planning & Development
DSM Innovation Center
Safety, Health, Environment &
Manufacturing
DSM Nederland B.V.
ICT
Marketing & Communications
DSM China
Sourcing
Legal Affairs
Operational Audit
Strategic Projects
DSM Manufacturing Center

Paul Fuchs
Loek Radix
Ben van Dijk
Hein Schreuder
Rob van Leen
John Prooi

Frans Pistorius
(1948)
Jo van den Hanenberg (1947)
(1958)
Jan Paul de Vries
(1957)
Stefan Sommer
(1950)
Ton Trommelen
(1954)
Pieter de Haan
(1946)
Roelof Mulder
(1950)
Hans van Suijdam
(1947)
Jo Scholz

(1963)

(1951)

(1964)
(1953)
(1956)
(1951)
(1951)
(1952)
(1953)
(1959)
(1955)
(1951)
(1949)

(1946)
(1956)
(1951)
(1951)
(1957)
(1946)

Managing Board

Peter Elverding (1948, m), chairman
Position: chairman of DSM’s Managing Board since July 1999;
member of the Managing Board since October 1995 (stepping
down on 1 May 2007).
Nationality: Dutch.
Supervisory directorships and other positions held: vice-
chairman of the Supervisory Board of De Nederlandsche Bank
N.V., member of the Supervisory Board of Océ N.V., chairman
of the Supervisory Board of the University of Maastricht and
member of the Supervisory Board of the Transnational
University of Limburg (Netherlands).
e-mail: peter.elverding@dsm.com

Jan Zuidam (1948, m), deputy chairman
Position: deputy chairman of DSM’s Managing Board since
January 2001; member of the Managing Board since January
1998.
Nationality: Dutch.
Supervisory directorships and other positions held: member of
the Supervisory Board of Gamma Holding N.V., vice-chairman
of the Dutch Chemical Industry Association (VNCI), chairman of
the Supervisory Board of the ORBIS medicare group, chairman
of the Netherlands Academy of Technology and Innovation,
member of the Supervisory Board of the Bonnefanten Museum
in Maastricht (Netherlands), chairman of the Technology
Committee of the Confederation of Netherlands Industry and
Employers (VNO-NCW), member of the Advisory Board of
SenterNovem.
e-mail: jan.zuidam@dsm.com

Feike Sijbesma (1959, m)
Position: member of DSM’s Managing Board since July 2000
(appointed as Chairman as of 1 May 2007).
Nationality: Dutch.
Supervisory directorships and other positions held: board
member of Cefic (European Chemical Industry Council), board
member of EuropaBio (European Association for Biotech
Industries) and of BIO (Biotechnology Industry Organization,
USA), board member of the Wageningen Centre for Food
Sciences (Netherlands), member of the Supervisory Board of
Utrecht University (Netherlands) and the Supervisory Board of
the Dutch Genomics Initiative.
e-mail: feike.sijbesma@dsm.com

Nico Gerardu (1951, m)
Position: member of DSM’s Managing Board since April 2006.
Nationality: Dutch.
Supervisory directorships and other positions held: member of
the Supervisory Boards of Voestalpine Polynorm N.V. and
Holland Colours N.V.
e-mail: nicolaas.gerardu@dsm.com

Rolf-Dieter Schwalb (1952, m), CFO
Position: member of DSM’s Managing Board and CFO since
October 2006.
Nationality: German.
Supervisory directorships and other positions held: None.
e-mail: rolf-dieter.schwalb@dsm.com

Annual Report 2006

www.dsm.com

Remuneration Policy regarding the Managing Board and
the Supervisory Board

This chapter comprises two parts. The first part outlines
the remuneration policy as approved by the Annual General
Meeting of Shareholders on 6 April 2005. The second part
contains details of the remuneration in 2006.

Remuneration policy

The objective of DSM’s remuneration policy is to attract,
motivate and retain the qualified and expert individuals that
the company needs in order to achieve its strategic and
operational objectives.

• DSM strives for a high performance in the field of

sustainability and aims to maintain a good balance between
economic gain, respect for people and concern for the
environment in accordance with the Triple P concept (People,
Planet, Profit). The remuneration policy reflects a balance
between the interests of DSM’s main stakeholders as well as
a balance between the Company’s short-term and long-term
strategy. In the light of the remuneration policy, the structure
of the remuneration package for the Managing Board is
designed to balance short-term operational performance
with the long-term objective of creating sustainable value
within the company, while taking account of the interests of
all stakeholders.

• To ensure that highly skilled and qualified senior executives

can be attracted and retained, DSM aims for a total
remuneration level that is comparable to levels provided by
other Dutch multinational companies that are similar to DSM
in terms of size and complexity. For that purpose, external
reference data are used.

• The remuneration policy for the members of the Managing

Board is aligned with the remuneration of other senior
executives of DSM.

• In designing and setting the levels of remuneration for the
Managing Board, the Supervisory Board also takes into
account the relevant provisions of statutory requirements,
corporate governance guidelines and other best practices
applicable to DSM.

Labor market peer group
In order to be able to recruit the right caliber of people for
the Managing Board and to secure long-term retention of the
current Board members, DSM has taken external reference
data into account in determining adequate salary levels.
For that purpose, a specific labor market peer group has
been defined which consists of Dutch companies that are
headquartered in the Netherlands and are more or less
comparable to DSM in terms of size, international scope and
complexity of industrial operations.

The labor market peer group consists of the following ten
companies:

Aegon
Akzo Nobel
Getronics
Heineken
KPN

Numico
Nutreco
Océ
TNT
Wolters Kluwer

Professional independent remuneration experts (Towers Perrin,
Amsterdam) have modified the raw data of the peer-group
companies using a statistical empirical model, so as to make
them comparable with a company the size of DSM, with the
associated scope and responsibilities of the Managing Board.
Peer-group data are updated on an annual basis.

DSM operates in a competitive international industry. Therefore,
DSM will also closely monitor industry and company-specific
international developments with respect to remuneration.

Below, the various remuneration components are addressed
separately.

Base salary
On joining the Board, the Managing Board members receive
a base salary that is comparable with the median of the labor
market peer group. Every year base salary levels are reviewed.
Adjustment of the base salary is at the discretion of the
Supervisory Board, which takes into account external and
internal developments.

Bonus
Managing Board members can earn a bonus amounting to
60% of their annual base salary for on-target performance.
Under the bonus plan, the part of the bonus that is related to
financial targets accounts for 42% of base salary, which can
increase to 63% in the case of an exceptionally good financial
performance.

The part of the bonus that is not related to financial targets
accounts for 18% of the base salary and cannot increase
beyond that. Targets are defined in the areas of the strategic
development of the company and Triple P.

Bonus part linked to financial targets
Besides the CFROI, the part of the bonus that is linked to
financial targets includes elements related to operational
performance, being operating profit and free cash flow,
reflecting short-term financial results. The weighting given to
the individual financial elements in the bonus is as follows:
CFROI 21%, operating profit 12% and free cash 9% of annual
base salary for on-target performance.

Annual Report 2006

www.dsm.com

Remuneration Policy regarding the
Managing Board and the Supervisory Board

Remuneration policy
Remuneration 2006

On-target pay-out
(% of base salary)

Maximum
pay-out
(% of base salary)

things. The targets contribute to the realization of the objective
of long-term value creation.

Targets

Financial targets:
- CFROI
- Operating profit
- Free cash

Non-financial targets

Total

21.0

12.0

9.0

18.0

60.0

31.5

18.0

13.5

18.0

81.0

CFROI
The definition of CFROI has been established in such a way
that the realization of the CFROI target can be derived from
the financial information in the annual report. The definition is
as follows:1)

Recurring EBITDA – related annual tax – economic depreciation (1%)

gross asset base (incl. working capital)

CFROI focuses on value realization and creation compared
with the weighted average cost of capital (WACC) established
for DSM.

Operational performance
There are two financial-target-related bonus elements that
allow for a focus on short-term operational targets: operating
profit and free cash. These can be derived from the financial
statements and are defined as follows:

• Operating profit: EBIT before exceptional items
• Free cash, defined as cash from operating activities minus
capital expenditure (as shown in the cash flow statement)
and minus the average dividend paid in the previous
three years

The company is of the opinion that the combination of CFROI
(value realization and creation), operating profit and free cash
adequately reflects the company’s financial performance.
Targets are determined each year by the Supervisory Board,
based on historical performance, the operational and strategic
outlook of the company in the short term and expectations of
the company’s management and stakeholders, among other

1) Recurring EBITDA is defined as: EBIT excluding exceptional items plus

depreciation and amortization as reported in the income statement. Related
annual tax expense is defined as taxes minus the effect of exceptional items
as reported in the statement of income. Economic depreciation is defined as
a 1% charge on the historical cost of intangible assets and property, plant and
equipment as reported in the balance sheet. The 1% charge represents the fund to
be formed to replace the average asset mix after its economic lifetime ends. Gross
asset base is defined as the historical cost value of property, plant and equipment
and intangible assets plus average annualized working capital. Working capital is
defined as inventories plus receivables minus current liabilities as reported in the
balance sheet.

2) Degussa will be eliminated from the peer group due to the fact that the company is

no longer listed.

In determining the realization of the operating-profit target,
a (partial) adjustment mechanism for sensitivity to the euro /
dollar ratio will apply. The company does not disclose the actual
targets, as they qualify as commercially sensitive information.

Stock incentives
The Managing Board Members are eligible to performance
related stock options and shares. Both stock options and
performance shares operate on the basis of the same
performance schedule.

The vesting of stock options and performance shares is
conditional on the achievement after three years of previously
determined target levels of total shareholder return (TSR)
compared to the peer group.

The Chairman will receive 10,000 performance shares and
37,500 performance options; the members of the Managing
Board will receive 8,000 performance shares and 30,000
performance options.

Exercise price
The stock options and shares are granted on the first ‘ex
dividend’ day following the Annual General Meeting at which
DSM’s financial statements are adopted. The exercise price of
the stock incentives is equal to the opening price of the share
on the date of grant at the Amsterdam Stock Exchange.

TSR as a performance measure
DSM’s TSR performance is compared to the average TSR
performance of a set of pre-defined peer companies.

The TSR peer group for 2006 consists of the following
companies:

Akzo Nobel
BASF
CIBA Specialty Chemicals
Clariant
Danisco/Genencor
Degussa2)
EMS Chemie Holding

ICI
Lanxess
Lonza Group
Novozymes
Rhodia
Solvay

2
The peer group used for benchmarking total-shareholder-
return performance reflects the relevant market in which DSM
competes for shareholder preference . It includes sector-specific
competitors which the Supervisory Board considers to be
suitable benchmarks for DSM.

The peer group is verified by the Supervisory Board each year
based on market circumstances (mergers, acquisitions) which
determine the appropriateness of the composition of the
performance peer group. Depending on DSM’s performance
compared to the peer group a certain number of options will
become exercisable and a certain number of shares will be

Annual Report 2006

www.dsm.com

Remuneration Policy regarding the Managing Board and
the Supervisory Board

unconditionally awarded. The stock options can be kept for
a maximum of eight years (including the three-year vesting
period) while the shares shall be retained by the members of
the Managing Board for a period of at least five years (after the
three-year vesting period) or at least until termination of
employment if this period is shorter. The final performance of
DSM versus its peers will be determined and validated by a
bank and audited by the external auditor at the end of the
performance period.

Performance incentive zone
The number of options and shares that become unconditional
after three years is determined on the basis of DSM’s
performance relative to the average TSR performance of the
peer group. The difference between DSM’s performance and
the peer group’s performance (in percentage points)
determines the vesting.

The following table gives an overview of the vesting conditions.

DSM performance minus peer group
performance in % points

Percentage of performance-related
stock options that become exercisable
and percentage of shares awarded

> 20

> 10 and < 20

> -10 and < 10 (target)

> -20 and < -10

< -20

100

Pensions
The members of the Managing Board are participants in the
Dutch pension fund ‘Stichting Pensioenfonds DSM Nederland’
(PDN). PDN operates similar pension plans for various DSM
companies. The pension provision of the Managing Board is
equal to the pension provision for the employees of DSM
Limburg BV and executives employed in the Limburg area.

Due to changes in legislation with respect to pre-pensions,
the pension plans of PDN have been revised with effect from
1 January 2006. Since the Managing Board members are
participants in the PDN pension plans, these changes are
applicable to the Managing Board as well.

For members of the Managing Board born before 1 January
1950 (Peter Elverding and Jan Zuidam) continuation of the old
pension plans is possible. Continuation of the old plans is not
possible for other Board members. For Feike Sijbesma a
transitional arrangement is applicable, which makes retirement
before the age of 65 possible.

Employment contracts

Term of employment
The employment contracts of the members of the Managing
Board appointed before 1 January 2005 have been entered
into for an indefinite period of time. Newly appointed members
of the Managing Board are also offered an employment
contract for an indefinite period of time. The employment
contract ends on the date of retirement or by notice of
either party.

Term of appointment
Members of the Managing Board appointed before 1 January
2005 are appointed for an indefinite period of time. New
members of the Managing Board (appointed after 1 January
2005) will be appointed for a period of four years as Board
Member. Newly appointed members are subject to
reappointment by the shareholders after a period of four years.

Notice period
Termination of employment by a member of the Managing
Board is subject to three months’ notice. A notice period of six
months will for legal reasons be applicable in the case of
termination by the company.

Severance arrangement
There are no specific contractual exit arrangements for the
members of the Managing Board appointed before 1 January
2005. Should a situation arise in which a severance payment is
appropriate for these Board members, the Nomination and
Remuneration Committee of the Supervisory Board will
recommend the terms and conditions. The Supervisory Board
will decide upon this, taking into account usual practices for
these types of situations, as well as applicable laws and
corporate governance requirements.

The employment contracts of newly appointed members of the
Managing Board (appointed after 1 January 2005) include an
exit arrangement provision which is in accordance with best
practice provision II.2.7. of the Dutch corporate governance
code (i.e. a sum equivalent to the fixed annual salary, or if this is
manifestly unreasonable in the case of dismissal during the first
term of office, two times the fixed annual salary).

Remuneration 2006

The remuneration package for the Managing Board is subject
to annual review. The market competitiveness of the remuneration
package of the Managing Board for 2006 was reviewed, based
on the Dutch labor market peer group. The data reflect the July
2006 remuneration levels. All values are denominated in euros.

On target bonus and stock incentive grants are expressed as a
percentage of base salary. The remuneration data are
regressed to reflect the size and scope of DSM. Stock incentive
valuations are based on the Black-Scholes model.

Furthermore, data are presented as median actual levels.

Annual Report 2006

www.dsm.com

Remuneration Policy regarding the
Managing Board and the Supervisory Board

Remuneration policy
Remuneration 2006

Benchmark against Dutch labor market peer group 2006

Managing Board Chairman

DSM (01.07.2006) Peer group median

The 2006 annual report presents the bonuses that have been
earned on the basis of results achieved in 2006. These
bonuses will be paid out in 2007.

Base salary
On-target bonus
Total cash on target
Annualized stock incentive value
Total direct compensation

€660,000

€750,000

60%
€1,056,000

41%
€1,326,600

65%
€1,237,500

65%
€1,725,000

Other Board members

DSM (01.07.2006) Peer group median

Base salary
On-target bonus
Total cash on target
Annualized stock incentive value
Total direct compensation

€482,000

60%
€771,200

45%
€988,100

€475,000

60%
€760,000

60%
€1,045,000

Base salary in 2006
The Supervisory Board reviewed whether circumstances
justified an adjustment of the base salary levels. Based on the
benchmark against the peer group, it was concluded that the
base salary for the chairman was at the lower quartile whilst the
salaries of the other members of the Managing Board were
around the median level. DSM’s policy is to offer the Managing
Board a base salary comparable with the median of the Dutch
labor market peer group.

In order to move closer towards the median level of the
benchmark a 5% extra increase in the base salary of the
chairman took place as of 1 January 2006. It is the intention
to close the gap with the median of the benchmark by 2008
at the latest. For other Board members no extra increase
was required.

External and internal circumstances justified a general increase
of the base salary of the Managing Board of 2.5% as of 1 July
2006 to cope with inflation and labor market developments.

Bonus for 2006
Bonus targets are revised annually so as to ensure that they
are stretching but realistic. Considerations regarding the
performance targets are influenced by the operational and
strategic course taken by the company and are directly linked
to the company´s ambitions. The targets are determined at the
beginning of the year for each Board member.

Target bonus level and pay-out
When they achieve all their targets, Managing Board members
receive a bonus of 60% of their annual base salary. Outstanding
financial performance can increase the bonus level to 81% of
the annual base salary.

The Supervisory Board has established the extent to which the
targets for 2006 were achieved. The realization of the 2006
financial bonus targets has been reviewed by Ernst & Young
Accountants. Furthermore, Ernst & Young has reviewed the
process with respect to the target setting and realization of the
non-financial bonus targets. The targets relating to the group’s
financial performance were met, with the exception of free
cash. The other, non-financial targets were almost fully
achieved. The average realization percentage was 49.00%.

See page 72 for tabular overviews on the actual bonus pay-out
per individual Board member in 2006.

Stock options and performance shares in 2006

Stock incentives granted in 2006
In 2006 performance-related stock options and performance
shares were granted to the Managing Board on 31 March 2006
at an exercise price of €38.30. The table below shows the
number of stock incentives granted to the individual Managing
Board members:

Number of stock incentives granted

Stock options

Performance
shares

Peter Elverding
Jan Zuidam
Henk van Dalen (until 01.04.06)
Feike Sijbesma
Chris Goppelsroeder (until 01.04.06)
Nico Gerardu (as from 01.04.06)
Rolf-Dieter Schwalb (as from 01.10.06)

37,500

30,000

10,000

8,000

Pensions in 2006
The members of the Managing Board are participants in the
Dutch pension fund ‘Stichting Pensioenfonds DSM
Nederland’ (PDN).
As of 1 January 2006 the pension scheme comprises the
following elements:
• Retirement age 65 years (early retirement possible only by

actuarial reduction of pension rights).

• The scheme includes a spouse pension as well as a disability

pension.

• Annual accrual of pension rights (old age pension) over base
salary exceeding €11,354 (reviewed annually) at a rate of 2%.

• Employee’s contribution of 2.5% of base salary up to

€50,810 and 6.5% of the pensionable salary above this
amount (to be reviewed annually).

• Conditional defined benefit: indexation of pensions and pension
rights is conditional, depending on PDN’s financial returns.

Annual Report 2006

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Remuneration Policy regarding the Managing Board and
the Supervisory Board

Loans
The company does not provide any loans to members of the
Managing Board. There are therefore no loans outstanding.

Pension

Pension costs
(employer)

Accrued pension
as of age 65

in €

2006

2005

31 Dec.
2006

31 Dec.
2005

Peter Elverding
Jan Zuidam
Henk van Dalen
(until 01.04.06)
Chris
Goppelsroeder
(until 01.04.06)
Feike Sijbesma
Nico Gerardu
(as from 01.04.06)
Rolf-Dieter
Schwalb
(as from 01.10.06)

111,379

111,482

323,573

283,206

81,968

22,843

86,148

240,446

225,192

86,148

200,490

17,555

48,304

48,830

91,248

49,493

86,148

153,897

140,745

148,575

17,990

2,352

Total remuneration
The total remuneration (including pension costs relating to
current and former Board members) of the Managing Board
amounted to €4.3 million in 2006 (2005: €3.9 million). The
increase of €0.4 million was mainly due to a higher bonus pay
out in 2006.

Overview of remuneration awarded to the Managing Board
in 2006
The tables below show the remuneration awarded to the
Managing Board in 2006.

Fixed annual salary

in €

1 July 2006

1 July 2005

Peter Elverding
Jan Zuidam
Henk van Dalen (until 01.04.06)
Chris Goppelsroeder (until 01.04.06)
Feike Sijbesma
Nico Gerardu (as from 01.04.06)
Rolf-Dieter Schwalb (as from 01.10.06)

660,000

482,000

612,000

470,000

Bonus

in €

2006 1

2005 2

Peter Elverding
Jan Zuidam
Henk van Dalen (until 01.04.06) 3
Chris Goppelsroeder (until 01.04.06) 3
Feike Sijbesma
Nico Gerardu (as from 01.04.06) 4
Rolf-Dieter Schwalb (as from 01.10.06)4

319,235

233,240

70,000

233,240

175,665

59,286

378,675

290,950

1 Based on results achieved in 2006 and therefore payable in 2007
2 Bonus paid in 2006 based on results achieved in 2005
3 Pro-rated bonus based on estimated results achieved in Q1 2006
4 Pro-rated bonus

Annual Report 2006

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Remuneration Policy regarding the
Managing Board and the Supervisory Board

Remuneration policy
Remuneration 2006

Overview of remuneration package of Supervisory Board in 2006
The remuneration package of the Supervisory Board comprises
an annual fixed fee and an annual committee membership fee.
The fixed fee for the Chairman of the Supervisory Board is
€50,000. The members of the Supervisory Board each receive
a fixed fee of €35,000. Committee membership is awarded
€5,000 per member and €7,500 for the Chairman.

In accordance with good corporate governance, the
remuneration of the Supervisory Board is not dependent on
the results of the company. This implies that neither stock
options nor shares are granted to Supervisory Board members
by way of remuneration.

If any shareholdings in DSM are held by Supervisory Board
members, they serve as a long-term investment in the
company. At year-end 2006 the members of the Supervisory
Board together held 9,584 shares in Royal DSM N.V.

The company does not provide any loans to its Supervisory
Board members.

Rules have been adopted governing ownership of and
reporting on transactions in securities (other than securities
issued by DSM) by Supervisory Board members.

The table below gives an overview of the remuneration paid to
the Supervisory Board in 2006.

in €

Annual fixed
fee

Committee
fee

Total

Cor Herkströter, chairman
Henk Bodt, deputy chairman
Okko Müller
Cees van Woudenberg
Ewald Kist
Pierre Hochuli
Claudio Sonder
Tom de Swaan (as from 29.03.06)

50,000

35,000

26,250

12,500

7,500

5,000

62,500

42,500

40,000

35,000

26,250

Total

286,250

35,000

321,250

Annual Report 2006

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Corporate governance, risk management and internal control

support the Managing Board and the business groups. Intra-
group product supplies and the services of a number of shared
service departments and research departments are contracted
by the business groups at market prices.

The company is governed by its Articles of Association, which
can be consulted at the DSM website. A decision to amend the
Articles of Association may only be taken at the proposal of the
Managing Board, subject to the approval of the Supervisory
Board. The General Meeting of Shareholders decides on an
amendment to the Articles of Association by an absolute
majority of the votes cast.

Dutch corporate governance code

DSM supports the Dutch corporate governance code
(Tabaksblat Code), and applies all but one of its 113 Best
Practices. The only exception is Best Practice III.5.11, which
stipulates that the remuneration committee shall not be chaired
by the chairman of the Supervisory Board. This exception has
been discussed in the Annual General Meeting of Shareholders,
where it met with no objections.

All documents related to the implementation at DSM of the
Dutch corporate governance code can be found at the
corporate website (www.dsm.com).

I DSM in Jiangyin / China

In the 2004 annual report, an extensive account was given of
the way in which DSM conducts its governance, risk
management and control (see www.dsm.com section
Governance). In this section, the main elements are reported,
the overall governance framework is described, and the risk
management and control system is explained.

Organization

Governance framework

The Vision 2010 strategy resulted in some adjustments to
DSM’s business steering model. The business groups remain
the main building blocks of the organization; they have integral
long- and short-term business responsibility and have at their
disposal all functions that are crucial for their business success.
However, in order to facilitate selective leveraging of expertise
and implementation capabilities in the approach to markets,
products and technologies, business groups with the most
important commonalities in these areas have been grouped
into four clusters: Nutrition, Pharma, Performance Materials
and Industrial Chemicals. The business groups within a specific
cluster report to one member of the Managing Board. This
Board member has the responsibility of managing the synergy
within the cluster. In order to ensure sufficient independence
with regard to financial management, the Chief Financial Officer
no longer has business groups reporting to him.

Apart from the above, in 2006 there were no major changes to
DSM's overall governance framework. For the sake of clarity, a
short summary of the main aspects is given here. It is much the
same as last year’s summary.

Royal DSM N.V. is a public limited company with a Managing
Board and an independent Supervisory Board. The Managing
Board is responsible for the company's strategy, its portfolio
policy, the deployment of human and capital resources and the
company's financial performance as based on these factors.
The Supervisory Board supervises the policy pursued by the
Managing Board, the Managing Board's performance of its
managerial duties and the company's general state, taking
account of the interests of all the company's stakeholders. The
annual financial statements are approved by the Supervisory
Board and then submitted for adoption to the Annual General
Meeting of Shareholders, accompanied by an explanation by
the Supervisory Board of how it carried out its supervisory
duties during the year concerned.

Members of the Managing Board and the Supervisory Board
are appointed (and, if necessary, dismissed) by the General
Meeting of Shareholders.

DSM fully informs its stakeholders about its corporate
objectives, the way the company is managed and the
company's performance. Its aim in doing so is to pursue an
open dialog with its shareholders and other stakeholders.

DSM has a decentralized organizational structure built around
business groups that are empowered to carry out all short-term
and long-term business functions. This structure ensures a
flexible, efficient and fast response to market changes. At the
corporate level, DSM has a number of staff departments to

Annual Report 2006

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Corporate governance, risk management and
internal control

Organization
Dutch corporate governance code
Governance framework
Risk management system
Financial policy
Risks

The figure below depicts how DSM’s responsibilities are
divided over the various levels of the company and lists some
of the most important governance elements and regulations
at each level.

Shareholders

Supervisory
Board

Managing
Board

Articles of Association

• Regulations of the Supervisory Board
• Charter of the Audit Committee
• Charter of the Nomination and Remuneration
Committee

• Works according to DSM Values and Regulations
of the Managing Board
• Creates and maintains Risk Management
Framework for units reporting to the
Managing Board

company, the business groups and clusters have the freedom
to operate within the limits set by the Corporate Requirements
(and of course in compliance with all applicable national or
international laws and regulations). The Corporate
Requirements form the basis for systematic risk management
and internal control at this operational level. If a special situation
calls for it, the Corporate Requirements are extended to include
so-called Management Directives (for example a travel ban for
security reasons).

Compliance with the Corporate Requirements and the
effectiveness of the risk management and internal control
system are monitored by the entities themselves and discussed
regularly between Managing Board and operational units. On
average once every three years, the units are also audited by
Corporate Operational Audit (COA). The director of the COA
department reports to the Chairman of the Managing Board
and has the authority to consult with the Chairman of the Audit
Committee. Furthermore, the director of COA acts as the
compliance officer with regard to inside information and is the
chairman of the DSM Alert Committee, which implements the
whistle-blower policy.

Management
of the unit

Units reporting to the Managing Board
conduct their business within the parameters
of the Risk Management Framework
set by the Managing Board

Risk management system

Note: All internal regulations apply in addition to applicable national and international
laws and regulations. In cases where internal regulations are incompatible with
national or international laws and regulations, the latter prevail.

Major initiatives were taken to further enhance the risk
management system and adapt it to the Vision 2010
developments.

The relationship between the Managing Board and the units
reporting to the Board (business groups, corporate staff
departments and shared competence & business support
functions) is described by risk management framework that the
Managing Board has established and to which the operational
units adhere.

The following are the most important governance elements of
this framework:
• The DSM Values, to which both the Managing Board and the

operational units have to adhere.

• The governance model, including the roles of clusters,

corporate staff departments, shared competence & business
support functions, the China Governance function, the DSM
Innovation Center and the charters of several Boards.
Together they define the basic organizational structure and
the division of responsibilities between the Managing Board,
these corporate and central functions and the business
groups and clusters.

• The Corporate Strategy Dialog (CSD), specifying the

strategic direction and objectives of the corporation, and
Business Strategy Dialogs (BSD), which establish the
strategy and objectives of the various businesses.

• Policies and multi-year plans in functional areas.
• The risk management framework for the business groups
and clusters, governed by the Corporate Requirements.

Within the responsibilities as defined by the governance model
and in the context of the strategies and policies of the

As described on page 34, DSM continued to place emphasis
on the effective implementation of the system and these efforts
were supported by flying squads of experts from the True Blue
project. As a result, the business processes regarding the flows
of goods and money were further improved, as were the tools
and methods to implement them.

To ensure that these improvements will be sustainable in
the future, internal control principles, such as appropriate
segregation of duties, clear assignment of roles and authorities
and adequate documentation of policies and procedures, were
integrated in the business processes. There will be one
organization to execute the design and implementation of these
SAP supported standard business processes in the area of
goods and money flows. The Corporate Staff Directors for
Purchasing, Manufacturing, Marketing and Control &
Accounting will be the owners of these processes and related
Corporate Requirements. In close cooperation with the
business groups, the Corporate Risk Manager and the Chief
Information Officer, they set the agenda for the development,
improvement and extension of these processes. A governance
structure has been designed that is overseen by the CFO.

The Corporate Requirements being the basis for risk
management at the operational level, much attention was given
to keeping them up-to-date and accessible and to provide
practices for their implementation. They were, for instance,
adapted to the developments in Vision 2010 and specific
practices were created for the implementation of the Human
Resources Requirements.

Annual Report 2006

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Corporate governance, risicomanagement en internal control

All business groups submitted in plans for further
implementation of the Corporate Requirements. In doing so,
they were supported by True Blue and provided with tools to
track progress.

In 2007 DSM’s risk management efforts will mainly concentrate
on finalizing and embedding the initiatives started in 2005 and
2006. Having developed a solid system for risk management,
the emphasis will be on sustainable, principle-based
implementation.

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, see definition on page 69) which
exceeds the weighted average cost of capital (WACC) by at
least 50 basis points. DSM further aims for a net debt which is
between 30 and 40% 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.
This underlines the company's aim of maintaining its single A
long-term credit rating.

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 strengthening the Nutrition and Performance
Materials businesses by means of selective acquisitions. As the
occasion arises, the company may choose to buy back shares,
if excess cash is available in the context of a medium-term
analysis of primary cash flow allocation requirements and a
sustained solid single A rating.

DSM's dividend policy is outlined on page 38 of this report. 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 at a
reasonable price.

An important acquisition criterion is that the business concerned
should be compatible with DSM in terms of technological and/
or market competencies. Acquired companies are in principle
required to contribute to DSM's earnings per share from the
very beginning and to meet the company's profitability
requirements. In some cases, for instance in the case of small
innovative growth acquisitions, this requirement may not be
appropriate and will therefore not be applied.

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.

The control and accounting function is responsible for trans-
action accounting, financial reporting and making assessments
and providing advice regarding business processes geared to
the company's financial targets. The main policy aim in this
function is to obtain and make available reliable financial
information that is adequate for business steering purposes
and meets statutory and other governance requirements.

The treasury function's tasks include financing the group and
its units, managing the cash held by the company and
managing currency risks and interest rate risks. To ensure that
its policy in these fields is properly implemented and produces
the best possible results, DSM has a set of stringent internal
regulations, procedures, organizational measures and market-
related benchmarks in place. DSM's treasury policy is mainly
geared to managing the financial risks to which the group and
its units are exposed and to optimizing the balance of financial
income and expense.

The tax function is responsible for the management of the
company's position with regard to taxes and import, export
and excise duties. As part of this task, it handles the various tax
returns and reviews acquisitions, disposals and liquidations of
business components and/or joint ventures, as well as
restructuring programs and reorganizations. It also examines
the tax consequences of cross-border activities between
business components such as transfer pricing, cross-border
activities that lead to some permanent form of foreign
establishment, and changes in the shareholdings in legal
entities. DSM's tax policy is aimed at realizing an optimal
position in the field of taxes and import, export and excise
duties, and at maintaining such a position for the long term.

The investor relations function's primary task is to maintain
contacts with current and potential shareholders of DSM and
with analysts who advise shareholders. The objective of this
function is to provide quality information to investors and
analysts about developments at DSM, ensuring that relevant
information is equally and simultaneously provided and
accessible to all interested parties.

The insurance function has the task of achieving a proper
balance between self-financing hazardous risks or having
these risks transferred to external insurers, based on the
relative costs involved. The underlying premise is the company's
risk management philosophy, which is that group-wide risk
awareness will ultimately lead to a proper insight into the risks
that a company such as DSM may be confronted with, and to
the control, prevention and mitigation of such risks. An insurance
policy is therefore viewed as a last-resort instrument for the
management of these risks. The choice as to whether or not to
obtain external insurance coverage also depends on the scope
of the risk exposure in relation to the financial parameters that
are relevant for a listed company. Such parameters determine
the amount of risk that the company is willing to bear itself.

All DSM units have to report their results periodically and
comply with Corporate Requirements in the field of finance &
economics. Compliance with the requirements for accounting
and reporting is confirmed by means of a quarterly written

Annual Report 2006

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Corporate governance, risk management and
internal control

Organization
Dutch corporate governance code
Governance framework
Risk management system
Financial policy
Risks

statement signed by management. During the drafting of the
annual report, the report is first discussed by the Managing
Board with the Supervisory Board's Audit Committee and the
external auditor, and subsequently with the Supervisory Board.
Quarterly financial reports are discussed by the Managing
Board, with the Chairman of the Audit Committee and the
external auditor. The company uses a release calendar for
financial results.

Risks

DSM’s internet website gives an overview of important risks
that have been identified and for the management of which
strategies, controls and mitigating measures have been put in
place as part of our risk management practices. They
nevertheless involve uncertainties that may lead to the actual
results differing from those projected. There may also be
current risks that the company has not yet fully assessed and
that are currently qualified as ‘minor’ but that could have a
material impact on the company's performance at a later stage.
The company's risk management and internal control system
has been designed to identify and respond to these
developments on time, but 100% assurance can never be
achieved, of course. The nature of the risks as identified below
can be found in descriptions on the website.

I DSM in Guangzhou / China

Generic risks

• Macro-economic trends
• General market developments
• Low-cost competition
• Political risks
• Currency risks and interest risk

Strategic risks

• Acquisitions, disposals and joint ventures
• New markets, products and technologies
• Innovation risks
• Human resource risks

Specific risks

• Corporate reputation risks
• Customer risks
• Production process risks
• Product liability risks
• Insurable risks
• ICT risks
• Project risks
• Financial risks
• Control failures

See www.dsm.com, Governance section.

Annual Report 2006

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Information about the DSM share

Shares and listings
Ordinary shares in Royal DSM N.V. are listed in NL 00983 on
the Euronext stock exchange in Amsterdam, the Netherlands
(Stock code 00982, ISIN code NL0000009827).

Options on ordinary DSM shares are traded on the European
Option Exchange in Amsterdam, the Netherlands (Euronext.liffe).

In the United States a sponsored unlisted American Depositary
Receipts (ADR) program is offered by Citibank NA (Cusip
780249108), with four ADRs representing the value of one
ordinary DSM share.

Besides the ordinary shares, 44.04 million cumulative preference
shares A are in issue, which are not listed on the stock exchange;
these have been placed with institutional investors in the
Netherlands. The cumprefs A have the same voting rights as
ordinary shares, as their nominal value of €1.50 per share is
equal to the nominal value of the ordinary shares. As of
1 January 2006 the dividend on cumprefs A amounts to
4.348% of the issue price of €5.295 per share until the
contractual dividend reset date (1 January 2016).

Transfer of the cumprefs A requires the approval of the
Managing Board, unless the shareholder is obliged to transfer
his shares to a previous shareholder by virtue of the law.

The information referred to in the Resolution of 5 April 2006
regarding the implementation of article 10 of Directive 2004/25
EC of the European Parliament and the Council of the European
Union pertaining to a takeover bid is given in this section of the
annual report (insofar as it is relevant to this section) and in the
following places elsewhere in the report: the Corporate
governance section starting on page 76, notes 17 (page 106),
19 (page 109) and 27 (page 121) to the financial statements
and the Other Information section starting on page 134.

Share buy-back program
On 27 September 2006 DSM announced a share buy-back
program with a total value of €750 million as a main building
block to realize the desired balance sheet structure in the
framework of the Vision 2010 strategy. This program will
increase DSM’s gearing (net debt / total capital) to a level of
around 20%. It will enable the repurchase of approximately
20 million ordinary shares, which equals approximately 10%
of the total number of ordinary shares in issue. Consequently,
the direct EPS-enhancing effect for ordinary shareholders will
be around 10%.

For tax reasons, the execution of this share buy-back program
is split over 2006 and 2007. On 15 December, 2006 DSM had
repurchased a total of 6,700,000 shares under this program for
a total consideration of €242.1 million, which completed the
first phase of the program.

As resolved in the Annual General Meeting of Shareholders,
held on 29 March 2006, the shares that have been bought back
thus far will be cancelled. The required process to cancel these
shares has been initiated.

DSM will resume the program in the course of 2007.

The total number of ordinary DSM shares outstanding decreased
by 6,073,128 in 2006. On 31 December it stood at 184,849,837.

The average number of ordinary shares outstanding in 2006
was 189,550,018. All shares in issue are fully paid.

Distribution of shares
Under the Dutch Major Holdings Disclosure Act, shareholdings
of 5% or more in any Dutch company must be disclosed to the
Netherlands Authority for the Financial Markets (AFM).
According to the register kept by the AFM the following

Development of the number of ordinary DSM shares

Balance at 31 December 2005
Changes:
- Reissue of shares in connection with exercise of option rights
- Repurchase of own shares

Issued

Repurchased

Outstanding

201,953,008

11,030,043

190,922,965

(2,671,872)

8,745,000

2,671,872

(8,745,000)

Balance at 31 December 2006

201,953,008

17,103,171

184,849,837

Average number of shares outstanding

DSM share prices on Euronext Amsterdam
- Highest price
- Lowest price
- At 31 December

189,550,018

€39.70
€28.58
€37.43

Annual Report 2006

www.dsm.com

Information about the DSM share

shareholders had disclosed that they owned between 5 and
10% of DSM’s total share capital on 1 January 2007:
• ABN AMRO Holding N.V.
• Aviva plc
• Capital Research and Management Company
• Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A.
• ING Groep N.V.

Issue of shares
The issue of shares takes place by a decision of the
Managing Board. The decision is subject to the approval of
the Supervisory Board. The scope of this power of the
Managing Board shall be determined by a resolution of the
General Meeting of Shareholders and shall relate to at most
all unissued shares of the authorized capital, as applicable
now or at any time in the future. In the Annual General
Meeting of Shareholders of 29 March 2006 this power
extended up to and including 29 September 2007, on the
understanding that:
• in the case of the issue of ordinary shares this authorization of
the Managing Board will be limited to a number of shares with
a nominal value amounting to 10% of the issued capital, and
to an additional 10% of the issued capital if the issue takes
place within the context of a merger or acquisition, and

• in the case of the issue of preference shares this authorization
of the Managing Board will relate to all non-issued preference
shares of the authorized capital at the level at which it now
stands or may stand at any future time.

Repurchase of own shares
The company may acquire paid-up own shares by virtue of a
decision of the Managing Board, provided that the par value of
the shares in its capital amounts to no more than one tenth of
the issued capital. Such a decision is subject to the approval
of the Supervisory Board. In the Annual General Meeting of
Shareholders of March 29, 2006 the Managing Board was

authorized to acquire own shares for a period of 18 months
from said date.

Geographical spread of DSM shares

2006

2005

Netherlands
United States / Canada
Belgium / Luxemburg
France
United Kingdom
Switzerland
Germany
Other countries

32%

13%

14%

30%

35%

14%

16%

<1%

24%

Trading volumes DSM shares 2006
(on a monthly basis)
x million

December
November
October
September
August
July
June
May
April
March
February
January

• 0

• 10

• 20

• 30

• 40

DSM share price development versus AEX and Dow Jones Euro Stoxx Chemical Index, 2005 - 2006

DSM
DJ Euro Stoxx Chemical Index
AEX Index
45

R
U
E

1/05 2/05 3/05 4/05 5/05 6/05 7/05 8/05 9/05 10/05 11/05 12/05 1/06 2/06 3/06 4/06 5/06 6/06 7/06 8/06 9/06 10/06 11/06 12/06

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Annual Report 2006

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Financial statements 2006

Annual Report 2006

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Financial statements 2006
Consolidated financial statements

Summary of significant accounting policies

Basis of preparation
DSM’s consolidated financial statements have been prepared
in accordance with International Financial Reporting Standards
(IFRS) as adopted by the European Union. The accounting
policies applied by DSM comply with IFRS and the pronounce-
ments of the International Financial Reporting Interpretation
Committee (IFRIC) effective at 31 December 2006.

Consolidation
The consolidated financial statements include Royal DSM N.V.
and its subsidiaries as well as the proportion of DSM’s ownership
of joint ventures (together ‘DSM’ or ‘Group’). A subsidiary is
an entity over which DSM has control. Control is the power
to govern the financial and operating policies of the entity so
as to obtain benefits from its activities. The financial data of
subsidiaries are fully consolidated. Minority interests in the
Group’s equity and profit and loss are stated separately. A joint
venture is an entity in which DSM holds an interest and which
is jointly controlled by DSM and one or more other venturers
under a contractual arrangement. Joint ventures are included
in the consolidated financial statements according to the
method of proportionate consolidation.

Subsidiaries and joint ventures are consolidated from the
acquisition date until the date on which DSM ceases to have
control or joint control, respectively. On consolidation all intra-
group balances and transactions and unrealized profits or
losses from intra-group transactions are eliminated. Unrealized
losses are not eliminated if these losses indicate an impairment
of the asset transferred. In such cases a value adjustment for
impairment of the asset is made.

Segmentation
Segment information is presented in respect of the Group’s
business and geographical segments. The primary format,
business segments, reflects the Group’s management
structure. Prices for transactions between segments are
determined on an arm’s length basis. Segment results, assets
and liabilities include items directly attributable to a segment
as well as those that can reasonably be allocated.

Foreign currency translation
The presentation currency of the Group is the euro.

Each entity of the Group records transactions and balance
sheet items in its functional currency. Transactions denominated
in currency other than the functional currency are recorded
at the spot exchange rates prevailing at the date of the
transactions. Monetary assets and liabilities denominated in
a currency other than the functional currency of the entity are
translated at the closing rates. Exchange differences resulting
from the settlement of these transactions and from the
translation of monetary items are recognized in the
income statement.

On consolidation, the balance sheets of subsidiaries and
joint ventures whose functional currency is not the euro are
translated into euro at the closing rate. The income statements
of these entities are translated into euro at the average rates
for the relevant period. Goodwill paid on acquisition is recorded
in the functional currency of the acquired entity. Exchange
differences arising from the translation of the net investment
in entities with a functional currency other than the euro are
recorded in equity (Translation reserve). The same applies
to exchange differences arising from borrowings and other
financial instruments in so far as they hedge the currency risk
related to the net investment. On disposal of an entity with
a functional currency other than the euro the cumulative
exchange differences relating to the translation of the net
investment is recognized in the income statement.

Distinction between current and non-current
An asset (liability) is classified as current when it is expected
to be realized (settled) within 12 months after the balance
sheet date.

Intangible assets
Goodwill represents the excess of the cost of an acquisition
over DSM’s share in the net fair value of the identifiable assets
and liabilities of an acquired subsidiary, joint venture or associate.
Goodwill paid on acquisition of subsidiaries and joint ventures
is included in intangible assets. Goodwill paid on acquisition
of associates is included in the carrying amount of these
associates. Goodwill is not amortized but tested for impairment
annually and when there are indications that the carrying
amount may exceed the recoverable amount. A gain or loss
on the disposal of an entity includes the carrying amount
of goodwill relating to the entity sold.

Intangible assets acquired in a business combination are
recognized at fair value on the date of acquisition and
subsequently amortized over the expected useful lives that
vary from 5 to 15 years.

Acquired licenses, patents and application software are
carried at historical cost less straight-line depreciation and
less any impairment losses. The expected useful lives vary from
4 to 10 years. Costs of software maintenance are expensed
when incurred. Capital expenditure that is directly related to the
development of application software is recognized as intangible
asset and amortized over its estimated useful life (5-8 years).

Research costs are expensed when incurred. Where the
recognition criteria are met, development expenditure is
capitalized and amortized over its useful life from the moment
the product is launched commercially. The carrying amount of
assets arising from development expenditures is reviewed for
impairment at each balance sheet date or earlier upon
indication of impairment. Development assets in use are tested
for impairment when there are indications that the carrying
amount may exceed the recoverable amount. Any impairment
losses are recorded in the income statement.

Annual Report 2006

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Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

When DSM’s share in the loss of an associate exceeds
the carrying amount of the associate, including any other
receivables, the carrying amount is reduced to zero. No further
losses are recognized, unless DSM has responsibility for
obligations relating to the associate.

Other financial assets
Other securities comprise equity interests in entities in which
DSM has no significant influence; they are accounted for as
available-for-sale securities. These securities are measured
against fair value with changes in fair value being recognized in
equity (Fair value reserve). On disposal the cumulative fair value
adjustments of the related securities are released from equity
and included in the income statement. If a reliable fair value
cannot be established, the securities are recognized at cost.
The proceeds from these securities and the gain or loss upon
their disposal are recognized in the income statement.

Loans and long-term receivables are measured at amortized
cost, if necessary after deduction of a value adjustment for bad
debts. The proceeds from these assets and the gain or loss
upon their disposal are recognized in the income statement.

Impairment of assets
When there are indications that the carrying amount of a
non-current asset (intangible assets or property, plant and
equipment) may exceed the estimated recoverable amount
(the higher of its value in use and fair value less costs to sell),
the possible existence of an impairment loss is investigated.
If an asset does not generate largely independent cash flows,
the recoverable amount is determined for the cash-generating
unit to which the asset belongs. In assessing the value in use,
the estimated future cash flows are discounted to their present
value using a pre-tax discount rate that reflects current market
interest rate and the risks specific to the asset.

When the recoverable amount of a non-current asset is less
than its carrying amount, the carrying amount is impaired to
its recoverable amount and an impairment charge is recognized
in the income statement. An impairment loss is reversed when
there has been a change in estimate that is relevant for the
determination of the asset’s recoverable amount since the last
impairment loss was recognized. Impairment losses for
goodwill will never be reversed.

All financial assets are reviewed for impairment. If there is
objective evidence of impairment as a result of one or more
events after initial recognition, an impairment loss is recognized
in the income statement.

Property, plant and equipment
Property, plant and equipment are stated at cost less
depreciation calculated on a straight-line basis and less any
impairment losses. Interest during construction is capitalized.
Expenditures relating to major scheduled turnarounds are
capitalized and depreciated over the period up to the
next turnaround.

Property, plant and equipment are systematically depreciated
over their estimated useful lives. Reviews are made annually
of the estimated remaining lives of assets, taking account of
commercial and technological obsolescence as well as normal
wear and tear. The initially assumed expected useful lives are in
principle as follows: for buildings 10-50 years, for plant and
machinery 5-15 years, for other equipment 4-10 years. Land is
not depreciated.

In oil and gas exploration, development and production costs
are accounted for using the successful efforts method. Costs
of successful and incomplete oil and gas drilling operations are
capitalized as property, plant and equipment. The estimated
discounted costs for future drilling platform decommissioning
and site restoration are capitalized and depreciated. Items of
property, plant and equipment related to oil and gas exploration
are depreciated on the basis of the unit of production method.

An item of property, plant and equipment is derecognized upon
disposal or when no future economic benefits are expected to
arise from the continued use or the sale of the asset. Any gain
or loss arising on derecognition of the asset is recorded in the
income statement.

Leases
Finance leases, which transfer to the Group substantially all the
risks and benefits incidental to ownership of the leased item,
are capitalized at inception of the lease at the fair value of the
leased property or, if lower, at the present value of the minimum
lease payments. All other leases are operating leases.

Lease payments for finance leases are apportioned to finance
charges and reduction of the lease liability so as to achieve a
constant rate of interest on the remaining balance of the liability.
Finance charges are included in Net finance costs. Capitalized
leased assets are depreciated over the shorter of the estimated
useful life of the asset or the lease term. Operating lease
payments are recognized as an expense on a straight-line basis
over the lease term.

Associates
An associate is an entity over which DSM has significant
influence but no control, usually evidenced by a shareholding
that entitles DSM to between 20% and 50% of the voting rights.
Investments in associates are accounted for by the equity
method, which involves recognition in the income statement of
DSM’s share of the associate’s profit or loss for the year. DSM’s
interest in an associate is carried in the balance sheet at its
share in the net assets of the associate together with goodwill
paid on acquisition, less any impairment loss.

Annual Report 2006

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Financial statements 2006

Inventories
Inventories are stated at the lower of cost and net realizable
value. The first-in, first-out (FIFO) method of valuation is used.
The cost of intermediates and finished goods includes directly
attributable costs and related production overhead expenses.
Net realizable value is determined as the estimated selling price
in the ordinary course of business, less the estimated costs of
completion and the estimated costs necessary to make the
sale. Products whose manufacturing cost cannot be calculated
because of joint cost components are stated at net realizable
price after deduction of a margin.

Current receivables
Current receivables are stated at amortized cost which
generally corresponds with face value, less an adjustment for
bad debts.

Current investments
Deposits held at call with banks with a remaining maturity
of more than 3 months and less than 12 months are classified
as current investments. They are measured at amortized
cost. Proceeds from these deposits are recognized in the
income statement.

Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and in
hand and deposits held at call with banks with a remaining
maturity of less than 3 months. Bank overdrafts are included
in current liabilities. Cash and cash equivalents are measured
at nominal value.

Non-current assets and disposal groups held for sale
Non-current assets and disposal groups (assets and liabilities
relating to an activity that is to be sold) are classified as ‘held
for sale’ if their carrying amount is to be recovered principally
through a sales transaction rather than through continuing use.
The reclassification takes place when the assets are available
for immediate sale and the sale is highly probable. These
conditions are usually met as from the date on which a first draft
of an agreement to sell is ready for discussion. Non-current
assets held for sale and disposal groups are measured at the
lower of carrying amount and fair value less costs to sell. Non-
current assets held for sale are not depreciated and amortized.

Royal DSM N.V. Shareholders’ equity
DSM’s ordinary shares and cumulative preference shares are
classified as Royal DSM N.V. shareholders’ equity. The price
paid for repurchased DSM shares (treasury shares) is deducted
from Royal DSM N.V. Shareholders’ equity until the shares are
withdrawn or reissued. Dividend to be distributed to holders of
cumulative preference shares is recognized as a liability when
the Supervisory Board approves the proposal for profit
distribution. Dividend to be distributed to holders of ordinary
shares is recognized as a liability when the Annual General
Meeting of Shareholders approves the proposal for dividend.

Provisions
Provisions are recognized when all of the following conditions
are met: 1) there is a present legal or constructive obligation
as a result of past events; 2) it is probable that a transfer of
economic benefits will settle the obligation; and 3) a reliable
estimate can be made of the amount of the obligation.

The probable amount required to settle long-term obligations
is discounted if the effect of discounting is material. Where
discounting is used, the increase in the provision due to the
passage of time is recognized as borrowing costs. However,
the interest costs relating to pension obligations are included in
pension costs.

Any provision for costs that will arise from future drilling platform
decommissioning and site restoration is made when the
investment project concerned is taken into operation. These
are included in Property, plant and equipment, along with the
historic cost of the related asset, and depreciated over the
useful life of the asset.

Borrowings
Borrowings are initially recognized at cost, being the fair value
of the proceeds received, net of transaction costs. Subsequently,
borrowings are stated at amortized cost using the effective
interest method. Amortized cost is calculated by taking into
account any discount or premium. Interest expenses are
accrued and recorded in the income statement for each period.

Where the interest rate risk relating to a long-term borrowing
is hedged, and the hedge is regarded as effective, the carrying
amount of the long-term loan is adjusted for changes in fair
value of the interest component of the loan.

Other current liabilities
Other current liabilities are stated at amortized cost, which
generally corresponds to the nominal value.

Revenue recognition
Revenue from the sale of goods is recognized when the
significant risks and rewards of ownership are transferred to
the buyer. Net sales represent the invoice value less estimated
rebates and cash discounts, and excluding indirect taxes.

Royalty income is recognized in Other operating income on an
accrual basis in accordance with the substance of the relevant
agreements. Interest income is recognized on a time-proportion
basis using the effective interest method. Dividend income is
recognized when the right to receive payment is established.

Annual Report 2006

www.dsm.com

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Government grants
Government grants are recognized at their fair value where
there is reasonable assurance that the grant will be received
and all related conditions will be complied with. Cost grants
are recognized as income over the periods necessary to match
the grant on a systematic basis to the costs that it is intended
to compensate. If the grant is an investment grant, its fair value
is initially recognized as deferred income in Other non-current
liabilities and then released to the income statement over the
expected useful life of the relevant asset by equal
annual amounts.

Share-based compensation
The costs of option plans are measured by reference to the
fair value of the options at the date at which the options are
granted. The fair value is determined using the Black-Scholes
model, taking into account market conditions linked to the price
of the DSM share. The costs of these options are recognized in
the income statement (Employee benefits costs) during the
vesting period, together with a corresponding increase in equity
(Reserve for share-based compensation) in the case of share-
settled options or Other non-current liabilities in the case of
cash-settled options (Share Appreciation Rights). No expense
is recognized for options that do not ultimately vest, except for
options where vesting is conditional upon a market condition,
which are treated as vesting, irrespective of whether or not the
market condition is satisfied, provided that all other
performance conditions are met.

Income tax expense
Income tax expense is recognized in the income statement
except to the extent that it relates to an item recognized directly
within shareholders’ equity.

Current tax is the expected tax payable on the taxable income
for the year, using tax rates enacted at the balance sheet date,
and any adjustment to tax payable in respect to previous years.
Deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between
the carrying amount of assets and liabilities and their tax base.
Deferred tax assets and liabilities are measured at the tax rates
and under the tax laws that have been enacted or substantially
enacted at the balance sheet date and are expected to apply
when the related deferred tax assets are realized or the
deferred tax liabilities are settled. Deferred tax assets, including
assets arising from losses carried forward, are recognized to
the extent that it is probable that future taxable profits will be
available against which the deductible temporary differences
and unused tax losses can be utilized. Deferred tax assets and
liabilities are stated at face value.

Deferred taxes are not provided for the following temporary
differences: the initial recognition of goodwill, the initial
recognition of assets or liabilities that affect neither accounting
nor taxable profit, and differences relating to investments in
subsidiaries to the extent that they will probably not reverse in
the foreseeable future.

Emission rights
DSM is subject to legislation encouraging reductions in
greenhouse gas emission and has been awarded emission
rights (principally CO2 emission rights) in a number of
jurisdictions. Emission rights are reserved for meeting delivery
obligations and are recognized at cost (usually zero). Revenue
is recognized when surplus emission rights are sold to third
parties. When actual emissions exceed the emission rights
available to DSM a provision is recognized for the expected
additional costs.

Financial derivatives
The Group uses financial derivatives such as foreign currency
forward contracts and interest rate swaps to hedge risks
associated with foreign currency and interest rate fluctuations.
Financial derivatives are initially recognized in the balance sheet
at fair value including transaction costs and subsequently
measured at their fair value on each balance sheet date.
Changes in fair value are recognized in the income statement
unless cash flow hedge accounting or net investment hedge
accounting is applied.

Exceptional items
Exceptional items relate to material non-recurring items of
income and expense arising from circumstances such as:
• write-downs of inventories to net realizable value or of
property , plant and equipment to recoverable amount,
as well as reversals of such write-downs;
• restructurings of the activities of an entity;
• releases of provisions;
• disposals of property, plant and equipment;
• disposals of associates or other financial assets;
• discontinued operations;
• onerous contracts;
• litigation settlements.
Exceptional items are reported separately to provide a better
understanding of the underlying results of the period.

Changes in the fair value of financial derivatives designated and
qualifying as cash flow hedges are recognized in equity
(Hedging reserve) to the extent that the hedge is effective. Upon
recognition of the related asset or liability the cumulative gain
or loss is transferred from the Hedging reserve and included in
the carrying amount if the hedged item is a non-financial asset
or liability or in the income statement if the hedged item is a
financial asset or liability. Changes in the fair value of financial
derivatives designated and qualifying as net investment hedges
are recognized in equity (Translation reserve) to the extent that
the hedge is effective. Accumulated gains and losses are
released from the Translation reserve and are included in the
income statement when the net investment is disposed of.
Changes in the fair value of financial derivatives designated
and qualifying as fair value hedges are immediately recognized
in the income statement, together with any changes in the fair
value of the hedged assets or liabilities attributable to the
hedged risk.

Annual Report 2006

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Financial statements 2006

Pensions and other post-employment benefits
For defined benefit plans, pension costs are determined using
the projected unit credit method. Actuarial gains and losses are
recognized in full under equity in the period in which they occur.
Prepaid pension costs relating to defined benefit plans are
capitalized only if they lead to refunds to the employer or to
reductions in future contributions to the plan by the employer.
Payments to defined contribution plans are charged as an
expense as they fall due.

Effect of new accounting standards
DSM has applied the new standard IFRS 6, Exploration for and
Evaluation of Mineral Resources and the amendment to IAS 19,
Employee Benefits from 1 January 2006 onwards.
(i)

The new standard IFRS 6, Exploration for and Evaluation
of Mineral Resources requires, among other things,
the disclosure of information regarding the recognized
amounts arising from the exploration for and evaluation
of mineral resources. It is DSM’s policy to expense these
costs; the amounts incurred are not material.

(ii) DSM adopted the new alternative in IAS 19, Employee

Benefits that permits the immediate recognition outside
profit or loss of actuarial gains and losses arising in defined
benefit plans. Previously, actuarial gains and losses
outside of the ‘corridor’ were recognized in the income
statement, spread over the average number of years of
service of employees. This ‘corridor’ was the higher of
10% of the present value of the defined benefit obligation
and 10% of the fair value of the plan assets, both measured
at the end of the previous year. The adoption of this new
alternative has increased the net asset for employee
benefits by €31 million, equity increased by €27 million
(net of income tax) as of 1 January 2006. The impact on
reported equity as of 1 January 2005 is a decrease of
€167 million (net of income tax). The impact on the
income and the earnings per share for 2005 and 2006
is immaterial. Moreover, the amended IAS 19 requires
additional disclosures that have been included in the
financial statements.

The following amendments and interpretations are effective as
of 1 January 2006, but do not affect DSM’s financial statements
for 2006:
(iii)

IAS 21 (Amendment), Net Investment in a Foreign
Operation.
IAS 39 (Amendment), Cash Flow Hedge Accounting of
Forecast Intragroup Transactions.
IAS 39 (Amendment), The Fair Value Option.
IAS 39 and IFRS 4 (Amendment), Financial Guarantee
Contracts.
IFRIC 4, Determining whether an Arrangement contains
a Lease.
IFRIC 5, Rights to Interests arising from
Decommissioning, Restoration and Environmental
Rehabilitation Funds.
IFRIC 6, Liabilities arising from Participating in a Specific
Market – Waste Electrical and Electronic Equipment.

(iv)

(v)
(vi)

(vii)

(viii)

(ix)

DSM did not opt for early adoption of the following new
standards, amendments and interpretations, which will be
mandatory for DSM for annual periods beginning on or after
1 January 2007 or later years:
(x)
(xi)
(xii)

IFRS 7, Financial Instruments – Disclosures.
IFRS 8, Operating Segments.
IAS 1 (Amendment), Presentation of Financial
Statements – Capital Disclosures.
IFRIC 7, Applying the Restatement Approach under
IAS 29, Financial Reporting in Hyperinflationary
Economies.
IFRIC 8, Scope of IFRS 2.
IFRIC 9, Reassessment of Embedded Derivatives.

(xiii)

(xiv)
(xv)

DSM expects that the adoption of these new standards,
amendments and interpretations in future periods will have
no material impact on DSM’s financial statements.

Annual Report 2006

www.dsm.com

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Annual Report 2006

www.dsm.com

Financial statements 2006

Consolidated income statement for the year ended 31 December 2006
x € million

Continuing operations

Before
exceptional
items

Exceptional
items
(note 9)

Notes

Discontinued
operations

Total

Net sales
Other operating income

Own work capitalized
Change in inventories of intermediates and finished goods
Raw materials and consumables used
Work subcontracted and other external costs
Employee benefits costs
Depreciation and amortization
Other operating costs

Operating profit
Interest costs
Other financial income and expense
Share of the profit of associates

Profit before income tax expense
Income tax expense

8,352

210

8,562

(4,536)

(1,481)

(1,338)

(440)

(34)

835

(84)

755

(199)

(11)

(97)

(26)

(22)

8,352

283

8,635

(4,536)

(1,481)

(1,329)

(451)

(131)

809

(84)

733

(181)

Profit for the year

556

(4)

552

Of which:
- Profit attributable to minority interests
- Net profit attributable to equity holders of Royal DSM N.V.

Net profit attributable to equity holders of Royal DSM N.V.
Dividend on cumulative preference shares

Net profit available for holders of ordinary shares

Average number of ordinary shares outstanding (x 1000)
Effect of dilution due to share options (x 1000)

Adjusted weighted average number of ordinary shares (x 1000)

Per ordinary share in euro:
- Basic earnings
- Diluted earnings
- Dividend paid in the period
- Dividend for the year

551

(10)

541

(4)

547

(10)

537

2.85

2.84

(0.02)

2.83

2.82

(5)

(18)

(4)

(3)

(1)

8,380

285

8,665

(4,554)

(1,485)

(1,332)

(451)

(132)

808

(84)

732

(180)

552

547

(10)

537

189,550

1,200

190,750

2.83

2.82

1.04

1.00

Annual Report 2006

www.dsm.com

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Consolidated income statement for the year ended 31 December 2005
x € million

Continuing operations

Before
exceptional
items

Exceptional
items
(note 9)

Discontinued
operations

Total

Net sales
Other operating income

Operating profit
Interest costs
Other financial income and expense
Share of the profit of associates

Profit before income tax expense
Income tax expense

7,816

222

8,038

248

(4,211)

(1,469)

(1,331)

(491)

(44)

787

(88)

(2)

715

(168)

(64)

(31)

(36)

(8)

(21)

(65)

7,816

281

8,097

248

(4,211)

(1,469)

(1,331)

(555)

(75)

751

(96)

(23)

650

(139)

Profit for the year

547

(36)

511

Of which:
- Profit attributable to minority interests
- Net profit attributable to equity holders of Royal DSM N.V.

Net profit attributable to equity holders of Royal DSM N.V.
Dividend on cumulative preference shares

(7)

554

(16)

(36)

(7)

518

(16)

Net profit available for holders of ordinary shares

538

(36)

502

379

380

(219)

(75)

(54)

(12)

(2)

(12)

Average number of ordinary shares outstanding (x 1000)
Effect of dilution due to share options (x 1000)

Adjusted weighted average number of ordinary shares (x 1000)

Per ordinary share in euro:
- Basic earnings
- Diluted earnings
- Dividend paid in the period
- Dividend for the year

2.82

2.80

(0.19)

2.63

2.61

0.05

8,195

282

8,477

251

(4,430)

(1,544)

(1,385)

(567)

(77)

772

(96)

(23)

671

(151)

520

(7)

527

(16)

511

190,783

1,066

191,849

2.68

2.66

0.875

1.00

Annual Report 2006

www.dsm.com

Financial statements 2006

Consolidated balance sheet as at 31 December
Assets
x € million

2006

2005

Notes

Non-current assets
Intangible assets
Property, plant and equipment
Deferred tax assets
Prepaid pension costs
Associates
Other financial assets

Current assets
Inventories
Trade receivables
Other receivables
Financial derivatives
Current investments
Cash and cash equivalents

Assets held for sale

Total

Equity and liabilities
x € million

Equity
Royal DSM N.V. shareholders’ equity
Minority interests

Non-current liabilities
Deferred tax liabilities
Employee benefits liabilities
Provisions
Borrowings
Other non-current liabilities

Current liabilities
Employee benefits liabilities
Provisions
Borrowings
Financial derivatives
Trade payables
Other current liabilities

Liabilities held for sale

1,008

3,655

496

918

100

6,203

1,515

1,377

362

552

3,888

1,003

3,750

533

478

189

5,996

1,535

1,337

260

902

4,075

4,118

10,091

10,114

5,784

5,855

383

304

188

907

1,826

127

607

1,091

523

2,410

5,501

5,568

219

383

166

1,381

2,202

220

329

985

714

2,336

2,344

Total

10,091

10,114

Annual Report 2006

www.dsm.com

Consolidated statement of recognized income and expense

x € million

2005
Exchange differences on translation of foreign operations
Balance of actuarial gains and losses, after asset ceiling
Income tax expense
Change in hedging reserve

Total income and expense directly recognized in equity
Profit for the year

Other
reserves

121

(2)

126

Retained earnings

Total

Actuarial
gains
and
losses

274

(80)

194

Other

527

121

274

(73)

(2)

320

527

Recognized income and expense for the period

126

194

527

847

2006
Exchange differences on translation of foreign operations
Balance of actuarial gains and losses, after asset ceiling
Income tax expense
Change in hedging reserve

Total income and expense directly recognized in equity
Profit for the year

(126)
-

(10)
45

(91)

-
382

(99)
-

283

-
-

547

(126)
382

(109)
45

192

547

Minority
interests

Total

(7)

(5)
-

-
-

(5)

128

274

(73)

(2)

327

520

847

(131)
382

(109)
45

187

552

Recognized income and expense for the period

(91)

283

547

739

Consolidated statement of changes in equity (note 17)

x € million

Share
capital

Share
premium

Treasury
shares

Other
reserves

Retained earnings

Total

Actuarial
gains and
losses

Other

Minority
interests

Total
equity

Balance at 1 January 2005

304

381

(288)

(48)

(160)

4,479

4,668

4,690

Reclassification of cumulative preference
shares A
Dividend paid
Changes in option rights
Repurchase of shares
Proceeds from reissued shares
Change in DSM’s share in subsidiaries
Capital duty

Recognized income and expense for
the period

66
-
-
-
-
-
-

167
-
-
-
-
-
(3)

-
-
-
(170)
82
-
-

-
-
7
-
-
-
-

-
-
-
-
-
-
-

-
(183)
-
-
20
-
-

233
(183)
7
(170)
102
-
(3)

-
(3)
-
-
-
48
-

233
(186)
7
(170)
102
48
(3)

126

194

527

847

Balance at 31 December 2005

370

545

(376)

4,843

5,501

5,568

Dividend paid
Changes in option rights
Repurchase of shares
Proceeds from reissued shares
Changes in DSM’s share in subsidiaries
Capital duty

Recognized income and expense for
the period
Reclassifications

-
-
-
-
-
-

-
-

-
-
-
-
-
(1)

-
-

-
10
-
-
-
-

-
-
(318)
53
-
-

-
-
-
-
-
-

(213)
11
-
2
-
-

(213)
21
(318)
55
-
(1)

-
-

(91)
(2)

283
-

547
2

739
-

(1)
-
-
-
5
-

-
-

(214)
21
(318)
55
5
(1)

739
-

Balance at 31 December 2006

370

544

(641)

317

5,192

5,784

5,855

Annual Report 2006

www.dsm.com

Financial statements 2006

Consolidated cash flow statement (note 26)
x € million

Operating activities
Profit for the year
Profit attributable to minority interests
Net profit attributable to equity holders of Royal DSM N.V.
Adjustments for:
- Depreciation, amortization and impairment losses
- Gain from disposals
- Change in provisions
- Interest:

- Charged to the income statement
- Received
- Paid

- Income taxes:

- Charged to the income statement
- Paid

- Defined benefit plans: - Charged to the income statement

- Paid

- Other changes
Operating cash flow before changes in working capital
Changes in operating working capital:
- Inventories
- Trade receivables
- Trade payables

Changes in other operating working capital
Cash provided by operating activities

Investing activities
Capital expenditure for:

- Intangible assets
- Property, plant and equipment
Proceeds from disposal of property, plant and equipment
Acquisition of subsidiaries
Proceeds from disposal of subsidiaries and businesses
Associates and other financial assets:
- Capital payments and acquisitions
- Change in loans granted
- Proceeds from disposals
Cash used in investing activities

Financing activities
Sale of financial derivatives
Loans taken up
Repayment of loans
Change in debt to credit institutions
Dividend paid
Repurchase of own shares
Proceeds from reissued shares
Change in minority interests
Capital duty
Cash used in financing activities

Change in cash and cash equivalents

Cash and cash equivalents at 1 January
Exchange differences of cash held
Changes in the scope of the consolidation
Cash and cash equivalents at 31 December

2006

552

(5)

547

451

(75)

(83)

(125)

826

(4)

(192)

630

(345)

(620)

(335)

902

(12)

(3)

552

(95)

151

(133)

(102)

(140)

(63)

(23)

(370)

(559)

192

(8)

(107)

133

348

(487)

(183)

(170)

102

(2)

(3)

(101)

180

(109)

(144)

(49)

(77)

122

(40)

(418)

(44)

135

(15)

(205)

(213)

(318)

(1)

2005

520

527

567

(20)

(130)

(86)

894

(119)

(82)
693

(845)

(220)

(372)

1,261

(3)

902

Annual Report 2006

www.dsm.com

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Notes to the consolidated financial statements
of Royal DSM N.V.

2 Change in the scope of the consolidation

1 General information

Unless stated otherwise, all amounts are in € million.

In conformity with article 402, Book 2 of the Dutch Civil Code,
a condensed income statement is included in the separate
financial statements of Royal DSM N.V.

A list of DSM participations is published at the Chamber of
Commerce for Zuid-Limburg in Maastricht (Netherlands) and
available from the company upon request. The list is also
available on the company’s website www.dsm.com.

The preparation of financial statements requires estimates
and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities at the date of the financial
statements. The policies that management considers both
to be most important to the presentation of financial condition
and results of operations and to make the most significant
demands on management’s judgments and estimates about
matters that are inherently uncertain are discussed in the notes
that are impacted by such estimates and judgments.
Management cautions that future events often vary from
forecasts and that estimates routinely require adjustment.

Exchange rates
The currency exchange rates that were used in drawing up
the consolidated statements are listed below for the most
important currencies.

1 euro =

Exchange rate at balance sheet date

Average exchange rate

2006

2005

2006

2005

US dollar

Swiss franc

Pound sterling

100 Japanese yen

1.32

1.61

0.67

1.57

1.18

1.56

0.69

1.39

1.26

1.57

0.68

1.46

1.25

1.55

0.68

1.37

Acquisitions
The acquisitions of CRINA SA, the remaining 73% of the
share capital of Lipid Technologies Provider AB (LTP) and the
remaining 50% of the share capital of Fersinsa GB SA de CV
had the following impact on the balance sheet:

Assets
Intangible assets
Property, plant and equipment
Other financial assets
Inventories
Receivables
Cash and cash equivalents

Total assets

Liabilities
Provisions
Deferred tax liabilities
Other liabilities

Total liabilities

Net assets, at fair value
Acquisition price (in cash)
Acquisition costs

Goodwill

(3)

Assets and liabilities of Fersinsa GB SA de CV are fully
consolidated. The purchase price allocation and determination
of the goodwill to be recognized will be performed in 2007.

Besides the above DSM acquired various smaller
participations.

Disposals
Discontinued operations
DSM Minera was sold on January 19, 2006 for a total cash
consideration of €74 million. The business had already been
classified as held for sale as at December 31, 2005. The activities
of DSM Bakery Ingredients were reported as discontinued
operations in 2005 in view of the disposal of these activities to
Gilde Investment Management for a total cash consideration
of €200 million.

Other disposals
Besides the above-mentioned entities DSM disposed of various
smaller participations.

Annual Report 2006

www.dsm.com

Financial statements 2006

3 Segment information

Business segments1) 2)

2006

Financial performance
Net sales
Supplies to other clusters

Nutrition

Pharma Performance
Materials

Industrial
Chemicals

Other
activities3)

Elimina-
tions

Continuing operations

Discon-
tinued
operations

Total

2,407

916

2,753

1,872

263

404

8,352

(394)

8,380

Supplies

2,463

967

2,759

2,135

422

(394)

8,352

8,380

Operating profit before exceptional
items
Exceptional items

314

(44)

(14)

329

196

(6)

(69)

Operating profit

270

340

190

(42)

Depreciation and amortization
Additions to provisions
Share of the profit of associates
R&D costs
R&D costs / net sales (in %)
Wages, salaries and social
security costs

150

134

5.6

6.2

100

107

3.9

1.0

2.7

470

204

270

245

835

(26)

809

440

107

327

3.9

(1)

834

(26)

808

440

107

327

3.9

1,286

1,288

Financial position
Total assets
Total liabilities
Capital employed at year-end
Capital expenditure and acquisitions
Share in equity of associates

3,466

1,688

2,159

113

1,734

1,524

1,302

146

2,998

1,395

1,697

126

1,390

855

745

9,690

3,851

407

(9,187)

10,091

(5,077)

4,236

6,310

501

(7)

10,091

4,236

6,303

501

EBITDA / net sales (in %)

19.3

15.9

15.6

14.4

Workforce4)
Average
Year-end

7,599

7,844

4,557

4,731

4,410

4,664

2,187

2,183

2,656

2,728

21,409

22,150

21,436

22,156

1) For a description of the types of products and services of each segment please refer to the review of business on pages 42-63.
2) In accordance with DSM’s new strategy, Vision 2010 – Building on strengths, the segments have been redefined.
3) Other activities also includes costs for defined benefit plans, corporate overhead and share-based compensation. A reasonable basis for the allocation of the costs for

defined benefit plans to the individual clusters is not available, because these costs relate to both current and former employees.

4) The workforce of joint ventures has been included on a proportionate basis.

Annual Report 2006

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Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Business segments1) 2)
2005

Financial performance
Net sales
Supplies to other clusters

Nutrition

Pharma Performance
Materials

Industrial
Chemicals

Other
activities 3)

Elimina-
tions

Continuing operations

Discon-
tinued
operations

Total

2,399

924

2,447

1,687

212

359

7,816

(364)

379

8,195

Supplies

2,458

988

2,459

1,899

376

(364)

7,816

379

8,195

Operating profit before
exceptional items
Exceptional items

329

41
(91)

305

165

(53)

Operating profit

338

(50)

309

165

(11)

Depreciation and amortization
Additions to provisions
Share of the profit of associates
R&D costs
R&D costs / net sales (in %)
Wages, salaries and social
security costs

158

115

4.8

102

6.2

105

3.8

2
(1)

0.8

24
(2)

2.2

479

223

258

103

240

787
(36)

751

491

89
(2)

288

3.7

0.5

808
(36)

772

503

89
(2)

290

3.5

1,303

1,355

Financial position
Total assets
Total liabilities
Capital employed at year-end
Capital expenditure and acquisitions
Share in equity of associates

3,731

1,954

2,188

122

1,780

1,604

1,356

2,862

1,418

1,707

667

1,408

889

728

9,981

3,567

242

(9,648)
(4,886)

10,114

4,546

6,221

972

10,114

4,546

6,221

974

EBITDA / net sales (in %)

20.3

15.5

16.8

14.6

Workforce4)
Average
Year-end

7,744

7,568

4,769

4,500

4,302

4,441

2,312

2,234

2,585

2,919

21,712

21,662

1,127

22,839

158

21,820

defined benefit plans to the individual clusters is not available, because these costs relate to both current and former employees.

4) The workforce of joint ventures has been included on a proportionate basis.

Annual Report 2006

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Financial statements 2006

Geographical segments

2006

Net sales by origin
In € million
In %

Net sales by destination
In € million
In %

The
Netherlands

Rest of
Europe

North
America

China

Rest of
Asia-Pacific

Rest of
the world

Elimina-
tions

Total

Continuing operations

3,802

2,276

1,193

451

376

808

3,537

1,617

618

1,090

254

682

8,352

100

8,352

100

Total assets

9,402

3,682

1,523

576

413

508

(6,013)

10,091

Property, plant and equipment
Capital expenditure
Carrying amount

128

1,365

135

1,368

101

520

304

Workforce1) at year-end

7,057

6,976

2,659

3,031

1,188

1,239

2005

Net sales by origin
In € million
In %

Net sales by destination
In € million
In %

3,527

2,240

1,162

300

333

865

3,183

1,569

494

1,062

254

643

418

3,655

22,150

7,816

100

7,816

100

Total assets

9,056

3,580

1,708

585

373

455

(5,643)

10,114

Property, plant and equipment
Capital expenditure
Carrying amount

119

1,405

1,377

104

523

332

Workforce1) at year-end

7,215

6,948

2,760

2,581

1,156

1,002

1) The workforce of joint ventures has been included on a proportionate basis.

376

3,750

21,662

Annual Report 2006

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Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

4 Other operating income

7 Other operating costs

2006

2005

2006

2005

Continuing operations before
exceptional items
Release of provisions
Emission rights sold
Gain on assets and activities sold
Price settlements
Government grants
Proceeds from the sale of scrap, waste
materials, etc.
Insurance benefits
Sundry

102

Continuing operations before
exceptional items
Additions to provisions
Loss from the disposal of assets and
activities
Exchange differences
Sundry

Total

8 Net finance costs

Total

210

222

5 Employee benefits costs

Continuing operations before
exceptional items
Wages and salaries
Social security costs
Pension costs (see also note 24)

Total

6 Depreciation and amortization

2006

2005

1,104

1,120

182

183

1,338

1,331

Continuing operations before
exceptional items
Interest costs
Interest expense
Capitalized interest during construction
Interest charge on discounted
provisions

Total

Other financial income and expense
Interest income
Exchange differences
Income from other securities
Sundry

2006

2005

Total

2006

2005

(82)

(4)

(92)

(2)

(84)

(88)

(7)

(4)

(7)

Continuing operations before
exceptional items
Amortization of intangible assets
Depreciation of property, plant and
equipment
Impairment losses

Total

400

436

440

491

Net finance costs

(81)

(70)

In 2006 the interest rate applied in the capitalization of interest
during construction was 5% (2005: 5%).

Annual Report 2006

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Financial statements 2006

9 Exceptional items

Exceptional income:
- Gain from the disposal of activities
- Release from provisions

Total exceptional income

Exceptional expense:
- Loss from the disposal of activities
- Additions to provisions
- Impairment of intangible assets and

property, plant and equipment

- Employee benefits costs
- Other costs

2006

2005

(84)

(11)

(13)

(3)

(28)

(64)

- The employee benefits costs comprise the gain from

a deferred pension settlement related to the disposal of
DSM Bakery Ingredients in 2005.

- The other costs mainly concern the settlement for

terminating the melamine production joint venture (AMEL) in
the United States (€6 million).

- The share of the profit of associates is the balance of the

gain from the disposal of Methanor and the impairment of
DSM’s share in AMEL.

- The income tax expense concerns the income tax over the

exceptional items in the financial year. The favorable tax rate
results from the fact that significant parts of the exceptional
items are tax exempt.

2005
The exceptional items in 2005 are listed below:
- The gain from the disposal of activities relates to gains from

the disposal of DSM Bakery Ingredients and from the
disposal of land (DSM Nutritional Products).

- Jurisprudence showed that a provision for environmental

costs could be released.

Total exceptional expense

(99)

(95)

- The loss from the disposal of activities is related to the

disposal of the SBR business.

- The addition to provisions is mainly the sum of restructuring

and termination benefits at the Linz site in Austria
(€15 million) and expenses due to the closing of the
South Haven site (USA) of DSM Pharmaceutical Products
(€11 million).

- The impairment of intangible assets and property, plant and

equipment relates to impairment of property, plant and
equipment at the Linz site (€6 million), the South Haven site
(€27 million) and the Montreal site in Canada (€31 million).

- The net finance costs are related to interest payments in

connection with a final tax assessment in the Netherlands
for the years 1997 and 1998.

- The share of the profit of associates concerns the

impairment of DSM’s share in Methanor.

- The income tax expense on exceptional items also

includes the recognition of withholding tax credits over
previous years.

Operating profit from
exceptional items
Net finance costs
Share of the profit of associates

Total, before income tax expense
Income tax expense

Total, after income tax expense
Minority interests

Net result from exceptional items

(26)

(22)

(4)

(36)

(8)

(21)

(65)

(36)

2006
The exceptional items in 2006 are listed below:
- The gain from the disposal of activities relates to gains from

the disposal of DSM Minera (Chile), the disposal of the
display coatings business and the disposal of the South
Haven site (USA).

- Due to the disposal of the South Haven site a restructuring

provision could be released.

- The addition to provisions is mainly related to costs

(€13 million) for the termination of the aspartame business,
costs (€9 million) for the closing of the production facilities in
Landskrona (Sweden), costs (€44 million) for a provision for
an onerous contract (DSM Nutritional Products) and costs
(€14 million) for the restructuring of the Geleen (Netherlands)
and Linz (Austria) sites of DSM Pharmaceutical Products.
- The impairment of intangible assets and property, plant and

equipment relates to the termination of the aspartame
business (€2 milion), the closing of the production facilities
in Landskrona (€2 million) and the restructuring of the Geleen
and Linz sites of DSM Pharmaceutical Products (€7 million).

Annual Report 2006

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Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

10 Income tax

The income tax expense on the total result was €180 million
(2005: €151 million) and can be broken down as follows:

The balance of deferred tax assets and deferred tax
liabilities decreased by €201 million owing to the changes
in the table below.

Current tax expense:
- Current year
- Prior-year adjustments

Deferred tax expense:
- Originating from and reversal of

temporary differences
- Prior-year adjustments
- Change in tax rate
- Benefit of tax losses and tax credits

recognized

2006

2005

(76)

(12)

(82)

(54)

(88)

(136)

(99)

(93)

(4)

Balance at 1 January
Deferred tax assets
Deferred tax liabilities

Total

Changes:
- Income tax expense in income

statement

- Income tax expense in equity
- Acquisitions and disposals
- Exchange differences
- Reclassifications

2006

2005

533

(219)

492

(134)

314

358

(92)

(110)

(6)

(25)

(14)

(71)

(37)

(92)

(15)

Balance at 31 December

113

314

Of which:
- Deferred tax assets
- Deferred tax liabilities

496

(383)

533

(219)

The group companies that DSM has in various countries
conduct a large variety of transactions among themselves.
In various countries DSM has taken standpoints regarding
its tax position which may at any time be challenged, or have
already been challenged, by the tax authorities because the
authorities in question interpret the law differently. DSM has
taken these risks into account in recognizing its tax assets in
the balance sheet.

Total

(180)

(151)

Of which income tax related to:
- The result from discontinuing

operations

- The result from exceptional items
- The result from continuing operations

(199)

(12)

(168)

The effective income tax rate on the result from continuing
operations was 26.4% in 2006 (2005: 23.5%). The
relationship between the income tax rate in the Netherlands
and the effective tax rate on the result from continuing
operations is as follows:

As a %

2006

2005

Domestic income tax rate

29.6

31.5

Tax effects of:
- Deviating rates
- Tax-exempt income and non-

deductible expense

- Other effects

(4.7)

(10.1)

0.5

1.0

(0.9)

3.0

Effective tax rate

26.4

23.5

Annual Report 2006

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Financial statements 2006

The deferred tax assets and liabilities relate to the following balance sheet items:

Intangible assets
Property, plant and equipment
Financial assets
Inventories
Receivables
Equity
Other non-current liabilities
Non-current provisions
Non-current borrowings
Other current liabilities

Tax losses carried forward
Set-off

Total

2006

Deferred
tax assets

Deferred
tax liabilities

Deferred
tax assets

2005

Deferred
tax liabilities

309

419

(232)

496

(42)

(285)

(213)

(29)

(10)

(5)

(2)

(11)

(14)

(4)

(615)

232

(383)

375

520

(362)

533

(47)

(295)

(160)

(35)

(1)

(10)

(7)

(13)

(6)

(7)

(581)

362

(219)

No deferred tax assets were recognized for losses carried forward amounting to €80 million (2005: €115 million).

DSM has to assess the likelihood that deferred tax assets will be recovered from future taxable income. Deferred tax assets are
reduced if, and to the extent that, it is not probable that all or some portion of the deferred tax assets will be realized. In the event
that actual results differ from estimates in future periods, and depending on tax strategies that DSM may be able to implement,
changes to the measurement of deferred taxes could be required, which could impact on the financial position and net profit.

Annual Report 2006

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100

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Total

Goodwill

Licences
and patents

Other

545

453

526

(4)

(35)

(13)

(2)

550

1,110

107

1,003

(40)

(42)

(3)

1,156

148

1,008

326

368

416

742

(38)

(17)

725

102

(7)

(13)

(6)

(10)

(2)

(3)

127

117

151

(4)

(28)

129

275

206

(30)

(2)

(1)

304

205

11 Intangible assets

Balance at 1 January 2005
Cost
Amortization

Carrying amount

Changes in carrying amount:
- Capital expenditure
- Acquisitions
- Disposals
- Amortization
- Exchange differences
- Classified as held for sale
- Other changes

Balance at 31 December 2005
Cost
Amortization

Carrying amount

Changes in carrying amount:
- Capital expenditure
- Acquisitions
- Amortization and impairments
- Exchange differences
- Reclassifications
- Other changes

Balance at 31 December 2006
Cost
Amortization

Carrying amount

DSM acquired several entities in business combinations that have been accounted for by the purchase method, resulting
in recognition of goodwill and other intangible assets. The amounts assigned to the acquired assets and liabilities are based on
assumptions and estimates about their fair values. In making these estimates, management consults independent, qualified
appraisers if appropriate. A change in assumptions and estimates could change the values allocated to certain assets and
estimated useful lives, which could affect the amount or timing of charges to the income statement, such as amortization of
intangible assets.

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101

Financial statements 2006

The carrying amount of goodwill as at 31 December 2006 includes an amount of €329 million (31 December 2005: €366 million)
relating to the acquisition of Catalytica in 2001, an amount of €358 million (31 December 2005: €358 million) relating to the
acquisition of NeoResins in 2005, an amount of €14 million relating to the acquisition of Lipid Technologies Provider AB (LTP) in
2006 and an amount of €6 million relating to the acquisition of CRINA in 2006. For impairment testing reasons, goodwill has been
allocated to the following cash-generating units: the goodwill related to Catalytica to the business unit DSM Pharmaceuticals, the
goodwill related to NeoResins to the business group DSM Resins, the goodwill related to Lipid Technologies Provider AB (LTP) to
the business group DSM Food Specialties and the goodwill related to CRINA to the business group DSM Nutritional Products.

The annual impairment tests of goodwill are performed in the fourth quarter. The recoverable amount of the cash-generating
units concerned is based on a value-in-use calculation. The cash flow projections for the first five years are derived from DSM’s
business plan (Annual Strategic Review) as adopted by the Managing Board. Cash flow projections beyond the 5-year planning
period are extrapolated. The terminal value for the period after ten years is determined with the assumption of no growth.
The pre-tax discount rate is between 7 and 10% depending on the risk profile of the cash generating unit.

In 2006 and 2005 no goodwill impairment was identified.

The other intangible assets are listed in the table below:

Application software
Marketing-related
Customer-related
Technology-based
Other

Total

Total 2005

Cost

Amortization

Carrying
amount

2006
Of which
acquisition related

2005
Acquisition
related

106

161

304

275

(54)

(3)

(2)

(35)

(5)

(99)

(69 )

126

205

206

126

141

114

129

141

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102

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Total

Land and
buildings

Plant and
machinery

Other
equip-
ment

Under
construc-
tion

Not used
for operating
activities

8,838

5,027

3,811

1,635

637

998

6,566

4,127

2,439

378

(126)

(446)

(86)

140

(6)

(3)

(61)

(44)

(57)

(26)

(1)

218

(63)

(372)

(33)

(5)

(8)

(54)

8,804

5,054

3,750

1,664

649

1,015

6,483

4,098

2,385

418

(6)

(400)

(12)

(104)

(23)

(95)

(2)

(54)

(1)

(27)

(17)

(57)

158

(4)

(336)

(9)

(60)

(142)

8,578

4,923

3,655

1,603

645

958

6,286

4,043

2,243

299

244

(15)

(17)

(1)

(3)

(23)

284

252

(10)

(1)

242

204

323

307

264

(264)

(4)

(26)

(1)

343

306

318

(195)

(2)

(16)

(7)

428

404

12 Property, plant and equipment

Balance at 1 January 2005
Cost
Depreciation and impairment losses
Carrying amount

Changes in carrying amount:
- Capital expenditure
- Put into operation
- Acquisitions
- Disposals
- Depreciation
- Impairment losses
- Exchange differences
- Classified as held for sale
- Other changes

Balance at 31 December 2005
Cost

Depreciation and impairment losses
Carrying amount

Changes in carrying amount:
- Capital expenditure
- Put into operation
- Acquisitions
- Disposals
- Depreciation
- Impairment losses
- Change in estimate decommisioning costs
- Exchange differences
- Reclassifications
- Other changes

Balance at 31 December 2006
Cost
Depreciation and impairment losses
Carrying amount

Property, plant and equipment includes assets acquired under finance lease agreements with a carrying amount of
€27 million (31 December 2005: €34 million). The related commitments are included under Borrowings and amount
to €11 million (31 December 2005: €22 million). The total of the minimum lease payments at the balance sheet date amounts to
€11 million (31 December 2005: €25 million) and their present values to €10 million (31 December 2005: €24 million).

Annual Report 2006

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103

Financial statements 2006

Overview of minimum lease payments in time:

14 Other financial assets

2007
2008 - 2011
After 2011

Total

Other
securities

Other
receivables

Other
deferred
items

Balance at
1 January 2005

In 2006, €12 million in impairment losses was recognized
(2005: €86 million). In 2006 the asset impairment losses
mainly related to the termination of the aspartame business
(€2 million), the closing of the production facilities in
Landskrona in Sweden (€1 million) and the restructuring of the
Geleen (Netherlands) and Linz (Austria) sites of DSM
Pharmaceutical Products (€9 million).

The impairment losses on property, plant and equipment in
2005 amounted to €86 million and related to the Montreal site
in Canada (€31 million), the South Haven site in Michigan,
USA (€27 million), the Capua site in Italy (€8 million), the Linz
site in Austria (€6 million) and various smaller impairment
losses.

Changes:
- Charged to the income

statement

- Capital payments
- Disposals
- Loans granted
- Repayments
- Exchange differences
- Other changes

(3)

111

(5)

(1)

(2)

(1)

111

(5)

(3)

(6)

Balance at
31 December 2005

189

123

13 Associates

Balance at 1 January

2006

2005

Changes:
- Share of profit
- Dividend received
- Capital payments
- Acquisitions
- Disposals
- Impairments
- Transfers
- Other changes

Balance at 31 December
Of which loans granted

(1)

(6)

(8)

(2)

(1)

(2)

(3)

(9)

(21)

(2)

Changes:
- Charged to the income

statement

- Capital payments
- Acquisitions
- Disposals
- Impairments
- Loans granted
- Repayments
- Transfer to current loans
- Exchange differences
- Transfers
- Other changes

(6)

(14)

(5)

(20)

(92)

(2)

(3)

(14)

(5)

(3)

(20)

(92)

(2)

(1)

(3)

(6)

Balance at
31 December 2006

100

Other securities relate to equity instruments in companies with
activities that support DSM’s business, such as venture funds.
In Other securities an amount of €40 million is included that
relates to unquoted equity instruments whose fair value cannot
be measured reliably because there is no quoted price in an
active market for these equity instruments (2005: €45 million).
These securities are therefore held at cost.

The loans granted in 2005 mainly relate to a loan to the Gist-
brocades Pension Fund. In 2006 an amount of €17 million
was repaid on this loan.

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104

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

15 Inventories

2006

2005

Raw materials and consumables
Intermediates and finished goods

448

442

1,124

1,120

Adjustments to lower net realizable value

(57 )

(27)

1,572

1,562

Total

1,515

1,535

The carrying amount of inventories adjusted to net realizable
value is €127 million (2005: €78 million), the value adjustments
of inventories charged to the income statement were €30 million
(2005: €4 million).

16 Receivables

Trade receivables
Trade accounts receivable
Receivable from associates

Adjustments for bad debts

Total

Other receivables
Income taxes receivable
Other taxes and social security
contributions
Government grants
Loans
Other receivables
Deferred items

2006

2005

1,386

1,350

1,399

1,363

(22)

(26)

1,377

1,337

108

Total

362

260

Deferred items comprise €35 million in prepaid expenses that
will be recognized in future periods but have already been paid.

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105

Financial statements 2006

17 Equity

Balance at 1 January

Net profit
Exchange differences, net of income tax expense
Net actuarial gains and (losses) on defined benefit obligations, after asset ceiling
Reclassification of cumulative preference shares A1)
Dividend paid
Repurchase of ordinary shares
Proceeds from reissue of ordinary shares
Other changes

2006

5,568

552

(133)

283

(214)

(318)

2005

4,690

520

135

194

233

(186)

(170)

102

Balance at 31 December

5,855

5,568

After the balance sheet date the following dividends were declared by the Managing Board:

Per cumulative preference share A: €0.23 (2005: €0.36)
Per ordinary share: €1.00 (2005: €1.00)

Total

2006

187

197

2005

191

207

The proposed dividend on ordinary shares is subject to approval by the Annual General Meeting of Shareholders and has not
been deducted from equity.

Share capital
On 31 December 2006 the authorized capital amounted to €1,125 million, distributed over 306,960,000 ordinary shares,
44,040,000 cumulative preference shares A and 375,000,000 cumulative preference shares B with a nominal value of €1.50
each, and 1,200,000,000 cumulative preference shares C with a nominal value of €0.03 each. Every nominal amount of three
eurocents (€0.03) carries one vote. The changes in the number of shares in 2006 are shown in the following table.

1) The original conditions of cumulative preference shares A were such that the instrument did not meet the criteria for recognition of an equity instrument of IAS 32. Therefore
they were classified as borrowing at DSM’s first time adoption of IFRS. In early 2005 the conditions of the cumulative preference shares were renegotiated in such a way that
they represented equity instruments and could be reclassified to equity.

Annual Report 2006

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Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Balance at 1 January 2006
Reissue of shares in connection with
exercise of option rights
Repurchase of own shares

Balance at 31 December 2006
Number of treasury shares at 31 December
2006

Ordinary

Cumprefs A

Cumprefs C

Ordinary

Cumprefs C

Issued shares

Treasury shares

201,953,008

44,040,000

37,500,000

11,030,043

37,500,000

(2,671,872)

8,745,000

201,953,008

44,040,000

37,500,000

17,103,171

37,500,000

17,103,171

37,500,000

Number of shares outstanding at
31 December 2006

184,849,837

44,040,000

The average number of ordinary shares outstanding in 2006 was 189,550,018. All shares issued are fully paid.

Share premium
Of the total Share premium of €544 million, an amount of €139 million can be regarded as entirely free of tax.

Treasury shares
On 31 December 2005 DSM possessed 11,030,043 ordinary shares (nominal value €17 million, 4.5% of the share capital).
In 2006, DSM used 2,671,872 ordinary shares for servicing option rights. The company repurchased 8,745,000 ordinary shares.

On 31 December 2006 DSM possessed 17,103,171 ordinary shares (nominal value €26 million, 6.9% of the share capital).
The average purchase price of the ordinary treasury shares was €30.87. The treasury shares at 31 December 2006 include
6.7 million shares related to the share buy-back program of Vision 2010. The process to cancel these shares has been initiated.
The remaining ordinary treasury shares will be used for servicing management and personnel share option rights.

Other reserves

Balance at 1 January 2005

Fair value changes of cash flow hedges
Exchange differences, net of income tax
Changes in option rights

Balance at 31 December 2005

Fair value changes of cash flow hedges
Exchange differences, net of income tax
Changes in option rights
Reclassifications

Balance at 31 December 2006

Total

(48)

(2)

128

(128)

(2)

Translation
reserve

Hedging
reserve

Reserve for
share-based
compensation

(51)

128

(128)

(2)

(53)

(1)

(2)

(3)

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Financial statements 2006

18 Provisions

Restructuring costs and termination benefits
Environmental costs
Other long-term employee benefits
Other provisions

Total

2006
Of which
current

127

Total

105

138

315

2005
Of which
current

156

220

Total

207

102

386

Where the effect of the time value of money is material, provisions are measured at the present value of the expenditures expected
to be required to settle the obligation. The discount rate used is based on swap rates for various terms, increased with 75 to
100 base points depending on those terms.

The Provision for restructuring costs and termination benefits mainly relates to the costs of redundancy schemes relating to the
dismissal and transfer of employees, costs of termination of contracts and consulting fees. These provisions have an average life
of 1 to 3 years.

The Provision for environmental costs relates to soil clean-up obligations, among other things. These provisions have an average
life of more than 10 years.

Several items have been combined under Other provisions, for example obligations ensuing from future drilling platform
decommissioning and site restoration, expenses relating to claims and onerous contracts and other long-term employee benefits
such as jubilee benefits. These provisions have an average life of 5 to 10 years.

The total of non-current and current provisions decreased by €71 million. This is the balance of the following changes:

Balance at
1 January 2006

Additions

Releases

Uses

Exchange
differences

Other
changes

Balance at
31 December
2006

Restructuring costs and termination benefits
Environmental costs
Other long-term employee benefits
Other provisions

207

102

(49)

(5)

(15)

(75)

(12)

(2)

(32)

Total

386

107

(69)

(121)

(4)

(1)

(6)

(1)

105

138

315

The other changes included in Other provisions relate to revision of the costs for future drilling platform decommissioning and
site restoration.

The additions to the Provision for restructuring costs and termination benefits mainly relate to the Pharma cluster (€11 million)
and to the termination of the aspartame business (€5 million). The withdrawal from this provision concerns expenditure related
to restructuring operations at DSM Pharmaceutical Products, DSM Food Specialties, DSM Anti-Infectives, DSM Nutritional
Products, DSM Elastomers and DSM Industrial Services (Copernicus project).

The additions to the Other provisions mainly relate to a provision for an onerous contract at DSM Nutritional Products, costs
related to the termination of the aspartame business, costs related to the disposal of DSM Minera (Chile) and costs related to the
restructuring of the Geleen (Netherlands) and Linz (Austria) sites of DSM Pharmaceutical Products.

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Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

19 Borrowings

On balance, total borrowings decreased by €196 million
owing to the following changes:

Debenture loans
Private loans
Finance lease liabilities
Credit institutions

2006
Total Of which
current

Total

2005
Of which
current

886

460

159

403 1,057

159

492

139

140

139

Total

1,514

607 1,710

329

In agreements governing loans with a residual amount at
year-end 2006 of €1,118 million, of which €403 million of a
short-term nature (31 December 2005: €1,322 million, of
which €147 million short term), clauses have been included
which restrict the provision of security. The documentation
of the €300 million bond issued in November 2005 includes
a change of control clause. This clause allows the bond investors
to request repayment at par if 50% or more of the DSM shares
are controlled by a third party and if the company is downgraded
below investment grade (< BBB-).

At 31 December 2006, borrowings to a total of €606 million
had a remaining term of more than 5 years.
The schedule of repayment of borrowings excluding credit
institutions is as follows:

2006

2005

Balance at 1 January

1,710

2,024

Loans taken up
Repayments
Changes in fair value
Changes in debt to credit institutions
Exchange differences
Reclassification of cumulative
preference shares A
Other changes

(205)

(15)

(58)

348

(487)

(27)

100

(233)

(57)

Balance at 31 December

1,514

1,710

The changes in fair value of borrowings are offset by the
changes in fair value of related financial derivatives.

The average effective interest rate on the portfolio of
borrowings, including financial instruments related to these
borrowings, outstanding in 2006 amounted to 4.3% in 2006
(2005: 4.1%).

A breakdown of debenture loans is given below:

2007
2008
2009
2010 and 2011
2012 through 2016
after 2016

Total

448

241

606

NLG loan
USD loan
EUR loan
EUR loan

6.25%
6.75%
6.38%
4.00%

1996-2006
1999-2009
2000-2007
2005-2015

1,355

Total

2006

2005

183

403

300

140

204

413

300

886

1,057

A breakdown of the borrowings by currency excluding debt to
credit institutions is given below:

EUR
USD
CNY
Other

Total

2006

2005

823

424

986

459

124

1,355

1,571

All debenture loans have a fixed interest rate. The fixed interest
rate of the 6.75% USD loan 1999-2009 and the 6.38% EUR
loan 2000-2007 have been swapped to floating rates by
means of interest rate swaps (fair value hedges).

The 6.38% EUR loan 2000-2007 was swapped into USD in
2000 to hedge the currency risk of net investments in USD
denominated subsidiaries. This net investment hedge was
unwound in 2005. In 2005 this EUR loan was swapped into
CHF to hedge the currency risk of net investments in CHF
denominated subsidiaries. The 4% EUR loan 2005-2015 was
also partly swapped into CHF in 2006 for an amount of €200
million to hedge the currency risk of net investments in CHF
denominated subsidiaries.

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Financial statements 2006

The 4% EUR loan 2005-2015 was pre-hedged (cash flow
hedge) in 2005 by means of a forward starting swap, which
led to a lower effective fixed interest rate of 3.66%.

21 Current liabilities

A breakdown of private loans is given below:

9.3%
4.34%
floating
(6 months)
floating
(indefinite)
5.51%
5.61%

1991-2006
1998-2008

2000-2014

2002-2009
2003-2013
2003-2015

NLG loan
NLG loan
NLG loan

CNY loan

USD loan
USD loan
Other loans

Total

2006

2005

115

114

123

128

127

460

492

Trade payables
Received in advance
Trade accounts payable
Notes and cheques due
Owing to associates

Total

Other current liabilities
Income taxes payable
Other taxes and social security
contributions
Pensions
Other liabilities
Deferred items

2006

2005

1,074

960

1,091

985

179

235

205

384

Total

523

714

The fixed interest rate of the 5.51% USD loan 2003-2013 was
swapped into a floating rate by means of an interest rate swap
(fair value hedge). During 2005 this interest rate swap was
unwound. The gain from this will be amortized until the
maturity, leading to an effective fixed USD interest rate of
4.29% for the loan.

The currency component of the 5.61% USD loan 2003-2015
was swapped into euros (cash flow hedge). The resulting
EUR obligation was swapped into CHF to hedge the currency
risk of net investments in CHF denominated subsidiaries (net
investment hedge).

DSM’s policy regarding financial risk management is described
in note 23.

20 Other non-current liabilities

Total

22 Contingent liabilities

Operating leases and rents
Guarantee obligations on behalf of
associates and third parties
Outstanding orders for projects under
construction
Other

2006

2005

114

Investment grants
Other deferred items

Total

2006

2005

Most of the outstanding orders for projects under construction
will be completed in 2007. Property, plant and equipment
under operating leases primarily concern catalyst, buildings
and various equipment.

The commitments for operating leases and rents are spread as
follows:

2007
2008
2009
2010 and 2011
After 2011

Total

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110

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Litigation
The investigations into possible restrictive and/or concerted practices involving a number of EPDM producers, including DSM,
which had been launched at the end of 2002 by the European Commission, the United States Department of Justice and the
Canadian Competition Bureau were closed
mid 2006 without charges of any kind being brought against DSM or its affiliates. Several civil actions in the United States and
Canada are still ongoing.

DSM has a process in place to monitor legal claims periodically and systematically.

23 Financial derivatives
Policies on financial risks

General
The main financial risks faced by DSM relate to liquidity risk
and market risk (comprising interest rate risk and currency risk). DSM’s financial policy is aimed at minimizing the effects of
fluctuations in currency exchange and interest rates on its results in the short term and following market rates in the long term.
DSM uses financial derivatives to manage financial risks relating to business operations and does not enter into speculative
derivative positions.

Liquidity risk
DSM has two confirmed credit facilities of €500 million and €400 million amounting to a total of €900 million (2005: also two
confirmed credit facilities amounting to a total of €900 million) and two commercial paper programs, one amounting to €900
million (2005: €900 million) and the other amounting to $400 million (2005: $400 million). The company will use the two
commercial paper programs to a total of not more than €900 million (2005: €900 million).

Interest rate risk
DSM’s interest rate risk policy is aimed at minimizing the interest rate risks associated with the financing of the company and
thus at the same time optimizing the net interest costs. This policy translates into a certain desired profile of fixed interest and
floating interest positions, including cash and cash equivalents, with the floating interest position in principle not exceeding 60%
of net debt.

Floating and fixed rate borrowings analyzed by maturity are summarized below. Borrowings excluding credit institutes are shown
after taking account of related interest rate derivatives in designated hedging relationships.

Within 1 year
Within 1 to 2 years
Within 2 to 3 years
Within 3 to 4 years
Within 4 to 5 years
After 5 years

Total

Fixed rate
borrowings

Floating rate
borrowings

531

563

442

227

792

2006
Total

448

241

606

1,355

Fixed rate
borrowings

Floating rate
borrowings

558

591

177

456

243

980

2005
Total

190

462

248

630

1,571

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Financial statements 2006

On 31 December 2006, the notional amount of interest rate swaps in relation to long-term borrowings was €590 million
(2005: €748 million).

The following sensitivity analysis of borrowings and related financial derivatives to interest rate movements assumes an immediate
1% change in interest rates for all currencies and maturities from their level on 31 December 2006, with all other variables held
constant. A 1% reduction in interest rates would result in an estimated decrease in net finance costs of €8 million on the basis of
the composition of financial instruments on 31 December 2006. A 1% increase in interest rates would result in an estimated
increase in net finance costs of €8 million. The sensitivity of the fair value of financial instruments on 31 December 2006 to
changes in interest rates is set out in the next table.

Current investments
Cash and cash equivalents
Short-term borrowings
Long-term borrowings
Interest rate swaps (fixed to floating)

Pre-hedges

Carrying amount

Fair value

Fair value change
+1%

Fair value change
-1%

552

(607)

(907)

(1)

552

(607)

(876)

(1)

(5)

(4)

(23)

(32)

Interest rate swaps are from time to time used to hedge the fixed interest rate of a new external loan as from the future issue date
(pre-hedges). In this way DSM achieves up-front certainty about the interest costs for a major part of DSM long-term euro debt.
Using forward starting swaps, DSM pre-hedged the highly probable refinancing of the 6.38% EUR 400 million loan 2000-2007
maturing in 2007 for a locked interest rate (excluding credit spread) of 3.8%. On 31 December 2006 the notional amount of the
related interest rate swaps was €400 million (2005: €200 million).

Currency risk
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 opt – under strict conditions – for hedging currency
risks from firm commitments and forecast transactions. The currencies giving rise to these risks are primarily the USD, the JPY,
the GBP and the CHF. DSM uses average rate currency forward contracts, currency forward contracts, spot contracts, and – to
a limited extent – average rate currency options to hedge the exposure to fluctuations in foreign exchange rates. In general the
instruments have maturities of less than one year.

To hedge intercompany loans, receivables and payables, denominated in other currencies than the functional currency of the
subsidiaries, DSM uses currency forward contracts. Hedge accounting is not applied for these instruments. On 31 December 2006,
the notional amount of the currency forward contracts was €1,156 million (2005: €1,567 million).

In 2006 DSM hedged USD 432 million (2005: USD 306 million) of its projected net cash flow in USD in 2007 by means of average
rate currency forward contracts at an average exchange rate of USD 1.2217 per euro for the four quarters of 2007. This hedge has
fixed the exchange rate for part of the USD receipts in 2007. The effects of these hedges will be included in the operating profit of
the clusters involved.

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Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

The currency risk associated with the translation of DSM’s net investment in entities denominated in currencies other than the
euro is partially hedged. CHF denominated net assets have partially been hedged by currency swaps (CHF 1,138 million). USD
denominated net assets have partially been hedged through USD loans (USD 400 million).

The following sensitivity analysis of net borrowings and derivative financial instruments to currency movements against the euro
assumes a 10% change in all foreign currency rates against the euro from their level on 31 December 2006, with all other
variables held constant. A +10% change indicates a strengthening of foreign currencies against the euro. A -10% change
represents a weakening of foreign currencies against the euro.

Current investments
Cash and cash equivalents
Short-term borrowings
Long-term borrowings
Cross currency swaps
Currency forward contracts
Cross currency swaps related to net investments in
foreign entities
Average rate forwards used for economic hedging

Carrying amount

Fair value

Fair value change
+10%

Fair value change
-10%

552

(607)

(907)

(25)

552

(607)

(876)

(25)

(9)

(55)

(14)

(80)

(20)

(11)

Currency swaps that hedge the currency risk resulting from recognized assets and liabilities, firm commitments and forecast
transactions are accounted for as cash flow hedges. The notional amount of currency swaps relating to long-term- loans
denominated as cash flow hedge was €141 million (2005: €141 million).

Credit risk
DSM manages the credit risk to which it is exposed through credit limits per financial institution and by dealing exclusively with
financial institutions having a high credit rating. At the balance sheet date there were no significant concentrations of credit risk.

Fair value of financial instruments
In the following table the carrying amounts and the estimated fair values of financial instruments are disclosed:

Assets
Other securities (non-current)
Other non-current receivables
Current receivables
Financial derivatives
Current investments
Cash and cash equivalents

Liabilities
Non-current borrowings
Other non-current liabilities
Current borrowings
Financial derivatives
Other current liabilities

Carrying amount

31 December 2006
Fair value

Carrying amount

31 December 2005
Fair value

1,739

552

907

607

1,739

552

876

607

1,614

123

1,597

902

1,381

329

1,699

123

1,597

902

1,363

329

1,699

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Financial statements 2006

The following methods and assumptions were used to determine the fair value of financial instruments:
Cash, current investments, current receivables, current borrowings and other current and non-current liabilities are stated at
carrying amount, which approximates fair value in view of the short maturity of these instruments. The fair values of financial
derivatives and long-term instruments are based on calculations, quoted market prices or quotes obtained from intermediaries.

A breakdown of the carrying amount of financial derivatives recognized into their respective type and purpose is provided below:

Interest rate swaps
Currency swaps

Total financial derivatives related to borrowings

Currency forward contracts
Currency options

Balance at 31 December 2005

Interest rate swaps
Currency swaps

Total financial derivatives related to borrowings

Currency forward contracts
Currency options

Balance at 31 December 2006

Current
assets

Current
liabilities

(8)

(18)

(26)

(39)

(65)

(6)

(25)

(31)

(10)

(41)

Total

(7)

(36)

(29)

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114

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

24 Post-employment benefits

The Group operates a number of defined benefit plans and
defined contribution plans throughout the world, the assets
of which are generally held in separately administered funds.
The pension plans are generally funded by payments from
employees and by the relevant Group companies. The Group
also provides certain additional healthcare benefits to retired
employees in the United States.

Changes in Prepaid pension costs and Employee benefits
liabilities recognized in the balance sheet are disclosed in the
following overview:

Prepaid pension costs
Employee benefits liabilities

2006

2005

478

(406)

166

(417)

The charges for pension costs recognized in the income
statement (note 5) relate to the following:

Balance at 1 January

(251)

Defined benefit plans
Healthcare plans
Other defined benefit plans
Defined contribution plans

Total

Of which pension costs related to:
- Continuing operations
- Exceptional items
- Discontinued operations

2006

2005

(9)

(3)

Changes:
- Balance of actuarial gains and (losses)
- Employee benefits costs
- Acquisitions and disposals
- Contributions by employer
- Exchange differences
- Other changes

382

(19)

144

274

(16)

(2)

102

(15)

(20)

Total changes

521

323

Balance at 31 December

593

Of which:
- Prepaid pension costs
- Employee benefits liabilities

918

(325)

478

(406)

For 2007 costs related to defined benefit and healthcare plans,
excluding gains and losses on curtailments and settlements,
will be lower than the costs for 2006 (€26 million).

The Employee benefits liabilities of €325 million (2005: €406
million) consist of €267 million (2005: €318 million) related to
pensions, €33 million (2005: €57 million) related to healthcare
and other costs and €25 million (2005: €31 million) for other plans.

Pensions
The DSM Group companies have various pension plans, which
are geared to the local regulations and practices in the countries
in which they operate. As these plans are designed to comply
with the statutory framework, tax legislation, local customs and
economic situation of the countries concerned, it follows that
the nature of the plans varies from country to country.

Defined benefit plans are applicable to certain employees in the
Netherlands, Germany, the United Kingdom, Switzerland, the
United States and Austria. The rights that can be derived from
these plans are based primarily on length of service and the
majority of the plans are based on final salary. The majority of
the obligations are funded and have been transferred to
independent pension funds and life insurance companies.

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Financial statements 2006

Post-employment benefits relate to obligations that will be
settled in the future and require assumptions to project benefit
obligations and fair values of plan assets. Post-employment
benefit accounting is intended to reflect the recognition of post-
employment benefits over the employee’s approximate service
period, based on the terms of the plans and the investment and
funding. The accounting requires management to make
assumptions regarding variables such as discount rate, future
salary increases, return on assets, and future healthcare costs.
Management consults with external actuaries regarding these
assumptions at least annually for significant plans. Changes in
these key assumptions can have a significant impact on the
projected defined benefit obligations, funding requirements and
periodic costs incurred.

The changes defined in the present value of the defined benefit
obligations and in the fair value of plan assets of the major plans
are listed below:

Present value of defined benefit obligations

Fair value of plan assets

2006

2005

Balance at 1 January

5,231

4,616

Changes:
- Expected return on plan assets
- Actuarial gains and (losses)

Actual return on plan assets
- Settlements
- Acquisitions / disposals
- Contributions by employer
- Contributions by employees
- Exchange differences on foreign plans
- Benefits paid
- Other changes

308

333

(11)

119

(16)

(212)

305

430

735

(233)

2006

2005

Balance at 31 December

5,466

5,231

Balance at 1 January

5,064

4,775

Changes:
- Service costs
- Interest costs
- Contributions by employees
- Actuarial (gains) and losses
- Curtailments
- Settlements
- Past service costs
- Acquisitions / disposals
- Exchange differences on foreign plans
- Benefits paid
- Other changes

107

209

(365)

(20)

121

(20)

(212)

112

211

150

(6)

(233)

The amounts recognized in the balance sheet are as follows:

2006

2005

Present value of funded obligations
Fair value of plan assets

(4,685)

5,466

(4,828)

5,231

Present value of unfunded obligations

Funded status
Unrecognized past service costs
Effect of asset ceiling

781

(221)

560

107

(16)

403

(236)

167

(7)

Balance at 31 December

4,906

5,064

Net assets

651

160

Of which:
- Liabilities (provision for post-

employment benefits)

- Assets (prepaid pension costs)

(267)

918

(318)

478

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Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

The changes in the net assets recognized in the balance sheet are as follows:

Balance at 1 January

Net expense recognized in the income statement
Actuarial gains and (losses) / asset ceiling recognized directly in equity during the year
Contributions by employer
Acquisitions / disposals
Exchange differences on foreign plans
Other changes

Balance at 31 December

2006

160

(13)

381

119

651

In 2007 DSM is expected to contribute €202 million to its defined benefit plans. This includes the loan granted to the
Gist-brocades Pension Fund in 2005, which will be converted into a ‘contribution by employer’ in 2007.

The major categories of pension plan assets as a percentage of total plan assets are as follows:

Bonds
Equities
Property
Other

The pension plan assets do not include ordinary DSM shares nor property occupied by DSM.

The total expense recognized in the income statement is as follows:

2006

48%

43%

2005

(164)

(17)

278

(18)

(7)

160

2005

51%

44%

Current service costs
Interest on obligation
Expected return on plan assets
Past service costs
Gains and losses on curtailments and settlements

Costs related to defined benefit plans

2006

2005

107

209

(308)

(9)

112

211

(305)

(5)

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Financial statements 2006

The main actuarial assumptions for the year (weighted average) are:

Discount rate
Price inflation
Salary increase
Pension increase
Expected return on plan assets

The Netherlands

Foreign

The Netherlands

2006

4.70%

1.75%

4.37%

2.03%

3.05%

2.00%

4.15%

1.75%

2005

Foreign

4.06%

2.00%

3.01%

1.91%

5.3%-6.0%

4.5%-8.5%

5.2%-6.0%

4.5%-8.5%

Year-end amounts for the current and previous periods are as follows:

Defined benefit obligations
Plan assets

Funded status of asset / (liability)

Experience adjustments on plan assets, gain
Experience adjustments on plan liabilities, loss
Assumption gain / (loss) on liabilities

2006

2005

2004

2003

(4,906)

5,466

560

(94)

459

(5,064)

5,231

167

430

(149)

(1)

(4,775)

4,616

(159)

175

(407)

(1)

(4,264 )

4,254

(10)

Post-employment healthcare and other costs
In some countries, particularly in the United States, group companies provide retired employees and their surviving dependants
with post-employment benefits other than pensions, mainly allowances for healthcare expenses and life insurance premiums.
Some of these are unfunded; in these cases, approved expense claims are reimbursed out of the financial resources of the group
companies concerned.

The amounts included in the balance sheet are as follows:

Present value of funded obligations
Fair value of plan assets (including reimbursement rights)

Present value of unfunded obligations
Unrecognized past service costs

Liability (provision for post-employment benefits)

2006

2005

(34)

(26)

(6)

(1)

(33)

(63)

(50)

(6)

(1)

(57)

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Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

2006

2005

(1)

(8)

(3)

The amounts recognized in the income statement are as follows:

Current service costs
Interest costs
Expected return on plan assets and reimbursement rights
Past service costs
(Gains) and losses on curtailments or settlements

Costs related to healthcare plans

The changes in the liability for post-employment healthcare and other costs recognized in the balance sheet (provision for
post-employment benefits) can be shown as follows:

2006

2005

Balance at 1 January

Expense recognized in the income statement
Actuarial gains and (losses) recognized directly in equity
Benefits paid / employer contributions
Acquisitions / disposals
Exchange differences

Balance at 31 December

(57)

(4)

(1)

(33)

The main actuarial assumptions for post-employment healthcare costs (weighted averages) for the year are:

Discount rate
Price inflation
Salary increase
Healthcare cost trend (initial rate)
Healthcare cost trend (ultimate rate)

2006

6.0%

3.0%

4.0%

7.3%

4.7%

(47)

(4)

(5)

(7)

(57)

2005

6.0%

3.0%

4.0%

7.0%

4.7%

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119

Financial statements 2006

The impact of a one percentage point change in assumed healthcare cost trend rates would have the following effects:

Effect on the aggregate of the service costs and interest costs, (increase)
Effect on defined obligation, (increase)

Amounts for the current and previous periods are as follows:

One percentage
point increase

One percentage
point decrease

(1)

(6)

Defined benefit obligations
Plan assets (including reimbursement rights)

Funded status asset / (liability)

Experience adjustments on plan liabilities, (loss)

25 Net debt

Borrowings:
- Non-current borrowings
- Current borrowings

Total borrowings
Current investments
Cash and cash equivalents
Financial derivatives, assets (see also note 23)
Financial derivatives, liabilities (see also note 23)

Net debt

2006

2005

2004

2003

(40)

(32)

(69)

(56)

(4)

(55)

(44)

(7)

(61)

2006

2005

907

607

1,514

(3)

(552)

(79)

921

1,381

329

1,710

(5)

(902)

(36)

832

Cash at year-end 2006 was not being used as collateral and was therefore not restricted (2005: €13 million via an escrow
account in connection with the termination of the feed enzymes joint venture with BASF).

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120

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

specific rules regarding vesting and forfeitures apply. Stock
options and SARs will partly vest and may therefore be
exercised immediately upon termination of employment in
connection with retirement or early retirement. The exercise
of stock incentives is regulated.

Besides stock options tied to performance, performance
shares have been granted to the members of the Managing
Board. Performance shares vest after three years upon the
realization of a predefined performance measure (same
performance schedule as operated for stock options).

26 Notes to the cash flow statement

The cash flow statement provides an explanation of the
changes in cash and cash equivalents. It is prepared on the
basis of a comparison of the balance sheets as at 1 January
and 31 December. Changes that do not involve cash flows,
such as changes in exchange rates, impairment losses and
transfers to other balance sheet items, are eliminated.

Changes in working capital due to the acquisition or disposal of
consolidated companies are included under Investing activities.

Most of the changes in the cash flow statement can be
traced back to the detailed statements of changes for the
balance sheet items concerned. For those balance sheet items
for which no detailed statement of changes is included, the
table below shows the link between the change according to
the balance sheet and the change according to the cash
flow statement:

Operating
working capital

In % of net sales
(from continuing
operations)

24.1

21.6

Balance at 1 January 2006
Balance at 31 December 2006

Balance sheet change

Adjustments:
- Exchange differences
- Changes in consolidation
- Transfers

Total

Change in cash flow

1,887

1,801

(86)

(1)

(2)

(4)

27 Share-based compensation

Under the DSM Stock Incentive Plan, performance and
non-performance related stock options or Stock Appreciation
Rights (SARs) are granted to senior management. Such a
grant takes place on the first day on which the DSM stock is
quoted ex-dividend following the Annual General Meeting of
Shareholders. The opening price of the DSM stock on that day
is the exercise price of the stock options and SARs.

Stock Options and SARs have a term of eight years and are
subject to a vesting period of three years. After this 3-year period
one third of the stock options and SARs (non-performance
related) will vest and two thirds of the stock options and SARs
which are performance related will become exercisable in
whole, in part, or not at all, depending on the Total Shareholder
Return (TSR) achieved by DSM in comparison with a peer
group. Non-vested stock options and SARs will be forfeited.
In case employment is terminated prior to the vesting date,

Annual Report 2006

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Financial statements 2006

Overview of management option rights (stock options and Stock Appreciation Rights)

In 2006

Granted

Exercised

Outstanding
on 31 Dec.
2006

Fair value
on grant
date (€)

Forfeited /
expired

Year of issue

1999

2000

2001

2002

2003

2003(1)

2004

2005

2006

Outstanding
on 31 Dec.
2005

14,000

136,500

633,391

1,252,250

2,285,876

530,000

3,113,226

2,971,628

(10,000)

(55,500)

(238,041)

(563,450)

4,000

81,000

395,350

688,800

(1,164,803)

(64,750)

1,056,323

(278,500)

(63,350)

188,150

(137,150)

(222,250)

2,753,826

(79,500)

(210,850)

2,681,278

Exercise
price (€)

13.005

18.240

19.990

23.505

18.195

19.770

17.895

29.050

38.300

Expiry date

14 Jan. 2007

31 March 2008

30 March 2009

4 April 2010

4 April 2011

3 Nov. 2011

2 April 2012

8 April 2013

31 March 2014

1.62

3.52

3.88

5.22

3.09

3.64

2.97

6.15

8.95

3,122,725

(137,750)

2,984,975

Total 10,936,871

3,122,725 (2,526,944)

(698,950) 10,833,702

Of which exercisable

2,342,541

at 31 Dec.
2004

2,831,473

at 31 Dec.
2005

2005

Total 12,237,452

3,028,228 (4,005,709)

(323,100) 10,936,871

Of which exercisable

4,044,650

2,342,541

1) On 3 November 2003 a select group of DSM Nutritional Products employees received stock options and SARs on a one-off basis.

Certain employees in the Netherlands are entitled to employee stock options that are granted on the first day on which the DSM
stock is quoted ex-dividend following the Annual General Meeting of Shareholders. The opening price of the DSM stock on that
day is the exercise price of the stock options. Employee stock options can immediately be exercised and have a term of 5 years.

Overview of employee option rights

Year of issue

2000
2001
2002
2003
2005
2006

Total

Outstanding
on 31 Dec.
2005

36,858

62,556

164,668

77,882

235,494

In 2006

Granted

Exercised

(33,848)

(59,604)

(35,642)

(13,830)

(24,036)

Forfeited /
expired

(3,010)

(2,952)

(910)

(530)

(6,210)

639,471

(160)

(34,227)

Outstanding
on 31 Dec.
2006

Fair value
on grant
date (€)

Exercise
price (€)

Exercise period

128,116

63,522

205,248

605,084

2.90

3.67

2.33

4.29

6.03

19.80

19.99

23.11

18.19

29.05

38.30

until Feb. 2006

until Mar. 2006

until Apr. 2007

until Apr. 2008

until Apr. 2010

until Mar. 2011

577,458

639,471

(167,120)

(47,839)

1,001,970

Changes in 2005

256,100 (1,114,860)

(19,482)

Based on the 2005 result, 639,471 employee option rights were granted in 2006.

Annual Report 2006

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122

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Measurement of fair value
The costs of option plans are measured by reference to the
fair value of the options at the date at which the options are
granted. The fair value is determined using the Black-Scholes
model, taking into account market conditions linked to the
price of the DSM share. Stock price volatility is determined
on the basis of historical volatilities of the DSM share price
measured each month over a period equal to the expected
option life. The costs of these options are recognized in the
income statement (Employee benefits costs).

The following assumptions were used in the
Black-Scholes model:

Non-current assets
Current assets
Non-current liabilities
Current liabilities

Net assets

Net sales
Expenses

2006

2005

Net profit

2006

2005

165

(108)

(49)

187

134

(116)

(66)

139

158

(125)

374

(339)

3.93%

3.15%

6 years

8 years

29 Interests in associates

DSM’s share in its most important associates is
disclosed below:

2.5 years

Company

Location Country

DSM interest

Risk-free interest rate (6 years risk free)
Expected option life of management
option rights
Nominal option life of management
option rights
Expected option life of employee option
rights
Nominal option life of employee option
rights
Stock price volatility

5 years

26%

In the costs for wages and salaries an amount of €21 million is
included for share-based compensation (2005: €22 million).

28 Interests in joint ventures

DSM’s share in its most important joint ventures is
disclosed below:

Company

Location

Country

DSM interest

DEX-Plastomers VoF
Noordgastransport BV
EdeA VoF

Heerlen

Zoetermeer

Geleen

50%

40%

50%

The financial data of joint ventures are included in the
consolidated financial statements according to the method of
proportionate consolidation. DSM’s interests in the assets and
liabilities, income and expense of these joint ventures are:

Nylon Polymer Company,
LLC
Xinhui Meida - DSM Nylon
Chips Co. Ltd.

Augusta

Guangzhou

25%

Investments in associates are accounted for by the equity
method. The following table provides summarized financial
information on associates on a 100% basis.

Non-current assets
Current assets
Non-current liabilities
Current liabilities

Net assets

Net sales
Net result

2006

2005

(7)

(48)

126

(17)

(62)

112

255

(1)

358

(2)

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123

Financial statements 2006

30 Related parties

Related parties disclosure relates entirely to the key management of DSM being represented by the Managing Board and
Supervisory Board of DSM.

The total remuneration (including pension costs and other commitments) of the members of the Managing Board amounted
to €4.4 million (2005: €3.9 million). This includes fixed annual salary €2.3 million (2005 €2.5 million), bonuses €1.6 million (2005:
€0.9 million), pension costs €0.4 million (2005: €0.3 million) and others €0.1 million (2005: €0.2 million). For further information
about the remuneration of the members of the Managing Board see note 10 on page 129.

Members of the Supervisory Board received a fixed remuneration (included in Other operating costs) totaling €0.3 million
(2005: €0.3 million).

Further information about the remuneration of Managing Board members and Supervisory Board members and their share option
rights is given on page 68 of the Report by the Managing Board.

31 Service fees paid to external auditors

The service fees paid to Ernst & Young Accountants included in Work subcontracted and other external costs in 2006 amounted
to €5.2 million for audit services (2005: €5.2 million), €2.0 million for tax services (2005: €1.6 million) and €0.7 million for sundry
services (2005: €0.4 million).

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124

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

2006

2005

Notes

368

8,647

9,046

513

560

359

8,016

8,396

331

365

9,606

8,761

5,784

5,501

203

715

920

403

2,463

2,902

9,606

1,175

1,233

147

1,841

2,027

8,761

2006

2005

652

(105)

547

450

527

Financial statements of Royal DSM N.V.

Balance sheet at 31 December

x € million

Assets
Non-current assets
Intangible assets
Property, plant and equipment
Financial assets

Current assets
Receivables
Financial derivatives
Cash and cash equivalents

Total

Shareholders’ equity and liabilities
Royal DSM N.V. shareholders’ equity

Non-current liabilities
Deferred tax liabilities
Provisions
Borrowings

Current liabilities
Provisions
Borrowings
Financial derivatives
Other current liabilities

Total

Income statement

x € million

Share in results of subsidiaries, joint ventures and
associates (after income tax expense)
Other income and expense

Net profit attributable to equity holders of Royal DSM N.V.

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125

Financial statements 2006

Notes to the Royal DSM N.V. balance sheet

1 General

Unless stated otherwise, all amounts are in € million.

The company financial statements have been prepared in accordance with accounting principles generally accepted in
the Netherlands.

The accounting policies used are substantially the same as those used in the consolidated financial statements in accordance
with the provisions of article 362-8 of Book 2 of the Dutch Civil Code. Investments in subsidiaries are accounted for in accordance
with the equity method. In conformity with article 402, Book 2 of the Dutch Civil Code, a condensed income statement is included
in the separate financial statements of Royal DSM N.V.

A list with DSM participations has been published at the Chamber of Commerce for Zuid-Limburg in Maastricht (Netherlands)
and is available from the company upon request. The list is also available on the company’s website www.dsm.com.

Intangible assets

The intangible assets mainly comprise of goodwill. The intangible assets consist out of the goodwill paid for the acquisition
of NeoResins in 2005 (€358 million) and of CRINA in 2006 (€6 million).

3 Property, plant and equipment

This item mainly relates to land and buildings and corporate IT projects. Capital expenditure in 2006 was €13 million, while the
depreciation charge in 2006 was €2 million. The historic cost of property, plant and equipment as at 31 December 2006 was €64
million; accumulated depreciation amounted to €33 million.

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126

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

4 Financial assets

Total

Subsidiaries

Share in
equity

Loans

Other
securities

Other
loans

Balance at 1 January 2005

7,292

6,884

406

Changes:
- Share in profit
- Dividend received
- Capital payments
- Goodwill
- Net actuarial gains and (losses), after asset ceiling
- Loans granted
- Intra-group transactions
- Value adjustments
- Exchange differences
- Other changes

450

(422)

728

(358)

194

108

(211)

107

136

(8)

450

(422)

727

(358)

194

(211)

107

136

(7)

(1)

Balance at 31 December 2005

8,016

7,500

405

Changes:
- Share in profit
- Dividend received
- Capital payments
- Goodwill
- Net actuarial gains and (losses), after asset ceiling
- Repayments
- Transfer to current loans
- Intra-group transactions
- Value adjustments
- Exchange differences
- Other changes

652

(1,514)

312

(6)

283

(17)

(91)

1,170

(32)

(140)

652

(1,514)

308

(6)

283

1,171

(27)

(140)

(1)

Balance at 31 December 2006

8,647

8,242

404

5 Receivables

Receivable from subsidiaries
Loans
Other receivables

Total

(1)

(5)

108

(17)

(91)

2006

2005

326

513

250

331

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127

Financial statements 2006

6 Royal DSM N.V. shareholders' equity

Balance at 1 January

Net profit
Exchange differences, net of income tax expense
Net actuarial gains and (losses) on defined benefit obligations, after asset ceiling
Reclassification of cumulative preference shares A
Dividend paid
Repurchase of ordinary shares
Proceeds from reissue of ordinary shares
Other changes

2006

2005

5,501

4,668

547

(128)

283

(213)

(318)

527

128

194

233

(183)

(170)

102

Balance at 31 December

5,784

5,501

For details see the consolidated statement of changes in equity on page 91.

Legal reserve
Since the profits retained in Royal DSM N.V.'s subsidiaries, joint ventures and associates can be distributed, and received in the
Netherlands, without restriction, no legal reserve for retained profits is required. In Royal DSM N.V. shareholders’ equity an
amount of €53 million is included for Translation reserve and €34 million for Hedging reserve.

7 Provisions

Environmental costs
Other provisions

Total

2006
Of which
current

Total

2005
Of which
current

The total of non-current and current provisions decreased by €19 million. This is the net effect of the following changes:

Environmental costs
Other provisions

Total

Balance at
1 January
2006

Additions

Releases

Uses

(1)

(7)

(8)

(3)

(8)

(11)

Balance at
31 December
2006

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128

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Total

886

232

1,118

2006
Of which
current

403

Total

1,057

265

1,322

2005
Of which
current

139

147

8 Borrowings

Debenture loans
Private loans

Total

Of the total amount of borrowings outstanding at 31 December 2006, €530 million had a remaining term of more than five years.

The repayment schedule for borrowings is as follows:

10 Remuneration of the members of

the Managing Board

2007
2008
2009
2010 and 2011
2012 through 2016
After 2016

Total

403

184

530

1,118

The repayment scheduled for 2007 relates to the €400 million
debenture loan 2000-2007.

In agreements governing loans with a residual amount at year-
end 2006 of €1,118 million, of which €403 million of a current
nature (31 December 2005: €1,175 million, of which €147
million current), clauses have been included which restrict the
provision of securities.

9 Other current liabilities

Owing to subsidiaries
Other liabilities
Deferred items

Total

2006

2005

2,387

1,769

2,463

1,841

Contingent liabilities
Guarantee obligations on behalf of affiliated companies and
third parties amounted to €268 million (31 December 2005:
€300 million). Royal DSM N.V. has declared in writing that it
accepts several liability for debts arising from acts in law of a
number of consolidated companies. These debts are included
in the consolidated balance sheet.

Total remuneration
The remuneration of the members of the Managing Board is
determined by the Supervisory Board within the framework
of the remuneration policy for 2006 and subsequent years as
approved by the Annual General Meeting of Shareholders on
29 March 2006. More details about the remuneration policy
are included in the remuneration report (page 68).

The total remuneration (including pension costs and other
commitments) of the members of the Managing Board
amounted to €4.4 million (2005: €3.9 million). The
remuneration of the individual members of the Managing
Board was as follows:

Peter Elverding: salary €656,000 (2005: €611,000), bonus
€379,000 (2005: €216,000), pension costs €111,000 (2005:
€111,000); Jan Zuidam: salary €480,000 (2005: €469,000),
bonus €291,000 (2005: €166,000), pension costs €82,000
(2005: €86,000); Chris Goppelsroeder (until 1 April 2006):
salary €119,000 (2005: €350,000), bonus €289,000 (2005:
na), pension costs €18,000 (2005: €48,000); Henk van Dalen
(until 1 April 2006): salary €119,000 (2005: €473,000), bonus
€361,000 (2005: €166,000), pension costs €23,000 (2005:
€86,000); Feike Sijbesma: salary €482,000 (2005:
€473,000), bonus €291,000 (2005: €166,000), pension
costs €91,000 (2005: €86,000); Nico Gerardu (as of 1 April
2006): salary €361,000, pension costs €52,000; Rolf-Dieter
Schwalb (as of 1 October 2006): salary €122,000, pension
costs €18,000.

Outstanding and exercised stock incentives
The following table shows the stock incentives of the individual
members of the Managing Board and the rights exercised.

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129

Financial statements 2006

Overview of share options (including Share Appreciations Rights)

Year of
issue

Outstanding
on 31 Dec.
2005

In 2006

Granted

Exercised

Outstanding
on 31 Dec.
2006

Exercise
price (€)

Average
share price
at exercise (€)

Expiry date

Forfeited /
expired

Peter Elverding

Stock options

Of which exercisable

Performance shares

Jan Zuidam

Stock options

Of which exercisable

Performance shares

Feike Sijbesma

Stock options

Of which exercisable

Performance shares

2000

2001

2002

2003

2004

2005

2006

Total

2005

2006

Total

2000

2001

2002

2003

2004

2005

2006

Total

2005

2006

Total

2001

2002

2003

2004

2005

2006

Total

2005

2006

Total

45,000

75,000

37,500

382,500

195,000

10,000

36,000

60,000

30,000

306,000

156,000

8,000

60,000

30,000

270,000

120,000

8,000

37,500

10,000

30,000

8,000

30,000

8,000

(36,000)

31 March 2008

30 March 2009

4 April 2010

4 April 2011

2 April 2012

8 April 2013

31 March 2014

37.000 31 March 2008

30 March 2009

4 April 2010

4 April 2011

2 April 2012

8 April 2013

31 March 2014

30 March 2009

4 April 2010

4 April 2011

2 April 2012

8 April 2013

31 March 2014

45,000

75,000

37,500

420,000

270,000

10,000

20,000

60,000

30,000

300,000

180,000

8,000

16,000

60,000

30,000

300,000

180,000

8,000

16,000

18.240

19.990

23.505

18.195

17.895

29.050

38.300

29.050

38.300

18.240

19.990

23.505

18.195

17.895

29.050

38.300

29.050

38.300

19.990

23.505

18.195

17.895

29.050

38.300

29.050

38.300

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130

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Year of
issue

Outstanding
on 31 Dec.
2005

In 2006

Granted

Exercised

Outstanding
on 31 Dec.
2006

Exercise
price (€)

Average
share price
at exercise (€)

Expiry date

Forfeited /
expired

Nico Gerardu

Stock options

Of which exercisable

Performance shares

Henk van Dalen

Stock options

Of which exercisable

Performance shares

Chris Goppelsroeder

Stock options

Of which exercisable

Performance shares

2002

2003

2004

2005

2006

Total

2006

Total

2001

2002

2003

2004

2005

2006

Total

2005

2006

Total

2003

2004

2005

2006

Total

2005

2006

Total

36,000

144,000

36,000

30,000

8,000

60,000

30,000

270,000

120,000

8,000

59,000

30,000

148,000

8,000

(60,000)

(30,000)

(120,000)

(150,000)

(8,000)

(59,000)

(30,000)

(148,000)

(8,000)

36,000

30,000

174,000

72,000

8,000

23.505

18.195

17.895

29.050

38.300

19.990

23.505

18.195

17.895

29.050

38.300

19.770

17.895

29.050

38.300

4 April 2010

4 April 2011

2 April 2012

8 April 2013

31 March 2014

35.786 30 March 2009

35.394

4 April 2010

4 April 2011

2 April 2012

8 April 2013

3 Nov. 2011

2 April 2012

8 April 2013

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131

Financial statements 2006

Overview of performance shares

Outstanding
on 31 Dec.
2005

In 2006

Granted

Exercised

Forfeited

2005

2006

42,000

34,000

Total 2006
Of which exercisable

42,000

34,000

Outstanding
on 31 Dec.
2004

Total 2005
Of which exercisable

42,000

Before 2005 no performance shares were granted.

Outstanding
on 31 Dec.
2006

26,000

34,000

Share price
at date of
grant (€)

29.050

38.300

(16,000)

60,000

Outstanding
on 31 Dec.
2005

42,000

Shares
At year-end 2006 the members of the Managing Board together held 1,836 shares (year-end 2005: also 1,836 shares)
in Royal DSM N.V.

Loans
The company does not provide any loans to members of the Managing Board.

11 Remuneration of the members of the Supervisory Board

The total remuneration (annual fixed fee and annual committee membership fee) of the members of the Supervisory Board
amounted to €0.3 million (2005: €0.3 million).The remuneration of the individual members of the Supervisory Board was
as follows:

In €

Cor Herkströter, chairman
Henk Bodt, deputy chairman
Pierre Hochuli
Ewald Kist
Okko Müller
Claudio Sonder
Tom de Swaan (as of 1 April)
Cees van Woudenberg

Annual fixed
fee

Committee
fee

50,000

35,000

26,250

35,000

12,500

7,500

5,000

Other
costs

3,201

1,250

3,201

1,250

2,400

1,250

Total

65,701

45,701

36,250

43,201

41,250

36,250

28,650

41,250

Total

286,250

35,000

17,003

338,253

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132

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

At year-end 2006 the members of the Supervisory Board together held 9,584 shares (2005: 8,084 shares) in Royal DSM N.V.
These shareholdings serve as a long-term investment in the company.

The company does not provide any loans to its Supervisory Board members. Rules have been adopted governing ownership of
and reporting on transactions in securities (other than securities issued by DSM) by Supervisory Board members.

Heerlen, 12 February 2007

Heerlen, 13 February 2007

Managing Board,

Supervisory Board,

Peter Elverding
Jan Zuidam
Feike Sijbesma
Nico Gerardu
Rolf-Dieter Schwalb

Cor Herkströter
Henk Bodt
Pierre Hochuli
Ewald Kist
Okko Müller
Claudio Sonder
Tom de Swaan
Cees van Woudenberg

Annual Report 2006

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133

Financial statements 2006
Other information

Royal DSM N.V.
Attn. Managing Board of Directors

We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit opinion.

Opinion with respect to the consolidated financial statements
In our opinion, the consolidated financial statements give a true
and fair view of the financial position of Royal DSM N.V. as at
December 31, 2006, and of its result and its cash flow for the
year then ended in accordance with International Financial
Reporting Standards as adopted by the European Union and
with Part 9 of Book 2 of the Netherlands Civil Code.

Opinion with respect to the company financial statements
In our opinion, the company financial statements give a true
and fair view of the financial position of Royal DSM N.V. as at
December 31, 2006, and of its result for the year then ended
in accordance with Part 9 of Book 2 of the Netherlands
Civil Code.

Report on other legal and regulatory requirements

Pursuant to the legal requirement under 2:393 sub 5 part e
of the Netherlands Civil Code, we report, to the extent of our
competence, that the managing board report is consistent
with the financial statements as required by 2:391 sub 4 of
the Netherlands Civil Code.

Maastricht, 13 February 2007
for Ernst & Young Accountants

was signed by P.J.A.M. Jongstra

Auditor’s report

Report on the financial statements

We have audited the accompanying financial statements of
Royal DSM N.V., Heerlen. The financial statements consist of
the consolidated financial statements and the company financial
statements. The consolidated financial statements comprise
the consolidated balance sheet as at December 31, 2006, the
income statement, statement of changes in equity and cash
flow statement for the year then ended, and a summary of
significant accounting policies and other explanatory notes.
The company financial statements comprise the company
balance sheet as at December 31, 2006, the company income
statement for the year then ended and the notes.

Management’s responsibility
Management is responsible for the preparation and fair
presentation of the financial statements in accordance with
International Financial Reporting Standards as adopted by the
European Union and with Part 9 of Book 2 of the Netherlands
Civil Code, and for the preparation of the report by the
managing board in accordance with Part 9 of Book 2 of the
Netherlands Civil Code. This responsibility includes: designing,
implementing and maintaining internal control relevant to the
preparation and fair presentation of the financial statements
that are free from material misstatement, whether due to fraud
or error; selecting and applying appropriate accounting policies;
and making accounting estimates that are reasonable in
the circumstances.

Auditor’s responsibility
Our responsibility is to express an opinion on the financial
statements based on our audit. We conducted our audit in
accordance with Dutch law. This law requires that we comply
with ethical requirements and plan and perform our audit to
obtain reasonable assurance whether the financial statements
are free from material misstatement.

An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material
misstatement of the financial statements, whether due to fraud
or error. In making those risk assessments, the auditor considers
internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating
the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management,
as well as evaluating the overall presentation of the
financial statements.

Annual Report 2006

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134

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Profit appropriation

According to Article 32 of the Royal DSM N.V. Articles of
Association and with the approval of the Supervisory Board of
Directors, every year the Managing Board determines the
portion of the net profit to be appropriated to the reserves. For
the year 2006 the net profit is €547 million and the amount to
be appropriated to the reserves has been established at €350
million. From the subsequent balance of the net profit (€197
million), dividend is first distributed on the cumulative
preference shares B. At the end of 2006 no cumprefs B were in
issue. Subsequently, a 4.348% dividend is distributed on the
cumulative preference shares A, based on a share price of
€5.29 per cumulative preference share A. For 2006 this
distribution amounts to €0.23 per share, which is €10 million in
total. An interim dividend of €0.08 per cumulative preference
share A having been paid in August 2006, the final dividend will
then amount to €0.15 per cumulative preference share A.

the Managing Board and Supervisory Board, either a bid is
made for the ordinary shares, or a significant participation in
ordinary shares is built up, or such event is likely to occur, then
these preference shares B may be issued, which shares shall
have the same voting rights as the ordinary shares. These
preference shares can be placed with the DSM Preference
Shares Foundation.

The DSM Preference Shares Foundation and DSM have
concluded agreements on the placement of preference shares
B and an option on such shares. Under these agreements, the
Foundation is obliged to take preference shares B in DSM’s
capital or has the right to acquire such shares to a maximum
corresponding to 100% of the capital issued in any form other
than preference shares B, less one.

The Foundation acquired no preference shares B in 2006.

The profits remaining after distribution of these dividends (€187
million) will be put at the disposal of the Annual General Meeting
of Shareholders in accordance with the provisions of Article 32,
section 6 of the Articles of Association.

On 31 December 2006 the Foundation Committee was
composed as follows:
Floris Maljers, chairman
Maarten van Veen, vice-chairman
Bas Kortmann

In view of the above, the proposed dividend on ordinary shares
outstanding for the year 2006 would amount to €1.00 per
share. This dividend corresponds to about 19% of the net profit
(€551 million) plus depreciation and amortization (€440 million),
both before exceptional items, minus the dividend payable
to holders of cumulative preference shares (€10 million). An
interim dividend of €0.33 per ordinary share having been paid
in August 2006, the final dividend would then amount to €0.67
per ordinary share.

The Foundation Committee

Declaration of independence
The DSM Managing Board and the Foundation Committee
hereby declare that, according to their joint assessment, the
DSM Preference Shares Foundation meets the independence
requirements laid down in Appendix X of the General Rules for
the Euronext Amsterdam Stock Market.

If the Annual General Meeting of Shareholders makes a
decision in accordance with the proposal, the net profit will be
appropriated as follows:

The Managing Board of Royal DSM N.V.
The Foundation Committee

x € million

Net profit

Profit appropriation:
- To be added to / paid from the reserves
- Dividend on cumprefs A
- Interim dividend on ordinary shares
- Final dividend payable on ordinary

2006

2005

547

527

350

124

320

136

Special statutory rights

DSM Preference Shares Foundation
The DSM Preference Shares Foundation was established
in 1989.

By virtue of DSM's Articles of Association, 375,000,000
preference shares B can be issued. If, without the approval of

Annual General Meeting of Shareholders
The Annual General Meeting is to be held at the DSM head
office in Heerlen (Netherlands) on Wednesday, 28 March 2007
at 14.00 hours.

Important dates

Ex-dividend quotation

Friday, 30 March 2007

Publication of first-quarter results

Friday, 27 April 2007

Publication of second-quarter
results
Publication of third-quarter
results
Annual report 2007

Annual General Meeting of
Shareholders

Thursday, 26 July 2007

Thursday, 25 October 2007

Wednesday, 13 February 2008

Wednesday, 26 March 2008

Annual Report 2006

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135

Financial statements 2006
DSM figures: five-year summary

Balance sheet
x € million

Intangible assets
Property, plant and equipment
Deferred tax assets
Prepaid pension costs
Associates
Other financial assets
Non-current assets

Inventories
Receivables
Financial derivatives
Current investments
Cash and cash equivalents

Assets held for sale
Current assets
Total assets

Royal DSM N.V. shareholders’ equity
Minority interests
Equity

Deferred tax liabilities
Employee benefits liabilities
Provisions
Borrowings
Other non-current liabilities
Non-current liabilities

Employee benefits liabilities
Provisions
Borrowings
Financial derivatives
Other current liabilities

Liabilities held for sale
Current liabilities
Total equity and liabilities

Capital employed
Capital expenditure:
- Intangible assets and property, plant and

equipment
- Acquisitions
Disposals
Depreciation and amortization
Net debt2)

Ratios2)
- Net sales / average capital employed
- Current assets / current liabilities
- Equity / total assets
- Gearing (net debt / equity plus net debt)

20061)

20051)

20041)

2004

2003

2002

1,008

3,655

496

918

100

1,003

3,750

533

478

189

453

3,811

492

166

6,203

5,996

5,082

1,515

1,739

552

3,888

10,091

5,784

5,855

383

304

188

907

1,826

127

607

1,614

2,410

10,091

1,535

1,597

902

4,075

4,118

10,114

5,501

5,568

219

383

166

1,381

2,202

220

329

1,699

2,336

2,344

10,114

1,348

1,556

244

1,261

4,415

9,497

4,668

4,690

134

378

284

1,497

2,353

219

527

1,610

2,454

9,497

369

3,809

491

4,669

1,347

1,669

1,247

4,267

8,936

4,812

4,834

874

1,045

1,919

543

1,640

2,183

8,936

405

4,188

371

4,964

1,474

1,746

1,212

4,436

9,400

4,918

4,961

901

1,505

2,406

382

1,651

2,033

9,400

462

2,885

292

3,639

944

1,439

2,014

960

5,357

8,996

5,142

5,186

682

1,337

2,019

599

1,192

1,791

8,996

6,303

6,221

5,558

5,554

6,162

4,538

457

165

451

921

1.34

1.61

0.58

0.14

401

573

222

567

832

1.34

1.76

0.55

0.13

348

613

339

1.34

1.80

0.49

0.07

334

632

337

1.32

1.95

0.54

0.07

433

1,561

516

671

1.21

2.18

0.53

0.12

503

2,037

493

(1,038)

1.29

2.99

0.58

(0.25)

1) After the change to IFRS as primary basis of accounting. The figures for previous periods were prepared in accordance with NL GAAP.
2) To enhance comparability the net debt and ratios 2004 do not include the impact of the temporary reclassification of cumulative preference shares A.

Annual Report 2006

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136

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Income statement
x € million

Net sales

20061)

20051)

20041)

2004

2003

2002

8,380

8,195

7,832

7,752

6,050

6,665

Operating profit plus depreciation and amortization
(EBITDA)

1,274

1,311

1,067

1,013

Operating profit (EBIT)
Net finance costs
Income tax expense
Share of the profit of associates

Net profit before exceptional items
Net profit from exceptional items

Profit for the year
Profit attributable to minority interests

Net profit attributable to equity holders
of Royal DSM N.V.
Net profit attributable to holders of cumulative
preference shares

Net profit used for calculating earnings per share

Workforce at 31 December (x 1000)

834

(81)

(198)

556

(4)

552

(5)

547

(10)

537

808

(70)

(180)

(2)

556

(36)

520

527

(16)

511

562

(56)

(103)

412

(142)

270

293

(22)

271

489

(51)

(98)

348

(97)

251

262

(22)

240

723

294

(31)

(49)

219

(94)

125

892

450

(14)

(84)

(3)

349

840

1,189

(1)

139

1,188

(22)

117

1,166

Employee benefits costs (x € million)

1,332

1,385

1,411

1,487

1,215

1,217

Percentage ratios:
- EBIT / net sales
- CFROI
- Net profit / average Royal DSM N.V. shareholders’

equity attributable to holders of ordinary shares

10.0

8.5

10.1

9.9

9.1

10.4

7.2

8.1

6.2

6.3

7.6

5.7

4.9

5.8

2.5

6.8

7.0

26.8

EBITDA / net finance costs

15.7

18.7

19.1

19.9

23.3

63.7

Dividend (x € million)

197

207

190

188

199

1) After the change to IFRS as primary basis of accounting, including discontinued operations. The figures for previous periods were prepared in accordance with NL GAAP.

Annual Report 2006

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137

Financial statements 2006

Information about ordinary DSM shares1)
Per ordinary share in €

Net profit before exceptional items
Net profit
Cash flow
Royal DSM N.V. shareholders’ equity

Dividend:
- Interim dividend
- Final dividend

Pay-out as % of cash flow
Pay-out including dividend on cumulative
preference shares as % of net profit before
exceptional items
Dividend yield (based on average price of an
ordinary DSM share)

Share prices on Euronext Amsterdam:
- Highest price
- Lowest price
- At 31 December

(x 1000)

Number of ordinary shares outstanding:
- At 31 December
- Average

Daily trading volumes on Euronext Amsterdam:
- Average
- Lowest
- Highest

20062)

20052)

20042)

2004

2003

2002

2.85

2.83

5.21

30.03

1.00

0.33

0.67

19%

2.82

2.68

5.65

27.59

1.00

0.29

0.71

18%

2.09

1.41

4.52

1.76

1.25

3.99

1.11

0.62

2.88

25.19

23.86

0.875

0.290

0.585

0.875

0.290

0.585

0.875

0.290

0.585

1.69

6.04

8.34

24.82

0.875

0.290

0.585

19%

20%

26%

23%

35%

34%

45%

53%

81%

57%

2.9%

3.4%

4.3%

4.5%

3.9%

39.70

28.58

37.43

35.22

23.07

34.50

23.85

17.88

23.81

23.85

17.88

23.81

22.50

15.65

19.52

25.63

18.95

21.69

184,850

189,550

190,923

190,783

191,957

191,617

191,957

191,617

191,537

189,430

193,179

192,935

1,301

267

5,268

1,063

238

6,563

1,014

6,494

1,014

6,494

1,126

130

6,540

1,034

140

3,864

1) On 5 September 2005 DSM effected a share split on a two-for-one basis (two shares for one old share) in order to increase the liquidity of the DSM share. The data

regarding the number of shares and earnings per share in the overview have been presented as if the splitting of the ordinary DSM shares had taken place prior to all
periods presented.

2) After the change to IFRS as primary basis of accounting. The figures for previous periods were prepared in accordance with NL GAAP.

Annual Report 2006

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138

Financial statements 2006

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Explanation of some financial concepts and ratios

General

Definitions

In calculating financial profitability ratios use is made of the
average of the opening and closing values of balance sheet
items in the year under review.

The financial indicators per ordinary share are calculated on the
basis of the average number of ordinary shares outstanding
(average daily number). In calculating Royal DSM N.V.
shareholders’ equity per ordinary share, however, the number
of shares outstanding at year-end is used.

In calculating the figures per ordinary share and the ‘net profit
as a percentage of average Royal DSM N.V. shareholders’
equity available to holders of ordinary shares’, the amounts
available to the holders of cumulative preference shares are
deducted from the profits and from Royal DSM N.V.
shareholders’ equity.

Capital employed
The total of the carrying amount of intangible assets and
property, plant and equipment, inventories, trade receivables
and other receivables, less trade payables and other
current liabilities.

Capital expenditure
This includes all investments in intangible assets and property,
plant and equipment as well as the acquisition of subsidiaries,
associates and securities.

Cash flow
Cash flow is net profit plus depreciation and amortization.

CFROI (Cash Flow Return On Investment)
Cash Flow Return On Investment is the sustainable cash flow
(EBITDA minus related annual tax and minus 1% depreciation
on weighted average historic asset base) divided by weighted
average asset base plus average working capital.

Disposals
This includes the disposal of intangible assets and property,
plant and equipment as well as the disposal of participating
interests and other securities.

Earnings Before Interest, Tax, Depreciation and Amortization
(EBITDA)
EBITDA is the sum total of operating profit plus depreciation
and amortization.

Earnings per ordinary share
Net profit attributable to equity holders of Royal DSM N.V.
minus dividend on cumulative preference shares, divided by
the average number of ordinary shares outstanding.

Operating working capital
The total of inventories and trade receivables, less trade
payables.

Total Shareholder Return (TSR)
Total Shareholder Return is capital gain plus dividend paid.

Annual Report 2006

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139

Index – Financial statements

A
accounting policies ____________________________________________________________ 82
acquisitions ________________________________________________________________________ 93
associates _________________________________________________________________ 104, 123

interest-rate risks ________________________________________________________________ 111
inventories __________________________________________________________________________ 105
investment grants _______________________________________________________________ 110

B
borrowings ________________________________________________________________ 109, 129

C
cash provided by operating activities _________________________________ 92
cash used in financing activities _________________________________________ 92
cash used in investing activities __________________________________________ 92
consolidated balance sheet _______________________________________________ 90
consolidated cash flow statement ______________________________________ 92
consolidated financial statements ______________________________________ 88
consolidated statement of

changes in equity ____________________________________________________________ 91

consolidated statement of

recognized income and expense ____________________________________ 91
contingent liabilities ____________________________________________________________ 110
credit facilities _____________________________________________________________________ 111
credit risk ____________________________________________________________________________ 113
currency exchange rates ____________________________________________________ 93
currency risk _______________________________________________________________________ 112
current liabilities __________________________________________________________________ 110

D
debenture loans _________________________________________________________________ 109
deferred taxes ____________________________________________________________________ 99
definitions ___________________________________________________________________________ 139
disposals ____________________________________________________________________________ 93

E
equity __________________________________________________________________________________ 106
exceptional items _______________________________________________________________ 98

F
fees paid to external auditors _____________________________________________ 124
finance lease _______________________________________________________________________ 103
financial derivatives ____________________________________________________________ 111
financial risks ______________________________________________________________________ 111
financial statements of Royal DSM N.V. _____________________________ 125
five year summary ______________________________________________________________ 136

G
goodwill ______________________________________________________________________________ 101
guarantee obligations _________________________________________________________ 110

H
hedging reserve __________________________________________________________________ 107

I
important dates __________________________________________________________________ 135
income tax expense ___________________________________________________________ 99
information about ordinary DSM shares _____________________________ 138
intangible assets _________________________________________________________________ 101
interest expense _________________________________________________________________ 97
interest income ___________________________________________________________________ 97

J
joint ventures ______________________________________________________________________ 123

L
land and buildings ______________________________________________________________ 103
licences ______________________________________________________________________________ 101
litigation ______________________________________________________________________________ 111

M
management option rights _________________________________________________ 122

N
net debt ______________________________________________________________________________ 120
net finance costs ________________________________________________________________ 97

O
operating lease ___________________________________________________________________ 110
options _______________________________________________________________________________ 122
other current liabilities _________________________________________________ 110, 129
other financial assets __________________________________________________________ 104
other non-current liabilities _________________________________________________ 110
other operating income ______________________________________________________ 97
other reserves _____________________________________________________________________ 107

P
patents _______________________________________________________________________________ 101
pensions _____________________________________________________________________________ 115
plant and machinery ___________________________________________________________ 103
post-employment benefits _________________________________________________ 115
post-employment healthcare and other costs ___________________ 119
private loans _______________________________________________________________________ 110
profit appropriation _____________________________________________________________ 135
property, plant and equipment ___________________________________________ 103
provisions ___________________________________________________________________ 108, 128

R
receivables _________________________________________________________________ 105, 127
related parties _____________________________________________________________________ 124
reserve for share-based compensation _____________________________ 107
Royal DSM N.V. shareholders' equity _________________________________ 128

S
share capital _______________________________________________________________________ 107
share premium ___________________________________________________________________ 107
share-based compensation _______________________________________________ 121

T
trade accounts payable ______________________________________________________ 110
trade accounts receivable __________________________________________________ 105
translation reserve ______________________________________________________________ 107
treasury shares ___________________________________________________________________ 107

W
wages and salaries ______________________________________________________________ 97

Annual Report 2006

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140

Annual report
Copies of this report (which is also available in the original
Dutch version) can be ordered by phone (+31 800 0233480) or
e-mail (dsm@servicebureau.nl).

Internet
The information contained in this annual report is also available
via DSM’s website: www.dsm.com. You can view the annual
report online and download and print parts of it.

Information
Our other publications and sources of information are:
• Internet: www.dsm.com
• Triple P Report 2006
• Brochure: The Unlimited World of DSM

Addresses
Institutional and private investors and financial analysts should
contact:

DSM, Investor Relations
P.O. Box 6500
6401 JH Heerlen
the Netherlands
tel.: +31 455782864
e-mail: investor.relations@dsm.com

Those who are interested in DSM in general should contact:

DSM, Corporate Communications
P.O. Box 6500
6401 JH Heerlen
the Netherlands
tel.: +31 455782421
e-mail: media.relations@dsm.com

General information
Production: DSM, Corporate Communications

Royal DSM N.V.

P.O Box 6500
6401 JH Heerlen
The Netherlands
T + 31 (45) 578 8111